<PAGE> 1
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
[X] For the quarterly period-ended December 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of Securities Exchange Act of 1934
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 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 last 90 days.
Yes [X] No [ ]
On January 10, 2000, the registrant had outstanding 34,218,000 shares of Common
Stock.
1
<PAGE> 2
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 December 31
1999 1998
(As restated --
see Note 7)
---- ----
Operating Revenues:
<S> <C> <C>
Passenger $ 108,711 $ 96,255
Freight and other 2,242 1,465
------- ------
Total operating revenues 110,953 97,720
------- ------
Operating expenses:
Flight operations 50,254 42,007
Maintenance 19,852 17,768
Aircraft and traffic servicing 13,194 12,842
Promotion and sales 8,212 8,257
General and administrative 6,516 6,200
Depreciation and amortization 4,666 4,808
------- ------
Total operating expenses 102,694 91,882
------- ------
Operating income 8,259 5,838
------- ------
Other expense:
Interest expense (4,584) (4,658)
Interest income 862 93
Other 3,236 489
------ ------
Total other expense (486) (4,076)
------ ------
Income before income taxes 7,773 1,762
Income taxes -- --
------ ------
Net income $ 7,773 $ 1,762
====== ======
Average common shares outstanding: Basic 34,220 34,036
Average common shares outstanding: Diluted 34,301 34,036
Net income per common and common
equivalent share, basic 0.23 0.05
Net income per common and common
equivalent share, diluted $ 0.23 $ 0.05
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
<PAGE> 3
MESA AIR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31 September 30
1999 1999
(As restated --
see Note 7)
---- ----
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 61,066 $ 52,905
Marketable securities - current -- 3,306
Receivables, primary traffic 33,194 30,859
Expendable parts and supplies, net 27,186 24,727
Aircraft held for sale 75,518 77,412
Prepaid expenses and other current assets 6,930 12,739
--------- ---------
Total current assets 203,894 201,948
Property and equipment, net 158,013 160,453
Lease and equipment deposits 22,690 22,392
Intangibles, net 10,647 10,855
Other assets 8,535 8,125
--------- ---------
Total assets $ 403,779 $ 403,773
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital leases $ 120,681 $ 121,297
Accounts payable 15,348 17,480
Air traffic liability 2,618 2,128
Accrued compensation 1,573 2,324
Other accrued expenses 20,138 25,679
--------- ---------
Total current liabilities 160,358 168,908
Long-term debt and capital leases, excluding current portion 109,718 114,234
Deferred credits and other liabilities: 29,992 24,196
--------- ---------
Total liabilities 300,068 307,338
Stockholders' equity:
Common stock of no par value, 75,000,000 shares
authorized; 34,117,308 and 34,197,752
shares issued and outstanding, respectively 122,995 123,492
Accumulated deficit (19,284) (27,057)
--------- ---------
Total stockholders' equity 103,711 96,435
--------- ---------
Total liabilities and stockholders' equity $ 403,779 $ 403,773
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
MESA AIR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
(As restated--
see Note 7)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 7,773 $ 1,762
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization 4,666 4,808
Provision for doubtful accounts 24 19
Gain on sale of marketable securities (710) --
Changes in assets and liabilities:
Receivables (2,359) 3,994
Expendable parts and supplies (2,459) 8,002
Prepaid expenses and other current assets 5,809 1,031
Accounts payable (2,132) 579
Air traffic liability 490 (1,134)
Accrued compensation (751) (2,531)
Other accrued expenses (5,541) 9,848
Deferred credits and other liabilities 5,796 (731)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES: 10,606 25,647
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,224) (816)
Proceeds from sale of marketable securities 4,016 --
Other (410) 2,122
Lease and equipment deposits (298) 168
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,084 1,474
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long term debt -- 6,606
Principal payments on notes payable & obligations under
capital leases (3,032) (4,527)
Proceeds from issuance of common stock 10 1,043
Stock buy-back program (507) --
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,529) 3,122
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 8,161 30,243
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 52,905 35,668
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 61,066 $ 65,911
======== ========
</TABLE>
<TABLE>
<S> <C> <C>
Supplemental disclosure of noncash investing and financing
activities:
Sale of property in exchange for debt reduction $ 2,100 --
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 5
MESA AIR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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
a complete set of financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the results for the unaudited
three month periods have been made. Operating results for the three
month period ended December 31, 1999, are not necessarily indicative of
the results that may be expected for the fiscal year ending September
30, 2000. These condensed consolidated financial statements should be
read in conjunction with the Company's consolidated financial
statements and notes thereto included in the Company's annual report on
Form 10K for the fiscal year ended September 30, 1999.
2. The condensed consolidated financial statements include the accounts of
Mesa Air Group, Inc. and its wholly owned subsidiaries, Mesa Airlines,
Inc., West Air Holdings, Inc., Air Midwest, Inc., CCAIR, Inc., Mesa
Leasing, Inc., MAGI Insurance, Ltd. , Regional Aircraft Services, Inc.,
The Ritz Hotel Management Corporation, and MPD, Inc. All significant
intercompany balances and transactions have been eliminated in
consolidation. See discussion of WestAir holdings, Inc. in the "Legal
Proceedings" section of this report.
3. Income tax benefit in the three-month period ended December 31, 1999
has been recognized only to the extent of previously recorded deferred
tax liability. For the quarter ended December 31, 1999, the Company did
not recognize any income tax expense as a result of net operating loss
carryforwards.
4. On June 9, 1999, Mesa Merger Corporation, a wholly owned subsidiary of
the Company, merged with and into CCAIR, Inc. a regional carrier based
in Charlotte, NC, and in connection therewith the company issued
5,933,000 shares of common stock in exchange for all of CCAIR's
outstanding common stock. CCAIR is a regional airline serving the East
Coast as US Airways Express. The merger was accounted for as a pooling
of interests and accordingly, the Company's consolidated financial
statements have been restated to include the results of CCAIR for all
periods presented. The combined financial information for the three
months ended December 31, 1998 contains adjustments to conform the
accounting policies of the two companies. This conforming adjustment
reflects the restatement of CCAIR's engine overhaul amount to the
direct expense method from the accrued method. The adjustment decreased
combined net income for the three month period ended December 31, 1998,
by $254,000.
5. In November 1999, Mesa settled various disputed claims it had against
Bombardier regarding Bombardier's obligation to accept trade in
Brasilia aircraft and the availability of 16 additional rolling option
CRJs. Under this settlement agreement, Mesa will receive up to $9.0
million ($8.5 million cash, $.5 million credit) $7.1 million of which
has been received as of December 31, 1999 and the remainder of which
will be paid as the remaining 5 CRJ aircraft are financed on a
long-term basis if financed by June 30, 2000. Based on this settlement,
Mesa recognized $2.0 million in other income for the quarter ended
December 31, 1999 related to damages from the dispute with BRAD for
incremental lease payments, storage and insurance costs incurred by
Mesa. The remainder of the settlement ($5.1 million at December 31,
1999) will be recognized by Mesa over the remaining lives of the
related aircraft leases and has been recorded as a deferred credit.
6. In December 1999, the Company's Board of Directors authorized the
Company to repurchase up to 10% of the outstanding shares of its Common
Stock. As of March 31, 2000 the Company has acquired approximately 1.8
million shares of its common stock at an aggregate cost of
approximately $9.9 million.
7. Subsequent to the issuance of the Company's condensed consolidated
financial statements for the three month period ended December 31, 1999
on Form 10-Q, management determined that certain costs related to
implementation of its new ERJ jets which had been charged against
deferred credits should have been charged to expense as incurred,
maintenance expense was over accrued, a receivable should have been
established for certain reimbursable training costs previously charged
to expense, and interest expense associated with parked aircraft should
have been classified as interest expense and not included as general
and administrative expense. The net effect of these adjustments is an
increase in net income of $15,000 for the quarter ended December 31,
1999. Accordingly, the accompanying financial statements for the three
month period have been restated as follows:
<TABLE>
<CAPTION>
As
Previously As
Reported Restated
----------- ---------
(in thousands, except per
share amounts)
<S> <C> <C>
For the three months ended December 31, 1999:
Operating expenses:
Flight operations $ 50,138 $ 50,254
Maintenance 19,983 19,852
General and administrative 7,050 6,516
Operating income 7,710 8,259
Other income (expense) 48 (486)
Net income 7,758 7,773
At December 31, 1999:
Receivables 32,903 33,194
Other accrued expenses 18,550 20,138
Deferred credits and other liabilities 31,304 29,992
Accumulated deficit (19,299) (19,284)
</TABLE>
6. Legal Proceedings:
See, "Part II. Item 1."
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, 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 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 the 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 prices; changes in regional economic
conditions; Mesa's relationship with employees and the terms of future
collective bargaining agreements; 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
5
<PAGE> 6
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 herein as
"Mesa") is an independently owned regional airline serving 134 cities in 38
states, the District of Columbia, Toronto, Canada, and Guaymas and Hermasillo,
Mexico. Mesa operates a fleet of 137 aircraft and has approximately 1,100 daily
departures.
Subsequent to the issuance of the Company's condensed consolidated financial
statements for the three month period ended December 31, 1999 on Form 10-Q,
management determined that certain items had not been accounted for correctly.
The net effect of these adjustments is an increase in net income of $15,000 for
the quarter ended December 31, 1999. Accordingly, the accompanying financial
information has been revised to account for the restatement. See Note 7 to the
condensed consolidated financial statements included elsewhere herein.
Mesa's airline operations are conducted by three 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 USAirways Express under
code-sharing agreements with USAirways, Inc. ("USAirways") 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 USAirways and flies as USAirways Express. CCAIR,
Inc.("CCAIR"), a wholly-owned subsidiary of Mesa, which was acquired during
1999, operates under a code-share agreement with USAirways that permits CCAIR to
operate under the name USAirways Express and to charge their joint passengers on
a combined basis with USAirways.
Approximately 97% of Mesa's consolidated revenues for the quarter ended December
31, 1999, were derived from operations associated with code-sharing agreements
with America West and USAirways. All of Mesa Airlines, Inc.'s America West
Express operations (except Guaymas and Hermasillo, Mexico) and USAirways Express
jet operations are on a fee per departure basis. For the quarter ended December
31, 1999, approximately 50% of Mesa's airline revenues were derived from fee per
departure contractural arrangements. The percentage of revenue generated under
fee per departure agreements is expected to significantly increase in 2000 as
Mesa adds additional regional jets to its America West Express and USAirways
Express operations. The code-sharing agreements provide for terms of five years
for America West (expiring in 2004), and from one to seven years for USAirways,
with the regional jet agreement expiring in 2007. Mesa derives the remainder of
its passenger revenues from a combination of local fares, through fares and
joint fares. Local fares are 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 USAirways 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 applicable 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.
During fiscal 1999, and the three months ended December 31, 1999, several
significant events have occurred:
In November, 1999, Mesa and USAirways amended the USAirways regional jet service
agreement to extend the term from 2004 to February 2007 and to expand the
service from 14 regional jets to 28 regional jets. Unlike the USAirways
turboprop service agreements, which are standard prorate agreements, Mesa does
not have passenger revenue exposure under the jet agreement. USAirways is
responsible for marketing, pricing and scheduling the regional jets. Mesa
operates the routes and is paid via a combination of direct cost reimbursements
and a negotiated formula.
6
<PAGE> 7
In March, 1999, the code-sharing agreement between CCAIR and USAirways was
extended through December 31, 2003.
During 1999, Mesa entered into an agreement with Empresa Brasiliera de
Aeronautica SA(Embraer) to acquire 36 50-passenger Embraer ERJ- 145 regional
jets. Deliveries will begin late in the second quarter of fiscal 2000 and
continue through late fiscal 2002. Mesa also has options for an additional 64
aircraft with the right to convert deliveries into 37-seat ERJ's 135.
In November 1999, Mesa settled various disputed claims it had against Bombardier
Regional Aircraft Division ("BRAD") regarding BRAD's obligation to accept
trade-in Brasilia aircraft and the availability of 16 additional rolling option
CRJs. Under this settlement, Mesa will receive up to $9 million ($8.5 million
cash, $.5 million credit), $7.1 million of which has been received as of
December 31, 1999 and the remainder of which will be paid as each remaining 5
CRJ aircraft are financed on a long-term basis, if financed by June 30, 2000.
Based on this settlement, Mesa recognized $2 million in other income for the
quarter ended December 31, 1999 related to damages from the dispute with BRAD
for incremental lease payments, storage and insurance costs incurred by Mesa.
The remainder of the settlement ($5.1 million at December 31, 1999), will be
recognized by Mesa over the remaining lives of the related aircraft leases and
has been recorded as a deferred credit.
Mesa intends to introduce the ERJ-145 aircraft into revenue service early in the
third quarter of fiscal year 2000 as USAirways Express. Mesa intends to replace
the CRJ regional jets currently flying as USAirways Express with the ERJ-145's.
The CRJ's will be transitioned to the America West Express operation over 18
months and, by the end of 2001, the fleets will be isolated, with ERJ's operated
under USAirways and CRJ's with America West Express. This discussion of the
proposed allocation of the ERJ's and the CRJ transition plan is a
forward-looking statement and is subject to change depending upon, among other
factors, the availability of ERJ-145 aircraft from the manufacturer, the
willingness of USAirways and America West to agree to deployment of additional
aircraft and competitor's routes.
In December 1999, the Company's Board of Directors authorized the repurchase up
to 10% of the outstanding shares of its Common Stock. The Company plans to
repurchase the shares in the open market from time to time, based on market
conditions. Through February 2, 2000, the Company has acquired 906,600 shares of
Common Stock for approximately $4.8 million.
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.
This 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.
The following tables set forth year-to-year comparisons for the periods
indicated below:
OPERATING DATA
<TABLE>
<CAPTION>
Three Months Ended
December 31
1999 1998
---- ----
<S> <C> <C>
Passengers 1,097,771 1,072,065
Available seat miles (000's) 720,722 610,544
Revenue passenger miles (000's) 371,318 309,101
Load factor 51.5% 50.6%
Yield per revenue passenger mile (cents) 29.9 31.6
Revenue per available seat mile (cents) 15.4 16.0
Operating cost per available seat mile (cents) 14.3 15.0
Average stage length (miles) 243.9 213.7
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
<S> <C> <C>
Number of operating aircraft in fleet 137 133
Gallons of fuel consumed 19,339,018 16,971,891
Block hours flown 100,743 104,595
Departures 88,474 97,528
</TABLE>
FINANCIAL DATA
Three Months ended December 31, 1999 versus Three Months ended
December 31, 1998
<TABLE>
<CAPTION>
1999 1998
------------------------- ------------------------
Costs per % of total Costs per % of total
ASM (cents) revenues ASM (cents) revenues
<S> <C> <C> <C> <C>
Flight operations 6.97 45.3% 6.88 43.0%
Maintenance 2.75 17.9% 2.91 18.2%
Aircraft and traffic servicing 1.83 11.9% 2.10 13.1%
Promotion and sales 1.14 7.4% 1.35 8.4%
General and administrative 0.90 5.9% 1.02 6.3%
Depreciation and amortization 0.65 4.2% 0.79 4.8%
Other operating items 0.00 0.0% 0.00 0.0%
Total operating expenses 14.24 92.6% 15.05 93.9%
Interest expense 0.64 4.1% 0.76 4.8%
</TABLE>
RESULTS OF OPERATIONS
Operating Revenues:
Operating revenues increased by $13.2 million (13.5%) for the quarter ended
December 31, 1999 as compared to the quarter ended December 31, 1998. This
increase was primarily due to the increase in capacity in the Mesa system.
Capacity, measured by available seat miles (ASM's), increased by 18.0% for the
quarter ended December 31,1999 over the same period in 1998. The ASM's increased
as a result of the number of CRJ's added to the fleet which have additional
seats and fly longer stage lengths. Passenger traffic measured by revenue
passenger miles (RPM's), and representing one passenger carried one mile,
increased by 20.1%. Passenger load factor increased from 50.6% to 51.5%, yield
(passenger revenue per RPM) decreased by 1.7 cents to 29.9 in the first quarter
of 2000. The airline industry has a history of fare and traffic volatility. The
regional jet aircraft, which are generally faster and flown over a longer stage
length than the turboprop aircraft, typically generate lower revenue and cost
per ASM. Because Mesa expects to operate increasing number of regional jet
aircraft in the future, overall revenue per ASM and cost per ASM are expected to
decrease in the future.
Operating Expenses:
Flight Operations:
8
<PAGE> 9
Flight operations expense increased by 19.6% to $50.3 million (7.0 cents per
ASM) for the quarter ended December 31, 1999, from $42.0 million (6.9 cents per
ASM) from the comparable period in 1999 primarily due to an increase in the
available capacity and higher fuel costs.
Maintenance Expense:
Maintenance expense increased by 11.7% to $19.9 million (2.8 cents per ASM) for
the quarter ended December 31, 1999, from $17.8 million (2.9 cents per ASM) for
the comparable period in 1998. Increased maintenance costs are primarily the
result of an increase in available capacity, which drives maintenance events.
Aircraft and Traffic Service Expense:
Aircraft and traffic servicing costs increased by 2.7% to $13.2 million (1.8
cents per ASM) for the quarter ended December 31, 1999 from $12.8 million (2.1
cents per ASM) during the comparable quarter of the previous fiscal year. This
change is also a result of an increase in flying activity.
Promotion and Sales:
Promotion and sales expense decreased .5% to $8.21 million (1.1 cents per ASM)
for the quarter ended December 31, 1999 from $8.26 million (1.4 cents per ASM)
from the prior year's comparable quarter. Mesa's contract with America West
eliminates booking fees and travel agency commissions being charged directly to
Mesa and as such, these costs per ASM are expected to decline as the America
West Express operation grows.
General and Administrative Expense:
General and administrative expense increased 5.1% to $6.5 million (0.9 cents
per ASM) for the quarter ended December 31, 1999 from $6.2 million (1.0 cents
per ASM) as compared to the quarter ended December 31, 1998. The increase is due
primarily to increased payroll costs.
Depreciation and Amortization:
Depreciation and amortization decreased by $142,000 to $4.7 million for the
quarter ended December 31, 1999 as compared to the quarter ended, December 31,
1998.
Non-Operating Items:
For the quarter ended December 31, 1999, Mesa recognized two non-recurring items
totaling $2.7 million. Mesa recognized $2.0 in Other Non-Operating Income as a
result of the settlement with Bombardier, and a $.7 million gain on an
investment in an aviation related company.
LIQUIDITY AND CAPITAL RESOURCES
Mesa's cash and cash equivalents and marketable securities as of December 31,
1999, totaled $61.1 million. Mesa's net cash flow from operations totaled
approximately $10.6 million during the three months ended December 31, 1999.
Mesa makes semi-annual lease payments on a substantial portion of its leased
aircraft with approximately $18.4 million due in January and $15.4 due in
September of each year. Mesa's cash and cash equivalents and marketable
securities are intended to be used for working capital, capital expenditures and
acquisitions.
Mesa had receivables of approximately $33 million at December 31, 1999, which
consisted primarily of amounts due from code-sharing partner USAirways and
passenger ticket receivables due through the Airline
9
<PAGE> 10
Clearing House. Under the terms of the USAirways agreement, Mesa receives a
substantial portion of its revenues through the clearing house. Historically,
Mesa has generated adequate cash flow to meet its needs.
In January, 2000, Mesa entered into an agreement with Empresa Brasiliera de
Aeronautica SA (Embraer) to acquire 36 50-passenger Embraer ERJ-145 regional
jets. Deliveries will begin late in the second quarter of fiscal 2000 and
continue through late fiscal 2002. Mesa also has options for an additional 64
aircraft with the right to convert deliveries into 37-seat ERJ's 135. Mesa
intends to introduce the ERJ-145 aircraft into revenue service early in the
fiscal third quarter of 2000 as USAirways Express. Mesa intends to replace the
CRJ regional jets currently flying as USAirways Express with the ERJ- 145's. In
conjunction with this purchase agreement, Mesa has placed an $11.8 million
deposit which is included with lease and equipment deposits.
In connection with the 32 CRJ aircraft, 27 are currently under long-term
operating leases with terms of 16 1/2 to 18 1/2 years. The remaining five
aircraft are currently under interim financial arrangements and are expected to
be leased under long-term operating leases in the next six months.
In November 1999, Mesa settled various disputed claims it had against BRAD
regarding BRAD's obligation to accept trade-in Brasilia aircraft and the
availability of 16 additional rolling option CRJs. Under this settlement, Mesa
will receive up to $9 million ($8.5 million cash, $.5 million credit), $7.1
million of which has been received as of December 31, 1999 and the remainder of
which will be paid as each remaining 5 CRJ aircraft are financed on a long-term
basis if financed by June 30, 2000. Based on this settlement, Mesa recognized $2
million in other income for the quarter ended December 31, 1999 related to
damages from the dispute with BRAD for incremental lease payments, storage and
insurance costs incurred by Mesa. The remainder of the settlement ($5.1 million
at December 31, 1999) will be recognized by Mesa over the remaining lives of the
related aircraft leases and has been recorded as a deferred credit.
Mesa has significant lease obligations and debt payments on the remaining (non
CRJ) aircraft. At December 31, 1999 Mesa had 67 aircraft with debt balances with
maturities through 2011. During the fiscal year ended September 30, 1999, Mesa
determined that some Beech 1900 aircraft could no longer be operated as the
result of the substantial losses associated with this aircraft. In connection
with this determination, Mesa has classified 30 Beech 1900D aircraft as
available for sale and recognized an impairment loss of $20.8 million for such
sale in the 1999 fiscal year. As of December 31, 1999, Mesa had disposed of 1 of
the 30 aircraft to be disposed of. Fifteen of the aircraft are surplus to Mesa's
operating needs and are idle. The remaining 14 aircraft are in service, used
primarily as spare aircraft to enhance the reliability of Mesa's 1900D flying.
Mesa continues to evaluate proposals from various sources in attempting to
dispose of the aircraft.
Mesa has negotiated 10 year maintenance contracts with General Electric Aircraft
engines ("GE") for the CRJ 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 32 CRJ aircraft. 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.
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 this forward looking statement as a result of many factors, including in
the event of the termination of one or more code-sharing agreements; failure to
sell, dispose of, or redeploy excess aircraft in a timely manner; a substantial
decrease in the number of routes allocated to MAI under its code-sharing
agreements with USAirways; reduced levels of passenger revenue, additional taxes
or costs of compliance with governmental regulations; fuel cost increases;
increases in competition; increases in interest rates; general economic
conditions and unfavorable settlement of existing 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 financing.
In December 1999, the Company's Board of Directors authorized the Company to
repurchase up to 10% of the outstanding shares of its Common Stock. As of
February 2, 2000, the Company has acquired 906,600 shares of common Stock for
approximately $4,840,000.
YEAR 2000 ISSUES
10
<PAGE> 11
Mesa so far has experienced no disruptions in the operations of its internal
information systems or in the availability of its facilities during its
transition to the year 2000. Mesa is not aware that any of its vendors
experienced any disruptions during their transition to the year 2000, or that
there have been any year 2000 problems with its material held for sale. Mesa
will continue to monitor the transition to year 2000 and will act promptly to
resolve any problems that occur. If Mesa or any third parties with which it has
business relationships experience problems related to the year 2000 transition
that have not yet been discovered, it could have a material adverse impact on
Mesa.
AIRCRAFT:
The following table lists the aircraft owned and leased by Mesa for scheduled
operations as of December 31, 1999:
<TABLE>
<CAPTION>
OPERATING ON PASSENGER
TYPE OF AIRCRAFT OWNED LEASED TOTAL DECEMBER 31, 1999 CAPACITY
<S> <C> <C> <C> <C> <C>
BeechCraft 1900 67 10 77 67 19
Jet Stream Super 31 -- 16 16 16 19
Dash 8-100 -- 10 10 10 37
Dash 8-200 -- 12 12 12 37
CRJ -- 32 32 32 50
Embraer-Brasilia -- 7 7 -- 30
67 87 154 137
</TABLE>
1
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
UNITED AIRLINES, INC.
In June 1997, United Airlines, Inc. ("UAL") filed a complaint in the United
States District Court for the Northern District of Illinois against two
subsidiaries of Mesa (MAI and 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,
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 to amend its complaint to
include an additional $4.0 million in damages resulting from Mesa's alleged
failure to remit baggage fees at Denver International Airport to UAL. The motion
has not 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 to the business of MAI and WestAir which have been incurred.
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
11
<PAGE> 12
the part of UAL and SkyWest in terminating markets under the Mesa agreement and
in leading to the non-renewal of the WestAir agreement. Mesa is seeking
substantial damages against each defendant.
WESTAIR
In November 1998, Mesa settled all claims with the aircraft and equipment
lessors of WestAir for approximately $15 million. WestAir contributed
approximately $11.2 million toward the settlement and Mesa contributed
approximately $3.8 million. WestAir had operated 43 leased aircraft pursuant to
a Partnership Agreement with United Airlines, a division of UAL, and upon
cessation of United Express service had considerable liabilities for the
remaining terms of the leases. Mesa worked closely with all lessors to develop
and implement a plan that was acceptable to both Mesa and the various lessors.
In February 1999, a complaint was filed against WestAir and Mesa in Superior
court of California for Fresno county, by the former WestAir pilots, seeking
severance pay in the amount of $1.2 million plus economic and punitive damages
as a result of Westair's termination of online operations, following United's
non-renewal of the WestAir agreement. Mesa does not believe that the pilots will
prevail on their claims and intends to defend this matter vigorously.
On or about March 6, 2000, West Air filed a motion for summary judgment in this
matter. West Air's primary agreement was that the plaintiffs' claims were
precluded by the Railway Labor Act. On April 12, 2000, the Court agreed with
West Air's arguments and, accordingly, granted its motion for summary judgment.
At this time, management is unaware whether the plaintiffs intend to appeal the
Court's ruling.
LYNRISE AIR LEASE, INC.
On June 29, 1999, Lynrise Air Lease, Inc. ("Lynrise") filed suit against Mesa
and CCAIR in Supreme Court of the State of New York. Lynrise was the lessor of
certain Shorts model 360 aircraft to CCAIR. In 1998, CCAIR restructured its
aircraft fleet and elected to terminate the leases held by Lynrise for the
Shorts aircraft. In connection with the early termination of the leases, CCAIR
issued to Lynrise an Unsecured convertible promissory Note (the "Note") in the
principal amount of $8,334,770. The Note was convertible into CCAIR stock at a
price of $8.00 per share of CCAIR common stock. As a result of the June 1999
merger between CCAIR and Mesa Merger Corporation, the Note became convertible
into Mesa Common Stock at a price of $12.87 per share of Mesa Common Stock. The
Note is due June 30, 2004, accrues interest at the rate of 7% per annum and
requires the repayment of Principal in 10 equal semiannual installments
commencing December 31, 1999 and the payment of interest in quarterly
installments commencing March 31, 1999.
The Note contains a provision that upon a change of control, Lynrise may, at its
option, require CCAIR to repurchase the Note. In its lawsuit filed against the
Company and CCAIR, Lynrise alleges that it has exercised its option to require
CCAIR to repurchase the Note after CCAIR became a wholly-owned subsidiary of the
Company on June 9, 1999. Both CCAIR and the Company contend that Lynrise waived
its rights with respect to the repurchase option and both intend to defend to
the lawsuit vigorously. In addition, by letter dated August 9, 1999, Lynrise
declared that in accordance with the terms of the Note, an Event of Default had
occurred as a result of CCAIR's alleged failure to make the Repurchase Offer and
declared the principal amount of the Note and all accrued interest thereon due
and payable immediately.
Lynrise's claims against CCAIR include a claim for declaratory judgement that
CCAIR is obligated to repurchase the Note and a claim for breach of contract. As
against the Company, Lynrise has claimed tortious interference. Should Lynrise
prevail against CCAIR and require it to repurchase the Note, CCAIR is without
sufficient assets to Repurchase the Note and would be unable to satisfy such a
judgement.
On May 2, 2000, the Company and Lynrise reached a settlement of the above
litigation. Under the terms of the settlement, CCAIR agreed to make a principal
payment of $1.0 million and to pay accrued interest of approximately $440,000,
after which the principal balance of the note was approximately $6.9 million.
The Note was amended and restated to delete any conversion rights and to provide
that prior to the maturity date of the Note CCAIR shall have the right to redeem
the note for a cash payment equal to (i) the accrued interest on the note plus
(ii) $5.5 million less the aggregate amount of principal amortization paid on
the note after the date of the closing of the settlement. In addition,the
Company agreed to unconditionally guarantee the Note.
BOMBARDIER
On November 4, 1999, Mesa settled various outstanding disputes with Bombardier,
Inc. Under the terms of the settlement, Bombardier has agreed to pay to Mesa a
total of $8.5 million, $7.1 million of which has been received as of December
31, 1999.
OTHER LEGAL PROCEEDINGS
12
<PAGE> 13
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 4. Submission of Matters to vote for Security Holders
Not applicable
Item 5. Other Matters
Not applicable
Item 6. Report on Form 8-K
(A) Reports on form 8-K
The Company did not file any reports on Form 8-K for the quarterly
period ended December 31, 1999.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk," in Mesa's Annual Report on Form 10-K for the
year ended September 30, 1999. There have been no significant changes since the
filing of the aforementioned report.
13
<PAGE> 14
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: May 23, 2000 /s/ Robert B. Stone
------------------------------
Robert B. Stone
Chief Financial Officer
(Principal Financial Officer)
14
<PAGE> 15
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 61,066
<SECURITIES> 0
<RECEIVABLES> 33,194
<ALLOWANCES> 0
<INVENTORY> 27,186
<CURRENT-ASSETS> 203,894
<PP&E> 158,013
<DEPRECIATION> 0
<TOTAL-ASSETS> 403,779
<CURRENT-LIABILITIES> 160,358
<BONDS> 109,718
0
0
<COMMON> 122,995
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 403,779
<SALES> 110,953
<TOTAL-REVENUES> 110,953
<CGS> 0
<TOTAL-COSTS> 102,694
<OTHER-EXPENSES> 486
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,584
<INCOME-PRETAX> 7,773
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,773
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,773
<EPS-BASIC> .23
<EPS-DILUTED> .23
</TABLE>
