Item 1. Business
GENERAL
Mesa Air Group, Inc. (collectively referred to herein as "Mesa") is the largest independently owned regional airline in the world (based upon passenger enplanements), serving 164 cities in 30 states and the District of Columbia. Mesa has a fleet of 175 aircraft with approximately 1,900 daily departures.
Mesa operates a regional airline utilizing a low-cost hub-and-spoke system under code-sharing agreements with America West Airlines, Inc. ("America West"), United Airlines ("United") and USAir, Inc. ("USAir").
Mesa's business strategy is to achieve sustained, profitable growth by utilizing its low cost structure 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 existing code-sharing agreements with certain of the major air carriers to benefit from the name recognition, reservation systems and marketing and promotional efforts of these carriers. Mesa also controls operating expenses by utilizing a fleet of new and efficient aircraft and by performing most maintenance and overhaul work at its own facilities. By managing its fares and flight schedules to increase yields and by developing new markets, Mesa seeks to maximize gross revenues.
CORPORATE REORGANIZATION
In September 1996, Mesa redomesticated the Company in Nevada. After the redomestication and corporate restructuring, Mesa Air Group, Inc. now owns Mesa Airlines, Inc. ("MAI"), a Nevada corporation and certificated air carrier formed to hold all airline operations; 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; and various non-airline operations.
The Company is in the process of revising the management structure to centralize flight and maintenance controls and management in one location and will switch from the "division" management system to one focusing on its hubs.
San Juan Pilot Training, Inc. dba Mesa Pilot Development, the Company's pilot training program, was reincorporated as MPD, Inc., a Nevada corporation. Four Corners Aviation, Inc. a fixed-base operation at Farmington, New Mexico, has been reincorporated in Nevada as FCA, Inc.
The Company created two new corporations as part of the reorganization. Mesa Leasing, Inc. ("Mesa Leasing") and MAGI Insurance, Ltd. ("MAGI"). Mesa Leasing is a Nevada corporation established to assist the Company in the acquisition and leasing of aircraft. MAGI is a Barbados, West Indies- based insurance company established for the purpose of allowing the Company to attain favorable insurance rates. It is anticipated that MAGI will be relocated within the United States during the 1997 fiscal year.
OPERATIONS
Mesa operates as America West Express, Mesa Airlines, United Express and USAir Express as of December 6, 1996, organized throughout the United States by code-share and region as follows:
AMERICA WEST EXPRESS
Southwest: 18 destinations out of its Phoenix hub
Mesa has 167 weekday departures out of Phoenix utilizing 15 aircraft: 11 Beechcraft 1900D Airliners ("Beech 1900Ds" or "1900Ds") which carry 19 passengers, two Embraer Brasilia EMB-120 aircraft ("EMB-120s" or "Brasilias") which carry 30 passengers, and two Fokkers 70s which carry 78 passengers. The Company plans to replace the two Fokker 70 aircraft with three 50-seat Canadair Regional Jet 200 aircraft ("CRJs") in 1997. An additional three CRJs are scheduled to be added in early 1998.
MESA AIRLINES
Southwest: 10 destinations out of its Albuquerque hub
Flying under its own colors as Mesa Airlines, Mesa has 85 weekday departures out of Albuquerque utilizing six Beech 1900Ds.
South: Proposed jet service from Fort Worth
In May 1997, Mesa plans to begin service utilizing CRJs from Meacham International Airport ("Meacham") in Fort Worth, Texas to destinations throughout Texas and the Southwest. Initially, Mesa Airlines intends to offer 11 daily departures with an additional 50 departures projected within a year. Mesa plans to deploy the first four CRJ aircraft delivered at Meacham. An additional six aircraft may be added at a later date.
UNITED EXPRESS
Rocky Mountains: 34 destinations out of its Denver hub
Mesa serves the Southwest and Rocky Mountain regions with 204 weekday departures, utilizing 26 aircraft: 14 Beech 1900Ds, eight Dash 8-200s (plus one 50-seat Dash 8-300 as a spare), and four Brasilias. In 1997, the Company plans to replace the four Brasilias with new Dash 8-200s.
California: 17 destinations out of its Los Angeles hub and 16 destinations out of its San Francisco hub
Mesa flies 212 weekday departures out of Los Angeles and 195 weekday departures from San Francisco, utilizing a total of 37 aircraft: 21 British Aerospace Jetstream 31 aircraft ("BAe Jetstream 31s" or "J31s") which carry 19 passengers, and 16 Brasilias.
Pacific Northwest: 11 destinations out of its Portland and Seattle hubs
Mesa has 194 weekday departures in the Northwest, utilizing 14 Beech 1900Ds.
USAIR EXPRESS
Northeast: 11 destinations out of its Boston hub
Mesa operates 70 weekday departures out of Boston to cities in Massachusetts, Maine, New Hampshire, Connecticut and Pennsylvania, utilizing 11 Beech 1900Ds.
Mid-Atlantic: 18 destinations out of its Philadelphia hub and 17 out of its Pittsburgh hub
The Company serves the Mid-Atlantic states with 258 weekday departures, utilizing 26 Beech 1900Ds.
Southeast: Nine destinations out of its Tampa hub, nine destinations out of its Orlando hub and eight destinations out of its New Orleans hub
Mesa has 249 weekday departures in the states of Florida, Alabama and North Carolina and 54 weekday departures out of New Orleans, utilizing a total of 29 aircraft: 19 Beech 1900Ds and 10 Brasilias.
Central: 16 destinations out of its Kansas City hub
In the Central states Mesa has 158 weekday departures out of Kansas City, utilizing 13 Beech 1900Ds.
MESA AIRCRAFT BY HUB AS OF SEPTEMBER 30, 1996
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. Mesa also owns and operates MPD, Inc., providing flight training as "Mesa Pilot Development" in coordination with San Juan College in Farmington, New Mexico. In April 1992, Mesa acquired FCA, Inc., a fixed based operator located in Farmington, New Mexico which operates as Four Corners Aviation. Another subsidiary, Regional Aircraft Services, Inc., performs component overhaul and repairs 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 Mesa's airline divisions and subsidiaries.
CODE-SHARING
Approximately 95 percent of Mesa's consolidated revenues are derived from operations associated with codesharing agreements with America West, United and USAir. 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 to provide coordinated schedules, joint advertising and through fares. In addition, Mesa participates in the respective partners' frequent flyer programs. Mesa's passengers receive mileage credits in the respective frequent flyer programs, and credits in those programs can be used on Mesa's flights.
Mesa has two separate code-sharing agreements with United and three separate code-sharing agreements with USAir. Although the terms of each of the code-sharing agreements with a particular code-sharing partner are quite similar, each agreement relates to a separate division and has a different expiration date. Renewal of one code-sharing agreement with a code-sharing partner does not guarantee the renewal of any other codesharing agreement with the same code-sharing partner.
The code-sharing agreements provide for terms of nine to 10 years with respect to America West (expires in 2004), five to 10 years with respect to United (expire in 1998 in the Los Angeles and San Francisco hubs and in 2005 in the Denver, Portland and Seattle hubs) and nine to 10 years with respect to USAir (expire in 2000 in Kansas City hub, 2003 in Pittsburgh hub and 2004 in New Orleans, Boston,
Philadelphia, Tampa and Orlando hubs). Although the provisions of the agreements vary, generally they are subject to cancellation should Mesa fail to meet certain operating and performance standards, the breach of other contractual terms and conditions, and, in the case of the USAir code-sharing agreements, upon six months' notice by either party. In connection with the extension of its code-sharing agreement with United until 2005, Mesa agreed not to enter 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 United, which restricts United from competing with Mesa 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 Mesa. A termination of any of Mesa's code-sharing agreements with America West, United or USAir would have a material adverse effect on Mesa's business.
THE REGIONAL AIRLINE MARKET
The regional airline industry has grown rapidly since airline deregulation in 1978 and airline enplanements have increased fivefold to 57.2 million passengers. This growth has included considerable consolidation and expanded relationships between the major and regional airlines.
The airline industry is now divided into three primary groups: the major airlines (88 percent of industry revenues), the regional airlines (seven percent) and the low-fare airlines (five percent). Each airline group maintains a distinct niche in the industry. The major airlines carry connecting and longer-distance passengers, catering to more service- and convenience-oriented business travelers. The regional airlines operate primarily in low-density markets and feed business and leisure travelers to the hubs of their codesharing partners. The regional segment is defined by markets with low traffic density and the use of turboprop and regional jet aircraft. Competition from the majors and low-fare carriers in the regional market is limited because traffic density is generally insufficient for profitable operation of traditional narrow-body jet aircraft. Low-fare airlines such as Southwest Airlines and Carnival focus on leisure and price-sensitive business travelers, providing point-to-point service in medium- to high-density markets. The low-fare airlines utilize traditional narrow-body jet aircraft with 113 to 164 seats and tend to operate only in markets where higher traffic volumes allow their low fares.
The regional airline market has undergone substantial consolidation, from 250 operators in 1981 to 124 in 1995. The remaining air carriers are generally stronger and more sophisticated. The large regionals all maintain code-sharing relationships with at least one major airline. Under these arrangements, the regional carriers' flights appear under the name of the major airline. This provides a substantial marketing advantage and allows the regional carrier to offer special fares and receive priority computer reservation system displays. Totally independent regional carriers account for only a marginal amount of regional passenger traffic in the United States. In the absence of marketing relationships with major airlines, these operators limit themselves to small niche areas.
INDUSTRY GROWTH
Since 1984, passenger enplanements for regional air carriers have grown from 26.1 million to 57.2 million in 1995. Revenue passenger miles have increased similarly from 4.17 billion to 12.8 billion over the same period. The number of aircraft operated by regionals in 1984 was 1,747 compared to 2,138 in 1995. This growth is expected to continue with the RAA forecasting for 2,700 regional aircraft by 2005 with most of the growth originating in the 30- to 50-seat segment. As major airlines continue to eliminate routes which are unprofitable under their cost structures, regional airlines will expand their operations. Lacking the higher labor costs and large corporate cultures of the majors, regional airlines operate very efficient systems which can respond swiftly to changing markets.
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 business strategy is to operate a competitive and profitable, low-cost, 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.
Mesa's market selection process is completed through 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. In the event expectations are not met in a particular region, Mesa can usually relocate aircraft and personnel to another region. For example, in early November 1996, eight 1900Ds were transferred from Los Angeles to serve routes in the Pacific Northwest, and eight J31s were transferred from routes in the Pacific Northwest to the Los Angeles hub. Also, five Brasilias were added to service routes out of Los Angeles.
Mesa demonstrated its focus on profitability by its response to difficulties at its subsidiary WestAir Holding, Inc. ("WestAir"). Competition on the West Coast and high labor costs had contributed to lower earnings at WestAir in fiscal 1995. By (i) reducing capacity approximately 20%, (ii) negotiating reduced cost of operating leases on 21 J31 aircraft leased from the manufacturer and (iii) negotiating a higher fee per departure with its code-sharing partner in Los Angeles, the Company increased its earnings in fiscal 1996 from that realized in fiscal 1995.
AIRLINE OPERATIONS
Mesa recently announced a consolidation and centralization plan for its dispatch, flight operations and maintenance programs, bringing regional operations into its headquarters. The consolidation plan was prompted by an agreement with the FAA and in anticipation of future Company expansion and conversion from an FAR Part 135 to an FAR Part 121 air carrier.
The centralization and growth of Mesa will require an expansion of MAI's corporate headquarters facility. The Company has reviewed alternatives to determine the best location for its headquarters and a consolidated training facility to accommodate MAI's size, its new jet operations and its geographic diversity. Following the review, the Company has decided to keep MAI's headquarters in Farmington, New Mexico while locating its primary training academy in the Dallas/Fort Worth metroplex. A specific location for the training academy has not yet been finalized.
This action will serve to consolidate the Company's training in one central location instead of having 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 is gradually consolidating its fleet by aircraft type. The Company plans to eventually replace all J31s and EMB-120s, reducing the type of aircraft operated to three: 1900Ds, Dash 8-200s and CRJs. Mesa intends to phase out the J31s as they come off lease between 1998 and 2004, leaving the Beech 1900Ds as the 19-seat aircraft fleet type. EMB-120s will be replaced by Dash 8s and the CRJs, and all remaining EMB-120s will be redeployed to the Los Angeles and San Francisco hubs. The Fokker 70s will also be replaced by the new CRJs.
Mesa has also been consolidating aircraft bases and certain maintenance facilities. The Company previously operated a combination of J31s and 1900Ds that required multiple maintenance bases in both the Northwest and in California. In early November 1996, the Company transferred aircraft creating a uniform 1900D fleet in the Northwest and a uniform J31 fleet in California. This allowed the closing of two maintenance facilities, the J31 maintenance base in Eugene, Oregon and the 1900D maintenance base in Bullhead City, Arizona.
MESA'S JET SERVICE
Mesa recently announced an order for 16 CRJs with 50 passenger seats as well as options for up to an additional 32 aircraft. Deliveries of the CRJs will begin in early 1997. In conjunction with the CRJ commitment, Mesa will trade in 12 Embraer Brasilias. The Company has been successful in utilizing jet aircraft on selected routes during the last 18 months.
Mesa has selected the CRJ to meet the requirements of a market niche in Fort Worth currently not served and to expand jet service for its America West Express service out of Phoenix, Arizona. The Company plans to use the first four aircraft delivered to initiate service at Fort Worth's Meacham International Airport ("Meacham") beginning in May 1997. Mesa believes that Meacham, which is not currently utilized by scheduled air carriers, offers a unique market niche necessary to operate a successful, stand-alone airline operation. Fort Worth has a population of approximately 1.1 million people with about 70 percent of them living significantly closer to Meacham than Dallas/Fort Worth International Airport or Love Field. The CRJ can efficiently and comfortably serve both short and long routes from Fort Worth and will attract customers who demand jet service. Although customers will have to alter current travel habits, the proximity and convenience of Meacham should foster the change. By 1998, the Company plans to provide service out of Meacham with 10 of its 16 CRJ aircraft.
As of December 7, 1996, Mesa and the City of Fort Worth had not reached a final agreement for the lease of terminal facilities. While the Company believes the remaining issues will be favorably resolved with the City of Fort Worth, there can be no assurance an agreement will be reached. If an agreement is not reached, the Company intends to establish an independent operation based at other locations it has considered and deploy jets in its America West Express or other code-share operations.
After initiating service at Meacham or at another location with the first four CRJs delivered to Mesa, Mesa plans to use the next three jets delivered in the America West Express operation in Phoenix, replacing two Fokker 70 aircraft which are currently used on successful routes. The Company expects to add three additional CRJ aircraft to the America West Express operation by 1998, which will further expand jet capacity in a growing market. Mesa is also optimistic that future opportunities exist for other code-share partners to benefit from the jet service strategy.
MARKETING
Under Mesa's code-sharing agreements, America West, United, and USAir (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 and 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, Mesa Airlines, utilizes SABRE, a computerized reservation system widely used by travel agents, corporate travel offices and other airlines. The reservation systems of Mesa's codesharing 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.
FARES
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 and joint fares. 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, United or USAir 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-share 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.
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" on page 11.
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 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, numerous fare levels and low aircraft operating cost.
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 1996 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, aircraft loss or damage, baggage and cargo liability and workers' compensation.
During 1996, Mesa created a captive insurance company, MAGI Insurance, Ltd., to handle baggage and freight claims in addition to a portion of Mesa's aviation insurance.
EMPLOYEES
Mesa currently has approximately 4,000 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. Mesa is working with its wholly owned subsidiary, MPD, Inc. dba Mesa Pilot Development, to train sufficient numbers of new pilots to maintain adequate staffing in its operations. No assurance can be given, however, that pilot turnover will not become 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 even if pilot turnover does not become a major problem for Mesa.
During November 1996, Mesa reached a five-year agreement with the Air Line Pilots Association (ALPA) for a single pilot contract for Mesa Airlines, Inc. and Air Midwest, Inc. The contract provides for industry-average pay, economic work rules and excellent opportunities for advancement. This contract will result in
additional annual pilot payroll expense of approximately $3.1 million. WestAir pilots are also represented by ALPA and are currently in federal mediation regarding their contract negotiations. Air Midwest mechanics are represented by the International Association of Machinists (IAM), flight attendants at WestAir and Mountain West, a division of Mesa Airlines, Inc., 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 Deregulation Act allows airlines freedom to introduce, increase, and generally reduce or eliminate service to existing markets. Under the Essential Air Service program, which is administered by the U.S. Department of Transportation ("DOT"), certain communities that received scheduled air service prior to the passage of the Deregulation Act are guaranteed specified levels of "essential air service." The DOT may authorize federal subsidies to compensate a carrier for providing essential air service in otherwise unprofitable or minimally profitable markets.
Mesa serves several subsidized Essential Air Service communities in its operations. Mesa also serves a number of unsubsidized Essential Air Service communities. The Essential Air Service subsidy orders are normally issued for a period of one or two years. Mesa received $3.5 million, $5.4 million, and $5.5 million in subsidy payments in fiscal 1996, 1995 and 1994, respectively. This represented 0.7 percent, 1.2 percent, and 1.4 percent of operating revenues in 1996, 1995 and 1994, respectively.
An airline providing essential air services is required to give the DOT 90 days' advance notice before it may terminate or reduce service. The DOT may require the continuation of existing service until a replacement carrier is found, but in that event it must compensate the carrier for actual losses sustained in continuing to serve the community during this period.
In November 1995, Congress reduced the federal program subsidizing service to small communities (the Essential Air Service program). The DOT unilaterally reduced funding to all Essential Air Service markets by 20 percent following the Congressional action. While the revenue from this program is less than one percent of Mesa's total revenue, Mesa believed this action by the DOT was illegal and began legal proceedings to recover its damages caused by the DOT's action. Mesa prevailed in the litigation which then allowed Mesa to leave the affected markets. Mesa is currently documenting its monetary damages for submission to the government.
REGULATION
As an interstate air carrier, Mesa is subject to the economic jurisdiction of and regulation by the DOT, which became responsible for most of the continuing functions of the Civil Aeronautics Board on January 1, 1985, and the FAA under the Federal Aviation Act of 1958, as amended (the "1958 Act"). Although economic regulation of the airline industry has been considerably diminished by the Deregulation Act, the DOT continues to exercise certain economic regulatory jurisdiction over airlines. In October 1990, Mesa Airlines, Inc. became a certificated air carrier under Section 401 of the 1958 Act. Previously, Mesa Airlines, Inc. operated under an exemption from the certificate requirement. 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 the air carrier economic regulations under the 1958 Act, including the assessment of civil penalties, and to seek criminal sanctions. Mesa has recently undergone a routine informal fitness review under direction of the DOT. No further actions have been taken as a result of this review.
During September 1996, the Department of Transportation (DOT) requested supplemental information from Mesa as part of its continuing fitness review obligations. The DOT has stated the request was made because of the Company's expansion into jet service. Mesa has supplied all requested information, and it does not anticipate any action will be taken by the DOT.
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.
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 is 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 the special review by the FAA of Mesa's operations, a consent order was signed in September 1996 assessing a compromise civil penalty of $500,000. Mesa paid $250,000 of the compromise amount, and the remaining $250,000 will be waived upon Mesa complying with provisions of the consent order. Under the consent order, Mesa has agreed to adopt operational standards that exceed the requirements of the Federal Aviation Regulations. The consent order requires that control of operational areas (maintenance, flight operations and training) be consolidated under one central management team. The Company has until March 1997 to complete the specified tasks, and as of December 6, 1996 was on or ahead of the schedule set forth in the order.
Based on the required conversion to FAR Part 121 and the provisions of the FAA consent order, Mesa anticipates a one-time capital expenditure of approximately $1.0 million in fiscal 1997 to bring all aircraft currently being operated by Mesa into compliance with the enacted FAR Part 121 rules. In addition, Mesa presently anticipates ongoing operational costs in order to comply with the FAR Part 121 rules and consent order of approximately $2.5 million per year.
Recent events in Mesa's Denver system have resulted in many consumer complaints regarding the quality of service in that system. A United States Senator and two Congressmen from Colorado have also complained publicly about the service in the Denver system and requested a Congressional investigation regarding the service level there.
In response to these concerns, Mesa has made significant efforts to improve the Denver situation including hiring additional customer service personnel and placing spare aircraft with flight crew in Denver to assist in reducing flight cancellations. These actions have reduced the operational problems in Denver. The Company has retained the services of a public relations firm and a government affairs firm to address its relationships with local communities and government representatives. The Company has received no further indication that a Congressional investigation regarding the service level in Denver will occur.
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.
Item 2.
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, 1996:
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:
In addition, 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. Mesa, as the lessor, also leases commercial real estate of approximately 26,200 square feet in Farmington, New Mexico to unrelated entities.
Item 3.
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, and certain underwriters who participated in Mesa's June 1993 public offering of common stock. During October 1995, the court granted class certification in the action. These complaints have been consolidated by court order, and, after the court granted in part a motion to dismiss in May 1996, a second amended consolidated complaint was filed alleging that during various periods the defendants caused or permitted Mesa to issue publicly misleading financial statements and other misleading statements in 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), disgorgement of all insider trading profits earned by defendants in connection with the sale of common stock of Mesa, and reasonable attorney, accountant and expert fees. Mesa has accrued approximately $5.7 million to vigorously defend the class action litigation, of which $4.1 million is included in Deferred Credits as of September 30, 1996.
Mesa and the corporate officers and directors deny the allegations made against them in these lawsuits. Further, Mesa and the corporate officers and directors believe they have substantial and meritorious defenses against these allegations and intend to continue to defend 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 a related case, in September 1994, a shareholder derivative suit was filed in the United States District Court for the District of New Mexico, purportedly on behalf of Mesa. The derivative lawsuit was dismissed by the Court on August 12, 1996.
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 known at this time, the ultimate outcome of these proceedings and claims pending against Mesa is not expected to have a material adverse effect on Mesa's financial position.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
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.
On December 6, 1996, Mesa had 1,387 shareholders of record. Mesa has never paid cash dividends and does not intend to pay cash dividends in the future.
Item 6.
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
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS
Mesa Air Group, Inc. ("Mesa") and its subsidiaries are a group of regional airlines and related companies providing service across the United States as America West Express, Mesa Airlines, United Express and USAir Express.
The following tables set forth selected operating and financial data of Mesa for the years indicated below:
REVENUE AND EXPENSE COMPARISON
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.
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 major airlines hiring more than the usual number of 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. Depreciation will continue to increase per ASM during 1997 as a result of additional 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.
FISCAL 1995 VERSUS FISCAL 1994
Operating revenues increased $59.0 million (15 percent) for fiscal 1995 compared to the prior fiscal year. Capacity measured by ASMs increased by 22 percent. During fiscal 1995 capacity grew at a higher rate than revenues primarily as a result of intense competition and negative publicity regarding regional airline safety which took place in the first six months of the 1995 fiscal year. The introduction of jet aircraft into the fleet in the last quarter of the fiscal year also increased capacity without corresponding increase in revenue per available seat mile. The load factor decreased slightly from 51.8 percent to 51 percent and the yield per RPM decreased from 38.9(cent) to 37.5(cent). The decrease in yield per RPM is primarily the result of
lower air fares on the West Coast during the first six months of the year, which adversely affected financial results at the WestAir subsidiary.
Flight operations cost increased by $39.6 million (31.2 percent) compared to a 22 percent increase in capacity. This resulted in an increase in cost per ASM from 6.7(cent) in 1994 to 7.2(cent) in 1995. The primary reason for the increase in flight operations expense was the integration costs related to introduction of DHC-8-300 and Fokker 70 jet aircraft into the fleet. These integration costs were expensed during the fiscal year.
Maintenance expense decreased from 3.6(cent) per ASM in 1994 to 3.2(cent) per ASM in 1995. Excluding jet ASMs, the decrease was from 3.6(cent) per ASM in 1994 to 3.3(cent) per ASM in 1995. This decrease was primarily the result of a fewer number of scheduled engine overhauls in 1995 as compared to 1994.
Aircraft and traffic servicing cost increased slightly from 2.4(cent) per ASM in 1994 to 2.7(cent) per ASM in 1995. These costs include landing fees, station wages, rent and other station costs.
Promotion and sales expense decreased slightly from 3.4(cent) in 1994 to 3.2(cent) per ASM in 1995. These costs include commissions, booking fees and other reservation costs and will vary with revenue.
General and administrative expense decreased from 1.4(cent) per ASM in 1994 to 1.2(cent) per ASM in 1995.
Depreciation and amortization expense increased from 0.8(cent) per ASM in 1994 to 0.9(cent) per ASM in 1995 due to increased amortization resulting from an increase in intangibles.
Interest expense decreased from 0.4(cent) per ASM in 1994 to 0.3(cent) per ASM in 1995 as a result of financing more aircraft through operating leases rather than debt and a decrease in the amount of long-term debt.
Mesa incurred an effective tax rate of approximately 39 percent for the year 1995, a slightly higher rate than the prior year. Changes in tax law and the adoption of Financial Accounting Standards Board Statement 109 in 1994 did not have a material impact on the financial statements.
The combination of the above factors resulted in a slight increase in operating expenses from 18.3(cent) per ASM in 1994 to 18.4(cent) per ASM in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Mesa's cash, cash equivalents and marketable securities as of September 30, 1996 amounted to $60 million. This was a decrease of $35 million from the prior year resulting from utilization of cash in a stock repurchase program. Mesa generated approximately $42 million in cash from operating activities during 1996. Mesa's cash, cash equivalents and marketable securities are intended to be used for working capital, acquisitions, capital expenditures and a continuing stock buy-back program.
Mesa had receivables of $41 million at September 30, 1996 which consist primarily of amounts due from code-sharing partners United and USAir. Under the terms of the United and USAir 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.
Mesa currently has a $20 million line of credit, of which approximately $16 million is available. Amounts reserved under this line of credit have been used to facilitate the issuance of letters of credit.
Mesa has significant operating lease obligations on existing aircraft. At September 30, 1996, Mesa leased 73 aircraft with remaining terms of up to 16.5 years. Future lease payments due under all aircraft operating leases were approximately $282 million at September 30, 1996.
At September 30, 1996, Mesa had commitments to acquire nine Beechcraft model 1900D aircraft prior to December 31, 1996. Beech Acceptance Corporation has agreed to provide lease or debt financing, at Mesa's option.
Mesa accepted delivery of two Fokker 70 jet aircraft during the summer of 1995. Mesa's purchase contract included an option to acquire six additional aircraft. The agreement with Fokker allowed Mesa the right to return the two aircraft to Fokker from 12 to 18 months after delivery, subject to a six-month notification.
During January 1996, Fokker announced a suspension of payments to its creditors. By April 1996, Fokker had entered into liquidation and was unable to provide the six additional Fokker 70 aircraft under option to Mesa. Therefore, since management believed a fleet of two Fokker 70s could not be operated profitably, the Company noticed the return of the two Fokker 70 aircraft.
Daimler-Benz, the owner of the Fokker aircraft, and Mesa have negotiated an agreement in principle which allows Mesa to continue operating the two aircraft through August 1997 at existing lease rates in exchange for the Company's agreement to pay for time-related costs use of the aircraft through the date of return. At June 30, 1996, the Company accrued a provision for the hours utilized on the aircraft through June 30, 1996. In addition, the Company will continue to accrue additional time-related aircraft costs on an hourly basis through the remainder of the lease term of the aircraft. At June 30, 1996 the Company accrued an aircraft return provision for all other estimated costs related to the return of these two aircraft.
Mesa has an aircraft order with Bombardier, Inc. to acquire 25 de Havilland Dash 8-200 aircraft worth $262.5 million with deliveries scheduled in early 1996 through March 1997. Due to production delays, the delivery schedule was delayed and Mesa was granted an option to cancel up to five of the 25 aircraft on order. As of September 30, 1996, Mesa had taken delivery of only five of the scheduled 14 Dash 8-200 aircraft. Mesa has arranged financing commitments for 10 of the 25 aircraft and is presently arranging financing for the remaining aircraft on order. Bombardier will participate as needed to finance any new aircraft deliveries. Mesa also has an option to acquire 25 additional de Havilland Dash 8-200 aircraft. The Dash-8-200 aircraft purchase agreement provides for a spare parts supply program, which includes all required parts to maintain the aircraft, excluding engines and propellers, for a period of seven years. Mesa will pay a fixed hourly charge per flight hour for this spare parts supply program.
During August 1996, Mesa entered into a memorandum of understanding to acquire 16 Canadair Regional 50-passenger jet aircraft ("CRJs") worth approximately $320 million with deliveries to begin in February 1997. Mesa will trade in 12 Embraer Brasilia aircraft on the 16 Canadair Regional jet aircraft on order. An $8.3 million deposit has been made to Bombardier, Inc. related to this commitment, and Bombardier will participate as needed to provide financing for the CRJs to be acquired by Mesa. Mesa has options to acquire an additional 32 CRJ aircraft.
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 is 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 the special review by the FAA of Mesa's operations, a consent order was signed in September 1996 assessing a compromise civil penalty of $500,000. Mesa paid $250,000 of the compromise amount, and the remaining $250,000 will be waived upon Mesa complying with provisions of the consent order. Under the consent order, Mesa has agreed to adopt operational standards that exceed the requirements of the Federal Aviation Regulations. The consent order requires that control of operational areas (maintenance, flight operations and training) be consolidated under one central management team. The Company has until March 1997 to complete the specified tasks, and as of December 6, 1996 was on or ahead of the schedule set forth in the order.
Based on the required conversion to FAR Part 121 and the provisions of the FAA consent order, Mesa anticipates a one-time capital expenditure of approximately $1.0 million in fiscal 1997 to bring all aircraft currently being operated by Mesa into compliance with the enacted FAR Part 121 rules. In addition, Mesa presently anticipates ongoing operational costs in order to comply with the FAR Part 121 rules and consent order of approximately $2.5 million per year.
Mesa does not expect any material negative impact to its operations as a result of inflation. Mesa believes fares, and accordingly revenues, can be changed to offset the impact of inflation. Approximately 80 percent of Mesa's $355.4 million of indebtedness is at floating rates and may be affected by inflation if such inflation results in an increase in interest rates. A significant portion of the aircraft fleet is leased at fixed rates that would not be impacted by inflation.
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123) requires that companies can elect to account for stock-based compensation plans using a method based upon fair value or can continue measuring compensation expense for those plans using the "intrinsic value method" prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25). Companies electing to continue using the intrinsic value method must make pro forma disclosures in fiscal 1997 of net earnings and earnings per share as if the "fair value based method" had been applied. The Company will continue using APB 25; therefore, SFAS 123 is not expected to have an impact on the Company's results of operations or financial position.
Mesa announced on December 20, 1996 that it anticipates falling short of analysts' earnings expectations for the first fiscal quarter of 1997 (October-December 1996). Disappointing revenues in November, along with several one-time costs associated with changes in its operations, are the primary causes of the anticipated shortfall. These changes relate to improvements in the Company's performance and customer service levels in the Denver system; the consolidation of operations on the West Coast by fleet type and the related closing of two maintenance facilities in that system. In addition, the Company incurred unusually high pilot training costs resulting from a transition into the deHavilland Dash 8-200 aircraft. The Company has also suffered the industry-wide consequences of dramatically increased fuel costs.
As a result of these changes, which caused these one-time expenses, the Company expects to realize improving financial results going forward into the subsequent quarters.
FORWARD LOOKING STATEMENTS
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.
Item 8. Financial Statements and Supplementary Data
1. Consolidated Financial Statements
Page 23 - Independent Auditors' Report
Page 24 - Consolidated Balance Sheets - September 30, 1996 and 1995
Page 26 - Consolidated Statements of Earnings - Years ended September 30, 1996, 1995, and 1994
Page 27 - Consolidated Statements of Cash Flows - Years ended September 30, 1996, 1995, and 1994
Page 28 - Consolidated Statements of Stockholders' Equity - Years ended September 30, 1996, 1995, and 1994
Page 29 - 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.
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, 1996 and 1995, and the related consolidated statements of earnings, cash flows, and stockholders' equity for each of the years in the three-year period ended September 30, 1996. 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, 1996 and 1995 and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1996 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
November 22, 1996 Phoenix, Arizona
MESA AIR GROUP, INC. CONSOLIDATED BALANCE SHEETS (in thousands except share amounts)
See accompanying notes to consolidated financial statements.
MESA AIR GROUP, INC. CONSOLIDATED BALANCE SHEETS (in thousands except share amounts)
See accompanying notes to consolidated financial statements.
MESA AIR GROUP, INC. CONSOLIDATED STATEMENTS OF EARNINGS (in thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
MESA AIR GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See accompanying notes to consolidated financial statements.
MESA AIR GROUP CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1996, 1995 and 1994 (in thousands except number of shares)
See accompanying notes to consolidated financial statements.
MESA AIR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1996, 1995 and 1994
1. Summary of Significant Accounting Policies
a. Principles of Consolidation and Organization
Mesa Air Group, Inc. ("Mesa") and its subsidiaries is a group of regional airlines providing service in various regions across the United States as America West Express, Mesa Airlines, United Express and USAir Express.
Pursuant to ratification by Mesa's shareholders, during September 1996 Mesa (previously a New Mexico corporation) reincorporated in the state of Nevada. MPD, Inc. (formerly San Juan Pilot Training, Inc. dba Mesa Air Pilot Development) and FCA, Inc. (formerly Four Corners Aviation, Inc.) were also reincorporated as Nevada corporations. A new subsidiary, Mesa Airlines, Inc., a Nevada corporation, was formed to hold all airline operating divisions. The Company is in the process of revising the management structure to centralize flight and maintenance controls and management in one location and will switch from the "division" management system to one focusing on its hubs.
The consolidated financial statements include the accounts of Mesa and its wholly owned subsidiaries Mesa Airlines, Inc., WestAir Holding, Inc., Air Midwest, Inc., MPD, Inc., and FCA, Inc., MAGI Insurance, Ltd. and Mesa Leasing, Inc. (collectively referred to as Mesa). All significant intercompany balances and transactions have been eliminated in consolidation.
Mesa is a Nevada-based regional airline providing passenger service across the United States utilizing 173 turboprop aircraft and two jet aircraft. Mesa also operates four other related companies. The related companies are Desert Turbine Services, FCA, Inc., MPD, Inc. and Regional Aircraft Services, Inc.
Mesa currently operates as America West Express under a code-sharing agreement which expires in 2004 with America West Airlines, Inc. ("America West") utilizing a Phoenix, Arizona hub.
Mesa utilizes an Albuquerque hub as Mesa Airlines, serving the Southwest and Rocky Mountain regions.
In addition, Mesa operates as United Express under two separate code-sharing agreements with United Airlines ("United"). One code-sharing agreement, expiring in 1998, covers operations on the West Coast originating out of hubs in San Francisco and Los Angeles. The other United code-sharing agreement provides for operations as United Express out of hubs in Denver, Portland and Seattle and expires in 2005.
Mesa also operates as USAir Express under three code-sharing agreements with USAir, Inc. ("USAir"). One agreement covers operations utilizing a Kansas City hub and expires in 2000. Another USAir 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 Boston hubs and expires in 2004.
MPD, Inc. dba Mesa Pilot Development began operations in 1989 and provides flight training in coordination with a community college. FCA, Inc. dba Four Corners Aviation, which was acquired in 1992, 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, 1996 and 1995, accounts receivable from air carriers totaled approximately $33.8 million and $36.5 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:
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
In February 1990, Mesa acquired the routes previously developed in the Rocky Mountain region by Aspen Airways, Inc. "Aspen" signed a 10-year noncompete agreement with the exception of a direct route to Aspen, Colorado. The cost of $3 million for this noncompete agreement is being amortized over a 10-year period.
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 $5.7 million for the recognition of the tax effects of net operating loss and investment tax credit carryovers acquired in the Air Midwest purchase. In February 1994, Mesa entered into an Asset Purchase Agreement with Crown Airways, Inc., now operating as USAir Express utilizing a Pittsburgh hub. Intangible assets of $11.3 million are being amortized over a 20-year period.
In July 1994, Mesa entered into an Asset Purchase Agreement with USAir for certain aircraft and related assets of its subsidiary Pennsylvania Commuter Airlines, Inc. dba Allegheny Commuter Airlines now operating as USAir Express originating out of Boston, Philadelphia and New Orleans. Acquired intangibles of $10.5 million are being amortized over a 20-year period.
During October 1994, Mesa reached an agreement with United to purchase 10 and assume leases on two de Havilland DHC-8 aircraft for a total contract price of $118.5 million. The agreement also provides for a 10-year extension of its code-sharing agreement with United in Los Angeles and Denver through 2005 and guarantees Mesa the exclusive right to operate as a United Express carrier in eight additional Denver markets. The purchase price has been allocated to the acquired aircraft based upon fair market values at the date of acquisition with acquired intangibles of approximately $34.5 million to be amortized over a 10-year period.
Mesa continually evaluates the recoverability of these intangible assets by assessing whether the amortization over the remaining estimated life can be recovered through expected future operating results.
h. Income Taxes
Deferred income taxes are recognized for income and expense items that are recognized in the financial statement in different periods than the income tax returns.
Effective October 1, 1994, Mesa adopted Statement of Financial Accounting Standards No. 109 (FAS No. 109), "Accounting For Income Taxes" which requires a change from the deferred method previously used by Mesa to the asset and liability method of accounting for income taxes. Under the asset and liability method of FAS 109, 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. 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. Under FAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of earnings as an adjustment to the effective income tax rate in the period that includes the enactment date. Adoption of FAS 109 did not have a material effect on Mesa's financial position or result of operations. 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 serving 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, United, and USAir, Mesa participates in the frequent flyer programs of these airlines. Incremental costs for mileage accumulation relating to those programs is expensed as incurred.
k. Maintenance
Maintenance and repairs, including major engine overhauls, are charged to operating expenses as incurred.
l. Earnings Per Common and Common Equivalent Share
Earnings 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 and warrants) outstanding during the respective periods. Fully diluted earnings per share are not materially different than primary earnings per share and has not been presented. The number of shares used in the earnings-per-share computation are as follows:
m. New Accounting Standard
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123) requires that companies can elect to account for stock-based compensation plans using a method based upon fair value or can continue measuring compensation expense for those plans using the "intrinsic value method" prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25). Companies electing to continue using the intrinsic value method must make pro forma disclosures in fiscal 1997 of net earnings and earnings per share as if the "fair value based method" had been applied. The Company will continue using APB 25; therefore, SFAS 123 is not expected to have an impact on the Company's results of operations or financial position.
n. Reclassifications
Certain prior year balances have been reclassified to conform to the 1996 presentation.
2. Marketable Securities
Marketable securities available for sale are summarized as follows:
At September 30, 1996, all debt securities will mature within one year.
Unrealized gains and losses at September 30, 1996 by security classification are as follows (in thousands):
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, 1996, 100,000 Class A shares, approximately 200,000 Class B shares and warrants were classified as available for sale, and market appreciation was recorded (net of taxes) through equity.
3. Investment in Community Express Airlines, Limited. (CEAL)
In May 1995, Mesa purchased approximately 49.9 percent of the outstanding voting common shares and all of the preferred shares of Community Express Airlines, Limited ("CEAL"), a start-up commuter airline in the United Kingdom with headquarters in Birmingham, England for approximately $1.3 million. During November 1995, an additional cash infusion was made and Mesa's preferred shares were converted to common shares and a nine-year interest-free loan resulting in a decrease in Mesa's interest in CEAL to 44 percent. By August 1996, CEAL had not yet attained break-even cash flow, and Mesa elected not to invest further resources in CEAL. In September 1996, CEAL ceased operations. As of September 30, 1996, Mesa's investment in CEAL was written off.
4. Property and Equipment
Property and equipment consists of the following:
As of September 30, 1996, Mesa had flight equipment consisting primarily of rotable parts held for sale with a fair value of approximately $11.7 million included in Other Assets.
5. Long-Term Debt, Capital Leases and Lines of Credit
At September 30, 1996, Mesa had a line of credit with a bank of $20 million bearing interest at prime plus 1/2 percent (8.75% at September 30, 1996). At September 30, 1996, approximately $4 million letters of credit were outstanding under the line of credit. The line matures on March 31, 1997 and bears an annual fee of 1/4 percent.
Mesa leases certain equipment under leases having noncancelable lease terms of more than one year which have been recorded as capital leases.
In May 1996, Mesa refinanced operating leases on 66 aircraft as debt resulting in additional debt of approximately $234 million. Subsequent deliveries of 1900D aircraft have been financed by use of debt.
Long-term debt and capital leases consist of the following:
PRINCIPAL MATURITIES OF LONG-TERM DEBT AND CAPITAL LEASES FOR EACH OF THE NEXT FIVE YEARS ARE AS FOLLOWS:
6. Income Taxes
Income tax expense consists of the following:
The actual income tax expense differs from the "expected" tax expense (computed by applying the U.S. federal corporate income tax rate of 35 percent in 1996, 1995 and 1994 to earnings before income taxes and extraordinary item) as follows:
Elements of deferred income tax assets (liabilities) are as follows:
Deferred tax assets include benefits estimated to be realized from the utilization of minimum tax credit carryforwards of $5.5 million which do not expire and from the utilization of investment tax credit carryforwards of $1 million which expire from 2000 through 2001. 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 1989, 1990 and 1991 have been examined by the IRS. A tentative agreement on the audit issues has been reached with the IRS appeals division and will result in additional federal income tax payable in the 1989 through 1994 tax years of approximately $4 million. An additional net $2.5 million of state income taxes payable in the 1989 through 1994 tax years will result from settlement of the federal audit. Interest expense relating to the additional federal and state tax adjustments total $1.8 million as of September 30, 1996. Provision has been made for tax and interest payable from the audit, and the $6.5 million tax liability is reflected in current income taxes payable as of September 30, 1996.
7. Stockholders' Equity
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 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 depleted all remaining options available for granting under this plan.
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, 1,958,458 options have been granted.
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 100,000 options have been granted. In 1996 shareholders voted to reduce the number of options available for granting under the plan by 590,000. There are 110,000 remaining options available for granting under this plan.
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 24,000 options have been granted.
Transactions in stock options under these plans are summarized as follows:
At September 30, 1996, there were 977,542 shares of common stock available for grant under these plans.
At its December 1, 1995 meeting, the Board of Directors of Mesa approved a stock buy-back program under which cash generated by operations may be used to repurchase Mesa common stock. During fiscal year 1996, Mesa repurchased 5.5 million shares having a value of approximately $54 million. The Board's intent is that available cash not required for working capital, general corporate purposes or other investment opportunities be used to repurchase Mesa common stock.
8. Benefit Plans
Mesa and WestAir have 401(k) plans under which employees may contribute up to 15 percent of their annual compensation, as defined. Mesa and WestAir currently make matching contributions of 50 percent of employee contributions up to 10 percent. To be eligible to participate in their respective plans, employees must be at least 21 years of age, have a minimum of one year of service with Mesa and have worked at least 1,000 hours. These plans are not available to certain union employees. Upon completing three years' service, the employee is 20 percent vested in employer contributions and the remainder of the employer contributions vest 20 percent per year.
The 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, 1996, 1995 and 1994 were $1,286,746, $1,097,023, and $894,633, 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 1996 and 1995 was approximately $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, 1996, 1995 and 1994 were $969,937, $541,044, and $2,059,000, respectively. Employees of Mesa who participate in Mesa's management incentive program are not eligible to receive a stock bonus under the employee plan. As of September 30, 1996, a total of 370,632 shares have been issued pursuant to the plan.
9. Lease Commitments
a. Operating Leases
At September 30, 1996, Mesa leased 73 aircraft under noncancelable 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 the leases at various times throughout the lease. Lease deposits totaling $1.0 million have been paid to secure the leases and are included in lease and equipment deposits on the accompanying consolidated balance sheet at September 30, 1996.
Certain lease agreements contain provisions which, among other things, require Mesa to maintain (i) certain levels of net worth, (ii) the code-sharing agreement between United and WestAir, and (iii) certain debt and working capital ratios. Payment of cash dividends is also restricted. At September 30, 1996, Mesa was in compliance with these provisions.
In accordance with provisions of certain aircraft lease agreements, Mesa is required to fund certain cash deposits to trustees based on flight hours incurred for the payment of certain engine and airframe maintenance costs of leased aircraft. In December 1990, Mesa negotiated an agreement which suspended certain of its cash deposit requirements. The aircraft lessors have agreed to continue to waive the payment requirements on a month-to-month basis.
Aggregate rental expense totaled $59 million, $65.6 million (net of $0.8 million of sublease income), and $44.8 million (net of $8.2 million of sublease income) for the years ended September 30, 1996, 1995 and 1994, respectively.
Future minimum lease payments under noncancelable operating leases are as follows:
10. Aircraft Acquisitions and Commitments
At September 30, 1996, Mesa had commitments to acquire nine Beechcraft model 1900D aircraft prior to December 31, 1996. Beech Acceptance Corporation has agreed to provide lease or debt financing, at Mesa's option. Mesa has made a $25,000 deposit for each of these aircraft which is included in lease and equipment deposits at September 30, 1996 in the accompanying consolidated balance sheet. Mesa has the option under certain specified conditions to trade in at stipulated value its 1900C aircraft in "as-is" FAR Part 135 airworthy condition as new 1900D aircraft are received. As of September 30, 1996, five 1900C aircraft remained for trade-in which will be returned by December 31, 1996.
Mesa accepted delivery of two Fokker 70 jet aircraft during the summer of 1995. Mesa's purchase contract included an option to acquire six additional aircraft. The agreement with Fokker allowed Mesa the right to return the two aircraft to Fokker from 12 to 18 months after delivery, subject to a six-month notification.
During January 1996, Fokker announced a suspension of payments to its creditors. By April 1996, Fokker had entered into liquidation and was unable to provide the six additional Fokker 70 aircraft under option to Mesa. Therefore, since management believed a fleet of two Fokker 70s could not be operated profitably, the Company noticed the return of the two Fokker 70 aircraft.
Daimler-Benz, the owner of the Fokker aircraft, and Mesa have negotiated an agreement in principle which allows Mesa to continue operating the two aircraft through August 1997 at existing lease rates in exchange for the Company's agreement to pay for time-related costs use of the aircraft through the date of return. At June 30, 1996, the Company accrued a provision for the hours utilized on the aircraft through June 30, 1996. In addition, the Company will continue to accrue additional time-related aircraft costs on an hourly basis through the remainder of the lease term of the aircraft. At June 30, 1996 the Company accrued an aircraft return provision for all other estimated costs related to the return of these two aircraft.
Mesa has an aircraft order with Bombardier, Inc. to acquire 25 de Havilland Dash 8-200 aircraft worth $262.5 million with deliveries scheduled in early 1996 through March 1997. Due to production delays, the delivery schedule was delayed and Mesa was granted an option to cancel up to five of the 25 aircraft on order. As of September 30, 1996, Mesa had taken delivery of only five of the scheduled 14 Dash 8-200 aircraft. Mesa has arranged financing commitments for 10 of the 25 aircraft and is presently arranging financing for the remaining aircraft on order. Bombardier will participate as needed to finance any new aircraft deliveries. Mesa also has an option to acquire 25 additional de Havilland Dash 8-200 aircraft. The Dash-8-200 aircraft purchase agreement provides for a spare parts supply program, which includes all required parts to maintain the aircraft, excluding engines and propellers, for a period of seven years. Mesa will pay a fixed hourly charge per flight hour for this spare parts supply program.
During August 1996, Mesa entered into a memorandum of understanding to acquire 16 Canadair Regional 50-passenger jet aircraft ("CRJs") worth approximately $320 million with deliveries to begin in February 1997. Mesa will trade in 12 Embraer Brasilia aircraft on the 16 Canadair Regional jet aircraft on order. An $8.3 million deposit has been made to Bombardier, Inc. related to this commitment, and Bombardier will participate as needed to provide financing for the CRJs. Mesa has options to acquire an additional 32 CRJ aircraft.
11. Supplemental Disclosures of Cash Flow Information
Mesa purchased property and equipment and made lease deposits upon which debt was assumed or incurred totaling approximately $110.8 million for the year ended September 30, 1994. In 1995, Mesa did not purchase any property or equipment upon which debt was assumed. During 1996 Mesa purchased property and equipment upon which debt was assumed of approximately $280 million.
12. Commitments and Contingencies
During November 1996, Mesa Air Group reached a five-year agreement with the Air Line Pilots Association (ALPA) for a single pilot contract for all Mesa divisions and Air Midwest, Inc. The contract provides for industry-average pay, improved work rules and excellent opportunities for advancement. This contract will result in additional annual pilot payroll expense of approximately $3.1 million. WestAir pilots are also represented by ALPA and are currently in federal mediation regarding their contract negotiations. Air Midwest mechanics are represented by the International Association of Machinists (IAM) and WestAir flight attendants are represented by the Association of Flight Attendants (AFA). During the current year, Mountain West flight attendants voted to join AFA and are in contract negotiations. No Mesa Air Group divisions or subsidiaries are parties to any other 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 is 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 the special review by the FAA of Mesa's operations, a consent order was signed in September 1996 assessing a compromise civil penalty of $500,000. Mesa paid $250,000 of the compromise amount, and the remaining $250,000 will be waived upon Mesa complying with provisions of the consent order. Under the consent order, Mesa has agreed to adopt operational standards that exceed the requirements of the Federal Aviation Regulations. The consent order requires that control of operational areas (maintenance, flight operations and training) be consolidated under one central management team. The Company has until March 1997 to complete the specified tasks, and as of December 7, 1996 was on or ahead of the schedule set forth in the order.
Based on the required conversion to FAR Part 121 and the provisions of the FAA consent order, Mesa anticipates a one-time capital expenditure of approximately $1.0 million in fiscal 1997 to bring all aircraft currently being operated by Mesa into compliance with the enacted FAR Part 121 rules. In addition, Mesa presently anticipates ongoing operational costs in order to comply with the FAR Part 121 rules and consent order of approximately $2.5 million per year.
Recent events in Mesa's Denver system have resulted in many consumer complaints regarding the quality of service in that system. A United States Senator and two Congressmen from Colorado have also complained publicly about the service in the Denver system and requested a Congressional investigation regarding the service level there.
In response to these concerns, Mesa has made significant efforts to improve the Denver situation including hiring additional customer service personnel and placing spare aircraft with flight crew in Denver to assist in reducing flight cancellations. These actions have reduced the operational problems in Denver. The Company has retained the services of a public relations firm and a government affairs firm to address its relationships with local communities and government representatives. The Company has received no further indication that a Congressional investigation regarding the service level in Denver will occur.
During September 1996, the Department of Transportation (DOT) requested supplemental information from Mesa as part of its continuing fitness review obligations. The DOT has stated the request was made because of the Company's expansion into jet service. Mesa has supplied all requested information, and it does not anticipate any action will be taken by the DOT.
WestAir Commuter Airlines, Inc. and ALPA were engaged in alleged unlawful misconduct litigation against each other. Each party sought injunctive relief and monetary damages. This matter was dismissed by mutual consent of both parties.
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, and certain underwriters who participated in Mesa's June 1993 public offering of common stock. These complaints have been consolidated by court order, and, after the court granted in part a motion to dismiss in May 1996, a second amended consolidated complaint was filed alleging that during various periods the defendants caused or permitted Mesa to issue publicly misleading financial statements and other misleading statements in 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), disgorgement of all insider trading profits earned by defendants in connection with the sale of common stock of Mesa, and reasonable attorney, accountant and expert fees. During October 1995, the court granted class certification in the action. Mesa has accrued approximately $5.7 million to vigorously defend the class action litigation, of which $4.1 million is included in Deferred Credits as of September 30, 1996.
Mesa and the corporate officers and directors deny the allegations made against them in these lawsuits. Further, Mesa and the corporate officers and directors believe they have substantial and meritorious defenses against these allegations and intend to continue to defend 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 a related case, in September 1994, a shareholder derivative suit was filed in the United States District Court for the District of New Mexico, purportedly on behalf of Mesa. The derivative lawsuit was dismissed by the Court on August 12, 1996.
Mesa is also a party to legal proceedings and claims which arise during the ordinary course of business, none of which are expected to have a material adverse effect on Mesa's financial position.
In the belief of management, based upon information known at this time, the ultimate outcome of these proceedings and claims pending against Mesa is not expected to have a material adverse effect on Mesa's financial position.
13. 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).
Substantially all of Mesa's long-term debt bears interest at rates which fluctuate with market rates and therefore the carrying amounts approximate fair value.
14. Valuation and Qualifying Accounts
During fiscal year 1995, $495,000 of allowance for obsolescence was transferred to Other Assets.
15. Selected Quarterly Financial Data (Unaudited)
The following table presents selected quarterly unaudited financial data (in thousands):
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
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:
Larry L. and E. Janie Risley are husband and wife and Larry L. Risley is Gary E. Risley's uncle.
The directors hold office until the next annual meeting of shareholders and until their successors are elected and qualified. Mesa pays each director who is not an officer of Mesa a nominal fee for each meeting of the Board of Directors attended and reimburses expenses incurred in attending meetings.
LARRY L. RISLEY is Chief Executive Officer and Chairman of the Board of Directors of Mesa, positions he has held since Mesa was incorporated in 1983. He served as President of Mesa from 1983 until February 1995. From April 1979 until August 1982, Mr. Risley was President of Mesa Aviation Services, Inc., the fixed base operator at Farmington, New Mexico.
E. JANIE RISLEY is a member of Mesa's Board of Directors. From August 1982 until June 1990, Ms. Risley was Executive Vice President and Vice President responsible for personnel management, reservations, and station operations.
Larry L. Risley and E. Janie Risley are husband and wife.
CLARK STEVENS was named President of Mesa Air Group, Inc. in February 1995 and became a member of the Board of Directors in March 1995. He served as President of FloridaGulf since February 1993. From December 1992 to February 1993, Mr. Stevens served as Vice President-DFW Division with Simmons Airlines dba American Eagle. From September 1990 to December 1992, he served as Executive Vice President of Metroflight, Inc. dba American Eagle ("Metro"). In 1991, Metro filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. Metro emerged from Bankruptcy
during 1992. Prior to his service at Metro, from August 1975 to September 1990, Mr. Stevens served as President of Chaparral Airlines, Inc.
BLAINE M. JONES is a member of the Board of Directors. Prior to his resignation from Mesa in March 1995, Mr. Jones held the position of President of Mountain West since July 1994 and Chief Financial Officer from April 1985 through March 1994 and Treasurer from December 1985 through July 1994.
GEORGE W. PENNINGTON has been a director of Mesa since January 1986. Mr. Pennington is President of Farmer Family Center, Inc., a retail supermarket; President of REDROX, Inc., a real estate development company; and general partner of Pennington Partnerships, a real estate development company, all located in Bloomfield, New Mexico.
RICHARD C. POE has been a director of Mesa since January 1986. He has been President and Chief Executive Officer of Dick Poe Chrysler-Plymouth, Inc. since 1962 and of Dick Poe Pontiac-Toyota, Inc. since 1980. He is also a director of M Bank, El Paso, Texas.
JACK BRALY was appointed as director of Mesa in December 1993. Mr. Braly is currently serving as President of Sino Swearingen, a corporate jet manufacturer. He served as Vice President and General Manager -- North American Aircraft Modification of Rockwell International Corporation from June 1994 to August 1996. He served as the President of Beech Aircraft Corporation from March 1991 until July 1993. Mr. Braly began with Beech in 1978 and worked in various management positions including Vice President of Operations and Vice President of Manufacturing until becoming President in March 1991.
GARY E. RISLEY is Secretary, Vice President of Legal Affairs and General Counsel for Mesa. He has held the position of General Counsel since September 1987 and the position of Corporate Secretary since March 1988. He has served as Vice President of Legal Affairs since February 1989. Mr. Risley is the nephew of Larry L. Risley, Chief Executive Officer and Chairman of the Board of Mesa.
W. STEPHEN JACKSON, a Certified Public Accountant, was appointed Chief Financial Officer of Mesa Air Group, Inc. in March 1994. In July 1994 he assumed the additional responsibilities of Treasurer and Vice President of Finance. Immediately prior to joining Mesa Air Group, Inc., Mr. Jackson was President of WSJ Development Company, a financial consulting and real estate development firm. Before that, Mr. Jackson was a partner at KPMG Peat Marwick serving clients for over 20 years in the transportation, financial institution, real estate and high technology industries.
Item 11.
Item 11. Executive Compensation
The information set forth in the 1996 Proxy Statement to shareholders is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth in the 1996 Proxy Statement to shareholders is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
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.
PART IV
Item 14.
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,
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:
- ------------- * This document has been filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. An excised version of the documents is being filed as an exhibit hereto.
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: December 23, 1996
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.