SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of Securities Exchange Act of 1934
For the quarter ended December 31, 1997
Commission File Number 0-15495
Mesa Air Group, Inc.
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(Exact name of registrant as specified in its charter)
Nevada 85-0302351
- -------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3753 Howard Hughes Parkway, Suite 200, Las Vegas 89109
- --------------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 892-3773
--------------------
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
On February 18, 1998 the Registrant had outstanding 28,294,659 shares of Common
Stock.
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1.
MESA AIR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended December 31
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996
------------------ ----------------
<S> <C> <C>
Operating revenues:
Passenger $ 122,066 $ 118,876
Freight and other 1,535 1,701
Public Service 958 835
------------------ ----------------
Total operating revenues 124,559 121,412
Operating expenses:
Flight operations 47,964 41,978
Maintenance 22,927 21,293
Aircraft and traffic servicing 21,746 20,398
Promotion and sales 18,500 17,592
General and administrative 8,063 6,958
Depreciation and amortization 7,243 8,543
Other operating items 33,943 --
----------------- -----------------
Total operating expenses 160,386 116,762
Operating income (loss) (35,827) 4,650
----------------- -----------------
Non-operating income (expenses):
Interest expense (6,234) (6,696)
Interest income 595 542
Other (136) 73
----------------- -----------------
Total non-operating income (expenses) (5,775) (6,081)
Loss before income tax benefit (41,602) (1,431)
Income tax benefit (2,511) (556)
----------------- -----------------
Net loss $ (39,091) $ (875)
================= =================
Average common shares outstanding 28,295 28,442
================= =================
Loss per share:
Basic $ (1.38) $ (0.03)
================= =================
Diluted $ (1.38) $ (0.03)
================= =================
</TABLE>
2
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
December 31 September 30
1997 1997
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 59,307 $ 57,232
Marketable securities 11,201 8,690
Receivables, principally traffic 38,371 53,852
Income tax refund receivable 7,358 6,999
Expendable parts and supplies, net 31,446 31,377
Prepaid expenses and other current assets 8,840 8,553
----------------- -----------------
Total current assets 156,523 166,703
Property and equipment, net 438,519 440,890
Lease and equipment deposits 11,414 10,354
Intangibles, net 21,714 22,071
Other assets 7,587 9,848
----------------- -----------------
Total assets $ 635,757 $ 649,866
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Current portion of long-term debt and capital leases $ 31,932 $ 31,786
Accounts payable 20,006 21,884
Air traffic liability 4,691 6,785
Accrued compensation 5,294 7,025
Other accrued expenses 29,171 30,662
----------------- -----------------
Total current liabilities 91,094 98,142
Long-term debt and capital leases, excluding current portion 333,864 338,199
Deferred credits and other liabilities 70,785 34,837
Deferred income taxes -- 1,600
Stockholder's equity:
Preferred stock of no par value, 2,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock of no par value, 75,000,000 shares authorized;
28,294,584 and 28,294,584 shares issued and outstanding 101,361 101,361
Retained earnings 34,010 72,686
Unrealized gain on marketable securities, net 4,643 3,041
----------------- -----------------
Total stockholders' equity 140,014 177,088
----------------- -----------------
Total liabilities and stockholders' equity $ 635,757 $ 649,866
================= =================
</TABLE>
3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended December 31
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (39,091) $ (875)
Adjustments to reconcile net loss to
net cash flows from operating activities:
Depreciation and amortization 7,243 8,543
Provision for code-share agreement termination 33,943 --
Amortization of deferred credits (334) (458)
Stock bonus plan -- 348
Provision for doubtful accounts 1,007 --
Other 859 --
Changes in assets and liabilities:
Receivables 14,474 (1,278)
Expendable parts and supplies (69) 1,015
Prepaid expenses and other current assets (287) (4,188)
Accounts payable (1,878) 6,016
Other accrued liabilities (6,543) (5,212)
----------------- -----------------
NET CASH FLOWS FROM OPERATING ACTIVITIES: 9,324 3,911
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,261) (2,090)
Proceeds from sale of property and equipment -- 1,438
Proceeds from sale of marketable securities -- 1,000
Other assets 2,261 1,147
Lease and equipment deposits (1,060) (900)
----------------- -----------------
NET CASH FLOWS FROM INVESTING ACTIVITIES: (3,060) 595
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and obligations
under capital leases (4,189) (4,662)
Proceeds from issuance of common stock -- 122
Proceeds from deferred credits -- 409
----------------- -----------------
NET CASH FLOWS FROM FINANCING ACTIVITIES: (4,189) (4,131)
----------------- -----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS: 2,075 375
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 57,232 54,720
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 59,307 $ 55,095
================= =================
</TABLE>
4
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended December 31
Supplemental disclosures of cash flow information:
1997 1996
------------------- --------------------
Cash paid during the period for:
Interest $ 6,667 $ 6,538
Income taxes 1,024 78
Mesa did not purchase any property or equipment upon which debt was assumed
during the first quarter ended December 31, 1997. Mesa purchased property and
equipment upon which debt was assumed or incurred totaling approximately $37
million during the quarter ending December 31, 1996.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended December 31, 1997 are
not necessarily indicative of the results that may be expected for the
year ending September 30, 1998.
These condensed consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and
footnotes included in the annual report for the year ended September 30,
1997.
2. The condensed consolidated financial statements include the accounts of
Mesa Air Group, Inc. and its wholly owned subsidiaries Mesa Airlines,
Inc., WestAir Holding, Inc., Air Midwest, Inc., Mesa Leasing, Inc., MAGI
Insurance, Ltd., MPD, Inc., and FCA, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.
3. Income tax benefit in the quarter ended December 31, 1997 has been
recognized only to the extent of previously recorded deferred tax
liability.
4. The Company increased the other accrued liabilities associated with the
discontinuation of service under United Airlines, Inc. code-sharing
agreements by $33.9 million for potential losses on the disposition of
aircraft and equipment as discussed in "Part I., Item 2., Other
Events--United Airlines, Inc."
5. Pursuant to a plan adopted by the Board of Directors on February 6, 1998
effective February 20, 1998, the Company terminated the jet operations
conducted under its Mesa Airlines, Inc. subsidiary. As a result of ceasing
this jet operation the Company will recognize losses subsequent to
December 31, 1997 of approximately $7.0 million as discussed in "Part I.,
Item 2., Liquidity and Capital Resources" and "Other Events--Independent
Jet Operation."
6. Legal Proceedings:
See, "Part II., Item 1."
6
<PAGE>
Item 2.
MESA AIR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
Mesa Air Group, Inc. and its subsidiaries (collectively referred to herein as
"Mesa" or the "Company") is a regional airline serving 168 cities in 31 states
and the District of Columbia. Mesa has a fleet of 189 aircraft with
approximately 1,700 daily departures.
Mesa's long-term strategy is to profitably service routes not directly served by
major air carriers. The Company evaluates market demand and utilizes its fleet
of aircraft to meet that demand. Code-sharing agreements with certain of the
major air carriers provide benefits from the name recognition, reservation
systems, marketing and promotional efforts of these carriers. Mesa operates a
fleet of new and efficient aircraft and performs much of its own maintenance and
overhaul work.
Historically, the Company has relied on generating most of its revenues by use
of a "through fare" arrangement with its major code-sharing partners. A "through
fare" is a fare offered to passengers of a major code-sharing partner. Mesa is
paid a pro rata portion of the "through fare." As an alternative to the "through
fare" arrangements with the major code-sharing partners the Company, in certain
markets, has utilized fee per departure arrangements. A fee per departure
arrangement allows the Company to obtain a fee based on a proprietary formula
for each flight operated. The Company intends to rely on a fee per departure
arrangement for certain markets in which it deems the arrangement more favorable
than a "through fare."
The following tables set forth year-to-year comparisons for the periods
indicated below:
OPERATING DATA
--------------
Three Months Ended
December 31
1997 1996
------------------ ------------------
Passengers 1,599,610 1,560,485
Available seat miles (000) 633,113 589,142
Revenue passenger miles (000) 354,473 327,488
Load factor 56.0% 55.6%
Yield per revenue passenger mile 34.4(cent) 36.3(cent)
Revenue per available seat mile 19.7(cent) 20.6(cent)
Operating cost per available seat mile 25.3(cent) 19.8(cent)
Average stage length (miles) 184 170
Number of aircraft in fleet 189 183
Gallons of fuel consumed (000) 18,630 18,502
Block hours flown 137,469 136,162
Departures 138,567 146,067
7
<PAGE>
FINANCIAL DATA
--------------
<TABLE>
<CAPTION>
Three Months Ended December 31, 1997 Versus Three Months Ended December 31, 1996
- --------------------------------------------------------------------------------
Three Months Ended December 31
-------------------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------------------
Cost per Percent of total Cost per Percent of total
ASM operating revenues ASM operating revenues
--------------- ---------------------- --------------- ---------------------
<S> <C> <C> <C> <C>
Flight operations 7.6(cent) 38.5% 7.1(cent) 34.6%
Maintenance 3.6(cent) 18.4% 3.6(cent) 17.5%
Aircraft and traffic servicing 3.4(cent) 17.5% 3.5(cent) 16.8%
Promotion and sales 2.9(cent) 14.9% 2.9(cent) 14.5%
General and administrative 1.3(cent) 6.5% 1.2(cent) 5.7%
Depreciation and amortization 1.2(cent) 5.8% 1.5(cent) 7.0%
Other operating items 5.3(cent) 27.3% -- --
--------------- ---------------------- --------------- ---------------------
Total operating expenses 25.3(cent) 128.8% 19.8(cent) 96.1%
Interest expense 1.0(cent) 5.0% 1.1(cent) 5.5%
</TABLE>
OPERATIONS
Operating Revenues:
Passenger revenues increased by $3.2 million to $122.1 million in the quarter
ended December 31, 1997 from $118.9 million in the quarter ended December 31,
1996. The increase was primarily due to a 2.51% increase in passengers carried.
Other factors include an increase in available seat miles ("ASMs") of 7.46% and
an increase in revenue passenger miles ("RPMs") of 8.24%. Load factor increased
from 55.6% to 56.0%. Average fare increased to $76.31 from $76.18, while
passenger revenue per ASM declined from 20.2(cent) to 19.3(cent).
Operating Expenses:
Flight Operations:
- ------------------
Flight operations costs increased by $6.0 million to $48.0 million. The primary
causes of this increase were a $2.8 million increase in pilot salaries and
benefits resulting from a pilot contract executed in December 1996, a $1.0
million increase in training and dispatch costs relating to operation under more
comprehensive Part 121 federal aviation regulations ("FAR") in 1997 as compared
to operation under FAR Part 135 in 1996 and a $1.4 million increase in aircraft
ownership costs due to the addition of Canadair Regional Jet ("CRJ") aircraft to
the Company's fleet. Fuel costs decreased $0.2 million to $15.9 million in the
first fiscal quarter from $16.1 million in the comparable quarter of the
previous year. The primary reason for the decrease was a .09(cent) per gallon
decrease in the price of fuel.
8
<PAGE>
Maintenance Expense:
- --------------------
Maintenance expense increased by $1.6 million in the first fiscal quarter of
1998 to $22.9 million from $21.3 million in the same quarter of the previous
fiscal year. The increase was primarily due to a provision of $1.1 million in
uncollectable warranty and insurance claims. An additional $0.5 million increase
was a result of the higher cost of operating under increased regulatory
oversight. Engine overhaul costs declined $0.9 million because of a reduction in
scheduled overhaul events as compared to the prior year. The reduction in engine
overhaul costs was offset by a $0.8 million increase in the cost of aircraft
parts used for maintenance of aircraft, primarily at the Company's WestAir
Holding, Inc. division.
Aircraft and Traffic Service Expense:
- -------------------------------------
Aircraft and traffic service expense increased by $1.3 million to $21.7 million
during the first fiscal quarter from $20.4 million in the comparable quarter of
the previous fiscal year. The increase was primarily due to a $0.5 million
increase in passenger reaccommodation expenses resulting from flight
cancellations caused by crew scheduling difficulties and training delays. Costs
also increased by $0.4 million as a result of increased expenses relating to
lost or delayed baggage. An additional increase of $0.1 million in station
personnel wages was a result of increased staffing levels to enhance customer
service.
Promotion and Sales:
- --------------------
Promotion and sales expense increased $0.9 million to $18.5 million for the
quarter ended December 31, 1997. The increase was due to promotional activity
for the independent jet operation.
General and Administrative Expense:
- -----------------------------------
General and administrative expense increased by $1.1 million to $8.1 million as
compared to the first fiscal quarter of the prior year. The primary cause of the
increase was a $0.6 million increase in amounts paid to employees as part of the
employee performance bonus plan. A $0.3 million increase in the amount of health
insurance claims was also incurred during the quarter.
Depreciation, Amortization and Interest Expense:
- ------------------------------------------------
Depreciation and amortization decreased by $1.3 million during the first fiscal
quarter. The decrease was caused primarily by the recognition of a loss
provision for the Denver system intangible assets of $26.3 million as of
September 30, 1997. These intangible assets were previously being amortized at
the rate of approximately $1.0 million per quarter. Interest expense declined by
$0.5 million to $6.2 million during the period ended December 31, 1997 from $6.7
million during the similar period in the prior fiscal year. The decrease was
primarily due to declining interest expense on variable rate loans.
Other Operating Items:
- ----------------------
At December 31, 1997, the Company recognized an additional $33.9 million loss
provision related to the discontinuation of service under the MAI Code-Sharing
Agreement with United Airlines, Inc. ("UAL") as a result of the plan to dispose
of excess aircraft and equipment and to record other costs to shut down the
Denver United Express system. See, "Other Events--United Airlines, Inc."
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and marketable securities at December 31, 1997 were $70.5
million compared to $65.9 million at September 30, 1997. Approximately $2.5
million of the increase was the result of an increase in the unrealized gain on
marketable securities held by the Company.
Mesa had receivables of $38.4 million at December 31, 1997 which consisted
primarily of amounts due from code-sharing partners UAL and US Airways, Inc.
("US Airways"). Under the terms of the UAL and US Airways code-sharing
agreements, Mesa receives a substantial portion of its revenues through the
Airline Clearing House. Historically, the Company has enjoyed cash flow
sufficient to meet its needs. However, UAL has announced the termination of all
of its code-sharing agreements with the Company and such action could have a
material negative impact on the financial position and cash flow of the Company,
particularly if the majority of the aircraft operations associated with the
code-sharing agreement between Mesa Airlines, Inc. ("MAI") and UAL cease prior
to the expected termination date of the agreements (see following discussion).
Management's belief that the Company will have adequate cash flow to meet its
operating needs is a forward-looking statement. The Company may have less cash
flow than anticipated in the event of the termination or renegotiation of one or
more code-sharing agreements, cessation of aircraft operations associated with
MAI's code-sharing agreement with UAL on or before April 22, 1998, a substantial
decrease in the number of routes allocated to MAI under its code-sharing
agreements with US Airways, failure to sell or dispose of assets associated with
its United Express operations in a timely manner, termination of one or more of
the Company's credit facilities resulting in the need to refinance existing
debt, reduced levels of passenger revenue, additional taxes or costs of
compliance with governmental regulations, fuel cost increases, increase in
competition, increase in interest rates, general economic conditions and
unfavorable settlement of existing or potential litigation.
Mesa currently has a $20 million line of credit with a bank, renewable on March
1, 1998, which is being utilized solely to secure outstanding letters of credit.
Approximately $15.6 million is currently available under the line of credit.
Should Mesa draw upon this line of credit, an interest rate of LIBOR plus 1.5%
(7.28%) will apply. The line matures on March 1, 1998, and bears an annual fee
of 1/4 percent. The Company is presently in negotiations to renew this line of
credit. There can be no assurance that the line of credit will be renewed, or if
renewed, on as favorable terms.
As of December 31, 1997, Mesa was not in compliance with certain debt covenants
required by the line of credit agreement; however, the bank has waived
compliance with such covenants. Certain loan and debt agreements with other
banks also contain covenants which require Mesa to maintain or exceed specified
debt and working capital ratios. As of December 31, 1997 Mesa was not in
compliance with certain of these financial ratio covenants. Subsequent to
December 31, 1997, noncompliance was waived or covenants were amended for
certain, but not all, of these loan agreements. In February 1998, the Company
voluntarily prepaid $10.1 million of indebtedness to a lending institution.
The Company believes it will either maintain compliance or obtain waivers of
compliance with either its present or amended covenants for its remaining debt
through September 30, 1998. Management's belief that it will maintain compliance
with either its present or amended covenants is a forward-looking statement.
Compliance may be adversely impacted in the event of the termination or
renegotiation of one or more code-sharing agreements, early cessation of airline
operations pursuant to MAI's code-sharing agreement with UAL causing a greater
need for cash, a substantial decrease in the number of routes allocated to MAI
under its code-sharing agreements with US Airways, unfavorable renegotiation of
the Company's AWA code-sharing agreement, ongoing flight crew shortages causing
passengers to choose alternative transportation due to unreliable scheduling of
flights, reduced levels of passenger revenue, additional taxes or costs of
compliance with governmental regulations, fuel cost increases, increase in
competition, increase in interest rates, general economic conditions and
settlement of existing or potential litigation.
10
<PAGE>
As of December 31, 1997, the Company had aggregate indebtedness of approximately
$366 million payable to various parties under promissory notes issued in
connection with the purchase of 110 aircraft. The notes have interest rates
ranging from 6.66% to 7.87% with maturities through December 2011. In addition,
the Company has significant lease obligations on existing aircraft operated by
the Company. These leases are classified as operating leases and therefore are
not reflected as liabilities in the accompanying balance sheet. At December 31,
1997, 79 aircraft were leased by the Company with terms extending through June
2016. The Company made approximately $20 million of scheduled semi-annual lease
payments in January 1998. Total lease expense for the quarter ended December 31,
1997 amounted to $10.8 million.
Mesa has ordered 32 CRJ aircraft for use in its AmericaWest Express operation in
Phoenix, Arizona, as USAirways Express on the East Coast and in other markets
that management believes have the potential for profitable operations. As of
December 31, 1997, the Company had received eleven of the 32 CRJ aircraft on
order and expects to take delivery of the remaining 21 aircraft by the end of
1999. The value of these 32 CRJ aircraft is approximately $640 million. The
expected delivery schedule of aircraft is a forward-looking statement which
could significantly differ based on manufacturer's delivery delays, among other
factors.
As a result of closing the facilities associated with the independent jet
operation and relocating the jet aircraft described in the "Other Events"
section of this report, the Company will recognize a loss provision of
approximately $4.0 million during the quarter ending March 31, 1998. Operating
losses of the independent jet operation from January 1, 1998 through February
20, 1998 are expected to approximate $3.0 million. Anticipated operating losses
of $3.0 million is a forward-looking statement which could materially increase
if expenses associated with the operation of the independent jet operation are
greater than they historically have been.
Management of the Company recognizes the need to ensure its operations will not
be adversely impacted by Year 2000 software failure and that the Company's
computer systems and applications must function properly beyond 1999. To date,
the Company has not conducted the extent of analysis necessary to determine the
potential Year 2000 risk and therefore the cost to the Company as a result of
the Year 2000 software issue has not been determined. Although the Company
cannot presently estimate the costs associated with Year 2000 software failure,
such costs will be expensed as incurred.
The Company recognizes that its business is reliant upon the systems and
applications of third parties and will conduct an assessment of the potential
risks. However, there can be no assurances that the systems and applications of
other parties upon which the Company's business relies will be converted on a
timely basis. The Company's business, financial condition, or results of
operations could be materially adversely affected by the failure of its systems
and applications or those operated by other parties to properly operate or
manage dates beyond 1999.
11
<PAGE>
OTHER EVENTS
Retirement of CEO and Chairman
In December 1997, Mr. Larry L. Risley, the Company's Chief Executive Officer
("CEO") and Chairman of the Board of Directors, announced that he would retire
as CEO and Chairman. His resignation as Chairman was effective on February 3,
1998. He will remain on the Board as a Director. Upon his resignation as
Chairman he was appointed Chairman Emeritus, a position he will hold as long as
he is a member of the Board. Mr. Risley's resignation as CEO will become
effective when a new CEO is appointed or, if no CEO has been appointed, on
April 30, 1998. His severance package includes, among other things, a
five-year employment agreement as Manager of Special Projects with an annual
salary of $275,000 per year, vesting of all outstanding stock options previously
granted to him during the term of his employment as CEO pursuant to the
vesting dates set forth in the options themselves, and a requirement to
nominate him as a director of the Company for approval by the shareholders
through September 30, 2003. In exchange for entry into a covenant not to
compete, Mr. Risley's employment agreement was made non-terminable through its
five-year term. Paul R. Madden, Jack Braly and Larry L. Risley have been
appointed to identify and recommend CEO candidates to the Board of Directors
for the Board's review and selection.
Restructuring of Board
On January 29, 1998, the Company increased the size of its Board of Directors
from seven to nine members. The following persons were elected to serve and to
fill the vacancies on the expanded Board until the next annual meeting of
shareholders:
Daniel J. Altobello of Bethesda, Maryland, Chairman of the Board of
Onex Food Services, Inc., the largest airline caterer in the world,
consisting of LSG/SKY Chefs and Caterair, International, Inc.
Herbert A. Denton of New York City, President of Providence Capital,
Inc., a registered investment banker.
Ronald R. Fogleman of Durango, Colorado, a retired General who served
as Chief of Staff of the United States Air Force from October 1994 to
September 1997.
Jonathan G. Ornstein, of Barlow Management, Inc., the general partner
of Barlow Partners II, L.P., and the President and Chief Executive
Officer of Virgin Express. Mr. Ornstein served as Executive Vice
President of Mesa from September 1993 to June 1994.
James E. Swigart, Chief Financial Officer of Virgin Express and a
principal of Barlow Management, Inc. Mr. Swigart served as a director
of Mesa for two years from 1993 to 1994.
On February 3, 1998, Paul R. Madden was elected Chairman of the Board of
Directors. Jack Braly and Larry L. Risley will continue to serve as members of
the Board of Directors. Clark Stevens has announced he will resign from the
Board when the new Chief Executive Officer is selected.
Independent Jet Operation
Effective on February 20, 1998, the Company terminated the jet operations
conducted under its MAI subsidiary between Fort Worth, Texas and Houston, San
Antonio, and Austin, Texas; San Antonio and Colorado Springs, Colorado; and
Colorado Springs and Nashville, Tennessee. Management intends to redeploy the
five jets previously operated by its independent jet operation into other
markets and will continue operating CRJ aircraft as USAirways Express in the
Eastern United States and from its AmericaWest Express hub in Phoenix, Arizona.
12
<PAGE>
United Airlines, Inc.
On January 22, 1998, Mesa received notice from UAL of the termination of the
Company's code-sharing agreement covering the Denver system, Pacific Northwest
and Los Angeles markets ("MAI Code-Sharing Agreement") to be effective April 22,
1998. UAL also arbitrarily terminated WestAir's markets in the Pacific Northwest
as of April 22, 1998. Except for the WestAir markets in the Pacific Northwest
arbitrarily terminated by UAL as of April 22, 1998, remaining markets served
pursuant to the Company's WestAir code-sharing agreement will no longer be
served as of May 31, 1998, the scheduled termination date of the WestAir
contract. UAL also amended its complaint for declaratory judgment against Mesa
and its MAI and WestAir Commuter Airlines, Inc. ("WestAir") subsidiaries to
include damages related to breach of contract to provide specified levels of
service in certain cities. Mesa does not believe the termination by UAL of the
MAI Code-Sharing Agreement is permitted, and if permitted, could not be made
effective April 22, 1998 and intends to seek damages from UAL for its wrongful
termination.
On January 29, 1998, the Company announced the restructuring of its Board of
Directors. On January 29, 1998, UAL proposed a new code-sharing agreement with
Mesa expressly limited to the Denver system. The new contract would have been
effective beginning April 23, 1998 for a six-month period, subject to renewal by
UAL for two additional six-month periods. UAL gave Mesa two business days to
accept the terms of its proposed new code-sharing agreement. Management of the
Company believed it prudent to allow its restructured Board to evaluate UAL's
proposal before its acceptance and requested additional time from UAL to
evaluate the proposal. UAL refused to extend its two-day deadline to accept its
offer and the offer expired on February 2, 1998.
Subsequent to its February 3, 1998 meeting of the Board of Directors, the
Company notified UAL that Mesa considered the termination notice, although
improper, wrongful and arbitrary, to be effective as of February 6, 1998, 15
days after issuance of the January 22, 1998 termination notice in accordance
with the termination provisions of the contract, and not 90 days after issuance
of the termination notice on April 22, 1998 as indicated by UAL. Mesa advised
UAL that, subject to certain conditions, it would continue to operate certain
markets in the Denver system after the February 6, 1998 termination date but
would expect compensation from UAL under the terms of the wrongfully terminated
MAI Code-Sharing Agreement. The Company then sent notice to UAL of its intention
to terminate service in several markets out of Portland, Seattle and Denver
effective in late February 1998.
On February 10, 1998, Mesa received a letter from UAL claiming additional
damages for discontinuation of service to markets in which the Company intends
to vacate or reduce frequency levels but suggested that Mesa and UAL negotiate
an agreement that would allow Mesa to phase out its United Express service in an
orderly manner. By letters dated February 13 and 15, 1998, the Company proposed
an orderly phase-out of its MAI code-sharing operations, extension of a new
contract on a commercially feasible basis and sale of the Denver United Express
system assets to other UAL code-sharing partners. On February 16, 1998, UAL
rejected all of the Company's proposals and indicated it intended to transfer
the MAI code-sharing operations to existing UAL code-sharing partners effective
April 22, 1998. One of the extant UAL code-sharing partners recently purchased a
bankrupt competitor and has no need for the Company's 12 Dash 8-200 aircraft
used in the Company's MAI code-sharing operations with UAL. The other UAL
code-sharing partner may have no need for the Company's 27 Beechcraft 1900D
aircraft presently used in its MAI code-sharing operations with UAL.
13
<PAGE>
The Company believes that it will continue to operate under the terms of the
wrongfully terminated MAI Code-Sharing Agreement through April 22, 1998. As a
result of the UAL code-sharing partners' not needing the Company's aircraft and
equipment associated with the MAI Code-Sharing Agreement, the Company is
incurring an approximate $33.9 million loss provision for the quarter ended
December 31, 1997 to provide for costs to dispose of certain aircraft as well as
other costs to shut down the Denver system. The Company has previously
recognized a loss provision of $72.1 million for non-renewal of the WestAir
code-share agreement and potential early termination of the MAI Code-Sharing
Agreement. Should UAL's new Denver code-sharing partners implement service
prior to April 22, 1998 or the Company fail to locate a purchaser of its excess
Beechcraft 1900D and Dash 8-200 aircraft in a timely manner, the $33.9
million additional loss provision may be inadequate and subject to a material
increase. Management of the Company believes that it will incur approximately
$15 to $20 million of net cash expenditures during the 1998 fiscal year as a
result of the termination of its MAI and WestAir code-sharing agreements. The
Company's belief that it will continue to operate under the terms of the
wrongfully terminated MAI Code-Sharing Agreement through April 22, 1998
and the estimated net cash expenditures are forward-looking statements which
could materially change as a result of UAL's failure to compensate or adequately
compensate the Company for its flights through the scheduled termination dates,
notification by UAL to cease operations earlier than the scheduled termination
dates, or the failure to sell or dispose of excess aircraft in a timely manner.
US Airways, Inc.
Mesa has entered into a marketing agreement with US Airways in which it will
initially operate 12 CRJ aircraft in its USAirways Express operation. The
Company began USAirways Express CRJ service on January 19, 1998, with flights
between Philadelphia, Pennsylvania and Birmingham, Alabama; St. Louis, Missouri;
Cincinnati, Ohio; and Newburgh, New York. Other cities to be served include
Charlotte, North Carolina; Washington, D.C.; Toronto, Canada; Little Rock,
Arkansas; Charleston, West Virginia; and Tallahassee, Florida. All of this
service is provided pursuant to a fee per departure arrangement.
The Company has experienced a shortage of flight crews resulting in the
temporary removal of Beechcraft 1900D aircraft from service in the US Airways
system. The Company's temporary flight crew shortage in the US Airways, Inc.
system is expected to be alleviated by the end of February, 1998. Although the
timing of the return of grounded aircraft to service is uncertain, the Company
has already returned two of the ten previously grounded Beechcraft 1900D
aircraft to service. The expectation that the temporary crew shortage will be
alleviated by the end of February 1998 is a forward-looking statement. Actual
performance could differ materially from the forward-looking statement caused by
a continuing shortage of qualified pilots and aircraft dispatchers, the failure
to develop an adequate crew scheduling system, competitors' receipt of canceled
routes, and other factors.
America West Airlines, Inc.
The terms of the Company's code-sharing agreement with America West Airlines,
Inc. ("AWA") provide for a minimum controllable flight completion factor
for any consecutive two months. Primarily as a result of flight crew
shortages in December 1997 and January 1998, MAI's controllable flight
completion factor fell below the minimum and the Company is in technical default
of its contract with AWA. However, management believes that its code-sharing
agreement with AWA permits the Company to cure its technical default by meeting
its controllable completion factor in the ensuing months. In early February
1998, MAI resolved its crew shortages with AWA and expects its controllable
completion factor to exceed the minimum requirement in February 1998 and
subsequent months. Should management of AWA interpret the code-sharing agreement
with the Company to not permit the right to cure, and terminate the contract,
the Company would either renegotiate its existing code-sharing agreement with
AWA, terminate all of its AWA code-sharing operations, or seek a judicial
resolution of the interpretation of the AWA code-sharing agreement. Regardless
14
<PAGE>
of how the code-sharing agreement is interpreted, AWA has expressed an interest
in renegotiating certain provisions of its code-sharing agreement with the
Company before it is willing to allow the Company to expand its jet operations.
The Company is presently negotiating a conversion of all of its AWA operations
to a fee per departure basis and believes that a new and materially satisfactory
code-sharing agreement will be achieved. Management's belief that MAI's
controllable completion factor will exceed the minimum requirements in February
1998 and subsequent months and that it can negotiate a mutually satisfactory
code-sharing agreement with AWA are forward-looking statements which could
materially differ as a result of the failure of the parties to reach a
satisfactory fee structure in certain markets or the failure to resolve the crew
shortages in the future. The Company's relationship with AWA is good, however,
and management believes it could favorably resolve any additional issues which
may arise as a result of negotiations.
The following table lists the aircraft operated by Mesa as of December 31, 1997:
NUMBER OF AIRCRAFT
Passenger
Type of Aircraft Owned Leased Total Capacity
------------------ ------------- -------------- -------------- ---------------
Beechcraft 1900 108 10 118 19
Embraer Brasilia 2 25 27 30
BAe Jetstream 31 -- 21 21 19
Dash 8-200 -- 12 12 37
CRJ -- 11 11 50
------------- -------------- --------------
Total 110 79 189
------------- -------------- --------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
During 1994, seven shareholder class action complaints were filed
in the United States District Court for the District of New Mexico
against Mesa, certain of its present and former corporate officers
and directors, its independent auditor, and certain underwriters
who participated in Mesa's June 1993 public offering of Common
Stock. During October 1995, the court certified a class consisting
of persons who purchased Mesa stock between January 28, 1993 and
August 5, 1994. These complaints have been consolidated by court
order, and, after the court granted in part a motion to dismiss in
May 1996, a third amended consolidated complaint has been filed
alleging that during the class period the defendants caused or
permitted Mesa to issue publicly misleading financial statements
and other misleading statements in the registration statement for
the June 1993 public offering, annual and quarterly reports to
shareholders, press releases and interviews with securities
analysts. The current complaint alleges that these statements
misrepresented Mesa's financial performance and condition, its
business, the status of its operations, its earnings, its capacity
to achieve profitable growth and its future business prospects,
all with the purpose and effect of artificially inflating the
market price of common stock of Mesa throughout the relevant
period. The complaint further alleges that certain officers and
directors of the Company illegally profited from sales of Mesa
Common Stock during these periods. The complaint seeks damages
against the defendants in an amount to be determined at trial
(including rescission and/or money damages as appropriate) and
reasonable attorney, accountant and expert fees. In 1996, Mesa
made an accrual to vigorously defend the litigation. Further, Mesa
and the corporate officers and directors believe they have
substantial and meritorious defenses against these allegations and
are defending their position vigorously. However, should an
unfavorable resolution of this litigation occur, it is possible
that Mesa's future results of operations or cash flows could be
materially affected in a particular period.
15
<PAGE>
In June 1997, UAL filed a complaint in the United States District
Court for the Northern District of Illinois against two
subsidiaries of the Company, Mesa Airlines, Inc. ("MAI") and
WestAir Commuter Airlines, Inc. ("WestAir"), seeking a judicial
declaration of the parties' rights and obligations under two
separate written agreements, pursuant to which MAI and WestAir
allegedly agreed to provide certain airline transportation
services to UAL including the provision of scheduled air
transportation services in certain areas of the United States
under the service mark "United Express." UAL contends that, under
these agreements, UAL has the right to "increase, decrease, or in
any other way adjust the flight frequencies, or markets, or both"
in certain airports currently serviced by WestAir and/or MAI. In
January 1998, UAL amended its complaint to include damages related
to MAI's purported breach of contract to provide specified levels
of service in certain cities. Neither MAI nor WestAir has yet
responded to the complaint. In order to give both parties
additional time to explore the possibility of resolving this
action without further litigation, the parties have entered into a
stipulation, which the Court approved, extending defendants' time
to respond to the complaint to and including March 2, 1998. MAI
and WestAir dispute the principal contentions in UAL's complaint,
and unless a satisfactory negotiated resolution is achieved,
intend to defend their position vigorously. Furthermore, MAI and
WestAir believe that UAL has breached its code-sharing agreements
with the respective entities and intend to file a counterclaim
seeking to recover the substantial damages to the business of MAI
and WestAir which have been incurred.
Mesa is also a party to legal proceedings and claims which arise
during the ordinary course of business.
In the belief of management, based upon information at this time,
the ultimate outcome of all the proceedings and claims pending
against Mesa other than that with UAL referred to above is not
expected to have a material adverse effect on Mesa's consolidated
financial position. It is too early to determine the impact on
Mesa's financial position of the litigation with UAL.
The belief that substantial and meritorious defenses against the
allegations contained in the class action complaint, the belief
that UAL has breached its code-sharing agreements with MAI and
WestAir and the belief that the ultimate outcome of certain of the
proceedings and claims pending against Mesa will favorably be
resolved are forward-looking statements which could materially
differ as a result of the determination of a judge or jury.
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
None
16
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
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 duly
authorized undersigned.
MESA AIR GROUP, INC.
Registrant
Date: February 23, 1998 /s/ W. Stephen Jackson
------------------------------
W. Stephen Jackson
Chief Financial Officer
(Principal Accounting Officer)
17
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