Attached files
file | filename |
---|---|
EX-99.4 - REPUBLIC AIRWAYS HOLDINGS INC | v163009_ex99-4.htm |
8-K/A - REPUBLIC AIRWAYS HOLDINGS INC | v163009_8ka.htm |
EX-23.1 - REPUBLIC AIRWAYS HOLDINGS INC | v163009_ex23-1.htm |
EX-99.1 - REPUBLIC AIRWAYS HOLDINGS INC | v163009_ex99-1.htm |
EX-99.3 - REPUBLIC AIRWAYS HOLDINGS INC | v163009_ex99-3.htm |
MIDWEST
AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2008 (SUCCESSOR) AND 2007 (PREDECESSOR)
(Dollars
in thousands, except share and per share amounts)
Successor
|
Predecessor
|
|||||||
December 31,
|
December 31,
|
|||||||
2008
|
2007
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 10,769 | $ | 139,950 | ||||
Accounts
receivable — less allowance for doubtful accounts of $98 and $20 in 2008
and 2007, respectively
|
1,907 | 5,963 | ||||||
Fair
value of fuel derivatives
|
1,400 | 8,792 | ||||||
Inventories
|
4,660 | 8,389 | ||||||
Prepaid
expenses
|
2,168 | 11,510 | ||||||
Assets
held for sale
|
21,958 | |||||||
Restricted
cash
|
38,406 | 22,840 | ||||||
Deferred
income taxes
|
2,645 | 5,631 | ||||||
Total
current assets
|
83,913 | 203,075 | ||||||
PROPERTY
AND EQUIPMENT — Net
|
46,330 | 137,362 | ||||||
GOODWILL
|
48,248 | |||||||
INTANGIBLE
AND OTHER ASSETS — Net
|
89,779 | 20,927 | ||||||
TOTAL
ASSETS
|
$ | 268,270 | $ | 361,364 | ||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY (DEFICIT)
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 6,224 | $ | 9,671 | ||||
Income
taxes payable
|
338 | |||||||
Current
debt
|
307,049 | 793 | ||||||
Air
traffic liability
|
49,932 | 82,861 | ||||||
Unearned
revenue
|
1,686 | 30,244 | ||||||
Accrued
liabilities:
|
||||||||
Vacation
pay
|
3,983 | 6,310 | ||||||
Other
|
59,946 | 43,411 | ||||||
Total
current liabilities
|
428,820 | 173,628 | ||||||
LONG-TERM
DEBT
|
19,658 | |||||||
DEFERRED
INCOME TAXES
|
14,988 | 5,352 | ||||||
ACCRUED
PENSION AND OTHER POSTRETIREMENT BENEFITS
|
9,077 | 24,846 | ||||||
DEFERRED
FREQUENT FLYER REVENUE
|
56,438 | 8,509 | ||||||
DEFERRED
REVENUE, CREDITS, AND GAINS
|
62,494 | |||||||
OTHER
NON-CURRENT LIABILITIES
|
12,376 | 24,551 | ||||||
Total
liabilities
|
521,699 | 319,038 | ||||||
COMMITMENTS
AND CONTINGENCIES (Notes 13, 15, and 16)
|
||||||||
SHAREHOLDERS’(DEFICIT)
EQUITY:
|
||||||||
Predecessor:
|
||||||||
Preferred
stock, without par value, 5,000,000 shares authorized, no shares issued
and outstanding
|
||||||||
Common
stock, $0.01 par value; 50,000,000 shares authorized, 26,345,005 shares
issued
|
263 | |||||||
Additional
paid-in capital
|
85,331 | |||||||
Treasury
stock, at cost; 708,667 shares
|
(15,584 | ) | ||||||
Accumulated
deficit
|
(28,524 | ) | ||||||
Accumulated
other comprehensive income
|
840 | |||||||
Successor:
|
||||||||
Common
stock, $0.01 par value; 1 billion shares authorized, 243,267,464 shares
issued
|
2,433 | |||||||
Additional
paid-in capital
|
241,814 | |||||||
Accumulated
deficit
|
(501,720 | ) | ||||||
Accumulated
other comprehensive income
|
4,044 | |||||||
Total
shareholders’ (deficit) equity
|
(253,429 | ) | 42,326 | |||||
TOTAL
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY
|
$ | 268,270 | $ | 361,364 |
The
accompanying notes are an integral part of these consolidated financial
statements.
MIDWEST
AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 2008 (SUCCESSOR),
THE
ONE-MONTH PERIOD ENDED JANUARY 31, 2008 (PREDECESSOR), AND
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006 (PREDECESSOR)
(Dollars
in thousands)
Successor
|
Predecessor
|
|||||||||||||||
Eleven
|
One-Month
|
|||||||||||||||
Months Ended
|
Ended
|
Years Ended
|
||||||||||||||
December 31,
|
January 31,
|
December 31,
|
||||||||||||||
2008
|
2008
|
2007
|
2006
|
|||||||||||||
OPERATING
REVENUES:
|
||||||||||||||||
Passenger
service
|
$ | 529,492 | $ | 49,751 | $ | 672,634 | $ | 588,242 | ||||||||
Cargo
|
7,605 | 984 | 9,934 | 9,444 | ||||||||||||
Other
|
56,975 | 6,907 | 73,169 | 66,815 | ||||||||||||
Total
operating revenues
|
594,072 | 57,642 | 755,737 | 664,501 | ||||||||||||
OPERATING
EXPENSES:
|
||||||||||||||||
Salaries,
wages, and benefits
|
119,074 | 17,802 | 174,293 | 160,060 | ||||||||||||
Aircraft
fuel and oil
|
294,348 | 28,481 | 263,306 | 232,013 | ||||||||||||
Losses
(gains) on fuel derivatives
|
6,780 | 3,683 | (9,660 | ) | ||||||||||||
Commissions
|
18,005 | 1,597 | 21,388 | 18,018 | ||||||||||||
Dining
services
|
5,174 | 725 | 9,867 | 8,397 | ||||||||||||
Station
rental, landing, and other fees
|
47,678 | 5,957 | 58,321 | 51,562 | ||||||||||||
Aircraft
maintenance, materials, and repairs
|
33,383 | 5,629 | 64,504 | 51,451 | ||||||||||||
Depreciation
and amortization
|
23,390 | 1,306 | 15,417 | 15,178 | ||||||||||||
Aircraft
rentals
|
52,281 | 5,000 | 61,935 | 64,215 | ||||||||||||
Regional
carrier charges
|
68,978 | 5,105 | 31,385 | |||||||||||||
Restructuring
charges
|
38,311 | |||||||||||||||
Goodwill
impairment loss
|
190,387 | |||||||||||||||
Other
impairment losses
|
171,459 | 13,700 | ||||||||||||||
Acquisition
charges
|
23,138 | |||||||||||||||
Other
|
59,471 | 2,102 | 80,693 | 63,015 | ||||||||||||
Total
operating expenses
|
1,128,719 | 100,525 | 785,149 | 663,909 | ||||||||||||
OPERATING
INCOME (LOSS)
|
(534,647 | ) | (42,883 | ) | (29,412 | ) | 592 | |||||||||
OTHER
INCOME (EXPENSE):
|
||||||||||||||||
Interest
income
|
2,174 | 619 | 9,638 | 7,701 | ||||||||||||
Interest
and other expense
|
(20,179 | ) | (93 | ) | (1,791 | ) | (3,284 | ) | ||||||||
Total
other (expense) income
|
(18,005 | ) | 526 | 7,847 | 4,417 | |||||||||||
INCOME
(LOSS) BEFORE INCOME TAX
|
(552,652 | ) | (42,357 | ) | (21,565 | ) | 5,009 | |||||||||
INCOME
TAX (BENEFIT) PROVISION
|
(50,932 | ) | 279 | (403 | ) | |||||||||||
NET
INCOME (LOSS)
|
$ | (501,720 | ) | $ | (42,636 | ) | $ | (21,565 | ) | $ | 5,412 |
The
accompanying notes are an integral part of these consolidated financial
statements.
MIDWEST
AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY
FOR
THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 2008 (SUCCESSOR),
THE
ONE-MONTH PERIOD ENDED JANUARY 31, 2008 (PREDECESSOR), AND
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006 (PREDECESSOR)
(Dollars
in thousands)
Common
|
Accumulated
|
|||||||||||||||||||||||||||
Stock,
|
Additional
|
Other
|
Total
|
|||||||||||||||||||||||||
$0.01
|
Paid-In
|
Treasury
|
Accumulated
|
Comprehensive
|
Unearned
|
Shareholders’
|
||||||||||||||||||||||
Par Value
|
Capital
|
Stock
|
Deficit
|
Income (Loss)
|
Compensation
|
(Deficit) Equity
|
||||||||||||||||||||||
BALANCE
— January 1, 2006 (Predecessor)
|
$ | 185 | $ | 47,000 | $ | (15,584 | ) | $ | (13,253 | ) | $ | (838 | ) | $ | (254 | ) | $ | 17,256 | ||||||||||
Comprehensive
income (loss):
|
||||||||||||||||||||||||||||
Net
income
|
5,412 | 5,412 | ||||||||||||||||||||||||||
Other
comprehensive income (loss):
|
||||||||||||||||||||||||||||
Fuel
hedge (net of tax)
|
(4,216 | ) | (4,216 | ) | ||||||||||||||||||||||||
Pension
and other postretirement plans (net of tax)
|
134 | 134 | ||||||||||||||||||||||||||
Total
comprehensive income
|
1,330 | |||||||||||||||||||||||||||
Reclassification
of unearned compensation to Paid in capital upon adoption of
SFAS 123(R)
|
(254 | ) | 254 | - | ||||||||||||||||||||||||
Issuance
of common stock upon exercise of stock options
|
5 | 1,821 | 1,826 | |||||||||||||||||||||||||
Issuance
of 109,700 restricted shares
|
1 | (1 | ) | - | ||||||||||||||||||||||||
Issuance
of 789,189 of common shares for conversion of
warrants
|
8 | 3,524 | 3,532 | |||||||||||||||||||||||||
Issuance
of 556,600 shares of common stock for conversion of
debt
|
6 | 2,777 | 2,783 | |||||||||||||||||||||||||
Adjustments
to adopt SFAS 158 (net of tax)
|
(6,040 | ) | (6,040 | ) | ||||||||||||||||||||||||
Other
|
1,135 | 1,135 | ||||||||||||||||||||||||||
BALANCE
— December 31, 2006 (Predecessor)
|
205 | 56,002 | (15,584 | ) | (7,841 | ) | (10,960 | ) | - | 21,822 | ||||||||||||||||||
Comprehensive
income (loss):
|
||||||||||||||||||||||||||||
Net
loss
|
(21,565 | ) | (21,565 | ) | ||||||||||||||||||||||||
Other
comprehensive income (loss):
|
||||||||||||||||||||||||||||
Fuel
hedge (net of tax)
|
4,456 | 4,456 | ||||||||||||||||||||||||||
Pension
and other postretirement plans (net of tax)
|
7,344 | 7,344 | ||||||||||||||||||||||||||
Total
comprehensive loss
|
(9,765 | ) | ||||||||||||||||||||||||||
FIN
No. 48 adoption
|
882 | 882 | ||||||||||||||||||||||||||
Issuance
of common stock upon exercise of stock options
|
7 | 3,675 | 3,682 | |||||||||||||||||||||||||
Issuance
of 152,885 restricted shares
|
1 | 2,138 | 2,139 | |||||||||||||||||||||||||
Issuance
of 678,243 of common shares for conversion of
warrants
|
7 | 3,195 | 3,202 | |||||||||||||||||||||||||
Issuance
of 4,327,800 shares of common stock for conversion of
debt
|
43 | 21,596 | 21,639 | |||||||||||||||||||||||||
Other
|
(1,275 | ) | (1,275 | ) | ||||||||||||||||||||||||
BALANCE
— December 31, 2007 (Predecessor)
|
263 | 85,331 | (15,584 | ) | (28,524 | ) | 840 | - | 42,326 | |||||||||||||||||||
Comprehensive
income (loss):
|
||||||||||||||||||||||||||||
Net
loss
|
(42,636 | ) | (42,636 | ) | ||||||||||||||||||||||||
Other
comprehensive income —
|
||||||||||||||||||||||||||||
Pension
and other postretirement plans (net of tax)
|
325 | 325 | ||||||||||||||||||||||||||
Total
comprehensive loss
|
(42,311 | ) | ||||||||||||||||||||||||||
Other
|
2 | 2 | ||||||||||||||||||||||||||
BALANCE
— January 31, 2008 (Predecessor)
|
263 | 85,333 | (15,584 | ) | (71,160 | ) | 1,165 | - | 17 | |||||||||||||||||||
Elimination
of Predecessor equity accounts
|
(263 | ) | (85,333 | ) | 15,584 | 71,160 | (1,165 | ) | (17 | ) | ||||||||||||||||||
Contribution
of capital (Successor)
|
2,425 | 240,043 | 242,468 | |||||||||||||||||||||||||
Additional
shares issued
|
8 | 792 | 800 | |||||||||||||||||||||||||
Stock-based
compensation expense
|
979 | 979 | ||||||||||||||||||||||||||
Comprehensive
income (loss):
|
||||||||||||||||||||||||||||
Net
loss
|
(501,720 | ) | (501,720 | ) | ||||||||||||||||||||||||
Other
comprehensive income —
|
||||||||||||||||||||||||||||
Pension
and other postretirement plans (net of tax)
|
4,044 | 4,044 | ||||||||||||||||||||||||||
Total
comprehensive loss
|
(497,676 | ) | ||||||||||||||||||||||||||
BALANCE
— December 31, 2008 (Successor)
|
$ | 2,433 | $ | 241,814 | $ | - | $ | (501,720 | ) | $ | 4,044 | $ | - | $ | (253,429 | ) |
The
accompanying notes are an integral part of these consolidated financial
statements.
MIDWEST
AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 2008 (SUCCESSOR),
THE
ONE-MONTH PERIOD ENDED JANUARY 31, 2008 (PREDECESSOR), AND
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006 (PREDECESSOR)
(Dollars
in thousands)
Successor
|
Predecessor
|
|||||||||||||||
Eleven
|
One-Month
|
|||||||||||||||
Months Ended
|
Ended
|
Years Ended
|
||||||||||||||
December 31,
|
January 31,
|
December 31,
|
||||||||||||||
2008
|
2008
|
2007
|
2006
|
|||||||||||||
OPERATING
ACTIVITIES:
|
||||||||||||||||
Net
income (loss)
|
$ | (501,720 | ) | $ | (42,636 | ) | $ | (21,565 | ) | $ | 5,412 | |||||
Items
not involving the use of cash:
|
||||||||||||||||
Depreciation
and amortization
|
23,390 | 1,306 | 15,417 | 15,178 | ||||||||||||
Deferred
income taxes
|
(50,530 | ) | 279 | |||||||||||||
Impairment
losses
|
361,846 | 13,700 | ||||||||||||||
Share-based
compensation
|
979 | 1,250 | 992 | |||||||||||||
Losses
(gains) on fuel derivatives
|
4,571 | 3,683 | (8,792 | ) | ||||||||||||
Curtailment
gain on pension plans
|
(7,746 | ) | ||||||||||||||
Interest
paid in kind
|
16,160 | |||||||||||||||
Other
— net
|
5,294 | 359 | (2,995 | ) | 1,059 | |||||||||||
Changes
in operating assets and liabilities:
|
||||||||||||||||
Accounts
receivable
|
6,781 | 2,902 | (1,097 | ) | 410 | |||||||||||
Inventories
|
2,302 | (393 | ) | (445 | ) | 1,589 | ||||||||||
Prepaid
expenses
|
10,492 | (1,480 | ) | 5,238 | (5,162 | ) | ||||||||||
Other
assets
|
601 | 9,528 | (9,460 | ) | (5,142 | ) | ||||||||||
Accounts
payable
|
(8,743 | ) | 7,363 | (313 | ) | (2,746 | ) | |||||||||
Deferred
frequent flyer revenue
|
(6,135 | ) | 114 | 1,294 | 2,054 | |||||||||||
Accrued
liabilities
|
12,950 | 13,778 | 4,234 | (5,136 | ) | |||||||||||
Unearned
revenue
|
(17,726 | ) | 133 | (554 | ) | (4,259 | ) | |||||||||
Accrued
pension and other postretirement benefits
|
(3,005 | ) | (1,601 | ) | 1,786 | 2,697 | ||||||||||
Restricted
cash
|
(3,849 | ) | (11,717 | ) | 16,736 | (796 | ) | |||||||||
Air
traffic liability
|
(35,120 | ) | 20,458 | 6,781 | 12,218 | |||||||||||
Other
non-current liabilities
|
8,401 | 117 | 7,200 | 2,153 | ||||||||||||
Net
cash (used in) provided by operating activities
|
(180,807 | ) | 2,193 | 28,415 | 20,521 | |||||||||||
INVESTING
ACTIVITIES:
|
||||||||||||||||
Capital
expenditures
|
(14,799 | ) | (492 | ) | (12,286 | ) | (13,539 | ) | ||||||||
Return
of purchase deposits and predelivery progress payments
|
11,957 | |||||||||||||||
Proceeds
from sale of property and equipment
|
13,249 | 746 | 8 | 1,350 | ||||||||||||
Other
— net
|
(1 | ) | 1,359 | |||||||||||||
Net
cash (used in) provided by investing activities
|
(1,550 | ) | 254 | (12,279 | ) | 1,127 | ||||||||||
FINANCING
ACTIVITIES:
|
||||||||||||||||
Proceeds
from debt issuance
|
50,000 | |||||||||||||||
Proceeds
from warrants and options exercised
|
2 | 5,580 | 5,336 | |||||||||||||
Payment
of debt associated with progress payments
|
(9,100 | ) | ||||||||||||||
Payment
on note payable
|
(64 | ) | (1,139 | ) | ||||||||||||
Other
— net
|
791 | 1,244 | 1,245 | |||||||||||||
Net
cash provided by (used in) financing activities
|
50,791 | (62 | ) | 5,685 | (2,519 | ) | ||||||||||
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
(131,566 | ) | 2,385 | 21,821 | 19,129 | |||||||||||
CASH
AND CASH EQUIVALENTS — Beginning of period
|
142,335 | 139,950 | 118,129 | 99,000 | ||||||||||||
CASH
AND CASH EQUIVALENTS — End of period
|
$ | 10,769 | $ | 142,335 | $ | 139,950 | $ | 118,129 | ||||||||
SUPPLEMENTAL
CASH FLOW INFORMATION — Cash paid for:
|
||||||||||||||||
Income
taxes
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Interest
paid
|
$ | 1,662 | $ | 93 | $ | 1,226 | $ | 3,047 | ||||||||
NON-CASH
TRANSACTIONS:
|
||||||||||||||||
Accrued
capital expenditures
|
$ | 308 | $ | - | $ | 99 | $ | 670 | ||||||||
Accrued
liability converted into promissory note
|
$ | 9,328 | $ | - | $ | - | $ | - | ||||||||
Non-cash
incentives
|
$ | - | $ | - | $ | - | $ | 4,687 | ||||||||
Conversion
of debt to common stock
|
$ | - | $ | - | $ | 21,639 | $ | 2,777 |
The
accompanying notes are an integral part of these consolidated financial
statements.
MIDWEST
AIR GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2008 (SUCCESSOR) AND 2007 (PREDECESSOR),
AND
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 2008
(SUCCESSOR),
THE
ONE-MONTH PERIOD ENDED JANUARY 31, 2008 (PREDECESSOR), AND
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006 (PREDECESSOR)
1.
|
DESCRIPTION
OF BUSINESS
|
Midwest
Air Group, Inc. and subsidiaries (the “Company”) include two wholly owned
entities, Midwest Airlines, Inc. (“Midwest”) and Skyway Airlines, Inc.
(“Skyway”). Skyway discontinued flight operations during 2008 and surrendered
its operating certificate. Beginning in 2007 and during 2008, regional jet
capacity is also provided by SkyWest Airlines, Inc., (“SkyWest”) and
beginning in 2008 by Republic Airways Holdings Inc. and its subsidiaries
(“Republic”) both doing business as Midwest Connect under capacity agreements.
Midwest is a U.S. air carrier providing scheduled passenger service to
destinations in the United States. Midwest also provides air cargo and other
airline services and provided charter service through 2008. Midwest Connect
provides regional scheduled passenger service to cities primarily in the
Midwestern states and to Toronto, Canada. Service to Toronto ended in 2009.
Through 2008, Midwest Connect flights were operated with aircraft having
76 seats or less. The Midwest Connect flights supplement Midwest operations
by providing connecting service through Milwaukee and nonstop service to smaller
cities.
2.
|
BASIS
OF PRESENTATION, ORGANIZATION, AND OTHER
MATTERS
|
On
January 31, 2008 (the “Acquisition Date”), 100% of the issued and
outstanding publicly traded shares of Midwest Air Group, Inc.
(“Predecessor”) were acquired by an investment group composed of Northwest
Airlines Corp. (“Northwest”) and a syndicate of investment entities
arranged by TPG Capital, L.P. (the “TPG Entities”). The acquisition was
accomplished by the formation of Midwest Air Partners, LLC (“MAP”), a
Delaware limited liability company. Northwest holds 48.7% and the TPG Entities
hold 51.3% of MAP. MAP held a 97.7% interest in Midwest Management
Holdings, LLC (“MMH”), a Delaware limited liability company, with
management of Predecessor holding a 2.3% fully diluted interest in MMH. MMH
owned 100% of Midwest Acquisition Company, Inc. (“MAC”), which was
incorporated on August 13, 2007, in the state of Wisconsin. In connection
with the acquisition, Predecessor was merged into MAC, with Midwest Air
Group, Inc. being the surviving corporation (such surviving entity being
the “Company” or “Successor”). Following the merger, management of Predecessor
also held a diluted 4.3% interest in Successor in the form of common stock and
stock options.
The
acquisition of Predecessor by MAC was accounted for as a business combination in
accordance with the Financial Accounting Standards Board (“FASB”) Statement
No. 141, Business
Combinations, (“FASB Statement No. 141”).The assets and liabilities
acquired were adjusted to their fair values. See Note 4, Acquisition, for
more information.
The
accompanying consolidated statement of operations of Successor represents the
activity of Successor from February 1, 2008 through December 31, 2008.
The Successor’s consolidated financial statements as of December 31, 2008, and
for the eleven month period ended December 31, 2008, are not necessarily
comparable to the consolidated financial statements of Predecessor due to the
application of FASB Statement No. 141.
On
July 31, 2009, the Company was sold by the TPG Entities to Republic and is
now a wholly owned subsidiary of Republic. See Note 16, Subsequent Events, for
more information.
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation —
The accompanying consolidated financial statements include the accounts of the
Company. All significant intercompany accounts and transactions have been
eliminated in consolidation. The accounting policies of the Company conform to
the accounting principles generally accepted in the United States of
America.
Use of Estimates — The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the consolidated financial statements, and the reported amounts of
revenues and expenses during the year. Future results could differ significantly
from those estimates.
The
Company estimates fair value in accounting for indefinite-lived intangible
assets, long-lived assets, deferred frequent flyer revenue, and goodwill for
impairment. These estimates and assumptions are inherently subject to
significant uncertainties and contingencies beyond the control of the Company.
Accordingly, the Company cannot provide assurance that the estimates,
assumptions, and values reflected in the valuations will be realized, and actual
results could vary materially.
Cash and Cash
Equivalents — The Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents. They
are carried at cost, which approximates market. These investments consist
primarily of overnight deposits.
Inventories — Inventories
consist primarily of aircraft maintenance parts, maintenance supplies, and fuel
stated at the lower of cost on the first-in, first-out method (for Midwest),
average cost (for Midwest Connect), or market, and are expensed when used in
operations.
Property and Equipment —
Property and equipment are stated at cost and are depreciated on the
straight-line method. Aircraft are depreciated to estimated residual values, and
any gain or loss on disposal is reflected in operations.
The
depreciable lives for the principal asset categories for both Successor and
Predecessor are as follows:
Asset
Category
|
Depreciable
Lives
|
Flight
equipment
|
10–20
years
|
Other
equipment
|
3–8
years
|
Office
furniture and equipment
|
5–20
years
|
Building
and improvements
|
40
years
|
Leasehold
improvements
|
Lesser
of 20 years or remaining
|
life
of building or lease
|
Restricted Cash —
Restricted cash primarily pertains to cash that is due to the Company for
advance credit card ticket purchases. Under the terms of the agreement with the
credit card processor, the funds are held by the credit card processor until
travel takes place. This restricted cash of $21.6 million and
$22.8 million as of December 31, 2008 (Successor) and 2007
(Predecessor), respectively, earns a market rate of interest and is held
primarily at one financial institution. On December 31, 2008, there was a
separate reserve fund containing approximately $6.8 million of estimated
government-related fees associated with excise tax, passenger facility charges,
and security fees. There was also $10 million of restricted cash held in
escrow as of December 31, 2008 that represented funds provided by Republic
and the TPG Entities that would be made available to the Company when certain
conditions were met.
Goodwill and Intangible
Assets — The Company accounts for goodwill and other intangible
assets in accordance with FASB Statement No. 142, Goodwill and Other Intangible
Assets. Goodwill and other intangible assets that have indefinite useful
lives are not amortized, but are tested if a triggering event occurred, or at
least annually, for impairment. Intangible assets that have finite useful lives
are amortized over their useful lives and reviewed for impairment in accordance
with FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. In December 2008, management reviewed the
carrying value of goodwill and other intangible assets and concluded that
goodwill and certain other intangible assets were impaired. See Note 5,
Asset Impairments, Goodwill, and Other Intangible Assets, for further
information.
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 amount of any impairment is
based on the fair value of the related asset. See Note 5, Asset
Impairments, Goodwill, and Other Intangible Assets, for further
information.
Concentrations of Risk —
Certain Company employees are covered under various collective bargaining
agreements. Midwest pilot and Midwest flight attendant groups had previously
ratified five-year contracts that expired during 2008. These groups represent 8%
and 8%, respectively, of the Company’s employees as of December 31, 2008.
As of December 31, 2008, these groups are operating without a collective
bargaining agreement. The Company operates approximately 83% of its flights and
derives 75% of its passenger revenue based on Milwaukee-originating or
Milwaukee-arriving flights; thus, the Company is impacted by the economy of the
Milwaukee area. The Company has mitigated a portion of this risk over the last
two years by nearly doubling the amount of connect or “flow” traffic; i.e.,
passenger traffic beginning in a field station and traveling to another station
in the Company’s network with a connection in Milwaukee or Kansas City. This
reduces the reliance on traffic originating from Milwaukee.
Fair Value of Financial
Instruments — The Company believes the carrying value of its
financial instruments (cash and cash equivalents, restricted cash, accounts
receivable, and accounts payable) is a reasonable estimate of the fair value of
these instruments due to their short-term nature or variable interest rate. The
carrying value of derivative instruments, including fixed fuel contracts, has
been marked to market based on the fair value of similar instruments as of each
balance sheet date. It is not practicable to estimate the fair value of debt
given the financial condition of the Company.
Revenue Recognition —
Passenger revenue, related commissions (if any), and cargo revenues are
recognized in the period when the service is provided. The estimated liability
for sold, but unused, tickets is included in current liabilities as air traffic
liability. The amount of commissions associated with unused tickets is included
in current assets as prepaid commissions. After 13 months, any sold but
unused tickets are recognized in revenue and any related commission expense is
recognized. During the eleven-month period ended December 31, 2008, no unused
tickets were recognized as revenue since the air traffic liability was recorded
at fair value as of January 31, 2008, which included the impact of estimated
breakage.
A portion
of the revenue from the sale of frequent flyer miles was deferred and recognized
straight line over 32 months by the Predecessor. The Successor records a
portion of revenue from the sale of frequent flyer miles when the sale occurs
and a portion of revenue when the miles are redeemed and the transportation is
provided.
Certain
governmental taxes are imposed on Midwest ticket sales through a fee included in
ticket prices. Midwest collects these fees and remits them to the appropriate
government agency. These fees are recorded on a net basis (excluded from
operating revenues).
Advertising Expense —
Advertising costs are charged to expense when incurred. Advertising expense for
the eleven-month period ended December 31, 2008 (Successor), one-month
period ended January 31, 2008 (Predecessor), and the years ended
December 31, 2007 and 2006 (Predecessor), was $6.8 million,
$1.0 million, $8.3 million, and $8.3 million,
respectively.
Maintenance and Repair
Costs — Routine maintenance and repair costs for owned and leased
aircraft are charged to expense when incurred. The Company expenses airframe
maintenance costs as they are incurred. Midwest and Midwest Connect engines were
primarily under fleet hour agreements and engine maintenance was expensed as
flight hours are incurred over the term of the contract. During 2008, the fleet
hour agreement was terminated and engine maintenance is now being expensed as
maintenance is incurred.
Frequent Flyer Programs —
The Company has a frequent flyer program that offers incentives to travel on
Midwest. The program allows participants to earn mileage credits by flying on
Midwest and participating airlines, as well as through participating companies,
such as credit card companies, hotels, and car rental agencies. The Company also
sells mileage credits to other airlines and to nonairline businesses. The
mileage credits may be redeemed for free air travel on Midwest or other
airlines, as well as hotels, rental cars, and other awards.
Mileage Credits — The
Company has an agreement with its co-branded credit card partner that requires
its partner to purchase miles as they are awarded to the co-branded partner
cardholders. The air transportation element for the awarded miles are included
in deferred frequent flyer revenue at the estimated fair value and the residual
marketing element is recorded as other revenue when the miles are awarded. The
deferred revenue is subsequently recognized as passenger service revenue when
transportation is provided.
Earned Mileage Credits —
The Company also defers the portion of the sales proceeds that represents
estimated fair value of the air transportation and recognizes that amount as
revenue when transportation is provided. The fair value of the air
transportation component is determined utilizing the deferred revenue method as
further described below. The initial revenue deferral is presented as deferred
frequent flyer revenue in the consolidated balance sheets. When recognized, the
revenue related to the air transportation component is classified as passenger
service in the Company’s consolidated statements of operations.
On the
Acquisition Date, the Successor changed the accounting policy for its frequent
flyer program from the incremental cost method to the deferred revenue method.
The deferred revenue measurement method used on and after the Acquisition Date
is to record the fair value of the frequent flyer obligation by allocating an
equivalent weighted-average ticket value to each outstanding mile based on
projected redemption patterns for available award choices when such miles are
consumed. Such value is estimated assuming redemptions on Midwest and by
estimating the relative proportions of awards to be redeemed by class of
service. The estimation of the fair value of each award mile requires the use of
several significant assumptions for which significant management judgment is
required. For example, management must estimate how many miles are projected to
be redeemed on Midwest versus on other airline partners. Since the equivalent
ticket value on miles redeemed on Midwest and on other carriers can vary
greatly, this assumption can materially affect the calculation of the
weighted-average ticket value from period to period.
Management
must also estimate the expected redemption patterns of Midwest customers who
have a number of different award choices when redeeming their miles, each of
which can have materially different estimated fair values. Such choices include
different classes of service and award levels. Customer redemption patterns may
also be influenced by program changes, which occur from time to time,
introducing new award choices or making material changes to terms of existing
award choices. Management must often estimate the probable impact of such
program changes on future customer behavior, which requires the use of
significant judgment. Management uses historical customer redemption patterns as
the best single indicator of future redemption behavior in making its estimates,
but changes in customer mileage redemption behavior patterns, which are not
consistent with historical behavior can result in historical changes to deferred
revenue balances and to recognized revenue.
The
Company measures its deferred revenue obligation using all awarded and
outstanding miles, regardless of whether or not the customer has accumulated
enough miles to redeem an award. Eventually these customers will accumulate
enough miles to redeem awards, or their account will deactivate after a period
of inactivity, in which case the Company will recognize the related revenue when
the miles expire.
Current
and future changes to the expiration policy, or to program rules and program
redemption opportunities, may result in material changes to the deferred revenue
balance as well as recognized revenue from the program.
Prior to
January 31, 2008, the Company accounted for frequent flyer miles earned on
an incremental cost basis as an accrued liability and as operating expense,
while miles sold to airline and nonairline businesses were accounted for on a
deferred revenue basis. For members with mileage credits greater than
5,000 miles, the Company recorded a liability for the estimated incremental
cost of flight awards that were earned and expected to be redeemed for travel on
Midwest or other airlines. The Company’s incremental costs included an average
cost per passenger for fuel, food, and other direct passenger costs. The Company
periodically recorded adjustments to this liability in other operating expense
in its consolidated statements of operations and other accrued liabilities in
its consolidated balance sheets based on awards earned, awards redeemed, changes
in its estimated incremental costs, and changes to the program.
Income Taxes — On
January 1, 2007, the Company adopted FASB Interpretation (“FIN”)
No. 48, Accounting
for Uncertainty in Income Taxes — an interpretation of FASB Statement
No. 109 (“FIN No. 48”). This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.
This interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The pronouncement also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. Pursuant to FIN No. 48, the
Company has recorded any unrecognized tax benefits that are not expected to be
paid within one year as noncurrent.
As part
of the process of preparing the Company’s consolidated financial statements, it
is required to estimate income taxes in each of the jurisdictions in which the
Company operates. The provision for income taxes is determined using the asset
and liability approach for accounting for income taxes. A current liability is
recognized for the estimated taxes payable for the current year. Deferred tax
assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using the enacted tax rates in effect for
the year in which the timing differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of changes in tax
rates or tax laws are recognized in the provision for income taxes in the period
that includes the enactment date.
Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount more likely than not to be realized. Changes in valuation allowances will
adjust goodwill or will be recorded in the consolidated statements of
operations, unless related to deferred tax assets that expire unutilized or are
modified through translation, in which case both the deferred tax asset and
related valuation allowance are similarly adjusted.
Leases — Rental
obligations under operating leases, including any delivery credits for aircraft,
facilities, and equipment are charged to expense on the straight-line method
over the term of the lease.
Derivative Instruments and Hedging
Activities — The Company has utilized three types of derivative and
hedging instruments to reduce the risk of exposure to jet fuel price increases:
call options, collars, and fixed fuel contracts. The Company accounted for
certain of its fuel derivative instruments as cash flow hedges, as defined in
FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (“FASB Statement No. 133”), as
amended. The Company accounts for the remainder of the fuel derivative
instruments as free-standing derivatives. The Company does not purchase or hold
any derivative financial instruments for trading or speculative
purposes.
The
Company periodically utilizes these derivative 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 financial risk.
The
collars establish ceiling and floor prices for anticipated jet fuel purchases
and serve as hedges of those purchases. Call options establish a ceiling price
and serve as a hedge against rising prices. They require an up-front premium
payment and the risk of loss is limited to the premium payment. Prior to
January 31, 2008, fuel collar options were accounted for as cash flow
hedges, as defined by FASB Statement No. 133. Therefore, all changes in the
fair value of the derivative instruments that are considered effective hedges
were recorded in other comprehensive income until the underlying hedged fuel was
consumed, when the fair value of such derivative instruments is reclassified to
the consolidated statements of operations as an adjustment to fuel expense.
Subsequent to January 31, 2008, all changes in value of collars are
recorded in the consolidated statements of operations as a component of losses
(gains) on fuel derivatives. As of December 31, 2007, there were no
outstanding call contracts and the fair value of collar contracts was an asset
of $0.9 million. As of December 31, 2008, the fair value of collars
outstanding was an asset of $1.4 million, and there were no outstanding
call option contracts.
The
Company also enters into fixed price fuel contracts. While the Company considers
these good economic hedges, the Company does not utilize hedge accounting for
these derivatives. As a result, the fixed fuel contracts are adjusted to fair
value through earnings in losses (gains) on fuel derivatives, each balance sheet
date. In addition, any cash settlements for unused fuel commitments are also
adjusted to fair value through earnings. This may result, and has resulted, in
increased volatility in the Company’s results. The Company recorded
$6.8 million of losses in the consolidated statement of operations for the
eleven-month period December 31, 2008 (Successor), for the fixed fuel
contracts. The Company recorded $3.7 million of losses in the consolidated
statement of operations for the one-month period ended January 31, 2008,
and $9.7 million of gains in 2007 (Predecessor). Approximately 80% of fuel
purchases in 2008 were hedged using these three different fuel-hedging
strategies. As of December 31, 2008 there were no outstanding fixed-price
fuel contracts. As of December 31, 2007, the fair value of fixed-price fuel
contracts was $8.8 million.
Fair Value Measurements —
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements
(“FASB Statement No. 157”), which provides guidance for measuring
the fair value of assets and liabilities and requires expanded disclosures about
fair value measurements. FASB Statement No. 157 indicates that fair value
should be determined based on the assumptions marketplace participants would use
in pricing the asset or liability and provides additional guidelines to consider
in determining the market-based measurement. The Company adopted FASB Statement
No. 157 on January 1, 2008, for financial assets and financial
liabilities. In February 2008, the FASB issued FASB Staff Position (“FSP”)
Financial Accounting Standards (“FAS”) 157-2, Effective Date of FASB Statement
No. 157 (“FSP 157-2”). FSP 157-2 delayed the effective date of FASB
Statement No. 157 for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the Company’s
consolidated financial statements on a recurring basis (at least annually), to
January 1, 2009. The adoption of FASB Statement No. 157 for
nonfinancial assets and nonfinancial liabilities on January 1, 2009, did
not have a material impact on the Company’s consolidated financial statements
other than additional disclosure requirements.
To
increase consistency and comparability in fair value measures, FASB Statement
No. 157 establishes a three-level fair value hierarchy to prioritize the
inputs used in valuation techniques between observable inputs that reflect
quoted prices in active markets, inputs other than quoted prices with observable
market data and unobservable data (e.g., a company’s own data). FASB
Statement No. 157 requires disclosures detailing the extent to which
companies measure assets and liabilities at fair value, the methods and
assumptions used to measure fair value and the effect of fair value measurements
on earnings. In accordance with FASB Statement No. 157, the Company applied
the following fair value hierarchy:
Level 1 — Assets or
liabilities for which the identical item is traded on an active exchange, such
as publicly traded instruments.
Level 2 — Assets
and liabilities valued based on observable market data for similar
instruments.
Level 3 — Assets or
liabilities for which significant valuation assumptions are not readily
observable in the market; instruments valued based on the best available data,
some of which are internally developed; and consider risk premiums that a market
participant would require.
As of
December 31, 2008, fuel collars were recorded at fair value using
Level 2 inputs. The Company estimated the fair value of fuel collars to be
$1.4 million as of December 31, 2008.
Restructuring
Activities — Restructuring charges include employee severance and
benefit costs, impairments of assets, and other costs associated with exit
activities. The Company applies the provisions of FASB Statement No. 112,
Employers’ Accounting for
Postemployment Benefits, for severance benefits and accrues an obligation
for severance benefits attributable to employees’ services already rendered when
the payment of the benefits is probable and the amount of the benefits can be
reasonably estimated. Impairment losses are based upon the estimated fair value,
with fair value estimated based on existing market prices for similar assets.
Other exit costs include contract termination costs, primarily related to
equipment and facility lease obligations. During the period in which the Company
ceases use of leased assets, the Company recognizes a liability for the fair
value of the costs that will continue to be incurred under the lease for its
remaining term without economic benefit to the Company, net of estimated
sublease rentals. The Company has recorded $12.4 million for the early
retirement of leased aircraft and a hangar as of December 31, 2008, as a
component of other accrued liabilities and other noncurrent liabilities in the
consolidated balance sheet. All leased aircraft and the hangar were in service
as of December 31, 2007. At each reporting date, the Company evaluates the
accruals for restructuring costs to ensure the accruals are still
appropriate.
A
liability related to exit or disposal activity costs may change subsequent to
the date it is initially measured. These changes are measured using the
credit-adjusted risk-free rate that was used in the initial measurement. The
adjustment resulting from a change to either the timing or the amount of
estimated cash flows is recognized as an adjustment to the liability in the
period of the change. Changes due to the passage of time are recognized as an
increase in the carrying amount of the liability as time passes.
Regional Carrier —
Regional carrier expense includes the direct costs paid to Republic and SkyWest.
Direct costs represent expenses that are based on specific rates for various
operating expenses, such as crew expenses, maintenance and aircraft ownership,
some of which are multiplied by specific operating statistics (e.g., block
hours and departures) while others are fixed per month. Midwest has the right to
exclusively operate and direct the operations of these aircraft and accordingly,
the minimum future lease payments for these aircraft are included in the
Company’s lease obligations (see Note 8, Leases).
New Accounting
Pronouncements — In June 2006, FASB issued FIN No. 48. This
interpretation clarifies the accounting for uncertainty of income taxes
recognized in an entity’s financial statements in accordance with FASB Statement
No. 109, Accounting for
Income Taxes. FIN No. 48 prescribes recognition threshold and
measurement principles for financial statement disclosure of tax positions taken
or expected to be taken on a tax return. FIN No. 48 also provides guidance
on derecognition classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The Company adopted FIN No. 48 as of
the beginning of the 2007 fiscal year and the effect on the Company’s financial
results as of the date of adoption was an increase in retained earnings and a
reduction in reserves for uncertain tax positions of $0.9 million as of
January 1, 2007.
In
December 2007, the FASB issued FASB Statement No. 141 (revised 2007),
Business Combinations
(“FASB Statement No. 141(R)”). FASB Statement No. 141(R)
establishes principles and requirements for how an acquirer in a business
combination recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, goodwill, and any noncontrolling
interest in the acquiree. FASB Statement No. 141(R) will be applied
prospectively to business combinations for which the acquisition date is on or
after January 1, 2009. Early adoption is not permitted. While the impact on
the Company will depend on the facts of a particular business combination, FASB
Statement No. 141(R) presents several significant changes from current
accounting for business combinations, including accounting for contingent
consideration, transaction costs, preacquisition contingencies, restructuring
costs, and step acquisitions. The adoption of FASB Statement No. 141(R)
will require adjustments to the valuation allowance for deferred income taxes to
be recorded as an adjustment in the statement of operations for valuation
allowances recorded at the acquisition. Previously, adjustments for these
valuation allowances would be recorded as an adjustment to
goodwill.
In March
2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement
No. 133 (“FASB Statement No. 161”), to improve financial
standards for derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity’s financial position, financial performance, and cash flows. The
adoption of FASB Statement No. 161 on January 1, 2009, did not have a
material impact on the consolidated financial statements.
In April
2008, FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”), was issued. FSP 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142. The adoption of FSP 142-3 on January 1, 2009,
is not expected to have a material impact on the consolidated financial
statements other than additional disclosure requirements.
In
December 2008, FSP 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets (“FSP 132(R)-1”), was issued. This FSP
requires entities to disclose more information about pension asset valuations,
investment allocation decisions, and major categories of plan assets. These
disclosure requirements are effective for years ended after December 15,
2009. The Company is currently evaluating the impact of adopting
FSP 132(R)-1 on the consolidated financial statements.
In April
2009, the FASB issued FSP 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (“FSP
157-4”), intended to provide application guidance and revise the disclosures
regarding fair value measurements and impairments of securities. This FSP
addresses the determination of fair values when there is no active market or
where the price inputs represent distressed sales. FSP 157-4 reaffirms the
view in FASB Statement No. 157 that the objective of fair value measurement
is to reflect an asset’s sale price in an orderly transaction at the date of the
financial statements. This pronouncement is effective for fiscal years ended
after June 15, 2009. The Company does not expect the adoption of this
pronouncement will have a material impact on the consolidated financial
statements.
In May
2009, the FASB issued FASB Statement No. 165, Subsequent Events (“FASB
Statement No. 165”). FASB Statement No. 165 provides guidance on
management’s assessment of subsequent events. This statement clarifies that
management must evaluate as of each reporting period, events, or transactions
that occur after the balance sheet date through the date the financial
statements are issued or are available to be issued. FASB Statement No. 165
is effective for annual and interim periods after June 15, 2009. The
adoption of FASB Statement No. 165 is not expected to have a material
impact on the consolidated financial statements.
4.
|
ACQUISITION
|
Effective
January 31, 2008, Northwest and the TPG Entities through their collective
interest in MAC acquired 100% of the outstanding publicly traded stock of the
Predecessor at $17.00 per share with approximately 26.3 million shares
outstanding and 1.8 million shares of restricted stock and
options.
The
purchase price was $455.7 million paid to stockholders. The purchase price
was funded by $213.3 million in debt from Northwest and the TPG Entities
and cash of $242.4 million.
A summary
of the fair values assigned to the acquired net assets as of January 31,
2008, is as follows (in millions):
Current
assets, excluding cash
|
$ | 35.8 | ||
Property
and equipment
|
89.9 | |||
Goodwill
|
238.6 | |||
Other
intangible assets
|
258.3 | |||
Other
|
7.2 | |||
Total
assets acquired
|
$ | 629.8 | ||
Debt
assumed
|
$ | (18.2 | ) | |
Deferred
income taxes
|
(62.8 | ) | ||
Other
liabilities
|
(270.0 | ) | ||
Total
liabilities assumed
|
(351.0 | ) | ||
Net
assets acquired — net of cash acquired
|
$ | 278.8 |
Cash
acquired at closing consists of cash and cash equivalents and restricted cash of
$142.3 million and $34.6 million, respectively. The goodwill and trade
name are not deductible for income tax purposes.
5.
|
ASSET
IMPAIRMENTS, GOODWILL, AND OTHER INTANGIBLE
ASSETS
|
Asset Impairments — In
accordance with FASB Statement No. 142 and FASB Statement No. 144,
Accounting for the Impairment
or Disposal of Long Lived Assets (“FASB Statement No. 144”), the Company performed an
impairment test of its goodwill, all intangible assets, and certain of its
long-lived assets (principally aircraft and related spare engines and spare
parts) due to events and changes in circumstances that indicated an impairment
might have occurred due to the Company’s insufficient current and expected cash
flows and the decision to exit the regional flight operations of
Skyway.
Goodwill — Goodwill
represents the purchase price in excess of the net amount assigned to
identifiable assets acquired and liabilities assumed by the Company on
January 31, 2008. FASB Statement No. 142 requires that goodwill be
tested for impairment on an annual basis and between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair
value of the reporting unit below its carrying value.
During
2008, the Company performed step one of the two-step impairment test and
compared the estimated fair value of its single reporting unit to its carrying
value, including goodwill. Consistent with the Company’s policies and approach
to annual impairment testing, the Company used the income approach to estimate
fair value and also considered the market approach in its analysis. Under the
income approach, the fair value of the Company is based on the present value of
estimated future cash flows. The income approach is dependent on a number of
significant management assumptions, including estimates of future capacity,
passenger yield, traffic, fuel and other operating costs, and discount rates.
The Company determined that the fair value of the Company was less than the
carrying value of the net assets of the reporting unit, and accordingly, the
Company performed step two of the impairment test.
In step
two of the impairment test, the Company determined the implied fair value of the
goodwill and compared it to the carrying value of the goodwill. The Company’s
step two analysis resulted in $48.2 million implied fair value of goodwill,
and therefore, the Company recognized an impairment charge of
$190.4 million for the eleven-months ended December 31,
2008.
The
following table reflects the change in the carrying amount of goodwill from
January 31, 2008 through December 31, 2008, is as follows (in
thousands):
Balance
— January 31, 2008
|
$ | 238,635 | ||
Impairment
charge
|
(190,387 | ) | ||
Balance
— December 31, 2008
|
$ | 48,248 |
Other Intangible Assets —
Intangible assets not subject to amortization are tested for impairment annually
or more frequently if events or changes in circumstances indicate that the asset
might be impaired. In connection with completing the Company’s goodwill
impairment analysis in December 2008, the Company assessed the fair values of
its trade name since it is not subject to amortization. Intangibles subject to
amortization are reviewed in accordance with FASB Statement No. 144. These
intangibles consist primarily of customer loyalty programs, business contracts,
customer lists, and landing slots.
In the
Company’s impairment assessment of other intangible assets, the fair value of
the trade name was assessed using the relief from royalty method, a variation of
the income approach. The cargo contracts, business passenger contracts, and
customer loyalty program fair values were assessed using the income approach. As
a result of these assessments, a total impairment of $162.2 million was
recorded in the eleven-month period ended December 31, 2008, for intangible
assets.
The other
intangible assets as of January 31, 2008 and December 31, 2008, are as
follows (in thousands):
Balance at
|
Eleven-Months Ended
|
Balance at
|
||||||||||||||||||
Amortization
|
January 31,
|
December 31, 2008
|
December 31,
|
|||||||||||||||||
Period
|
2008
|
Amortization
|
Impairment
|
2008
|
||||||||||||||||
Trade
name
|
- | $ | 157,183 | $ | - | $ | (126,326 | ) | $ | 30,857 | ||||||||||
Customer
loyalty program
|
6
years
|
50,558 | (7,724 | ) | (35,540 | ) | 7,294 | |||||||||||||
Cargo
contracts
|
9
years
|
25,053 | (2,552 | ) | 22,501 | |||||||||||||||
Business
passenger contracts
|
9
years
|
4,646 | (473 | ) | 4,173 | |||||||||||||||
Other
|
2–10
years
|
408 | (90 | ) | (318 | ) | - | |||||||||||||
$ | 237,848 | $ | (10,839 | ) | $ | (162,184 | ) | $ | 64,825 |
Future
intangible asset amortization expense is expected to be approximately
$6.7 million in 2009 and each subsequent year through 2013.
Landing
slots are rights to take off and land at slot-controlled airports. At
January 31, 2008, the Company’s landing slots consisted of Ronald Reagan
National Airport located in Washington, D.C. (“DCA”) and New York-LaGuardia
Airport (“LGA”) and are each subject to annual amortization of $1 million.
The slots as of January 31, 2008 and December 31, 2008, are as follows
(in thousands):
Amortization
|
||||||||||||||
for the Eleven-
|
||||||||||||||
Balance at
|
Months Ended
|
Balance at
|
||||||||||||
January 31,
|
December 31,
|
December 31,
|
||||||||||||
Useful Life
|
2008
|
2008
|
2008
|
|||||||||||
DCA
|
11
years
|
$ | 10,730 | $ | (894 | ) | $ | 9,836 | ||||||
LGA
|
10
years
|
10,217 | (937 | ) | 9,280 | |||||||||
$ | 20,947 | $ | (1,831 | ) | $ | 19,116 |
Management
assessed the fair value of landing slots in accordance with FASB Statement
No. 144 and determined no impairment had occurred during 2008.
Other Long-Lived Assets —
For purposes of testing impairment of other long-lived assets as of
December 31, 2008 and 2007, the Company determined whether the carrying
amount of its long-lived assets were recoverable by comparing the carrying
amount to the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the assets. If the carrying value of the assets
exceeded the expected cash flows, the Company estimated the fair value of these
assets to determine whether an impairment existed. The Company grouped its
aircraft by fleet type to perform this evaluation and used data and assumptions
through December 31, 2008. The estimated undiscounted cash flows were
dependent on a number of management assumptions, including estimates of future
capacity, passenger yield, traffic, operating costs (including fuel prices), and
other relevant assumptions. If estimates of fair value were required, fair value
was estimated using the market approach. Asset appraisals, published aircraft
pricing guides, and recent transactions for similar aircraft were considered by
the Company in its market value determination. Based on the results of these
tests, as of December 31, 2007, the Company recorded an impairment of
$13.7 million, which was attributable to the Company’s fleet of Fairchild
328 jet’s (“FRJs”) and Beech 1900D turboprop aircraft and related spare
parts. Based on the results of these tests as of December 31, 2008, the
Company recorded an impairment of $9.3 million that was attributable to the
Company’s fleet of FRJs and MD80 aircraft and related spare
parts.
As a
result of the impairment testing described above, the Company’s goodwill and
certain of its indefinite-lived intangible assets and tangible assets were
impaired to their respective fair values. In accordance with FSP 157-2, the
Company has not applied FASB Statement No. 157 to the determination of the
fair value of these assets. However, the provisions of FASB Statement
No. 157 were applied to the determination of the fair value of financial
assets and financial liabilities that were part of the FASB Statement
No. 142 step two goodwill fair value determination.
The
carrying value of the Company’s intangible assets or tangible long-lived assets
as of December 31, 2008, may be impaired further in future periods as a
result of factors, such as decreased demand for aircraft, decreases in revenues,
fuel price volatility, and adverse economic conditions, among
others.
6.
|
RELATED
PARTIES
|
TPG
Entities is the majority shareholder of MAP, owning 51.3% of the shares. In
addition, as of December 31, 2008 (Successor), the Company has promissory
notes totaling $229.3 million and secured debt of $24.8 million with
the TPG Entities. Also, as described in Note 3, Restricted Cash, the
Company has $5 million of restricted cash held in escrow with the TPG
Entities.
Northwest
is the secondary shareholder of MAP, owning 48.7% of the shares. Northwest also
provided a letter of credit that reduced the credit card holdback by
$10 million, as described in Note 9, Financing Agreements. On
April 28, 2008, the Company entered into a synergy agreement with Northwest
to source all aircraft fuel procurement for flights operated by Midwest. Total
payments made to Northwest during the eleven-months ended December 31,
2008, were $135.8 million. Other costs for into-plane fueling and station
support agreements at various stations totaled $1.5 million for the
eleven-months ended December 31, 2008.
7.
|
PROPERTY
AND EQUIPMENT
|
As of December 31, 2008 and 2007,
property and equipment (excluding assets held for sale) consisted of the
following (in thousands):
Successor
|
Predecessor
|
|||||||
2008
|
2007
|
|||||||
Flight
equipment
|
$ | 32,847 | $ | 199,898 | ||||
Other
equipment
|
7,724 | 18,166 | ||||||
Buildings
and improvements
|
5,964 | 15,130 | ||||||
Office
furniture and equipment
|
5,958 | 21,742 | ||||||
Construction
in progress
|
2,209 | 2,586 | ||||||
Total
property and equipment
|
54,702 | 257,522 | ||||||
Less
accumulated depreciation
|
(8,372 | ) | (120,160 | ) | ||||
Property
and equipment — net
|
$ | 46,330 | $ | 137,362 |
During
2008 and 2007, the Company performed impairment analysis of its property and
equipment (see Note 5, Asset Impairments, Goodwill, and Other Intangible
Assets). The amounts shown above are net of any impairment charges.
Depreciation
expense for the eleven-month period ended December 31, 2008 (Successor),
one-month period ended January 31, 2008, and the years ended
December 31, 2007 and 2006 (Predecessor), was $10,720, $1,278, $15,417, and
$15,178, respectively.
In
conjunction with 2007 strategic business review, management determined in
December 2007 and the Company announced in January 2008 that it would exit the
regional flight operations of its Skyway subsidiary and replace much of the
flying utilizing SkyWest as a contract carrier providing service as Midwest
Connect. As a result, the Company would sell or return to lessors 12 FRJ
aircraft and four Beech 1900D turboprop aircraft. Many of the flights
provided by Skyway are flown by SkyWest as a contract carrier providing service
as Midwest Connect. The Company’s strategic review determined that the current
economic environment did not provide the potential to deliver an acceptable
long-term return on the investment in these aircraft. The Company stopped
operating these aircraft in June 2008. During 2008, the Company sold three of
the FRJs for a loss of $3.1 million, which is reflected in the consolidated
statement of operations as other operating expense and removed from operations
the remaining nine FRJs. The Company also returned two of the four
Beech 1900D turboprop aircraft to the lessor during 2008 and subleased the
remaining two until their lease expiration in January 2009. These two subleased
aircraft were returned to the lessor in February 2009.
During
2008, the Company announced that it would be removing 13 MD80 aircraft from
active service. During 2008, the Company sold one MD80, returned two to lessors,
and grounded the remaining 10 aircraft. Five of the MD80s are planned to be
returned to the lessor and five of the aircraft are classified as held for sale.
During 2009, two additional MD80s were returned to the lessor.
During
2008, the Company returned 16 of the 25 Boeing 717 aircraft to the
lessor. The remaining nine aircraft are expected to be returned by early 2010
(see Note 16, Subsequent Events).
Assets Held for Sale —
Assets held for sale as of December 31, 2008, are as follows
(in thousands):
Successor
|
||||
Balance
|
||||
December 31, 2008
|
||||
FRJs
— four owned aircraft
|
$ | 6,800 | ||
MD80s
— five owned aircraft
|
6,800 | |||
Flight
equipment
|
8,358 | |||
$ | 21,958 |
8.
|
LEASES
|
The
Company leases aircraft, terminal space, office space, and maintenance
facilities. Future minimum lease payments required under operating leases having
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 2008, were as follows (in thousands):
Years
Ending
|
Regional
|
|||||||||||
December 31
|
Carriers
|
Other
|
Total
|
|||||||||
2009
|
$ | 38,208 | $ | 8,449 | $ | 46,657 | ||||||
2010
|
30,608 | 6,762 | 37,370 | |||||||||
2011
|
24,528 | 3,341 | 27,869 | |||||||||
2012
|
24,528 | 3,341 | 27,869 | |||||||||
2013
|
24,528 | 3,360 | 27,888 | |||||||||
Thereafter
|
116,508 | 31,238 | 147,746 |
As a
result of the Company’s deteriorating financial condition, scheduled rent
payments on several aircraft were either discontinued or modified after
negotiations with the respective lessors. The table above excludes aircraft that
have been removed from operations as these payments have been accrued in the
consolidated balance sheets net of expected sublease income in accordance with
FASB Statement No. 146. The table also excludes the nine Boeing
717 jet aircraft that were operating as of December 31, 2008, which
are being returned to their lessor. Negotiations continued into 2009 as the
Company pursued lease restructurings with several lessors. See Note 16,
Subsequent Events, for more information on these leases.
Midwest
received credit memos from certain suppliers associated with the delivery of
each Boeing 717 aircraft to be used for the acquisition of aircraft spare parts
and maintenance tooling, employee training, flight simulator rental, aircraft
lease payments, and engine maintenance agreements. There are no unused credit
memos remaining as of December 31, 2008. The Company has used the credit
memos as needed to pay for applicable services.
As of
December 31, 2008, Skyway’s two remaining turboprop aircraft were financed
under operating leases with an initial lease term of 12 years and
expiration dates in January 2009. The aircraft were returned to the lessor
during 2009, with disputes relating to holdover rents and return condition
deficiencies resolved shortly thereafter (see Note 16, Subsequent
Events).
As of
December 31, 2008, five of Skyway’s FRJs were financed under operating
leases with an initial lease term of 16.5 years expiring in 2016. These
leases permit renewal for various periods at rates approximating fair market
value and purchase options at or near the end of the lease term at fair market
value. Lease payments on these aircraft were discontinued during 2008.
Negotiations ensued with the lessor and continued into 2009.
During
2001, the Company completed a $6.3 million financing of a new maintenance
facility for Midwest Connect operations located at General Mitchell
International Airport. Occupancy of the new maintenance facility began 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 and
guarantor of principal and interest payments. Interest payments made to
bondholders and amortization of principal are recorded as rent expense.
Concurrent with the discontinuation of Skyway’s flight operations, this facility
was not used for the maintenance of aircraft. Effective May 1, 2009, the
facility was subleased for one year.
During
1998, Midwest moved into a newly constructed maintenance facility that is owned
by Milwaukee County and located at General Mitchell International Airport. To
finance the $7.9 million project, the city of Milwaukee issued
variable-rate demand industrial development revenue bonds. The Company’s
variable rent payments are based on the current interest rate of the city of
Milwaukee’s outstanding tax-exempt bonds over the 32-year lease term. Milwaukee
County is the owner and guarantor of principal and interest
payments.
The
initial lease term for the headquarters is 15 years with options to renew
the lease for four successive five-year periods at fair market value lease
rates. Monthly payments increase by approximately 5.6% for years 6 to 10 and
another 7.0% for years 11 to 15; however, the payments are recorded on the
straight line basis over the life of the lease.
Rent
expense for all operating leases, excluding landing fees, was
$71.3 million, $7.1 million, $85.8 million, and
$84.8 million for the eleven-month period ended December 31, 2008,
one-month period ended January 31, 2008, and the years ended
December 31 2007 and 2006, respectively.
9.
|
FINANCING
AGREEMENTS
|
Credit Card Holdback —
The Company has agreements with organizations that process credit card
transactions arising from purchases of air travel tickets by customers of the
Company. Credit card processors have financial risk associated with tickets
purchased for travel because 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 organization that
processes MasterCard/Visa transactions allows 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”). During 2007,
the Company and the processor entered into an amended agreement that allows the
processor to change the holdback percentage based on the Company’s performance
against certain financial criteria. During 2008, the agreement was amended to
extend the expiration date to July 2009 and incorporate a letter of credit from
Northwest Airlines that reduced the cash holdback by $10 million. When
considering the Northwest Airlines letter of credit, the total holdback
requirement as of December 31, 2008, was 100% of the processor’s risk
exposure. The letter of credit expired in July 2009 and increased to a 100%
holdback. The Company also has an agreement with American Express for processing
purchases made through the use of an American Express credit card. As of
December 31, 2008, the credit card processor had 100% holdback under this
agreement.
Aircraft — Three FRJs
were originally financed for a 32-month period beginning in 2001 at fixed rates
of interest 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 loans were scheduled to come due in August and November
2003 and January 2004, respectively. As part of the aircraft lease and loan
restructuring that occurred in third quarter of 2003, the loans were extended to
July 2013 at a fixed rate of interest of 4.0%. The Company was in default and
has classified the debt that totaled $18.3 million as current as of
December 31, 2008. Negotiations with the lender representing these aircraft
were included in the restructuring effort and continued into 2009 (see
Note 16, Subsequent Events).
Debt — On
January 31, 2008, the Company issued a junior promissory note for
$200 million to MAP, which bears interest at 8% annually. Interest is
payable quarterly in arrears. If the interest remains unpaid, it will be added
to the outstanding principal balance and interest is calculated on the new
balance. During the eleven-month period ended December 31, 2008, interest
of approximately $14.6 million was not paid and is included in the
principal balance. The outstanding principal balance is due on January 31,
2018, subject to certain acceleration clauses as defined in the agreement. As of
December 31, 2008, the debt totaling $214.6 million has been
classified as current due to the default on other outstanding debt (see
Note 16, Subsequent Events).
On
January 31, 2008, the Company issued three senior promissory notes for a
total of $13.3 million to three affiliates of TPG Capital, Inc., which
bear interest at 10% annually. Interest is payable quarterly in arrears. If the
interest payments remain unpaid, they will be added to the outstanding principal
balance. During the eleven-month period ended December 31, 2008, interest
of approximately $1.4 million was not paid and included in the principal
balance. The outstanding principal balance is due on January 30, 2013,
subject to certain acceleration clauses as defined in the agreements. As of
December 31, 2008, the debt totaling $14.7 million has been classified
as current due to the default on other outstanding debt (see Note 16,
Subsequent Events).
In
October 2008, the Company amended the Airline Service Agreement (“ASA”) with
SkyWest. The amendment resulted in reduced costs and called for the return of
nine Bombardier CRJ-200 aircraft (“CRJs”), leaving 12 CRJs in the ASA. The
amendment also called for a promissory note for $9.3 million with a 12%
interest rate and a March 2010 maturity date. This note was cancelled on
June 3, 2009, as part of another amendment to the ASA (see Note 16,
Subsequent Events).
Additional
investments from the TPG Entities and Republic during 2008 resulted in an
increase in the Company’s debt during 2008. The debt was secured by all
unencumbered assets of the Company. Each company invested $25 million
during 2008, requiring monthly interest payments based on a 10.25% annual rate.
Interest payments totaled $1.5 million during 2008. There was no set
amortization for these loans, but the principal balance declined during the
period based on permitted sales of assets by the Company and is due in full in
October 2009. As of December 31, 2008, the total borrowings were
$49.6 million due to the TPG Entities and Republic.
10.
|
SHAREHOLDERS’
(DEFICIT) EQUITY
|
As of
December 31, 2008, the authorized stock of the Successor consisted of
1 billion shares of common stock, par value $0.01 per share.
As of
December 31, 2007, the authorized stock of the Predecessor consisted of
50,000,000 shares of common stock, par value $0.01 per share and
5,000,000 shares of preferred stock, without par value.
Changes
in common shares are summarized as follows (in thousands):
Successor
|
Predecessor
|
|||||||||||
Period From
|
Period From
|
|||||||||||
January 31 to
|
January 1 to
|
Year Ended
|
||||||||||
December 31,
|
January 31,
|
December 31,
|
||||||||||
2008
|
2008
|
2007
|
||||||||||
Beginning
share balance
|
242,467 | 26,345 | 20,490 | |||||||||
Additional
shares issued
|
800 | |||||||||||
Shares
delivered under share-based compensation plans
|
849 | |||||||||||
Convertible
debt
|
4,328 | |||||||||||
Warrants
|
678 | |||||||||||
Ending
share balance
|
243,267 | 26,345 | 26,345 |
The
Company was party to a rights agreement that expired by its terms on
February 13, 2006. On February 15, 2006, the Board of Directors
adopted a new rights agreement and declared a dividend of one Preferred Share
Purchase Right (the “Right”) on each outstanding share of the Company’s Common
Stock (“Common Stock”) that was distributed to each shareholder of record of the
Common Stock on February 16, 2006. The Rights are exercisable only if a
person or entity acquires 15% or more of the Common Stock of the Company or
announces a tender offer for 15% or more of the Common Stock. Each Right
initially entitles its holder to purchase one one-hundredth of a share of the
Company’s Series A preferred stock at an exercise price of $21.00, subject
to adjustment. If a person or entity acquires 15% or more of the Common Stock,
then each Right will entitle the holder to purchase, at the Right’s then-current
exercise price, Common Stock valued at twice the exercise price. The Board of
Directors is also authorized to reduce the 15% threshold to not less than 10%.
The Rights were scheduled to expire in 2016. In connection with the acquisition,
the Rights were terminated.
In
connection with restructuring agreements in 2003 with the aircraft lessors and
lenders, the Company issued warrants to certain lessors and lenders that gave
the holders the right to purchase in the aggregate 1,571,467 shares of the
Common Stock at an exercise price per share of $4.72. The weighted-average fair
value of the warrants at the grant date was $2.89. The warrants were settled in
connection with the acquisition for consideration of
$1.3 million.
As of
December 31, 2008 and 2007, all of the accumulated other comprehensive
income represents the pension and other postretirement liabilities for the
employee benefit plans.
11.
|
SHARE-BASED
COMPENSATION
|
The
Predecessor had certain compensation plans which provided for the granting of
stock options and other share-based payments to various officers, directors, and
other employees of the Company at prices not less than 100% of the fair market
value of the stock, determined by the closing price on the date of grant except
for stock options issued to employees under collective bargaining agreements.
Options and restricted stock awards granted under those plans generally vested
over a three-year period from the date of issuance at varying rates or
immediately upon a change in control. In connection with the acquisition, all
outstanding options were converted into the right to receive cash resulting in a
payout of approximately $21.6 million, which was included in purchase
consideration. Following is a summary of the Predecessor stock options
plans.
All
outstanding Predecessor shares at January 31, 2008 were repurchased in
connection with the January 31, 2008 acquisition and 242,467 Successor
shares were issued.
Under the
Company’s 2003 All-Employee Stock Option Plan, the Compensation Committee of the
Board of Directors may grant options, at its discretion, to certain
nonrepresented employees and each union may grant options, at its discretion, to
certain represented employees to purchase shares of Common Stock. An aggregate
of 1,551,741 shares of Common Stock were reserved for issuance under the
plan, of which no shares were available for future grants as of
December 31, 2008. Granted options for nonrepresented employees become
exercisable at the rate of 33-1/3% immediately upon the date of grant, 33-1/3%
after the first year, and the remaining 33-1/3% after the second year. Options
for represented employees became exercisable in varying increments as determined
by each union, such that no more than 33-1/3% of the options allocated to a
represented group become exercisable immediately upon the date of grant. On each
anniversary of the plan’s effective date, any options that were forfeited by a
represented employee without being exercised were regranted at the original
grant price to other represented employees.
Under the
Company’s 2005 Equity Incentive Plan, the Compensation Committee of the Board of
Directors may grant restricted stock and options, at its discretion, to certain
employees to purchase shares of Common Stock. An aggregate of
1,000,000 shares of Common Stock was reserved for issuance under the Plan,
of which no shares are available for future grants at January 31, 2008.
Under the Plan, options granted had an exercise price equal to 100% of the fair
market value of the underlying stock at the date of grant. Granted options
became exercisable at the rate of 33-1/3% upon the first anniversary of the date
of grant, an additional 33-1/3% upon the second anniversary of the date of
grant, and the remaining 33-1/3% upon the third anniversary of the date of
grant, unless otherwise determined, and had a maximum term of
10 years.
The fair
value of restricted stock awards for the Predecessor was determined based on the
number of shares granted and the quoted price of the Common Stock at the grant
date. Such fair values are recognized as compensation expense over the requisite
service period, net of estimated forfeitures, using the accrual method of
expenses recognition under FASB Statement No. 123(R), Share-Based
Payment.
The
Predecessor estimated the fair value of its options awards using the
Black-Scholes option-pricing model. Expected volatilities were based on
historical volatility of the Amex Airline Index. The Predecessor used historical
data to estimate option exercises and employee terminations within the valuation
model. The expected term of the option was derived from historical exercise
experience and represents the period of time the Predecessor expected options
granted to be outstanding. The risk-free rates for the periods within the
expected life of the option are based on the U.S. Treasury yield curve in effect
at the time of the grant. Option valuation models require the input of
subjective assumptions, including the expected volatility and lives. Actual
values of grants could vary significantly from the results of the calculations.
The weighted-average fair value of options granted was $8.57 and $3.51 for the
years ended December 31, 2007 and 2006 (Predecessor), respectively. The
assumptions used to value stock option grants for the years ended December 31,
2007 and 2006, were as follows:
2007
|
2006
|
|||||||
Expected
volatility
|
65.1 | % | 62.2 | % | ||||
Risk-free
interest rate
|
4.7 | % | 4.8 | % | ||||
Forfeiture
rate
|
2.3 | % | 1.3 | % | ||||
Dividend
rate
|
0 | % | 0 | % | ||||
Expected
life in years
|
4.6 | 7.3 |
Compensation
cost for options granted is recognized over the vesting period of the options.
The Predecessor recognized stock-based compensation expense of $0.8 million
and $0.8 million for the stock options and $0.4 million and
$0.2 million for restricted stock which has been recorded in salaries,
wages, and benefits in the consolidated statements of operations for the years
ended December 31, 2007 and 2006, respectively.
The total
intrinsic value of options exercised in the one-month ended January 31,
2008, and the years ended December 31, 2007 and 2006, was
$0.1 million, $7.3 million, and $3.0 million, respectively. Cash
received from option exercises during the one-month ended January 31, 2008,
was $0.1 million.
Transactions
with respect to the Predecessor plans are summarized as follows:
Exercise
Price Less
|
Exercise
Price at
|
Exercise
Price Greater
|
||||||||||||||||||||||
Than
Market Price
|
Market
Price
|
Than
Market Price
|
||||||||||||||||||||||
Weighted-
|
Weighted-
|
Weighted-
|
||||||||||||||||||||||
Average
|
Average
|
Average
|
||||||||||||||||||||||
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
|||||||||||||||||||
Options
outstanding — December 31, 2005
|
982,877 | $ | 2.89 | 1,979,517 | $ | 15.32 | 330,147 | $ | 2.89 | |||||||||||||||
Granted
|
13,426 | 2.89 | 327,950 | 5.18 | ||||||||||||||||||||
Exercised
|
(304,019 | ) | 2.89 | (132,428 | ) | 3.64 | (102,651 | ) | 2.89 | |||||||||||||||
Forfeited
|
(25,655 | ) | 2.89 | (124,135 | ) | 13.64 | (4,262 | ) | 2.89 | |||||||||||||||
Options
outstanding — December 31, 2006
|
666,629 | 2.89 | 2,050,904 | 14.53 | 223,234 | 2.89 | ||||||||||||||||||
Granted
|
151 | 2.89 | 266,947 | 13.84 | ||||||||||||||||||||
Exercised
|
(434,114 | ) | 2.89 | (84,820 | ) | 6.93 | (172,389 | ) | 2.89 | |||||||||||||||
Forfeited
|
(16,073 | ) | 2.89 | (218,930 | ) | 15.84 | (31 | ) | 2.89 | |||||||||||||||
Options
outstanding — December 31, 2007
|
216,593 | 2.89 | 2,014,101 | 14.61 | 50,814 | 2.89 | ||||||||||||||||||
Exercised
|
(3,162 | ) | 2.89 | (982 | ) | 2.89 | ||||||||||||||||||
Forfeited
|
(31 | ) | 2.89 | (919,431 | ) | 23.77 | (1 | ) | 2.89 | |||||||||||||||
Converted
into the right to receive cash
|
(213,400 | ) | 2.89 | (1,094,670 | ) | 6.83 | (49,831 | ) | 2.89 | |||||||||||||||
Options
outstanding — January 31, 2008
|
- | - | - |
Options
exercisable with their weighted-average exercise price as of December 31,
2007 and 2006, for options where the exercise price was equal to the market
price on the date of grant were 1,490,396 options at $16.50 and
1,538,896 options at $17.87, respectively.
Options exercisable with their
weighted-average exercise price as of December 31, 2007 and 2006, for
options where the exercise price was less than the market price on the date of
grant were 216,593 options at $2.89 and 666,629 options at $2.89,
respectively.
Options exercisable with their
weighted-average exercise price as of December 31, 2007 and 2006, for
options where the exercise price was higher than the market price on the date of
grant were 50,814 options at $2.89 and 223,234 options at $2.89,
respectively.
The
information concerning non-vested options as of January 31, 2008, is as
follows:
Weighted-
|
||||||||
Average
|
||||||||
Non-vested
|
Grant
Date
|
|||||||
Options
|
Fair
Value
|
|||||||
Total
non-vested options as of January 1, 2008
|
523,705 | $ | 9.40 | |||||
Grants
vested in January 2008
|
(520,971 | ) | 9.39 | |||||
Forfeited,
non-vested shares
|
(2,734 | ) | 11.43 | |||||
Total
non-vested options as of January 31, 2008
|
- |
Vesting
for all outstanding option grants and restricted stock is based only on
continued service as an employee of the Company or upon death or total and
permanent disability. The stock options and restricted stock awards provide for
accelerated vesting if there is a change in control and generally vest upon
retirement. All of the Company’s outstanding stock options and restricted stock
awards are classified as equity instruments. The Company generally uses either
treasury stock or will issue new Common Stock to satisfy stock option
exercises.
Weighted-
|
||||||||
Average
|
||||||||
Grant
Date
|
||||||||
Restricted
Stock
|
Shares
|
Fair
Value
|
||||||
Outstanding
— January 1, 2008
|
417,153 | $ | 7.11 | |||||
Granted
|
||||||||
Forfeited
or expired
|
||||||||
Converted
into the right to receive cash
|
(417,153 | ) | 7.11 | |||||
Outstanding
— January 31, 2008
|
- |
Restricted
stock awards vested on the third anniversary of the date of grant. In connection
with the January 2008 acquisition, all restricted shares and options were
settled on January 31, 2008.
On
January 31, 2008, the Successor approved the Company’s 2008 Incentive Plan.
Under the 2008 Incentive Plan, the Compensation Committee of the Board of
Directors may grant restricted stock and options, at its discretion, to certain
employees to purchase shares of Common Stock. An aggregate of
15,343,000 shares of Common Stock was reserved for issuance under this
plan. Under the plan, options granted had an exercise price equal to 100% of the
fair market value of the underlying stock at the date of grant. Granted options
vest and become exercisable at the rate of 20% of the shares on January 31
in each of calendar years 2009, 2010, 2011, 2012, and 2013, and have a maximum
term of seven years.
The
Successor has estimated the fair value of the stock option awards granted using
the Black-Scholes option-pricing model. The following assumptions were used to
value the stock options grants:
Expected
volatility
|
48.9 | % | ||
Risk-free
interest rate
|
2.4 | % | ||
Forfeiture
rate
|
22.7 | % | ||
Dividend
rate
|
0 | % | ||
Expected
life in years
|
5.3 |
Expected
volatilities were based on historical volatility of the Amex Airline Industry
Index. The Successor uses historical data to estimate option exercises within
the valuation model. The expected term of the option was derived from historical
exercise experience and represented the period of time the Successor expected
options granted to be outstanding. The risk-free rates for the periods within
the expected life of the option are based on the U.S. Treasury yield curve in
effect at the time of the grant. The forfeiture rate was determined based on
historical experience adjusted for known trends. The forfeiture rate will be
revised in subsequent periods if actual forfeitures differ from the estimates.
Option valuation models require the input of subjective assumptions, including
the expected volatility and lives. Actual values of grants could vary
significantly from the results of the calculation. The weighted-average fair
value of options granted was $0.46 for the eleven-months ended December 31,
2008.
Compensation
cost for options granted is recognized over the vesting period of the options.
The Successor recognized stock-based compensation expense of $0.7 million
for stock options which has been recorded in salaries, wages, and benefits in
the consolidated statement of operations for the eleven-months ended
December 31, 2008.
As of
December 31, 2008, there was $1.6 million of total unrecognized
compensation cost related to stock options. This cost is expected to be
recognized over a weighted-average period of 4.0 years.
Excess
tax benefits result from tax deductions in excess of the compensation cost
recognized for those options. The consolidated statement of cash flows for the
year ended December 31, 2008, did not include any tax benefits related to
stock options since the Company did not have taxable income.
A
rollforward of option activity for the eleven-months ended December 31,
2008, is as follows:
Granted
(not yet vested)
|
6,325,000 | |||
Forfeited
(non-vested shares)
|
(500,000 | ) | ||
Options
outstanding — December 31, 2008
|
5,825,000 |
There
were 5,825,000 options outstanding as of December 31, 2008, with a
weighted-average remaining contractual life of six years and a weighted-average
exercise price of $1.00.
No
options are exercisable as of December 31, 2008. There are 1,165,000
options expected to vest in 2009 at a weighted-average exercise price of
$1.00.
On
January 31, 2008, the Successor approved the 2008 Restricted Profits
Interest Unit Incentive Plan to provide additional incentive to selected
employees and directors of the Successor. The plan includes Class A Profits
Interest Units and Class B Profits Interest Units. Class A Profits
Interest Units vest 25% on the second anniversary of the grant date and 25% on
each of the following three anniversaries. Class B Profits Interest Units
can be Performance Based or Service Based. Service-Based Class B Profits
Interest Units vest ratably over five years. Performance-Based Class B
Profits Interest Units vest ratably over five years on March 31st beginning
with the first anniversary after the performance criteria are met. The
performance criteria for each year is based on the annual Earnings Before
Interest, Taxes, Depreciation, Amortization and Restructuring (“EBITDAR”) goal
as defined in the agreement. The maximum number of Class A Profits Interest
Units that can be issued under the plan is 3,571,500 and the maximum number of
Class B Profits Interest Units that can be issued under the plan is
7,143,000. Profits Interest Units that are forfeited, canceled, exchanged,
repurchased, surrendered, terminated, or expired are available again for grant.
Profits Interest Units expire 10 years from the date of grant.
During
the eleven-months ended December 31, 2008, the Successor issued
2.9 million Class A Profits Interest Units, 2.9 million
Class B Performance-Based Profits Interest Units, and 2.9 million
Class B Service-Based Profits Interest Units. The Successor did not meet
the performance criteria during the eleven-months ended December 31, 2008,
therefore, the Class B Performance-Based Profits Interest Units did not
vest and no corresponding expense was recorded. The fair value of the
Class A Profits Interest Units is $0.46 and the fair value of the
Class B Service-Based Profits Interest Units is $0.46. The fair value was
determined using the Black-Scholes option-pricing model and the same assumptions
as those used for the stock option grants. Option valuation models require the
input of subjective assumptions, including the expected volatility and lives.
Actual values of grants could vary significantly from the results of the
calculations.
During
the eleven-months ended December 31, 2008, the Successor recorded
$0.3 million of expense related to the Class A Profits Interest Units
which is recorded in salaries, wages, and benefits in the consolidated statement
of operations. As of December 31, 2008, there was $1.4 million of
total unrecognized compensation cost related to the Profits Interest Units,
which is expected to be recognized over a weighted-average period of
four years.
Following
is a summary of the activity associated with the Profits Interest
Units:
Class
B
|
||||||||||||
Performance-
|
Class
B Service-
|
|||||||||||
Class
A Profits
|
Based
Profits
|
Based
Profits
|
||||||||||
Interest
Units
|
Interest
Units
|
Interest
Units
|
||||||||||
Granted
(not yet vested)
|
2,931,668 | 2,856,667 | 2,856,667 | |||||||||
Forfeited
(not yet vested)
|
(1,375,000 | ) | (1,300,000 | ) | (1,300,000 | ) | ||||||
Cancelled
(not yet vested)
|
(1,556,667 | ) | ||||||||||
Profits
interest units outstanding
|
1,556,668 | - | 1,556,667 |
12.
|
INCOME
TAXES
|
The
income tax provision (benefit) credit for the Successor’s eleven-month period
ended December 31, 2008 (Successor), and the Predecessor’s one-month period
ended January 31, 2008, and the years ended December 31, 2007 and 2006
(Predecessor), consisted of the following (in thousands):
Successor
|
Predecessor
|
|||||||||||||||
Eleven
|
||||||||||||||||
Months
|
One
Month
|
|||||||||||||||
Ended
|
Ended
|
Years
Ended
|
||||||||||||||
December
31,
|
January
31,
|
December
31,
|
||||||||||||||
2008
|
2008
|
2007
|
2006
|
|||||||||||||
Current
(credit) provision:
|
||||||||||||||||
Federal
|
$ | (402 | ) | $ | - | $ | - | $ | (403 | ) | ||||||
State
|
||||||||||||||||
Total
current
|
(402 | ) | - | - | (403 | ) | ||||||||||
Deferred
(credit) provision:
|
||||||||||||||||
Federal
|
(44,214 | ) | 279 | |||||||||||||
State
|
(6,316 | ) | ||||||||||||||
Total
deferred
|
(50,530 | ) | 279 | - | - | |||||||||||
Income
tax (benefit) provision
|
$ | (50,932 | ) | $ | 279 | $ | - | $ | (403 | ) |
A
reconciliation of income taxes at the U.S. federal statutory tax rate to the
effective tax rate is as follows:
Tax
at statutory U.S. tax rates
|
(35 | )% | (35 | )% | (35 | )% | 35 | % | ||||||||
State income taxes —
net of federal benefit
|
(5 | ) | (5 | ) | (19 | ) | ||||||||||
Reversal
of tax contingency
|
(14 | ) | ||||||||||||||
Goodwill
impairment
|
12 | |||||||||||||||
Alternative
minimum tax
|
6 | |||||||||||||||
Valuation
allowance
|
19 | 41 | 54 | (35 | ) | |||||||||||
Effective
tax rate
|
(9 | )% | 1 | % | - | % | (8 | )% |
Deferred
tax assets and liabilities resulting from temporary differences consist of the
following as of December 31 (in thousands):
(Successor)
|
(Predecessor)
|
|||||||
2008
|
2007
|
|||||||
Current
deferred income tax assets (liabilities) attributable to:
|
||||||||
Frequent
flyer
|
$ | 6,000 | $ | 2,038 | ||||
Accrued
liabilities
|
5,163 | 3,110 | ||||||
Valuation
allowance
|
(10,280 | ) | ||||||
Other
|
1,762 | 483 | ||||||
Net
current deferred tax assets
|
$ | 2,645 | $ | 5,631 | ||||
Non-current
deferred income tax (liabilities) assets attributable to:
|
||||||||
Excess
book basis over tax basis of property
|
$ | (29,398 | ) | $ | (40,476 | ) | ||
Frequent
flyer
|
17,962 | 2,425 | ||||||
Pension
liability
|
3,967 | 10,751 | ||||||
Deferred
revenue — new aircraft program
|
236 | 20,487 | ||||||
Federal
net operating losses
|
110,838 | 51,531 | ||||||
State
net operating losses
|
19,588 | 14,549 | ||||||
AMT
carryforwards
|
2,018 | 2,318 | ||||||
Indefinite-lived
intangible assets
|
(12,343 | ) | ||||||
Valuation
allowance
|
(130,439 | ) | (71,523 | ) | ||||
Other
|
2,583 | 4,586 | ||||||
Net
non-current deferred tax liabilities
|
$ | (14,988 | ) | $ | (5,352 | ) |
As of
December 31, 2008, the Company has tax-effected state net operating losses
of $19.6 million that will expire beginning in 2009 through 2027. The
Company has recorded a valuation allowance for all state net operating losses as
of December 31, 2008. The Company has recorded tax-effected federal net
operating losses of $110.8 million, which will begin to expire in 2023. The
Company has recorded a valuation allowance for all federal net operating losses
as of December 31, 2008. The Company has not recorded an income tax benefit
on federal and state net operating losses generated on the accumulated losses
since 2004.
In
connection with the Company’s initial public offering in 1995 (the “Offering”),
the Company, Midwest, Midwest Connect, and Kimberly-Clark entered into a Tax
Allocation and Separation Agreement (“Tax Agreement”). Pursuant to the Tax
Agreement, the Company is treated for tax purposes as if it purchased all of
Midwest’s assets at the time of the Offering, and as a result, the tax bases of
Midwest’s assets were increased to the deemed purchase price of the assets. The
tax on the amount of the gain on the deemed asset purchase was paid by
Kimberly-Clark. This additional basis is expected to result in increased income
tax deductions and, accordingly, may reduce income taxes otherwise payable by
the Company. Pursuant to the Tax Agreement, the Company will pay to
Kimberly-Clark 90% of the amount of the tax benefit associated with this
additional basis (retaining 10% of the tax benefit), as realized on a quarterly
basis, calculated by comparing the Company’s actual taxes to the taxes that it
would have owed had the increase in basis not occurred. In the event of certain
business combinations or other acquisitions involving the Company, tax benefit
amounts thereafter will not take into account, under certain circumstances,
income, losses, credits, or carryovers of businesses other than those
historically conducted by Midwest or the Company. Except for the 10% benefit,
the effect of the Tax Agreement is to put the Company in the same financial
position it would have been in had there been no increase in the tax bases of
Midwest’s assets. There have been no tax-related payments to Kimberly-Clark in
2008, 2007, or 2006.
Upon
adoption of FIN No. 48, the interpretation clarifies the accounting for
uncertainty of income taxes recognized in an entity’s financial statements in
accordance with FASB Statement No. 109. FIN No. 48 prescribes
recognition threshold and measurement principles for financial statement
disclosure of tax positions taken or expected to be taken on a tax return. FIN
No. 48 also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and
transition.
Management
has an obligation under FASB Statement No. 109 to review, at least
annually, the components of its deferred tax assets. This review is to ascertain
that, based upon the information available at the time of the preparation of
financial statements, it is more likely than not that the Company expects to
utilize these future deductions and credits. In the event that management
determines that it is more likely than not these future deductions, or credits,
will not be utilized, a valuation allowance is recorded, reducing the deferred
tax asset to the amount expected to be realized.
Management’s
analysis for 2008 determined that a valuation allowance of $139.1 million
is necessary as of December 31, 2008, for net deferred tax assets. This
decision is based upon many factors, both quantitative and qualitative, such as
(1) substantial current year losses, (2) significant unutilized
operating loss and credit carryforwards, (3) limited cash refund carryback
opportunities, (4) uncertain future operating profitability, and
(5) substantial organization and operating restructuring. The Company also
considered the effect of U.S. Internal Revenue Code (“Code”) Section 382 on
its ability to utilize existing net operating loss and tax credit carryforwards.
Section 382 imposes limits on the amount of tax attributes that can be
utilized where there has been an ownership change as defined under the Code. The
Company experienced an ownership change on January 31, 2008, and determined
a majority of its U.S. and state net operating loss and credit carryforwards
will be subject to future limitation. While application of Section 382 is
complex and continues to be fully evaluated with respect to the January 31,
2008, ownership change, the valuation allowance established as of
December 31, 2008, is considered necessary to reduce the Company’s deferred
tax assets to the amount expected to be realized, based upon all available
information at such time.
Effective
January 1, 2007, the Company adopted FIN No. 48. FIN No. 48
allows transition accounting for the cumulative effect of adopting the provision
as an adjustment to beginning retained earnings. The Predecessor recorded a
$0.9 million decrease to reserves for uncertain tax positions and a
corresponding increase to retained earnings as of January 1, 2007. This
adjustment reflects the net difference between related balance sheet accounts
before applying FIN No. 48 and as measured pursuant to FIN No. 48’s
provisions. The Company’s unrecognized tax benefit was $0.2 million as of
December 31, 2008 and 2007, and January 1, 2007. No changes in the
balance have occurred during the years ended December 31, 2008 and 2007.
The Company does not anticipate a significant change to the total amount of
unrecognized tax benefits within the next 12 months.
The
Company files income tax returns in the U.S. and various states. The Company is
not currently under federal or state examination. Tax years subsequent to 2002
remain open to examination by the major tax jurisdictions to which the Company
is subject.
13.
|
COMMITMENTS
AND CONTINGENCIES
|
In
February 1997, Midwest agreed to pay $9.25 million over 15 years for
the naming rights to the Midwest Airlines Center, an 800,000-square-foot
convention center in Milwaukee that opened in July 1998. As of December 31,
2008, the Company had remaining payments on this commitment of
$3.1 million.
The
Company received a prepayment in December 2007 from a frequent flyer
program partner. The prepayment program includes financial covenants that, if
violated, could allow for termination of the program and repayment of any
unearned portion of the prepayment. The prepayment was included in unearned
revenue in the December 31, 2007, consolidated balance sheet and was fully
earned in 2008.
Pursuant
to a letter agreement dated December 22, 2006 (the “Letter Agreement”), the
Company had retained a financial advisor with respect to the Air Tran
Holdings, Inc., exchange offer, and certain other possible transactions.
The Company agreed to pay a fee equal to 1.25% of the aggregate consideration
paid in such transaction or transactions. The Company also agreed to reimburse
the financial advisor periodically for its reasonable expenses, including the
fees and disbursements of its attorneys arising in connection with any matter
referred to in the Letter Agreement. In addition, the Company has agreed to
indemnify the financial advisor against certain liabilities, including
liabilities under federal securities laws. The acquisition of the Company by MAP
was completed and closed on January 31, 2008, and the related transaction
fee was paid as described above and recorded as acquisition costs in the
consolidated statements of operations.
In
December 2006, the Company entered into an agreement with SkyWest to
operate 50-seat regional jet service which began in April 2007. SkyWest will
operate a minimum of 15 and up to 25 Canadair regional jets for the Company
during the five-year term agreement. Flying as Midwest Connect, the SkyWest jets
allowed the Company to add new destinations, increase frequency on existing
routes, and upgrade regional routes to all-jet service. All contract-related
costs are included in the regional carrier line item of the accompanying
consolidated statement of operations. All other operating costs, including fuel,
are included in the applicable line items in the consolidated statement of
operations. See Note 16, Subsequent Events, for discussion of amendment to
the agreement.
On
September 3, 2008, the Company entered into a 10-year Airline Service
Agreement (“ASA”) with Republic to operate 12 Embraer E170 jets. Under this
agreement, Republic provides commercial regional air transportation services,
along with all crew (flight and cabin), doing business as Midwest Connect.
Midwest remains responsible for the scheduling of flight routes, marketing,
establishing all passenger fares, and providing the fuel and in-flight food and
supplies. Total payments made to Republic for the eleven-months ended
December 31, 2008, were $12.2 million and include various pass-through
charges, including fuel and oil, catering, landing feeds, deicing, security, and
other maintenance and property costs. In addition, the Company has issued to
Republic secured notes totaling $25 million.
The
Company is party to routine litigation incidental to its business. Management
believes that none of this litigation is likely to have a material adverse
effect on the Company’s consolidated financial statements.
14.
|
RETIREMENT
AND BENEFIT PLANS
|
The
Company adopted FASB Statement No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements
No. 87, 88, 106, and 132(R) (“FASB Statement
No. 158”), as
of December 31, 2006, that requires recognition of the overfunded or
underfunded status of pension and other postretirement benefit plans on the
balance sheet. Under FASB Statement No. 158, gains and losses, prior
service costs and credits, and any remaining transition amounts under FASB
Statement No. 87 and FASB Statement No. 106 that have not yet been
recognized through net periodic benefit cost will be recognized in accumulated
other comprehensive income, net of tax.
The
Company uses an annual December 31 measurement date for purposes of
calculations of plan assets and obligations and all other related
measurements.
Upon the
Acquisition Date, the Company completed a remeasurement of its pension and other
postretirement plan liabilities. Additionally, employee layoffs, furloughs, and
other workforce reductions led to plan curtailments on August 1, 2008, and
December 31, 2008. The curtailment gains recognized in the eleven-months
ended December 31, 2008, are included in the discussion and tables
below.
Qualified Defined Benefit
Plan — Midwest has one qualified defined benefit plan, the Pilots’
Supplemental Pension Plan. This plan provides retirement benefits to Midwest
pilots covered by their collective bargaining agreement.
Nonqualified Defined Benefit
Plans — Nonqualified defined benefit plans consist of an Executive
Supplemental Plan and a Pilots’ Nonqualified Supplemental Pension
Plan.
The
Executive Supplemental Plan provides annuity benefits for salary in excess of
Internal Revenue Service (“IRS”) salary limits that could not be applied in the
qualified Salaried Employees’ Retirement Plan. The Salaried Employees’ Plan was
terminated as of March 31, 2000. Benefits under the Executive Supplemental
Plan and the Salaried Employees’ Plan were paid in full on January 31,
2008, and the Company has no further duties or rights with respect to these
plans.
The other
Midwest nonqualified defined benefit plan is the Pilots’ Nonqualified
Supplemental Pension Plan. This plan provides Midwest pilots with annuity
benefits for salary in excess of IRS salary limits that cannot be covered by the
qualified Pilots’ Supplemental Pension Plan.
The
following table sets forth the status of the plans as of December 31 (in
thousands):
Midwest
Qualified Defined-Benefit Plan
|
Midwest
Nonqualified Defined-Benefit Plans
|
|||||||||||||||||||||||
Successor
|
Predecessor
|
Successor
|
Predecessor
|
|||||||||||||||||||||
Period
From
|
Period
From
|
Period
From
|
||||||||||||||||||||||
February
1,
|
January
1,
|
February
1,
|
One-Month
|
|||||||||||||||||||||
2008
to
|
2008
to
|
Year
Ended
|
2008
to
|
Ended
|
Year
Ended
|
|||||||||||||||||||
December
31,
|
January
31,
|
December
31,
|
December
31,
|
January
31,
|
December
31,
|
|||||||||||||||||||
Change
in Projected Benefit Obligation
|
2008
|
2008
|
2007
|
2008
|
2008
|
2007
|
||||||||||||||||||
Net
benefit obligation — beginning of period
|
$ | 21,054 | $ | 20,838 | $ | 24,252 | $ | 116 | $ | 1,753 | $ | 1,762 | ||||||||||||
Service
cost
|
897 | 111 | 1,587 | 4 | 3 | |||||||||||||||||||
Interest
cost
|
1,165 | 118 | 1,543 | 8 | 10 | 105 | ||||||||||||||||||
Actuarial
(gain) loss
|
(6,444 | ) | 3 | (6,383 | ) | (64 | ) | (117 | ) | |||||||||||||||
Gross
benefits paid
|
(218 | ) | (16 | ) | (161 | ) | ||||||||||||||||||
Curtailments
|
(7,794 | ) | 48 | 321 | ||||||||||||||||||||
Settlements
|
(1,968 | ) | ||||||||||||||||||||||
Net
projected obligation — end of period
|
$ | 8,660 | $ | 21,054 | $ | 20,838 | $ | 112 | $ | 116 | $ | 1,753 |
Midwest
Qualified Defined-Benefit Plan
|
Midwest
Nonqualified Defined-Benefit Plans
|
|||||||||||||||||||||||
Successor
|
Predecessor
|
Successor
|
Predecessor
|
|||||||||||||||||||||
Period
From
|
Period
From
|
Period
From
|
||||||||||||||||||||||
February
1,
|
January
1,
|
February
1,
|
One-Month
|
|||||||||||||||||||||
2008
to
|
2008
to
|
Year
Ended
|
2008
to
|
Ended
|
Year
Ended
|
|||||||||||||||||||
December
31,
|
January
31,
|
December
31,
|
December
31,
|
January
31,
|
December
31,
|
|||||||||||||||||||
Change
in Plan Assets
|
2008
|
2008
|
2007
|
2008
|
2008
|
2007
|
||||||||||||||||||
Fair
value of assets — beginning of period
|
$ | 9,605 | $ | 10,206 | $ | 7,630 | $ | - | $ | - | $ | - | ||||||||||||
Actual
return on plan assets
|
(2,851 | ) | (585 | ) | 688 | |||||||||||||||||||
Employer
contributions
|
1,050 | 2,049 | ||||||||||||||||||||||
Gross
benefits paid
|
(218 | ) | (16 | ) | (161 | ) | ||||||||||||||||||
Fair
value of plan assets — end of period
|
$ | 7,586 | $ | 9,605 | $ | 10,206 | $ | - | $ | - | $ | - | ||||||||||||
Accrued
benefit liability
|
$ | (1,074 | ) | $ | (11,449 | ) | $ | (10,632 | ) | $ | (112 | ) | $ | (116 | ) | $ | (1,753 | ) |
Amounts
recognized in the consolidated balance sheet consist of (in
thousands):
Midwest
Qualified
|
Midwest
Nonqualified
|
|||||||||||||||
Defined-Benefit
Plan
|
Defined-Benefit
Plans
|
|||||||||||||||
Successor
|
Predecessor
|
Successor
|
Predecessor
|
|||||||||||||
Year
Ended
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
|||||||||||||
Amounts
Recognized in the
|
December
31,
|
December
31,
|
December
31,
|
December
31,
|
||||||||||||
Consolidated
Balance Sheet
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Accrued
non-current benefit liability
|
$ | (1,074 | ) | $ | (10,632 | ) | $ | (112 | ) | $ | (1,753 | ) | ||||
Accumulated
other comprehensive (income) loss
|
(2,855 | ) | 2,508 | (16 | ) | 366 |
On
December 13, 2007, the president signed a bill that raises the retirement
age for commercial pilots from 60 to 65. This change had the effect on the
qualified defined benefit plan of a reduced liability as reflected in the net
actuarial gain as of December 31, 2007.
As a
result of the remeasurement on the Acquisition Date in 2008, all previously
existing unrecognized net actuarial gains or losses and unrecognized prior
service costs were eliminated for the plans at Acquisition Date.
During
2008, curtailment gains were recognized within salaries, wages, and benefits in
the consolidated statement of operations due to employee layoffs, furloughs, and
other workforce reductions and reduced the obligation as of December 31,
2008.
The
amounts recognized in accumulated other comprehensive (income) loss as of
December 31, 2007, for the qualified and nonqualified plans include net
actuarial (gains) losses of $0.4 million and $(0.1) million,
respectively and prior service cost of $2.1 million and $0.1 million,
respectively. The amounts recognized in accumulated other comprehensive (income)
loss as of December 31, 2008, for the qualified and nonqualified plans
include net actuarial (gains) of $(2.9) million and $(0.1) million,
respectively. The estimated net actuarial gain that will be amortized from
accumulated other comprehensive income into pension income in 2009 is expected
to be $0.4 million.
The
benefit obligations and fair value of plan assets (in which the accumulated
obligation exceeds the fair value of plan assets), consist of the following (in
thousands):
Successor
|
Predecessor
|
|||||||
December
31,
|
December
31,
|
|||||||
2008
|
2007
|
|||||||
Projected
benefit obligation
|
$ | 8,772 | $ | - | ||||
Accumulated
benefit obligation
|
8,772 | |||||||
Fair
value of plan assets
|
7,586 |
The net
periodic benefit (income) cost of defined benefit pension plans for the
eleven-month period ended December 31, 2008 (Successor), and the one-month
period ended January 31, 2008 (Predecessor), and the years ended
December 31, 2007 and 2006 (Predecessor), includes the following (in
thousands):
Midwest
Qualified Defined Benefit Plan
|
Midwest
Nonqualified Defined Benefit Plans
|
|||||||||||||||||||||||||||||||
Successor
|
Predecessor
|
Successor
|
Predecessor
|
|||||||||||||||||||||||||||||
Period
From
|
Period
From
|
Period
From
|
Period
From
|
|||||||||||||||||||||||||||||
February
1,
|
January
1,
|
February
1,
|
January
1,
|
|||||||||||||||||||||||||||||
2008
to
|
2008
to
|
Years
Ended
|
2008
to
|
2008
to
|
Years
Ended
|
|||||||||||||||||||||||||||
Components
of Net
|
December
31,
|
January
31,
|
December
31
|
December
31,
|
January
31,
|
December
31,
|
||||||||||||||||||||||||||
Periodic
Benefit Cost
|
2008
|
2008
|
2007
|
2006
|
2008
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||
Service
cost
|
$ | 897 | $ | 111 | $ | 1,587 | $ | 1,535 | $ | 4 | $ | - | $ | 3 | $ | 4 | ||||||||||||||||
Interest
cost
|
1,165 | 118 | 1,543 | 1,320 | 8 | 10 | 105 | 98 | ||||||||||||||||||||||||
Expected
return on assets
|
(714 | ) | (72 | ) | (665 | ) | (506 | ) | 1 | |||||||||||||||||||||||
Amortization
of:
|
||||||||||||||||||||||||||||||||
Prior
service cost
|
26 | 310 | 310 | 5 | 9 | 9 | ||||||||||||||||||||||||||
Actuarial
(gain) loss
|
(25 | ) | 324 | 362 | 76 | 52 | ||||||||||||||||||||||||||
Curtailment
(gain) loss
|
(7,794 | ) | ||||||||||||||||||||||||||||||
Total
net periodic benefit
|
||||||||||||||||||||||||||||||||
(income)
cost
|
$ | (6,471 | ) | $ | 183 | $ | 3,099 | $ | 3,021 | $ | 12 | $ | 16 | $ | 193 | $ | 163 | |||||||||||||||
Weighted-Average
|
||||||||||||||||||||||||||||||||
Assumptions
(in Percentages)
|
||||||||||||||||||||||||||||||||
Discount
rate
|
6.15 | % | 6.40 | % | 6.40 | % | 6.00 | % | 6.15 | % | 6.40 | % | 6.40 | % | 6.40 | % | ||||||||||||||||
Expected
return on plan assets
|
8.00 | 8.00 | 8.00 | 8.00 | n/a | n/a | n/a | n/a | ||||||||||||||||||||||||
Rate
of compensation increase
|
4.00 | 6.30 | 6.30 | 6.30 | 4.00 | 6.30 | 6.30 | 6.30 |
Postretirement Health Care and Life
Insurance Benefits — Midwest allows retirees to participate in
unfunded health care and life insurance benefit plans. Benefits are based on
years of service and age at retirement. The plans are principally
noncontributory for current retirees and are contributory for most future
retirees.
During
2008, curtailment gains were recognized due to employee layoffs, furloughs, and
other workforce reductions, and reduced the obligation as of December 31,
2008. In 2007, the increased retirement age for commercial pilots from 60 to 65
has the effect of a reduced liability reflected in the actuarial gain disclosed
in the table below.
Pilots’ Severance Plan —
Midwest provides certain benefits to a select group of pilots based on the
pilot’s age and years of service at termination. During 2008, curtailment gains
were recognized as income within salaries, wages, and benefits in the
consolidated statement of operations due to employee layoffs, furloughs, and
other workforce reductions, and reduced the obligation as of December 31,
2008. In 2007, the increased retirement age for commercial pilots from 60 to 65
has the effect of a reduced liability reflected in the actuarial gain disclosed
in the following table.
The
status of the plans as of December 31, 2008 and 2007, is as follows (in
thousands):
Postretirement
Health Care and
|
||||||||||||||||||||||||
Life
Insurance Benefits
|
Pilots’
Severance Plan
|
|||||||||||||||||||||||
Successor
|
Predecessor
|
Successor
|
Predecessor
|
|||||||||||||||||||||
Period
From
|
Period
From
|
Period
From
|
Period
From
|
|||||||||||||||||||||
February
1,
|
January
1,
|
February
1,
|
January
1,
|
|||||||||||||||||||||
2008
to
|
2008
to
|
Year
Ended
|
2008
to
|
2008
to
|
Year
Ended
|
|||||||||||||||||||
Projected Change in Benefit
|
December
31,
|
January
31,
|
December
31,
|
December
31,
|
January
31,
|
December
31,
|
||||||||||||||||||
Obligation
|
2008
|
2008
|
2007
|
2008
|
2008
|
2007
|
||||||||||||||||||
Net
benefit obligation — beginning of period
|
$ | 5,120 | $ | 5,067 | $ | 4,630 | $ | 7,064 | $ | 7,202 | $ | 7,095 | ||||||||||||
Service
cost
|
303 | 32 | 441 | 409 | 44 | 520 | ||||||||||||||||||
Interest
cost
|
302 | 29 | 370 | 401 | 39 | 434 | ||||||||||||||||||
Plan
amendments
|
2,481 | |||||||||||||||||||||||
Actuarial
gain
|
(199 | ) | (2 | ) | (2,800 | ) | (987 | ) | (499 | ) | ||||||||||||||
Curtailments
|
(1,818 | ) | (2,564 | ) | ||||||||||||||||||||
Gross
benefits paid
|
(67 | ) | (6 | ) | (55 | ) | (221 | ) | (348 | ) | ||||||||||||||
Net
projected obligation — end of period
|
$ | 3,641 | $ | 5,120 | $ | 5,067 | $ | 4,323 | $ | 7,064 | $ | 7,202 | ||||||||||||
Change
in Plan Assets
|
||||||||||||||||||||||||
Fair
value of assets — beginning of period
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Employer
contributions
|
67 | 6 | 55 | 221 | 348 | |||||||||||||||||||
Gross
benefits paid
|
(67 | ) | (6 | ) | (55 | ) | (221 | ) | (348 | ) | ||||||||||||||
Fair
value of assets — end of period
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Actuarial
benefit liability recognized — end of period
|
$ | (3,641 | ) | $ | (5,120 | ) | $ | (5,067 | ) | $ | (4,323 | ) | $ | (7,064 | ) | $ | (7,202 | ) |
The net
periodic benefit (income) cost of the plans for the years ended
December 31, 2008, 2007, and 2006, includes the following (in
thousands):
Post
Retirement Health Care and
|
||||||||||||||||||||||||||||||||
Life
Insurance Benefits
|
Pilots’
Severance Plan
|
|||||||||||||||||||||||||||||||
Successor
|
Predecessor
|
Successor
|
Predecessor
|
|||||||||||||||||||||||||||||
Period
From
|
Period
From
|
Period
From
|
Period
From
|
|||||||||||||||||||||||||||||
February
1,
|
January
1,
|
February
1,
|
January
1,
|
|||||||||||||||||||||||||||||
2008
to
|
2008
to
|
Years
Ended
|
2008
to
|
2008
to
|
Years
Ended
|
|||||||||||||||||||||||||||
Components
of Net Period
|
December
31,
|
January
31,
|
December
31,
|
December
31,
|
January
31,
|
December
31,
|
||||||||||||||||||||||||||
Benefit
Cost
|
2008
|
2008
|
2007
|
2006
|
2008
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||
Service
cost
|
$ | 303 | $ | 32 | $ | 441 | $ | 278 | $ | 409 | $ | 44 | $ | 520 | $ | 464 | ||||||||||||||||
Interest
cost
|
302 | 29 | 370 | 250 | 401 | 39 | 434 | 379 | ||||||||||||||||||||||||
Amortization
of:
|
||||||||||||||||||||||||||||||||
Prior
service costs
|
(26 | ) | (354 | ) | (497 | ) | ||||||||||||||||||||||||||
Actuarial
loss
|
(6 | ) | (2 | ) | 42 | 108 | (7 | ) | ||||||||||||||||||||||||
Net
periodic benefit cost
|
599 | 33 | 499 | 139 | 803 | 83 | 954 | 843 | ||||||||||||||||||||||||
FASB
Statement No. 88
|
||||||||||||||||||||||||||||||||
charges
— curtailment
|
||||||||||||||||||||||||||||||||
credit
|
(1,818 | ) | (2,564 | ) | ||||||||||||||||||||||||||||
Total
net periodic benefit (income) cost
|
$ | (1,219 | ) | $ | 33 | $ | 499 | $ | 139 | $ | (1,761 | ) | $ | 83 | $ | 954 | $ | 843 | ||||||||||||||
Weighted-Average
Assumptions
|
||||||||||||||||||||||||||||||||
Discount
rate
|
6.40 | % | 6.40 | % | 6.40 | % | 5.75 | % | 6.10 | % | 6.10 | % | 6.10 | % | 5.75 | % | ||||||||||||||||
Rate
of compensation increase
|
4.73 | 4.73 | 4.73 | 4.73 | n/a | n/a | n/a | 4.73 | ||||||||||||||||||||||||
Assumed
Health Care Cost
|
||||||||||||||||||||||||||||||||
Trend
Rate
|
||||||||||||||||||||||||||||||||
Initial
rate
|
8.5 | % | 9 | % | 9 | % | 8 | % | n/a | n/a | n/a | n/a | ||||||||||||||||||||
Ultimate
rate
|
5 | % | 5 | % | 5 | % | 5 | % | n/a | n/a | n/a | n/a | ||||||||||||||||||||
Years
to ultimate
|
7 | 8 | 8 | 3 | n/a | n/a | n/a | n/a |
Amounts
recognized in the consolidated balance sheet consist of the following (in
thousands):
Post
Retirement Health Care
|
||||||||||||||||
and
Life Insurance Benefits
|
Pilots’
Severance Plan
|
|||||||||||||||
Successor
|
Predecessor
|
Successor
|
Predecessor
|
|||||||||||||
Eleven-
|
Eleven-
|
|||||||||||||||
Months
|
Months
|
|||||||||||||||
Ended
|
Year
Ended
|
Ended
|
Year
Ended
|
|||||||||||||
Amounts
Recognized in the
Consolidated Balance
|
December
31,
|
December
31,
|
December
31,
|
December
31,
|
||||||||||||
Sheet
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Current
liability
|
$ | (80 | ) | $ | (96 | ) | $ | (83 | ) | $ | - | |||||
Accrued
benefit liability
|
(3,561 | ) | (4,971 | ) | (4,241 | ) | (7,202 | ) | ||||||||
Accumulated
other comprehensive (income) loss
|
(193 | ) | (4,223 | ) | (980 | ) | 184 |
As a
result of the remeasurement on the Acquisition Date, all previously existing
unrecognized net actuarial gains or losses and unrecognized prior service costs
were eliminated for the plans at Acquisition Date.
The
amounts recognized in accumulated other comprehensive income (loss) as of
December 31, 2007, for the Postretirement Health Care and Life Insurance
Benefits Plans and the Pilots’ Severance Plan include net actuarial (gains)
losses of $(.9) million and $0.2 million, respectively, and prior
service costs of $3.4 million for the Postretirement Health Care and Life
Insurance Benefit Plans. The amounts recognized on accumulated other
comprehensive (income) loss as of December 31, 2008 for the Postretirement
Health Care and Life Insurance Benefits Plans and the Pilots’ Severance Plan
include net actuarial gains of $0.2 million and $1 million,
respectively. The estimated net actuarial gain that will be recognized from
accumulated other comprehensive (income) as income in 2009 is expected to be
$(.1) million.
The
benefit obligations and fair value of plan assets (in which the accumulated
obligation exceeds the fair value of plan assets) as of December 31 consist
of the following (in thousands):
Post
Retirement Health Care and
|
||||||||||||||||||||||||
Life
Insurance Benefits
|
Pilots’
Severance Plan
|
|||||||||||||||||||||||
Successor
|
Predecessor
|
Successor
|
Predecessor
|
|||||||||||||||||||||
Eleven-
|
Eleven-
|
|||||||||||||||||||||||
Months
|
One-Month
|
Months
|
One-Month
|
|||||||||||||||||||||
Ended
|
Ended
|
Year
Ended
|
Ended
|
Ended
|
Year
Ended
|
|||||||||||||||||||
December
31,
|
January
31,
|
December
31,
|
December
31,
|
January
31,
|
December
31,
|
|||||||||||||||||||
2008
|
2008
|
2007
|
2008
|
2008
|
2007
|
|||||||||||||||||||
Projected
benefit obligation
|
$ | 3,641 | $ | 5,120 | $ | 5,067 | $ | 4,323 | $ | 7,064 | $ | 7,202 | ||||||||||||
Accumulated
benefit obligation
|
4,323 | 7,064 | 7,202 | |||||||||||||||||||||
Fair
value of plan assets
|
Midwest
continues to sponsor group health care coverage to its retirees; however, the
Company reduced the amount it subsidizes effective March 31, 2005. For
employees retiring after June 1, 2005, the Company will not subsidize the
cost of health care coverage between the ages of 55 and 60. The Company will
also not subsidize the cost of retiree health care coverage after age 65.
Retiree life insurance benefits were also eliminated. For employees retired
prior to June 1, 2005, the Company will continue to subsidize part of the
cost of pre-65 coverage.
Midwest
is not eligible for the federal subsidy under the Medicare Prescription Drug,
Improvement and Modernization Act of 2003.
Plan Assets — The fair
value of plan assets for these plans was $7.6 million and
$10.2 million as of December 31, 2008 and 2007, respectively. The
expected long-term rate of return on these plan assets was 8% in 2008 and
2007.
The
return on plan assets reflects the weighted average of the expected long-term
rates of return for the broad categories of investments held in the plan. The
expected long-term rate of return is adjusted when there are fundamental changes
in expected returns on the plan investments; this adjustment takes into account
consideration from the actuary regarding long-term market conditions and
investment management performance.
The asset
allocation for the Company’s pension plans at the end of 2008 and 2007, and the
target allocation for 2009, by asset category, is as follows:
Percentage
of
|
||||||||||||
Plan
Assets
|
||||||||||||
Target
|
December
31,
|
|||||||||||
Allocation
|
Successor
|
Predecessor
|
||||||||||
Asset
Category
|
for
2009
|
2008
|
2007
|
|||||||||
Equity
securities
|
75 | % | 74 | % | 72 | % | ||||||
Fixed
income
|
25 | 26 | 27 | |||||||||
Cash
and cash equivalents
|
1 | |||||||||||
Total
|
100 | % | 100 | % | 100 | % |
Plan Investment
Strategy — The Qualified Plan (the “Plan”) has a Fiduciary Committee
that oversees the investment of the assets of the Plan. The Fiduciary Committee
has created an investment policy for the assets of the Plan. The basic
investment strategy for the Plan assets provides that over the investment
horizon established in the policy, aggregate Plan assets will meet or
exceed:
|
·
|
an
absolute annual rate of return of 8% based on the blended weighted-average
return on equity and fixed income securities based on the target
allocation
|
|
·
|
an
absolute real return (excess of inflation) of
5%
|
|
·
|
the
return of a balanced market index composed of 75% S&P 500 Stock Index
and 25% Barclays U.S. Aggregate Bond
Index.
|
The
investment goals above are the objectives of the aggregate Plan and are not
meant to be imposed on each investment account (if more than one account is
used). The goal of each investment manager, over the investment horizon, shall
be to:
|
·
|
meet
or exceed the market index, or blended market index, selected and agreed
upon by the Plan’s Fiduciary Committee that most closely corresponds to
the style of investment management.
|
|
·
|
display
an overall level of risk in the portfolio that is consistent with the risk
associated with the benchmark specified above. Risk will be measured by
the standard deviation of quarterly
returns.
|
Specific
investment goals and constraints for each investment manager are incorporated as
part of the investment policy.
Expected Cash Flows —
Information about expected cash flows for the pension and postretirement benefit
plans and severance plan is as follows (in thousands):
Pension
|
Other
|
|||||||
2009
Expected Employer Contributions
|
Benefits
|
Benefits
|
||||||
To
plan trusts
|
$ | 72 | $ | 162 |
Expected
future benefit payments for the next five years are as follows (in
thousands):
Years
Ended
|
Pension
|
Other
|
||||||
December
31
|
Benefits
|
Benefits
|
||||||
2009
|
$ | 200 | $ | 162 | ||||
2010
|
236 | 235 | ||||||
2011
|
285 | 311 | ||||||
2012
|
338 | 387 | ||||||
2013
|
405 | 528 | ||||||
2014–2017
|
3,197 | 4,608 |
Qualified Defined Contribution
Plans — Midwest made monthly contributions to substantially all
employees’ accounts under the Retirement Account Plan. Effective July 1,
2008, the Company stopped contributions to all nonunion employees, as part of
the restructure plan. Company contributions vary based on the age of the
employee and their earnings. In addition, under the Retirement Account Plan,
some employees who were participants in the terminated Midwest Airlines Pension
Plan on March 31, 2000, may receive additional transition benefits each
year.
Company
contributions under the Retirement Account Plan are limited to the extent
required by tax regulations. To the extent contributions to the Retirement
Account Plan are limited under tax law, any excess will be paid pursuant to
supplemental retirement arrangements. The amounts expensed and reflected in the
accompanying consolidated statements of operations were $3.2 million,
$0.6 million, $5.0 million, and $4.7 million in the eleven-month
period ended December 31, 2008, the one-month period ended January 31,
2008, and the years ended December 31, 2007 and 2006,
respectively.
The
Company has two voluntary defined contribution investment plans covering
substantially all employees. Under these plans, the Company matches a portion of
an employee’s contributions if certain thresholds are met. Amounts expensed and
reflected in the accompanying consolidated statements of operations were
$0.1 million, $0.0 million, $0.2 million, and $0.2 million
in the eleven-month period ended December 31, 2008, the one-month period
ended January 31, 2008, and the years ended December 31, 2007 and
2006, respectively. Effective October 1, 2001, Midwest temporarily
suspended matching contributions to its 401(k) program following the events
of September 11. In 2002, Midwest reinstated matching contributions using a
targeted profitability measure. Midwest Connect matches 25% of employee
contributions up to 10% of an employee’s salary. In addition, Midwest Connect
will increase matching contributions above that level if targeted profitability
measures are met.
15.
|
RESTRUCTURING
CHARGES
|
In 2008,
the Company made announcements to restructure the airline, which included
exiting the regional flight operations of its Skyway subsidiary as a result of a
strategic business review. Operations of Skyway ceased in April 2008 and the
Company’s operations were further restructured in June 2008, resulting in the
elimination of positions, compensation reductions, reduction of contractual
costs, and fleet changes. Total costs are expected to be approximately $62
million. The final completion and satisfaction of the related liabilities is
anticipated to be completed by December 31, 2010 (in
thousands):
Lease
|
Severance
|
|||||||||||||||
Commitments
|
Related
|
Other
|
Total
|
|||||||||||||
Accrued
— January 31, 2008
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Restructuring
expense
|
25,533 | 2,562 | 10,216 | 38,311 | ||||||||||||
Amounts
paid or settled
|
(9,765 | ) | (2,325 | ) | (9,834 | ) | (21,924 | ) | ||||||||
Accrued
— December 31, 2008
|
$ | 15,768 | $ | 237 | $ | 382 | $ | 16,387 |
Of the
$16.4 million outstanding as of December 31, 2008, $9.9 million
is reflected in other noncurrent liabilities, $4.8 million in current
accrued liabilities, and $1.7 million as a reserve against
inventories.
16.
|
SUBSEQUENT
EVENTS
|
Subsequent
to December 31, 2008, the Company entered into a number of transactions as
part of its restructuring program. These transactions include adjustments to and
cancelations of debt and leases, as well as for the changes in fleet and the
issuance of new debt. In addition, air services agreements with the Company’s
regional partner were renegotiated.
Leases — During 2008 and
2009, the Company was negotiating with its Boeing 717 lessor. As of
December 31, 2008, the Company had $15.4 million accrued liabilities
associated with a negotiated forbearance agreement with the lessor. On
May 26, 2009, the Company negotiated an additional forbearance agreement
with its lessor. The May 2009 agreement replaces the previously negotiated
forbearance agreement and certain provisions of the previously negotiated
forbearance agreement were eliminated. As a result, the Company will return the
remaining nine Boeing 717 aircraft by early 2010. In addition, the Company will
pay the lessor $5.4 million in installments of $600,000 at the time each
aircraft is returned and contribute two Rolls Royce jet engines, valued at
approximately $6.4 million. Republic is the guarantor of the
$5.4 million cash payment and the $6.4 million engine
contribution.
On
May 4, 2009, another aircraft lessor received a judgment against the
Company for failure to pay lease payments for two MD80s. The Company agreed to
settle this judgment for $1.8 million. The lessor assigned the claim and
judgment to Republic at a discounted price and other consideration. At this
point the Company remains obligated on the judgment being held by Republic. As
of December 31, 2008, the Company had recorded a liability of
$1.8 million associated with these leases.
On
June 3, 2009, the Company entered into agreements with two other lessors
for the early termination of two MD80 leases in exchange for settlement payments
totaling $1.5 million. As of December 31, 2008, the Company had a
liability totaling $1.5 million for these leases.
Air Services Agreements —
On May 21, 2009, the Company expanded the air services agreement with
Republic to include two Embraer E190 jets. The jets are expected to begin
service in August 2009 and September 2009. The Company also expanded the air
services agreement to include twelve 37- to 50-seat Embraer E135 jets to serve a
number of its Midwest Connect routes.
On
June 3, 2009, the Company entered into an agreement for the early
termination of the SkyWest ASA. As part of the restructured transaction, two of
the 12 aircraft being operated by SkyWest under the ASA were removed from the
fleet without further consideration. Thereafter, the Company is obligated to pay
SkyWest $400,000 for each of the aircraft at the time of removal from the ASA.
The last aircraft is expected to be returned in early 2010. Republic did
guarantee payment of the $400,000 per aircraft. The loss of capacity from
SkyWest will be replaced by additional Embraer aircraft, provided by the
expanded agreement with Republic.
Debt Financing — On
June 8, 2009, the Company received additional debt financing of
$12 million, consisting of $6 million each from Republic and the TPG
Entities.
On
June 12, 2009, the senior promissory notes totaling approximately
$238 million with three TPG Capital, Inc. affiliates were assigned to
MAP. Concurrent with this transaction, MAP canceled all outstanding senior and
junior promissory notes resulting in a capital contribution in exchange for all
the outstanding common stock as held by Midwest Management Holdings LLC and
the minority shareholders.
On
June 12, 2009, the Company reached an agreement with the lessor of the FRJs
to settle the lease and debt default obligations associated with eight aircraft
on July 17, 2009. The Company made an up-front payment of $3.1 million
and issued a $15 million note secured by the aircraft plus one additional
FRJ aircraft contributed to the collateral pool by the Company. The secured note
is to be repaid from the net proceeds of sale of the aircraft. The lessor is
guaranteed by Republic to receive $15 million by December 31, 2010.
Interest begins accruing on June 1, 2009, at 5% payable quarterly in
arrears on the last day of each quarter until December 31, 2010. As of
December 31, 2008, the Company had $29.8 million accrued related to
these aircraft.
Other — Due to the
continued recessionary economic environment, as well as other uncertainties, the
Company will likely be required to record additional asset impairment charges in
2009.
On
June 25, 2009, the Company announced a code-share program with Frontier
Airlines. The code-share will allow customers to connect between Midwest and
Frontier Airlines flights for selected cities and will begin on August 30,
2009.
On
July 31, 2009, the Company was sold by the TPG Entities to Republic for
$31 million in cash and debt. The Company is now a wholly owned subsidiary
of Republic. Republic plans to continue to operate the Company as a branded
carrier using Midwest’s fleet of aircraft, as well as aircraft provided under
the ASA with Republic. During 2008 and 2009, the Company restructured several
leases, debt agreements, and other financial obligations to reduce costs in 2009
and future periods. Furthermore, the Company plans to continue expanding the ASA
with Republic, which is expected to reduce the net operating costs. The Company
also plans for additional workforce reductions, cost reductions from outsourcing
or insourcing of airport support functions, and use of third-party services, and
continued negotiation of more favorable terms with key vendors. The Company’s
cash used in operations for 2009 is projected to be funded from ticket sales and
will be supplemented by Republic and potentially from other third parties, as
needed.
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