1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997 Commission File
Number 0-15495
MESA AIR GROUP, Inc.
(Exact name of registrant as specified in its charter)
Nevada 85-0302351
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3753 Howard Hughes Parkway, Suite 200, Las Vegas 89109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 892-3773
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of December 18, 1997:
Common Stock, no par value: $162,693,858
On December 18, 1997, the Registrant had outstanding 28,294,584 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
- --------- -------------------
None None
2
PART I
This Form 10-K includes certain forward-looking statements and information based
on management's beliefs as well as on assumptions made by and information
currently available to management. When used in this Form 10-K, the words
"expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," and
similar expressions are intended to identify such forward-looking statements.
However, this Form 10-K also contains other forward-looking statements. Such
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions which could cause the Company's future results to
differ materially from those expressed in any forward-looking statements made by
or on behalf of the Company. Many of such factors are beyond the Company's
ability to control or predict. Readers are cautioned not to put undue reliance
on forward-looking statements. The Company disclaims any intent or obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. See, "FORWARD-LOOKING STATEMENTS."
Item 1. Business
GENERAL
Mesa Air Group, Inc. and its subsidiaries (collectively referred to herein as
"Mesa" or the "Company") is an independently owned regional airline serving 168
cities in 31 states and the District of Columbia. Mesa has a fleet of 186
aircraft with approximately 1,700 daily departures.
Mesa operates a regional airline utilizing a hub-and-spoke system under
code-sharing agreements with America West Airlines, Inc. ("America West"),
United Airlines, Inc. ("UAL") and US Airways, Inc. ("US Airways"). Mesa
Airlines, Inc. ("MAI"), a wholly owned subsidiary of the Company, also operates
an independent division, "Mesa Airlines," primarily from hubs in Albuquerque,
New Mexico and Fort Worth, Texas.
Mesa's long-term business strategy is to achieve sustained, profitable growth by
utilizing its fleet of regional aircraft and focused operating strategies to
service routes not generally served by major air carriers. Mesa implements its
strategy by carefully evaluating market demand on the routes it serves and
utilizes its fleet of aircraft to meet that demand. In addition, Mesa is able to
expand the markets it serves under its subsidiaries' existing code-sharing
agreements with the major air carriers listed above to benefit from the name
recognition, reservation systems, marketing and promotional efforts of these
carriers. Mesa also utilizes a fleet of new and efficient aircraft and performs
most maintenance and overhaul work at its own facilities. Mesa seeks to maximize
gross revenues by managing its fares and flight schedules to maximize revenue
per available seat mile and by developing new markets.
The Company's subsidiaries are expanding operations under the independent
division "Mesa Airlines" and as AmericaWest Express and US Airways Express by
adding a fleet of 50-seat Canadair Regional Jets ("CRJ") to operate in longer
range, low density markets that would not be profitable for airlines operating
larger aircraft.
1
3
CORPORATE STRUCTURE
The Company is a Nevada corporation which owns MAI, a Nevada corporation and
certificated air carrier; WestAir Holding, Inc., a California corporation and
owner of certificated air carrier WestAir Commuter Airlines, Inc. ("WestAir");
Air Midwest, Inc., a Kansas corporation and certificated air carrier ("Air
Midwest"); and various non-airline operations which include:
- - MPD, Inc., a Nevada corporation dba Mesa Pilot Development, which operates
the Company's ab initio pilot training program.
- - Regional Aircraft Services, Inc., a California corporation owned by WestAir
Holdings, Inc., performs component overhaul and repair services.
- - FCA, Inc., a Nevada corporation dba Four Corners Aviation, a fixed-base
operation at Farmington, New Mexico.
- - Mesa Leasing, Inc. a Nevada corporation established to assist the Company
in the acquisition and leasing of aircraft.
- - MAGI Insurance, Ltd., a Barbados, West Indies based insurance company
established for the purpose of attaining more favorable insurance rates.
During 1997, the Company centralized flight operations, dispatch and maintenance
control for MAI in Farmington, New Mexico. Most of the Company's accounting
functions were consolidated in Farmington, New Mexico in July 1997.
OPERATIONS
The Company's subsidiaries operate approximately 1,700 daily departures
throughout the United States as AmericaWest Express, Mesa Airlines, United
Express and US Airways Express by code-share and region as follows:
AMERICAWEST EXPRESS
Southwest: 17 destinations out of its Phoenix system
MAI operates 134 weekday departures out of the Phoenix system utilizing 15
aircraft: 12 Beechcraft 1900D 19-seat aircraft and three 50-seat CRJ aircraft.
Beginning December 17, 1997 MAI added one Dash 8-200 to the AmericaWest Express
operation serving Grand Junction and Aspen, Colorado from Phoenix, Arizona.
2
4
MESA AIRLINES
Southwest: 12 destinations out of its Albuquerque system
Flying under its own colors as "Mesa Airlines," MAI has 49 weekday departures
utilizing eight Beech 1900D aircraft.
5 destinations out of its Fort Worth system
During May 1997, MAI began service utilizing CRJs from Meacham International
Airport in Forth Worth, Texas to destinations throughout Texas. MAI has 24 daily
departures utilizing two aircraft.
Southeast: 3 destinations out of Nashville
On July 14, 1997, MAI began service utilizing two Beechcraft 1900D aircraft from
the Nashville International Airport with eight departures between Nashville and
Tupelo, Little Rock and Wichita. MAI provides service between Colorado Springs,
Colorado and Nashville, Tennessee utilizing one CRJ aircraft.
UNITED EXPRESS
Rocky Mountains: 27 destinations out if its Denver system
MAI serves the Southwest and Rocky Mountain regions with 210 weekday departures,
utilizing 14 Beech 1900D aircraft and twelve 37-seat Dash 8-200 aircraft.
California: 8 destinations out of Los Angeles, 19 destinations out of San
Francisco and other northern California cities
WestAir operates 114 weekday departures out of Los Angeles and 244 weekday
departures from San Francisco, utilizing twenty-one 19-seat British Aerospace
Jetstream 31 aircraft and nineteen 30-seat Embraer Brasilia aircraft.
Pacific Northwest: 8 destinations out of its Portland and Seattle systems
MAI operates 151 weekday departures in the Northwest, utilizing 14 Beech 1900D
aircraft.
US AIRWAYS EXPRESS
Northeast: 8 destinations out of Boston, 6 destinations out of New York and
2 destinations out of Baltimore
MAI operates 112 weekday departures out of Boston, New York and Baltimore to
cities in Massachusetts, Maine, New Hampshire, Connecticut and Pennsylvania,
utilizing 10 Beech 1900D aircraft.
Mid-Atlantic: 13 destinations out of its Philadelphia system and 17 out of
its Pittsburgh system
3
5
MAI serves the Mid-Atlantic states with 256 weekday departures, utilizing 28
Beech 1900D aircraft.
Southeast: 6 destinations out of Tampa, 7 destinations out of Orlando and 7
destinations out of New Orleans
MAI has 163 weekday departures in the states of Florida, Alabama and North
Carolina and 55 weekday departures out of New Orleans, utilizing 18 Beech 1900D
aircraft and nine Embraer Brasilia aircraft.
Central: 17 destinations out of its Kansas City system
Air Midwest operates 150 weekday departures out of Kansas City, utilizing 12
Beech 1900D aircraft.
MESA AIRCRAFT BY HUB AS OF SEPTEMBER 30, 1997
BEECH EMB-
1900 120 DASH 8 J31 CRJ
--------------------------------------------------------
Denver 14 12
Los Angeles 4 9
San Francisco 15 12
Portland/Seattle 14
Boston 10
Philadelphia 14
Pittsburgh 14
Tampa/Orlando 12 9
New Orleans 6
Kansas City 12
Phoenix 12 3
Fort Worth 2
Albuquerque 8
Nashville 2
TOTAL: 118 28 12 21 5
In addition to carrying passengers, Mesa carries freight and express packages on
its passenger flights and has interline small cargo freight agreements with
virtually all other carriers. Mesa has contracts with the U.S. Postal Service
for hauling mail by air to the cities it serves and occasionally operates
charter flights when aircraft are not otherwise utilized for scheduled service.
MAI also owns and operates MPD, Inc., providing flight training as "Mesa Pilot
Development" in coordination with San Juan College in Farmington, New Mexico.
MAI owns FCA, Inc., a fixed base operator located in Farmington, New Mexico
which operates as Four
4
6
Corners Aviation. Another subsidiary, Regional Aircraft Services, Inc., performs
component overhaul and repair services at a facility in Reading, Pennsylvania.
Desert Turbine Services, based in Farmington, New Mexico, provides power plant
and component repair, maintenance and overhaul services for MAI's airline
subsidiaries.
CODE-SHARING RELATIONSHIPS
Approximately 96 percent of Mesa's consolidated revenues are derived from
operations associated with code-sharing agreements with America West, UAL and US
Airways. These code-sharing agreements allow use of the code-sharing partner's
reservation system and flight designator code to identify flights and fares in
the computer reservation system, permit use of the logo, service marks, exterior
aircraft paint schemes, and uniforms similar to the code-sharing partners', and
provide coordinated schedules and joint advertising. Mesa's passengers receive
mileage credits in the respective frequent flyer programs, and credits in those
programs can be used on Mesa's flights.
The Company's subsidiaries have one code-sharing agreement with America West,
two separate code-sharing agreements with UAL and four separate code-sharing
agreements with US Airways. Renewal of one code-sharing agreement with a
code-sharing partner does not guarantee the renewal of any other code-sharing
agreement with the same code-sharing partner.
The code-sharing agreements provide for terms of 10 years for America West
(expiring in 2004), five to 10 years for UAL (the WestAir agreement expires in
May 1998 in certain markets in the Los Angeles, San Francisco, Portland and
Seattle hubs and the MAI agreements expire in 2005 in the Denver hub and certain
markets in Los Angeles, Portland and Seattle hubs) and five to 10 years for US
Airways ( Air Midwest expires in 2000 in the Kansas City hub, and the various
MAI agreements expire in 2003 in Pittsburgh and for the new CRJ service
(described below) and 2004 in the New Orleans, Boston, Philadelphia, Tampa and
Orlando hubs). Although the provisions of the agreements vary, generally they
are subject to cancellation should the Company's subsidiaries fail to meet
certain operating and performance standards, the breach of other contractual
terms and conditions, and, in the case of the US Airways code-sharing agreements
(other than the new CRJ service agreement described below), upon six months'
notice by either party. Certain fee per departure markets with UAL (Portland and
Seattle) permit cancellation upon 90 days' written notice by either UAL or
MAI/WestAir. The code-sharing agreement between MAI and UAL which expires in
2005 prohibits MAI from entering into any new code-sharing agreement relating to
services to and from Denver, Chicago, Washington, D.C., Los Angeles, Portland,
San Francisco or Seattle. Other than the code-sharing agreement with UAL, which
restricts UAL from competing with MAI in certain markets by aircraft with less
than 101 seats of capacity, the code-sharing agreements do not prohibit the
major carrier from serving routes served by the various subsidiaries of the
Company. The code-sharing agreements contain varying provisions allowing the
Company's partners to terminate the agreements upon certain potential
operational or "change in control" events. The UAL code-sharing agreements
require MAI and WestAir to provide notice and a right of first refusal to UAL
for (i) any merger, (ii) any sale, acquisition, or purchase of the assets or
aircraft materially affecting operations, or (iii) any sale, acquisition, or
purchase of five percent or more of the voting stock not made upon the open
market or pursuant to a public offering. The UAL agreement with MAI further
provides that UAL may terminate the code-sharing agreement upon the completion
of a hostile takeover of Mesa that will result in a material change in the
senior
5
7
management. The agreements with US Airways provide US Airways may terminate its
code-sharing agreement upon a change in control of the Company consisting of not
less than 51 percent of the outstanding voting stock or a replacement of 50
percent or more of the members of the Board of Directors. A termination or
expiration without renewal of any code-sharing agreements with America West, UAL
or US Airways would have a material adverse effect on the Company's business.
See, "United Airlines, Inc." below and "MANAGEMENT'S DISCUSSION AND ANALYSIS --
Revenue and Expense Comparison-Fiscal 1997 versus Fiscal 1996; Liquidity and
Capital Resources" sections for discussion of the effect of the expiration of
the WestAir code-sharing agreement with UAL, the termination of certain fee per
departure markets and the related effects to the Denver system.
In November 1997, MAI entered into a new code-sharing agreement with US Airways
to provide CRJ service between various domestic city pairs. The CRJ code-sharing
agreement terminates five years after CRJ service first begins but is subject to
earlier termination by US Airways in the event (i) certain performance
requirements are not met and remain uncured for 90 days or (ii) without cause on
a "per aircraft basis" three years after such aircraft have been installed in
the system upon 180 days' notice. In addition, payments to MAI are based on
operating performance goals and may be increased or decreased based on actual
results.
AMERICA WEST AIRLINES, INC.
The Company operates 15 of its fleet of 186 aircraft as AmericaWest Express out
of a hub in Phoenix, Arizona under a code-sharing agreement which expires in
2004. The AmericaWest Express operation represents approximately 16% of the
available seat mile capacity (ASMs) and approximately 11% of revenue generated
by the Company. On December 17, 1997 the Company added a Dash 8-200 aircraft to
the AmericaWest Express system to serve the markets of Grand Junction and Aspen,
Colorado from Phoenix. Deployment of the CRJ aircraft in the AmericaWest Express
system has exceeded management's expectations and the Company is discussing the
possibility of allocating additional CRJ aircraft to the AmericaWest Express
system with the management of America West. Allocation of additional CRJ
aircraft is a forward looking statement and is subject to change depending,
among other factors, on the availability of CRJ aircraft from the manufacturer
or other regions of the country, the willingness of management of America West
to agree to deployment of additional aircraft, and changes in competitors'
routes.
UNITED AIRLINES, INC.
The Company operates 80 of its fleet of 186 aircraft as United Express under two
code-sharing agreements with UAL. One agreement, which covers the Denver
operation and approximately half of the operations in Los Angeles, Portland and
Seattle, is with MAI and expires in 2005. The second agreement, with WestAir,
expires on May 31, 1998. The United Express operation represents approximately
44 percent of the available seat mile (ASM) capacity and 48 percent of revenue
generated by the Company. United Express ASMs are distributed approximately as
follows: California system, 42%; Denver system, 45%; and Pacific Northwest
system, 13%.
WestAir Code-Sharing Agreement:
In July 1997, WestAir received a proposal from UAL for the extension of
WestAir's code-sharing agreement which is due to expire on May 31, 1998. The
proposal contained certain
6
8
material amendments to the existing code-sharing agreement. The Company did not
accept this proposal because it provided for significant cost increases and did
not include certain changes to the proposal requested by the Company. Management
continued to negotiate for improvements to the proposal.
On July 22, 1997, UAL awarded WestAir's eight Los Angeles contract markets to
Skywest Airlines, effective October 1, 1997. UAL subsequently granted additional
pro-rate markets to WestAir, sufficient to utilize the aircraft previously
serving the eight Los Angeles system contract markets. There was no material
cost of transition to these new pro-rate markets and the new pro-rate markets
are attaining similar financial results as the discontinued contract markets.
The Company is in litigation to resolve UAL's unilateral termination of
WestAir's contract markets in the Los Angeles area. See, "Item 3. Legal
Proceedings."
In late November 1997, WestAir received written notice from UAL that WestAir's
code-sharing agreement would not be renewed. Since November 1997, management has
on repeated occasions sought a reconsideration of UAL's decision not to renew
the WestAir code-sharing agreement. At a meeting on January 6, 1998, UAL
confirmed that it will not reconsider renewing WestAir's code-sharing
agreement upon its expiration. WestAir will have significant assets in excess of
its needs upon expiration of the agreement on May 31, 1998. Accordingly, by
resolution of the Board of Directors on January 10, 1998, the Company has
recognized a loss provision to provide for the cost of discontinuation of
WestAir operations. The provision includes the cost to retire or sell aircraft,
for the sale of parts and equipment, and for employee severance and other costs.
See, "MANAGEMENT'S DISCUSSION AND ANALYSIS -- Revenue and Expense
Comparison-Fiscal 1997 versus Fiscal 1996; Liquidity and Capital Resources" for
a further discussion of the loss provision.
Denver System:
MAI incurred a substantial operating loss in the Denver system for fiscal year
1997. Among the factors contributing to the loss were the significant increases
in airport costs related to the new Denver International Airport ("DIA") and a
20 percent decrease in the average connecting fare received from UAL.
In late September 1997, management began a reduction of service in some markets
and gave notice to UAL of its intent to terminate service in other markets. UAL
responded by asserting that MAI's past and proposed termination of service was a
"material default" under the code-sharing agreement, requested an increase in
service in certain markets, and claimed damages and remedies, including
termination of the code-sharing agreement. The Company has responded to UAL,
noting that the Denver code-sharing agreement allows MAI to terminate service in
an unprofitable market, but gives UAL the right to place another carrier into
any market in which MAI terminates service on the same terms and conditions as
originally offered to MAI. In the opinion of Mesa's management, there is no
requirement that MAI continue to serve unprofitable markets or that MAI provide
the additional service requested by UAL. Management of UAL does not agree with
interpretation of the code-sharing agreement and believes it can terminate the
Denver code-sharing agreement as a result of MAI's reduction of service to
certain markets. On January 6, 1998, UAL informed the Company that it will not
provide any increases in Denver system connecting fares or permit MAI to
decrease its level of Denver system service. As a result of UAL's decision not
to assist the Company in connection with improving operations in its Denver
system, on January 10, 1998, the Board of Directors resolved that the Company
7
9
recognize a loss provision for impairment of the $26.3 million Denver system
intangible asset currently remaining on the Company's financial statements at
September 30, 1997 and provide for the other costs of restructuring the
Company's Denver operations.
Mesa's relationship with UAL is poor and if a resolution of the level of service
to be provided in the Denver market is not attained, UAL may unilaterally cancel
the Denver code-sharing agreement and award the routes to another carrier.
Interpretation of the Denver code-sharing agreement may require judicial
resolution and subject the Company to a risk that UAL's interpretation of the
code-sharing agreement prevails. Regardless of whether the interpretation of the
Denver code-sharing agreement is favorably resolved, it is unlikely that MAI
will operate in the Denver market through 2005. As a result, the Company
believes it will ultimately dispose of its Denver operations by transfer or sale
to another airline. See, "Airline Operations" for a further discussion of the
impact of aircraft relocation, sale and removal from service. See, "MANAGEMENT'S
DISCUSSION AND ANALYSIS -- Revenue and Expense Comparison-Fiscal 1997 Versus
Fiscal 1996; Liquidity and Capital Resources" for a discussion of the loss
provision related to the Denver operations. If UAL were successful in
unilaterally cancelling the Denver code-sharing agreement and awarded the routes
to another carrier, losses in excess of the amounts accrued at September 30,
1997 would probably be incurred.
Fee Per Departure Markets:
Under the MAI and WestAir code-sharing agreements with UAL, most markets provide
revenue sharing based on an allocation of fares between UAL and the Company
("pro-rate markets"). However, an increasing portion of United Express routes in
the Pacific Northwest and Los Angeles have become "contract markets" operated on
a fee per departure basis. Certain of these markets may be terminated upon 90
days' notice by either UAL or MAI/WestAir. On January 8, 1998, the Company
received written notice that UAL is terminating all of the "contract" markets in
the Pacific Northwest effective September 30, 1998. As a result of this
termination, MAI will have 13 Beech 1900D aircraft which are anticipated to be
in excess of its operating needs. Management believes it can dispose of all of
the 13 Beech 1900D aircraft. A portion of the loss provision described in
"MANAGEMENT'S DISCUSSION AND ANALYSIS -- Revenue and Expense Comparison-Fiscal
1997 Versus Fiscal 1996; Liquidity and Capital Resources" has been recorded as a
result of the termination of those "contract" markets. Management's belief that
it can dispose of all of the 13 Beech 1900D aircraft is a forward-looking
statement and is contingent on the market for surplus aircraft, demand for the
1900D aircraft in particular, and general economic conditions.
USAIRWAYS, INC.
As previously reported, in early 1997 US Airways notified the Company that it
desired to amend the code-sharing agreements between the Company and US Airways
to decrease the Company's share of joint fares by approximately three percent.
Negotiations between the Company and US Airways have resulted in a resolution
which is expected to result in no decrease in the US Airways Express share of
joint fares. US Airways Express currently represents approximately 35 percent of
the available seat mile (ASM) capacity and 37 percent of revenue generated by
the Company.
Temporary flight crew shortage and scheduling difficulties relating to the
centralization of operations required under MAI's September 1996 Consent Order
with the Federal Aviation
8
10
Administration ("FAA") have resulted in excessive flight cancellations and poor
on-time performance under the MAI operating certificate, particularly in the US
Airways Express system. (Flight operations under the Company's Air Midwest and
WestAir operating certificates have remained at their historic level of
reliability.) Management believes that the MAI flight crew shortages and
scheduling problems created by centralization of flight operations will be
resolved during the second quarter of the 1998 fiscal year.
Beginning in October 1997 and continuing through January 12,1998, MAI has, at US
Airways' request, periodically removed aircraft from scheduled service to
alleviate crew shortages. On January 12, 1998, MAI had a total of ten 1900D
Beech aircraft removed from service. After the Company's temporary crew shortage
is alleviated, it is the intention of the Company to phase-in the return of the
grounded aircraft to revenue service. Management believes that it will be able
to return these aircraft to service within the US Airways system, although some
of the canceled routes have been awarded to other carriers and there is a risk
that sufficient markets may not exist to profitably return all the aircraft to
service. See, "Employees."
Management's belief that its temporary crew shortage can be alleviated in the
second quarter of fiscal 1998 and that flight operation performance will improve
when the temporary crew shortages are alleviated thereby permitting a phase-in
of grounded aircraft to revenue service are forward-looking statements. Actual
performance could differ materially from the forward looking statement caused by
a continuing shortage of qualified pilots and aircraft dispatchers, the failure
to develop an adequate crew scheduling system, competitors' receipt of MAI's
canceled routes, and other factors.
THE REGIONAL AIRLINE MARKET
The U.S. regional airline industry remains strong, continuing a trend that began
more than a decade ago. In 1996 the industry transported 11 percent of all
commercial airline passengers in the United States. Regional airline passenger
enplanements increased 8.3 percent to almost 62 million in 1996, with the
average industry load factor at its highest level in history: 52.98 percent.
The vast majority of North American airports receive air service from regional
carriers. Airports served by the industry in North America totaled 782 in 1996,
with 71 percent of these communities depending exclusively on regional airlines
for access to the U.S. air transportation system.
The hub-and-spoke system, the cornerstone of the American air transportation
network, continues to work successfully due, in part, to the essential role
played by code-sharing regional airlines. In 1996, thirty-five of the nation's
top 50 regional air carriers used the two-letter designator code of a major or
national airline to list their flights. In 1996, 95 five percent of the
industry's passengers were transported by code-sharing regional airlines.
On March 20, 1997, the regional airline industry achieved one of the most
important milestones in the history of the industry: the transition for aircraft
with 10 to 30 seats to FAR Part 121, the operating standards that previously
governed aircraft with 31 or more seats. The regional airlines recorded this
achievement while attaining growth in passenger enplanements and revenue
passenger miles as well as continuing their excellent safety record.
9
11
INDUSTRY GROWTH
Since 1986, passenger enplanements have grown from 33.5 million to 61.9 million
in 1996. Revenue passenger miles have increased similarly from 4.47 billion to
14.22 billion over the same period. The number of aircraft operated by regionals
in 1986 was 1,806 compared to 2,127 in 1996. This growth is expected to continue
with the Regional Aircraft Association forecasting for 2,700 regional aircraft
by 2005 with most of the growth originating in the 30- to 50-seat segment. More
modern, sophisticated and faster aircraft are added to the regional airline
fleet each year.
Regional carriers continue to rely on 19-seat aircraft for a significant portion
of airline service. In 1996 there were 565 aircraft in this category. The
19-seat aircraft flew 12.9 percent of the industry's revenue passenger miles in
1996. Aircraft with 20-30 seats flew 20 percent, while aircraft in the 31- to
40-seat category flew 29.8 percent. Aircraft with more than 41 seats flew 19.7
percent of revenue passenger miles. The average seating capacity of aircraft
used by regional carriers increased from 24.6 seats per airplane in 1995 to 25.1
seats per airplane in 1996.
MARKET FACTORS
The key factors supporting the regional airline market are:
- - Service in low-density markets which remain unattractive to major airlines
and low-fare carriers;
- - Relationships with the major airlines, operating feeder service to hubs for
connecting passengers under code-sharing arrangements;
- - Allocation of new-generation, lower-cost turboprop aircraft to routes that
were traditionally jet routes;
- - Ability to provide complementary service in existing major airline markets
by operating flights in scheduling gaps between those of the major air
carrier; and
- - Lower costs than a major airline operating a similar route due to lower
wages, more flexible work rules and more suitable aircraft for that
particular route.
CORPORATE STRATEGY
Mesa's long business strategy is to operate a competitive and profitable,
high-frequency, quality-service airline, primarily with a hub-and-spoke route
system. The strategy is implemented through a disciplined approach to the
regional airline business which incorporates (i) the previously discussed
regional diversification, (ii) a focus on profitable markets, (iii) consolidated
operations, and (iv) a modern, efficient aircraft fleet that positions the
airline to be able to capitalize on future growth opportunities.
10
12
Mesa's market selection process follows an in-depth analysis on a route-by-route
basis. Agreement is then reached where appropriate with Mesa's code-share
partners regarding the level of service and fares. This selection process
enhances the likelihood of profits in a given market.
AIRLINE OPERATIONS
In 1997, Mesa completed the consolidation and centralization of the dispatch,
flight operations and maintenance functions of its MAI operations in Farmington,
New Mexico. The consolidation plan was prompted by an agreement with the FAA,
plans for future company expansion and conversion from an FAR Part 135 to an FAR
Part 121 air carrier. Headquarters for its WestAir and Air Midwest subsidiaries
are located in Fresno, California and Wichita, Kansas, respectively.
The Company relocated its training center and Human Resources Department to the
Dallas/Fort Worth metroplex. This action consolidated the Company's training and
personnel processing in one central location from several locations throughout
the United States. The Company believes that this action will result in greater
consistency and quality of training of its flight crewmembers and ground
personnel.
Mesa plans to reduce the number and type of aircraft it operates. In July 1997,
the Fokker 70 aircraft were retired and replaced by CRJ aircraft. Termination of
the WestAir code-sharing agreement and certain Mesa contract markets could
result in a surplus of 21 British Aerospace Jetstream 31 aircraft, ten 30-seat
Embraer Brasilia aircraft and 13 1900D Beech aircraft. An additional 26 Beech
1900D aircraft may become surplus to MAI should operations in the Denver system
be discontinued or sold. The Company presently plans to retire all 21 of the
British Aerospace Jetstream 31 aircraft as well as all remaining 30-seat Embraer
Brasilia aircraft. Retirement of the J-31 and EMB-120 aircraft will reduce the
type of aircraft operated to three: the 1900D, Dash 8-200 and CRJ aircraft.
Reduction, relocation, trade-in and sale of aircraft or discontinuation or sale
of operations is a forward-looking statement and is dependent on, among other
factors, the terms Mesa obtains from manufacturers, alleviation of crew
shortages and the market for surplus aircraft.
MESA'S JET SERVICE
Mesa has ordered 32 Canadair Regional Jets (CRJs) for operations from its MAI
hub in Fort Worth, Texas, its AmericaWest Express operation in Phoenix, Arizona,
and to operate new service as US Airways Express in the eastern portion of the
United States. As of the end of fiscal 1997, the Company had received seven of
the aircraft. Delivery of all CRJ aircraft is scheduled to be completed before
the end of 1999. The value of these 32 jets is approximately $640 million.
MAI inaugurated independent jet service under its own name "Mesa Airlines"
between Fort Worth and Houston, Texas in May 1997 and between Fort Worth and San
Antonio, Texas in September 1997. Subsequent to September 30, 1997, CRJ flights
were initiated between Fort
11
13
Worth and Austin, Texas; San Antonio and Colorado Springs, Colorado; and
Colorado Springs and Nashville, Tennessee.
Mesa operates three CRJs pursuant to its code-sharing agreement with America
West from its AmericaWest Express hub in Phoenix, Arizona. These aircraft
operate between Phoenix and Des Moines, Iowa; Fresno, California; and Santa
Barbara, California.
Under the new code-sharing agreement with US Airways, Mesa will operate 12 CRJs
with an option for up to an additional 12 aircraft. Service is scheduled to
begin in the new jet markets effective January 19, 1998 on flights between US
Airways' hubs in Philadelphia, Pennsylvania and Birmingham, Alabama; St. Louis,
Missouri; Cincinnati, Ohio; and Newburgh, New York.
MARKETING
Under Mesa's code-sharing agreements, America West, UAL, and US Airways (the
major partners) coordinate advertising and public relations within their
respective regions. In addition, Mesa benefits from the major partners'
advertising programs in regions outside those served by Mesa, with the major
partners' customers becoming customers of Mesa as a result of through fares.
Under these code-sharing arrangements, Mesa's passengers also benefit from
through-fare ticketing with the major partners and greater accessibility to
Mesa's flights on computer reservation systems and in the Official Airline
Guide.
Mesa's services are promoted through listings in computer reservation systems,
the Official Airline Guide, and through direct contact with travel agencies and
corporate travel departments. Mesa participates in shared advertising with
resort and rental property operators and ski areas in leisure markets in which
it operates. Mesa's non-code-share operation, MAI, utilizes SABRE, a
computerized reservation system widely used by travel agents, corporate travel
offices and other airlines. The reservation systems of Mesa's code-sharing
partners are also utilized in each of Mesa's other operations through their
respective code-sharing agreements. Mesa also pays booking fees to owners of
other computerized reservation systems based on the number of passengers booked
by travel agents using such systems. Mesa believes that it has good
relationships with the travel agents handling its passengers.
To further introduce more frequent travel within its own independent operation,
MAI has introduced a frequent flyer program (MesaMax). It is management's
opinion that the frequent flyer program will build brand loyalty, provide an
additional incentive for travel on MAI, and act as a promotional device. The
program is restricted to MAI's independent operation and is not offered or made
available on any flights offered in conjunction with any of MAI's code-share
operations with America West, UAL or US Airways. Management believes MAI's media
advertising campaign has increased community awareness of its Meacham airport
location in Fort Worth. The independent operation consists of travel through
MAI's Albuquerque hub and that portion of MAI's jet operations within Texas;
between San Antonio and Colorado Springs, Colorado; and Colorado Springs and
Nashville, Tennessee. The program offers travelers one free round trip for every
16 one way tickets (eight round-trips) purchased and used on the independent
system. Frequent flyer awards may be redeemed for travel between any connecting
points on MAI's independent system, but must be accumulated and used within one
year. No restrictions apply on travel under the awards program so long as seats
are available on desired flights under any class of service. Awards have no cash
value and cannot be sold, traded or
12
14
bartered. The incremental cost of transporting a free passenger consists almost
entirely of reservations, passenger liability insurance and catering costs which
total a nominal amount. MAI had no material liability for frequent flyer awards
at September 30, 1997. Management's belief that the frequent flyer awards
program will result in increased brand loyalty, additional incentive for travel
on MAI, and serve as a promotional device and that MAI's media advertising
campaign has increased community awareness are forward-looking statements.
Actual results could differ materially from the forward-looking statements
caused by, among other factors, limitations of the route systems included in the
program, diversion of traffic from revenue to non-revenue, increased
reservations costs, increased incidental costs relating to booking, boarding and
handling incremental traffic, and general economic conditions.
FARES AND FEE PER DEPARTURE
Since 1978, airlines in the United States have been free to set their own
domestic fares without governmental regulation. Mesa derives its passenger
revenues from a combination of local fares, through fares, joint fares and fee
per departure arrangements. Local fares are fares for one-way and round-trip
travel provided by Mesa within its route system. Local fares are also frequently
used by passengers connecting with other carriers. A through fare is a fare
offered to passengers by either America West, UAL or US Airways which generally
provides cost savings to the passenger who transfers to the major carrier's
code-sharing partner on routes flown by the code-sharing partner. Through fares
are prorated in accordance with standards specified in the various code-sharing
agreements. Joint fares are single fares for travel combining flights with Mesa
and other airlines which are not code-sharing partners with Mesa. With joint
fares, the passenger generally pays a single lower fare than the sum of the
local fares charged for the combined flights. Mesa has been able to negotiate
joint-fare arrangements with major carriers as an additional means of deriving
passengers connecting through its hub cities.
The Company has increasingly relied on fee per departure contractual agreements
with two of its code-sharing partners to generate revenue. A number of MAI and
WestAir routes generate revenue on a fee per departure basis and all revenue to
be generated by the new CRJ code-sharing agreement with US Airways is based on a
fee per departure arrangement.
COMPETITION
The airline industry is highly competitive and volatile. Airlines compete in the
areas of pricing, scheduling (frequency and timing of flights), on-time
performance, type of equipment, cabin configuration, amenities provided to
passengers, frequent flyer plans, travel agents' commissions and the automation
of travel agents' reservation systems. Further, because of the Deregulation Act,
airlines are currently free to set prices and establish new routes without the
necessity of seeking governmental approval. At the same time, deregulation has
allowed airlines to abandon unprofitable routes where the affected communities
will not be left without air service. See, "ESSENTIAL AIR SERVICE PROGRAM."
Mesa believes that the Deregulation Act facilitated Mesa's entry into scheduled
air service markets and will allow it to compete on the basis of service and
fares. The Deregulation Act, however, makes possible the entry of other
competitors which have substantial financial
13
15
resources and experience, creating the potential for intense competition among
regional air carriers in Mesa's markets.
As discussed earlier, Mesa believes its code-sharing agreements provide a
significant competitive advantage in hub airports where its major partner has a
predominant share of the market. The ability to control connecting passenger
traffic by offering a superior service makes it very difficult for other
regional airlines to compete at such hubs. In addition to the enhanced
competitive edge offered by the code-sharing agreements, Mesa competes with
other airlines through offering frequent flights, flexible schedules and
numerous fare levels.
FUEL
During its operating history, Mesa has experienced few problems with the
availability of fuel, and it believes that it will be able to obtain fuel
sufficient to meet its existing and anticipated future requirements at
competitive prices. Standard industry contracts do not generally provide
protection against fuel price increases, nor do they ensure availability of
supply. Increased fuel costs during the Company's fiscal 1997 year have had an
impact on the profitability of the airline market in general and on the Company
in particular. The extent and the duration of fuel price increases are not
predictable; however, to the extent that fuel price increases cannot be passed
on to the customer they are absorbed as an additional expense by the Company.
MAINTENANCE OF AIRCRAFT AND TRAINING
All mechanics and avionics specialists employed by Mesa have the appropriate
training and experience and hold the required licenses issued by the FAA. Using
its own personnel and facilities, Mesa maintains its aircraft on a scheduled and
"as-needed" basis. Mesa emphasizes preventive maintenance and checks its
aircraft engines and airframes as required. Mesa has also developed an inventory
of spare parts specific to the aircraft it flies and has instituted a
computerized tracking system to increase maintenance efficiency and to avoid
excess inventories of spare parts.
Mesa provides periodic in-house and outside training for its maintenance and
flight personnel and also takes advantage of factory training programs that are
offered when acquiring new aircraft.
INSURANCE
Mesa carries types and amounts of insurance customary in the airline industry,
including coverage for public liability, passenger liability, property damage
product liability, aircraft loss or damage, baggage and cargo liability and
workers' compensation.
Mesa's captive insurance company, MAGI Insurance, Ltd., handles baggage and
freight claims in addition to a portion of Mesa's hull and liability insurance.
14
16
EMPLOYEES
Mesa currently has approximately 4,800 employees. Mesa's success is in part
dependent upon its ability to continue to attract and retain qualified
personnel. In the past Mesa has had no difficulty attracting qualified personnel
to meet its requirements.
Pilot turnover at times is a significant issue among regional carriers when
major carriers are hiring experienced commercial pilots away from regional
carriers. The addition of aircraft, especially new aircraft types, can result in
pilots upgrading between aircraft types and becoming unavailable for duty during
the extensive training periods required. In addition, the consolidation and
standardizing of Mesa's pilot training program resulted in training delays.
These factors have impacted Mesa's operations and resulted in unavailability of
flight crews and cancellation of flights. See, "CODE-SHARING RELATIONSHIPS -- US
Airways, Inc." for a further discussion of crew shortages and flight
cancellations. The pilot shortage was reduced in October 1997 when the Company
reduced service in certain markets and temporarily removed aircraft from
service. As of January 12, 1998, 10 aircraft remained out of service to comply
with the reduced levels of service required by US Airways until pilot and crew
shortages could be alleviated in MAI's US Airways Express system. See,
"CODE-SHARING RELATIONSHIPS -- US Airways, Inc." Mesa is working with its wholly
owned subsidiary, MPD, Inc. dba Mesa Pilot Development, to train larger numbers
of new pilots to meet the staffing needs of MAI's operations and expects to have
an adequate level of qualified pilots by the second fiscal quarter of 1998. No
assurance can be given, however, that pilot turnover and unavailability will not
continue to be a major problem in the future, particularly if major carriers
expand. Similarly, there can be no assurance that sufficient numbers of new
pilots will be available to support any future growth.
During December 1996, Mesa reached a five-year agreement with the Air Line
Pilots Association (ALPA) for a single pilot contract for MAI and Air Midwest,
Inc. The contract provides for industry-average pay, economic work rules and
excellent opportunities for advancement. This contract resulted in an increase
in pilot salary expense of approximately $6.1 million for the 1997 fiscal year.
WestAir pilots are also represented by ALPA and the Company is in mediation
regarding a new contract, although with the expiration of the WestAir
code-sharing agreement with UAL in May 1998, it is unlikely that a new contract
agreement will be negotiated. Air Midwest mechanics are represented by the
International Association of Machinists (IAM), flight attendants at WestAir and
Mountain West, a division of MAI, are represented by the Association of Flight
Attendants (AFA). No other Mesa subsidiaries are parties to any other collective
bargaining agreement or union contracts.
ESSENTIAL AIR SERVICE PROGRAM
The Essential Air Service program administered by the United States Department
of Transportation ("DOT"), guarantees a minimum level of air service in certain
communities, predicated on predetermined guidelines set forth by Congress. Based
on these guidelines, DOT will subsidize air service to communities which might
otherwise not have air service. Mesa Air Group services 23 such markets for an
annual subsidy of approximately $3.5 million.
15
17
REGULATION
As an interstate air carrier, Mesa is subject to the economic jurisdiction of
and regulation by the DOT. The DOT is authorized to establish consumer
protection regulations to prevent unfair methods of competition and deceptive
practices, to prohibit certain pricing practices, to inspect a carrier's books,
properties and records, and to mandate conditions of carriage. The DOT also has
the power to bring proceedings for the enforcement of air carrier economic
regulations, including the assessment of civil penalties, and to seek criminal
sanctions.
Mesa is subject to the jurisdiction of the FAA with respect to its aircraft
maintenance and operations, including equipment, ground facilities, dispatch,
communication, training, weather observation, flight personnel and other matters
affecting air safety. To ensure compliance with its regulation, the FAA requires
airlines to obtain an operating certificate which is subject to suspension or
revocation for cause, and provides for regular inspections.
As a result of a special review by the FAA of Mesa's operations, and other
factors, a Consent Order was signed with the FAA in September 1996, assessing a
compromise civil penalty of $500,000. Mesa paid $250,000 of the compromise
amount, and the remaining $250,000 was waived after Mesa complied with
provisions of the Consent Order by September 30, 1997. Mesa agreed to adopt
operational standards that exceed the requirements of the Federal Aviation
Regulations and consolidate control of operational areas (maintenance, flight
operation and training) under one central management team.
Effective in March 1997, the FAA required that commuter airlines with aircraft
of 10 or more passenger seats operating under FAR Part 135 rules to begin
operating those aircraft under FAR Part 121 regulations. Mesa, one of the
largest regional airlines operating under FAR Part 135 regulations, completed
the transition to Part 121 on the FAA's deadline. Company management is
monitoring the costs increases to its 19- and 30-seat aircraft operations
resulting from compliance with FAR Part 121 and the consent order. At present,
management believes those continuing costs will be approximately $4.5 million
per year. Those increased costs are primarily related to additional training,
dispatch and maintenance procedures. Continuing efforts are being made to
minimize the cost of these new operating procedures while fully complying with
FAR Part 121 operating requirements.
The ongoing cost estimate to comply with FAR Part 121 regulations is a
forward-looking statement that involves a number of uncertainties which could
cause actual costs to differ materially from the forward looking statements
including, among other factors, promulgation of future FAA regulations,
administrative rules, or informal requests by the FAA requiring the hiring of
additional personnel, addition of new aircraft mechanical equipment, payment of
additional fines and the impact of future laws or Congressional investigations
all of which could have the effect of increasing the costs of compliance.
Mesa is subject to the jurisdiction of the Federal Communications Commission
regarding the utilization of its radio facilities and to the jurisdiction of the
United States Postal Service with respect to carriage of United States mail.
Local governments in certain markets have adopted regulations governing various
aspects of aircraft operations including noise abatement and curfews.
16
18
Item 2. Properties
Mesa's primary property consists of aircraft used in the operation of the
business. The following table lists the aircraft operated by Mesa as of
September 30, 1997:
Number of Aircraft
---------------------------------
Passenger
Type of Aircraft Owned Leased Total Capacity
- -------------------------------------------------------------------------------------
Beechcraft 1900 108 10 118 19
Embraer Brasilia 2 26 28 30
BAe Jetstream 31 21 21 19
Dash 8-200 12 12 37
Canadair Regional Jet 7 7 50
---------------------------------
Total 110 76 186
---------------------------------
See, "MANAGEMENT'S DISCUSSION AND ANALYSIS -- LIQUIDITY AND CAPITAL RESOURCES"
regarding aircraft commitments.
In addition to aircraft, Mesa has office and maintenance facilities to support
its operations. The facilities are as follows:
Type Location Ownership Approximate Size
---- -------- --------- ----------------
Accounting Farmington, NM Owned 7,000 sq. ft.
Administration Farmington, NM Owned 18,000 sq. ft.
Operations Farmington, NM Owned 16,000 sq. ft.
Training/Personnel Arlington, TX Leased 15,000 sq. ft.
Hangar Farmington, NM Leased 30,000 sq. ft.
Engine Shop Farmington, NM Leased 6,000 sq. ft.
Hangar Fresno, CA Leased 50,000 sq. ft.
Offices Fresno, CA Leased 20,000 sq. ft.
Warehouse/Office Fresno, CA Leased 21,750 sq. ft.
Hangar/Office Forth Worth, TX Leased 14,000 sq. ft.
Hangar/Office Wichita, KS Leased 30,000 sq. ft.
Hangar/Office Jacksonville, FL Leased 30,256 sq. ft.
Hangar Jamestown, NY Leased 30,000 sq. ft.
Hangar/Office Dubois, PA Leased 23,000 sq. ft.
Hangar Reading, PA Leased 56,250 sq. ft.
Hangar/Office Grand Junction, CO Leased 32,768 sq. ft.
Hangar/Office Yakima, WA Leased 14,500 sq. ft.
Hangar/Office Bullhead City, AZ Leased 12,852 sq. ft.
Office Phoenix, AZ Leased 3,570 sq. ft.
Mesa, as the lessee, leases space at each of the airports in which it operates
to accommodate its operations. These leases are generally month-to-month or
relatively short-term leases. MAI, as the lessor, also leases commercial real
estate of approximately 26,200 square feet in Farmington, New Mexico to
unrelated entities.
17
19
Item 3. Legal Proceedings
During 1994, seven shareholder class action complaints were filed in the United
States District Court for the District of New Mexico against Mesa, certain of
its present and former corporate officers and directors, its independent
auditor, and certain underwriters who participated in Mesa's June 1993 public
offering of Common Stock. During October 1995, the court certified a class
consisting of persons who purchased Mesa stock between January 28, 1993 and
August 5, 1994. These complaints have been consolidated by court order, and,
after the court granted in part a motion to dismiss in May 1996, a third amended
consolidated complaint has been filed alleging that during the class period the
defendants caused or permitted Mesa to issue publicly misleading financial
statements and other misleading statements in the registration statement for the
June 1993 public offering, annual and quarterly reports to shareholders, press
releases and interviews with securities analysts. The current complaint alleges
that these statements misrepresented Mesa's financial performance and condition,
its business, the status of its operations, its earnings, its capacity to
achieve profitable growth and its future business prospects, all with the
purpose and effect of artificially inflating the market price of common stock of
Mesa throughout the relevant period. The complaint further alleges that certain
officers and directors of the Company illegally profited from sales of Mesa
Common Stock during these periods. The complaint seeks damages against the
defendants in an amount to be determined at trial (including rescission and/or
money damages as appropriate) and reasonable attorney, accountant and expert
fees. In 1996, Mesa made an accrual to vigorously defend the litigation.
Further, Mesa and the corporate officers and directors believe they have
substantial and meritorious defenses against these allegations and are defending
their position vigorously. However, should an unfavorable resolution of this
litigation occur, it is possible that Mesa's future results of operations or
cash flows could be materially affected in a particular period.
In June 1997, UAL filed a complaint in the United States District Court for the
Northern District of Illinois against two subsidiaries of the Company, Mesa
Airlines, Inc. ("MAI") and WestAir Commuter Airlines, Inc. ("WestAir"), seeking
a judicial declaration of the parties' rights and obligations under two separate
written agreements, pursuant to which MAI and WestAir allegedly agreed to
provide certain airline transportation services to UAL including the provision
of scheduled air transportation services in certain areas of the United States
under the service mark "United Express." UAL contends that, under these
agreements, UAL has the right to "increase, decrease, or in any other way adjust
the flight frequencies, or markets, or both" in certain airports currently
serviced by WestAir and/or MAI. Neither MAI nor WestAir has yet responded to the
complaint. In order to give both parties additional time to explore the
possibility of resolving this action without further litigation, the parties
have entered into a stipulation, which the Court approved, extending defendants'
time to respond to the complaint to and including January 28, 1998. MAI and
WestAir dispute the principal contentions in UAL's complaint, and unless a
satisfactory negotiated resolution is achieved, intend to defend their position
vigorously.
Mesa is also a party to legal proceedings and claims which arise during the
ordinary course of business.
18
20
In the belief of management, based upon information at this time, the ultimate
outcome of all the proceedings and claims pending against Mesa referred to above
is not expected to have a material adverse effect on Mesa's consolidated
financial position.
The belief that substantial and meritorious defenses against the allegations
contained in the class action complaint and the belief that the ultimate outcome
of all the proceedings and claims pending against Mesa will favorably be
resolved are forward looking statements which could materially differ as a
result of the determination of a judge or jury.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
MARKET PRICE OF COMMON STOCK
Presented below are the high and low sales prices of the Common Stock of Mesa
Air Group, Inc. on the National Market System under the NASDAQ symbol MESA.
=========================================================================
FISCAL 1997 FISCAL 1996
-------------------------------------------------------------------------
Quarter HIGH LOW HIGH LOW
-------------------------------------------------------------------------
First $ 10.50 $ 6.44 $ 10.75 $ 8.00
Second 7.63 5.44 13.25 7.75
Third 6.50 4.69 13.88 10.38
Fourth 6.63 5.00 12.13 8.44
On December 9, 1997, Mesa had 1,335 shareholders of record. Mesa has never paid
cash dividends and does not intend to pay cash dividends in the future.
19
21
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA AND OPERATING STATISTICS
================================================================================
In thousands of dollars, except per share and average fare amounts and otherwise
indicated
Years ended September 30
------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------
Operating revenues $ 510,977 $ 500,363 $ 455,139 $ 396,134 $ 353,640
Operating expenses 565,463 452,369 425,567 347,760 311,730
Operating income (loss) (54,486) 47,994 29,572 48,374 41,910
Other income (expense) 3,087 14,302 (156) 3,534 3,797
Interest expense 27,776 12,777 6,395 7,916 5,366
Earnings (loss) before income taxes (79,175) 49,519 23,021 43,992 40,341
Net earnings (loss) (48,597) 30,407 14,012 27,688 26,352
Net earnings (loss) per common share (1.72) 1.00 0.42 0.76 0.77
Working capital 68,561 70,860 115,378 134,186 125,706
Total assets 649,866 678,491 446,722 419,902 399,318
Long-term debt, excluding current portion 338,199 338,278 78,411 91,772 91,742
Stockholders' equity 177,088 224,666 255,883 234,316 215,394
Net book value per common share $ 6.26 $ 7.96 $ 7.53 $ 7.16 $ 6.08
- -----------------------------------------------------------------------------------------------------------------------------
Passengers carried 6,720,631 6,463,690 6,086,782 5,170,252 4,449,492
Revenue passenger miles (000) 1,397,645 1,364,681 1,179,397 982,642 916,851
Available seat miles (000) 2,484,489 2,437,662 2,310,895 1,897,933 1,821,156
Average passenger journey 208 211 194 190 206
Average stage length 171 167 167 163 NA
Load factor 56.3% 56% 51% 51.8% 50.3%
Break-even passenger load factor 57.6% 51.7% 49.2% 47.0% 45.8%
Revenue per available seat mile 20.6(cent) 20.5(cent) 19.7(cent) 20.9(cent) 19.4(cent)
Cost per available seat mile 22.8(cent) 18.6(cent) 18.4(cent) 18.3(cent) 17.1(cent)
Average yield per revenue passenger mile 35.8(cent) 35.9(cent) 37.5(cent) 38.9(cent) 37.3(cent)
Average fare $ 74.52 $ 75.72 $ 72.53 $ 74.11 $ 76.80
Aircraft in service 184 175 177 166 146
Cities served 168 164 172 165 152
Number of employees 4,800 4,000 3,900 3,500 2,800
=============================================================================================================================
NA - Information not available
20
22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS
Mesa Air Group, Inc. and its subsidiaries ("Mesa" or the "Company") are a group
of regional airlines and related companies providing service across the United
States as AmericaWest Express, Mesa Airlines, United Express and US Airways
Express.
The following tables set forth selected operating and financial data of Mesa for
the years indicated below:
OPERATING DATA
Years ended September 30
--------------------------------------------------
1997 1996 1995
--------- --------- ---------
Passengers 6,720,631 6,463,690 6,086,782
Available seat miles (000) 2,484,489 2,437,662 2,310,895
Revenue passenger miles (000) 1,397,645 1,364,681 1,179,397
Load factor 56.3% 56.0% 51.0%
Revenue per ASM 20.6(cent) 20.5(cent) 19.7(cent)
Yield per RPM 35.8(cent) 35.9(cent) 37.5(cent)
Cost per ASM 22.8(cent) 18.6(cent) 18.4(cent)
FINANCIAL DATA
Years ended September 30
----------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ----------------------------- ------------------------------
Percent Cost Percent Cost Percent Cost
Amount of per Amount of per Amount of per
(000) Revenues ASM (000) Revenues ASM (000) Revenues ASM
------------------------------ ----------------------------- ------------------------------
Flight operations $181,696 35.5% 7.3(cent) $166,151 33.2% 6.8(cent) $166,596 36.6% 7.2(cent)
Maintenance 93,278 18.3% 3.8(cent) 81,400 16.3% 3.3(cent) 73,701 16.2% 3.2(cent)
Aircraft and traffic servicing 85,755 16.8% 3.5(cent) 73,469 14.7% 3.0(cent) 64,120 14.1% 2.7(cent)
Promotion and sales 75,448 14.8% 3.0(cent) 74,844 15.0% 3.1(cent) 73,289 16.1% 3.2(cent)
General and administrative 26,543 5.2% 1.1(cent) 29,186 5.8% 1.2(cent) 26,921 5.9% 1.2(cent)
Depreciation and amortization 34,859 6.8% 1.4(cent) 24,296 4.9% 1.0(cent) 20,940 4.6% 0.9(cent)
Other operating items 67,884 13.3% 2.7(cent) 3,023 0.6% 0.1(cent) -- -- --
------------------------------ ----------------------------- ------------------------------
Total operating expenses $565,463 110.7% 22.8(cent) $452,369 90.4% 18.6(cent) $425,567 93.5% 18.4(cent)
============================== ============================= ==============================
Interest expense $ 27,776 5.4% 1.1(cent) $ 12,777 2.6% 0.5(cent) $ 6,395 1.4% 0.3(cent)
============================== ============================= ==============================
21
23
REVENUE AND EXPENSE COMPARISON
FISCAL 1997 VERSUS FISCAL 1996
Operating revenues increased by $10.6 million (2.1 percent) for fiscal 1997
compared to the prior fiscal year. This increase in operating revenues is the
result of a 4 percent increase in passengers, partially offset by a 1.6 percent
decrease in average fares. Capacity, measured by available seat miles (ASMs),
increased by 1.9 percent and passenger traffic measured by Revenue Passenger
Miles (RPMs) which is one passenger carried one mile, increased by 2.4 percent.
The load factor increased from 56.0 percent to 56.3 percent, yield (passenger
revenue per RPM) decreased to 35.8(cent) in fiscal 1997 from 35.9(cent) per RPM,
and revenue per ASM increased to 20.6(cent) from 20.5(cent) per ASM in fiscal
1996. The airline industry has a history of fare and traffic volatility.
Management expects revenue per available seat mile to remain relatively stable
in existing markets during the next fiscal year. However, the CRJ jet aircraft,
which is faster and flown over a longer stage length than turbo prop aircraft,
generates lower revenue per ASM than turbo prop aircraft. Because the Company
expects to operate increasing numbers of CRJ aircraft in the future, overall
revenue per ASM is expected to be lower in the 1998 fiscal year than that
attained in fiscal 1997.
Flight Operations expense increased by 9.4 percent to $181.7 million (7.3(cent)
per ASM) for the fiscal year ended September 30, 1997, from $166.2 million
(6.8(cent) per ASM) for the year ended September 30, 1996. Fuel costs increased
by $10.1 million to 2.7(cent) per ASM from 2.3(cent) per ASM during the current
period as compared to the prior period. Of that increase, $6.2 million is a
result of a 7.0(cent) per gallon increase in the average price of fuel with
increased usage accounting for the balance. Pilot costs increased by $14.0
million during the year due primarily to a $10.2 million increase in pilot wages
and payroll taxes. Of this increase $6.1 million was a result of increased rates
of pay associated with the new pilot contract which became effective in December
1996 and $4.1 million of the increase was due to an increase in the number of
pilots employed. The costs of pilot meals and lodging increased by $3.4 million
as a result of the new contract and conversion to operating under FAR Part 121.
Dispatch costs increased by $1.9 million and pilot training costs rose by $2.0
million in the 1997 period due to the stricter operating requirements of FAR
Part 121. These cost increases were partially offset by an approximate $17.0
million reduction in aircraft lease costs during the 1997 fiscal year which
resulted from the purchase of 69 aircraft in May 1996, previously operated by
Mesa under operating leases. Aircraft ownership costs are reported as
depreciation and interest expense rather than flight operations expense.
Maintenance costs increased by $11.9 million to $93.3 million (3.8(cent) per
ASM) for the 1997 fiscal year, from $81.4 million (3.3(cent) per ASM) for the
prior year. The requirements of operating under FAR Part 121, the associated new
training requirements and implementation of the Consent Order with the Federal
Aviation Administration (FAA) resulted in a 20 percent increase in the number of
mechanics per airplane in fiscal 1997 as compared to fiscal 1996. The increase
in number of mechanics per aircraft and a wage increase granted to the mechanics
resulted in increasing labor costs by approximately $3.8 million during the
fiscal year. An increase in the number of aircraft engine overhauls resulted in
an increase in engine overhaul expense of $8.1 million (35.7 percent).
22
24
Aircraft and Traffic Servicing costs increased to $85.7 million (3.5(cent) per
ASM) during fiscal 1997 from $73.5 million (3.0(cent) per ASM ) in fiscal 1996.
Station labor costs rose by $6.1 million due to an across the board wage
increase granted in September 1996 in order to attract and retain qualified
individuals. Non-completion costs increased by $1.4 million in fiscal 1997. The
increase was caused by a higher than normal level of flight cancellations as a
result of flight crew scheduling difficulties and training delays. The flight
crew scheduling difficulties and training delays were related to the significant
changes required by conversion to FAR Part 121 and compliance with the FAA
Consent Order. Deicing costs increased $.8 million and security expenses
increased $.5 million in 1997 over the prior year. Increased costs of security
are directly related to the increase in passengers carried.
Promotion and Sales expense increased slightly from $74.8 million to $75.4
million.
General and Administrative costs declined from $29.2 million in fiscal 1996 to
$26.5 million in fiscal 1997. The primary reason for the decrease was reduced
management compensation expense under the management incentive program.
Depreciation and amortization expense rose by $10.5 million to $34.9 million and
interest expense increased by $15.0 million to $27.8 million. The increase in
depreciation and interest expense was due to the purchase of 69 aircraft in May
1996, which had previously been operated by Mesa under operating leases, and the
purchase of 22 new Beechcraft aircraft financed with debt.
At September 30, 1997, the Company recognized a provision of $72.1 million for
the non-renewal of the WestAir, and potential early termination of the MAI,
code-sharing agreements with UAL. This provision is included in other operating
items. (See footnotes 11 and 15 in the accompanying consolidated financial
statements for additional discussion). The $72.1 million provision provides for
the estimated loss on the retirement or sale of aircraft, parts and equipment
which are expected to be surplus to the needs of the Company upon expiration or
potential early termination of the code-sharing agreements. In addition, the
provision includes an estimate for all other anticipated costs of
discontinuation or sale of the WestAir, Denver and Pacific Northwest operations.
Other operating items in fiscal 1997 also includes a gain from the settlement
with an aircraft manufacturer of $5.2 million and a $1 million aircraft return
provision related to the final settlement and return of the Company's Fokker 70
aircraft. In fiscal 1996, the Company recognized a $3 million provision related
to return of the Fokker 70 aircraft.
The Company's effective tax rate of 38.6% is comparable with prior years.
FISCAL 1996 VERSUS FISCAL 1995
Operating revenues increased $45.2 million (10 percent) for fiscal 1996 compared
to the prior fiscal year. This increase in operating revenues is the result of a
six percent increase in passengers and a four percent increase in average fares.
Capacity, measured by available seat miles (ASMs), increased by 5.5 percent. The
load factor increased from 51 percent to 56 percent and revenue per ASM
increased from 19.7(cent) to 20.5(cent). The airline industry has a history of
fare and traffic volatility; however, management expects revenue per available
seat mile to remain relatively stable during the next fiscal year.
23
25
Flight operations expense decreased from 7.2(cent) per ASM in 1995 to 6.8(cent)
per ASM in 1996 primarily due to a reduction of fleet integration costs during
the current year, a conversion of many aircraft from being operated under
operating lease to owned aircraft, and the operation of jet aircraft throughout
the entire 1996 fiscal year. However, this benefit was partially offset by
higher-than-average pilot training costs in the third and fourth quarters caused
by the increased turnover caused by major airlines increased hiring of Mesa
pilots and an increase in fuel related to a new tax on jet fuel and a general
increase in price.
Maintenance expense was essentially unchanged at 3.3(cent) per ASM in 1996.
Aircraft and traffic servicing cost increased slightly from 2.7(cent) per ASM in
1995 to 3.0(cent) per ASM in 1996. This increase is primarily the result of
increased operating fees at Denver International Airport. These costs include
landing fees, station wages, rent and other station costs.
Promotion and sales expense decreased slightly from 3.2(cent) in 1995 to
3.1(cent) per ASM in 1996. These costs include commissions, booking fees and
other reservation costs and will vary with revenue.
General and administrative expense remained constant at 1.2(cent) per ASM.
Depreciation and amortization expense increased from 0.9(cent) per ASM in 1995
to 1.0(cent) per ASM in 1996 primarily due to additional depreciation on owned
aircraft.
Interest expense increased from 0.3(cent) per ASM in 1995 to 0.5(cent) per ASM
in 1996 as a result of financing more aircraft through use of debt rather than
operating leases.
Mesa incurred an effective tax rate of approximately 38.6 percent for the year
1996. This rate is lower than 1995 due in part to implementation of a state tax
minimization program.
The combination of the above factors, excluding a one-time accrual for Fokker
return costs of 0.1(cent) per ASM, resulted in a slight increase in operating
expenses from 18.4(cent) per ASM in 1995 to 18.6(cent) per ASM in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Mesa's cash, cash equivalents and marketable securities as of September 30, 1997
amounted to $65.9 million. This was an increase of $5.9 million over the prior
year. Mesa generated approximately $11 million in cash from operating activities
during 1997. Mesa's cash, cash equivalents and marketable securities are
intended to be used for working capital, acquisitions and capital expenditures.
Mesa had receivables of approximately $53.9 million at September 30, 1997 which
consist primarily of amounts due from code-sharing partners UAL and US Airways.
Under the terms of the UAL and US Airways agreements, Mesa receives a
substantial portion of its revenues through the Airline Clearing House.
Historically, Mesa has generated adequate cash flow to meet its operating needs.
Management's belief that the Company will have adequate cash flow to meet its
operating needs is a forward-looking statement. Actual cash flow could
materially differ from the forward-looking statement in the event of the
termination of one or more code-
24
26
sharing agreements, a substantial decrease in the number of routes allocated to
MAI under its code-sharing agreement with UAL or US Airways, termination of one
or more of the Company's credit facilities resulting in the need to repay
unanticipated debt, reduced levels of passenger revenue, additional taxes or
costs of compliance with governmental regulations, fuel cost increases, increase
in competition, increase in interest rates, general economic conditions and
unfavorable settlement of existing or potential litigation.
At September 30, 1997, Mesa had a line of credit with a bank of $20 million
which was being utilized solely to secure outstanding letters of credit. An
aggregate ceiling of $12 million applies to the letters of credit issued under
this agreement, of which $4.3 million were outstanding at September 30, 1997.
Should Mesa draw upon this line of credit, an interest rate of LIBOR plus 1.5
percent (7.28 percent) will apply. The line matures on March 31, 1998, and bears
an annual fee of 1/4 percent. As of September 30, 1997, Mesa was not in
compliance with certain debt covenants of the line of credit agreement, however
the bank has waived compliance with such covenants.
Certain loan and debt agreements with banks contain covenants which require Mesa
to maintain or exceed stated levels of net worth and to equal or exceed
specified debt and working capital ratios. As of September 30, 1997, Mesa was
not in compliance with certain of these financial ratio covenants with total
borrowings of $10.5 million which have been classified as current portion of
long-term debt in the accompanying balance sheet. In January 1998, certain other
financial ratio covenants were either waived or amended effective September 30,
1997. The Company believes it will be in compliance with either its present
covenants or amended covenants through September 30, 1998 except for the
aforementioned borrowings of $10.5 million which has been classified as current
portion of long-term debt. The Company's belief that it will be in compliance
with its covenants or amended covenants is a forward looking statement and its
compliance could be impacted by the costs further described herein related to
restructuring the Company's operations and the timing and sale of aircraft.
Mesa has significant operating lease obligations on existing aircraft. At
September 30, 1997, Mesa leased 76 aircraft with remaining terms of up to 16.5
years. Future lease payments due under all aircraft operating leases were
approximately $467 million at September 30, 1997.
As previously reported, the Company gave notice to Bombardier Regional Aircraft
Division ("BRAD") of its decision to exercise an option to cancel five Dash
8-200 aircraft on order and cancel delivery of the eight remaining previously
ordered Dash 8-200 aircraft because of production delays and initial operating
reliability issues. The Company had originally ordered 25 of the 37-seat,
turboprop aircraft. Long-term financing for all 12 Dash 8-200 aircraft delivered
and placed in service has been completed. On August 15, 1997, the Company
reached an agreement with BRAD providing for conversion of the remaining eight
Dash 8-200 aircraft on order into orders for eight Canadair Regional Jet ("CRJ")
aircraft.
In August 1996, Mesa entered into a memorandum of understanding with BRAD to
acquire 16 CRJ 50-passenger jet aircraft with options to acquire an additional
32 of the jet aircraft. In August 1997, Mesa announced that it would exercise
options for 16 of its 32 option aircraft reserved under the option agreement
including the conversion of eight of its Dash 8-200 aircraft then on order to
CRJ 50-passenger jet aircraft. The order for 32 aircraft totals approximately
$640 million. Mesa has an $8.5 million deposit with BRAD relating to this order.
This deposit will increase to $9.1 million by September 1, 1998. Eleven CRJ
aircraft had been delivered to Mesa by December 18, 1997. The Company expects to
receive nine more CRJ aircraft in 1998 and the remaining 12 jets are scheduled
to be delivered in 1999. The Company has an agreement to trade in 32 Embraer 120
Brasilia ("EMB-120") aircraft to BRAD on a one-for-one basis for the 32 CRJ
aircraft being acquired from BRAD. Eight of the 32 EMB-120 trade-in aircraft
were originally traded in on the eight Dash 8-200 aircraft order which were
subsequently converted
25
27
into orders for CRJ aircraft. All EMB-120 aircraft are required to be in
airworthy condition under Mesa's maintenance program at the time of the
trade-in. Mesa has committed to maintain the trade-in EMB-120 aircraft on its
maintenance program until such aircraft are sold or released to another
operator. As of December 18, 1997, 13 EMB-120s have been delivered to BRAD.
Should the Company fail to receive favorable financing terms from third parties
on the ordered CRJ aircraft to be delivered to the Company, the Company has the
right to obtain financing for the CRJ aircraft from BRAD, subject to the Company
meeting certain creditworthiness standards.
Approximately $1.0 million was incurred as a one-time expense in the fourth
quarter of fiscal 1997 related to the two Fokker 70 aircraft returned by the
Company to Daimler-Benz.
On January 9, 1997, one of the Company's wholly owned subsidiaries, FCA, Inc.,
entered into a distributorship agreement (the "Distributor Agreement") with Sino
Swearingen Aircraft Company, L. P. ("SSAC") for the distribution of corporate
jets. The Distributor Agreement requires FCA to maintain a retail sales area,
hangar and maintenance facility, with appropriate staff, an adequate supply of
spare parts at a general aviation airport strategically located within FCA's
distribution area, and certain other requirements. The Company is subject to an
annual minimum purchase requirement to be adjusted by SSAC and the Company on an
annual basis. The initial annual purchase requirement was three aircraft. FCA
has agreed to purchase eight aircraft from SSAC with delivery dates beginning in
the first quarter of 1999 and ending in the first quarter of 2001. The current
purchase price of each aircraft is approximately $3.5 million and is subject to
change by SSAC. FCA is required to make progress payments to SSAC on each
aircraft as follows: upon execution of the purchase agreement, $75,000; 365 days
prior to delivery date, $50,000; 180 days prior to delivery date, $150,000; at
delivery, approximately $3.225 million (based upon the current purchase price)
reduced by the distributors' profit. In total, FCA is presently obligated to
purchase eight aircraft for approximately $28 million at current prices. FCA is
also obligated to purchase an adequate supply of parts to support aircraft sold
in the distribution area. In February 1997, FCA made progress payments of
$600,000 to SSAC against its purchase order for eight aircraft. The Chief
Executive Officer of SSAC, Mr. Jack Braly, is a member of the Board of Directors
of Mesa Air Group, Inc. (See, Item 13., "Certain Relationships and Related
Transactions.")
The Company has negotiated 10-year engine maintenance contracts with General
Electric Aircraft Engines ("GE") for the CRJ and with Pratt and Whitney, Canada
Aircraft Services ("PWC") for the Dash 8-200 aircraft. The GE engine maintenance
contract provides coverage for the engines on the first 16 CRJ aircraft to be
delivered. The Company is presently negotiating with GE to add the CRJ aircraft
engines for 16 additional CRJ aircraft to this maintenance contract. The PWC
contract provides coverage for all Dash 8-200 aircraft engines operated by the
Company. Both contracts provide for payment at the time of the repair event and
a fixed dollar amount per flight hour, subject to escalation based on changes in
the CPI, for the number of flight hours incurred since the previous event.
As a result of a special review by the FAA of Mesa's operations, a Consent Order
was signed with the FAA in September 1996, assessing a compromise civil penalty
of $500,000. Mesa paid $250,000 of the compromise amount, and the remaining
$250,000 was waived in September 1997 upon Mesa's compliance with provisions of
the Consent Order.
26
28
Company management is monitoring the extent of new costs imposed on its 19- and
30-seat aircraft operations by the implementation of the additional operating
procedures required by FAR Part 121 and the consent order. At present,
management believes the continuing costs of implementing the new operating
procedures required by FAR Part 121 and the Consent Order approximate $4.5
million per annum. The $4.5 million of increased costs are primarily related to
additional training, dispatch and maintenance procedures.
The ongoing costs estimates to comply with FAR Part 121 regulations and the
consent order are forward looking statements that involve a number of
uncertainties which could cause actual costs to differ materially from the
forward looking statements including, among other factors, promulgation of
future FAA regulations, administrative rules, or informal requests by the FAA
requiring the hiring of additional personnel, addition of new aircraft
mechanical equipment, payment of additional fines and the impact of future laws
or Congressional investigations all of which could have the effect of increasing
the costs of compliance.
In connection with the $72.1 million loss provision for the fiscal year ended
September 30, 1997, the Company believes that it will incur approximately $15 to
$20 million in cash expenditures in fiscal 1998 primarily as a result of the
costs to be incurred for disposition of the surplus aircraft, severance and
other expenditures. The estimated cash expenditure is a forward-looking
statement which is subject to change caused by, among other factors, the timing,
sale and relocation of aircraft, employee severance and relocation costs, and
other costs related to the Company's restructuring of its operations.
Mesa does not expect any material negative impact to its operations as a result
of inflation. Mesa believes fares and fee per departure rates, and accordingly
revenues, can be changed to offset the impact of inflation. At September 30,
1997, approximately 87 percent of the Company's $370 million of indebtedness was
at fixed rates. However, $317 million of the total debt converts from fixed to
variable interest rates upon the seventh anniversary of the delivery date of the
financed aircraft and may be affected by inflation if such inflation results in
an increase in interest rates. Management's belief that inflation will have no
material negative impact on the Company is a forward-looking statement. Actual
results could differ materially from the forward-looking statements due to
general economic factors which cannot be foreseen or controlled by Mesa and its
management.
Management of the Company recognizes the need to ensure its operations will not
be adversely impacted by Year 2000 software failure. To date the Company has not
completed its analysis of the potential Year 2000 risk and therefore the cost to
the Company as a result of Year 2000 software has not been fully determined.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued several new
pronouncements that are not yet adopted by the Company.
In February 1997 the FASB issued SFAS No. 128, "Earnings Per Share," which
specifies the computation, presentation and disclosure requirements for earnings
per share for entities with publicly-held common stock. SFAS No. 128 will be
effective for the Company for the quarter ending December 31, 1997; earlier
application is not permitted. This new accounting standard
27
29
will require presentation of basic earnings per share (which for the Company is
currently anticipated to result in slightly higher earnings per share than would
otherwise be reported) and diluted earnings per share (which for the Company is
currently anticipated to result in essentially the same earnings per share as
the Company would otherwise report as primary earnings per share).
In February 1997 the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure," to consolidate existing disclosure requirements. This new
standard contains no change in disclosure requirements for the Company. It will
be effective for the Company for the quarter ending December 31, 1997.
In June 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive Income," to
establish standards for reporting and display of comprehensive income (all
changes in equity during a period except those resulting from investments by and
distributions to owners) and its components in financial statements. This new
standard, which will be effective for the Company for the fiscal year ended
September 30, 1999, is not currently anticipated to have a significant impact on
the Company's consolidated financial statements based on the current financial
structure and operations of the Company.
In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," to establish standards for reporting
information about operating segments in annual financial statements, selected
information about operating segments in interim financial reports and
disclosures about products and services, geographic areas and major customers.
This new standard, which will be effective for the Company for the fiscal year
ending September 30, 1999, will require the Company to report financial
information on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments, which is
currently anticipated to result in more detailed information in the notes to the
Company's consolidated financial statements than is currently required and
provided.
FORWARD-LOOKING STATEMENTS
28
30
This Form 10-K contains information regarding the replacement, deployment, and
acquisition of certain numbers and types of aircraft, entry into an independent
jet operation, and projected expenses associated therewith; costs of compliance
with FAA regulations and other rules and acts of Congress; the passing of taxes,
fuel costs, inflation, and various expenses to the consumer; the relocation of
certain operations of the Company; the resolution of litigation in a favorable
manner; and certain projected financial obligations. These statements, in
addition to statements made in conjunction with the words "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate," and similar
expressions, are forward-looking statements that involve a number of risks and
uncertainties. The following is a list of factors, among others, that could
cause actual results to differ materially from the forward-looking statements:
business conditions and growth in certain market segments and industries and the
general economy; an increase in competition along the routes the Company plans
to operate its newly acquired aircraft; material delays in completion by the
manufacturer of the ordered and yet-to-be delivered aircraft; changes in general
economic conditions, such as fuel price increases, and changes in regional
economic conditions, making the costs of aircraft operation prohibitive in the
targeted regions the Company plans to operate the newly acquired aircraft; the
Company's relationship with employees and the terms of future collective
bargaining agreements and the impact of current and future laws, Congressional
investigations, and governmental regulations affecting the airline industry and
the Company's operations; bureaucratic delays on amendments to existing
legislation; consumers unwilling to incur greater costs for flights; unfavorable
resolution of negotiations with municipalities for the leasing of facilities;
and risks associated with trial outcomes. See page 2 of Form 10-K.
Item 8. Financial Statements and Supplementary Data
1. Consolidated Financial Statements
Page 30 - Independent Auditors' Report
Page 31 - Consolidated Balance Sheets - September 30, 1997 and 1996
Page 33 - Consolidated Statements of Operations - Years ended
September 30, 1997, 1996, and 1995
Page 34 - Consolidated Statements of Cash Flows - Years ended
September 30, 1997, 1996, and 1995
Page 35 - Consolidated Statements of Stockholders' Equity - Years
ended September 30, 1997, 1996, and 1995
Page 36 - Notes to Consolidated Financial Statements
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted
because they are not applicable, not required or the information has been
furnished elsewhere.
29
31
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
MESA AIR GROUP, INC.:
We have audited the accompanying consolidated balance sheets of Mesa Air Group,
Inc. and subsidiaries as of September 30, 1997 and 1996, and the related
consolidated statements of operations, cash flows, and stockholders' equity for
each of the years in the three-year period ended September 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mesa Air Group, Inc.
and subsidiaries as of September 30, 1997 and 1996 and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Phoenix, Arizona
December 12, 1997, except for certain
information contained in notes 4, 11 and 15
which is as of January 10, 1998
30
32
MESA AIR GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
September 30
-------------------
1997 1996
- -------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 57,232 $ 54,720
Marketable securities (note 2) 8,690 5,300
Receivables, principally traffic 53,852 41,105
Income taxes receivable (note 5) 6,999 --
Expendable parts and supplies, less allowance for
obsolescence of $2,631 and $1,350 31,377 26,956
Prepaid expenses and other current assets 8,553 6,394
-------------------
Total current assets $166,703 $134,475
Property and equipment, net (notes 3 and 4) 440,890 452,273
Lease and equipment deposits (notes 8 and 9) 10,354 10,889
Intangibles, less amortization of $5,200 and $11,478 22,071 53,538
Other assets 9,848 27,316
-------------------
Total assets $649,866 $678,491
===================
See accompanying notes to consolidated financial statements.
31
33
MESA AIR GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
September 30
--------------------
1997 1996
- --------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital leases (note 4) $ 31,786 $ 17,127
Accounts payable 21,884 13,811
Income taxes payable (note 5) -- 3,708
Air traffic liability 6,785 4,789
Accrued compensation 7,025 5,010
Other accrued expenses 30,662 19,170
-------------------
Total current liabilities 98,142 63,615
-------------------
Long-term debt and capital leases, excluding current portion (note 4) 338,199 338,278
Deferred credits and other liabilities 34,837 29,538
Deferred income taxes (note 5) 1,600 22,394
Stockholders' equity (note 6):
Preferred stock of no par value, 2,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock of no par value, 75,000,000 shares authorized;
28,294,584 shares in 1997 and 28,243,382 shares in 1996 issued
and outstanding 101,361 100,876
Retained earnings 72,686 121,283
Unrealized gain on marketable securities, net of deferred
income taxes of $1,754 and $1,420 (note 2) 3,041 2,507
-------------------
Total stockholders' equity 177,088 224,666
-------------------
Commitments, contingencies and
subsequent events (notes 4, 7, 8, 9, 11 and 15)
Total liabilities and stockholders' equity $649,866 $678,491
===================
See accompanying notes to consolidated financial statements.
32
34
MESA AIR GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years Ended September 30
------------------------
1997 1996 1995
--------- --------- ---------
Operating revenues:
Passenger $ 500,822 $ 489,432 $ 442,087
Freight and other 6,673 7,387 7,636
Public service 3,482 3,544 5,416
--------- --------- ---------
Total operating revenues 510,977 500,363 455,139
--------- --------- ---------
Operating expenses:
Flight operations 181,696 166,151 166,596
Maintenance 93,278 81,400 73,701
Aircraft and traffic servicing 85,755 73,469 64,120
Promotion and sales 75,448 74,844 73,289
General and administrative 26,543 29,186 26,921
Depreciation and amortization 34,859 24,296 20,940
Other operating items (note 15) 67,884 3,023 --
--------- --------- ---------
Total operating (income) expenses 565,463 452,369 425,567
--------- --------- ---------
Operating income (loss) (54,486) 47,994 29,572
--------- --------- ---------
Non-operating income (expenses):
Interest expense (27,776) (12,777) (6,395)
Interest income 1,837 2,274 1,970
Other (note 2) 1,250 12,028 (2,126)
--------- --------- ---------
Total non-operating expenses (24,689) 1,525 (6,551)
--------- --------- ---------
Earnings (loss) before income tax expense (benefit) (79,175) 49,519 23,021
Income tax expense (benefit) (note 5) (30,578) 19,112 9,009
--------- --------- ---------
Net earnings (loss) $ (48,597) $ 30,407 $ 14,012
========= ========= =========
Average common and common equivalent shares outstanding 28,275 30,449 33,363
========= ========= =========
Net earnings (loss) per common and common equivalent share $ (1.72) $ 1.00 $ 0.42
========= ========= =========
See accompanying notes to consolidated financial statements.
33
35
MESA AIR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended September 30
------------------------
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(48,597) $ 30,407 $ 14,012
Adjustments to reconcile net earnings (loss)
to net cash flows from operating activities:
Depreciation and amortization 34,859 24,296 20,940
Provision for code-share agreements and other liabilities 72,100 10,000 --
Deferred income taxes (20,439) 10,473 493
(Gain) loss on disposal of property and equipment -- 689 (82)
(Gain) loss on sale of securities -- (22,008) 145
Amortization of deferred credits (1,745) (3,271) (1,964)
Stock bonus plan 349 970 538
Changes in assets and liabilities, net of acquisitions:
Receivables (12,747) 3,706 1,658
Income taxes receivable (6,999) -- --
Expendable parts and supplies (4,421) (2,274) (5,281)
Prepaid expenses and other current assets (2,159) 529 442
Accounts payable 8,073 (4,361) 12,485
Other accrued liabilities (7,306) (6,109) (400)
-------- -------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES 10,968 43,047 42,986
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,562) (20,263) (92,296)
Proceeds from sale of property and equipment 1,874 1,616 99,634
Proceeds from maturities and sale of marketable securities 1,000 40,861 23,499
Purchased intangibles -- -- (34,489)
Other assets 9,539 (354) (2,492)
Lease and equipment deposits (339) 699 (9,365)
-------- -------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES 7,512 22,559 (15,509)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds received from long-term debt -- -- 5,000
Principal payments on long-term debt and
obligations under capital leases (17,114) (12,141) (18,553)
Proceeds from issuance of common stock 123 1,510 1,592
Common stock repurchase and retirement -- (53,930) --
Proceeds from deferred credits 1,023 -- 2,592
-------- -------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES (15,968) (64,561) (9,369)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,512 1,045 18,108
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 54,720 53,675 35,567
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 57,232 $ 54,720 $ 53,675
======== ======== ========
See accompanying notes to consolidated financial statements.
34
36
MESA AIR GROUP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1997, 1996 and 1995
(in thousands except number of shares)
Available
Number of Common Retained for sale
shares stock earnings securities Total
------ ----- -------- ---------- -----
Balance at September 30, 1994 32,704,042 $ 147,695 $ 76,864 $ 9,757 $ 234,316
Exercise of options (note 6) 687,487 1,592 -- -- 1,592
Stock bonus plan (note 7) 69,213 538 -- -- 538
Tax benefits from sale of optioned
stock -- 2,132 -- -- 2,132
Change in unrealized gains, net of tax
(note 2) -- -- -- 3,293 3,293
Net earnings -- -- 14,012 -- 14,012
---------- ----------- ----------- ----------- -----------
Balance at September 30, 1995 33,460,742 $ 151,957 $ 90,876 $ 13,050 $ 255,883
Exercise of options (note 6) 194,759 1,510 -- -- 1,510
Stock bonus plan (note 7) 94,281 970 -- -- 970
Common stock repurchase (5,506,400) (53,930) -- -- (53,930)
Tax benefits from sale of optioned
stock -- 369 -- -- 369
Change in unrealized gains, net of tax
(note 2) -- -- -- (10,543) (10,543)
Net earnings -- -- 30,407 -- 30,407
---------- ----------- ----------- ----------- -----------
Balance at September 30, 1996 28,243,382 $ 100,876 $ 121,283 $ 2,507 $ 224,666
Exercise of options (note 6) 16,333 123 -- -- 123
Stock bonus plan (note 7) 34,869 349 -- -- 349
Tax benefits from sale of optioned
stock -- 13 -- -- 13
Change in unrealized gains, net of tax
(note 2) -- -- -- 534 534
Net loss -- -- (48,597) -- (48,597)
---------- ----------- ----------- ----------- -----------
Balance at September 30, 1997 28,294,584 $ 101,361 $ 72,686 $ 3,041 $ 177,088
========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
35
37
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1997, 1996 and 1995
1. Summary of Significant Accounting Policies
a. Principles of Consolidation and Organization
Mesa Air Group, Inc. and its subsidiaries ("Mesa") is a group of
regional airlines providing service in various regions across the
United States as AmericaWest Express, Mesa Airlines, United Express
and US Airways Express utilizing 179 turboprop aircraft and seven
jet aircraft.
Mesa is a Nevada corporation which owns Mesa Airlines, Inc. ("MAI"),
a Nevada corporation and certificated air carrier; WestAir Holding,
Inc., a California corporation and owner of certificated air carrier
WestAir Commuter Airlines, Inc.; Air Midwest, Inc., a Kansas
corporation and certificated air carrier. Mesa's non-airline
subsidiaries are MPD, Inc., a Nevada corporation dba Mesa Pilot
Development, the Company's pilot training program; FCA, Inc., a
Nevada corporation, dba Four Corners Aviation, a fixed-base
operation at Farmington, New Mexico; Mesa Leasing, Inc. a Nevada
corporation established to assist the Company in the acquisition and
leasing of aircraft; and MAGI Insurance, Ltd. a Barbados, West
Indies based insurance company. The consolidated financial
statements include the accounts of Mesa and its wholly owned
subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
Mesa currently operates as AmericaWest Express under a code-sharing
agreement which expires in 2004 with America West, utilizing a
Phoenix, Arizona hub.
Mesa utilizes an Albuquerque hub as Mesa Airlines, serving the
Southwest and Rocky Mountain regions.
Mesa operates as United Express under two separate code-sharing
agreements with United Airlines, Inc. ("UAL"). One code-sharing
agreement, expiring in May 1998, covers operations on the West Coast
originating out of hubs in San Francisco, Los Angeles, Portland and
Seattle (WestAir). The other UAL code-sharing agreement expiring in
2005, provides for operations as United Express out of hubs in
Denver, Los Angeles, Portland and Seattle (Denver system). (See note
11, "Commitments and Contingencies" and note 15, "Other Operating
Items.")
Mesa operates as US Airways Express under four code-sharing
agreements with US Airways, Inc. ("US Airways"). One agreement
covers operations utilizing a Kansas City hub and expires in 2000.
Another US Airways code-sharing agreement covers operations out of
the Pittsburgh hub and expires in 2003. The third agreement covers
hubs in New Orleans, Tampa, Orlando, Philadelphia and
36
38
Boston and expires in 2004. The fourth agreement which was entered
into in November 1997 with operations to commence in January 1998,
provides for Canadair Regional Jet ("CRJ") 50-passenger jet service
on certain defined routes and expires in 2003.
MPD, Inc. provides flight training in coordination with a community
college. FCA, Inc. is a fixed-base operation in Farmington, New
Mexico. Regional Aircraft Services, Inc. and Desert Turbine Services
provide aircraft and engine maintenance service to Mesa.
MAGI Insurance, Ltd. is a captive insurance created to handle
freight and baggage claims in addition to a portion of Mesa's
aviation insurance.
b. Cash and Cash Equivalents
For purposes of the statements of cash flows, Mesa considers all
highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
c. Marketable Securities
All marketable securities are considered to be available for sale.
Any unrealized holding gains or losses on available-for-sale
securities have been recorded net of deferred taxes through
stockholders' equity. Premiums and discounts on debt securities are
amortized over the term to maturity using the interest method.
d. Receivables
Mesa provides commercial air transportation into most regions of the
United States. The majority of the passenger tickets collected by
Mesa at the time of travel are sold by other air carriers largely as
a result of the code-sharing agreements discussed above. As a
result, Mesa has a significant concentration of its accounts
receivable with other air carriers and does not have any collateral
securing such accounts receivable. At September 30, 1997 and 1996,
accounts receivable from air carriers totaled approximately $41.7
million and $33.8 million, respectively. Accounts receivable credit
losses have not been significant and have been within management's
expectations.
e. Expendable Parts and Supplies
Expendable parts and supplies are stated at the lower of average
cost or market, less an allowance for obsolescence. Expendable parts
and supplies are charged to expense as they are used.
f. Property and Equipment
Property and equipment are recorded at cost and depreciated to
estimated residual values. Depreciation of property and equipment is
provided on a straight-line basis over estimated useful lives as
follows:
37
39
Buildings 30 years
Flight equipment 7-20 years
Leasehold improvements Life or term of lease, whichever is less
Equipment 5-12 years
Furniture and fixtures 3-5 years
Vehicles 5 years
Assets utilized under capital leases are amortized over the lesser of the
lease term or the estimated useful life of the asset using the
straight-line method. Amortization of capital leases is included in
depreciation expense.
g. Intangibles
The Company evaluates the recoverability of its intangibles assets by
measuring the carrying amount of the assets against the estimated
undiscounted future cash flows associated with them. At the time such
evaluations indicate that the future undiscounted cash flows are not
sufficient to recover the carrying value of such assets, the assets are
adjusted to their fair values.
In July 1991, Mesa acquired Air Midwest, Inc. This acquisition resulted in
purchased intangibles of approximately $10.2 million, which are being
amortized over a 40-year period. Subsequently the intangibles were reduced
by approximately $4.7 million for the recognition of the tax effects of
net operating loss and investment tax credit carryovers acquired in the
Air Midwest purchase.
In 1994, Mesa entered into Asset Purchase Agreements related to operations
as US Airways. Intangible assets acquired of $21.8 million are being
amortized over a 20-year period.
During October 1994, Mesa reached an agreement with UAL for the purchase
of certain aircraft and provided for a 10-year extension of its
code-sharing agreement for its Denver and Los Angeles markets. Intangible
assets related to this agreement of $34.5 million are being amortized over
the 10-year life of the agreement. Based upon the Company's evaluations,
the intangibles related to the Company's Denver operation have been
determined to be impaired at September 30, 1997 and a provision has been
made for the carrying value of $26.3 million. (See note 11, "Commitments
and Contingencies" and note 15, "Other Operating Items.")
h. Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in future years in which those temporary
differences are expected to be recovered or settled. The
38
40
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Mesa
and its subsidiaries file a consolidated federal income tax return.
i. Deferred Credits
Deferred lease incentives consist of credits for parts or services and
deferred gains from the sale and leaseback of aircraft. Deferred credits
are amortized on a straight-line basis as a reduction of lease expense
over the term of the respective leases.
j. Revenues
Passenger, freight and other revenues are recognized as earned when the
service is provided.
Mesa receives public service revenues for providing scheduled air service
to certain small communities. These revenues are recognized as earned in
the period to which the payments relate. The amount of such payments is
determined by the Department of Transportation on the basis of its
evaluation of the amount of revenue needed to meet operating expenses and
to provide a reasonable return on investment with respect to eligible
routes.
As a code-share partner for America West, UAL, and US Airways, Mesa
participates in the frequent flyer programs of these airlines. Incremental
costs for mileage accumulation relating to those programs is expensed as
incurred.
During 1997, the Company created a frequent travel award program known as
MesaMax for travel within its own independent operation. The program
offers travelers free flight awards based on accumulated tickets
purchased. The estimated cost of providing the free travel, using the
incremental cost method as adjusted for estimated redemption rates, is
recognized as a liability and charged to operations as program members
accumulate mileage.
k. Maintenance
Maintenance and repairs, including major engine overhauls, are charged to
operating expenses as incurred.
39
41
l. Earnings (Loss) Per Common and Common Equivalent Share
Earnings (loss) per common and common equivalent share are computed based
on the weighted average number of common shares, and if dilutive, common
stock equivalent shares (options) outstanding during the respective
periods. Fully diluted per share amounts are not materially different than
primary per share amounts and have not been presented. The number of
shares used in the per share computation are as follows:
September 30
1997 1996 1995
------------------------------------------
(in thousands)
Weighted average shares of common
stock outstanding during the year 28,275 29,988 32,857
Common stock equivalent shares --
assumed exercise of options -- 461 506
------------------------------------------
28,275 30,449 33,363
==========================================
m. Stock Options
Prior to October 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On October 1, 1996, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards
on the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma net earnings and pro forma earnings per share disclosures for
employee stock option grants made in fiscal 1996 and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No.
25 and provide pro forma disclosure provision of SFAS No. 123. (See note
6, "Stockholders' Equity.")
n. Use of Estimates
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
40
42
o. New Accounting Standards
The Financial Accounting Standards Board ("FASB") has issued
several new pronouncements that are not yet adopted by the
Company.
In February 1997 the FASB issued SFAS No. 128, "Earnings Per
Share," which specifies the computation, presentation and
disclosure requirements for earnings per share for entities
with publicly-held common stock. SFAS No. 128 will be
effective for the Company for the quarter ending December 31,
1997; earlier application is not permitted. This new
accounting standard will require presentation of basic
earnings per share (which for the Company is currently
anticipated to result in slightly higher earnings per share
than would otherwise be reported) and diluted earnings per
share (which for the Company is currently anticipated to
result in essentially the same earnings per share as the
Company would otherwise report as primary earnings per share).
In February 1997 the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," to consolidate existing
disclosure requirements. This new standard contains no change
in disclosure requirements for the Company. It will be
effective for the Company for the quarter ending December 31,
1997.
In June 1997 the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," to establish standards for reporting
and display of comprehensive income (all changes in equity
during a period except those resulting from investments by and
distributions to owners) and its components in financial
statements. This new standard, which will be effective for the
Company for the fiscal year ended September 30, 1999, is not
currently anticipated to have a significant impact on the
Company's consolidated financial statements based on the
current financial structure and operations of the Company.
In June 1997 the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," to
establish standards for reporting information about operating
segments in annual financial statements, selected information
about operating segments in interim financial reports and
disclosures about products and services, geographic areas and
major customers. This new standard, which will be effective
for the Company for the fiscal year ending September 30, 1999,
will require the Company to report financial information on
the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to
segments, which is currently anticipated to result in more
detailed information in the notes to the Company's
consolidated financial statements than is currently required
and provided.
2. Marketable Securities
Marketable securities available for sale are summarized as follows:
41
43
September 30
1997 1996
-------------------------------------
(in thousands)
Cost Market Cost Market
Basis Value
-------------------------------------
Equity securities -- available for sale $3,895 $8,690 $ 3,903 $ 7,830
-------------------------------------
Debt securities -- municipal securities -- -- 1,001 1,001
-------------------------------------
$3,895 $8,690 $ 4,904 $ 8,831
Less equity securities classified as
Other Assets -- -- (2,246) (3,531)
-------------------------------------
$3,895 $8,690 $ 2,658 $ 5,300
=====================================
On August 25, 1994, Mesa entered into the AmWest Partners, L. P.
partnership agreement, which governs the terms of an investment by the
partnership in America West providing for the consummation of America
West's Plan of Reorganization. Upon making the investment, the
partnership was dissolved. In consideration of the investment of
approximately $18.7 million, Mesa received 100,000 Class A shares of
common stock, 2,183,343 Class B shares of common stock and 799,767
warrants. In February 1996, Mesa sold 1,984,970 shares of Class B
common stock of America West, resulting in a realized gain of $22
million. At September 30, 1997, 100,000 Class A shares, approximately
200,000 Class B shares and warrants for approximately 800,000 Class B
shares were classified as available for sale, and market appreciation
of approximately $4,795,000 has been recorded (net of taxes) through
equity.
3. Property and Equipment
Property and equipment consists of the following:
September 30
1997 1996
----------------------
(in thousands)
Flight equipment, substantially pledged $ 494,755 $ 482,736
Other equipment 17,206 20,047
Construction in progress 221 5
Leasehold improvements 6,517 4,571
Furniture and fixtures 2,422 2,355
Buildings 9,098 9,480
Land 525 525
Vehicles 2,258 2,200
----------------------
533,002 521,919
Less accumulated depreciation (92,112) (69,646)
----------------------
Net property and equipment $ 440,890 $ 452,273
======================
42
44
As of September 30, 1997 and 1996, Mesa had property and equipment
consisting primarily of aircraft parts held for sale with a fair value
of approximately $5.0 million and $11.7 million, respectively, included
in Other Assets.
4. Long-Term Debt, Capital Leases and Lines of Credit
Long-term debt and capital leases consist of the following:
September 30
----------------------
1997 1996
----------------------
(in thousands)
Notes payable to manufacturers: approximately $826,000 plus interest
due monthly through 2011. Notes provide fixed and variable rates of
interest ranging from 6.87% to 7.31% at September 30, 1997
Secured by aircraft $ 319,442 $ 297,327
Notes payable to banks: Approximately $494,000 due monthly plus
interest indexed to adjusted LIBOR rates (6.90% to 7.78% at
September 30, 1997) through 2006. Secured by aircraft 49,569 55,716
Capital leases; due in monthly installments through 2005; interest
indexed to prime rate. Secured by equipment 974 2,362
----------------------
Total long-term debt and capital leases 369,985 355,405
Less current portion (31,786) (17,127)
----------------------
Long-term debt and capital leases, excluding current portion $ 338,199 $ 338,278
======================
Principal maturities of long-term debt and capital leases for each of
the next five years are as follows:
Year Ending September 30:
----------------------------------
(in thousands)
1998 $ 31,786
1999 16,493
2000 17,100
2001 17,966
2002 18,691
==========
At September 30, 1997, Mesa had a line of credit with a bank of $20
million which was being utilized solely to secure outstanding letters
of credit. An aggregate ceiling of $12 million applies to the letters
of credit issued under this agreement, of which $4.3 million
43
45
were outstanding at September 30, 1997. Should Mesa draw upon this line
of credit, an interest rate of LIBOR plus 1.5 percent (7.28 percent at
September 30, 1997) will apply. The line matures on March 31, 1998, and
bears an annual fee of 1/4 percent. As of September 30, 1997 Mesa was
not in compliance with certain debt covenants of the line of credit
agreement, however the bank has waived compliance with such covenants.
Certain loan and debt agreements with banks contain covenants which
require Mesa to maintain or exceed stated levels of net worth and to
equal or exceed specified debt and working capital ratios. As of
September 30, 1997, Mesa was not in compliance with certain of these
financial ratio covenants with total borrowings of $10.5 million which
have been classified as current portion of long-term debt in the
accompanying balance sheet. In January 1998, certain other financial
ratio covenants were either waived or amended effective September 30,
1997. The Company believes it will be in compliance with either its
present covenants or amended covenants through September 30, 1998
except for the aforementioned borrowings of $10.5 million which has
been classified as current portion of long-term debt.
In May 1996, Mesa refinanced operating leases on 66 aircraft utilizing
debt financing. This resulted in additional debt of approximately $234
million. Subsequent deliveries of 1900D aircraft have been financed by
use of debt.
Mesa leases certain equipment with noncancelable lease terms of more
than one year which have been recorded as capital leases.
44
46
5. Income Taxes
Income tax expense (benefit) consists of the following:
September 30
1997 1996 1995
--------------------------------------------
Current: (in thousands)
Federal $(10,139) $ 7,912 $ 6,899
State -- 727 1,617
--------------------------------------------
$(10,139) $ 8,639 $ 8,516
--------------------------------------------
Deferred:
Federal (16,054) 8,457 399
State (4,385) 2,016 94
--------------------------------------------
(20,439) 10,473 493
--------------------------------------------
$(30,578) $ 19,112 $ 9,009
============================================
The actual income tax expense (benefit) differs from the "expected"
tax expense (benefit) (computed by applying the U.S. federal corporate
income tax rate of 35 percent in 1997, 1996 and 1995 to earnings (loss)
before income taxes) as follows:
September 30
1997 1996 1995
----------------------------------
(in thousands)
Computed "expected" tax expense (benefit) $(27,711) $ 17,332 $ 8,058
Increase (reduction) in income taxes resulting from:
Intangibles 98 98 8
Investment tax credits -- (29) --
Tax exempt interest (1) (32) (112)
State taxes, net of federal tax benefit (2,850) 1,783 951
Other (114) (40) 104
----------------------------------
Total income tax expense (benefit) $(30,578) $ 19,112 $ 9,009
==================================
45
47
Elements of deferred income tax assets (liabilities) are as follows:
September 30
Deferred tax assets: 1997 1996
---------------------
(in thousands)
Inventory, parts and equipment allowances $ 2,485 $ 1,288
Accrued expenses 904 845
Deferred credit 536 3,514
Other accrued liabilities 770 4,380
Provisions not deductible for tax 27,831 --
AMT credit carryover 12,922 5,507
Unrealized holding gain on marketable securities (1,754) (1,420)
Benefit of net operating loss and tax credit carryforwards 20,129 1,708
---------------------
63,823 15,822
Valuation allowance (1,000) (1,000)
---------------------
Net deferred tax assets 62,823 14,822
Deferred tax liabilities:
Depreciation and tax capital lease differences (64,423) (37,216)
---------------------
Net deferred taxes $ (1,600) $(22,394)
=====================
Deferred tax assets include benefits estimated to be realized from the
utilization of minimum tax credit carryforwards of $12.9 million which
do not expire; from the utilization of investment tax credit
carryforwards of $3 million which expire in 2000 through 2001; and net
operating loss carryforwards of $39.4 million which expire during 2012.
The tax benefits from the investment tax credit and loss carryforwards,
which were obtained in the acquisition of Air Midwest, Inc., have been
recorded as a reduction of intangibles. Management believes it is more
likely than not that the results of future operations will generate
sufficient taxable income to realize the net deferred tax assets.
Mesa's U.S. federal income tax returns for the tax years ended
September 30, 1993 and 1994 are being examined by the Internal Revenue
Service (IRS). A final report of proposed adjustments, including a tax
assessment of approximately $4.7 million, has been received from the
IRS. Approximately $3 million of this adjustment is resultant from a
prior audit and is undisputed. Although the ultimate outcome of the
examination cannot be predicted with certainty, management is of the
opinion that adequate provision exists in the financial statements for
the estimated impact of the examination.
6. Stockholders' Equity
At September 30, 1997, Mesa has four stock-based compensation plans,
which are described below.
a. On June 2, 1992, Mesa adopted an employee stock option plan
which provides for the granting of options to purchase up to
2,250,000 shares of Company
46
48
common stock at the fair market value on the date of grant.
Under this plan, 1,999,481 shares have been granted. In 1996
shareholders voted to reduce the number of options available
for granting under the plan by 250,519. This eliminated all
remaining options available for granting under this plan.
b. On December 1, 1995, Mesa adopted an additional employee stock
option plan under the new management incentive program
(Omnibus Plan) which provides for the granting of options to
purchase up to 2,800,000 shares of Company common stock at the
fair market value on the date of grant. Under this plan,
options to 2,478,456 shares have been granted.
c. In March 1993, Mesa adopted a directors' stock option plan for
outside directors. This plan provides for the grant of options
for up to 800,000 shares of Mesa's common stock at fair market
value on the date of grant. This is a formula-based plan under
which options to 120,000 shares have been granted. In 1996
shareholders voted to reduce the number of options available
for granting under the plan by 590,000. There are 90,000
remaining shares reserved for options under this plan.
d. On December 9, 1994, Mesa adopted an additional directors'
stock option plan for outside directors. This plan provides
for the grant of options for up to 50,000 shares of Mesa's
common stock at fair market value on the date of grant. This
is a formula-based plan under which options to 36,000 shares
have been granted.
At September 30, 1997, there were 425,544 shares of common stock
available for grant under these plans.
Transactions involving stock options under these plans are summarized
as follows:
1997 1996 1995
----------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Fixed Options (000) Price (000) Price (000) Price
------------- ------------------------------------------------------------------------
Outstanding at
beginning of year 3,389 $ 10.30 1,625 $ 11.38 2,225 $ 8.65
Granted 709 6.03 2,007 9.17 273 7.67
Exercised (16) 7.48 (195) 7.75 (687) 1.68
Canceled/Forfeited (717) 7.92 (48) 9.95 (186) 9.13
-------- -------- -------
Outstanding at end
of year 3,365 $ 9.93 3,389 $ 10.30 1,625 $ 11.38
======== ======== =======
47
49
At September 30, 1997, the range of exercise prices was $4.88 - $19.25
and the weighted-average contractual life of all options was 6.4 years.
The number of options exercisable at September 30, 1997 and 1996 was
1,822,497 and 1,509,332, respectively, and the weighted-average
exercise price of these options was $11.67 and $10.76, respectively.
The per share weighted-average fair value of stock options granted
during 1997 and 1996 was $3.24 and $4.97, respectively, on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: expected dividend yield 0.0%, risk-free
interest rate of 5.9%, volatility of 54.2% and an expected life of 4-6
years.
Mesa applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. Had the compensation cost
for the Company's four stock-based compensation plans been determined
consistent with SFAS No. 123, the Company's net earnings (loss) and
earnings (loss) per share would have been changed to the pro forma
amounts indicated below:
1997 1996
---------- ----------
Net earnings (loss) As reported $ (48,597) $ 30,407
========== ==========
Pro forma $ (50,643) $ 27,422
========== ==========
Primary earnings (loss) As reported $ (1.72) $ 1.00
========== ==========
per share
Pro forma $ (1.80) $ 0.90
========== ==========
Pro forma net earnings (loss) reflects only options granted in fiscal years 1997
and 1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected over the option vesting period and
compensation cost for options granted prior to October 1, 1995 is not
considered.
48
50
7. Benefit Plans
Mesa sponsors two 401(k) plans, one for employees of WestAir Commuter
and another for employees of MAI, Air Midwest and the non-airline
operations, under which employees may contribute up to 15 percent of
their annual compensation, as defined. The Company currently makes
matching contributions of 50 percent of employee contributions up to 10
percent of employee compensation. These plans are not available to
certain union employees. Upon completing three years of service, the
employee is 20 percent vested in employer contributions and the
remainder of the employer contributions vest 20 percent per year.
Employees become fully vested in employer contributions after seven
years of employment. Mesa has the right to terminate the 401(k) plan at
any time.
Contributions by Mesa to the above plans for the years ended September
30, 1997, 1996 and 1995 were $1,679,802, $1,286,746 and $1,097,023,
respectively.
A management incentive program (Omnibus Plan), approved in September
1995 and ratified by shareholders at the April 1996 annual meeting, has
a cash incentive provision that ties the corporate officers to an
increase in the earnings per share over the previous year, and the
division/subsidiary executives to a specified rate of return on
revenue. The total incentive expense under the Omnibus Plan for fiscal
year 1997, 1996 and 1995 was approximately $191,000, $1.9 million and
$165,000 respectively.
On March 9, 1993, Mesa adopted an Employee Stock Bonus Plan which
provides for employees of Mesa to receive shares of Common Stock in
lieu of discretionary cash bonuses accrued each quarter. The custodian
of the plan is empowered to determine the times at which and the
conditions under which the plan, on behalf of participating employees,
purchases shares of Common Stock. All purchases of Common Stock by the
custodian will be made at prices approximating fair market value on the
date of purchase, subject to the limitation that only 1,000,000 shares
may be purchased over the life of the plan. The bonuses paid under the
plan for the year ended September 30, 1997, 1996 and 1995 were
$348,693, $969,937 and $541,044, respectively. As of September 30,
1997, a total of 405,501 shares have been issued pursuant to the plan.
As of May 9, 1997 the Employee Stock Bonus Plan was discontinued and
replaced with a monthly completion bonus based on improvements in
percentage of on-time completed flights. Employees of Mesa who
participate in Mesa's management incentive program are not eligible to
receive a completion bonus. Completion bonus expense for May 9 through
September 30, 1997 was $775,000.
8. Lease Commitments
At September 30, 1997, Mesa leased 76 aircraft under non-cancelable
operating leases with remaining terms ranging up to 16.5 years. The
aircraft leases require Mesa to pay all taxes, maintenance, insurance
and other operating expenses. Mesa has the option to terminate certain
of the leases at various times throughout the lease.
49
51
Aggregate rental expense totaled [$43.6] million, $59 million, and
$65.6 million (net of $0.8 million in 1995 of sublease income) for the
years ended September 30, 1997, 1996 and 1995 respectively.
Future minimum lease payments under noncancelable operating leases are
as follows:
Year ending September 30
------------------------
(in thousands)
1998 $ 45,484
1999 44,076
2000 42,728
2001 39,964
2002 39,387
Thereafter 255,755
9. Aircraft Acquisitions and Commitments
During 1997, the Company gave notice to Bombardier Regional Aircraft
Division ("BRAD") of its decision to exercise an option to cancel five
Dash 8-200 aircraft on order and cancel delivery of the eight remaining
previously ordered Dash 8-200 aircraft because of production delays and
initial operating reliability issues. The Company had originally
ordered 25 of the 37-seat, turboprop aircraft. Long-term financing for
all 12 Dash 8-200 aircraft delivered and placed in service has been
completed. On August 15, 1997, the Company reached an agreement with
BRAD which provided for conversion of the remaining eight Dash 8-200
aircraft on order into orders for eight Canadair Regional Jet ("CRJ")
aircraft.
In August 1996, Mesa entered into a memorandum of understanding with
BRAD to acquire 16 CRJ 50-passenger jet aircraft with options to
acquire an additional 32 of the jet aircraft. In August 1997, Mesa
announced that it would exercise options for 16 of its 32 option CRJ
aircraft reserved under the option agreement. This exercise included
the conversion of eight of its Dash 8-200 aircraft then on order to CRJ
50-passenger jet aircraft. The order for 32 aircraft has a value of
approximately $640 million. Mesa has an $8.5 million deposit with BRAD
relating to this order. This deposit will increase to a maximum of $9.1
million by September 1, 1998. Eleven CRJ aircraft had been delivered to
Mesa by December 18, 1997. The Company expects to receive nine more CRJ
aircraft in 1998 and the remaining 12 jets are scheduled to be
delivered in 1999.
The Company has an agreement to trade in 32 Embraer 120 Brasilia
("EMB-120") aircraft to BRAD on a one-for-one basis for the 32 CRJ
aircraft being acquired from BRAD. Eight of the 32 EMB-120 trade-in
aircraft were originally traded in on the eight Dash 8-200 aircraft
order which were subsequently converted into orders for CRJ aircraft.
All EMB-120 aircraft are required to be in airworthy condition under
Mesa's maintenance program at the time of the trade-in. Mesa has
committed to maintain the trade-in EMB-120 aircraft in airworthy
condition under its maintenance program until
50
52
such aircraft are sold or released to another operator. As of December
18, 1997, 13 EMB-120s have been delivered to BRAD under the CRJ
purchase contract. Should the Company fail to receive favorable
financing terms from third parties on the ordered CRJ aircraft to be
delivered to the Company, the Company has the right to obtain financing
for such CRJ aircraft from BRAD, subject to the Company meeting certain
creditworthiness standards.
Approximately $1.0 million was incurred as a one-time expense in the
fourth quarter of fiscal 1997 related to the return of two Fokker 70
aircraft to Daimler-Benz.
On January 9, 1997, one of the Company's wholly owned subsidiaries,
FCA, Inc., entered into a distributorship agreement ("the
Distributorship Agreement") with Sino Swearingen Aircraft Company, L.
P. ("SSAC"). The Distributor Agreement grants FCA exclusive
distribution rights in the states of Colorado, Louisiana, New Mexico
and Texas for sale of SSAC aircraft and parts. The Distributorship
Agreement also requires FCA to maintain a retail sales area, hangar and
maintenance facility, with appropriate staff, and an adequate supply of
spare parts at a general aviation airport strategically located within
FCA's distribution area. FCA has agreed to purchase eight aircraft from
SSAC with delivery dates beginning in the first quarter of 1999 and
ending in the first quarter of 2001. The current purchase price of each
aircraft is approximately $3.5 million and is subject to change by
SSAC. FCA is required to make progress payments to SSAC on each
aircraft as follows: upon execution of the purchase agreement, $75,000;
365 days prior to delivery date, $50,000; 180 days prior to delivery
date, $150,000; at delivery, approximately $3.225 million (based upon
the current purchase price) reduced by the distributors' profit. In
total, FCA is presently obligated to purchase approximately $28 million
of SSCA aircraft at current prices. FCA is also obligated to purchase
an adequate supply of parts to support aircraft sold in the
distribution area. In February 1997, FCA made progress payments of
$600,000 to SSAC against its purchase order for eight aircraft. SSAC
has subsequently notified FCA that the delivery schedule for the eight
aircraft will be delayed for at least one year. The Distributorship
Agreement is cancelable by mutual agreement of the parties or
unilaterally by SSAC. The Chief Executive Officer of SSAC, Mr. Jack
Braly, is a member of the Board of Directors of Mesa Air Group, Inc.
The Company has negotiated 10-year engine maintenance contracts with
General Electric Aircraft Engines (GE) for the Canadair Regional Jet
(CRJ) and with Pratt and Whitney, Canada Aircraft Services (PWC) for
the Dash 8-200 aircraft. The GE engine maintenance contract provides
coverage for the engines on the first 16 CRJ aircraft to be delivered.
The Company is presently negotiating with GE to add the CRJ aircraft
engines for 16 additional CRJ aircraft to this maintenance contract.
The PWC contract provides coverage for all Dash 8-200 aircraft engines
operated by the Company. Both contracts provide for payment at the time
of the repair event at a fixed dollar amount per flight hour, subject
to escalation based on changes in the CPI, for the number of flight
hours incurred since the previous event.
51
53
10. Supplemental Disclosures of Cash Flow Information
September 30
1997 1996 1995
-----------------------------
(in thousands)
Cash paid for interest $27,776 $12,047 $ 6,354
Cash paid for income taxes $ 2,600 $12,445 $ 4,961
In 1995 Mesa did not purchase any property or equipment upon which debt
was incurred. In 1996 Mesa purchased property and equipment upon which
debt was incurred of approximately $280 million. In 1997 Mesa purchased
property and equipment upon which debt was incurred totaling
approximately $31.7 million.
11. Commitments and Contingencies
During December 1996, Mesa reached a five-year agreement with the Air
Line Pilots Association (ALPA) for a single pilot contract for MAI and
Air Midwest, Inc. The contract provides for industry-average pay,
economic work rules and excellent opportunities for advancement. This
contract resulted in an increase in pilot salary expense of
approximately $6.1 million for the 1997 fiscal year. WestAir pilots are
also represented by ALPA and the Company is in mediation regarding a
new contract. Air Midwest mechanics are represented by the
International Association of Machinists (IAM), flight attendants at
WestAir and Mountain West, a division of MAI, are represented by the
Association of Flight Attendants (AFA). No other Mesa subsidiaries are
parties to collective bargaining agreement or union contracts.
During December 1995, the Federal Aviation Administration (FAA)
announced rules which require commuter airlines with aircraft of 10 or
more passenger seats operating under FAR Part 135 rules to begin
operating those aircraft under FAR Part 121 regulations by the end of
March 1997. Mesa was one of the largest regional airlines operating
under FAR Part 135 regulations. In anticipation of Mesa's conversion to
FAR Part 121 and to address issues raised in past inspections, the FAA
began a special review of Mesa's operations in June 1996. As a result
of a special review by the FAA of Mesa's operations, and other factors,
a Consent Order was signed with the FAA in September 1996, assessing a
compromise civil penalty of $500,000. Mesa paid $250,000 of the
compromise amount, and the remaining $250,000 was waived after Mesa
complied with provisions of the Consent Order. Mesa agreed to adopt
operational standards that exceed the requirements of the Federal
Aviation Regulations and to consolidate control of operational areas
(maintenance, flight operation and training) under one central
management team. Effective in March 1997, the FAA required that
commuter airlines with aircraft of 10 or more passenger seats begin
operating those aircraft under FAR Part 121 regulations instead of FAR
Part 135. Mesa completed the transition to FAR Part 121 on the FAA's
deadline. Company management is monitoring the costs increases in its
19- and 30-seat aircraft operations resulting from compliance with FAR
Part 121 regulations. At present, management believes those continuing
costs will be
52
54
approximately $4.5 million per year. The cost increase is primarily
related to additional training, dispatch and maintenance procedures.
In July 1997, WestAir received a proposal from UAL for the extension of
WestAir's code-sharing agreement which is due to expire on May 31,
1998. The proposal contained certain material amendments to the
existing code-sharing agreement. The Company did not accept this
proposal because it provided for significant cost increases and did not
include certain changes to the proposal requested by the Company.
Management continued to negotiate for improvements in the proposal.
On July 22, 1997, awarded WestAir's eight Los Angeles contract markets
to Skywest Airlines, effective October 1, 1997. UAL subsequently
granted additional pro-rate markets to WestAir, sufficient to utilize
the aircraft previously serving the eight Los Angeles system contract
markets. There was no material cost of transition to these new pro-rate
markets and the new pro-rate markets are attaining similar financial
results as the discontinued contract markets. The Company is in
litigation to resolve UAL's unilateral termination of WestAir's
contract markets in the Los Angeles area.
In late November 1997, WestAir received written notice from UAL that
WestAir's code-sharing agreement would not be renewed. Since November
1997, management has on repeated occasions sought a reconsideration of
UAL's decision not to renew the WestAir code-sharing agreement. At a
meeting on January 6, 1998, UAL confirmed that it will not reconsider
renewing WestAir's code-sharing agreement upon its expiration. WestAir
will have significant assets in excess of its needs upon expiration of
the agreement on May 31, 1998. Accordingly, by resolution of the Board
of Directors on January 10, 1998, the Company has recognized a loss
provision to provide for the cost of discontinuation of WestAir
operations. The provision includes the cost to retire or sell aircraft,
for the sale of parts and equipment, and for severance and employee
costs. (See note 15.)
MAI incurred a substantial operating loss in the Denver system for
fiscal year 1997. Among the factors contributing to the loss were the
large increases in airport costs related to the new Denver
International Airport ("DIA") and a 20 percent decrease in the average
connecting fare received from UAL.
In late September 1997, management began a reduction of service in some
markets and gave notice to UAL of its intent to terminate service in
other markets. UAL responded by asserting that MAI's past and proposed
termination of service was a "material default" under the code-sharing
agreement, requested an increase in service in certain markets, and
claimed damages and remedies, including termination of the code-sharing
agreement. The Company has responded to UAL, noting that the Denver
code-sharing agreement allows MAI to terminate service in an
unprofitable market, but gives UAL the right to place another carrier
into any market in which MAI terminates service on the same terms and
conditions as originally offered to MAI. In the opinion of Mesa's
management, there is no requirement that MAI continue to serve
unprofitable markets or that MAI provide additional service as
requested by UAL. Management of UAL does not agree with MIA's
interpretation of the code-sharing agreement and believes it can
terminate the Denver code-sharing agreement as a result of MAI's
reduction of service to certain markets. On January 6, 1998, UAL
informed the Company that it will not
53
55
provide any increases in Denver system connecting fares or permit MAI
to decrease its level of Denver system service. As a result of UAL's
decision not to assist the Company in connection with improving
operations in its Denver system, on January 10, 1998, the Board of
Directors resolved that the Company recognize a loss provision for
impairment of the $26.3 million Denver system intangible asset
currently remaining on the Company's financial statements at September
30, 1997 and provide for the other costs of restructuring the Company's
Denver operations. (See note 15.)
Mesa's relationship with UAL is poor and if a resolution of the level
of service to be provided in the Denver market is not attained, UAL may
unilaterally cancel the Denver code-sharing agreement and award the
routes to another carrier. Interpretation of the Denver code-sharing
agreement may require a judicial resolution and subject the Company to
a risk that UAL's interpretation of the code-sharing agreement
prevails. Regardless of whether the interpretation of the Denver
code-sharing agreement is favorably resolved, it is unlikely that MAI
will operate in the Denver market through 2005. As a result, the
Company believes it will ultimately dispose of its Denver operations by
transfer or sale to another airline.
Under the MAI and WestAir code-sharing agreements with UAL, most
markets provide revenue sharing based on an allocation of fares between
UAL and the Company ("pro-rate markets"). However, an increasing
portion of United Express routes in the Pacific Northwest and Los
Angeles have become "contract markets" operated on a fee per departure
basis. Certain of these markets may be terminated upon 90 days' notice
by either UAL or MAI/WestAir. On January 8, 1998, the Company received
written notice that UAL is terminating all of the "contract" markets in
the Pacific Northwest effective September 30, 1998. As a result of this
termination, MAI will have 13 Beech 1900D aircraft which are
anticipated to be in excess of its operating needs. Management believes
it can dispose of all of the 13 Beech 1900D aircraft.
During 1994, seven shareholder class action complaints were filed in
the United States District Court for the District of New Mexico against
Mesa, certain of its present and former corporate officers and
directors, its independent auditor, and certain underwriters who
participated in Mesa's June 1993 public offering of Common Stock.
During October 1995, the court certified a class consisting of persons
who purchased Mesa stock between January 28, 1993 and August 5, 1994.
These complaints have been consolidated by court order, and, after the
court granted in part a motion to dismiss in May 1996, a third amended
consolidated complaint has been filed alleging that during the class
period the defendants caused or permitted Mesa to issue publicly
misleading financial statements and other misleading statements in the
registration statement for the June 1993 public offering, annual and
quarterly reports to shareholders, press releases and interviews with
securities analysts. The current complaint alleges that these
statements misrepresented Mesa's financial performance and condition,
its business, the status of its operations, its earnings, its capacity
to achieve profitable growth and its future business prospects, all
with the purpose and effect of artificially inflating the market price
of common stock of Mesa throughout the relevant period. The complaint
further alleges that certain officers and directors of the Company
illegally profited from sales of Mesa Common Stock during these
periods. The complaint seeks damages against the defendants in an
amount to be determined at trial (including rescission and/or money
damages as appropriate) and reasonable attorney, accountant and expert
fees. In
54
56
1996, Mesa made an accrual to vigorously defend the litigation.
Further, Mesa and the corporate officers and directors believe they
have substantial and meritorious defenses against these allegations and
are defending their position vigorously. However, should an unfavorable
resolution of this litigation occur, it is possible that Mesa's future
results of operations or cash flows could be materially affected in a
particular period.
In June 1997, UAL filed a complaint in the United States District Court
for the Northern District of Illinois against two subsidiaries of the
Company, Mesa Airlines, Inc. ("MAI") and WestAir Commuter Airlines,
Inc. ("WestAir"), seeking a judicial declaration of the parties' rights
and obligations under two separate written agreements, pursuant to
which MAI and WestAir allegedly agreed to provide certain airline
transportation services to UAL including the provision of scheduled air
transportation services in certain areas of the United States under the
service mark "United Express." UAL contends that, under these
agreements, UAL has the right to "increase, decrease, or in any other
way adjust the flight frequencies, or markets, or both" in certain
airports currently serviced by WestAir and/or MAI. Neither MAI nor
WestAir has yet responded to the complaint. In order to give both
parties additional time to explore the possibility of resolving this
action without further litigation, the parties have entered into a
stipulation, which the Court approved, extending defendants' time to
respond to the complaint to and including January 28, 1998. MAI and
WestAir dispute the principal contentions in UAL's complaint, and
unless a satisfactory negotiated resolution is achieved, intend to
defend their position vigorously.
Mesa is also a party to legal proceedings and claims which arise during
the ordinary course of business.
In the belief of management, based upon information at this time, the
ultimate outcome of all the proceedings and claims pending against Mesa
referred to above is not expected to have a material adverse effect on
Mesa's consolidated financial position.
12. Financial Instrument Disclosure
The carrying amount of cash and cash equivalents, receivables, notes
receivable and accounts payable approximate fair value due to the short
maturity periods of these instruments. The fair value of marketable
securities is based on quoted market prices (see note 2).At September
30, 1997 the carrying value of Mesa's long-term debt approximates fair
value.
55
57
13. Valuation and Qualifying Accounts
Balance at Additions
beginning of charged to costs Balance at end
year and expenses Deductions of year
------------------------------------------------------------
(in thousands)
Allowance for obsolescence deducted
from expendable parts and supplies
September 30, 1997 $1,350 $1,281
-- $2,631
September 30, 1996 1,200 150
-- 1,350
September 30, 1995 1,695 --
$ 495 1,200
During fiscal year 1995, $495,000 of allowance for obsolescence was
transferred to Other Assets.
14. Selected Quarterly Financial Data (Unaudited)
The following table presents selected quarterly unaudited financial
data (in thousands):
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
---------------------------------------------------
Operating revenues $ 121,412 $ 125,410 $ 129,443 $ 134,712
Operating income (loss) 4,650 4,570 1,772 (65,478)
Net earnings (loss) (875) (989) (2,503) (44,230)
Net earnings (loss) per share $ (0.03) $ (0.03) $ (0.09) $ (1.57)
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
---------------------------------------------------
Operating revenues $ 120,029 $ 120,974 $ 130,274 $ 129,086
Operating income 7,602 8,324 14,305 17,763
Net earnings 3,874 11,865 6,525 8,143
Net earnings per share $ 0.12 $ 0.39 $ 0.23 $ 0.29
---------------------------------------------------
The net loss in the fourth quarter ended September 30, 1997, includes a
provision for the non-renewal of the WestAir code-share agreement with
UAL and other adjustments as discussed in note 15.
15. Other Operating Items
Other operating items consist of the following expenses (income):
56
58
September 30
1997 1996
-------------------------
(in thousands)
Provision for non-renewal of the WestAir
and potential early termination of the
Denver code-share agreements with UAL $ 72,100 $ --
Settlement with manufacturer (5,220) --
Aircraft return provision 1,004 3,023
----------- ----------
$ 67,884 $ 3,023
=========== ========
The present WestAir code-sharing agreement with UAL expires on May 31,
1998. On January 10, 1998, the Board of Directors approved a $72.1
million provision in the Company's financial statements because the
Company has been notified by UAL that it will not renew WestAir's
code-sharing agreement upon its expiration, and management believes
that it is probable that MAI will not operate in the Denver market for
the duration of the Denver code-sharing agreement with UAL. (see note
11, "Commitments and Contingencies.") The $72.1 million provision
provides for the estimated loss on the retirement or sale of aircraft,
parts and equipment which are expected to be surplus to the needs of
the Company upon expiration and potential early termination of the
code-share agreements. In addition, the provision includes an estimate
for all other anticipated costs of discontinuation of the WestAir,
Denver and Pacific Northwest operations. The restructuring provision
consists of $26.3 million for the Denver intangibles; $39.5 for costs
to sell or retire aircraft and related parts and equipment; and $6.3
million for severance and other costs. The Company believes that it
will incur approximately $15 to $20 million in cash expenditures in
fiscal 1998 primarily as a result of the costs to be incurred for
disposition of the surplus aircraft, severance and other expenditures.
The settlement with manufacturer of approximately $5.2 million is the
result of resolution of financial costs to Mesa caused by production
delays and initial operating reliability issues relating to new
equipment integrated into the Company's fleet.
The aircraft return provision of $1.0 million in 1997, and $3.0 million
in 1996 related to the two Fokker-70 aircraft returned by the Company
to Daimler-Benz in August and September, 1997.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
57
59
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth the names and ages of the directors and executive
officers of Mesa and certain additional information:
DIRECTOR
NAME AGE POSITION SINCE
Larry L. Risley (1) 53 Chief Executive Officer and Chairman of 1983
the Board of Directors of Mesa Air Group, Inc.
J. Clark Stevens 47 Director, President of Mesa Air Group, Inc., 1995
and Chief Operating Officer
E. Janie Risley (1) 51 Director 1983
George W. Pennington (2) 69 Director 1986
Richard C. Poe 63 Director 1986
Jack Braly 56 Director 1993
Paul R. Madden 71 Director 1997
W. Stephen Jackson 50 Chief Financial Officer, Treasurer --
and Vice President of Finance
Gary E. Risley (1) 39 Secretary, Vice President of Legal --
Affairs and General Counsel
(1) Larry L. and E. Janie Risley are husband and wife and Larry L. Risley is
Gary E. Risley's uncle.
(2) Mr. Pennington resigned from the Board of Directors on January 3, 1998.
The directors hold office until the next annual meeting of shareholders and
until their successors are elected and qualified.
On December 5, 1997 the Company announced the retirement of Mr. Larry L. Risley
as Chief Executive Officer (CEO). Mr. Risley's retirement is to be effective
upon the announcement of a successor CEO or April 30, 1998, whichever occurs
first. The Board of Directors has appointed a committee which now includes Mr.
Paul R. Madden and Mr. Richard C. Poe to conduct a search for a replacement CEO.
Mr. Risley will continue as the non-executive Chairman of the Company. The Board
of Directors is reviewing a retirement package for Mr. Risley but has not
reached any agreement as to its terms.
58
60
Item 11. Executive Compensation
The report of the Compensation Committee and the five-year Shareholder Return
Comparison and Performance Graph and related explanation and footnotes shall not
be incorporated by reference into any filings under the Securities Act of 1933,
as amended (the "Act"), or under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), notwithstanding statements made within the Company's
previous filings that all subsequent filings, in whole or in part, include,
without limitation, this Form 10-K.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee consists of three non-employee directors of the
Company and has responsibility for allocation of cash compensation and options
to senior executive officers of the Company. The Compensation Committee
primarily administers the Company's cash compensation plans, employee stock
option plans, and employee stock purchase plans. In those instances in which
Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires grants or awards of stock options to be made by a
"disinterested" committee, the Compensation Committee is solely responsible for
the administration of such plans. The full Board of Directors regularly reviews
the Compensation Committee decisions relating to executive compensation. The
Compensation Committee has allocated certain compensation decisions to the
Chairman of the Board of the Company.
The Board of Directors approved new levels of base compensation and related
structured bonus plan (the "Compensation Plan") and an Employee Stock Option
Plan (the "Stock Option Plan"), collectively the "Omnibus Plan," on December 1,
1995 and it was later approved by the shareholders of the Company on April 8,
1996. The Compensation Plan and Stock Option Plan were based on an independent
consultant's report on base pay and annual and long-term incentive compensation
with respect to 21 positions from four large carriers and three regional or
commuter airlines. Only one of the airlines furnishing information is included
in the SIC Industry Group ("SIC Group") included in the stock performance graph
appearing elsewhere herein. Since most of the Companies included in the SIC
Group did not participate in the survey, the Compensation Committee was unable
to consider any differences which may exist between members of the SIC Group and
the Company. While the comparisons considered annual revenues, number of
employees and years in the position, financial performance of the competitors or
other airlines providing information was not directly considered. The
alternatives presented by the consultant included: (i) a program providing for
base salaries slightly below general industry market with a strong above market,
at risk, annual bonus potential; or (ii) a program with base salaries slightly
above general industry market with an annual, at risk, bonus potential below the
general industry market. Based upon its study and review and the recommendations
of the compensation consultant, the Committee concluded and recommended to the
Board of Directors that the first alternative more closely aligned executives'
intent with the intent of the Company's shareholders. The Compensation Committee
was unable to secure sufficient data from competitor or peer publicly held
regional or commuter airlines to determine whether the base salaries so
established were at the low, medium or high range of compensation paid by those
in the comparative group. Based on the limited data available, the Compensation
Committee believes that the base salaries, bonus ranges and stock options
provided in the Omnibus Plan fall between the medium and high range of the
general industry group.
59
61
Under the Compensation Plan, salaries for all executive officers and key
employees have been capped. Bonuses for executive officers and key employees are
limited to prescribed percentages of base salary, based upon the percentage
growth in earnings per share. Growth in earning per share ("EPS") is categorized
at four levels: Minimum -- any growth in EPS during the prior fiscal year;
Threshold -- 7.0% to 12.9% growth in EPS; Target 13.0% to 17.9% growth in EPS
and Maximum -- 18.0% or greater growth in EPS. The Compensation Plan provides
that the Chairman of the Board is entitled to receive a cash bonus of 15%, 30%,
60% and 120% if the Minimum, Threshold, Target and Maximum, respectively, levels
of EPS are reached. Other executive officers and key employees, other than key
employees of a division or subsidiary, receive cash bonuses of from 3.75 percent
to 100 percent, graded as to each position at the four levels of EPS. Division
and subsidiary employee bonuses are based on earnings before taxes and interest
divided by total revenues of the division or subsidiary (the "Rate of Return").
The Rate of Return has been categorized at four levels: Minimum -- a Rate of
Return of five to nine and nine-tenths percent; Threshold -- a Rate of Return of
10 to 12.9 percent; Target -- a Rate of Return of 13 to 17.9 percent and Maximum
- -- a Rate of Return of 18 percent or more. Under the Compensation Plan, division
and subsidiary key employees are entitled to cash bonuses of seven and one-half
percent to 100 percent of base salary, depending upon the level of the Rate of
Return. Bonuses are actually paid after the end of each fiscal year and reflect
the growth in EPS for the prior year.
In addition to the bonus component of the Plan, the 150,000 options granted to
Mr. Risley pursuant to the Stock Option Plan during fiscal 1996 provide
incentive to Mr. Risley to increase shareholder return. While Mr. Risley's bonus
is now capped at a maximum of 120 percent of salary, he can participate in a
return on the appreciation of the Common Stock of the Company through exercise
of his options.
Since salary and bonuses are capped under the Compensation Plan, an integral
part of the Omnibus Plan is the issuance of stock options on an annualized basis
to key employees under the Stock Option Plan.
The Stock Option Plan provides for options to be issued to officers and key
employees on an annualized basis which vest at the rate of approximately
one-third per year. The options have a 10-year term and are subject to standard
option provisions such as are included in existing Company plans and exclude the
requirement of continued employment and provisions to deal with termination of
employment due to retirement, death or disability. Under the plan, options will
be issued at the low selling price of the Company's Common Stock on the date of
grant.
The total number of options granted under the Stock Option Plan in fiscal 1997
was 664,000.
The Compensation Committee believes that the Omnibus Plan, which provides for
established salary levels, a limit on cash bonuses and provides for the issuance
of stock options to officers and key employees related to the appreciation of
the Company's Common Stock, provides equitable incentives to increase the
profitability of the Company.
Compensation Committee
Jack Braly, Chairman
George W. Pennington
Richard C. Poe
60
62
COMPENSATION SUMMARY OF EXECUTIVE OFFICERS
The following table sets forth certain compensation paid or accrued by the
Company during the fiscal year ended September 30, 1997 to the Chief Executive
Officer and the three most highly compensated executive officers of the Company
whose total annual salary and bonuses exceeded $100,000.
OTHER RESTRICTED
ANNUAL STOCK LTIP ALL OTHER
SALARY BONUS (1) COMPENSATION AWARD(S (2) OPTIONS PAYOUT COMPENSATION (3)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- -------------------------- ------ -------- ---------- -------------- ------------ -------- -------- -----------------
Larry L. Risley.......... 1997 350,000 --- -- -- 150,000 -- 4,750
Chairman of the Board 1996 350,000 420,000 150,000 4,750
and Chief Executive 1995 350,000 -- 300,000 4,620
Officer
J. Clark Stevens......... 1997 235,000 --- -- -- 80,000 -- 4,750
Chief Operating Officer 1996 235,000 235,000 80,000 4,750
and President 1995 198,000 -- 178,000 4,846
Gary E. Risley........... 1997 150,000 --- -- -- 50,000 -- 4,750
Vice President of Legal 1996 150,000 150,000 50,000 4,076
Affairs and Secretary 1995 150,000 -- 110,000 5,151
W. Stephen Jackson....... 1997 150,000 --- -- -- 50,000 -- 4,750
Chief Financial Office, 1996 150,000 150,000 50,000 4,615
Vice President Finance 1995 150,000 -- 150,000 3,080
and Treasurer
- ----------
(1) Bonuses are actually paid after the end of each fiscal year and reflect
performance for the prior year. As the Company incurred a loss for fiscal
1997, no bonuses were paid in fiscal 1998.
(2) As of December 31, 1997, Larry L. Risley owned 516,380 shares of Mesa
Common Stock, Gary E. Risley owned 15,300 shares of Mesa Common Stock, J.
Clark Stevens owned 2,000 shares of Mesa Common Stock, and W.
Stephen Jackson owned 2,400 shares of Mesa Common Stock.
(3) These amounts represent both vested and non-vested Registrant contributions
the individual named executive officer's 401(k) plan. Under the Company's
401(k) plan, employees may contribute up to 15% of their annual salary and
bonus up to a specified maximum. The Company currently makes matching
contributions 50% of employees' contribution (including officers) with a
cap of 10% of the employees' annual compensation. Contributions by the
Company to its 401(k) plans for the year ended September 30, 1997 was
$1,679,802.
OPTIONS
61
63
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
--------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS/ POTENTIAL REALIZABLE
UNDERLYING SARS VALUE AT
OPTIONS/ GRANTED TO ASSUMED ANNUAL RATES OF
SARS EMPLOYEES EXERCISE OF STOCK PRICE APPRECIATION
GRANTED IN FISCAL BASE PRICE EXPIRATION FOR OPTION TERM
---------------------------
NAME (#) YEAR ($/SH) DATE 5% (S) 10% (S)
(A) (B) (C) (D) (E) (F) (G)
- --------------------------- ------------ ------------ ------------ ------------- ------------ -------------
Larry L. Risley.......... 150,000 22.6% 5.88 04/01/07 $441,000 $882,000
J. Clark Stevens......... 80,000 12.0% 5.88 04/01/07 $235,200 $470,400
Gary E. Risley........... 50,000 7.5% 5.88 04/01/07 $147,000 $294,000
W. Stephen Jackson....... 50,000 7.5% 5.88 04/01/07 $147,000 $294,000
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SEPTEMBER 30, 1997 AT SEPTEMBER 30, 1997
SHARES ACQUIRED ON VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE (1)
- --------------------------- ------------------ ----------------- ------------------- ---------------------
Larry L. Risley.......... -0- -0- 600,000 / 350,000 $0 / $83,700
J. Clark Stevens......... 2,000 $2,250 204,665 / 193,335 $0 / $44,640
Gary E. Risley........... -0- -0- 164,998 / 120,002 $0 / $27,900
W. Stephen Jackson....... -0- -0- 116,665 / 133,335 $0 / $27,900
- ----------
(1) Based on the closing price of the Common Stock on September 30, 1997 at
$6.438.
EMPLOYMENT AGREEMENTS
Employment agreements have been entered into with the Chief Operating Officer,
Chief Financial Officer, Chief Legal Officer and the Presidents of the
AmericaWest Express, Mesa Airlines, United Express and US Airways Express
divisions of the Company. The employment agreements with Mr. Stevens, Gary
Risley and W. Stephen Jackson provide for a term of one year after a new CEO is
appointed or April 30, 1999, whichever is earlier ("Termination Date"). If
Messrs. Stevens, Gary Risley or Jackson are still employed on the Termination
Date, each will receive a bonus equal to his annual base salary. If terminated
"without cause" or they elect to terminate employment with "Good Reason," (as
such terms are defined in the employment agreements) each is entitled to
severance pay of 90 percent of base salary payable for twelve months and 10
percent of base salary for an additional twelve months. Also, Messrs. Stevens,
Gary Risley and Jackson shall continue to be treated as employees for the
purpose of the Company's stock option plan during the period severance is paid.
COMPENSATION OF DIRECTORS
Each outside director receives a salary of $10,000 per year, along with the
payment of $1,000 per meeting attended in person; $500 for each committee
meeting attended in person; $500 for each telephone Board meeting attended and
reimbursement of all expenses associated with attending committee or Board of
Directors meetings. In addition, each outside director was granted 3,000 options
in fiscal 1997 pursuant to a stock option plan which automatically grants 3,000
options to each outside director on an annual basis (other than Mr. Madden who
received 3,000 options on June 9, 1997 when he was appointed to the Board of
Directors). All options granted to Mr. Jones expired on September 6, 1997, as a
result of his resignation from the Board of Directors on June 6, 1997. Options
granted to Messrs. Poe, Pennington and Braly were granted on December 11, 1996
at an exercise price of $9.75 per share and were fully vested on December 11,
1997. Options granted to Mr. Madden were at an exercise price of $4.88 and will
be fully vested on June 6, 1998.
62
64
Each outside director also participates in the Company's Outside Directors Stock
Option Plan (the "Formula Plan"). Other than initial grants under this plan,
grants pursuant to the Formula Plan are contingent on improved returns for the
shareholders. Each outside director is granted 10,000 options as of the first
business day of the month following appointment to the Board. (The date of the
first grant of option is referred to herein as the "Initial Grant Date"). Each
outside director receives a grant of an additional 10,000 options (the "Second
Grant") if: (1) the director is still serving as a director of the Company on
the date of the Second Grant; and (2) either the annual percentage increase in
shareholder return:
(a) exceeds seven percent for any fiscal year within four years of
the Initial Grant Date (the "Target Percent"), provided that the
effective date of the grant shall be delayed until the second
anniversary of the Initial Grant Date if the Target Percent is
achieved in the first two fiscal years following the Initial
Grant Date, or
(b) exceeds an aggregate of 10 percent for any two consecutive fiscal
years within four years after the Initial Grant Date (the
"Alternative Target Percent").
Each outside director receives a third grant of an additional 10,000 options
(the "Third Grant") if: (1) the director is still serving as a director of the
Company on the date of the Third Grant; and (2) either the annual percentage
increase in shareholder return:
(a) exceeds seven percent for any fiscal year within six years of the
Initial Grant Date (the "Additional Target Percent"), provided
that the effective date of the grant shall be delayed until the
fourth anniversary of the Initial Grant Date if the Additional
Target Percent is achieved in the first four fiscal years
following the Initial Grant Date, or
(b) exceeds an aggregate of 10 percent for any two consecutive fiscal
years within six years after the Initial Grant Date (the
"Additional Alternative Target Percent").
Options granted to the outside directors on the Initial Grant Date become
exercisable one year after the Initial Grant Date and when the fair market value
(as defined by the Formula Plan) of the Common Stock has increased by three
percent from the Initial Grant Date.
All other options become exercisable immediately upon satisfaction of the
following conditions: six months after the date the option was granted, and when
the fair market value of the shares (as defined in the Formula Plan) has
increased by seven percent from the date the option was granted.
With respect to options granted on the Initial Grant Date, the exercise price of
the options granted under the Formula Plan may not be less than the fair market
value of the Common Stock on the date of the grant. With respect to options
granted on the Second Grant Date, the option price per share may not be less
than the fair market value of the shares on the last business day of the fiscal
year that the Company achieves the Target Percent or the Alternative Target
percent. With respect to options granted on the Third Grant Date, the option
price per share may not be less than the fair market value of the shares as of
the last business day of the fiscal year that the Company achieves the
Additional Target percent or the Additional Alternative Target percent.
63
65
Mr. Madden received 10,000 options at an exercise price of $5.32 on July 1,
1997, which will vest on July 1, 1998 if the fair market value of the Common
Stock has increased by three percent over the exercise price. No other options
were granted in fiscal 1997 pursuant to this plan.
Each director who is not an employee of the Company also receives free travel on
Mesa for himself and certain family members and through arrangements with
certain major air carriers receives free or reduced-fare travel on those at no
cost to the Company. The Company believes that the directors' use of free air
travel is "de minimis" and therefore did not maintain any records of their
travel during fiscal 1997.
Directors hold office until the next annual meeting of shareholders or until
their successors are elected and qualified.
During fiscal 1997 the Company paid legal fees and expenses aggregating
approximately $347,517 incurred in connection with the defense of a
shareholders' derivative action on behalf of the Company and a class action
suit, as a nominal defendant, the directors of the Company, a former director
and a non-director officer. The aggregate amount paid has not been allocated
between the Company and the individuals who are being indemnified pursuant to
indemnification agreements and Nevada law.
COMPENSATION COMMITTEE INTERLOCKS
Richard C. Poe, Jack Braly and George W. Pennington all served as members of the
Compensation Committee during the fiscal year ended September 30, 1996. None of
these directors held any executive officer position or other employment with the
Company prior to or during such service nor did any executive officer serve on
any other company's compensation committee.
FIVE-YEAR SHAREHOLDER RETURN COMPARISON
Set forth below is a graph comparing the five-year cumulative shareholder return
on the Common Stock of Mesa Air Group, Inc. against the five-year cumulative
total return on the CRSP Index for NASDAQ Stock Market (US Companies) and the
CRSP Index for NASDAQ Stocks (SIC 4510-4519) (an index composed of NASDAQ
companies engaged in air transportation, and includes regional airlines whose
stocks trade on NASDAQ) for the periods indicated. The graph assumes an initial
investment of $100.00 and reinvestment of dividends, if any.
Comparison of Five-Year Cumulative Total Returns
Performance Report for
Mesa Air Group,Inc.
Company Index: CUSIP Ticker Class Sic Exchange
59047910 MESA 4510 NASDAQ
FISCAL YEAR-END IS 09/30/97
Market Index: Nasdaq Stock Market (US Companies)
Peer Index: NASDAQ Stocks (SIC 4510-4519 US Companies)
Air Transportation, Scheduled, and Air Courier Services
Date Company Index Market Index Peer Index
09/30/92 100.000 100.000 100.000
10/30/92 107.104 103.939 108.600
11/30/92 125.683 112.210 113.480
12/31/92 143.716 116.341 129.209
01/29/93 141.530 119.653 125.585
02/26/93 148.634 115.189 147.177
03/31/93 179.235 118.523 173.453
04/30/93 177.049 113.465 183.624
05/28/93 198.907 120.243 200.801
06/30/93 192.350 120.799 177.304
07/30/93 169.399 120.941 174.434
08/31/93 163.934 127.192 178.965
09/30/93 169.399 130.981 170.255
10/29/93 159.563 133.925 179.021
11/30/93 146.448 129.932 175.831
12/31/93 155.191 133.555 167.891
01/31/94 157.377 137.609 176.704
02/28/94 173.770 136.324 170.477
03/31/94 179.235 127.941 162.732
04/29/94 126.776 126.281 160.171
05/31/94 104.918 126.589 144.405
06/30/94 86.339 121.960 137.541
07/29/94 92.896 124.461 155.301
08/31/94 66.667 132.396 160.405
09/30/94 57.924 132.057 143.572
10/31/94 71.038 134.653 143.302
11/30/94 80.328 130.185 128.064
12/30/94 79.781 130.551 123.047
01/31/95 56.284 131.283 128.702
02/28/95 54.645 138.226 156.500
03/31/95 53.552 142.325 173.947
04/28/95 53.552 146.806 195.969
05/31/95 56.831 150.594 197.753
06/30/95 79.781 162.798 242.734
07/31/95 95.082 174.765 246.677
08/31/95 92.896 178.307 238.788
09/29/95 89.071 182.407 261.741
10/31/95 83.060 181.362 275.097
11/30/95 79.235 185.620 321.071
12/29/95 78.689 184.633 298.438
01/31/96 70.492 185.543 267.669
02/29/96 103.825 192.605 292.322
03/29/96 93.989 193.244 317.731
04/30/96 107.104 209.276 297.917
05/31/96 115.847 218.886 273.155
06/28/96 103.825 209.018 263.193
07/31/96 78.689 190.402 237.251
08/30/96 86.339 201.070 246.419
09/30/96 79.781 216.450 233.979
10/31/96 80.874 214.058 216.115
11/29/96 86.339 227.292 246.511
12/31/96 59.016 227.088 233.131
01/31/97 57.924 243.338 214.814
02/28/97 55.738 229.782 217.415
03/31/97 53.415 214.780 224.431
04/30/97 46.448 221.496 226.803
05/30/97 43.716 246.610 250.441
06/30/97 46.995 254.152 239.488
07/31/97 48.087 230.979 254.081
08/29/97 44.809 280.550 239.195
09/30/97 56.284 297.140 261.173
The index level for all series was set to 100.0 on 09/30/92.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1997 by all
directors, by each person who is known by the Company to be the beneficial owner
of more than five percent of the outstanding Common Stock, by each executive
officer named in the Summary Compensation Table and by all directors and
executive officers as a group.
64
66
The number of shares beneficially owned by each director or executive officer is
determined under rules of the Securities and Exchange Commission (the
"Commission"), and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership includes
any shares as to which the individual has the sole or shared voting power or
investment power and also any shares which the individual has the right to
acquire within 60 days of December 31, 1997 through the exercise of any stock
option or other right. Unless otherwise indicated, each person has sole
investment and voting power (or shares such powers with his or her spouse) with
respect to the shares set forth in the following table. In certain instances,
the number of shares listed includes, in addition to shares owned directly,
shares held by the spouse or children of the person, or by a trust or estate of
which the person is a trustee or an executor or in which the person may have a
beneficial interest.
NUMBER OF SHARES OF
COMMON STOCK BENEFICIALLY OWNED
--------------------------------------------------------------
VESTED
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OPTIONS (1) TOTAL (1) PERCENT (1)
- ---------------------------------------- -------------- -------------- -------------- -----------
Larry L. Risley (2)............................. 516,380 600,000 1,116,380 3.9%
Farmington, New Mexico 87401
E. Janie Risley (2)............................. -- -- -- --
Farmington, New Mexico 87401
Jack Braly...................................... 0 19,000 19,000 0.1%
San Antonio, Texas 78216
Paul R. Madden.................................. 1,000 0 1,000 0.0%
5847 North 46th Street
Phoenix, Arizona 85018
George W. Pennington (3)........................ 46,124 59,000 105,124 0.4%
401 West Broadway
Bloomfield, New Mexico 84712
Richard C. Poe.................................. 238,496 59,000 297,496 1.1%
6501 Montana
El Paso, Texas 79925
J. Clark Stevens................................ 2,000 204,665 206,665 0.7%
Farmington, New Mexico 87401
Gary E. Risley.................................. 15,300 164,998 180,298 0.6%
Farmington, New Mexico 87401
W. Stephen Jackson.............................. 2,400 116,665 119,065 0.4%
Farmington, New Mexico 87401
State of Wisconsin.............................. 2,762,000 -- 2,762,000 9.8%
P.O. Box 7842
Madison, Wisconsin 53707
Gardner Lewis Asset Management.................. 2,132,900 -- 2,132,900 7.5%
285 Wilmington-Westchester
Chadds Ford, Pennsylvania 19317
Nicholas Applegate Capital Management........... 1,640,000 -- 1,640,000 5.8%
600 West Broadway, 29th Floor
San Diego, California 92101
Merrill Lynch & Co. Et Al....................... 1,590,000 -- 1,590,000 5.6%
250 Vesey Street
New York, New York 10281
65
67
NUMBER OF SHARES OF
COMMON STOCK BENEFICIALLY OWNED
--------------------------------------------------------------
VESTED
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OPTIONS (1) TOTAL (1) PERCENT (1)
- ---------------------------------------- -------------- -------------- -------------- -----------
FMR Corp........................................ 1,589,600 -- 1,589,600 5.6%
82 Devonshire Street
Boston, Massachusetts 02109
American Express Co. Et Al...................... 1,500,000 -- 1,500,000 5.3%
200 Vesey Street
New York, New York 10285
All directors and officers as a group........... 821,700 1,249,996 2,071,696 7.3%
- ----------
(1) Includes options vested on December 31, 1997 and options which will become
vested on or before March 2, 1998. This table is based upon information
supplied by executive officers, directors and principal stockholders and
Schedules 13D and 13G filed with the SEC.
(2) Larry L. Risley and E. Janie Risley are husband and wife, and since New
Mexico is a community property state Ms. Risley has a beneficial interest
in Mr. Risley's shares and shares dispositive and voting powers with Mr.
Risley.
(3) George W. Pennington resigned from the Board of Directors on January 3,
1998.
Item 13. Certain Relationships and Related Transactions
On January 9, 1997, one of the Company's wholly owned subsidiaries, FCA, Inc.,
entered into a distributorship agreement ("the Distributor Agreement") with Sino
Swearingen Aircraft Company, L. P. (SSAC) for the distribution of corporate
jets. The Distributor Agreement grants FCA distribution rights in the states of
Colorado, Louisiana, New Mexico and Texas for sale of SSAC aircraft and parts.
The Distributor Agreement also requires FCA to maintain a retail sales area,
hangar and maintenance facility, with appropriate staff, and an adequate supply
of spare parts at a general aviation airport strategically located within FCA's
distribution area. FCA has agreed to purchase eight aircraft from SSAC with
delivery dates beginning in the first quarter of 1999 and ending in the first
quarter of 2001. The current purchase price of each aircraft is approximately
$3.5 million and is subject to change by SSAC. FCA is required to make progress
payments to SSAC on each aircraft as follows: upon execution of the purchase
agreement, $75,000; 365 days prior to delivery date, $50,000; 180 days prior to
delivery date, $150,000; at delivery, approximately $3.225 million (based upon
the current purchase price) reduced by the distributors' profit. In total, FCA
is presently obligated to purchase eight aircraft for approximately $28 million
at current prices. FCA is also obligated to purchase an adequate supply of parts
to support aircraft sold in the distribution area. In February 1997, FCA made
progress payments of $600,000 to SSAC against its purchase order for eight
aircraft. SSAC has subsequently notified FCA that the delivery schedule for the
eight aircraft will be delayed for at least one year. The Distributor Agreement
may be terminated by either party, upon 90 days' notice, on January 9, 2000, or
annually thereafter, and is cancelable by mutual agreement of the parties or
unilaterally by SSAC. The Chief Executive Officer of SSAC, Mr. Jack Braly, is a
member of the Board of Directors of Mesa Air Group, Inc.
Mesa will enter into future business arrangements with related parties only
where such arrangements are approved by a majority of disinterested directors
and are on terms at least as favorable as available from unaffiliated third
parties.
66
68
PART IV
Item 14. Exhibits, Schedules and Reports on Form 8-K
(A) Documents filed as part of this report:
1. Reference is made to consolidated financial statement schedules in
item 8 hereof.
2. Reports on Form 8-K
Other events - August 19, 1996
Other events - September 27, 1996
3. Exhibits
The following exhibits are either filed as part of this report or
are incorporated herein by reference from documents previously filed
with the Securities and Exchange Commission:
EXHIBIT
NUMBER DESCRIPTION REFERENCE
------ ----------- ---------
2.1 Plan and Agreement of Merger of Mesa Air Filed as Exhibit 2.1 to Registrant's Form 10-K for
Group, Inc. into Mesa Holding, Inc. dated the fiscal year ended September 30, 1996,
September 16, 1996 incorporated herein by reference
3.1 Articles of Incorporation of Mesa Air Holdings, Filed as Exhibit 3.1 to Registrant's Form 10-K for
Inc. dated May 28, 1996 the fiscal year ended September 30, 1996,
incorporated herein by reference
3.2 Bylaws of Mesa Air Group, Inc., as amended Filed as Exhibit 3.2 to Registrant's Form 10-K for
the fiscal year ended September 30, 1996,
incorporated herein by reference
4.1 Form of Common Stock certificate Filed as Exhibit 4.5 to Amendment No. 1 to
Registrant's Form S-18, Registration No.33-11765
filed March 6, 1987, incorporated herein by
reference
4.2 Form of Common Stock certificate (issued after Filed as Exhibit 4.8 to Form S-1, Registration No.
November 12, 1990) 33-35556 effective December 6, 1990,
incorporated herein by reference
4.8 Form of Employee Non-Incentive Stock Option Filed as Exhibit 4.12 to Registrant's Form 10-K for
Plan,dated as of June 2, 1992 the fiscal year ended September 30, 1992,
Commission File No. 33-15495, incorporated herein
by reference
67
69
EXHIBIT
NUMBER DESCRIPTION REFERENCE
------ ----------- ---------
4.9 Form of Non-Incentive Stock Option issued under Filed as Exhibit 4.13 to Registrant's Form 10-K for
Mesa Airlines, Inc. Employee Non-Incentive the fiscal year ended September 30, 1992,
Stock Option Plan, dated as of June 2, 1992 Commission File No. 33-15495, incorporated herein
by reference
4.10 Form of Mesa Airlines, Inc. Outside Filed as Exhibits 4.1, 4.2 and 4.3 to
Directors Stock Option Plan, dated as of Registration No. 33-09395 effective August 1,
March 9, 1993 1996
4.11 Form of Stock Option issued under Mesa Filed as Exhibit 4.4 to Registration No.
Airlines, Inc. Outside Director's Stock 33-09395 effective August 1, 1996
Option Plan, dated as of March 9, 1993
4.12 Form of Mesa Airlines, Inc. Additional Filed as Exhibit 4.5 to Registration No.
Outside Directors Stock Option Plan dated as 33-09395 effective August 1, 1996
of December 9, 1994
4.13 Form of Non-Qualified Stock Option Issued Filed as Exhibit 4.6 to Registration No.
Under Mesa Airlines, Inc. Additional Outside 33-09395 effective August 1, 1996
Directors' Stock Option Plan
4.14 Form of Mesa Air Group, Inc. Restated and Filed as Exhibit 4.1 to Registration No.
Amended Employee Stock Option Plan dated 33-02791 effective April 24, 1996
April 23, 1996
4.15 Form of Non-Qualified Stock Option issued Filed as Exhibit 4.2 to Registration No.
under Mesa Air Group, Inc. Restated and 33-02791 effective April 24, 1996
Amended Employee Stock Option Plan dated
April 23, 1996
4.16 Form of Qualified Stock Option issued under Filed as Exhibit 4.3 to Registration No.
Mesa Air Group, Inc. Restated and Amended 33-02791 effective April 24, 1996
Employee Stock Option Plan dated April 23,
1996
10.17 Agreement between Beech Aircraft Corporation Filed as Exhibit 10.30 to Form S-1,
and Mesa Airlines, Inc., dated April 30, 1990 Registration No. 33-35556 effective December 6,
1990, incorporated herein by reference
10.18 Sublease Agreement between Air Midwest, Inc. Filed as Exhibit 10.32.1 to Form S-1,
and Mesa Airlines, Inc., dated April 27, Registration No. 33-35556 effective December 6,
1990 for Embraer Brasilia aircraft 120.180 1990, incorporated herein by reference
10.20 Agreement between Air Midwest, Inc. and Mesa Filed as Exhibit 10.32.3 to Form S-1,
Airlines, Inc., dated February 27, 1990, for Registration No. 33-35556 effective December 6,
purchase of four Embraer Brasilia aircraft 1990, incorporated herein by reference
10.21 Letter Agreement between McDonnell Douglas Filed as Exhibit 10.32.4 to Form S-1,
Finance Corporation, Air Midwest, Inc. and Registration No. 33-35556 effective December 6,
Mesa Airlines, Inc., dated March 19, 1990, 1990, incorporated herein by reference
as amended, regarding lease and sublease of
four Embraer Brasilia aircraft
10.22 Sublease Agreement between Air Midwest Inc. Filed as Exhibit 10.32.5 to Form S-1,
and Mesa Airlines, Inc., dated July 26, Registration No. 33-35556 effective December 6,
1990, for Embraer Brasilia aircraft 120.193 1990, incorporated herein by reference
68
70
EXHIBIT
NUMBER DESCRIPTION REFERENCE
------ ----------- ---------
10.23 Lease Agreement between McDonnell Douglas Filed as Exhibit 10.32.6 to Form S-1,
Finance Corporation and Mesa Airlines, Inc., Registration No. 33-35556 effective December 6,
dated July 26, 1990, for Embraer Brasilia 1990, incorporated herein by reference
aircraft 120.193
10.24 Sublease Agreement between Air Midwest Inc. Filed as Exhibit 10.32.7 to Form S-1,
and Mesa Airlines, Inc., dated September 26, Registration No. 33-35556 effective December 6,
1990, for Embraer Brasilia aircraft 120.203 1990, incorporated herein by reference
10.25 Lease Agreement between McDonnell Douglas Filed as Exhibit 10.32.8 to Form S-1,
Finance Corporation and Mesa Airlines, Inc., Registration No. 33-35556 effective December 6,
dated September 26, 1990, for Embraer 1990, incorporated herein by reference
Brasilia aircraft 120.203
10.27 Expanded Partner Agreement between United Filed as Exhibit 19.3 to Registrant's Form 10-Q
Air Lines, Inc., and Mesa Airlines, Inc., for the quarterly period ended June 30, 1990,
dated February 15, 1990 Commission File No. 0-15495, incorporated
herein by reference
10.29 Form of Directors' and Officers' Filed as Exhibit 10.41 to Form S-1,
Indemnification Agreement Registration No. 33-35556 effective December 6,
1990, incorporated herein by reference
10.31 Agreement Relating to the Settlement of Filed as Exhibit 10.45 to Form S-1,
Interline Accounts through Airlines Clearing Registration No. 33-35556 effective December 6,
House, Inc., between Airlines Clearing 1990, incorporated herein by reference
House, Inc. and Mesa Airlines, Inc., dated
September 2, 1981
10.32 Agreement between Beech Aircraft Corporation Filed as Exhibit 10.42 to Form 10-K for fiscal
and Mesa Airlines, Inc., dated September 18, year ended September 30, 1991, Commission File
1991 No. 0-15495, incorporated herein by reference
10.33 Agreement between US Airways, Inc. and Air Filed as Exhibit 10.43 to Form 10-K for fiscal
Midwest, Inc. year ended September 30, 1991, Commission File
No. 0-15495, incorporated herein by reference
10.34 Agreement between US Airways, Inc. and Filed as Exhibit 10.44 to Form 10-K for fiscal
FloridaGulf Airlines, Inc. year ended September 30, 1991, Commission File
No. 0-15495, incorporated herein by reference
10.35 Sublease agreement between Trans States Filed as Exhibit 10.45 to Form 10-K for fiscal
Airlines, Inc. and Air Midwest, Inc. year ended September 30, 1992, Commission File
No. 0-15495, incorporated herein by reference
10.37 Agreement between Beech Aircraft Filed as Exhibit 10.47 to Form 10-K for fiscal
Corporation, Beech Acceptance Corporation, year ended September 30, 1992, Commission File
Inc. and Mesa Airlines, Inc., dated August No. 0-15495, incorporated herein by reference
21, 1992
10.38 Agreement between America West Airlines, Filed as Exhibit 10.48 to Form 10-K for fiscal
Inc. and Mesa Airlines, Inc. year ended September 30, 1992, Commission File
No. 0-15495, incorporated herein by reference
10.39 Agreement between United Air Lines, Inc. and Filed as Exhibit 10.49 to Form 10-K for fiscal
WestAir Commuter Airlines, Inc. (WestAir) year ended September 30, 1992, Commission File
No. 0-15495, incorporated herein by reference
69
71
EXHIBIT
NUMBER DESCRIPTION REFERENCE
------ ----------- ---------
10.40 Plan and Agreement to Merge between Mesa Filed as Exhibit A to Form S-4 Registration No.
Airlines, Inc., Mesa Acquisition Corporation 33-45638, effective April 17, 1992, incorporated
and WestAir Holding, Inc., dated February 7, herein byreference 1992.
10.41 Certificate of Public Convenience and Filed as Exhibit 10.1(a) to WestAir Holding,
Necessity for WestAir Commuter Airlines, Inc. Inc.'s Registration Statement on Form S-1,
Commission File No. 33-24316, incorporated
herein by reference
10.42 Air Carrier Operating Certificate for WestAir Filed as Exhibit 10. to WestAir Holding, Inc.'s
Registration Statement on Form S-1, Commission
File No. 33-24316, incorporated herein by
reference
10.46 Original Agreement to Lease dated as of Filed as Exhibit 10.44 to WestAir Holding,
April 27, 1987 between NPA, Inc. ("NPA") and Inc.'s Registration Statement on Form S-1,
British Aerospace, Inc. ("BAe") with a Commission File No. 33-24316, incorporated
Letter to FG Holdings, Inc. ("FGH") dated herein by reference
March 11, 1988 and Amendment No. 1 to
Agreement to Lease dated as of March 3, 1988
between BAe and FGH
10.47 Side Letter Agreement to NPA from JACO dated Filed as Exhibit 10.48 to WestAir Holding,
June 4, 1987 Inc.'s Registration Statement on Form S-1,
Commission File No. 33-24316, incorporated
herein by reference
10.49 Employment Agreement dated as of September Filed as Exhibit 10.51(b) to WestAir Holding,
1, 1988 between WestAir and Maurice J. Inc.'s Registration Statement on Form S-1,
Gallagher Jr. Commission File No. 33-24316, incorporated
herein by reference
10.50 Aviation Land and Building Lease and Filed as Exhibit 10.164 to the Pre-effective
Agreement between City of Fresno, California Amendment No. 1, filed October 19, 1988, to
and WestAir dated January 7, 1986 WestAir Holding, Inc.'s Registration Statement
on Form S-1, Commission File No. 33-24316,
incorporated herein by reference
10.51 Airport Operating Permit between Airport Filed as Exhibit 10.67 to WestAir Holding,
Commission of City and County of San Inc.'s Registration Statement on Form S-1,
Francisco and WestAir Commission File No. 33-24316, incorporated
herein by reference
10.58 Promissory Note to Textron for spare parts Filed as Exhibit 10.80 to WestAir Holding,
as executed by WestAir, dated December 30, Inc.'s Form 10-K dated December 31, 1988,
1988 Commission File No. 33-24316, incorporated
herein by reference
10.59 Agreement to lease Jetstream model 3101 Filed as Exhibit 2.1 to WestAir Holding, Inc.'s
aircraft and Jetstream model 3201 Form 8-K filed June 8, 1989, Commission
aircraft File between BAe and WestAir, No. 33-24316,incorporated herein by reference
dated May 11, 1989
10.60 Amendment to Agreement to Lease dated May Filed as Exhibit 10.38 to WestAir Holding,
11, 1989 between WestAir and BAe, dated Inc.'s Form 10-K for the year ended December
February 15, 1990 31, 1989, Commission File No. 33-24316,
incorporated herein by reference
10.61 Amended and Restated Stock Purchase Filed as Exhibit 10.42(a) to WestAir Holding,
Agreement, dated September 30, 1991 among Inc.'s Form 10-K for the year ended December
WestAir Holding, Inc., WestAir Commuter 31, 1991, Commission File No. 33-24316,
Airlines, Inc. and Atlantic Coast Airlines, incorporated herein by reference
Inc., relating to the sale of the Atlantic
Coast division of WestAir Commuter Airlines,
Inc.
70
72
EXHIBIT
NUMBER DESCRIPTION REFERENCE
------ ----------- ---------
10.65 Agreement of Purchase and Sales of Assets by Filed as Exhibit 10.90 to Mesa Airlines, Inc.
and among Crown Airways, Inc., Phillip R. Form 10-K for the year ended September 30,
Burnaman, A. J. Beiga and Mesa Airlines, 1994, Commission File No. 0-15495
Inc., dated as of December 16, 1993
10.66 Supplemental Agreement No. 9/03/94 Filed as Exhibit 10.66 to Mesa Airlines, Inc.
Beechcraft 1900 D Airliner Acquisition Form 10-K for the year ended September 30,
Master Agreement between Mesa Airlines, 1994, Commission File No. 0-15495
Inc., Beech Aircraft Corporation and Beech
Acceptance Corporation, Inc., dated as of
September 23, 1994
10.67 Form of Lease Agreement between Beech Filed as Exhibit 10.67 to Mesa Airlines, Inc.
Acceptance Corporation, Inc. and Mesa Form 10-K for the year ended September 30,
Airlines, Inc., negotiated September 30, 1994, Commission File No. 0-15495
1994 for all prospective 1900 D Airliner
leases.
10.68 Asset Purchase Agreement dated July 29, 1994 Filed as Exhibit 10.68 to Mesa Airlines, Inc.
among Pennsylvania Commuter Airlines, Inc., Form 10-K for the year ended September 30,
dba Allegheny Commuter Airlines, US Airways 1994, Commission File No. 0-15495
Leasing and Services, Inc., and Mesa
Airlines, Inc.
10.69 Letter Agreement in Principle dated as of Filed as Exhibit 10.69 to Mesa Airlines, Inc.
October 16, 1994 among Air Wisconsin, Inc., Form 10-K for the year ended September 30,
United Air Lines Inc. and Mesa Airlines, 1994, Commission File No. 0-15495
Inc. (Certain portions deleted pursuant to
request for confidential treatment)
(Referred to erroneously as Exhibit 10.94 in
letter asking for confidential treatment to
Securities and Exchange Commission dated
12-23-94 from Chapman & Cutler)
10.70 Subscription Agreement between AmWest Filed as Exhibit 10.70 to Mesa Airlines, Inc.
Partners, L.P. and Mesa Airlines, Inc. dated Form 10-K for the year ended September 30,
as of June 28, 1994 1994, Commission File No. 0-15495
10.71 Omnibus Agreement Filed as Exhibit 10.71 to Mesa Air Group, Inc.
Form 10-Q for the quarter ended December 31,
1994, Commission File No. 0-15495
10.72 Aircraft Purchase and Sale Agreement Filed as Exhibit 10.72 to Mesa Air Group, Inc.
Form 10-Q for the quarter ended December 31,
1994, Commission File No. 0-15495
10.73 Expendable and Rotable Spare Parts and Sale Filed as Exhibit 10.73 to Mesa Air Group, Inc.
Agreement Form 10-Q for the quarter ended December 31,
1994, Commission File No. 0-15495
10.74 United Express Agreement Amendment Filed as Exhibit 10.74 to Mesa Air Group, Inc.
Form 10-Q for the quarter ended December 31,
1994, Commission File No. 0-15495
10.75 Side Letter Agreement Filed as Exhibit 10.75 to Mesa Air Group, Inc.
Form 10-Q for the quarter ended December 31,
1994, Commission File No. 0-15495
71
73
EXHIBIT
NUMBER DESCRIPTION REFERENCE
------ ----------- ---------
10.76 First Amendment to Omnibus Agreement Filed as Exhibit 10.76 to Mesa Air Group, Inc.
Form 10-Q for the quarter ended December 31,
1994, Commission File No. 0-15495
10.77 Operating Lease Agreement Filed as Exhibit 10.77 to Mesa Air Group, Inc.
Form 10-Q for the quarter ended December 31,
1994, Commission File No. 0-15495
10.78 Item 3. Legal Proceedings - Form 10-K dated Filed as Exhibit 10.78 to Mesa Air Group, Inc.
September 30, 1994 Form 10-Q for the quarter ended December 31,
1994, Commission File No. 0-15495
10.79 Purchase Agreement B95-7701-PA-200 between Filed as Exhibit 10.79 to Mesa Air Group, Inc.
Bombardier Inc. and Mesa Airlines, Inc. Form 10-Q for the quarter ended March 31, 1995,
Commission File No. 0-15495
10.81 Letter of Understanding between Mesa Air Filed as Exhibit 10.81 to Mesa Air Group, Inc.
Group, Inc. and Raytheon Aircraft Company Form 10-Q for the quarter ended March 31, 1996,
(RAC) dated April 12, 1996. Commission File No. 0-15495
10.82 Supplemental Agreement No. 05/22/96, Filed as Exhibit 10.82 to Mesa Air Group, Inc.
Beechcraft 1900D Airliner Acquisition Master Form 10-Q for the quarter ended March 31, 1997,
Agreement between Mesa Air Group, Inc., Commission File No. 0-15495
Raytheon Aircraft Company and Raytheon
Aircraft Credit Corporation
10.83 Bombardier Regional Aircraft Division Filed as Exhibit 10.83 to Mesa Air Group, Inc.
Purchase Agreement CRJ-0351 between Form 10-Q for the quarter ended December 31,
Bombardier Inc. and Mesa Air Group, Inc. 1996, Commission File No. 0-15495
10.84 Aircraft Option Exercise B97-7701-RJTL-3492L Filed herewith
dated as of August 15, 1997 between Mesa Air
Group, Inc. and Bombardier Inc. (Request
for confidential treatment submitted to SEC.)
10.85 Bombardier Regional Aircraft Division Filed herewith
Settlement Agreement B97-7701-RJTL-3493L
dated as of August 15, 1997 between Mesa Air
Group, Inc. and Bombardier Inc. (Request
for confidential treatment submitted to SEC.)
10.86 Service Agreement dated as of November 11, Filed herewith
1997 between Mesa Airlines, Inc. and US
Airways, Inc. (Request for confidential
treatment submitted to SEC.)
21.1 Subsidiaries list of Mesa Air Group, Inc. Filed herewith
23.1 Independent Auditors' Consent of KPMG Peat Filed herewith
Marwick LLP
72
74
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MESA AIR GROUP, INC.
By: /s/ Larry L. Risley
-------------------
Larry L. Risley
Chief Executive Officer and
Chairman of the Board of Directors
By: /s/ W. Stephen Jackson
----------------------
W. Stephen Jackson
Chief Financial Officer, Treasurer
and Vice President of Finance
Dated: January ____, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Larry L. Risley Chairman, Chief Executive Officer, Director January ___, 1998
- ------------------------------
Larry L. Risley
/s/ J. Clark Stevens President, Chief Operating Officer January ___, 1998
- ------------------------------
J. Clark Stevens
/s/ Jack Braly Director January ___, 1998
- ------------------------------
Jack Braly
/s/ Paul R. Madden Director January ___, 1998
- ------------------------------
Paul R. Madden
/s/ E. Janie Risley Director January ___, 1998
- ------------------------------
E. Janie Risley
/s/ Richard C. Poe Director January ___, 1998
- ------------------------------
Richard C. Poe
73