FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
---------------------------------------------
{ } 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 Identification No.)
or organization)
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)
Securities registered pursuant to
Section 12(b) of the Act:
Common Stock, $.01 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
(Title of class) (Names of exchange on which registered)
Securities registered pursuant to
Section 12(g) of the Act: None
-------------
(Title of class)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Aggregate market value of voting and non-voting common equity held by
nonaffiliates as of March 9, 1999: $392.5 million As of March 9, 1999 there
were 14,126,645 shares of Common Stock, $.01 par value, of the registrant
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Annual Report to Shareholders for the fiscal year ended
December 31, 1998 are incorporated by reference into Parts II and IV. Portions
of the definitive Proxy Statement for registrant's Annual Meeting of
Shareholders to be held on April 28, 1999 are incorporated by reference in Part
III.
<PAGE>
MIDWEST EXPRESS HOLDINGS, INC.
FORM 10-K
For the year ended December 31, 1998
TABLE OF CONTENTS
PART I Page No.
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Management - Officers of the Registrant 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 15
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners
and Management 15
Item 13. Certain Relationships and Related Transactions 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 16
SIGNATURES 17
INDEPENDENT AUDITORS' REPORT 18
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 19
EXHIBIT INDEX 20
2
<PAGE>
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements
that may state the Company's or management's intentions, hopes, beliefs,
expectations or predictions for the future. 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, aircraft
maintenance and refurbishment schedules, potential delays related to acquired
aircraft 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 the Registration Statement on Form S-1 No. 333-03325.
PART I
Item 1. Business
Background
Midwest Express Holdings, Inc. was reincorporated under the laws of the
State of Wisconsin in 1996. Midwest Express Holdings, Inc. is a holding company
and its principal subsidiary is Midwest Express Airlines, Inc. ("Midwest
Express").
Midwest Express operates a single-class, premium service passenger jet
airline that caters to business travelers and serves selected major destinations
throughout the United States and Toronto, from bases of operations in Milwaukee
and Omaha, Nebraska.
Midwest Express evolved out of Kimberly-Clark Corporation's
("Kimberly-Clark") desire to provide a convenient and cost-effective way to meet
its internal transportation needs. Kimberly-Clark began daily, nonstop aircraft
shuttle service in October 1982 for its employees traveling between offices in
two cities. Key management personnel from Kimberly-Clark who successfully
operated the shuttle service became the senior management of Midwest Express.
Midwest Express began commercial operations in June 1984 with two
DC-9-10 aircraft, serving three destinations from Milwaukee's General Mitchell
International Airport. Milwaukee, as Midwest Express' original base of
operations, has been the main focus of its route structure. Midwest Express
established Omaha as its first base of operations outside Milwaukee in May 1994.
Astral Aviation, Inc. ("Astral"), d/b/a Skyway Airlines ("Skyway"), a
wholly owned subsidiary of Midwest Express, began operations in early 1994 by
taking over routes that Mesa Airlines, Inc. ("Mesa") had operated as a commuter
feed system under a codesharing agreement between Mesa and Midwest Express.
Under the agreement, Mesa operated the system beginning in 1989 as "Skyway
Airlines" using Midwest Express' airline code. As of December 31, 1998, Skyway
offered service in 25 cities--mainly in the upper Midwest.
On September 27, 1995, the stock of Midwest Express was transferred to
Midwest Express Holdings, Inc. in connection with the initial public offering
("Offering") by Kimberly-Clark of shares of common stock of Midwest Express
Holdings, Inc. Following the Offering, Kimberly-Clark retained 20% of the shares
of outstanding common stock of the Company that it subsequently sold in a
secondary public offering consummated on May 23, 1996. As used herein, unless
the context otherwise requires, the "Company" refers to Midwest Express
Holdings, Inc. and its respective predecessors, including Midwest Express
Airlines, Inc. when operated as a subsidiary of Kimberly-Clark.
3
<PAGE>
Route Structure and Scheduling
Bases of Operations
Midwest Express currently has two bases of operations, Milwaukee and
Omaha. As of December 31, 1998, Midwest Express served 26 cities from Milwaukee
and was the only carrier providing nonstop service between Milwaukee and most
Midwest Express destinations. Although 10 other jet airlines serve Milwaukee's
airport, these carriers generally provide nonstop flights only between Milwaukee
and their respective operations' hubs.
From Omaha, Midwest Express provides nonstop service to Los Angeles,
Milwaukee, Newark, Washington, D.C, Kansas City (through May 9, 1999) and
Orlando (weekends). Passengers in Omaha can also travel to most other cities in
the Midwest Express route system via connections through Milwaukee. Although
nine other jet airlines serve Omaha's airport, these carriers (other than
Southwest Airlines) provide nonstop flights only between Omaha and their
respective hubs.
Integration of Skyway Operations
Midwest Express coordinates Skyway routes and schedules. The Company
primarily has sought to provide Skyway service to communities where there is the
opportunity to complement Midwest Express service by giving passengers on
short-haul, low-density routes the ability to connect to Midwest Express flights
in Milwaukee without switching carrier systems. To enhance aircraft utilization
and profitability, Skyway also seeks to identify short-haul, low-density,
point-to-point routes where there is likely to be a consistent demand for air
service even though there is no Milwaukee connection. As of December 31, 1998,
Skyway offered flights in 25 cities, generally in the upper Midwest. The Company
expects that five Fairchild Aerospace 328JETs will join Skyway's fleet of 15
Beechcraft 1900D turboprop aircraft in 1999.
Customer Service
Overall
Midwest Express primarily caters to the business traveler and has built
its reputation providing passengers with personal attention, two-across leather
seats, fine food served on china with complimentary wine or champagne, and
baked-onboard chocolate chip cookies on luncheon flights - all at competitive
fares. Conde Nast Traveler, Travel & Leisure and the Zagat Airline Survey have
recognized Midwest Express as the best airline in the United States, and
Aviation Week & Space Technology named Midwest Express as the best managed
national airline in the world.
Premium Seating
Each Midwest Express aircraft is configured with two leather-covered
seats on each side of the aisle that are larger than coach seats on most other
airlines (21 inches wide at the seat cushion compared to standard coach seats
that are 17 to 18 inches wide). There are no middle seats. The number of seats
in each aircraft is 15% to 20% less than the number of seats that major airlines
typically install in the same type of aircraft. Midwest Express has continued to
be recognized by a leading consumer travel report, most recently in June 1997,
as having the most comfortable coach seats in its periodic surveys of U.S.
airlines.
Dining Services
The high quality of Midwest Express cuisine has been recognized
repeatedly in customer surveys. Breakfast and dinner menus consist typically of
a choice of two entrees. Midwest Express offers complimentary champagne on
breakfast flights and complimentary wine on other flights. Midwest Express
spends about twice as much per revenue passenger meal compared to the industry
average for major carriers.
4
<PAGE>
Fare Pricing and Yield Management
Airlines generally offer a range of fares that are distinguished by
restrictions on use, such as the times of day and days of the week for travel,
length of stay and minimum advance booking period. Midwest Express and Skyway
generally offer the same range of fares that their competitors offer, although
there are exceptions in particular markets where Midwest Express will discount
certain categories of fares or charge a premium compared to its competitors.
The number of seats an airline offers within each fare category is also
an important factor in pricing. Midwest Express monitors the inventory and
pricing of available seats with a computer-assisted yield management system. The
system enables Midwest Express' yield management analysts to examine Midwest
Express' and Skyway's historical demand and increases the analysts' opportunity
to establish the optimal allocation of the number of seats made available for
sale at various fares. The analysts then monitor each flight to adjust seat
allocations and actual booking levels, with the objective of optimizing the
number of passengers and the fares paid on future flights to maximize revenues.
Marketing
Travel Agency Relationships
Midwest Express sells approximately 70% of its tickets through travel
agents. The Company maintains its own reservations center at its headquarters.
As with most travel agencies, the Company's reservations center obtains airline
information, makes reservations and sells tickets for Midwest Express and Skyway
flights through a computer reservation system ("CRS"). The Company has a
contract to use the SABRE CRS until 2001. Effective September 1997, the Company
changed its travel agency commission rate structure to an 8% base commission
rate, with no commission cap. Effective February 1, 1999, a maximum commission
of $50 per roundtrip or $25 for a one-way ticket will be paid. This commission
structure is similar to most other airlines.
Frequent Flyer Program
The Company operates a Frequent Flyer Program under which mileage
credits are earned by flying on Midwest Express, Skyway or other participating
airlines and by using the services of participating hotels (including Hilton,
Hyatt, Loews and Wyndham), car rental firms (including Hertz and National), MCI
telecommunications and Elan MasterCard. Members can redeem Frequent Flyer miles
for travel on Midwest Express (20,000 miles for a free round trip or 15,000 for
companion), Skyway or other participating airlines. The Frequent Flyer Plus plan
allows members that reach an initial 30,000 mile threshold to earn bonus miles;
status is retained by accruing at least 20,000 flight miles in a calendar year.
In addition to free travel, miles can be redeemed at participating hotels and
car rental firms. The program is designed to enhance customer loyalty and
thereby retain and increase the business of frequent travelers by offering
incentives for their continued patronage.
The Company's Frequent Flyer program includes a marketing agreement
whereby members in Northwest Airlines' WorldPerks frequent flier program and
Midwest Express' Frequent Flyer members maintain their separate accounts, but
can choose to redeem award travel on either carrier. The Company also operates
the Midwest Express MasterCard program in conjunction with Elan Financial
Services of Illinois ("Elan"). The program allows Midwest Express to offer a
co-branded credit card to its Frequent Flyer members and other members of the
public to induce them to become Frequent Flyers. The Company generates income by
selling Frequent Flyer miles to Elan, which awards the miles to cardholders for
charges on their credit cards.
5
<PAGE>
As of year-end 1998 and 1997, the Company had approximately 1,050,000
and 938,000 members enrolled in its Frequent Flyer program, respectively. The
Company estimates that as of December 31, 1998 and 1997, the total available
awards under the Frequent Flyer program were 110,000 and 80,000, respectively,
after eliminating those accounts below the minimum award level. Free travel
awards redeemed were approximately 31,000 and 21,000 during 1998 and 1997,
respectively. Free travel awards accounted for approximately 4% of total Company
revenue passenger miles during 1998. Because Midwest Express controls the number
of seats available for free travel on each flight, it does not believe that use
of Frequent Flyer awards results in a significant displacement of revenue
passengers.
Miles accrued prior to November 1, 1995 expired on October 31, 1998,
unless there was qualifying activity in the Frequent Flyer accounts. Qualifying
activity includes flights on Midwest Express and/or Skyway Airlines or at least
10,000 miles accrued from the Midwest Express Mastercard during the previous
36-month period. Frequent flyer benefits will continue only for members who show
account activity at least once every 36 months. If the account does not remain
active, the mileage expires and the account is considered inactive.
The Company accounts for its Frequent Flyer obligation on the accrual
basis using the incremental cost method. This method recognizes an average
incremental cost to provide roundtrip transportation to one additional
passenger. The incremental cost includes the cost of meals, commissary,
reservations and insurance. The incremental cost does not include a contribution
to overhead, aircraft cost or profit. The accrual is based on estimated
redemption percentages applied to actual mileage recorded in members' accounts.
For purposes of calculating the Frequent Flyer accrual, the Company anticipates
that approximately 72% of outstanding awards will be redeemed. No liability is
recorded for hotel or car rental award certificates that are to be honored by
other parties because there is no cost to Midwest Express for such awards.
Codesharing Agreements
In 1998 Midwest Express established a one-year renewable codesharing
agreement with American Eagle. The agreement can be canceled by either party
with 180 days notice. Under the agreement, Midwest Express provides passengers
with jet service to Los Angeles or Dallas/Ft. Worth, with American Eagle
providing passengers with connecting service from Los Angeles to eight cities in
California, and from Dallas/Ft. Worth to 31 cities in the southern and south
central United States. Both the Midwest Express and American Eagle segments are
designated in computer reservation systems with Midwest Express airline codes.
In 1998, Midwest Express signed a letter of intent to enter into a codeshare
agreement with Reno Air. However, to date, no final codesharing agreement has
been reached and such an agreement is pending the buyout of Reno Airlines by
American Airlines.
Related Business
Midwest Express also offers ancillary airline services directly to
customers, including freight services and aircraft charters. The freight
business consists of transporting freight, United States mail and
counter-to-counter packages on regular passenger flights. Midwest Express
operates a DC-9-30 jet aircraft configured specifically for the purpose of
providing charter services. The primary customers of aircraft charter services
are athletic teams, business groups and tour operators. The Company also
generates revenue from providing aircraft ground handling and aircraft
maintenance services for other airlines and from inflight sales.
6
<PAGE>
Competition
The Company competes with other air carriers on all routes it serves.
Many of the Company's competitors have elaborate route structures that transport
passengers to hub airports for transfer to many destinations, including those
served by Midwest Express and Skyway. Some competitors offer flights from cities
served by Midwest Express to more than one of their hub airports, permitting
them to compete in markets by offering multiple routings. For many markets that
Midwest Express serves from Milwaukee and Omaha, the competition does not
provide nonstop service, but that condition could change. In some markets,
Skyway and Midwest Express also compete against ground transportation.
The Company has the largest market share of passengers at Milwaukee. In
1998, the Company carried 33.0% of passengers boarded in Milwaukee, while
Northwest Airlines, which has the second largest share, carried 19.8%. In Omaha,
Midwest Express had 5.7% of the market based on passengers boarded in 1998,
compared to 26.6% boarded by United Airlines and 14.3% by Southwest Airlines,
the carriers with the two largest market shares.
In addition to traditional competition among domestic carriers, the
industry may be subject to new forms of competition in the future. The
development of video teleconferencing and other methods of electronic
communication may add a new dimension of competition to the industry as
businesses look for lower cost substitutes to air travel.
Employees
As of December 31, 1998, Midwest Express had 2,358 employees (401 of
whom were part-time and 37 of whom were intermittents), and Skyway had 365
employees (86 of whom were part-time). The categories of employees were as
indicated in the following table:
Employees as of December 31, 1998
---------------------------------
Midwest
Employee Categories Express Skyway
Flight Operations 334 157
Inflight 395 -
Passenger Services 676 132
Maintenance 360 53
Reservations and Marketing 394 -
Accounting and Finance 101 4
Administrative 98 19
----- --
Total 2,358 365
===== ===
The Company makes extensive use of part-time employees to increase
operational flexibility. Given the size of Midwest Express' and Skyway's fleet
and flight schedules, the Company does not have continuous operations at many
locations. The use of part-time employees enables the Company to schedule
employees when they are needed. Part-time employees are eligible for the
Company's benefits program, subject to certain restrictions and co-pay
requirements, because doing so enables the Company to attract quality employees
and reinforces the value the Company places on part-time employees.
7
<PAGE>
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. No other employees in
the Company are currently unionized. In February 1999, an application was filed
on behalf of the Association of Flight Attendants, AFL-CIO for the services of
the National Mediation Board to conduct an election to determine representation
of the flight attendants of Midwest Express. The election will be held in the
first quarter, with ballots counted on April 29, 1999.
Regulation
General
The Department of Transportation ("DOT") has the authority to regulate
economic issues affecting air service, including among other things, air carrier
certification and fitness, insurance, deceptive and unfair competitive
practices, advertising, CRSs and other consumer protection matters such as
on-time performance, denied boarding and baggage liability. It also is
authorized to require reports from air carriers and to inspect a carrier's
books, records and property. The DOT has authority to investigate and institute
proceedings to enforce its economic regulations and may in certain circumstances
assess civil penalties, revoke operating authority and seek criminal sanctions.
The Federal Aviation Administration ("FAA") regulates the Company's
aircraft maintenance and operations, including flight operations, equipment,
aircraft noise, ground facilities, dispatch, communications, training, security,
weather observation, flight and duty time, crew qualifications, aircraft
registration and other matters affecting air safety. The FAA has the authority
to suspend temporarily or revoke permanently the authority of the Company or its
licensed personnel for failure to comply with regulations promulgated by the FAA
and to assess civil penalties for such failures.
The Company also is subject to regulations or oversight by federal
agencies other than the DOT and FAA. Antitrust laws are enforced by the U.S.
Department of Justice; labor relations are generally regulated by the Railway
Labor Act, which vests certain regulatory powers in the National Mediation Board
with respect to airlines and labor unions arising under collective bargaining
agreements; and the use of radio facilities is regulated by the Federal
Communications Commission. Also, the Company is generally regulated by federal,
state and local laws relating to the protection of the environment and to the
discharge of materials into the environment. In addition the Immigration and
Naturalization Service, the U.S. Customs Service, and the Animal and Plant
Health Inspection Service of the Department of Agriculture have jurisdiction
over inspection of the Company's aircraft, passengers and cargo to ensure the
Company's compliance with U.S. immigration, customs and import laws.
Noise Abatement
The federal Airport Noise and Capacity Act of 1990 ("ANCA") was
intended to convert the nation's commercial jet service to quieter Stage 3
operations by requiring phaseout of Stage 2 operations (as defined in Part 36 of
the Federal Aviation Regulations) by December 31, 1999, subject to certain
exceptions. Midwest Express has chosen to comply with ANCA by operating a fleet
that is 65% Stage 3 by the end of 1996, 75% Stage 3 by the end of 1998, and 100%
Stage 3 by the end of 1999. As of December 31, 1998, Midwest Express operated 21
Stage 3 aircraft representing 78% of its fleet, and six Stage 2 aircraft. The
Company has ordered equipment to convert the remaining Stage 2 aircraft to Stage
3 by December 31, 1999.
8
<PAGE>
ANCA also recognizes the right of airport operators with special noise
problems to implement local noise abatement procedures that do not interfere
unreasonably with the interstate and foreign commerce of the national air
transportation system. ANCA generally requires FAA approval of local noise
restrictions on Stage 3 aircraft and establishes a regulatory notice and review
process for local restrictions on Stage 2 aircraft first proposed after October
1990. As a result of litigation and pressure from airport area residents,
airport operators have taken local actions over the years to reduce aircraft
noise. These actions have included regulations requiring aircraft to meet
prescribed decibel limits by designated dates, prohibition on operations during
night-time hours, restrictions on frequency of aircraft operations, and various
operational procedures for noise abatement. While the Company has had sufficient
operational and scheduling flexibility to accommodate local noise restrictions
imposed to date, its operations could be adversely affected if locally imposed
regulations become more restrictive or widespread.
Safety
In compliance with FAA regulations, the Company's aircraft are subject
to many different levels of maintenance or "checks," and periodically go through
complete overhauls. Maintenance efforts are monitored by the FAA, with FAA
representatives typically on site. The regulations that govern aircraft with 30
seats or fewer had been less stringent than the regulations applicable to
aircraft with more than 30 seats. In March 1997, Skyway completed its conversion
to certain FAA regulations that require smaller aircraft operations to conduct
business under more stringent rules previously applicable only to aircraft with
more than 30 seats.
Slots
The FAA's regulations currently permit the buying, selling, trading and
leasing of certain airline slots at Chicago's O'Hare, New York's La Guardia and
Kennedy International, and Washington, D.C.'s Reagan airports. A slot is an
authorization to take off or land at the designated airport within a specified
time window. The FAA must be advised of all slot transfers and can disallow any
such transfer.
The FAA's slot regulations require the use of each slot at least 80% of
the time, measured on a bi-monthly basis. Failure to do so without a waiver from
the FAA (which is granted only in exceptional cases) subjects the slot to recall
by the FAA. In addition, the slot regulations provide that slots may be
withdrawn by the FAA at any time without compensation to meet the DOT's
operational needs (such as providing slots for international or essential air
transportation). Midwest Express' ability to increase its level of operations at
these cities is affected by the number of slots available for takeoffs and
landings.
Aircraft Fuel
Because fuel costs constitute a significant portion of the Company's
operating costs (approximately 13% and 16% in 1998 and 1997, respectively),
significant changes in fuel costs can materially affect the Company's operating
results. Fuel prices continue to be susceptible to political events and other
factors that affect the supply of fuel, and the Company cannot predict the
effect of changes in near- or long-term fuel prices. In the event of a fuel
supply shortage resulting from a disruption of oil imports or otherwise, higher
fuel prices or curtailment of scheduled service could result. Changes in fuel
prices may have a marginally greater impact on the Company than on many of its
competitors because of the composition of the Company's fleet. See "Item 2.
Properties - Fleet Equipment." The Company periodically enters into short-term
hedge agreements, which as of December 31, 1998 were not material, in an attempt
to reduce its exposure to jet fuel price fluctuations.
9
<PAGE>
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 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 has developed plans 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.
This system, which is used for purchasing, inventory, accounts payable and
aircraft maintenance planning and records and is scheduled to be completed by
September 1999. The Company estimates that the total cost of achieving year-2000
readiness will approximate $1.0 million, approximately 50% of which is from
reallocation of existing internal resources.
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 have
been 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
service or commodity used, and the response received. The Company is also
participating with the airline industry to identify potential year-2000 issues
at airports and within industry infrastructure, including common vendors,
suppliers, government agencies and the Federal Aviation Administration ("FAA").
FAA operations are made possible by many critical computer systems; without
these specialized systems, the FAA could not effectively control the current
level of air traffic, target airlines for inspection, or provide up-to-date
weather conditions to pilots and air traffic controllers.
The implications for the Company, a critical vendor, 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 will be developed during the first six
months of 1999 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.
10
<PAGE>
Item 2. Properties
Fleet Equipment
As of December 31, 1998, Midwest Express' fleet in service consisted of
27 McDonnell Douglas jet aircraft, including eight DC-9-10 series aircraft, 16
DC-9-30 series aircraft, two MD-88 aircraft and one MD-82 aircraft. Twenty-one
aircraft meet Stage 3 noise requirements. None of the aircraft owned by Midwest
Express is subject to liens to secure obligations.
MIDWEST EXPRESS AIRLINES AIRCRAFT
Date of Stage
Tail # Type # of Seats Owned/Leased Manufacture Type
------ ---- ---------- ------------ ----------- ----
809ME MD-82 116 Owned 10/9/81 3
601ME MD-88 112 Leased 09/21/89 3
701ME MD-88 112 Leased 08/22/89 3
202ME DC-9-30 84 Leased 06/26/75 3
203ME DC-9-30 84 Leased 07/07/75 3
204ME DC-9-30 84 Leased 07/25/75 3
205ME DC-9-30 84 Leased 01/02/74 3
206ME DC-9-30 84 Leased 05/07/79 3
207ME DC-9-30 84 Leased 07/06/79 3
209ME DC-9-30 84 Leased 06/18/76 3
216ME DC-9-30 84 Leased 10/18/76 3
502ME DC-9-30 84 Owned 06/10/80 3
602ME DC-9-30 84 Owned 07/21/80 3
302ME DC-9-30 60 Owned 11/08/67 3
501ME DC-9-30 84 Owned 12/15/67 2
212ME DC-9-30 84 Leased 4/29/76 3
215ME DC-9-30 84 Leased 8/19/76 3
401ME DC-9-30 84 Owned 01/02/68 2
301ME DC-9-30 84 Owned 01/11/68 2
500ME DC-9-10 60 Owned 06/05/65 3
300ME DC-9-10 60 Owned 01/22/66 3
600ME DC-9-10 60 Owned 02/06/66 3
800ME DC-9-10 60 Owned 02/16/66 2
700ME DC-9-10 60 Owned 07/14/66 3
400ME DC-9-10 60 Owned 07/29/66 2
900ME DC-9-10 60 Owned 08/18/66 2
080ME DC-9-10 60 Owned 10/30/66 3
The two MD-88 aircraft leases expire in 2000. Ten DC-9-30 operating
leases expire as follows: three in 2001, four in 2006, one in 2007 and two in
2008.
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 and fifth aircraft are presently being refurbished with in-service dates
scheduled for May and August 1999. The sixth aircraft was received in March 1999
and will be placed in service in October 1999. The seventh and eighth aircraft
are expected to be received in the fourth quarter of 1999 and are scheduled to
enter service in early 2000. The Company financed the first four aircraft,
including refurbishment costs, in 1998 primarily using internal cash flow, and
expects to finance the remaining four aircraft using internal cash flow as well.
Skyway acquired 15 new Beechcraft 1900D turboprop aircraft between
January 11, 1994, and May 18, 1995. Each of these aircraft have 19 passenger
seats. During 1996 Skyway sold and leased back these aircraft from a group of
five financial institutions with lease terms of five to 12 years, and expiration
dates ranging from 2001 through 2008.
11
<PAGE>
Skyway expects to take delivery of the first of five new Fairchild
Aerospace 328JET aircraft in June 1999. All five are expected to be in service
by the end of 1999. The Company also holds options to purchase 10 additional
aircraft to support future growth, which are exercisable after January 1, 2001.
Facilities
The Company has secured long-term use of gates and maintenance
facilities at General Mitchell International Airport in Milwaukee. The Company
is a signatory to the airport master lease, which expires in 2010, for 19 gates
at the Milwaukee airport, including ticket counter, baggage handling and
operations space. In 1989 the Company completed construction of its maintenance
facility at the Milwaukee airport with a lease of land from the airport that
will allow the Company to exercise a series of five-year options to extend the
lease for 50 years.
In October 1998 Midwest Express moved into a newly constructed
97,000-square-foot maintenance facility that is owned by Milwaukee County and
located at General Mitchell International Airport. The new structure is used to
handle maintenance support for its current fleet and planned growth. The City of
Milwaukee issued variable-rate-demand industrial development revenue bonds to
finance the cost of the estimated $8.3 million project. The Company's variable
rent payments are based on the current interest rate on the City of Milwaukee's
outstanding bonds over the 32-year lease term.
In August 1997 the Company purchased a headquarters building, which it
previously leased. As part of the transaction, the Company assumed $3.5 million
of long-term debt.
In 11 of the other 26 cities Midwest Express served as of December 31,
1998, gates at the airport were leased directly from the airport authority. For
the other 15 cities, Midwest Express subleased gates from other carriers. In
Omaha, Midwest Express has exclusive rights to two gates.
Skyway has secured long-term leases of facilities at Milwaukee's
airport. Skyway owns an aircraft maintenance and office facility at the airport.
The land on which this facility is located is leased until 2010. Skyway also
owns a headquarters building, which is located off airport grounds. Skyway
currently operates four gates, one gate is leased directly from Milwaukee County
and the other three are subleased from Midwest Express.
Item 3. Legal Proceedings
During 1996 the Wisconsin Department of Revenue asserted that Wisconsin
sales taxes should be paid in connection with Midwest Express' purchase of meals
from its food caterer. A petition for review with the Wisconsin Tax Appeals
Commission is pending and a trial is anticipated in late 1999. While Midwest
Express does not believe any such tax is payable, if the Department of Revenue
successfully asserts its position, then Midwest Express would be liable for back
taxes and associated interest of approximately $.7 million.
The Company is a party to routine litigation incidental to its
business. Management believes that none of this litigation is likely to have a
material adverse effect on the Company's consolidated financial position and
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter 1998.
12
<PAGE>
MANAGEMENT
Officers of the Registrant
The executive officers and other officers of the Company as of March 9,
1999, together with their ages, positions and business experience are described
below:
NAME AGE POSITION
Timothy E. Hoeksema 52 Chairman of the Board, President and Chief
Executive Officer and Director
Brenda F. Skelton 43 Senior Vice President-Marketing and Director
David C. Reeve 53 Senior Vice President-Operations
Robert S. Bahlman 40 Senior Vice President, Chief Financial Officer
and Controller
Carol Skornicka 57 Senior Vice President-Corporate Development,
General Counsel and Secretary
Rex J. Kessler 51 Vice President-Technical Services
Michael W. Mooney 44 Vice President-Planning and Pricing
Lisa A. Bauer 35 Vice President-Sales and Distribution
Dennis J. O'Reilly 43 Treasurer and Director of Investor Relations
Christopher D. White 36 Vice President - Safety and Regulatory
Compliance
Timothy E. Hoeksema has been a director, Chairman of the Board,
President and Chief Executive Officer of the Company since 1983. Mr. Hoeksema
was appointed President-Transportation Sector of Kimberly-Clark in 1988 and
resigned from all positions with Kimberly-Clark as of August 1, 1995.
Brenda F. Skelton has served as the Senior Vice President-Marketing and
director since 1998 and Senior Vice President-Marketing and Customer Service and
director from 1995 to 1998. Prior thereto, Ms. Skelton served as Vice
President-Marketing for the Company from February 1993 to March 1995.
David C. Reeve has served as Senior Vice President of Operations of
Midwest Express since November 1998. Mr. Reeve served as President and Chief
Executive Officer of Astral which operates Skyway from March 1997 and continues
to serve in a dual capacity until a replacement is named. Prior thereto, Mr.
Reeve served as Director of Flight Operations for DHL Airways from June 1991 to
February 1997.
Robert S. Bahlman has served as the Senior Vice President, Chief
Financial Officer and Controller since February 1999. Mr. Bahlman served as
Senior Vice President, Chief Financial Officer, Treasurer and Controller of the
Company from February 1998 to February 1999. Mr. Bahlman served as Vice
President, Chief Financial Officer, Treasurer and Controller of the Company from
December 1996 to February 1998. Mr. Bahlman served as the Controller for the
Company from September 1995 to December 1996. Prior thereto, Mr. Bahlman also
served as the Financial Manager of the Company from July 1990 to August 1995.
13
<PAGE>
Carol Skornicka has served as Senior Vice President-Corporate
Development, Secretary and General Counsel of the Company since February 1998.
Ms. Skornicka served as Vice President, General Counsel and Secretary of the
Company from May 1996 to February 1998. Ms. Skornicka formerly served as
Secretary of the Wisconsin Department of Industry, Labor and Human Relations, a
position she held from 1991 until joining the Company.
Rex J. Kessler has served as Vice President-Technical Services for the
Company since September 1995. Prior thereto, Mr. Kessler served as
Director-Maintenance of the Company from December 1987 to August 1995.
Michael W. Mooney has served as Vice President of Planning and Pricing
since February 1999. Mr. Mooney served as Director of Planning and Pricing from
March 1993 to February 1999. Prior thereto, Mr. Mooney served as Manager of
Pricing and Scheduling from December 1985 to March 1993.
Lisa A. Bauer has served as Vice President-Sales and Distribution of
the Company since December 1997. Ms. Bauer served as Director of Sales for the
Company from November 1994 to December 1997. Prior thereto, Ms. Bauer served as
National Sales Manager from October 1992 to November 1994.
Dennis J. O'Reilly has served as Treasurer and Director of Investor
Relations of the Company since February 1999. Mr. O'Reilly served as Assistant
Treasurer from February 1996 to February 1999. Prior thereto, Mr. O'Reilly
served as Business Analyst for the Company from November 1990 to January 1996.
Christopher D. White has served as Vice President of Safety and
Regulatory Compliance since February 1999. Mr. White served as Director of
Safety and Regulatory Compliance from October 1996 to February 1999. Mr. White
served as Manager of Internal Safety from March 1996 to October 1996. From April
1995 to March 1996, Mr. White served as Internal Safety Evaluation Coordinator.
From March 1994 to April 1995, Mr. White served as Special Project Coordinator.
Prior thereto, Mr. White served as Research Analyst from October 1992 to March
1994.
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
The information required in this Item is incorporated by reference to
discussions of the share repurchase program in Management's Discussion and
Analysis of Financial Condition and Results of Operations on page 22 and to
Shareholder Information on page 36 of the Company's 1998 Annual Report to
Shareholders.
Item 6. Selected Financial Data
The information required in this Item is incorporated by reference to
page 18 of the Company's 1998 Annual Report to Shareholders.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required in this Item is incorporated by reference to
pages 19 through 23 of the Company's 1998 Annual Report to Shareholders.
14
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
None.
Item 8. Financial Statements and Supplementary Data
The information required in this Item is incorporated by reference to
pages 24 through 36 of the Company's 1998 Annual Report to Shareholders.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required in this Item is set forth under the heading
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance," incorporated herein by reference to pages 1 through 3 and page 15,
respectively, of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 28, 1999, and "Management--Officers of the
Registrant" in Part I following Item 4.
Item 11. Executive Compensation
The information required in this Item is set forth under the heading
"Executive Compensation," incorporated herein by reference, to pages 7 through
14 of the definitive Proxy Statement for the Annual Meeting of Shareholders to
be held on April 28, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required in this Item is set forth under the heading
"Stock Ownership of Management and Others," incorporated herein by reference to
pages 5 and 6 of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 28, 1999.
Item 13. Certain Relationships and Related Transactions
Not applicable.
15
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
(a)(1) Financial Statements:
The consolidated financial statements of the Company as of December 31,
1998 and 1997 and for each of the three years in the period ending December 31,
1998, together with the report thereon of Deloitte & Touche LLP, dated January
29, 1999, appear on pages 25 through 35 of the Company's 1998 Annual Report to
Shareholders, and are incorporated herein by reference.
(a)(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
Schedules not included have been omitted because they are not
applicable.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter of 1998.
(c) Exhibits:
The Exhibits filed or incorporated by reference herewith are as
specified in the Exhibit Index.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MIDWEST EXPRESS HOLDINGS, INC.
Registrant
March 25, 1999 By /s/ TIMOTHY E. HOEKSEMA
Timothy E. Hoeksema
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 25, 1999.
Signature Capacity
/s/ TIMOTHY E. HOEKSEMA Chairman of the Board of Directors,
Timothy E. Hoeksema President and Chief Executive Officer
(Principal Executive Officer)
/s/ BRENDA F. SKELTON Senior Vice President-Marketing and Director
Brenda F. Skelton
/s/ ROBERT S. BAHLMAN Senior Vice President and Chief Financial Officer
Robert S. Bahlman (Principal Financial and Accounting Officer)
/s/ JOHN F. BERGSTROM Director
John F. Bergstrom
/s/ OSCAR C. BOLDT Director
Oscar C. Boldt
/s/ JAMES G. GROSKLAUS Director
James G. Grosklaus
/s/ULICE PAYNE, JR. Director
Ulice Payne, Jr.
/s/ SAMUEL K. SKINNER Director
Samuel K. Skinner
/s/ RICHARD H. SONNENTAG Director
Richard H. Sonnentag
/s/ FREDERICK P. STRATTON, JR. Director
Frederick P. Stratton, Jr.
/s/ DAVID H. TREITEL Director
David H. Treitel
__________________________ Director
John W. Weekly
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Midwest Express Holdings, Inc.
Oak Creek, Wisconsin
We have audited the consolidated financial statements of Midwest Express
Holdings, Inc. as of December 31, 1998 and 1997 and for each of the three years
in the period ended December 31, 1998, and have issued our report thereon dated
January 29, 1999; such consolidated financial statements and report are included
in your 1998 Annual Report to Shareholders and are incorporated herein by
reference. Our audits also included the consolidated financial statement
schedule of Midwest Express Holdings, Inc., listed in Item 14. This consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
January 29, 1999
18
<PAGE>
Schedule II
<TABLE>
MIDWEST EXPRESS HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Balance at Additions Balance at
Beginning of Charged to Deductions End of
Year Expense from Reserve Year
Allowance for doubtful accounts:
<S> <C> <C> <C> <C>
Year ended December 31, 1998 $231,000 $102,000 $ (82,000) $251,000
Year ended December 31, 1997 $207,000 $400,000 $(376,000) $231,000
Year ended December 31, 1996 $307,000 $218,000 $(318,000) $207,000
</TABLE>
19
<PAGE>
EXHIBIT INDEX
MIDWEST EXPRESS HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Exhibit No. Description
(3.1) Restated Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form 8-B filed
May 2, 1996 (File No. 1-13934)).
(3.2) Bylaws, as amended through December 4, 1996 (incorporated by reference
to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year
ended December 31, 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) Credit Agreement among Firstar Bank Milwaukee, N.A; M & I Marshall &
Ilsley Bank; Bank One, Milwaukee, N.A.; and Midwest Express Holdings,
Inc. dated September 27, 1995 (incorporated by reference to Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995 (File No. 1-13934)).
(4.2) Credit Agreement between Kimberly-Clark Corporation and Midwest Express
Holdings, Inc., dated September 27, 1995 (incorporated by reference to
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995 (File No. 1-13934)).
(4.3) 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)).
(4.4) Amendment to the Rights Agreement, dated April 19, 1996, between the
Company 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)).
(4.5) Second Amendment to Credit Agreement, dated as of April 30, 1997,
amending the Credit Agreement dated September 27, 1995, as amended to
date, among Midwest Express Holdings, Inc.; Firstar Bank Milwaukee,
N.A.; M&I Marshall & Ilsley Bank; and Bank One, Milwaukee, N.A.
(incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 (File No. 1-13934)).
(10.1) Lease Agreement between Milwaukee County and Midwest Express, dated May
12, 1988 (incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (File No. 33-95212) (the "S-1")).
(10.2) Airline Lease, as amended, between Milwaukee County and Midwest
Express, dated October 1, 1984 (incorporated by reference to Exhibit
10.5 to the S-1).
(10.3) Omaha Airport Authority Agreement and Lease at Eppley Airfield with
Midwest Express between the Airport Authority of the City of Omaha and
Midwest Express (incorporated by reference to Exhibit 10.6 to the S-1).
(10.4) Airline Lease, as amended, between Milwaukee County and Astral, dated
November 23, 1994 (incorporated by reference to Exhibit 10.7 to the
S-1).
(10.5) Lease Agreement between Milwaukee County and Phillip Morris
Incorporated, dated October 7, 1982, to which Astral has succeeded as
lessee (incorporated by reference to Exhibit 10.8 to the S-1).
20
<PAGE>
(10.6) Tax Allocation and Separation Agreement among Kimberly-Clark
Corporation, K-C Nevada, Inc., Midwest Express Holdings, Inc., Midwest
Express Airlines, Inc., and Astral Aviation Inc., dated September 27,
1995 (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1995
(File No. 1-13934)).
(10.7) Guarantee Fee Agreement between Kimberly-Clark Corporation and Midwest
Express Holdings, Inc., dated September 27, 1995 (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995 (File No. 1-13934)).
(10.8) Employee Matters Agreement between Kimberly-Clark Corporation and
Midwest Express Holdings, Inc., dated September 27, 1995 (incorporated
by reference to Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995 (File No. 1-13934)).
(10.9) Tenth Amendment to Airline Lease between Milwaukee County and Midwest
Express, dated August 18, 1997 (incorporated by reference to Exhibit
10.9 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 1-13934)).
(10.10) Eleventh Amendment to Airline Lease between Milwaukee County and
Midwest Express, dated December 17, 1997 (incorporated by reference to
Exhibit 10.10 to the Company's Annual Report of Form 10-K for the year
ended December 31, 1997 (File No. 1-13934)).
(10.11) Twelfth Amendment to Airline Lease, as amended between Milwaukee County
and Midwest Express, dated April 21, 1998 (incorporated by reference to
Exhibit 10 to the company's Quarterly Report of Form 10-Q for the
quarter ended March 31, 1998 (File No. 1-13934)).
(10.12)+ Assignment of Rights Agreement between Dolphin Trade & Finance, LTD.
and Midwest Express, dated November 14, 1997 (incorporated by reference
to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 (File No. 1-13934)).
(10.13)* Midwest Express Holdings, Inc. 1995 Stock Option Plan, as amended
through February 13, 1997 (incorporated by reference to Exhibit 4.2 to
the Company's Registration Statement on Form S-8 (File No. 333-44253)).
(10.14)* Midwest Express Holdings, Inc. 1995 Stock Plan for Outside Directors,
as amended through September 18, 1996 (incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 (File No. 1-13934)).
(10.15)* Annual Incentive Compensation Plan, amended through February 11, 1998
(incorporated by reference to Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 (File No.
1-13934)).
(10.16)* Supplemental Benefits Plan (incorporated by reference to Exhibit 10.19
to the Company's Annual Report on Form 10-K for the year ended December
31, 1995 (File No. 1-13934)).
(10.17)* Form of Key Executive Employment and Severance Agreement between the
Company and each of Timothy E. Hoeksema, Brenda F. Skelton, and Dennis
J. Crabtree and Carol N. Skornicka (incorporated by reference to
Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 1-13934)).
21
<PAGE>
(10.18)* Form of Key Executive Employment and Severance Agreement between the
Company and each of Robert S. Bahlman, Rex J. Kessler, Carol J. Reimer,
David C. Reeve, Lisa A. Bauer and Dennis J. O'Reilly (incorporated by
reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 (File No. 1-13934)).
(13) The 1998 Annual Report to Shareholders (to the extent incorporated by
reference herein).
(23) Consent of Deloitte & Touche LLP, Independent Auditors.
(27) Financial Data Schedule.
- ---------------------
* A management contract or compensatory plan or arrangement.
+ Portions of this exhibit have been redacted and are subject to a confidential
treatment request filed with the Secretary of the Securities and Exchange
Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
as amended. The redacted material was filed separately with the Securities
and Exchange Commission.
22
EXHIBIT 13
FIVE - YEAR FINANCIAL AND OPERATING DATA
MIDWEST EXPRESS HOLDINGS, INC.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Total operating revenues............... $388,874 $344,557 $304,746 $259,155 $203,592
Total operating expenses............... 333,219 306,087 270,387 227,781 192,328
Operating income....................... 55,655 38,470 34,359 31,374 11,264
Net income............................. 35,869 24,940 21,750 19,129 6,662
Net income per share-basic(1).......... 2.54 1.76 1.51 1.23 0.33
Net income per share-diluted(1)........ 2.51 1.74 1.50 1.23 0.33
Balance Sheet Data:
Property and equipment, net ........... 160,583 89,156 70,903 55,919 57,626
Total assets........................... 220,477 166,748 129,135 92,833 95,436
Intercompany receivable(2)............. 0 0 0 61 17,923
Long-term debt......................... 3,206 3,333 0 0 0
Shareholders' equity................... $97,632 $63,398 $40,341 $21,264 $37,840
Selected Operating and Other Date(3):
Midwest Express Airlines:
Revenue passenger miles (000s)....... 1,623,659 1,409,528 1,239,966 1,150,338 972,809
Available seat miles (000s).......... 2,498,543 2,198,179 1,954,151 1,794,924 1,600,437
Passenger load factor (%)............ 65.0% 64.1% 63.5% 64.1% 60.8%
Revenue yield (cents per RPM)........ 19.2 19.4 19.3 17.8 16.7
Cost per total ASM (cents per mile).. 11.8 12.1 12.0 11.0 10.8
Aircraft in service at year-end...... 27 24 22 19 19
Average aircraft utilization
(hours per day).................... 9.1 9.3 9.2 9.0 8.6
Number of FTE employees at year-end.. 2,133 1,889 1,624 1,411 1,334
Astral Aviation, d/b/a Skyway Airlines(4):
Revenue passenger miles (000s)....... 77,547 69,277 71,165 66,415 43,219
Available seat miles (000s).......... 160,772 158,912 160,488 156,113 103,759
Passenger load factor (%)............ 48.2% 43.6% 44.3% 42.5% 41.7%
Revenue yield (cents per RPM)........ 52.9 55.1 52.7 49.9 48.3
Cost per total ASM (cents per mile).. 23.7 23.8 21.6 19.4 17.9
Aircraft in service at year-end...... 15 15 15 15 13
Average aircraft utilization
(hours per day).................... 8.1 7.7 7.8 7.9 7.9
Number of FTE employees at year-end.. 322 277 245 217 177
(1) Net income per share data is presented on a pro forma basis for 1995 and 1994 results.
(2) Intercompany receivable reflects amounts receivable from Kimberly-Clark in connection with the Company's participation in
Kimberly-Clark's cash management program prior to the Company's initial public offering.
(3) Revenue passenger miles, available seat miles, passenger load factor and revenue yield are for scheduled service operations. The
other statistics include charter operations.
(4) Because Astral began service in February 1994, results for 1994 reflect less than a full year of operations. Before Astral
commenced operations, Mesa Airlines, Inc. ("Mesa"), pursuant to a codesharing agreement with Midwest Express, operated routes
similar to those that Astral now operates. Because Mesa is not affiliated with the Company, information relating to Mesa's results
of operations for these routes is not shown.
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
1998 Overview
1998 operating income for Midwest Express Holdings, Inc. (the "Company") was
$55.7 million, an increase of $17.2 million over 1997. Net income in 1998
increased by $10.9 million to $35.9 million. The favorable change in financial
results was primarily caused by continued strong demand for air travel,
successful results of new operations, lower fuel prices, reduced travel agent
commissions and improved results from supplemental revenue programs.
The Company increased scheduled service capacity in 1998 by 12.8%, while traffic
increased 15.0%. This resulted in a load factor increase of 1.3 points. Midwest
Express Airlines, Inc. ("Midwest Express") put three additional aircraft in
service. The principal new routes include Milwaukee-Hartford (May);
Milwaukee-Raleigh/Durham (August); Kansas City-Raleigh/Durham (October). In
addition, year-round service between Milwaukee-Phoenix (December) and weekend
service between Omaha-Orlando (December) was initiated. These routes contributed
favorably to 1998 profitability.
The Company benefited significantly from lower fuel prices in 1998, which
averaged 22.3% less than 1997, and resulted in a favorable impact on operating
income of $12.2 million. Also, a reduced travel agent commission structure
combined with a shift in ticket distribution methods resulted in a $5.8 million
positive impact on operating income.
Improved results from supplemental revenue programs also favorably impacted 1998
financial results. Midwest Express' credit card program generated $2.7 million
additional revenue in 1998 than 1997 and ticket exchange fees increased $1.2
million. Partially offsetting these improvements was a $2.0 million decrease in
charter revenue due to not having a dedicated aircraft for charters much of the
year and the delay in the start of the NBA basketball season.
Operating expenses increased 8.9% primarily due to 12.8% increased capacity.
Significant increases occurred in labor, maintenance, depreciation, dining
services and aircraft rentals, which are explained in subsequent sections.
The following table provides operating revenues and expenses for the Company
expressed as cents per total available seat miles ("ASM"), including charter
operations, and as a percentage of total operating revenues for 1998, 1997 and
1996:
<TABLE>
<CAPTION>
1998 1997 1996
Per Per Per
Total Total Total
ASM % ASM % ASM %
(in cents) (in cents) (in cents)
Operating revenues:
<S> <C> <C> <C> <C> <C> <C>
Passenger service.................. 13.12 90.8% 12.95 90.3% 12.81 90.8%
Cargo.............................. 0.44 3.0% 0.48 3.3% 0.52 3.7%
Other.............................. 0.90 6.2% 0.92 6.4% 0.77 5.5%
----- ----- ----- ----- ----- -----
Total operating revenues............ 14.46 100.0% 14.35 100.0% 14.10 100.0%
Operating expenses:
Salaries, wages and benefits...... 4.18 28.9% 3.84 26.7% 3.61 25.6%
Aircraft fuel and oil.............. 1.60 11.0% 2.09 14.5% 2.19 15.5%
Commissions........................ 1.12 7.7% 1.31 9.2% 1.31 9.3%
Dining services.................... 0.73 5.0% 0.72 5.0% 0.70 4.9%
Station rental/landing/other fees.. 0.96 6.7% 1.02 7.1% 1.00 7.1%
Aircraft maintenance materials/
repairs........................... 1.37 9.5% 1.17 8.2% 0.99 7.0%
Depreciation and amortization...... 0.37 2.6% 0.36 2.5% 0.35 2.5%
Aircraft rentals................... 0.72 5.0% 0.73 5.1% 0.74 5.3%
Other.............................. 1.34 9.3% 1.51 10.5% 1.62 11.5%
----- ----- ----- ----- ----- -----
Total operating expenses............ 12.39 85.7% 12.75 88.8% 12.51 88.7%
===== ===== ===== ===== ===== =====
Total ASMs (millions)............... 2,689.7 2,401.3 2,160.9
Note: Numbers in this table cannot be recalculated due to rounding.
</TABLE>
Year Ended December 31, 1998
Compared to Year Ended December 31, 1997
Operating Revenues
The Company's operating revenues totaled $388.9 million in 1998, a $44.3
million, or 12.9%, increase over 1997. Passenger revenues accounted for 90.8% of
total revenues and increased $41.9 million, or 13.5%, from 1997 to $352.9
million. The increase was primarily attributable to a 15.0% increase in
passenger volume, as measured by revenue passenger miles, offset by a 1.4%
decrease in revenue yield.
Midwest Express' passenger revenue increased $39.0 million to $311.9 million, or
14.3%, from 1997. This increase was caused by a 13.7% increase in passengers
carried and a 1.3% increase in passenger trip length, partially offset by a .8%
decrease in revenue yield. Midwest Express' capacity, as measured by scheduled
service ASMs, increased 13.7%. The increase in capacity was primarily due to
three additional jet aircraft added to scheduled service during the year. Load
factor increased to 65.0% in 1998 from 64.1% in 1997. The slight decrease in
revenue yield was caused by increased competitive pricing in some markets.
Passenger revenue at Astral Aviation, Inc. ("Skyway") increased $2.9 million to
$41.1 million, or 7.7%, in 1998. This increase was caused by a 14.3% increase in
passengers carried, offset by a 3.8% decrease in revenue yield. Total capacity
increased by 1.2%, while load factor increased from 43.6% to 48.2% in 1998.
Skyway's results benefited from several schedule changes and traffic diverted to
Skyway during and following Northwest Airlines' pilots' strike.
19
<PAGE>
Mail and cargo revenue increased $.3 million, or 2.6%, in 1998 due to the new
markets added during the year.
Revenue from other services increased $2.1 million, or 9.6%, in 1998. Midwest
Express benefited from increased revenue of $2.7 million from the Midwest
Express MasterCard program and $1.2 million in fees from ticket exchanges.
Charter service revenue decreased $2.0 million due to delays placing new
aircraft in scheduled service, requiring the use of the dedicated charter
aircraft. Since Midwest Express provides charter service to several NBA teams,
the delayed start-up of the NBA season also negatively affected charter service
revenue.
Operating Expenses
1998 operating expenses increased $27.1 million, or 8.9%, from 1997, primarily
due to higher labor costs, increased profit sharing, higher maintenance costs
and expenses associated with expanded operations. On a cost per total ASM basis,
Midwest Express' operating expenses decreased 2.6%, from 12.14(cent) to
11.82(cent) in 1998. Cost per total ASM at Skyway decreased .2% from 23.75(cent)
to 23.70(cent) in 1998.
Salaries, wages and benefits increased $20.1 million, or 21.8%, from 1997. On a
cost per total ASM basis, these costs increased from 3.84(cent) in 1997 to
4.18(cent), or 8.7%, in 1998. Major contributors to the labor cost increase
included additional employees necessary for expanded service and administrative
requirements throughout the system, increased labor rates and increased fringe
benefit costs. The labor rate increase was due to an increase in pay scales for
most operations employees at Midwest Express effective in January 1998, as well
as merit increases for salaried employees. These rate adjustments were
implemented based on industry salary surveys and management's desire to increase
pay scales to maintain a competitive position in the industry. Salaries, wages
and benefits were adversely affected by unanticipated delays in completing new
aircraft modifications and refurbishments as initially scheduled. This delay
caused a temporary excess in aircraft flight crews. Profit sharing and incentive
plan costs increased $5.0 million in 1998. The profit sharing and incentive
plans benefit substantially all employees and depend almost entirely on
achieving certain levels of profitability.
Aircraft fuel and oil and associated taxes decreased $7.2 million, or 14.3%,
from 1997. The decrease was primarily the result of into-plane fuel prices
decreasing 22.3% in 1998, averaging 56.8(cent) per gallon versus 73.1(cent) in
1997. The decrease was partially offset by fuel consumption that increased 10.4%
in 1998 primarily because Midwest Express operated 9.4% more aircraft hours. The
Company experienced continued low fuel costs in January 1999, averaging
51.2(cent) per gallon.
Commissions to travel agents and credit card companies decreased by $1.5 million
in 1998, or 4.6%. Commissions, as a percent of passenger revenue, decreased to
8.5% in 1998 from 10.1% in 1997. Most of the reduction was due to the new
commission rate structure implemented in the third quarter of 1997, which
lowered travel agent commissions from 10% to 8%. In addition, more revenue was
realized in 1998 from direct sales via the Company's reservation center, Web
site and ticket counters.
Dining services increased by $2.5 million, or 14.3%, due to a 13.7% increase in
passenger volume at Midwest Express. Total dining services costs (including
food, beverages, linen, catering equipment and supplies) increased from $11.11
per Midwest Express passenger in 1997 to $11.17 in 1998.
Station rental, landing and other fees increased by $1.4 million, or 5.7%, in
1998. Midwest Express' airport costs increased $1.3 million as a result of a
7.6% increase in flight segments. In addition, the Company incurred higher
facility costs and landing fees.
Aircraft maintenance, materials and repairs increased by $8.8 million, or 31.1%,
from 1997. Midwest Express' maintenance costs increased by $9.4 million, or
41.5%, and Skyway's maintenance costs decreased $.6 million, or 10.9%. The
increase was attributable to more flight hours at Midwest Express, higher costs
for major aircraft maintenance that required outsourcing, an increase in accrual
rates for future engine and aircraft overhauls and higher aircraft component
repair costs.
Depreciation and amortization increased by $1.4 million, or 15.9%, in 1998,
primarily as a result of the depreciation associated with aircraft placed in
service, capitalized maintenance and aircraft engine hush kits installed in
1998.
Aircraft rental costs increased $1.8 million, or 10.5%, in 1998 as a result of
Midwest Express leasing two additional aircraft.
Other operating expenses decreased by $.2 million, or .5%, from 1997. Other
operating expenses consist primarily of advertising and promotion, insurance,
property taxes, reservation fees, administration and other items. The decrease
was due to a $1.1 million non-recurring airport rental credit received from
Milwaukee County due to an airport rental surplus, and lower hull and liability
insurance costs. This was offset by higher passenger booking fees, property
taxes, and professional and financial services. Other operating expenses on a
cost per total ASM basis decreased 11.2% to 1.34(cent) in 1998 from 1.51(cent)
in 1997.
Interest Income
Interest income reflects interest earned on the Company's cash and cash
equivalents.
Provision for Income Taxes
Income tax expense in 1998 was $21.2 million, an increase of $6.5 million from
1997. The effective tax rate for 1998 and 1997 was 37.1%. 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 increased $10.9 million, or 43.8%, in 1998. The net income margin
increased to 9.2% in 1998 from 7.2% in 1997.
20
<PAGE>
Year Ended December 31, 1997
Compared to Year Ended December 31, 1996
Operating Revenues
The Company's operating revenues totaled $344.6 million in 1997, a $39.8
million, or 13.1%, increase over 1996. Passenger revenues accounted for 90.3% of
total revenues and increased $34.2 million, or 12.4%, from 1996 to $311.0
million. The increase was attributable to a 12.8% increase in passenger volume,
as measured by revenue passenger miles, offset by a .4% decrease in revenue
yield.
Midwest Express' passenger revenue increased $33.6 million to $272.9 million, or
14.1%, from 1996. This increase was caused by a 12.3% increase in passengers
carried and a .3% increase in revenue yield. Midwest Express' capacity, as
measured by scheduled service ASMs, increased 12.5%. The increase in capacity is
primarily due to the addition of two DC-9 aircraft to scheduled service during
the year. Load factor increased to 64.1% in 1997 from 63.5% in 1996. During the
year, revenue yield was negatively impacted by the reinstatement of the federal
excise tax on passenger tickets effective March 7, 1997, and competitive pricing
pressures on several new routes. Service initiated in March 1997 in the
Milwaukee-Orlando market resulted in lower yields as expected, but higher load
factors than the remainder of the Midwest Express system. Fare increases late in
the third quarter of 1997 contributed favorably to revenue yield. Passenger
revenue at Skyway increased by $.6 million to $38.1 million, or 1.6%, in 1997.
This increase was caused by a 4.4% increase in revenue yield, offset by a 4.3%
decrease in passengers carried. Total capacity decreased 1.0%, as one aircraft
was required for scheduled maintenance during most of the year. Load factor
decreased to 43.6% in 1997 from 44.3% in 1996.
Mail and cargo revenue increased $.2 million, or 1.3%, in 1997. This increase
was due to the aircraft added to scheduled service during the year.
Revenue from other services increased $5.4 million, or 32.6%, in 1997. Midwest
Express benefited from increased revenue of $2.3 million from the Midwest
Express MasterCard program and additional ground service contracts of $1.2
million. Charter service revenue increased $1.2 million, because Midwest Express
had one aircraft dedicated to charter operations during the first four months of
1997 but did not have a dedicated aircraft until the second quarter of 1996.
During portions of the second and third quarters of 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 $35.7 million, or 13.2%, from 1996, primarily
due to expanded operations. On a cost per total ASM basis, Midwest Express'
operating expenses increased 1.4%, from 11.97(cent) in 1996 to 12.14(cent) in
1997. Cost per total ASM at Skyway increased 10.0% from 21.59(cent) to
23.75(cent) in 1997.
Salaries, wages and benefits increased $14.2 million, or 18.2%, from 1996. On a
cost per total ASM basis, these costs increased from 3.61(cent) in 1996 to
3.84(cent), or 6.4%, in 1997. The labor cost increase was primarily due to an
increase in the number of employees necessary for expanded service and
administrative requirements. 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 ground handling 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 1997's second and third quarters. The labor cost
increase was also due to an adjustment in pay scales for most operations
employees at Midwest Express effective in January 1997. These rate adjustments
were implemented based on industry salary surveys and management's desire to
increase pay scales to maintain a competitive position in the industry. Profit
sharing decreased $.5 million in 1997 from 1996.
Aircraft fuel and oil and associated taxes increased $2.8 million, or 6.0%, from
1996. Into-plane fuel prices decreased 5.3% in 1997, averaging 73.1(cent) per
gallon in 1997 and 77.2(cent) in 1996. Fuel consumption increased 12.0% in 1997
because Midwest Express operated 12.1% more aircraft hours.
Commissions increased by $3.2 million, or 11.4%, due to increased passenger
revenue. Of the increase, $2.3 million related to increased travel agency
commissions and $.9 million to increased credit card fees. Commissions as a
percent of passenger revenue decreased from 10.2% in 1996 to 10.1% in 1997 due
to a new commission rate structure effective September 25, 1997, which lowered
travel agent commissions from 10% to 8%. The Company's 1997 operating income
would have increased approximately $3.2 million had the new commission rate
structure been in place during the entire year.
Dining services increased by $2.1 million, or 13.9%, due to increased passenger
volume. Total dining services costs (including food, beverages, linen, catering
equipment and supplies) increased from $10.95 per Midwest Express passenger in
1996 to $11.11 in 1997.
Station rental, landing and other fees increased by $2.9 million, or 13.3%, in
1997. Airport costs at Midwest Express increased $2.6 million as a result of a
9.8% increase in flight segments. In addition, the Company incurred higher
landing fees, security costs and facility rental costs at most airports.
Aircraft maintenance, materials and repairs increased by $6.9 million, or 32.2%,
from 1996. Midwest Express maintenance costs increased by $5.4 million, or
31.1%, and Skyway maintenance costs increased $1.5 million, or 36.5%. The
increase was attributable in part to an unscheduled repair of one MD-88 engine,
which adversely affected costs by $1.3 million. The increase was also
attributable to more flight hours at Midwest Express, an increase in the number
and cost of aircraft component repairs, and an increase in Skyway maintenance
due to scheduled landing gear and propeller repairs and unscheduled engine
maintenance.
Depreciation and amortization increased by $1.0 million, or 12.8%, in 1997,
primarily as a 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 both 1996 and
1997.
Aircraft rental costs increased $1.4 million, or 8.7%, in 1997 as a result of
Midwest Express leasing two additional aircraft.
21
<PAGE>
The increased cost was partially offset by lower lease costs for Skyway's 15
turboprop aircraft that were refinanced in the second and third quarters of
1996, and the decision to exercise purchase options on two leased aircraft in
October 1996. In addition, the Company leased a second spare engine for its
MD-88 aircraft for nine months during 1997.
Other operating expenses increased by $1.2 million, or 3.5%, from 1996. Other
operating expenses consist primarily of advertising and promotion, insurance,
property taxes, reservation fees, administration and other items. Expenses
increased due to additional overnight costs associated with flight schedule
changes, professional and financial services, software costs, and
telecommunication costs. The increased costs were partially offset by decreases
in property taxes, facilities rental, and headquarters relocation costs. Other
operating expenses on a cost per total ASM basis decreased 6.9% from 1.62(cent)
in 1996 to 1.51(cent) in 1997.
Interest Income
Interest income reflects interest income on the Company's cash and cash
equivalents.
Other Income and Expense
Other expenses in 1996 primarily reflected the costs of the secondary public
offering completed in the second quarter.
Provision for Income Taxes
Income tax expense in 1997 was $14.7 million, an increase of $1.2 million from
1996. The effective tax rates for 1997 and 1996 were 37.1% and 38.3%,
respectively.
Net Income
Net income increased by $3.2 million, or 14.7%, in 1997. The net income margin
increased to 7.2% in 1997 from 7.1% in 1996.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $13.5 million at December 31,
1998 compared to $32.1 million at December 31, 1997. Net cash provided by
operating activities totaled $57.5 million during 1998. Net cash used in
investing activities totaled $83.8 million, primarily due to capital
expenditures of $86.2 million, including $11.9 million of purchase deposits on
flight equipment. Net cash provided by financing activities totaled $7.7 million
during 1998.
The Company had a working capital deficit of $42.5 million as of December 31,
1998, versus a $12.9 million deficit on December 31, 1997. 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 which 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 December 31, 1998, 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 $16.1 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, support
financing on the Company's new maintenance facility and for various other
purposes.
Capital expenditures totaled $86.2 million for the period ended December 31,
1998, including $11.9 million of purchase deposits on flight equipment.
Expenditures consisted primarily of aircraft purchases and refurbishment costs.
Other capital expenditures included capitalized engine and airframe overhauls
and aircraft engine hush kit components. The Company expects to incur $63.5
million of capital spending in 1999, $37.8 of which is associated with the MD-80
aircraft acquisition program. The remaining spending primarily relates to
maintenance projects, including completion of the aircraft hush kit program and
acquisition of spare engines and capitalized spare parts. This capital spending
excludes the Company's five aircraft regional jet program, as the decision to
lease versus own these aircraft has not been completed.
During 1997 the Company executed definitive purchase documents to acquire eight
McDonnell Douglas MD-80 series aircraft. The Company financed the first four
deliveries, including refurbishment costs, in 1998 primarily using internal cash
flow, and expects to finance the remaining four aircraft using internal cash
flow as well.
Leases relating to three Midwest Express jet aircraft are guaranteed by
Kimberly-Clark. The Company pays Kimberly-Clark a guarantee fee equal to 1.25%
annually of the outstanding lease commitments. Kimberly-Clark will continue to
guarantee the leases for the three aircraft until the expiration of their
initial lease terms. The first of these jet aircraft leases expires in 2001.
Aircraft lease guarantee fees will be approximately $.1 million in 1999.
The Company's Board of Directors has authorized a $15.0 million common stock
repurchase program. During the third quarter of 1998, the Company repurchased
65,300 shares of common stock totaling $2.0 million. As of December 31, 1998,
the Company purchased a total of 418,625 shares of common stock at a cost of
$6.8 million under the share repurchase program.
In October 1998 Midwest Express moved into a newly constructed maintenance
facility that is owned by Milwaukee County and located at General Mitchell
International Airport. To finance the estimated $8.3 million project, the City
of Milwaukee issued variable-rate demand industrial development revenue bonds.
The Company's variable rent payments are based on the current interest rate on
the City of Milwaukee's outstanding bonds over the 32-year lease term. The bonds
are secured by a promissory note between Midwest Express and the City of
Milwaukee, with further security provided by Firstar Bank Milwaukee, N.A.
The Company believes 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
Forward-Looking Statements -- This Annual Report, 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. The Company's actual results could
22
<PAGE>
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, aircraft
maintenance and refurbishment schedules, potential delays related to acquired
aircraft 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 the Registration Statement on Form S-1 No. 333-03325.
MD-80 Series 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 and fifth aircraft are presently being refurbished
with in-service dates scheduled for May and August. The sixth aircraft will be
received in March and placed in service in October 1999. The seventh and eighth
aircraft will be received in the fourth quarter and will enter service in early
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 Jet Aircraft -- Astral Aviation expects to take delivery of the first
of five new Fairchild Aerospace 328JET aircraft in June 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
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
as deliveries take place. The Company is continuing to evaluate financing
alternatives.
Labor Relations -- In December 1997 Midwest Express pilots elected the Air Line
Pilots Association ("ALPA") for representation in collective bargaining.
Negotiations are in progress. In January 1998, Skyway pilots represented by ALPA
ratified a four-year labor contract. No other employees in the Company are
currently unionized.
Sales Taxes -- During 1996 the Wisconsin Department of Revenue asserted that
Wisconsin sales taxes should be paid in connection with Midwest Express'
purchase of meals from its food caterer. While Midwest Express does not believe
any such sales tax is payable, if the Department of Revenue successfully asserts
its position, then Midwest Express would be liable for back taxes and associated
interest of approximately $.7 million, and would have to pay approximately $.3
million in additional sales taxes annually in the future.
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 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.
Notwithstanding the above, the Company has developed plans 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, operational, 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. This system -- which is used for purchasing, inventory, accounts
payable and aircraft maintenance planning and records -- is scheduled to be
modified by September 1999. The Company is also evaluating systems that include
embedded technology, such as microcontrollers in aircraft parts, airport
equipment and facility infrastructures. The Company estimates that the total
cost of achieving year 2000 readiness will approximate $1.0 million,
approximately 50% of which is from reallocation of existing internal resources.
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 have been
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
service or commodity used, and the response received. The Company is also
participating with the airline industry to identify potential year 2000 issues
at airports and within industry infrastructure, including common vendors,
suppliers, government agencies and the Federal Aviation Administration ("FAA").
FAA operations are made possible by many critical computer systems; without
these specialized systems, the FAA could not effectively control the current
level of air traffic, target airlines for inspection, or provide up-to-date
weather conditions to pilots and air traffic controllers.
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 will be developed during the first six
months of 1999 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.
Maintenance Program -- The Company is evaluating a new program for performing
airframe maintenance overhauls in 1999 that may necessitate a change in
accounting principle. This proposed change will eliminate accruals of heavy
maintenance expense and amortization of capitalized maintenance, which will
result in such costs being expensed as incurred. Under the proposed program,
major airframe maintenance will be performed at more frequent intervals and many
duplicate tasks eliminated. The Company believes that the financial impact of
making the required change will not be material to the Company's consolidated
financial position, results of operations or cash flows.
23
<PAGE>
REPORT OF MANAGEMENT
To the Shareholders of Midwest Express Holdings, Inc.:
The management of Midwest Express Holdings, Inc. is responsible for the
preparation, content, integrity and objectivity of the financial statements and
other information contained in this annual report. The financial statements were
prepared using generally accepted accounting principles, applied on a consistent
basis. The statements have been audited by Deloitte & Touche LLP, independent
auditors, whose report appears on the next page.
The Company maintains a system of internal control that is supported by written
policies and procedures, and is monitored by management and the internal audit
function. Although all internal control systems have inherent limitations,
including the possibility of circumvention and overriding controls, management
believes the Company's internal control system provides reasonable assurance as
to the integrity and reliability of the financial statements and that its assets
are safeguarded against unauthorized acquisition, use or disposition.
Appropriate actions are taken by management to correct deficiencies as they are
identified.
The Audit Committee of the Board of Directors is composed entirely of outside
directors. The Committee meets periodically with the Company's management and
internal audit function and with its independent auditors to review auditing,
internal control and financial reporting matters.
Based on its assessment of internal control as of December 31, 1998, management
believes its system of internal control over the preparation of financial
statements and the safeguarding of assets is effective.
/s/ Timothy E. Hoeksema
Timothy E. Hoeksema
Chairman, President and Chief Executive Officer
/s/ Robert S. Bahlman
Robert S. Bahlman
Senior Vice President and Chief Financial Officer
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Midwest Express Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Midwest Express
Holdings, Inc. and its subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Midwest Express Holdings, Inc. and
its subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
January 29, 1999
25
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
MIDWEST EXPRESS HOLDINGS, INC.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997 1996
Operating revenues:
Passenger service................ $352,933 $311,022 $276,792
Cargo............................ 11,761 11,466 11,316
Other............................ 24,180 22,069 16,638
-------- -------- --------
Total operating revenues....... $388,874 $344,557 $304,746
-------- -------- --------
Operating expenses:
Salaries, wages and benefits..... 112,315 92,207 78,015
Aircraft fuel and oil............ 42,925 50,107 47,274
Commissions...................... 30,080 31,535 28,310
Dining services.................. 19,633 17,181 15,078
Station rental, landing and
other fees...................... 25,933 24,526 21,652
Aircraft maintenance materials
and repairs..................... 36,961 28,190 21,316
Depreciation and amortization.... 10,021 8,645 7,663
Aircraft rentals................. 19,290 17,453 16,054
Other............................ 36,061 36,243 35,025
-------- -------- --------
Total operating expenses 333,219 306,087 270,387
-------- -------- --------
Operating income................... 55,655 38,470 34,359
-------- -------- --------
Other income (expense):
Interest income.................. 1,727 1,419 1,084
Interest expense................. (280) (95) -
Other, net....................... (75) (162) (211)
-------- -------- --------
Total other income (expense)... 1,372 1,162 873
-------- -------- --------
Income before income taxes......... 57,027 39,632 35,232
Provision for income taxes......... 21,158 14,692 13,482
-------- -------- --------
Net income......................... $ 35,869 $ 24,940 $ 21,750
======== ======== ========
Net income per share - basic....... $2.54 $1.76 $1.51
===== ===== =====
Net income per share - duluted..... $2.51 $1.74 $1.50
===== ===== =====
See notes to consolidated financial statements.
26
<PAGE>
CONSOLIDATED BALANCE SHEETS
MIDWEST EXPRESS HOLDINGS, INC.
YEARS ENDED DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
1998 1997
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 13,455 $ 32,066
Accounts receivable:
Traffic, less allowance for doubtful accounts
of $251 in 1998 and $231 in 1997................ 5,450 5,106
Other receivables................................ 3,804 444
-------- --------
Total accounts receivable...................... 9,254 5,550
Inventories........................................ 4,020 3,942
Prepaid expenses:
Commissions...................................... 2,931 1,509
Other............................................ 3,427 1,905
-------- --------
Total prepaid expenses......................... 6,358 3,414
Aircraft and modifications intended to be
financed by sale and leaseback transactions...... 951 6,000
Deferred income taxes.............................. 5,521 4,655
-------- --------
Total current assets........................... 39,559 55,627
-------- --------
Property and equipment, net........................ 160,583 89,156
Landing slots and leasehold rights, less
accumulated amortization of $2,178 in
1998 and $1,850 in 1997.......................... 4,572 4,900
Purchase deposits on flight equipment.............. 13,383 14,500
Other assets....................................... 2,380 2,565
-------- --------
Total assets....................................... $220,477 $166,748
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 5,064 $ 5,560
Air traffic liability.............................. 35,285 28,934
Accrued liabilities:
Scheduled maintenance expense.................... 5,182 7,115
Accrued profit sharing........................... 9,518 4,855
Vacation pay..................................... 4,066 3,586
Frequent Flyer awards............................ 3,653 3,400
Other............................................ 19,253 15,033
-------- --------
Total current liabilities...................... 82,021 68,483
-------- --------
Long-term debt....................................... 3,206 3,333
Deferred income taxes................................ 13,647 12,509
Noncurrent scheduled maintenance expense............. 12,082 7,594
Accrued pension and other postretirement benefits.... 6,201 5,462
Other noncurrent liabilities......................... 5,688 5,969
-------- --------
Total liabilities.................................... 122,845 103,350
-------- --------
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, no shares issued or outstanding....... 145 96
Additional paid-in capital......................... 9,680 9,531
Treasury stock, at cost; 381,015 shares in
1998 and 223,490 shares in 1997................... (6,401) (4,572)
Retained earnings.................................. 94,208 58,343
-------- --------
Total shareholders' equity........................... 97,632 63,398
-------- --------
Total liabilities and shareholders' equity........... $220,477 $166,748
======== ========
See notes to consolidated financial statements.
27
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
MIDWEST EXPRESS HOLDINGS, INC.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1998 1997 1996
Operating activities:
Net income......................................... $35,869 $24,940 $21,750
Items not involving the use of cash:
Depreciation and amortization.................... 10,021 8,645 7,663
Deferred income taxes............................ 272 1,294 (3,918)
Other............................................ 4,974 4,335 3,245
Changes in operating assets and liabilities:
Accounts receivable.............................. (3,704) (319) 483
Inventories...................................... (78) (820) (396)
Prepaid expenses................................. (2,990) 833 (715)
Accounts payable................................. (496) 1,876 (3)
Accrued liabilities.............................. 7,281 1,236 12,139
Air traffic liability............................ 6,352 6,891 4,793
------- ------- -------
Net cash provided by operating activities......... 57,501 48,911 45,041
------- ------- -------
Investing activities:
Capital expenditures.............................. (74,332) (27,617) (25,607)
Aircraft acquisitions and modifications financed
by or intended to be financed by sale and
leaseback transactions........................... 557 (12,520) (86,771)
Purchase deposits on flight equipment............. (10,800) (14,500) -
Proceeds from sale of property and equipment...... 336 196 22
Other............................................. 451 (2,128) (151)
------- ------- -------
Net cash used in investing activities............. (83,788) (56,569)(112,507)
------- ------- -------
Financing Activities:
Proceeds from sale and leaseback transactions..... 4,492 15,566 83,895
Purchase of treasury stock........................ (2,003) (1,977) (2,790)
Other............................................. 5,187 (1,454) (676)
------- ------- -------
Net cash provided by financing activities......... 7,676 12,135 80,429
------- ------- -------
Net (decrease) increase in cash and
cash equivalents................................ (18,611) 4,477 12,963
Cash and cash equivalents, beginning of year...... 32,066 27,589 14,626
------- ------- -------
Cash and cash equivalents, end of year............ $13,455 $32,066 $27,589
======= ======= =======
Supplemental cash flow information:
Cash paid for:
Income taxes................................... $22,754* $11,948* $19,776*
Interest....................................... $ 280 $ 95 $ -
Supplemental schedule of non-cash
financing activities:
Long-term debt assumed in connection
with capital expenditures....................... $ - $ 3,487 $ -
Supplemental schedule of investing activities:
Transfer of flight equipment from purchase
deposits to property and equipment............. $11,917 $ - $ -
* Included in taxes paid are amounts paid to Kimberly-Clark in accordance with
the Tax Agreement totaling $4,535 in 1998, $5,996 in 1997 and $9,243 in 1996.
See notes to consolidated financial statements.
28
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
MIDWEST EXPRESS HOLDINGS, INC.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Common Additional Total
Stock $.01 Paid-in Treasury Retained Shareholders'
par value Capital Stock Earnings Equity
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995.................... $ 64 $9,546 $ - $11,654 $21,264
Net income...................................... - - - 21,750 21,750
Purchase of 103,700 shares of treasury stock.... - - (2,790) - (2,790)
Issuance of treasury stock upon exercise
of stock options and related tax benefits...... - (5) 107 - 102
Other........................................... - 4 11 - 15
---- ----- ------ ------ ------
Balances at December 31, 1996.................... 64 9,545 (2,672) 33,404 40,341
Net income...................................... - - - 24,940 24,940
Stock split effected in the form of a dividend.. 32 (31) - (1) -
Purchase of 80,000 shares of treasury stock..... - - (1,977) - (1,977)
Issuance of treasury stock upon exercise
of stock options and related tax benefits..... - 3 52 - 55
Other........................................... - 14 25 - 39
---- ----- ------ ------ ------
Balances at December 31, 1997.................... 96 9,531 (4,572) 58,343 63,398
Net income...................................... - - - 35,869 35,869
Stock split effected in the form of a dividend.. 49 (49) - - -
Purchase of 65,300 shares of treasury stock..... - - (2,003) - (2,003)
Issuance of treasury stock upon exercise
of stock options and related tax benefits..... - 122 132 - 254
Other........................................... - 76 42 (4) 114
---- ----- ------ ------ ------
Balances at December 31, 1998.................... $145 $9,680 $(6,401) $94,208 $97,632
==== ====== ======= ======= =======
See notes to consolidated financial statements.
</TABLE>
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MIDWEST EXPRESS HOLDINGS, INC.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Note 1. Business and Basis of Presentation
Basis of Presentation
The accompanying Consolidated Financial Statements of Midwest Express Holdings,
Inc. (collectively, the "Company") include the accounts of Midwest Express
Airlines, Inc. ("Midwest Express"), a wholly owned subsidiary of the Company,
and Astral Aviation, Inc. ("Astral"), a wholly owned subsidiary of Midwest
Express that does business as Skyway Airlines. All inter-company balances and
transactions have been eliminated.
Nature of Operations
Midwest Express is a U.S. air carrier providing non-stop scheduled passenger
service between Milwaukee and 26 destinations in North America. The Company also
provides aircraft charter services, air freight and other airline services.
Midwest Express established Omaha, Nebraska, as its first base of operations
outside of Milwaukee in May 1994 and provides nonstop jet service between Omaha
and six destinations. Astral provides regional scheduled passenger service to
cities primarily in the upper Midwest.
Stock Splits
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, 1997, to shareholders of record as of May 12,
1997.
On April 22, 1998, 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 27, 1998, to shareholders of record as of May 11,
1998.
Note 2. Accounting Policies
The accounting policies of the Company conform to generally accepted accounting
principles and to accounting practices generally followed in the airline
industry. Significant policies followed are described below.
Cash and Cash Equivalents
The Company considers all highly liquid investments with purchased maturities of
three months or less to be cash equivalents. They are carried at cost, which
approximates market.
Inventories
Inventories consist primarily of aircraft maintenance parts, maintenance
supplies and fuel stated at the lower of cost on the first-in, first-out (FIFO)
method or market and are expensed when used in operations.
Property and Equipment
Property and equipment is stated at cost and is depreciated on the straight-line
method applied to each unit of property for financial reporting purposes and by
use of accelerated methods for income tax purposes. Aircraft are depreciated to
estimated residual values, and any gain or loss on disposal would be reflected
in income. The depreciable lives for the principal asset categories are as
follows:
Asset Category Depreciable Life
-------------- ----------------
Flight equipment 10 to 15 years
Other equipment 5 to 8 years
Office furniture and equipment 5 to 20 years
Buildings 40 years
Building improvements Lesser of 20 years or
remaining life of building
Other Assets
Airport take-off and landing slots have an unlimited life, have historically
appreciated in value and are occasionally traded, sold or leased among airlines.
The cost of take-off and landing slots is amortized on the straight-line method
over 20 years, consistent with industry practice. The cost of airport leasehold
rights is amortized on the straight-line method over the term of the lease. The
cost of capitalized software is amortized on the straight-line method over five
years or less.
Revenue Recognition
Passenger and cargo revenues are recognized in the period when the service is
provided. Contract maintenance revenue is recognized when work is completed and
invoiced. The estimated liability for sold, but unused, tickets is included in
current liabilities as air traffic liability.
Maintenance and Repair Costs
Routine maintenance and repair costs for owned and leased aircraft are charged
to expense when incurred. Depending on the particular aircraft or engine, major
airframe and engine maintenance costs are either (1) accrued to expense on the
basis of estimated future costs and the estimated number of future flight hours
or the number of future take-offs and landings between overhauls or (2)
capitalized when incurred and amortized on the basis of the estimated number of
future flight hours or the number of future take-offs and landings between
overhauls. The actual maintenance and repair costs to be incurred could differ
from the Company's estimates.
Frequent Flyer Program
The estimated incremental cost of providing future transportation in conjunction
with the Company's Frequent Flyer program is accrued based on estimated
redemption percentages applied to actual mileage recorded in members' accounts.
The ultimate cost, however, will depend on the actual redemption of Frequent
Flyer miles and may be greater than amounts accrued at December 31, 1998.
Postretirement Health Care and Life Insurance Benefits
The costs of health care and life insurance benefit plans for retired employees
are accrued over the working lives of employees in accordance with Statement of
Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires that deferred income taxes
be determined under the asset and liability method. Deferred income taxes have
been recognized for the future tax consequences of temporary differences by
applying enacted statutory tax rates applicable to differences between the
financial reporting and the tax bases of assets and liabilities.
Prior to 1995, the Company was a member of the Kimberly-Clark consolidated group
and, as such, filed a consolidated federal income tax return with Kimberly-Clark
and its U.S. subsidiaries. The Company also filed consolidated state tax returns
with Kimberly-Clark and certain of its subsidiaries, as well as separately in
various states. Income tax expense and deferred income tax assets and
liabilities are reflected in the Company's financial statements in accordance
with SFAS No. 109.
Leases
Rental obligations under operating leases for aircraft, facilities and equipment
are charged to expense on the straight-line method over the term of the lease.
30
<PAGE>
Hedging Transactions
The Company has entered into hedging arrangements to reduce its exposure to
fluctuations in the price of jet fuel. Contracts entered into were not material
as of December 31, 1998. Net settlements are recorded as adjustments to aircraft
fuel expense.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Future results could differ from those estimates.
Accounting Standard to Be Adopted
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.
Reclassifications
Certain reclassifications have been made in prior year financial statements to
conform to the current year presentation.
Note 3. Property and Equipment
As of December 31, 1998 and 1997, property and equipment consisted of the
following (in thousands):
1998 1997
Flight equipment..................... $150,622 $119,409
Other equipment...................... 10,143 8,547
Buildings and improvements........... 17,746 16,911
Office furniture and equipment....... 10,140 8,430
Construction in progress............. 54,633 6,751
-------- --------
243,284 160,048
Less accumulated depreciation........ (82,701) (70,892)
-------- --------
Property and equipment, net.......... $160,583 $ 89,156
======== ========
Note 4. Leases
The Company leases aircraft, terminal space, office space and warehouse space.
Future minimum lease payments required under operating leases having initial or
remaining noncancelable lease terms in excess of one year as of December 31,
1998 were as follows (in thousands):
Year ended December 31,
1999......................................... $ 23,591
2000......................................... 19,942
2001......................................... 15,894
2002......................................... 13,754
2003......................................... 13,226
2004 and thereafter.......................... 78,440
--------
$164,847
========
As of December 31, 1998, the Company had 12 of its jet aircraft in service under
operating leases, three of which have been guaranteed by Kimberly-Clark. These
leases have expiration dates ranging from 2000 through 2008 and can generally be
renewed, based on fair market value at the end of the lease term, for one to
three years. Ten of the leases include purchase options at or near the end of
the lease term at fair market value, but generally not in excess of the defined
lessor's cost of the aircraft.
As of December 31, 1998, the Company's turboprop fleet was financed under
operating leases with initial lease terms of five to 12 years, and expiration
dates ranging from 2001 through 2008. These leases permit renewal for various
periods at rates approximating fair market value and purchase options at or near
the end of the lease term at fair market value.
In October 1998 Midwest Express moved into a newly constructed maintenance
facility that is owned by Milwaukee County and located at General Mitchell
International Airport . To finance the estimated $8.3 million project, the City
of Milwaukee issued variable-rate demand industrial development revenue bonds.
The Company's variable rent payments are based on the current interest rate on
the City of Milwaukee's outstanding bonds over the 32-year lease term. The bonds
are secured by a promissory note between Midwest Express and the City of
Milwaukee, with further security provided by Firstar Bank Milwaukee, N.A.
Rent expense for all operating leases, excluding landing fees, was $28,088,000,
$25,435,000 and $24,356,000 for 1998, 1997 and 1996, respectively.
Note 5. Financing Agreements
At December 31, 1998, the Company had available two credit facilities: (1) a
$55.0 million revolving credit facility with three banks and (2) a $20.0 million
secondary revolving credit facility with Kimberly-Clark. Borrowings under the
Kimberly-Clark facility must be repaid prior to repayments on the bank credit
facility. The bank credit facility requires an annual commitment fee of 12.5
basis points on the average unused commitment with interest payable on the
outstanding principal balance at LIBOR plus 50 basis points. The Kimberly-Clark
facility does not require a commitment fee, and interest will be at a rate equal
to the then-current rate of interest under the bank credit facility plus 100
basis points. There were no outstanding borrowings under these agreements at
December 31, 1998, except for letters of credit totaling approximately
$16,150,000 that reduce the amount of available credit.
In August 1997 the Company purchased a headquarters building, which it
previously leased. As part of the transaction, the Company assumed $3,487,000 of
long-term debt. The mortgage note has an interest rate of 8.25% and is payable
in monthly installments through April 2011. Future maturities of long-term debt
for the next five years are as follows (in thousands):
Year ended December 31,
1999................................. $127
2000................................. 138
2001................................. 182
2002................................. 214
2003................................. 233
The fair value of the Company's borrowing under this agreement approximates its
carrying value as of December 31, 1998.
Note 6. Retirement and Benefit Plans
The Company adopted SFAS No. 132, "Employer's Disclosures about Pensions and
Other Postretirement Benefits," in 1998. SFAS No. 132 revises disclosure
requirements for such pension and postretirement benefit plans to, among other
things, standardize certain disclosures and eliminate certain other disclosures
no longer deemed useful. SFAS No. 132 does not change the measurement or
recognition criteria for such plans.
Defined Benefit Plans
Midwest Express has two defined benefit pension plans which, in total cover
substantially all of its employees. The benefits for these plans are based
primarily on years of service and employee compensation. It is Midwest Express'
policy to annually fund at least the minimum contribution as required by the
Employee Retirement Income Security Act (ERISA) of 1974.
31
<PAGE>
The following table sets forth the funded status of the plans at December 31 (in
thousands):
Midwest Express
Pension Plan
1998 1997
Change in Benefit Obligation
Net benefit obligation at beginning of year............ $18,552 $11,881
Service cost........................................... 2,456 1,656
Interest cost.......................................... 1,676 1,132
Actuarial loss......................................... 4,953 3,900
Gross benefits paid.................................... (23) (17)
------- -------
Net benefit obligation at end of year.................. $27,614 $18,552
======= =======
Change in Plan Assets
Fair value of assets at beginning of year.............. $12,331 $ 7,449
Actual return on plan assets........................... 1,705 1,516
Employer contributions................................. 3,726 3,383
Gross benefits paid.................................... (23) (17)
------- -------
Fair value of plan assets at end of year............... $17,739 $12,331
======= =======
Funded status at end of year........................... $(9,875) $(6,221)
Unrecognized net actuarial loss........................ 7,900 3,856
Unrecognized prior service cost........................ (28) (31)
Unrecognized net transition obligation................. 86 109
------- -------
Accrued benefit liability.............................. $(1,917) $(2,287)
======= =======
Amounts recognized in the balance sheet consist of an accrued benefit liability
of $1,917,000 and $2,287,000 on December 31, 1998 and 1997, respectively.
Weighted-average assumptions as of December 31
Discount rate.......................................... 7.00% 7.25%
Expected return on plan assets......................... 10.00% 10.00%
Rate of compensation increase.......................... 4.25% 4.25%
Supplemental
Pension Plan
1998 1997
Change in Benefit Obligation
Net benefit obligation at beginning of year............ $ 1,152 $ 511
Service cost........................................... 52 45
Interest cost.......................................... 81 73
Actuarial loss......................................... 5 523
------- -------
Net benefit obligation at end of year.................. $ 1,290 $ 1,152
======= =======
Funded status at end of year........................... $(1,290) $(1,152)
Unrecognized net actuarial loss........................ 641 672
Unrecognized prior service cost........................ 50 55
Unrecognized net transition obligation................. 15 19
------- -------
Accrued benefit liability.............................. $ (584) $ (406)
======= =======
Amounts recognized in the balance sheet consist of:
Accrued benefit liability............................ $ (584) $ (442)
Intangible asset..................................... _ 36
------- -------
Net amount recognized at end of year................... $ (584) $ (406)
======= =======
Weighted-average assumptions as of December 31
Discount rate.......................................... 7.00% 7.25%
Rate of compensation increase.......................... 4.25% 4.25%
The net periodic benefit cost of defined benefit pension plans for the years
ending December 31 includes the following (in thousands):
Midwest Express
Pension Plan
Components of Net Periodic Benefit Cost 1998 1997 1996
Service cost........................................... $2,456 $1,656 $1,488
Interest cost.......................................... 1,676 1,132 915
Expected return on assets.............................. (1,175) (994) (664)
Amortization of:
Transition obligation................................ 23 23 23
Prior service cost................................... (3) (2) (2)
Actuarial loss....................................... 379 37 87
------ ------ ------
Total net periodic benefit cost........................ $3,356 $1,852 $1,847
====== ====== ======
Supplemental
Pension Plan
Components of Net Periodic Benefit Cost 1998 1997 1996
Service cost........................................... $ 52 $ 45 $ 19
Interest cost.......................................... 81 73 38
Amortization of:
Transition obligation................................ 4 4 4
Prior service cost................................... 5 5 5
Actuarial loss....................................... 36 30 12
------ ------ ------
Total net periodic benefit cost........................ $ 178 $ 157 $ 78
====== ====== ======
Postretirement Health Care and Life Insurance Benefits
Midwest Express allows retirees to participate in unfunded health care and life
insurance benefit plans. Benefits are based on years of service and age at
retirement. The plans are principally noncontributory for current retirees, and
are contributory for most future retirees.
The following table sets forth the status of the plans at December 31 (in
thousands):
1998 1997
Change in Benefit Obligation
Net benefit obligation at beginning of year............ $ 2,151 $ 1,195
Service cost........................................... 270 211
Interest cost.......................................... 176 141
Actuarial loss......................................... 128 604
------- -------
Net benefit obligation at end of year.................. $ 2,725 $ 2,151
======= =======
Funded status at end of year........................... $(2,725) $(2,151)
Unrecognized net actuarial loss........................ 380 254
------- -------
Accrued benefit liability.............................. $(2,345) $(1,897)
======= =======
Amounts recognized in the balance sheet consist of:
Accrued benefit liability............................ $(2,725) $(2,151)
Accumulated other comprehensive income............... 380 254
------- -------
Net amount recognized at end of year................... $(2,345) $(1,897)
======= =======
Weighted-average assumptions as of December 31
Discount rate.......................................... 7.00% 7.25%
Rate of compensation increase.......................... 4.25% 4.25%
The net periodic benefit cost of postretirement health care and life insurance
benefits for the years ending December 31 includes the following (in thousands):
Components of Net Periodic Benefit Cost 1998 1997 1996
Service cost........................................... $270 $211 $180
Interest cost.......................................... 176 141 89
Actuarial loss (gain).................................. 2 - (6)
---- ---- ----
Total net periodic benefit cost........................ $448 $352 $263
==== ==== ====
32
<PAGE>
The assumed health care cost trend rate was approximately 10%, declining
annually to a rate of 6% by the year 2005, and remaining level thereafter. A
change of one percentage point would not be significant.
Defined Contribution Plans
The Company has two voluntary defined contribution investment plans covering
substantially all employees. Under these plans, the Company matches a portion of
employee contributions. Amounts expensed and reflected in the accompanying
income statements were $1,471,000, $1,498,000 and $1,175,000 in 1998, 1997 and
1996, respectively.
Profit Sharing Plans
The Company has three profit sharing plans: an employee profit sharing plan for
substantially all employees of Midwest Express, an employee profit sharing plan
for substantially all employees of Astral and an Annual Incentive Plan for key
management employees. Company contributions for all plans are based entirely on
achieving specified levels of profitability. The Company expensed $9,984,000,
$4,938,000 and $5,370,000 under these plans during 1998, 1997 and 1996,
respectively.
Note 7. Net Income Per Share
Effective in 1997, the Company adopted SFAS No.128, "Earnings Per Share," which
established new standards for the calculation of net income per share.
Reconciliations of the numerator and denominator of the basic and diluted per
share computations are summarized as follows (in thousands, except per share
amounts):
1998 1997 1996
Net Income Per Share - Basic:
Net income (numerator)............................. $35,869 $24,940 $21,750
Weighted average shares outstanding
(denominator)..................................... 14,102 14,197 14,390
------- ------- -------
Net income per share - basic....................... $ 2.54 $ 1.76 $ 1.51
======= ======= =======
Net Income Per Share - Diluted:
Net income (numerator)............................. $35,869 $24,940 $21,750
Weighted average shares outstanding
(denominator)..................................... 14,102 14,197 14,390
Effect of dilutive securities:
Stock options...................................... 196 113 76
Shares issuable under the 1995 Stock Plan
for Outside Directors............................. 8 5 2
------- ------- -------
Weighted average shares outstanding assuming
dilution (denominator)............................ 14,306 14,315 14,468
------- ------- -------
Net income per share - diluted..................... $ 2.51 $ 1.74 $ 1.50
======= ======= =======
Note 8. Shareholders' Equity
In 1996 the Board of Directors adopted a shareholder rights plan and made a
dividend distribution of one Preferred Share Purchase Right ("Right") on each
outstanding share of the Company's common stock. As a result of the 3-for-2
stock splits effected in May 1997 and 1998, four-ninths of a Right is now
associated with each share of common stock. The Rights are exercisable only if a
person or entity acquires 15% or more of the common stock of the Company or
announces a tender offer for 15% or more of the common stock. Each Right
initially entitles its holders to buy one one-hundredth share of the Company's
Series A Preferred Stock at an exercise price of $100, subject to adjustment. If
a person or entity acquires 15% or more of the Company's common stock, 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 expire in 2006.
Under the Company's 1995 Stock Option Plan, the Compensation Committee of the
Board of Directors may grant options, at its discretion, to purchase shares of
common stock to certain employees. An aggregate of 1,548,900 shares of common
stock is reserved for issuance under the Plan. Under the Plan, options granted
have an exercise price equal to 100% of the fair market value of the underlying
stock at the date of grant. Granted options become exercisable 30% after the
first year, 30% after the second year and the remaining 40% after the third
year, unless otherwise determined, and have a maximum term of 10 years.
Transactions with respect to the Plan have been adjusted to reflect the effect
of the stock splits and are summarized as follows:
Weighted Average
Shares Exercise Price
Options outstanding at January 1, 1996............ 292,500 $ 8.00
Granted........................................ 22,500 14.00
Exercised...................................... (10,125) 8.00
Forfeited...................................... (38,250) 8.00
------- -------
Options outstanding at December 31, 1996.......... 266,625 $ 8.51
Granted........................................ 285,750 16.04
Exercised...................................... (6,750) 8.00
Forfeited...................................... (4,500) 16.11
------- -------
Options outstanding at December 31, 1997.......... 541,125 $ 12.43
Granted........................................ 285,750 30.50
Exercised...................................... (19,000) 11.90
Forfeited...................................... (45,900) 24.41
------- -------
Options outstanding at December 31, 1998.......... 761,975 $ 18.49
======= =======
Options exercisable at December 31, 1998.......... 316,250 $ 10.17
======= =======
Options exercisable at December 31, 1998 included 227,500 options with an
exercise price of $8.00, 13,500 options with an exercise price of $14.00, 6,750
options with an exercise price of $15.14 and 68,500 options with an exercise
price of $16.11. The following table summarizes information concerning currently
outstanding options:
Weighted
Average Weighted
Remaining Average
Number Contractual Exercise
Range of Exercise Prices Outstanding Life Price
$8.00.......................... 227,500 6.8 years $ 8.00
$14.00 - $16.11................ 275,725 8.1 years 15.86
$30.52 - $30.88................ 258,750 9.6 years 30.53
------- --------- ------
Options outstanding at
December 31, 1998.............. 761,975 8.2 years $18.49
======= ========= ======
33
<PAGE>
In 1996 the Company adopted the disclosure requirements of SFAS No. 123
"Accounting for Stock-Based Compensation" (SFAS 123). The Company has elected to
continue to follow the provisions of Accounting Principles Board No. 25
"Accounting for Stock Issued to Employees" and its related interpretations;
accordingly, no compensation cost has been reflected in the financial statements
for its stock option plan. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant dates for awards under
those plans consistent with the method of SFAS 123, the Company's net income and
net income per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share amounts):
1998 1997 1996
Net income:
As reported.................. $ 35,869 $ 24,940 $ 21,750
Pro forma.................... $ 34,514 $ 24,461 $ 21,535
Net income per share - basic:
As reported.................. $ 2.54 $ 1.76 $ 1.51
Pro forma.................... $ 2.45 $ 1.72 $ 1.49
Net income per share - diluted:
As reported.................. $ 2.51 $ 1.74 $ 1.50
Pro forma.................... $ 2.41 $ 1.71 $ 1.49
For purposes of these disclosures, the fair value of each option granted was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions:
1998 1997 1996
Expected volatility.............. 31.6% 27.4% 42.2%
Risk-free interest rate.......... 4.5% 5.4% 5.3%
Forfeiture rate.................. 5.0% 5.0% 4.0%
Dividend rate.................... 0.0% 0.0% 0.0%
Expected life in years........... 5 5 5
Note 9. Income Taxes
The provision for income taxes for the years ended December 31, 1998, 1997 and
1996 consisted of the following (in thousands):
1998 1997 1996
Currently payable:
Federal............................ $ 17,611 $ 11,314 $ 14,780
State.............................. 3,275 2,084 2,620
-------- -------- --------
20,886 13,398 17,400
-------- -------- --------
Deferred (Credit):
Federal............................ 246 1,169 (3,991)
State.............................. 26 125 73
-------- -------- --------
272 1,294 (3,918)
-------- -------- --------
Total provision for income taxes... $ 21,158 $ 14,692 $ 13,482
======== ======== ========
A reconciliation of income taxes at the U.S. federal statutory tax rate to the
effective tax rate follows:
1998 1997 1996
Tax at statutory U.S. tax rates.... 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit........... 3.8 3.8 3.8
Other, net......................... (1.7) (1.7) (0.5)
---- ---- ----
Provision for income taxes......... 37.1% 37.1% 38.3%
==== ==== ====
Temporary differences that gave rise to the deferred tax assets and liabilities
comprise the following (in thousands):
1998 1997
Current deferred income tax assets attributable to:
Accrued liabilities................................... $ 2,550 $ 1,742
Maintenance expense liability......................... 2,633 2,633
Other................................................. 338 280
-------- -------
Net current deferred tax assets....................... $ 5,521 $ 4,655
======== =======
Noncurrent deferred income tax assets (liabilities)
attributable to:
Excess of tax over book depreciation.................. $(20,467) $(18,997)
Maintenance expense liability......................... 3,692 2,943
Pension liability..................................... 1,794 1,831
Other................................................. 1,334 1,714
-------- --------
Net noncurrent deferred tax liabilities............... $(13,647) $(12,509)
======== ========
In connection with the Company's initial public offering in 1995, the Company,
Midwest Express, Astral and Kimberly-Clark entered into a Tax Allocation and
Separation Agreement (`'Tax Agreement"). Pursuant to the Tax Agreement, the
Company is treated for tax purposes as if it purchased all of Midwest Express'
assets at the time of the Offering, and as a result, the tax bases of Midwest
Express' assets were increased to the deemed purchase price of the assets. The
tax on the amount of the gain on the deemed asset purchase was paid by
Kimberly-Clark. This additional basis is expected to result in increased income
tax deductions and, accordingly, may reduce income taxes otherwise payable by
the Company. Pursuant to the Tax Agreement, the Company will pay to
Kimberly-Clark the amount of the tax benefit associated with this additional
basis (retaining 10% of the tax benefit), as realized on a quarterly basis,
calculated by comparing the Company's actual taxes to the taxes that would have
been owed had the increase in basis not occurred. In the event of certain
business combinations or other acquisitions involving the Company, tax benefit
amounts thereafter will not take into account, under certain circumstances,
income, losses, credits or carryovers of businesses other than those
historically conducted by Midwest Express or the Company. Except for the 10%
benefit, the effect of the Tax Agreement is to put the Company in the same
financial position it would have been in had there been no increase in the tax
bases of Midwest Express' assets. The effect of the retained 10% benefit is
reflected in the financial statements as a reduction in the Company's provision
for income taxes.
Note 10. Commitments and Contingencies
At December 31, 1998, the Company had purchase commitments approximating
$12,678,000 for capital expenditures.
In February 1997 Midwest Express committed to pay $9,250,000 over 15 years for
the naming rights to the Midwest Express Center, an 800,000-square-foot
convention center in Milwaukee that opened in July 1998.
During 1997 the Company executed definitive purchase documents to acquire eight
McDonnell Douglas MD-80 series aircraft. The Company took delivery of four of
the aircraft in 1998 and will take delivery of the four remaining aircraft in
1999. The Company expects that the cost of this entire project, including
aircraft refurbishment, modification and support equipment, will total
approximately $120.0 million through the year 2000, of which approximately $63.6
million has been expended through December 31, 1998.
34
<PAGE>
During 1998 the Company placed firm orders on five new Fairchild Aerospace
328JET aircraft, with options for 10 additional aircraft, exercisable after
2001. The Company will take delivery of all five firm-ordered aircraft in 1999.
The Company expects that the cost of these first five aircraft, including
purchase price and support equipment, will total approximately $55.0 million and
will be financed as deliveries take place.
The Company is party to routine litigation incidental to its business. In the
opinion of management, the final disposition of these matters will have no
material adverse effect on the consolidated financial statements.
Note 11. Segment Reporting
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," in 1998. 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. No single customer accounted for more than 10% of revenue.
The accounting policies of the reportable segments are the same as those
described in Note 2.
Midwest Express offers nonstop jet service to 27 major destinations throughout
North America by offering single-class, premium service at competitive coach
fares. At December 31, 1998, Midwest Express operated a fleet of 27 aircraft _
24 DC-9s and three MD-80s.
Skyway Airlines offers point-to-point service in select markets and increases
traffic for Midwest Express by providing passengers with connecting service to
jet flights. At December 31, 1998, Skyway Airlines operated a fleet of 15
Beechcraft 1900D turboprop aircraft.
Revenue for passengers who travel on both carriers within a single itinerary is
allocated to each entity based on a formula that is dependent upon the fare type
paid by the passenger. There were 88,154, 76,508 and 81,561 passengers in 1998,
1997 and 1996, respectively, under the aforementioned pricing agreement.
Although Skyway Airlines is independent from an operational perspective, Midwest
Express performs a number of services for Astral including, but not limited to,
coordinating aircraft scheduling, pricing, reservations, yield management,
advertising, fuel procurement and revenue accounting. Astral is charged a
marketing service fee for these services, approximating 10% of the revenue for
passengers who travel exclusively on Astral and approximately $2 per passenger
for passengers who connect between the carriers. These service charges comprise
a majority of the intercompany revenue and expense between the two
segments.
Midwest Express also performs treasury functions for Astral, including
controlling cash centrally. Astral earns interest income at market rates for any
cash managed by Midwest Express. This interest income comprises the intercompany
interest income and expense shown as eliminations in the subsequent information.
The total asset elimination consists primarily of the intercompany payable and
receivable balances.
Financial information on the two operating segments, Midwest Express and Astral,
follows (in thousands):
<TABLE>
<CAPTION>
Midwest
1998 Express Astral Elimination Consolidated
<S> <C> <C> <C> <C>
Operating Revenues................ $351,357 $41,478 $ (3,691) $388,874
Operating Income.................. 52,390 3,265 - 55,655
Depreciation and
Amortization Expense............ 9,334 687 - 10,021
Interest Income................... 1,727 587 (587) 1,727
Interest Expense.................. 867 - (587) 280
Income Before Income Taxes........ 53,175 3,852 - 57,027
Provision for Income Taxes........ 19,714 1,444 - 21,158
Total Assets...................... 213,119 21,319 (13,961) 220,477
Capital Expenditures.............. $ 73,830 $ 502 $ - $ 74,332
1997
Operating Revenues................ $309,912 $38,484 $ (3,839) $344,557
Operating Income.................. 37,793 677 - 38,470
Depreciation and
Amortization Expense............ 8,056 589 - 8,645
Interest Income................... 1,419 462 (462) 1,419
Interest Expense.................. 557 - (462) 95
Income Before Income Taxes........ 38,459 1,137 - 39,632
Provision for Income Taxes........ 14,266 426 - 14,692
Total Assets...................... 160,027 17,962 (11,241) 166,748
Capital Expenditures.............. $ 26,052 $ 1,565 $ - $ 27,617
1996
Operating Revenues................ $270,599 $37,814 $ (3,667) $304,746
Operating Income.................. 31,228 3,131 - 34,359
Depreciation and
Amortization Expense............ 7,141 522 - 7,663
Interest Income................... 1,165 471 (552) 1,084
Interest Expense.................. 471 81 (552) -
Income Before Income Taxes........ 31,710 3,522 - 35,232
Provision for Income Taxes........ 12,169 1,313 - 13,482
Total Assets...................... 123,660 17,373 (11,898) 129,135
Capital Expenditures.............. $ 24,380 $ 1,227 $ - $ 25,607
</TABLE>
35
<PAGE>
MIDWEST EXPRESS HOLDINGS, INC.
Quarterly Financial Summary (Unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended
- --------------------------------------------------------------------------------
1998 March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------
Operating revenues $88,412 $100,097 $103,823 $96,542
Operating expenses 79,009 83,266 86,907 84,037
Operating income 9,403 16,831 16,916 12,505
Income before income taxes 9,728 17,217 17,242 12,840
Income taxes 3,648 6,456 6,447 4,607
Net income 6,080 10,761 10,795 8,233
Net income per share - basic 0.43 0.76 0.77 0.58
Net income per share - diluted 0.43 0.75 0.75 0.58
Three Months Ended
- --------------------------------------------------------------------------------
1997 March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------
Operating revenues $79,920 $83,344 $89,399 $91,894
Operating expenses 73,447 74,837 77,611 80,192
Operating income 6,473 8,507 11,788 11,702
Income before income taxes 6,769 8,830 12,003 12,030
Income taxes 2,538 3,232 4,445 4,477
Net income 4,231 5,598 7,558 7,553
Net income per share - basic 0.30 0.39 0.53 0.53
Net income per share - diluted 0.29 0.39 0.53 0.53
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
Headquarters Annual Meeting
Midwest Express Holdings, Inc. The Annual Meeting of Midwest Express
6744 South Howell Avenue Holdings, Inc. will be held at 10 a.m. on
Oak Creek, Wisconsin Wednesday, April 28, 1999, at The Midwest
53154-1402 Express Center, 400 West Wisconsin Avenue,
(414) 570-4000 Milwaukee. Shareholders of record on
March 9, 1999, will be mailed an official
notice of the meeting.
Transfer Agent and Registrar Financial Reports
Firstar Bank Milwaukee, N.A. Form 10-K (without exhibits) and other
Corporate Trust Department reports filed with the Securities and
Milwaukee, Wisconsin Exchange Commission are available without
charge upon written request from the
Independent Auditors Company's Investor Relations department at
Deloitte & Touche LLP the headquarters address. Company documents
Milwaukee, Wisconsin filed electronically with the U.S.
Securities and Exchange Commission (SEC)
can also be found on the SEC's Web site
at www.sec.gov.
Common Stock
Midwest Express Holdings, Inc. (symbol:MEH)
common stock trades on the New York Stock
Exchange. As of December 31, 1998, there
were 14,464,056 shares of common stock
issued and 772 registered shareholders.
Following are low and high closing prices per share
for the past two years, adjusted to reflect
3-for-2 stock splits on May 27, 1998 and May 28, 1997.
1998 1997
First Quarter $24 1/4 - 34 43/64 $15 1/16 - 17 7/32
Second Quarter $27 37/64 - 36 3/16 $16 1/2 - 21 15/16
Third Quarter $26 3/4 - 37 9/16 $15 27/64 - 21 3/8
Fourth Quarter $24 1/8 - 32 3/8 $20 1/2 - 26 3/8
The Company has not paid a cash dividend since its initial public offering.
36
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
333-1554, 333-1552, 333-18127 and 333-44253 of Midwest Express Holdings, Inc. on
Forms S-8 of our reports dated January 29, 1999 appearing in and incorporated by
reference in the Annual Report on Form 10-K of Midwest Express Holdings, Inc.
for the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Milwaukee, Wisconsin
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MIDWEST EXPRESS HOLDINGS, INC. AS OF AND FOR THE YEAR
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 13,455
<SECURITIES> 0
<RECEIVABLES> 9,505
<ALLOWANCES> 251
<INVENTORY> 4,020
<CURRENT-ASSETS> 39,559
<PP&E> 243,284
<DEPRECIATION> 82,701
<TOTAL-ASSETS> 220,477
<CURRENT-LIABILITIES> 82,021
<BONDS> 3,206
0
0
<COMMON> 145
<OTHER-SE> 97,487
<TOTAL-LIABILITY-AND-EQUITY> 220,477
<SALES> 0
<TOTAL-REVENUES> 388,874
<CGS> 0
<TOTAL-COSTS> 333,219
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 102
<INTEREST-EXPENSE> 280
<INCOME-PRETAX> 57,027
<INCOME-TAX> 21,158
<INCOME-CONTINUING> 35,869
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,869
<EPS-PRIMARY> 2.54
<EPS-DILUTED> 2.51
</TABLE>
