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, 1999
[ ] 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 April 30, 1999, there were 14,140,936 shares of Common Stock, $.01 par
value, of the Registrant outstanding.
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MIDWEST EXPRESS HOLDINGS, INC.
FORM 10-Q
For the period ended March 31, 1999
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 6
and Financial Condition
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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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,
--------
1999 1998
---- ----
Operating revenues:
Passenger service $88,862 $79,201
Cargo 3,033 2,931
Other 6,986 6,280
------- -------
Total operating revenues 98,881 88,412
------- -------
Operating expenses:
Salaries, wages and benefits 29,021 26,303
Aircraft fuel and oil 10,356 11,203
Commissions 7,068 6,625
Dining services 5,198 4,398
Station rental, landing and other fees 8,003 7,205
Aircraft maintenance materials and repairs 10,378 7,468
Depreciation and amortization 2,970 2,335
Aircraft rentals 4,890 4,711
Other 9,732 8,761
------- -------
Total operating expenses 87,616 79,009
------- -------
Operating income 11,265 9,403
------- -------
Other income (expense):
Interest income 207 413
Interest expense (69) (71)
Other (38) (17)
Total other income (expense) 100 325
Income before income taxes 11,365 9,728
Provision for income taxes 4,262 3,648
------- -------
Net income $ 7,103 $ 6,080
======= =======
Net income per common share-- basic $ 0.50 $ 0.43
======= =======
Net income per common share-- diluted $ 0.50 $ 0.43
======= =======
See notes to consolidated financial statements.
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PART I - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
1999 1998
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,246 $ 13,455
Accounts receivable:
Traffic, less allowance for doubtful
accounts of $246 and $251 at March 31, 1999
and December 31, 1998, respectively 6,530 5,450
Other 3,129 3,804
-------- --------
Total accounts receivable 9,659 9,254
Inventories 4,374 4,020
Prepaid expenses 6,616 6,358
Deferred income taxes 5,398 5,521
Aircraft and modifications intended to be financed
by sale and leaseback transactions -- 951
-------- --------
Total current assets 32,293 39,559
Property and equipment, at cost 279,612 243,284
Less accumulated depreciation 86,359 82,701
-------- --------
Net property and equipment 193,253 160,583
Landing slots and leasehold rights, net 4,491 4,572
Purchase deposits on flight equipment 3,817 13,383
Other assets 2,932 2,380
-------- --------
Total assets $236,786 $220,477
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $5,955 $5,064
Income taxes payable 4,245 2,305
Air traffic liability 41,392 35,285
Accrued liabilities 37,363 39,367
-------- --------
Total current liabilities 88,955 82,021
Long-term debt 3,175 3,206
Deferred income taxes 12,714 13,647
Noncurrent scheduled maintenance expense 13,162 12,082
Accrued pension and other postretirement benefits 7,709 6,201
Other noncurrent liabilities 5,571 5,688
-------- --------
Total liabilities 131,286 122,845
Shareholders' equity:
Preferred stock, without par value, 5,000,000
shares authorized, no shares issued or outstanding n/a n/a
Common stock, $.01 par value, 25,000,000 shares
authorized, 14,512,306 shares issued in 1999 and
14,464,056 in 1998 145 145
Additional paid-in capital 10,493 9,680
Treasury stock, at cost; 382,661 shares in 1999
and 381,015 shares in 1998 (6,449) (6,401)
Retained earnings 101,311 94,208
-------- --------
Total shareholders' equity 105,500 97,632
-------- --------
Total liabilities and shareholders' equity $236,786 $220,477
======== ========
See notes to consolidated financial statements.
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PART I - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
--------
1999 1998
---- ----
Operating activities:
Net income $ 7,103 $ 6,080
Items not involving the use of cash:
Depreciation and amortization 2,970 2,335
Deferred income taxes (110) (573)
Other 1,233 1,192
Changes in operating assets and liabilities:
Accounts receivable (405) (1,795)
Inventories (354) 328
Prepaid expenses (958) (2,497)
Accounts payable 891 1,136
Income taxes payable 1,940 3,520
Accrued liabilities (1,754) (3,392)
Air traffic liability 6,107 5,163
------- -------
Net cash provided by operating activities 16,663 11,497
------- -------
Investing activities:
Capital expenditures (26,337) (9,510)
Purchase deposits on flight equipment (900) --
Other (791) (1,302)
------- -------
Net cash used in investing activities (28,028) (10,812)
------- -------
Financing activities:
Proceeds from sale and leaseback transactions 951 --
Other 3,205 2,238
------- -------
Net cash provided by financing activities 4,156 2,238
------- -------
Net (decrease) increase in cash and cash equivalents (7,209) 2,923
Cash and cash equivalents, beginning of period 13,455 32,066
------- -------
Cash and cash equivalents, end of period $ 6,246 $34,989
======= =======
Supplemental schedule of investing activities:
Transfer of flight equipment from purchase
deposits to property and equipment $10,466 $ --
See notes to consolidated financial statements.
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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 three-month period ended March 31,
1999 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, 1998. The results of operations for the three-month
period ended March 31, 1999 are not necessarily indicative of the results for
the entire fiscal year ending December 31, 1999.
2. New Accounting Standards
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company is
currently in the process of evaluating the accounting and disclosure effects of
this Statement and anticipates adopting the Statement in the first quarter of
2000.
3. Segment Reporting
Midwest Express and Astral, doing business as Skyway Airlines, constitute the
reportable segments of the Company. The Company's reportable segments are
strategic units that are managed independently because they provide different
services with different cost structures and marketing strategies. Additional
detail on segment reporting is included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998. Financial information for the three
months ended March 31 on the two operating segments, Midwest Express and Astral,
follows (in thousands):
Midwest
1999 Express Astral Elimination Consolidation
- ---- ------- ------ ----------- -------------
Operating Revenues $ 89,840 $ 9,892 $ (851) $ 98,881
Operating Income 11,196 69 --- 11,265
Depreciation and
Amortization Expenses 2,771 199 --- 2,970
Interest Income 207 132 (132) 207
Interest Expense 201 --- (132) 69
Income Before Income Taxes 11,164 201 --- 11,365
Provision for Income Taxes 4,186 76 --- 4,262
Total Assets 226,507 21,092 (10,813) 236,786
Capital Expenditures $ 25,540 $ 797 $ --- $ 26,337
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Midwest
1998 Express Astral Elimination Consolidation
- ---- ------- ------ ----------- -------------
Operating Revenues $ 79,800 $ 9,518 $ (906) $ 88,412
Operating Income 9,411 (8) --- 9,403
Depreciation and
Amortization Expenses 2,169 166 --- 2,335
Interest Income 413 108 (108) 413
Interest Expense 179 --- (108) 71
Income Before Income Taxes 9,628 100 --- 9,728
Provision for Income Taxes 3,610 38 --- 3,648
Total Assets 173,833 17,609 (9,479) 181,963
Capital Expenditures $ 9,479 $ 31 $ --- $ 9,510
PART I Item 2.
Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition
-----------------------
Results of Operations
Overview
- --------
The Company's 1999 first quarter operating income was $11.3 million, an increase
of $1.9 million from the first quarter 1998. Net income increased by $1.0
million, or 16.8%, to $7.1 million. Year-to-date net income per share on a
diluted basis was $.50, a $.07 or 16.3% increase over 1998 results.
The Company's total revenue in the first quarter increased $10.5 million, or
11.8%, relative to the first quarter 1998. The favorable change in revenue in
the quarter was primarily the result of increased passenger volume resulting
from strong passenger demand for air travel throughout the industry. Traffic
increased by 21.0% on 19.0% increased capacity. Revenue yield decreased 6.7% as
a result of competitive pricing pressures. The Company also realized increased
supplemental revenue from the Midwest Express credit card program.
The Company's operating costs increased by $8.6 million or 10.9% primarily due
to increases in maintenance, depreciation, dining services, labor and other
expenses associated with service expansion. These higher costs were partially
offset by lower fuel prices. The Company benefited from significantly lower fuel
prices in the first quarter 1999, which averaged 18.2% less than in the first
quarter 1998 and favorably impacted operating income by $2.3 million. On a cost
per available seat mile (ASM) basis, costs decreased 6.3%, or 4.1% excluding the
impact of fuel price. Unit costs decreased due to the three larger capacity
MD-80 aircraft placed in service, improved fixed cost absorption associated with
the 19% capacity increase, and efforts throughout the Company to lower costs.
Additional detail on cost changes is included in subsequent sections.
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Operating Statistics
- --------------------
The following table provides selected operating statistics for Midwest Express
and Skyway.
Three Months Ended
March 31,
-------------------
%
1999 1998 Change
------- ------- ------
Midwest Express Operations
--------------------------
Origin & Destination Passengers 442,590 375,618 17.8
Revenue Passenger Miles (000s) 427,349 351,856 21.5
Scheduled Service Available Seat Miles (000s) 705,236 585,786 20.4
Total Available Seat Miles (000s) 713,847 596,659 19.6
Load Factor (%) 60.6% 60.1% 0.5 pts
Revenue Yield $0.185 $0.198 -6.7
Cost per total ASM $0.110 $0.118 -6.6
Average Passenger Trip Length 965.6 936.7 3.1
Number of Flights 10,798 9,793 10.3
Into-plane Fuel Cost per Gallon $0.503 $0.615 -18.2
Full-time equivalent Employees at End of Period 2,219 1,934 14.8
Aircraft in Service at End of Period 29 24 20.8
Skyway Airlines Operations
--------------------------
Origin & Destination Passengers 79,845 70,863 12.7
Revenue Passenger Miles (000s) 18,141 16,434 10.4
Scheduled Service Available Seat Miles (000s) 39,078 39,520 -1.1
Total Available Seat Miles (000s) 39,219 39,555 -0.8
Load Factor (%) 46.4% 41.6% 4.8 pts
Revenue Yield $0.540 $0.574 -5.9
Cost per total ASM $0.250 $0.241 4.0
Average Passenger Trip Length 227.2 231.9 -2.0
Number of Flights 10,443 10,517 -0.7
Into-plane Fuel Cost per Gallon $0.555 $0.675 -17.9
Full-time equivalent Employees at End of Period 335 278 20.5
Aircraft in Service at End of Period 15 15 -
Note:All statistics exclude charter operations except the following: total
available seat miles ("ASM"), cost per total ASM, into-plane fuel cost,
number of employees and aircraft in service. Aircraft acquired but not yet
placed into service are excluded from the aircraft in service statistics.
Numbers in this table may not be recalculated due to rounding.
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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,
---------------------------
1999 1998
---- ----
Per Total % of Per Total % of
ASM Revenue ASM Revenue
--------- ------- --------- -------
Operating revenues:
Passenger service $0.118 89.9% $0.124 89.6%
Cargo 0.004 3.1% 0.005 3.3%
Other 0.009 7.0% 0.010 7.1%
------- ------ ------- ------
Total operating revenues 0.131 100.0% 0.139 100.0%
Operating expenses:
Salaries, wages and benefits 0.038 29.3% 0.041 29.8%
Aircraft fuel and oil 0.014 10.5% 0.018 12.7%
Commissions 0.009 7.2% 0.010 7.5%
Dining services 0.007 5.3% 0.007 5.0%
Station rental, landing and other fees 0.011 8.1% 0.011 8.2%
Aircraft maintenance materials and repairs 0.014 10.5% 0.012 8.4%
Depreciation and amortization 0.004 3.0% 0.004 2.6%
Aircraft rentals 0.006 4.9% 0.007 5.3%
Other 0.013 9.8% 0.014 9.9%
------- ------ ------- ------
Total operating expenses $0.116 88.6% $0.124 89.4%
======= ====== ======= ======
Total ASMs (000s) 753,066 636,214
Note: Numbers in this table may not be recalculated due to rounding.
Three Months Ended March 31, 1999 Compared to
Three Months Ended March 31, 1998
Operating Revenues
- ------------------
Company operating revenues totaled $98.9 million in the first quarter 1999, a
$10.5 million, or 11.8%, increase over the first quarter 1998. Passenger
revenues accounted for 89.9% of total revenues and increased $9.7 million, or
12.2%, from 1998 to $88.9 million. The increase is attributable to a 21.0%
increase in passenger volume, as measured by revenue passenger miles.
Midwest Express passenger revenue increased by $9.3 million, or 13.3%, from 1998
to $79.1 million. This increase was caused by a 17.8% increase in origin and
destination passengers. Total capacity, as measured by scheduled service ASMs,
increased 20.4% due to five additional aircraft in scheduled service during the
first quarter 1999. Also, load factor increased from 60.1% in 1998 to 60.6% in
1999 due to strong travel demand. Revenue yield decreased 6.7% due to
competitive pricing pressure, Northwest Airlines' fare sales following their
pilots' strike, operating larger aircraft on certain routes, 3.1% increase in
average passenger trip length and an 89% increase in traffic in the
Milwaukee-Phoenix market which has lower than average yields.
Skyway passenger revenue increased by $.4 million, or 3.9%, from 1998 to $9.8
million. This increase was caused by a 10.4% increase in passenger volume. Load
factor increased from 41.6% in 1998 to 46.4% in 1999 while revenue yield
decreased 5.9% due to lower overall pricing levels.
Revenue from cargo, charter and other services increased $.8 million in the
first quarter 1999. Midwest Express benefited from increased revenue from the
Midwest Express MasterCard
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program of $.8 million. Charter revenue decreased $.3 million due to the
National Basketball Association (NBA) lockout which resulted in the cancellation
of scheduled charters.
Operating Expenses
- ------------------
1999 operating expenses increased by $8.6 million, or 10.9%, from 1998. The
increase was primarily the result of service expansion. Midwest Express operated
10.3% more flights during the quarter and had five additional aircraft in
service. Offsetting higher costs in most categories were lower fuel costs. Cost
per total ASM decreased 6.3%, from 12.4(cent) in 1998 to 11.6(cent) in 1999.
Salaries, wages and benefits increased by $2.7 million, or 10.3%. The labor cost
increase reflects the addition of approximately 343 full-time equivalent
employees (286 at Midwest Express and 57 at Skyway) since March 31, 1998, as
well as increases in labor rates. Midwest Express added employees throughout the
organization to support additional aircraft placed in service; Skyway added
employees primarily to support ground service operations at the Milwaukee
airport. On a cost per total ASM basis, labor costs decreased 7.0%, from
4.1(cent) in 1998 to 3.9(cent) in 1999.
Aircraft fuel and oil and associated taxes decreased $.8 million, or 7.6%, in
first quarter 1999. Into-plane fuel prices decreased 18.2% in 1999, averaging
50.7(cent) per gallon in 1999 versus 62.0(cent) per gallon in 1998. Fuel
consumption increased by 13.2% in the quarter, primarily because Midwest Express
operated 12.6% more aircraft flight hours. Fuel costs in April 1999 trended
upward, averaging 53.6(cent) per gallon.
Commissions increased by $.4 million, or 6.7%. The increase was primarily due to
a 12.2% increase in passenger revenue, partially offset by a new commission cap
implemented February 1, 1999. In addition, the Company realized an increase in
travel booked directly through the reservation center, Midwest Express web site
and other travel related web sites not subject to commission. The commission
cap, which is similar to most other airlines, limits travel agent commissions to
$50 per round-trip ticket and $25 per one-way ticket.
Dining services costs increased by $.8 million, or 18.1%, from 1998. The
increase was primarily due to the 17.8% increase in Midwest Express origin and
destination passengers.
Maintenance costs increased by $2.9 million, or 38.9%, from 1998. The increase
was caused by higher than expected costs associated with outsourcing a heavy
airframe overhaul, more flight hours at Midwest Express and higher material and
aircraft component repair costs. During the quarter, one aircraft was outsourced
for heavy maintenance. The cost of this maintenance exceeded the estimate by
over $1.0 million. No additional airframe maintenance is scheduled for
outsourcing in 1999.
Station rental, landing and other fees increased by $.8 million, or 11.1%, from
1998. The increase was caused by 10.3% more flight segments at Midwest Express.
On a cost per ASM basis, these costs decreased 6.2%.
Depreciation and amortization increased by $.6 million, or 27.2%, from 1998. The
increase was primarily the result of the depreciation associated with three
additional MD-80 aircraft placed in
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service.
Aircraft rental costs increased by $.2 million, or 3.8%, from 1998 as a result
of full year lease payments versus partial lease payments on two Midwest Express
DC-9-30 aircraft that were placed into service during the second quarter 1998.
Other costs increased by $1.0 million, or 11.1%, from 1998. Other operating
expenses consist primarily of advertising and promotion, insurance, property
taxes, reservation fees, administration and other items. The increase was
primarily due to higher costs for professional services, passenger booking fees,
property taxes and communication costs.
Provision for Income Taxes
- --------------------------
Income tax expense for the first quarter 1999 was $4.3 million, a $.6 million
increase from 1998. The effective tax rate for the first quarter of 1999 and
1998 was 37.5%. 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 under a tax allocation and separation agreement entered into in
connection with the Company's initial public offering as if they were payable to
taxing authorities.
Net Income
- ----------
Net income for the first quarter increased $1.0 million from 1998. The net
income margin improved from 6.9% in 1998 to 7.2% in 1999.
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Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $6.2 million at March 31, 1999,
compared to $13.5 million at December 31, 1998. Net cash provided by operating
activities totaled $16.7 million for the three months ended March 31, 1999. Net
cash used in investing activities totaled $28.0 million, primarily due to
capital expenditures of $27.2 million, including $.9 million of purchase
deposits on flight equipment.
As of March 31, 1999, the Company had a working capital deficit of $56.7 million
versus a $42.5 million deficit on December 31, 1998. The working capital deficit
is primarily due to the Company's air traffic liability (which represents
deferred revenue for advance bookings, whereby passengers have purchased tickets
for future flights, that is recognized when the passenger travels). Because of
this, the Company expects to operate at a working capital deficit, which is not
unusual for the industry.
As of March 31, 1999, 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
totaling approximately $14.9 million that reduce the amount of available credit.
The letters of credit are used to secure certain reserve amounts for stipulated
airframe and engine maintenance on Midwest Express' MD-88 aircraft, to support
financing on the Company's new maintenance facility and for various other
purposes.
Net cash used for capital expenditures totaled $27.2 million for the three
months ended March 31, 1999. Capital expenditures primarily consisted of
aircraft purchases and refurbishment costs. Other capital expenditures included
aircraft engine hush kit components, engine overhauls, acquisition of
capitalized spare parts and the Skyway concourse expansion at the General
Mitchell International airport in Milwaukee. The Company anticipates full year
capital spending to be $80 million, excluding the five regional jets that the
Company plans to acquire during the second half of the year. The Company is
planning on leasing these aircraft.
During 1997, the Company executed definitive purchase documents to acquire eight
McDonnell Douglas MD-80 series aircraft. The Company financed the first five
deliveries, including refurbishment costs primarily using internal cash flow,
and expects to finance the remaining three aircraft using internal cash flow as
well.
As of March 31, 1999, 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 second
quarter 2001.
In April 1999, the Company renegotiated two MD-88 aircraft leases, changing
lessors and extending the lease to 12 years. This transaction will reduce lease
cost by $.6 million in 1999.
The Company's Board of Directors has authorized a $15.0 million share repurchase
program. As of March 31, 1999, the Company has purchased a total of 418,625
shares of common stock at a cost of $6.8 million under the share repurchase
program.
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The Company believes its existing cash and cash equivalents, cash flow from
operations, funds available from credit facilities and available long-term
financing for the acquisition of jet aircraft will be adequate to meet its
current and anticipated working capital requirements and capital expenditures.
Pending Developments
This Form 10-Q filing, and particularly this Pending Developments section,
contains forward-looking statements that may state the Company's or management's
intentions, hopes, beliefs, expectations or predictions for the future. It is
important to note that the Company's actual results could differ materially from
those projected results due to factors that include, but are not limited to,
uncertainties related to general economic factors, industry conditions,
scheduling developments, government regulations, labor relations, aircraft
maintenance and refurbishment schedules, potential delays related to acquired
aircraft, fuel prices and year 2000 compliance. Additional information
concerning factors that could cause actual results to differ materially from
those in the forward-looking statements is contained from time to time in the
Company's SEC filings, including but not limited to the Company's prospectus
dated May 23, 1996 included in Registration Statement on Form S-1 No. 333-03325.
MD-80 -- Aircraft During January 1999 Midwest Express placed into service the
second and third of eight MD-80 series aircraft the Company agreed to purchase
in 1997. The fourth aircraft was placed into service in April 1999. The fifth
and sixth aircraft are currently being refurbished and have scheduled in-service
dates of August and December. The seventh and eighth aircraft will be received
in the fourth quarter and are expected to enter service in the first and second
quarters of 2000. The Company has financed all deliveries thus far with internal
cash flow and expects to do the same for the remaining aircraft. These aircraft
will be used to increase capacity on the Company's high-traffic routes and
expand service in existing or new markets.
Regional Jets -- Skyway expects to take delivery of the first of five new
Fairchild Aerospace 328JET aircraft in July 1999. All five are expected to be in
service by the end of 1999. The Company also holds options for 10 additional
aircraft to support future growth, which are exercisable after January 1, 2001.
Plans for these 32-passenger aircraft have not been announced. The Company
expects that the cost of these five aircraft, including purchase price and
support equipment, will total approximately $55.0 million, and will be financed
via operating leases as deliveries take place.
Labor Relations -- In December 1997 Midwest Express pilots elected the Air Line
Pilots Association ("ALPA"), a labor union, for representation in collective
bargaining. Negotiations are in process. In January 1998, Skyway pilots
represented by ALPA ratified a four-year labor contract. In April 1999, the
flight attendants elected the Association of Flight Attendants, AFL-CIO, a labor
union, for representation in collective bargaining. Negotiations have not yet
begun. No other employees in the Company are currently unionized.
Year 2000 -- The Company established a year 2000 team in January 1998 to
evaluate and remediate any year 2000 issues. As a result of the Company becoming
publicly owned in September 1995, many systems required immediate replacement.
All of the replacement systems purchased were
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represented to be year-2000 compliant by their respective vendors. In mid-1997,
the Company designed and implemented a technology infrastructure comprising
almost all year 2000-compliant products.
The Company developed a comprehensive plan to address issues related to the
impact of the year 2000 on its business. The Company's Year 2000 Project
involves five phases: Awareness, Inventory/Assessment, Renovation, Validation
and Implementation. Internal financial, operations, non-information technology
systems and external interfaces have been inventoried and assessed, and plans
have been developed to remediate any non-compliant systems. The Company has one
major internally developed and maintained system that requires modifications and
to facilitate the remediation of this system, the Company has contracted with an
outside consultant. This system which is used for purchasing, inventory,
accounts payable and aircraft maintenance planning and records is scheduled to
be compliant by September 1999. The Company completed its review of the impact
of year 2000 issues on its aircraft fleet and has determined there are no safety
of flight issues. The majority of the Company's systems, including all safety
and regulatory related systems are expected to be year 2000-compliant by the end
of second quarter 1999. Midwest Express and Skyway's operating aircraft are
fully year 2000-compliant. The Company estimates that the overall cost
associated with year 2000 readiness will approximate $1.1 million, approximately
50% of which is from reallocation of existing internal resources. Costs
associated with year 2000 readiness are expensed as incurred and have been
funded using internal cash flow.
The Company realizes that preparedness is also predicated on many external
factors. Therefore, the Company is actively pursuing suppliers and vendors to
evaluate their respective levels of preparedness. Questionnaires were mailed to
the most critical suppliers and vendors and evaluation of their preparedness is
in process. Follow-up action is dictated by the priority of the services or
commodity used, and the response received. The company is also participating
with the airline industry to identify potential year 2000-related issues at
airports and within the industry infrastructure, including common vendors,
suppliers, and government agencies, including the Federal Aviation
Administration ("FAA"). The April 13th U.S. Department of Transportation news
release acknowledges that recent tests conducted by the FAA demonstrated that
the nations' air traffic control system will be ready for the Year 2000.
The implications for the Company, a critical vendor or supplier, or the FAA of
not being prepared for the year 2000 could have a material adverse effect on the
Company, resulting in customer inconvenience, increased costs, grounded or
delayed flights, or a degraded level of safety. To be prepared to address
unexpected occurrences, contingency plans are being developed for those
scenarios within the Company's control. However, due to the complexity and
pervasiveness of the year 2000 issue, and in particular the uncertainty
regarding the compliance programs of third parties, no assurance can be given
that the Company's estimates will be achieved, and actual results could differ
materially from those anticipated.
Other Issues - The Company's Annual Report for the year ended December 31, 1998,
disclosed certain issues relating to the maintenance program and sales taxes.
These issues remain pending.
14
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------------------------------------------------------------------
There have been no material changes in the Company's market risk since
December 31, 1998.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
--------
(10) Thirteenth Amendment to Airline Lease, as amended between
Milwaukee County and Midwest Express, dated April 5, 1999.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended March
31, 1999.
15
<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: May 14, 1999 By /s/ Timothy E. Hoeksema
------------ Timothy E. Hoeksema
Chairman of the Board, President
and Chief Executive Officer
Date: May 14, 1999 By /s/ Robert S. Bahlman
------------ Robert S. Bahlman
Senior Vice President and Chief Financial
Officer
16
Exhibit 10
AMENDMENT NO. 13
TO
AIRLINE LEASE NO. AC-865
THIS AMENDMENT TO CONTRACT OF LEASE is made and entered into as of the
5th day of April, 1999, by and between MILWAUKEE COUNTY, a municipal
corporation, organized and existing as one of the counties in Wisconsin
(hereinafter referred to as "Lessor" or "County"), and MIDWEST EXPRESS AIRLINES,
INC., a corporation organized and existing under the laws of the State of
Wisconsin (hereinafter referred to as "Lessee" or "Airline").
W I T N E S S E T H:
THAT, WHEREAS, the parties hereto have heretofore entered into an
Airline Lease dated April 5, 1985, as amended, relating to space, occupancy and
the use of the premises and facilities of General Mitchell International Airport
(GMIA) for the transportation of persons and cargo by air; and
WHEREAS, Airline requests that Lessor assign approximately 15,000
square feet of additional space under gates D-39, D-52, D-53, D-55, and D-56
which Airline will improve at Airline's cost; and,
WHEREAS, Airline has requested to make improvements to other areas of
the terminal building currently under lease to Airline at Airline's cost which
changes the amount of space under lease to Airline; and,
WHEREAS, on May 22, 1998, (File No. 98-310) County's Board of
Supervisors approved amending Airline's Lease to include space under gates D-39,
D-52, D-53, D-55, and D-56;
WHEREAS, Airline has requested and County has consented to the
issuance of rental credits to reimburse Airline for the cost which County would
otherwise incur on behalf of the Airline to improve said approximately 15,000
square feet of lower level space;
NOW, THEREFORE, for and in consideration of the premises and of the
mutual covenants and agreements herein contained and other valuable
considerations, it is mutually agreed between the parties hereto that the
aforesaid agreement dated April 5, 1985, as amended, be and it is hereby further
amended in the following particulars, to wit:
1. In order to establish a base document which summarizes all space
occupied by Airline, Exhibit "P" Base Document 6/98, pages 1 through 14 is
attached hereto and made a part hereof, containing all space occupied by Airline
as of 6/98 and replaces all previous Exhibit "P" pages.
2. Effective on July 15, 1998, paragraph S of Article IV shall be
deleted in its entirety and a new paragraph S inserted therefore, reading as
follows:
<PAGE>
"S. LESSEE'S EXCLUSIVE USE SPACE WITHIN THE TERMINAL BUILDING ON JULY
1, 1998
For purposes of calculation of Lessee's Terminal rents for those areas
designated for Lessee's exclusive use in the Terminal Building, the following
space definitions, relative cost factors, and resultant ERUs shall be utilized:
Relative
Space Function Sq. Ft. Cost Factor ERUs
-------------- ------- ----------- ----
Concourse Lower Level -0- .20 -0-
Office Unfinished
(Unheated)
Concourse Lower Level 5,262.50 .70 3,683.75
Office Finished
(Heated)
Concourse Lower Level 36,040.90 .85 30,634.77
Office Finished
(Heated & Air Conditioned)
Concourse Upper Level -0- .95 -0-
Office Unfinished
Concourse Upper Level 945.00 .95 897.75
Office Finished
Ticket Counter 661.70 1.10 727.87
Ticket County Office 1,307.40 .95 1,242.03
Gate Hold Rooms 29,518.00 1.00 29,518.00
Baggage Makeup Area 3,939.10 .75 2,954.33
Baggage Service Office 405.00 1.00 405.00
Hold Room Stairwell 2,625.44 .15 393.82
Basement 0 .25 0
Mezzanine Office Areas 0 .90 0
Operations Control tower 401.00 1.08 433.08
TOTALS 81,106.04 70,890.40
2
<PAGE>
The spaces outlined above are those occupied by Lessee on July 15, 1998, which
deletes 191 square feet of Concourse Lower Level Office Unfinished (Unheated)
space, and includes an additional 1,157.50 square feet of Concourse Lower Level
Office finished (Heated) space, 8,197 square feet of Concourse Lower Level
Office finished (Heated and Air Conditioned) space, 112 square feet of Concourse
Upper level Office Finished space, 3,457 square feet of Gate Hold Room space,
and 550 feet of Hold Room Stairwell space, as shown on Exhibit "P", pages 6, 12,
13 and 14 of 14, Revised 7/15/98, attached hereto and made a part hereof."
3. Except as specifically provided herein, the terms and conditions of
the Lease heretofore entered into between the parties dated April 5, 1985, as
amended, shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused these presents to
be signed by their respective proper officers and their corporate seals hereto
affixed on the dates hereinafter set forth.
COUNTY
Dated at Milwaukee, Wisconsin, this 5th day of April, 1999.
APPROVED: MILWAUKEE COUNTY
a municipal corporation
/s/ 3/31/99 By /s/ William Heinemann 4/2/99
- ---------------------------------- -------------------------------
Airport Director Date William Heinemann
Acting Director of Public Works
/s/ 3/31/99 By /s/ Mark E. Ryan 4/5/99
- ---------------------------------- -------------------------------
Corporation Counsel Date Mark E. Ryan
County Clerk, Deputy
AIRLINE
Dated at Milwaukee, Wisconsin, this 23rd day of March, 1999.
MIDWEST EXPRESS AIRLINES, INC.
a Wisconsin corporation
By /s/ Robert S. Bahlman
------------------------------
Robert S. Bahlman
Title: Sr. Vice President
Date: March 23, 1999
3
<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 PERIOD ENDED MARCH 31, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,246
<SECURITIES> 0
<RECEIVABLES> 6,530
<ALLOWANCES> 246
<INVENTORY> 4,374
<CURRENT-ASSETS> 32,293
<PP&E> 279,612
<DEPRECIATION> 86,359
<TOTAL-ASSETS> 236,786
<CURRENT-LIABILITIES> 88,755
<BONDS> 3,175
0
0
<COMMON> 145
<OTHER-SE> 105,355
<TOTAL-LIABILITY-AND-EQUITY> 236,786
<SALES> 0
<TOTAL-REVENUES> 98,881
<CGS> 0
<TOTAL-COSTS> 87,616
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (3)
<INTEREST-EXPENSE> 69
<INCOME-PRETAX> 11,365
<INCOME-TAX> 4,262
<INCOME-CONTINUING> 7,103
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,103
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
