<PAGE>
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, 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 February 1, 1999
----- ----------------------------------
Common Stock
Par value $.01 per share 19,853,329
<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
------
December 31, March 31,
1998 1998
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 78,555 $ 66,554
Accounts receivable, net 15,621 13,610
Inventories 10,825 5,547
Prepaid expenses and deposits 2,471 3,788
Deferred tax asset 7,058 4,702
------------ ------------
Total current assets 114,530 94,201
PROPERTY AND EQUIPMENT:
Facilities under capital lease 9,147 9,147
Rotables and other spare parts 35,328 22,449
Other property and equipment 21,338 16,865
Accumulated depreciation and amortization (21,933) (16,364)
------------ ------------
Net property and equipment 43,880 32,097
OTHER ASSETS AND DEFERRED COSTS 14,297 10,893
------------ ------------
TOTAL ASSETS $ 172,707 $ 137,191
============ ============
The accompanying notes to interim consolidated financial statements are
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,
1998 1998
------------ ------------
(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 385 $ 436
Accounts payable 22,243 18,093
Accrued liabilities
Payroll 8,430 9,362
Maintenance 11,228 6,877
Other 8,622 7,741
------------ ------------
Total current liabilities 50,908 42,509
LONG-TERM OBLIGATIONS, net of current
liabilities 4,460 4,751
DEFERRED CREDITS AND OTHER LIABILITIES 15,891 14,385
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 60,000,000 shares
authorized, 19,838,829 and 19,397,523 shares
issued and outstanding, respectively 198 194
Paid-in capital 43,650 41,196
Warrants 16,500 7,900
Retained earnings 41,100 26,256
------------ ------------
Total shareholders' equity 101,448 75,546
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 172,707 $ 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 Nine Months Ended
December 31, December 31,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
OPERATING REVENUES:
Passenger $ 88,977 $ 74,598 $ 239,202 $ 199,375
Other 664 845 2,597 2,434
---------- ---------- ---------- ----------
Total operating revenues 89,641 75,443 241,799 201,809
OPERATING EXPENSES:
Wages and benefits 20,395 17,587 58,331 48,092
Aircraft fuel costs 6,622 6,481 19,128 18,081
Aircraft maintenance costs 15,823 12,376 40,781 29,865
Aircraft rents 18,734 15,932 51,297 42,761
Landing fees 1,771 1,566 5,026 4,548
Insurance and taxes 2,313 1,793 6,433 4,863
Depreciation and amortization 2,467 1,788 6,799 4,562
Administrative and other costs 11,274 9,593 31,492 25,346
---------- ---------- ---------- ----------
Total operating expenses 79,399 67,116 219,287 178,118
Operating income 10,242 8,327 22,512 23,691
NONOPERATING INCOME (EXPENSE):
Interest expense (109) (109) (337) (352)
Other, net 899 572 3,469 1,611
---------- ---------- ---------- ----------
Other income, net 790 463 3,132 1,259
Income before income taxes 11,032 8,790 25,644 24,950
PROVISION FOR INCOME TAXES 4,302 3,498 10,001 9,937
---------- ---------- ---------- ----------
NET INCOME BEFORE CHANGE IN
CHANGE IN ACCOUNTING PRINCIPLE 6,730 5,292 15,643 15,013
PRE-OPERATING COST WRITE OFF,
NET OF TAX - - 800
---------- ---------- ---------- ----------
NET INCOME $ 6,730 $ 5,292 $ 14,843 $ 15,013
========== ========== ========== ==========
NET INCOME PER SHARE:
Basic $ 0.34 $ 0.27 $ 0.75 $ 0.78
========== ========== ========== ==========
Diluted $ 0.32 $ 0.25 $ 0.69 $ 0.73
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 19,838 19,276 19,758 19,232
========== ========== ========== ==========
Diluted 21,230 21,021 21,541 20,618
========== ========== ========== ==========
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,
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 14,843 $ 15,013
Adjustments to reconcile net income to net
provided by operating activities:
Depreciation and amortization 6,799 4,562
Amortization of deferred credits 1,506 (770)
Gain on sale of inventory (799) -
Deferred income tax benefit (2,356) 181
Changes in current operating items:
Accounts receivable, net (733) (2,524)
Inventories (3,932) (1,539)
Prepaid expenses and deposits 1,317 (1,588)
Accounts payable and accrued liabilities 9,762 6,727
------------ ------------
Net cash provided by operating activities 26,407 20,062
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (16,544) (10,806)
Other 23 (386)
------------ ------------
Net cash used for investing activities (16,521) (11,192)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 2,457 501
Repayment of long-term obligations (342) (320)
------------ ------------
Net cash provided by financing activities 2,115 181
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 12,001 9,051
CASH AND CASH EQUIVALENTS:
Beginning of period 66,554 49,126
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End of period $ 78,555 $ 58,177
============ ============
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 337 $ 361
============ ============
Income taxes $ 10,984 $ 11,488
============ ============
Noncash investing activities included the following:
Rotable and spare parts inventory
acquired with integration funds $ - $ 5,679
============ ============
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 in 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 36 Avro
RJ85 ("RJ85") regional jets for Northwest. As of December 31, 1998, Mesaba
had taken delivery of 18 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 Agreements,
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
fiscal year. It did not have a material adverse affect on the liquidity
or capital resources of the Company.
3. Earnings Per Share
The table below sets forth the computation of earnings per common share.
Quarter Ended Nine Months Ended
------------- -----------------
December 31,
------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net Income $ 6,730 $ 5,292 $ 14,843 $ 15,013
========== ========== ========== ==========
For Earnings Per
Common Share - Basic: 19,838 19,276 19,758 19,232
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 317 583 528 415
Computed shares outstanding under
warrants issued utilizing the
treasury stock method 1,075 1,162 1,255 971
---------- ---------- ---------- ----------
For earnings per Common Share - Diluted:
Weighted average common shares and Common
share equivalents outstanding 21,230 21,021 21,541 20,618
========== ========== ========== ==========
Earnings Per Share - Basic $ 0.34 $ 0.27 $ 0.75 $ 0.78
========== ========== ========== ==========
Earnings Per Share _ Diluted $ 0.32 $ 0.25 $ 0.69 $ 0.73
========== ========== ========== ==========
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 December 31, 1998, Mesaba has taken delivery of all
aircraft covered under this agreement.
In April 1998, Mesaba signed an amendment to the Jet Agreement
providing for the delivery of six additional RJ85 aircraft. As of December
31, 1998, Mesaba has taken delivery of all 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 February 1999.
<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, 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 $6,730 or $0.32 diluted earnings per
share for the three months ended December 31, 1998, compared to $5,292 or
$0.25 diluted earnings per share in the same period of fiscal 1998.
Weighted average common shares and common share equivalents outstanding
increased to 21,230 from 21,021.
OPERATING REVENUE
Total operating revenues increased 18.8% in the third quarter of fiscal
1999 to $89,641 from $75,443 in the year earlier quarter, and revenue
passenger miles increased 36.7% to 303,153 from 221,746. Passenger revenue
per available seat mile ("RASM") decreased to $0.163 from $0.183 in the
previous year's third quarter. Mesaba's average load factor was 55.7% in the
third quarter compared to 54.4% during the same period a year ago. The
improvement in traffic is attributable to the introduction of 10 RJ85 and 26
Saab 340 aircraft when compared to one year ago offset by the return of 17
deHavilland Dash 8 aircraft as well as overall increases in passenger
travel within the industry.
Operating Costs Per Three months ended December 31,
Available Seat Mile (Unit Cost) 1998 1997
- - -------------------------------------------------------------------------
Wages and benefits 3.8 CENTS 4.3 CENTS
Aircraft fuel costs 1.2 1.6
Aircraft maintenance costs 2.9 3.0
Aircraft rents 3.4 3.9
Landing fees 0.3 0.4
Insurance and taxes 0.4 0.5
Depreciation and amortization 0.5 0.4
Administrative and other costs 2.1 2.4
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Total 14.6 CENTS 16.5 CENTS
Three months ended December 31,
Operating statistics 1998 1997
- - -------------------------------------------------------------------------
Revenue passengers carried 1,212,100 908,000
Revenue passenger miles (000) 303,153 221,746
Available seat miles (000) 544,407 407,784
Passenger load factor 55.7% 54.4%
Passenger revenue per available seat $0.163 $0.183
Departures 64,501 54,985
Aircraft in service 96 74
Operating Expenses.
Total operating expenses increased 18.3% to $79,399 from $67,116 in the
prior year's third quarter. Mesaba's unit cost decreased 11.5% to $0.146
from $0.165 as a result of a 33.5% increase in available seat miles to
544,407 in the third quarter of fiscal 1999 from 407,784 in the year
earlier quarter. The increase in ASMs was accomplished by the acquisition
of 10 RJ85 and 26 Saab 340 aircraft offset by the retirement of 17 Dash 8
aircraft since December 31, 1997.
<PAGE>
Wages and benefits increased 16.0% to $20,395 in the third quarter of
fiscal 1999 from $17,587 in the third quarter of fiscal 1998. 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
148.6% 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 a 6.5% increase in turbo-prop operating activity.
Fuel costs increased 2.2% to $6,622 in this year's third quarter compared
to $6,481 in last year's third quarter. The change is primarily
attributable to a increase in consumption as a result of 2.9% more block
hours flown by turbo- prop aircraft when compared to one year ago, offset
by increased utilization of the more fuel efficient Saab 340 aircraft.
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 third quarter and a
year ago. Unit cost for fuel decreased 25.0% to 1.2 cents from 1.6 cents.
Mesaba is not required to provide fuel for the jet operation.
Direct maintenance expense, excluding wages and benefits, increased 27.9%
to $15,823 in the third quarter of fiscal 1999 from $12,376 in the third
quarter of fiscal 1998. This increase was primarily attributable to the
addition of 26 Saab 340 and 10 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 17 aircraft to lessors. Unit cost for direct
maintenance decreased 3.3% to 2.9 cents from 3.0 cents.
Aircraft rents increased 17.6% to $18,734 in the third quarter of fiscal
1999 from $15,932 in the third quarter of fiscal 1998. This increase is
primarily attributable to the addition of 26 Saab 340 and 10 RJ85 aircraft
offset by returning 17 Dash 8 aircraft to lessors and not incurring any wet
lease expenses during the third quarter. Mesaba has taken delivery of
eight Saab 340 and one RJ85 aircraft during the third quarter. Unit cost
for aircraft rents decreased 12.8% to 3.4 cents from 3.9 cents.
Total landing fees increased 13.1% to $1,771 in the third quarter of fiscal
1999 compared to $1,566 for the third quarter of fiscal 1998. The increase
is attributable to a 6.5% increase in turbo-prop departures and an 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 provide that Mesaba is not required to pay for landing fees for
the jet operation.
Insurance and taxes increased 29.0% to $2,313 in the third quarter of
fiscal 1999 compared to $1,793 for the third 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. This was 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 turboprop equipment, unit cost
for insurance and taxes decreased 20.0% to 0.4 cents from 0.5 cents.
<PAGE>
Depreciation and amortization increased 38.0% to $2,467 in the third
quarter of fiscal 1999 compared to $1,788 in the third 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. Unit cost for depreciation and amortization
increased 25.0% to 0.5 cents from 0.4 cents.
Administrative and other costs increased 17.5% to $11,274 in the third
quarter of fiscal 1999 compared to $9,593 in the third 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. Unit cost for administrative and other costs decreased
12.5% to 2.1 cents from 2.4 cents. Mesaba is generally not required to
provide airport and passenger related expenses for the jet operation.
OPERATING INCOME.
Operating income totaled $10,242 in the third quarter period, an increase
of 23.0% from $8,327 a year ago. Mesaba's operating margin increased to
11.4% from 11.0% in the prior year's third quarter.
NONOPERATING INCOME.
Nonoperating income increased to $790 in the third quarter from $463 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 39.0% in the third quarter of fiscal
1999 and 39.8% in the comparable quarter in fiscal 1998. The lower
effective tax rate is due to lower levels of nondeductible expenses in the
third quarter.
<PAGE>
Results of Operations for the Nine Months Ended December 31, 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 $14,843 or $0.69 per diluted share for
the nine months ended December 31, 1998, compared to $15,013 or $0.73 per
share in the same period of fiscal 1998. Weighted average shares
outstanding increased to 21,541 from 20,618. 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 fiscal year.
OPERATING REVENUES
Total operating revenues increased 19.8% in the first nine months of fiscal
1999 to $241,799 from $201,809 in the year earlier period, and revenue
passenger miles increased 42.5% to 819,130 from 574,922. Passenger revenue
per available seat mile ("RASM") as anticipated, decreased to $0.165 from
$0.193 in the year earlier period. Mesaba's average load factor was 56.5%
in the current nine-month period compared to 55.6% during the same period a
year ago. The improvement in traffic is attributable to the introduction
of 10 RJ85 aircraft 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 Nine months ended December 31,
Available Seat Mile (Unit Cost) 1998 1997
- - -------------------------------------------------------------------------
Wages and benefits 4.0 CENTS 4.7 CENTS
Aircraft fuel costs 1.3 1.7
Aircraft maintenance costs 2.8 2.9
Aircraft rents 3.5 4.1
Landing fees 0.4 0.4
Insurance and taxes 0.4 0.5
Depreciation and amortization 0.5 0.4
Administrative and other costs 2.2 2.5
------------- -----------
Total 15.1 CENTS 17.2 CENTS
Nine months ended December 31,
Operating statistics 1998 1997
- - -------------------------------------------------------------------------
Revenue passengers carried 3,214,900 2,421,800
Revenue passenger miles (000) 819,130 574,922
Available seat miles (000) 1,449,567 1,033,592
Passenger load factor 56.5% 55.6%
Passenger revenue per available seat $0.165 $0.193
Departures 174,555 147,146
Aircraft in service 96 74
OPERATING EXPENSE
Total operating expenses increased 23.1% to $219,287 from $178,118 in the
prior year's first nine months. Mesaba's unit cost decreased 12.2% to
$0.151 from $0.172 as a result of a 40.2% increase in available seat miles
to 1,449,567 in the first nine months of fiscal 1999 from 1,033,592 in the
year earlier period. The increase in ASMs was primarily accomplished by the
acquisition of 10 RJ85 and 26 Saab 340 aircraft offset by the retirement of
17 Dash 8 aircraft when compared to one year ago.
<PAGE>
Wages and benefits increased 21.3% to $58,331 in the first nine months of
fiscal 1999 from $48,092 in the first nine months of fiscal 1998. The
majority of the increase is a result of higher cost of flight crews due to
a 20.2% 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 an 8.0% increase in
scheduled turbo-prop operations. The increased capacity generated by the
additional jet and turboprop equipment has caused these costs to be
reduced on a unit cost basis 14.9% to 4.0 cents from 4.7 cents.
Fuel costs increased 5.8% to $19,128 in this year's first nine months
compared to $18,081 in last year's first nine months. The increase is
primarily attributable to an increased consumption due to a 13.8%
additional block hours flown offset by higher utilization of the more
fuel-efficient Saab 340 aircraft. 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 nine-month period 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 36.6%
to $40,781 in the first nine months of fiscal 1999 from $29,865 in the first
nine months of fiscal 1998. This increase was primarily attributable to the
addition of 26 Saab 340 and 10 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 17 Dash 8 aircraft
to lessors. Unit costs for direct maintenance decreased 3.4% to 2.8 cents
from 2.9 cents.
Aircraft rents increased 20.0% to $51,297 in the first nine months of
fiscal 1999 from $42,761 in the first nine months of fiscal 1998. This
increase is primarily attributable to the addition of 26 Saab 340 and 10
RJ85 aircraft while returning 17 Dash 8 aircraft to lessors and not
incurring any wet lease expense during the current fiscal year. Mesaba
has taken delivery of 24 Saab 340 and eight RJ85 aircraft during the
current nine-month period. Unit cost for aircraft rents decreased 14.6% to
3.5 cents from 4.1 cents.
Total landing fees increased 10.5% to $5,026 in the first nine months of
fiscal 1999 compared to $4,548 for the first nine months of fiscal 1998.
The increase is attributable to a 13.2% increase in the total gross landed
weight due to increased turbo-prop activity offset by a 2.6% decrease in the
overall effective landing fee rate. Unit cost for landing fees remained
unchanged at 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 increased 32.3% to $6,433 in the first nine months of
fiscal 1999 compared to $4,863 for the first nine months 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 decreased 20.0 % to 0.4 cents from 0.5
cents.
Depreciation and amortization increased 49.0% to $6,799 in the first nine
months of fiscal 1999 compared to $4,562 in the first nine-month of fiscal
1998. The higher level of depreciation and amortization resulted from
<PAGE>
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 24.2% to $31,492 in the first nine
months of fiscal 1999 compared to $25,346 in the first nine months of
fiscal 1998. This increase is primarily attributable to higher pilot
training and crew related expenses, excluding wages and benefits,
associated with increased flying. 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 $22,512 in the current nine-moonth period, a
decrease of 5.0% from $23,691 a year ago. Mesaba's operating margin
decreased to 9.3% from 11.7% in the prior year's first nine months.
NONOPERATING INCOME
Nonoperating income increased to $3,132 in the current nine-month period
from $1,259 in the prior year's first nine months 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 nine months 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 nine-month period.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to $63,622 with a current ratio of
2.3 at December 31, 1998 compared to $51,692 and 2.2 at March 31, 1998.
Cash and cash equivalents increased by $12,001 to $78,555 at December 31,
1998. Net cash flows provided by operating activities totaled $26,407 in
the first nine months of 1999 compared to $20,062 in the first nine months
of fiscal 1998. Net cash flows used for investing activities amounted to
$16,521 during the nine months ended December 31, 1998 compared to $11,192
in the same period last year. Net cash flows provided by financing
activities through December 31, 1998 totaled $2,115 compared to $181 in
the same period last year.
Long-term obligations, net of current maturities, totaled $4,460 at
December 31, 1998 compared to $4,751 at March 31, 1998. The ratio of
long-term debt to stockholders' equity decreased to .04 at December 31,
1998 from .06 at March 31, 1998.
As of January, 1999, Mesaba's fleet consisted of 93 aircraft covered under
operating leases with remaining terms of two months to 17.5 years and an
aggregate monthly lease payments of approximately $6.4 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
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.
YEAR 2000 COMPLIANCE
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 $500,000 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.
<PAGE>
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 computer systems which
the Company relies upon include: Federal Aviation Administration Air
Traffic Control, Saab Aircraft, British Aerospace and Northwest Airlines.
The Company's business, financial condition and/or 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) could result in the reduction or suspension of the Company's
operation.
The Company is reviewing and revising our 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
September 1999. The review of these plans will include how to maintain
safety, carrying additional essential components, changing suppliers,
performing certain functions and processes manually and reducing or
suspending 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 5. Other Information
Mesaba is in contract negotiations with the Aircraft Mechanics Fraternal
Association ("AMFA"), its 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 "0self-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 the 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>
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 12, 1999 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)
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