<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number 000-23447
MIDWAY AIRLINES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3915637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2801 Slater Road, Suite 200
Morrisville, NC 27560
(Address of principal executive offices)
(Zip Code)
919-595-6000
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes ____X___ No ________
As of November 10, 2000 there were 15,174,755 shares of Common Stock, $.01
par value, of the registrant outstanding.
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
Midway Airlines Corporation
Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 45,046 $ 27,351
Restricted cash 22,699 10,668
Short-term investments - 545
Accounts Receivable:
Credit cards and travel agencies 10,841 4,311
Other (net) 1,004 2,719
Inventories 5,034 3,638
Deferred income tax asset 1,172 1,172
Prepaids and other 11,110 9,878
-------- --------
Total current assets 96,906 60,282
Equipment and property:
Flight 141,282 124,808
Other 15,081 11,485
Less accumulated depreciation and amortization (22,809) (15,888)
-------- --------
Total equipment and property, net 133,554 120,405
Other noncurrent assets:
Equipment and aircraft purchase deposits 117,301 61,824
Aircraft lease deposits and other 11,671 9,306
Deferred income tax asset 10,497 4,872
-------- --------
Total other noncurrent assets 139,469 76,002
-------- --------
Total assets $369,929 $256,689
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,494 $ 11,574
Accrued expenses 6,754 6,385
Accrued income and excise taxes 3,229 2,267
Advance ticket sales 41,846 25,486
Other current liabilities 12,398 2,686
Current maturities of long-term debt and capital lease obligations 6,571 7,470
-------- --------
Total current liabilities 84,292 55,868
Noncurrent liabilities:
Long-term debt and capital lease obligations 163,267 103,349
Deferred income tax liability 14,336 14,336
-------- --------
Total noncurrent liabilities 177,603 117,685
Total liabilities 261,895 173,553
Stockholders' equity:
Preferred stock, $0.01 par value; 12 million shares authorized; none
issued and outstanding - -
Common stock, $0.01 par value; 25 million shares authorized; 8,602,395
and 15,174,755 shares issued and outstanding at December 31, 1999 and
September 30, 2000 152 86
Additional paid-in capital 88,359 54,349
Retained earnings ($51.1 million of accumulated deficit eliminated
in the quasi-reorganization as of June 30, 1997) 19,523 28,701
-------- --------
Total stockholders' equity 108,034 83,136
-------- --------
Total liabilities and stockholders' equity $369,929 $256,689
======== ========
</TABLE>
<PAGE>
Midway Airlines Corporation
Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
2000 1999 Favorable (Unfavorable)
---- ---- -----------------------
Variance Variance %
-------- ----------
<S> <C> <C> <C> <C>
Operating revenues:
Passenger $68,201 $48,500 $19,701 41%
Cargo 567 427 140 33%
Contract and other 1,906 581 1,325 228%
----------------- ------------- ---------------- -------------
Total revenues 70,674 49,508 21,166 43%
Operating expenses:
Wages, salaries and related costs 15,262 9,662 (5,600) (58%)
Aircraft fuel 13,147 5,933 (7,214) (122%)
Aircraft and engine rentals 12,405 7,639 (4,766) (62%)
Commissions 3,823 3,241 (582) (18%)
Maintenance, materials and repairs 4,240 3,056 (1,184) (39%)
Other rentals and landing fees 3,790 2,471 (1,319) (53%)
Depreciation and amortization 2,647 1,724 (923) (54%)
Other 20,255 14,985 (5,270) (35%)
----------------- ------------- ---------------- -------------
Total operating expenses 75,569 48,711 (26,858) (55%)
----------------- ------------- ---------------- -------------
Operating (loss) income (4,895) 797 (5,692) (714%)
Other income (expense):
Interest income 776 452 324 72%
Interest expense (910) (879) (31) (4%)
----------------- ------------- ---------------- -------------
Total other income (expense) (134) (427) 293 69%
----------------- ------------- ---------------- -------------
(Loss) income before income taxes (5,029) 370 (5,399) (1459%)
Income tax (benefit) expense (1,911) 141 2,052 1455%
----------------- ------------- ---------------- -------------
Net (loss) income ($3,118) $229 ($3,347) (1462%)
================= ============= ================ =============
Basic (loss) earnings per share:
Net (loss) income $(0.23) $0.03
======= =====
Weighted average shares used in
Computing basic (loss) earnings per share 13,320,516 8,602,395
========== =========
Diluted (loss) earnings per share:
Net (loss) income $(0.23) $0.02
====== =====
Weighted average shares used in
Computing diluted (loss) earnings per share 13,320,516 9,445,495
========== =========
</TABLE>
<PAGE>
Midway Airlines Corporation
Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
2000 1999 Favorable (Unfavorable)
---- ---- -----------------------
Variance Variance %
-------- ----------
<S> <C> <C> <C> <C>
Operating revenues:
Passenger $198,884 $156,547 $42,337 27%
Cargo 1,763 1,350 413 31%
Contract and other 4,312 2,149 2,163 101%
------------- -------------- ------------- --------------
Total revenues 204,959 160,046 44,913 28%
Operating expenses:
Wages, salaries and related costs 40,466 28,207 (12,259) (44%)
Aircraft fuel 34,250 14,737 (19,513) (132%)
Aircraft and engine rentals 34,949 22,353 (12,596) (56%)
Commissions 11,375 10,537 (838) (8%)
Maintenance, materials and repairs 11,839 10,091 (1,748) (17%)
Other rentals and landing fees 10,590 7,401 (3,189) (43%)
Depreciation and amortization 7,381 5,296 (2,085) (39%)
Other 58,355 44,264 (14,091) (32%)
Equipment retirement charges 9,163 2,008 (7,155) (356%)
------------- -------------- ------------- --------------
Total operating expenses 218,368 144,894 (73,474) (51%)
------------- -------------- ------------- --------------
Operating (loss) income (13,409) 15,152 (28,561) (189%)
Other income (expense):
Interest income 1,576 1,799 (223) (12%)
Interest expense (2,970) (3,649) 679 19%
------------- -------------- ------------- --------------
Total other income (expense) (1,394) (1,850) 456 25%
------------- --------------- ------------- --------------
(Loss) income before income taxes (14,803) 13,302 (28,105) (211%)
Income tax (benefit) expense (5,625) 5,055 10,680 211%
------------- --------------- ------------- --------------
Net (loss) income ($9,178) $8,247 ($17,425) (211%)
============= =============== ============= ==============
Basic (loss) earnings per share:
Net (loss) income $(0.90) $0.96
======= =====
Weighted average shares used in
computing basic (loss) earnings per share 10,192,304 8,602,395
=========== =========
Diluted (loss) earnings per share:
Net (loss) income $(0.90) $0.86
======= =====
Weighted average shares used in
computing diluted (loss) earnings per share 10,192,304 9,553,665
=========== =========
</TABLE>
<PAGE>
Statement of Stockholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Retained
Additional Earnings
Preferred Stock Common Stock Paid-in (Accumulated
-------------------------------------------
Shares Amount Shares Amount Capital Deficit) Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 1,080,000 $ 11 10,000,000 $ 100 $ 30,989 $ (71,669) $ (40,569)
Cancellation of prior stock in
connection with (1,080,000) (11) (10,000,000) (100) 111 - -
recapitalization
Issuance of preferred stock 3,728,693 37 - - 14,963 - 15,000
Issuance of common stock - - 2,130,682 21 8,551 - 8,572
Issuance of common stock
warrants in connection with - - - - 1,571 - 1,571
debt restructuring
Contributed capital - - - - 1,314 - 1,314
Reclassification of accumulated
deficit pursuant to
quasi-reorganization - - - - (51,139) 51,139 -
Conversion of preferred stock (3,728,693) (37) 3,728,693 37 - - -
Issuance of common stock in
connection with initial public - - 2,699,320 27 37,677 - 37,704
offering
Net income - - - - - 24,894 24,894
----------------------------------------------------------------------------------------
Balance at December 31, 1997 - - 8,558,695 85 44,037 4,364 48,486
Issuance of common stock - - 43,700 1 176 - 177
Net operating loss carryforward
utilization credited to
additional paid-in capital - - - - 6,819 - 6,819
Net income - - - - - 14,981 14,981
----------------------------------------------------------------------------------------
Balance at December 31, 1998 - - 8,602,395 86 51,032 19,345 70,463
Net operating loss carryforward
utilization credited to
additional - - - - 3,317 - 3,317
paid-in capital
Net income - - - - - 9,356 9,356
----------------------------------------------------------------------------------------
Balance at December 31, 1999 - - 8,602,395 86 54,349 28,701 83,136
----------------------------------------------------------------------------------------
Issuance of common stock - - 6,572,360 66 34,010 - 34,076
Net (loss) - - - - - (9,178) (9,178)
----------------------------------------------------------------------------------------
Balance at September 30, 2000 - - 15,174,755 $ 152 $ 88,359 $ 19,523 $ 108,034
========================================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Midway Airlines Corporation
Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (9,178) $ 8,247
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 7,381 5,296
Loss on disposal of assets 4 48
Deferred income taxes (5,625) -
Amortization of discount on debt 662 335
Other non-cash items 160 -
Changes in operating assets and liabilities:
Restricted cash (12,031) (4,848)
Accounts receivable (5,979) (3,153)
Inventories (1,396) (485)
Prepaids and other (1,376) 2,439
Aircraft lease deposits and other (2,789) (5,635)
Accounts payable and accrued expenses 2,288 1,544
Accrued income and excise taxes 962 3,749
Advance ticket sales 16,360 9,488
Other current liabilities 9,712 (245)
Other noncurrent liabilities - (1,057)
--------- ---------
Net cash (used in) provided by operating activities (845) 15,723
INVESTING ACTIVITIES:
Purchase of short-term investments - (7,820)
Sale of short-term investments 545 3,050
Purchase of equipment and property (18,432) (12,219)
Proceeds from sale of equipment 21 -
Aircraft and equipment purchase deposits (23,318) (38,463)
Refund of aircraft and equipment purchase deposits 6,650 10,760
--------- ---------
Net cash used in investing activities (34,534) (44,692)
FINANCING ACTIVITIES:
Issuance of common stock 34,075 -
Proceeds from issuance of long-term debt 24,575 -
Proceeds from line of credit-related party 30,000 -
Repayment of line of credit-related party (30,000) -
Repayment of long-term debt and capital lease obligations (5,576) (4,928)
--------- ---------
Net cash provided by (used in) financing activities 53,074 (4,928)
Increase (decrease) in cash and cash equivalents 17,695 (33,897)
Cash and cash equivalents at beginning of period 27,351 48,736
--------- ---------
Cash and cash equivalents at end of period $ 45,046 $ 14,839
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 9,736 $ 5,276
========= =========
Income taxes paid $ 27 $ 2,191
========= =========
SCHEDULE OF NON-CASH ACTIVITIES:
Issuance of debt and capital leases for equipment purchases $ 2,065 $ 1,529
========= =========
Debt issued for aircraft purchase deposits $ 50,091 -
========= =========
Accounts receivable from lessor offset against long-term
note payable to lessor $ 1,313 -
========= =========
Refund of aircraft purchase deposits applied to outstanding debt $ 11,282 -
========= =========
</TABLE>
6
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements
(Informationas of September 30, 2000 and for the three and nine months
ended September 30, 2000 and 1999 are unaudited)
1. Basis of Presentation
The unaudited interim financial statements included herein have been prepared by
Midway Airlines Corporation ("Midway" or the "Company"), in accordance with
generally accepted accounting principles ("GAAP") for interim financial
reporting pursuant to the rules and regulations of the Securities and Exchange
Commission. The information furnished in the interim financial statements
includes normal recurring adjustments and reflects all adjustments which, in the
opinion of management, are necessary for a fair presentation of such financial
statements. The results of operations for any interim period presented are not
necessarily indicative of the results to be expected for any other period.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission,
although the Company believes that the disclosures are adequate to make the
information presented not misleading. These interim financial statements should
be read in conjunction with the financial statements, and the notes thereto,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
Certain reclassifications have been made in the prior year's financial
statements to conform to the current year presentation.
2. Significant Accounting Policies and Other Matters
Use of Estimates and Assumptions
Preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during those reporting periods. Actual results could
differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include investments with an original maturity of three
months or less or which may be redeemed without penalty at any time. These
investments are stated at cost, which approximates market value. As of September
30, 2000 and December 31, 1999, approximately $22.7 million and $10.7 million,
respectively, of cash and cash equivalents were restricted as to withdrawal;
these funds serve as collateral to support letters of credit, collateral for
negative carry (the difference between the coupon rate on the certificates and
the interest rate being earned on the funds prior to the closing of the
financing on delivery of each aircraft included in the "EETCs" issued in
September 2000), and a credit card holdback, and are classified as restricted
cash in the balance sheets.
Capitalized Interest
Interest on aircraft purchase deposits was capitalized at an amount
approximating the Company's incremental borrowing rate for similar type assets.
All capitalized amounts are amortized over the term of the respective service
life of the related equipment. Capitalized interest totaled $7.2 million and
$1.3 million for the nine months ended September 30, 2000 and 1999,
respectively.
7
<PAGE>
3. Earnings (Loss) Per Share of Common Stock
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2000 (1) 1999 (1) 2000 (1) 1999 (1)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net (loss) income (2) $(3,118,000) $ 229,000 $(9,178,000) $8,247,000
Denominator:
Denominator for basic (loss) earnings per
share - weighted average shares 13,320,516 8,602,395 10,192,304 8,602,395
Effect of dilutive securities (3):
Employee stock options - 452,598 - 560,719
Warrants - 390,502 - 390,551
Dilutive potential common shares - 843,100 - 951,270
----------- ---------- ----------- ----------
Denominator for diluted (loss) earnings per
share - adjusted weighted average shares and
assumed conversions 13,320,516 9,445,495 10,192,304 9,553,665
Basic (loss) earnings per share $ (0.23) $ 0.03 $ (0.90) $ 0.96
Diluted (loss) earnings per share $ (0.23) $ 0.02 $ (0.90) $ 0.86
</TABLE>
(1) Options and warrants to purchase 1,516,273 shares of common stock were
outstanding during the three and nine months ended September 30, 2000, but
were not included in the computation of earnings per share because the
Company was in a net loss position, and, therefore, their effect would have
been anti-dilutive. Options to purchase 237,280 shares of common stock at
$15.50 per share were outstanding during the three and nine months ended
September 30, 1999, but were not included in the computation of diluted
earnings per share because the exercise price of the options was greater
than the average market price of the common shares and, therefore, the
effect would be anti-dilutive.
(2) Numerator for basic and diluted earnings (loss) per share.
(3) Shares calculated using the "Treasury Stock" method under SFAS 128.
4. Debt
The Company received a $30 million revolving credit facility on March 31, 2000,
provided by an entity owned by two shareholders, James H. Goodnight and John P.
Sall. Pursuant to the terms of this credit facility, the Company was obligated
to undertake a rights offering of common stock. Amounts borrowed and outstanding
under this credit facility in excess of $10 million, if any, had to be repaid
and the remaining available loan commitment reduced to $10 million on the
earlier of September 30, 2000 or the date on which the Company completed the
rights offering, which was completed on July 26, 2000. The credit facility
carries a variable interest rate based on LIBOR plus 3% payable monthly, and a
commitment fee of 0.5% on the average daily unused balance payable quarterly. As
of September 30, 2000, there was no outstanding balance due under the credit
facility. The outstanding balance of all loans made under this credit facility
is due and payable on March 31, 2002.
On August 11, 2000 the Company closed a financing with a syndicate of banks
which have agreed to provide the Company with up to $37.5 million, in the
aggregate, to either reimburse the Company for cash pre-delivery deposits
previously made pursuant to its purchase agreement with The Boeing Company or to
make pre-delivery deposits that become due under such agreement. As of September
30, 2000, $27.1 million has been drawn under the pre-delivery deposit financing
and is included in long-term debt on the balance sheet. The related deposits are
reflected in equipment and aircraft purchase deposits on the balance sheet at
September 30, 2000. As of November 10, 2000, the amounts drawn under this
agreement total $32.3 million. In addition, another lender has provided
pre-delivery deposit financing in conjunction with the bank consortium. As of
September 30, 2000, $31.1 million has been forwarded under this agreement and is
included in long-term debt and equipment and aircraft purchase deposits on the
balance sheet. As of November 10, 2000, $35.0 million is outstanding under this
agreement. Under both agreements, interest is based on LIBOR plus 2-3% and is
payable monthly. The interest paid is capitalized in flight equipment on the
balance sheet as of September 30, 2000. When each aircraft delivers, the
permanent financing of such aircraft repays the lenders and the Company for all
pre-delivery deposits previously paid by or on behalf of the Company.
8
<PAGE>
5. Equity
On July 26, 2000, the Company completed a rights offering related to its common
stock which raised gross proceeds to the company of $34.1 million. As a result
of this rights offering, 6,561,163 shares of common stock were issued at $5.20
per share. Common stock issued and outstanding after the rights offering totals
15,174,755 shares. From the proceeds of the offering, $5.0 million was used to
repay all amounts then outstanding under a $30 million revolving credit facility
provided by an entity owned by two stockholders, James H. Goodnight, Ph.D. and
John P. Sall. As of November 10, 2000, the Company may draw up to $10 million
under this revolving credit facility. Together, Messrs. Goodnight and Sall own
approximately 66.1% of the outstanding stock as of November 10, 2000. The
remaining proceeds of this offering will be used to meet working capital and
capital expenditure requirements including the funding of pre-delivery deposits
due to aircraft manufacturers.
6. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 "Accounting for Derivative and Hedging
Activities." ("SFAS No. 133"). SFAS No. 133, as amended, is required to be
adopted in the first quarter of 2001. Because the Company had no derivative
instruments as of November 10, 2000, management does not anticipate that the
adoption of this statement will have a material impact on net earnings or the
financial position of the Company.
7. Commitments and Contingencies
Aircraft Commitments:
The Company has placed firm orders to purchase fifteen Boeing 737 aircraft
("737s"), has agreed to lease six additional 737s, and intends to lease one
additional 737. Deliveries of two of the leased 737 aircraft occurred in
December 1999 and January 2000, and delivery for the other nineteen 737 aircraft
on firm order or subject to lease began in September 2000 and ends in October
2002. The additional 737 aircraft that the Company intends to lease is scheduled
for delivery in January 2001. The Company has options to acquire ten additional
737s. The Company intends to purchase up to four CFM 56-7B spare engines to
support the operation of its 737 aircraft.
The Company has in place firm orders to purchase three newly manufactured
CRJ-2100ER Canadair Regional Jet aircraft which are scheduled for delivery in
January, September and December 2001.
The Company currently leases eight Fokker F100s. In December 1999, the Company
settled a pending lawsuit with the lessor of four Fokker F100 aircraft
previously operated by the Company. As a result of this settlement, the Company
recorded a pre-tax charge of approximately $700,000 during the fourth quarter of
1999 and obtained an option to terminate leases on four other F100s. In February
2000, the Company exercised this option to terminate the leases on these four
F100s prior to their scheduled lease expirations in 2003 and 2004, resulting in
a revised scheduled return date of these aircraft in the first half of 2001. The
Company is required to pay the lessor $2.125 million upon the termination of
each of these four leases, of which $4.25 million is payable in each of the
first two quarters of 2001. In addition, the Company is required to perform
certain maintenance tasks on these aircraft prior to their return. During the
nine months ended September 30, 2000, the Company recorded $9.2 million in
equipment retirement charges related to the exercise of this option. As of
September 30, 2000, the Company has recorded liabilities of $8.8 million related
to the lease termination penalties and related expenses. The remaining $363,000
charge relates to the write-down of leasehold improvements resulting from the
shortened lease terms.
Pursuant to a March 1995 purchase agreement, Midway is obligated to purchase
four Airbus A320 aircraft with deliveries in 2005 and 2006. To support the
operation of the four A320 aircraft, the Company also agreed to purchase one IAE
V2527-A5 spare engine
9
<PAGE>
scheduled for delivery in November 2005 from International Aero Engines AG
("IAE"). The purchase of the A320s and the associated spare engine no longer fit
with the Company's current strategy. The Company is considering several
alternatives with respect to the A320s, including restructuring its agreement
with Airbus or selling its positions.
Other Contingencies:
The Company's pilots, fleet service (ramp) agents, and flight attendants are
represented by labor unions. The pilots' representative, the Air Line Pilots
Association ("ALPA"), was elected in December 1997; the ramp employees'
representative, International Association of Machinists and Aerospace Workers,
AFL-CIO ("IAM"), was elected in June 1998; and the flight attendants'
representative, the Association of Flight Attendants, AFL-CIO ("AFA") was
elected in December 1998. Prior to those dates, none of the Company's employees
were represented by a union. The Company's pilots ratified a collective
bargaining agreement with the Company which became effective on April 1, 2000.
With respect to the fleet service employees, a contract proposal was agreed upon
by the IAM and the Company, and such agreement was submitted to the employees
for ratification on October 28, 1999; it was rejected. The IAM filed an
application for mediation with the National Mediation Board ("NMB") on November
3, 1999, and the NMB appointed a mediator on November 8, 1999. In February 2000,
with the assistance of an NMB-appointed mediator, the Company reached agreement
with the IAM and members of the fleet service agent negotiating committee on a
collective bargaining agreement. The agreement was then submitted to the fleet
service agents for ratification. On March 20, 2000, the Company was advised that
the fleet service agents voted not to approve the agreement. Further mediation
of this matter has commenced and additional meetings will be held. Negotiations
with the AFA have not yet concluded.
In August 1998, the Compliance and Enforcement Branch of the Drug Abatement
Division of the Federal Aviation Administration ("FAA") conducted an inspection
of the Company's compliance with certain regulations related to its alcohol and
drug testing programs. In September 1998, the FAA notified the Company that it
was investigating alleged violations discovered during the August 1998
inspection. The Company responded to these alleged violations in October 1998.
In May 1999, the FAA requested that the Company provide the FAA with an update
of certain matters raised during the investigation. The Company promptly
provided this information to the FAA. The Company is unable to determine whether
the FAA's investigation will result in the finding of violations of these
regulations and, if so, whether the FAA will pursue an assessment as a result of
any such findings or what the amount of any such assessment might be.
In September 1997, the Civil Aviation Security Division of the FAA conducted an
investigation of the Company's compliance with certain regulations requiring the
Company to verify the accuracy of the background information provided by its
employees who have access to secure airport areas. The Company revised its
background check procedures during the course of the FAA's investigation and
then obtained and verified the necessary background information of those
employees who had been identified by the FAA as having insufficient background
check documentation. This investigation will likely result in a finding by the
FAA of violations of these regulations. The Company has received no
communications from the FAA in this respect since 1998.
The Company is involved in various legal proceedings that are incidental to the
conduct of its business. The outcome of these matters cannot be predicted, but
it is management's belief that whatever the outcome, the results will not,
either individually or in the aggregate, have a material adverse effect on the
Company's financial position, results of operations or cash flows.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS, THE NOTES THERETO AND THE OTHER FINANCIAL DATA INCLUDED IN
THE COMPANY'S ANNUAL REPORT FILED ON FORM 10-K.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
OVERVIEW
Results of Operations
For the three months ended September 30, 2000, the Company's net loss was $3.1
million. Revenue for the three months ended September 30, 2000 was up 43% over
the three months ended September 30, 1999 to $70.7 million. Fuel prices have
continued to be up significantly in the three months ended September 30, 2000
from the three months ended September 30, 1999. Fuel expense increased $7.2
million, or 122%, in the three months ended September 30, 2000, mainly due to
the 69% increase in liquid fuel price per gallon to 91.8 cents from 54.2 cents
and a 40% increase in gallons of fuel consumed due to increased number of
flights. During the three months ended September 30, 2000, the Company continued
to incur significant pilot training costs associated with the induction of the
Boeing 737-700 fleet.
<TABLE>
<CAPTION>
Selected Operating Data
For the Three Months Ended September 30,
Favorable (Unfavorable)
-----------------------
2000 1999 Variance Variance %
---- ---- -------- ----------
<S> <C> <C> <C> <C>
ASMs (thousands) 532,693 381,540 151,153 39.6%
RPMs (thousands) 374,675 252,243 122,432 48.5%
Load Factor 70.3% 66.1% 4.2 pts 6.4%
Breakeven Passenger Load Factor 75.5% 65.5% (10.0) pts (15.3%)
Departures 16,938 11,710 5,228 44.6%
Block Hours 26,227 18,071 8,156 45.1%
Passenger Revenue per ASM (cents) 12.80 12.71 0.09 0.7%
Passenger Yield (cents) 18.20 19.23 (1.03) (5.4%)
Average Fare $ 88 $ 95 ($7) (7.4%)
Operating Cost per ASM (cents) 14.19 12.77 (1.42) (11.1%)
Total Cost per ASM (cents) 14.21 12.88 (1.33) (10.3%)
Onboard Passengers 771,517 509,460 262,057 51.4%
Average Seats per departure 66 66 0 0.0%
Average Stage Length (miles) 453 471 (18) (3.8%)
Aircraft (average during period) 33.0 22.7 10.3 45.4%
Aircraft Utilization (hours per day) 8.6 8.7 (0.1) (1.1%)
Fuel Price per Gallon (cents) (1) 91.8 54.2 (37.6) (69.4%)
</TABLE>
(1) Excludes taxes and into-plane fees
11
<PAGE>
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Capacity. In the three months ended September 30, 2000, the Company produced 533
million ASMs, an increase of 151 million or 40% from the three months ended
September 30, 1999. The increase in ASM production was attributable to 45% more
departures (to 16,938), offset somewhat by a 4% shorter average stage length (to
453 miles) and stable average seats per departure. These changes resulted from
the change in the Company's fleet (see below).
As of September 30,
Aircraft 2000 1999
-------- ---- ----
F100 (98 seats) 8 8
CRJ (50 seats) 23 16
Boeing (128 seats) 3 0
- -
34 24
Operating Revenues. The Company's operating revenues increased 43% to $70.7
million for the three months ended September 30, 2000 from $49.5 million for the
three months ended September 30, 1999. The increase is attributable to a 51%
increase in the number of passengers boarded to 772 thousand from 509 thousand
partially offset by a 7% decrease in average fare to $88. Passenger revenue per
ASM increased 1% to 12.8 cents per ASM due to a 4.2 percentage point increase in
load factor to 70.3%, partially offset by 5% decrease in passenger yield
(revenue per RPM) to 18.2 cents. Cargo revenue increased 33% to $0.6 million for
the three months ended September 30, 2000 from $0.4 million for the three months
ended September 30, 1999. The increase is due to a 69% increase in mail pounds
carried and a 33% increase in freight pounds carried during the three months
ended September 30, 2000. Other revenue increased 228% to $1.9 million for the
three months ended September 30, 2000 from $0.6 million for the three months
ended September 30, 1999, due to a change in the revenue sharing arrangement
with the Company's commuter affiliate and an increase in administrative fee
revenue.
Operating Expenses. The Company's operating expenses increased 55% to $75.6
million for the three months ended September 30, 2000 from $48.7 million for the
three months ended September 30, 1999. Total expenses increased due to overall
increase in the fuel prices, crew training, size, capacity, and passengers
served in the three months ended September 30, 2000. Total operating expense per
ASM increased 11% to 14.19 cents from 12.77 cents.
12
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
---- ----
Percent of Cost per Percent of Cost per
Total Expenses ASM (Cents) Total Expenses ASM (Cents)
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Operating expenses:
Wages, salaries and related costs 20.2% 2.86 19.7% 2.53
Aircraft fuel 17.4 2.47 12.1 1.56
Aircraft and engine rentals 16.4 2.33 15.5 2.00
Commissions 5.0 0.72 6.6 0.85
Maintenance, materials and repairs 5.6 0.80 6.2 0.80
Other rentals and landing fees 5.0 0.71 5.0 0.65
Depreciation and amortization 3.5 0.50 3.5 0.45
Other 26.7 3.80 30.5 3.93
----- ----- ----- -----
Total operating expenses 99.8 14.19 99.1 12.77
Other (income) expenses 0.2 0.02 0.9 0.11
----- ----- ----- -----
Total expenses 100.0% 14.21 100.0% 12.88
===== ===== ===== =====
</TABLE>
Wages, salaries and related costs increased $5.6 million or 58% to $15.3 million
for the three months ended September 30, 2000 from $9.7 million for the three
months ended September 30, 1999. The increase is attributable to increased
staffing associated with the addition of new aircraft and stations throughout
the three months and general hiring to fill specific needs within the Company.
Wages, salaries and related cost per ASM increased 0.33 cents or 13% to 2.86
cents. The increase in unit costs is attributable to the items noted above as
well as the changes noted in "Capacity".
Aircraft fuel expense increased 122% to $13.1 million for the three months ended
September 30, 2000 from $5.9 million for the three months ended September 30,
1999. The increase was due to a 69% increase in the average liquid fuel price
per gallon to 91.8 cents from 54.2 cents and a 40% increase in gallons of fuel
consumed due to the increased number of flights. Aircraft fuel expense per ASM
increased 58% to 2.47 cents driven by the 59% increase in total fuel cost per
gallon (including taxes and into plane fees).
Aircraft and engine rental expense increased 62% to $12.4 million for the three
months ended September 30, 2000 from $7.6 million for the three months ended
September 30, 1999. The increase in expense is attributable to the rent expense
on additional leased CRJs and two Boeing 737-700s leased subsequent to September
30, 1999, partially offset by the reduction in the use of leased spare engines.
Aircraft and engine rentals expense per ASM increased 17% to 2.33 cents from
2.00 cents. The increase in aircraft and engine rental expense per ASM resulted
primarily from the increase in the number of leased aircraft in 2000 and the
higher cost per ASM of the leased aircraft with a stable average number of seats
per departure.
Commission expense increased 18% to $3.8 million for the three months ended
September 30, 2000 from $3.2 million for the three months ended September 30,
1999. This was due to a 61% increase in agency-generated revenues partially
offset by reduction in average commission paid. Commission expense per ASM
decreased 15% to 0.72 cents from 0.85 cents, primarily driven by the reduction
in commission rate paid and partially offset by an increase in travel agency
revenues as a percent of passenger revenue to 72% from 63%.
Maintenance, materials and repairs expense increased 39% to $4.2 million for the
three months ended September 30, 2000 from $3.1 million in the three months
ended September 30, 1999. The expense increase is largely attributable to the
45% increase in block hours. Maintenance, materials and repairs expense per ASM
was stable at 0.80 cents.
Other rentals and landing fees expense increased 53% to $3.8 million for the
three months ended September 30, 2000 from $2.5 million for the three months
ended September 30, 1999 driven by the 45% increase in departures. Other rentals
and landing fees expense per ASM increased 9% to 0.71 cents from 0.65 cents.
Depreciation and amortization expense increased 54% to $2.6 million for the
three months ended September 30, 2000 from $1.7 million for the three months
ended September 30, 1999. Depreciation and amortization expense per ASM
increased 11% to 0.50 cents from 0.45 cents in the three months ended September
30, 1999. During the three months ended September 30, 2000 the Company increased
its investment in fixed assets including capitalized interest for the 737-700
fleet, purchases primarily for the 737-700 and CRJ fleets, and the Company's
management information systems.
13
<PAGE>
Other operating expense increased 35% to $20.3 million for the three months
ended September 30, 2000 from $15.0 million for the three months ended September
30, 1999. Other operating expenses consist primarily of reservations, ground
handling, advertising, general and administrative expense, training, and
insurance. The increase in expense is attributable to the 45% increase in
departures and to the 52% increase in passengers. Other operating expense per
ASM decreased 3% to 3.80 cents from 3.93 cents in 1999.
Interest income increased 72% to $0.8 million for three months ending September
30, 2000 due to higher average cash balances due to financing of pre-delivery
deposits for the Boeing fleets and the proceeds from the rights offering.
Interest expense increased 4% to $0.9 million due to the lower offset of
interest expense by the capitalized interest on aircraft purchase deposits. Net
interest expense per ASM for the three months ending September 30, 2000 was 0.02
cents compared to net interest expense per ASM of 0.11 cents in the comparable
prior period.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
OVERVIEW
Results of Operations
Revenue for the nine months ended September 30, 2000 was up 28% over the nine
months ended September 30, 1999 to $205 million. Fuel prices have continued to
be up significantly from the nine months ended September 30, 1999. Fuel expense
increased $19.5 million, or 132% in the nine months ended September 30, 2000.
Results were also impacted by a "hundred-year" snow storm in January which
closed our hub at RDU for three days and other storms which effectively closed
the system another two days. The Company exercised its option to terminate early
four Fokker leases which resulted in a pre-tax equipment retirement charge of
$9.2 million. For the nine months ended September 30, 2000 the Company's net
loss was $9.2 million. During the nine months ended September 30, 2000, the
Company continued to incur significant pilot training costs associated with the
induction of the Boeing 737-700 fleet.
The following chart shows the results of the nine months ended September 30,
2000 and 1999 with and without the equipment retirement charges.
<TABLE>
<CAPTION>
Dollars in millions except per With Equipment Retirement Without Equipment Retirement
share amounts Charges Charges
Nine months Ended September 30, Nine months Ended September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating (loss) income $(13.4) $15.2 ($4.2) $17.2
Operating margin (6.5)% 9.5% (2.1%) 10.7%
Net (loss) income $ (9.2) $ 8.2 $ (3.5) $ 9.5
Diluted (loss) earnings per
share $(0.90) $0.86 $(0.34) $0.99
</TABLE>
14
<PAGE>
Unusual Items
Nine months ended September 30, 2000
. $9.2 million ($5.7 million net of taxes) equipment retirement charges
related to the exercise of an option to return four leased F100 aircraft
prior to the scheduled return at the end of their leases.
. $0.3 million ($0.2 million net of taxes) interest expense for the decrease
in carrying value of debt discount proportionate to the $1.5 million
decrease in principal related to the option agreement.
Nine months ended September 30, 1999
. $2.0 million ($1.2 million after taxes) equipment retirement charges
related to the retirement of three aircraft during the first six months of
1999.
Selected Operating Data
<TABLE>
<CAPTION>
For the Nine months Ended September 30,
Favorable (Unfavorable)
-----------------------
2000 1999 Variance Variance %
---- ---- -------- ----------
<S> <C> <C> <C> <C>
ASMs (thousands) 1,514,700 1,132,665 382,035 33.7%
RPMs (thousands) 1,057,544 742,542 315,002 42.4%
Load Factor 69.8% 65.6% 4.2 pts 6.4%
Breakeven Passenger Load Factor (1) 71.8% 59.1% (12.7) pts (21.5%)
Departures 47,821 32,978 14,843 45.0%
Block Hours 73,263 50,863 22,400 44.0%
Passenger Revenue per ASM (cents) 13.13 13.82 (0.69) (5.0%)
Passenger Yield (cents) 18.81 21.08 (2.27) (10.8%)
Average Fare $ 92 $ 105 ($13) (12.4%)
Operating Cost per ASM (cents) (1) 13.81 12.61 (1.20) (9.5%)
Total Cost per ASM (cents) (1) 13.90 12.77 (1.14) (8.9%)
Onboard Passengers 2,154,449 1,484,406 670,043 45.1%
Average Seats per departure 66 70 (4) (5.7%)
Average Stage Length (miles) 454 470 (16) (3.4%)
Aircraft (average during period) 31.3 21.7 9.6 44.2%
Aircraft Utilization (hours per day) 8.6 8.6 0.0 0.0%
Fuel Price per Gallon (cents) (2) 83.5 44.5 (39.0) (87.6%)
</TABLE>
(1) Excludes equipment retirement charges
(2) Excludes taxes and into-plane fees
15
<PAGE>
Nine months Ended September 30, 2000 Compared to Nine months Ended September 30,
1999
Capacity. In the nine months ended September 30, 2000, the Company produced
1,515 million ASMs, an increase of 382 million or 34% from the nine months ended
September 30, 1999. The increase in ASM production was attributable to 45% more
departures (to 47,821), offset somewhat by a 3% shorter average stage length (to
454 miles) and 6% fewer seats per departure (to 66 seats). These changes
resulted from the change in the Company's fleet (see below). The ASM production
was lower than what it otherwise would have been due to the severe January
weather.
As of September 30,
Aircraft 2000 1999
-------- ---- ----
F100 (98 seats) 8 8
CRJ (50 seats) 23 16
Boeing (128 seats) 3 0
- -
34 24
Operating Revenues. The Company's operating revenues increased 28% to $205.0
million for the nine months ended September 30, 2000 from $160.0 million for the
nine months ended September 30, 1999. The increase is attributable to a 45%
increase in the number of passengers boarded to 2.2 million from 1.5 million
partially offset by a 12% decrease in average fare to $92. Passenger revenue per
ASM decreased 5% to 13.1 cents per ASM due to an 11% decrease in passenger yield
(revenue per RPM) to 18.8 cents, partially offset by 4.2 percentage point
increase in load factor to 69.8%. Cargo revenue increased 31% to $1.8 million
for the nine months ended September 30, 2000 from $1.4 million for the nine
months ended September 30, 1999. The increase is due to a 35% increase in mail
pounds carried and a 36% increase in freight pounds carried during the nine
months ended September 30, 2000. Other revenue increased 101% to $4.3 million
for the nine months ended September 30, 2000 from $2.1 million for the nine
months ended September 30, 1999, due to a change in the revenue sharing
arrangement with the Company's commuter affiliate and increases in
administrative fee revenue and charters.
Operating Expenses. The Company's operating expenses increased 51% to $218.4
million for the nine months ended September 30, 2000 from $144.9 million for the
nine months ended September 30, 1999. Total expenses increased due to the
increased fuel prices and overall increase in the size, capacity, and passengers
served in the nine months ended September 30, 2000. Total operating expense per
ASM increased 13% to 14.41 cents from 12.79 cents. Excluding the one-time
equipment retirement charges in 2000 and 1999, operating expense per ASM
increased 10% to 13.81 cents from 12.61 cents. This increase is attributable
primarily to higher fuel prices, the winter storms, and the 6% decrease in seats
per departure.
16
<PAGE>
<TABLE>
<CAPTION>
Nine months Ended September 30,
2000 1999
---- ----
Percent of Cost per Percent of Cost per
Total Expenses ASM (Cents) Total Expenses ASM (Cents)
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Operating expenses:
Wages, salaries and related costs 18.4% 2.67 19.2% 2.49
Aircraft fuel 15.6 2.26 10.0 1.30
Aircraft and engine rentals 15.9 2.31 15.2 1.97
Commissions 5.2 0.75 7.2 0.93
Maintenance, materials and repairs 5.4 0.78 6.9 0.89
Other rentals and landing fees 4.8 0.70 5.0 0.65
Depreciation and amortization 3.4 0.49 3.6 0.47
Other 26.5 3.85 30.2 3.91
----- ----- ----- -----
Subtotal operating expenses before
Equipment retirement charges 95.2 13.81 97.3 12.61
Equipment retirement charges 4.2 0.60 1.4 0.18
----- ----- ----- -----
Total operating expenses 99.4 14.41 98.7 12.79
Other (income) expenses 0.6 0.09 1.3 0.16
----- ----- ----- -----
Total expenses 100.0% 14.50 100.0% 12.95
===== ===== ===== =====
</TABLE>
Wages, salaries and related costs increased $12.3 million or 44% to $40.5
million for the nine months ended September 30, 2000 from $28.2 million for the
nine months ended September 30, 1999. The increase is attributable to increased
staffing associated with the addition of new aircraft and stations throughout
the nine months, annual wage increases for all personnel and general hiring to
fill specific needs within the Company. For the nine months ended September 30,
2000 there was no expense recorded for discretionary bonuses versus $1.2 million
in 1999. Wages, salaries and related cost per ASM increased 0.18 cents or 7% to
2.67 cents. The increase in unit costs is attributable to the items noted above
as well as the changes noted in "Capacity".
Aircraft fuel expense increased 132% to $34.3 million for the nine months ended
September 30, 2000 from $14.7 million for the nine months ended September 30,
1999. The increase was due to an 88% increase in the average liquid fuel price
per gallon to 83.5 cents from 44.5 cents and a 36% increase in gallons of fuel
consumed due to the increased number of flights. Aircraft fuel expense per ASM
increased 74% to 2.26 cents driven by the 71% increase in total fuel cost per
gallon (including taxes and into plane fees).
Aircraft and engine rental expense increased 56% to $34.9 million for the nine
months ended September 30, 2000 from $22.4 million for the nine months ended
September 30, 1999. The increase in expense is attributable to the rent expense
on additional leased CRJs and two Boeing 737-700s leased subsequent to September
30, 1999, partially offset by the return of two F100s and the Airbus A320 in the
first half of 1999, and the reduction in the use of leased spare engines.
Aircraft and engine rentals expense per ASM increased 17% to 2.31 cents from
1.97 cents. The increase in aircraft and engine rental expense per ASM resulted
primarily from the increase in the number of leased aircraft in 2000 and the
higher cost per ASM of the leased aircraft, partially offset by the return of
the two F100s and one A320 aircraft in the first half of 1999.
Commission expense increased 8% to $11.4 million for the nine months ended
September 30, 2000 from $10.5 million for the nine months ended September 30,
1999. This was due to a 42.5% increase in agency-generated revenues, partially
offset by a reduction in the average commission paid. Commission expense per ASM
decreased 19% to 0.75 cents from 0.93 cents, driven by the reduction in
commission rate paid and partially offset by an increase in travel agency
revenues as a percent of passenger revenue to 72%.
Maintenance, materials and repairs expense increased 17% to $11.9 million for
the nine months ended September 30, 2000 from $10.1 million in the nine months
ended September 30, 1999. The expense increase is largely attributable to the
44% increase in block hours. Maintenance, materials and repairs expense per ASM
decreased 12% to 0.78 cents from 0.89 cents.
Other rentals and landing fees expense increased 43% to $10.6 million for the
nine months ended September 30, 2000 from $7.4 million for the nine months ended
September 30, 1999 primarily due to the 45% increase in departures. Other
rentals and landing fees expense per ASM increased 8% to 0.70 cents from 0.65
cents, due to the use of more space and thus higher rental costs at certain
facilities (mainly at RDU) and increased slot costs.
17
<PAGE>
Depreciation and amortization expense increased 39% to $7.4 million for the
nine months ended September 30, 2000 from $5.3 million for the nine months ended
September 30, 1999. Depreciation and amortization expense per ASM increased 4%
to 0.49 cents from 0.47 cents in the nine months ended September 30, 1999.
During the nine months ended September 30, 2000 the Company increased its
investment in fixed assets including capitalized interest for the 737-700 fleet,
purchases primarily for 737-700 and CRJ fleets, management information systems,
and ground service equipment.
Other operating expense increased 32% to $58.4 million for the nine months
ended September 30, 2000 from $44.3 million for the nine months ended September
30, 1999. Other operating expenses consist primarily of reservations, ground
handling, advertising, general and administrative expense, training and
insurance. The increase in expense is attributable to the 45% increases in both
departures and passengers. Other operating expense per ASM decreased 2% to 3.85
cents from 3.91 cents in 1999.
Interest income decreased 12% to $1.6 million for nine months ending September
30, 2000 due to lower average cash balances due to pre-delivery deposits for the
CRJ and Boeing fleets. Interest expense decreased 19% to $3 million due to the
offset of interest expense by the capitalized interest on aircraft purchase
deposits. Net interest expense per ASM for the nine months ending September 30,
2000 was 0.09 cents compared to net interest expense per ASM of 0.16 cents in
the comparable prior period.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company's working capital increased during the nine months ended September
30, 2000 compared to the year ended December 31, 1999. As of September 30, 2000,
the Company had cash, restricted cash, and short-term investments of $67.7
million and working capital of $12.6 million compared to cash, restricted cash,
and short-term investments of $38.6 million and working capital of $4.4 million
respectively as of December 31, 1999. During the nine months ended September 30,
2000, cash, restricted cash, and short-term investments increased $29.2 million,
reflecting net cash provided by operating activities of $11.2 million (excluding
changes in restricted cash), net cash used in investing activities of $35.1
million (excluding purchases and sales of short-term investments), and net cash
provided by financing activities of $53.1 million. During the nine months ended
September 30, 2000, net cash provided by operating activities was primarily due
to increases in liabilities, advance ticket sales, depreciation and amortization
offset by the net loss and increases in receivables; net cash used in investing
activities was due to purchases of equipment and property and equipment purchase
deposits; and net cash provided by financing activities was due to proceeds from
issuance of long-term debt and proceeds from the rights offering.
Capital Resources
The Company's aircraft purchase obligations amount to approximately $557 million
as of September 30, 2000. The Company's remaining pre-delivery deposit
obligations (net of pre-delivery deposit financing) amount to approximately $7.0
million. The Company's anticipated near-term, non-aircraft capital expenditures
amount to approximately $10 million. A substantial portion of the required
external capital has been committed to the Company by the aircraft and engine
manufacturers, subject to satisfaction of certain conditions. Additionally, the
Company raised approximately $34.1 million before expenses as a result of its
issuance of 6,561,163 new shares of common stock pursuant to the rights offering
which expired on July 26, 2000. Approximately $5.0 million of the proceeds of
the offering were used to repay amounts outstanding under a $30 million
revolving credit facility provided by an entity owned by two stockholders, James
H. Goodnight, Ph.D. and John P. Sall. As a result of the completion of the
rights offering, the commitment under this facility reduced to $10 million, all
of which is available as of September 30, 2000. On August 11, 2000 the Company
closed a financing with a syndicate of banks which have agreed to provide the
Company with up to $37.5 million, in the aggregate, to either reimburse the
Company for cash pre-delivery deposits previously made pursuant to its purchase
agreement with The Boeing Company or to make pre-delivery deposits that become
due under such agreement. The Company continues to pursue external financing for
aircraft purchase obligations and anticipated capital expenditures.
Capital Expenditures
The Company's cash outflows for capital expenditures in the nine months ended
September 30, 2000 and 1999 were $18.4 million and $12.2 million, respectively,
excluding financed purchases. Debt financed purchases in the nine months ended
September 30, 2000 and 1999 were $2.1 million and $0, respectively. The Company
paid $23.3 million and $38.5 million in aircraft pre-delivery deposits in the
nine months ended September 30, 2000 and 1999, respectively. During the third
quarter of 2000, $36.0 million for pre-delivery deposits for aircraft purchases
was paid by the lenders to the aircraft manufacturer and $24.3 million was
returned to the Company by the lenders, with a corresponding increase in
long-term debt. In addition, during the third quarter, $6.4 million in
pre-delivery deposits was returned to the Company upon completion of permanent
financing of delivered aircraft.
The Company has placed firm orders to purchase fifteen Boeing 737 aircraft
("737s"), has agreed to lease six additional 737s, and intends to lease one
additional 737. Deliveries of two of the leased 737 aircraft occurred in
December 1999 and January 2000, and
<PAGE>
delivery for the other nineteen 737 aircraft on firm order or subject to lease
began in September 2000 and ends in October 2002. The additional 737 aircraft
that the Company intends to lease is scheduled for delivery in January 2001. The
Company has options to acquire ten additional 737s. In September 2000, the
Company completed an offering of $197,572,000 of Pass Through Certificates, also
known as Enhanced Equipment Trust Certificates (the "EETCs"). The EETCs are not
direct obligations of, or guaranteed by, the Company and therefore are not
included in the Company's financial statements. The cash proceeds from the EETCs
are deposited with an escrow agent and enable the Company to finance the debt
portion of a leveraged lease for the first eight 737's on firm order, the last
of which is scheduled for delivery in August 2001. The Company has obtained a
commitment to finance the equity portion of a leveraged lease for the first four
737's on firm order and the Company completed leveraged lease financings for the
first two of these 737's which were delivered to the Company in September and
October 2000. With respect to the remaining 737's on the firm order for which
the Company has not yet received financing commitments from third parties, the
Company intends to arrange a combination of third party debt and leveraged lease
financings; and will use available manufacturer support to complete certain
financings in the event that it is unable to arrange more attractive financing
from third party sources. The Company intends to purchase up to four CFM 56-7B
spare engines to support the operation of its 737 aircraft.
The Company has in place firm orders to purchase three newly manufactured
CRJ-2100ER Canadair Regional Jet aircraft which are scheduled for delivery in
January, September and December 2001. The Company expects to arrange a
combination of third party debt and leveraged lease financing for these
aircraft, and intends to use available manufacturer support to complete such
financings in the event that it is unable to arrange more attractive financing
from third party sources or in the event such support is otherwise necessary to
complete such financings. For each aircraft that is purchased (as opposed to
leased), the Company anticipates an initial cash outlay of approximately $4
million.
Other Financing
The Company has significant lease obligations for aircraft that are classified
as operating leases and therefore are not reflected as liabilities on the
Company's balance sheet. The remaining terms of such leases range from less than
one year to approximately eighteen years. The Company's total rent expense for
the nine months ended September 30, 2000 and 1999 under all non-cancelable
aircraft operating leases was approximately $34.9 million and $22.4 million,
respectively.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe
harbor for forward-looking statements made by or on behalf of the Company. The
Company and its representatives may from time to time make written or verbal
forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in reports to share
owners. All statements which address operational performance, events or
developments which are anticipated to occur in the future, including statements
relating to revenue growth, cost reductions and earnings growth or statements
expressing general optimism about future operating results, are forward-looking
statements within the meaning of the Act. The forward-looking statements are and
will be based on management's then current views and assumptions regarding
future events and operating performance.
Some of the factors that could cause actual results to differ materially from
estimates contained in the Company's forward-looking statements include the
following:
The ability to generate sufficient cash flows and/or to obtain sufficient
financing to support capital expansion plans and general operating activities.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Seasonality and Quarterly Results of Operations, Liquidity and
Capital Resources" in the Company's Annual Report on Form 10K for the fiscal
year ended December 31, 1999.
Change in laws and regulations, including changes in accounting standards,
taxation requirements (including tax rate changes, new tax laws and revised tax
law interpretations) and environmental laws.
Fluctuations in the cost and availability of materials, fuel, equipment and
labor including the continued availability of landing slots at New
York/LaGuardia and Ronald Reagan Washington National airports. See "Business -
Maintenance and Support, Slots, Fuel, Flight Equipment, Employees and Labor
Relations" in the Company's Annual Report on Form 10K for the fiscal year ended
December 31, 1999.
Unexpected delays in the delivery of new aircraft now scheduled for delivery in
2000, 2001, and 2002. See "Properties - Flight Equipment" in the Company's
Annual Report on Form 10K for the fiscal year ended December 31, 1999.
The ability to achieve earnings forecasts, which are based on projected traffic
and fares in the different markets the Company serves, some of which are more
profitable than others.
<PAGE>
Interest rate fluctuations and other capital market conditions.
The reliance on a limited number of markets and the ability to enter and develop
new markets. See "Business - Growth Strategy" in the Company's Annual Report on
Form 10K for the fiscal year ended December 31, 1999.
The effectiveness of and availability of resources to support advertising,
marketing and promotional programs. See "Business - American Relationship" in
the Company's Annual Report on Form 10K for the fiscal year ended December 31,
1999.
The uncertainties of litigation and/or administrative proceedings. See "Business
- Government Regulation, Employees and Labor Relations" and "Legal Proceedings"
in the Company's Annual Report on Form 10K for the fiscal year ended December
31, 1999.
Adverse weather conditions, which could impact the Company's ability to operate.
See "Business - Raleigh-Durham Market" in the Company's Annual Report on Form
10K for the fiscal year ended December 31, 1999.
The Company's significant dependence on the Raleigh-Durham Market. See "Business
- Raleigh-Durham Market" in the Company's Annual Report on Form 10K for the
fiscal year ended December 31, 1999.
Control by existing stockholders. See "Business - Control by Existing
Shareholders" in the Company's Annual Report on Form 10K for the fiscal year
ended December 31, 1999.
The Company's indebtedness (including capital lease obligations). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" in the Company's Annual Report on
Form 10K for the fiscal year ended December 31, 1999.
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings.
The Company is a 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
financial position or results of operations.
Item 6. Exhibits and Reports on Form 8-K.
a) Reports on Form 8-K:
Date Subject
---- -------
September 29, 2000 Item 5: Announcement of the closing of the
private sale of $197,572,000 aggregate
principal amount of Enhanced Equipment Pass
Through Certificates.
October 11, 2000 Item 5: Announcement of entering into term
sheets to lease two additional newly
manufactured Boeing 737-700 and that it has
released the options it had to purchase
fourteen additional Canadair Regional Jets.
b) Exhibits
Financial Data Schedule
(see Edgar filing)
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Midway Airlines Corporation
Registrant
November 14, 2000 By /s/ STEVEN WESTBERG
Steven Westberg
Executive Vice President and General Manager
<PAGE>
Midway Airlines
Index of Documents
------------------
4.1 Offering Memorandum of Midway Airlines Corporation pertaining to the
offering of Class A, Class B, and Class C Certificates by Midway Airlines
Corporation.
4.2 Pass Through Trust Agreement, dated as of September 27, 2000, between
MIDWAY AIRLINES CORPORATION and ALLFIRST BANK, as Trustee, is made with
respect to the formation of Midway Airlines 2000-1A Pass Through Trust
and the issuance of 8.82% Midway Airlines 2000-1A Pass Through
Certificates representing fractional undivided interests in the Trust.
4.3 Pass Through Trust Agreement, dated as of September 27, 2000, between
MIDWAY AIRLINES CORPORATION, and ALLFIRST BANK, as Trustee, is made with
respect to the formation of Midway Airlines 2000-1B Pass Through Trust
and the issuance of 10.07% Midway Airlines 2000-1B Pass Through
Certificates representing fractional undivided interests in the Trust.
4.4 Pass Through Trust Agreement, dated as of September 27, 2000, between
MIDWAY AIRLINES CORPORATION and ALLFIRST BANK, as Trustee, is made with
respect to the formation of Midway Airlines 2000-1C Pass Through Trust
and the issuance of 11.19% Midway Airlines 2000-1C Pass Through
Certificates representing fractional undivided interests in the Trust.
10.1 Placement Agreement under which ALLFIRST BANK, as trustee under the
Trusts issues and sells to the placement agents named in Schedule II
thereto its Pass Through Certificates, Series 2000-1 on the terms and
conditions stated therein.
10.2 Registration Rights Agreement made and entered into on September 27,
2000, among MIDWAY AIRLINES CORPORATION, ALLFIRST BANK, as Trustee and
MORGAN STANLEY & CO. INCORPORATED and SEABURY SECURITIES LLC.
10.3 Revolving Credit Agreement dated as of September 27, 2000, between
ALLFIRST BANK, not in its individual capacity but solely as Subordination
Agent under the Intercreditor Agreement, as agent and trustee for the
Class A Trust, and MORGAN STANLEY CAPITAL SERVICES INC.
10.4 Revolving Credit Agreement dated as of September 27, 2000, between
ALLFIRST BANK, solely as Subordination Agent under the Intercreditor
Agreement, as agent and trustee for the Class B Trust, and MORGAN STANLEY
CAPITAL SERVICES INC.
10.5 Revolving Credit Agreement dated as of September 27, 2000, between
ALLFIRST BANK, solely as Subordination Agent under the Intercreditor
Agreement, as agent and trustee for the Class C Trust, and MORGAN STANLEY
CAPITAL SERVICES INC.
1
<PAGE>
10.6 Intercreditor Agreement dated as of September 27, 2000, among ALLFIRST
BANK, as Trustee, MORGAN STANLEY CAPITAL SERVICES INC., as Class A
Liquidity Provider, as Class B Liquidity Provider and as Class C
Liquidity Provider, and ALLFIRST BANK, as Subordination Agent.
10.7 Deposit Agreement (Class A) dated as of September 27, 2000 between FIRST
UNION TRUST COMPANY, NATIONAL ASSOCIATION, as Escrow Agent under the
Escrow and Paying Agent Agreement, and ALLFIRST BANK.
10.8 Deposit Agreement (Class B) dated as of September 27, 2000 between FIRST
UNION TRUST COMPANY, NATIONAL ASSOCIATION, as Escrow Agent, and ALLFIRST
BANK, as depositary bank.
10.9 Deposit Agreement (Class C) dated as of September 27, 2000 between FIRST
UNION TRUST COMPANY, NATIONAL ASSOCIATION, as Escrow Agent, and ALLFIRST
BANK, as depositary bank.
10.10 Escrow and Paying Agent Agreement (Class A) dated as of September 27,
2000 among FIRST UNION TRUST COMPANY, NATIONAL ASSOCIATION, as Escrow
Agent, MORGAN STANLEY & CO. INCORPORATED and SEABURY SECURITIES LLC, as
Placement Agents of the Certificates, ALLFIRST BANK, as trustee and
ALLFIRST BANK, as paying agent.
10.11 Escrow and Paying Agent Agreement (Class B) dated as of September 27,
2000 among FIRST UNION TRUST COMPANY, NATIONAL ASSOCIATION, as Escrow
Agent, MORGAN STANLEY & CO. INCORPORATED and SEABURY SECURITIES LLC, as
Placement Agents of the Certificates, ALLFIRST BANK, as trustee and
ALLFIRST BANK, as paying agent.
10.12 Escrow and Paying Agent Agreement (Class C) dated as of September 27,
2000 among FIRST UNION TRUST COMPANY, NATIONAL ASSOCIATION, as Escrow
Agent, MORGAN STANLEY & CO. INCORPORATED and SEABURY SECURITIES LLC, as
Placement Agents of the Certificates, ALLFIRST BANK, as trustee and
ALLFIRST BANK, as paying agent.
10.13 Note Purchase Agreement, dated as of September 27, 2000, among MIDWAY
AIRLINES CORPORATION, ALLFIRST BANK, as trustee, ALLFIRST BANK, as
subordination agent and trustee, FIRST UNION TRUST COMPANY, NATIONAL
ASSOCIATION, as Escrow Agent and ALLFIRST BANK.
10.14+ Participation Agreement [N588ML], dated as of September 21, 2000 among
MIDWAY AIRLINES CORPORATION, FIRST UNION TRUST COMPANY, NATIONAL
ASSOCIATION, as owner trustee, GENERAL ELECTRIC CAPITAL CORPORATION, each
Loan Participant identified on Schedule II thereto, and ALLFIRST BANK, as
indenture trustee. The Company is party to two additional Participation
Agreements which are substantially identical in all material respects
except as indicated on the exhibit.
10.15 Trust Agreement [N588ML], dated as of September 21, 2000 between GENERAL
ELECTRIC CAPITAL CORPORATION and FIRST UNION TRUST COMPANY,
2
<PAGE>
NATIONAL ASSOCIATION, in its individual capacity only as expressly stated
therein and otherwise as trustee thereunder. The Company is party to two
additional Trust Agreements which are substantially identical in all
material respects except as indicated on the exhibit.
10.16 Trust Indenture and Security Agreement [N588ML], dated as of September
21, 2000 between FIRST UNION TRUST COMPANY, NATIONAL ASSOCIATION, not in
its individual capacity, except as otherwise specifically set forth
therein under the Trust Agreement, as defined therein, and ALLFIRST BANK.
The Company is party to two additional Trust Indenture and Security
Agreements which are substantially identical in all material respects
except as indicated on the exhibit.
10.17 Indenture Supplement No. 1 [N588ML], dated September 22, 2000 of FIRST
UNION TRUST COMPANY, NATIONAL ASSOCIATION, not in its individual capacity
except as expressly provided in the Operative Agreements, but solely as
Owner Trustee under the Trust Agreement. The Company is party to two
additional Indenture Supplements which are substantially identical in all
material respects except as indicated on the exhibit.
10.18+ Lease Agreement [N588ML], dated as of September 21, 2000, between FIRST
UNION TRUST COMPANY, NATIONAL ASSOCIATION, as Owner Trustee, the Lessor,
and MIDWAY AIRLINES CORPORATION. The Company is party to two additional
Lease Agreements which are substantially identical in all material
respects except as indicated on the exhibit.
10.19 Lease Supplement NO. 1 [N588ML], dated September 22, 2000, between FIRST
UNION TRUST COMPANY, NATIONAL ASSOCIATION, as Owner Trustee, except as
otherwise provided therein, the Lessor (as defined therein) and MIDWAY
AIRLINES CORPORATION. The Company is party to two additional
Lease Supplements which are substantially identical in all material
respects except as indicated on the exhibit.
10.20 Purchase Agreement Assignment [N588ML], dated as of September 21, 2000,
between MIDWAY AIRLINES CORPORATION and FIRST UNION TRUST COMPANY,
NATIONAL ASSOCIATION, as Owner Trustee. The Company is party to two
additional Purchase Agreements Assignments which are substantially
identical in all material respects except as indicated on the exhibit.
10.21 Engine Warranty Assignment [N588ML] made on the 21/st/ day of September,
2000 between MIDWAY AIRLINES CORPORATION and FIRST UNION TRUST COMPANY,
NATIONAL ASSOCIATION, as Owner Trustee. The Company is party to two
additional Engine Warranty Assignments which are substantially identical
in all material respects except as indicated on the exhibit.
10.22+ Credit Agreement [Midway/LBK] dated as of July 31, 2000 is among (i)
MIDWAY AIRLINES CORPORATION, each Senior Loan Participant identified on
Schedule I thereto, BOEING NEVADA, INC., as Junior Loan Participant, and
LANDESBANK SCHLESWIG-HOLSTEIN GIROZENTRALE, as the Security Agent.
10.23+ Mortgage and Security Agreement [Midway/LBK], dated as of July 31, 2000,
between MIDWAY AIRLINES CORPORATION and LANDESBANK SCHLESWIG-HOLSTEIN
GIROZENTRALE, as Security Agent.
10.24+ Participation Agreement [N361ML] dated as of September 27, 2000 among
MIDWAY AIRLINES CORPORATION, FIRST UNION TRUST COMPANY, NATIONAL
ASSOCIATION, as owner trustee under the Trust Agreement, SILVERMINE RIVER
FINANCE ONE, INC., ALLFIRST BANK, as indenture trustee under the
Indenture, ALLFIRST BANK, as pass-through trustee of three separate Pass-
Through Trusts, and ALLFIRST BANK, as subordination agent
10.25 Trust Agreement [N361ML], dated as of September 27, 2000 between
SILVERMINE RIVER FINANCE ONE, INC., and FIRST UNION TRUST COMPANY,
NATIONAL
3
<PAGE>
ASSOCIATION, in its individual capacity only as expressly stated therein
and otherwise solely as trustee thereunder.
10.26+ Trust Indenture and Security Agreement [N361ML] dated as of September 27,
2000, between FIRST UNION TRUST COMPANY, NATIONAL ASSOCIATION, not in its
individual capacity, except as otherwise specifically set forth therein
under the Trust Agreement, and ALLFIRST BANK.
10.27 Indenture Supplement No. 1 [N361ML] dated September 27, 2000, of First
Union Trust Company, National Association, as owner trustee under the
Trust Agreement [N361ML] dated as of September 27, 2000, between First
Union Trust Company, National Association, and the Owner Participant
named therein.
10.28+ Lease Agreement [N361ML], dated as of September 27, 2000, between FIRST
UNION TRUST COMPANY, NATIONAL ASSOCIATION, as Owner Trustee, the Lessor
(as defined therein), and MIDWAY AIRLINES CORPORATION.
10.29 Lease Supplement No. 1 [N361ML] dated September 27, 2000, between FIRST
UNION TRUST COMPANY, NATIONAL ASSOCIATION, as Owner Trustee, except as
otherwise provided therein, the Lessor (as defined therein), and MIDWAY
AIRLINES CORPORATION.
10.30 Purchase Agreement Assignment [N361ML], dated as of September 27, 2000,
between MIDWAY AIRLINES CORPORATION and FIRST UNION TRUST COMPANY,
NATIONAL ASSOCIATION as Owner Trustee.
10.31 Engine Warranty Assignment [N361ML] is made this 27th day of September,
2000 between MIDWAY AIRLINES CORPORATION and FIRST UNION TRUST COMPANY,
NATIONAL ASSOCIATION as Owner Trustee.
10.32+ Aircraft Lease Agreement (serial no. 29893) dated as of September 15,
2000 between Aviation Financial Services, Inc., as Lessor, and Midway
Airlines Corporation, as Lessee.
10.33+ Aircraft Lease Agreement (serial no. 32244) dated as of September 15,
2000 between Aviation Financial Services, Inc., as Lessor, and Midway
Airlines Corporation, as Lessee.
10.34+ Aircraft Lease Agreement (serial no. 28654) dated as of September 15,
2000 between Aviation Financial Services, Inc., as Lessor, and Midway
Airlines Corporation, as Lessee.
+ Portions have been ommitted pursuant to request for confidential treatment.
The confidential portions have been separately filed with the Securities and
Exchange Commission.
4
