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 June 30, 1997
[ ] 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 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 July 31, 1997, there were 9,483,866 shares of Common Stock, $.01 par
value, of the Registrant outstanding.
<PAGE>
MIDWEST EXPRESS HOLDINGS, INC.
FORM 10-Q
For the period ended June 30, 1997
INDEX
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (unaudited)
Consolidated Statements of Income 3
Condensed 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 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security
Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
<PAGE>
Part I Item I - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
1997 1996 1997 1996
Operating revenues:
Passenger service . . . . $ 76,419 $ 70,209 $147,847 $131,124
Cargo . . . . . . . . . . 2,699 2,843 5,292 5,441
Other . . . . . . . . . . 4,226 3,793 10,125 6,888
------- ------- ------- -------
Total operating revenues 83,344 76,845 163,264 143,453
------- ------- ------- -------
Operating expenses:
Salaries, wages and
benefits . . . . . . . . 21,154 19,098 42,562 36,966
Aircraft fuel and oil . . 11,960 11,277 25,362 21,579
Commissions . . . . . . 8,064 7,350 15,183 13,080
Dining services . . . . . 4,362 3,880 8,188 7,357
Station rental, landing
and other fees . . . . . 5,768 5,193 12,384 10,537
Aircraft maintenance
materials and repairs . 8,353 4,769 14,263 10,042
Depreciation and
amortization . . . . . . 2,147 1,862 4,248 3,751
Aircraft rentals . . . . 4,312 4,072 8,574 8,148
Other . . . . . . . . . . 8,717 8,749 17,520 16,982
------- ------- ------- -------
Total operating expenses 74,837 66,250 148,284 128,442
------- ------- ------- -------
Operating income 8,507 10,595 14,980 15,011
------- ------- ------- -------
Other income (expense):
Interest income 339 255 639 522
Other (16) (153) (20) (164)
------ ------- ------- -------
Total other income
(expense) . . . . . . . 323 102 619 358
Income before income
taxes . . . . . . . . . 8,830 10,697 15,599 15,369
Provision for income
taxes . . . . . . . . . 3,232 4,107 5,770 5,943
------- ------- ------- -------
Net income $ 5,598 $ 6,590 $ 9,829 $ 9,426
======= ======= ======= =======
Net income per common
share $ .59 $ .69 $ 1.04 $ .98
======= ======= ====== =======
See notes to consolidated financial statements.
<PAGE>
Part I Item I - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
1997 1996
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . $ 22,623 $ 27,589
Accounts receivable:
Traffic, less allowance for doubtful
accounts of $261 and $207 at June 30,
1997 and December 31, 1996,
respectively. . . . . . . . . . . . 4,910 4,639
Other receivables 1,184 592
------- -------
Total accounts receivable . . . . . . 6,094 5,231
Inventories . . . . . . . . . . . . . . 3,570 3,122
Prepaid expenses 4,909 4,247
Deferred income taxes . . . . . . . . . 3,190 3,334
Aircraft and modifications intended to
be financed by sale and leaseback
transactions . . . . . . . . . . . . . 16,079 9,046
------- --------
Total current assets . . . . . . . . 56,465 52,569
------- --------
Property and equipment, at cost . . . . 145,140 130,792
Less accumulated depreciation . . . . . 65,627 59,889
------- --------
Net property and equipment . . . . . . 79,513 70,903
Landing slots and leasehold rights, net 5,064 5,228
Other assets. . . . . . . . . . . . . . 840 435
------- --------
Total assets . . . . . . . . . . . . . $141,882 $129,135
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . $ 4,304 $ 3,684
Income taxes payable . . . . . . . . . 894 -
Air traffic liability . . . . . . . . . 29,412 22,043
Accrued liabilities 27,521 32,636
------- -------
Total current liabilities . . . . . . 62,131 58,363
------- -------
Deferred income taxes . . . . . . . . . 8,946 9,894
Other noncurrent liabilities . . . . . 20,578 20,537
------- -------
Total liabilities . . . . . . . . . . . 91,655 88,794
------- -------
Shareholders' 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, 9,642,807 shares
issued 96 64
Additional paid-in capital . . . . . . 9,522 9,545
Treasury stock, at cost (2,623) (2,672)
Retained earnings . . . . . . . . . . . 43,232 33,404
Total shareholders' equity . . . . . . 50,227 40,341
Total liabilities and shareholders'
equity . . . . . . . . . . . . . . . . $141,882 $129,135
See notes to consolidated financial statements.
<PAGE>
Part I Item I- Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
1997 1996
Operating activities:
Net income . . . . . . . . . . . . . . . . . . $ 9,829 $ 9,426
Items not involving the use of cash:
Depreciation and amortization . . . . . . . 4,249 3,751
Deferred income taxes . . . . . . . . . . . (804) (769)
Other . . . . . . . . . . . . . . . . . . . 2,085 1,667
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . (863) 2,117
Inventories . . . . . . . . . . . . . . . . (448) (3)
Prepaid expenses . . . . . . . . . . . . . . (662) 482
Accounts payable . . . . . . . . . . . . . . 620 (895)
Income taxes payable . . . . . . . . . . . . 894 779
Accrued liabilities . . . . . . . . . . . . (5,115) 6,058
Air traffic liability . . . . . . . . . . . 7,369 2,263
------- -------
Net cash provided by operating activities . . 17,154 24,876
------- -------
Investing activities:
Capital expenditures . . . . . . . . . . . . . (14,791) (4,297)
Aircraft acquisitions and modifications
financed by or intended to be financed by
sale and leaseback transactions . . . . . . (8,299) (71,410)
Proceeds from sale of property and equipment . 11 4
Other . . . . . . . . . . . . . . . . . . . . (405) (182)
------- -------
Net cash used in investing activities . . . . (23,484) (75,885)
------- -------
Financing activities:
Proceeds from sale and leaseback transactions 1,266 45,785
Other . . . . . . . . . . . . . . . . . . . . 98 681
------- -------
Net cash provided by financing activities . . 1,364 46,466
------- -------
Net decrease in cash and cash equivalents . . . . (4,966) (4,543)
Cash and cash equivalents, beginning
of period . . . . . . . . . . . . . . . . . . 27,589 14,626
------- -------
Cash and cash equivalents, end of period . . . . $ 22,623 $ 10,083
======= =======
See notes to consolidated financial statements.
<PAGE>
Midwest Express Holdings, Inc.
Unaudited Notes to Consolidated Financial Statements
1. Business and Basis of Presentation
Basis of Presentation
The consolidated financial statements for the six-month period ended
June 30, 1997 are unaudited and reflect all adjustments (consisting
only of normal recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of the financial position
and operating results for the interim 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 Shareholders
and incorporated by reference in the Company's Annual Report on Form
10-K for the year ended December 31, 1996. The results of operations
for the six-month period ended June 30, 1997 are not necessarily
indicative of the results for the entire fiscal year ending December
31, 1997.
Stock Split
On April 23, 1997, the Company announced that its board of directors
had approved a plan to split its stock 3-for-2 in the form of a 50%
stock dividend. The new shares were issued May 28 to shareholders of
record as of May 12. The financial and share information presented
herein for all periods has been adjusted to reflect the effect of the
stock dividend.
2. Financing Agreements
In May 1997, the Company amended its revolving credit facility with
three banks extending its available credit to $55,000,000.
3. Commitments and Contingencies
As discussed in Note 11 to the Company's consolidated financial
statements for the year ended December 31, 1996 and in Item 3 of the
Company's Annual Report on Form 10-K for that year, a Commissioner of
the Equal Employment Opportunity Commission ("EEOC") filed charges
against the Company on July 8, 1992. On May 30, 1997, the EEOC
commenced litigation in the federal District Court for the Eastern
District of Wisconsin relating to such charges seeking compensatory and
punitive damages in unspecified amounts for its claimants. The
litigation involves a smaller number of claimants than the original
charges. When the Company responds to the complaint in the litigation,
the Company will deny the EEOC's allegations, and the Company intends
to vigorously defend itself against the charges unless a settlement can
be reached that would make it economically impractical to contest the
charges. The accompanying financial statements do not reflect any
liability with respect to the EEOC's claims, and the Company does not
believe the amount of any settlement or adverse judgment would be
material to the Company.
4. New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted
on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to
restate all prior periods. The impact of adopting Statement 128 on the
calculation of earnings per share for the six months ended June 30,
1997 and June 30, 1996 would not be material.
Part I Item 2.
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Overview
The Company's 1997 second quarter operating income was $8.5 million, a
decrease of $2.1 million from the second quarter 1996. Net income
decreased by $1.0 million, or 15.1%, to $5.6 million. For the first six
months of 1997 and 1996, operating income was $15.0 million. Year-to-date
net income increased from $9.4 million to $9.8 million, or 4.3%. Year-to-
date earnings per share were $1.04, a $.06, or 6.1%, increase over 1996
results.
Although the Company's total revenue in the second quarter increased $6.5
million, or 8.5%, relative to the second quarter 1996, operating costs
increased by $8.6 million, or 13.0%. The increase in revenue was
primarily attibutable to record passenger traffic, which increased 15.5%.
The Company had two additional aircraft in scheduled service during the
quarter, with the principal new routes being Milwaukee- Orlando, Kansas City-
Boston and Kansas City-New York LaGuardia. Offsetting the improvements
in passenger traffic was a 5.8% decrease in revenue yield. The yield
reduction resulted from the reinstatement of the 10% federal excise tax on
passenger travel on March 7, 1997, which was temporarily suspended during
much of 1996. In addition, the Company incurred competitive pricing
pressure on a number of routes, particularly West Coast markets. Finally,
yield decreased as a result of a change in product mix. As anticipated,
each of the new routes added by the Company had lower revenue yields than
the system average. The Company believes that from an overall profit
perspective, the lower revenue yield will be offset, at least by some
extent by a longer aircraft stage length and higher load factors on these
routes.
The Company's costs were affected by an unscheduled engine repair, which
impacted operating income by $1.3 million in the quarter, or $.08 per
share. Costs were also affected by an unanticipated delay in completing
several new aircraft modifications and refurbishments as initially
scheduled. This delay caused the Company to temporarily use the one
aircraft dedicated to the charter program for scheduled service. In
addition, the delay caused a temporary excess in aircraft flight crews and
other costs. Additional detail on cost changes is included in subsequent
sections.
Operating Statistics
The following table provides selected operating statistics for Midwest
Express and Skyway.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
% %
1997 1996 Change 1997 1996 Change
<S> <C> <C> <C> <C> <C> <C>
Midwest Express Operations
Origin & Destination Passengers 400,831 349,723 14.6 741,210 667,612 11.0
Revenue Passenger Miles (000s) 362,070 310,152 16.7 675,487 602,410 12.1
Scheduled Service Available Seat
Miles (000s) 548,071 470,675 16.4 1,068,508 932,308 14.6
Total Available Seat Miles
(000s) 553,638 479,298 15.5 1,090,356 950,258 14.7
Load Factor (%) 66.1% 65.9% 0.2 63.2% 64.6% -1.4
Revenue Yield $0.185 $0.195 -5.1 $0.192 $0.187 2.6
Cost per total ASM $0.120 $0.123 -2.3 $0.120 $0.119 0.8
Average Passenger Trip Length 903.3 886.9 1.8 911.3 902.3 1.0
Number of Flights 9,688 8,480 14.2 18,832 16,758 12.4
Into-plane Fuel Cost per Gallon $0.725 $0.748 -3.0 $0.765 $0.726 5.4
Full-time equivalent Employees
at End of Period 1,820 1,507 20.8 1,820 1,507 20.8
Aircraft in Service at End of
Period 23 21 9.5 23 21 9.5
Skyway Airlines Operations
Origin & Destination Passengers 76,140 79,633 -4.4 144,922 152,565 -5.0
Revenue Passenger Miles (000s) 17,803 18,609 -4.3 33,626 35,222 -4.5
Scheduled Service Available Seat
Miles (000s) 39,382 39,594 -0.5 78,048 78,707 -0.8
Total Available Seat Miles
(000s) 39,488 39,675 -0.5 78,229 78,851 -0.8
Load Factor (%) 45.2% 47.0% -1.8 43.1% 44.8% -1.7
Revenue Yield $0.532 $0.524 1.5 $0.543 $0.523 3.7
Cost per total ASM $0.239 $0.211 13.0 $0.242 $0.213 13.6
Average Passenger Trip Length 233.8 233.7 0.0 232.0 230.9 0.5
Number of Flights 10,356 10,168 1.8 20,429 20,564 -0.7
Into-plane Fuel Cost per Gallon $0.760 $0.803 -5.4 $0.809 $0.789 2.6
Full-time equivalent Employees
at End of Period 247 244 1.2 247 244 1.2
Aircraft in Service at End of
Period 15 15 -- 15 15 --
</TABLE>
Note: With the exception of total available seat miles, cost per
total ASM, into-plane fuel cost, number of employees and
aircraft in service, statistics exclude charter operations.
Aircraft acquired but not yet placed into service are
excluded from the aircraft in service statistics.
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:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
Per Total % of Per Total % of Per Total % of Per Total % of
ASM Revenue ASM Revenue ASM Revenue ASM Revenue
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues:
Passenger service $0.129 91.7% $0.135 91.4% $0.126 90.6% $0.127 91.4%
Cargo 0.005 3.2% 0.006 3.7% 0.005 3.3% 0.005 3.8%
Other 0.007 5.1% 0.007 4.9% 0.009 6.1% 0.007 4.8%
------ ------ ------ ------ ------ ------ ------ ------
Total operating revenues 0.141 100.0% 0.148 100.0% 0.140 100.0% 0.139 100.0%
Operating expenses:
Salaries, wages and benefits 0.036 25.4% 0.037 24.8% 0.037 26.1% 0.036 25.8%
Aircraft fuel and oil 0.020 14.3% 0.022 14.7% 0.022 15.5% 0.021 15.0%
Commissions 0.013 9.7% 0.014 9.6% 0.013 9.3% 0.013 9.1%
Dining services 0.007 5.2% 0.007 5.0% 0.007 5.0% 0.007 5.1%
Station rental, landing and
other fees 0.010 6.9% 0.010 6.8% 0.011 7.6% 0.010 7.4%
Aircraft maintenance
materials/repairs 0.014 10.0% 0.009 6.2% 0.012 8.7% 0.010 7.0%
Depreciation and
amortization 0.003 2.6% 0.004 2.4% 0.003 2.6% 0.004 2.6%
Aircraft rentals 0.008 5.2% 0.008 5.3% 0.007 5.3% 0.008 5.7%
Other 0.015 10.5% 0.017 11.4% 0.015 10.7% 0.016 11.8%
------ ------ ------ ----- ------ ----- ------ -----
Total operating expenses $0.126 89.8% $0.128 86.2% $0.127 90.8% $0.125 89.5%
====== ====== ====== ===== ====== ===== ====== =====
Total ASMs (000s) 593,125 518,974 1,168,585 1,029,109
</TABLE>
Note: Numbers in this table cannot be recalculated due to rounding.
Three Months Ended June 30, 1997 Compared to
Three Months Ended June 30, 1996
Operating Revenues
Company operating revenues totalled $83.3 million in the second quarter
1997, a $6.5 million, or 8.5%, increase over revenues for the second
quarter 1996. Passenger revenues accounted for 91.7% of total revenues and
increased $6.2 million, or 8.8%, from 1996 to $76.4 million. The increase
is attributable to a 15.5% increase in passenger volume, as measured by
revenue passenger miles, offset by a 5.8% decrease in revenue yield.
Midwest Express passenger revenue increased by $6.5 million, or 10.7%,
from 1996 to $66.9 million. This increase reflects a 14.6% increase in
origin and destination passengers, offset by a 5.1% decrease in revenue
yield. Total capacity, as measured by scheduled service ASMs, increased
16.4% because of two additional aircraft in scheduled service during the
1997 quarter, as well as improved weather in 1997 resulting in fewer
cancellations. Load factor increased from 65.9% in 1996 to 66.1% in 1997.
Yield was negatively impacted by the reinstatement of the federal excise
tax on tickets effective March 7, 1997, competitive pricing pressures and
the start-up of several new routes that were impacted by introductory and
competitive pricing. Of the 5.1% yield decrease in the second quarter
1997, approximately 2% was caused by service initiated in March 1997 in
the Milwaukee-Orlando market. This market will typically have higher load
factors, but lower revenue yields than the remainder of the Midwest
Express system.
Skyway passenger revenue decreased by $.3 million, or 2.9%, from 1996 to
$9.5 million. This decrease was caused by a 4.4% decrease in origin and
destination passengers, offset by a 1.5% increase in revenue yield. Total
capacity decreased by .5%, as a result of maintenance issues and a
schedule change. Load factor decreased from 47.0% in 1996 to 45.2% in
1997.
Revenue from cargo, charter and other services increased $.3 million in
the second quarter 1997. Midwest Express benefited from increased revenue
from the Midwest Express MasterCard program of $.5 million and additional
ground service contracts of $.3 million. Charter revenue decreased $.4
million because in 1997 Midwest Express had delays with an aircraft
refurbishment that required the use of the dedicated charter jet aircraft
for scheduled service.
Operating Expenses
1997 operating expenses increased by $8.6 million, or 13.0%, from 1996.
The cost increase was primarily due to expanded operations and an
unscheduled engine repair. Cost per total ASM decreased 1.2%, from 12.8
cents in 1996 to 12.6 cents in 1997.
Salaries, wages and benefits increased by $2.1 million, or 10.8%. The
labor cost increase reflects the addition of approximately 316 full-time
equivalent employees since June 30, 1996; 313 at Midwest Express and three
at Skyway. Midwest Express added employees throughout the organization to
support the aircraft placed in service during 1996 and 1997. In addition,
employees were added to support aircraft ramp operations in Boston, Kansas
City and Washington D.C., which were previously contracted from other
airlines. Salaries, wages and benefits were also adversely affected by an
unanticipated delay in completing several new aircraft modifications and
refurbishments as initially scheduled. This delay caused a temporary
excess in aircraft flight crews during the 1997 quarter. The labor cost
increase was also due to an adjustment in pay scales for most operations'
employees at Midwest Express effective January 1, 1997. These rate
adjustments were implemented based on industry salary surveys and
management's desire to increase pay scales to maintain a competitive
position within the industry. Labor costs were reduced by a reduction in
accruals for Midwest Express' profit sharing and management incentive
programs. The profit sharing and incentive plans, which benefit
substantially all employees, are based entirely on achieving certain
levels of profitability, are payable annually and are accrued monthly
based on earnings to date and projected results for the remainder of the
year.
Aircraft fuel and oil and associated taxes increased $.7 million, or 6.1%,
in 1997. Into-plane fuel prices decreased 3.3% in 1997, averaging 72.8
cents per gallon in 1997 and 75.3 cents per gallon in 1996. Fuel
consumption increased by 9.7% in the quarter because Midwest Express
operated 15.2% more aircraft flight hours.
Commissions increased by $.7 million, or 9.7%, primarily due to the
increase in passenger revenue.
Dining services costs increased by $.5 million, or 12.4%, from 1996. The
increase was primarily due to the 14.6% increase in origin and destination
passengers.
Station rental, landing and other fees increased by $.6 million, or 11.1%,
from 1996. The increase was caused by 14.2% more flight segments by
Midwest Express and higher airport costs, primarily for purchased security
services and landing fees.
Maintenance costs increased by $3.6 million, or 75.2%, from 1996. The
increase was primarily attributable to an unscheduled repair of one MD-88
engine that adversely affected costs by $1.3 million. In addition, this
event resulted in the lease of an additional engine during the quarter.
The increase was also attributable to more flight hours at Midwest
Express, increases in Skyway maintenance due to the expiration of
manufacturer warranties on most aircraft, an increase in unscheduled
engine repairs, and an increase in accrual rates for future engine and
airframe overhauls.
Aircraft rental costs increased by $.2 million in 1997, as a result of
Midwest Express leasing two additional aircraft in 1997. This increased
cost was partially offset by lower lease costs for Skyway's 15 turboprop
aircraft that were refinanced in the second and third quarter 1996, and
the decision to exercise purchase options on two leased jet aircraft in
October 1996.
Provision for Income Taxes
Income tax expense for the second quarter 1997 was $3.2 million, a $.9
million decrease from 1996. The effective tax rates for the second
quarter of 1997 and 1996 were 36.6% and 38.4%, respectively. For purposes
of calculating the Company's income tax expense and effective tax rate,
the Company treats amounts payable to an affiliate of Kimberly-Clark
Corporation under a tax allocation and separation agreement entered into
in connection with the initial public offering as if they were payable to
taxing authorities.
Net Income
Net income for the second quarter decreased $1.0 million from 1996. The
net income margin changed from 8.6% in 1996 to 6.7% in 1997.
Six Months Ended June 30, 1997 compared to
Six Months Ended June 30, 1996
Operating Revenues
Company operating revenues totaled $163.3 million for the six months ended
June 30, 1997, a $19.8 million, or 13.8%, increase over 1996. Passenger
revenues accounted for 90.6% of total revenues and increased $16.7
million, or 12.8%, from 1996 to $147.8 million. The increase is
attributable to an 11.2% increase in passenger volume, as measured by
revenue passenger miles, and a 1.4% increase in revenue yield.
Midwest Express passenger revenue increased by $16.9 million, or 15.0%,
from 1996 to $129.5 million. This increase was caused by an 11.0%
increase in passengers, a 2.6% increase in revenue yield and a 1.0%
increase in average passenger trip length. Total Midwest Express
capacity, as measured by scheduled service ASMs, increased 14.6%. Load
factor decreased from 64.6% in 1996 to 63.2% in 1997.
Skyway passenger revenue decreased by $.2 million, or 1.0%, from 1996 to
$18.3 million. This decrease was caused by a 5.0% decrease in passengers,
offset by a 3.7% increase in revenue yield. Load factor decreased from
44.8% in 1996 to 43.1% in 1997.
Revenue from cargo, charter and other services increased $3.1 million, or
25.1%, in 1997. Midwest Express benefited from increased revenue from the
Midwest Express MasterCard program of $1.2 million and additional ground
service contracts of $.5 million. Charter revenue increased $1.2 million
because Midwest Express had one aircraft dedicated to charter operations
during the first four months of 1997 and did not have a dedicated aircraft
until the second quarter 1996. During the second quarter 1997, Midwest
Express had delays with an aircraft refurbishment that required the use of
the dedicated charter jet aircraft for scheduled service.
Operating Expenses
1997 operating expenses increased $19.8 million, or 15.4%, from 1996,
primarily due to expanded operations and an unscheduled engine repair.
Cost per total ASM increased 1.7%, from 12.5 cents in 1996 to 12.7 cents
in 1997.
Salaries, wages and benefits increased $5.6 million, or 15.1%, from 1996.
On a cost per total ASM basis, these costs increased 2.8%, from 3.6 cents
in 1996 to 3.7 cents in 1997. The labor cost increase reflects the
addition of approximately 316 full-time equivalent employees since June
30, 1996; 313 at Midwest Express and 3 at Skyway. Midwest Express added
employees throughout the organization to support the aircraft placed in
service during 1996 and 1997. In addition, employees were added to
support aircraft ramp operations in Boston, Kansas City and Washington
D.C., which were previously contracted from other airlines. Salaries,
wages and benefits were also adversely affected by an unanticipated delay
in completing several new aircraft modifications and refurbishments as
initially scheduled. This delay caused a temporary excess in aircraft
flight crews during the 1997 second quarter. The labor cost increase was
also due to an adjustment in pay scales for most operations' employees at
Midwest Express effective January 1, 1997. These rate adjustments were
implemented based on industry salary surveys and management's desire to
increase pay scales to maintain a competitive position within the
industry. Labor costs were reduced by a reduction in accruals for Midwest
Express' profit sharing and management incentive programs.
Aircraft fuel and oil and associated taxes increased $3.8 million, or
17.5%, from 1996. Into-plane fuel prices increased 5.1% in 1997,
averaging 76.8 cents per gallon in 1997 and 73.1 cents in 1996. Fuel
consumption increased 11.8% because of a 15.1% increase in Midwest Express
aircraft block hours.
Commissions increased by $2.1 million, or 16.1%, primarily due to higher
passenger revenue.
Dining services costs increased $.8 million, or 11.3%, in 1997, primarily
due to the increase in passengers at Midwest Express.
Station rental, landing and other fees increased by $1.8 million, or
17.5%, from 1996. The increase was caused by 12.4% more flight segments
by Midwest Express, increased costs for and use of deicing fluid, and
significantly higher airport costs, primarily for purchased security
services and landing fees.
Maintenance costs increased by $4.2 million, or 42.0%, from 1996. The
increase was primarily attributable to an unscheduled repair of one MD-88
engine that adversely affected costs by $1.3 million. In addition, this
event resulted in the lease of an additional engine during the six months.
The increase was also attributable to more flight hours at Midwest
Express, increases in Skyway maintenance due to the expiration of
manufacturer warranties on most aircraft, and an increase in unscheduled
engine repairs.
Depreciation and amortization increased by $.5 million, or 13.2%, from
1996. The increase was primarily the result of the depreciation
associated with capital spending and the decision to exercise purchase
options on two leased jet aircraft in October 1996, offset by two jet
aircraft becoming fully depreciated during 1996.
Aircraft rental costs increased $.4 million as a result of Midwest Express
leasing additional aircraft in 1997. This increased cost was partially
offset by lower lease costs for Skyway's 15 turboprop aircraft that were
refinanced in the second and third quarter 1996, and the decision to
exercise purchase options on two leased aircraft in October 1996.
Other operating expenses increased by $.5 million, or 3.2%, from 1996.
Other cost increases included increased charter costs due to additional
charter volume, higher property tax costs because of more aircraft,
additional overnight costs for flight crews associated with flight
schedule changes and telecommunication costs. These cost increases were
partially offset by lower advertising, legal and headquarter relocation
costs in 1997.
Provision for Income Taxes
Income tax expense for the first six months 1997 was $5.8 million, a
decrease of $.2 million from 1996. The effective tax rates for the first
six months 1997 and 1996 were 37.0% and 38.7%, respectively.
Net Income
Net income for the first six months increased $.4 million from 1996. The
net income margin decreased to 6.0% in 1997 from 6.6% in 1996.
Liquidity and Capital Resources
The Company's cash and cash equivalents totalled $22.6 million at June 30,
1997, compared to $27.6 million at December 31, 1996. Net cash provided
by operating activities totalled $17.2 million for the six months ended
June 30, 1997. Net cash used in investing activities totalled $23.5
million, primarily due to aircraft acquisitions and related modifications
in 1997 of $8.3 million, which are intended to be financed by sale and
leaseback transactions, and due to capital expenditures of $14.8 million.
As of June 30, 1997, the Company had a working capital deficit of $5.7
million versus a $5.8 million deficit at December 31, 1996. The working
capital deficit is due to the Company's air traffic liability (advance
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 operate periodically with a working
capital deficit, which is not unusual for the industry.
The Company has no debt, other than its lease commitments. As of June 30,
1997, the Company's two credit facilities, a $55.0 million revolving bank
credit facility and a $20.0 million secondary revolving credit facility
with Kimberly-Clark, have not been used except for letters of credit
totalling approximately $12.0 million that reduce the amount of available
credit.
Capital expenditures totalled $14.8 million for the six months ended June
30, 1997, not including aircraft acquisitions. Capital expenditures
primarily consisted of the completion of Midwest Express' hangar
expansion, the acquisition of an office building for Skyway, capitalized
engine overhauls, capitalized aircraft major engine maintenance, hush kits
and one spare aircraft engine. During August 1997, the Company will
purchase its headquarters building, which it currently leases. The
Company will pay $2.8 million and will assume $3.5 million of long-term
debt. The mortgage note has an interest rate of 8.25% and is payable in
monthly installments through April 2011.
Aircraft acquisitions and modifications intended to be financed by sale
and leaseback transactions totalled $8.3 million during the six months
ended June 30, 1997. Modifications to aircraft not yet in service include
maintenance inspection and modification, hush kit installation and
complete interior refurbishment. During the remainder of 1997, the
Company intends to finalize sale and leaseback transactions on one DC-9-30
aircraft acquired in 1996, in which case the Company would be reimbursed
for approximately $4.7 million of related aircraft acquisition and
modification costs incurred to June 30, 1997. The Company anticipates
finalizing the sale and leaseback transactions on the two remaining jet
aircraft during 1998.
As of June 30, 1997, leases relating to three of Midwest Express' jet
aircraft are guaranteed by Kimberly-Clark in return for a guarantee fee
paid by the Company. Kimberly-Clark will continue to guarantee these
leases until the end of the current lease terms. None of these jet
aircraft leases expires before 2001.
During the second quarter 1997, the Company's board of directors approved
increasing the Company's share repurchase program by $10 million over and
above the original $5 million limit authorized by the board in December
1995. As of June 30, 1997, the Company has purchased 155,550 shares at a
cost of $2.8 million.
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
New Aircraft - As of June 30, 1997, three DC-9 aircraft acquired during
1996 had not yet been placed into service. The first aircraft suffered an
unanticipated delay in aircraft modifications and refurbishments, which
resulted in the Company's dedicated charter aircraft covering its
scheduled service routes. This aircraft is expected to enter service
during the third quarter 1996, thereby reinstating the charter aircraft to
charter service. The second aircraft will initially be used as a
maintenance spare during the first quarter 1998. The third aircraft will
be placed into service during 1998; plans for this aircraft have not been
announced.
Federal Excise Tax - Effective October 1, 1997, the United States
Government will change the federal excise ticket tax structure. The
Company expects the change in the ticket tax to favorably impact its
financial statements, however the change is not expected to be material.
Other Issues - The Company's annual report for the year ended December 31,
1996, disclosed certain issues relating to the White House Commission on
Aviation Safety and Security, labor relations and sales taxes. These
issues remain pending.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As discussed in Note 11 to the Company's consolidated financial statements
for the year ended December 31, 1996 and in Item 3 of the Company's Annual
Report on Form 10-K for that year, a Commissioner of the Equal Employment
Opportunity Commission ("EEOC") filed charges against the Company on July
8, 1992. On May 30, 1997, the EEOC commenced litigation in the federal
District Court for the Eastern District of Wisconsin relating to such
charges seeking compensatory and punitive damages in unspecified amounts
for its claimants. The litigation involves a smaller number of claimants
than the original charges. When the Company responds to the complaint in
the litigation, the Company will deny the EEOC's allegations, and the
Company intends to vigorously defend itself against the charges unless a
settlement can be reached that would make it economically impractical to
contest the charges. The accompanying financial statements do not reflect
any liability with respect to the EEOC's claims, and the Company does not
believe the amount of any settlement or adverse judgment would be material
to the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Shareholders held on April 23, 1997,
the following individuals were elected to the Board of Directors:
Authority Authority
Granted Withheld
Oscar C. Boldt 5,553,402 42,082
Brenda F. Skelton 5,555,683 39,801
Richard H. Sonnentag 5,558,389 37,095
The term of office for the following directors continued after the
Company's Annual Meeting: John F. Bergstrom; Frederick P. Stratton, Jr.;
John W. Weekly; Timothy E. Hoeksema; James G. Grosklaus and David H.
Treitel. Effective June 30, 1997, Albert J. DiUlio, S.J. resigned from
the Board of Directors of the Company.
The following proposal was approved at the Company's Annual Meeting:
Affirmative Negative Votes Broker
Votes Votes Abstained Non Vote
Approval of amendments
of Midwest Express
Holdings, Inc. 1995
Stock Option Plan 4,635,416 167,345 18,024 774,699
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
No reports on Form 8-K were filed during the quarter ended
June 30, 1997.
<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.
Date: August 13, 1997 By /s/ Robert S. Bahlman
Robert S. Bahlman
Vice President, Chief Financial Officer
and Treasurer
<PAGE>
EXHIBIT INDEX
Number Description
(10.1) Commercial Offer to Purchase between Chocolate Chip
Limited Partnership and Midwest Express, dated
April 11, 1997.
(27) Financial Data Schedule
COMMERCIAL OFFER TO PURCHASE
Milwaukee, Wisconsin, April 11, 1997
IF ACCEPTED, THIS OFFER CAN CREATE A LEGALLY ENFORCEABLE CONTRACT, BOTH
PARTIES SHOULD READ THIS DOCUMENT CAREFULLY AND UNDERSTAND IT BEFORE
SIGNING.
The undersigned, Midwest Express Airlines, Inc. or assigns (the
"Buyer"), hereby offers to purchase the building, all improvements, all
alterations (as defined in Paragraph 10 of the Lease between Buyer and
Seller) and the real property located at 6744 South Howell Avenue, in the
City of Oak Creek, County of Milwaukee, State of Wisconsin, more
particularly described in the title commitment to be provided pursuant to
this Offer (the "Property") at the price of Six Million Two Hundred
Thousand and 00/100 Dollars ($6,200,000.00), which amount shall be paid as
follows: Earnest Money of Fifteen Thousand and 00/100 Dollars
($15,000.00) shall be paid by Buyer within five (5) days of the execution
of this Offer by Buyer and Seller, the assumption of Seller's financing
upon the Property by Buyer, and the balance, subject to prorations, shall
be wire transferred by Buyer to Seller at closing.
THE BUYER'S OBLIGATION TO CONCLUDE THIS TRANSACTION IS CONDITIONED UPON
THE CONSUMMATION OF THE FOLLOWING:
SEE EXHIBIT A ATTACHED.
Buyer agrees that unless otherwise specified, Buyer will, in good faith,
pay all costs of securing the assumption of any financing on the Property
and will perform all acts necessary to expedite the assumption of such
financing. The parties hereto covenant and agree that Seller shall use
its best efforts to work with Buyer to accomplish the assumption of
Seller's financing on the Property and to minimize any assumption fee
required to be paid by Buyer as a condition of such an assumption.
PERSONAL PROPERTY INCLUDED IN THE SALE: None
Seller shall, upon payment of the purchase price, convey the property
by warranty deed, free and clear of all liens and encumbrances except:
municipal and zoning ordinances, recorded easements for public utilities
serving the Property, recorded building and use restrictions and covenants
approved by Buyer in writing prior to closing, the lien of any financing
assumed by Buyer, all title matters appearing in the commitment described
below, and general taxes levied in the year of closing, provided none of
the foregoing prohibit or materially hinder Buyer's use of the Property.
Seller shall complete and execute a Wisconsin Real Estate Transfer Return,
title company forms of Gap Affidavit and a Lien and Possession Affidavit,
a Closing Statement and any other documents necessary for closing.
However, the parties hereto agree that Buyer shall be responsible for
paying the Wisconsin Real Estate Transfer Fee.
This offer is binding upon both parties only if a copy of the
accepted Offer is deposited, postage or fees prepaid, in the U.S. mail or
a commercial delivery system, addressed to Buyer at 6744 South Howell
Avenue, Oak Creek, Wisconsin 53154, Attn.: Mike Lafferty, or by personal
delivery of the accepted offer to Buyer on or before April 18, 1997.
Otherwise, this offer is void and all earnest money shall be promptly
returned to Buyer.
This transaction is to be closed at Buyer's or the title company's
offices on or before May 30, 1997.
Legal possession of the Property shall be delivered to Buyer on the
date of closing.
Physical possession of the Property is held by Buyer pursuant to a
lease with Seller, which lease (but not Seller's warranty obligations)
shall be terminated at closing.
Seller warrants and represents the Property is not located in a flood
plain.
Seller warrants and represents that the Property is zoned B3 Office
and Professional Building.
Seller warrants and represents to Buyer that Seller has no notice or
knowledge of any:
(a) planned or commenced public improvements which may result in
special assessments or otherwise materially affect the Property;
(b) government agency or court order requiring repair, alteration or
correction of any existing condition;
(c) underground storage tanks or any structural, mechanical, or
other defects of material significance affecting the Property,
including but not limited to inadequacy for normal use of
mechanical systems, waste disposal systems and well, unsafe well
water according to state standards, and the presence of any
dangerous or toxic materials or conditions affecting the
Property;
(d) wetland and shoreland regulations affecting the Property; or
(e) condition or defect which could give rise to an order described
in subparagraph (b) above.
EXCEPTIONS TO WARRANTIES AND REPRESENTATIONS STATED ABOVE: None
The following item shall be prorated as of the day of closing:
Buyer's rent. General taxes, water and sewer use charges, property taxes,
utilities and all other operating expenses of the Property shall not be
prorated, as such operating expenses are Buyer's responsibility under
Buyer's lease from Seller.
Any income through the day of closing accrues to Seller.
Special assessments, if any, for work on site actually commenced or
levied prior to date of Offer shall be paid by Buyer. All other special
assessments shall also be paid by Buyer.
Seller will provide Buyer, at Buyer's expense, at least ten (10) days
after acceptance of this Offer:
A commitment from Chicago Title Insurance Company to issue
title insurance in the amount of the purchase price
together with an access endorsement insuring Buyer's access
to South Howell Avenue, which commitment shall be updated
or endorsed within fifteen (15) days prior to closing
showing title to the property as of a date no more than fifteen (15) days
before such title proof is provided to Buyer to be in the condition called
for in this Offer, and further subject only to the permitted liens set
forth above and liens which will be paid out on the proceeds of the
closing. Buyer shall notify Seller of any valid objection to title or any
title matter described therein which is not permitted by this Offer in
writing within five (5) days after receipt of the initial commitment;
Buyer shall also notify Seller of any valid objection to title in writing
within five (5) days after receipt of the amended title commitment in the
amount of the purchase price. Seller shall have a reasonable time, but
not exceeding thirty (30) days, to remove the objections, and closing
shall be extended as necessary for this purpose.
If the transaction fails to close and the parties fail to agree on
the disposition of earnest money, then the earnest money shall be
disbursed according to the decision of a court of competent jurisdiction.
SEE EXHIBIT A ATTACHED.
Seller and Buyer agree to act in good faith and use diligence in
completing the terms of this agreement. This agreement binds and inures
to the benefit of the parties to this agreement and their respective
successors and assigns.
BUYER: MIDWEST EXPRESS AIRLINES, INC.
By: /s/ Timothy E. Hoeksema
Name Printed: Timothy E. Hoeksema
Title: Chief Financial Officer
THIS OFFER IS HEREBY ACCEPTED, THE WARRANTIES AND REPRESENTATIONS MADE
HEREIN SURVIVE THE CLOSING OF THIS TRANSACTION. THE UNDERSIGNED HEREBY
AGREES TO SELL AND CONVEY THE ABOVE-MENTIONED PROPERTY ON THE TERMS AND
CONDITIONS SET FORTH HEREIN AND ACKNOWLEDGES RECEIPT OF A COPY OF THIS
AGREEMENT.
Dated: April __, 1997, SELLER: CHOCOLATE CHIP
LIMITED PARTNERSHIP
By:
Name Printed:
Title: General Partner
<PAGE>
EXHIBIT A TO COMMERCIAL OFFER TO PURCHASE
1. Escrow. An earnest money escrow shall be opened by Buyer
with Chicago Title Insurance Company within five (5) days after execution
and delivery of this Contract by Buyer and Seller. Upon receipt of such
earnest money, Chicago Title Insurance Company shall invest and hold the
earnest money in an interest bearing account for the benefit of Buyer.
Chicago Title Insurance Company shall continue to hold such earnest money
until it is applied against the purchase price or otherwise released as
required by the terms of this Contract.
2. Contingencies. Buyer's obligation to purchase the Property
pursuant to this Contract is subject to Buyer's written satisfaction or
waiver of the following contingencies. Buyer's failure to satisfy or
waive the contingencies shall be deemed disapproval by Buyer, thereby
rendering this Contract null and void. If Buyer so disapproves, Buyer's
earnest money, and all interest earned thereon shall be returned
immediately to Buyer and Buyer and Seller shall be relieved from all
further obligations hereunder.
A. Assumption of Financing Contingency. Within thirty (30)
days after acceptance of this Offer, Buyer shall, at Buyer's sole expense,
procure the approval of Seller's lender to Buyer's assumption of Seller's
financing at the closing of the purchase and sale of the Property, upon
terms and conditions which are commercially reasonable and acceptable to
Buyer. In the event that Buyer is unable, within such time period, to
procure terms and conditions for the assumption of such financing which
are commercially reasonable or are acceptable to Buyer, then Buyer may
terminate this Contract by giving Seller written notice of the same and
this Contract shall be null and void.
B. Board Approval. Within twenty (20) days after acceptance
of this Offer, Buyer shall, at Buyer's sole expense procure the approval
of Buyer's board of directors to the terms and conditions of the purchase
of the Property as set forth herein. In the event that Buyer is unable
within such time period to procure such an approval, then Buyer may
terminate this Contract by giving Seller written notice of the same and
this Contract shall be null and void.
3. Seller's Additional Warranties. Seller warrants and
represents that: (a) Seller has no notice or knowledge that the Property
has been damaged or affected by any environmental contamination, defect,
or dangerous condition; (b) Seller has no notice or knowledge that the
Property violates any environmental laws and regulations, that except as
may otherwise be set forth in the Environmental Site Assessment Update
dated April 25, 1995 and the Geotechnical Engineering Explanation and
Analysis dated May 25, 1995; the Property has ever been used for the
production, storage or disposal of any hazardous substances, and that
there have been any actions, suits, claims, orders, notices or proceedings
threatened, pending, or outstanding against Seller or the Property, which
adversely affect the Property or in any way jeopardize Seller's ability to
perform its obligations under this Contract; (c) there is no existing or
to Seller's knowledge any pending or threatened litigation, suit, action
or proceeding before any court or administrative agency which has or may
either create a lien upon the Property which will not be cleared by Seller
at or prior to closing or otherwise adversely affect the Property; (d) to
Seller's knowledge, there are no existing, pending or threatened
condemnation proceedings affecting any portion of the Property; (e) to the
best of Seller's knowledge, there are underground tanks on the Property;
(f) under penalty of perjury, Seller is not a foreign person within the
meaning of Section 1445 of the Internal Revenue Code of 1986, as amended,
and Seller will deliver to Purchaser on or before closing the Seller's
taxpayer identification number; and (g) Seller has good right, title and
authority to convey title to the Property in the manner called for
hereunder, the individuals executing the acceptance of this Offer have
been duly authorized and empowered to so act on behalf of Seller and this
Offer is, upon execution of the acceptance set forth below by such a
partner, a valid and binding obligation of Seller, enforceable in
accordance with its terms.
4. Closing. The transfer of the Property shall be closed on
the date set forth in line 42 of the Offer or on such earlier date (the
"Closing Date") as specified by Buyer in a written notice delivered to
Seller at least five (5) working days before such Closing Date. Such
Closing Date shall be no earlier than five (5) days after the Buyer's
waiver or satisfaction of the contingencies set forth in Paragraphs 2A and
2B above.
<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 SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 22,623
<SECURITIES> 0
<RECEIVABLES> 4,910
<ALLOWANCES> 261
<INVENTORY> 3,570
<CURRENT-ASSETS> 56,465
<PP&E> 145,140
<DEPRECIATION> 65,627
<TOTAL-ASSETS> 141,882
<CURRENT-LIABILITIES> 62,131
<BONDS> 0
0
0
<COMMON> 96
<OTHER-SE> 50,131
<TOTAL-LIABILITY-AND-EQUITY> 141,882
<SALES> 0
<TOTAL-REVENUES> 163,264
<CGS> 0
<TOTAL-COSTS> 148,284
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,599
<INCOME-TAX> 5,770
<INCOME-CONTINUING> 9,829
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,829
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
</TABLE>
