<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 June 30, 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.
Class Outstanding at August 11, 2000
----- ------------------------------
Common stock, no par value 32,458,903
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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 Nine Months Ended
June 30, June 30,
2000 1999 2000 1999
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Operating Revenues:
Passenger $ 117,187 $ 103,769 $ 337,741 $ 295,395
Freight and other 3,811 1,504 8,827 4,792
--------- --------- --------- ---------
Total operating revenues 120,998 105,273 346,568 300,187
--------- --------- --------- ---------
Operating Expenses:
Flight operations 55,798 43,105 159,723 125,078
Maintenance 22,227 18,038 62,752 53,640
Aircraft and traffic servicing 13,214 12,250 40,319 38,202
Promotion and sales 7,466 8,853 22,853 24,829
General and administrative 6,336 6,661 19,597 19,202
Depreciation and amortization 3,557 4,387 12,142 13,833
--------- --------- --------- ---------
Total operating expenses 108,598 93,294 317,386 274,784
--------- --------- --------- ---------
Operating Income 12,400 11,979 29,182 25,403
--------- --------- --------- ---------
Other income (expense):
Interest expense (4,352) (4,475) (12,921) (13,455)
Interest income 315 754 1,855 1,482
Other (402) (3,476) 3,020 (2,584)
--------- --------- --------- ---------
Net other expense (4,439) (7,197) (8,046) (14,557)
--------- --------- --------- ---------
Income before income taxes 7,961 4,782 21,136 10,846
Provision for income taxes -- -- -- --
--------- --------- --------- ---------
Net income $ 7,961 $ 4,782 $ 21,136 $ 10,846
========= ========= ========= =========
Net income per common share:
Basic $ 0.25 $ 0.14 $ 0.63 $ 0.32
Diluted $ 0.24 $ 0.14 $ 0.63 $ 0.31
Weighted average common shares:
Basic 32,462 34,011 33,334 33,954
Diluted 32,585 34,675 33,414 34,559
</TABLE>
See accompanying notes to condensed consolidated financial statements
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MESA AIR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
(Unaudited)
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18,772 $ 52,905
Marketable securities 9,442 3,306
Receivables, primarily traffic, net 43,864 30,859
Expendable parts and supplies, net 31,965 24,727
Aircraft held for sale 74,466 77,412
Prepaid expenses and other current assets 9,414 12,739
-------- ---------
Total current assets 187,923 201,948
-------- ---------
Property and equipment, net 172,799 160,453
Lease and equipment deposits 22,564 22,392
Intangibles, net 10,232 10,855
Other assets 14,847 8,125
-------- ---------
Total assets $ 408,365 $ 403,773
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 118,627 $ 121,297
Accounts payable 14,943 17,480
Air traffic liability 3,774 2,128
Accrued compensation 1,116 2,324
Other accrued expenses 22,702 25,679
-------- ---------
Total current liabilities 161,162 168,908
-------- ---------
Long-term debt and capital leases, net of current maturities 108,157 114,234
Deferred credits and other liabilities 31,260 24,196
-------- ---------
Total liabilities 300,579 307,338
-------- ---------
Stockholders' Equity:
Common stock, no par value, 75,000,000 shares
authorized; 32,458,903 and 34,197,752 shares
outstanding at June 30, 2000 and September
30, 1999, respectively 123,678 123,492
Accumulated deficit (5,921) (27,057)
Treasury stock, at cost (1,789,800 shares) (9,971) --
-------- ---------
Total stockholders' equity 107,786 96,435
-------- ---------
Total liabilities and stockholders' equity $ 408,365 $ 403,773
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
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MESA AIR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
--------------------------
2000 1999
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 21,136 $ 10,846
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 12,142 13,833
Provision for doubtful accounts 99 72
Gain on sale of marketable securities (1,149) --
Loss on sale of property and equipment -- 1,607
Changes in assets and liabilities:
Receivables (13,104) 63
Income tax refund receivable -- 9,057
Expendable parts and supplies (7,238) 2,698
Prepaid expenses and other current assets 3,325 (2,259)
Accounts payable (2,537) 8,562
Air traffic liability 1,646 (826)
Accrued compensation (1,208) 2,896
Deferred credits and other liabilities 7,064 481
Other accrued expenses (2,976) (19,516)
-------- --------
Net cash provided by operating activities 17,200 27,514
-------- --------
Cash Flows From Investing Activities:
Capital expenditures (23,020) (8,966)
Proceeds from sale of subsidiary -- 4,500
Proceeds from sale of property and equipment -- 11,703
Purchases of marketable securities, net (4,987) --
Other assets (6,722) 738
Lease and equipment deposits (172) (11,197)
-------- --------
Net cash (used in) provided by investing activities (34,901) (3,222)
-------- --------
Cash Flows From Financing Activities:
Principal payments on notes payable & obligations
under capital leases (6,647) (4,961)
Proceeds from issuance of common stock 186 1,109
Stock repurchases (9,971) --
-------- --------
Net cash used in financing activities (16,432) (3,852)
-------- --------
(Decrease) increase in cash and cash equivalents (34,133) 20,440
Cash and cash equivalents at beginning of period 52,905 35,667
-------- --------
Cash and cash equivalents at end of period $ 18,772 $ 56,107
======== ========
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 notes required by generally accepted
accounting principles of the United States 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 nine months ended June 30, 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 nine months ended June 30, 2000 has been
recognized only to the extent of previously recorded deferred tax liabilities.
For the three and nine month periods ended June 30, 2000, the Company did not
recognize any income tax expense as a result of net operating loss
carryforwards.
4. 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):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
---------------------- ---------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 32,462 34,011 33,334 33,954
Effect of outstanding stock options 123 664 80 605
------ ------ ------ ------
Weighted average shares for diluted net income
Per common share 32,585 34,675 33,414 34,559
====== ====== ====== ======
</TABLE>
5. 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 June 30,
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2000, the Company has acquired approximately 1.8 million shares of its common
stock at an aggregate cost of approximately $10.0 million.
6. DISPOSAL OF 1900D AIRCRAFT
During fiscal 1999, the Company announced its intention to dispose of 30 surplus
Raytheon 1900D aircraft. In connection therewith, the Company recognized an
impairment charge of $20.6 million. During the quarter ended December 31, 1999,
the Company disposed of one 1900D aircraft. The Company has received a proposal
from Raytheon for the return of up to 20 1900D aircraft and the refinancing of
36 additional 1900D aircraft. Execution of the proposal is subject to completion
of a definitive agreement between the Company and Raytheon. The airline industry
is highly competitive, and fare and traffic volatility is common. Currently,
assuming stability in current fare and traffic levels and execution of the
proposal from Raytheon, the Company does not anticipate further writedowns on
its 1900D fleet. However, should the Company experience significant differences
in fare and / or traffic levels, or be unable to timely dispose of its excess
1900D aircraft, there can be no assurance that additional writedowns will not
occur.
7. RECLASSIFICATION
Certain reclassifications have been made to the 1999 financial statements to
conform to the 2000 presentation.
8. 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 128 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 code sharing agreements with
US Airways expiring between 2000 and 2004. CCAIR, Inc. (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 Albuquerque hub 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 nine
months ended June 30, 2000 were derived from operations associated with code
sharing agreements with America West and US Airways. All of the Company's
America West Express code share operations 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 agreements. For the quarter and nine months ended June 30, 2000,
approximately 53% of the Company's airline revenues were derived from fee per
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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 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 the Company's flights with flights of other
airlines that are not code sharing 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 $9.0 million, $7.6
million of which has been earned as of June 30, 2000. The remainder of the
settlement will be received if the Company secures long-term operating lease
financing on 3 remaining CRJ aircraft by September 30, 2000. 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 $2.0 million in other income in 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 introduced the ERJ into revenue service in June 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
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Passengers 1,142,607 1,104,877 3,265,346 3,142,043
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Available seat miles (000s) 712,697 671,958 2,183,728 1,895,327
Revenue passenger miles (000s) 395,344 346,753 1,134,963 958,300
Load factor 55.5% 51.6% 52.0% 50.6%
Yield per revenue passenger mile (cents) 30.6c 30.4c 30.5c 31.3c
Revenue per available seat mile (cents) 17.0c 15.7c 15.9c 15.8c
Operating cost per available seat mile (cents) 15.2c 13.9c 14.5c 14.4c
Average stage length (miles) 248.4 230.0 248.9 224.0
Aircraft in service 126 139 126 139
Departures 83,684 91,961 258,635 278,553
</TABLE>
OPERATING COST PER AVAILABLE SEAT MILE (ASM)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
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 7.8 46.1% 6.4 41.0% 7.3 46.1% 6.6 41.7%
Maintenance 3.1 18.4% 2.7 17.1% 2.9 18.1% 2.8 17.9%
Aircraft and traffic 1.9 10.9% 1.8 11.6% 1.8 11.6% 2.0 12.7%
servicing
Promotion and sales 1.0 6.2% 1.3 8.4% 1.0 6.6% 1.3 8.2%
General and administrative 0.9 5.2% 1.0 6.3% 0.9 5.7% 1.0 6.4%
Depreciation and amortization 0.5 3.0% 0.7 4.2% 0.6 3.5% 0.7 4.6%
------- -------- ----- ------- ------- -------- ----- -----
Total operating expenses 15.2 89.8% 13.9 88.6% 14.5 91.6% 14.4 91.5%
======= ======== ===== ======= ======= ======== ===== =====
</TABLE>
RESULTS OF OPERATIONS
Operating Revenues
In the quarter and nine months ended June 30, 2000, operating revenues increased
$15.7 million (14.9%) and $46.4 million (15.5%), 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 6.1% and 15.2%, respectively, for the
quarter and nine months ended June 30, 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 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 14.0% and 18.4%, respectively, in the
quarter and nine months ended June 30, 2000 as compared to the corresponding
periods in 1999. The RPM increases were 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 increased to 55.5% and 52.0%,
respectively, in the quarter and nine months ended June 30, 2000 as
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compared to 51.6% and 50.6% in 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 June 30, 2000, flight operations expense increased 29.4% to
$55.8 million (7.8 cents per ASM) from $43.1 million (6.4 cents per ASM) in the
corresponding quarter in 1999. In the nine months ended June 30, 2000, flight
operations expense increased 27.7% to $159.7 million (7.3 cents per ASM) from
$125.1 million (6.6 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 June 30, 2000, maintenance expense increased 23.2% to $22.2
million (3.1 cents per ASM) from $18.0 million (2.7 cents per ASM) in the
corresponding quarter in 1999. In the nine months ended June 30, 2000,
maintenance expense increased 17.0% to $62.8 million (2.9 cents per ASM) from
$53.6 million (2.8 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.
Aircraft and Traffic Servicing Expense
In the quarter ended June 30, 2000, aircraft and traffic servicing expense
increased 7.9% to $13.2 million (1.9 cents per ASM) from $12.3 million (1.8
cents per ASM) in the corresponding quarter in 1999. In the nine months ended
June 30, 2000, aircraft and traffic servicing expense increased 5.5% to $40.3
million (1.9 cents per ASM) from $38.2 million (2.0 cents per ASM) in the
corresponding period in 1999. The increase was primarily due to the Company's
increase in flights. On a unit cost (per ASM) basis, aircraft and traffic
servicing expenses were essentially flat between periods.
Promotion and Sales
In the quarter ended June 30, 2000, promotion and sales expense decreased 15.7%
to $7.5 million (1.0 cents per ASM) from $8.8 million (1.3 cents per ASM) in the
corresponding quarter in 1999. In the nine months ended June 30, 2000, promotion
and sales expense decreased 8.0% to $22.9 million (1.0 cents per ASM) from $24.8
million (1.3 cents per ASM) in the corresponding period in 1999. The decrease is
primarily 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 on
flights operated by the Company.
General and Administrative Expense
In the quarter ended June 30, 2000, general and administrative expense decreased
4.9% to $6.3 million (0.9 cents per ASM) from $6.7 million (1.0 cents per ASM)
in the corresponding quarter in 1999. In the nine months ended June 30, 2000,
general and administrative expense increased 2.1% to $19.6 million (0.9 cents
per ASM) from $19.2 million (1.0 cents per ASM) in the corresponding period in
1999. General and administrative expense consists of items such as
administrative payroll, office rent, professional fees and other items that are
generally fixed from period to period. On both an absolute and unit cost (per
ASM) basis, the change in general and administrative expense was not
significant.
Depreciation and Amortization
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In the quarter ended June 30, 2000, depreciation and amortization expense
decreased 18.9% to $3.6 million (0.5 cents per ASM) from $4.4 million (0.7 cents
per ASM) in the corresponding quarter in 1999. In the nine months ended June 30,
2000, depreciation and amortization expense decreased 12.2% to $12.1 million
(0.6 cents per ASM) from $13.8 million (0.7 cents per ASM). The decrease is
primarily due to the cessation of depreciation on 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 June 30, 2000, net other expense decreased to $4.4 million
from $7.2 million in the corresponding quarter in 1999. Other expense in 1999
included a one-time charge of approximately $3.6 million for costs related to
the Company's acquisition of CCAIR. In the nine months ended June 30, 2000, net
other expense decreased to $8.0 million from $14.6 million. In addition to the
aforementioned CCAIR acquisition costs included in 1999, in 2000 the Company
recognized a $2.0 million gain from the settlement with BRAD, $1.1 million in
gains from the sale of short-term investments and increased interest income on
invested cash.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company's cash and cash equivalents and marketable
securities totaled $28.2 million, compared to $56.2 million at September 30,
1999. The Company's net cash flow from operations totaled approximately $17.2
million during the nine months ended June 30, 2000. During the nine months ended
June 30, 2000, the Company invested approximately $5.0 million in marketable
securities, $29.7 million in aircraft parts and other fixed assets, reduced
long-term debt by $6.6 million and repurchased approximately $10.0 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 June 30, 2000, the Company had receivables of approximately $43.9 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. 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, 29 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 $15.4
million due in September 2000 and $17.9 million due in January 2001 . The
remaining 3 aircraft are currently leased pursuant to interim financial
arrangements and are expected to be leased under long-term operating leases as
market conditions allow. The Company has significant lease obligations and debt
payments on its remaining (non-CRJ) aircraft. At June 30, 2000 the Company owned
67 1900D aircraft securing debt with maturities through 2011. During the fiscal
year ended September 30, 1999 the Company elected to cease service on several
routes operated by Raytheon 1900D aircraft, and determined that 30 1900D
aircraft would be disposed of. The Company has received a proposal from Raytheon
for the return of up to 20 1900D aircraft and the refinancing of 36 additional
1900D aircraft. Execution of the proposal is subject to completion of a
definitive agreement between the Company and Raytheon.
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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 $9.0 million ($8.5 million cash, $0.5
million credit), $7.6 million of which has been earned to date. The remainder
will be paid if the Company secures long-term operating lease financing on each
remaining 3 CRJ aircraft by certain deadlines.
The Company has negotiated 10-year engine maintenance contracts with General
Electric Aircraft Engines for its CRJ aircraft, Rolls-Royce Allison for its ERJ
aircraft and Pratt and Whitney, Canada Aircraft Services 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 June
30, 2000, the Company has acquired approximately 1.8 million shares of its
common stock at an aggregate cost of approximately $10.0 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 June 30, 2000:
<TABLE>
<CAPTION>
OPERATING ON PASSENGER
TYPE OF AIRCRAFT OWNED LEASED TOTAL JUNE 30, 2000 CAPACITY
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beechcraft 1900D 67 10 77 58 19
Jet Stream Super 31 -- 14 14 14 19
Dash 8-100 -- 10 10 10 37
Dash 8-200 -- 12 12 12 37
CRJ -- 32 32 32 50
ERJ -- 2 2 2 50
Embraer EMB-120 Brasilia -- 7 7 -- 30
---- ---- ---- ---- 30
67 87 154 128
==== ==== ==== ====
</TABLE>
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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. In November 1998, UAL's 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 was granted. In December
1998, UAL filed its Second Amended Complaint. In November 1999 Mesa amended its
own counterclaims to assert a corresponding claim for UAL's failure to provide a
working baggage system. 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 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.
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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 sought 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 leased 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 contained 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 alleged that it had 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. 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 immediately due and payable.
Lynrise's claims against CCAIR included a claim for declaratory judgement that
CCAIR was obligated to repurchase the Note and a claim for breach of contract.
As against the Company, Lynrise 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
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<PAGE> 14
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 as of June 30, 2000.
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. 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 May 15, 2000 regarding the
appointment of Deloitte & Touche LLP as its independent auditors. No
financial statements were filed as a part of the report.
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
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Date: August 14, 2000 /s/ Robert B. Stone
Robert B. Stone
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit
-------
Exhibit 27 Financial Data Schedule
