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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
Commission File Number 0-15495
MESA AIR GROUP, INC.
(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.)
410 North 44th Street, Suite 700, Phoenix, Arizona 85008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 685-4000
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 1, 1999 the registrant had outstanding 28,385,581 shares of Common
Stock.
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PART 1. FINANCIAL INFORMATION
Item 1.
MESA AIR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
December 31
1998 1997
--------- ---------
<S> <C> <C>
Operating revenues:
Passenger $ 75,880 $ 122,066
Freight and other 1,240 2,493
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Total operating revenues 77,120 124,559
--------- ---------
Operating expenses:
Flight operations 33,404 47,964
Maintenance 13,341 22,927
Aircraft and traffic servicing 9,575 21,746
Promotion and sales 5,358 18,500
General and administrative 4,744 8,063
Depreciation and amortization 4,492 7,243
Other operating items -- 33,943
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Total operating expenses 70,914 160,386
--------- ---------
Operating income (loss) 6,206 (35,827)
--------- ---------
Non-operating expense:
Interest expense (4,325) (6,234)
Interest income 93 595
Other 311 (136)
--------- ---------
Total non-operating expense (3,921) (5,775)
--------- ---------
Income (loss) before income taxes 2,285 (41,602)
Income tax benefit -- (2,511)
--------- ---------
Net income (loss) $ 2,285 $ (39,091)
========= =========
Average common shares outstanding: Basic 28,366 28,295
========= =========
Average common shares outstanding: Diluted 28,671 28,295
========= =========
Net income (loss) per share: Basic $ 0.08 $ (1.38)
========= =========
Net income (loss) per share: Diluted $ 0.08 $ (1.38)
========= =========
</TABLE>
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MESA AIR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
----------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 65,865 $ 35,622
Receivables, primarily traffic 18,794 22,807
Income tax refund receivable -- 9,057
Expendable parts and supplies, net 21,772 29,774
Prepaid expenses and other current assets 3,866 4,897
-------- --------
Total current assets 110,297 102,157
Property and equipment, net 327,416 331,974
Lease and equipment deposits 11,347 11,515
Intangibles, net 20,295 20,646
Other assets 1,516 4,660
-------- --------
Total assets $470,871 $470,952
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital leases $ 39,491 $ 33,945
Accounts payable 12,822 12,243
Air traffic liability 3,624 4,758
Accrued compensation 1,303 3,834
Other accrued expenses 43,004 44,006
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Total current liabilities 100,244 98,786
Long-term debt and capital leases, excluding current portion 231,111 234,475
Deferred credits and other liabilities 15,862 16,592
Stockholders' 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;
28,369,081 and 28,294,584 shares issued and outstanding 101,868 101,847
Retained earnings 21,786 19,252
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Total stockholders' equity 123,654 121,099
-------- --------
Total liabilities and stockholders' equity $470,871 $470,952
======== ========
</TABLE>
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MESA AIR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,285 $(39,091)
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Depreciation and amortization 5,146 7,243
Provision for other operating items -- 33,943
Amortization and write-off of deferred credits (729) (334)
Stock bonus plan -- --
Provision for doubtful accounts 19 1,007
Other 229 859
Changes in assets and liabilities:
Receivables 13,070 14,474
Expendable parts and supplies 8,002 (69)
Prepaid expenses and other current assets 1,031 (287)
Accounts payable 579 (1,878)
Other accrued expenses (4,667) (6,543)
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NET CASH FLOWS FROM OPERATING ACTIVITIES: 24,965 9,324
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (237) (4,261)
Other assets 3,144 2,261
Lease and equipment deposits 168 (1,060)
-------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES: 3,075 (3,060)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds received from long-term debt 6,300 --
Principal payments on long-term debt and obligations (4,118) (4,189)
under capital leases
Proceeds from issuance of common stock 21 --
-------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES: 2,203 (4,189)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS: 30,243 2,075
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 35,622 57,232
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 65,865 $ 59,307
======== ========
</TABLE>
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<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Cash paid during the period for:
Interest $ 5,599 $ 6,667
Income taxes -- 1,024
</TABLE>
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MESA AIR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation: 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, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending September 30,
1999.
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 fiscal year ended
September 30, 1998.
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 Four Corners Aviation, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation. See discussion of WestAir Holding, Inc. in the "Legal
Proceedings" section of this report.
3. Income tax benefit in the three-month period ended December 31, 1997 has
been recognized only to the extent of previously recorded deferred tax
liability. For the three month period ended December 31, 1998, there was
no income tax expense recorded due to the utilization of net operating
loss carryforwards.
4. Legal Proceedings:
See, "Part II., Item 1."
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This Form 10-Q contains certain statements including, but not limited to,
information regarding the replacement, deployment, and acquisition of certain
numbers and types of aircraft, and projected expenses associated therewith;
costs of compliance with FAA regulations and other rules and acts of Congress;
the passing of taxes, fuel costs, inflation, and various expenses to the
consumer; the relocation of certain operations of Mesa; the resolution of
litigation in a favorable manner; compliance with Year 2000 issues, and certain
projected financial obligations. These statements, in addition to statements
made in conjunction with the words "expect," "anticipate," "intend," "plan,"
"believe," "seek," "estimate," and similar expressions, are forward-looking
statements which we believe are within the meaning of the safe harbor provision
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements relate to future
events or the future financial performance of Mesa and only reflect Management's
expectations and estimates. The following is a list of factors, among others,
that could cause actual results to differ materially from such forward-looking
statements: changing business conditions in certain market segments and
industries; an increase in competition along the routes Mesa operates or plans
to operate; material delays in completion by the manufacturer of the ordered and
yet-to-be delivered aircraft; changes in general economic conditions; changes in
fuel price; changes in regional economic conditions; Mesa's relationship with
employees and the terms of future collective bargaining agreements; and the
impact of current and future laws, Congressional investigations, and
governmental regulations affecting the airline industry and Mesa's operations;
bureaucratic delays; amendments to existing legislation; consumers unwilling to
incur greater costs for flights; unfavorable resolution of negotiations with
municipalities for the leasing of facilities; and risks associated with
litigation outcomes. One or more of these or other factors may cause Mesa's
actual results to differ materially from any forward-looking statement. Mesa is
not undertaking any obligation to update any forward-looking statements
contained in this Form 10-Q.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Mesa Air Group, Inc. and its subsidiaries (collectively referred to as "Mesa" or
the "Company") is an independently owned regional airline serving 114 cities in
28 states, the District of Columbia, Toronto, Canada and Guaymas and Hermasillo,
Mexico. At December 31, 1998, Mesa operated a fleet of 107 aircraft with
approximately 1,000 daily departures.
Mesa's airline operations are conducted by two regional airlines utilizing
hub-and-spoke systems. Mesa Airlines, Inc. ("MAI"), a wholly-owned subsidiary of
Mesa, operates as America West Express under a code-sharing agreement with
America West Airlines, Inc. ("America West") and as US Airways Express under
code-sharing agreements with US Airways, Inc. ("US Airways") and also operates
an independent division, Mesa Airlines, from a hub in Albuquerque, New Mexico.
Air Midwest, Inc. , a wholly owned subsidiary of Mesa, also operates under a
code-sharing agreement with US Airways and flies as US Air Express.
Mesa's long-term business strategy is to operate a competitive and profitable,
high-frequency, quality service airline, primarily with a hub-and-spoke system.
The strategy is implemented through a disciplined approach to the regional
airline business which incorporates (i) regional diversification, (ii) focus on
profitable markets, (iii) reactions to the changing economic and competitive
environment, and (iv) a modern, efficient aircraft fleet that positions the
airline to be able to capitalize on future growth opportunities.
Since 1978, airlines in the United States have been free to set their own
domestic fares without governmental regulation. Mesa has increasingly relied on
fee per departure contractual agreements with its two code-sharing partners to
generate revenue. All of Mesa's America West Express operations (except Guaymas
and Hermasillo, Mexico) and all its US Airways Express jet operations are on a
fee per departure basis. The percentage of revenue generated under the fee per
departure agreements is expected to significantly increase in 1999 as Mesa adds
additional regional jets to its America West Express and US Airways Express
operations. Mesa derives the
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remainder of its passenger revenues from a combination of local fares, through
fares, and joint fares. Local fares are fares for one-way and round-trip travel
provided by Mesa within its route system. Passengers connecting with other
carriers also frequently use local fares. A through-fare is a fare offered to
passengers by either America West or US Airways which generally provides cost
savings to the passenger who transfers to the major carrier's code-sharing
partner on routes flown by the code-sharing partner. Through-fares are prorated
in accordance with standards specified in the various code-sharing agreements.
Joint fares are single fares for travel combining flights with Mesa and other
airlines, which are not code-sharing partners with Mesa. With joint fares, the
passenger generally pays a single lower fare than the sum of the local fares
charged for the combined flights. Mesa has been able to negotiate joint-fare
arrangements with some major carriers as an additional means of deriving
passengers connecting through its hub cities.
The following tables set forth year-to-year comparisons for the periods
indicated below:
OPERATING DATA
<TABLE>
<CAPTION>
Three Months Ended
December 31
1998 1997
------------------------------------
<S> <C> <C>
Passengers 823,205 1,599,610
Available seat miles (000) 517,144 633,113
Revenue passenger miles (000) 256,007 354,473
Load factor 49.5% 56.0%
Yield per revenue passenger mile 30.1(cent) 35.1(cent)
Revenue per available seat mile 14.9(cent) 19.7(cent)
Operating cost per available seat mile 13.7(cent) 25.3(cent)
Average stage length (miles) 261 184
Number of operating aircraft in fleet 107 189
Gallons of fuel consumed (000) 14,571 18,630
Block hours flown 82,990 137,469
Departures 79,114 138,567
</TABLE>
FINANCIAL DATA
Three Months Ended December 31, 1998 Versus Three Months Ended December 31, 1997
<TABLE>
<CAPTION>
Three Months Ended December 31
----------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------
Cost per Percent of total Cost per Percent of total
ASM operating revenues ASM operating revenues
---------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Flight operations 6.5(cent) 43.3% 7.7(cent) 38.5%
Maintenance 2.6(cent) 17.3% 3.6(cent) 18.3%
Aircraft and traffic servicing 1.9(cent) 12.5% 3.4(cent) 17.5%
Promotion and sales 1.0(cent) 6.9% 2.9(cent) 14.9%
General and administrative 0.9(cent) 6.3% 1.3(cent) 6.5%
Depreciation and amortization 0.9(cent) 5.8% 1.1(cent) 5.8%
Other operating items 0.0(cent) 0.0% 5.4(cent) 27.3%
---------------------------------- ---------------------------------
Total operating expenses 13.7(cent) 92.0% 25.3(cent) 129.0%
Interest expense 0.8(cent) 5.6% 1.0(cent) 5.0%
</TABLE>
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RESULTS OF OPERATIONS
Operating Revenues:
Operating revenues decreased by $47.4 million to $77.1 million in the quarter
ended December 31, 1998, from $124.6 million in the quarter ended December 31,
1997. The revenue decrease was primarily due to a 48.5% decrease in passengers
carried. Available seat miles ("ASMs") decreased by 18.3%, and the load factor
decreased from 56.0% during the December 31, 1997 quarter to 49.5% for the
current quarter. The decrease in ASM's and passengers carried is primarily
attributable to the discontinuation of the Company's United Airlines Express
("United") operations. (See Part II - Item 1. Legal Events.)
Operating Expenses:
Flight Operations:
Flight operations costs decreased by $14.6 million to $33.4 million for the
quarter ended December 31, 1998 from $48 million in the quarter ended December
31, 1997. The primary cause of the decrease for the quarter ended December 31,
1998 from the prior year's comparable quarter was the reduction in ASM's
previously noted. Flight operations expense on a cost per ASM basis decreased to
6.5(cent) per seat mile for the quarter ended December 31, 1998 from 7.7(cent)
for the quarter ended December 31, 1997 due to lower fuel costs of $9.8 million
for the quarter ended December 31, 1998 compared to $17.4 million for the
quarter ended December 31, 1997. Approximately $3.1 million of this decrease is
the result of a decrease in the average cost per gallon from 93(cent) for the
quarter ended December 31, 1997 to 72(cent) for the quarter ended December 31,
1998, while the remainder is due to less consumption. Aircraft rents decreased
by $7.6 million from $15.3 million for the quarter ended December 31, 1997 to
$7.7 million for the quarter ended December 31, 1998 due to the reduction in
fleet size.
Maintenance Expense:
Maintenance expense decreased by $9.6 million in the quarter ended December 31,
1998 to $13.3 million from $22.9 million in the same quarter of the previous
fiscal year. The decrease for the quarter ended December 31, 1998 was due to the
reduction in ASM's previously noted, and the introduction of 9 new Canadair
Regional Jets ("CRJ") aircraft into the fleet. At December 31, 1998, Mesa had 20
CRJ aircraft compared to 11 at December 31, 1997.
Aircraft and Traffic Service Expense:
Aircraft and traffic service expense decreased by $12.1 million to $9.6 million
during the quarter ended December 31, 1998 from $21.7 million in the comparable
quarter of the previous fiscal year. The decrease for the quarter ended December
31, 1998 was primarily due to reduced station wages and benefits of $4.1
million, reduced rent of $2.1 million, reduced landing fees of $1.4 million, and
reduced non-completion and related expenses of $1.8 million. These reductions
were due to the reduction in ASMs, closure of the Company's United Express
operations in Denver and the West Coast, reduced staffing levels, and better
on-time and completion performance.
Promotion and Sales:
Promotion and sales expense decreased $13.1 million to $5.4 million for the
quarter ended December 31, 1998 from the prior year's comparable quarter. The
lower revenues resulted in decreases of $4.2 million in travel agency
commissions, $3.5 million in booking fees, and $4.3 million in program fees.
These decreases were caused by a
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significant decline in the number of passengers carried due to the termination
of the United code-sharing agreement. In addition, under the new code-sharing
contract with America West, effective September 10, 1998, Mesa no longer pays
commissions, booking fees, and certain other revenue related costs.
General and Administrative Expense:
General and administrative expense decreased by $3.3 million for the three-month
period ended December 31, 1998 to $4.7 million as compared to the quarter ended
December 31, 1997. The primary causes of the decrease were a $1.6 million
decrease in benefits, primarily health insurance claims, and a $0.7 million
decrease in property and casualty insurance.
Depreciation and Amortization:
Depreciation and amortization decreased by $2.7 million to $4.5 million for the
quarter ended December 31, 1998 as compared to the quarter ended December 31,
1997 due to the reduction in fleet size.
Other Operating Items:
During the three months ended December 31, 1997, Mesa recognized an additional
$33.9 million loss provision related to the discontinuation of service under the
WestAir and Mesa code-sharing agreements with United Airlines. Mesa had
previously recognized a loss provision of $72.1 million for the non-renewal of
the WestAir code-sharing agreement and the early termination of the MAI
code-sharing agreement. See Part II, Item 1. "Legal Proceedings." There were no
loss provisions for the quarter ended December 31, 1998.
Other Non-Operating Expense:
Other non-operating expense decreased by $1.9 million to $3.9 million in the
quarter ended December 31, 1998 from $5.8 million in the quarter ended December
31, 1997. Interest expense decreased by $1.9 million to $4.3 million in the
quarter ended December 31, 1998 from $6.2 million in the quarter ended December
31, 1997 due to lower outstanding principal loan balances as a result of the
retirement of aircraft.
LIQUIDITY AND CAPITAL RESOURCES
Mesa's cash, cash equivalents and marketable securities as of December 31, 1998
were $65.9 million, representing an increase of $30.3 million over the prior
year. Mesa's net cash flows from operations was approximately $25.0 million
during the quarter ended December 31, 1998. Mesa makes semiannual lease payments
on a substantial portion of its leased aircraft with approximately $15 million
due in January and July. Mesa's cash, cash equivalents and marketable securities
are intended to be used for working capital, capital expenditures and
acquisitions.
Mesa had receivables of approximately $18.8 million at December 31, 1998, which
consist primarily of amounts due from code-sharing partner US Airways. Under the
terms of the US Airways agreement, Mesa receives a substantial portion of its
revenues through the Airline Clearing House. Historically, Mesa has generated
adequate cash flow to meet its operating needs. However, termination of the
United Express code-sharing agreement has left Mesa with excess aircraft which
will need to be re-deployed on other routes, or alternatively, sold or returned
to their lessors. At December 31, 1998, Mesa owned had 19 excess Beech 1900D
aircraft and five leased Embraer Brasilia aircraft. The Embraer aircraft are
intended to be traded in on new CRJ aircraft. On February 25, 1999 Mesa
announced that it had sold 16 of the excess Beech 1900D aircraft with delivery
to the purchaser scheduled through June 1999. Mesa is continuing its efforts to
sell the remaining three excess Beech 1900D aircraft.
Mesa has significant lease obligations and debt payments on existing aircraft.
At December 31, 1998, Mesa had 84 aircraft with debt balances with maturities
through December 2011. During 1996, Raytheon Aircraft Credit Corporation
("RACC") provided financing on 69 Beech 1900D aircraft. In April 1998, Mesa
reached an agreement with RACC, to defer the monthly principle and interest
payments due on the aircraft for the months of May, June and July. The payments
were deferred by extending the financing terms for an additional three months.
In addition, RACC agreed to finance two Beech 1900 aircraft owned by Mesa for an
amount equal to the monthly payments due on 69 Beech 1900D aircraft for the
months of August, September and October 1998. Mesa then
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used the proceeds of the financing for those monthly payments. The two aircraft
were financed by RACC with non-recourse, non-interest bearing loans and are in
the process of being sold. In the fall of 1998, RACC refinanced from another
lender an additional 14 Beech 1900D aircraft. The total financing provided by
RACC is secured by the aircraft and totals $271 million at December 31, 1998
with monthly payments of $2.2 million.
In August 1998 Mesa reached an Agreement with RACC whereby RACC agreed to
purchase excess Beech 1900 aircraft parts from Mesa. As a result of disputes
between Mesa and RACC regarding the applicability and value of certain aircraft
parts under the Agreement, Mesa withheld its monthly payment on 83 Beech 1900
aircraft to RACC for the months of November and December 1998. In an Agreement
dated January 7, 1999, Mesa and RACC resolved the issues regarding these parts
and RACC accepted them in lieu of payment for the months of November and
December 1998. To the extent that any Event of Default, as defined in the
financing documents, may have occurred for the months of November and December
1998, they have been deemed fully cured pursuant to the terms of the Agreement
with RACC.
Mesa is the lessee of one (1) Embraer EMB 120 aircraft with Fleet Capital
Leasing ("Fleet") as lessor. This aircraft is no longer in service with the
Company, however, it is maintained in accordance with Mesa's FAA approved
maintenance program. On January 11, 1999, Fleet delivered to Mesa a notice of
default under the aircraft lease for failing to maintain the aircraft in
accordance with the requirements of the applicable aircraft lease. Mesa has
responded to Fleet, disputing that an Event of Default under the lease has
occurred.
Future lease payments due under all aircraft operating leases were approximately
$551 million at December 31, 1998. These leases are classified as operating
leases and therefore are not reflected as liabilities in the accompanying
consolidated balance sheet. At December 31,1998, 47 aircraft were leased by Mesa
with terms extending through June 2016. Total lease expense for the three months
ended December 31, 1998 was $7.6 million.
Mesa has ordered 32 CRJ aircraft for use in its America West Express operation
in Phoenix, Arizona and Columbus, Ohio, and for its US Airways Express
operations on the East Coast. As of February 1, 1999, Mesa had received 22 of
the 32 CRJ aircraft on order and expects to take delivery of the remaining 10 by
the end of 1999. Mesa has Rolling Options for an additional 16 CRJ aircraft with
a delivery schedule subject to availability of one per month beginning June
2000. The value of these additional 16 CRJ aircraft, at listed prices, is
approximately $320 million. Permanent financing has been completed on 11 of
these aircraft for which Mesa has entered into operating leases. The
manufacturer, Bombardier Regional Aircraft Division, is providing interim
financing and has agreed to provide back up financing at agreed upon rates if
Mesa is not successful in obtaining permanent financing. The financing rate, but
not the commitment, is subject to there being no material adverse change in
Mesa's creditworthiness. Mesa anticipates finalizing operating leases upon the
completion of permanent financing for the additional 11 aircraft delivered
through January 1999 and for the remaining 10 aircraft to be delivered in 1999.
In December 1997, Mesa gave notice to Bombardier, the manufacturer, of its
intent to exercise its option to purchase the 16 Rolling Option aircraft.
Bombardier contends that the aircraft are subject to availability and that they
are no longer available. Mesa disputes Bombardier's position. The matter has not
yet been resolved.
Mesa currently has offers for its various real properties located in Farmington,
New Mexico. Mesa anticipates closing on the sale of its Revenue Accounting and
Operations buildings in early 1999. As of February 5, 1999, Mesa had received in
excess of $5.5 million from these sales. Mesa is also currently reviewing offers
to buy Desert Turbine Services and Four Corners Aviation. Desert Turbine
Services is a division of Mesa Airlines, Inc. which overhauls Mesa's turbine
engines. Four Corners Aviation is a wholly owned subsidiary of Mesa Air Group,
Inc. that operates a Fixed Based Operation at the Farmington, New Mexico
Airport.
Mesa has negotiated 10-year engine maintenance contracts with General Electric
Aircraft Engines ("GE") for the CRJ aircraft and with Pratt and Whitney, Canada
Aircraft Services ("PWC") for the Dash 8-200 aircraft. The GE engine maintenance
contract provides coverage for the engines on the first 16 CRJ aircraft to be
delivered. Mesa is presently negotiating with GE to add the CRJ aircraft engines
for 16 additional CRJ aircraft to this maintenance contract. The PWC contract
provides coverage for all Dash 8-200 aircraft engines operated by Mesa. Both
contracts provide for payment at the time of the repair event and a fixed dollar
amount per flight hour, subject to escalation based on changes in the Consumer
Price Index, for the number of flight hours incurred since the previous event.
In connection with the $110 million loss provision recorded of which $72.1
million was for the fiscal year ended September 30, 1997 and $37.9 million was
for the fiscal year ended September 30, 1998, Mesa incurred $3.4 million in cash
expenditures in the quarter ended December 31, 1998 primarily for disposition of
surplus aircraft
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severance and other expenditures. Mesa estimates that the cash expenditures for
fiscal year 1999 attributable to the remaining costs related to the termination
of the United Express code-share agreements and the shut down of the Denver and
Fort Worth operations will be approximately $6.9 million, primarily related to
aircraft interest and severance costs. At December 31, 1998, Mesa had applied
$79.4 million to this provision, leaving a balance of $30.3 million for
remaining disposition costs. Mesa estimates that the remaining provision will be
adequate for the remaining disposition expenses. Mesa's estimation that the
remaining provision will be adequate for the remaining disposition expenses is a
forward-looking statement.
Management's belief that Mesa will have adequate cash flow to meet its operating
needs is a forward-looking statement. Actual cash flow could materially differ
from the forward-looking statement in the event of the termination of one or
more code-sharing agreements; failure to sell, dispose of, or re-deploy excess
aircraft in a timely manner; a substantial decrease in the number of routes
allocated to MAI under its code-sharing agreement with US Airways; 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 has minimal market risk with respect to
market risk instruments such as foreign currency exchange risk and commodity
price risk. Mesa is subject to interest rate risk with respect to current and
future aircraft financings.
YEAR 2000 ISSUES
Many currently installed computer systems and software products are coded to
accept two digits entries in the date code field. These date code fields will
need to accept four digit entries to distinguish 21st century dates from 20th
century dates. Any programs that have time sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in the computer shutting down or performing incorrect computations. As a
result, in less than eleven months, computer systems and software used by many
companies will need to be upgraded to comply with such "Year 2000"
requirements. Certain of Mesa's systems, including information and computer
systems and automated equipment, will be affected by the Year 2000 issue.
Mesa has begun to compile a comprehensive inventory of its core business
applications to determine the adequacy of these systems to meet future business
requirements. To date, Mesa's Year 2000 remediation efforts have focused on its
core business computer applications (i.e., those systems that Mesa is dependent
upon for the conduct of day-to-day business operations). Year 2000 readiness is
only one of many factors considered in this assessment. Out of this effort, a
number of systems have already been identified for upgrade or replacement. In no
case has a system been replaced or contemplated to be replaced solely because of
Year 2000 issues, although in some cases the timing of system replacements is
being accelerated. Thus, Mesa does not believe the costs of these system
replacements are specifically Year 2000 related. Additionally, while Mesa may
have incurred an opportunity cost for addressing the Year 2000 issue, it does
not believe that any specific information technology projects have been deferred
as a result of its Year 2000 efforts.
Mesa's reservation systems are tied to its code-sharing partners, US Airways
and America West. Mesa representatives have met with the reservation system
providers and are engaged in on-going dialogue regarding their year 2000
progress. Mesa has installed an upgraded version of its current accounting
system which is represented by the vendor to be compliant but has not yet been
tested. A new flight operations software package which will handle crew
scheduling and dispatch is currently being installed to replace an in-house
system and is expected to be compliant after implementation of a vendor
supplied upgrade. Mesa has had extensive discussions with the manufacturers of
its various aircraft to discuss year 2000 issues and identify the required
avionics and flight systems upgrades which will be implemented during 1999. The
aircraft manufacturers are also required to report the Year 2000 status of
their aircraft to the FAA. Mesa currently has two employees devoted full-time
to Year 2000 issues - one in Information Technology and one in the Maintenance
department. Projects are currently underway to evaluate the remaining systems
(including tracking of maintenance parts, revenue accounting and payroll) and
replace them if needed, with implementations and testing scheduled for the
remainder of calendar year 1999. As with systems that have already been
replaced, Mesa does not believe the costs of these replacements are
specifically Year 2000 related. Mesa has upgraded or replaced much of its
personal computers and related replacements were not specifically related to
Year 2000 but were part of a larger system upgrade. Mesa has spent
approximately $1 million on these upgrades thus far, and anticipates another
$.5 million in expenditures to complete its system upgrade. Mesa expects to
incur costs to replace or repair some of its systems, but it has not at this
time determined the amount of these costs.
Mesa is currently assessing other potential Year 2000 issues, including
non-information technology systems. A broad-based Year 2000 Task Force is being
formed and will begin meeting to identify areas of concern and develop action
plans. Mesa has also been meeting with similar task forces at America West, US
Airways, and SABRE. Also as part of the Task Force effort, the Company's
relationships with vendors, contractors, financial institutions and other third
parties will be examined to determine the status of the Year 2000 issue efforts
on the part of the other parties to material relationships. The Year 2000 Task
Force will include both internal and Company-external representation.
Mesa expects to incur Year 2000-specific costs in the future but does not at
present anticipate that these costs will be material. Mesa believes that the
most reasonably likely worst-case scenario for the Year 2000 issue would be
that Mesa or the third parties with whom it has relationships would cease or
not successfully complete their Year 2000 remediation efforts. If this were to
occur, Mesa would encounter disruptions to its business that could have a
material adverse effect on its business, financial position, and results of
operations. Mesa could be materially impacted by widespread economic or
financial market disruption or by Year 2000 computer system failures.
Mesa has not at this time established a formal Year 2000 contingency plan but
will consider and, if necessary, address doing so as part of its Year 2000 Task
Force activities. Mesa maintains and deploys contingency plans designed to
address various other potential business interruptions. These plans may be
applicable to address the interruption of support provided by third parties
resulting from their failure to be Year 2000 ready.
12
<PAGE> 13
AIRCRAFT:
The following table lists the aircraft owned and leased by Mesa for scheduled
operations as of December 31, 1998:
NUMBER OF AIRCRAFT
<TABLE>
<CAPTION>
Operating
On Dec. 31, Passenger
Type of Aircraft Owned Leased Total 1998 Capacity
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beechcraft 1900 84 10 94 75 19
Embraer Brasilia -- 5 5 -- 30
Dash 8-200 -- 12 12 12 37
CRJ -- 20 20 20 50
-----------------------------------------------------
Total 84 47 131 107
-----------------------------------------------------
</TABLE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In June 1997, UAL filed a complaint in the United States District Court for the
Northern District of Illinois against two subsidiaries of Mesa, Mesa Airlines,
Inc. and WestAir Commuter Airlines, Inc., 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,
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. On November 1, 1998, UAL filed a motion with the Court to amend its
Complaint to include an additional $4.0 million in damages resulting from Mesa's
alleged failure to remit baggage
13
<PAGE> 14
fees at Denver International Airport to UAL. The motion has not yet been
considered. MAI and WestAir dispute the principal contentions in UAL's
complaint, and unless a satisfactory negotiated resolution is achieved, intend
to defend their positions vigorously. Furthermore, MAI and WestAir believe that
UAL has breached its code-sharing agreements with the respective entities and
have filed a counterclaim seeking to recover the substantial damages which have
been incurred by the business of MAI and WestAir.
In addition, Mesa and WestAir have filed suit against UAL and SkyWest Airlines,
Inc. ("SkyWest"). SkyWest was contracted to be Mesa's successor of the West
Coast. The complaint alleges that SkyWest unlawfully interfered with Mesa's and
WestAir's contracts with UAL. It further alleges improper conduct on the part of
UAL and SkyWest in terminating markets under the Mesa agreement and leading to
the non-renewal of the WestAir agreement. Mesa is seeking substantial damages
against each defendant.
Mesa is also a party to legal proceedings and claims which arise in the ordinary
course of business.
Although the ultimate outcome of the above pending lawsuits cannot be determined
at this time, Mesa believes, based upon currently available information, that
the ultimate outcome of all the proceedings and claims pending against Mesa is
not expected to have a material adverse effect on Mesa's consolidated financial
position. Mesa's belief regarding the outcome of all pending proceedings and
claims is a forward-looking statement.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
1. none
(B) Reports on Form 8-K
A current report on Form 8-K was filed February 1, 1999 announcing
that Mesa entered into a Merger Agreement, dated as of January 28, 1999, with
CCAir, Inc.
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.
MESA AIR GROUP, INC.
Registrant
Date: March 9, 1999 /s/ Blaine M. Jones
-------------------------------------
Blaine M. Jones
Chief Financial Officer
(Principal Accounting Officer)
14
<PAGE> 15
Exhibit Index
-------------
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS 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> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 65,865
<SECURITIES> 0
<RECEIVABLES> 18,794
<ALLOWANCES> 254
<INVENTORY> 34,463
<CURRENT-ASSETS> 134,011
<PP&E> 327,416
<DEPRECIATION> 88,575
<TOTAL-ASSETS> 470,871
<CURRENT-LIABILITIES> 100,244
<BONDS> 0
0
0
<COMMON> 101,868
<OTHER-SE> 21,786
<TOTAL-LIABILITY-AND-EQUITY> 470,871
<SALES> 75,880
<TOTAL-REVENUES> 77,120
<CGS> 0
<TOTAL-COSTS> 70,914
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,325
<INCOME-PRETAX> (3,921)
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,285
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,285
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
