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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, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to___________________
Commission file number 1-13934
MIDWEST EXPRESS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1828757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6744 South Howell Avenue
Oak Creek, Wisconsin 53154
(Address of principal executive offices)
(Zip Code)
414-570-4000
(Registrant's telephone number, including area code)
Securities registered pursuant
to Section 12(b) of the Act:
Common stock, $.01 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
(Title of Class) (Names of exchange on
which registered)
Securities registered pursuant to
Section 12(g) of the Act: None
(Title of class)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes ____X___ No ________
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of voting stock held by nonaffiliates as of March
18, 1997: $235.8 million
As of March 18, 1997 there were 6,330,863 shares of Common Stock, $.01 par
value, of the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1996 Annual Report to Shareholders for the fiscal year
ended December 31, 1996 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 23, 1997 are incorporated by
reference in Part III.
MIDWEST EXPRESS HOLDINGS, INC.
FORM 10-K
For the year ended December 31, 1996
TABLE OF CONTENTS
PART I Page No.
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of
Security Holders 10
Management - Executive Officers of the Registrant 11
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 12
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 8. Financial Statements and Supplementary Data 12
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 12
PART III
Item 10. Directors and Executive Officers of the
Registrant 12
Item 11. Executive Compensation 12
Item 12. Security Ownership of Certain Beneficial
Owners and Management 12
Item 13. Certain Relationships and Related
Transactions 12
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 13
SIGNATURES 14
INDEPENDENT AUDITORS' REPORT 15
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 16
EXHIBIT INDEX 17
PART I
Item 1. Business
Background
Midwest Express Holdings, Inc. was reincorporated under the laws of
the State of Wisconsin in 1996. Midwest Express Holdings, Inc. is a
holding company, and its principal subsidiary is Midwest Express Airlines,
Inc. ("Midwest Express").
Midwest Express operates a single-class, premium service passenger
jet airline that caters to business travelers and serves selected major
business destinations throughout the United States and Toronto, Canada,
from operations bases in Milwaukee and Omaha.
Midwest Express evolved out of Kimberly-Clark Corporation's
("Kimberly-Clark") desire to provide a convenient and cost-effective way
to meet Kimberly-Clark's internal transportation needs. Kimberly-Clark
began daily, nonstop aircraft shuttle service in October 1982 for its
employees traveling between Kimberly-Clark 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 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 code sharing agreement between Mesa and
Midwest Express that expired that year. Under the agreement, Mesa
operated the system beginning in 1989 as "Skyway Airlines" using Midwest
Express' airline code. As of December 31, 1996, Skyway offered service in
25 Midwestern cities.
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 5,140,000 shares of common
stock of Midwest Express Holdings, Inc. Following the Offering, Kimberly-
Clark retained 1,288,571 shares of the outstanding common stock of the
Company which were 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, 1996, Midwest Express served 24 cities from
Milwaukee and was the only carrier providing nonstop service between
Milwaukee and most Midwest Express destinations. To increase utilization
of aircraft, Midwest Express provides seasonal service from Milwaukee to
four cities, Tampa, Ft. Myers, Ft. Lauderdale and Phoenix, which generally
begins in mid-December and operates through April. Although nine other
jet airline carriers serve Milwaukee's airport, these carriers (other than
American Trans Air) only provide nonstop flights between Milwaukee and
their respective operations' hubs.
From Omaha, Midwest Express provides nonstop service to cities that
include Los Angeles, San Diego (connecting service on weekdays),
Milwaukee, Newark, and Washington D.C. Passengers in Omaha can also
travel to most other cities in the Midwest Express route system via
connections through Milwaukee. Although 10 other jet airline carriers
serve Omaha's airport, these carriers (other than Southwest Airlines and
Airtran Airways) only provide nonstop flights between Omaha and their
respective hubs.
Integration of Skyway Operations
Midwest Express coordinates Skyway routes and schedules. The Company
primarily has sought to provide Skyway service to communities where there
is the opportunity to complement Midwest Express service by giving
passengers on short haul, low density routes to Milwaukee the ability to
connect to Midwest Express flights without switching carrier systems. To
enhance aircraft utilization, 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, 1996, Skyway offered flights in 25 cities, generally in
the northern Midwest of the United States, and Toronto, Canada.
Customer Service
Overall
Midwest Express has consistently emphasized, and been recognized by
the public for, its premium customer service which is a principal factor
that distinguishes Midwest Express from other airlines. In 1996, the
editors of Air Transport World honored Midwest Express with their
"Passenger Services Award," the first time a U.S. airline has earned the
award since 1978. Conde Nast Traveler magazine readers rated Midwest
Express "Top Domestic Airline" in 1995 and 1996. In 1995, the Zagat
Airline Survey of frequent travelers rated Midwest Express as the best
U.S. airline. It also ranked Midwest Express as the fourth best airline
in the world, with no other U.S. airline ranked in the top ten. The June
1995 issue of a leading consumer magazine reported Midwest Express as
"Best Airline" based on its 1994 survey of about 120,000 readers. In
1996, a leading consumer travel report awarded Midwest Express the
designation as the best U.S. airline for the fifth consecutive year.
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
service due to the limited duration of its flights, it also focuses on
superior customer service within 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 17 to 18
inch wide standard coach seats). There are no middle seats. Midwest
Express has continued to be recognized by a leading consumer travel
report, most recently in June 1995, as having the most comfortable coach
seats in its periodic surveys of U.S. airlines. The number of seats in
each aircraft is also 15 - 20% fewer 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 consist
typically of a choice of two entrees. Midwest Express offers
complimentary champagne on breakfast flights and complimentary wine on
other flights. Midwest Express spends about twice as much per revenue
passenger meal when compared to an 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 more than
its competition or will charge a premium in markets.
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 77% of its tickets through travel
agents. The Company maintains its own reservations center at its
headquarters for Midwest Express and Skyway flights. As with most travel
agencies, the Company's reservations center obtains airline information,
makes reservations and sells tickets through a computer reservation system
("CRS"). The Company has a contract to use the SABRE CRS until 2001.
Frequent Flyer Program
The Company operates a frequent flyer program under which mileage
credits are earned by flying on Midwest Express, Skyway or other
participating airlines (including Virgin Atlantic Airways and Swissair)
and by using the services of participating hotels (including Wyndham,
Hilton and Loews), car rental firms (including Hertz, Alamo, National and
Avis), MCI telecommunications and Elan MasterCard. Members can redeem
frequent flyer miles for travel on Midwest Express (20,000 miles for
member and 15,000 for companion), Skyway or other participating airlines.
In addition to free travel, miles can be redeemed for services of
participating hotels and car rental firms. The program is designed to
enhance customer loyalty and thereby retain and increase the business of
frequent travelers by offering incentives for their continued patronage.
The Company's Frequent Flyer program includes a Mutual Miles program
whereby members in Northwest Airlines' WorldPerks frequent flier program
and Midwest Express' Frequent Flyer members maintain their separate
accounts, but can choose to redeem award travel on either carrier or can
combine certain mileage from both programs to reach an award level. In
October 1995, the Company introduced the Midwest Express MasterCard in
conjunction with Elan Financial Services of Illinois ("Elan"). The
program allows Midwest Express to offer a co-branded credit card to its
Frequent Flyer members and other members of the public to induce them to
become Frequent Flyers. The Company generates income by selling Frequent
Flyer miles to Elan, which awards the miles to cardholders for charges on
their credit cards.
As of year end 1996 and 1995, the Company had approximately 828,000
and 713,000 members enrolled in its Frequent Flyer program, respectively.
The Company estimates that as of December 31, 1996 and 1995, the total
available awards under the Frequent Flyer program were 64,000 and 45,000,
respectively, after eliminating those accounts below the minimum award
level. Free travel awards redeemed were approximately 16,100 and 8,500
during 1996 and 1995. Free travel awards accounted for 3.2% of total
Company revenue passenger miles during 1996. Midwest Express does not
believe that usage of Frequent Flyer awards results in any significant
displacement of revenue passengers.
The Company accounts for its frequent flyer obligation on the accrual
basis using the incremental cost method. This method recognizes an
average incremental cost to provide roundtrip transportation to one
additional passenger. The incremental cost includes the cost of meals,
commissary, reservations and insurance. The incremental cost does not
include a contribution to overhead, aircraft cost or profit. The accrual
is based on estimated redemption percentages applied to actual mileage
recorded in members' accounts. For purposes of calculating the Frequent
Flyer accrual, the Company anticipates that approximately 63% of
outstanding awards will be redeemed. No liability is recorded for hotel
or car rental award certificates that are to be honored by other parties
because there is no cost to Midwest Express for such awards.
Related Businesses
Midwest Express also offers ancillary airline services directly to
customers, including freight services and aircraft charters. The freight
business consists of transporting freight, United States mail and counter-
to-counter packages on regular passenger flights. During 1996, Midwest
Express configured and placed into service a DC-9-10 jet aircraft
specifically for the purpose of providing charter services. The primary
customers of aircraft charter services are athletic teams, business groups
and tour operators.
Competition
The Company competes with other air carriers between all cities it
serves. Many of the Company's competitors have elaborate route structures
that transport passengers to hub airports for transfer to many
destinations, including those served by Midwest Express and Skyway. Some
competitors offer flights from cities served by Midwest Express to more
than one of their hub airports, permitting them to compete in markets by
offering multiple routings. For many markets that Midwest Express serves
from Milwaukee and Omaha, the competition does not provide nonstop
service, but that condition could change. In some markets, Skyway and
Midwest Express also compete against ground transportation.
The Company has the largest market share of passengers at Milwaukee.
In 1996, the Company carried 30.8% of passengers boarded in Milwaukee,
while Northwest Airlines, which has the second largest share, carried
22.5%. In Omaha, Midwest Express had 5.3% of the market based upon
passengers boarded in 1996, compared to 29.5% boarded by United Airlines
and 12.5% by Southwest Airlines, the carriers with the two largest market
shares.
In addition to traditional competition among domestic carriers, the
industry may be subject to new forms of competition in the future. The
development of video teleconferencing and other methods of electronic
communication may add a new dimension of competition to the industry as
businesses look for lower cost substitutes to air travel.
Employees
As of December 31, 1996, Midwest Express had 1,815 employees (337 of
whom were part-time and 34 of whom were intermittents) and Skyway had 265
employees (41 of whom were part-time). The categories of employees were
as indicated on the following table:
Employees as of December 31, 1996
Midwest Skyway
Express
Employee Categories
Flight Operations 258 141
Inflight 314 -
Passenger Services 553 67
Maintenance 268 44
Reservations & Marketing 264 -
Revenue Accounting & Finance 100 7
Administrative 58 6
----- -----
Total 1,815 265
===== =====
The Company makes extensive use of part-time employees to increase
operational flexibility. Given the size of Midwest Express' fleet and
flight schedules, the Company does not have continuous operations at many
locations. The use of part-time employees enables Midwest Express 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 July 1995, Skyway pilots elected the Air Line Pilots Association
("ALPA"), a labor union, to represent them for collective bargaining
purposes. Currently, the Company and ALPA have commenced negotiations and
are in the process of mediation by the National Mediation Board. No other
Company employees are represented by labor unions. The Company believes
management and its employees have had excellent relations.
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's and other consumer
protection matters such as on-time performance, denied boarding and
baggage liability. It also is authorized to require reports from air
carriers and to inspect a carrier's books, records and property. The DOT
has authority to investigate and institute proceedings to enforce its
economic regulations and may in certain circumstances assess civil
penalties, revoke operating authority and seek criminal sanctions.
The Federal Aviation Administration ("FAA") regulates the Company's
aircraft maintenance and operations, including flight operations,
equipment, aircraft noise, ground facilities, dispatch, communications,
training, security, weather observation, flight and duty time, crew
qualifications, aircraft registration and other matters affecting air
safety. The FAA has the authority to suspend temporarily or revoke
permanently the authority of the Company or its licensed personnel for
failure to comply with regulations promulgated by the FAA and to assess
civil penalties for such failures.
The Company also is subject to regulations or oversight by federal
agencies other than the DOT and FAA. The 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 utilization 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.
During 1996, the White House Commission on Aviation Safety and
Security ("Commission") was formed to recommend aviation safety measures
for the airline industry. The Commission has issued a summary of draft
recommendations that include more detailed inspections of aging aircraft,
new airline fees for upgrading air traffic control and several security-
related items. The Company believes these recommendations, once
instituted, will result in increased operating costs, the effect of which
cannot be estimated at this time.
Noise Abatement
The federal Airport Noise and Capacity Act of 1990 ("ANCA") was
intended to convert the nation's commercial jet service to quieter Stage 3
operations by requiring phaseout of Stage 2 operations (as defined in Part
36 of the Federal Aviation Regulations) by December 31, 1999, subject to
certain exceptions. The FAA regulations that implement ANCA require
carriers to reduce the number of Stage 2 aircraft operated by one of two
methods. Midwest Express has chosen to comply with ANCA by operating a
fleet that is 65% Stage 3 by the end of 1996, 75% Stage 3 by the end of
1998, and 100% Stage 3 by the end of 1999. As of December 31, 1996,
Midwest Express operated 14 Stage 3 aircraft and eight Stage 2 aircraft.
ANCA also recognizes the right of airport operators with special
noise problems to implement local noise abatement procedures that do not
interfere unreasonably with the interstate and foreign commerce of the
national air transportation system. ANCA generally requires FAA approval
of local noise restrictions on Stage 3 aircraft and establishes a
regulatory notice and review process for local restrictions on Stage 2
aircraft first proposed after October 1990. As the 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 the present, its operations could be adversely
affected if locally-imposed regulations become more restrictive or
widespread.
Safety
In compliance with FAA regulations, the Company's aircraft are
subject to many different levels of maintenance or "checks" and
periodically go through complete overhauls. Maintenance efforts are
monitored by the FAA, with FAA representatives typically on-site.
Although both Midwest Express and Skyway are subject to FAA safety
regulations, the regulations that govern aircraft with 30 seats or fewer
were less stringent than the regulations applicable to aircraft with more
than 30 seats. In March 1997, Skyway completed its conversion to certain
FAA regulations that require smaller aircraft operations to conduct
business under more stringent rules previously applicable only to aircraft
with more than 30 seats.
Slots
The FAA's regulations currently permit the buying, selling, trading
and leasing of certain airline slots at Chicago's O'Hare, New York's La
Guardia and Kennedy International and Washington D.C.'s National airports.
A slot is an authorization to take off or land at the designated airport
within a specified time window. The FAA must be advised of all slot
transfers and can disapprove any such transfer.
The FAA's slot regulations require the use of each slot at least 80%
of the time, measured on a bi-monthly basis. Failure to do so without a
waiver of the FAA (which is granted only in exceptional cases) subjects
the slot to recall by the FAA. In addition, the slot regulations provide
that slots may be withdrawn by the FAA at any time without compensation to
meet the DOT's operational needs (such as providing slots for
international or essential air transportation). Midwest Express' ability
to increase its level of operations at certain domestic cities currently
served 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 17% and 15% in 1996 and 1995,
respectively), significant changes in fuel costs would materially affect
the Company's operating results. Fuel prices continue to be susceptible
to political events and other factors that can affect the supply of fuel,
and the Company cannot predict 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."
Item 2. Properties
Fleet Equipment
As of December 31, 1996, Midwest Express' fleet in service consisted
of 22 McDonnell Douglas jet aircraft; consisting of eight DC-9-10 series
aircraft, twelve DC-9-30 series aircraft and two MD-88 aircraft. Fourteen
aircraft meet Stage 3 noise requirements. None of the aircraft owned by
Midwest Express is subject to liens to secure obligations.
MIDWEST EXPRESS AIRLINES AIRCRAFT
Date of Stage
Tail # Type # of Seats Owned/Leased Manufacture Type
601ME MD-88 112 Leased 08/22/89 3
701ME MD-88 112 Leased 09/21/89 3
202ME DC-9-30 84 Leased 06/26/75 3
203ME DC-9-30 84 Leased 07/07/75 3
204ME DC-9-30 84 Leased 07/25/75 3
206ME DC-9-30 84 Leased 05/07/79 3
207ME DC-9-30 84 Leased 07/06/79 3
209ME DC-9-30 84 Leased 06/18/76 3
502ME DC-9-30 84 Owned 06/10/80 3
602ME DC-9-30 84 Owned 07/21/80 3
302ME DC-9-30 84 Owned 11/08/67 2
501ME DC-9-30 84 Owned 12/15/67 2
401ME DC-9-30 84 Owned 01/02/68 2
301ME DC-9-30 84 Owned 01/11/68 2
500ME DC-9-10 60 Owned 06/05/65 3
300ME DC-9-10 60 Owned 01/22/66 3
600ME DC-9-10 60 Owned 02/06/66 3
800ME DC-9-10 60 Owned 02/16/66 2
700ME DC-9-10 60 Owned 07/14/66 3
400ME DC-9-10 60 Owned 07/29/66 2
900ME DC-9-10 60 Owned 08/18/66 2
080ME DC-9-10 60 Owned 10/30/66 2
The two MD-88 aircraft leases expire in 1998. Six DC-9-30 operating
leases expire as follows: three in 2001 and three in 2006.
The Company has acquired four DC-9-30 aircraft that were not placed
into service by December 31, 1996. The Company has entered into ten-year
operating leases on two of these aircraft and intends to finance the other
two with operating leases. These aircraft will enter service during 1997.
Skyway acquired all new Beechcraft 1900D turboprop aircraft, starting
with its first delivery on January 11, 1994, through the delivery of its
fifteenth airplane on May 18, 1995. Skyway leases the aircraft from a
group of financial institutions with initial lease terms of five to 12
years, and expiration dates ranging from 2001 through 2008.
Facilities
The Company has secured long-term use of gates and hangar 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 14 gates at the Milwaukee airport, including ticket
counter, baggage handling and operations space. In 1989, the Company
completed construction of its maintenance facility at the Milwaukee
airport with a lease of land from the airport that will allow the Company
to exercise a series of five-year options to extend the lease for 60
years.
In 11 of the other 24 cities Midwest Express served as of December
31, 1996, gates at the airport were leased directly from the airport
authority. For the other 13 cities, Midwest Express subleased gates from
other carriers. In Omaha, Midwest Express has exclusive rights to two
gates.
Skyway has secured long term leases of facilities at Milwaukee's
airport. Skyway owns an office and aircraft hangar facility at the
airport. The land on which this facility is located is leased until 2010.
Skyway leases one gate from the Milwaukee airport, under terms that extend
until 2010, and also utilizes one Midwest Express gate. Skyway can park
several aircraft in the ramp area serviced by these gates.
Item 3. Legal Proceedings
A Commissioner of the Equal Employment Opportunity Commission
("EEOC") filed charges against the Company on July 8, 1992, pursuant to
Title VII of the Civil Rights Act of 1964, as amended, that pertained to
the Company's practices since January 1, 1989. On October 20, 1994, the
Milwaukee office of the EEOC issued a decision finding that reasonable
cause existed to believe the Company violated Title VII by: (a) engaging
in recruitment practices which discriminate against Blacks (as such term
is defined in Title VII); (b) failing to hire Blacks for flight service
representative, aircraft groomer and aircraft mechanic positions; (c)
failing to hire and assign Blacks into entry-level supervisory and
management positions; and (d) failing to maintain proper records on its
employment process in accordance with Section 709 (c)(1) of Title VII and
the Uniform Guidelines Employee Selection Procedures.
Based on these charges and the EEOC's subsequent decision, the EEOC
proposed a conciliation agreement that would have involved costs to the
Company of approximately $1,500,000. The Company has denied the
allegations by the EEOC, has rejected the conciliation agreement and
intends to vigorously defend itself against the charges unless a
settlement can be reached that would make it economically impractical to
contest the charges. To date, the Company has not established any reserve
with respect to these charges.
In addition to the pending EEOC charges, 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 of 1996.
MANAGEMENT
Executive Officers of the Registrant
The executive officers of the Company as of March 1, 1997 together
with their ages, positions and business experiences are described below:
NAME AGE POSITION
Timothy E. Hoeksema 50 Chairman of the Board,
President and Chief Executive
Officer and Director
Brenda F. Skelton 41 Senior Vice President -
Marketing and Customer
Service and Director
Dennis J. Crabtree 56 Senior Vice President -
Operations
Robert S. Bahlman 38 Vice President, Chief
Financial Officer and
Treasurer
Carol Skornicka 55 Vice President, General
Counsel and Secretary
Rex J. Kessler 49 Vice President - Technical
Services
Carol J. Reimer 47 Vice President - Human
Resources
Dennis J. O'Reilly 41 Assistant Treasurer/Director
of Investor Relations
David C. Reeve 51 President and Chief Executive
Officer of Astral Aviation,
Inc.
Timothy E. Hoeksema has been a director, the Chairman of the Board,
President and Chief Executive Officer of the Company since 1983. Mr.
Hoeksema was appointed President - Transportation Sector of Kimberly-Clark
in 1988 and resigned from all positions with Kimberly-Clark as of August
1, 1995.
Brenda F. Skelton has served as the Senior Vice President-Marketing
and Customer Service of the Company since March 1995. Prior thereto, Ms.
Skelton served as Vice President of Marketing for the Company from
February 1993 to March 1995. Ms. Skelton also served as Director of
Marketing Programs for the Company from April 1987 to February 1993.
Dennis J. Crabtree has served as Senior Vice President-Operations of
the Company since September 1995 after joining the Company as Vice
President-Operations in May 1995. From July 1994 to May 1995, Mr.
Crabtree served as Vice President-Safety and Regulatory Compliance for
Continental Airlines, Inc. From January 1993 to July 1994, Mr. Crabtree
served as the President of Continental Express, Inc. From March 1989 to
January 1993, Mr. Crabtree served as the Staff Vice President-Safety and
Regulatory Compliance for Continental Airlines, Inc.
Robert S. Bahlman has served as the Vice President, Chief Financial
Officer and Treasurer of the Company since December 1996. Mr. Bahlman
served as the Controller for the Company from September 1995 to December
1996. Prior thereto, Mr. Bahlman also served as the Financial Manager of
the Company from July 1990 to August 1995.
Carol Skornicka has served as Vice President, General Counsel and
Secretary of the Company since May 1996. Ms. Skornicka formerly served
as Secretary of the Wisconsin Department of Industry, Labor and Human
Relations, a position she held from 1991 until joining the Company.
Rex J. Kessler has served as Vice President-Technical Services for
the Company since September 1995. Prior thereto, Mr. Kessler served as
Director-Maintenance of the Company from December 1987 to August 1995.
Carol J. Reimer has served as Vice President-Human Resources of the
Company since September 1995. Prior thereto, Ms. Reimer served as
Director-Human Resources for the Company from its commencement of
operations to August 1995 and as Director-Human Resources for K-C Aviation
Inc. from December 1982 to August 1995.
Dennis J. O'Reilly has served as the Assistant Treasurer of the
Company since February 1996. Prior thereto, Mr. O'Reilly served as
Business Analyst for the Company from November 1990 to January 1996.
David C. Reeve has served as President and Chief Executive Officer of
Astral Aviation Inc. since March 1997. Prior thereto, Mr. Reeve served as
Director of Flight Operations for DHL Airways from June 1991 to February
1997.
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 23 and to "Shareholder Information" on page 36 of the Company's
1996 Annual Report to Shareholders.
Item 6. Selected Financial Data
The information required in this Item is incorporated by
reference to page 18 of the Company's 1996 Annual Report to Shareholders.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required in this Item is incorporated by
reference to pages 19 through 23 of the Company's 1996 Annual Report to
Shareholders.
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 1996 Annual Report to
Shareholders.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required in this Item is set forth under the
heading "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance," incorporated herein by reference, from pages 1-4
and pages 20-21, respectively, of the definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on April 23, 1997 and "Executive
Officers of the Registrant" in Part I following Item 4.
Item 11. Executive Compensation
The information required in this Item is set forth under the
heading "Executive Compensation," incorporated herein by reference, from
pages 7-13 of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 23, 1997.
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, from pages 5-6 of the definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on April 23, 1997.
Item 13. Certain Relationships and Related Transactions
The information required in this Item is set forth under the
heading "Certain Transactions," incorporated herein by reference, from
pages 14-16 of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 23, 1997.
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, 1996 and 1995 and for each of the three years in the period
ending December 31, 1996, together with the report thereon of Deloitte &
Touche LLP, dated January 31, 1997, appear on pages 25 through 35 of the
Company's Annual Report to Shareholders, and are incorporated herein by
reference.
(a)(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Schedules not included have been omitted because they are not
applicable.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the fourth
quarter of 1996.
(c) Exhibits:
The Exhibits filed or incorporated by reference herewith are as
specified in the Exhibit Index.
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 26, 1997 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 26, 1997.
Signature Capacity
/s/ TIMOTHY E. HOEKSEMA Chairman of the Board of Directors,
Timothy E. Hoeksema President and Chief Executive Officer
(Principal Executive Officer)
/s/ BRENDA F. SKELTON Senior Vice President - Marketing and
Brenda F. Skelton Customer Service and Director
/s/ ROBERT S. BAHLMAN Vice President,
Robert S. Bahlman Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
/s/ JOHN F. BERGSTROM Director
John F. Bergstrom
/s/ OSCAR C. BOLDT Director
Oscar C. Boldt
/s/ ALBERT J. DIULIO, S.J. Director
Albert J. DiUlio, S.J.
/s/ JAMES G. GROSKLAUS Director
James G. Grosklaus
/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
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Midwest Express Holdings, Inc.
Oak Creek, Wisconsin
We have audited the financial statements of Midwest Express Holdings, Inc.
as of December 31, 1996 and 1995, and for each of the three years in the
period ended December 31, 1996, and have issued our report thereon dated
January 31, 1997; such financial statements and report are included in
your 1996 Annual Report to Shareholders and are incorporated herein by
reference. Our audits also included the financial statement schedule of
Midwest Express Holdings, Inc., listed in Item 14. This financial
statement schedule is the responsibility of the Corporation's management.
Our responsibility is to express an opinion based on our audits. In our
opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
January 31, 1997
Schedule II
MIDWEST EXPRESS HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions Balance at
Beginning of Charged to Deductions End of
Year Expense from Reserve Year
Allowance for doubtful accounts:
Year ended December 31, 1996 $307,000 $218,000 $(318,000) $207,000
Year ended December 31, 1995 $125,000 $317,000 $(135,000) $307,000
Year ended December 31, 1994 $ 94,000 $115,000 $ (84,000) $125,000
EXHIBIT INDEX
MIDWEST EXPRESS HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Exhibit No. Description
( 3.1) Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form 8-B filed May 2, 1996 (File No. 1-
13934)).
( 3.2) Bylaws, as amended through December 4, 1996.
( 3.3) Articles of Amendment relating to Series A Junior
Participating Preferred Stock (incorporated by reference
to Exhibit 3.3 to the Company's Registration Statement on
Form 8-B filed May 2, 1996 (File No. 1-13934)).
( 4.1) Credit Agreement among Firstar Bank Milwaukee, N.A., M & I
Marshall & Ilsley Bank, Bank One, Milwaukee, N.A. and
Midwest Express Holdings, Inc., dated September 27, 1995
(incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995 (File No. 1-13934)).
( 4.2) Credit Agreement between Kimberly-Clark Corporation and
Midwest Express Holdings, Inc., dated September 27, 1995
(incorporated by reference to Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995 (File No. 1-13934)).
( 4.3) Rights Agreement, dated February 14, 1996, between the
Company and Firstar Trust Company (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form 8-A filed February 15, 1996 (File No. 1-
13934)).
( 4.4) Amendment to the Rights Agreement, dated April 19, 1996,
between the Company and Firstar Trust Company
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form 8-B filed May 2, 1996 (File
No. 1-13934)).
(10.1) Lease Agreement between Milwaukee County and Midwest
Express, dated May 12, 1988 (incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on
Form S-1 (File No. 33-95212) (the "S-1")).
(10.2) Airline Lease, as amended, between Milwaukee County and
Midwest Express, dated October 1, 1984 (incorporated by
reference to Exhibit 10.5 to the S-1).
(10.3) Omaha Airport Authority Agreement and Lease at Eppley
Airfield with Midwest Express between the Airport
Authority of the City of Omaha and Midwest Express
(incorporated by reference to Exhibit 10.6 to the S-1).
(10.4) Airline Lease, as amended, between Milwaukee County and
Astral, dated November 23, 1994 (incorporated by reference
to Exhibit 10.7 to the S-1).
(10.5) Lease Agreement between Milwaukee County and Phillip
Morris Incorporated, dated October 7, 1982, to which
Astral has succeeded as lessee (incorporated by reference
to Exhibit 10.8 to the
S-1).
(10.6) Building Lease between Chocolate Chip Limited Partnership
and Midwest Express, dated June 30, 1995 (incorporated by
reference to Exhibit 10.9 to the S-1).
(10.7) Tax Allocation and Separation Agreement among Kimberly-
Clark Corporation, K-C Nevada, Inc., Midwest Express
Holdings, Inc., Midwest Express Airlines, Inc., and Astral
Aviation, Inc., dated September 27, 1995 (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1995 (File No. 1-13934)).
(10.8) Guarantee Fee Agreement between Kimberly-Clark Corporation
and Midwest Express Holdings, Inc., dated September 27,
1995 (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995 (File No. 1-13934)).
(10.9) Employee Matters Agreement between Kimberly-Clark
Corporation and Midwest Express Holdings, Inc., dated
September 27, 1995 (incorporated by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995 (File No. 1-13934)).
(10.10) Stock Agreement between K-C Nevada, Inc. and Midwest
Express Holdings, Inc., dated September 27, 1995
(incorporated by reference to Exhibit No. 2 to the
Schedule 13D of Kimberly-Clark Corporation filed on
October 10, 1995 with respect to the common stock, $.01
par value, of the Company).
(10.11)* Midwest Express Holdings, Inc. 1995 Stock Option Plan, as
amended through December 3, 1996.
(10.12)* Midwest Express Holdings, Inc. 1995 Stock Plan for Outside
Directors, as amended through September 18, 1996.
(10.13)* Annual Incentive Compensation Plan, amended through
February 13, 1997.
(10.14)* 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)).
(10.15)* Form of Key Executive Employment and Severance Agreement
between the Company and each of Timothy E. Hoeksema,
Brenda F. Skelton, Dennis J. Crabtree and Carol
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)).
(10.16)* Form of Key Executive Employment and Severance Agreement
between the Company and each of Robert S. Bahlman, Rex J.
Kessler, Carol J. Reimer, David C. Reeve and Dennis J.
O'Reilly (incorporated by reference to Exhibit 10.21 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 1-13934)).
(13) The 1996 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.