1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 For the quarter ended December 31, 1995 Commission File Number 0-15495 MESA AIR GROUP, INC. ---------------------------------------------------------- (Exact name of registrant as specified in its charter) New Mexico 85-0302351 - ------------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2325 East 30th Street, Farmington, New Mexico 87401 - ------------------------------------------------- -------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (505) 327-0271 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- On February 12, 1996, the Registrant had outstanding 29,992,792 shares of Common Stock. 1
2 PART I. FINANCIAL INFORMATION Item 1. MESA AIR GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) Three Months Ended December 31 (in thousands, except per share amounts) <TABLE> <CAPTION> 1995 1994 -------------------- <S> <C> <C> Operating revenues: Passenger $116,928 $ 98,515 Freight and other 1,910 1,936 Public service 1,191 1,377 -------------------- Total operating revenues 120,029 101,828 Operating expenses: Flight operations 44,564 37,855 Maintenance 19,424 17,842 Aircraft and traffic servicing 17,088 13,048 Promotion and sales 18,116 16,839 General and administrative 7,522 6,301 Depreciation and amortization 5,713 4,164 -------------------- Total operating expenses 112,427 96,049 Operating income 7,602 5,779 -------------------- Non-operating income (expenses): Interest expense (1,621) (1,210) Interest income 645 715 Other (317) (857) -------------------- Total non-operating income (expenses) (1,293) (1,352) Earnings before income tax expense 6,309 4,427 Income tax expense 2,435 1,682 -------------------- Net earnings $ 3,874 $ 2,745 ==================== Average common and common equivalent shares outstanding 33,679 33,586 ==================== Earnings per common and common equivalent shares outstanding: Net earnings $ 0.12 $ 0.08 ==================== </TABLE> 2
3 MESA AIR GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share amounts) <TABLE> <CAPTION> December 31 September 30 1995 1995 ------------------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 47,585 $ 53,675 Marketable securities 49,687 45,559 Receivables, principally traffic 44,100 44,811 Expendable parts and supplies, net 23,374 24,682 Prepaid expenses and other current assets 5,344 6,923 ------------------------- Total current assets 170,090 175,650 Property and equipment, net 169,382 170,899 Lease and equipment deposits 24,575 26,147 Intangibles, net 59,787 60,598 Other assets 12,558 13,428 ------------------------- Total assets $436,392 $446,722 ========================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital leases $ 7,792 $ 8,283 Accounts payable 17,430 23,205 Income taxes payable 1,757 1,073 Air traffic liability 5,345 5,131 Accrued compensation 3,961 3,937 Other accrued expenses 11,462 13,985 ------------------------- Total current liabilities 47,747 55,614 Long-term debt and capital leases, excluding current portion 71,732 78,411 Deferred credits 30,025 28,353 Deferred income taxes 30,121 28,461 Stockholders' equity: Preferred stock of no par value, 2,000,000 shares authorized; no shares issued and outstanding -- -- Common stock of no par value, 75,000,000 shares authorized; 32,657,792 and 33,460,742 shares issued and outstanding 146,476 151,957 Retained earnings 94,751 90,876 Unrealized gain on marketable securities, net 15,540 13,050 ------------------------- Total stockholders' equity 256,767 255,883 ------------------------- Total liabilities and stockholders' equity $436,392 $446,722 ========================= </TABLE> 3
4 MESA AIR GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months Ended December 31 <TABLE> <CAPTION> 1995 1994 ------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 3,874 $ 2,745 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization 5,713 4,552 Amortization of deferred credits (655) (388) Stock bonus plan 441 293 Changes in assets and liabilities: Receivables 711 8,492 Expendable parts and supplies 1,068 (1,534) Prepaid expenses and other current assets 1,579 580 Accounts payable (5,775) (88) Other accrued liabilities (1,601) (5,508) ------------------- NET CASH FLOWS FROM OPERATING ACTIVITIES 5,355 9,144 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (7,694) (2,738) Proceeds from sale of property and equipment 6,042 3,336 Proceeds from sale of marketable securities -- 19,148 Other assets 500 (743) Lease and equipment deposits 2,572 (873) ------------------- NET CASH FLOWS FROM INVESTING ACTIVITIES 1,420 18,130 CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt and obligations under capital leases (7,168) (2,088) Proceeds from issuance of common stock 48 71 Stock repurchase program (5,970) -- Proceeds from deferred credits 225 1,167 ------------------- NET CASH FLOWS FROM FINANCING ACTIVITIES (12,865) (850) NET CHANGE IN CASH AND CASH EQUIVALENTS (6,090) 26,424 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 53,675 35,567 ------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 47,585 $ 61,991 =================== </TABLE> 4
5 MESA AIR GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months Ended December 31 Supplemental disclosures of cash flow information: <TABLE> <CAPTION> 1995 1994 ------ ------ <S> <C> <C> Cash paid during the period for: Interest $1,621 $1,662 Income taxes 1,752 953 </TABLE> 5
6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended December 31, 1995 are not necessarily indicative of the results that may be expected for the year ending September 30, 1996. All intercompany accounts have been eliminated. These financial statements should be read in conjunction with the Company's consolidated financial statements and footnotes included in the annual report. 2. The consolidated financial statements include the accounts of Mesa Air Group, Inc. and its wholly owned subsidiaries WestAir Holding, Inc., Air Midwest, Inc., San Juan Pilot Training, Inc., and Four Corners Aviation, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. 3. Income tax expense is based upon Mesa's annual effective tax rate of 38.6 percent. 4. Legal Proceedings: See Part II. Item 1. 5. Subsequent Events: Mesa has elected to include 1.5 million shares of America West Airlines, Inc. stock held by the Company in America West's public offering scheduled to occur during February 1996. This will result in the sale and recognition of the gain on those shares. 6
7 Item 2. MESA AIR GROUP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS GENERAL Mesa Air Group, Inc. ("Mesa") and its divisions and subsidiaries is a group of six regional airlines and other related companies operating in various regions across the United States. Mountain West Airlines provides service to the general public as America West Express, United Express and Mesa Airlines. In addition, Mesa operates FloridaGulf Airlines and Liberty Express Airlines providing service as USAir Express. During the Summer of 1995 a new division was formed named Desert Sun Airlines which operates jet aircraft providing service as America West Express. Mesa also operates Air Midwest, Inc., providing service as USAir Express, and WestAir Holding, Inc. (operating through its wholly-owned subsidiary WestAir Commuter Airlines, Inc.), providing service as United Express. The following table sets forth selected operating data of the Company for the periods indicated below: OPERATING DATA <TABLE> <CAPTION> Three Months Ended December 31 1995 1994 --------- --------- <S> <C> <C> Passengers 1,610,268 1,425,632 Available seat miles (000) 629,483 533,278 Revenue passenger miles (000) 342,901 264,733 Load factor 54.5% 49.6% Yield per revenue passenger mile 34.1 cents 37.2 cents Operating cost per available seat mile 17.9 cents 18.0 cents Revenue per available seat mile 19.1 cents 19.1 cents Average stage length (miles) 166 160 </TABLE> 7
8 FINANCIAL DATA <TABLE> <CAPTION> Three Months Ended December 31 ------------------------------------------------------------ 1995 1994 ------------------------------------------------------------ Cost per Percent of total Cost per Percent of total ASM operating revenues ASM operating revenues ------------------------------------------------------------ <S> <C> <C> <C> <C> Flight operations 7.1 cents 37.1% 7.1 cents 37.2% Maintenance 3.1 cents 16.2% 3.3 cents 17.5% Aircraft and traffic servicing 2.7 cents 14.2% 2.4 cents 12.8% Promotion and sales 2.9 cents 15.1% 3.2 cents 16.5% General and administrative 1.2 cents 6.3% 1.2 cents 6.2% Depreciation and amortization 0.9 cents 4.8% 0.8 cents 4.1% ------------------------------------------------------------ Total operating expenses 17.9 cents 93.7% 18.0 cents 94.3% Interest expense 0.3 cents 1.4% 0.2 cents 1.2% </TABLE> OPERATIONS For the three months ended December 31, 1995 Mesa experienced an 18 percent growth in revenues from $101.8 million to $120.0 million when compared with the three months ended December 31, 1994. This growth in revenue can be attributed to a 13 percent increase in passengers carried in addition to a 5 percent increase in average ticket prices to $72.63 for the quarter ended December 31, 1995 from $69.10 for the quarter ended December 31, 1994. The increase in passengers is partially attributable to the introduction of two jet aircraft into scheduled service during June and July of 1995. Negative press regarding regional airline safety issues, direct competition in the Southeast and indirect competition on the West Coast and on all USAir code-sharing routes resulted in lower average fares and decreased passenger traffic in December 1994. However, during the quarter ended December 31, 1995, ticket prices and passenger traffic returned to more normal levels. Continental Lite's abandonment of jet service which resulted in significant rescheduling of the directly competitive Continental Express service in the FloridaGulf markets and significant operational changes made in the WestAir subsidiary's markets resulted in increased passenger traffic and fares. Operating expenses were 17.9 cents per available seat mile (ASM) for the quarter ended December 31, 1995 compared to 18.0 cents per ASM for the quarter ended December 31, 1994. Maintenance costs decreased from 17.5 percent of operating revenues in the quarter ended December 31, 1994 to 16.2 percent of operating revenues in the quarter ended December 31, 1995. During the quarter ended December 31, 1994, increased maintenance costs on engine overhauls for Embraer Brasilia aircraft received in exchange for J-31 Jetstream aircraft from Atlantic Coast Airlines were incurred, and these costs were not incurred in the quarter ended December 31, 1995. In addition, older aircraft are periodically being returned for newer aircraft resulting in reduced maintenance costs overall. The increase in aircraft and traffic servicing costs as a percentage of total operating revenues is offset by the decrease in promotion and sales cost as a percentage of total operating expenses for the quarter ended 8
9 December 31, 1995. This is due to a reclassification of USAir traffic connection credits in all USAir Express operations from aircraft and traffic servicing to promotion and sales in August 1995. There were no other significant shifts in the individual cost components for the same period in the prior year. As a result of the factors noted above, operating income increased to $7.6 million in the quarter ended December 31 1995 from $5.8 million in the quarter ended December 31, 1994. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and marketable securities at December 31, 1995 were $97.3 million compared to $99.2 million at September 30, 1995. The Company has historically generated cash from operations which has been sufficient to meet its operating needs. Cash, cash equivalents and marketable securities are intended to be used for working capital, acquisitions, capital expenditures and a stock repurchase program. Mesa had receivables of $44.1 million at December 31, 1995 which consist primarily of amounts due from code-sharing partners United and USAir. Under the terms of the United and USAir agreement, 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 an $11 million line of credit, of which approximately $7 million is available. This line of credit is primarily used to facilitate the issuance of letters of credit. During the first quarter of fiscal year 1996, Mesa began a stock repurchase program under which the Company may repurchase shares having a value of up to $30 million. By February 12, 1996, approximately 3.5 million shares had been repurchased for approximately $30 million. As of December 31, 1995, the Company had aggregate indebtedness of $79.5 million payable to various parties under promissory notes issued in connection with the purchase of aircraft and related equipment. The notes have interest rates ranging from 6.8 percent to 8.75 percent, maturities ranging from 1995 to 2006 and require monthly installments aggregating approximately $650,000. In addition, the Company has significant lease obligations on existing aircraft operated by the Company. These leases are classified as operating leases and therefore are not reflected as liabilities on the balance sheet. At December 31, 1995, 156 aircraft were leased by the Company with terms ranging up to 15 years. Aircraft lease expense for the quarter ended December 31, 1995 was $17.6 million. Future lease payments due under all aircraft operating leases were approximately $540 million at December 31, 1995. As of December 31, 1995, the Company had 23 Beechcraft 1900D aircraft on order. These aircraft are being delivered at the rate of approximately two per month. The agreement giving Mesa the right to receive the 1900D aircraft allows Mesa to trade in existing Beechcraft 1900C aircraft in an "as-is" condition so long as such aircraft are airworthy. Beech Acceptance Corporation has agreed to provide lease or debt financing for these aircraft under terms similar to financing provided in the past. By December 1996, Mesa expects to take delivery of 23 1900D aircraft and will return all remaining 1900C (19) aircraft. WestAir has an agreement (Embraer Agreement) to acquire 15 Embraer EMB-120 Brasilia aircraft which was amended in November 1995. Under the amended agreement, Mesa acquired two Embraer Brasilia aircraft in December 1995. In addition, WestAir and Embraer have agreed to use their best efforts to negotiate a used aircraft purchase agreement under which Embraer would acquire 13 used aircraft from 9
10 WestAir in exchange for WestAir acquiring 13 new aircraft from Embraer. WestAir's obligation to take delivery of 13 new Embraer aircraft is subject to availability of commercially reasonable financing. Should the parties be unable to sell existing aircraft or agree on a used aircraft purchase agreement, or should commercially reasonable financing not be available, WestAir will have no obligation to take delivery of the 13 additional aircraft. If the parties reach an agreement, the remaining 13 aircraft will be delivered beginning in August 1997 through November 1999. Mesa has an aircraft order with Bombardier, Inc. to acquire 25 de Havilland Dash-8-200 aircraft with deliveries beginning in Spring 1996 and ending in Summer 1997. During January 1996, Mesa returned five Dash-8-300 aircraft to Bombardier as part of the Dash-8-200 trade-in program. Mesa will trade in two Dash-8-300 and four additional Embraer Brasilia aircraft on a one-for-one basis as the new Dash-8-200 aircraft are delivered. The last 19 Dash 8-200 aircraft to be delivered will result in an increase in Mesa's fleet in 1996 and 1997. Bombardier will participate as needed to finance the new aircraft deliveries. Mesa also has an option to acquire 25 additional de Havilland Dash-8-200 aircraft. Mesa accepted delivery of two Fokker 70 jet aircraft during the Summer of 1995 and has an option to acquire six additional aircraft. The agreement with Fokker allows Mesa the right to return the aircraft to Fokker between 12 and 18 months after delivery, subject to a six-month notification. Jet aircraft operations have become marginally profitable; however, they have not met management's expectations. As a result, management has begun discussions with Fokker to amend the agreement. Unless future operating results improve or Mesa is able to obtain amendments to the Fokker agreement, it may be necessary to exercise its option to return the aircraft. Also, during January 1996, Fokker announced a suspension of payments, which is similar to a Chapter 11 Bankruptcy in the United States. If Fokker has not resolved its financial problems by April 1996, the Company may decide to exercise its option to return the two Fokker 70 aircraft to the manufacturer, cancel its options for six additional aircraft and locate other suitable jet equipment. Mesa currently has deposits under the agreement of approximately $1 million. In the event the decision is made to return the aircraft, the Company would incur return costs of approximately $3 million. During the quarter ended December 31, 1995, Mesa created a wholly-owned subsidiary, MAGI Insurance, Ltd., a captive insurance company. This entity is an offshore company located in Barbados, W.I. utilized to insure risk related to lost baggage and freight. In the future, the Company plans to utilize the captive insurance company for other insurance-related matters. During December 1995, the FAA announced rules which require commuter airlines with aircraft of 30 or fewer passenger seats operating under FAR Part 135 rules to begin operating those aircraft under FAR Part 121 regulations. Based on the rules announced in December, Mesa anticipates a one-time cost of approximately $75,000 in fiscal 1996 and $2.1 million in fiscal 1997 to bring all aircraft currently being operated by Mesa into compliance with the enacted rules. In addition, an ongoing cost of approximately $800,000 per year subsequent to 1997 is anticipated in order to comply with the rules enacted by the FAA. In November 1995, Congress reduced the federal program subsidizing service to small communities (the Essential Air Service program). The Department of Transportation (D.O.T.) 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 believes this action by the D.O.T. was illegal and has begun legal proceedings to recover its damages caused by D.O.T.'s action. On October 1, 1995, the airline industry became subject to a $.043 per gallon tax on jet fuel as a result of expiration of a fuel tax exemption applicable to airlines. The additional fuel tax of $.043 per gallon resulted in approximately $800,000 additional fuel expense during the quarter. New legislation has been proposed, but not yet passed, to exempt the airline industry from this tax. 10
11 Negotiation of pilot contracts for Mesa's Mountain West division and WestAir subsidiary continue. Mesa management and the Air Line Pilots Association continue to make progress in development of a contract; however, no final resolution has been made. The following table lists the aircraft operated by Mesa as of December 31, 1995: <TABLE> <CAPTION> Number of Aircraft ------------------------------------ Passenger Type of Aircraft Owned Leased Total Capacity - -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Beechcraft 1900 22 92 114 19 Embraer Brasilia 2 34 36 30 BAe Jetstream 31 21 21 19 Dash 8-300 7 7 50 Fokker 70 2 2 78 --------------------------------- Total 24 156 180 --------------------------------- </TABLE> The following table lists aircraft operated by division as of December 31, 1995: <TABLE> <CAPTION> AIRCRAFT BY DIVISION --------------------------------------------------------------------- Mountain Desert Air Liberty West Sun WestAir FloridaGulf Midwest Express Total --------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Beech 1900 47 40 12 15 114 Embraer Brasilia 14 13 9 36 BAe Jetstream 31 21 21 Dash 8-300 7 7 Fokker 70 2 2 --------------------------------------------------------------------- Total 68 2 34 49 12 15 180 </TABLE> 11
12 PART II. OTHER INFORMATION Item 1. Legal Proceedings The contents of Item 3. Legal Proceedings from the Form 10-K filed for the fiscal year ended September 30, 1995 has been incorporated by reference. Item 2. Change in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MESA AIR GROUP, INC. Registrant Date: /s/ W. Stephen Jackson ------------------------------ W. Stephen Jackson Chief Financial Officer (Principal Accounting Officer) 12