<PAGE> 1
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
[ X ] For the quarterly period ended March 31, 2000
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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
<S> <C>
Class Outstanding at May 15, 2000
Common stock, no par value 32,458,603
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MESA AIR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- -----------------------
2000 1999 2000 1999
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Operating Revenues:
Passenger $ 111,843 $ 95,371 $ 220,554 $ 191,626
Freight and other 2,774 1,823 5,016 3,288
--------- --------- --------- ---------
Total operating revenues 114,617 97,194 225,570 194,914
--------- --------- --------- ---------
Operating Expenses:
Flight operations 53,671 39,958 103,925 81,966
Maintenance 20,673 17,834 40,525 35,602
Aircraft and traffic servicing 13,911 13,110 27,105 25,952
Promotion and sales 7,175 7,718 15,387 15,975
General and administrative 6,745 6,347 13,261 12,547
Depreciation and amortization 3,919 4,640 8,585 9,448
--------- --------- --------- ---------
Total operating expenses 106,094 89,607 208,788 181,490
--------- --------- --------- ---------
Operating Income 8,523 7,587 16,782 13,424
--------- --------- --------- ---------
Other income (expense):
Interest expense (3,985) (4,322) (8,569) (8,980)
Interest income 678 635 1,540 728
Other 186 402 3,422 891
--------- --------- --------- ---------
Net other expense (3,121) (3,285) (3,607) (7,361)
--------- --------- --------- ---------
Income before income taxes 5,402 4,302 13,175 6,063
Provision for income taxes -- -- -- --
--------- --------- --------- ---------
Net income $ 5,402 $ 4,302 $ 13,175 $ 6,063
========= ========= ========= =========
Net income per common share:
Basic $ 0.16 $ 0.13 $ 0.39 $ 0.18
Diluted $ 0.16 $ 0.12 $ 0.39 $ 0.18
Weighted average common shares:
Basic 33,319 33,956 33,772 33,946
Diluted 33,431 34,679 33,893 34,538
</TABLE>
See accompanying notes to condensed consolidated financial statements
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MESA AIR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31, September 30,
2000 1999
----------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,292 $ 52,905
Marketable securities 10,257 3,306
Receivables, primarily traffic, net 39,010 30,859
Expendable parts and supplies, net 28,063 24,727
Aircraft held for sale 74,466 77,412
Prepaid expenses and other current assets 19,028 12,739
--------- ---------
Total current assets 195,116 201,948
--------- ---------
Property and equipment, net 165,445 160,453
Lease and equipment deposits 22,539 22,392
Intangibles, net 10,440 10,855
Other assets 12,372 8,125
--------- ---------
Total assets $ 405,912 $ 403,773
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 119,022 $ 121,297
Accounts payable 12,861 17,480
Air traffic liability 3,532 2,128
Accrued compensation 2,503 2,324
Other accrued expenses 26,661 25,679
--------- ---------
Total current liabilities 164,579 168,908
--------- ---------
Long-term debt and capital leases, net of current maturities 109,221 114,234
Deferred credits and other liabilities 32,167 24,196
--------- ---------
Total liabilities 305,967 307,338
--------- ---------
Stockholders' Equity:
Common stock, no par value, 75,000,000 shares
authorized; 32,492,503 and 34,197,752 shares issued
and outstanding, respectively 123,677 123,492
Accumulated deficit (13,882) (27,057)
Treasury stock, at cost (1,755,900 shares) (9,850) --
--------- ---------
Total stockholders' equity 99,945 96,435
--------- ---------
Total liabilities and stockholders' equity $ 405,912 $ 403,773
========= =========
See accompanying notes to condensed consolidated financial statements
</TABLE>
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MESA AIR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
2000 1999
--------- ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 13,175 $ 6,063
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 8,585 9,448
Provision for doubtful accounts 48 48
Unrealized gain on sale of marketable securities (346) --
Loss on sale of property and equipment -- 31
Changes in assets and liabilities:
Receivables (8,199) 642
Income tax refund receivable -- 9,057
Expendable parts and supplies (3,336) 5,327
Prepaid expenses and other current assets (6,289) (6,312)
Accounts payable (4,619) 633
Air traffic liability 1,404 (508)
Accrued compensation 179 (2,206)
Deferred credits and other liabilities 7,971 (383)
Other accrued expenses 982 (2,819)
-------- --------
Net cash provided by operating activities 9,555 19,021
-------- --------
Cash Flows From Investing Activities:
Capital expenditures (12,316) (2,977)
Proceeds from sale of property and equipment -- 14,752
Purchases of marketable securities (10,621) --
Proceeds from sale of marketable securities 4,016 --
Other assets (4,247) 1,115
Lease and equipment deposits (147) 639
-------- --------
Net cash (used in) provided by investing activities (23,315) 13,529
-------- --------
Cash Flows From Financing Activities:
Principal payments on notes payable & obligations
under capital leases (5,188) (2,627)
Proceeds from issuance of common stock 185 77
Stock repurchases (9,850) --
-------- --------
Net cash used in financing activities (14,853) (2,550)
-------- --------
(Decrease) increase in cash and cash equivalents (28,613) 30,000
Cash and cash equivalents at beginning of period 52,905 35,668
-------- --------
Cash and cash equivalents at end of period $ 24,292 $ 65,668
======== ========
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
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MESA AIR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been prepared
by Mesa Air Group, Inc. (the Company) without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for a complete set of financial statements. The condensed
consolidated financial statements reflect all adjustments of a normal recurring
nature which, in the opinion of management, are necessary to present fairly the
results of operations for the interim periods presented. Certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. The
results of operations for the quarter and six months ended March 31, 2000 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 annual report on
Form 10-K for the fiscal year ended September 30, 1999.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries: Mesa Airlines, Inc. (MAI), West Air
Holdings, Inc. (West Air), Air Midwest, Inc. (Air Midwest), CCAIR, Inc. (CCAIR),
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.
3. INCOME TAXES
Income tax benefit in the quarter and six months ended March 31, 2000 has been
recognized only to the extent of previously recorded deferred tax liabilities.
For the quarter and six months ended March 31, 2000, the Company did not
recognize any income tax expense as a result of net operating loss
carryforwards.
4. MERGER WITH CCAIR
On June 9, 1999, Mesa Merger Corporation, a wholly owned subsidiary of the
Company, merged with and into CCAIR, a regional airline based in Charlotte,
North Carolina. In connection therewith, the Company issued approximately 5.9
million shares of its common stock in exchange for all of the outstanding stock
of CCAIR. The merger was accounted for as a pooling of interests. Accordingly,
the accompanying condensed consolidated statements of operations for the quarter
and six months ended March 31, 1999 and the accompanying condensed consolidated
statement of cash flows for the six months ended March 31, 1999 have been
restated to include the results of CCAIR.
5. EARNINGS PER SHARE
The Company accounts for earnings per share in accordance with Statement of
Financial Accounting Standards No. 128. Basic net income per share is computed
by dividing net income by the weighted average number of common shares
outstanding during the periods presented. Diluted net income per common share
reflects the potential dilution that could occur if outstanding stock options
were exercised. The calculation of the weighted average number of shares
outstanding is as follows (amounts in thousands):
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<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended March 31, Ended March 31,
2000 1999 2000 1999
------ ------ ------- ------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 33,319 33,956 33,772 33,946
Effect of outstanding stock options 112 723 121 592
------ ------ ------ ------
Weighted average shares for diluted net income
per common share 33,431 34,679 33,893 34,538
====== ====== ====== ======
</TABLE>
6. STOCK REPURCHASE
In December 1999, the Company's board of directors authorized the repurchase, at
management's discretion, of up to 10% of the Company's outstanding shares of
common stock. The Company's repurchases are recorded as treasury stock, and
result in a reduction of stockholders' equity. 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. LEGAL PROCEEDINGS
See Part II., Item 1. - "Legal Proceedings"
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Through its airline subsidiaries, the Company operates as a regional air carrier
providing scheduled passenger service. The Company serves over 120 cities in 38
states, the District of Columbia, Canada and Mexico. The Company operates a
fleet of 131 aircraft and has approximately 1,000 daily departures.
The Company's airline operations are conducted by three airline subsidiaries
using hub-and-spoke route systems. Mesa Airlines, Inc. (MAI) operates as America
West Express under a code share agreement with America West Airlines, Inc.
(America West) expiring in 2004, and as US Airways Express under a code share
agreement with US Airways, Inc. (US Airways) expiring in 2007. Air Midwest, Inc.
(Air Midwest) operates as US Airways Express under a code share agreement with
US Airways expiring in 2000. CCAIR operates as US Airways Express under a code
share agreement with US Airways expiring in 2003. MAI also operates as Mesa
Airlines from a hub in Albuquerque, New Mexico. The Mesa Airlines operation is
not subject to a code sharing agreement with a major carrier.
Approximately 97% of the Company's airline revenues for the quarter and six
months ended March 31, 2000 were derived from operations associated with code
share agreements with America West and US Airways. All of The Company's America
West Express code share operations (except Guaymas and Hermosillo, Mexico) and
US Airways Express jet code share operations are operated pursuant to fee per
departure contracts. Generally, the fee per departure contracts provide for the
Company to operate routes on behalf of the major carrier. The major carrier is
responsible for scheduling the routes to be flown by The Company's aircraft, as
well as marketing and pricing the scheduled routes. The Company is compensated
through a combination of direct reimbursements for certain costs and per hour
billing rates for flying performed. The Company does not have passenger revenue
exposure under the fee per departure
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agreements. For the quarter and six months ended March 31, 2000, approximately
54% and 52%, respectively, of the Company's airline revenues were derived from
fee per departure contracts. The Company's percentage of revenue generated under
fee per departure agreements is expected to significantly increase in future
periods as the Company continues to add regional jets to its America West
Express and US Airways Express jet operations. The Company 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 roundtrip travel provided by the
Company within its route systems. 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 share partner on routes
flown by the code share partner. Through fares are prorated in accordance with
standards specified in the applicable code share agreements. Joint fares are
single fares for travel combining the Company's flights with flights of other
airlines that are not code share partners with the Company. Joint fares
generally allow a passenger to pay a single lower fare than the passenger would
otherwise have paid with separate local fares. The Company has been able to
negotiate joint fare arrangements with certain major carriers as an additional
means of deriving passengers connecting through its hub cities.
During fiscal 1999, the Company entered into an agreement with Empresa
Brasiliera de Aeronautica SA (Embraer) to acquire 36 Embraer ERJ-145 (ERJ) 50
passenger regional jets. Deliveries began in April 2000 and are expected to
continue through the latter months of 2002. The Company also has options for 64
additional aircraft, with the right to convert the options into firm orders for
ERJ-135 37 passenger regional jets.
In November 1999, the Company settled various disputed claims it had against
Bombardier Regional Aircraft Division (BRAD) regarding 1) BRAD's refusal to
accept trade-in Embraer EMB-120 aircraft and 2) the unavailability of 16
Canadair Regional Jet (CRJ) aircraft pursuant to rolling options held by the
Company. Under the settlement, the Company will receive up to $9 million, $7.1
million of which has been received to date. The remainder of the settlement will
be received if the Company secures permanent financing on 5 remaining CRJ
aircraft by certain deadlines. For the portion of the settlement attributable to
BRAD's refusal to accept trade in EMB-120 aircraft, in which the Company
suffered damages in periods prior to fiscal 2000, the Company recognized $2
million in other income for the quarter ending December 31, 1999. The remainder
of the settlement has been recorded as a deferred purchase incentive and is
being amortized over the remaining terms of the Company's CRJ leases.
The Company intends to introduce the ERJ into revenue service early in the third
quarter of fiscal 2000 as US Airways Express. By the end of 2001, the Company
intends to perform all US Airways Express regional jet operations with ERJs and
all America West Express regional jet operations with CRJs. The above regional
jet fleet allocation is subject to various contingencies, including the
availability of ERJ aircraft from Embraer, the willingness of US Airways and
America West to agree to deployment of additional aircraft and competitors'
routes.
The Company's 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 comparisons for the periods indicated below:
OPERATING STATISTICS
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
----------- -------- --------- ----------
<S> <C> <C> <C> <C>
Passengers 1,024,968 963,069 2,122,739 2,035,134
Available seat miles (000s) 750,309 608,036 1,471,031 1,218,581
Revenue passenger miles (000s) 368,301 299,765 739,619 608,866
Load factor 49.1% 49.3% 50.3% 50.0%
Yield per revenue passenger mile (cents) 31.1c 32.4c 30.5c 32.0c
Revenue per available seat mile (cents) 15.2c 16.0c 15.3c 16.0c
Operating cost per available seat mile (cents) 14.2c 14.7c 14.2c 14.9c
Average stage length (miles) 254.4 223.7 249.1 218.5
Aircraft in service 131 112 131 112
Departures 86,477 89,051 174,951 186,579
</TABLE>
OPERATING COST PER AVAILABLE SEAT MILE (ASM)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------------------------- ------------------------------------------------
2000 1999 2000 1999
---------------------- ----------------------- --------------------- -----------------------
Cost per Percent of Cost per Percent of Cost per Percent of Cost per Percent of
ASM Total ASM Total ASM Total ASM Total
(cents) Revenues (cents) Revenues (cents) Revenues (cents) Revenues
-------- ---------- --------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Flight operations 7.2 46.9% 6.5 41.1% 7.1 46.1% 6.8 42.1%
Maintenance 2.8 18.0% 2.9 18.3% 2.8 18.0% 2.9 18.3%
Aircraft and traffic 1.8 12.1% 2.2 13.5% 1.8 12.0% 2.1 13.3%
servicing
Promotion and sales 1.0 6.3% 1.3 7.9% 1.0 6.8% 1.3 8.2%
General and administrative 0.9 5.9% 1.0 6.6% 0.9 5.9% 1.0 6.4%
Depreciation and 0.5 3.4% 0.8 4.8% 0.6 3.8% 0.8 4.8%
amortization
---- ----- ---- ----- ---- ----- ---- -----
Total operating expenses 14.2 92.6% 14.7 92.2% 14.2 92.6% 14.9 93.1%
==== ===== ==== ===== ==== ===== ==== =====
</TABLE>
RESULTS OF OPERATIONS
Operating Revenues
In the quarter and six months ended March 31, 2000, operating revenues increased
$17.4 million (17.9%) and $30.7 million (15.7%), respectively, as compared to
the corresponding periods in 1999. The increase was primarily due to additional
revenues from the Company's expanded use of regional jets pursuant to fee per
departure contracts with America West and US Airways.
Capacity, measured by ASMs, increased 23.4% and 20.7%, respectively, for the
quarter and six months ended March 31, 2000 as compared to the corresponding
periods in 1999. The ASM increases resulted from the Company's continued
implementation of regional jet aircraft, which have more seats and fly
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longer stage lengths than turboprop aircraft, into its fleet. Passenger traffic
is measured by revenue passenger miles (RPMs), which represent one revenue
passenger carried one mile. RPMs increased 22.9% and 21.5%, respectively, in the
quarter and six months ended March 31, 2000 as compared to the corresponding
periods in 1999. The RPM increase was due primarily to the Company's expanded
use of regional jets pursuant to fee per departure contracts with America West
and US Airways. Passenger load factor was essentially flat in the quarter and
six months ended March 31, 2000 as compared to the corresponding periods in
1999. As discussed previously, the majority of the Company's revenue is derived
from fee per departure contracts with its major airline partners, and the major
airline partners are responsible for marketing and selling seats on the
Company's flights. Therefore, the Company's load factors are largely dependent
on the marketing efforts of its major airline partners.
Operating Expenses
Flight Operations
In the quarter ended March 31, 2000, flight operations expense increased 34.5%
to $53.7 million (7.2 cents per ASM) from $40.0 million (6.5 cents per ASM) in
the corresponding quarter in 1999. In the six months ended March 31, 2000,
flight operations expense increased 26.9% to $104.0 million (7.1 cents per ASM)
from $82.0 million (6.8 cents per ASM) in the corresponding period in 1999. The
increase was primarily due to the Company's increase in available capacity,
higher fuel costs and additional pilot and flight attendant costs associated
with operating regional jets.
Maintenance Expense
In the quarter ended March 31, 2000, maintenance expense increased 15.9% to
$20.7 million (2.8 cents per ASM) from $17.8 million (2.9 cents per ASM) in the
corresponding quarter in 1999. In the six months ended March 31, 2000,
maintenance expense increased 13.8% to 40.5 million (2.8 cents per ASM) from
$35.6 million (2.9 cents per ASM) in the corresponding period in 1999. Increased
maintenance expenditures are due primarily to the additional maintenance events
arising from the Company's increase in capacity. On a unit cost (per ASM) basis,
maintenance expenses were essentially flat between periods.
Aircraft and Traffic Servicing Expense
In the quarter ended March 31, 2000, aircraft and traffic servicing expense
increased 6.1% to $13.9 million (1.8 cents per ASM) from $13.1 million (2.2
cents per ASM) in the corresponding quarter in 1999. In the six months ended
March 31, 2000, aircraft and traffic servicing expense increased 4.4% to $27.1
million (1.8 cents per ASM) from $26.0 million (2.1 cents per ASM) in the
corresponding period in 1999. The increase was primarily due to the Company's
increase in flights. The decrease on a unit cost (per ASM) basis is a result of
additional capacity spread over certain fixed costs.
Promotion and Sales
In the quarter ended March 31, 2000, promotion and sales expense decreased 7.0%
to $7.2 million (1.0 cents per ASM) from $7.7 million (1.3 cents per ASM) in the
corresponding quarter in 1999. In the six months ended March 31, 2000, promotion
and sales expense decreased 3.7% to $15.4 million (1.0 cents per ASM) from $16.0
million (1.3 cents per ASM) in the corresponding period in 1999. The decrease is
due to the Company's continued expansion of flights performed pursuant to fee
per departure contracts with America West and US Airways, whereby America West
and US Airways assume the responsibility for promoting and selling seats flown
by the Company.
General and Administrative Expense
In the quarter ended March 31, 2000, general and administrative expense
increased 6.3% to $6.7 million (0.9 cents per ASM) from $6.3 million (1.0 cents
per ASM) in the corresponding quarter in 1999. In the
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six months ended March 31, 2000, general and administrative expense increased
5.7% to $13.3 million (0.9 cents per ASM) from $12.6 million (1.0 cents per ASM)
in the corresponding period in 1999. The slight increase is due primarily to an
increase in administrative payroll costs. On a unit cost (per ASM) basis,
general and administrative expense was essentially flat between periods.
Depreciation and Amortization
In the quarter ended March 31, 2000, depreciation and amortization expense
decreased 15.5% to $3.9 million (0.5 cents per ASM) from $4.6 million (0.8 cents
per ASM) in the corresponding quarter in 1999. In the six months ended March 31,
2000, depreciation and amortization expense decreased 9.1% to $8.6 million (0.6
cents per ASM) from $9.5 million (0.8 cents per ASM). The decrease is primarily
due to the cessation of depreciation on 15 parked 1900D aircraft to be disposed
of in accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of."
Other Expense
In the quarter ended March 31, 2000, net other expense decreased slightly to
$3.1 million from $3.3 million in the corresponding quarter in 1999. The
decrease is not significant. In the six months ended March 31, 2000, net other
expense decreased to $3.6 million from $7.4 million. The decrease was due
primarily to the recognition of a $2.0 million gain from the settlement with
BRAD, gains from the sale of short-term investments and increased interest
income on invested cash.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company's cash and cash equivalents and marketable
securities totaled $34.6 million, compared to $56.2 million at September 30,
1999. The Company's net cash flow from operations totaled approximately $9.6
million during the six months ended March 31, 2000. During the six months ended
March 31, 2000, the Company invested approximately $6.6 million in marketable
securities, $16.6 million in aircraft parts and other fixed assets, reduced
long-term debt by $5.2 million and repurchased approximately $9.9 million of its
common stock. The Company intends to use its cash and cash equivalents and
marketable securities for working capital, capital expenditures and
acquisitions. Historically, the Company has generated adequate cash flow to meet
its operating needs.
As of March 31, 2000, the Company had receivables of approximately $39.0
million, consisting primarily of amounts due from its code share partners and
passenger ticket receivables due through the Airline Clearing House (ACH). Under
the terms of the US Airways code share agreement, the Company receives a
substantial portion of its revenues through the ACH.
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 began in April 2000 and are expected to continue through the
latter months of 2002. The Company also has options for an additional 64
aircraft, with the right to convert the options into firm orders for ERJ-145
regional jets or 37-passenger ERJ-135 regional jets. During 1999, in conjunction
with this purchase agreement, Mesa has placed an $11.8 million deposit that is
included in lease and equipment deposits in the accompanying condensed
consolidated balance sheets.
Of the 32 CRJ aircraft operated by the Company, 27 are currently leased pursuant
to long term operating leases with terms of 16-1/2 to 18-1/2 years. The Company
makes semi-annual lease payments on its CRJ aircraft, with approximately $17.9
million due in January and $15.4 million due in September of each year. The
remaining 5 aircraft are currently leased pursuant to interim financial
arrangements and are expected to be leased under long term operating leases by
June 30, 2000. The Company has significant lease obligations and debt payments
on its remaining (non-CRJ) aircraft. At March 31, 2000 the Company owned 67
1900D aircraft securing debt with maturities through 2011. During the fiscal
year ended September 30, 1999 the
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Company elected to cease service on several routes operated by 1900D aircraft,
and determined that 30 1900D aircraft would be disposed of. As of March 31,
2000, the Company had disposed of 1 of the 30 aircraft to be disposed of.
Fifteen of the aircraft are surplus to the Company's operating needs and are
idle. The remaining 14 aircraft are in service, used primarily as spare aircraft
to enhance the reliability of the Company's 1900D flying. The Company continues
to evaluate proposals from various sources in attempting to dispose of the
aircraft.
In October 1999, the Company settled various disputed claims it had against BRAD
regarding BRAD's obligation to accept trade-in Embraer EMB-120 Brasilia aircraft
and the availability of 16 additional CRJs under rolling options. Under this
settlement, the Company will receive up to $9 million ($8.5 million cash, $.5
million credit), $7.1 million of which has been received to date and the
remainder of which will be paid if each remaining 5 CRJ aircraft are permanently
financed by certain deadlines.
The Company has negotiated 10-year engine maintenance contracts with General
Electric Aircraft Engines (GE) for its CRJ aircraft and with Pratt and Whitney,
Canada Aircraft Services (PWC) for its Dash 8-200 aircraft. The contracts
provide for payment at the time of the repair event for a fixed dollar amount
per flight hour, subject to escalation based on changes in certain price
indices, for the number of flight hours incurred since the previous event.
Management's belief that the Company 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 the termination of one or more code share agreements; failure
to sell, dispose of, or redeploy excess aircraft in a timely manner; a
substantial decrease in the number of routes allocated to the Company under its
code share agreements with it code share partners; 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.
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.
YEAR 2000 ISSUES
To date, the Company 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. The Company 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. The
Company continues to monitor the transition to year 2000 and will act promptly
to resolve any problems that occur. If the Company or any third parties with
which it has business relationships experience disruptions related to the year
2000 transition that have not yet been discovered, such disruptions could have a
material adverse impact on the Company.
AIRCRAFT:
The following table lists the aircraft owned and leased by the Company for
scheduled operations as of March 31, 2000:
<TABLE>
<CAPTION>
OPERATING ON PASSENGER
TYPE OF AIRCRAFT OWNED LEASED TOTAL MARCH 31, 2000 CAPACITY
- -------------------------- ----- ------- -------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Beechcraft 1900D 67 10 77 62 19
Jet Stream Super 31 -- 15 15 15 19
Dash 8-100 -- 10 10 10 37
Dash 8-200 -- 12 12 12 37
CRJ -- 32 32 32 50
Embraer EMB-120 Brasilia -- 7 7 -- 30
-- -- -- ---
67 86 153 131
== == === ===
</TABLE>
11
<PAGE> 12
FORWARD - LOOKING STATEMENTS
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 the Company; 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 the
Company 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 on routes the
Company operates or plans to operate; material delays in completion by the
manufacturer of ordered and yet-to-be-delivered aircraft; changes in general
economic conditions; changes in fuel prices; changes in regional economic
conditions; the Company'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 the Company'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 the outcome of pending litigation. One or
more of these or other factors may cause the Company's actual results to differ
materially from any forward-looking statement. The Company is not undertaking
any obligation to update any forward-looking statements contained in this Form
10-Q.
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
the Company (MAI and West Air) seeking a judicial declaration of the parties
rights and obligations under two separate written agreements, pursuant to which
MAI and West Air 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 West Air 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 MAI's alleged
failure to remit baggage fees at Denver International Airport to UAL. The motion
has not been considered. MAI and West Air 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 West Air
believe that UAL has breached its code-sharing
12
<PAGE> 13
agreements with the respective entities and have filed a counterclaim seeking to
recover the substantial damages to the business of MAI and West Air which have
been incurred.
In addition, MAI and West Air have filed suit against UAL and SkyWest Airlines,
Inc. (SkyWest). SkyWest was contracted to be MAI's successor on the West Coast.
The complaint alleges that Skywest unlawfully interfered with MAI's and West
Air's contracts with UAL. The complaint further alleges improper conduct on the
part of UAL and SkyWest in terminating markets under the MAI agreement and in
leading to the non-renewal of the West Air agreement. MAI is seeking substantial
damages against each defendant.
WEST AIR
In November 1998, the Company settled all claims with the aircraft and equipment
lessors of West Air for approximately $15 million. West Air contributed
approximately $11.2 million toward the settlement and the Company contributed
approximately $3.8 million. West Air had operated 43 leased aircraft pursuant to
a partnership agreement with United Airlines (United), a division of UAL, and
upon cessation of United Express service had considerable liabilities for the
remaining terms of the leases. The Company worked closely with all lessors to
develop and implement a plan that was acceptable to both the Company and the
various lessors.
In February 1999, a complaint was filed against West Air and the Company in the
Superior Court of California for Fresno County (the Court) by the former West
Air pilots. The plaintiffs are seeking severance pay in the amount of $1.2
million, plus economic and punitive damages as a result of West Air's
termination of online operations following United's non-renewal of the West Air
agreement.
On or about March 6, 2000, West Air filed a motion for summary judgment in this
matter. West Air's primary argument 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, the Company 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 the
Company and CCAIR in the 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 approximately $8.3 million. The Note was
convertible into CCAIR common stock at a price of $8.00 per share. As a result
of the June 1999 merger between CCAIR and Mesa Merger Corporation, the Note
became convertible into Mesa Air Group, Inc. common stock at a price of $12.87
per share. The Note accrues interest at the rate of 7% per annum, with quarterly
interest payments due commencing March 31, 1999. Principal payments in 10 equal
installments are due commencing December 31, 1999. The remaining principal
balance of the Note, together with any accrued and unpaid interest, is due and
payable on June 30, 2004.
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. 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.
13
<PAGE> 14
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 tortuous interference.
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, the Company settled various outstanding disputes with BRAD.
Under the terms of the settlement, BRAD has agreed to pay the Company a total of
$9.0 million, $7.1 million of which has been paid to date.
OTHER LEGAL PROCEEDINGS
The Company is also a party to various legal proceedings and claims arising in
the ordinary course of business.
Although the ultimate outcome of the above pending lawsuits cannot be
determined, the Company believes, based upon currently available information,
that the ultimate outcome of all the proceedings and claims pending against the
Company will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows. The Company's statement
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. Exhibits and Reports on Form 8-K
a. Exhibits - Financial Data Schedule - Exhibit 27
b. Reports on form 8-K
The Company filed a report on Form 8-K dated March 3, 2000 regarding the
dismissal of KPMG LLP as its independent public accountants. The Company
filed an amendment on March 10, 2000 containing KPMG LLP's response to the
original Form 8-K. No financial statements were filed as a part of the
original or amended report.
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 the Company'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.
14
<PAGE> 15
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)
15
<PAGE> 16
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> MARCH-31-2000
<EXCHANGE-RATE> 1
<CASH> 24,292
<SECURITIES> 10,257
<RECEIVABLES> 39,010
<ALLOWANCES> 0
<INVENTORY> 28,063
<CURRENT-ASSETS> 195,116
<PP&E> 165,445
<DEPRECIATION> 0
<TOTAL-ASSETS> 405,912
<CURRENT-LIABILITIES> 164,579
<BONDS> 109,221
0
0
<COMMON> 113,827
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 405,912
<SALES> 225,570
<TOTAL-REVENUES> 225,570
<CGS> 0
<TOTAL-COSTS> 208,788
<OTHER-EXPENSES> 3,607
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,569
<INCOME-PRETAX> 13,175
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,175
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,175
<EPS-BASIC> .39
<EPS-DILUTED> .39
</TABLE>
