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 March 31, 2003
[ ] 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
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MIDWEST EXPRESS HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1828757
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(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
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(Registrant's telephone number, including area code)
Indicate by checkmark 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
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Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
Yes X No
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As of April 30, 2003, there were 15,517,411 shares of Common Stock, $.01 par
value, of the registrant outstanding.
MIDWEST EXPRESS HOLDINGS, INC.
FORM 10-Q
For the period ended March 31, 2003
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
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Condensed Consolidated Statements of Operations 2
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements
(Unaudited) 5
Item 2. Management's Discussion and Analysis of Results of
------ --------------------------------------------------
Operations and Financial Condition 14
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Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
------ ----------------------------------------------------------
Item 4. Controls and Procedures 31
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 32
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SIGNATURES 33
CERTIFICATIONS 34
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
March 31,
---------
2003 2002
---- ----
Operating revenues:
Passenger service $ 79,929 $ 91,550
Cargo 1,284 1,619
Other 12,845 10,853
---------------- ----------------
Total operating revenues 94,058 104,022
---------------- ----------------
Operating expenses:
Salaries, wages and benefits 38,983 37,971
Aircraft fuel and oil 24,720 15,737
Commissions 3,381 4,594
Dining services 3,261 4,624
Station rental, landing and other fees 11,181 9,755
Aircraft maintenance materials and repairs 7,938 9,526
Depreciation and amortization 5,357 5,559
Aircraft rentals 6,402 6,309
Impairment loss - 29,911
Other 10,757 12,703
---------------- ----------------
Total operating expenses 111,980 136,689
---------------- ----------------
Operating loss (17,922) (32,667)
---------------- ----------------
Other (expense) income:
Interest income 304 225
Interest expense (488) (936)
Other, net (1) 39,490
---------------- ----------------
Total other (expense) income (185) 38,779
---------------- ----------------
(Loss) Income before income tax (credit) provision (18,107) 6,112
Income tax (credit) provision (6,337) 2,263
---------------- ----------------
Net (Loss) Income $ (11,770) $ 3,849
================ ================
(Loss) Income per common share - basic $ (0.76) $ 0.28
================ ================
(Loss) Income per common share - diluted $ (0.76) $ 0.28
================ ================
Weighted average shares - basic 15,512,298 13,831,590
Weighted average shares - diluted 15,512,298 13,915,458
See notes to condensed consolidated financial statements (unaudited).
2
Part I Item 1 - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
March 31, December 31,
ASSETS 2003 2002
---- ----
Current assets:
Cash and cash equivalents:
Unrestricted $ 23,167 $ 41,498
Restricted 16,777 15,067
-------------- --------------
Total cash and cash equivalents 39,944 56,565
Accounts receivable:
Traffic, less allowance for doubtful accounts of $85 and $133
at March 31, 2003 and December 31, 2002, respectively 5,256 4,575
Income tax refund 3,067 5,247
Other receivables 348 555
-------------- --------------
Total accounts receivable 8,671 10,377
Inventories 6,776 7,250
Prepaid expenses:
Commissions 1,408 1,691
Other 5,724 5,649
-------------- --------------
Total prepaid expenses 7,132 7,340
Deferred income taxes 10,700 10,013
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Total current assets 73,223 91,545
Property and equipment, at cost 366,829 360,993
Less accumulated depreciation and amortization 139,225 136,429
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Net property and equipment 227,604 224,564
Landing slots and leasehold rights, less accumulated amortization of $3,737
and $3,642 at March 31, 2003 and December 31, 2002, respectively 3,013 3,108
Aircraft purchase deposits and pre-delivery progress payments 55,248 52,362
Other assets 12,737 5,027
-------------- --------------
Total assets $ 371,825 $ 376,606
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,356 $ 6,702
Notes payable 2,500 5,500
Current maturities of long-term debt 32,608 18,194
Air traffic liability 39,981 38,700
Unearned revenue 19,337 23,870
Accrued liabilities:
Vacation pay 6,569 6,676
Scheduled maintenance expense 8,622 5,932
Frequent flyer awards 1,917 1,985
Other 31,282 29,175
-------------- --------------
Total current liabilities 149,172 136,734
Long-term debt 2,379 16,903
Long-term debt on pre-delivery progress payments 40,724 37,516
Deferred income taxes 26,205 25,193
Noncurrent scheduled maintenance expense 2,051 6,186
Accrued pension and other postretirement benefits 13,787 12,724
Deferred frequent flyer partner revenue 7,654 8,085
Other noncurrent liabilities 16,756 8,138
-------------- --------------
Total liabilities 258,728 251,479
Shareholders' equity:
Preferred stock, without par value; 5,000,000 shares authorized, no
shares issued and outstanding - -
Common stock, $.01 par value; 25,000,000 shares authorized,
16,224,531 shares issued 162 162
Additional paid-in capital 32,165 32,177
Treasury stock, at cost (15,630) (15,644)
Retained earnings 96,273 108,043
Cumulative other comprehensive income 127 389
-------------- --------------
Total shareholders' equity 113,097 125,127
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Total liabilities and shareholders' equity $ 371,825 $ 376,606
============== ==============
See notes to condensed consolidated financial statements (unaudited).
3
Part I Item 1 - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Operating activities:
Net (loss) income $ (11,770) $ 3,849
Items not involving the use of cash:
Impairment loss - 29,911
Depreciation and amortization 5,357 5,559
Deferred income taxes 325 (398)
Other, net 1,800 (13,820)
Changes in operating assets and liabilities:
Accounts receivable 1,706 10,684
Inventories 474 (401)
Prepaid expenses 884 (2,910)
Accounts payable (346) (10,097)
Accrued liabilities 158 4,642
Unearned revenue (4,533) 551
Air traffic liability 1,281 5,044
Deferred frequent flyer partner revenue (431) (23)
----------- ------------
Net cash (used in) provided by operating activities (5,095) 32,591
----------- ------------
Investing activities:
Capital expenditures (9,572) (1,241)
Aircraft purchase deposits and pre-delivery
progress payments (9,177) -
Aircraft purchase deposits returned 6,532 -
Proceeds from sale of property and equipment 31 257
Other, net (1,033) 144
----------- ------------
Net cash used in investing activities (13,219) (840)
----------- ------------
Financing activities:
Funding of pre-delivery progress payments 8,447 -
Return of pre-delivery progress payments (5,425) -
Long term lease obligations 617 -
Payment on note payable (3,000) (10,000)
Other, net 1,054 1
----------- ------------
Net cash provided by (used in) financing activities 1,693 (9,999)
----------- ------------
Net (decrease) increase in cash and cash equivalents (16,621) 21,752
Cash and cash equivalents, beginning of period 56,565 46,923
----------- ------------
Cash and cash equivalents, end of period $ 39,944 $ 68,675
=========== ============
Supplemental non cash financing activities:
Non cash incentives $ 7,900 $ -
See notes to condensed consolidated financial statements (unaudited).
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-month periods ended March 31, 2003 and 2002 reflect all
adjustments (consisting only of normal recurring adjustments, except as
noted herein) 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 of America 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 notes
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,
2002. The results of operations for the three-month period ended March 31,
2003 are not necessarily indicative of the results that may be expected for
the entire fiscal year ending December 31, 2003.
2. Impairment Loss
During the first quarter 2002, the Company decided to accelerate the
retirement of the DC-9 fleet of Midwest Airlines, Inc. ("Midwest Airlines")
in anticipation of accelerated deliveries of Boeing 717 aircraft. In
connection with this decision, the Company performed evaluations to
determine, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal on Long-Lived
Assets," whether probability-weighted future cash flows from an asset
(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 flows would be less
than the aggregate carrying amounts, 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 Company
considered market trends in aircraft dispositions, data from third parties
and management estimates.
3. Settlement of Arbitration
Skyway Airlines, Inc., doing business as Midwest Connect ("Midwest
Connect"), currently operates 10 Fairchild 32-passenger 328JET regional
jets. In September 2001, the Company settled its arbitration with Fairchild
Dornier GmbH ("Fairchild") over the cancellation of the
5
428JET program. In the first quarter 2002, the Company recorded as other
income $39.5 million (pre-tax) associated with the settlement.
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 Airlines and Midwest Connect 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, 2002. Financial information for the
three-month periods ended March 31, 2003 and 2002, for the two operating
segments, Midwest Airlines and Midwest Connect, follows (in thousands).
6
Three Months Ended March 31, 2003
---------------------------------
Midwest
Midwest Connect Elimination Consolidated
------- ------- ----------- ------------
Operating revenues $79,626 $15,773 ($1,341) $94,058
Operating loss (12,099) (5,823) - (17,922)
Depreciation and amortization expense 4,333 1,024 - 5,357
Interest income 342 - (38) 304
Interest expense (488) (38) 38 (488)
Loss before income tax credit (12,246) (5,861) - (18,107)
Income tax credit (4,286) (2,051) - (6,337)
Total assets 323,202 69,857 (21,234) 371,825
Capital expenditures 9,515 57 - 9,572
Three Months Ended March 31, 2002
---------------------------------
Midwest
Midwest Connect Elimination Consolidated
------- ------- ----------- ------------
Operating revenues $88,555 $16,734 ($1,267) $104,022
Operating loss (31,892) (775) - (32,667)
Depreciation and amortization expense 4,706 853 - 5,559
Interest income 256 - (31) 225
Interest expense (936) (31) 31 (936)
(Loss) income before income tax (credit) provision (32,582) 38,694 - 6,112
(Credit) provision for income tax (12,054) 14,317 - 2,263
Total assets 297,285 68,264 (13,997) 351,552
Capital expenditures 815 426 - 1,241
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 March 31, 2003 and April 30, 2003, the Company had options in place
to hedge approximately 15% of its projected fuel purchases in the second quarter
of 2003. These contracts expire at various dates through June 30, 2003. As of
April 30, 2003, no additional options had been placed for this period or later
periods. At March 31, 2003, the options were valued at $0.4 million and are
included in other prepaid expense in the 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" and the corresponding amendments under SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain 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, when they are reclassified to the income
statement as an offset of fuel expense. The Company reclassified $1.0 million to
the income statement in first quarter 2003 as an offset to fuel expense when the
first quarter 2003 hedges expired. Other comprehensive income was $0.1 million
and $0.4 million for the quarters ended March 31, 2003 and 2002, respectively.
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 $40.0 million
as of March 31, 2003. Under a financing commitment between the Company and
Boeing Capital Corporation ("BCC"), at each aircraft delivery date BCC acquires
and pays for the aircraft delivered, including interest accrued on the debt owed
KfW, and then leases the aircraft to the Company. At that time, BCC reimburses
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 uses the amounts reimbursed to repay the related debt to KfW. Interest
accrues from the date of borrowing to the aircraft delivery date, and is
included in the final purchase price. The interest on borrowings under the
agreement is LIBOR plus 200 basis points. This debt has been classified as
long-term in the accompanying condensed consolidated balance sheet.
8
8. New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (the "FASB") 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 adoption of SFAS No. 146 did not have a
material impact on the Company's condensed consolidated financial statements.
In November 2002, the FASB issued Interpretation No. ("FIN") 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others," which elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees. It also clarifies
that at the time a guarantee is issued, the Company must recognize an initial
liability for the fair value, or market value, of the obligations it assumes
under that guarantee and must disclose that information in its interim and
annual financial statements. FIN 45 does not apply to certain guarantee
contracts, such as those issued by insurance companies or for a lessee's
residual value guarantee embedded in a capital lease. The provisions related to
recognizing a liability at inception of the guarantee for the fair value of the
guarantor's obligations would not apply to product warranties or to guarantees
accounted for as derivatives. The disclosure requirements in FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of FIN 45 did not have a material impact on the
condensed consolidated financial statements.
9. Other Debt Obligations
On October 7, 2002, the Company amended the agreement relating to its bank
credit facility. Under the amended agreement, the bank credit facility declines
in tranches from $25.0 million in October 2002 to $18.5 million in mid-April
2003. At March 31, 2003, the credit facility was $19.0 million, with a
subsequent reduction to $18.5 million in mid-April per the agreement. 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 interest rate on borrowings under the facility is
prime plus 50 basis points.
The credit agreement requires monthly compliance with certain financial
covenants. Primarily due to a weak revenue environment and increasing fuel
prices, the Company did not meet the financial covenants as of January 31, 2003
and obtained a waiver of the covenant default. The Company also did not meet the
financial covenants as of February 28, 2003, March 31, 2003 and April 30, 2003.
In addition, the Company's action to temporarily suspend payments to lessors and
certain other creditors, announced March 7, 2003, resulted in a default under
the terms of the credit agreement, as well as under certain lease agreements.
The Company is in discussions with the banks and lessors to attempt to resolve
the situation, however there is no assurance that the Company will be successful
in those negotiations. As a result of the temporary payment
9
suspension, the Company has reclassified $6.4 million of debt related to one
MD-80 from long-term to short-term on the accompanying condensed consolidated
balance sheet.
As of March 31, 2003, the Company had borrowings under the bank credit facility
totaling $2.5 million. In addition, the Company had outstanding letters of
credit totaling $15.9 million, reducing the available credit by that amount. The
letters of credit are primarily used to support financing of the Company's
maintenance facilities.
10. Shareholders' Equity
At March 31, 2003, the Company had one stock-based employee compensation plan,
which is described more fully in Note 8 of the Notes to the Consolidated
Financial Statements of the Company's Annual Report on 10-K for the year ended
December 31, 2002. The Company has adopted the disclosure requirements of SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") as amended by
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." The Company has elected to continue to follow the provisions of
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees"
and its related interpretations; accordingly, no compensation cost has been
reflected for the stock option plan in the condensed consolidated financial
statements in this filing.
Had compensation costs for the Company's stock option plan been determined based
on their fair value at the grant dates for awards under those plans consistent
with the method of SFAS 123, the Company's net (loss) income and net (loss)
income per share for the quarters ended March 31 would have been reduced to the
pro forma amounts indicated below (in thousands, except per share amounts):
10
Three Months Ended
March 31
2003 2002
---- ----
Net (loss) income:
As reported $(11,770) $ 3,849
Deduct: Total stock-based employee
compensation expense determined under fair
value based methods, net of related tax effect (324) (538)
-------- ---------
Pro forma $(12,094) $ 3,311
======== =========
Net (loss) income per share - basic:
As reported $ (0.76) $ 0.28
Pro forma $ (0.78) $ 0.24
Net (loss) income per share - diluted:
As reported $ (0.76) $ 0.28
Pro forma $ (0.78) $ 0.24
The following table is a reconciliation of the weighted average shares
outstanding for the quarters ended March 31, 2003 and 2002 (in thousands):
Three Months Ended
March 31
2003 2002
---- ----
Weighted average shares
outstanding 15,512 13,832
Effect of dilutive securities:
Stock options 0 70
Shares issuable under the 1995
Stock Plan for Outside
Directors (1) 0 13
- --
Weighted average shares
outstanding assuming dilution 15,512 13,915
(1) Shares issuable under the 1995 Stock Plan for Outside Directors of 18 were
excluded from the 2003 calculation as their effect was anti-dilutive.
11. Comprehensive (Loss) Income
Comprehensive (loss) income for the quarters ended March 31, 2003 and 2002 was
$(12.0) million and $4.2 million, respectively.
11
12. Going Concern and Management's Plan
Going Concern - The consolidated financial statements presented in the Company's
Annual Report on 10-K and the unaudited condensed consolidated financial
statements in this filing have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company incurred substantial operating losses
in 2001 and 2002, and existing industry conditions - including high fuel prices
and depressed business travel due to the stagnant economy - will likely cause
the Company to incur an operating loss in 2003. In addition, the Company's
liquidity position has deteriorated as a result of the losses and additional
pressure applied by the Company's creditors to reduce its obligations.
On March 7, 2003, the Company suspended lease and debt payments associated with
most of its aircraft until June 7, 2003. The suspension is intended to provide
the Company the opportunity to negotiate a restructuring of the terms and
conditions of the leases and other financial obligations with the lessors and
other affected creditors to bring them in line with market conditions and better
reflect the reduced market values of the aircraft. Because the Company suspended
payments without the consent of the lessors and other affected creditors, the
suspension of payments resulted in defaults under the terms of the applicable
leases and debt obligations and a default under the terms of the Company's bank
credit agreement and the Company's credit card processing agreement for
MasterCard/Visa transactions. Such defaults give the other parties to these
arrangements certain rights and remedies. For example, the default under the
Company's credit card processing agreement for MasterCard/Visa transactions has
resulted in an increase of the reserve under that agreement to 90% of the card
processor's exposure and may potentially result in an increase to 100% of the
card processor's exposure. While the Company is attempting to negotiate with the
relevant parties regarding the consequences of the defaults, there is no
assurance it will be successful in these negotiations.
The Company's consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classifications of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's ability to
continue as a going concern is dependent on its ability to generate sufficient
cash flows to meet obligations on a timely basis, to negotiate new agreements
with its aircraft lessors and debt providers, and to obtain additional financing
should industry conditions not improve. Management is implementing a number of
plans to help alleviate these situations, as described below.
Management's Plan - The Company has implemented a number of actions to improve
its profitability and liquidity position. On February 26, 2003, the Company
announced the launch of low-fare service focusing on the leisure market. Service
is expected to be launched in the third quarter 2003 with five existing MD-80
aircraft that will be converted to a high-density seating configuration. This
product is expected to enable the Company to serve high-volume leisure
destinations more profitably.
12
The Company also announced profit improvement measures aimed at improving cash
flow by more than $4 million per month. The Company reduced its planned
operating schedule by approximately 12% in early April, eliminating some routes
that were unprofitable and reducing frequency in others. The Company also
reduced its complimentary inflight meal service to beverages, snacks and
cookies, and switched to a buy-onboard dining service, discontinued standard
travel agency commissions to match the industry, and implemented service fee
increases for changes to nonrefundable tickets, similar to most other airlines.
In addition, the Company implemented a 13% workforce reduction to align with the
capacity reductions and reduce overhead costs. Remaining non-union employees
received temporary compensation reductions. The labor union representing Midwest
Airlines' pilots agreed to six-month wage concessions effective April 2003 that
will save approximately $1.0 million in the aggregate over the six-month period;
discussions continue on longer-term adjustments to work rules and productivity
enhancements. The Company is also discussing cost concessions with its other
labor unions, aircraft lessors and other key vendors. Achieving the Company's
target will require some level of success with all these measures, and there is
no assurance that the Company will be successful in achieving its objectives.
The Company is also pursuing other alternatives to increase its short-term
liquidity, including the sale of certain assets, support from government
entities, and support from its key suppliers and creditors. There is no
assurance that the Company will be successful in these plans.
13
Part I Item 2.
Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition
-----------------------
Results of Operations
Overview
- --------
The Company's first quarter 2003 operating loss was ($17.9) million, a decrease
in loss of $14.8 million from the first quarter 2002 operating loss of ($32.7)
million. Net loss for the quarter was ($11.8) million, a decrease of $15.6
million from first quarter 2002 net income of $3.8 million. First quarter 2003
net loss per share on a diluted basis was ($0.76), a $1.04 decline from 2002 net
income per share on a diluted basis of $0.28. 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.
The Company's total revenue in first quarter 2003 decreased $10.0 million, or
9.6%, from first quarter 2002. Traffic, as measured by scheduled service revenue
passenger miles, increased 2.9% in the first quarter, while scheduled service
capacity, as measured by available seat miles ("ASMs"), increased 5.2%. Traffic
increased 1.8% at Midwest Airlines and 16.2% at Midwest Connect. Capacity at
Midwest Connect increased 15.0% due to the shifting of certain routes from
Midwest Airlines, as well as the addition of Essential Air Service routes.
Midwest Airlines' capacity increased 4.1% due primarily to the effects of the
prior year shutdown in service between Omaha and Washington National, which was
the result of the post-September 11, 2001 flight restrictions into National.
This service was restored in March 2002.
First quarter revenue yield decreased 15.3% at Midwest Airlines and 20.5% at
Midwest Connect. The decreases in revenue yield were due in large part to a
substantial decline in high-yield business travel, heavy industrywide fare
discounting implemented to stimulate travel demand, and increased competition in
some markets.
The Company's operating costs decreased $24.7 million, or 18.1%, to $112.0
million in first quarter 2003. In the first quarter, the Company incurred an
additional $9.0 million in fuel costs over the prior year, due primarily to
higher prices. Some of the increase in fuel costs was offset by savings from
companywide cost-reduction efforts, with reduced costs in many expense
categories. First quarter 2002 operating costs include a $29.9 million (pre-tax)
impairment charge related to the early retirement of the Company's DC-9 fleet.
Additional detail on cost changes is included in subsequent sections.
The Company's passenger traffic and yields declined severely following the
events of September 11th. Since that time, the Company has experienced
significantly lower revenues and has incurred higher costs in certain categories
than were originally anticipated. To mitigate the adverse financial situation,
the Company has taken, and will continue to take, action intended to improve
financial performance by improving revenue and reducing costs. These actions
focus on two key areas: 1) cost reductions and internal restructuring, and 2)
the launch of low-fare service
14
in third quarter 2003 to address the growing low-fare segment of the market.
Further discussion of these actions follows. There is no assurance that the
Company's short and long-term liquidity issues will be resolved without a
substantial restructuring of its business and contracts, and an overall
improvement in the conditions within the industry. Further, to successfully
restructure the Company, the Company may need to pursue alternative
restructuring scenarios, including judicial restructuring.
Cost Reductions and Internal Restructuring
The Company has announced profit improvement measures aimed at improving cash
flow by more than $4 million per month. The Company reduced its planned
operating schedule by approximately 12% in early April, eliminating some routes
that were unprofitable and reducing frequency in others. The Company also
reduced its complimentary inflight meal service to beverages, snacks and
cookies, switched to a buy-onboard dining service, discontinued standard travel
agency commissions to match the industry, and implemented service fee increases
for changes to nonrefundable tickets, similar to most other airlines. In
addition, the Company implemented a 13% workforce reduction to align with the
capacity reductions and to reduce overhead costs. Remaining non-union employees
received temporary compensation reductions. The labor union representing Midwest
Airlines' pilots agreed to six-month wage concessions effective April 2003 that
will save approximately $1.0 million in the aggregate over the six-month period;
discussions continue on longer-term adjustments to work rules and productivity
enhancements. The Company is also discussing cost concessions with its other
labor unions, aircraft lessors and other key vendors. Achieving the Company's
target will require some level of success with all these measures, and there is
no assurance it will be successful in achieving its objectives.
Low-Fare Product
On February 26, 2003, the Company announced the launch of low-fare service
focusing on the leisure market. Service on this product is expected to be
initiated in the third quarter 2003, and will complement the Company's existing
premium (Midwest Airlines) and regional (Midwest Connect) products by offering
flights to high-demand leisure destinations at the lower fares leisure travelers
want to pay. The decision to offer a low-fare product was based on extensive
market research. The Company expects to initiate service with five MD-80
aircraft (currently part of the Midwest Airlines fleet) in a high-density
seating configuration that will seat 143-147 passengers in a three-by-two
configuration in a single-class cabin. Pitch will average 33 inches, similar to
Midwest Airlines and more than other low-fare carriers. The low-fare product is
expected to enhance the Company's competitive position by serving a segment of
the market that is growing more rapidly than the business travel market,
expanding to destinations that have not been economically viable to serve with
the premium product, and serving some existing destinations more efficiently.
There is no assurance that the Company will be successful in these plans.
15
Operating Statistics
- --------------------
The following table provides selected operating statistics for Midwest Airlines
and Midwest Connect.
Three Months Ended
------------------
March 31,
---------
2003 2002
---- ----
Midwest Airlines Operations
- ---------------------------
Origin & Destination Passengers 454,723 459,839
Revenue Passenger Miles (000s) 468,740 460,505
Scheduled Service Available Seat Miles (000s) 767,751 737,621
Total Available Seat Miles (000s) 783,655 755,932
Load Factor (%) 61.1% 62.4%
Revenue Yield $0.1378 $0.1628
Revenue per Scheduled Service ASM (1) $0.0881 $0.1060
Total Cost per Total ASM $0.1170 $0.1594
Impairment Loss per Total ASM $0.0000 $0.0396
Total Cost per Total ASM Excluding Impairment Loss (2) $0.1170 $0.1198
Average Passenger Trip Length (miles) 1,031 1,001
Number of Flights 10,217 10,166
Into-plane Fuel Cost per Gallon $1.10 $0.71
Full-time Equivalent Employees at End of Period 2,226 2,415
Aircraft in Service at End of Period 33 35
Midwest Connect Operations
- --------------------------
Origin & Destination Passengers 133,777 124,395
Revenue Passenger Miles (000s) 45,969 39,558
Scheduled Service Available Seat Miles (000s) 100,732 87,580
Total Available Seat Miles (000s) 100,776 87,760
Load Factor (%) 45.6% 45.2%
Revenue Yield $0.3332 $0.4192
Revenue per Scheduled Service ASM (1) $0.1557 $0.1900
Total Cost per Total ASM $0.2143 $0.1995
Average Passenger Trip Length (miles) 344 318
Number of Flights 14,179 12,500
Into-plane Fuel Cost per Gallon $1.18 $0.78
Full-time Equivalent Employees at End of Period 606 540
Aircraft in Service at End of Period 25 25
(1) Passenger, cargo and other transport-related revenue divided by scheduled
service ASMs.
(2) Management believes the total cost per total ASM excluding impairment loss
statistic provides investors a better measure to monitor the company's cost
trends.
Note: All statistics exclude charter operations except the following: total
available seat miles ("ASMs"), total cost per total ASM, impairment loss per
total ASM, total cost per total ASM excluding impairment loss, 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 statistics.
Numbers in this table may not be recalculated due to rounding.
16
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 March 31,
----------------------------
2003 2002
---- ----
Per Total % of Per Total % of
ASM Revenue ASM Revenue
--- ------- --- -------
Operating Revenues:
Passenger Service $0.090 85.0% $0.109 88.0%
Cargo 0.001 1.4% 0.002 1.6%
Other 0.015 13.6% 0.013 10.4%
------- ------ ------- ------
Total Operating Revenues $0.106 100.0% $0.124 100.0%
------- ------ ------- ------
Operating Expenses:
Salaries, Wages and Benefits $0.044 41.5% $0.045 36.5%
Aircraft Fuel and Oil 0.028 26.3% 0.019 15.1%
Commissions 0.004 3.6% 0.005 4.4%
Dining Services 0.004 3.5% 0.005 4.4%
Station Rental, Landing, Other Fees 0.013 11.9% 0.012 9.4%
Aircraft Maintenance, Materials and Repairs 0.009 8.4% 0.011 9.2%
Depreciation and Amortization 0.006 5.7% 0.007 5.3%
Aircraft Rentals 0.007 6.8% 0.007 6.1%
Impairment Loss 0.000 0.0% 0.035 28.8%
Other 0.012 11.4% 0.015 12.2%
------- ------ ------- ------
Total Operating Expenses $0.127 119.1% $0.161 131.4%
======= ====== ======= ======
Total ASMs (000s) 884,431 843,692
Note: Numbers, percents and totals in this table may not be recalculated due to rounding.
17
Three Months Ended March 31, 2003 Compared With
-----------------------------------------------
Three Months Ended March 31, 2002
---------------------------------
Operating Revenues
- ------------------
Company operating revenues totaled $94.1 million in first quarter 2003, a $10.0
million, or 9.6%, decrease from first quarter 2002. Passenger revenues accounted
for 85.0% of total revenues and decreased $11.6 million, or 12.7%, from first
quarter 2002 to $79.9 million. The decrease is attributable to a 15.2% decrease
in revenue yield and a decrease of 1.3 percentage points in load factor,
partially offset by a 2.9% increase in passenger volume, as measured by revenue
passenger miles. Poor weather also contributed to the decrease, resulting in
increased flight cancellations quarter over quarter for both airlines.
Midwest Airlines passenger revenue decreased $10.4 million, or 13.8%, from 2002
to $64.6 million. Revenue yield decreased 15.3% 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. Load factor decreased from
62.4% in 2002 to 61.1% in 2003. Total capacity, as measured by scheduled service
ASMs, increased 4.1% due primarily to the effects of the prior year shutdown in
service between Omaha and Washington National, which was the result of the
post-September 11, 2001 flight restrictions into National. This service was
restored in March 2002. Passenger volume, as measured by scheduled service
revenue passenger miles, increased 1.8%.
Midwest Connect passenger revenue decreased $1.2 million, or 7.6%, from first
quarter 2002 to $15.3 million. This decrease was primarily the result of a
decline in revenue yield of 20.5%, which was caused by 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. Average passenger trip length increased 26 miles, or 8.1%. Total
capacity, as measured by scheduled service ASMs, increased 15.0% due to the
shifting of certain routes from Midwest Airlines, as well as the addition of
Essential Air Service routes. Passenger volume, as measured by scheduled service
revenue passenger miles, increased 16.2%. Load factor increased from 45.2% in
first quarter 2002 to 45.6% in first quarter 2003.
Revenue from cargo, charter and other services increased $1.7 million in first
quarter 2003. Revenue from charter sales increased 20% over first quarter 2002
as more aircraft time was available for charter service, and the Company
generated additional bookings from sports teams. Cargo revenue decreased $0.3
million, or 20.7%, 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
- ------------------
First quarter 2003 operating expenses decreased $24.7 million, or 18.1%, from
first quarter 2002. The decrease was primarily the result of lower costs year
over year in many categories, including the effect of a non-recurring $29.9
asset impairment charge included in 2002 costs. These decreases were partially
offset by higher fuel costs of $9.0 million quarter over quarter, as well as
cost increases in the labor, rental and station costs categories. Cost per total
ASM (unit costs) at
18
Midwest Airlines decreased 2.3% to 11.7(cent) in first quarter 2003; Midwest
Connect's cost per total ASM increased 7.4% to 21.4(cent).
Salaries, wages and benefits increased $1.0 million, or 2.7%, from first quarter
2002 to $39.0 million. The labor cost increase is primarily due to higher pilot
and flight attendant labor costs, partially offset by decreases in headcount. On
a cost per total ASM basis, labor costs decreased 2.1% to 4.4(cent) in 2003.
Aircraft fuel and oil and associated taxes increased $9.0 million, or 57.1%, to
$24.7 million in first quarter 2003. Into-plane fuel prices increased 54.5% in
first quarter 2003, averaging $1.11 per gallon versus $0.72 per gallon in first
quarter 2002, and resulted in an $8.7 million (pre-tax) unfavorable price
impact. Fuel consumption increased 1.8% in the quarter as a result of capacity
additions at Midwest Connect. The Company had option cap agreements relating to
about 20% of its first quarter 2003 fuel volume, and those agreements provided a
$1.0 million benefit for the quarter. Fuel costs trended downward in April 2003,
averaging $0.97 per gallon. The Company has hedged approximately 15% of its
anticipated second quarter 2003 fuel needs. As of April 30, 2003, no additional
options had been placed for this or later periods.
Commissions for travel agents and commissions related to credit card
transactions decreased $1.2 million, or 26.4%, from first quarter 2002 to $3.4
million. The decrease was due to a 12.7% decrease in passenger revenue, as well
as the effects of lower travel agent commission caps that were in place in first
quarter 2003 versus 2002. In addition, in March 2003, the Company discontinued
standard travel agent commission payments. Commissions as a percentage of
passenger revenue decreased from 5.0% in first quarter 2002 to 4.2% in first
quarter 2003.
Dining services costs decreased $1.4 million, or 29.5%, from first quarter 2002
to $3.3 million. The decrease was due to the implementation of tiered meal
service in November 2002, which reduced the number of flights receiving meal
service, as well as the cost of the food served. In addition, in April 2003, the
Company discontinued complimentary meal service on all flights, retaining only
beverage, snack and cookie service. Total dining services costs per Midwest
Airlines passenger (including food, beverage, linen, catering equipment and
supplies) decreased from $9.79 in first quarter 2002 to $6.78 in first quarter
2003.
Station rental, landing and other fees increased $1.4 million, or 14.6%, from
first quarter 2002 to $11.2 million. The increase was primarily the result of an
increase in landing fee rates and airport rental and ground handling costs, as
well as the effect of nonrecurring credits from first quarter 2002. On a cost
per ASM basis, these costs increased 9.3%.
Aircraft maintenance material costs decreased $1.6 million, or 16.7%, from first
quarter 2002 to $7.9 million. The decrease was caused by lower engine repair
costs at Midwest Airlines due to the phase-out of the DC-9 program, and was
partially offset by increased maintenance costs at Midwest Connect due to the
cancellation of the 328JET warranty program as a result of Fairchild's
insolvency. On a cost per total ASM basis, maintenance costs decreased 20.5% to
0.9(cent) in 2003.
19
Depreciation and amortization decreased $0.2 million, or 3.6%, from first
quarter 2002 to $5.4 million. On a cost per total ASM basis, these costs
decreased 8.1%. Depreciation was lower on the DC-9 fleet following the asset
impairment charge in first quarter 2002.
Aircraft rental costs increased $0.1 million, or 1.5%, from first quarter 2002
to $6.4 million. On a cost per total ASM basis, these costs decreased 3.2% due
to higher aircraft utilization at Midwest Airlines and Midwest Connect. Costs
include expense recognized for lease payments subject to the payment moratorium,
as the Company continues to accrue these costs based on rates under existing
agreements.
Other operating expenses decreased $1.9 million, or 15.3%, from first quarter
2002 to $10.8 million. Other operating expenses consist primarily of advertising
and promotion, insurance, property taxes, crew hotel rooms, reservation fees,
administration and other items. Cost decreases were realized in insurance,
advertising, and telephone and communication costs; in addition, first quarter
2002 costs included a $1.4 million writedown of the MD-80 telephone system. On a
cost per total ASM basis, other operating expenses decreased 19.2%.
Credit for Income Taxes
- -----------------------
Income tax credit for first quarter 2003 was ($6.3) million, a $8.6 million
decrease from the 2002 provision of $2.3 million. The effective tax rates for
the first quarters of 2003 and 2002 were 35.0% and 37.0%, respectively. 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 first quarter 2003 was ($11.8) million, a decrease of $15.6 million
from first quarter 2002 net income of $3.8 million.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $39.9 million (including $16.8
million of "restricted cash," as discussed more fully below) at March 31, 2003,
compared with $56.6 million at December 31, 2002. Net cash used by operating
activities totaled $5.1 million in 2003. Net cash used in investing activities
totaled $13.2 million in 2003. Net cash provided by financing activities in 2003
totaled $1.7 million, due primarily to funding associated with the pre-delivery
progress payments related to the Company's Boeing 717 aircraft program,
partially offset by the payment of principal under the bank credit facility
(each as discussed below). The Company's unrestricted cash and cash equivalents
totaled $19.9 million at April 30, 2003. The Company's restricted cash and cash
equivalents at April 30, 2003 totaled an additional $21.3 million. The cash
balance at April 30, 2003 reflects the effects of the lease and debt payment
moratorium (as discussed below). Payments suspended as of this date are
approximately $7.0 million.
20
As of March 31, 2003, the Company had a working capital deficit of $75.9 million
compared with a $45.2 million deficit on December 31, 2002. The increase in the
working capital deficit is due primarily to decreased cash from capital spending
to acquire spare parts for the 717 program, as well as the reclassification of
certain debt obligations from long-term to short-term (as discussed more fully
below). 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.
On October 7, 2002, the Company amended the agreement relating to its bank
credit facility. Under the amended agreement, the bank credit facility declines
in tranches from $25.0 million in October 2002 to $18.5 million in mid-April
2003. At March 31, 2003, the credit facility was $19.0 million, with a
subsequent reduction to $18.5 million in mid-April per the agreement. 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 interest rate on borrowings under the facility is
prime plus 50 basis points.
The credit agreement requires monthly compliance with certain financial
covenants. Primarily due to a weak revenue environment and increasing fuel
prices, the Company did not meet the financial covenants as of January 31, 2003
and obtained a waiver of the covenant default. The Company also did not meet the
financial covenants as of February 28, 2003, March 31, 2003 and April 30, 2003.
In addition, the Company's action to suspend payments to lessors and certain
other creditors announced March 7 resulted in a default under the terms of the
credit agreement, as well as under certain lease agreements. A default under the
credit agreement entitles the banks to, among other things, terminate the bank
credit facility and demand immediate repayment of all outstanding amounts. The
Company is in discussions with the banks and lessors to attempt to resolve the
situation; however, there is no assurance that it will be successful in these
negotiations. As a result of the payment suspension, the Company has
reclassified $6.4 million of debt related to one MD-80 from long-term to
short-term on the accompanying balance sheet.
As of March 31, 2003, the Company had borrowings under the facility totaling
$2.5 million. In addition, the Company had outstanding letters of credit
totaling approximately $15.9 million, 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 April 30, 2003, the Company had
borrowings under the facility totaling $2.5 million; it expects that the
outstanding amount will decline $0.5 million by mid-May due to proceeds from the
sale of assets. The amount of the outstanding letters of credit had not changed
as of April 30, 2003.
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
21
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 85 percent of the credit card processor's risk exposure
(determined on a daily basis), or $15.4 million of the $16.8 million of
restricted cash as of March 31, 2003. As of April 18, 2003, the level was raised
to 90 percent. The processor can raise the level to 100% of its risk exposure at
its discretion, as long as the Company remains in default under the covenants.
The Company did not meet the financial covenants for January 2003, but received
a waiver for that month. The Company also did not meet the financial covenants
for February, March or April 2003. In addition, the Company's action to suspend
payments to lessors and certain other creditors announced March 7 resulted in a
default under the terms of the credit card processing agreement. The Company
obtained a waiver from the credit card processor for the January 2003 financial
covenant defaults, and is in discussions with the credit card processor to
attempt to resolve the current situation. There is no assurance that the Company
will be successful in those negotiations. 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
and by a third priority lien on the Company's headquarters facility. It is
likely, if current industry conditions persist, that other credit card
processors will require a holdback as well. The aggregate amount of the risk
exposure of the other processors as of April 30, 2003 was approximately $6.7
million.
The Company offers the Midwest Airlines MasterCard program. During 2002, the
Company transitioned the program from Elan Financial Services to Juniper Bank
under an agreement effective July 1, 2002. The program allows Midwest Airlines
to offer a co-branded credit card to enhance loyalty to the airline and to
increase frequent flyer membership. The Company 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 the Company $20.0 million in accordance with the
agreement between the parties. 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 the
payment and in part the prepayment of a minimum amount due for the period from
the date of payment through June 30, 2003. 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 on the receipt of these or similar cash payments that the
agreement may obligate Juniper Bank to make. Accordingly, the Company is
reflecting deferred revenue 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 Company's revenue recognition policy. As of
March 31, 2003, the deferred revenue was $6.4 million. This liability will
decrease by approximately $1.3 million to $1.5 million per month, and the
Company expects the balance will be fully decremented by the end of third
quarter 2003.
22
Capital spending totaled $9.6 million for the three months ended March 31, 2003.
Capital expenditures consisted primarily of costs associated with the start up
of the Boeing 717 program, with the majority of the spending related to the
acquisition of spare parts for the aircraft program. Capital spending for the
remainder of the year is estimated at $6 million.
To date, the Company has made pre-delivery progress payments of $51.4 million
for the Boeing 717 aircraft program, of which $40.0 million was funded under a
loan agreement with KfW, guaranteed by Rolls-Royce. The loan agreement provides
up to $45.0 million in pre-delivery progress payment financing. Under a
financing commitment between the Company and BCC, at each aircraft delivery date
BCC acquires and pays for the aircraft delivered, including interest accrued on
the debt owed KfW, and BCC then leases the aircraft to the Company. At that
time, BCC reimburses 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 uses 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 represent available cash. With the loan agreement with
KfW 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 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.
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, for a 10-year term. Three 328JETs were
debt-financed in 2001, each for a period up to 32 months at fixed interest rates
ranging from 5.58% to 5.92% for the first 26 to 28 months. The interest rates
revert to a variable rate for the last few months of the financing agreement.
The Company will attempt to refinance these 328JET regional jets for longer
terms when the initial financing comes due in August and November 2003 for two
jets and in January 2004 for the third. The Company's ability to refinance these
jets will be dependent in part on the then-current fair market value of the jets
and the Company's financial position. As of April 30, 2003, the Company believes
that the aggregate value of these 328JET regional jets is approximately $12.0
million less than the aggregate amount of the associated indebtedness.
The Company's Board of Directors has authorized a $30.0 million common stock
repurchase program. As of March 31, 2003, 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 three months ended March 31, 2003.
On April 23, 2001, the Company completed a $6.3 million financing of a new
maintenance facility for Midwest Connect 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 credit facility.
Interest payments made to bondholders and amortization of principal are recorded
as rent expense.
23
The Company maintains a qualified defined benefit plan, the Pilots' Supplemental
Pension Plan (the "Qualified Plan"), which provides supplemental retirement
benefits to Midwest Airlines pilots, and an unfunded nonqualified defined
benefit plan to provide Midwest Airlines pilots with annuity benefits for salary
in excess of amounts permitted to be paid under the provisions of the tax law to
participants in the Qualified Plan. The discount rate used to determine the
funding requirements for the Qualified Plan was 6.75%. To determine this rate,
industry benchmarks were used, primarily the Moody's Aa Corporate Bond yield as
of December 31, 2002. The method used to determine the market-related value of
plan assets is the prior year's market-related value of assets, adjusted by
contributions, disbursements, expected return on investments and 20% of
investment gains (losses) during the five prior years. The Qualified Plan assets
are currently invested in money market and other stable principal-type funds.
Estimated 2003 funding requirements for the Qualified Plan are $1.7 million.
On March 7, 2003, the Company suspended aircraft lease and debt payments
associated with the Company's DC-9, MD-80, 328JET and Beech 1900 aircraft until
June 7, 2003. The suspension is intended to provide the Company opportunity to
negotiate a restructuring of the terms and conditions of the leases and other
financial obligations with the lessors and other affected creditors to bring
them in line with market conditions and better reflect the reduced market values
of the aircraft. Payments being suspended total approximately $9.7 million.
Because the Company suspended the payments without the consent of the lessors
and other affected creditors, the suspension of payments resulted in defaults
under the terms of the applicable leases and debt obligations, and also resulted
in defaults under the terms of the Company's bank credit agreement and the
Company's credit card processing agreement for MasterCard/Visa transactions.
This could potentially result in an increase of the reserve under that agreement
to 100% of the card processor's exposure, and may result in defaults of other
contractual obligations. Such defaults give the other parties to these
arrangements certain rights and remedies. Although the Company is negotiating
with the relevant parties regarding the consequences of the defaults, there is
no assurance it will be successful in these negotiations.
In April 2003, the Senate and House of Representatives of the United States of
America passed, and the President signed, a supplemental appropriations bill to
provide certain aviation-related assistance, the Emergency Wartime Supplemental
Appropriations Act. The bill includes the following key provisions:
o $2.3 billion of the appropriation is for grants to be made by the
Transportation Security Administration ("TSA") to U.S. air carriers
based on the proportional share each carrier has paid or collected as
of the date of enactment of the legislation for passenger security and
air carrier security fees. These amounts will be distributed not later
than 30 days after the date of enactment of the legislation.
o The TSA will not impose passenger security fees on air carriers during
the period beginning June 1, 2003 and ending September 30, 2003.
o $100 million of the appropriation will be available to compensate air
carriers for the direct costs associated with the strengthening of
flight deck doors and locks on aircraft.
24
o Aviation war risk insurance provided by the federal government is
extended until August 2004.
The Company expects to receive a grant of approximately $10-11 million in May
2003 as a result of this legislation.
Going forward, there are numerous uncertainties associated with the Company's
liquidity position. Financial results and cash flow from operations can vary
significantly depending on the price of fuel, the general economic condition of
the country, and the acts undertaken by other airlines in the industry with
regard to capacity and pricing. The Company is attempting to solve immediate
liquidity issues by implementing measures to reduce costs. Many actions have
been taken, while others require the participation of labor unions representing
certain of the Company's employees, aircraft lessors and debt providers. In
addition, the Company is seeking liquidity from other sources including
government sources and significant suppliers. There is no assurance that the
Company's short and long-term liquidity issues will be resolved without a
substantial restructuring of its business and contracts, and an overall
improvement in the conditions within the industry. To successfully restructure
the Company, the Company may need to pursue alternative restructuring scenarios,
including judicial restructuring.
Critical Accounting Policies
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company to make estimates, assumptions and judgments that affect
amounts of assets and liabilities reported in the consolidated financial
statements, the disclosure of contingent assets and liabilities as of the date
of the financial statements, and reported amounts of revenues and expenses
during the year. The Company believes its estimates and assumptions are
reasonable; however, future results could differ from those estimates under
different assumptions or conditions.
Critical accounting policies are policies that reflect material judgment and
uncertainty, and may result in materially different results using different
assumptions or conditions. The Company identified the following critical
accounting policies and estimates: revenue recognition, frequent flyer revenue
and impairment of long-lived assets. For a detailed discussion of accounting
policies, refer to the notes to the consolidated financial statements in the
Company's Annual Report on 10-K.
25
Revenue Recognition
- -------------------
Passenger revenue, related commissions, if any, and cargo revenues are
recognized in the period when the service is provided. A portion of the revenue
from the sale of frequent flyer mileage credit is deferred and recognized
straight-line over 32 months. Contract maintenance revenue is recognized when
work is completed and invoiced. The estimated liability for sold, but unused,
tickets is included in current liabilities as air traffic liability. The amount
of commissions associated with unearned revenue is included in current assets as
prepaid commissions.
Frequent Flyer Revenue
- ----------------------
Effective January 1, 2000, the Company adopted Staff Accounting Bulletin 101,
"Revenue Recognition in Financial Statements" ("SAB 101"), issued by the
Securities and Exchange Commission in December 1999. SAB 101 provides guidance
on the application of generally accepted accounting principles to revenue
recognition in financial statements. Prior to the issuance of SAB 101, the
Company recognized all revenue from frequent flyer miles sold to partners, net
of the incremental cost of providing future air travel, when the mileage credits
were sold, which was consistent with most major airlines. Beginning January 1,
2000, as a result of adopting SAB 101, the Company changed its method used to
account for participating partners such as credit card companies, hotels and car
rental agencies. Under the new accounting method, a portion of the revenue from
the sale of frequent flyer mileage credits is deferred and recognized
straight-line over 32 months. The Company believes the method appropriately
matches revenues with the period in which services are provided.
The estimated incremental cost of providing future transportation in conjunction
with travel miles under the Company's frequent flyer program is accrued based on
estimated redemption percentages applied to actual mileage recorded in members'
accounts. The ultimate cost will depend on the actual redemption of frequent
flyer miles, and may be greater or less than amounts accrued at March 31, 2003.
Impairment of Long-Lived Assets
- -------------------------------
The Company records impairment charges on long-lived assets used in operations
when events and circumstances indicate the assets may be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
their carrying amount. The Company uses judgment when applying the impairment
rules to determine when an impairment test is necessary. Factors the Company
considers that could trigger an impairment review include significant
underperformance relative to historical or forecasted operating results, a
significant decrease in the market value of an asset and significant negative
industry or economic trends.
Impairment losses are measured as the amount by which the carrying value of an
asset exceeds its estimated fair value. The Company is required to make
estimates of its future cash flows related to the asset subject to review. These
estimates require assumptions about demand for the Company's service, future
market conditions and industry competition. Other assumptions include
determining the discount rule and future growth rates.
26
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 the Company's ability to generate sufficient cash flows to meet
obligations on a timely basis;
o the Company's ability to negotiate new agreements with its aircraft
lessors and debt providers;
o the Company's ability to successfully achieve the desired
profit-improvement measures;
o uncertainties concerning ongoing financing for operations, including
the ability to finance the purchase of new aircraft;
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;
o increases in fuel costs or the failure of fuel costs to decline;
o competitive developments;
o interest rates;
o increased costs for security-related measures;
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 U.S. military involvement in overseas operations.
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 Securities and Exchange Commission filings.
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 began in February 2003 and will continue into 2005 at a rate of one
aircraft every month. The first Boeing 717 aircraft entered scheduled
27
service in March 2003. These aircraft will replace Midwest Airlines DC-9
aircraft and be used to 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 and lease payment expenses) than the Company's DC-9 aircraft.
Benefits of the Boeing 717 aircraft, which are not 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.
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 was intended to allow the Company to
concentrate on the introduction of Boeing 717 aircraft to the Midwest Airlines
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 Midwest Connect with flexibility to
serve markets with differing capacity demands. The Embraer regional jet program
requires less significant pre-delivery payments than the Boeing 717 program but
will require long-term financing on or after delivery. The Company believes
long-term financing will be difficult to obtain given current industry
conditions and Company financial results, and is in discussions with Embraer to
further defer the deliveries of these aircraft.
Labor Relations - In June 2001, Midwest Connect began negotiating with its
pilots who are represented by the Air Line Pilots Association ("ALPA"), a
collective bargaining labor union. The Midwest Connect pilots' contract became
amendable in January 2002. The Company and ALPA are currently in negotiations
for a new contract. In July 2002, the Company and ALPA jointly filed for
mediation services from the National Mediation Board.
The Company is currently in discussions with its labor unions regarding cost
concessions as part of the internal restructuring initiative. In April 2003, the
Company reached agreement with Midwest Airlines pilots, represented by ALPA, for
a six-month wage reduction that will result in savings of approximately $1
million in the aggregate over the six-month period. The Company is continuing
discussions with ALPA for long-term productivity and work rule improvements. The
Company is also in discussions with the Association of Flight Attendants in
regard to concessions.
28
New Accounting Pronouncements - In June 2002, the FASB 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 adoption of SFAS No. 146 did not have a material impact on the
Company's condensed consolidated financial statements.
In November 2002, the FASB issued Interpretation No. ("FIN") 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others," which elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees. It also clarifies
that at the time a guarantee is issued, the Company must recognize an initial
liability for the fair value, or market value, of the obligations it assumes
under that guarantee and must disclose that information in its interim and
annual financial statements. FIN 45 does not apply to certain guarantee
contracts, such as those issued by insurance companies or for a lessee's
residual value guarantee embedded in a capital lease. The provisions related to
recognizing a liability at inception of the guarantee for the fair value of the
guarantor's obligations would not apply to product warranties or to guarantees
accounted for as derivatives. The disclosure requirements in FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of FIN 45 did not have a material impact on the
Company's condensed consolidated financial statements.
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 Company has received an extension of this war-risk
liability insurance through June 13, 2003. As a result of the Emergency Wartime
Supplemental Appropriations Act of 2003, the Company expects to receive
extensions of this coverage through August 31, 2004.
Commercial air carriers are required by the Department of Transportation to
obtain appropriate aviation insurance coverage. The effects of September 11
insurance losses, additional terrorist attacks or other unanticipated events
could result in aviation insurers further increasing their premiums, or a future
shortage of available aviation insurance. Significant increases in insurance
premiums or a shortage of available insurance could result in the curtailment or
discontinuation of scheduled service.
Low-Fare Service - On February 26, 2003, the Company announced the launch of
low-fare service focusing on the leisure market. Service is expected to be
initiated in the third quarter 2003 and will complement the Company's existing
premium (Midwest Airlines) and regional (Midwest Connect) products by offering
flights to high-demand leisure destinations at the lower fares leisure travelers
want to pay. The decision to offer low-fare service was based on extensive
29
market research. The Company expects to initiate service with five MD-80
aircraft (currently part of the Midwest Airlines fleet) in a high-density
seating configuration that will seat 143-147 passengers in a three-by-two
configuration in a single-class cabin. Pitch will average 33 inches, similar to
Midwest Airlines and more than other low-fare carriers. The low-fare brand is
expected to enhance the Company's competitive position by serving a segment of
the market that is growing more rapidly than the business travel market,
expanding to destinations that have not been economically viable to serve with
the premium product, and serving some existing destinations more cost
efficiently.
Suspension of Payments - On March 7, 2003, the Company suspended aircraft lease
and debt payments associated with the Company's DC-9, MD-80, 328JET and Beech
1900 aircraft until June 7, 2003. The suspension is intended to provide the
Company opportunity to negotiate a restructuring of the terms and conditions of
the leases and other financial obligations with the lessors and other affected
creditors to bring them in line with market conditions and better reflect the
reduced market values of the aircraft. Because the Company suspended the
payments without the consent of the lessors and other affected creditors, the
suspension of payments resulted in defaults under the terms of the applicable
leases and debt obligations, and also resulted in defaults under the terms of
the Company's bank credit agreement and the Company's credit card processing
agreement for MasterCard/Visa transactions. This could potentially result in an
increase of the reserve under that agreement to 100% of the card processor's
exposure, and may result in defaults of other contractual obligations. Such
defaults give the other parties to these arrangements certain rights and
remedies. Although the Company is negotiating with the relevant parties
regarding the consequences of the defaults, there is no assurance it will be
successful in these negotiations.
Government Assistance - The Company is in discussions with Milwaukee County
regarding financial support related to interest and principal obligations on
aircraft maintenance facilities financed by industrial development revenue
bonds. The Company is the obligor for payment of interest, and principal and the
bonds are supported by letters of credit issued by a credit facility bank.
Discussions have been directed toward Milwaukee County becoming the obligor for
the payment of interest and principal, and in return receiving certain assets of
the Company as collateral. This would have the effect of reducing the Company's
credit exposure to the credit facility bank.
As discussed above, in April 2003, the Senate and House of Representatives of
the United States of America passed, and the President signed, the Emergency
Wartime Supplemental Appropriations Act. The Company expects to receive a grant
of approximately $10-11 million in May 2003 as a result of this legislation.
30
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------------------------------------------------------------------
There have been no material changes in the Company's market risk since December
31, 2002.
Item 4. Controls and Procedures
- -------------------------------
(a) Evaluation of disclosure controls and procedures. In accordance with Rule
13a-15(b) of the Securities Exchange Act 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 Senior Vice President and
Chief Financial Officer, 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 and Chief Financial Officer have
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.
(b) Changes in internal controls. There were no 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.
31
PART II - OTHER INFORMATION
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
-------------------
The following reports on Form 8-K were filed during the quarter ended
March 31, 2003:
Date Filed Date of Report Item
---------- -------------- ----
February 10, 2003 January 23, 2003 The Company filed a news release under Item 5 of Form 8-K
reporting fourth quarter and full year 2002 financial results.
February 21, 2003 February 12, 2003 The Company filed a news release under Item 5 of Form 8-K
reporting January performance data for Midwest Airlines and
Midwest Connect.
February 27, 2003 February 26, 2003 The Company filed a press release under Item 5 of Form 8-K
announcing strategic plans to position its operations for the
future.
March 7, 2003 March 7, 2003 The Company filed a news release under Item 5 of Form 8-K
announcing details of a comprehensive strategic plan to return to
profitability.
March 13, 2003 March 12, 2003 The Company filed a news release under Item 5 of Form 8-K
reporting February performance data for Midwest Airlines and
Midwest Connect.
March 14, 2003 March 14, 2003 The Company filed a news release under Item 5 of Form 8-K
relating to its negotiations regarding aircraft-related
obligations.
32
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: May 15, 2003 By /s/ Timothy E. Hoeksema
-------------------------------------
Timothy E. Hoeksema
Chairman of the Board, President and
Chief Executive Officer
Date: May 15, 2003 By /s/ Robert S. Bahlman
-------------------------------------
Robert S. Bahlman
Senior Vice President and
Chief Financial Officer
33
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 (or persons performing the
equivalent function):
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: May 15, 2003
/s/ Timothy E. Hoeksema
- ----------------------------------------
Timothy E. Hoeksema
Chairman of the Board, President
and Chief Executive Officer
35
I, Robert S. Bahlman, Senior Vice President and Chief Financial 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 (or persons performing the
equivalent function):
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
36
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: May 15, 2003
/s/ Robert S. Bahlman
- ----------------------------------------
Robert S. Bahlman
Senior Vice President and
Chief Financial Officer
37
EXHIBIT INDEX
MIDWEST EXPRESS HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
------------------------------------
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.
38