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, 1999
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number 1-13934
-----------
MIDWEST EXPRESS HOLDINGS, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1828757
--------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation 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 check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ___X___ No ________
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 nonvoting common equity held by
nonaffiliates as of March 9, 2000: $342.6 million. As of March 9, 2000 there
were 14,017,662 shares of Common Stock, $.01 par value, of the registrant
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 Annual Report to Shareholders for the fiscal year ended
December 31, 1999 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 26, 2000 are incorporated by reference in Part
III.
<PAGE>
MIDWEST EXPRESS HOLDINGS, INC.
FORM 10-K
For the period ended December 31, 1999
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 13
Management - Officers of the Registrant 14
PART II
- -------
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 15
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 16
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 16
PART III
- --------
Item 10. Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial Owners and
Management 17
Item 13. Certain Relationships and Related Transactions 17
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 17
SIGNATURES 19
INDEPENDENT AUDITORS' REPORT 20
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 21
EXHIBIT INDEX 22
2
<PAGE>
PART I
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. It is important to note that the Company's actual
results could differ materially from those projected results due to factors that
include, but are not limited to, uncertainties related to general economic
factors, industry conditions, scheduling developments, government regulations,
labor relations, aircraft maintenance and refurbishment schedules, potential
delays related to acquired aircraft, fuel costs and interest rates. 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.
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 major destinations
throughout the United States and Toronto, from Milwaukee, Wisconsin; Omaha,
Nebraska; and Kansas City, Missouri.
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 marketing agreement between Mesa and Midwest Express. Under
the agreement, Mesa operated the system beginning in 1989 as "Skyway Airlines"
using Midwest Express' airline code.
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
3
<PAGE>
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.
Route Structure and Scheduling
Bases of Operations
Midwest Express currently has two bases of operations, Milwaukee and Omaha.
As of December 31, 1999, Midwest Express served 28 cities and was the only
carrier providing nonstop service between Milwaukee and more than 60% of its
core jet routes. Although 11 other jet airlines serve Milwaukee's airport, these
carriers generally provide nonstop flights only between Milwaukee and their
respective hubs.
From Omaha, Midwest Express provides nonstop service to Los Angeles,
Milwaukee, Newark, Washington, D.C. 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 operations' hubs.
Integration of Skyway Operations
Midwest Express coordinates Skyway's routes and schedules primarily 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, 1999,
Skyway offered flights in 26 markets. In late 1999, four Fairchild Aerospace
328JETs joined Skyway's fleet of 15 Beech 1900D turboprop aircraft; a fifth
regional jet joined the Skyway fleet in January 2000.
Customer Service
Overall
Midwest Express primarily caters to business travelers and has built its
reputation by providing passengers with personal attention, two-across wide
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 and the Zagat Airline Survey recognize
Midwest Express as the best airline in the United States, and Aviation Week &
Space Technology has honored Midwest Express as the world's best-managed
national airline.
4
<PAGE>
Midwest Express has accomplished its unique level of customer service
through such tangible amenities as a more comfortable seating configuration,
quality cuisine, and complimentary wine and champagne, as well as such
intangibles as the accommodating attitude of Midwest Express employees. Although
Skyway has less opportunity to provide premium inflight service due to the
limited duration of its flights, it also focuses on superior customer service in
the regional airline industry.
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 about 20% less than the number of seats that major airlines
typically install in the same type of aircraft.
Dining Services
The high quality of Midwest Express cuisine has been recognized repeatedly
in customer surveys. Breakfast and dinner menus typically consist 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.
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 67% 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
5
<PAGE>
the SABRE CRS until 2001. Effective February 1, 1999, the Company placed a cap
on travel agent commissions of $25 for a one-way ticket and $50 per roundtrip.
Effective October 19, 1999, the Company implemented a new commission rate
structure that reduced base commissions from 8% to 5%, with the maximum
commission remaining. This commission structure is similar to that of most other
airlines. The Company realized more revenue in 1999 than in previous years from
direct sales via the Company's reservation center, Web site and ticket counters.
Frequent Flyer Program
The Company operates a frequent flyer program (the "Frequent Flyer
Program") under which mileage credits are earned by flying on Midwest Express,
Skyway or other participating airlines (including Swissair, Virgin Atlantic and
Northwest) and by using the services of participating hotels (including Hilton,
Hyatt, Loews, Radisson, Swissotel and Wyndham), car rental firms (including
Avis, Hertz and National), MCI telecommunications, Elan MasterCard(R) and other
program partners. Members can redeem Frequent Flyer Program miles for travel on
Midwest Express or Skyway (20,000 miles for a free roundtrip ticket or 15,000
miles for a companion ticket), or other participating airlines. In addition to
free travel, miles can be redeemed at participating hotels, car rental firms and
other program partners. 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 Frequent Flyer Plus Plan offers
additional benefits and rewards to members flying at least 20,000 miles or 25
one-way trips in a calendar year.
The Company's Frequent Flyer Program includes a marketing agreement whereby
members in Northwest Airlines' WorldPerks Frequent Flyer Program and Midwest
Express' Frequent Flyer Program members maintain their separate accounts, but
can 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 Program 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 in turn awards the miles to
cardholders for purchases made with their credit cards.
As of year-end 1999 and 1998, the Company had approximately 1,183,000 and
1,050,000 members enrolled in its Frequent Flyer Program, respectively. The
Company estimates that as of December 31, 1999 and 1998, the total available
awards under the Frequent Flyer Program were 116,000 and 110,000, respectively,
after eliminating those accounts below the minimum award level. Free travel
awards redeemed were approximately 46,000 and 31,000 during 1999 and 1998,
respectively. Free travel awards accounted for approximately 4% of the total
Company revenue passenger miles during 1999. Because Midwest Express controls
the number of seats available for free travel on each flight, it does not
believe that the use of Frequent Flyer Program awards results in a significant
displacement of revenue passengers.
Miles accrued in a member's account will expire unless there is qualifying
activity in the Frequent Flyer Program account within a 36-month period.
Qualifying activity includes flights on Midwest Express and/or Skyway, or
accrued mileage from any program partner activity during the previous 36-month
period. If the account does not remain active, the mileage expires and the
account is considered inactive.
6
<PAGE>
The Company accounts for its Frequent Flyer Program obligations on the
accrual basis using the incremental cost method. This method requires accrual of
the 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 Program accrual, the
Company anticipates that approximately 72% of outstanding awards will be
redeemed.
Codesharing Agreements
In 1999, Midwest Express continued a one-year renewable codesharing
agreement with American Eagle that was originally established in 1998. Either
party can cancel the agreement upon 180 days notice. Under the agreement,
Midwest Express provides passengers with jet service to Los Angeles and
Dallas/Ft. Worth, and American Eagle provides passengers with connecting service
from Los Angeles to seven cities in California, and from Dallas/Ft. Worth to 34
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.
Related Business
The Company 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 inflight sales and from providing aircraft
ground handling and aircraft maintenance services for other airlines.
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,
Midwest Express and Skyway also compete against ground transportation.
The Company has the largest market share of passengers at Milwaukee. In
1999, the Company carried 34.9% of the passengers boarded in Milwaukee, while
Northwest Airlines, which has the second largest share, carried 20.8%. In 1999,
Midwest carried 6.3% of the passengers boarded in Omaha, compared to 24.0%
boarded by United Airlines and 15.2% by Southwest Airlines, the carriers with
the two largest market shares of passengers.
7
<PAGE>
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 alternative to air travel.
Employees
As of December 31, 1999, Midwest Express had 2,703 employees (435 of whom
were part-time and 55 of whom were intermittents) and Skyway had 476 employees
(117 of whom were part-time). The categories of employees were as indicated in
the following table:
Employees as of December 31, 1999
-------------------------------------
Midwest
Employee Categories Express Skyway
------------------- ------- ------
Flight Operations 394 170
Inflight 441 14
Passenger Services 786 187
Maintenance 453 49
Reservations and Marketing 385 -
Accounting and Finance 113 5
Administrative 131 51
------ -----
Total 2,703 476
====== =====
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.
Labor Relations
In January 1998, Skyway's pilots, represented by the Air Line Pilots
Association ("ALPA"), a labor union, ratified a four-year labor contract. In
February 2000, Midwest Express' pilots, represented by ALPA, ratified a
five-year contract. In April 1999, Midwest Express' flight attendants elected
the Association of Flight Attendants (AFL-CIO), a labor union, for
representation in collective bargaining. Negotiations currently are in progress.
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, CRS, and other consumer protection matters such as
on-time performance, denied boarding and baggage liability. It is also
authorized to require
8
<PAGE>
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 regulation and/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 III operations by
requiring phaseout of Stage II operations (as defined in Part 36 of the Federal
Aviation Regulations) by December 31, 1999, subject to certain exceptions.
Midwest Express complies with ANCA by operating a fleet that is 100% Stage III
compliant.
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 III aircraft and establishes a regulatory notice and
review process for local restrictions on Stage II 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.
9
<PAGE>
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. The FAA monitors maintenance efforts 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.
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 schedule a takeoff or landing 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 comply with these regulations
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 the FAA may withdraw at any time and 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 14% and 13% in 1999 and 1998, 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 has periodically entered into
short-term hedge agreements, which as of December 31, 1999 were not material, in
an attempt to reduce its exposure to jet fuel price fluctuations. As of December
31, 1999 the Company hedged approximately 25% of its first quarter 2000 fuel
requirements.
Year 2000
The Company successfully completed the Year 2000 rollover. The Company
spent $.8 million to achieve Year 2000 readiness. The Company estimates lost
revenue as a result of some passengers avoiding travel in the last week of
December 1999 and the first week of January 2000 due to the millennium change
was approximately $.7 million. The Company had no significant occurrences
10
<PAGE>
associated with the millennium rollover and does not anticipate any future
interruptions in operations as a result of the processing or display of
date/time data.
Item 2. Properties
Fleet Equipment
As of December 31, 1999, Midwest Express' fleet in service consisted of 32
McDonnell Douglas jet aircraft, including eight DC-9 series 10 aircraft, 16 DC-9
series 30 aircraft, two MD-88 aircraft, three MD-81 aircraft and three MD-82
aircraft. All aircraft meet Stage III noise requirements. None of the aircraft
owned by Midwest Express is subject to liens to secure obligations.
MIDWEST EXPRESS AIRLINES AIRCRAFT IN SERVICE
--------------------------------------------
Type Seats Owned Leased Total
---- ----- ----- ------ -----
DC-9-10 60 8 - 8
DC-9-30 84* 6 10 16
MD-88 112 - 2 2
MD-81/82 116 5 1 6
- - -
Total 19 13 32
*One aircraft is reconfigured to 60 seats and is primarily used for charter
flights.
The MD-82 lease and the two MD-88 aircraft leases expire in 2011. Ten
DC-9-30 operating leases expire as follows: three in 2001, four in 2006, one in
2007 and two in 2008. During 1999 Midwest Express placed into service five MD-80
series aircraft the Company agreed in 1997 to purchase from Japan Air Systems.
Two MD-80 series aircraft were received in the fourth quarter of 1999 and will
enter service in the second and third quarter 2000. The Company has financed
four deliveries with internal cash flows; a sale-leaseback was completed in 1999
for one aircraft.
In November 1999, the Company signed a purchase agreement to acquire four
MD-80 series aircraft currently operated by Scandinavian Airlines System.
Delivery of the aircraft is expected to begin in September 2000 and continue
through November 2001. After refurbishment and modification, three aircraft are
expected to enter scheduled service in 2001, and the last in 2002. The Company
expects that this project, including aircraft acquisition, refurbishment,
modification and support equipment, will cost approximately $60 million.
Financing alternatives are currently being evaluated. These aircraft will be
used to increase capacity on the Company's high-traffic routes and expand
service in new markets.
Skyway acquired 15 new Beech 1900D turboprop aircraft between January 11,
1994 and May 18, 1995. Each of these aircraft has 19 passenger seats. During
1996, Skyway sold and leased back these aircraft from a group of six financial
institutions with lease terms of five to 12 years, and expiration dates ranging
from 2001 through 2008.
11
<PAGE>
In 1999, Skyway acquired five 32-passenger Fairchild Aerospace 328JET
aircraft. The five aircraft were financed via operating leases from one
financial institution; with expiration dates all occurring in 2016. Four
aircraft were placed in service in late 1999. The Company holds options to
acquire 10 additional aircraft, with delivery dates beginning 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 counters, baggage handling and
operations space. In 1988, the Company completed construction of its maintenance
facility at the Milwaukee airport with a lease of land from the airport for an
initial term of five years ending March 31, 1993 which allows the Company to
exercise a series of 11 additional five-year options to extend the lease.
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 $8.2 million project. The Company's variable rent
payments are based on the current interest rate of the City of Milwaukee's
outstanding bonds over the 32-year lease term.
In August 1997, the Company purchased its headquarters building, which it
had previously leased. As part of the transaction, the Company assumed $3.5
million of long-term debt. As of December 31, 1999, $3.1 million of long-term
debt remained.
In 11 of the other 28 cities Midwest Express served as of December 31,
1999, gates at the airport were leased directly from the airport authority. In
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 General Mitchell
International Airport. Skyway owns an aircraft maintenance and office facility
at the Milwaukee airport. The land on which this facility is located is leased
from Milwaukee County until 2010. Skyway also owns a headquarters building,
which is located off airport grounds. Skyway currently operates from 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 Midwest
Express should pay Wisconsin sales taxes in connection with its purchase of
meals from its food caterer. A petition for review with the Wisconsin Tax
Appeals Commission is pending. 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 $.9 million, and would have to pay approximately $.3 million in
additional sales tax annually in the future.
12
<PAGE>
In December 1999, Midwest Express commenced an action in the United States
District Court for the Central District of California. The defendant in the
action is Pacific Skyway, Inc. Midwest Express alleges that Pacific Skyway, Inc.
has infringed Midwest Express' service mark rights in the mark SKYWAY, committed
acts of unfair competition and diluted its service mark rights through the use
of the service mark PACIFIC SKYWAY for providing air passenger transportation
services.
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 1999.
13
<PAGE>
MANAGEMENT
Officers of the Registrant
The executive officers and other officers of the Company as of March 9,
2000, together with their ages, positions and business experience are described
below:
NAME AGE POSITION
---- --- --------
Timothy E. Hoeksema 53 Chairman of the Board, President, Chief
Executive Officer and Director
Brenda F. Skelton 44 Senior Vice President-Marketing and Director
Robert S. Bahlman 41 Senior Vice President, Chief Financial Officer
and Controller
Carol N. Skornicka 58 Senior Vice President-Corporate Development,
General Counsel and Secretary
David C. Reeve 54 Senior Vice President-Operations
William E. Brown 37 Vice President-Technical Services
Michael W. Mooney 45 Vice President-Planning and Pricing
Christopher D. White 37 Vice President-Safety and Regulatory Compliance
Dennis J. O'Reilly 44 Treasurer
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 in 1995.
Brenda F. Skelton has served as the Senior Vice President of Marketing and
Director since 1998 and Senior Vice President of Marketing and Customer Service
and Director from 1995-98. Prior to that, Ms. Skelton served as Vice President
of Marketing from February 1993-95.
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 from 1998-99; as
Vice President, Chief Financial Officer, Treasurer and Controller from 1996-98;
as Controller from 1995-96; and as Financial Manager from 1990-95.
Carol N. Skornicka has served as Senior Vice President of Corporate
Development, Secretary and General Counsel since 1998. Ms. Skornicka served as
Vice President, General Counsel and
14
<PAGE>
Secretary from 1996-98. She formerly served as Secretary of the Wisconsin
Department of Industry, Labor and Human Relations from 1991-96.
David C. Reeve has served as Senior Vice President of Operations of Midwest
Express since 1998. Mr. Reeve has served as President and Chief Executive
Officer of Astral Aviation - which operates Skyway - since 1997 and will
continue to serve in that dual capacity until a replacement is named. Before
joining the Company, Mr. Reeve served as Director of Flight Operations for DHL
Airways from 1991-97.
William E. Brown has served as Vice President of Technical Services since
October 1999. Before joining the company, he served American Airlines as Senior
Manager Engine Repair from 1998-99; Composite Repair Manager from 1997-98; MD-11
and DC-10 Product Manager from 1995-97; Manager Component Maintenance from
1993-95; RB211 Engine Shop Supervisor from 1991-93; Maintenance Instructor MD-80
and All Engine Products from 1987-91; and Mechanic Engine Shop from 1986-87.
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
1993-99, and as Manager of Pricing and Scheduling from 1985-93.
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 1996-99; Manager of Internal Safety in 1996; Internal
Safety Evaluation Coordinator from 1995-96; Special Project Coordinator from
1994-95; and Research Analyst from 1992-94.
Dennis J. O'Reilly has served as Treasurer and Director of Investor
Relations since February 1999. Mr. O'Reilly served as Assistant Treasurer from
1996-99, and Business Analyst from 1990-96.
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 1999 Annual Report to
Shareholders, Exhibit 13.
Item 6. Selected Financial Data
The information required in this Item is incorporated by reference to page
18 of the Company's 1999 Annual Report to Shareholders.
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements,"
which provides guidance on the application of generally accepted accounting
principles to revenue recognition in financial statements. SAB 101 provides
additional guidance regarding when revenue is realized, earned and appropriately
recognized. The Company expects this guidance will be applicable to revenue
recognition related to the sale of frequent flyer miles to frequent flyer
partners. The Company is currently in the process of evaluating the accounting
and disclosure effects of SAB 101 and is anticipating the adoption of any
changes in policies to comply in the first quarter 2000. The Company expects the
cumulative effect of this change will result in a material charge to earnings in
first quarter 2000.
Additional information required in this Item is incorporated by reference
to pages 19 through 35 of the Company's 1999 Annual Report to Shareholders.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company's primary market risk exposures include commodity price risk
(i.e. aircraft fuel prices) and interest rate risk. The Company's operating
results are significantly impacted by changes in the price and availability of
aircraft fuel. The Company manages the price risk of fuel primarily by
purchasing commodity options that establish ceiling prices. Any premiums paid to
enter into option contracts are recorded as prepaid expense and amortized to
fuel expense over their respective option life. For 1999, aircraft fuel and oil
and associated taxes (including the effect of any hedging) represented 13.8% of
the Company's total operating expenses. Based on the Company's fiscal 2000 fuel
consumption estimate of 97 million gallons, a one-cent change in the average
annual price per gallon of aviation fuel would increase the Company's fuel
expense by approximately $1.0 million. As of December 31, 1999, the Company
hedged approximately 25% of its first quarter 2000 fuel requirements.
Exposure to interest rate risk relates primarily to the Company's cash
equivalents and short-term investment portfolios and its interest expense from
floating debt instruments. Market risk associated with the Company's long-term
debt is the potential increase in fair value resulting from a decrease in
interest rates. A 10% change in interest rates would not have a material impact
on the Company's interest expense associated with fixed or variable rate debt.
If short-term interest rates average 10% more in 2000 than they did during 1999,
there would be no material impact on the Company's interest income.
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 1999 Annual Report to Shareholders.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
16
<PAGE>
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 4 and page 12,
respectively, of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 26, 2000, and "Management - Officers of the
Registrant" in Part I, 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 26, 2000.
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 26, 2000.
Item 13. Certain Relationships and Related Transactions
Not applicable.
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,
1999 and 1998 and for each of the three years in the period ended December 31,
1999, together with the report thereon of Deloitte & Touche LLP, dated January
28, 2000, appear on pages 25 through 35 of the Company's 1999 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.
17
<PAGE>
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the fourth quarter
of 1999.
(c) Exhibits:
The Exhibits filed or incorporated by reference herewith are as specified
in the Exhibit Index.
18
<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 27, 2000 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 27, 2000.
/s/ TIMOTHY E. HOEKSEMA Chairman of the Board of Directors,
- ------------------------------- President and Chief Executive Officer
Timothy E. Hoeksema (Principal Executive Officer)
/s/ ROBERT S. BAHLMAN Senior Vice President, Chief Financial Officer
- ------------------------------- and Controller
Robert S. Bahlman (Principal Financial and Accounting Officer)
/s/ BRENDA F. SKELTON Senior Vice President-Marketing and Director
- -------------------------------
Brenda F. Skelton
/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
/s/ JOHN W. WEEKLY Director
- -------------------------------
John W. Weekly
19
<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, 1999 and 1998 and for each of the three years
in the period ended December 31, 1999, and have issued our report thereon dated
January 28, 2000; such consolidated financial statements and report are included
in your 1999 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 herein.
/s/Deloitte & Touch LLP
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
January 28, 2000
20
<PAGE>
Schedule II
<TABLE>
MIDWEST EXPRESS HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Balance at Additions Deductions Balance at
Beginning Charged to from End of
of Year Expense Reserve Year
-------------------------------------------------------------------
Allowance for doubtful accounts:
<S> <C> <C> <C> <C>
Year ended December 31, 1999 $251,000 $123,000 $(208,000) $166,000
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
</TABLE>
21
<PAGE>
EXHIBIT INDEX
MIDWEST EXPRESS HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
-------------------------------------------
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 of the Company as amended through April 29, 1999
(incorporated by reference to Exhibit 3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999 (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, National Association as
successor in interest to Firstar Bank Milwaukee, N.A.; M&I
Marshall & Ilsley Bank; Bank One, Milwaukee, N.A.; and the
Company 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 the
Company 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 Bank, National Association as successor
in interest to 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 Bank, National Association
as successor in interest to 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 the Company; Firstar Bank,
National Association as successor in interest to 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")).
22
<PAGE>
(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).
(10.6) Tax Allocation and Separation Agreement among Kimberly-Clark
Corporation, K-C Nevada, Inc., the Company, Midwest Express
and Astral 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 the Company 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 the Company 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)).
23
<PAGE>
(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 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)).
(10.18)* Form of Key Executive Employment and Severance Agreement
between the Company and each of Robert S. Bahlman, David C.
Reeve 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)).
(10.19) Thirteenth Amendment to Airline Lease, as amended between
Milwaukee County and Midwest Express, dated April 5, 1999
(incorporated by reference to Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 (File No. 1-13934)).
(10.20) Fourteenth Amendment to Airline Lease, as amended between
Milwaukee County and Midwest Express, dated June 15, 1999
(incorporated by reference to Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999 (File No. 1-13934)).
(13) The 1999 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 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.
24
FIVE-YEAR FINANCIAL AND OPERATING DATA
MIDWEST EXPRESS HOLDINGS, INC.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ------------
Statement of Income Data:
<S> <C> <C> <C> <C> <C>
Total operating revenues $ 447,552 $ 388,874 $ 344,557 $ 304,746 $ 259,155
Total operating expenses 386,800 333,219 306,087 270,387 227,781
Operating income 60,752 55,655 38,470 34,359 31,374
Net income 38,791 35,869 24,940 21,750 19,129
Net income per share - basic (1) 2.75 2.54 1.76 1.51 1.23
Net income per share - diluted (1) 2.71 2.51 1.74 1.50 1.23
Balance Sheet Data:
Property and equipment, net 211,449 160,583 89,156 70,903 55,919
Total assets 263,829 220,477 166,748 129,135 92,833
Intercompany receivable (2) - - - - 61
Long-term debt 3,068 3,206 3,333 - -
Shareholders' equity $ 133,539 $ 97,632 $ 63,398 $ 40,341 $ 21,264
Selected Operating and Other Data (3):
Midwest Express Airlines:
Revenue passenger miles (000s) 1,958,510 1,623,659 1,409,528 1,239,966 1,150,338
Available seat miles (000s) 2,993,765 2,498,543 2,198,179 1,954,151 1,794,924
Passenger load factor (%) 65.4% 65.0% 64.1% 63.5% 64.1%
Revenue yield (cents per RPM) 18.5 19.2 19.4 19.3 17.8
Cost per total ASM (cents per mile) 11.5 11.8 12.1 12.0 11.0
Aircraft in service at year-end 32 27 24 22 19
Average aircraft utilization (hours per day) 8.8 9.1 9.3 9.2 9.0
Number of FTE employees at year-end 2,449 2,133 1,889 1,624 1,411
Astral Aviation, d/b/a Skyway Airlines:
Revenue passenger miles (000s) 84,517 77,547 69,277 71,165 66,415
Available seat miles (000s) 170,428 160,772 158,912 160,488 156,113
Passenger load factor (%) 49.6% 48.2% 43.6% 44.3% 42.5%
Revenue yield (cents per RPM) 52.7 52.9 55.1 52.7 49.9
Cost per total ASM (cents per mile) 25.2 23.7 23.8 21.6 19.4
Aircraft in service at year-end 19 15 15 15 15
Average aircraft utilization (hours per day) 8.2 8.1 7.7 7.8 7.9
Number of FTE employees at year-end 424 322 277 245 217
(1) Net income per share data is presented on a pro forma basis for 1995 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.
</TABLE>
PAGE 18 MIDWEST EXPRESS HOLDINGS
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
1999 Overview
1999 operating income for Midwest Express Holdings, Inc. (the "Company") was
$60.8 million, an increase of $5.1 million over 1998. Net income in 1999
increased by $2.9 million to $38.8 million. The favorable change in financial
results was primarily caused by an increase in capacity coupled with strong
passenger demand, increased revenue from the Midwest Express MasterCard program,
and improved unit costs.
The Company increased traffic, as measured by scheduled service revenue
passenger miles (RPMs), by 20.1%, while capacity increased 19.0%. This resulted
in a load factor increase of .6 percentage points. Midwest Express Airlines,
Inc. ("Midwest Express") increased traffic by placing five additional aircraft
into service. The principal new routes include Kansas City-San Antonio (May) and
Milwaukee-Washington Dulles (September). Additionally, Midwest Express
significantly expanded service in a number of markets: Milwaukee-Kansas City,
Kansas City-La Guardia, Milwaukee-Phoenix, Milwaukee- La Guardia and
Milwaukee-Orlando. Astral Aviation, Inc. ("Skyway") placed four Fairchild
Aerospace 328JETs in service in the fourth quarter. The 32-passenger aircraft
replaced DC-9 jet service in Grand Rapids and Toronto, and provided new service
between Milwaukee and Pittsburgh (November).
Midwest Express' credit card and frequent flyer partnership programs generated
$4.1 million, or 37.3%, more revenue in 1999 than 1998.
Operating expenses increased 16.1%, primarily due to a 19.0% increase in
capacity. On a per available seat mile basis, costs decreased 2.7% at Midwest
Express and increased 6.1% at Skyway. Higher fuel prices reduced operating
income $4.0 million in 1999, but were offset by lower ticket distribution costs
and a reduction in the cost of the Company's profit sharing program and
management incentive plan. Cost changes are further 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 1999, 1998 and
1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- -----------------------
Per Per Per
Total Total Total
ASM % ASM % ASM %
------------ ------ ----------- ------ ------ ------
Operating revenues:
<S> <C> <C> <C> <C> <C> <C>
Passenger service................. 12.75(cent) 90.9% 13.12(cent) 90.8% 12.95(cent) 90.3%
Cargo............................. 0.37 2.7% 0.44 3.0% 0.48 3.3%
Other............................. 0.91 6.4% 0.90 6.2% 0.92 6.4%
Total operating revenues............ 14.03 100.0% 14.46 100.0% 14.35 100.0%
Operating expenses:
Salaries, wages and benefits...... 3.95 28.2% 4.18 28.9% 3.84 26.7%
Aircraft fuel and oil............. 1.67 11.9% 1.60 11.0% 2.09 14.5%
Commissions....................... 0.96 6.8% 1.12 7.7% 1.31 9.2%
Dining services................... 0.75 5.3% 0.73 5.0% 0.72 5.0%
Station rental/landing/other fees 0.96 6.8% 0.96 6.7% 1.02 7.1%
Aircraft maintenance materials/
repairs.......................... 1.44 10.3% 1.37 9.5% 1.17 8.2%
Depreciation and amortization..... 0.63 4.5% 0.72 5.0% 0.73 5.1%
Other............................. 1.35 9.7% 1.34 9.3% 1.51 10.5%
Total operating expenses............ 12.12(cent) 86.4% 12.39(cent) 85.7% 12.75(cent) 88.8%
Total ASMs (millions)............... 3,190.4 2,689.7 2,401.3
</TABLE>
Note: Numbers in this table may not be recalculated due to rounding.
<PAGE>
Year Ended December 31, 1999
Compared to Year Ended December 31, 1998
Operating Revenues
The Company's operating revenues totaled $447.6 million in 1999, a $58.7
million, or 15.1%, increase over 1998. Passenger revenue accounted for 90.9% of
total revenues and increased $53.9 million, or 15.3%, from 1998 to $406.8
million. The increase was primarily attributable to a 20.1% increase in
passenger volume, as measured by revenue passenger miles, offset by a 4.0%
decrease in revenue yield.
Midwest Express' passenger revenue of $362.3 million increased $50.4 million, or
16.2%, from 1998. This increase was caused by a 16.8% increase in passengers
carried. Total capacity increased 19.8% due to five additional aircraft in
scheduled service. Also, load factor increased from 65.0% in 1998 to 65.4% in
1999 due to continued strong travel demand. Revenue yield decreased 3.7%, to
18.5(cent) in 1999, from 19.2(cent) in 1998 due to longer aircraft flight
segments, competitive pricing pressure in several markets and operating larger
aircraft on certain routes.
Passenger revenue at Skyway increased $3.5 million, or 8.4%, in 1999 to $44.5
million. This increase was caused by a 9.2% increase in passengers carried,
offset by a .5% decrease in revenue yield. Total capacity increased 6.0% due to
four additional jet aircraft in service in fourth quarter 1999. Load factor
increased from 48.2% to 49.6% in 1999 due to continued strong travel demand.
Revenue from other services increased $4.7 million, or 19.3%, in 1999. Midwest
Express benefited from revenue increases of $3.1 million from the Midwest
Express MasterCard program, $1.0 million from Frequent Flyer partnership
programs, $.8 million in fees from ticket exchanges and $.2 million in ground
ANNUAL REPORT 1999 PAGE 19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
handling services for other airlines. Partially offsetting these increases were
decreases of $.3 million in charter revenue and $.2 million in maintenance
services for other airlines.
Operating Expenses
1999 operating expenses increased $53.6 million, or 16.1%, from 1998, primarily
due to an increase in flight segments. On a cost per total ASM basis, Midwest
Express' operating expenses decreased 2.7%, from 11.82(cent) to 11.50(cent), in
1999, and cost per total ASM at Skyway increased 6.1% from 23.70(cent) to
25.15(cent) in 1999.
Salaries, wages and benefits increased $13.9 million, or 12.3%, from 1998. On a
cost per total ASM basis, these costs decreased from 4.18(cent) in 1998 to
3.95(cent), or 5.5%, in 1999. Major contributors to the labor cost increase were
the addition of 418 full-time equivalent employees from 1998, increases in labor
rates and increased benefit costs. Midwest Express added employees throughout
the organization to support aircraft placed in service in 1999; Skyway added
employees to support ramp and gate operations at the Milwaukee airport and the
start-up of the regional jet program. The labor rate increase was due to an
increase in pay scales for most operations employees at Midwest Express
effective January 1999, 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. These increases were partially offset by a $5.0 million reduction
in the employee profit sharing program and management incentive plan. These
plans, which are payable annually, are generally based upon increasing operating
income year over year. The incremental change in operating income for 1999
versus 1998 was significantly less than the incremental change from 1998 to
1997. Therefore, accruals for these programs were $5.0 million less in 1999.
Aircraft fuel, oil and associated taxes increased $10.3 million, or 24.0%, from
1998. Fuel consumption increased 14.4% from 1998, primarily because Midwest
Express operated 13.0% more aircraft flight hours and used larger aircraft with
higher fuel useage per hour. Into-plane fuel prices (which represent the
Company's cost after the effect of hedging) increased 8.1% in 1999, averaging
61.4(cent) per gallon versus 56.8(cent) per gallon in 1998. The Company
experienced continued high fuel costs in January 2000, averaging 84.8(cent) per
gallon. The Company manages the price risk of fuel primarily by purchasing
commodity options that establish ceiling prices. The Company has hedged
approximately 25% of first quarter 2000 forecasted fuel requirements, albeit at
significantly higher prices than realized in 1999.
Commissions to travel agents and credit card companies increased by $.4 million,
or 1.4%. Commissions as a percent of passenger revenue decreased to 7.5% in 1999
from 8.5% in 1998. Most of this reduction was due to a cap placed on travel
agent commissions of $25 one way and $50 roundtrip, implemented February 1,
1999, and a new commission rate structure that reduced base commissions from
8% to 5% effective October 19, 1999. In addition, more ticket sales
were generated in 1999 from direct sales via the Company's reservation center,
Web site and ticket counters.
The Company's dining services increased by $4.3 million, or 21.7%, primarily due
to a 16.8% increase in passenger volume at Midwest Express. Total dining
services costs (including food, beverages, linen, catering equipment and
supplies) increased from $11.17 per Midwest Express passenger in 1998 to $11.60
in 1999.
Station rental, landing and other fees increased $4.6 million, or 17.6%, in
1999. Midwest Express incurred higher ground handling fees, landing fees and
facility costs due to expanded operations.
Aircraft maintenance, materials and repairs increased $9.1 million, or 24.7%,
from 1998. Midwest Express' maintenance costs increased $8.0 million, or 25.0%,
and Skyway's maintenance costs increased $1.1 million, or 22.5%. Midwest
Express' increase was caused by a significant number of airframe maintenance,
aircraft refurbishment and heavy checks requiring extensive use of contract
labor, more flight hours at Midwest Express, and higher material and aircraft
component repair costs. Increased costs at Skyway were caused by more flight
hours, utilization of contract mechanics, and higher material and aircraft
component repair costs.
<PAGE>
Depreciation and amortization increased by $3.2 million, or 31.8%, in 1999,
primarily as a result of the depreciation associated with four MD-80 aircraft
placed in service during 1999.
Aircraft rental costs increased $.7 million, or 3.8%, in 1999 as a result of
Skyway leasing five 328JETs in the second half
of the year and Midwest Express leasing one MD-80 aircraft. Those costs were
partially offset by lower lease costs for two leased MD-88 aircraft that were
re-negotiated in 1999.
Other operating expenses increased by $7.1 million, or 19.8%, from 1998. Other
operating expenses consist primarily of advertising and promotion, insurance,
property taxes, reservation fees, administration and other items. The increase
was primarily due to higher professional and financial services costs, higher
booking fees associated with record passenger volume, an increase in advertising
and promotion to support new service, higher flight simulator rental costs to
support increased pilot training, increased costs for crew hotel rooms, higher
legal fees and a $1.1 million nonrecurring airport rental credit received from
Milwaukee county in 1998.
Interest Income
Interest income reflects interest earned on the Company's cash and cash
equivalents.
Provision for Income Taxes
Income tax expense in 1999 was $22.9 million, an increase of $1.7 million from
1998. The effective tax rate for 1999 and 1998 was 37.1%. For purposes of
calculating the Company's income tax expense and effective tax rate, the Company
treats amounts payable to Kimberly-Clark Corporation 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 $2.9 million, or 8.1%, in 1999. The net income margin
decreased to 8.7% in 1999 from 9.2% in 1998.
ANNUAL REPORT 1999 PAGE 20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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, or 14.3%, to $311.9
million from 1997. The 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 Skyway increased $2.9 million, or 7.7%, to $41.1 million in
1998. The 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.
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 startup 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 benefit
costs. The labor rate increase was due to an increase in pay scales for most
operations employees at Midwest Express effective 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 are based 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.
Commissions to travel agents and credit card companies decreased by $1.5
million, or 4.6%, in 1998. 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 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.
<PAGE>
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, 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.
ANNUAL REPORT 1999 PAGE 21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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%.
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.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $16.0 million at December 31,
1999 compared to $13.5 million at December 31, 1998. Net cash provided by
operating activities totaled $58.6 million during 1999. Net cash used in
investing activities totaled $71.5 million, primarily due to capital
expenditures of $70.2 million, including $3.0 million of purchase deposits on
flight equipment. Net cash provided by financing activities totaled $15.5
million during 1999.
The Company had a working capital deficit of $37.1 million
as of December 31, 1999, versus a $42.5 million deficit on December 31, 1998.
The working capital deficit is primarily due to the Company's air traffic
liability (which represents deferred revenue for advance bookings, whereby
passengers have purchased tickets for future flights, 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, 1999, the Company's two credit facilities, a $55.0 million
revolving bank credit facility and a $20.0 million secondary revolving credit
facility with Kimberly-Clark, have not been used, except for letters of credit
totaling approximately $9.7 million that reduce the amount of available credit.
The letters of credit are used to support financing on the Company's new
maintenance facility and for various other purposes.
Capital expenditures totaled $70.2 million for the period ended December 31,
1999, including $3.0 million of purchase deposits on flight equipment.
Expenditures consisted primarily of aircraft purchases and refurbishment costs.
Other capital expenditures included aircraft engine hush kit components and
capitalized engine overhauls. In 1999, the Company completed the process of
installing seven noise hush kits on its fleet of DC-9 aircraft to meet Stage III
noise regulations. The Company expects to incur about $50.0 million of capital
spending in 2000, $21.0 million of which is associated with the acquisition and
refurbishment of MD-80 aircraft. The remaining capital spending includes the
completion of the Company's training facility, the acquisition of spare engines
and other capitalized aircraft and engine overhauls and spare parts, airport
facility improvements, and costs associated with improving and maintaining the
Company's information technology infrastructure.
During 1997, the Company executed definitive purchase documents to acquire eight
previously owned McDonnell Douglas MD-80 series aircraft. The Company financed
four deliveries and $13.4 million in refurbishment costs during 1999, primarily
using internal cash flow; a sale-leaseback was completed in the third quarter
for one MD-80. Financing alternatives are currently being evaluated for the
remaining aircraft scheduled to enter service in 2000.
During 1999, the Company signed a purchase agreement to acquire four preowned
MD-80 series aircraft. Deliveries of the aircraft are expected to begin in
September 2000 and continue through November 2001. Financing alternatives are
currently being evaluated.
Leases relating to three Midwest Express jet aircraft are guaranteed by
Kimberly-Clark Corporation. 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 immaterial in 2000.
<PAGE>
The Company's Board of Directors has authorized a $15.0 million common stock
repurchase program. During 1999, the Company repurchased 147,100 shares of
common stock totaling $4.3 million. As of December 31, 1999, the Company
purchased a total of 565,725 shares of common stock at a cost of $11.0 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 $8.2 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 of 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, National Association.
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.
Market Risk
Quantitative and Qualitative Disclosures about Market Risk - The Company's
primary market risk exposures include commodity price risk (i.e. aircraft fuel
prices) and interest rate risk. The Company's operating results are
significantly impacted by changes in the price and availability of aircraft
fuel. The Company manages the price risk of fuel primarily by purchasing
commodity options that establish ceiling prices. Any premiums paid to enter into
option contracts are recorded as prepaid expense and amortized to fuel expense
over their respective option life. For 1999, aircraft fuel, oil and associated
taxes (including the effect of any hedging) represented 13.8% of the Company's
total operating expenses. Based on the Company's fiscal 2000 fuel consumption
estimate of 97 million gallons, a one-cent increase in the average annual price
per gallon of aviation fuel would increase the Company's fuel expense by
approximately $1.0 million. As of December 31, 1999, the Company has hedged
approximately 25% of its first quarter 2000 fuel requirements.
Exposure to interest rate risk relates primarily to the Company's cash
equivalents and short-term investment portfolios, and
ANNUAL REPORT 1999 PAGE 22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
interest expense from floating rate debt instruments. Market risk associated
with the Company's long-term debt is the potential increase in fair value
resulting from a decrease in interest rates. A 10% change would not have a
material impact on the Company's interest expense associated with fixed or
variable rate debt. If short-term interest rates average 10% more in 2000 than
they did during 1999, there would be no material impact on the Company's
interest income.
Pending Developments
Forward-Looking Statements - This Annual Report, 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 differ materially
from those projected results due to factors that include, but are not limited to
uncertainties related to general economic factors, industry conditions, labor
relations, scheduling developments, government regulations, aircraft maintenance
and refurbishment schedules, potential delays related to acquired aircraft, fuel
costs and interest rates. 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 1999, Midwest Express placed into service five
MD-80 series aircraft the Company agreed to purchase in 1997. Two MD-80 series
aircraft were received in the fourth quarter and will enter service in the
second and third quarter 2000. In November 1999, the Company signed a purchase
agreement to acquire four MD-80 series aircraft currently operated by
Scandinavian Airlines System. Delivery of the aircraft is expected to begin in
September 2000 and continue through November 2001. After refurbishment and
modification, three aircraft are expected to enter scheduled service in 2001 and
the last in 2002. The Company expects this project, including aircraft
refurbishment, modification and support equipment, will cost $60 million. These
aircraft will be used to increase capacity on the Company's high-traffic routes
and expand service in existing and new markets.
Regional Jet Aircraft - In 1999, five Fairchild Aerospace 328JET aircraft were
financed via operating leases. Four aircraft were placed in service and the
remaining aircraft was placed into service in first quarter 2000. These
32-passenger aircraft replaced DC-9 jet service in Grand Rapids and Toronto.
They also provide new service between Milwaukee and Pittsburgh, and supplement
turboprop service on select flights to several Midwest cities. Additional routes
are expected to be added in mid-2000. The Company holds options for 10
additional regional jet aircraft to support future growth. Those options are for
aircraft deliveries beginning after January 1, 2001.
Labor Relations - Pilots at the Company are represented by the Air Line Pilots
Association, a labor union, for representation in collective bargaining. In
February 2000, Midwest Express pilots ratified a five-year contract. In April
1999, Midwest Express flight attendants elected the Association of Flight
Attendants, AFL-CIO, a labor union, for representation in collective bargaining.
Negotiations began in January 2000.
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, Midwest Express would be liable for back taxes and associated
interest of approximately $.9 million, and would have to pay approximately $.3
million in additional sales taxes annually in the future.
Year 2000 - The Company successfully completed the Year 2000 rollover. The
Company spent approximately $.8 million to achieve Year 2000 readiness. The
Company estimates lost revenue as a result of passengers not traveling during
the last week of December due to the millennium change was approximately $.7
million. The Company had no significant occurrences associated with the
millennium rollover and does not anticipate any future interruptions in
operations as a result of the processing or display of date/time data.
<PAGE>
Headquarters Building Expansion - In July 1999, the Company announced it will
add a 55,000-square-foot training facility to its Oak Creek, Wisconsin
headquarters. Ground-breaking for the building took place in October 1999, with
facility completion anticipated in the third quarter 2000. The Company expects
the cost of this project to be approximately $6.0 million and anticipates
funding this project with cash flows from operations.
Maintenance Program - Midwest Express is planning a new program for performing
airframe maintenance overhauls that may necessitate a change in accounting
principles. This proposed change will eliminate accruals of heavy maintenance
expense and capitalization and amoritization of maintenance costs. Under the
proposed program, major airframe maintenance will be performed at more frequent
intervals, and many duplicate tasks will be eliminated. The Company expects FAA
approval of the revised maintenance program in the second quarter 2000. The
Company is currently evaluating the impact of the change.
Pension Plan - In 1999, Midwest Express approved a plan whereby the qualified
defined benefit plan that covers substantially all Midwest Express employees
will be terminated on March 31, 2000. This is subject to approval by Pension
Benefit Guaranty Corporation (PBGC), the federal agency responsible for
supervising pension plan terminations. The obligations reported as of December
31, 1999 assume the pension plan is ongoing.
Subject to approval of the pension plan termination, on April 1, 2000,
substantially all Midwest Express employees will be covered by a money purchase
pension plan. Midwest Express will make monthly contributions, primarily based
on employee compensation and employee age.
ANNUAL REPORT 1999 PAGE 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, 1999, 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, Chief Financial Officer and Controller
PAGE 24 MIDWEST EXPRESS HOLDINGS
<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, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
January 28, 2000
ANNUAL REPORT 1999 PAGE 25
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
MIDWEST EXPRESS HOLDINGS, INC.
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ---------
Operating revenues:
<S> <C> <C> <C>
Passenger service..................................$ 406,803 $ 352,933 $ 311,022
Cargo.............................................. 11,912 11,761 11,466
Other.............................................. 28,837 24,180 22,069
---------- ---------- ---------
Total operating revenues...................... 447,552 388,874 344,557
---------- ---------- ---------
Operating expenses:
Salaries, wages and benefits....................... 126,167 112,315 92,207
Aircraft fuel and oil.............................. 53,226 42,925 50,107
Commissions........................................ 30,499 30,080 31,535
Dining services.................................... 23,892 19,633 17,181
Station rental, landing and other fees............. 30,510 25,933 24,526
Aircraft maintenance materials and repairs......... 46,076 36,961 28,190
Depreciation and amortization...................... 13,211 10,021 8,645
Aircraft rentals................................... 20,014 19,290 17,453
---------- ---------- ---------
Other.............................................. 43,205 36,061 36,243
---------- ---------- ---------
Total operating expenses...................... 386,800 333,219 306,087
---------- ---------- ---------
Operating income 60,752 55,655 38,470
Other income (expense):
Interest income.................................... 1,117 1,727 1,419
Interest expense................................... (270) (280) (95)
Other, net......................................... 68 (75) (162)
---------- ---------- ---------
Total other income (expense).................. 915 1,372 1,162
---------- ---------- ---------
Income before income taxes............................. 61,667 57,027 39,632
Provision for income taxes............................. 22,876 21,158 14,692
---------- ---------- ---------
Net income.............................................$ 38,791 $ 35,869 $ 24,940
========== ========== =========
Net income per share - basic...........................$ 2.75 $ 2.54 $ 1.76
========== ========== =========
Net income per share - diluted.........................$ 2.71 $ 2.51 $ 1.74
========== ========== =========
</TABLE>
See notes to consolidated financial statements.
PAGE 26 MIDWEST EXPRESS HOLDINGS
<PAGE>
CONSOLIDATED BALANCE SHEETS
MIDWEST EXPRESS HOLDINGS, INC.
AS OF DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
ASSETS ---------- ----------
Current assets:
<S> <C> <C>
Cash and cash equivalents..................................................... $ 16,049 $ 13,455
Accounts receivable:
less allowance for doubtful accounts of $166 in 1999 and $251 in 1998..... 10,237 9,254
Inventories................................................................... 7,270 4,020
Prepaid expenses:
Commissions............................................................... 2,168 2,931
Other..................................................................... 2,477 3,427
---------- ----------
Total prepaid expenses............................................... 4,645 6,358
Aircraft and modifications intended to be financed
by sale and leaseback transactions........................................ - 951
Deferred income taxes......................................................... 4,687 5,521
---------- ----------
Total current assets................................................. 42,888 39,559
---------- ----------
Property and equipment, net...................................................... 211,449 160,583
Landing slots and leasehold rights, less accumulated amortization
of $2,505 in 1999 and $2,178 in 1998.......................................... 4,244 4,572
Purchase deposits on flight equipment............................................ 2,000 13,383
Other assets..................................................................... 3,248 2,380
---------- ----------
Total assets..................................................................... $ 263,829 $ 220,477
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 4,796 $ 5,064
Air traffic liability......................................................... 36,428 35,285
Accrued liabilities:
Scheduled maintenance expense............................................. 3,897 5,182
Accrued profit sharing.................................................... 4,957 9,518
Vacation pay.............................................................. 4,840 4,066
Frequent Flyer awards..................................................... 4,001 3,653
Other..................................................................... 21,023 19,253
---------- ----------
Total current liabilities............................................ 79,942 82,021
---------- ----------
Long-term debt................................................................... 3,068 3,206
Deferred income taxes............................................................ 14,283 13,647
Noncurrent scheduled maintenance expense......................................... 16,991 12,082
Accrued pension and other postretirement benefits................................ 9,115 6,201
Other noncurrent liabilities..................................................... 6,891 5,688
---------- ----------
Total liabilities................................................................ 130,290 122,845
---------- ----------
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,
14,543,231 shares issued in 1999 and 14,464,056 in 1998................... 145 145
Additional paid-in capital.................................................... 11,147 9,680
Treasury stock, at cost; 531,104 shares in 1999 and 381,015 shares in 1998.... (10,752) (6,401)
Retained earnings............................................................ 132,999 94,208
---------- ----------
Total shareholders' equity....................................................... 133,539 97,632
---------- ----------
Total liabilities and shareholders' equity....................................... $ 263,829 $ 220,477
========== ==========
</TABLE>
See notes to consolidated financial statements.
ANNUAL REPORT 1999 PAGE 27
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
MIDWEST EXPRESS HOLDINGS, INC.
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
Operating activities:
<S> <C> <C> <C>
Net income......................................................... $ 38,791 $ 35,869 $ 24,940
Items not involving the use of cash:
Depreciation and amortization.................................. 13,211 10,021 8,645
Deferred income taxes.......................................... 1,470 272 1,294
Other.......................................................... 5,565 4,974 4,335
Changes in operating assets and liabilities:
Accounts receivable............................................ (629) (3,704) (319)
Inventories.................................................... (3,250) (78) (820)
Prepaid expenses............................................... 1,713 (2,990) 833
Accounts payable............................................... (168) (496) 1,876
Accrued liabilities............................................ 789 11,769 1,059
Air traffic liability.......................................... 1,143 6,352 6,891
----------- ----------- -----------
Net cash provided by operating activities.......................... 58,635 61,989 48,734
----------- ----------- -----------
Investing activities:
Capital expenditures............................................... (67,206) (74,332) (27,617)
Aircraft acquisitions and modifications financed by or
intended to be financed by sale and leaseback transactions..... - 557 (12,520)
Purchase deposits on flight equipment............................. (2,983) (10,800) (14,500)
Proceeds from sale of property and equipment....................... 89 336 196
Other.............................................................. (1,438) 451 (2,128)
----------- ----------- -----------
Net cash used in investing activities.............................. (71,538) (83,788) (56,569)
----------- ----------- -----------
Financing activities:
Proceeds from sale and leaseback transactions ..................... 15,951 4,492 15,566
Purchase of treasury stock......................................... (4,253) (2,003) (1,977)
Other.............................................................. 3,799 699 (1,277)
----------- ----------- -----------
Net cash provided by financing activities.......................... 15,497 3,188 12,312
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents............... 2,594 (18,611) 4,477
Cash and cash equivalents, beginning of year....................... 13,455 32,066 27,589
----------- ----------- -----------
Cash and cash equivalents, end of year............................. $ 16,049 $ 13,455 $ 32,066
=========== =========== ===========
Supplemental cash flow information:
Cash paid for:
Income taxes................................................. $ 20,668* $ 22,754* $ 11,948*
Interest..................................................... $ 270 $ 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.................................... $ 14,366 $ 11,917 $ -
Accrued capital expenditures....................................... 1,372 - -
Spare parts credit................................................. 1,350 - -
* Included in taxes paid are amounts paid to Kimberly-Clark in accordance with the Tax Agreement totaling $4,047
in 1999, $4,535 in 1998 and $5,996 in 1997.
</TABLE>
See notes to consolidated financial statements.
PAGE 28 MIDWEST EXPRESS HOLDINGS
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
MIDWEST EXPRESS HOLDINGS, INC.
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(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, 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
Net income.............................................. - - - 38,791 38,791
Purchase of 147,100 shares of treasury stock............ - - (4,253) - (4,253)
Issuance (receipt) of common stock upon exercise........
of stock options and related tax benefits............. - 1,395 (104) - 1,291
Other................................................... - 72 6 - 78
------------ ---------- -------- ---------- -------------
Balances at December 31, 1999.............................. $ 145 $11,147 $(10,752) $132,999 $133,539
============ ========== ======== ========== ==============
</TABLE>
See notes to consolidated financial statements.
ANNUAL REPORT 1999 PAGE 29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MIDWEST EXPRESS HOLDINGS, INC.
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Note 1. Business and Basis of Presentation
Basis of Presentation
- ---------------------
The accompanying Consolidated Financial Statements of Midwest Express Holdings,
Inc. (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 intercompany balances and transactions
have been eliminated.
Nature of Operations
- --------------------
Midwest Express is a U.S. air carrier providing scheduled passenger service to
28 major destinations in North America. The Company also provides aircraft
charter services, air freight and other airline services. In May 1994, Midwest
Express established Omaha, Nebraska, as its first base of operations outside of
Milwaukee, and currently provides nonstop jet service between Omaha and five
destinations. Astral provides regional scheduled passenger service to cities
primarily in the 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 is 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
<PAGE>
Other Assets
- ------------
Airport takeoff and landing slots have an unlimited life, have historically
appreciated in value, and are occasionally traded, sold or leased among
airlines. The cost of takeoff 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 takeoffs 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 takeoffs 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 will depend on the actual redemption of Frequent Flyer miles
and may be greater or less than amounts accrued at December 31, 1999.
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.
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.
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, 1999. Net settlements are recorded as adjustments to aircraft
fuel expense.
PAGE 30 MIDWEST EXPRESS HOLDINGS
<PAGE>
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
2001.
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, 1999 and 1998, property and equipment consisted of the
following (in thousands):
1999 1998
------------ ------------
Flight equipment.................. $230,341 $150,622
Other equipment................... 12,611 10,143
Buildings and improvements........ 19,111 17,746
Office furniture and equipment.... 12,067 10,140
Construction in progress.......... 34,288 54,633
------------ ------------
308,418 243,284
Less accumulated depreciation..... (96,969) (82,701)
------------ ------------
Property and equipment, net....... $211,449 $160,583
============ ============
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,
1999 were as follows (in thousands):
Year ended December 31,
2000.................................... $ 27,244
2001.................................... 25,035
2002.................................... 23,309
2003.................................... 22,528
2004.................................... 22,470
2005 and thereafter..................... 150,963
---------
$ 271,549
=========
As of December 31, 1999, the Company had 13 of its jet aircraft in service under
operating leases, three of which have been guaranteed by Kimberly-Clark
Corporation. Prior to 1995, the Company was a member of the Kimberly-Clark
Corporation consolidated group. These leases have expiration dates ranging from
2000 through 2011 and can generally be renewed, based on the fair market value
at the end of the lease term, for one to three years. All 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 lessor's defined cost of the aircraft.
As of December 31, 1999, 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.
<PAGE>
In the fourth quarter 1999, the Company entered into lease agreements to finance
the acquisition of five Fairchild Aerospace 328JETs. The leases run for a term
of 16.5 years, with expiration for all leases occurring in 2015. 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 $8.2 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 of 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, National Association.
Rent expense for all operating leases, excluding landing fees, was $31,096,000,
$28,088,000 and $25,435,000 for 1999, 1998 and 1997 respectively.
Note 5. Financing Agreements
At December 31, 1999, 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, 1999, except for letters of credit totaling $9,707,000 that reduce
the amount of available credit.
In August 1997, the Company purchased its headquarters building, which it had
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,
2000.................................... $ 138
2001.................................... 182
2002.................................... 214
2003.................................... 233
2004.................................... 253
The fair value of the Company's borrowing under this agreement approximates its
carrying value as of December 31, 1999.
Note 6. Retirement and Benefit 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.
ANNUAL REPORT 1999 PAGE 31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the funded status of the plans as of December 31
(in thousands):
Midwest Express
Pension Plan
1999 1998
---------- --------
Change in Benefit Obligation
Net benefit obligation at beginning of year.... $ 27,614 $ 18,552
Service cost................................... 3,266 2,456
Interest cost.................................. 2,092 1,676
Actuarial (gain) loss.......................... (6,129) 4,953
Gross benefits paid............................ (31) (23)
---------- --------
Net benefit obligation at end of year.......... $ 26,812 $ 27,614
========== ========
Change in Plan Assets
Fair value of assets at beginning of year...... $ 17,739 $ 12,331
Actual return on plan assets................... 2,147 1,705
Employer contributions......................... 2,474 3,726
Gross benefits paid............................ (31) (23)
---------- --------
Fair value of plan assets at end of year....... $ 22,329 $ 17,739
========== ========
Funded status at end of year................... $ (4,483) $ (9,875)
Unrecognized net actuarial loss................ 1,017 7,900
Unrecognized prior service cost................ (26) (28)
Unrecognized net transition obligation......... 63 86
---------- --------
Accrued benefit liability...................... $ (3,429) $ (1,917)
========== ========
Amounts recognized in the balance sheet consist of an accrued benefit
liability of $3,429,000 and $1,917,000 on December 31, 1999 and 1998,
respectively.
Weighted-average assumptions
Discount rate.................................. 7.75% 7.00%
Expected return on plan assets................. 10.00% 10.00%
Rate of compensation increase.................. 4.25% 4.25%
Supplemental
Pension Plan
1999 1998
---------- --------
Change in Benefit Obligation
Net benefit obligation at beginning of year.... $ 1,290 $ 1,152
Service cost................................... 68 52
Interest cost.................................. 106 81
Actuarial (gain) loss.......................... (121) 5
---------- --------
Net benefit obligation at end of year.......... $ 1,343 $ 1,290
========== ========
Funded status at end of year................... $ (1,343) $(1,290)
Unrecognized net actuarial loss................ 483 641
Unrecognized prior service cost................ 45 50
Unrecognized net transition obligation......... 11 15
---------- --------
Accrued benefit liability...................... $ (804) $ (584)
========== ========
Amounts recognized in the balance sheet consist of an accrued benefit
liability of $804,000 and $584,000 on December 31, 1999 and 1998,
respectively.
Weighted-average assumptions
Discount rate.................................. 7.75% 7.00%
Rate of compensation increase.................. 4.25% 4.25%
<PAGE>
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
1999 1998 1997
-------- -------- --------
Components of Net Periodic Benefit Cost
Service cost.......................... $ 3,266 $ 2,456 $ 1,656
Interest cost......................... 2,092 1,676 1,132
Expected return on assets............. (1,802) (1,175) (994)
Amortization of:
Transition obligation.............. 23 23 23
Prior service cost................. (2) (3) (2)
Actuarial loss..................... 409 379 37
-------- -------- --------
Total net periodic benefit cost....... $ 3,986 $ 3,356 $ 1,852
======== ======== =========
Supplemental
Pension Plan
1999 1998 1997
-------- -------- --------
Components of Net Periodic Benefit Cost
Service cost.......................... $ 68 $ 52 $ 45
Interest cost......................... 106 81 73
Amortization of:
Transition obligation.............. 4 4 4
Prior service cost................. 5 5 5
Actuarial loss..................... 36 36 30
-------- -------- --------
Total net periodic benefit cost....... $ 219 $ 178 $ 157
======== ======== ========
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 as of December
31 (in thousands):
1999 1998
-------- --------
Change in Benefit Obligation
Net benefit obligation at beginning of year...... $ 2,725 $ 2,151
Service cost..................................... 430 270
Interest cost.................................... 266 176
Actuarial loss................................... 159 128
-------- --------
Net benefit obligation at end of year............ $ 3,580 $ 2,725
======== ========
Funded status at end of year..................... $ (3,580) $ (2,725)
Unrecognized net actuarial loss.................. 503 380
-------- --------
Accrued benefit liability........................ $ (3,077) $ (2,345)
======== ========
Amounts recognized in the balance sheet consist of an accrued benefit
liability of $3,077,000 and $2,345,000 on December 31, 1999 and 1998,
respectively.
Weighted-average assumptions
Discount rate.................................... 7.75% 7.00%
Rate of compensation increase.................... 4.25% 4.25%
PAGE 32 MIDWEST EXPRESS HOLDINGS
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1999 1998 1997
Benefit Cost
Service cost................................... $ 430 $ 270 $ 211
Interest cost.................................. 266 176 141
Actuarial loss................................. 37 2 -
----- ------ ------
Total net periodic benefit cost................ $ 733 448 352
===== ====== ======
The assumed health care cost trend rate was approximately 8%, 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
an employee's contributions. Amounts expensed and reflected in the accompanying
income statements were $1,642,000, $1,471,000 and $1,498,000 in 1999, 1998 and
1997, 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 $4,951,000,
$9,984,000 and $4,938,000 under these plans during 1999, 1998 and 1997,
respectively.
Plan Termination
- ----------------
In 1999, the Company approved a plan whereby the Midwest Express Pension Plan
which covers substantially all Midwest Express employees will be terminated on
March 31, 2000 subject to approval of the Pension Benefit Guaranty Corporation
(the federal agency responsible for supervising pension plan terminations). The
obligations reported as of December 31, 1999 assume that the pension plan is
ongoing.
Note 7. Net Income Per Share
The Company has adopted SFAS No.128, "Earnings Per Share," which established new
standards for the calculation of net income per share. Reconciliations of the
numerator and denominator of the basic and diluted per share computations are
summarized as follows (in thousands, except per share amounts):
1999 1998 1997
-------- --------- --------
Net Income Per Share - Basic:
Net income (numerator).....................$ 38,791 $ 35,869 $ 24,940
Weighted average shares outstanding
(denominator)............................ 14,121 14,102 14,197
-------- --------- --------
Net income per share - basic...............$ 2.75 $ 2.54 $ 1.76
======== ========= ========
Net Income Per Share - Diluted:
Net income (numerator).....................$ 38,791 $ 35,869 $ 24,940
Weighted average shares outstanding........ 14,121 14,102 14,197
Effect of dilutive securities:
Stock options.............................. 160 196 113
Shares issuable under the 1995 Stock
Plan for Outside Directors................ 12 8 5
-------- --------- --------
Weighted average shares outstanding
assuming dilution (denominator)........... 14,293 14,306 14,315
-------- --------- --------
Net income per share - diluted.............$ 2.71 $ 2.51 $ 1.74
======== ========= ========
<PAGE>
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 certain employees to
purchase shares of common stock. 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 at the rate of
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 two stock splits and are summarized
as follows:
Weighted
Average
Shares Exercise Price
------- --------------
Options outstanding at January 1, 1997...... 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
Granted.................................. 309,250 29.27
Exercised................................ (77,150) 11.01
Forfeited................................ (72,850) 27.62
-------- -------
Options outstanding at December 31, 1999.... 921,225 $ 22.02
======== =======
Options exercisable at December 31, 1999.... 391,200 $ 14.76
======== =======
Options exercisable at December 31, 1999 included 179,000 options with an
exercise price of $8.00, 22,500 options with an exercise price of $14.00, 13,500
options with an exercise price of $15.14, 108,025 options with an exercise price
of $16.11, and 68,175 options with an exercise price of $30.52.
ANNUAL REPORT 1999 PAGE 33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information concerning currently outstanding
options:
Weighted
Average Weighted
Remaining Average
Number Contractual Exercise
Range of Exercise Prices Outstanding Life Price
------------ ----------- ---------
$8.00 179,000 5.7 years $ 8.00
$14.00 - $16.11 234,925 7.1 years 15.82
$25.00 - $29.22 258,800 9.2 years 29.04
$30.00 - $33.63 248,500 8.2 years 30.66
Options outstanding at
December 31, 1999 921,225 7.7 years $ 22.02
======= ========= =======
The Company has 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):
1999 1998 1997
Net income:
As reported $ 38,791 $ 35,869 $ 24,940
Pro forma $ 36,920 $ 34,514 $ 24,461
Net income per share - basic:
As reported $ 2.75 $ 2.54 $ 1.76
Pro forma $ 2.61 $ 2.45 $ 1.72
Net income per share - diluted:
As reported $ 2.71 $ 2.51 $ 1.74
Pro forma $ 2.58 $ 2.41 $ 1.71
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:
1999 1998 1997
Expected volatility 30.9% 31.6% 27.4%
Risk-free interest rate 6.5% 4.5% 5.4%
Forfeiture rate 5.0% 5.0% 5.0%
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, 1999, 1998 and
1997 consisted of the following (in thousands):
1999 1998 1997
Current provision:
Federal $ 18,122 $ 17,611 $ 11,314
State 3,284 3,275 2,084
21,406 20,886 13,398
Deferred provision:
Federal 1,272 246 1,169
State 198 26 125
1,470 272 1,294
Total provision for income taxes $ 22,876 $ 21,158 $ 14,692
A reconciliation of income taxes at the U.S. federal statutory tax rate to the
effective tax rate follows:
1999 1998 1997
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) (1.7)
Provision for income taxes 37.1% 37.1% 37.1%
<PAGE>
Deferred tax assets and liabilities resulting from temporary differences are
comprised of the following (in thousands):
1999 1998
Current deferred income tax assets
attributable to:
Accrued liabilities $ 3,102 $ 2,550
Maintenance expense liability 1,317 2,633
Other 268 338
Net current deferred tax assets $ 4,687 $ 5,521
Noncurrent deferred income tax assets
(liabilities) attributable to:
Excess of tax over book depreciation $(25,585) $ (20,467)
Maintenance expense liability 6,304 3,692
Pension liability 2,831 1,794
Other 2,167 1,334
Net noncurrent deferred tax liabilities $(14,283) $ (13,647)
In connection with the Company's initial public offering in 1995 (the
"Offering"), 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
In February 1997, Midwest Express committed to pay $9.25 million 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.
In July 1999, the Company announced the addition of a 55,000-square-foot
training facility to its Oak Creek, Wisconsin headquarters. Groundbreaking for
the building took place in October 1999, with facility completion expected in
third quarter 2000. The Company expects the cost of the project to be
approximately $6 million, and anticipates funding the project with cash flows
from operations.
PAGE 34 MIDWEST EXPRESS HOLDINGS
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 1999, the Company signed a purchase agreement to acquire four MD-80
series aircraft currently operated by Scandinavian Airlines System. Delivery of
the aircraft is expected to begin in September 2000 and continue through
November 2001. After refurbishment and modification, three aircraft are expected
to enter scheduled service in 2001, and the last in 2002. The Company expects
that this project, including aircraft refurbishment, modification and support
equipment, will cost $60 million. Financing alternatives are currently being
evaluated.
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
Midwest Express and Astral, doing business as Skyway Airlines, constitute the
two 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 jet service to 28 major destinations throughout North
America by offering single-class, premium service at competitive coach fares. As
of December 31, 1999, Midwest Express operated a fleet of 32 aircraft - 24 DC-9s
and eight MD-80s.
Astral offers point-to-point service in select markets and increases traffic for
Midwest Express by providing passengers with connecting service to jet flights.
As of December 31, 1999, Astral operated a fleet of 15 Beech 1900D turboprop
aircraft and four Fairchild Aerospace 328JETs.
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 100,848; 88,154; and 76,508 passengers in
1999, 1998 and 1997, respectively, under the aforementioned pricing agreement.
Although Astral 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 - 9% 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 centrally
controlling cash. 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.
Reportable segments, as defined, are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding resource allocation and assessing
performance.
<PAGE>
Financial information on the two operating segments, Midwest Express and Astral,
follows (in thousands):
Midwest
1999 Express Astral Elimination Consolidated
- ---- -------- ------ ----------- ------------
Operating revenues $406,127 $ 44,887 $ (3,462) $ 447,552
Operating income 58,847 1,905 - 60,752
Depreciation and
amortization expense 12,336 875 - 13,211
Interest income 1,033 706 (622) 1,117
Interest expense 892 _ (622) 270
Income before
income taxes 58,854 2,813 - 61,667
Provision for
income taxes 21,869 1,007 - 22,876
Total assets 253,354 25,406 (14,931) 263,829
Capital expenditures 66,894 3,295 - 70,189
1998
- ----
Operating revenues $351,357 $41,478 $ (3,961) $ 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 83,630 1,502 - 85,132
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
Interestincome 1,419 462 (462) 1,419
Interest expense 557 _ (462) 95
Income before
income taxes 38,495 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 40,552 1,565 - 42,117
ANNUAL REPORT 1999 PAGE 35
<PAGE>
<TABLE>
MIDWEST EXPRESS HOLDINGS, INC.
Quarterly Financial Summary (Unaudited)
(In Thousands, Except Per Share Data)
<CAPTION>
Three Months Ended
- -------------------------------------------------------------------------------------------------------------------
1999 March 31 June 30 September 30 December 31
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $98,881 $117,662 $115,837 $115,172
Operating expenses 87,616 96,858 98,343 103,983
Operating income 11,265 20,804 17,494 11,189
Income before income taxes 11,365 20,896 17,795 11,611
Income taxes 4,262 7,836 6,673 4,105
Net income 7,103 13,060 11,122 7,506
Net Income per share - basic 0.50 0.92 0.79 0.53
Net income per share - diluted 0.50 0.91 0.78 0.53
<CAPTION>
Three Months Ended
- -------------------------------------------------------------------------------------------------------------------
1998 March 31 June 30 September 30 December 31
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHAREHOLDER INFORMATION
<S> <C>
Headquarters Annual Meeting
Midwest Express Holdings, Inc. The annual Meeting of Midwest Express Holdings, Inc. will be held at 10
6744 South Howell Avenue a.m. on Wednesday, April 26, 2000 at The Midwest Express Center, 400
Oak Creek, Wisconsin 53154-1402 West Wisconsin Avenue, Milwaukee. Shareholders of record on March 9,
(414) 570-4000 2000 will be mailed an official notice of the meeting.
Web Site Financial Reports
www.midwestexpress.com Form 10-K (without exhibits) and other reports filed with the Securities
and Exchange Commission are available without charge upon written
Transfer Agent and Registrar request from the Company's Investor Relations department at the
Firstar Bank, National Association headquarters address. Company documents filed electronically with
Corporate Trust Department the U.S. Securities and Exchange Commission (SEC) can also be found
Milwaukee, Wisconsin on the SEC's Web site at www.sec.gov.
Independent Auditors Common Stock
Deloitte & Touche LLP Midwest Express Holdings, Inc. (symbol: MEH) common stock
Milwaukee, Wisconsin trades on the New York Stock Exchange. As of December 31, 1999,
there were 14,543,231 shares of common stock issued and
782 registered shareholders.
</TABLE>
Following are low and high prices per share
for the past two years, adjusted to reflect
a 3-for-2 stock split on May 27, 1998.
1999 1998
First Quarter $24-1/8 - 30-15/16 $24-1/4 - 34-43/64
Second Quarter $28-5/16 - 34-3/8 $27-37/64 - 36-3/16
Third Quarter $26-3/16 - 34-11/16 $26-3/4 - 37-9/16
Fourth Quarter $25-13/16 - 32-5/8 $24-1/8 - 32-3/8
The Company has not paid a cash dividend since its initial public offering.
ANNUAL REPORT 1999 PAGE 36
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 28, 2000 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, 1999.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Milwaukee, Wisconsin
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF MIDWEST EXPRESS HOLDINGS, INC. AS OF AND
FOR THE PERIOD ENDED DECEMBER 31, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 16,049
<SECURITIES> 0
<RECEIVABLES> 10,403
<ALLOWANCES> 166
<INVENTORY> 7,270
<CURRENT-ASSETS> 42,888
<PP&E> 308,418
<DEPRECIATION> 96,969
<TOTAL-ASSETS> 263,829
<CURRENT-LIABILITIES> 79,942
<BONDS> 3,068
0
0
<COMMON> 145
<OTHER-SE> 133,394
<TOTAL-LIABILITY-AND-EQUITY> 263,829
<SALES> 0
<TOTAL-REVENUES> 447,552
<CGS> 0
<TOTAL-COSTS> 386,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 123
<INTEREST-EXPENSE> 270
<INCOME-PRETAX> 61,667
<INCOME-TAX> 22,876
<INCOME-CONTINUING> 38,791
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,791
<EPS-BASIC> 2.75
<EPS-DILUTED> 2.71
</TABLE>
