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, 1999
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 10, 1999
------------------------ -----------------------------------
Common Stock
Par value $.01 per share 20,222,141
<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 contract
negotiations between the Company and the Association of Flight Attendants
and Transport Workers Union.
<PAGE>
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
MESABA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
ASSETS
------
September 30, March 31,
1999 1999
(Unaudited)
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 90,058 $ 83,152
Accounts receivable, net 17,308 15,905
Inventories 5,428 6,564
Prepaid expenses and deposits 4,344 3,719
Deferred tax asset 8,014 8,014
------------ ------------
Total current assets 125,152 117,354
PROPERTY AND EQUIPMENT:
Facilities under capital lease 9,147 9,147
Rotables and other spare parts 51,811 41,178
Other property and equipment 25,009 21,635
Accumulated depreciation and amortization (30,601) (24,765)
------------ ------------
Net property and equipment 55,366 47,195
OTHER ASSETS AND DEFERRED COSTS 13,752 14,674
TOTAL ASSETS $194,270 $179,223
============ =============
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,
1999 1999
(Unaudited)
------------ ------------
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 410 $ 393
Accounts payable 16,550 20,857
Accrued liabilities
Payroll 7,823 8,786
Maintenance 12,329 10,415
Other 9,731 8,223
------------ ------------
Total current liabilities 46,843 48,674
LONG-TERM OBLIGATIONS, net of current 4,149 4,359
maturities
DEFERRED CREDITS AND OTHER LIABILITIES 15,399 16,951
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 60,000,000
shares authorized, 20,222,141 and 19,823,579 202 199
shares issued and outstanding, respectively
Paid-in capital 47,256 45,013
Warrants 16,500 16,500
Retained earnings 63,921 47,527
------------ ------------
Total shareholders' equity 127,879 109,239
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $194,270 $ 179,223
============ =============
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,
1999 1998 1999 1998
--------- --------- --------- ---------
OPERATING REVENUES:
Passenger $ 101,314 $70,461 $200,103 $150,225
Other 1,189 1,228 2,215 1,933
--------- --------- --------- ---------
Total operating revenues 102,503 71,689 202,318 152,158
--------- --------- --------- ---------
OPERATING EXPENSES:
Wages and benefits 25,166 18,709 48,574 37,936
Aircraft fuel costs 6,923 5,568 13,594 12,506
Aircraft maintenance costs 16,669 12,418 32,982 24,958
Aircraft rents 22,359 16,739 43,406 32,563
Landing fees 1,907 1,439 3,802 3,255
Insurance and taxes 1,374 2,077 2,706 4,120
Depreciation and amortization 3,542 2,358 6,809 4,332
Administrative and other costs 13,339 10,575 25,193 20,218
--------- --------- --------- ---------
Total operating expenses 91,279 69,883 177,066 139,888
--------- --------- --------- ---------
Operating income 11,224 1,806 25,252 12,270
NONOPERATING INCOME (EXPENSE):
Interest expense (102) (116) (207) (228)
Other, net 878 1,720 1,835 2,570
--------- --------- --------- ---------
Other income, net 776 1,604 1,628 2,342
--------- --------- --------- ---------
Income before income taxes 12,000 3,410 26,880 14,612
PROVISION FOR INCOME TAXES 4,682 1,330 10,486 5,699
--------- --------- --------- ---------
NET INCOME BEFORE CHANGE IN
ACCOUNTING PRINCIPLE 7,318 2,080 16,394 8,913
PRE-OPERATING COST WRITE OFF,
NET OF TAX - - - 800
--------- --------- --------- ---------
NET INCOME $ 7,318 $ 2,080 $ 16,394 $ 8,113
========= ========= ========= =========
NET INCOME PER SHARE:
Earnings per share before
accounting change - Basic $ 0.36 $ 0.10 $ 0.82 $ 0.45
========= ========= ========= =========
Earnings per share - Basic $ 0.36 $ 0.10 $ 0.82 $ 0.41
========= ========= ========= =========
Earnings per share before
accounting change - Diluted $ 0.35 $ 0.10 $ 0.77 $ 0.41
========= ========= ========= =========
Earnings per share -
Diluted $ 0.35 $ 0.10 $ 0.77 $ 0.37
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 20,221 19,824 20,095 19,720
========= ========= ========= =========
Diluted 21,119 21,638 21,193 21,697
========= ========= ========= =========
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,
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 16,394 $ 8,113
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,809 4,332
Amortization of deferred credits (1,552) (552)
Deferred income tax benefit - (945)
Changes in current operating items:
Accounts receivable, net (1,403) 2,524
Inventories 1,136 (3,258)
Prepaid expenses and deposits (625) 999
Accounts payable and accrued liabilities (1,899) 5,744
------------ ------------
Net cash provided by operating activities 18,860 16,957
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (14,007) (12,494)
Other - 23
------------ ------------
Net cash used for investing activities (14,007) (12,471)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 2,246 2,433
Repayment of long-term obligations (193) (227)
------------ ------------
Net cash provided by financing activities 2,053 2,206
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,906 6,692
CASH AND CASH EQUIVALENTS:
Beginning of period 83,152 66,554
------------ ------------
End of period $ 90,058 $ 73,246
============ ============
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 193 $ 228
============ ============
Income taxes $ 9,997 $ 6,287
============ ============
Noncash investing activities included the following:
Rotable and spare parts inventory
acquired with integration funds - $ 2,231
============ ============
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, 1999, 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
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 84 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, 1999, Mesaba had taken delivery of 28 RJ85 aircraft and currently
serves 45 cities. The aircraft are subleased from Northwest and are
operated as Northwest Jet Airlink currently from the Minneapolis/St. Paul,
Detroit and Memphis hubs.
Under the agreements, all flights that Mesaba currently operates are
designated as Northwest flights using Northwest's designator code in all
computer reservations systems, including the Official Airline Guide, with
an asterisk and a footnote indicating that Mesaba is the carrier providing
the service. In addition, flight schedules of Mesaba and Northwest are
closely coordinated to facilitate interline connections, and Mesaba's
passenger gate facilities at the Minneapolis/St. Paul International
Airport, Detroit Metropolitan Airport and Memphis International Airport
are integrated with Northwest's facilities in the main terminal buildings,
rather than at the more remote commuter air terminals.
<PAGE>
The agreement with Northwest also permits Mesaba to offer its passengers
fares between the cities serviced by Mesaba and all of the destinations
served by Northwest as well as participation in Northwest's frequent flyer
program. Mesaba's jet aircraft are painted in the colors of Northwest
Airlines and the jet-prop aircraft are painted in a distinctive "Northwest
Airlink" configuration, with a Northwest Airlines logo in addition to
Mesaba's name.
Mesaba, through the agreements, receives ticketing and certain check-in,
baggage, freight and aircraft handling services from Northwest at certain
airports. In addition, Mesaba receives its computerized reservations
services from Northwest. Northwest also performs all marketing schedules,
yield management and pricing services for Mesaba's flights.
Mesaba believes that its competitive position is enhanced as a result of
its marketing and other agreements with Northwest, particularly through
the ability of Mesaba to offer its passengers coordinated flight schedules
to the destinations served by Northwest. Loss of Mesaba's affiliation
with Northwest or Northwest's failure to materially perform under the
Airlink or Jet Agreement for any reason would have a material adverse
effect on the Company's operations and financial position.
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
effect on the results of operations for the prior year's reporting period.
It did not have a material adverse effect on the liquidity or capital
resources of the Company.
3. Earnings Per Share
The Company accounts for earnings per share in accordance with Statement of
Financial Accounting Standards No. 128.
The table below sets forth the computation of earnings per common share.
Quarter Ended Six Months Ended
------------- ----------------
September 30,
-------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net Income $ 7,318 $ 2,080 $ 16,394 $ 8,113
For Earnings Per Common Share -
Basic: 20,221 19,824 20,095 19,720
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 138 506 272 633
Computed shares outstanding under
warrants issued utilizing the
treasury stock method 760 1,308 826 1,344
--------- --------- --------- ---------
For earnings per Common Share -
Diluted:
Weighted average common shares and
common share equivalents outstanding 21,119 21,638 21,193 21,697
========= ========= ========= =========
Earnings Per Share - Basic $ 0.36 $ 0.10 $ 0.82 $ 0.41
========= ========= ========= =========
Earnings Per Share - Diluted $ 0.35 $ 0.10 $ 0.77 $ 0.37
========= ========= ========= =========
<PAGE>
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.
<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 1999 AND 1998
(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 $7,318 or $0.35
diluted earnings per share for the three months ended September 30, 1999,
compared to $2,080 or $0.10 diluted earnings per share in the same period
of fiscal 1999. Weighted average common shares and common share
equivalents outstanding decreased to 20,119 from 21,638. 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 effect on
the results of operations for the prior year's reporting period.
OPERATING REVENUES. Total operating revenues increased 43.0% in the second
quarter of fiscal 2000 to $102,503 from $71,689 in the year earlier
quarter, and revenue passenger miles increased 64.3% to 409,559 from
249,209. Passenger revenue per available seat mile ("RASM") decreased to
$0.150 from $0.163 in the previous year's second quarter. Mesaba's average
load factor was 60.3% in the current quarter compared to 57.7% during the
same period a year ago. The improvement in traffic is attributable to the
introduction of 11 RJ85 aircraft when compared to one year ago as well as
the effect of the 18-day suspension of operations during September 1998 as a
result of the Northwest Airlines pilot strike.
Operating Costs Per Three months ended September 30,
Available Seat Mile (Unit Cost) 1999 1998
- --------------------------------------------------------------------------
Wages and benefits 3.7 CENTS 4.3 CENTS
Aircraft fuel costs 1.0 1.3
Aircraft maintenance costs 2.5 2.9
Aircraft rents 3.3 3.9
Landing fees 0.3 0.3
Insurance and taxes 0.2 0.5
Depreciation and amortization 0.5 0.5
Administrative and other costs 2.0 2.5
--------- ---------
Total 13.5 CENTS 16.2 CENTS
Three months ended September 30,
Operating statistics 1999 1998
- --------------------------------------------------------------------------
Revenue passengers carried 1,508,900 962,800
Revenue passenger miles (000) 409,559 249,209
Available seat miles (000) 679,277 432,216
Passenger load factor 60.3% 57.7%
Passenger revenue per available seat mile $0.150 $0.163
Departures 70,142 51,705
Aircraft in service 101 94
OPERATING EXPENSES. Total operating expenses increased 30.6% to $91,279
from $69,883 in the prior year's second quarter. Mesaba's unit cost
decreased 16.7% to $0.135 from $0.162 as a result of a 57.2% increase in
available seat miles to 679,277 in the second quarter of fiscal 2000 from
432,216 in the year earlier quarter. The increase in ASMs was accomplished
by the acquisition of 11 RJ85 and one Saab 340 aircraft offset by the
retirement of five Dash 8 aircraft since September 30, 1998.
Wages and benefits increased 34.5% to $25,166 in the second quarter of
fiscal 2000 from $18,709 in the second quarter of fiscal 1999. 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 125.3%
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. Unit cost for wages and
benefits decreased 14.0% to 3.7 cents from 4.3 cents.
Fuel costs increased 24.3% to $6,923 in this year's second quarter compared
to $5,568 in last year's second quarter. The change is primarily
attributable to a increase in consumption as a result of more block hours
flown when compared to one year ago. 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
23.1% to 1.0 cents from 1.3 cents. Mesaba is not required to provide fuel
for the jet operation.
Direct maintenance expense, excluding wages and benefits, increased 34.2%
to $16,669 in the second quarter of fiscal 2000 from $12,418 in the second
quarter of fiscal 1999. This increase was primarily attributable to the
addition of one 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 five aircraft to lessors.
However, unit cost for direct maintenance decreased 13.8% to 2.5 cents
from 2.9 cents.
Aircraft rents increased 33.6% to $22,359 in the second quarter of fiscal
2000 from $16,739 in the second quarter of fiscal 1999. This increase is
primarily attributable to the addition of one Saab 340 and 11 RJ85
aircraft while returning five Dash 8 aircraft to lessors. Unit cost for
aircraft rents decreased 15.4% to 3.3 cents from 3.9 cents.
Total landing fees increased 32.5% to $1,907 in the second quarter of
fiscal 2000 compared to $1,439 for the second quarter of fiscal 1999. The
increase is attributable to a 23.1% increase in departures. Mesaba also
experienced a 21.0% increase in the average gross landing weight due to
this increased activity and a 9.1% increase in the overall effective
landing fee rate. Unit cost for landing fees remained unchanged at 0.3
cents. Provisions of the Jet Agreement provide that Mesaba is not
required to pay for landing fees for the jet operation.
Insurance and taxes decreased 33.8% to $1,374 in the second quarter of
fiscal 2000 compared to $2,077 for the second quarter of fiscal 1999.
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 decreased 60.0% to 0.2 cents
from 0.5 cents.
Depreciation and amortization increased 50.2% to $3,542 in the second
quarter of fiscal 2000 compared to $2,358 in the second quarter of fiscal
1999. 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. Unit cost for depreciation and
amortization remained unchanged at 0.5 cents.
Administrative and other costs increased 26.1% to $13,339 in the second
quarter of fiscal 2000 compared to $10,575 in the second quarter of fiscal
1999. 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. Unit cost for
administrative and other costs decreased 20.0% to 2.0 cents from 2.5
cents. Mesaba is generally not required to provide airport and passenger
related expenses for the jet operation.
OPERATING INCOME. Operating income totaled $11,224 in the current period,
an increase of 521.5% from 1,806 a year ago. Mesaba's operating margin
increased to 10.9% from 2.5% in the prior year's second quarter.
NONOPERATING INCOME. Nonoperating income decreased to $776 in the current
quarter from $1,604 in the prior year's second quarter as a result of higher
levels of interest income offset by a one-time gain on the sale of surplus
aircraft parts included in the previous year.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 39.0% in
the second quarter of fiscal 2000 and fiscal 1999.
<PAGE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 and 1998
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 $16,394 or $0.77 per
share for the six months ended September 30, 1999, compared to $8,113 or
$0.37 per share in the same period of fiscal 1999. Weighted average shares
outstanding decreased to 21,193 from 21,697. 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 effect on the results of
operations for the previous year's reporting period.
OPERATING REVENUES. Total operating revenues increased 33.0% in the first
half of fiscal 2000 to $202,318 from $152,158 in the year earlier period,
and revenue passenger miles increased 49.7% to 772,621 from 515,977.
Passenger revenue per available seat mile (_RASM_) decreased to $0.154 from
$0.166 in the year earlier period. Mesaba's average load factor was 59.4% in
the current period compared to 57.0% during the same period a year ago. The
improvement in traffic is attributable to the introduction of 11 RJ85
aircraft as well as the effect of 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) 1999 1998
- --------------------------------------------------------------------------
Wages and benefits 3.7 CENTS 4.2 CENTS
Aircraft fuel costs 1.1 1.4
Aircraft maintenance costs 2.5 2.7
Aircraft rents 3.3 3.6
Landing fees 0.3 0.4
Insurance and taxes 0.2 0.5
Depreciation and amortization 0.5 0.5
Administrative and other costs 2.0 2.2
--------- ---------
Total 13.6 CENTS 15.5 CENTS
Six months ended September 30,
Operating statistics 1999 1998
- --------------------------------------------------------------------------
Revenue passengers carried 2,906,900 2,002,800
Revenue passenger miles (000) 772,621 515,977
Available seat miles (000) 1,301,071 905,160
Passenger load factor 59.4% 57.0%
Passenger revenue per available seat mile $0.154 $0.166
Departures 137,836 110,054
Aircraft in service 101 94
OPERATING EXPENSES. Total operating expenses increased 26.6% to $177,066
from $139,888 in the prior year's first half. Mesaba's unit cost
decreased 12.3% to $0.136 from $0.155 as a result of a 43.7% increase in
available seat miles to 1,301,071 in the first half of fiscal 2000 from
905,160 in the year earlier period. The increase in ASMs was primarily
accomplished by the acquisition of 11 RJ85 and one Saab 340 aircraft
offset by the retirement of five Dash 8 aircraft when compared to one year
ago as well as the effect of the 18-day suspension of service as a result
of the pilots strike at Northwest Airlines.
Wages and benefits increased 28.0% to $48,574 in the first half of fiscal
2000 from $37,936 in the first half of fiscal 1999. The majority of the
increase is a result of higher cost of flight crews due to a 41.8%
increase in block hours and the addition of flight crews to support the
introduction of the RJ85. Mesaba also experienced an increase in wage and
benefit costs paid to support personnel due to a 23.1% increase in
scheduled turbo-prop 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 11.9% to 3.7 cents from 4.2
cents.
Fuel costs increased 8.7% to $13,594 in this year's first half-compared to
$12,506 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 21.4% to 1.1 cents from 1.4 cents. Mesaba is not
required to provide fuel for the jet operation.
Direct maintenance expense, excluding wages and benefits, increased 32.2%
to $32,982 in the first half of fiscal 2000 from $24,958 in the first half
of fiscal 1999. This increase was primarily attributable to the addition
of one 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 five Dash 8
aircraft to lessors. However, unit costs for direct maintenance decreased
7.4% to 2.5 cents from 2.7 cents.
Aircraft rents increased 33.3% to $43,406 in the first half of fiscal 2000
from $32,563 in the first half of fiscal 1999. This increase is primarily
attributable to the addition of one Saab 340 and 11 RJ85 aircraft while
returning five Dash 8 aircraft to lessors. Mesaba has taken delivery of
five RJ85 aircraft during the current six month period. Unit cost for
aircraft rents decreased 8.3% to 3.3 cents from 3.6 cents.
Total landing fees increased 16.8% to $3,802 in the first half of fiscal
2000 compared to $3,255 for the first half of fiscal 1999. The increase
is attributable to a 10.9% increase in the average gross landing weight
due to increased turbo-prop activity in addition to a 5.2% increase 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 with
Northwest provide that Mesaba is not required to pay landing fees for the
jet operation.
Insurance and taxes decreased 34.3% to $2,706 in the first half of fiscal
2000 compared to $4,120 for the first half of fiscal 1999. 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 turbo-prop equipment, unit cost for insurance and
taxes declined 60% to 0.2 cents from 0.5 cents.
Depreciation and amortization increased 57.2% to $6,809 in the first half
of fiscal 2000 compared to $4,332 in the first half of fiscal 1999. 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. Unit cost for depreciation and amortization remained unchanged
at 0.5 cents.
Administrative and other costs increased 24.6% to $25,193 in the first half
of fiscal 2000 compared to $20,218 in the first half of fiscal 1999. 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 9.1% to 2.0 cents from 2.2
cents.
OPERATING INCOME. Operating income totaled $25,252 in the current period,
a increase of 105.8% from $12,270 a year ago. Mesaba's operating margin
increased to 12.5% from 8.1% in the prior year's first half.
NONOPERATING INCOME. Nonoperating income decreased to $1,628 in the
current period from $2,342 in the prior year's first half as a result of
higher levels of interest income offset by a one-time gain on the sale of
surplus aircraft parts in the previous period.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 39.0% in
the first half of fiscal 2000 and in fiscal 1999.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to $78,309 with a current ratio of
2.7 at September 30, 1999 compared to $68,680 and 2.4 at March 31, 1999.
Cash and cash equivalents increased by $6,906 to $90,058 at September 30,
1999. Net cash flows provided by operating activities totaled $18,898 in
the first half of 2000 compared to $16,957 in the first half of fiscal 1999.
Net cash flows used for investing activities amounted to $14,042 during the
six months ended September 30, 1999 compared to $12,471 in the same period
last year. Net cash flows used for financing activities through September
30, 1999 totaled $2,050 compared to $2,206 in the same period last year.
Long-term obligations, net of current maturities, totaled $4,149 at
September 30, 1999 compared to $4,359 at March 31, 1999. The ratio of
long-term debt to stockholders' equity decreased to .03 at September 30,
1999 from .04 at March 31, 1999.
As of October, 1999, Mesaba's fleet consisted of 101 aircraft covered under
operating leases with remaining terms of two months to 16.5 years and an
aggregate monthly lease payments of approximately $8.3 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 original terms up to 17.5 years.
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.
During September 1999, Mesaba committed to lease approximately 497,000
square feet of facilities, ramp, parking and unimproved land at the
Cincinnati/Northern Kentucky Airport. The commitment covers
approximately 126,000 square feet of hangar and maintenance space and
obligates Mesaba to pay monthly rentals of $92 until July 1, 2029 as part
of Special Facilities Bond financing provided by Cincinnati/Northern
Kentucky Airport Authority. The ground lease has a 30-year term concurrent
with the facilities lease, which expires July 1, 2029. Monthly lease
payments of $10.4 are required under the ground lease.
The Company has historically relied upon cash reserves, internally
generated funds and borrowings to support its working capital
requirements. Management believes that funds from operations will provide
adequate resources for meeting non-aircraft capital needs in fiscal 2000.
The Company has implemented a Year 2000 compliance program designed to
ensure that the Company's internal information technology will function
properly beyond 1999. This includes software applications, hardware and
infrastructure which are essential for flight scheduling; aircraft
maintenance; finance systems; internal communication and facilities
management. The Company estimates that the overall cost of the Year 2000
compliance program will not exceed $500 and expects its Year 2000 date
conversion program to be completed on a timely basis. Any expenditure will
be funded through operating cash flows while any costs for new software
will be capitalized and amortized over the software's useful life.
The Company is working cooperatively with third parties having systems upon
which the Company must rely. The Company can not give any assurance that
the systems of other parties will be year 2000 compliant on a timely basis
or the Company's or third parties contingency plans will mitigate the
effects of noncompliance. Third parties with systems the Company uses or
relies upon include: Federal Aviation Administration Air Traffic Control,
Saab Aircraft, British Aerospace and Northwest Airlines. 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 (which
the Company believes is the most reasonable worst case scenario) and could
result in the reduction or suspension of the Company's operation.
The Company is reviewing and revising its business interruption contingency
plans to address internal and external issues to the extent practicable.
The review, together with any necessary revisions, will be completed by
November 1999. The review of these plans will include how to maintain
safety, increase inventory of essential components, change suppliers,
perform certain functions and processes manually and reduce or suspend
operations. Due to the uncertainty related to year 2000 issues, the
Company's contingency plan will be ongoing in nature and may require
further modifications to existing systems as new information is made
available and the Company further assesses the readiness of third parties
upon which the Company relies.
<PAGE>
Part II.
Item 4. Submissions of Matters to a vote of Security Holders.
The Company filed with the Securities and Exchange Commission a definitive
proxy statement dated July 22, 1999 in connection with its annual meeting of
shareholders held on August 18, 1999. All persons nominated by management
for election as Class One and Class Two directors, as discussed in the
definitive proxy statement, were elected. In addition, shareholders ratified
the appointment of Arthur Andersen LLP as the Company's independent auditors
for the fiscal year ending March 31, 2000, casting 18,618,384 votes in favor
of the ratification, 50,840 votes against the ratification and 26,781
abstentions. There were no broker non-votes.
Item 5. Other Information
The Company is constructing a maintenance facility for its RJ85 jets at
the Cincinnati/Northern Kentucky International Airport. A portion of the
financing for the project is being provided through $14,000,000 of
special facilities revenue bonds (the "Bonds") issued by the Kenton County
Airport Board (the "Airport Board"). Construction of the maintenance
facility began in April 1999 and is expected to be completed in January
2000. Mesaba Aviation, Inc. ("Mesaba") has entered into leases for the
facilities as described below. As security for its payment obligations
unter the leases, Mesaba has assigned its interest in the maintenance
facility to the Airport Board.
FACILITIES LEASE. Mesaba is leasing the maintenance base from the
Airport Board under a Lease Agreement dated July 1, 1999. Mesaba is
obligated to monthly rent under the lease in an amount sufficient to pay
all interest, principal and premium on the Bonds, and all administrative
and trustee's fees. The lease runs from July 1, 1999 to July 1, 2029, and
may be extended by Mesaba for two additional terms ending in 2034 and
2039. Monthly rents are $92 through July 1, 2029.
GROUND LEASE. The land on which the maintenance facility is being
constructed is leased by the Airport Board to Mesaba under a ground
lease. The site consists of approximately 515,000 square feet of property
located at the airport. The ground lease has the same term as the
facilities lease. The following table shows the annual rental payment
under the ground lease.
Annual Rental Annual Rental
Rental Year ($ per Sq. Ft) (Total)
- ----------- -------------- --------------
Year 1 - 10 $0.25 $ 124,331
Year 11 - 20 $0.32 $ 159,144
Year 21 - 30 $0.41 $ 203,903
Year 31 - 35 $0.49 $ 243,689
Year 36 to termination $0.56 $ 278,502
GUARANTY. To provide additional security for the bonds, the Company has
entered into a Guaranty Agreement in favor of the trustee,
unconditionally guaranteeing the payment by Mesaba of all principal,
premium and interest on the bonds, as well as the performance of Mesaba's
obligations under the facilities lease.
<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 15, 1999 BY: /s/ Paul F. Foley
----------------------------
Paul F. Foley
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Jon R. Meyer
----------------------------
Jon R. Meyer
Director of Accounting/Controller
(Principal Accounting Officer)
<PAGE>
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