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 September 30, 1998
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 November 11, 1998
--------------- -----------------------------------
Common Stock
Par value $.01 per share 19,834,829
<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; reductions or interruptions in Northwest
Airlines' air service; changes in regulations affecting the Company,
including DOT and FAA regulations or directives affecting
airworthiness of aircraft; the acquisition and phase-in of a
new aircraft; downturns in economic activity; seasonal factors; and
labor relationships, including slow downs and/or work stoppages
associated with the outcome of ongoing contract negotiations between
the Company and the Aircraft Mechanics Fraternal Association, the
mechanics union.
<PAGE>
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
MESABA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
ASSETS
September 30, March 31,
1998 1998
____________ ____________
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $73,246 $66,554
Accounts receivable, net 12,363 13,610
Inventories 10,153 5,547
Prepaid expenses and deposits 2,789 3,788
Deferred tax asset 5,647 4,702
____________ ____________
Total current assets 104,198 94,201
PROPERTY AND EQUIPMENT:
Facilities under capital lease 9,147 9,147
Rotables and other spare parts 31,595 22,449
Other property and equipment 21,021 16,865
Accumulated depreciation and amortization (19,852) (16,364)
____________ ____________
Net property and equipment 41,911 32,097
OTHER ASSETS AND DEFERRED COSTS 14,681 10,893
____________ ____________
TOTAL ASSETS $160,790 $137,191
============ ============
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
September 30, March 31,
1998 1998
_________ _________
(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 401 436
Accounts payable 22,543 18,093
Accrued liabilities
Payroll 8,648 9,362
Maintenance 8,584 6,877
Other 6,946 7,741
Total current liabilities 47,122 42,509
LONG-TERM OBLIGATIONS, net of current 4,559 4,751
maturities
DEFERRED CREDITS AND OTHER LIABILITIES 14,415 14,385
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 60,000,000
shares authorized, 19,823,579 and 19,397,523 198 194
shares issued and outstanding, respectively
Paid-in capital 43,626 41,196
Warrants 16,500 7,900
Retained earnings 34,370 26,256
_________ _________
Total shareholders' equity 94,694 75,546
_________ _________
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $160,790 $137,191
========= =========
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 Six Months Ended
September 30, September 30,
____________________ ____________________
1998 1997 1998 1997
________ ________ ________ ________
OPERATING REVENUES:
Passenger $70,461 $70,961 $150,225 $124,777
Other 1,228 981 1,933 1,589
________ ________ ________ ________
Total operating revenues 71,689 71,942 152,158 126,366
OPERATING EXPENSES:
Wages and benefits 18,709 16,476 37,936 30,505
Aircraft fuel costs 5,568 6,073 12,506 11,600
Aircraft maintenance costs 12,418 9,922 24,958 17,489
Aircraft rents 16,739 12,562 32,563 22,187
Wet lease expense - 4,642 - 4,642
Landing fees 1,439 1,561 3,255 2,982
Insurance and taxes 2,077 1,748 4,120 3,070
Depreciation and amortization 2,358 1,621 4,332 2,774
Administrative and other costs 10,575 8,182 20,218 15,753
________ ________ ________ ________
Total operating expenses 69,883 62,787 139,888 111,002
Operating income 1,806 9,155 12,270 15,364
NONOPERATING INCOME (EXPENSE):
Interest expense (116) (118) (228) (243)
Other, net 1,720 543 2,570 1,039
________ ________ ________ ________
Other income, net 1,604 425 2,342 796
Income before income taxes 3,410 9,580 14,612 16,160
PROVISION FOR INCOME TAXES 1,330 3,832 5,699 6,439
________ ________ ________ ________
NET INCOME BEFORE CHANGE IN
ACCOUNTING PRINCIPLE $2,080 $5,748 $8,913 $9,721
PRE-OPERATING COST WRITE OFF,
NET OF TAX - - 800 -
________ ________ ________ ________
NET INCOME 2,080 5,748 8,113 9,721
======== ======== ======== ========
NET INCOME PER SHARE:
Basic $ 0.10 $ 0.30 $ 0.41 $ 0.50
======== ======== ======== ========
Diluted $ 0.10 $ 0.28 $ 0.37 $ 0.48
======== ======== ======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 19,824 19,238 19,720 19,427
======== ======== ======== ========
Diluted 21,638 20,549 21,697 20,216
======== ======== ======== ========
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)
Six Months Ended
September 30,
1998 1997
_________ _________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $8,113 $9,721
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,332 2,774
Amortization of deferred credits (552) (427)
Deferred income tax benefit (945) (371)
Changes in current operating items:
Accounts receivable, net 2,524 (263)
Inventories (3,258) (1,346)
Prepaid expenses and deposits 999 388
Accounts payable and accrued 5,744 5,644
liabilities _________ _________
Net cash provided by operating activities 16,957 16,120
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (12,494) (7,254)
Other 23 (386)
_________ _________
Net cash used for investing activities (12,471) (7,640)
_________ _________
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 2,433 380
Repayment of long-term obligations (227) (212)
_________ _________
Net cash provided by financing activities 2,206 168
_________ _________
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,692 8,648
CASH AND CASH EQUIVALENTS:
Beginning of period 66,554 49,126
_________ _________
End of period 73,246 57,774
========= =========
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 228 $ 243
========= =========
Income taxes $ 6,287 $ 7,511
========= =========
Noncash investing activities included
the following:
Rotable and spare parts inventory
acquired with integration funds $ 2,231 $ 3,909
========= =========
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, 1998, 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.
In April 1998, the Company declared a three-for-two stock split of the
Company's common stock. The par value per share remained at $0.01.
This stock split has been retroactively reflected in these financial
statements.
2. Agreements with Northwest
The Company operates a regional air carrier providing scheduled
turbo-prop passenger and air freight service as Mesaba
Airlines/Northwest Airlink under an Airline Services Agreement (the
"Airlink Agreement") with Northwest Airlines, Inc. ("Northwest") to 91
cities in the Upper Midwest and Canada from Northwest's hub airports,
Minneapolis/St. Paul and Detroit. The Airlink Agreement provides for
exclusive turbo-prop rights to designated service areas and extends
through June 30, 2007. 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. Mesaba also operates
regional jet aircraft under a separate Regional Jet Services Agreement
(the "Jet Agreement"), under which Mesaba will operate up to 36 Avro
RJ85 ("RJ85") regional jets for Northwest. As of September 30, 1998,
Mesaba had taken delivery of 17 RJ85 aircraft. The aircraft are
subleased from Northwest and are operated as Northwest Jet Airlink
currently from the Minneapolis/St. Paul and Detroit hubs. Under the
Airlink and Jet Agreement, all Mesaba flights appear in Northwest's
timetables and Mesaba receives ticketing and certain check-in, baggage
and freight handling and other services from Northwest at certain
airports. In addition, Mesaba receives its computerized reservation
services from Northwest as well as performing all marketing schedules
and yield management and pricing services for Mesaba flights. 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 Agreement's for any reason would have a material
adverse effect on the Company's operations and financial position.
Under both the Airlink and Jet Agreements, Northwest is not required
to perform in the event of a material labor disruption at Northwest.
<PAGE>
On August 29, 1998 the Company temporarily suspended operations as a
result of the pilot strike at Northwest Airlines. The Company resumed
service on September 16, 1998. The suspension of operations had a
material adverse affect on the results of operations for the current
reporting period. It did not have a material adverse affect on the
liquidity or capital resources of the Company.
3. Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," requires presentation of "Basic" and "Diluted" earnings per
share amounts, as defined. "Basic" earnings per share replaces
primary earnings per share under APB Opinion No. 15, and excludes the
dilutive effects of options, warrants and convertible securities, if
any, from the calculation. Diluted earnings per share has not changed
significantly but has been named "Dilutive" earnings per share.
Statement No. 128 became effective for fiscal years beginning with
fiscal year 1998. All earnings per share prior to 1998 have been
restated to comply with this Statement.
The table below sets forth the computation of earnings per common share.
Quarter Ended Six Months Ended
------------- ----------------
September 30,
---------------
1998 1997 1998 1997
---- ---- ---- ----
Net Income $2,080 $5,748 $8,113 $9,721
====== ====== ====== ======
For Earnings Per Common Share - 19,824 19,238 19,720 19,427
Basic:
Weighted average number of issued
shares outstanding
Effect of dilutive securities
Computed shares outstanding under
the Company's stock option plan
utilizing the treasury stock method 506 646 633 331
Computed shares outstanding under
warrants issued utilizing the
treasury stock method 1,308 665 1,344 458
------ ------ ------ ------
For earnings per Common Share -
Diluted:
Weighted average common shares
and common share equivalents
outstanding 21,638 20,549 21,697 20,216
====== ====== ====== ======
Earnings Per Share - Basic $ 0.10 $ 0.30 $ 0.41 $ 0.50
====== ====== ====== ======
Earnings Per Share - Diluted $ 0.10 $ 0.28 $ 0.37 $ 0.48
====== ====== ====== ======
In April of 1998, the Company adopted AICPA Statement of Position
(SOP) 98- 5 "Reporting on the Costs of Start-Up Activities" which
requires all start- up costs to be charged to expense as incurred.
The adoption of SOP 98-5 resulted in an $800 charge (net of tax) to
operations, or $0.03 per basic and diluted share for previously
capitalized start-up costs and was recorded as a cumulative effect of
change in accounting principle.
4. Aircraft Additions
In October 1997, Mesaba entered into an agreement with Saab Aircraft
of America, Inc. ("Saab") for the acquisition of 19 new Saab 340BPlus
and three used Saab 340A aircraft. All previous option agreements
with Saab were canceled. As of September 30, 1998, Mesaba has taken
delivery of 11 Saab 340BPlus and three Saab 340A aircraft covered
under this agreement. The balance of the aircraft order is expected to
be phased into service over the next four months to replace Mesaba's
remaining fleet of five deHavilland Dash 8 aircraft as well as replace
Mesaba's Saab 340B aircraft which are on short-term leases.
<PAGE>
In April 1998, Mesaba signed an amendment to the Jet Agreement
providing for the delivery of six additional RJ85 aircraft. Mesaba
began taking delivery of the aircraft at a rate of approximately one
aircraft per month in June 1998. As of September 30, 1998, Mesaba has
taken delivery of five of these additional aircraft. On June 2, 1998,
Mesaba signed an agreement with Northwest to fly 18 additional RJ85
aircraft for a total of 36 aircraft. Mesaba will begin taking
delivery of these aircraft beginning in January 1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Item 2.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 and 1997
(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 $2,080 or $0.10
diluted earnings per share for the three months ended September 30, 1998,
compared to $5,748 or $0.28 diluted earnings per share in the same period
of fiscal 1998. Weighted average common shares and common share equivalents
outstanding increased to 21,638 from 20,549. On August 29, 1998 the Company
temporarily suspended operations as a result of the pilot strike at
Northwest Airlines. The Company resumed service on September 16, 1998. The
suspension of operations had a material adverse affect on the results of
operations for the current reporting period.
OPERATING REVENUES. Total operating revenues decreased 0.4% in the second
quarter of fiscal 1999 to $71,689 from $71,942 in the year earlier quarter,
and revenue passenger miles increased 20.0% to 249,209 from 207,691.
Passenger revenue per available seat mile ("RASM") decreased to $0.163 from
$0.196 in the previous year's second quarter. Mesaba's average load factor
was 57.7% in the current quarter compared to 57.4% during the same period a
year ago. The improvement in traffic is attributable to the introduction
of 11 RJ85 and 13 Saab 340 aircraft when compared to one year ago offset
by the effect of a 18-day suspension of operations as a result of the
Northwest Airlines pilot strike.
Operating Costs Per Three months ended September 30,
Available Seat Mile (Unit Cost) 1998 1997
- - - ----------------------------------- ------------ ------------
Wages and benefits 4.3 CENTS 4.6 CENTS
Aircraft fuel costs 1.3 1.7
Aircraft maintenance costs 2.9 2.7
Aircraft rents 3.9 3.5
Wet lease expense - 1.3
Landing fees 0.3 0.4
Insurance and taxes 0.5 0.5
Depreciation and amortization 0.5 0.4
Administrative and other costs 2.5 2.2
------------ ------------
Total 16.2 CENTS 17.3 CENTS
Three months ended September 30,
Operating statistics 1998 1997
- - - ----------------------------------- ------------ ------------
Revenue passengers carried 962,800 890,500
Revenue passenger miles (000) 249,209 207,691
Available seat miles (000) 432,216 361,957
Passenger load factor 57.7% 57.4%
Passenger revenue per available seat mile $0.163 $0.196
Departures 51,705 52,728
Aircraft in service 94 70
<PAGE>
OPERATING EXPENSES. Total operating expenses increased 11.3% to $69,883
from $62,787 in the prior year's second quarter. Mesaba's unit cost
decreased 6.8% to $0.162 from $0.173 as a result of a 19.4% increase in
available seat miles to 432,216 in the second quarter of fiscal 1999 from
361,957 in the year earlier quarter. The increase in ASMs was accomplished
by the acquisition of 11 RJ85 and 31 Saab 340 aircraft offset by the
retirement of 18 Dash 8 aircraft since September 30, 1997.
Wages and benefits increased 13.6% to $18,709 in the second quarter of
fiscal 1999 from $16,476 in the second quarter of fiscal 1998. 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 higher costs of flight crews due to a 211.7%
increase in block hours to support the RJ85 expansion program. Mesaba also
experienced an increase in wages and benefits costs paid to support
personnel due to the increase in operating activity.
Fuel costs decreased 8.3% to $5,568 in this year's second quarter compared
to $6,073 in last year's second quarter. The change is primarily
attributable to a decrease in consumption as a result of fewer block hours
flown when compared to one year ago; as a result of the suspension of
operations due to the pilot strike at Northwest. Provisions of the
Airlink Agreement with Northwest protect Mesaba from changes in fuel
prices. 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 for fuel decreased 23.5% to 1.3 cents from 1.7 cents. Mesaba is not
required to provide fuel for the jet operation.
Direct maintenance expense, excluding wages and benefits, increased 25.2%
to $12,418 in the second quarter of fiscal 1999 from $9,922 in the second
quarter of fiscal 1998. This increase was primarily attributable to the
addition of 31 Saab 340 and 11 RJ85 aircraft to the fleet. The additional
maintenance costs for the Saab 340 and RJ85 aircraft were partially offset
by lower maintenance costs related to the phase-out of the Dash 8 fleet
resulting from the return of 18 aircraft to lessors. However, unit cost
for direct maintenance increased 7.4% to 2.9 cents from 2.7 cents due to
lost capacity caused by the suspension of service during the pilot strike
at Northwest Airlines.
Aircraft rents increased 33.3% to $16,739 in the second quarter of fiscal
1999 from $12,562 in the second quarter of fiscal 1998. This increase is
primarily attributable to the addition of 31 Saab 340 and 11 RJ85 aircraft
while returning 18 Dash 8 aircraft to lessors. Mesaba has taken delivery
of five Saab 340 and three RJ85 aircraft during the current quarter. Due
to the lost capacity caused by the suspension of operations during the
Northwest pilots strike, unit cost for aircraft rents increased 11.4% to
3.9 cents from 3.5 cents.
Mesaba had no wet leased aircraft in the current year.
Total landing fees decreased 7.8% to $1,439 in the second quarter of fiscal
1999 compared to $1,561 for the second quarter of fiscal 1998. The
decrease is attributable to a 0.6% decrease in departures caused by the
suspension of operations caused by the pilot strike at Northwest. Mesaba
also experienced a 5.7% decrease in the average gross landing weight due
to the mix of the aircraft in the fleet and a 2.4% decrease in the overall
effective landing fee rate. Unit cost for landing fees decreased 25.0% to
0.3 cents from 0.4 cents. Provisions of the Jet Agreement provide that
Mesaba is not required to pay for landing fees for the jet operation.
<PAGE>
Insurance and taxes increased 18.8% to $2,077 in the second quarter of
fiscal 1999 compared to $1,748 for the second quarter of fiscal 1998.
This is due primarily to an increase in passenger liability insurance
associated with increased passenger volume and increased hull values
associated with the increase in the number of aircraft in the fleet 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 for insurance and taxes remained unchanged at 0.5
cents.
Depreciation and amortization increased 45.5% to $2,358 in the second
quarter of fiscal 1999 compared to $1,621 in the second quarter of fiscal
1998. The higher level of depreciation and amortization resulted from the
acquisition of spare parts to support the Saab 340 and RJ fleet. The
Company paid contract rights fees in the form of stock purchase warrants
issued to Northwest in connection with amendments to the Jet Agreement,
which increased the number of aircraft to be flown by Mesaba from 12 to
36. These fees are being amortized on a straight-line basis over the
remaining term of the Jet Agreement. Due to the lost capacity caused by
the Northwest strike, unit cost for depreciation and amortization
increased 25.0% to 0.5 cents from 0.4 cents.
Administrative and other costs increased 29.2% to $10,575 in the second
quarter of fiscal 1999 compared to $8,182 in the second quarter of fiscal
1998. This increase is primarily attributable to higher pilot training and
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
lost capacity caused by the pilot strike at Northwest, unit cost for
administrative and other costs increased 13.6% to 2.5 cents from 2.2
cents. Mesaba is generally not required to provide airport and passenger
related expenses for the jet operation.
OPERATING INCOME. Operating income totaled $1,806 in the current period, a
decrease of 80.3% from $9,155 a year ago. Mesaba's operating margin
decreased to 2.5% from 12.7% in the prior year's second quarter.
NONOPERATING INCOME. Nonoperating income increased to $1,604 in the
current quarter from $425 in the prior year's second quarter as a result
of higher levels of interest income and a one-time gain on the sale of
surplus aircraft parts.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 39.0% in
the second quarter of fiscal 1999 and 40.0% in the comparable quarter in
fiscal 1998. The lower effective tax rate is due to lower levels of
nondeductible expenses in the current period.
<PAGE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998 and 1997
(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 $8,113 or $0.37 per
share for the six months ended September 30, 1998, compared to $9,721 or
$0.48 per share in the same period of fiscal 1998. Weighted average shares
outstanding increased to 21,697 from 20,216. On August 29, 1998 the Company
temporarily suspended operations as a result of the pilot strike at
Northwest Airlines. The Company resumed service on September 16, 1998. The
suspension of operations had a material adverse affect on the results of
operations for the current reporting period.
OPERATING REVENUES. Total operating revenues increased 20.4% in the first
half of fiscal 1999 to $152,158 from $126,366 in the year earlier period,
and revenue passenger miles increased 46.1% to 515,977 from 353,176.
Passenger revenue per available seat mile ("RASM") decreased to $0.168 from
$0.202 in the year earlier period. Mesaba's average load factor was 57.0% in
the current period compared to 56.4% during the same period a year ago. The
improvement in traffic is attributable to the introduction of 11 RJ85
aircraft and a complete period of expanded activity at the Minneapolis/St.
Paul airport as well as overall increases in passenger travel within the
industry offset by the 18-day suspension of service as a result of the pilot
strike at Northwest Airlines.
Operating Costs Per Six months ended September 30,
Available Seat Mile (Unit Cost) 1998 1997
- - - ----------------------------------- ------------ ------------
Wages and benefits 4.2 CENTS 4.9 CENTS
Aircraft fuel costs 1.4 1.9
Aircraft maintenance costs 2.8 2.8
Aircraft rents 3.6 3.5
Wet lease expense - 0.7
Landing fees 0.4 0.5
Insurance and taxes 0.5 0.5
Depreciation and amortization 0.5 0.4
Administrative and other costs 2.2 2.5
------------ ------------
Total 15.5 CENTS 17.7 CENTS
Three months ended September 30,
Operating statistics 1998 1997
- - - ----------------------------------- ------------ ------------
Revenue passengers carried 2,002,800 1,513,800
Revenue passenger miles (000) 515,977 353,176
Available seat miles (000) 905,160 625,808
Passenger load factor 57.0% 56.4%
Passenger revenue per available seat mile $0.168 $0.202
Departures 110,054 92,161
Aircraft in service 94 70
<PAGE>
OPERATING EXPENSES. Total operating expenses increased 26.0% to $139,888
from $111,002 in the prior year's first half. Mesaba's unit cost
decreased 12.4% to $0.155 from $0.177 as a result of a 44.6% increase in
available seat miles to 905,160 in the first half of fiscal 1999 from
625,808 in the year earlier period. The increase in ASMs was primarily
accomplished by the acquisition of 11 RJ85 and 24 Saab 340 aircraft offset
by the retirement of 18 Dash 8 aircraft when compared to one year ago.
Wages and benefits increased 24.4% to $37,936 in the first half of fiscal
1999 from $30,505 in the first half of fiscal 1998. The majority of the
increase is a result of higher cost of flight crews due to a 17.0%
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 20.2% 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 14.3% to 4.2 cents from 4.9 cents.
Fuel costs increased 7.8% to $12,506 in this year's first half-compared to
$11,600 in last year's first half. The increase is primarily attributable
to an increased consumption due to additional block hours flown. Provisions
of the Airlink Agreement with Northwest protect Mesaba from fluctuations in
fuel prices. The actual cost of fuel, including taxes and pumping fees, was
83.5 cents per gallon both in the current period and a year ago. Unit cost
for fuel decreased 26.3% to 1.4 cents from 1.9 cents. Mesaba is not
required to provide fuel for the jet operation.
Direct maintenance expense, excluding wages and benefits, increased 42.7%
to $24,958 in the first half of fiscal 1999 from $17,489 in the first half
of fiscal 1998. This increase was primarily attributable to the addition
of 31 Saab 340 and 11 RJ85 aircraft to the fleet. The additional
maintenance costs for the Saab 340 and RJ85 aircraft were partially offset
by lower maintenance costs resulting from the return of 18 Dash 8 aircraft
to lessors. However, unit costs for direct maintenance remained
unchanged.
Aircraft rents increased 46.8% to $32,563 in the first half of fiscal 1999
from $22,187 in the first half of fiscal 1998. This increase is primarily
attributable to the addition of 31 Saab 340 and 11 RJ85 aircraft while
returning 18 Dash 8 aircraft to lessors. Mesaba has taken delivery of 16
Saab 340 and seven RJ85 aircraft during the current six month period.
Due to the lost capacity caused by the Northwest strike, unit cost for
aircraft rents increased 2.9% to 3.6 cents from 3.5 cents.
Mesaba had no wet leased aircraft in the current period.
Total landing fees increased 9.2% to $3,255 in the first half of fiscal
1999 compared to $2,982 for the first half of fiscal 1998. The increase
is attributable to a 11.7% increase in the average gross landing weight
due to increased turbo-prop activity offset by a 2.4% decrease in the
overall effective landing fee rate. Unit cost for landing fees decreased
20.0% to 0.4 cents from 0.5 cents. Provisions of the Jet Agreement with
Northwest provide that Mesaba is not required to pay landing fees for the
jet operation.
Insurance and taxes increased 34.2% to $4,120 in the first half of fiscal
1999 compared to $3,070 for the first half of fiscal 1998. 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 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 for insurance and
taxes remained unchanged at 0.5 cents.
<PAGE>
Depreciation and amortization increased 56.2% to $4,332 in the first half
of fiscal 1999 compared to $2,774 in the first half of fiscal 1998. 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. Due to the lost capacity caused by the Northwest strike, unit
cost for depreciation and amortization increased 25.0% to 0.5 cents from
0.4 cents.
Administrative and other costs increased 28.3% to $20,218 in the first half
of fiscal 1999 compared to $15,753 in the first half of fiscal 1998. This
increase is primarily attributable to higher pilot training and 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
for administrative and other costs decreased 12.0% to 2.2 cents from 2.5
cents.
OPERATING INCOME. Operating income totaled $12,270 in the current period,
a decrease of 20.1% from $15,364 a year ago. Mesaba's operating margin
decreased to 8.1% from 12.2% in the prior year's first half.
NONOPERATING. Nonoperating income increased to $2,342 in the current
period from $796 in the prior year's first half as a result of higher
levels of interest income and the one-time gain on the sale of surplus
aircraft parts.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 39.0% in
the first half of fiscal 1999 and 39.8% in fiscal 1998. 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 $57,076 with a current ratio of
2.2 at September 30, 1998 compared to $51,692 and 2.2 at March 31, 1998.
Cash and cash equivalents increased by $6,872 to $73,246 at September 30,
1998. Net cash flows provided by operating activities totaled $16,957 in
the first half of 1999 compared to $16,120 in the first half of fiscal 1998.
Net cash flows used for investing activities amounted to $12,471 during the
six months ended September 30, 1998 compared to $7,640 in the same period
last year. Net cash flows used for financing activities through September
30, 1998 totaled $2,206 compared to $168 in the same period last year.
Long-term obligations, net of current maturities, totaled $4,559 at
September 30, 1998 compared to $4,751 at March 31, 1998. The ratio of
long-term debt to stockholders' equity decreased to .05 at September 30,
1998 from .06 at March 31, 1998.
As of October, 1998, Mesaba's fleet consisted of 94 aircraft covered under
operating leases with remaining terms of two months to 17.5 years and an
aggregate monthly lease payments of approximately $6.3 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 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. Northwest has agreed to lease a total of 36 RJ85 aircraft to
Mesaba under similar terms.
The Company has historically relied upon cash reserves, internally
generated funds and borrowings to support its working capital
requirements. The Company has an unsecured agreement with a bank that
provides for borrowings of up to $15,000 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 1999.
The Company has implemented a Year 2000 compliance program designed to
ensure that the Company's computer systems and applications will function
properly beyond 1999. The Company believes that it has allocated adequate
resources for this purpose and expects its Year 2000 date conversion
program to be completed on a timely basis. The Company does not expect to
incur significant costs related to enhancements necessary to prepare its
systems for the Year 2000. The Company is in the process of assessing
Year 2000 compliance by significant vendors. This assessment is incomplete
and the Company is working cooperatively with third parties having systems
upon which the Company must rely, including: Federal Aviation
Administration Air Traffic Control, Saab Aircraft, British Aerospace and
Northwest Airlines reservation, passenger check-in and ticketing systems.
The Company can give no assurances that the computer systems of third
parties will be year 2000 compliant on a timely basis. The Company's
business, financial condition and results of operations could be materially
affected by the failure of its systems or those operated
by others.
<PAGE>
Part II.
Item 1. LEGAL PROCEEDINGS
On August 29, 1998, Mesaba announced that it had temporarily suspended
flight operations as a result of the strike against Northwest Airlines by
its pilots. On September 4, 1998, the Department of Transportation
("DOT") issued an order directing Mesaba to resume service to certain
communities by September 8, 1998. Mesaba then entered discussion with the
DOT regarding a plan to begin such service. On September 9, 1998, the
U.S. Department of Justice and DOT filed a lawsuit against Mesaba in U.S.
District Court in Minneapolis seeking to enforce DOT's order. Mesaba then
filed a petition in the U.S. Court of Appeals for the District of Columbia
seeking to have the DOT's order set aside.
Mesaba began service to the communities required by DOT's order on
September 16, 1998, following settlement of the strike against Northwest.
As a result, the DOT vacated its order and voluntarily dismissed the
lawsuit on September 17, 1998.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company filed with the Securities and Exchange Commission a
definitive proxy statement dated July 15, 1998 in connection with its
annual meeting of shareholders held on August 19, 1998. Both persons
nominated by management for election as Class One directors, as discussed
in the definitive proxy statement, were elected. Shareholders approved an
amendment to the Company's Articles of Incorporation to increase the
number of authorized shares of Common Stock from 25,000,000 to 60,000,000,
casting 16,732,868 votes in favor of the amendment, 1,380,200 against the
amendment and 26,644 abstentions. There were no broker nonvotes. In
addition, shareholders ratified the appointment of Arthur Andersen LLP as
the Company's independent auditors for the fiscal year ending March 31,
1999, casting 18,104,305 votes in favor of the ratification, 6,159 votes
against the ratification and 29,248 abstentions. There were no broker
nonvotes.
Item 5. OTHER INFORMATION
Mesaba is in contract negotiations with the Aircraft Mechanics
Fraternal Association ("AMFA"), the mechanics union. If contract talks are
unsuccessful, the National Mediation Board may declare an impasse in
contract negotiations and may set a mandatory 30-day cooling off period.
At the expiration of the 30-day cooling off period, the union would be
allowed to implement "self-help" measures up to and including a work
stoppage against the carrier. The company would also be allowed to
implement "self-help' measures which might include outsourcing maintenance
activities currently handled by the carrier and by imposing the terms
of the final contract offer. The Company expects that a curtailment
of operations by Mesaba as a result of any strike could have a material
adverse effect on the Company's business.
Northwest Airlines is also in contract negotiations with certain of its
labor groups. If contract talks are unsuccessful, a strike against
Northwest could occur if the National Mediation Board declares an impasse
in contract negotiations and a mandatory 30-day cooling off period
expires.
The Company expects that a curtailment or suspension of operations by
Northwest Airlines would have a material adverse effect on the Company's
business. Most of Mesaba's passengers are booked on connecting flights
with Northwest Airlines. Northwest also provides Mesaba with computerized
reservation services and with ticketing, check-in, baggage and freight
handling services at certain airports. In the event of a strike by
Northwest's labor, Northwest is not required to perform under the Airlink
or Jet agreements. Mesaba believes that it would not receive payments or
services from Northwest for the duration of a strike. Mesaba is likely to
experience substantially reduced revenues during any period in which
Northwest Airlines does not conduct normal flight operations.
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits
3A. Articles of Amendment dated August 31, 1998 to the
Company's Articles of Incorporation.
b.) The Registrant filed a Form 8-K dated August 29,
1998 during the quarter ended September 30, 1998,
relating to the suspension of operations as a
result of the pilot strike at Northwest Airlines.
<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: November 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)
<PAGE>
EXHIBIT INDEX
EXHIBIT NO EXHIBIT
3A. Articles of Amendment dated August 31, 1998 to the Company's
Articles of Incorporation.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END>MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 73,246
<SECURITIES> 0
<RECEIVABLES> 12,363
<ALLOWANCES> 0
<INVENTORY> 10,153
<CURRENT-ASSETS> 104,198
<PP&E> 61,763
<DEPRECIATION> 19,852
<TOTAL-ASSETS> 160,790
<CURRENT-LIABILITIES> 47,122
<BONDS> 0
0
0
<COMMON> 198
<OTHER-SE> 94,496
<TOTAL-LIABILITY-AND-EQUITY> 160,790
<SALES> 152,158
<TOTAL-REVENUES> 152,158
<CGS> 139,888
<TOTAL-COSTS> 139,888
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 228
<INCOME-PRETAX> 14,612
<INCOME-TAX> 5,699
<INCOME-CONTINUING> 8,913
<DISCONTINUED> 0
<EXTRAORDINARY> 800
<CHANGES> 0
<NET-INCOME> 8,113
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.37
</TABLE>
ARTICLES OF AMENDMENT
TO
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
MESABA HOLDINGS, INC.
Mesaba Holdings, Inc., a corporation organized and existing
under the laws of the State of Minnesota (herein referred to as
the "corporation"), in accordance with the provisions of
Minnesota Statutes, Section 302A.139, hereby certifies as
follows:
1. The name of the corporation is Mesaba Holdings, Inc.
2. Section 3.01 of Article III of the Amended and Restated
Articles of Incorporation of the corporation is hereby amended in
its entirety to read as follows:
3.01 The aggregate number of shares of
Common Stock which this corporation shall
have the authority to issue is sixty million
(60,000,000) shares of Common Stock each with
$.01 par value. Such shares shall be
designated as this corporation's "Common
Stock."
3. The amendment of the Amended and Restated Articles of
Incorporation of the corporation has been duly adopted by the
Board of Directors and the shareholders pursuant to the Minnesota
Business Corporation Act, Minnesota Statutes, Chapter 302A.
IN WITNESS WHEREOF, these Articles of Amendment of Mesaba
Holdings, Inc. are hereby executed on behalf of the corporation
this 31st day of August 1998.
MESABA HOLDINGS, INC.
By /s/ Bryan K. Bedford
_________________________
Bryan K. Bedford
President and Chief
Executive Officer
