FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 2000
[ ] 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)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of April 30, 2000, there were 14,022,342 shares of Common Stock, $.01 par
value, of the Registrant outstanding.
Page 1
<PAGE>
MIDWEST EXPRESS HOLDINGS, INC.
FORM 10-Q
For the period ended March 31, 2000
INDEX
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (unaudited)
- ------- --------------------------------
Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Unaudited Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of 9
- ------- --------------------------------------------------
Operations and Financial Condition
----------------------------------
Item 3. Quantitative and Qualitative Disclosure about Market Risk 16
- ------- ---------------------------------------------------------
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
- ------- --------------------------------
SIGNATURES 18
Page 2
<PAGE>
Part I Item I - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
2000 1999
---- ----
Operating revenues:
Passenger service......................................... $ 96,165 $88,862
Cargo .................................................... 2,896 3,033
Other .................................................... 7,703 6,986
-------- -------
Total operating revenues................................ 106,764 98,881
-------- -------
Operating expenses:
Salaries, wages and benefits.............................. 35,575 29,021
Aircraft fuel and oil..................................... 20,006 10,356
Commissions............................................... 5,822 7,068
Dining services........................................... 5,466 5,198
Station rental, landing and other fees.................... 8,771 8,003
Aircraft maintenance materials and repairs................ 11,978 10,378
Depreciation and amortization............................. 3,913 2,970
Aircraft rentals.......................................... 6,194 4,890
Other..................................................... 11,666 9,732
------ -----
Total operating expenses................................ 109,391 87,616
-------- -------
Operating (loss) income..................................... (2,627) 11,265
-------- -------
Other income (expense):
Interest income........................................... 225 207
Interest expense.......................................... (66) (69)
Other..................................................... (18) (38)
-------- --------
Total other income (expense)............................ 141 100
-------- --------
(Loss) income before income taxes and
cumulative effect of accounting changes................... (2,486) 11,365
Provision for income taxes (credit)........................ (924) 4,262
-------- --------
(Loss) income before cumulative effect of
accounting changes........................................ $ (1,562) $ 7,103
Cumulative effect of accounting changes,
net of applicable income taxes of $2,768.................. (4,713) -
-------- -------
Net (loss) income........................................... $ (6,275) $ 7,103
======== =======
(Loss) income per common share - basic:
(Loss) income before cumulative effect
of accounting changes................................... $ (.11) $ .50
Cumulative effect of accounting changes, net.............. (.34) -
-------- -------
Net (loss) income......................................... $ (.45) $ .50
======== =======
(Loss) income per common share - diluted:
(Loss) income before cumulative effect of
accounting changes...................................... $ (.11) $ .50
Cumulative effect of accounting changes, net.............. (.34) -
-------- -------
Net (loss) income......................................... $ (.45) $ .50
========= =======
See notes to consolidated financial statements.
Page 3
<PAGE>
Part I Item I - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
2000 1999
(Unaudited)
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 20,328 $ 16,049
Accounts receivable: less allowance for
doubtful accounts of $154 and $166 at
March 31, 2000 and December 31, 1999,
respectively..................................... 9,797 10,237
Inventories........................................ 7,052 7,270
Prepaid expenses................................... 6,504 4,645
Deferred income taxes.............................. 7,528 4,687
-------- --------
Total current assets............................. 51,209 42,888
Property and equipment, at cost...................... 305,104 308,418
Less accumulated depreciation and amortization..... 92,945 96,969
-------- --------
Net property and equipment........................... 212,159 211,449
Landing slots and leasehold rights, net.............. 4,159 4,244
Purchase deposits on flight equipment................ 2,250 2,000
Other assets......................................... 3,213 3,248
-------- --------
Total assets......................................... $272,990 $263,829
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 7,892 $ 4,796
Air traffic liability.............................. 55,366 36,428
Accrued liabilities................................ 33,322 38,718
-------- --------
Total current liabilities........................ 96,580 79,942
Long-term debt....................................... 3,031 3,068
Deferred income taxes................................ 13,143 14,283
Noncurrent scheduled maintenance expense............. 9,794 16,991
Accrued pension and other postretirement benefits.... 9,928 9,115
Deferred frequent flyer partner revenue.............. 6,601 -
Other noncurrent liabilities......................... 6,525 6,891
-------- --------
Total liabilities.................................... $145,602 $130,290
Shareholders' equity:
Preferred stock, without par value,
5,000,000 shares authorized, no shares
issued or outstanding............................ n/a n/a
Common stock, $.01 par value, 25,000,000
shares authorized, 14,543,231 shares
issued in 2000 and 14,543,231 shares
issued in 1999................................... 145 145
Additional paid-in capital......................... 11,208 11,147
Treasury stock, at cost; 525,569 shares in
2000 and 531,104 shares in 1999.................. (10,689) (10,752)
Retained earnings.................................. 126,724 132,999
-------- --------
Total shareholders' equity........................... 127,388 133,539
-------- --------
Total liabilities and shareholders' equity........... $272,990 $263,829
======== ========
See notes to consolidated financial statements.
Page 4
<PAGE>
Part I Item I - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months
Ended March 31,
2000 1999
---- ----
Operating activities:
Net (loss) income........................................ $(6,275) $ 7,103
Items not involving the use of cash:
Cumulative effect of accounting changes, net........... 4,713 -
Depreciation and amortization.......................... 3,913 2,970
Deferred income taxes.................................. (3,981) (110)
Other.................................................. 1,071 1,233
Changes in operating assets and liabilities:
Accounts receivable.................................... 440 (405)
Inventories............................................ 218 (354)
Prepaid expenses....................................... (1,859) (958)
Accounts payable....................................... 3,096 891
Deferred frequent flyer partner revenue................ 235 -
Accrued liabilities.................................... 734 186
Air traffic liability.................................. 10,823 6,107
------- --------
Net cash provided by operating activities.............. 13,128 16,663
------- --------
Investing activities:
Capital expenditures..................................... (9,143) (26,337)
Purchase deposits on flight equipment.................... (250) (900)
Other.................................................... 6 (791)
------- --------
Net cash used in investing activities.................... (9,387) (28,028)
------- --------
Financing activities:
Proceeds from sale and leaseback transactions............ - 951
Other.................................................... 538 3,205
------- --------
Net cash provided by financing activities.................. 538 4,156
------- --------
Net increase (decrease) in cash and cash equivalents....... 4,279 (7,209)
Cash and cash equivalents, beginning of period............. 16,049 13,455
------- --------
Cash and cash equivalents, end of period................... $20,328 $ 6,246
======= ========
Supplemental schedule of investing activities:
Transfer of flight equipment from purchase
deposits to property and equipment..................... - $ 10,466
See notes to consolidated financial statements.
Page 5
<PAGE>
Midwest Express Holdings, Inc.
Unaudited Notes to Consolidated Financial Statements
1. Business and Basis of Presentation
The consolidated financial statements for the three-month period ended
March 31, 2000 are unaudited and reflect all adjustments (consisting only
of normal recurring adjustments) that are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim period. The consolidated financial statements
should be read in conjunction with the notes thereto, together with
management's discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report to Shareholders and
incorporated by reference in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999. The results of operations for the
three-month period ended March 31, 2000 are not necessarily indicative of
the results for the entire fiscal year ending December 31, 2000.
2. New Accounting Standards
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company
is currently in the process of evaluating the accounting and disclosure
effects of this Statement, and anticipates adopting the Statement in the
first quarter of 2001.
3. Reclassifications
Certain reclassifications have been made in prior year financial statements
to conform to the current year's presentation.
4. Cumulative Effect of Accounting Changes
Effective January 1, 2000, the Company adopted Staff Accounting Bulletin
101, "Revenue Recognition in Financial Statements" ("SAB 101"), issued by
the Securities and Exchange Commission in December 1999. SAB 101 provides
guidance on the application of generally accepted accounting principles to
revenue recognition in financial statements. Prior to the issuance of SAB
101, the Company recognized all revenue from frequent flyer miles sold to
partners, net of the incremental cost of providing future air travel, when
the mileage was sold, which was consistent with most major airlines.
Beginning January 1, 2000, as a result of adopting SAB 101, the Company has
changed its method used to account for the sale of frequent flyer mileage
credits to participating partners such as credit card companies, hotels and
car rental agencies. Under the new accounting method, a portion of the
revenue from the sale of frequent flyer mileage credits is deferred and
recognized when transportation is provided to the passenger. The cumulative
effect of this change is an unfavorable adjustment of
Page 6
<PAGE>
($7.8) million, net of tax. The Company believes the new method
appropriately matches revenues in the period in which services are
provided.
The Company also changed its accounting policy associated with major
maintenance on airframes. In the past, major airframe costs were either (1)
accrued to expense on the basis of estimated future costs and estimated
flight hours between major maintenance events, or (2) capitalized when
incurred and amortized on the basis of estimated flight hours until the
next major maintenance event. Effective first quarter 2000, in conjunction
with the Company's efforts to divide major maintenance events into smaller,
more frequent events, the Company will record airframe maintenance costs as
they are incurred. Costs associated with major maintenance on aircraft
engines will continue to use the existing approach. In first quarter 2000,
the Company recorded a favorable adjustment of $3.1 million, net of tax,
for the cumulative effect of the change for prior years.
The pro forma results, assuming that accounting changes were applied
retroactively, are shown below (in thousands, except per share data):
Three months ended March 31, 1999 (unaudited)
As
Pro Previously
Forma Reported
----- ----------
Income before cumulative effect of accounting
changes........................................... $ 7,103 $ 7,103
Earnings per common share........................... $ .50 $ .50
Earnings per common share assuming dilution......... $ .50 $ .50
Net income.......................................... $ 7,826 $ 7,103
Earnings per common share........................... $ .55 $ .50
Earnings per common share assuming dilution......... $ .55 $ .50
Page 7
<PAGE>
5. Segment Reporting
Midwest Express Airlines, Inc. ("Midwest Express") and Astral Aviation,
Inc. doing business as Skyway Airlines ("Astral"), constitute the
reportable segments of the Company. The Company's reportable segments are
strategic units that are managed independently because they provide
different services with different cost structures and marketing strategies.
Additional detail on segment reporting is included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999. Financial
information for the three months ended March 31 on the two operating
segments, Midwest Express and Astral, follows (in thousands):
Midwest
2000 Express Astral Elimination Consolidation
- ---- ------- ------ ----------- -------------
Operating revenues............$ 94,511 $13,144 $ (891) $106,764
Operating (loss).............. (815) (1,812) - (2,627)
Depreciation and
amortization expenses....... 3,593 320 - 3,913
Interest income............... 225 147 (147) 225
Interest expense.............. 213 - (147) 66
(Loss) before income taxes
and cumulative effect of
accounting changes.......... (820) (1,666) - (2,486)
Provision for income taxes
(credit).................... (303) (621) - (924)
Cumulative effect of
accounting changes, net
of applicable taxes......... (4,713) - - (4,713)
Total assets.................. 260,173 24,652 (11,835) 272,990
Capital expenditures..........$ 8,453 $ 690 $ - $ 9,143
Midwest
2000 Express Astral Elimination Consolidation
- ---- ------- ------ ----------- -------------
Operating revenues............ $ 89,840 $ 9,892 $ (851) $ 98,881
Operating income.............. 11,196 69 - 11,265
Depreciation and
amortization expenses....... 2,771 199 - 2,970
Interest income............... 207 132 (132) 207
Interest expense.............. 201 - (132) 69
Income before income taxes ... 11,164 201 - 11,365
Provision for income taxes.... 4,186 76 - 4,262
Total assets.................. 226,507 21,092 (10,813) 236,786
Capital expenditures.......... $ 25,540 $ 797 $ - $ 26,337
Page 8
<PAGE>
Part I Item 2.
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Overview
The Company's first quarter 2000 operating loss was ($2.6) million, a decrease
of $13.9 million from the first quarter 1999 operating income of $11.3 million.
Net loss for the quarter was ($6.3) million, which was $13.4 million less than
net income in the first quarter 1999. Year-to-date net loss per share on a
diluted basis was ($.45), a $.95 decrease over 1999 net income per diluted share
of $.50.
The Company's total revenue in the first quarter increased $7.9 million, or
8.0%, compared to the first quarter 1999. Traffic, as measured in scheduled
service revenue passenger miles ("RPM"), increased 5.9% in the first quarter
while scheduled service capacity increased 8.5%. Capacity at Skyway Airlines
increased 44.6% as five regional jets were in service compared to none in first
quarter 1999. Capacity at Midwest Express increased 6.5% due to the addition of
three MD-80 aircraft in scheduled service. Capacity at both operating units was
constrained by a shortage of pilots, which resulted in abnormally low aircraft
utilization. While both airlines have been able to hire sufficient pilots, both
have experienced problems in training the number of pilots needed to support the
growth plan. Traffic increased at Midwest Express and Skyway 4.8% and 31.0%
respectively. Traffic was reduced the first few weeks in January due to
passenger concerns about the millennium rollover. Traffic in February and March
was reduced due to the threat of a pilots' strike at Midwest Express. Finally,
capacity and traffic were affected by a high number of flight cancellations in
the quarter. Skyway cancelled 850 flights, about 500 due to weather and most of
the others due to crew shortages. Midwest Express cancelled 462 flights, mostly
due to weather.
Revenue yield increased .3% at Midwest Express and 1.8% at Skyway. Competitive
pricing pressures reduced yield in several markets, but was more than offset by
the $10 fuel surcharge implemented on ticket sales effective February 1, 2000.
The Company's operating costs increased by $21.8 million, or 24.9%. On a cost
per available seat mile basis, costs increased 13.7% at Midwest Express (4.2%
excluding the impact of higher fuel prices) and 5.6% at Skyway ((.4%) excluding
fuel price changes). Higher fuel prices caused costs to increase $9.0 million,
as into-plane cost per gallon increased almost 80%. Unit costs also increased
due to reduced aircraft utilization caused by the shortage of pilots at both
airlines. In addition, pilot costs increased at Midwest Express due to a 2.5%
contract signing bonus, increased wage rates associated with the new contract,
and the implementation of the new FAA mandated interpretation of crew reserve
rest rules. This effectively added 18 pilots with no increased flying.
Additional detail on cost changes is included in subsequent sections.
Page 9
<PAGE>
Operating Statistics
The following table provides selected operating statistics for Midwest Express
and Astral.
Three Months Ended,
March 31,
--------------------------------------
%
2000 1999 Change
---- ---- ------
Midwest Express Operations
Origin & Destination Passengers 460,666 442,590 4.1
Revenue Passenger Miles (000s) 447,794 427,349 4.8
Scheduled Service Available Seat
Miles (000s) 751,268 705,236 6.5
Total Available Seat Miles (000s) 760,824 713,847 6.6
Load Factor (%) 59.6% 60.6% -1.0 pts.
Revenue Yield $ 0.186 $ 0.185 .3
Cost per total ASM $ 0.125 $ 0.110 13.7
Average Passenger Trip Length 972.1 965.6 .7
Number of Flights 10,793 10,798 0.0
Into-plane Fuel Cost per Gallon $ 0.901 $ 0.503 78.9
Full-time Equivalent Employees at
End of Period 2,556 2,219 15.2
Aircraft in Service at End of Period 32 29 10.3
Astral Operations
Origin & Destination Passengers 97,044 79,845 21.5
Revenue Passenger Miles (000s) 23,761 18,141 31.0
Scheduled Service Available Seat
Miles (000s) 56,516 39,078 44.6
Total Available Seat Miles (000s) 56,542 39,219 44.2
Load Factor (%) 42.0% 46.4% -4.4 pts.
Revenue Yield $0.550 $ 0.540 1.8
Cost per total ASM $0.264 $ 0.250 5.6
Average Passenger Trip Length 244.9 227.2 7.8
Number of Flights 12,021 10,443 15.1
Into-plane Fuel Cost per Gallon $1.002 $ 0.555 80.6
Full-time Equivalent Employees at
End of Period 457 335 36.4
Aircraft in Service at End of Period 20 15 33.3
Note: All statistics exclude charter operations except the following: total
available seat miles ("ASM"), cost per total ASM, into-plane fuel cost,
number of employees and aircraft in service. Aircraft acquired but not
yet placed into service are excluded from the aircraft in service
statistics. Numbers in this table may not be recomputed due to
rounding.
Page 10
<PAGE>
The following table provides operating revenues and expenses for the Company
expressed as cents per total ASM, including charter operations, and as a
percentage of total revenues:
Three Months Ended March 31,
2000 1999
---- ----
Per Per
Total % of Total % of
ASM Revenue ASM Revenue
----- ------- ----- -------
Operating revenues:
Passenger service $ 0.118 90.1% $ 0.118 89.9%
Cargo 0.004 2.7% 0.004 3.1%
Other 0.009 7.2% 0.009 7.0%
------- ------ ------- -----
Total operating revenues $ 0.131 100% $ 0.131 100%
------- ------ ------- -----
Operating expenses:
Salaries, wages and benefits $ 0.043 33.3% $ 0.038 29.3%
Aircraft fuel and oil 0.024 18.8% 0.014 10.5%
Commissions 0.007 5.5% 0.009 7.2%
Dining services 0.007 5.1% 0.007 5.3%
Station rental, landing and
other fees 0.011 8.2% 0.011 8.1%
Aircraft maintenance
materials/repairs 0.015 11.2% 0.014 10.5%
Depreciation and amortization 0.005 3.7% 0.004 3.0%
Aircraft rentals 0.008 5.8% 0.006 4.9%
Other 0.014 10.9% 0.013 9.8%
------- ------ ------- -----
Total operating expenses $ 0.134 102.5% $ 0.116 88.6%
======= ====== ======= =====
Total ASMs (000s) 817,365 753,066
Note: Numbers, percents and totals in this table
may not be recomputed due to rounding.
Three Months Ended March 31, 2000 Compared to
Three Months Ended March 31, 1999
Operating Revenues
Company operating revenues totaled $106.8 million in the first quarter 2000, a
$7.9 million, or 8.0%, increase over the first quarter 1999. Passenger revenues
accounted for 90.1% of total revenues and increased $7.3 million, or 8.2%, from
1999 to $96.2 million. The increase is attributable to a 5.9% increase in
passenger volume, as measured by revenue passenger miles.
Midwest Express passenger revenue increased $4.0 million, or 5.1%, from 1999 to
$83.1 million. This increase was caused by a 4.1% increase in origin and
destination passengers. Total capacity, as measured by scheduled service ASMs,
increased 6.5% due to three additional aircraft in scheduled service during the
first quarter 2000. Load factor decreased from 60.6% in 1999 to 59.6% in 2000,
due to lost bookings associated with a potential pilots' strike and a reduction
in passenger travel in the first few weeks of January due to passenger concerns
related
Page 11
<PAGE>
to the year 2000 rollover. Revenue yield increased .3% due to a $10 fuel
surcharge effective with February 1, 2000 ticket sales.
Astral passenger revenue increased $3.3 million, or 33.4%, from 1999 to $13.1
million. Total capacity, as measured by scheduled service ASMs, increased 44.6%
due to five new regional jets in scheduled service during first quarter 2000.
Passenger volume, as measured by revenue passenger miles, increased 31.0%. Load
factor decreased from 46.4% in 1999 to 42.0% in 2000, while revenue yield
increased 1.8% due to the $10 fuel surcharge effective with February 1, 2000
ticket sales.
Revenue from cargo, charter and other services increased $.6 million in the
first quarter 2000. Midwest Express benefited from increased revenue from
charter sales of $.4 million.
Operating Expenses
First quarter 2000 operating expenses increased $21.8 million, or 24.9%, from
1999. The increase was primarily the result of higher fuel prices, decreased
aircraft utilization at both Midwest Express and Astral and increased labor
costs. Decreased aircraft utilization was primarily due to a shortage of trained
pilots. The shortage of trained pilots was primarily the result of lack of
flight simulator time caused by increased industry demand for flight simulator
time to meet the 1999 FAA change in reserve rest rule interpretation. Because of
this, Midwest Express operated a similar number of flights during the quarter,
but had three additional aircraft in service. Astral had similar issues with
higher fuel prices and low regional jet utilization; the regional jets operated
at 57% utilization, but had the infrastructure and costs to support full
utilization. In addition to lack of simulator time, pilot turnover at Astral
resulted in a lack of trained instructor pilots and check airmen. Offsetting
higher costs in most categories were lower commission costs and no profit
sharing accrual. Cost per total ASM increased 15.0%, from 11.6(cent) in 1999 to
13.4(cent) in 2000.
Salaries, wages and benefits increased $6.6 million, or 22.6%. The labor cost
increase reflects the addition of approximately 459 full-time equivalent
employees (337 at Midwest Express and 122 at Skyway) since March 31, 1999.
Midwest Express and Astral added employees throughout the organization to
support additional aircraft placed in service. Increased labor costs were also
due to the Midwest Express pilots' contract signing bonus, an increase in the
number of pilots due to new rest and reserve rules mandated by the FAA, and a
wage increase for pilots associated with the new contract. On a cost per total
ASM basis, labor costs increased 12.9% from 3.8(cent) in 1999 to 4.3(cent) in
2000.
Aircraft fuel and oil and associated taxes increased $9.6 million, or 93.2%, in
first quarter 2000. Into-plane fuel increased 79.5% in 2000, averaging
90.9(cent) per gallon in 2000 versus 50.7(cent) per gallon in 1999 resulting in
a $9.0 million pre-tax price impact. Fuel consumption increased 7.8% in the
quarter, primarily because Astral placed five 328JETs in service. The Company
manages the price risk of fuel primarily by purchasing commodity options that
establish ceiling prices. The Company hedged 25% of first quarter 2000 fuel
requirements which resulted in $.6 million savings. Fuel costs in April 2000
trended downward, averaging 86.4(cent) per gallon.
Page 12
<PAGE>
Commissions decreased $1.2 million, or 17.6%. Most of this reduction was due to
a new commission rate structure that reduced base commissions from 8% to 5%
effective October 19, 1999. In addition, more tickets were generated in first
quarter 2000 via the Company's reservations center, Web site and ticket
counters.
Dining services costs increased $.3 million, or 5.2%, from 1999. The increase
was primarily due to the 4.1% increase in Midwest Express origin and destination
passengers.
Station rental, landing and other fees increased $.8 million, or 9.6%, from
1999. The increase was caused by 15.1% more flight segments at Astral. On a cost
per ASM basis, these costs increased 1.0%.
Maintenance costs increased $1.6 million, or 15.4%, from 1999. The increase was
caused by higher-than-expected costs associated with material aircraft component
repairs and higher engine overhaul costs.
Depreciation and amortization increased $.9 million, or 31.8%, from 1999. The
increase was primarily the result of depreciation associated with three
additional MD-80 aircraft placed in service, aircraft noise hushkits added to
six DC-9 aircraft and capital spending associated with the start-up of the
regional jet program.
Aircraft rental costs increased $1.3 million, or 26.6%, from 1999 primarily as a
result of Astral leasing five 328JETs and Midwest Express completing a
sale/leaseback on one MD-80 aircraft.
Other costs increased $1.9 million, or 19.9%, from 1999. Other operating
expenses consist primarily of advertising and promotion, insurance, property
taxes, consulting services, reservation fees, administration and other items.
The increase was primarily due to a non-recurring $.5 million airport rental
credit in 1999, higher costs for professional services, higher Frequent Flyer
expenses and higher crew training costs. On a cost per total ASM basis, these
costs increased 10.5% primarily because of lower aircraft utilization.
Provision for Income Taxes
Income tax expense for first quarter 2000 was a credit of ($.9) million, a $5.2
million decrease from 1999 provision of $4.3 million. The effective tax rates
for the first quarter of 2000 and 1999 were 37.2% and 37.5% respectively. For
purposes of calculating the Company's income tax expense and effective tax rate,
the Company treats amounts payable to an affiliate of Kimberly-Clark 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.
Cumulative Effect of Accounting Changes
The Company's cumulative effect of accounting changes, net of applicable tax,
totaled ($4.7) million. The change was ($7.8) million, net of tax, for a change
in accounting methods for Frequent Flyer partner miles, partially offset by a
$3.1 million, net of tax, adjustment for major
Page 13
<PAGE>
airframe maintenance due to the Company's planned transition to divide
major events into smaller, more frequent events, and record airframe
maintenance costs as they are incurred.
Net (Loss) Income
Net (loss) for the first quarter 2000 was ($6.3) million, a decrease of
$13.4 million from first quarter 1999 net income of $7.1 million. The net
(loss) income margin deteriorated from 7.2% in 1999 to (5.9)% in 2000.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $20.3 million at March 31, 2000,
compared to $16.0 million at December 31, 1999. Net cash provided by operating
activities totaled $13.1 million for the three months ended March 31, 2000. Net
cash used in investing activities totaled $9.4 million, due to capital
expenditures of $9.4 million, including $.3 million of purchase deposits on
flight equipment.
As of March 31, 2000, the Company had a working capital deficit of $45.4 million
versus a $37.1 million deficit on December 31, 1999. 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 and revenue is recognized when the passenger travels).
Because of this, the Company expects to operate at a working capital deficit,
which is common in the industry.
As of March 31, 2000, 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 maintenance
facility and for various other purposes. The Kimberly-Clark credit facility
expires in September 2000.
Capital spending totaled $9.1 million for the three months ended March 31, 2000.
Capital expenditures primarily consisted of spending for the construction of the
Company's new training facility, aircraft refurbishment costs for two of the
recently acquired MD-80 aircraft, engine overhauls, spare parts and spending for
refurbishment and equipment for the Kansas City call center. The Company
anticipates full year capital spending to be approximately $50 million in 2000,
$21 million of which is associated with the acquisition and refurbishment of
MD-80 aircraft.
During 1997, the Company executed definitive purchase documents to acquire eight
previously owned McDonnell Douglas MD-80 series aircraft. The Company financed
seven deliveries and refurbishment costs for six aircraft presently in service,
primarily using internal cash flow. A sale-leaseback was completed for one MD-80
in September 1999.
As of March 31, 2000, leases relating to three of Midwest Express' jet aircraft
are guaranteed by Kimberly-Clark. The Company pays Kimberly-Clark a guarantee
fee equal to 1.25% annually of
Page 14
<PAGE>
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.
The five Fairchild Aerospace 328JET aircraft were financed via leveraged leases
over a period of 16.5 years.
The Company's Board of Directors has authorized a $15.0 million share repurchase
program. As of March 31, 2000, the Company has purchased a total of 565,725
shares of common stock at a cost of $11.0 million. No shares were repurchased in
the first quarter.
The Company believes its existing cash and cash equivalents, cash flow from
operations, funds available from credit facilities and available long-term
financing for the acquisition of jet aircraft will be adequate to meet its
current and anticipated working capital requirements and capital expenditures.
Pending Developments
This Form 10-Q filing, and particularly this Pending Developments section,
contains forward-looking statements that may state the Company's or management's
intentions, hopes, beliefs, expectations or predictions for the future. It is
important to note that the Company's actual results could differ materially from
those projected results due to factors that include, but are not limited to,
uncertainties related to general economic factors, industry conditions,
scheduling developments, government regulations, labor relations, aircraft
maintenance and refurbishment schedules, potential delays related to acquired
aircraft, fuel prices and 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 Registration Statement on Form S-1 No. 333-03325.
MD-80 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 1999 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 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.
Page 15
<PAGE>
Regional Jet Aircraft - The Company plans to acquire five 32-passenger 328JETs
in 2001, with the first aircraft entering revenue service in February 2001, and
five 44-passenger 428JETs beginning in 2003. These aircraft will be operated by
Astral. The estimated cost of these ten aircraft will total approximately $115
million. The Company holds options to acquire five additional regional jet
aircraft.
Labor Relations - 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. Midwest Express
pilots ratified a five year agreement in February 2000. The Astral pilots have a
four-year agreement which expires January 2002. No other employees are
unionized.
Pension Plan - In 1999, Midwest Express approved a plan whereby the qualified
defined benefit plan that covers substantially all Midwest Express employees has
terminated as of March 31, 2000. This is subject to approval by Pension Benefit
Guaranty Corporation (PBGC), the federal agency responsible for supervising
pension plan terminations.
Subject to approval of the pension plan termination, effective 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.
Headquarters Building Expansion - In July 1999, the Company announced it would
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 $7.0 million, and anticipates funding this
project by cash flows from operations.
Other Issues - The Company's Annual Report for the year ended December 31, 1999,
disclosed certain issues relating to sales taxes. This issue remains pending.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Company's market risk since December
31, 1999.
Page 16
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(10) Fifteenth Amendment to Airline Lease, as amended
between Milwaukee County and Midwest Express, dated
February 16, 2000.
(27) Financial data schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 2000.
Page 17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Midwest Express Holdings, Inc.
Date: May 15, 2000 By /s/ Timothy E. Hoeksema
-------------- -----------------------------------
Timothy E. Hoeksema
Chairman of the Board, President
and Chief Executive Officer
Date: May 15, 2000 By /s/ Robert S. Bahlman
-------------- ---------------------------------
Robert S. Bahlman
Senior Vice President and
Chief Financial Officer
Page 18
AMENDMENT NO. 15
TO
AIRLINE LEASE NO. AC-865
THIS AMENDMENT TO CONTRACT OF LEASE is made and entered into as of the
16th day of February, 2000, by and between MILWAUKEE COUNTY, a municipal
corporation, organized and existing as one of the counties in Wisconsin
(hereinafter referred to as "Lessor" or "County"), and MIDWEST EXPRESS AIRLINES,
INC., a corporation organized and existing under the laws of the State of
Wisconsin (hereinafter referred to as "Lessee" or "Airline").
W I T N E S S E T H:
THAT, WHEREAS, the parties hereto have heretofore entered into an
Airline Lease dated April 5, 1985, as amended, relating to space, occupancy and
the use of the premises and facilities of General Mitchell International Airport
(GMIA) for the transportation of persons and cargo by air; and
WHEREAS, Airline requests that Lessor assign a portion of the
unassigned Ticket Counter and Ticket Counter Office space to Airline; and,
WHEREAS, Airline requests that Lessor accept surrender of the
commitment for Ticket Counter, Ticket Counter Office, and Baggage makeup area
from US Airways for reassignment to Airline; and,
WHEREAS, on July 22, 1999, (File No. 99-436) County's Board of
Supervisors approved amending Airline's Lease to add additional Ticket Counter,
Ticket Counter Office, and Baggage Makeup Area;
NOW, THEREFORE, for and in consideration of the premises and of the
mutual covenants and agreements herein contained and other valuable
considerations, it is mutually agreed between the parties hereto that the
aforesaid agreement dated April 5, 1985, as amended, be and it is hereby further
amended in the following particulars, to wit:
1. Effective on July 1, 1999, paragraph S of Article IV shall be
deleted in its entirety and a new paragraph S inserted therefore, reading as
follows:
"S. LESSEE'S EXCLUSIVE USE SPACE WITHIN THE TERMINAL BUILDING ON
JULY 1, 1999
For purposes of calculation of Lessee's Terminal
rents for those areas designated for Lessee's exclusive use
in the Terminal Building, the following space definitions,
relative cost factors, and resultant ERUs shall be utilized:
1
<PAGE>
Relative
Cost
Space Function Sq. Ft. Factor ERUs
-------------- ------- -------- ----
Concourse Lower Level Office -0- .20 -0-
Unfinished (Unheated)
Concourse Lower Level Office 4,588.50 .70 3,211.95
Unfinished (Heated)
Concourse Lower Level Office
Finished (Heated & Air
Conditioned) 30,460.90 .85 25,891.77
Concourse Upper Level Office
Unfinished -0- .95 -0-
Concourse Upper Level Office
Finished 833.00 .95 791.35
Ticket Counter 1,035.20 1.10 1,138.72
Ticket Counter Office 2,119.70 .95 2,013.71
Gate Hold Rooms 19.692.00 1.00 19,692.00
Baggage Makeup Area 5,510.10 .75 4,132.57
Baggage Service Office 405.00 1.00 405.00
Hold Room Stairwell 1,796.44 .15 269.47
Basement -0- .25 -0-
Mezzanine Office Areas -0- .90 -0-
Operations Control Tower 401.00 1.08 433.08
--------- ----- ---------
TOTALS 66,841.84 57,979.62
The spaces outlined above are those occupied by Lessee on
July 1, 1999, which adds: 373.5 square feet of Ticket
Counter space; 812.3 square feet of Ticket Counter Office
space; 1,571 square feet of Baggage makeup Area, as shown on
Exhibit "P", page 1 of 14, Revised 7/99, attached hereto and
made a part hereof."
2
<PAGE>
2. Except as specifically provided herein, the terms and conditions
of the Lease heretofore entered into between the parties dated April 5, 1985, as
amended, shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused these presents to
be signed by their respective proper officers and their corporate seals hereto
affixed on the dates hereinafter set forth.
COUNTY
------
Dated at Milwaukee, Wisconsin, this 16th day of February, 2000.
APPROVED: MILWAUKEE COUNTY
a municipal corporation
/s/ C. Barry Bateman 2/9/2000 By /s/ William Heinemann 2/16/00
- --------------------- Date ------------------------
Airport Director William Heinemann
Director of Public Works
/s/ Andrew Hunsak 2/12/00 /s/ Mark Ryan 2/16/00
- --------------------- Date ------------------------
Corporation Counsel Mark Ryan
County Clerk
AIRLINE
Dated at Milwaukee, Wisconsin, this 20th day of August, 1999.
MIDWEST EXPRESS AIRLINES, INC.
a Wisconsin corporation
By /s/ Robert S. Bahlman
-----------------------------------
Robert S. Bahlman
Title: Sr. Vice President
Date: August 20, 1999
3
<PAGE>
STATE OF WISCONSIN )
) ss
MILWAUKEE COUNTY )
Personally came before me this 16th day of February, 2000, the above named
William Heinemann, Director of Public Works for Milwaukee County, to me known to
be the person who executed the foregoing instrument on behalf of Milwaukee
County, and acknowledged the same to be the free act and deed of said County,
made by its authority.
/s/ Carolyn Pucci-Schiel
--------------------------------------
Notary Public, Milwaukee Co., Wis.
My commission expires 2/3/02
STATE OF WISCONSIN )
) ss
MILWAUKEE COUNTY )
Personally came before me this 16th day of February, 2000, the above named Mark
Ryan, County Clerk, of Milwaukee County, to me known to be the person who
executed the foregoing instrument on behalf of Milwaukee County, and
acknowledged the same to be the free act and deed of said County, made by its
authority.
/s/ Lori J. Mueller
--------------------------------------
Notary Public, Milwaukee Co., Wis.
My commission expires 10/19/03
STATE OF WISCONSIN )
) ss
MILWAUKEE COUNTY )
Personally came before me this 20th day of August, 1999, Robert S. Bahlman, Sr.
Vice President, of MIDWEST EXPRESS AIRLINES, INC., Lessee above, to me known to
be the person who executed the foregoing instrument on behalf of Milwaukee
County, and acknowledged the same to be the free act and deed of said County,
made by its authority.
/s/ Linda C. Snyder
--------------------------------------
Notary Public, Linda C. Snyder
My commission expires 1/7/01
4
<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 ENDING MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 20,328
<SECURITIES> 0
<RECEIVABLES> 9,951
<ALLOWANCES> 154
<INVENTORY> 7,052
<CURRENT-ASSETS> 51,209
<PP&E> 305,104
<DEPRECIATION> 92,945
<TOTAL-ASSETS> 272,990
<CURRENT-LIABILITIES> 96,580
<BONDS> 3,031
0
0
<COMMON> 145
<OTHER-SE> 127,243
<TOTAL-LIABILITY-AND-EQUITY> 272,990
<SALES> 0
<TOTAL-REVENUES> 106,764
<CGS> 0
<TOTAL-COSTS> 106,764
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66
<INCOME-PRETAX> (2,486)
<INCOME-TAX> (924)
<INCOME-CONTINUING> (1,562)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (4,713)
<NET-INCOME> (6,275)
<EPS-BASIC> (.45)
<EPS-DILUTED> (.45)
</TABLE>
