UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended December 31, 1997
OR
{ }TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No: 0-17895
MESABA HOLDINGS, INC.
---------------------
Incorporated under the laws of Minnesota
41-1616499
(I.R.S. Employer ID No.)
7501 26th Avenue South
Minneapolis, MN 55450
(612) 726-5151
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of February 12, 1998
----- -----------------------------------
Common Stock
par value $.01 per share 12,926,702
<PAGE>
PART I. FINANCIAL INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in the Quarterly Report on Form 10-Q under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as oral statements that may be made by the Company or
by officers, directors or employees of the Company acting on the Company's
behalf, that are not historical fact constitute "forward looking
statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward looking statements involve factors that could
cause the actual results of the Company to differ materially from
historical results or from any results expressed or implied by such
forward-looking statements. The Company cautions the public not to place
undue reliance on forward-looking statements, which may be based on
assumptions and anticipated events that do not materialize. Factors which
could cause the Company's actual results to differ from forward-looking
statements include material changes in the relationship between the Company
and Northwest Airlines; changes in regulations affecting the Company,
including DOT and FAA regulations; the acquisition and phase-in of a new
fleet of aircraft; downturns in economic activity; and seasonal factors.
<PAGE>
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
MESABA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
ASSETS
------
December 31, March 31,
1997 1997
-------- --------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 58,177 $ 49,126
Accounts receivable, net 15,868 13,344
Inventories 4,443 2,077
Prepaid expenses and deposits 4,642 3,054
Deferred tax asset 3,702 3,600
-------- --------
Total current assets 86,832 71,201
PROPERTY AND EQUIPMENT:
Facilities under capital lease 9,147 9,147
Flight equipment 30,183 18,655
Other property and equipment 15,808 12,008
Accumulated depreciation and amortization (23,769) (20,038)
-------- --------
Net property and equipment 31,369 19,772
OTHER ASSETS AND DEFERRED COSTS 12,768 13,593
-------- --------
TOTAL ASSETS $130,969 $104,566
======== ========
The accompanying notes to interim consolidated financial statements are an
integral part of these balance sheets.
<PAGE>
MESABA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except share information)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
December 31, March 31,
1997 1997
-------- --------
(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term
obligations $ 454 $ 425
Accounts payable 16,479 11,932
Accrued liabilities
Payroll 8,483 6,589
Maintenance 8,390 7,469
Other 7,344 6,978
-------- --------
Total current liabilities 41,150 33,393
LONG-TERM OBLIGATIONS, net of current
maturities 4,845 5,194
DEFERRED CREDITS AND OTHER LIABILITIES 14,865 16,185
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 25,000,000
shares authorized, 12,855,696 and
12,784,046 shares issued and outstanding,
respectively 129 128
Paid-in capital 40,614 40,114
Warrants 7,900 3,100
-------- --------
Retained earnings 21,466 6,452
-------- --------
Total shareholders' equity 70,109 49,794
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $130,969 $104,566
======== ========
The accompanying notes to interim consolidated financial statements are an
integral part of these balance sheets.
<PAGE>
MESABA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share information)
Three Months ended Nine Months Ended
December 31, December 31,
---------------- ------------------
1997 1996 1997 1996
--------- --------- --------- ---------
OPERATING REVENUES:
Passenger $ 74,598 $ 47,404 $ 199,375 $ 135,564
Other 845 643 2,434 1,579
--------- --------- --------- ---------
Total operating revenues 75,443 48,047 201,809 137,143
OPERATING EXPENSES:
Wages and benefits 17,587 12,489 48,092 37,010
Aircraft fuel costs 6,481 4,656 18,081 12,913
Aircraft maintenance costs 12,376 6,866 29,865 18,255
Aircraft rents 13,372 8,033 35,559 23,184
Wet lease expense 2,560 - 7,202 -
Landing fees 1,566 1,213 4,548 3,595
Insurance and taxes 1,793 1,386 4,863 3,879
Depreciation and amortization 1,788 1,124 4,562 3,126
Administrative and other costs 9,593 7,379 25,346 18,711
--------- --------- --------- ---------
Total operating expenses 67,116 43,146 178,118 120,673
Operating income 8,327 4,901 23,691 16,470
NONOPERATING INCOME (EXPENSE):
Interest expense (109) (280) (352) (378)
Other, net 572 395 1,611 927
--------- --------- --------- ---------
Other income, net 463 267 1,259 549
Income before income taxes 8,790 5,168 24,950 17,019
PROVISION FOR INCOME TAXES 3,498 2,167 9,937 7,157
--------- --------- --------- ---------
NET INCOME $ 5,292 $ 3,001 $ 15,013 $ 9,862
========= ========= ========= =========
NET INCOME PER COMMON SHARE:
Basic earnings per common share $ 0.42 $ 0.24 $ 1.17 $ 0.77
========= ========= ========= =========
Diluted earnings per common share $ 0.38 $ 0.23 $ 1.09 $ 0.76
========= ========= ========= =========
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
<PAGE>
MESABA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended
December 31,
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,013 $ 9,862
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,562 3,126
Amortization of deferred credits (770) (226)
Accrued maintenance, long-term - (917)
Deferred Income tax provision 181 (30)
Changes in current operating items:
Accounts receivable, net (2,524) (120)
Inventories (1,539) (1,726)
Prepaid expenses and deposits (1,588) (1,545)
Accounts payable and accrued liabilities 6,727 10,485
-------- --------
Net cash provided by operating activities 20,062 18,909
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (10,806) (2,275)
Capitalized pre-operating costs (386) -
-------- --------
Net cash used for investing activities (11,192) (2,275)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 501 213
Repayment of long-term obligations (320) (333)
-------- --------
Net cash provided by (used for) financing
activities 181 (120)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,051 16,514
CASH AND CASH EQUIVALENTS:
Beginning of period 49,126 29,428
-------- --------
End of period $ 58,177 $ 45,942
======== ========
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 361 $ 367
======== ========
Income taxes $ 11,488 $ 5,101
======== ========
Noncash investing activities included
the following:
Rotable and spare parts inventory
acquired with integration funds $ 5,679 $ 5,841
======== ========
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
<PAGE>
MESABA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared by
Mesaba Holdings, Inc. (the "Company"), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. The information
furnished in the consolidated financial statements includes normal recurring
adjustments and reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of such consolidated financial
statements. The Company's business is seasonal and, accordingly, interim
results are not indicative of results for a full year. Certain information
and footnote 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. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements for the year
ended March 31, 1997, and the notes thereto, included in the Company's
Annual Report or Form 10-K filed with the Securities and Exchange
Commission.
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiary, Mesaba Aviation, Inc. ("Mesaba"). All significant
intercompany balances have been eliminated in consolidation.
2. AGREEMENTS WITH NORTHWEST
Mesaba is a regional air carrier providing scheduled passenger and air
freight service to 82 cities in the Upper Midwest and Canada. Mesaba
operates flights from Minneapolis/St. Paul and Detroit Metropolitan airport
as Mesaba/Northwest Airlink ("Airlink") under a cooperative marketing
agreement with Northwest Airlines, Inc. ("Northwest"). In October 1997,
Mesaba signed a new long-term Airline Services Agreement ("Airlink
Agreement") with Northwest for Mesaba to continue operating as Northwest
Airlink. The ten year agreement granted all turboprop Airlink flying out of
Northwest's Minneapolis/St. Paul hub to Mesaba effective August 1, 1997.
The agreement also continues Mesaba's right to provide all turboprop
Airlink service out of Northwest's Detroit Metropolitan airport. Northwest
has the right to terminate the Airlink Agreement without cause upon 365
days written notice, such notice not to be given before July 1, 2000. As
consideration for the additional flights, the Company issued a warrant to
allow Northwest to purchase 880,000 shares of the Company's common stock
at an exercise price of $14.125 per share. The warrant expires on July 1,
2007. Additionally, the agreement continues Northwest's current right to
approve any new Chief Executive Officer.
Mesaba, through the Airlink Agreement and other agreements, receives
ticketing and certain check-in, baggage and freight handling services from
Northwest at certain airports. In addition, Mesaba receives its
computerized reservation services from Northwest. Northwest also performs
all marketing schedules and yield management and pricing services for
Mesaba's flights. Approximately 72% of Mesaba's passengers connected with
Northwest in fiscal 1997. Substantially all accounts receivable balances
in the accompanying balance sheets are due from Northwest. Loss of
Mesaba's affiliation with Northwest or Northwest's failure to make timely
payments of amounts owed to Mesaba or to otherwise materially perform under
the Airlink Agreement for any reason would have a material adverse effect
on the Company's operations and financial position.
Mesaba and Northwest entered into a Regional Jet Services Agreement in
October 1996 (the "Jet Agreement"), under which Mesaba operates 12
Avro/Ai(R) RJ85 ("RJ85") regional jets for Northwest under operating leases
<PAGE>
with terms up to 10 years. The aircraft will be subleased from Northwest
and will be operated as Northwest Jet Airlink from Minneapolis/St. Paul and
Detroit hubs according to routes and schedules determined by Northwest. Jet
service began June 6, 1997. The Jet Agreement provides for the delivery of
12 RJ85 regional jets to Mesaba, at a rate of approximately one aircraft per
month, beginning in April 1997. As of December 31, 1997, Mesaba had taken
delivery of eight RJ85 aircraft.
Mesaba and Express Airlines I, Inc. ("Express") a wholly owned subsidiary
of Northwest, entered into an agreement in June 1997 (the "Wet Lease
Agreement"), under which Express provided aircraft, crew services,
maintenance, insurance and other services to Mesaba beginning August 1,
1997. The aircraft were operated as a part of the expanded
Minneapolis/St. Paul Airlink flying granted to Mesaba as a part of the new
Airlink Agreement with Northwest. The Wet Lease Agreement terminaed on
January 31, 1998.
3. PER SHARE DATA
In the third quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128") "Earnings per
Share", which is effective for interim periods ending after December 15,
1997. As a result, all prior period earnings per share data has been
restated. This adoption of SFAS No. 128 did not have any significant
impact on previously reported earnings per share. Basic earnings per share
was computed by dividing net income by the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per
common share was computed similar to the computation for basic earnings per
share, except that the denominator is increased for the assumed exercise of
dilutive options and other dilutive securities using the treasury stock
method.
4. AIRCRAFT ADDITIONS
In 1996, Mesaba entered into an agreement with Saab Aircraft of America,
Inc. ("Saab") for the acquisition of 30 new Saab 340BPlus aircraft and 20
used Saab 340A aircraft. The Company also entered into an option agreement
for 10 additional new Saab 340BPlus aircraft and 12 additional used Saab
340A aircraft. As of December 31, 1997, Mesaba has taken delivery of 18
Saab 340A and 27 Saab 340BPlus aircraft. The balance of the aircraft order
is expected to be phased into service over the next 12 months to replace
Mesaba's remaining fleet of 17 deHavilland Dash 8 aircraft.
In 1997, Mesaba entered into an agreement with Saab to lease four used Saab
340B aircraft. Mesaba leases or will lease the Saab 340B aircraft under
operating leases from aircraft leasing companies with terms up to one year.
In October 1997, Mesaba entered into an agreement with Saab to acquire an
additional 19 new Saab 340BPlus aircraft. The aircraft order are to be
phased into service at a rate of approximately two aircraft per month
beginning in March 1998. All previous option agreements with Saab were
canceled.
<PAGE>
5. DEFERRED CREDITS
In order to assist the Company in integrating new aircraft into its fleet,
certain manufacturers provide the Company with spare parts or other
credits. The Company has deferred these amounts and amortizes them over
the terms of the related aircraft leases as a reduction of rent expense.
Amortization of $770 and $226 was recorded during the period ended December
31, 1997 and 1996 respectively.
6. RECLASSIFICATIONS
Certain balances in the fiscal and interim 1997 consolidated financial
statements have been reclassified to conform to the 1998 presentation.
These reclassifications had no impact on net income or shareholders'
equity.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
During June 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
"Disclosures about Segments of an Enterprise and Related Information",
which requires a disclosure of business segments in the financial
statements of the Company. The Company expects to adopt SFAS No. 131 in
the fiscal 1999 and anticipates a change in segment disclosure at the time
of adoption.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Item 2.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(As used herein, "unit cost" means operating cost per available seat mile.
Dollars and shares outstanding are expressed in thousands)
EARNINGS SUMMARY. The Company reported net income of $5,292 or $0.38
diluted earnings per share for the three months ended December 31, 1997,
compared to $3,001 or $0.23 diluted earnings per share in the same period
of fiscal 1997. Weighted average shares outstanding increased to 14,014
from 13,068.
OPERATING REVENUES. Total operating revenues increased 57.0% in the third
quarter of fiscal 1998 to $75,443 from $48,047 in the year earlier quarter,
and revenue passenger miles increased 97.3% to 221,746 from 112,403.
Passenger revenue per available seat mile ("RASM") decreased to $0.183 from
$0.212 in the previous year's third quarter. Mesaba's average load factor
was 54.4% in the current quarter compared to 50.2% during the same period a
year ago. The improvement in traffic and load factor are attributable to
the introduction of eight RJ85 aircraft and the expanded turboprop activity
at the Minneapolis/St. Paul airport as well as overall increases in
passenger travel within the industry.
Operating Costs Per Three months ended December 31,
Available Seat Mile (Unit Cost) 1997 1996
---------------------------------- -------------- ---------------
Wages and benefits 4.3 CENTS 5.6 CENTS
Aircraft fuel costs 1.6 2.1
Aircraft maintenance costs 3.0 3.1
Aircraft rents 3.3 3.6
Wet lease expense 0.6 -
Landing fees 0.4 0.5
Insurance and taxes 0.5 0.6
Depreciation and amortization 0.4 0.5
Administrative and other costs 2.4 3.3
------ ------
Total 16.5 CENTS 19.3 CENTS
Three months ended December 31,
Operating statistics 1997 1996
---------------------------------- -------------- ---------------
Revenue passengers carried 908,000 487,000
Revenue passenger miles (000) 221,746 112,403
Available seat miles (000) 407,784 223,707
Passenger load factor 54.4% 50.2%
Passenger revenue per available seat mile $0.183 $0 .212
Departures 54,985 36,819
Aircraft in service 74 58
<PAGE>
OPERATING EXPENSES. Total operating expenses increased 55.6% to $67,116
from $43,146 in the prior year's third quarter. Mesaba's unit cost
decreased 14.5% to $0.165 from $0.193 as a result of a 82.3% increase in
available seat miles ("ASM") to 407,784 in the third quarter of fiscal 1998
from 223,707 in the year earlier quarter. The increase in ASMs was
accomplished by the acquisition of eight RJ85 and 37 Saab 340 aircraft
offset by the retirement of 21 Metro III and eight Dash 8 aircraft since
December 31, 1996. As of June 30, 1997, all of the Metro III aircraft
have been removed from revenue service and as of December 31, 1997, all
but three had been returned to lessors.
Wages and benefits increased 40.8% to $17,587 in the third quarter of
fiscal 1998 from $12,489 in the third quarter of fiscal 1997. However the
increased capacity generated by the additional jet and turboprop equipment
has caused these costs to be reduced on a unit cost basis. The majority of
the increase is a result of the higher cost of flight crews due to a 36.3%
increase in block hours and the addition of flight crews to support the
introduction of the RJ85 as well as the continuing Saab fleet transition
program. Mesaba also experienced an increase in wage and benefit costs
paid to support personnel due to a 39.4% increase in scheduled turboprop
operations.
Fuel costs increased 39.2% to $6,481 in this year's third quarter compared
to $4,656 in last year's third quarter. The increase is primarily
attributable to a 37.3% increase in consumption. The remainder of the
increase was due to credits in the prior year as a result of certain
provisions of the Airlink Agreement which lowered the effective price per
gallon. These provisions of the Airlink Agreement with Northwest provide
Mesaba with a fixed price per gallon for fuel. The actual cost of fuel,
including taxes and pumping fees, was 83.5 cents per gallon both in the
current quarter and a year ago. Unit cost decreased 23.8% to 1.6 cents
from 2.1 cents. Mesaba is not required to provide fuel for the jet
operation.
Direct maintenance expense, excluding wages and benefits, increased 80.3%
to $12,376 in the third quarter of fiscal 1998 from $6,866 in the third
quarter of fiscal 1997. This increase was primarily attributable to the
addition of 37 Saab 340 and eight RJ85 aircraft to the fleet when compared
to a year ago and higher heavy inspection costs associated with the Saab
340 fleet. Mesaba utilizes the accrual method of accounting for heavy airfram
inspections. The additional maintenance costs for the Saab 340, RJ85 and Dash 8
aircraft were partially offset by lower maintenance costs related to the
phase-out of the Metro III fleet resulting from the return of 23 aircraft to
lessors. However, unit cost decreased 3.2% to 3.0 cents from 3.1 cents.
Aircraft rents increased 66.5% to $13,372 in the third quarter of fiscal
1998 from $8,033 in the third quarter of fiscal 1997. This increase is
primarily attributable to the addition of 37 Saab 340 and eight RJ85
aircraft while retiring 26 Metro III and eight Dash 8 aircraft to lessors.
Mesaba has taken delivery of nine Saab 340 and two RJ85 aircraft during
the current period. Due to the additional capacity generated by the jet
and larger turboprop equipment, unit cost decreased 8.3% to 3.3 cents from
3.6 cents.
Wet lease expense in the third quarter of fiscal 1998 was $2,560 which is a
result of the expanded activity out of the Minneapolis/St. Paul hub.
Mesaba had no wet leased aircraft in the year earlier period.
Total landing fees increased 29.1% to $1,566 in the third quarter of fiscal
1998 compared to $1,213 for the third quarter of fiscal 1997. The increase
is attributable to a 26.3% increase in departures and a 39.0% increase in
the average gross landing weight due to the mix of the aircraft in the
<PAGE>
fleet and offset by a 7.2% decrease in the overall effective landing fee
rate. Unit cost decreased 20.0% to 0.4 cents from 0.5 cents. Mesaba is
not required to pay for landing fees for the wet lease or jet operation
aircraft.
Insurance and taxes increased 29.4% to $1,793 in the third quarter of
fiscal 1998 compared to $1,386 for the third quarter of fiscal 1997. This
is due primarily to an increase in passenger liability insurance associated
with increased passenger volume and increased hull values associated with
the Saab 340 and RJ85 aircraft (compared to the Metro III) offset by a
reduction in passenger liability insurance rates and reduced amounts paid
for hull insurance caused by the normal decline in fleet values. Due to
the additional capacity generated by the jet and larger turboprop
equipment, unit cost decreased 16.7% to 0.5 cents from 0.6 cents.
Depreciation and amortization increased 59.1% to $1,788 in the third
quarter of fiscal 1998 compared to $1,124 in the third quarter of fiscal
1997. The higher level of depreciation and amortization resulted from the
acquisition of spare parts to support the Saab fleet, which are generally
funded by credits issued by the manufacturer. In October 1996, the
Company paid a contract rights fee in the form of a stock purchase warrant
issued to Northwest as a part of the Regional Jet Service Agreement ("Jet
Agreement"). Contract rights are being amortized on a straight-line basis
over the minimum term of the Jet Agreement through October 2002. The
Company also paid a contract rights fee in the form of a stock purchase
warrant issued to Northwest as a part of the new Airlink Agreement.
Contract rights are being amortized on a straight-line basis over the term
of the Airlink Agreement through June 2007. The increases were partially
offset by a reduction in warrant amortization related to previous warrants
issued to Northwest that were fully amortized as of March 31, 1997. Due to
the additional capacity generated by the jet and larger turboprop
equipment, unit cost decreased 20.0% to 0.4 cents from 0.5 cents.
Administrative and other costs increased 30.0% to $9,593 in the third
quarter of fiscal 1998 compared to $7,379 in the third quarter of fiscal
1997. This increase is primarily attributable to higher crew related
expenses excluding wages and benefits associated with increased flying and
increased airport and passenger related expenses due to an increase in
traffic and the number of cities served. Due to the additional capacity
generated by the jet and larger turboprop equipment, unit cost decreased
27.3% to 2.4 cents from 3.3 cents. Mesaba is generally not required to
provide airport and passenger related expenses for the jet operation.
OPERATING INCOME. Operating income totaled $8,327 in the current period,
an increase of 69.9% from $4,901 a year ago. Mesaba's operating margin
increased to 11.0% from 10.2% in the prior year's third quarter.
NONOPERATING INCOME. Nonoperating income increased to $463 in the current
quarter from $267 in the prior year's third quarter as a result of higher
levels of interest income.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 39.8% in
the third quarter of fiscal 1998 and 41.9% in the comparable quarter in
fiscal 1997. The lower effective tax rate is due to lower levels of
nondeductible expenses in the current period.
<PAGE>
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(As used herein, "unit cost" means operating cost per available seat mile.
Dollars and shares outstanding are expressed in thousands)
EARNINGS SUMMARY. The Company reported net income of $15,013 or $1.09
diluted earnings per share for the nine months ended December 31, 1997,
compared to $9,862 or $0.76 diluted earnings per share in the same period
of fiscal 1997. Weighted average shares outstanding increased to 13,806
from 13,002.
OPERATING REVENUES. Total operating revenues increased 47.2% in the first
nine months of fiscal 1998 to $201,809 from $137,143 in the year earlier
period, and revenue passenger miles increased 71.4% to 574,922 from
335,329. Passenger revenue per available seat mile ("RASM") decreased to
$0.193 from $0.213 in the year earlier period. Mesaba's average load factor
was 55.6% in the current period compared to 52.6% during the same period a
year ago. The improvement in traffic and load factor are attributable to
the introduction of eight RJ85 aircraft and the first two months of
expanded activity at the Minneapolis/St. Paul airport as well as overall
increases in passenger travel within the industry.
Operating Costs Per Nine months ended December 31,
Available Seat Mile (Unit Cost) 1997 1996
---------------------------------- -------------- ---------------
Wages and benefits 4.7 CENTS 5.8 CENTS
Aircraft fuel costs 1.7 2.0
Aircraft maintenance costs 2.9 2.9
Aircraft rents 3.4 3.6
Wet lease expense 0.7 -
Landing fees 0.4 0.6
Insurance and taxes 0.5 0.6
Depreciation and amortization 0.4 0.5
Administrative and other costs 2.5 2.9
------ ------
Total 17.2 CENTS 18.9 CENTS
Nine months ended December 31,
Operating statistics 1997 1996
---------------------------------- -------------- ---------------
Revenue passengers carried 2,421,800 1,483,000
Revenue passenger miles (000) 574,922 335,329
Available seat miles (000) 1,033,592 637,197
Passenger load factor 55.6% 52.6%
Passenger revenue per available seat mile $0.193 $0 .213
Departures 147,146 108,962
Aircraft in service 74 58
OPERATING EXPENSES. Total operating expenses increased 47.6% to $178,118
from $120,673 in the prior year's first nine months. Mesaba's unit cost
decreased 9.0% to $0.172 from $0.189 as a result of a 62.2% increase in
available seat miles ("ASM") to 1,033,592 in the first nine months of fiscal
1998 from 637,197 in the year earlier period. The increase in ASMs was
<PAGE>
primarily accomplished by the acquisition of eight RJ85 and 49 Saab 340
aircraft offset by the retirement of 21 Metro III and eight Dash 8 aircraft
when compared to one year ago. As of June 30, 1997, all of the Metro III
aircraft had been removed from revenue service and as of December 31, 1997,
all but three have been returned to lessors.
Wages and benefits increased 29.9% to $48,092 in the first nine months of
fiscal 1998 from $37,010 in the first nine months of fiscal 1997. The
majority of the increase is a result of higher cost of flight crews due to
a 24.5% increase in block hours and the addition of flight crews to support
the introduction of the RJ85 as well as the continuing Saab fleet
transition program. Mesaba also experienced an increase in wage and
benefit costs paid to support personnel due to a 29.5% increase in
scheduled operations. However, the increased capacity generated by the
additional jet and turboprop equipment has caused these costs to be reduced
on a unit cost basis 19.0% to 4.7 cents from 5.8 cents.
Fuel costs increased 40.0% to $18,081 in this year's first nine months
compared to $12,913 in last year's first nine months. The increase is
primarily attributable to a 36.0% increase in consumption. The remainder of
the increase was due to credits in the prior year as a result of certain
provisions of the Airlink Agreement which lowered the effective price per
gallon. These provisions of the Airlink Agreement with Northwest provide
Mesaba with a fixed price per gallon for fuel. The actual cost of fuel,
including taxes and pumping fees, was 83.5 cents per gallon both in the
current quarter and a year ago. Unit cost decreased 15.0% to 1.7 cents
from 2.0 cents. Mesaba is not required to provide fuel for the jet
operation.
Direct maintenance expense, excluding wages and benefits, increased 63.6%
to $29,865 in the first nine months of fiscal 1998 from $18,255 in the
first nine months of fiscal 1997. This increase was primarily attributable
to the addition of 37 Saab 340 and eight RJ85 aircraft to the fleet when
compared to a year ago and higher heavy inspection costs associated with
the Saab 340 and Dash 8 fleet. Mesaba utilizes the accrual method of
accounting for heavy airfram inspections. The additional maintenance costs
for the Saab 340, RJ85 and Dash 8 aircraft were partially offset by lower
maintenance costs related to the phase-out of the Metro III fleet
resulting from the return of 23 aircraft to lessors. However, unit costs
remained unchanged.
Aircraft rents increased 53.4% to $35,559 in the first nine months of
fiscal 1998 from $23,184 in the first nine months of fiscal 1997. This
increase is primarily attributable to the addition of 49 Saab 340 and eight
RJ85 aircraft while returning 23 Metro III and eight Dash 8 aircraft to
lessors. Mesaba has taken delivery of 25 Saab 340 and eight RJ85 aircraft
during the current period. Due to the additional capacity generated by the
larger jet and turboprop equipment, unit cost decreased 5.6% to 3.4 cents
from 3.6 cents.
Wet lease expense in the first nine months of fiscal 1998 was $7,202 which
is a result of the expanded activity out of the Minneapolis/St. Paul hub.
Mesaba had no wet leased aircraft in the year earlier period.
Total landing fees increased 26.5% to $4,548 in the first nine months of
fiscal 1998 compared to $3,595 for the first nine months of fiscal 1997.
The increase is attributable to a 18.3% increase in turboprop departures
and a 37.5% increase in the average gross landing weight due to the mix of
the aircraft in the fleet and offset by a 8.0% decrease in the overall
effective landing fee rate. Unit cost decreased 33.3% to 0.4 cents from
0.6 cents. Mesaba is not required to pay landing fees for the wet lease or
jet operation.
Insurance and taxes increased 25.4% to $4,863 in the first nine months of
fiscal 1998 compared to $3,879 for the first nine months of fiscal 1997.
This is due primarily to an increase in passenger liability insurance
<PAGE>
associated with increased passenger volume and increased hull values
associated with the Saab 340 and RJ85 aircraft (compared to the Metro III)
offset by a reduction in passenger liability insurance rates and reduced
amounts paid for hull insurance caused by the normal decline in fleet
values. Due to the additional capacity generated by the larger jet and
turboprop equipment, unit cost decreased 16.7% to 0.5 cents from 0.6 cents.
Depreciation and amortization increased 45.9% to $4,562 in the first nine
months of fiscal 1998 compared to $3,126 in the first nine months of fiscal
1997. The higher level of depreciation and amortization resulted from
increased expenditures associated with ground support equipment to support
the additional cities served as a part of the expanded flights out of the
Minneapolis/St. Paul hub and the acquisition of spare parts to support the
Saab fleet, which are generally funded by credits issued by the
manufacturer. In October 1996, the Company paid a contract rights fee in
the form of a stock purchase warrant issued to Northwest as a part of the
Regional Jet Service Agreement ("Jet Agreement"). Contract rights are
being amortized on a straight-line basis over the minimum term of the Jet
Agreement through October 2002. The Company also paid a contract rights
fee in the form of a stock purchase warrant issued to Northwest as a part
of the new Airlink Agreement. Contract rights are being amortized on a
straight-line basis over the term of the Airlink Agreement through June
2007. The increases were partially offset by a reduction in warrant
amortization related to previous warrants issued to Northwest that were
fully amortized as of March 31, 1997. Due to the additional capacity
generated by the larger jet and turboprop equipment, unit cost decreased
20.0% to 0.4 cents from 0.5 cents.
Administrative and other costs increased 35.5% to $25,346 in the first nine
months of fiscal 1998 compared to $18,711 in the first nine months of
fiscal 1997. This increase is primarily attributable to higher crew
related expenses, excluding wages and benefits, associated with increased
flying and increased airport and passenger related expenses due to an
increase in traffic and the number of cities served. Due to the additional
capacity generated by the larger jet and turboprop equipment, unit cost
decreased 13.8% to 2.5 cents from 2.9 cents.
OPERATING INCOME. Operating income totaled $23,691 in the current period,
an increase of 43.8% from $16,470 a year ago. Mesaba's operating margin
decreased to 11.7% from 12.0% in the prior year's first nine months.
NONOPERATING INCOME. Nonoperating income increased to $1,259 in the
current period from $549 in the prior year's first nine months as a result
of higher levels of interest income.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 39.8% in
the first nine months of fiscal 1998 and 42.0% in fiscal 1997. The lower
effective tax rate is due to lower levels of nondeductible expenses in the
current period.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to $45,682 with a current ratio of
2.1 at December 31, 1997 compared to $37,808 and 2.1 at March 31, 1997.
Cash and cash equivalents increased by $9,051 to $58,177 at December 31,
1997. Net cash flows provided by operating activities totaled $20,062 in
the first nine months of 1998 compared to $18,909 in the first nine months
of fiscal 1997. Net cash flows used for investing activities amounted to
$11,192 during the nine months ended December 31, 1997 compared to $2,275
in the same period last year. Net cash flows provided by financing
activities through December 31, 1997 totaled $181 compared to a use of $120
in the same period last year.
Long-term obligations, net of current maturities, totaled $4,845 at
December 31, 1997 compared to $5,194 at March 31, 1997. The ratio of long-
term debt to stockholders' equity decreased to .07 at December 31, 1997
from .10 at March 31, 1997.
As of February 2, 1997, Mesaba's fleet consisted of 76 aircraft covered
under operating leases with remaining terms of two months to 17.5 years and
an aggregate monthly lease payments of approximately $4.9 million.
Operating leases have been Mesaba's primary method of acquiring aircraft,
and management expects to continue relying on this method to meet most of
its future aircraft needs. Mesaba leases all of its Saab 340 aircraft,
either directly from aircraft leasing companies or through subleases with
Northwest under operating leases with terms up to 17.5 years. Mesaba has
negotiated a financing agreement with the airframe manufacturer whereby
operating lease financing for the remaining new and used Saab 340 aircraft
are committed to the Company on competitive rates and terms. Mesaba leases
its RJ85 aircraft from Northwest under operating leases with terms of up to
10 years. Mesaba will lease the remaining three RJ85 aircraft under firm
contract from Northwest.
The Company has historically relied upon cash reserves, internally
generated funds and borrowings to support its working capital requirements.
The Company has an approved unsecured agreement with a bank that provides
for borrowings of up to $5,000 under a revolving line of credit. No
amounts were outstanding under the credit agreement. Management believes
that funds from operations and existing credit lines will provide adequate
resources for meeting non-aircraft capital needs in fiscal 1998.
<PAGE>
Part II.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 11
b) The Registrant did not file any reports on form 8-K during the
quarter ended December 31, 1997.
<PAGE>
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.
MESABA HOLDINGS, INC.
Date: February 16, 1998 BY: /s/ Robert H. Cooper
-------------------------
Robert H. Cooper
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Jon R. Meyer
-------------------------
Jon R. Meyer
Director of Accounting/Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 58,117
<SECURITIES> 0
<RECEIVABLES> 15,868
<ALLOWANCES> 0
<INVENTORY> 4,443
<CURRENT-ASSETS> 86,832
<PP&E> 55,138
<DEPRECIATION> 23,769
<TOTAL-ASSETS> 130,969
<CURRENT-LIABILITIES> 41,150
<BONDS> 0
0
0
<COMMON> 129
<OTHER-SE> 69,980
<TOTAL-LIABILITY-AND-EQUITY> 130,969
<SALES> 201,809
<TOTAL-REVENUES> 201,809
<CGS> 178,118
<TOTAL-COSTS> 178,118
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 352
<INCOME-PRETAX> 24,950
<INCOME-TAX> 9,937
<INCOME-CONTINUING> 15,013
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,013
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.09
</TABLE>
<PAGE>
Exhibit 11
Three Months Ended Nine Months Ended
------------------ -----------------
December 31, December 31,
------------ ------------
1997 1996 1997 1996
--------- --------- --------- ---------
Net Income $ 5,292 $ 3,001 $ 15,013 $ 9,862
========= ========= ========= =========
Weighted average number of shares
outstanding 12,851 12,770 12,832 12,764
========= ========= ========= =========
Shares used in computation of basic
earnings per common share 12,851 12,770 12,832 12,770
Dilutive effect of outstanding
stock options and stock warrants
after application of treasury stock
method 1,163 298 974 232
--------- --------- --------- ---------
Common and common equivalent shares
outstanding - diluted 14,014 13,068 13,806 13,002
========= ========= ========= =========
Basic earnings per common share $ 0.41 $ 0.24 $ 1.17 $ 0.77
========= ========= ========= =========
Diluted earnings per common share $ 0.38 $ 0.23 $ 1.09 $ 0.76
========= ========= ========= =========
