FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _________________
Commission file number 1-13934
MIDWEST EXPRESS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1828757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6744 South Howell Avenue
Oak Creek, Wisconsin 53154
(Address of Principal executive offices)
(Zip code)
414-570-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be file 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 April 30, 1996 there were 6,428,571 shares of Common Stock, $.01 par
value, of the Registrant outstanding.
Page 1
<PAGE>
MIDWEST EXPRESS HOLDINGS, INC.
FORM 10-Q
For the quarter ended March 31, 1996
INDEX
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Unaudited Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBIT INDEX 20
<PAGE>
PART I - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31,
1996 1995
Operating revenues:
Passenger service . . . . . . $ 60,915 $ 52,817
Cargo . . . . . . . . . . . . 2,598 2,669
Other . . . . . . . . . . . . 3,095 3,055
------- -------
Total operating revenues . 66,608 58,541
------- -------
Operating expenses:
Salaries, wages and benefits . 17,868 15,168
Aircraft fuel and oil . . . . 10,302 8,738
Commissions . . . . . . . . . 5,730 5,530
Dining services . . . . . . . 3,477 3,760
Station rental, landing and
other fees . . . . . . . . 5,344 5,136
Aircraft maintenance materials
and repairs . . . . . . . . 5,273 4,476
Depreciation and amortization
1,889 1,837
Aircraft rentals . . . . . . . 4,076 3,997
Other . . . . . . . . . . . . 8,233 7,238
------- ------
Total operating expenses . 62,192 55,880
------- ------
Operating income . . . . . . . . 4,416 2,661
Interest expense . . . . . . . . (11) (4)
Interest income . . . . . . . . . 267 337
------- -------
Income before income taxes . . . 4,672 2,994
Provision for income taxes . . . 1,836 1,161
------ ------
Net income . . . . . . . . . . . $ 2,836 $ 1,833
======= ======
Net income per common share . . . $ 0.44 $ 0.21(1)
======= ======
(1) Pro forma
See notes to consolidated financial statements.
<PAGE>
PART I - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
1996 1995
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . $ 20,297 $ 14,626
Accounts receivable:
Traffic, less allowance for doubtful
accounts of $363 and $307 at March 31,
1996 and December 31, 1995,
respectively . . . . . . . . . . . . . 3,748 5,229
Other receivables:
Kimberly-Clark Corporation and
affiliated companies . . . . . . . . . 0 61
Other receivables . . . . . . . . . . 5,212 1,659
------ ------
Total accounts receivable . . . . 8,960 6,949
Inventories . . . . . . . . . . . . . . . 2,270 2,726
Prepaid expenses:
Commissions . . . . . . . . . . . . . 1,532 1,996
Other . . . . . . . . . . . . . . . . 1,334 1,536
------ ------
Total prepaid expenses . . . . . . 2,866 3,532
Deferred income taxes . . . . . . . . . . 3,415 3,253
------- -------
Total current assets . . . . . . . 37,808 31,086
Property and equipment, at cost . . . . . . . 112,755 107,830
Less accumulated depreciation and
amortization . . . . . . . . . . . . . 54,418 51,911
------- -------
Net property and equipment . . . . . . . . . 58,337 55,919
Landing slots and leasehold rights, net . . . 5,474 5,556
Other assets . . . . . . . . . . . . . . . . 304 272
------- --------
Total assets . . . . . . . . . . . . . . . . $101,923 $ 92,833
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . $ 2,978 $ 3,687
Income taxes payable . . . . . . . . . . . 2,862 1,381
Air traffic liability . . . . . . . . . . 17,682 17,250
Accrued liabilities:
Vacation pay . . . . . . . . . . . . . 2,518 2,628
Scheduled maintenance expense . . . . 4,997 4,253
Frequent flyer awards . . . . . . . . 2,361 2,064
Other . . . . . . . . . . . . . . . . 12,919 9,664
------- -------
Total current liabilities . . . . 46,317 40,927
Deferred income taxes . . . . . . . . . . . . 13,137 13,731
Noncurrent scheduled maintenance expense . . 11,590 10,483
Accrued pension and other post retirement
benefits . . . . . . . . . . . . . . . . . 4,159 3,748
Other noncurrent liabilities . . . . . . . . 2,620 2,680
------- -------
Total liabilities . . . . . . . . . . . . . . 77,823 71,569
Stockholders' equity:
Preferred stock, without par value,
5,000,000 shares authorized, no shares
issued or outstanding . . . . . . . . . - -
Common stock, $.01 par value, 25,000,000
shares authorized, 6,428,571 shares to
be issued and outstanding . . . . . . . 64 64
Additional paid-in capital . . . . . . . . 9,546 9,546
Retained earnings . . . . . . . . . . . . 14,490 11,654
------- -------
Total stockholders' equity . . . . . . . . . 24,100 21,264
------- -------
Total liabilities and stockholders' equity . $101,923 $ 92,833
======= =======
See notes to consolidated financial statements.
<PAGE>
PART I - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended March 31,
1996 1995
Operating activities:
Net income . . . . . . . . . . . . . . $ 2,836 $ 1,833
Items not involving the use of cash:
Depreciation and amortization . . . 1,889 1,837
Deferred income taxes . . . . . . . (756) (732)
Other . . . . . . . . . . . . . . . 729 654
Changes in operating assets and
liabilities:
Accounts receivable . . . . . . . . (2,011) (151)
Inventories . . . . . . . . . . . . 456 (523)
Prepaid expenses . . . . . . . . . 666 646
Accounts payable . . . . . . . . . (709) 131
Income taxes payable . . . . . . . 1,481 1,597
Accrued liabilities . . . . . . . . 4,186 3,307
Air traffic liability . . . . . . . 432 (896)
------- -------
Net cash provided by operating
activities . . . . . . . . . . . . 9,199 7,703
------- -------
Investing activities:
Capital expenditures . . . . . . . . . (4,954) (1,559)
Proceeds from sale of property and
equipment . . . . . . . . . . . . . - 62
Other . . . . . . . . . . . . . . . . (32) 53
------- -------
Net cash used in investing activities (4,986) (1,444)
------- -------
Financing activities:
Net increase in advances to
Kimberly-Clark . . . . . . . . . . - (6,794)
Other . . . . . . . . . . . . . . . . 1,458 535
------- -------
Net cash provided by (used in)
financing activities . . . . . . . 1,458 (6,259)
------- -------
Net increase in cash and cash equivalents 5,671 -
Cash and cash equivalents, beginning of
period . . . . . . . . . . . . . . . . 14,626 -
-------- -------
Cash and cash equivalents, end of period $ 20,297 $ -
======== ========
See notes to consolidated financial statements.
<PAGE>
Midwest Express Holdings, Inc.
Unaudited Notes to Consolidated Financial Statements
1. Basis of Presentation
The consolidated financial statements for the three month period ended
March 31, 1996 are unaudited and reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position
and operating results for the interim period. The consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report to Stockholders and
incorporated by reference in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995. The results of operations for the
three month period ended March 31, 1996 are not necessarily indicative
of the results for the entire fiscal year ending December 31, 1996.
2. Pro Forma Condensed Income Statement
The following unaudited pro forma condensed income statement for the
three months ended March 31, 1995 gives effect to estimated changes in
the Company's historical costs assuming the Company's initial public
offering (the "Offering") had occurred January 1, 1995 and it had
operated as an independent company during the three-month period ended
March 31, 1995. The pro forma adjustments to reflect these changes in
costs include (i) a lease guarantee fee of $233 charged by Kimberly-
Clark Corporation ("Kimberly-Clark") to continue to guarantee certain
aircraft leases, (ii) estimated incremental administrative and
management expense of $158 to reflect costs of obtaining, on an arm's
length basis as an independent company, certain services that Kimberly-
Clark had provided in the past, (iii) increased costs of $140 due to a
new management structure, (iv) costs of $224 associated with being a
publicly-owned entity, and (v) net changes in interest income and
expense of $46 to reflect the Company's financial position subsequent to
the Offering. Pro forma net income per common share was computed based
on an assumed weighted average 6,428,571 shares of common stock
outstanding.
Management believes the assumptions used in preparing the pro forma
adjustments provide a reasonable basis on which to present the pro forma
condensed income statement. This following pro forma condensed income
statement is provided for informational purposes only, should not be
construed to be indicative of the Company's results of operations had
the Offering been consummated on the date assumed, and is not intended
to project the Company's results of operations for any future periods.
Three Months Ended March 31, 1995
Pro Forma
Historical Adjustments Pro Forma
(in thousands, except per share
amount)
Operating revenues . . $ 58,541 $ - $ 58,541
Operating expenses . . 55,880 755 56,635
------- ------- -------
Operating income . . . 2,661 (755) 1,906
Interest income
(expense), net . . . . 333 (46) 287
------- ------- -------
Income before income
taxes . . . . . . . . 2,994 (801) 2,193
Provision for income
taxes . . . . . . . . 1,161 (312) 849
-------- ------- -------
Net income . . . . . . $ 1,833 $ (489) $ 1,344
======== ======= ========
Net income per common
share . . . . . . . . $ 0.21
========
3. Net Income per Common Share
Net income per common share was computed based upon the 6,428,571
common shares outstanding as of March 31, 1996. As of March 31,
1996, there were stock options outstanding under the Company's stock
option plan to acquire 130,000 shares. These options did not have a
dilutive effect on pro forma net income per common share.
4. Stock Option Plan
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes a fair value
based method of accounting for stock options. Entities have the
option of either adopting the measurement criteria of the statement
for accounting purposes, thereby recognizing an amount in results of
operations on a prospective basis, or disclosing in the footnotes
the pro forma effects of the new measurement criteria. The Company
intends to adopt the pro forma disclosure features of SFAS No. 123,
which are effective for fiscal years beginning after December 15,
1995.
5. Shareholder Rights Plan
On February 14, 1996, the Company adopted a Shareholder Rights Plan.
Under this plan, a dividend of one Preferred Share Purchase Right
was declared for each share of Common Stock outstanding on the close
of business on February 14, 1996. Each Right, when exercisable,
entitles the holder to purchase 1/100th of a share of the Company's
Series A Junior Participating Preferred Stock at a purchase price of
$100 per 1/100th of a share. The Rights will become exercisable
only if a person or entity (other than certain excluded persons and
entities) acquires 15% or more of the Company's Common Stock or
announces a tender offer for 15% or more of the Common Stock. If
any person or entity (other than an excluded person or entity)
becomes a 15% or greater shareholder of the Company, then each Right
will entitle its holder to purchase, at the Right's then-current
exercise price, Company Common Stock valued at twice the exercise
price. The Board of Directors is also authorized to reduce the 15%
thresholds referred to above to not less than 10%. The Rights will
expire on February 13, 2006.
<PAGE>
Part I Item 2.
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Overview
The Company's 1996 first quarter operating income was $4.4 million, an
increase of $1.8 million over the first quarter of 1995. Net income
increased by $1.0 million, or 54.7%, to $2.8 million.
The favorable change in financial results was caused by improvements in
passenger volume and revenue yield at both Midwest Express and Skyway and
an improvement in the financial results of Midwest Express' Omaha base of
operations.
Both Midwest Express and Skyway achieved record first quarter passenger
volume. This volume was primarily due to the continuation of strong
traffic throughout the industry driven by a healthy domestic economy and
limited increases in industry capacity. Other factors resulting in higher
volumes were less competition in certain markets and possible increases in
discretionary travel due to the elimination of the 10% excise tax on
passenger travel beginning on January 1, 1996.
An increase in revenue yield was an important factor in the improved
financial results, and was primarily the result of Continental Airlines
discontinuing its low-fare "Lite" product. For the first quarter, Midwest
Express revenue yield increased 10.5%, from 16.2 cents in 1995 to 17.9
cents in 1996. Skyway yield increased 2.5% in the quarter, but coupled
with a 7.7% increase in average passenger trip length, resulted in a 10.3%
increase in average fare. The yield gains were broad based, with almost
every market realizing improvement.
Midwest Express' Omaha base of operations, which was initiated in May
1994, did not generate sustained profitability until the second quarter of
1995. The Company achieved significant improvement in revenue from the
Omaha operations comparing first quarter of 1996 to 1995. For the first
quarter 1996 the Omaha operations had a passenger load factor of 54.3% and
a revenue yield of 14.3 cents. This compared favorably to the first
quarter of 1995, when the operations had a load factor of 48.2% and
revenue yield of 12.6 cents.
Partly offsetting the 13.8% increase in total revenue during the first
quarter of 1996 was an 11.3% increase in operating costs. The most
significant increases occurred in fuel costs, labor and maintenance.
Operating Statistics
The following table provides selected operating statistics for Midwest
Express and Skyway.
Three Months Ended
March 31, %
Midwest Express Operations 1996 1995 Change
Origin & Destination Passengers 317,889 313,312 + 1.5
Revenue Passenger Miles (000's) 292,258 282,517 + 3.4
Available Seat Miles (ASM)
(000's) 461,634 474,725 - 2.8
Load Factor (%) 63.3 59.5 + 3.8
Revenue Yield $0.179 $0.162 +10.5
Cost per ASM $0.116 $0.102 +13.7
Average Passenger Trip Length 919.4 901.7 + 2.0
Number of Flights 8,278 8,508 - 2.7
Into-plane Fuel Cost per Gallon $0.703 $0.592 +18.6
Full-time equivalent Employees
at End of Period 1,447 1,381 + 4.8
Aircraft in Service 19 19 -
Skyway Airlines Operations
Origin & Destination Passengers 72,932 66,156 +10.2
Revenue Passenger Miles (000's) 16,613 13,995 +18.7
Available Seat Miles (ASM)
(000's) 39,113 35,180 +11.2
Load Factor (%) 42.5 39.8 + 2.7
Revenue Yield $0.522 $0.509 + 2.5
Cost per ASM $0.214 $0.202 + 5.9
Average Passenger Trip Length 227.8 211.5 + 7.7
Number of Flights 10,396 10,302 + .9
Into-plane Fuel Cost per Gallon $0.774 $0.669 +15.7
Full-time equivalent Employees
at End of Period 218 192 +13.5
Aircraft in Service 15 13 +15.4
Note: With the exception of cost per ASM, fuel cost and number of
employees, statistics exclude charter operations.
The following table provides operating revenues and expenses for the
Company expressed as cents per total ASM, including charter operations,
and as a percentage of total revenues.
Three Months Ended March 31,
1996 1995
Per Per
Total % of Total % of
ASM Revenue ASM Revenue
Operating revenues:
Passenger service $0.120 91.6% $0.101 90.2%
Cargo 0.005 3.8% 0.005 4.5%
Other 0.006 4.6% 0.006 5.3%
----- ---- ----- -----
Total operating revenues $0.131 100.0% $0.112 100.0%
Operating expenses:
Salaries, wages and benefits 0.035 26.7% 0.029 25.9%
Aircraft fuel and oil 0.020 15.3% 0.017 15.2%
Commissions 0.011 8.4% 0.011 9.8%
Dining services 0.007 5.3% 0.007 6.3%
Station rental, landing and
other fees 0.011 8.4% 0.010 8.9%
Aircraft maintenance
materials/repairs 0.010 7.6% 0.008 7.1%
Depreciation and amortization 0.004 3.1% 0.003 2.7%
Aircraft rentals 0.008 6.1% 0.008 7.1%
Other 0.016 12.2% 0.014 12.5%
------ ----- ----- -----
Total operating expenses $0.122 93.1% $0.107 95.5%
====== ===== ===== =====
Total ASMs (000's) 510,135 521,256
Note: Numbers in this table cannot be recalculated due to rounding.
Three Months Ended March 31, 1996 Compared to
Three Months Ended March 31, 1995
Operating Revenues
Company operating revenues totalled $66.6 million in the first quarter
1996, an $8.1 million, or 13.8%, increase over revenues for the first
quarter 1995. Passenger revenues accounted for 91.6% of total revenues
and increased $8.1 million, or 15.3%, from 1995 to $60.9 million. The
increase is attributable to a 4.2% increase in volume, as measured by
revenue passenger miles, a 10.7% increase in revenue yield and a 1.1%
increase in average passenger trip length.
Midwest Express passenger revenue increased by $6.6 million, or 14.3%,
from 1995 to $52.2 million. This increase was caused by a 1.5% increase
in origin and destination passengers, a 10.5% increase in revenue yield
and a 2.0% increase in average passenger trip length. Total capacity, as
measured in scheduled service ASMs, decreased 2.8%; Midwest Express
operated 19 aircraft in the first quarter 1995 and 18 aircraft in the
first quarter 1996 as one aircraft was removed from service for scheduled
major maintenance. Load factor increased from 59.5% in 1995 to 63.3% in
1996.
Skyway passenger revenue increased by $1.5 million, or 21.6%, from 1995 to
$8.7 million. This increase was caused by a 10.2% increase in origin and
destination passengers, a 2.5% increase in revenue yield and a 7.7%
increase in average passenger trip length. Total capacity increased by
11.2%, primarily because of the addition of two 19-seat aircraft in the
second quarter 1995. Load factor increased from 39.8% in 1995 to 42.5% in
1996.
Revenue from cargo, charter and other services did not materially change
in the first quarter 1996 compared to the first quarter 1995. The $.8
million in revenue generated from the Midwest Express MasterCard program,
which was initiated in October 1995, was offset by lower revenue from
charter services, maintenance contract services and other airlines ground
handling services. Revenue from cargo, mail and small parcel services
decreased $.1 million, or 2.7%, due to the reduction in Midwest Express
flights in the quarter.
Operating Expenses
1996 operating expenses increased by $6.3 million, or 11.3%, from 1995,
primarily due higher fuel prices, higher labor costs, a new profit sharing
plan at Midwest Express, increased passenger volume, higher maintenance
costs and costs associated with being a public company. Cost per total
ASM increased 14.0%, from 10.7 cents in 1995 to 12.2 cents in 1996.
Salaries, wages and benefits costs increased by $2.7 million, or 17.8%.
On a cost per total ASM basis, these costs increased 20.7%, from 2.9 cents
to 3.5 cents. Approximately $1.2 million of the labor cost change is due
to increased labor rates. Most of this change was due to an adjustment in
pay scales for pilots and other operations employees at Midwest Express
effective January 1, 1996. These rate adjustments were implemented based
upon industry salary surveys and management's desire to increase pay
scales to maintain a competitive position within the industry. Labor
costs also increased due to a $.4 million accrual recorded in the 1996
quarter relating to a new profit sharing plan implemented at Midwest
Express. The profit sharing plan, which benefits substantially all
Midwest Express employees other than senior management, is based entirely
on achieving certain levels of profitability, is payable annually and is
accrued monthly based on operating income and projected results for the
remainder of the year. An increase in the number of senior management
personnel participating in the Company's management annual incentive plan
from seven to 25 employees also contributed to the labor cost increase.
In addition, the labor cost increase reflects the addition of 92 full-time
equivalent employees, 66 at Midwest Express and 26 at Skyway. Midwest
Express added employees in the reservations function to support continuing
high passenger volumes. Further, in connection with Midwest Express'
plans to place two of its recently acquired aircraft into service during
the second quarter 1996, Midwest Express added maintenance, flight
operations and reservations employees in the 1996 quarter, in advance of
placing the aircraft into service. Skyway added employees primarily to
support the two aircraft placed in service during the second quarter 1995
and in connection with regulatory changes.
Aircraft fuel and oil and associated taxes increased $1.6 million, or
17.9%, in 1996. Into-plane fuel prices increased 18.4% in 1996, averaging
70.9 cents per gallon in 1996 and 59.8 cents per gallon in 1995. The
Company has experienced increased fuel costs in April 1996 as well,
averaging approximately 81 cents per gallon. A portion of the increase in
fuel prices is attributable to the fact that, beginning October 1, 1995,
airlines were subject to the 4.3 cent federal fuel excise tax surcharge,
which cost the Company $.6 million in the first quarter 1996. Fuel
consumption decreased by .4% because of fewer flight segments at Midwest
Express.
Commissions increased by $.2 million, or 3.6%, due to increased passenger
revenue. Commissions as a percentage of passenger revenue decreased from
10.5% in 1995 to 9.4% in 1996. The decrease primarily resulted from a
slight increase in the percentage of revenue generated from direct sales
instead of through travel agents.
Dining services costs decreased by $.3 million, or 7.5%, in the first
quarter 1996. Total dining services costs (including food, beverages,
linen, catering equipment and supplies) per Midwest Express revenue
passenger decreased from $12.00 in 1995 to $10.94 in 1996. The decrease
was primarily due to a reduction in costs following the negotiation of a
long term contract with the primary food caterer for Midwest Express.
Reduced pricing was effective January 1, 1996.
Maintenance costs increased by $.8 million, or 17.8%, from 1995. Of this
increase $.6 million was at Midwest Express and was attributable to
increased repair costs of engines, landing gear and other aircraft
components. The increase in maintenance costs at Skyway was the result of
the two aircraft placed in service in the second quarter 1995.
Aircraft rental costs increased by $.1 million in 1996. Decreased lease
costs associated with Midwest Express' two MD-88 aircraft were more than
offset by the lease costs for two Midwest Express aircraft acquired in
December 1995, two Skyway aircraft acquired in May 1995 and lease
guarantee fees for five Midwest Express aircraft and all of the Skyway
aircraft. The lease guarantee fees totalled $.3 million in the first
quarter 1996.
Other operating expenses increased by $1.0 million, or 13.7%, from 1995.
The increase includes $.2 million of nonrecurring costs associated with
acquiring and transporting three of Midwest Express' recently acquired
aircraft from Asia to Milwaukee and $.1 million of relocation costs for
the new headquarters office facility. Other significant cost increases
included an increase in the frequent flyer liability resulting from
promotions associated with the credit card program, an increase in booking
fees due to higher passenger volume and rates and higher costs associated
with being a public company. The public company costs included
expenditures for the annual report, external audit fees, investor
relations, regulatory reporting and legal fees.
Interest Income
Interest income for the first quarter 1995 relates to an intercompany cash
management program the Company had with Kimberly-Clark prior to the
Company's initial public offering (the "Offering"). Market rates of
interest were earned on the amount of cash the Company had advanced to
Kimberly-Clark. Interest income in the first quarter 1996 reflects
interest income on cash and cash equivalents during the quarter.
Provision for Income Taxes
Income tax expense for the first quarter 1996 increased to $1.8 million, a
$.7 million increase over 1995. The effective tax rates for the first
quarters of 1996 and 1995 were 39.3% and 38.8%, respectively. For
purposes of calculating the Company's income tax expense and effective tax
rate for periods after the Offering, the Company treats amounts payable to
an affiliate of Kimberly-Clark under a tax allocation and separation
agreement (the "Tax Agreement") entered into in connection with the
Offering as if they were payable to taxing authorities.
Net Income
Net income for the first quarter increased $1.0 million, or 54.7%, from
1995. The net income margin improved from 3.1% in 1995 to 4.3% in 1996.
Liquidity and Capital Resources
The Company's cash and cash equivalents totalled $20.3 million at March
31, 1996 compared to $14.6 million at December 31, 1995. The increase in
cash and cash equivalents was due primarily to $9.2 million in cash
generated by operations. The Company entered into operating leases in
December 1995 to finance two of Midwest Express' recently acquired
aircraft, and as of March 31, 1996, the Company had approximately $4.7
million in receivables from the aircraft lessors associated with aircraft
refurbishment and hush kit costs for these aircraft that the lessors will
pay to the Company in the second quarter 1996.
The Company's working capital deficit decreased to $8.5 million at March
31, 1996 from $9.8 million at December 31, 1995, reflecting increased
working capital provided from operations. This deficit is primarily due
to the Company's air traffic liability (advanced bookings, whereby
passengers have purchased tickets for future flights), accrued scheduled
maintenance expense and accrued lease payments. Because of these items,
the Company expects to continue to operate with a working capital deficit,
which the Company believes is not unusual in the industry.
Net cash flows provided by operating activities totalled $7.7 million and
$9.2 million for the three months ended March 31, 1995 and 1996,
respectively. The increase for the three months ended March 31, 1996
versus the prior period was due to improvements in passenger volumes and
yields at both Midwest Express and Skyway and improved results from
Midwest Express' Omaha operations.
The Company has no debt, other than its lease commitments. As of March
31, 1996, the Company's two credit facilities, a $35.0 million three-year
revolving bank credit facility and a five-year $20.0 million secondary
revolving credit facility with Kimberly-Clark, have not been used except
for letters of credit totalling approximately $1.7 million that reduce the
amount of available credit.
Capital expenditures totalled $5.0 million for the three months ended
March 31, 1996. Capital expenditures during the three months ended March
31, 1996 included payments relating to the purchase of one of Midwest
Express' recently acquired aircraft. The Company may choose to enter into
a sale-leaseback transaction relating to this aircraft, in which case the
Company would recover approximately $4.0 million of these capital
expenditure payments as part of the transaction.
The Company believes its cash flow from operations, funds available from
credit facilities and available long-term financing for the acquisition of
jet aircraft and turboprop aircraft will be adequate to provide for
working capital needs and capital expenditures through 1997.
Pending Developments
Kimberly-Clark to Sell Remaining Interest in Stock - On April 19, 1996,
the Company announced that Kimberly-Clark intends to sell its remaining
interest in the Company, consisting of 1,288,571 shares or approximately
20% of all outstanding stock, in an underwritten public offering. Under
an agreement the Company entered into with Kimberly-Clark in connection
with its Offering, Midwest Express is obligated to assist Kimberly-Clark
in, and bear expenses of approximately $.2 million in connection with,
this offering. This offering is expected to be completed in the second
quarter 1996. Midwest Express does not intend to issue any primary shares
and will not receive any of the proceeds from this offering.
New Aircraft - On April 19, 1996, the Company announced an agreement to
acquire an additional DC-9 aircraft, bringing its jet fleet to 23. This
aircraft will be modified to Midwest Express specifications and undergo
extensive maintenance inspection checks prior to entering service in late
1996. The Company is evaluating alternatives for the use of this aircraft
as well as the aircraft acquired earlier this year which will enter
service in the third quarter.
Aircraft Financings - The Company has not finalized financing for the two
aircraft that it acquired in 1996; the Company anticipates it will secure
lease financing for one and retain ownership of the other.
As of March 31, 1996, leases relating to five of Midwest Express' jet
aircraft and all of Skyway's turboprop aircraft are guaranteed by
Kimberly-Clark in return for a guarantee fee paid by the Company. The
Company has given notice to the current lessors of the 15 turboprop
aircraft of its intention to purchase the aircraft in June 1996, and the
Company is pursuing replacement lease financing that the Company intends
to have in place at the time it purchases the aircraft or as soon as
possible thereafter. In addition, Midwest Express recently exercised a
right of first refusal purchase option for two DC-9-30 aircraft currently
under lease, and the Company anticipates securing lease financing for
these two aircraft with a different lessor in the second quarter 1996.
After refinancing the 15 turboprop aircraft and the two aircraft to be
acquired under the right of first refusal purchase option, only three
aircraft will remain subject to leases that Kimberly-Clark has guaranteed.
Kimberly-Clark will continue to guarantee these leases.
Labor Relations - In July 1995, the Skyway pilots elected the Air Line
Pilots Association ("ALPA") as the labor union representing them for
collective bargaining purposes. The Company began negotiations with ALPA
in February 1996.
Schedule Change - In the second quarter, Midwest Express will be placing
two additional jet aircraft into operation, one into charter service and
the other into scheduled service. These aircraft were acquired in
December 1995 and have undergone extensive modifications including the
installation of hush kits. Effective May 1, the Company will expand its
service, including new jet service between Madison and Las Vegas, and new
turboprop service between Milwaukee and Nashville and between Grand
Rapids, Michigan, Dayton, Ohio and Nashville. Additional jet service will
also be implemented between Milwaukee and Boston; Dallas/Ft. Worth; Kansas
City; New York; and Philadelphia.
Sales Tax Issue - The Company has recently learned the Wisconsin
Department of Revenue is asserting that Wisconsin sales taxes should be
paid in connection with the Company's purchase of meals from its food
caterer. While the Company does not believe any such sales tax is
payable, if the Department of Revenue successfully asserts its position,
then the Company would be liable for back taxes and associated interest in
the amount of approximately $.4 million as of May 1, 1996, and the Company
would have to pay approximately $.2 million in additional sales taxes
annually in the future. The Company has not established any reserve in
respect of these potential taxes.
Income Taxes - The Internal Revenue Service ("IRS") has recently issued a
technical advice memorandum concerning the timing of deducting amounts
paid for engine and airframe overhaul costs. Consistent with industry
practice, the Company deducts such amounts in full in the year paid. The
IRS' position is that such amounts should be capitalized and depreciated
on an accelerated basis over a period of seven years. If the IRS were to
successfully challenge the Company's practices, the result would have an
adverse impact on the Company's cash flows. The Company currently intends
to deduct approximately $8.0 million of these engine and airframe overhaul
costs in 1996; under the IRS' position, the Company could only deduct
these costs over seven years. In any event, because under the Tax
Agreement an affiliate of Kimberly-Clark is generally responsible for
income tax assessments with respect to periods ending on or prior to
consummation of the Offering, a final determination adverse to the Company
would not have an adverse effect on the Company with respect to these
periods.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits filed herewith or incorporated by reference are
set forth on the attached Exhibit Index.
(b) Reports on Form 8-K
Form 8-K dated February 14, 1996 to report the adoption of a
Shareholders Rights Plan. No financial statements were filed
as part of that report.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Midwest Express Holdings, Inc.
Registrant
Date: May 7, 1996 /s/ Roland E. Breunig
Roland E. Breunig
Vice President, Chief Financial Officer and
Treasurer
<PAGE>
EXHIBIT INDEX
Number Description
( 3.1) Restated Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 of the
Company's registration statement on Form 8-B filed May
2, 1996 (File No. 1-13934)).
( 3.2) Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to the Company's registration statement on
Form 8-B filed May 2, 1996 (File No. 1-13934)).
( 3.3) Articles of Amendment relating to Series A Junior
Participating Preferred Stock (incorporated by reference
to Exhibit 3.3 to the Company's registration statement
on Form 8-B filed May 2, 1996 (File No. 1-13934)).
( 4.1) Rights Agreement, dated February 14, 1996, between the
Company and Firstar Trust Company (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form 8-A filed February 15, 1996 (File No.
1-13934))
( 4.2) Amendment to the Rights Agreement, dated April 19, 1996,
between Midwest Express Holdings, Inc. and Firstar Trust
Company (incorporated by reference to Exhibit 4.1 to the
Company's registration statement on Form 8-B filed May
2, 1996 (File No. 1-13934)).
(27) Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF MIDWEST EXPRESS HOLDINGS, INC.
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 20,297
<SECURITIES> 0
<RECEIVABLES> 8,960
<ALLOWANCES> 363
<INVENTORY> 2,270
<CURRENT-ASSETS> 37,808
<PP&E> 112,755
<DEPRECIATION> 54,418
<TOTAL-ASSETS> 101,923
<CURRENT-LIABILITIES> 46,317
<BONDS> 0
0
0
<COMMON> 64
<OTHER-SE> 24,036
<TOTAL-LIABILITY-AND-EQUITY> 101,923
<SALES> 0
<TOTAL-REVENUES> 66,608
<CGS> 0
<TOTAL-COSTS> 62,104
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 88
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 4,672
<INCOME-TAX> 1,836
<INCOME-CONTINUING> 2,836
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,836
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
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