e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2005
Commission File Number 0-15495
Mesa Air Group, Inc.
(Exact name of registrant as specified in its charter)
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Nevada |
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85-0302351 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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410 North 44th Street, Suite 700,
Phoenix, Arizona
(Address of principal executive offices) |
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85008
(Zip Code) |
Registrants telephone number, including area code:
(602) 685-4000
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, No Par Value
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act
of
1934. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Act
Rule 12b-2). Yes þ No o
Indicate by check mark whether the registrant is a shell company
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of December 1, 2005:
Common Stock, no par value: $305.6 million.
On December 1, 2005, the Registrant had outstanding
29,086,346 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants proxy statement for the 2006
annual meeting of stockholders
MESA AIR GROUP, INC.
2005 FORM 10-K REPORT
TABLE OF CONTENTS
2
PART I
Forward-Looking Statements
This Form 10-K Report contains certain statements
including, but not limited to, information regarding the
replacement, deployment, and acquisition of certain numbers and
types of aircraft, and projected expenses associated therewith;
costs of compliance with Federal Aviation Administration
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 Mesa; 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 within the meaning of the Safe Harbor
provision of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended. These statements relate to future events or
the future financial performance of Mesa and only reflect
managements expectations and estimates. The following is a
list of factors, among others, that could cause actual results
to differ materially from the forward-looking statements:
changing business conditions in certain market segments and
industries; changes in Mesas code-sharing relationships;
the inability of America West, Delta Air Lines, US Airways or
United Airlines to pay their obligations under the code-share
agreements; the inability of United Airlines to successfully
restructure and emerge from bankruptcy; the ability of Delta Air
Lines to reject our code-share agreements in bankruptcy; the
inability to transition the planes we currently fly under our
code-share agreement with US Airways without undue cost and
expense; an increase in competition along the routes Mesa
operates or plans to operate; material delays in completion by
the manufacturer of the ordered and yet-to-be delivered
aircraft; availability and cost of funds for financing new
aircraft; changes in general economic conditions; changes in
fuel price; changes in regional economic conditions; Mesas
relationship with employees and the terms of future collective
bargaining agreements; the impact of current and future laws;
additional terrorist attacks; Congressional investigations, and
governmental regulations affecting the airline industry and
Mesas operations; bureaucratic delays; 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 the outcome of litigation. One or more of these
or other factors may cause Mesas actual results to differ
materially from any forward-looking statement. Mesa is not
undertaking any obligation to update any forward-looking
statements contained in this Form 10-K.
All references to we, our,
us, or Mesa refer to Mesa Air Group,
Inc. and its predecessors, direct and indirect subsidiaries and
affiliates.
General
Mesa Air Group, Inc. (Mesa or the
Company) is a holding company whose principle
subsidiaries operate as regional air carriers providing
scheduled passenger and airfreight service. As of
September 30, 2005, the Company served 176 cities in
43 states, the District of Columbia, Canada and Mexico and
operated a fleet of 182 aircraft with approximately 1,100 daily
departures.
Approximately 99% of our consolidated passenger revenues for the
fiscal year ended September 30, 2005 were derived from
operations associated with code-share agreements. Our
subsidiaries have code-share agreements with America West
Airlines, Inc. (America West), Midwest Airlines,
Inc. (Midwest Airlines), United Airlines, Inc.
(United Airlines or United) and US
Airways, Inc. (US Airways). These code-share
agreements allow use of the code-share partners flight
designator code to identify flights and fares in computer
reservation systems, permit use of logos, service marks,
aircraft paint schemes and uniforms similar to the code-share
partner and provide coordinated schedules and joint advertising.
The remaining passenger revenues are derived from our
independent operations. On October 1, 2005, we commenced
flight operations as Delta Connection under a code-share
agreement with Delta Air Lines, Inc. (Delta).
3
In addition to carrying passengers, we carry freight and express
packages on our passenger flights and have interline small cargo
freight agreements with many other carriers. We also have
contracts with the U.S. Postal Service for carriage of mail
to the cities we serve and occasionally operate charter flights
when our aircraft are not otherwise used for scheduled service.
Our airline operations are conducted by the following airline
subsidiaries:
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Mesa Airlines, Inc. (Mesa Airlines), a Nevada
corporation, operates regional jet and turboprop aircraft as
America West Express under a code-share agreement with America
West, primarily at America Wests operations hubs located
in Phoenix and Las Vegas; as US Airways Express under a
code-share agreement with US Airways, primarily at US
Airways hubs on the East Coast; and as United Express
under a code-share agreement with United Airlines, at various
United hubs across the country. |
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Air Midwest, Inc. (Air Midwest), a Kansas
corporation, operates Beechcraft 1900D 19-seat turboprop
aircraft as US Airways Express under a code-share agreement with
US Airways at certain US Airways hubs on the East Coast as
well as Kansas City. Air Midwests flights in Kansas City
code-share with both Midwest Airlines and US Airways. Air
Midwest operates as America West Express in Phoenix. Air Midwest
also operates as Mesa Airlines in Albuquerque, New Mexico and in
select Essential Air Service (EAS) markets. The
Albuquerque flights and certain EAS markets are
Independent Operations and are not subject to a
code-sharing agreement with a major carrier. |
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Freedom Airlines, Inc. (Freedom), a Nevada
corporation, commenced flight operations using ERJ-145 50-seat
regional jets as Delta Connection on October 1, 2005 under
a code-share agreement with Delta primarily between Orlando,
Florida and designated outlying cities. Freedom previously
operated Beechcraft 1900D 19-seat turboprop aircraft and CRJ-700
and 900 regional jets pursuant to the Companys code-share
agreement with America West. |
Unless the context indicates otherwise, the terms
Mesa, the Company, we,
us, or our, refer to Mesa Air Group,
Inc. and its subsidiaries.
Corporate Structure
Mesa is a Nevada corporation with its principal executive office
in Phoenix, Arizona.
In addition to operating the airline subsidiaries listed above,
we also have the following other subsidiaries:
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MPD, Inc., a Nevada corporation, doing business as Mesa Pilot
Development and MPD, operates training programs for student
pilots in conjunction with San Juan College in Farmington,
New Mexico and Arizona State University in Tempe, Arizona. |
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Regional Aircraft Services, Inc., (RAS) a California
corporation, performs aircraft component repair, certain
overhaul services, and ground handling services, primarily to
Mesa subsidiaries. |
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MAGI Insurance, Ltd., a Barbados, West Indies based captive
insurance company, was established for the purpose of obtaining
more favorable aircraft liability insurance rates. |
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Ritz Hotel Management Corp., a Nevada Corporation, was
established to facilitate the Companys acquisition and
management of a Phoenix area hotel property used for
crew-in-training accommodations. |
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Mesa Air Group Airline Inventory Management, LLC
(MAG-AIM), an Arizona Limited Liability Company, was
established to purchase, distribute and manage Mesas
inventory of spare rotable and expendable parts. |
4
Aircraft in Operation
The following table sets forth our aircraft fleet (owned and
leased) in operation by aircraft type as of September 30,
2005:
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Canadair | |
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Canadair | |
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Canadair | |
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Embraer | |
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Regional | |
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Regional | |
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Regional | |
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Regional | |
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Jet-200 | |
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Jet-700 | |
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Jet-900 | |
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Jet-145 | |
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Beechcraft | |
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DeHavilland | |
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(CRJ-200) | |
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(CRJ-700) | |
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(CRJ-900) | |
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(ERJ-145) | |
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1900D | |
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Dash 8-200 | |
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Total | |
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US Airways Express
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23 |
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36 |
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14 |
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73 |
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America West Express
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18 |
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37 |
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2 |
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6 |
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63 |
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United Express
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15 |
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15 |
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10 |
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40 |
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Mesa Airlines
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6 |
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6 |
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Total
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56 |
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15 |
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37 |
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36 |
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22 |
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16 |
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182 |
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Code-Share Agreements
Our airline subsidiaries have agreements with America West,
Delta, US Airways, United Airlines and Midwest Airlines to use
those carriers designation codes (commonly referred to as
code-share agreements). These code-share agreements
allow use of the code-share partners flight designator
code to identify flights and fares in computer reservation
systems, permit use of logos, service marks, aircraft paint
schemes and uniforms similar to the code-share partners
and provide coordinated schedules and joint advertising. Our
passengers traveling on flights operated pursuant to code-share
agreements receive mileage credits in the respective frequent
flyer programs of our code-share partners, and credits in those
programs can be used on flights operated by us.
The financial arrangement with our code-share partners involves
either a revenue-guarantee or pro-rate arrangement. The America
West (regional jet and Dash-8), Delta (regional jet), United
(regional jet and Dash-8), and US Airways (regional jet)
code-share agreements are revenue-guarantee code-share
agreements. Under the terms of these code-share agreements, the
major carrier controls marketing, scheduling, ticketing, pricing
and seat inventories. We receive a guaranteed payment based upon
a fixed minimum monthly amount plus amounts related to
departures and block hours flown in addition to direct
reimbursement of expenses such as fuel, landing fees and
insurance. Among other advantages, revenue-guarantee
arrangements reduce the Companys exposure to fluctuations
in passenger traffic and fare levels, as well as fuel prices.
The US Airways, Midwest Airlines and America West Beechcraft
1900D turboprop code-share agreements are pro-rate agreements,
for which we receive an allocated portion of each
passengers fare and pay all of the costs of transporting
the passenger.
The following table summarizes our available seat miles
(ASMs) flown and revenue recognized under our
code-share agreements for the years ended September 30,
2005 and 2004:
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Fiscal 2005 | |
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Fiscal 2004 | |
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Passenger | |
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Passenger | |
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ASMs | |
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Revenue | |
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ASMs | |
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Revenue | |
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(In thousands) | |
America West (Revenue-Guarantee)
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4,360,713 |
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50 |
% |
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$ |
487,221 |
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44 |
% |
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2,983,969 |
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42 |
% |
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$ |
323,889 |
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37 |
% |
US Airways (Revenue-Guarantee)
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2,401,808 |
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28 |
% |
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316,072 |
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29 |
% |
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2,471,476 |
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35 |
% |
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304,290 |
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35 |
% |
United (Revenue-Guarantee)
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1,748,466 |
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20 |
% |
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260,541 |
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24 |
% |
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1,269,454 |
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18 |
% |
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171,493 |
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20 |
% |
US Airways (Pro-Rate)*
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112,514 |
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1 |
% |
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25,101 |
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2 |
% |
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211,195 |
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3 |
% |
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47,177 |
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5 |
% |
Mesa Airlines
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71,257 |
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1 |
% |
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8,590 |
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1 |
% |
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94,269 |
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1 |
% |
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9,568 |
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1 |
% |
America West (Pro-Rate)
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20,991 |
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5,025 |
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21,372 |
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4,558 |
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1 |
% |
Frontier (Revenue-Guarantee)
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55,949 |
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1 |
% |
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7,440 |
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1 |
% |
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Total
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8,715,749 |
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$ |
1,102,550 |
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7,107,684 |
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$ |
868,415 |
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* |
Amount includes the ASMs and Passenger Revenue associated
with the Midwest Airlines (Pro-Rate) code-share agreement. |
5
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America West Code-Sharing Agreement |
As of September 30, 2005, we operated 37 CRJ-900 (a
38th CRJ-900
entered service for America West in October), 18 CRJ-200, and
six Dash-8 aircraft for America West under a revenue-guarantee
code-share agreement. In exchange for providing flights and all
other services under the agreement, we receive a fixed monthly
minimum amount plus certain additional amounts based upon the
number of flights flown and block hours performed during the
month. America West also reimburses us for certain costs on an
actual basis, including fuel costs, aircraft ownership and
financing costs, landing fees, passenger liability and hull
insurance, and aircraft property taxes, all as defined in the
agreement. In addition, America West also provides, at no cost
to Mesa, certain ground handling and customer service functions,
as well as airport-related facilities and gates at America West
hubs and cities where both carriers operate. We also receive a
monthly payment from America West based on a percentage of
revenue from flights that we operate under the code-share
agreement. Under the amended code-share agreement, America West
has the right to reduce the combined CRJ fleets utilized under
the code-share agreement by one aircraft in any six-month period
commencing in June 2006 (except during the calendar year 2007 in
which 2 CRJ-200 can be eliminated in each six-month period). In
addition, beginning in February 2007, America West may eliminate
the Dash-8 aircraft upon 180 days prior written notice. The
code-share agreement terminates on June 30, 2012 unless
America West elects to extend the contract for two years or
exercises options to increase fleet size. The code-share
agreement is subject to termination prior to that date in
various circumstances including:
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If our flight completion factor or arrival performance in the
Phoenix Hub falls below a specified percentage for a specified
period of time, subject to notice and cure rights; |
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If either America West or we become insolvent, file for
bankruptcy or fail to pay our debts as they become due, the
non-defaulting party may terminate the agreement; |
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Failure by us or America West to perform the covenants,
conditions or provisions of the code-sharing agreement, subject
to 15 days notice and cure rights; |
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If we or America West fails to make a payment when due, subject
to ten business days notice and cure rights; or |
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If we are required by the FAA or the U.S. Department of
Transportation (DOT) to suspend operations and we
have not resumed operations within three business days, except
as a result of an emergency airworthiness directive from the FAA
affecting all similarly equipped aircraft, America West may
terminate the agreement. |
On September 16, 2005, the merger of US Airways Group,
Inc., the parent company of US Airways, Inc., and America
West Holdings, the parent company of America West Airlines, Inc.
was completed. The new US Airways Group will operate under a
single brand name of US Airways through two principal operating
subsidiaries, US Airways, Inc. and America West Airlines, Inc.
We will continue to provide regional jet airline services for US
Airways Group pursuant to our code-share agreement with America
West Airlines.
Pursuant to a turboprop code-share agreement with America West,
we operated two Beechcraft 1900D turboprop aircraft in the
Phoenix hub under a pro-rate revenue-sharing arrangement as of
September 30, 2005. We control scheduling, inventory and
pricing. We are allocated a portion of each passengers
fare based on a standard industry formula and are required to
pay all costs of transporting the passenger. The pro-rate
agreement terminates on March 31, 2012 unless America West
elects to extend the contract for successive one-year periods.
The pro-rate agreement could also be terminated prior to the
termination under similar circumstances as the revenue-guarantee
agreement.
6
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US Airways Code-Sharing Agreements |
As of September 30, 2005, we operated 23 CRJ-200 and 36
ERJ-145 aircraft for US Airways under a code-sharing agreement.
As a result of US Airways emergence from bankruptcy and
their non-assumption of our code-share agreement, we began
working with US Airways to provide for the orderly transition of
these 59 jets to our United and Delta revenue-guarantee
code-sharing arrangements. As of December 1, 2005, we had
transitioned 32 of the 59 aircraft and operated 27 50-seat
regional jets for US Airways under our code-sharing agreement.
We expect to complete the transition of aircraft from US Airways
to United in the first quarter of fiscal year 2006 and to Delta
in the second quarter of fiscal year 2006. Under the jet
code-share agreement, we provide US Airways Express service
between US Airways hubs and cities designated by US Airways. In
exchange for performing the flight services under the agreement,
we receive from US Airways a fixed monthly minimum amount, plus
certain additional amounts based upon the number of flights
flown and block hours performed during the month. Additionally,
certain costs incurred by us in performing the flight services
are pass-through costs, whereby US Airways agrees to
reimburse us for the actual amounts incurred for these items:
insurance, property tax per aircraft, fuel and oil cost,
catering cost and landing fees. We also receive a fixed profit
margin based upon certain cost reimbursements under the
agreement. In addition, US Airways also provides, at no cost to
Mesa, certain ground handling and customer service functions, as
well as, airport-related facilities and gates at US Airways hubs
and cities.
Pursuant to a turboprop code-sharing agreement with US Airways,
we operated 14 Beechcraft 1900D turboprop aircraft under a
pro-rate revenue-sharing arrangement as of September 30,
2005. We control scheduling, inventory and pricing subject to US
Airways concurrence that such service does not adversely
affect its other operations in the region. We are allocated a
portion of each passengers fare based on a standard
industry formula and are required to pay all the costs of
transporting the passenger. Additionally, we are required to pay
certain franchise, marketing and reservation fees to US Airways.
US Airways may terminate the turboprop agreement at any time for
cause upon not less than five days notice under any of the
following conditions:
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If we fail to utilize the aircraft as specified in the
agreements. |
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If we fail to comply with the trademark license provisions of
the agreement. |
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If we fail to perform the material terms, covenants or
conditions of the code-sharing agreement. |
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Upon a change in our ownership or control without the written
approval of US Airways. |
The turboprop code-share agreement terminates in October 2006,
provided, however, most of the turboprop flying hub markets can
be terminated by US Airways for any reason upon 180 days
prior advance written notice.
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United Code-Sharing Agreement |
As of September 30, 2005, we operated 15 CRJ-200, 15
CRJ-700 and 10 Dash-8 aircraft for United under a code-sharing
arrangement. The code-share agreement provides that we can
increase our fleet to 45 50-seat and 30 70-seat regional
jet aircraft (15 of which would be replacements for 15
CRJ-200s). In exchange for performing the flight services under
the agreement, we receive from United a fixed monthly minimum
amount, plus certain additional amounts based upon the number of
flights flown and block hours performed during the month.
Additionally, certain costs incurred by us in performing the
flight services are pass-through costs, whereby
United agrees to reimburse us for the actual amounts incurred
for these items: insurance, property tax per aircraft, fuel
cost, oil cost, catering cost and landing fees. We also receive
a profit margin based upon certain reimbursable costs under the
agreement as well as our operational performance. The code-share
agreement for (i) the ten Dash-8 aircraft terminates in
July 2013 unless terminated by United by giving notice six
months prior to April 30, 2010, (ii) the 15 50-seat
CRJ-200s terminates no later
7
than April 30, 2010, which can be accelerated up to two
years at our discretion, (iii) the 15 70-seat regional jets
(to be delivered upon the withdrawal of the 50-seat regional
jets) terminates ten years from delivery date, but no later than
October 31, 2018, and (iv) the remaining 15 70-seat
regional jets terminates in three tranches between
December 31, 2011 and December 31, 2013. The
code-share agreement is subject to termination prior to these
dates under various circumstances including:
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If certain operational performance factors fall below a
specified percentage for a specified time, subject to notice and
cure rights; |
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Failure by us to perform the material covenants, agreements,
terms or conditions of the code-share agreement or similar
agreements with United, subject to thirty (30) days notice
and cure rights; or |
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If either United or we become insolvent, file bankruptcy or fail
to pay debts when due, the non-defaulting party may terminate
the agreement. |
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Delta Code-Sharing Agreement |
On October 1, 2005, we commenced flight operations for
Delta under a code-sharing agreement. Flight operations for
Delta are performed by our wholly-owned subsidiary, Freedom
Airlines. The code-share agreement provides that we increase our
fleet to 30 50-seat regional jet aircraft. In exchange for
performing the flight services and our other obligations under
the agreement, we receive from Delta monthly compensation made
up of a fixed monthly amount, plus certain additional amounts
based upon number of block hours flown and departures during the
month. Additionally, certain costs incurred by Freedom are
pass-through costs, whereby Delta agrees to reimburse us for the
actual amounts incurred for these items: landing fees, hull
insurance, passenger liability costs, fuel costs, catering costs
and property taxes. Aircraft rent/ownership expenses are also
considered a pass-through cost, but are limited to a specified
amount for each type of aircraft. We are eligible to receive
additional compensation based upon our completion rate and
on-time arrival rate each month. Further, for each semi-annual
period during the term of the agreement, we are eligible to
receive additional compensation from Delta based upon
performance. The fixed rates payable to us by Delta under the
code-sharing agreement have been determined through the term of
such agreement and are subject to annual revision.
The code-share agreement terminates on an aircraft-by-aircraft
basis between 2017 and 2018. At the end of the term, Delta has
the right to extend the agreement for additional one year
successive terms on the same terms and conditions. Delta may
terminate the code-sharing agreement at any time, with or
without cause, upon twelve months prior written notice, provided
such notice shall not be given prior to the earlier of
(i) the sixth anniversary of the in-service date of the
30th aircraft
added to the Delta Connection fleet by the Company, or
(ii) November 2012. However, Delta has not yet assumed our
code-share agreement in its bankruptcy proceedings and could
choose to terminate this agreement at any time prior to its
emergence from bankruptcy.
This agreement may be subject to early termination under various
circumstances including:
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If either Delta or we file for bankruptcy, reorganization or
similar action or if either Delta or we make an assignment for
benefit of creditors; |
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If either Delta or we commit a material breach of the code-share
agreement, subject to 30 days notice and cure
rights; or |
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Upon the occurrence of an event of force majeure that continues
for a period of 30 or more consecutive days. |
In addition, Delta may immediately terminate the code-share
agreement upon the occurrence of one or more of the following
events:
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If there is a change of control of Freedom or Mesa; |
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If there is a merger involving Freedom or Mesa; |
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If we fail to maintain a specified completion rate with respect
to the flights we operate for Delta during a specified
period; or |
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If our level of safety is not reasonably satisfactory to Delta. |
Fleet Plans and Aircraft Manufacturer Relationships
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Interim Financing of Aircraft |
Upon delivery of an aircraft from the manufacturer it is our
customary business practice to enter into an interim financing
arrangement with the manufacturer until such time as permanent
financing as an operating lease or debt can be arranged. Under
interim financing arrangements, we take delivery and title of
the aircraft prior to securing permanent financing and the
acquisition of the aircraft is accounted for as a purchase with
debt financing. Accordingly, we reflect the aircraft and debt
under interim financing on our balance sheet during the interim
financing period. The interim financing period can be for up to
six months after delivery of the aircraft. This practice allows
us to take delivery and begin operating aircraft quicker while
arranging permanent financing, either as an operating lease or
with debt, with an independent third party.
At September 30, 2005, we had $54.6 million in notes
payable to an aircraft manufacturer for two aircraft on interim
financing. These interim financing agreements are six months in
length and provide for monthly interest only payments at LIBOR
plus three percent. The current interim financing agreement with
the manufacturer provides for the Company to have a maximum of
15 aircraft on interim financing at a given time.
In June 1999, we entered into an agreement with Empresa
Brasiliera de Aeronautica SA (Embraer) to acquire 36
Embraer ERJ-145 50-passenger regional jets. Mesa introduced the
ERJ-145 aircraft into revenue service in the third quarter of
fiscal 2000. As of September 30, 2005, we have taken
delivery of all 36 ERJ-145s, which have been financed as
operating leases with initial terms of 16.5 to 18 years. We
also have options for 45 additional aircraft. In May 2005, our
contract with Embraer was amended to extend the option exercise
date to December 2005 for deliveries beginning in May 2007.
In August 1996, we entered into an agreement (the 1996
BRAD Agreement) with Bombardier Regional Aircraft Division
(BRAD) to acquire 32 CRJ-200 50-passenger regional
jet aircraft. The 32 aircraft have been delivered and are
currently under permanent financing as operating leases with
initial terms ranging from 16.5 to 18.5 years. The Company
has also entered into operating leases for 24
previously-operated CRJ-200s under both short and long-term
leases.
In May 2001, we entered into a second agreement with BRAD (the
2001 BRAD Agreement) under which we committed to
purchase a total of 15 CRJ-700s and 25 CRJ-900s. In January
2004, the Company exercised options to purchase 20 CRJ-900
aircraft (seven of which can be converted to CRJ-700 aircraft)
reserved under the option provision of the 2001 BRAD Agreement.
The transaction includes standard product support provisions,
including training, preferred pricing on initial inventory
provisioning, maintenance and technical publications. As of
September 30, 2005, we have accepted delivery of 15
CRJ-700s and 37 CRJ-900 aircraft. The Company accepted its
38th CRJ-900
in October 2005. We also have firm orders for seven additional
CRJ-900s (which can be converted to CRJ-700s). In addition to
the firm orders, we have an option to acquire an additional 72
CRJ-700 or CRJ-900 regional jets that are exercisable through
2009 and 40 CRJ-700 and CRJ-900 regional jets that are
exercisable in 2010 and beyond. In conjunction with the 2001
BRAD Agreement, we had $15.0 million on deposit with BRAD,
which was included with lease and equipment deposits at
September 30, 2005.
9
As of September 30, 2005, we owned 35 Beechcraft 1900D
aircraft and were operating 22 of these aircraft. During fiscal
year 2005, the Company leased four of its Beechcraft 1900D
aircraft to Gulfstream International Airlines
(Gulfstream), a regional turboprop air carrier based
in Ft. Lauderdale, Florida for a term of five years. In
January 2005, we entered into an agreement to lease ten of our
Beechcraft 1900D aircraft to Big Sky Transportation Co.
(Big Sky), a regional turboprop carrier based in
Billings, Montana. As of September 30, 2005, we had leased
nine aircraft to Big Sky and leased the tenth aircraft to Big
Sky in the first quarter of fiscal 2006 for a term of five years.
As of September 30, 2005, we operated 16 leased Dash-8
aircraft.
Marketing
Our flight schedules are structured to facilitate the connection
of our passengers with the flights of our code-share partners at
their hub airports and to maximize local and connecting service
to other carriers.
Under the America West, Delta, US Airways and United
revenue-guarantee code-share agreements, market selection,
pricing and yield management functions are performed by our
respective partners. The market selection process for our B1900
turboprop operations, outside the Essential Air Service program
flights, includes an in-depth analysis on a route-by-route basis
and is followed by a review and approval process in a joint
effort with US Airways or America West, as the case may be,
regarding the level of service and fares. We believe that this
selection process enhances the likelihood of profitability in a
given market.
Under our code-share agreements, the code-share partner
coordinates advertising and public relations within their
respective systems. In addition, our traffic is impacted by the
major airline partners advertising programs in regions
outside those served by us, with the major partners
customers becoming our customers as a result of through fares.
Under pro-rate code-share arrangements, our passengers also
benefit from through fare ticketing with the major airline
partners and greater accessibility to our flights on computer
reservation systems and in the Official Airline Guide.
Our pro-rate agreements and independent flights are promoted
through, and our revenues are generally believed to benefit
from, listings in computer reservation systems, the Official
Airline Guide and through direct contact with travel agencies
and corporate travel departments. Our independent operations
utilize SABRE, a computerized reservation system widely used by
travel agents, corporate travel offices and other airlines. The
reservation systems of our code-share partners are also utilized
in each of our other operations through their respective
code-share agreements. We also pay booking fees to owners of
other computerized reservation systems based on the number of
independent and pro-rate passengers booked by travel agents
using such systems. We believe that we have good relationships
with the travel agents serving our passengers.
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, and the automation of travel agent reservation
systems. Further, because of the Airline 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 may be left
without air service.
We believe that the Airline Deregulation Act facilitated our
entry into scheduled air service markets and allows us to
compete on the basis of service and fares, thus causing major
carriers to seek out further contractual agreements with
carriers like us as a way of expanding their respective
networks. However, the Airline Deregulation Act makes the entry
of other competitors possible, some of which may have
substantial financial resources and experience, creating the
potential for intense competition among regional air carriers in
our markets.
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Fuel
Historically, we have not experienced problems with the
availability of fuel, and believe that we will be able to obtain
fuel in quantities sufficient to meet our existing and
anticipated future requirements at competitive prices. Standard
industry contracts generally do not provide protection against
fuel price increases, nor do they ensure availability of supply.
However, our revenue-guarantee code-share agreements with
America West, United and US Airways (regional jet) allow fuel
used in the performance of the agreements to be reimbursed by
our code-share partner, thereby reducing our exposure to fuel
price fluctuations. In fiscal 2005, approximately 95% of our
fuel purchases was associated with our America West, United and
US Airways (regional jet) code-share agreements. A
substantial increase in the price of jet fuel, to the extent our
fuel costs are not reimbursed, or the lack of adequate fuel
supplies in the future, could have a material adverse effect on
our business, financial condition, results of operations and
liquidity.
Maintenance of Aircraft and Training
All mechanics and avionics specialists employed by us have the
appropriate training and experience and hold the required
licenses issued by the FAA. Using a combination of FAA-certified
maintenance vendors and our own personnel and facilities, we
maintain our aircraft on a scheduled and as-needed
basis. We emphasize preventive maintenance and inspect our
aircraft engines and airframes as required. We also maintain an
inventory of spare parts specific to the aircraft types we fly.
We provide periodic in-house and outside training for our
maintenance and flight personnel and also take advantage of
factory training programs that are offered when acquiring new
aircraft.
Insurance
We carry types and amounts of insurance customary in the
regional airline industry, including coverage for public
liability, passenger liability, property damage, product
liability, aircraft loss or damage, baggage and cargo liability
and workers compensation.
As a result of the terrorist attacks on September 11, 2001,
aviation insurers have significantly reduced the maximum amount
of insurance coverage available to commercial air carriers for
war-risk (terrorism) coverage, while at the same time,
significantly increasing the premiums for this coverage as well
as for aviation insurance in general. Given the significant
increase in insurance costs, the federal government is currently
providing insurance assistance under the Air Transportation
Safety and System Stabilization Act. In addition, the federal
government has issued war-risk coverage to U.S. air
carriers that is generally renewable for 60-day periods.
However, the availability of aviation insurance is not
guaranteed and our inability to obtain such coverage at
affordable rates may result in the grounding of our aircraft.
Insurance costs are reimbursed under the terms of our
revenue-guarantee code-share agreements.
Employees
As of September 30, 2005, we employed approximately 4,600
employees. Approximately 2,600 of our employees are represented
by various labor organizations. Our continued success is partly
dependent on our ability to continue to attract and retain
qualified personnel. Historically, we have had no difficulty
attracting qualified personnel to meet our requirements.
Relations between air carriers and labor unions in the United
States are governed by the Railway Labor Act or RLA. Under the
RLA, collective bargaining agreements generally contain
amendable dates rather than expiration dates, and
the RLA requires that a carrier maintain the existing terms and
conditions of employment following the amendable date through a
multi-stage and usually lengthy series of bargaining processes
overseen by the National Mediation Board. Mesa Airlines
flight attendants are represented by the Association of Flight
Attendants (AFA). Mesa Airlines contract with
the AFA becomes amendable in June 2006. Our pilots are
represented by the Air Line Pilot Association
(ALPA). Our contract with ALPA becomes amendable in
September 2007.
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Although not currently observing high turnover, pilot turnover
at times is a significant issue among regional carriers when
major carriers are hiring experienced commercial pilots away
from regional carriers. The addition of aircraft, especially new
aircraft types, can result in pilots upgrading between aircraft
types and becoming unavailable for duty during the extensive
training periods required. No assurances can be made that pilot
turnover and unavailability will not be a significant problem in
the future, particularly if major carriers expand their
operations. Similarly, there can be no assurance that sufficient
numbers of new pilots will be available to support any future
growth.
No other Mesa subsidiaries are parties to any other collective
bargaining agreement or union contracts.
Essential Air Service Program
The Essential Air Service (EAS) program administered
by the DOT guarantees a minimum level of air service in certain
communities, predicated on predetermined guidelines set forth by
Congress. Based on these guidelines, the DOT subsidizes air
service to communities that might not otherwise have air
service. At September 30, 2005, we provided service to 24
such cities for an annualized subsidy of approximately
$19 million. EAS rates are normally set for two-year
contract periods for each city. There is no guarantee that we
will continue to receive subsidies for the cities we serve. The
DOT may request competitive proposals from other airlines at the
end of the contract period for EAS service to a particular city.
Proposals, when requested, are evaluated on, among other things,
level of service provided, subsidy requested, fitness of the
applicant and comments from the communities served. If the
funding under this program is terminated for any of the cities
served by us, in all likelihood we would not continue to fly in
these markets, and as a result, we would be forced to find
alternative uses for the Beechcraft 1900D 19-seat turboprop
aircraft affected.
Regulation
As an interstate air carrier, we are subject to the economic
jurisdiction, regulation and continuing air carrier fitness
requirements of the DOT. Such requirements include minimum
levels of financial, managerial and regulatory fitness. 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
carriers books, properties and records, and to mandate
conditions of carriage. The DOT also has the power to bring
proceedings for the enforcement of air carrier economic
regulations, including the assessment of civil penalties, and to
seek criminal sanctions.
We are subject to the jurisdiction of the FAA with respect to
our 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 regulations, the FAA
requires airlines to obtain an operating certificate, which is
subject to suspension or revocation for cause, and provides for
regular inspections.
We are subject to various federal and local laws and regulations
pertaining to other issues of environmental protocol. We believe
we are in compliance with all governmental laws and regulations
regarding environmental protection.
We are also subject to the jurisdiction of the Federal
Communications Commission with respect to the use of our radio
facilities and 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.
Available Information
We maintain a website where additional information concerning
our business can be found. The address of that website is
www.mesa-air.com. We make available free of charge on our
website our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and
amendments to those reports, as soon as reasonably practicable
after we electronically file or furnish such materials to the
SEC.
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The following risk factors, in addition to the information
discussed elsewhere herein, should be carefully considered in
evaluating us and our business:
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Risks Related to Our Business |
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We are dependent on our agreements with our code-share
partners. |
We depend on relationships created by our code-share agreements.
We derive a significant portion of our consolidated passenger
revenues from our revenue guarantee code-share agreements with
America West, United Airlines, and US Airways. Our code-share
partners have certain rights to cancel the applicable code-share
agreement upon the occurrence of certain events or the giving of
appropriate notice, subject to certain conditions. No assurance
can be given that one or more of our code-share partners will
not serve notice at a later date of their intention to cancel
our code-sharing agreement, forcing us to stop selling those
routes with the applicable partners code and potentially
reducing our traffic and revenue.
Our code-share agreement with America West allows America West,
subject to certain restrictions, to reduce the combined CRJ
fleets utilized under the code-share agreement by one aircraft
in any six-month period commencing in June 2006 (except during
the calendar year 2007 in which 2 CRJ-200 can be eliminated in
each six-month period). In addition, beginning in February 2007,
America West may eliminate the Dash-8 aircraft upon
180 days prior written notice. America West has used this
provision to reduce the number of aircraft covered by the
code-share agreement and there can be no assurance that,
commencing in January 2007, they will not continue to further
reduce the number of covered aircraft.
In addition, because a majority of our operating revenues are
currently generated under revenue-guarantee code-share
agreements, if any one of them is terminated, our operating
revenues and net income could be materially adversely affected
unless we are able to enter into satisfactory substitute
arrangements or, alternatively, fly under our own flight
designator code, including obtaining the airport facilities and
gates necessary to do so. For the year ended September 30,
2005, our America West code-share agreement accounted for 44% of
our consolidated passenger revenues, our US Airways code-share
agreement accounted for 31% of our consolidated passenger
revenues and our United code-share agreement accounted for 24%
of our consolidated passenger revenues. Following the transition
of the 59 aircraft previously operated at US Airways, we
currently anticipate that our America West code-share agreement
will account for approximately 40% of our consolidated
passenger revenues, our Delta code-share agreement will account
for approximately 20% of our consolidated passenger
revenues and our United code-share agreement will accont for
approximately 35% of our consolidated passenger revenues.
Any material modification to, or termination of, our code-share
agreements with any of these partners could have a material
adverse effect on our financial condition, the results of our
operations and the price of our common stock. Should America
West, Delta or Uniteds revenue-guarantee code-share
agreements be terminated, we cannot assure you that we would be
able to enter into substitute code-share arrangements, that any
such arrangements would be as favorable to us as the current
code-share agreements or that we could successfully fly under
our own flight designator code.
As a result of the US Airways emergence from bankruptcy
and their non-assumption of our revenue-guarantee code-share
agreement, we began working with US Airways to provide for the
orderly transition of the aircraft flown under our US Airways
code-share agreement. If we are unable to timely transition the
jets flown under this agreement to other code-share
arrangements, we may incur unexpected costs which could have a
material adverse effect on our business, financial condition and
results of operations.
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If our code-share partners or other regional carriers
experience events that negatively impact their financial
strength or operations, our operations also may be negatively
impacted. |
We are directly affected by the financial and operating strength
of our code-share partners. Any events that negatively impact
the financial strength of our code-share partners or have a
long-term effect on the use of our code-share partners by
airline travelers would likely have a material adverse effect on
our business, financial condition and results of operations. In
the event of a decrease in the financial or operational strength
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of any of our code-share partners, such partner may seek to
reduce, or be unable to make, the payments due to us under their
code-share agreement. In addition, they may reduce utilization
of our aircraft. Although there are certain monthly guaranteed
payment amounts, there are no minimum levels of utilization
specified in the code-share agreements. UAL Corp., the parent
company of our code-share partner United Airlines, has not
emerged from reorganization under Chapter 11 of the
U.S. Bankruptcy Code. Additionally, US Airways, which
accounted for 31% of our consolidated passenger revenue for the
fiscal year ended September 30, 2005, filed for bankruptcy
protection. On September 16, 2005, the Bankruptcy court
entered an order confirming the debtors (US Airways) plan of
reorganization, which included the merger between US Airways
Group and America West Holding Corporation, the parent company
of America West Airlines. US Airways Group will operate under
the single brand name of US Airways through two principal
operating subsidiaries, US Airways, Inc. and America West
Airlines, Inc. As a result of US Airways emergence from
bankruptcy and their non-assumption of our revenue-guarantee
code-share agreement, we expanded our regional jet
revenue-guarantee code-share agreement with United and entered
into a new revenue-guarantee code-share agreement with Delta and
are currently working to transition the jets flown under the US
Airways code-share agreement to the United and Delta
arrangements. In addition, on September 14, 2005, Delta Air
Lines filed for reorganization under Chapter 11 of the US
Bankruptcy Code. Delta has not yet assumed our code-share
agreement in its bankruptcy proceeding and could choose to
terminate this agreement or seek to renegotiate the agreement on
terms less favorable to us. If any of our other current or
future code-share partners become bankrupt, our code-share
agreement with such partner may not be assumed in bankruptcy and
would be terminated. This and other such events could have a
material adverse effect on our business, financial condition and
results of operations. We may also experience additional costs
that could adversely affect our operations if we experience any
delay in the transition of aircraft flying under our US Airways
code-share agreement to United or Delta. In addition, any
negative events that occur to other regional carriers and that
affect public perception of such carriers generally could also
have a material adverse effect on our business, financial
condition and results of operations.
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Our code-share partners may expand their direct operation of
regional jets thus limiting the expansion of our relationships
with them. |
We depend on major airlines like America West, Delta, United
Airlines and US Airways electing to contract with us instead of
purchasing and operating their own regional jets. However, these
major airlines possess the resources to acquire and operate
their own regional jets instead of entering into contracts with
us or other regional carriers. We have no guarantee that in the
future our code-share partners will choose to enter into
contracts with us instead of purchasing their own regional jets
or entering into relationships with competing regional airlines.
A decision by America West, Delta, United Airlines, or US
Airways to phase out our contract-based code-share relationships
or to enter into similar agreements with competitors could have
a material adverse effect on our business, financial condition
or results of operations. In addition to Mesa, Delta, US Airways
and United Airlines have similar code-share agreements with
other competing regional airlines.
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If we experience a lack of labor availability or strikes, it
could result in a decrease of revenues due to the cancellation
of flights. |
The operation of our business is significantly dependent on the
availability of qualified employees, including, specifically,
flight crews, mechanics and avionics specialists. Historically,
regional airlines have periodically experienced high pilot
turnover as a result of air carriers operating larger aircraft
hiring their commercial pilots. Further, the addition of
aircraft, especially new aircraft types, can result in pilots
upgrading between aircraft types and becoming unavailable for
duty during the required extensive training periods. There can
be no assurance that we will be able to maintain an adequate
supply of qualified personnel or that labor expenses will not
increase.
At September 30, 2005, we had approximately 4,600
employees, a significant number of whom are members of labor
unions, including ALPA and the AFA. Our collective bargaining
agreement with ALPA becomes amendable in September 2007 and our
collective bargaining agreement with the AFA becomes amendable
in June 2006. The inability to negotiate acceptable contracts
with existing unions as agreements expire or with new unions
could result in work stoppages by the affected workers, lost
revenues resulting from
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the cancellation of flights and increased operating costs as a
result of higher wages or benefits paid to union members. We
cannot predict which, if any, other employee groups may seek
union representation or the outcome or the terms of any future
collective bargaining agreement and therefore the effect, if
any, on our business financial condition and results of
operations. If negotiations with unions over collective
bargaining agreements prove to be unsuccessful, following
specified cooling off periods, the unions may
initiate a work action, including a strike, which could have a
material adverse effect on our business, financial condition and
results of operations.
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Increases in our labor costs, which constitute a substantial
portion of our total operating costs, will cause our earnings to
decrease. |
Labor costs constitute a significant percentage of our total
operating costs. Under our code-share agreements, our
reimbursement rates contemplate labor costs that increase on a
set schedule generally tied to an increase in the consumer price
index or the actual increase in the contract. We are responsible
for our labor costs, and we may not be entitled to receive
increased payments under our code-share agreements if our labor
costs increase above the assumed costs included in the
reimbursement rates. As a result, a significant increase in our
labor costs above the levels assumed in our reimbursement rates
could result in a material reduction in our earnings.
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If new airline regulations are passed or are imposed upon our
operations, we may incur increased operating costs and
experience a decrease in earnings. |
Laws and regulations, such as those described below, have been
proposed from time to time that could significantly increase the
cost of our operations by imposing additional requirements or
restrictions on our operations. We cannot predict what laws and
regulations will be adopted or what changes to air
transportation agreements will be effected, if any, or how they
will affect us, and there can be no assurance that laws or
regulations currently proposed or enacted in the future will not
increase our operating expenses and therefore adversely affect
our financial condition and results of operations.
As an interstate air carrier, we are subject to the economic
jurisdiction, regulation and continuing air carrier fitness
requirements of the DOT, which include required levels of
financial, managerial and regulatory fitness. 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
carriers books, properties and records, to mandate
conditions of carriage and to suspend an air carriers
fitness to operate. The DOT also has the power to bring
proceedings for the enforcement of air carrier economic
regulations, including the assessment of civil penalties, and to
seek criminal sanctions.
We are also subject to the jurisdiction of the FAA with respect
to our 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 regulations, the FAA
requires airlines to obtain an operating certificate, which is
subject to suspension or revocation for cause, and provides for
regular inspections.
We incur substantial costs in maintaining our current
certifications and otherwise complying with the laws, rules and
regulations to which we are subject. We cannot predict whether
we will be able to comply with all present and future laws,
rules, regulations and certification requirements or that the
cost of continued compliance will not significantly increase our
costs of doing business.
The FAA has the authority to issue mandatory orders relating to,
among other things, the grounding of aircraft, inspection of
aircraft, installation of new safety-related items and removal
and replacement of aircraft parts that have failed or may fail
in the future. A decision by the FAA to ground, or require
time-consuming inspections of, or maintenance on, all or any of
our turboprops or regional jets, for any reason, could
negatively impact our results of operations.
In addition to state and federal regulation, airports and
municipalities enact rules and regulations that affect our
operations. From time to time, various airports throughout the
country have considered limiting the
15
use of smaller aircraft, such as Embraer or Canadair regional
jets, at such airports. The imposition of any limits on the use
of our regional jets at any airport at which we operate could
interfere with our obligations under our code-share agreements
and severely interrupt our business operations.
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lf additional security and safety measures regulations are
adopted, we may incur increased operating costs and experience a
decrease in earnings. |
Congress has adopted increased safety and security measures
designed to increase airline passenger security and protect
against terrorist acts. Such measures have resulted in
additional operating costs to the airline industry. The Aviation
Safety Commissions report recommends the adoption of
further measures aimed at improving the safety and security of
air travel. We cannot forecast what additional security and
safety requirements may be imposed on our operations in the
future or the costs or revenue impact that would be associated
with complying with such requirements, although such costs and
revenue impact could be significant. To the extent that the
costs of complying with any additional safety and security
measures are not reimbursed by our code-share partners, our
operating results and net income could be adversely affected.
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If our operating costs increase as our aircraft fleet ages
and we are unable to pass along such costs, our earnings will
decrease. |
As our fleet of aircraft age, the cost of maintaining such
aircraft, if not replaced, will likely increase. There can be no
assurance that costs of maintenance, including costs to comply
with aging aircraft requirements, will not materially increase
in the future. Any material increase in such costs could have a
material adverse effect on our business, financial condition and
results of operations. Because many aircraft components are
required to be replaced after specified numbers of flight hours
or take-off and landing cycles, and because new aviation
technology may be required to be retrofitted, the cost to
maintain aging aircraft will generally exceed the cost to
maintain newer aircraft. We believe that the cost to maintain
our aircraft in the long-term will be consistent with industry
experience for these aircraft types and ages used by comparable
airlines.
We believe that our aircraft are mechanically reliable based on
the percentage of scheduled flights completed and as of
September 30, 2005 the average age of our regional jet
fleet is 3.2 years. However, there can be no assurance that
such aircraft will continue to be sufficiently reliable over
longer periods of time. Furthermore, any public perception that
our aircraft are less than completely reliable could have a
material adverse effect on our business, financial condition and
results of operations.
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Our fleet expansion program has required a significant
increase in our leverage. |
The airline business is very capital intensive and, as a result,
many airline companies are highly leveraged. For the year ended
September 30, 2005, our debt service payments, including
principal and interest, totaled $74.6 million and our
aircraft lease payments totaled $206.2 million. We have
significant lease obligations with respect to our aircraft and
ground facilities, which aggregated approximately
$2.5 billion at September 30, 2005. As of
September 30, 2005, our growth strategy involves the
acquisition of one more Bombardier regional jet during fiscal
2006. As of September 30, 2005, we had permanently financed
all but two CRJ-700 and CRJ-900 aircraft delivered under the
2001 BRAD agreement. We may utilize interim financing provided
by the manufacturer and have the ability to fund up to 15
aircraft at any one time under this facility. There are no
assurances that we will be able to obtain permanent financing
for future aircraft deliveries.
There can be no assurance that our operations will generate
sufficient cash flow to make such payments or that we will be
able to obtain financing to acquire the additional aircraft
necessary for our expansion. If we default under our loan or
lease agreements, the lender/lessor has available extensive
remedies, including, without limitation, repossession of the
respective aircraft and, in the case of large creditors, the
effective ability to exert control over how we allocate a
significant portion of our revenues. Even if we are able to
timely service
16
our debt, the size of our long-term debt and lease obligations
could negatively affect our financial condition, results of
operations and the price of our common stock in many ways,
including:
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increasing the cost, or limiting the availability of, additional
financing for working capital, acquisitions or other purposes; |
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limiting the ways in which we can use our cash flow, much of
which may have to be used to satisfy debt and lease
obligations; and |
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adversely affecting our ability to respond to changing business
or economic conditions or continue our growth strategy. |
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Reduced utilization levels of our aircraft under the
revenue-guarantee agreements would adversely impact our revenues
and earnings. |
Even though our revenue-guarantee agreements require a fixed
amount per month to compensate us for our fixed costs, if our
aircraft are underutilized (including taking into account the
stage length and frequency of our scheduled flights) we will
lose the opportunity to receive a margin on the variable costs
of flights that would have been flown if our aircraft were more
fully utilized.
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If we incur problems with any of our third-party service
providers, our operations could be adversely affected by a
resulting decline in revenue or negative public perception about
our services. |
Our reliance upon others to provide essential services on behalf
of our operations may result in the relative inability to
control the efficiency and timeliness of contract services. We
have entered into agreements with contractors to provide various
facilities and services required for our operations, including
aircraft maintenance, ground facilities, baggage handling and
personnel training. It is likely that similar agreements will be
entered into in any new markets we decide to serve. All of these
agreements are subject to termination after notice. Any material
problems with the efficiency and timeliness of contract services
could have a material adverse effect on our business, financial
condition and results of operations.
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We are at risk of loss and adverse publicity stemming from
any accident involving any of our aircraft. |
If one of our aircraft were to crash or be involved in an
accident, we could be exposed to significant tort liability.
There can be no assurance that the insurance we carry to cover
damages arising from any future accidents will be adequate.
Accidents could also result in unforeseen mechanical and
maintenance costs. In addition, any accident involving an
aircraft that we operate could create a public perception that
our aircraft are not safe, which could result in air travelers
being reluctant to fly on our aircraft. To the extent a decrease
in air travelers is associated with our operations not covered
by our code-share agreements, such a decrease could have a
material adverse affect on our business, financial condition or
results of operations.
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If we become involved in any material litigation or any
existing litigation is concluded in a manner adverse to us, our
earnings may decline. |
We are, from time to time, subject to various legal proceedings
and claims, either asserted or unasserted. Any such claims,
whether with or without merit, could be time-consuming and
expensive to defend and could divert managements attention
and resources. There can be no assurance regarding the outcome
of current or future litigation.
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Our business would be harmed if we lose the services of our
key personnel. |
Our success depends to a large extent on the continued service
of our executive management team. We have employment agreements
with certain executive officers, but it is possible that members
of executive management may leave us. Departures by our
executive officers could have a negative impact on our business,
17
as we may not be able to find suitable management personnel to
replace departing executives on a timely basis. We do not
maintain key-man life insurance on any of our executive officers.
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We may experience difficulty finding, training and retaining
employees. |
Our business is labor intensive, we require large numbers of
pilots, flight attendants, maintenance technicians and other
personnel. The airline industry has from time to time
experienced a shortage of qualified personnel, specifically
pilots and maintenance technicians. In addition, as is common
with most of our competitors, we have faced considerable
turnover of our employees. Although our employee turnover has
decreased significantly since September 11, 2001, our
pilots, flight attendants and maintenance technicians often
leave to work for larger airlines, which generally offer higher
salaries and better benefit programs than regional airlines are
financially able to offer. Should the turnover of employees,
particularly pilots and maintenance technicians, sharply
increase, the result will be significantly higher training costs
than otherwise would be necessary. We cannot assure you that we
will be able to recruit, train and retain the qualified
employees that we need to carry out our expansion plans or
replace departing employees. If we are unable to hire and retain
qualified employees at a reasonable cost, we may be unable to
complete our expansion plans, which could have a material
adverse effect our financial condition, results of operations
and the price of our common stock.
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We may be unable to successfully launch or profitably operate
our planned Hawaiian airline, which could negatively impact our
business and operations. |
We have announced plans to form an independent inter-island
Hawaiian airline with service expected to begin in the first
quarter of 2006. Launching service in Hawaii will require
ongoing investments of working capital by Mesa, significant
management attention and focus, regulatory approval by state and
federal regulators, location of suitable facilities and may
involve a partnership or venture with financial investors.
We have not had operations in Hawaii prior to this planned
launch and we may be unable to begin service when planned, if at
all, given the inherent risks in establishing and operating a
new airline. If we are unable to begin service when planned or
are unable to begin service at all, our operations may be
negatively impacted. Additionally, given the costs and risks
associated with operating an independent low fare regional jet
airline, once service begins we may be unable to operate the
Hawaiian airline profitably, which would negatively impact our
financial results.
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Risks Related to Our Industry |
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If competition in the airline industry increases, we may
experience a decline in revenue. |
Increased competition in the airline industry as well as
competitive pressure on our code-share partners or in our
markets could have a material adverse effect on our business,
financial condition and results of operation. The airline
industry is highly competitive. The earnings of many of the
airlines have historically been volatile. The airline industry
is susceptible to price discounting, which involves the offering
of discount or promotional fares to passengers. Any such fares
offered by one airline are normally matched by competing
airlines, which may result in lower revenue per passenger, i.e.,
lower yields, without a corresponding increase in traffic
levels. Also, in recent years several new carriers have entered
the industry, typically with low cost structures. In some cases,
new entrants have initiated or triggered price discounting. The
entry of additional new major or regional carriers in any of our
markets, as well as increased competition from or the
introduction of new services by established carriers, could
negatively impact our financial condition and results of
operations.
Our reliance on our code-share agreements with our major airline
partners for the majority of our revenue means that we must rely
on the ability of our code-share partners to adequately promote
their respective services and to maintain their respective
market share. Competitive pressures by low-fare carriers and
price discounting among major airlines could have a material
adverse effect on our code-share partners and therefore
adversely affect our business, financial condition and results
of operations.
18
The results of operations in the air travel business
historically fluctuate in response to general economic
conditions. The airline industry is sensitive to changes in
economic conditions that affect business and leisure travel and
is highly susceptible to unforeseen events, such as political
instability, regional hostilities, economic recession, fuel
price increases, inflation, adverse weather conditions or other
adverse occurrences that result in a decline in air travel. Any
event that results in decreased travel or increased competition
among airlines could have a material adverse effect on our
business, financial condition and results of operations.
In addition to traditional competition among airlines, the
industry faces competition from ground and sea transportation
alternatives. Video teleconferencing and other methods of
electronic communication may add a new dimension of competition
to the industry as business travelers seek lower-cost
substitutes for air travel.
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The airline industry is heavily regulated. |
Airlines are subject to extensive regulatory and legal
compliance requirements, both domestically and internationally,
that involve significant costs. In the last several years, the
FAA has issued a number of directives and other regulations
relating to the maintenance and operation of aircraft that have
required us to make significant expenditures. FAA requirements
cover, among other things, retirement of older aircraft,
security measures, collision avoidance systems, airborne wind
shear avoidance systems, noise abatement, commuter aircraft
safety and increased inspection and maintenance procedures to be
conducted on older aircraft.
We incur substantial costs in maintaining our current
certifications and otherwise complying with the laws, rules and
regulations to which we are subject. We cannot predict whether
we will be able to comply with all present and future laws,
rules, regulations and certification requirements or that the
cost of continued compliance will not significantly increase our
costs of doing business, to the extent such costs are not
reimbursed by our code-share partners.
The FAA has the authority to issue mandatory orders relating to,
among other things, the grounding of aircraft, inspection of
aircraft, installation of new safety-related items and removal
and replacement of aircraft parts that have failed or may fail
in the future. A decision by the FAA to ground, or require time
consuming inspections of or maintenance on, all or any of our
aircraft, for any reason, could negatively impact our results of
operations.
In addition to state and federal regulation, airports and
municipalities enact rules and regulations that affect our
operations. From time to time, various airports throughout the
country have considered limiting the use of smaller aircraft at
such airports. The imposition of any limits on the use of our
aircraft at any airport at which we operate could interfere with
our obligations under our code-share agreements and severely
interrupt our business operations.
Additional laws, regulations, taxes and airport rates and
charges have been proposed from time to time that could
significantly increase the cost of airline operations or reduce
revenues. If adopted, these measures could have had the effect
of raising ticket prices, reducing revenue and increasing costs.
In addition, as a result of the terrorist attacks in New York
and Washington, D.C. in September 2001, the FAA has imposed
more stringent security procedures on airlines and imposed
security taxes on each ticket sold. We cannot predict what other
new regulations may be imposed on airlines and we cannot assure
you that laws or regulations enacted in the future will not
materially adversely affect our financial condition, results of
operations and the price of our common stock.
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The airline industry has been subject to a number of strikes
which could affect our business. |
The airline industry has been negatively impacted by a number of
labor strikes. Any new collective bargaining agreement entered
into by other regional carriers may result in higher industry
wages and add increased pressure on us to increase the wages and
benefits of our employees. Furthermore, since each of our
code-share partners is a significant source of revenue, any
labor disruption or labor strike by the employees of any one of
our code-share partners could have a material adverse effect on
our financial condition, results of operations and the price of
our common stock.
19
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Risks Related to Our Common Stock |
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Provisions in our charter documents might deter acquisition
bids for us. |
Our articles of incorporation and bylaws contain provisions
that, among other things:
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authorize our board of directors to issue preferred stock
ranking senior to our common stock without any action on the
part of the shareholders; |
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establish advance notice procedures for shareholder proposals,
including nominations of directors, to be considered at
shareholders meetings; |
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authorize a majority of our board of directors, in certain
circumstances, to fill vacancies on the board resulting from an
increase in the authorized number of directors or from vacancies; |
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restrict the ability of shareholders to modify the number of
authorized directors; and |
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restrict the ability of stockholders to call special meetings of
shareholders. |
In addition, Section 78.438 of the Nevada general
corporation law prohibits us from entering into some business
combinations with interested stockholders without the approval
of our board of directors. These provisions could make it more
difficult for a third party to acquire us, even if doing so
would benefit our stockholders.
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Our stock price may continue to be volatile and could decline
substantially. |
The stock market has, from time to time, experienced extreme
price and volume fluctuations. Many factors may cause the market
price for our common stock to decline following this
Form 10-K, including:
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our operating results failing to meet the expectations of
securities analysts or investors in any quarter; |
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downward revisions in securities analysts estimates; |
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material announcements by us or our competitors; |
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public sales of a substantial number of shares of our common
stock following this Form 10-K; |
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governmental regulatory action; or |
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adverse changes in general market conditions or economic trends. |
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Item 1B. |
Unresolved Staff Comments |
None.
Our primary property consists of the aircraft used in the
operation of our flights. The following table lists the aircraft
owned and leased by the Company as of September 30, 2005.
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Number of Aircraft | |
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Interim | |
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Operating on | |
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Passenger | |
Type of Aircraft |
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Owned | |
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Financing | |
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Leased | |
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Total | |
|
Sept. 30, 2005 | |
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Capacity | |
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| |
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| |
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| |
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| |
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| |
CRJ-200/100 Regional Jet
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2 |
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54 |
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56 |
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56 |
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50 |
|
CRJ-700 Regional Jet
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5 |
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10 |
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15 |
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15 |
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64 |
|
CRJ-900 Regional Jet
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11 |
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2 |
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24 |
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37 |
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37 |
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86 |
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Embraer 145 Regional Jet
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36 |
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36 |
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|
36 |
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50 |
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Beechcraft 1900D
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35 |
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35 |
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22 |
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19 |
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Dash 8-200
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|
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16 |
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16 |
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16 |
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37 |
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Embraer EMB-120
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2 |
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2 |
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|
30 |
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Total
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53 |
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|
|
2 |
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|
|
142 |
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|
|
197 |
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|
|
182 |
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20
See Business Airline Operations and
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Liquidity and
Capital Resources for a discussion regarding the
Companys aircraft fleet commitments.
In addition to aircraft, we have office and maintenance
facilities to support our operations. Our facilities are
summarized in the following table:
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|
Approximate | |
Type |
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Location | |
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Ownership | |
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Square Feet | |
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Headquarters
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Phoenix, AZ |
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Leased |
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36,000 |
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Training/Administration
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Phoenix, AZ |
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Leased |
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27,000 |
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Hangar/Office
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Phoenix, AZ |
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Leased |
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22,000 |
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Engine Shop & Commissary
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Phoenix, AZ |
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Leased |
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25,000 |
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RAS Office/Component Overhaul Facility
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Phoenix, AZ |
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Leased |
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19,000 |
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Customer Service Training/ Storage
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Phoenix, AZ |
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Leased |
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10,000 |
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Office (East Coast)
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Charlotte, NC |
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Leased |
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5,500 |
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Hangar
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Charlotte, NC |
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Leased |
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30,000 |
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Hangar
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Columbia, SC |
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(1) |
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20,000 |
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Hangar
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Grand Junction, CO |
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(1) |
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25,000 |
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Hangar/Office
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Wichita, KS |
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(1) |
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20,000 |
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Training/Administration
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Farmington, NM |
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(1) |
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10,000 |
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Hangar
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Farmington, NM |
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(1) |
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24,000 |
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Hangar/Office
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Dubois, PA |
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(1) |
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23,000 |
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Hangar
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Little Rock, AR |
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Leased |
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10,000 |
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Hangar
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Philadelphia, PA |
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Leased |
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10,000 |
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Hangar
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Reading, PA |
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(1) |
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30,000 |
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Hangar (RAS)
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Reading, PA |
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(1) |
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32,000 |
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(1) |
Building is owned, underlying land is leased. |
We lease ticket counters, check-in and boarding and other
facilities in the passenger terminal areas in the majority of
the airports we serve and staff those facilities with our
personnel. America West, US Airways and United also provide
facilities, ticket handling and ground support services for us
at certain airports.
Our corporate headquarters and training/administrative
facilities in Phoenix, Arizona are subject to long-term leases
expiring on August 31, 2012 and November 1, 2012,
respectively.
We believe our facilities are suitable and adequate for our
current and anticipated needs.
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Item 3. |
Legal Proceedings |
We are involved in various legal proceedings and FAA civil
action proceedings that the Company does not believe will have a
material adverse effect upon the Companys business,
financial condition or results of operations, although no
assurance can be given to the ultimate outcome of any such
proceedings.
21
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Item 4. |
Submission of Matters to a Vote of Security Holders |
None.
Executive Officers of the Registrant
The following table sets forth the names and ages of the
executive officers of the Company and certain additional
information:
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Name |
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Age | |
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Position |
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Jonathan G. Ornstein
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|
48 |
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Chief Executive Officer |
Michael J. Lotz
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45 |
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President and Chief Operating Officer |
George Murnane III
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47 |
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Executive Vice President and Chief Financial Officer |
Michael Ferverda
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61 |
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Senior Vice President Operations |
Brian S. Gillman
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36 |
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Vice President, General Counsel and Secretary |
F. Carter Leake
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43 |
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Senior Vice President Planning |
Jonathan G. Ornstein was appointed President and Chief
Executive Officer of Mesa Air Group, Inc. effective May 1,
1998. Mr. Ornstein relinquished his position as President
of the Company in June 2000. From April 1996 to his joining the
Company as Chief Executive Officer, Mr. Ornstein served as
President and Chief Executive Officer and Chairman of Virgin
Express S.A./N.V., a European airline. From 1995 to April 1996,
Mr. Ornstein served as Chief Executive Officer of Virgin
Express Holdings, Inc. Mr. Ornstein joined Continental
Express Airlines, Inc., as President and Chief Executive Officer
in July 1994 and, in November 1994, was named Senior Vice
President, Airport Services at Continental Airlines, Inc.
Mr. Ornstein was previously employed by the Company from
1988 to 1994, as Executive Vice President and as President of
the Companys WestAir Holding, Inc. subsidiary.
Michael J. Lotz, President and Chief Operating Officer,
joined the Company in July 1998. In January 1999, Mr. Lotz
became Chief Operating Officer. In August 1999, Mr. Lotz
became the Companys Chief Financial Officer and in January
2000 returned to the position of Chief Operating Officer. On
June 22, 2000, Mr. Lotz was appointed President of the
Company. Prior to joining the Company, Mr. Lotz served as
Chief Operating Officer of Virgin Express, S.A./N.V., a position
he held from October 1996 to June 1998. Previously,
Mr. Lotz was employed by Continental Airlines, Inc., most
recently as Vice President of Airport Operations, Properties and
Facilities at Continental Express.
George Murnane III, Executive Vice President and
Chief Financial Officer, was appointed Executive Vice President
of the Company effective December 2001 and Chief Financial
Officer in January 2003. Mr. Murnane served as a director
of the Company from June 1999 until October 2003. From 1996 to
December 2001, Mr. Murnane was a Director and Executive
Vice President of International Airline Support Group, Inc., a
redistributor of aftermarket commercial aircraft spare parts and
lessor and trader of commercial aircraft and engines, most
recently as its Chief Operating Officer. From 1995 to 1996,
Mr. Murnane served as Executive Vice President and Chief
Operating Officer of Atlas Air, Inc., an air cargo company. From
1986 to 1996, he was an investment banker with the New York
investment banking firm of Merrill Lynch & Co., most
recently as a Director in the firms Transportation Group.
Michael Ferverda, Senior Vice President
Operations joined the Company in 1990. He was appointed
President of Freedom Airlines in May 2002 and Senior Vice
President Operations in February 2003. Prior to the
appointments, Mr. Ferverda served as the Senior Vice
President of Operations for Mesa Airlines, Inc.
Mr. Ferverda has served the Company in various capacities
including pilot, Flight Instructor/Check Airman, Assistant Chief
Pilot, FAA Designated Examiner, FAA Director of Operations and
Divisional Vice President. Mr. Ferverda was a pilot with
Eastern Airlines from 1973 to 1989. Prior to joining Eastern
Airlines, Mr. Ferverda served as an Aviator in the United
States Navy. Mr. Ferverda is a graduate of Indiana
University.
Brian S. Gillman, Vice President, General Counsel and
Secretary, joined the Company in February 2001. From July 1996
to February 2001, he served as Vice President, General Counsel
and Secretary of Vanguard
22
Airlines, Inc. in Kansas City, Missouri. From September 1994 to
July 1996, Mr. Gillman was a corporate associate in the law
firm of Stinson, Mag & Fizzell, P.C., Kansas City,
Missouri. Mr. Gillman received his Juris Doctorate and
B.B.A. in Accounting from the University of Iowa in 1994 and
1991, respectively.
F. Carter Leake, Senior Vice President
Planning, joined the Company in January 2001. Mr. Leake
served as Executive Vice-President of CCAir, Inc., a former
wholly-owned subsidiary of the Company, commencing in January
2001 and was promoted to President of CCAir in October 2001.
Mr. Leake served as Senior Vice President East
Coast Operations for Mesa Airlines from February 2003 until
January 2005. In January 2005, Mr. Leake was appointed
Senior Vice President Planning of the Company. Prior
to joining the Company, Mr. Leake served as a Director of
Sales for Bombardier Regional Aircraft from November 1996 to
January 2001. Previously, Mr. Leake was an analyst with
SH&E, an aviation consulting firm in New York, and a US
Air Force military pilot.
PART II
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Item 5. |
Market for Registrants Common Equity and Related
Stockholder Matters |
Market Price of Common Stock
The following table sets forth, for the periods indicated, the
high and low price per share of Mesa common stock for the two
most recent fiscal years, as reported by NASDAQ. Mesas
common stock is traded on the NASDAQ National Market System
under the symbol MESA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005 | |
|
Fiscal 2004 | |
|
|
| |
|
| |
Quarter |
|
High | |
|
Low | |
|
High | |
|
Low | |
|
|
| |
|
| |
|
| |
|
| |
First
|
|
$ |
8.03 |
|
|
$ |
5.21 |
|
|
$ |
13.85 |
|
|
$ |
10.17 |
|
Second
|
|
|
7.93 |
|
|
|
6.29 |
|
|
|
12.45 |
|
|
|
7.48 |
|
Third
|
|
|
7.00 |
|
|
|
5.25 |
|
|
|
9.01 |
|
|
|
6.56 |
|
Fourth
|
|
|
8.66 |
|
|
|
6.76 |
|
|
|
8.12 |
|
|
|
5.10 |
|
On December 1, 2005, we had 1,066 shareholders of
record. We have never paid cash dividends on our common stock.
The payment of future dividends is within the discretion of our
board of directors and will depend upon our future earnings, if
any, our capital requirements, bank financing, financial
condition and other relevant factors.
Recent Sales of Unregistered Securities
On February 7, 2002, in connection with an agreement
entered into with Raytheon Aircraft Company
(Raytheon), we granted Raytheon a warrant to
purchase up to 233,068 shares of our common stock at a per
share exercise price of $10. Raytheon must pay a purchase price
of $1.50 per share underlying the warrant. The warrant is
exercisable at any time over a three-year period following its
date of issuance. Absent a default by us under the agreement
with Raytheon in which case vesting is accelerated, the shares
underlying the warrant vested (and are therefore purchasable by
Raytheon) according to the following schedule:
13,401 shares in fiscal year 2001; 116,534 shares in
fiscal year 2002; 58,267 shares in fiscal year 2003 and
44,866 shares in fiscal year 2004. As of December 1,
2004, Raytheon has exercised its option to purchase all of the
components of the warrant. The sale of the warrant and the
shares underlying the warrant were made pursuant to an exemption
from registration pursuant to Section 4(2) under the
Securities Act of 1933, as amended.
In June 2003, we completed the private placement of senior
convertible notes due 2023, raising approximately
$97.1 million net proceeds. At maturity, the principal
amount of each note will be $1,000 and the aggregate amount due
will be $252 million. These notes are convertible into
shares of our common stock at a conversion rate of
39.727 shares per $1,000 in principal amount at maturity of
the notes, which equals an initial conversion price of
approximately $10.00 per share. This conversion rate is
subject to adjustment in certain circumstances. Holders of these
notes may convert their notes only if: (i) the sale price
of our common
23
stock exceeds 110% of the accreted conversion price for at least
20 trading days in the 30 consecutive trading days ending on the
last trading day of the preceding quarter; (ii) prior to
June 16, 2018, the trading price for these notes falls
below certain thresholds; (iii) these notes have been
called for redemption; or (iv) specified corporate
transactions occur. We may redeem these notes, in whole or in
part, beginning on June 16, 2008, at a redemption price
equal to the issue price, plus accrued original issue discount,
plus any accrued and unpaid cash interest. The holders of these
notes may require us to repurchase the notes on June 16,
2008 at a price of $397.27 per note plus accrued and unpaid
cash interest, if any, on June 16, 2013 at a price of
$540.41 per note plus accrued and unpaid cash interest, if
any, and on June 16, 2018 at a price of $735.13 per
note plus accrued and unpaid cash interest, if any.
In February 2004, we completed the private placement of senior
convertible notes due 2024, raising approximately
$97.0 million net proceeds. At maturity, the principal
amount of each note will be $1,000 and the aggregate amount due
will be $171.4 million. These notes are convertible into
shares of our common stock at a conversion rate of
40.3737 shares per $1,000 in principal amount at maturity
of the notes, which equals an initial conversion price of
approximately $14.45 per share. This conversion rate is
subject to adjustment in certain circumstances. Holders of these
notes may convert their notes only if: (i) the sale price
of our common stock exceeds 110% of the accreted conversion
price for at least 20 trading days in the 30 consecutive trading
days ending on the last trading day of the preceding quarter;
(ii) prior to February 10, 2019, the trading price for
these notes falls below certain thresholds; (iii) these
notes have been called for redemption; or (iv) specified
corporate transactions occur. We may redeem these notes, in
whole or in part, beginning on February 10, 2009, at a
redemption price equal to the issue price, plus accrued original
issue discount, plus any accrued and unpaid cash interest. The
holders of the notes may require us to repurchase the notes on
February 10, 2009 at a price of $583.4 per note plus
accrued and unpaid cash interest, if any, on February 10,
2014 at a price of $698.20 per note plus accrued and unpaid
cash interest, if any, and on February 10, 2019 at a price
of $835.58 per note plus accrued and unpaid cash interest,
if any.
The following table sets forth information required regarding
repurchases of common stock that we made during the three months
ended September 30, 2005:
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number | |
|
|
|
|
|
|
Total Number of | |
|
of Shares That | |
|
|
Total Number | |
|
Average Price | |
|
Shares Purchased as | |
|
May yet be | |
|
|
of Shares | |
|
Paid per | |
|
Part of Publicly | |
|
Purchased Under | |
Period |
|
Purchased | |
|
Share | |
|
Announced Plan(1) | |
|
the Plan | |
|
|
| |
|
| |
|
| |
|
| |
September 2005
|
|
|
115,123 |
|
|
$ |
7.91 |
|
|
|
911,132 |
|
|
|
1,382,400 |
|
|
|
(1) |
Under resolutions adopted and publicly announced in December
1999, January 2001, October 2002, October 2004 and April 2005,
our Board of Directors has authorized the repurchase, at
managements discretion, of up to an aggregate of
approximately 9.4 million shares of our common stock.
Subsequent to year end, the Companys Board of Directors
authorized the Company to purchase up to an additional
10 million shares of the Companys outstanding common
stock. |
24
|
|
Item 6. |
Selected Financial Data |
Selected Financial Data and Operating Statistics
The selected financial data as of and for each of the five years
ended September 30, 2005, are derived from the Consolidated
Financial Statements of the Company and its subsidiaries and
should be read in conjunction with the Consolidated Financial
Statements included elsewhere in this Form 10-K and the
related notes thereto and MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In thousands of dollars except per share data and average fare
amounts and as otherwise indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005(1) | |
|
2004(2) | |
|
2003(3) | |
|
2002(4) | |
|
2001(5) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$ |
1,136,268 |
|
|
$ |
896,812 |
|
|
$ |
599,990 |
|
|
$ |
496,783 |
|
|
$ |
523,378 |
|
|
Operating expenses
|
|
|
1,007,006 |
|
|
|
829,454 |
|
|
|
544,711 |
|
|
|
503,343 |
|
|
|
593,291 |
|
|
Operating income (loss)
|
|
|
129,262 |
|
|
|
67,358 |
|
|
|
55,279 |
|
|
|
(6,560 |
) |
|
|
(69,913 |
) |
|
Interest expense
|
|
|
44,466 |
|
|
|
25,063 |
|
|
|
12,664 |
|
|
|
7,983 |
|
|
|
14,419 |
|
|
Income (loss) before income taxes
|
|
|
92,166 |
|
|
|
45,181 |
|
|
|
41,020 |
|
|
|
(16,405 |
) |
|
|
(71,596 |
) |
|
Net income (loss)
|
|
|
56,867 |
|
|
|
26,282 |
|
|
|
25,305 |
|
|
|
(11,268 |
) |
|
|
(48,225 |
) |
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.95 |
|
|
$ |
0.83 |
|
|
$ |
0.80 |
|
|
$ |
(0.34 |
) |
|
$ |
(1.50 |
) |
|
Diluted
|
|
|
1.35 |
|
|
|
0.66 |
|
|
|
0.76 |
|
|
|
(0.34 |
) |
|
|
(1.50 |
) |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficit)
|
|
$ |
236,112 |
|
|
$ |
16,046 |
|
|
$ |
(57,380 |
) |
|
$ |
27,483 |
|
|
$ |
6,399 |
|
|
Total assets
|
|
|
1,167,671 |
|
|
|
1,121,537 |
|
|
|
716,936 |
|
|
|
399,161 |
|
|
|
496,616 |
|
|
Long-term debt, excluding current portion
|
|
|
636,582 |
|
|
|
550,613 |
|
|
|
199,023 |
|
|
|
110,210 |
|
|
|
118,492 |
|
|
Stockholders equity
|
|
|
176,670 |
|
|
|
128,904 |
|
|
|
111,973 |
|
|
|
86,758 |
|
|
|
102,742 |
|
Consolidated Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passengers carried
|
|
|
13,088,872 |
|
|
|
10,239,915 |
|
|
|
6,444,459 |
|
|
|
5,118,839 |
|
|
|
4,789,180 |
|
|
Revenue passenger miles (000)
|
|
|
6,185,864 |
|
|
|
5,035,165 |
|
|
|
2,814,480 |
|
|
|
1,986,164 |
|
|
|
1,796,058 |
|
|
Available seat miles (ASM) (000)
|
|
|
8,715,749 |
|
|
|
7,107,684 |
|
|
|
4,453,707 |
|
|
|
3,459,427 |
|
|
|
3,289,216 |
|
|
Block hours
|
|
|
571,339 |
|
|
|
513,881 |
|
|
|
393,335 |
|
|
|
352,323 |
|
|
|
383,310 |
|
|
Average passenger journey in miles
|
|
|
473 |
|
|
|
492 |
|
|
|
436 |
|
|
|
388 |
|
|
|
375 |
|
|
Average stage length in miles
|
|
|
389 |
|
|
|
390 |
|
|
|
337 |
|
|
|
298 |
|
|
|
268 |
|
|
Load factor
|
|
|
71.0 |
% |
|
|
70.8 |
% |
|
|
63.2 |
% |
|
|
57.4 |
% |
|
|
54.6 |
% |
|
Break-even passenger load factor
|
|
|
53.3 |
% |
|
|
53.6 |
% |
|
|
46.3 |
% |
|
|
60.1 |
% |
|
|
63.8 |
% |
|
Revenue per ASM in cents
|
|
|
13.0 |
|
|
|
12.6 |
|
|
|
13.4 |
|
|
|
14.4 |
|
|
|
15.9 |
|
|
Operating cost per ASM in cents
|
|
|
11.6 |
|
|
|
11.7 |
|
|
|
12.3 |
|
|
|
14.6 |
|
|
|
18.0 |
|
|
Average yield per revenue passenger mile in cents
|
|
|
18.2 |
|
|
|
17.8 |
|
|
|
21.3 |
|
|
|
25.0 |
|
|
|
28.8 |
|
|
Average fare
|
|
$ |
84.25 |
|
|
$ |
84.81 |
|
|
$ |
89.44 |
|
|
$ |
93.93 |
|
|
$ |
106.18 |
|
|
Aircraft in service
|
|
|
182 |
|
|
|
180 |
|
|
|
150 |
|
|
|
124 |
|
|
|
118 |
|
|
Cities served
|
|
|
176 |
|
|
|
181 |
|
|
|
163 |
|
|
|
147 |
|
|
|
153 |
|
|
Number of employees
|
|
|
4,600 |
|
|
|
5,000 |
|
|
|
3,600 |
|
|
|
3,100 |
|
|
|
2,820 |
|
|
|
(1) |
Net income in fiscal 2005 includes the net effect of reversing
certain impairment and restructuring charges of
$1.3 million (pretax). |
25
|
|
(2) |
Net income in fiscal 2004 includes the net effect of impairment
and restructuring charges of $11.9 million (pretax). |
|
(3) |
Net income in fiscal 2003 includes the effect of impairment and
restructuring charges of $1.1 million (pretax) and the
reversal of CCAir impairment and restructuring charges of
$12.0 million (pretax). |
|
(4) |
Net loss in fiscal 2002 includes the effect of impairment and
restructuring charges of $26.7 million (pretax). |
|
(5) |
Net loss in fiscal 2001 includes the effect of impairment and
restructuring charges of $80.9 million (pretax). |
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
The following discussion and analysis provides information which
management believes is relevant to an assessment and
understanding of the Companys results of operations and
financial condition. The discussion should be read in
conjunction with the Consolidated Financial Statements and the
related notes thereto, and the Selected Financial Data and
Operating Statistics contained elsewhere herein.
Mesa is a holding company whose principle subsidiaries operate
as regional air carriers providing scheduled passenger and
airfreight service. As of September 30, 2005, the Company
served 176 cities in 43 states, the District of
Columbia, Canada and Mexico and operated a fleet of 182 aircraft
with approximately 1,100 daily departures.
Approximately 99% of our consolidated passenger revenues for the
fiscal year ended September 30, 2005 were derived from
operations associated with code-share agreements. Our
subsidiaries have code-share agreements with America West,
Midwest Airlines, United Airlines and US Airways. The remaining
passenger revenues are derived from our independent operations.
In fiscal 2005, approximately 97% of our passenger revenue was
associated with revenue-guarantee flying. The America West
(regional jet and Dash-8), United (regional jet and Dash-8), and
US Airways (regional jet) code-share agreements are
revenue-guarantee flying agreements. Under the terms of these
flying agreements, the major carrier controls marketing,
scheduling, ticketing, pricing and seat inventories. Our role is
simply to operate our fleet in the safest and most reliable
manner in exchange for fees paid under a generally fixed payment
schedule. We received a guaranteed payment based upon a fixed
minimum monthly amount plus amounts related to departures and
block hours flown in addition to direct reimbursement of
expenses such as fuel, landing fees and insurance. Among other
advantages, revenue-guarantee arrangements reduce the
Companys exposure to fluctuations in passenger traffic and
fare levels, as well as fuel prices. In fiscal 2005,
approximately 95% of our fuel purchases were reimbursed under
revenue guarantee code-share agreements.
In fiscal 2005, approximately 3% of our passenger revenue was
associated with pro-rate and independent flying. The
US Airways (Beechcraft 1900D turboprop), Midwest Airlines
and America West (Beechcraft 1900D turboprop) code-share
agreements are pro-rate agreements, for which we received an
allocated portion of each passengers fare and we pay all
of the costs of transporting the passenger.
In addition to carrying passengers, we carry freight and express
packages on our passenger flights and have interline small cargo
freight agreements with many other carriers. We also have
contracts with the U.S. Postal Service for carriage of mail
to the cities we serve and occasionally operate charter flights
when our aircraft are not otherwise used for scheduled service.
In fiscal 2005, we continued our regional jet fleet growth by
growing from 129 regional jets at September 30, 2004 to 144
regional jets at September 30, 2005.
26
The Company also continued reducing the number of B1900 aircraft
in service by leasing some of these aircraft to other operators.
In October 2004, the Company entered into an agreement to lease
four of its Beechcraft 1900D aircraft operated by Air Midwest to
Gulfstream and in January 2005, we entered into another
agreement to lease ten Beechcraft 1900D aircraft to Big Sky. As
of September 30, 2005, we had leased nine aircraft to Big
Sky pursuant to this agreement and subleased the tenth aircraft
to Big Sky in the first quarter of fiscal 2006. As of
September 30, 2005, we owned 35 Beechcraft 1900D aircraft
and were operating 22 of these aircraft.
Aircraft in Operation at September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Aircraft |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
CRJ-200/100 Regional Jet
|
|
|
56 |
|
|
|
54 |
|
|
|
43 |
|
CRJ-700 Regional Jet
|
|
|
15 |
|
|
|
15 |
|
|
|
15 |
|
CRJ-900 Regional Jet
|
|
|
37 |
|
|
|
24 |
|
|
|
6 |
|
Embraer 145 Regional Jet
|
|
|
36 |
|
|
|
36 |
|
|
|
32 |
|
Beechcraft 1900D
|
|
|
22 |
|
|
|
35 |
|
|
|
42 |
|
Dash 8-200
|
|
|
16 |
|
|
|
16 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
182 |
|
|
|
180 |
|
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
In September 2005, the Company completed the permanent financing
of 15 CRJ-900 regional jets through a sale and leaseback
transaction. As a result of this transaction, which was
structured as an off-balance sheet operating lease,
approximately $400 million in both the asset and related
debt were removed from the Companys balance sheet.
In October 2004, the Company permanently financed five CRJ-900
aircraft with $118.0 million in debt. The debt bears
interest at the monthly LIBOR plus three percent and requires
monthly principal and interest payments. The manufacturer has
entered into an arrangement on the Companys behalf to
limit the Companys variable interest rate exposure with
respect to these aircraft. These aircraft had been originally
acquired with interim financing from the manufacturer.
In May 2005, the Company announced a code-share arrangement
between the Company, Freedom, and Delta that provides for
Freedom to become a Delta Connection partner. Under the terms of
the agreement, Freedom commenced operations in October 2005 and
will operate up to 30 50-seat regional jet aircraft on routes
throughout Deltas network. The arrangement required Mesa
to partially reimburse Deltas lease payments associated
with Deltas 30 Dornier Fairchild 328 jets throughout the
term of the agreement in exchange for performing flight services
under the agreement; however, the requirement to reimburse Delta
for certain lease costs was terminated when Delta filed for
bankruptcy protection. The code-share arrangement will terminate
with respect to each aircraft, on an aircraft-by-aircraft basis,
beginning in approximately twelve years. Delta may terminate the
code-share agreement at any time, with or without cause, upon
twelve months prior written notice following the sixth
anniversary of the in-service date of the 30th aircraft
added to the Delta Connection fleet. However, Delta has not yet
assumed our code-share agreement in its bankruptcy proceedings
and could choose to terminate our agreement at any time prior to
its emergence from bankruptcy.
In May 2005, the Company amended its code-sharing arrangement
with United to allow the Company to put up to an additional 30
50-seat regional jet aircraft into the United Express system and
extend the expiration dates under the existing code-share
agreement with respect to certain aircraft. In connection with
the amendment, the Company agreed to make three $10 million
payments to United as follows: i) $10 million in June
2005, ii) $10 million in October 2005, and iii)
$10 million in November 2005.
27
As of September 30, 2005, we operated 59 50-seat regional
jets for US Airways. As a result of US Airways
emergence from bankruptcy and their non-assumption of our
code-share agreement, we began working with US Airways to
provide for the transition of these 59 jets to our United and
Delta code-sharing arrangements. As of December 1, 2005, we
had transitioned 32 50-seat regional jets out of US Airways
system. We expect to complete the transition of aircraft from US
Airways to United in the first quarter of fiscal year 2006 and
to Delta in the second quarter of fiscal year 2006.
|
|
|
Rotable Spare Parts Maintenance Agreements |
In August 2005, the Company entered into a ten-year agreement
with AAR Corp. (the AAR Agreement), for the
management and repair of certain of the Companys CRJ-200,
-700, -900 and ERJ-145 aircraft rotable spare parts inventory.
Under the agreement, AAR will purchase certain existing rotable
spare parts inventory with $39.5 million in cash and
$21.5 million in notes receivable to be paid over the next
four years. Under the agreement, the Company is required to pay
AAR a monthly fee based upon flight hours for the management of,
access to and maintenance of the inventory. The agreement also
contains certain minimum monthly payments that Mesa must make to
AAR. At termination, the Company may elect to purchase the
covered inventory at fair market value, but is not contractually
obligated to do so. The AAR agreement is contingent upon the
Company terminating an agreement for the Companys CRJ-200
aircraft rotable spare parts inventory with GE Capital Aviation
Services (GECAS), and including these rotables in
the arrangement. The Company notified GECAS of its intent to
cancel that agreement in August and terminated the agreement in
November 2005.
The Company announced its intention to establish an independent
inter-island Hawaiian airline with service expected to begin in
early to mid calendar 2006. The airline will be conducted using
state-of-the-art new generation regional jets in a high quality,
high frequency service, connecting the islands of Hawaii with
service to the Hilo, Honolulu, Kona, Lihue and Maui (Kahului)
markets. The aircraft are expected to be incremental to
Mesas current fleet.
|
|
|
Summary of Financial Results |
Mesa Air Group recorded consolidated net income of
$56.9 million in fiscal 2005, representing diluted earnings
per share of $1.35. This compares to consolidated net income of
$26.3 million or $0.63 per share in fiscal 2004 and
consolidated net income of $25.3 million or $0.76 per
share in fiscal 2003.
The fiscal 2005 results included $1.7 million in net costs
to return four non-operating Embraer 120 aircraft to the
lessor, a $1.3 million gain from the reversal of reserves
due to the early return of two Shorts 360 aircraft to the
lessor, $1.0 million in proceeds from the settlement of a
dispute with a vendor and net investment income of
$2.3 million.
The fiscal 2004 results included $12.4 million in costs to
terminate the leases of seven Beechcraft 1900D aircraft,
one-time compensation payments of $3.4 million, merger
costs of $3.4 million related to our failed attempt to
merge with Atlantic Coast Airlines, the reversal of certain
restructuring liabilities of $0.5 million and net
investment income of $0.6 million.
The fiscal 2003 results included the reversal of
$12.0 million in restructuring liabilities related to the
closure of CCAir, $1.1 million in costs of returning
Beechcraft 1900D aircraft to the manufacturer, a
$4.1 million settlement with the DOT related to payments
made to the Company under the Air Transportation Safety and
System Stabilization Act, $1.0 million in TSA funds
collected on the Companys behalf by other airlines, a gain
on the involuntary conversion of an aircraft of
$1.3 million related to the crash of Flight 5481 and a net
investment loss of $0.7 million.
28
Results of Operations
The following tables set forth selected operating and financial
data of the Company for the years indicated below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data | |
|
|
Years Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Passengers
|
|
|
13,088,872 |
|
|
|
10,239,915 |
|
|
|
6,444,459 |
|
Available seat miles (ASM)(000s)
|
|
|
8,715,749 |
|
|
|
7,107,684 |
|
|
|
4,453,707 |
|
Revenue passenger miles (000s)
|
|
|
6,185,864 |
|
|
|
5,035,165 |
|
|
|
2,814,480 |
|
Load factor
|
|
|
71.0 |
% |
|
|
70.8 |
% |
|
|
63.2 |
% |
Yield per revenue passenger mile (cents)
|
|
|
18.2 |
|
|
|
17.8 |
|
|
|
21.3 |
|
Revenue per ASM (cents)
|
|
|
13.0 |
|
|
|
12.6 |
|
|
|
13.4 |
|
Operating cost per ASM (cents)
|
|
|
11.6 |
|
|
|
11.7 |
|
|
|
12.3 |
|
Average stage length (miles)
|
|
|
389 |
|
|
|
390 |
|
|
|
337 |
|
Number of operating aircraft in fleet
|
|
|
182 |
|
|
|
180 |
|
|
|
150 |
|
Gallons of fuel consumed
|
|
|
202,410,695 |
|
|
|
170,867,222 |
|
|
|
115,640,808 |
|
Block hours flown
|
|
|
571,339 |
|
|
|
513,881 |
|
|
|
393,335 |
|
Departures
|
|
|
391,086 |
|
|
|
353,083 |
|
|
|
296,921 |
|
Operating Expense Data
Years Ended
September 30, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
Cost | |
|
|
|
Cost | |
|
|
|
Cost | |
|
|
|
|
Percent | |
|
per | |
|
|
|
Percent | |
|
per | |
|
|
|
Percent | |
|
per | |
|
|
Amount | |
|
of Total | |
|
ASM | |
|
Amount | |
|
of Total | |
|
ASM | |
|
Amount | |
|
of Total | |
|
ASM | |
|
|
(000s) | |
|
Revenues | |
|
(cents) | |
|
(000s) | |
|
Revenues | |
|
(cents) | |
|
(000s) | |
|
Revenues | |
|
(cents) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Flight operations
|
|
$ |
319,271 |
|
|
|
28.1 |
% |
|
|
3.7 |
|
|
$ |
297,521 |
|
|
|
33.2 |
% |
|
|
4.2 |
|
|
$ |
212,080 |
|
|
|
35.3 |
% |
|
|
4.8 |
|
Fuel
|
|
|
304,256 |
|
|
|
26.8 |
% |
|
|
3.5 |
|
|
|
194,510 |
|
|
|
21.7 |
% |
|
|
2.7 |
|
|
|
113,370 |
|
|
|
18.9 |
% |
|
|
2.5 |
|
Maintenance
|
|
|
198,695 |
|
|
|
17.5 |
% |
|
|
2.3 |
|
|
|
163,463 |
|
|
|
18.2 |
% |
|
|
2.3 |
|
|
|
118,517 |
|
|
|
19.8 |
% |
|
|
2.6 |
|
Aircraft & traffic servicing
|
|
|
68,475 |
|
|
|
6.0 |
% |
|
|
0.8 |
|
|
|
66,223 |
|
|
|
7.4 |
% |
|
|
0.9 |
|
|
|
50,053 |
|
|
|
8.3 |
% |
|
|
1.1 |
|
Promotion & sales
|
|
|
3,906 |
|
|
|
0.3 |
% |
|
|
0.0 |
|
|
|
5,806 |
|
|
|
0.6 |
% |
|
|
0.1 |
|
|
|
7,966 |
|
|
|
1.3 |
% |
|
|
0.2 |
|
General & administrative
|
|
|
69,429 |
|
|
|
6.1 |
% |
|
|
0.8 |
|
|
|
62,035 |
|
|
|
6.9 |
% |
|
|
0.9 |
|
|
|
37,982 |
|
|
|
6.3 |
% |
|
|
0.9 |
|
Depreciation & amortization
|
|
|
44,231 |
|
|
|
3.9 |
% |
|
|
0.5 |
|
|
|
28,001 |
|
|
|
3.2 |
% |
|
|
0.4 |
|
|
|
15,700 |
|
|
|
2.6 |
% |
|
|
0.4 |
|
Impairment and restructuring charges (credits)
|
|
|
(1,257 |
) |
|
|
(0.1 |
)% |
|
|
(0.0 |
) |
|
|
11,895 |
|
|
|
1.3 |
% |
|
|
0.2 |
|
|
|
(10,957 |
) |
|
|
(1.7 |
)% |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,007,006 |
|
|
|
88.6 |
% |
|
|
11.6 |
|
|
|
829,454 |
|
|
|
92.5 |
% |
|
|
11.7 |
|
|
|
544,711 |
|
|
|
90.8 |
% |
|
|
12.3 |
|
Interest expense
|
|
|
44,466 |
|
|
|
3.9 |
% |
|
|
0.5 |
|
|
|
25,063 |
|
|
|
2.8 |
% |
|
|
0.4 |
|
|
|
12,664 |
|
|
|
2.1 |
% |
|
|
0.3 |
|
Other income (expense)
|
|
|
4,469 |
|
|
|
0.4 |
% |
|
|
0.1 |
|
|
|
1,723 |
|
|
|
0.0 |
% |
|
|
0.0 |
|
|
|
(2,758 |
) |
|
|
(0.5 |
)% |
|
|
(0.1 |
) |
Note: Numbers in the table above may not be recalculated due to
rounding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
Air Midwest/ | |
|
|
|
|
|
|
September 30, 2005 (000s) |
|
Mesa | |
|
Freedom | |
|
Other | |
|
Elimination | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Total operating revenues
|
|
$ |
1,064,093 |
|
|
$ |
62,681 |
|
|
$ |
297,764 |
|
|
$ |
(288,270 |
) |
|
$ |
1,136,268 |
|
Total operating expenses
|
|
|
925,783 |
|
|
|
70,163 |
|
|
|
255,909 |
|
|
|
(244,849 |
) |
|
|
1,007,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
138,310 |
|
|
|
(7,482 |
) |
|
|
41,855 |
|
|
|
(43,421 |
) |
|
|
129,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Mesa/ | |
|
Air | |
|
|
|
|
|
|
September 30, 2004 (000s) |
|
Freedom | |
|
Midwest | |
|
Other | |
|
Elimination | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Total operating revenues
|
|
$ |
807,736 |
|
|
$ |
81,714 |
|
|
$ |
365,858 |
|
|
$ |
(358,496 |
) |
|
$ |
896,812 |
|
Total operating expenses
|
|
|
725,975 |
|
|
|
91,349 |
|
|
|
313,243 |
|
|
|
(301,113 |
) |
|
|
829,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
81,761 |
|
|
|
(9,635 |
) |
|
|
52,615 |
|
|
|
(57,383 |
) |
|
|
67,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Mesa/ | |
|
Air | |
|
|
|
|
|
|
|
|
September 30, 2003 (000s) |
|
Freedom | |
|
Midwest | |
|
CCAir | |
|
Other | |
|
Elimination | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total operating revenues
|
|
$ |
507,555 |
|
|
$ |
86,142 |
|
|
$ |
1,254 |
|
|
$ |
175,956 |
|
|
$ |
(170,917 |
) |
|
$ |
599,990 |
|
Total operating expenses
|
|
|
462,018 |
|
|
|
95,533 |
|
|
|
(10,556 |
) |
|
|
131,922 |
|
|
|
(134,206 |
) |
|
|
544,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
45,537 |
|
|
|
(9,391 |
) |
|
|
11,810 |
|
|
|
44,034 |
|
|
|
(36,711 |
) |
|
|
55,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of the Companys Beechcraft 1900D aircraft are owned by
Mesa Airlines. As such, the associated aircraft and debt are
recorded on the separate company financial statements of Mesa
Airlines. These aircraft are operated by Air Midwest, and as a
result, Mesa charges Air Midwest rent to offset its depreciation
and interest cost. Prior impairment charges related to these
aircraft are recorded on the separate company financial
statements of Mesa Airlines.
Fiscal 2005 Versus Fiscal 2004
In fiscal 2005, operating revenue increased by
$239.5 million, or 26.7%, from $896.8 million to
$1,136.3 million. The increase in revenue is primarily
attributable to a $256.9 million increase in revenue
associated with the operation of 15 additional regional jets
flown by Mesa compared to 2004. Offsetting this increase was a
decrease in passenger revenue of approximately
$20.3 million at Air Midwest and Freedom. The decrease in
passenger revenue at Air Midwest and Freedom was primarily due
to reductions in capacity as the Company has leased nine B1900
aircraft to Big Sky and four B1900 aircraft to Great Lakes
during fiscal 2005. However, EAS subsidies received by Air
Midwest increased by $1.3 million as a result of additional
markets served and higher subsidy rates on existing markets.
Operating Expenses
In fiscal 2005, flight operations expense increased
$21.8 million or 7.3%, to $319.3 million from
$297.5 million for fiscal 2004. On an ASM basis, flight
operations expense decreased 11.9% to 3.7 cents per ASM in
fiscal 2005 from 4.2 cents per ASM in fiscal 2004. This increase
in total expense is primarily attributed to a $15.8 million
increase in aircraft lease costs as a result of placing
additional regional jets into service and an increase of
$5.0 million in pilot and flight attendant wages due to
growth in flight operations. The decrease on an ASM basis is due
to the addition of larger regional jets at Mesa and the
reduction in turboprop aircraft flown by Air Midwest.
In fiscal 2005, fuel expense increased $109.7 million or
56.4%, to $304.3 million from $194.5 million for
fiscal 2004. On an ASM basis, fuel expense increased 29.6% to
3.5 cents per ASM in fiscal 2005 from 2.7 cents per ASM in
fiscal 2004. Into-plane fuel cost increased 32% per gallon,
resulting in a $62.3 million unfavorable price variance and
consumption increased 18% resulting in a $47.4 million
unfavorable volume variance. The increase in volume was due to
the additional regional jets added to the fleet. In fiscal 2005,
approximately 95% of our fuel costs were reimbursed by our
code-share partners.
30
In fiscal 2005, maintenance expense increased $35.2 million
or 21.6%, to $198.7 million from $163.5 million for
fiscal 2004. On an ASM basis, maintenance expense remained flat
at 2.3 cents for fiscal 2005 and fiscal 2004. The increase is
due to $5.5 million in additional aircraft heavy
maintenance expense, a $6.6 million increase in component
and rent expense, a $10.1 million increase in engine
maintenance, and a $13.5 million increase in materials,
repairs and servicing expenses. The increase is due to the
increased fleet size and age of the Companys aircraft.
|
|
|
Aircraft and Traffic Servicing |
In fiscal 2005, aircraft and traffic servicing expense increased
by $2.3 million or 3.4%, to $68.5 million from
$66.2 million for fiscal 2004. On an ASM basis, aircraft
and traffic servicing expense decreased 11.1% to 0.8 cents per
ASM in fiscal 2005 from 0.9 cents per ASM in fiscal 2004. The
increase in expense is primarily related to an 11% increase in
departures. The decrease on an ASM basis is due to the addition
of larger regional jets at Mesa and the reduction in turboprop
aircraft at Air Midwest.
In fiscal 2005, promotion and sales expense decreased
$1.9 million or 32.7%, to $3.9 million from
$5.8 million for fiscal 2004. On an ASM basis, promotion
and sales expense decreased 100% to 0.0 cents per ASM in fiscal
2005 from 0.1 cents per ASM in fiscal 2004. The decrease in
expense is due to a decline in booking and franchise fees paid
by Air Midwest under our pro-rate agreements with our code-share
partners, caused by a decline in passengers carried under these
agreements. We do not pay these fees under our regional jet
revenue-guarantee contracts.
|
|
|
General and Administrative |
In fiscal 2005, general and administrative expense increased
$7.4 million or 11.9%, to $69.4 million from
$62.0 million for fiscal 2004. On an ASM basis, general and
administrative expense decreased 11.1% to 0.8 cents per ASM
in fiscal 2005 from 0.9 cents per ASM in fiscal 2004. The
increase in expense includes a $6.3 million increase in
property taxes associated with increases in our fleet and a
$2.6 million increase in bad debt expense as a result of
increasing the Companys allowance for doubtful receivables
related to code share partners in bankruptcy. Offsetting these
increases was a $1.6 million decrease in health insurance
costs related to the timing and severity of claims.
|
|
|
Depreciation and Amortization |
In fiscal 2005, depreciation and amortization expense increased
$16.2 million or 58.0%, to $44.2 million from
$28.0 million for fiscal 2004. On an ASM basis,
depreciation and amortization expense increased 25.0% to 0.5
cents per ASM in fiscal 2005 from 0.4 cents per ASM in fiscal
2004. The increase in expense is primarily due to the purchase
of 13 regional jets in 2005.
|
|
|
Impairment and Restructuring Charges |
In fiscal 2005, we reversed $1.3 million in reserves for
lease and lease return costs related to two Shorts 360 aircraft
the Company returned to the lessor in January 2005.
In fiscal 2004, we recognized an impairment charge of
$12.4 million related to the early termination of leases on
seven B1900D aircraft. We negotiated the terms of the early
return with the majority of the aircraft lessors and took a
charge that included $2.4 million for the present value of
future lease payments, $2.4 million for the negotiated
settlement of return conditions, $1.2 million for the
cancellation of maintenance agreements, $0.8 million to
reduce maintenance deposits to net realizable value and
$4.5 million to reduce the value of rotable and expendable
inventory to fair value less costs to sell. We purchased two of
the aircraft from the lessors, which were subsequently scrapped.
As a result, we also took a $1.1 million impairment charge
for
31
the difference between the buy out of the lease and the
subsequent sale of the aircraft. These charges were offset by
the reversal of $0.5 million of prior year restructuring
charges.
In fiscal 2005, interest expense increased $19.4 million or
77.4%, to $44.5 million from $25.1 million for fiscal
2004. The increase in interest expense is primarily comprised of
an increase of $14.6 million on interim and permanently
financed aircraft debt, $1.2 million on the senior
convertible notes that were issued in February 2004,
$1.2 million on the inventory financing arrangement with
GECAS and $1.1 million on the B1900 aircraft debt.
In fiscal 2005, other income increased $2.7 million, or
159.4%, to $4.5 million from $1.7 million for fiscal
2004. In fiscal 2005, other income is primarily comprised of net
investment income of $2.3 million from the Companys
portfolio of aviation related securities, $2.9 million of
dividend income on marketable securities, $1.0 million
income from a settlement of a dispute with a vendor and
$1.7 million in net costs to return four non-operating
EMB120 aircraft to the lessor.
In fiscal 2004, other income was primarily comprised of
investment income of $0.6 million related to the
Companys portfolio of aviation related securities.
In fiscal 2005, the Companys effective income tax rate was
38.3% as compared to 41.8% in fiscal 2004. The decrease in rate
from fiscal 2004 is due to certain payments to top executives in
the prior year, a portion of which were not deductible for
income taxes.
Fiscal 2004 Versus Fiscal 2003
In fiscal 2004, operating revenue increased by
$296.8 million, or 49.5%, from $600.0 million to
$896.8 million. The increase in revenue is primarily
attributable to a $300.2 million increase in revenue
associated with the operation of 39 additional regional jets
flown by Mesa and Freedom compared to 2003. Offsetting this
increase was a decrease in passenger revenue of approximately
$7.8 million at Air Midwest. The decrease in passenger
revenue at Air Midwest was primarily due to a decline in
passengers carried as a result of parking seven leased aircraft
in the second quarter (the leases on these aircraft were
subsequently early terminated, with five aircraft returned to
the lessor and two purchased and resold). However, EAS subsidies
received by Air Midwest increased by $3.6 million as a
result of additional markets served and higher subsidy rates on
existing markets.
Operating Expenses
In fiscal 2004, flight operations expense increased
$85.4 million or 40.3%, to $297.5 million from
$212.1 million for fiscal 2003. On an ASM basis, flight
operations expense decreased 12.5% to 4.2 cents per ASM in
fiscal 2004 from 4.8 cents per ASM in fiscal 2003. The increase
in expense is consistent with the increased capacity from the
regional jets added to Mesa and Freedoms fleet during this
period. The decrease on an ASM basis is due to the addition of
larger regional jets at Mesa and Freedom and the reduction in
turboprop aircraft at Air Midwest.
In fiscal 2004, fuel expense increased $81.1 million or
71.6%, to $194.5 million from $113.4 million for
fiscal 2003. On an ASM basis, fuel expense increased 8.0% to 2.7
cents per ASM in fiscal 2004 from 2.5 cents
32
per ASM in fiscal 2003. Into-plane fuel cost increased
16% per gallon, resulting in a $26.2 million
unfavorable price variance and consumption increased 48%
resulting in a $54.1 million unfavorable volume variance
(excluding fuel used in other operations). The increase in
volume was due to the additional regional jets added to the
fleet. In fiscal 2004 approximately 92% of our fuel costs were
reimbursed by our code-share partners.
In fiscal 2004, maintenance expense increased $44.9 million
or 37.9%, to $163.5 million from $118.5 million for
fiscal 2003. On an ASM basis, maintenance expense decreased
11.5% to 2.3 cents per ASM in fiscal 2004 from 2.6 cents per ASM
in fiscal 2003. Mesa and Freedoms maintenance expense
increased $40.3 million primarily as a result of increases
in the number of aircraft in their fleet, repair costs on
certain rotable parts, headcount and engine overhaul expenses.
Maintenance expenses in the Other segment increased
$6.8 million due to increases in rotable repair expenses
and certain purchasing related administrative expenses at our
procurement company. These increases were offset by a
$1.3 million decrease in maintenance expenses at CCAIR, due
to its dissolution, and a $0.9 million decrease at Air
Midwest as a result of reductions in its fleet. The decrease on
an ASM basis is due to the lower maintenance costs associated
with adding new jets into our fleet.
|
|
|
Aircraft and Traffic Servicing |
In fiscal 2004, aircraft and traffic servicing expense increased
by $16.2 million or 32.3%, to $66.2 million from
$50.1 million for fiscal 2003. On an ASM basis, aircraft
and traffic servicing expense decreased 18.2% to 0.9 cents per
ASM in fiscal 2004 from 1.1 cents per ASM in fiscal 2003. The
increase in expense is primarily related to a 19% increase in
regional jet departures. The decrease on an ASM basis is due to
the efficiencies attained by adding additional regional jets at
Mesa and Freedom and the reduction in turboprop aircraft at Air
Midwest.
In fiscal 2004, promotion and sales expense decreased
$2.2 million or 27.1%, to $5.8 million from
$8.0 million for fiscal 2003. On an ASM basis, promotion
and sales expense decreased 50.0% to 0.1 cents per ASM in fiscal
2004 from 0.2 cents per ASM in fiscal 2003. The decrease in
expense is due to a decline in booking and franchise fees paid
by Air Midwest under the Companys pro-rate agreements with
its code-share partners, caused by a decline in passengers
carried under these agreements. The Company does not pay these
fees under its regional jet revenue-guarantee contracts.
|
|
|
General and Administrative |
In fiscal 2004, general and administrative expense increased
$24.1 million or 63.3%, to $62.0 million from
$38.0 million for fiscal 2003. On an ASM basis, general and
administrative expense remained the same at 0.9 cents per
ASM in fiscal 2004 and 2003. The increase in expense includes
$3.4 million in costs associated with the failed merger
with Atlantic Coast Airlines, Inc., $3.4 million in
executive compensation as a result of the restructuring of
employment contracts of top executives, a $6.1 million
increase in bad debt expense as the Company increased its
allowance for doubtful accounts by $4.3 million in fiscal
2004 (we reduced our allowance by $1.8 million in fiscal
2003), a $3.6 million increase in passenger liability
insurance associated with increases in our fleet, a
$1.2 million increase in property taxes associated with
increases in our fleet, a $3.6 million increase in
administrative wages and benefits and a $2.2 million
increase in health insurance costs as a result of increased
headcount.
|
|
|
Depreciation and Amortization |
In fiscal 2004, depreciation and amortization expense increased
$12.3 million or 78.4%, to $28.0 million from
$15.7 million for fiscal 2003. On an ASM basis,
depreciation and amortization expense remained the same at 0.4
cents per ASM in fiscal 2004 and 2003. The increase in expense
is primarily due to the purchase of 11 regional jets in 2004,
the acquisition of two CRJ200 aircraft acquired as part of the
purchase of Midway
33
assets, depreciation of aircraft on interim financing and an
increase in rotable aircraft inventory at Mesa and Freedom.
|
|
|
Impairment and Restructuring Charges |
In fiscal 2004, we recognized an impairment charge of
$12.4 million related to the early termination of leases on
seven B1900D aircraft. We negotiated the terms of the early
return with the majority of the aircraft lessors and took a
charge that included $2.4 million for the present value of
future lease payments, $2.4 million for the negotiated
settlement of return conditions, $1.2 million for the
cancellation of maintenance agreements, $0.8 million to
reduce maintenance deposits to net realizable value,
$4.5 million to reduce the value of rotable and expendable
inventory to fair value less costs to sell. We were forced to
purchase two of the aircraft from the lessors, which were
subsequently scrapped. As a result, we also took a
$1.1 million impairment charge for the difference between
the buy out of the lease and the subsequent sale of the
aircraft. These charges were offset by the reversal of
$0.4 million of prior year restructuring charges.
In fiscal 2003, we recognized an additional impairment charge of
$1.1 million related to the costs of returning Beechcraft
1900D aircraft to the manufacturer. We also reversed
$7.4 million in restructuring charges for future aircraft
leases related to CCAir aircraft that were returned to the
lessor and $4.6 million in aircraft related return costs
for these same aircraft.
In fiscal 2004, interest expense increased $12.4 million or
97.9%, to $25.1 million from $12.7 million for fiscal
2003. The increase in interest expense is primarily comprised of
$8.6 million in interest on the senior convertible notes
and an increase of $4.5 million in interest on interim and
permanently financed aircraft debt. These increases were offset
by a decrease of $1.3 million in interest expense on our
B1900 debt due to aircraft returns and principal payments.
In fiscal 2004, other income (expense) increased
$4.5 million or 162%, to income of $1.7 million from
expense of $2.8 million for fiscal 2003. In fiscal 2004,
other income is primarily comprised of investment income of
$0.6 million related to the Companys portfolio of
aviation related securities.
In fiscal 2003, other expense is primarily comprised of the
settlement with the DOT of $4.1 million related to payments
made to us under the Air Transportation Safety and System
Stabilization Act and $0.7 million in net investment
related losses on our portfolio of aviation related securities.
These expenses were offset by the gain on an involuntary
conversion of an aircraft of $1.3 million related to the
crash of Flight 5481 as well as $1.0 million for TSA funds
collected on our behalf by US Airways and Frontier.
Amounts included in minority interest in fiscal 2003 reflect the
after-tax portion of earnings of UFLY, LLC that are applicable
to the minority interest partners. UFLY was dissolved in fiscal
2003.
In fiscal 2004, the Companys effective income tax rate was
41.8% as compared to 38.3% in fiscal 2003. The increase in rate
from fiscal 2003 is due to certain payments to top executives in
the current year, a portion of which were not deductible for
income taxes.
Liquidity and Capital Resources
At September 30, 2005, we had cash, cash equivalents, and
marketable securities (including restricted cash and
held-to-maturity securities) of $280.4 million, compared to
$241.1 million at September 30, 2004. In
34
fiscal 2005, we permanently financed 15 CRJ-900 aircraft through
a sale/leaseback transaction, which resulted in proceeds on sale
of $389.2 million. Proceeds from this transaction were used
to retire $397.4 million in interim aircraft debt. We also
improved our cash position through operations and receipt of a
$22.8 million deposit from the pending sale of our existing
regional jet spare parts inventory.
Uses of cash included capital expenditures of
$42.0 million, which was primarily attributable to aircraft
modifications and provisioning of rotable inventory to support
the additional jets, and the purchase of $11.2 million of
the Companys outstanding common stock.
Our cash and cash equivalents and marketable securities are
intended to be used for working capital, capital expenditures,
acquisitions, and to fund our obligations with respect to
regional jet deliveries.
As of September 30, 2005, we had receivables of
approximately $29.0 million (net of an allowance for
doubtful accounts of $8.9 million), compared to receivables
of approximately $30.7 million (net of an allowance for
doubtful accounts of $7.1 million) as of September 30,
2004. The amounts include receivables due from our code-share
partners, credits due from the aircraft manufacturer and
passenger ticket receivables due through the Airline Clearing
House. Accounts receivable from our code-share partners was
35.3% of total gross accounts receivable at September 30,
2005.
We have significant long-term lease obligations primarily
relating to our aircraft fleet including 15 CRJ900 aircraft
that were permanently financed as operating leases in September
2005. The leases are classified as operating leases and are
therefore excluded from our consolidated balance sheets. At
September 30, 2005, we leased 142 aircraft with remaining
lease terms ranging from 1 to 18.5 years. Future minimum
lease payments due under all long-term operating leases were
approximately $2.5 billion at September 30, 2005.
|
|
|
3.625% Senior Convertible Notes due 2024 |
In February 2004, we completed the private placement of senior
convertible notes due 2024, which resulted in gross proceeds of
$100.0 million ($97.0 million net). Cash interest is
payable on the notes at the rate of 2.115% per year on the
aggregate amount due at maturity, payable semiannually in
arrears on February 10 and August 10 of each year,
beginning August 10, 2004, until February 10, 2009.
After that date, we will not pay cash interest on the notes
prior to maturity, and the notes will begin accruing original
issue discount at a rate of 3.625% until maturity. On
February 10, 2024, the maturity date of the notes, the
principal amount of each note will be $1,000. The aggregate
amount due at maturity, including interest accrued from
February 10, 2009, will be $171.4 million. Each of our
wholly owned domestic subsidiaries guarantees the notes on an
unsecured senior basis. The notes and the note guarantees are
senior unsecured obligations and rank equally with our existing
and future senior unsecured indebtedness. The notes and the note
guarantees are junior to the secured obligations of our wholly
owned subsidiaries to the extent of the collateral pledged.
The notes are convertible into shares of our common stock at a
conversion rate of 40.3737 shares per $1,000 in principal
amount at maturity of the notes. This conversion rate is subject
to adjustment in certain circumstances. Holders of the notes may
convert their notes only if: (i) after March 31, 2004,
the sale price of our common stock exceeds 110% of the accreted
conversion price for at least 20 trading days in the
30 consecutive trading days ending on the last trading day
of the preceding quarter; (ii) on or prior to
February 10, 2019, the trading price for the notes falls
below certain thresholds; (iii) the notes have been called
for redemption; or (iv) specified corporate transactions
occur. We may redeem the notes, in whole or in part, beginning
on February 10, 2009, at a redemption price equal to the
issue price, plus accrued original issue discount, plus any
accrued and unpaid cash interest. The holders of the notes may
require us to repurchase the notes on February 10, 2009 at
a price of $583.40 per note plus accrued and unpaid cash
interest, if any, on February 10, 2014 at a price of
$698.20 per note plus accrued and unpaid cash interest, if
any, and on February 10, 2019 at a price of
$835.58 per note plus accrued and unpaid cash interest, if
any.
35
|
|
|
6.25% Senior Convertible Notes Due 2023 |
In June 2003, we completed the private placement of senior
convertible notes due 2023, which resulted in gross proceeds of
$100.1 million ($96.9 million net). Cash interest is
payable on the notes at the rate of 2.4829% per year on the
aggregate amount due at maturity, payable semiannually in
arrears on June 16 and December 16 of each year, beginning
December 16, 2003, until June 16, 2008. After that
date, we will not pay cash interest on the notes prior to
maturity, and the notes will begin accruing original issue
discount at a rate of 6.25% until maturity. On June 16,
2023, the maturity date of the notes, the principal amount of
each note will be $1,000. The aggregate amount due at maturity,
including interest accrued from June 16, 2008, will be
$252 million. Each of our wholly owned domestic
subsidiaries guarantees the notes on an unsecured senior basis.
The notes and the note guarantees are senior unsecured
obligations and rank equally with our existing and future senior
unsecured indebtedness. The notes and the note guarantees are
junior to the secured obligations of our wholly owned
subsidiaries to the extent of the collateral pledged.
The notes are convertible into shares of our common stock at a
conversion rate of 39.727 shares per $1,000 in principal
amount at maturity of the notes. This conversion rate is subject
to adjustment in certain circumstances. Holders of the notes may
convert their notes only if: (i) the sale price of our
common stock exceeds 110% of the accreted conversion price for
at least 20 trading days in the 30 consecutive trading days
ending on the last trading day of the preceding quarter;
(ii) prior to June 16, 2018, the trading price for the
notes falls below certain thresholds; (iii) the notes have
been called for redemption; or (iv) specified corporate
transactions occur. The Company may redeem the notes, in whole
or in part, beginning on June 16, 2008, at a redemption
price equal to the issue price, plus accrued original issue
discount, plus any accrued and unpaid cash interest. The holders
of the notes may require the Company to repurchase the notes on
June 16, 2008 at a price of $397.27 per note plus
accrued and unpaid cash interest, if any, on June 16, 2013
at a price of $540.41 per note plus accrued and unpaid cash
interest, if any, and on June 16, 2018 at a price of
$735.13 per note plus accrued and unpaid cash interest, if
any.
|
|
|
Interim and Permanent Aircraft Financing
Arrangements |
At September 30, 2005, we had an aggregate of
$54.6 million in notes payable to an aircraft manufacturer
for delivered aircraft on interim financing. Under interim
financing arrangements, we take delivery and title of the
aircraft prior to securing permanent financing and the
acquisition of the aircraft is accounted for as a purchase with
debt financing. Accordingly, we reflect the aircraft and debt
under interim financing on our balance sheet during the interim
financing period. After taking delivery of the aircraft, it is
our practice and our intention to subsequently enter into a sale
and leaseback transaction with an independent third-party
lessor. Upon permanent financing, the proceeds from the sale and
leaseback transaction are used to retire the notes payable to
the manufacturer. Any gain recognized on the sale and leaseback
transaction is deferred and amortized over the life of the
lease. At September 30, 2005, we had two aircraft on
interim financing with the manufacturer. These interim
financings agreements have a term of six months and provide for
monthly interest only payments at LIBOR plus three percent. The
current interim financing agreement with the manufacturer
provides for us to have a maximum of 15 aircraft on interim
financing at any one time. Our ability to obtain additional
interim financing is contingent upon obtaining permanent
financing for the aircraft already delivered. There are no
assurances that we will be able to obtain permanent financing
for future aircraft deliveries.
|
|
|
Other Indebtedness and Obligations |
In October 2004, the Company permanently financed five CRJ-900
aircraft with $118.0 million in debt. The debt bears
interest at the monthly LIBOR plus three percent and requires
monthly principal and interest payments.
In January and March 2004, the Company permanently financed five
CRJ-700 and six CRJ-900 aircraft with $254.7 million in
debt. The debt bears interest at the monthly LIBOR plus three
percent and requires monthly principal and interest payments.
36
In December 2003, we assumed $24.1 million of debt in
connection with our purchase of two CRJ-200 aircraft in the
Midway Chapter 7 bankruptcy proceedings. The debt, due in
2013, bears interest at the rate of 7% per annum through
2008, converting to 12.5% thereafter, with principal and
interest due monthly.
In August 2005, the Company entered into a ten-year agreement
with AAR Corp. (the AAR Agreement), for the
management and repair of certain of the Companys CRJ-200,
-700, -900 and ERJ-145 aircraft rotable spare parts inventory.
Under the agreement, AAR will purchase certain existing spare
parts inventory for $39.5 million in cash and
$21.5 million in notes receivable to be paid over the next
four years. Under the agreement, the Company is required to pay
AAR a monthly fee based upon flight hours for access to and
maintenance of the inventory. The agreement also contains
certain minimum monthly payments that Mesa must make to AAR. At
termination, the Company may elect to purchase the covered
inventory at fair value, but is not contractually obligated to
do so. The AAR agreement is contingent upon the Company
terminating an agreement for the Companys CRJ-200 aircraft
rotable spare parts inventory with GE Capital Aviation Services
(GECAS), and including these rotables in the
arrangement. The amount included in the consolidated balance
sheet at September 30, 2005, represents deposits received
from AAR pending the termination of the GECAS agreement. The
Company notified GECAS of its intent to cancel that agreement in
August and terminated the agreement in November 2005 (see
note 8).
In June 2004, the Company entered into an agreement with
LogisTechs, Inc., a wholly-owned subsidiary of GECAS, whereby
GECAS provided financing to the Company and the Company agreed
to pay GECAS for the management and repair of certain of the
Companys CRJ-200 aircraft rotable spare parts inventory.
Under the agreement, the Company received $15 million in
cash and a $6 million promissory note receivable from
GECAS. In August 2005, Mesa notified GECAS of its intent to
terminate the agreement in order to enter into the AAR
agreement, and as such, the Company is required to repay the
19.7 million of outstanding financing at September 30,
2005. The agreement was terminated and this amount was repaid in
November 2005.
As of September 30, 2005, we had $8.8 million in
restricted cash on deposit collateralizing various letters of
credit outstanding and the ACH funding of our payroll. We have
entered into a $9.5 million letter of credit facility with
a financial institution, of which $3.8 million is required
to be secured.
Contractual Obligations
As of September 30, 2005, we had $664.4 million of
long-term debt (including current maturities). This amount
consisted of $460.6 million in notes payable related to
owned aircraft, $200.1 in aggregate principal amount of our
senior convertible notes due 2023 and 2024 and $3.7 million
in other miscellaneous debt.
37
The following table sets forth our cash obligations as of
September 30, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period | |
|
|
| |
Obligations |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable related to CRJ700s and 900s(2)
|
|
$ |
39,273 |
|
|
$ |
38,991 |
|
|
$ |
38,707 |
|
|
$ |
38,423 |
|
|
$ |
38,102 |
|
|
$ |
349,655 |
|
|
$ |
543,151 |
|
|
2003 senior convertible debt notes (assuming no conversions)
|
|
|
6,257 |
|
|
|
6,257 |
|
|
|
6,257 |
|
|
|
|
|
|
|
|
|
|
|
252,000 |
|
|
|
270,771 |
|
|
2004 senior convertible debt notes (assuming no conversions)
|
|
|
3,625 |
|
|
|
3,625 |
|
|
|
3,625 |
|
|
|
1,813 |
|
|
|
|
|
|
|
171,409 |
|
|
|
184,097 |
|
|
Notes payable related to B1900Ds
|
|
|
10,692 |
|
|
|
10,692 |
|
|
|
10,692 |
|
|
|
10,692 |
|
|
|
10,692 |
|
|
|
62,287 |
|
|
|
115,747 |
|
|
Note payable related to CRJ200s(2)
|
|
|
3,000 |
|
|
|
3,000 |
|
|
|
3,000 |
|
|
|
3,000 |
|
|
|
3,000 |
|
|
|
20,866 |
|
|
|
35,866 |
|
|
Note payable to manufacturer
|
|
|
941 |
|
|
|
1,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,764 |
|
|
Mortgage note payable
|
|
|
41 |
|
|
|
109 |
|
|
|
109 |
|
|
|
109 |
|
|
|
109 |
|
|
|
1,037 |
|
|
|
1,514 |
|
|
Other
|
|
|
61 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
63,890 |
|
|
|
64,522 |
|
|
|
62,415 |
|
|
|
54,062 |
|
|
|
51,928 |
|
|
|
857,279 |
|
|
|
1,154,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to manufacturer interim financing(1)(2)
|
|
|
3,876 |
|
|
|
4,105 |
|
|
|
4,105 |
|
|
|
4,105 |
|
|
|
4,105 |
|
|
|
61,812 |
|
|
|
82,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments under operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash aircraft rental payments(2)
|
|
|
245,708 |
|
|
|
228,285 |
|
|
|
205,173 |
|
|
|
185,729 |
|
|
|
184,041 |
|
|
|
1,433,376 |
|
|
|
2,482,312 |
|
|
Lease payments on equipment and operating facilities
|
|
|
1,578 |
|
|
|
1,351 |
|
|
|
1,392 |
|
|
|
961 |
|
|
|
947 |
|
|
|
2,154 |
|
|
|
8,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease payments
|
|
|
247,286 |
|
|
|
229,636 |
|
|
|
206,565 |
|
|
|
186,690 |
|
|
|
184,988 |
|
|
|
1,435,530 |
|
|
|
2,490,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future aircraft acquisition costs(3)
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,000 |
|
|
|
|
|
|
|
200,000 |
|
|
Rotable inventory financing commitments(4)
|
|
|
18,379 |
|
|
|
587 |
|
|
|
563 |
|
|
|
540 |
|
|
|
2,241 |
|
|
|
|
|
|
|
22,310 |
|
|
Minimum payments due under rotable spare parts maintenance
agreement
|
|
|
19,129 |
|
|
|
22,787 |
|
|
|
26,158 |
|
|
|
28,922 |
|
|
|
31,969 |
|
|
|
172,295 |
|
|
|
301,260 |
|
|
Contract initiation costs(5)
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
397,560 |
|
|
$ |
321,637 |
|
|
$ |
299,806 |
|
|
$ |
274,319 |
|
|
$ |
450,231 |
|
|
$ |
2,526,916 |
|
|
$ |
4,270,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents the principal and interest on notes payable to the
manufacturer for interim financed aircraft. These notes payable
have a six-month maturity. For purposes of this schedule, we
have assumed that aircraft on interim financing are converted to
permanent financing as debt upon the expiration of the notes
with future maturities included on this line. |
|
(2) |
Aircraft ownership costs, including depreciation and interest
expense on owned aircraft and rental payments on operating
leased aircraft, of aircraft flown pursuant to our
guaranteed-revenue agreements are reimbursed by the applicable
code-share partner. |
|
(3) |
Represents the estimated cost of commitments to acquire CRJ-900
aircraft. |
|
(4) |
Represents the principal and interest related to financed
rotable inventory and includes amounts due as a result of the
termination of the GECAS agreement. |
|
(5) |
Represents amounts due code share partners for contract
modification payments. |
In January 1997, we entered into a 10-year engine maintenance
contract with General Electric Aircraft Engines (GE)
for its CRJ-200 aircraft. The agreement was subsequently amended
in the first quarter of fiscal 2003. The amended contract
requires a monthly payment based upon the prior months
flight hours
38
incurred by the covered engines. The hourly rate increases over
time based upon the engine overhaul costs that are expected to
be incurred in that year and is subject to escalation based on
changes in certain price indices. The contract also provides for
a fixed number of engine overhauls per year. To the extent that
the number of actual overhauls is less than the fixed number, GE
is required to issue a credit to us for the number of events
less than the fixed number multiplied by an agreed upon price.
To the extent that the number of actual overhauls is greater
than the fixed number, we are required to pay GE for the number
of events greater than the fixed number multiplied by the same
agreed upon price.
In April 1997, we entered into a 10-year engine maintenance
contract with Pratt & Whitney Canada Corp.
(PWC) for our Dash 8-200 aircraft. The contract
requires us to pay PWC for the engine overhaul upon completion
of the maintenance based upon a fixed dollar amount per flight
hour. The rate under the contract is subject to escalation based
on changes in certain price indices.
In April 2000, we entered into a 10-year engine maintenance
contract with Rolls-Royce Allison (Rolls-Royce) for
its ERJ aircraft. The contract requires us to pay Rolls-Royce
for the engine overhaul upon completion of the maintenance based
upon a fixed dollar amount per flight hour. The rate per flight
hour is based upon certain operational assumptions and may vary
if the engines are operated differently than these assumptions.
The rate is also subject to escalation based on changes in
certain price indices. The agreement with Rolls-Royce also
contains a termination clause and look back provision to provide
for any shortfall between the cost of maintenance incurred by
the provider and the amount paid up to the termination date by
us and includes a 15% penalty on such amount. We do not
anticipate an early termination under the contract.
In May 2002, we entered into a new six-year fleet management
program with PWC to provide maintenance for our Beechcraft 1900D
turboprop engines. The contract requires a monthly payment based
upon flight hours incurred by the covered aircraft. The hourly
rate is subject to annual adjustment based on changes in certain
price indices and is guaranteed to increase by no less than
1.5% per year. Pursuant to the agreement, we sold certain
assets of our Desert Turbine Services unit, as well as all spare
PT6 engines to PWC for $6.8 million, which approximated the
net book value of the assets. Pursuant to the agreement, we
provided a working capital loan to PWC for the same amount,
which is to be repaid through a reduced hourly rate being
charged for maintenance. The agreement covers all of our
Beechcraft 1900D turboprop aircraft and engines. The agreement
also contains a termination clause and look back provision to
provide for any shortfall between the cost of maintenance
incurred by the provider and the amount paid up to the
termination date by us and provides for return of a pro-rated
share of the prepaid amount upon early termination. We do not
anticipate an early termination under the contract.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and
results of operations is based upon our financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the United States of America.
In connection with the preparation of these financial
statements, we are required to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue, and
expenses, and related disclosure of contingent liabilities. On
an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, the allowance for doubtful
accounts, medical claims reserve, valuation of assets held for
sale and costs to return aircraft and a valuation allowance for
certain deferred tax assets. We base our estimates on historical
experience and on various other assumptions that we believe are
reasonable under the circumstances. Such historical experience
and assumptions form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We have identified the accounting policies below as critical to
our business operations and the understanding of our results of
operations. The impact of these policies on our business
operations is discussed throughout Managements Discussion
and Analysis of Financial Condition and Results of Operations
where such policies affect our reported and expected financial
results. The discussion below is not intended to be a
comprehensive list of our accounting policies. For a detailed
discussion on the application of these and other accounting
policies, see Note 1 in the Notes to the Consolidated
Financial Statements, which contains
39
accounting policies and other disclosures required by accounting
principles generally accepted in the United States of
America.
The America West, United and the US Airways regional jet
code-share agreements are revenue-guarantee flying agreements.
Under a revenue-guarantee arrangement, the major airline
generally pays a fixed monthly minimum amount, plus certain
additional amounts based upon the number of flights flown and
block hours performed. The contracts also include reimbursement
of certain costs incurred by us in performing flight services.
These costs, known as pass-through costs, may
include aircraft ownership cost, passenger and hull insurance,
aircraft property taxes as well as, fuel, landing fees and
catering. The contracts also include a profit component that may
be determined based on a percentage of profits on the Mesa flown
flights, a profit margin on certain reimbursable costs as well
as a profit margin based on certain operational benchmarks. We
recognize revenue under our revenue-guarantee agreements when
the transportation is provided. The majority of the revenue
under these contracts is known at the end of the accounting
period and is booked as actual. We perform an estimate of the
profit component based upon the information available at the end
of the accounting period. All revenue recognized under these
contracts is presented at the gross amount billed.
Under the Companys revenue-guarantee agreements with
America West, US Airway and United, the Company is reimbursed
under a fixed rate per block-hour plus an amount per aircraft
designed to reimburse the Company for certain aircraft ownership
costs. In accordance with Emerging Issues Task Force Issue
No. 01-08, Determining Whether an Arrangement
Contains a Lease, the Company has concluded that a
component of its revenue under the agreement discussed above is
rental income, inasmuch as the agreement identifies the
right of use of a specific type and number of
aircraft over a stated period of time. The amount deemed to be
rental income during fiscal 2005 and 2004 was
$235.5 million and $189.0 million, respectively, and
has been included in passenger revenue on the Companys
consolidated statements of income.
In connection with providing service under the Companys
revenue-guarantee agreement with US Airways, the
Companys fuel reimbursement is capped at $0.85 per
gallon. Under this agreement, the Company has the option to
purchase fuel from a subsidiary of US Airways at the capped
rate. As a result, amounts included in revenue for fuel
reimbursement and expense for fuel cost may not represent market
rates for fuel for the Companys US Airways flying. The
Company purchased 67.4 million gallons, 68.1 million
gallons and 55.3 million gallons of fuel under this
arrangement in fiscal 2005, 2004 and 2003, respectively.
The America West, US Airways and Midwest Airlines B1900D
turboprop code-share agreements are pro-rate agreements. Under a
prorate agreement, we receive a percentage of the
passengers fare based on a standard industry formula that
allocates revenue based on the percentage of transportation
provided. Revenue from our pro-rate agreements and our
independent operation is recognized when transportation is
provided. Tickets sold but not yet used are included in air
traffic liability on the consolidated balance sheets.
We also receive subsidies for providing scheduled air service to
certain small or rural communities. Such revenue is recognized
in the period in which the air service is provided. The amount
of the subsidy payments is determined by the United States
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. EAS rates are normally set for two-year
contract periods for each city.
|
|
|
Allowance for Doubtful Accounts |
Amounts billed by the Company under revenue guarantee
arrangements are subject to our interpretation of the applicable
code-share agreement and are subject to audit by our code-share
partners. Periodically our code-share partners dispute amounts
billed and pay amounts less than the amount billed. Ultimate
collection of the remaining amounts not only depends upon Mesa
prevailing under audit, but also upon the financial well-being
of the code-share partner. As such, we periodically review
amounts past due and records a reserve for amounts estimated to
be uncollectible. The allowance for doubtful accounts was
$8.9 million and $7.1 million at September 30,
2005 and 2004, respectively. If our actual ability to collect
these receivables and
40
the actual financial viability of its partners is materially
different than estimated, the Companys estimate of the
allowance could be materially understated or overstated.
The majority of the Companys aircraft are leased from
third parties. In order to determine the proper classification
of a lease as either an operating lease or a capital lease, the
Company must make certain estimates at the inception of the
lease relating to the economic useful life and the fair value of
an asset as well as select an appropriate discount rate to be
used in discounting future lease payments. These estimates are
utilized by management in making computations as required by
existing accounting standards that determine whether the lease
is classified as an operating lease or a capital lease. All of
the Companys aircraft leases have been classified as
operating leases, which results in rental payments being charged
to expense over the terms of the related leases. Additionally,
operating leases are not reflected in the Companys
consolidated balance sheet and accordingly, neither a lease
asset nor an obligation for future lease payments is reflected
in the Companys consolidated balance sheet.
|
|
|
Accrued Health Care Costs |
We are currently self-insured up to a cap for health care costs
and as such, a reserve for the cost of claims that have not been
paid as of the balance sheet date is estimated. Our estimate of
this reserve is based upon historical claim experience and upon
the recommendations of our health care provider. At
September 30, 2005 and 2004, we accrued $2.6 million
and $2.2 million, respectively, for the cost of future
health care claims. If the ultimate development of these claims
is significantly different than those that have been estimated,
the accrual for future health care claims could be materially
overstated or understated.
|
|
|
Accrued Workers Compensation Costs |
Beginning in fiscal 2005, we implemented a new workers
compensation program. Under the program, we are self-insured up
to a cap for workers compensation claims and as such, a
reserve for the cost of claims that have not been paid as of the
balance sheet date is estimated. Our estimate of this reserve is
based upon historical claim experience and upon the
recommendations of our third-party administrator. At
September 30, 2005, we accrued $1.6 million for the
cost of workers compensation claims. If the ultimate
development of these claims is significantly different than
those that have been estimated, the accrual for future
workers compensation claims could be materially overstated
or understated.
|
|
|
Long-lived Assets, Aircraft and Parts Held for Sale |
Property and equipment are stated at cost and depreciated over
their estimated useful lives to their estimated salvage values
using the straight-line method. Long-lived assets to be held and
used are reviewed for impairment whenever events or changes in
circumstances indicate that the related carrying amount may be
impaired. Under the provisions of Statement of Financial
Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company
records an impairment loss if the undiscounted future cash flows
are found to be less than the carrying amount of the asset. If
an impairment loss has occurred, a charge is recorded to reduce
the carrying amount of the asset to fair value. Long-lived
assets to be disposed of are reported at the lower of carrying
amount or fair value less cost to sell.
|
|
|
Valuation of Deferred Tax Assets |
The Company records deferred tax assets for the value of
benefits expected to be realized from the utilization of
alternative minimum tax credit carryforwards and state and
federal net operating loss carryforwards. We periodically review
these assets for realizability based upon expected taxable
income in the applicable taxing jurisdictions. To the extent we
believe some portion of the benefit may not be realizable, an
estimate of the unrealized portion is made and an allowance is
recorded. At September 30, 2005, we had a valuation
allowance for certain state net operating loss carryforwards
because we believe we will not be able to generate sufficient
taxable income in these jurisdictions in the future to realize
the benefits of these recorded
41
deferred tax assets. We believe the Company will generate
sufficient taxable income in the future to realize the benefits
of its other deferred tax assets. This belief is based upon the
Company having had pretax income in fiscal 2005, 2004 and 2003
and we have taken steps to minimize the financial impact of its
unprofitable subsidiaries. Realization of these deferred tax
assets is dependent upon generating sufficient taxable income
prior to expiration of any net operating loss carryforwards.
Although realization is not assured, management believes it is
more likely than not that the remaining, recorded deferred tax
assets will be realized. If the ultimate realization of these
deferred tax assets is significantly different from our
expectations, the value of its deferred tax assets could be
materially overstated.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123R,
Share-Based Payment, requiring all share-based
payments to employees, including grants of employee stock
options, to be recognized as compensation expense in the
consolidated financial statements based on their fair values.
This standard is effective for fiscal years beginning after
June 15, 2005. The Company intends to adopt FAS 123(R)
beginning in its first quarter of fiscal 2006, which ends
December 31, 2005, and intends to utilize the modified
prospective transition method. Under the modified prospective
transition method, option awards granted, modified, or settled
after the date of adoption are required to be measured and
accounted for in accordance with SFAS 123R. Unvested
equity-classified awards that were granted prior to the
effective date will continue to be accounted for in accordance
with SFAS 123, and compensation amounts for awards that
vest will now be recognized in the income statement as an
expense. Adoption of the pronouncement is estimated to have a
$0.5 million impact on after-tax earnings in fiscal 2006.
|
|
Item 7A |
Quantitative and Qualitative Disclosures About Market
Risk |
We have exposure to market risk associated with changes in
interest rates related primarily to our debt obligations and
short-term marketable investment portfolio. Certain of our debt
obligations are variable in rate and therefore have exposure to
changes in interest rates. A 10% change in interest rates would
result in an approximately $0.4 million impact on interest
expense. We also have investments in debt securities. If
short-term interest rates were to average 10% more than
they did in fiscal year 2005 interest income would be impacted
by approximately $0.9 million.
We have exposure to certain market risks associated with our
aircraft fuel. Aviation fuel expense is a significant expense
for any air carrier and even marginal changes in the cost of
fuel greatly impact a carriers profitability. Standard
industry contracts do not generally provide protection against
fuel price increases, nor do they insure availability of supply.
However, the America West, United and US Airways
revenue-guarantee code-share agreements allow fuel costs to be
reimbursed by the code-share partner, thereby reducing our
overall exposure to fuel price fluctuations. In fiscal 2005,
approximately 95% of our fuel requirements were associated with
these contracts. Each one cent change in the price of jet fuel
amounts to a $0.1 million change in annual fuel costs for
that portion of fuel expense that is not reimbursed by our
code-share partners.
42
|
|
Item 8. |
Financial Statements and Supplementary Data |
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.
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Mesa Air Group, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of
Mesa Air Group, Inc. and subsidiaries (the Company)
as of September 30, 2005 and 2004, and the related
consolidated statements of income, stockholders equity,
and cash flows for each of the three years in the period ended
September 30, 2005. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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, such consolidated financial statements present
fairly, in all material respects, the financial position of Mesa
Air Group, Inc. and subsidiaries at September 30, 2005 and
2004, and the results of their operations and their cash flows
for each of the three years in the period ended
September 30, 2005, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2, substantially all of the
Companys passenger revenue is derived from code-share
agreements with United Airlines (United), America
West Airlines, Inc. (America West), and
US Airways, Inc (US Airways). UAL Corp., the
parent company of United, has not emerged from reorganization
under Chapter 11 of the U.S. Bankruptcy Code.
Additionally, US Airways filed for bankruptcy protection and in
September 2005 the bankruptcy court entered an order confirming
US Airways plan of reorganization, which includes the
merger between US Airways and America West. As a result of
US Airways emergence from bankruptcy and their
non-assumption of the Companys code-share agreement, the
Company expanded its regional jet code-share agreement with
United and entered into a new code-share agreement with Delta
Air Lines (Delta). In September 2005, Delta also
filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code. Delta has not yet assumed the
Companys code-share agreement in its bankruptcy proceeding.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of September 30, 2005, based on the
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
December 14, 2005 expressed an unqualified opinion on
managements assessment of the effectiveness of the
Companys internal control over financial reporting and an
unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
Phoenix, Arizona
December 14, 2005
44
PART 1. FINANCIAL INFORMATION
MESA AIR GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
$ |
1,102,550 |
|
|
$ |
868,415 |
|
|
$ |
577,582 |
|
|
Freight and other
|
|
|
33,718 |
|
|
|
28,397 |
|
|
|
22,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
1,136,268 |
|
|
|
896,812 |
|
|
|
599,990 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight operations
|
|
|
319,271 |
|
|
|
297,521 |
|
|
|
212,080 |
|
|
Fuel
|
|
|
304,256 |
|
|
|
194,510 |
|
|
|
113,370 |
|
|
Maintenance
|
|
|
198,695 |
|
|
|
163,463 |
|
|
|
118,517 |
|
|
Aircraft and traffic servicing
|
|
|
68,475 |
|
|
|
66,223 |
|
|
|
50,053 |
|
|
Promotion and sales
|
|
|
3,906 |
|
|
|
5,806 |
|
|
|
7,966 |
|
|
General and administrative
|
|
|
69,429 |
|
|
|
62,035 |
|
|
|
37,982 |
|
|
Depreciation and amortization
|
|
|
44,231 |
|
|
|
28,001 |
|
|
|
15,700 |
|
|
Impairment and restructuring charges (credits)
|
|
|
(1,257 |
) |
|
|
11,895 |
|
|
|
(10,957 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,007,006 |
|
|
|
829,454 |
|
|
|
544,711 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
129,262 |
|
|
|
67,358 |
|
|
|
55,279 |
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(44,466 |
) |
|
|
(25,063 |
) |
|
|
(12,664 |
) |
|
Interest income
|
|
|
2,901 |
|
|
|
1,163 |
|
|
|
1,163 |
|
|
Other income (expense)
|
|
|
4,469 |
|
|
|
1,723 |
|
|
|
(2,758 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(37,096 |
) |
|
|
(22,177 |
) |
|
|
(14,259 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
92,166 |
|
|
|
45,181 |
|
|
|
41,020 |
|
Income taxes
|
|
|
35,299 |
|
|
|
18,899 |
|
|
|
15,710 |
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
56,867 |
|
|
|
26,282 |
|
|
|
25,310 |
|
Minority interest in consolidated subsidiary
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
56,867 |
|
|
$ |
26,282 |
|
|
$ |
25,305 |
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic
|
|
$ |
1.95 |
|
|
$ |
0.83 |
|
|
$ |
0.80 |
|
|
|
|
|
|
|
|
|
|
|
Net income per common share diluted
|
|
$ |
1.35 |
|
|
$ |
0.66 |
|
|
$ |
0.76 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
45
MESA AIR GROUP, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands, except | |
|
|
share data) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
143,428 |
|
|
$ |
173,110 |
|
|
Marketable securities
|
|
|
128,162 |
|
|
|
58,522 |
|
|
Restricted cash
|
|
|
8,848 |
|
|
|
9,484 |
|
|
Receivables, net
|
|
|
28,956 |
|
|
|
30,744 |
|
|
Income tax receivable
|
|
|
704 |
|
|
|
1,466 |
|
|
Expendable parts and supplies, net
|
|
|
36,288 |
|
|
|
34,790 |
|
|
Prepaid expenses and other current assets
|
|
|
98,267 |
|
|
|
43,907 |
|
|
Deferred income taxes
|
|
|
8,256 |
|
|
|
8,855 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
452,909 |
|
|
|
360,878 |
|
Property and equipment, net
|
|
|
642,914 |
|
|
|
697,425 |
|
Lease and equipment deposits
|
|
|
25,428 |
|
|
|
31,342 |
|
Deferred income taxes
|
|
|
|
|
|
|
5,342 |
|
Other assets
|
|
|
46,420 |
|
|
|
26,550 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
1,167,671 |
|
|
$ |
1,121,537 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$ |
27,787 |
|
|
$ |
21,850 |
|
|
Short-term debt
|
|
|
54,594 |
|
|
|
230,969 |
|
|
Accounts payable
|
|
|
52,608 |
|
|
|
46,821 |
|
|
Air traffic liability
|
|
|
2,169 |
|
|
|
2,585 |
|
|
Accrued compensation
|
|
|
3,829 |
|
|
|
7,284 |
|
|
Deposit on pending sale of rotable spare parts
|
|
|
22,750 |
|
|
|
|
|
|
Rotable spare parts financing liability
|
|
|
19,685 |
|
|
|
|
|
|
Income taxes payable
|
|
|
2,863 |
|
|
|
456 |
|
|
Other accrued expenses
|
|
|
30,512 |
|
|
|
34,867 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
216,797 |
|
|
|
344,832 |
|
Long-term debt, excluding current portion
|
|
|
636,582 |
|
|
|
550,613 |
|
Deferred credits
|
|
|
97,497 |
|
|
|
71,451 |
|
Deferred income taxes
|
|
|
25,684 |
|
|
|
|
|
Other noncurrent liabilities
|
|
|
14,441 |
|
|
|
25,737 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
991,001 |
|
|
|
992,633 |
|
|
|
|
|
|
|
|
Commitments and contingencies (notes 2, 8, 9, 14 and
15)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock of no par value, 2,000,000 shares
authorized; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
Common stock of no par value and additional paid-in capital,
75,000,000 shares authorized; 28,868,167 and
30,066,777 shares issued and outstanding, respectively
|
|
|
97,894 |
|
|
|
108,173 |
|
|
Retained earnings
|
|
|
80,542 |
|
|
|
23,675 |
|
|
Unearned compensation on restricted stock
|
|
|
(1,766 |
) |
|
|
(2,944 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
176,670 |
|
|
|
128,904 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
1,167,671 |
|
|
$ |
1,121,537 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
46
MESA AIR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
56,867 |
|
|
$ |
26,282 |
|
|
$ |
25,305 |
|
Adjustments to reconcile net income to net cash Flows provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
44,231 |
|
|
|
28,001 |
|
|
|
15,519 |
|
|
Tax benefit on stock compensation
|
|
|
160 |
|
|
|
137 |
|
|
|
449 |
|
|
Impairment and restructuring charges (credits)
|
|
|
(1,257 |
) |
|
|
11,895 |
|
|
|
(10,957 |
) |
|
Deferred income taxes
|
|
|
31,625 |
|
|
|
18,723 |
|
|
|
13,702 |
|
|
Gain on involuntary conversion of aircraft.
|
|
|
|
|
|
|
|
|
|
|
(1,283 |
) |
|
Unrealized (gain) loss on investment securities
|
|
|
514 |
|
|
|
620 |
|
|
|
(255 |
) |
|
Amortization of deferred credits
|
|
|
(6,202 |
) |
|
|
(6,243 |
) |
|
|
(5,830 |
) |
|
Amortization of restricted stock awards
|
|
|
1,178 |
|
|
|
589 |
|
|
|
|
|
|
Provision for (recovery of) doubtful accounts
|
|
|
6,915 |
|
|
|
4,315 |
|
|
|
(1,771 |
) |
|
Provision for obsolete expendable parts and supplies
|
|
|
1,195 |
|
|
|
1,269 |
|
|
|
1,639 |
|
|
Department of Transportation settlement
|
|
|
|
|
|
|
|
|
|
|
4,154 |
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (purchases) sales of investment securities
|
|
|
(70,154 |
) |
|
|
(45,584 |
) |
|
|
(4,786 |
) |
|
|
Receivables
|
|
|
6,709 |
|
|
|
(9,566 |
) |
|
|
3,001 |
|
|
|
Income tax receivables
|
|
|
762 |
|
|
|
(1,466 |
) |
|
|
|
|
|
|
Expendable parts and supplies
|
|
|
(2,693 |
) |
|
|
(11,415 |
) |
|
|
(5,445 |
) |
|
|
Prepaid expenses and other current assets
|
|
|
(53,234 |
) |
|
|
(14,708 |
) |
|
|
(2,472 |
) |
|
|
Accounts payable
|
|
|
5,787 |
|
|
|
4,921 |
|
|
|
14,881 |
|
|
|
Income taxes payable
|
|
|
2,407 |
|
|
|
(440 |
) |
|
|
386 |
|
|
|
Cost to return aircraft held for sale
|
|
|
|
|
|
|
(2,392 |
) |
|
|
(2,097 |
) |
|
|
Other accrued liabilities
|
|
|
(2,540 |
) |
|
|
1,619 |
|
|
|
6,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
22,270 |
|
|
|
6,557 |
|
|
|
50,289 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(44,561 |
) |
|
|
(50,283 |
) |
|
|
(27,370 |
) |
Acquisition of Midway
|
|
|
|
|
|
|
(9,160 |
) |
|
|
|
|
Proceeds from the sale of flight equipment and expendable
inventory
|
|
|
449 |
|
|
|
2,383 |
|
|
|
2,637 |
|
Proceeds from aircraft insurance
|
|
|
|
|
|
|
|
|
|
|
3,218 |
|
Change in restricted cash
|
|
|
636 |
|
|
|
(9,484 |
) |
|
|
|
|
Change in other assets
|
|
|
(13,896 |
) |
|
|
(1,181 |
) |
|
|
935 |
|
Lease and equipment deposits
|
|
|
1,608 |
|
|
|
(5,491 |
) |
|
|
(12,013 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
(55,764 |
) |
|
|
(73,216 |
) |
|
|
(32,593 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(26,135 |
) |
|
|
(16,859 |
) |
|
|
(15,733 |
) |
Principal payments on short-term debt
|
|
|
(2,776 |
) |
|
|
|
|
|
|
|
|
Proceeds from senior convertible notes
|
|
|
|
|
|
|
100,000 |
|
|
|
100,112 |
|
Debt issuance costs
|
|
|
|
|
|
|
(3,009 |
) |
|
|
(3,262 |
) |
Proceeds from pending sale of rotable inventory (customer
deposits)
|
|
|
22,750 |
|
|
|
|
|
|
|
|
|
Proceeds from financing rotable inventory
|
|
|
|
|
|
|
15,000 |
|
|
|
|
|
Proceeds from exercise of stock options and issuance of warrants
|
|
|
813 |
|
|
|
843 |
|
|
|
1,775 |
|
Common stock purchased and retired
|
|
|
(11,252 |
) |
|
|
(10,921 |
) |
|
|
(2,314 |
) |
Proceeds from receipt of deferred credits
|
|
|
20,412 |
|
|
|
2,168 |
|
|
|
9,375 |
|
Distribution to minority interest shareholders
|
|
|
|
|
|
|
|
|
|
|
(972 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
3,812 |
|
|
|
87,222 |
|
|
|
88,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(29,682 |
) |
|
|
20,563 |
|
|
|
106,677 |
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
|
|
173,110 |
|
|
|
152,547 |
|
|
|
45,870 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
|
$ |
143,428 |
|
|
$ |
173,110 |
|
|
$ |
152,547 |
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
45,694 |
|
|
$ |
24,105 |
|
|
$ |
11,665 |
|
|
Cash paid for income taxes
|
|
|
336 |
|
|
|
1,906 |
|
|
|
1,130 |
|
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft and engine delivered under interim financing provided
by manufacturer
|
|
$ |
351,187 |
|
|
$ |
463,936 |
|
|
$ |
402,639 |
|
|
Aircraft and engine debt permanently financed as operating lease
|
|
|
(397,432 |
) |
|
|
(203,362 |
) |
|
|
(207,034 |
) |
|
Short-term debt permanently financed as long-term debt
|
|
|
(127,355 |
) |
|
|
(254,728 |
) |
|
|
|
|
|
Long-term debt assumed in Midway asset purchase
|
|
|
|
|
|
|
24,109 |
|
|
|
|
|
|
Inventory and other credits received in conjunction with
aircraft Financing
|
|
|
11,836 |
|
|
|
5,073 |
|
|
|
4,978 |
|
|
Note receivable received in conjunction with financing of
rotable inventory
|
|
|
|
|
|
|
6,000 |
|
|
|
|
|
|
Return of aircraft for reduction of long-term debt and accrued
interest
|
|
|
|
|
|
|
|
|
|
|
8,164 |
|
See accompanying notes to consolidated financial statements.
47
MESA AIR GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained | |
|
Unearned | |
|
|
|
|
|
|
|
|
Earnings | |
|
Compensation | |
|
|
Years Ended September 30, |
|
Number of | |
|
Common | |
|
(Accumulated | |
|
on Restricted | |
|
|
2005, 2004, and 2003 |
|
Shares | |
|
Stock | |
|
Deficit) | |
|
Stock | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except number of shares) | |
Balance at October 1, 2002
|
|
|
31,989,886 |
|
|
$ |
114,670 |
|
|
$ |
(27,912 |
) |
|
$ |
|
|
|
$ |
86,758 |
|
Exercise of stock options
|
|
|
270,088 |
|
|
|
1,465 |
|
|
|
|
|
|
|
|
|
|
|
1,465 |
|
Common stock purchased and retired
|
|
|
(555,349 |
) |
|
|
(2,314 |
) |
|
|
|
|
|
|
|
|
|
|
(2,314 |
) |
Tax benefit stock compensation
|
|
|
|
|
|
|
449 |
|
|
|
|
|
|
|
|
|
|
|
449 |
|
Amortization of warrants
|
|
|
|
|
|
|
134 |
|
|
|
|
|
|
|
|
|
|
|
134 |
|
Issuance of warrants
|
|
|
|
|
|
|
176 |
|
|
|
|
|
|
|
|
|
|
|
176 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
25,305 |
|
|
|
|
|
|
|
25,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2003
|
|
|
31,704,625 |
|
|
|
114,580 |
|
|
|
(2,607 |
) |
|
|
|
|
|
|
111,973 |
|
Exercise of stock options
|
|
|
110,208 |
|
|
|
622 |
|
|
|
|
|
|
|
|
|
|
|
622 |
|
Common stock purchased and retired
|
|
|
(1,748,056 |
) |
|
|
(10,921 |
) |
|
|
|
|
|
|
|
|
|
|
(10,921 |
) |
Restricted stock
|
|
|
|
|
|
|
3,533 |
|
|
|
|
|
|
|
(3,533 |
) |
|
|
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
589 |
|
|
|
589 |
|
Tax benefit stock compensation
|
|
|
|
|
|
|
137 |
|
|
|
|
|
|
|
|
|
|
|
137 |
|
Amortization of warrants
|
|
|
|
|
|
|
135 |
|
|
|
|
|
|
|
|
|
|
|
135 |
|
Issuance of warrants
|
|
|
|
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
87 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
26,282 |
|
|
|
|
|
|
|
26,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2004
|
|
|
30,066,777 |
|
|
|
108,173 |
|
|
|
23,675 |
|
|
|
(2,944 |
) |
|
|
128,904 |
|
Exercise of stock options
|
|
|
165,609 |
|
|
|
712 |
|
|
|
|
|
|
|
|
|
|
|
712 |
|
Common stock purchased and retired
|
|
|
(1,792,516 |
) |
|
|
(11,252 |
) |
|
|
|
|
|
|
|
|
|
|
(11,252 |
) |
Issuance of restricted stock
|
|
|
428,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,178 |
|
|
|
1,178 |
|
Tax benefit stock compensation
|
|
|
|
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
160 |
|
Amortization of warrants
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
33 |
|
Issuance of warrants
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
68 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
56,867 |
|
|
|
|
|
|
|
56,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005
|
|
|
28,868,167 |
|
|
$ |
97,894 |
|
|
$ |
80,542 |
|
|
$ |
(1,766 |
) |
|
$ |
176,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
48
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2005, 2004 and 2003
|
|
1. |
Summary of Significant Accounting Policies |
|
|
|
Principles of Consolidation and Organization |
The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States of America and include the
accounts of Mesa Air Group, Inc. and its wholly-owned operating
subsidiaries (collectively Mesa or the
Company): Mesa Airlines, Inc. (Mesa
Airlines), a Nevada corporation and certificated air
carrier; Freedom Airlines, Inc. (Freedom), a Nevada
corporation and certificated air carrier; Air Midwest, Inc.
(Air Midwest), a Kansas corporation and certificated
air carrier; CCAir, Inc. (CCAir), a Delaware
corporation and certificated air carrier; MPD, Inc., a Nevada
corporation, doing business as Mesa Pilot Development; Regional
Aircraft Services, Inc. (RAS) a Pennsylvania
company; Mesa Air Group Airline Inventory
Management, LLC (MAG-AIM), an Arizona Limited
Liability Company; Ritz Hotel Management Corp., a Nevada
Corporation; UFLY, LLC. (UFLY), a Delaware Limited
Liability Company; and MAGI Insurance, Ltd. (MAGI),
a Barbados, West Indies based captive insurance company. MPD,
Inc. provides pilot training in coordination with a community
college in Farmington, New Mexico and with Arizona State
University in Tempe, Arizona. RAS performs aircraft component
repair and overhaul services. UFLY was established in fiscal
2002 to make strategic investments in US Airways common stock.
MAGI is a captive insurance company established for the purpose
of obtaining more favorable aircraft liability insurance rates.
CCAir ceased operations and was dissolved in fiscal 2003. UFLY
distributed its assets and was subsequently dissolved in fiscal
2003. All significant intercompany accounts and transactions
have been eliminated in consolidation.
The Company is an independent regional airline serving
176 cities in 43 states, the District of Columbia,
Canada and Mexico. At September 30, 2005, the Company
operated a fleet of 182 aircraft and had over 1,100 daily
departures. The Companys airline operations are conducted
by three regional airline subsidiaries primarily utilizing
hub-and-spoke systems. Mesa Airlines operates as America West
Express under a code-share agreement with America West Airlines,
Inc. (America West), as United Express under a
code-share relationship with United Airlines
(United) and as US Airways Express under a
code-share agreement with US Airways, Inc. (US
Airways). On October 1, 2005, Freedom commenced
flight operations as Delta Connection under a code-share
agreement with Delta Air Lines (Delta). Air Midwest
operates under code-share agreements with America West, US
Airways and Midwest Airlines. Air Midwest also operates an
independent division, doing business as Mesa Airlines, from
Albuquerque, New Mexico and select Essential Air Service
markets. Prior to ceasing operations, CCAir operated under a
code-share agreement with US Airways as US Airways Express.
Approximately 99% of the Companys consolidated passenger
revenues for 2005 were derived from operations associated with
code-share agreements.
The financial arrangement between Mesa and its code-share
partners involve either a revenue-guarantee or pro-rate
arrangement. Under a revenue-guarantee arrangement, the major
airline generally pays a monthly guaranteed amount. The America
West jet and Dash-8 code-share agreement, the United code-share
agreement and the US Airways regional jet agreement are
revenue-guarantee flying agreements. Under the terms of these
flying agreements, the major carrier controls marketing,
scheduling, ticketing, pricing and seat inventories. The Company
receives a guaranteed payment based upon a fixed minimum monthly
amount plus amounts related to departures and block hours flown
plus direct reimbursement for expenses such as fuel, landing
fees and insurance. Among other advantages, revenue-guarantee
arrangements reduce the Companys exposure to fluctuations
in passenger traffic and fare levels, as well as fuel prices.
The America West B1900 agreement, Midwest Airlines agreement and
US Airways turboprop agreement are pro-rate agreements, for
which the Company receives an allocated portion of the
passengers fare and pays all of the costs of transporting
the passenger.
In addition to carrying passengers, the Company carries freight
and express packages on its passenger flights and has interline
small cargo freight agreements with many other carriers. Mesa
also has contracts with
49
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the U.S. Postal Service for carriage of mail to the cities
it serves and occasionally operates charter flights when its
aircraft are not otherwise used for scheduled service.
Renewal of one code-share agreement with a code-share partner
does not guarantee the renewal of any other code-share agreement
with the same code-share partner. The agreements with America
West expire in 2012; the revenue-guarantee agreements with Delta
expire in January 2017 and January 2018; the pro-rate agreement
with US Airways expires in October 2006; the agreement with
United expires between 2011 and 2018; and the agreement with
Midwest Airlines expires in 2006. Although the provisions of the
code-share agreements vary from contract to contract, generally
each agreement is subject to cancellation should the
Companys subsidiaries fail to meet certain operating
performance standards, and breach other contractual terms and
conditions.
|
|
|
Cash and Cash Equivalents |
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
At September 30, 2005, the Company has $8.8 million in
restricted cash on deposit with two financial institutions. In
September 2004, we entered into an agreement with a financial
institution for a $9.0 million letter of credit facility
and to issue letters of credit for landing fees, workers
compensation insurance and other business needs. Pursuant to the
agreement, $3.8 million of outstanding letters of credit
are required to be collateralized by amounts on deposit. The
Company also must maintain $5.0 million on deposit with
another financial institution to collateralize its direct
deposit payroll. The change in restricted cash of
$9.5 million was reclassified on the fiscal
2004 statement of cash flows from operating activities to
investing activities.
|
|
|
Expendable Parts and Supplies |
Expendable parts and supplies are stated at the lower of cost
using the first-in, first-out method or market, and are charged
to expense as they are used. The Company provides for an
allowance for obsolescence over the useful life of its aircraft
after considering the useful life of each aircraft fleet, the
estimated cost of expendable parts expected to be on hand at the
end of the useful life and the estimated salvage value of the
parts. The Company reviews the adequacy of this allowance on a
quarterly basis.
Property and equipment are stated at cost and depreciated over
their estimated useful lives to their estimated salvage values,
which are estimated to be 20% for flight equipment, using the
straight line method.
Estimated useful lives of the various classifications of
property and equipment are as follows:
|
|
|
Buildings
|
|
30 years |
Flight equipment
|
|
7-20 years |
Equipment
|
|
5-12 years |
Furniture and fixtures
|
|
3-5 years |
Vehicles
|
|
5 years |
Rotable inventory
|
|
Life of the aircraft or term of the lease, whichever is less |
Leasehold improvements
|
|
Life of asset or term of lease, whichever is less |
50
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-lived assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate
that the related carrying amount may be impaired. Under the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company
records an impairment loss if the undiscounted future cash flows
are found to be less than the carrying amount of the asset. If
an impairment loss has occurred, a charge is recorded to reduce
the carrying amount of the asset to fair value. Long-lived
assets to be disposed of are reported at the lower of carrying
amount or fair value less cost to sell.
The Company currently flies B1900 aircraft in Essential Air
Service markets (EAS). If the funding under this
program is terminated for any of the cities served by us, in all
likelihood we would not continue to fly in these markets, and as
a result, we would be forced to find alternative uses for the
Beechcraft 1900D 19-seat turboprop aircraft affected.
Interest related to deposits on aircraft purchase contracts is
capitalized as part of the aircraft. The Company capitalized
approximately $0.9 million, $1.0 million and
$0.8 million of interest in fiscal 2005, 2004 and 2003,
respectively.
Other long-term assets primarily consist of the capitalized
costs associated with establishing financing for aircraft,
contract incentive payments, prepaid maintenance, a note
receivable received pursuant to the rotable spare parts
financing and debt issuance costs associated with the senior
convertible notes. The financing costs are amortized over the
lives of the associated aircraft leases which are primarily
16-18.5 years. Contract incentive payments are amortized
over the term or the modified term of the code share agreements.
Prepaid maintenance is amortized over the six-year term of the
related maintenance contract based upon the hours flown by the
related aircraft. The debt issuance costs are amortized over the
20 year life of the senior convertible notes.
Air traffic liability represents the cost of tickets sold but
not yet used. The Company records the revenue associated with
these tickets in the period the passenger flies.
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in future years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date. The Company and its subsidiaries file a
consolidated federal income tax return.
|
|
|
Notes Payable for Aircraft on Interim
Financing |
Aircraft under interim financing are recorded as a purchase with
interim debt financing provided by the manufacturer. As such,
the Company reflects the aircraft in property and equipment and
the debt financing in short-term debt on its balance sheet
during the interim financing period. Upon permanent financing,
the proceeds from the sale and leaseback transaction are used to
retire the notes payable to the manufacturer. Any gain
recognized on the sale and leaseback transaction is deferred and
amortized over the life of the lease.
51
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred credits consist of aircraft purchase incentives
provided by the aircraft manufacturers and deferred gains on the
sale and leaseback of interim financed aircraft. Purchase
incentives include credits that may be used to purchase spare
parts, pay for training expenses or reduce other aircraft
operating costs. The deferred credits and gains are amortized on
a straight-line basis as a reduction of lease expense over the
term of the respective leases.
The America West, United and the US Airways regional jet
code-share agreements are revenue-guarantee flying agreements.
Under a revenue-guarantee arrangement, the major airline
generally pays a fixed monthly minimum amount, plus certain
additional amounts based upon the number of flights and block
hours flown. The contracts also include reimbursement of certain
costs incurred by Mesa in performing flight services. These
costs, known as pass-through costs, may include
aircraft ownership cost, passenger and hull insurance, aircraft
property taxes as well as, fuel, landing fees and catering. The
Company records reimbursement of pass-through costs as revenue.
In addition, the Companys code-share partners also
provide, at no cost to Mesa, certain ground handling and
customer service functions, as well as airport-related
facilities and gates at their hubs and other cities.
Pass-through costs provided by code-share partners are presented
net in the Companys financial statements, hence no amounts
are recorded for revenue or expense for these items. The
contracts also include a profit component that may be determined
based on a percentage of profits on the Mesa flown flights, a
profit margin on certain reimbursable costs as well as a profit
margin based on certain operational benchmarks. The Company
recognizes revenue under its revenue-guarantee agreements when
the transportation is provided. The majority of the revenue
under these contracts is known at the end of the accounting
period and is booked as actual. The Company performs an estimate
of the profit component based upon the information available at
the end of the accounting period. All revenue recognized under
these contracts is presented at the gross amount billed.
In connection with providing service under the Companys
revenue-guarantee agreement with US Airways, the
Companys fuel reimbursement is capped at $0.85 per
gallon. Under this agreement, the Company has the option to
purchase fuel from a subsidiary of US Airways at the capped
rate. As a result, amounts included in revenue for fuel
reimbursement and expense for fuel cost may not represent market
rates for fuel for the Companys US Airways flying. The
Company purchased 67.4 million gallons, 68.1 million
gallons and 55.3 million gallons of fuel under this
arrangement in fiscal 2005, 2004 and 2003, respectively.
Under the Companys revenue-guarantee agreements with
America West, US Airway and United, the Company is reimbursed
under a fixed rate per block-hour plus an amount per aircraft
designed to reimburse the Company for certain aircraft ownership
costs. In accordance with Emerging Issues Task Force Issue
No. 01-08, Determining Whether an Arrangement
Contains a Lease, the Company has concluded that a
component of its revenue under the agreements discussed above is
rental income, inasmuch as the agreement identifies the
right of use of a specific type and number of
aircraft over a stated period of time. The amount deemed to be
rental income during fiscal 2005 and 2004 was
$235.5 million and $189.0 million, respectively, and
has been included in passenger revenue on the Companys
consolidated statements of income.
The America West, US Airways, and Midwest Airlines turboprop
code-share agreements are pro-rate agreements. Under a pro-rate
agreement, the Company receives a percentage of the
passengers fare based on a standard industry formula that
allocates revenue based on the percentage of transportation
provided. Revenue from the Companys pro-rate agreements
and the Companys independent operation is recognized when
transportation is provided. Tickets sold but not yet used are
included in air traffic liability on the consolidated balance
sheets.
52
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company also receives subsidies for providing scheduled air
service to certain small or rural communities. Such revenue is
recognized in the period in which the air service is provided.
The amount of the subsidy payments is determined by the United
States 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. EAS rates are normally set for
two-year contract periods for each city.
The Company charges the cost of engine and aircraft maintenance
to expense as incurred.
In 2001, the Company entered into an agreement to form UFLY
for the purpose of making strategic investments in US Airways,
Inc. In 2002, UFLY was capitalized with $5.0 million from
the Company and $5.0 million from other members, which
included Jonathan Ornstein, the Companys Chairman and
Chief Executive Officer. UFLY distributed its assets and was
subsequently dissolved in fiscal 2003. The Company owned greater
than 50% of UFLY in 2003 and therefore the financial results of
UFLY are included in the consolidated financial results of the
Company. Amounts included in the consolidated statements of
operations as minority interest reflect the after-tax portion of
earnings of UFLY that are applicable to the minority interest
partners.
The Company accounts for earnings per share in accordance with
SFAS No. 128, Earnings per Share. Basic
net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the
periods presented. Diluted net income per share reflects the
potential dilution that could occur if outstanding stock options
and warrants were exercised. In addition, dilutive convertible
securities are included in the denominator while interest on
convertible debt, net of tax, is added back to the numerator. A
reconciliation of the numerator and denominator used in
computing income per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
29,215 |
|
|
|
31,490 |
|
|
|
31,556 |
|
Effect of dilutive outstanding stock options and warrants
|
|
|
127 |
|
|
|
1,139 |
|
|
|
507 |
|
Effect of restricted stock
|
|
|
286 |
|
|
|
214 |
|
|
|
|
|
Effect of dilutive outstanding convertible debt due 2023
|
|
|
16,931 |
|
|
|
14,410 |
|
|
|
2,935 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted
|
|
|
46,559 |
|
|
|
47,253 |
|
|
|
34,998 |
|
|
|
|
|
|
|
|
|
|
|
Adjustments to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
56,867 |
|
|
$ |
26,282 |
|
|
$ |
25,305 |
|
Interest expense on convertible debt, net of tax
|
|
|
6,097 |
|
|
|
5,027 |
|
|
|
1,144 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income
|
|
$ |
62,964 |
|
|
$ |
31,309 |
|
|
$ |
26,449 |
|
|
|
|
|
|
|
|
|
|
|
In September 2004, the Emerging Issues Task Force
(EITF) reached a consensus on EITF Issue
No. 04-08, The Effect of Contingently Convertible
Debt on Diluted Earnings per Share. EITF Issue
No. 04-08 requires shares of common stock issuable upon
conversion of contingently convertible debt
53
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
instruments to be included in the calculation of diluted
earnings per share whether or not the contingent conditions for
conversion have been met, unless the inclusion of these shares
is anti-dilutive. Previously, shares of common stock issuable
upon conversion of contingently convertible debt securities were
excluded from the calculation of diluted earnings per share if
the contingency had not been met. The Company previously
included its convertible notes due 2003 in the EPS calculation.
The Company adopted the provisions of EITF Issue No. 04-08
in the first quarter of fiscal 2005, and as such, has now also
included the 3.625% senior convertible notes due 2024 in
the calculation of dilutive earnings per share. EITF Issue
No. 04-08 required the restatement of prior period diluted
earnings per share amounts. The 3.625% senior convertible
notes due 2024 were issued in February 2004, thus the reported
diluted earnings per share for the year ended September 30,
2004 have been restated to include the dilutive impact of the
3.625% senior convertible notes.
The Company accounts for its stock-based compensation
arrangements in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and
related interpretations. The Company has adopted only the
disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation, as amended,
which permits pro-forma net earnings and pro-forma earnings per
share disclosures for employee stock option grants made in
fiscal 1996 and future years as if the fair value based
measurement method defined in SFAS No. 123 had been
applied. Warrants issued to non-employees are also accounted for
under SFAS No. 123, at fair value on the measurement
date.
Had the compensation cost for the Companys stock-based
compensation plans been determined consistent with the
measurement provisions of SFAS No. 123, the
Companys net income and net income per share would have
been as indicated by the pro forma amounts below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share | |
|
|
amounts) | |
Net income as reported
|
|
$ |
56,867 |
|
|
$ |
26,282 |
|
|
$ |
25,305 |
|
Stock option compensation expense determined under fair value
based method, net of related tax effects
|
|
|
(968 |
) |
|
|
(1,324 |
) |
|
|
(2,082 |
) |
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
55,899 |
|
|
$ |
24,958 |
|
|
$ |
23,223 |
|
|
|
|
|
|
|
|
|
|
|
Income per share basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
1.95 |
|
|
$ |
0.83 |
|
|
$ |
0.80 |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
1.91 |
|
|
$ |
0.79 |
|
|
$ |
0.74 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
1.35 |
|
|
$ |
0.66 |
|
|
$ |
0.76 |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
1.33 |
|
|
$ |
0.63 |
|
|
$ |
0.70 |
|
|
|
|
|
|
|
|
|
|
|
The per share weighted-average fair value of stock options
granted during 2005, 2004 and 2003 was $4.16, $6.77 and $3.29,
respectively, on the grant date as determined by using the
Black-Scholes option pricing model with the following weighted
average assumptions: an expected dividend yield 0.0%, an
expected life of 6.1 years, a risk-free interest rate of
4.2%, 4.1% and 4.3%, and volatility of 62.4%, 79.8% and 80.5% in
2005, 2004 and 2003, respectively.
|
|
|
Use of Estimates in the Preparation of Financial
Statements |
The preparation of the Companys consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and
54
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, requires disclosures
related to components of a company for which separate financial
information is available that is evaluated regularly by a
companys chief operating decision maker in deciding the
allocation of resources and assessing performance. The Company
has three airline operating subsidiaries, Mesa Airlines, Freedom
Airlines and Air Midwest and various other subsidiaries
organized to provide support for the Companys airline
operations. The Company has aggregated these operating segments
into three reportable segments; Mesa Airlines, Air Midwest/
Freedom and Other. Mesa Airlines operates all of the
Companys regional jets and Dash-8 aircraft pursuant to
revenue-guarantee code-share agreements. Air Midwest and Freedom
primarily operate the Companys Beech 1900D turboprop
aircraft pursuant to pro-rate code-share agreements. The Other
reportable segment includes Mesa Air Group, RAS, MPD, MAG-AIM
and MAGI, all of which support Mesas operating
subsidiaries.
|
|
|
Recent Accounting Pronouncements |
On December 16, 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123R,
Share-Based Payment, requiring all share-based
payments to employees, including grants of employee stock
options, to be recognized as compensation expense in the
consolidated financial statements based on their fair values.
This standard is effective for fiscal years beginning after
June 15, 2005. The Company intends to adopt
SFAS 123(R) beginning in its first quarter of fiscal 2006,
which ends December 31, 2005, and intends to utilize the
modified prospective transition method. Under the modified
prospective transition method, option awards granted, modified,
or settled after the date of adoption are required to be
measured and accounted for in accordance with SFAS 123R.
Unvested equity-classified awards that were granted prior to the
effective date will continue to be accounted for in accordance
with SFAS 123, and compensation amounts for awards that
vest will be recognized in the income statement as expense.
Adoption of the pronouncement is estimated to have a
$0.5 million impact on after-tax earnings in fiscal 2006.
Certain reclassifications were made to the 2004 and 2003
financial statements to conform to the 2005 presentation.
The Company has code-share agreements with America West, US
Airways and United Airlines. Approximately 99%, 99% and 98% of
the Companys consolidated passenger revenue for the years
ended September 30, 2005, 2004 and 2003, respectively, were
derived from these agreements. Accounts receivable from the
Companys code-share partners were 35% and 59% of total
gross accounts receivable at September 30, 2005 and 2004,
respectively.
Passenger revenue received from America West amounted to 44%,
38% and 44% of the Companys total passenger revenue in
fiscal 2005, 2004 and 2003, respectively. A termination of the
America West revenue-guarantee code-share agreements would have
a material adverse effect on the Companys business
prospects, financial condition, results of operations and cash
flows.
US Airways, which accounted for approximately 29%, 40% and 38%
of the Companys passenger revenue in fiscal 2005, 2004 and
2003, respectively, filed for Chapter 11 bankruptcy
protection on September 12, 2004.
55
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of September 30, 2005, we operated 59 50-seat regional
jet aircraft for US Airways under a revenue-guarantee
code-sharing agreement. As a result of US Airways
emergence from bankruptcy and their non-assumption of our
revenue-guarantee code-share agreement, the Company expanded its
regional jet revenue-guarantee code-share agreement with United
and entered into a new revenue-guarantee code-share agreement
with Delta and the Company is currently working to transition
the jets flown under the US Airways code-share agreement to the
United and Delta arrangements. As of December 1, 2005, the
Company had transitioned 32 of the 59 aircraft and operated 27
50-seat regional jets for US Airways under our code-sharing
agreement. The Company expects to complete the transition of
aircraft from US Airways to United in the first quarter of
fiscal year 2006 and to Delta in the second quarter of fiscal
year 2006. In addition, on September 14, 2005, Delta Air
Lines filed for reorganization under Chapter 11 of the US
Bankruptcy Code. Delta has not yet assumed the code-share
agreement with the Company in its bankruptcy proceeding and
could choose to terminate this agreement or seek to renegotiate
the agreement on less favorable terms.
United Airlines, a subsidiary of UAL Corp., accounted for
approximately 24%, 20% and 1% of the Companys passenger
revenue in fiscal 2005, 2004 and 2003, respectively. A
termination of the United agreement or the failure of United to
successfully emerge from bankruptcy would have a material
adverse effect on the Companys business prospects,
financial condition, results of operations and cash flows.
The Company has a cash management program which provides for the
investment of excess cash balances primarily in short-term money
market instruments, US treasury securities, intermediate-term
debt instruments, and common equity securities of companies
operating in the airline industry.
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, requires that all
applicable investments be classified as trading securities,
available for sale securities or held-to-maturity securities.
The Company currently has $128.2 million in marketable
securities that include US Treasury notes, government
bonds, corporate bonds and auction rate securities
(ARS). These investments are classified as trading
securities during the periods presented and accordingly, are
carried at market value with changes in value reflected in the
current period operations. Unrealized losses relating to trading
securities held at September 30, 2005 and 2004, were
$0.5 million and $1.7 million, respectively.
The Company has determined that investments in auction rate
securities should be classified as short-term investments.
Previously, such investments had been classified as cash and
cash equivalents. ARS generally have long-term maturities;
however, these investments have characteristics similar to
short-term investments because at predetermined intervals,
generally every 28 days, there is a new auction process. As
such, the Company classifies ARS as short-term investments. The
balance of marketable securities at September 30, 2005 and
2004 includes investments in ARS of $46.7 million and
$47.8 million, respectively. The Company reclassified ARS
of $47.8 million as of September 30, 2004 that were
previously included in cash and cash equivalents to short-term
investments and included this amount in net purchases of
investment securities in the consolidated statement of cash
flows for fiscal 2004.
56
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4. |
Property and Equipment |
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Flight equipment, substantially pledged
|
|
$ |
705,453 |
|
|
$ |
731,859 |
|
Other equipment
|
|
|
25,960 |
|
|
|
24,775 |
|
Leasehold improvements
|
|
|
2,883 |
|
|
|
2,620 |
|
Furniture and fixtures
|
|
|
1,117 |
|
|
|
1,087 |
|
Buildings
|
|
|
3,968 |
|
|
|
3,968 |
|
Vehicles
|
|
|
1,139 |
|
|
|
1,045 |
|
|
|
|
|
|
|
|
|
|
|
740,520 |
|
|
|
765,354 |
|
Less accumulated depreciation and amortization
|
|
|
(97,606 |
) |
|
|
(67,929 |
) |
|
|
|
|
|
|
|
Net property and equipment
|
|
$ |
642,914 |
|
|
$ |
697,425 |
|
|
|
|
|
|
|
|
At September 30, 2005 and 2004, the Company had
$54.6 million and $231.0 million, respectively, in
notes payable to an aircraft manufacturer for aircraft on
interim financing. Under interim financing arrangements, the
Company takes delivery and title to the aircraft prior to
securing permanent financing and the acquisition of the aircraft
is accounted for as a purchase with debt financing. Accordingly,
the Company reflects the aircraft and debt under interim
financing on its balance sheet during the interim financing
period. After taking delivery of the aircraft, it is the
Companys intention to permanently finance the aircraft as
an operate lease through a sale and leaseback transaction with
an independent third-party lessor. Upon permanent financing, the
proceeds are used to retire the notes payable to the
manufacturer. Any gain recognized on the sale and leaseback
transaction is deferred and amortized over the life of the
lease. The Company had two aircraft on interim financing with
the manufacturer at September 30, 2005. These interim
financings agreements are six months in length and provide for
monthly interest only payments at LIBOR plus three percent. The
current interim financing agreement with the manufacturer
provides for the Company to have a maximum of 15 aircraft on
interim financing at a given time.
|
|
6. |
Deposit on Pending Sale of Rotable Spare Parts |
In August 2005, the Company entered into a ten-year agreement
with AAR Corp. (the AAR Agreement), for the
management and repair of certain of the Companys CRJ-200,
-700, -900 and ERJ-145 aircraft rotable spare parts inventory.
Under the agreement, AAR will purchase certain existing spare
parts inventory for $39.5 million in cash and
$21.5 million in notes receivable to be paid over the next
four years. Under the agreement, the Company is required to pay
AAR a monthly fee based upon flight hours for access to and
maintenance of the inventory. The agreement also contains
certain minimum monthly payments that Mesa must make to AAR. At
termination, the Company may elect to purchase the covered
inventory at fair value, but is not contractually obligated to
do so. The AAR agreement is contingent upon the Company
terminating an agreement for the Companys CRJ-200 aircraft
rotable spare parts inventory with GE Capital Aviation Services
(GECAS), and including these rotables in the
arrangement. The amount included in the consolidated balance
sheet at September 30, 2005, represents deposits received
from AAR pending the termination of the GECAS agreement. The
Company notified GECAS of its intent to cancel that agreement in
August and terminated the agreement in November 2005 (see
note 8).
57
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company accounts for purchase incentives provided by
aircraft manufacturers as deferred credits. These credits are
amortized over the life of the related lease as a reduction of
lease expense, which is included in flight operations in the
statements of operations. Purchase incentives include credits
that may be used to purchase spare parts, pay for training
expenses or reduce other aircraft operating costs. Deferred
credits also include deferred gains on the sale and leaseback of
interim financed aircraft. These deferred gains are also
amortized over the life of the related leases as a reduction of
lease expense, which is included in flight operations in the
statements of operations.
|
|
8. |
Rotable Spare Parts Financing Liability |
In June 2004, the Company entered into an agreement with
LogisTechs, Inc., a wholly-owned subsidiary of GECAS, whereby
GECAS provided financing to the Company and the Company agreed
to pay GECAS for the management and repair of certain of the
Companys CRJ-200 aircraft rotable spare parts inventory.
Under the agreement, the Company received $15 million in
cash and a $6 million promissory note receivable from
GECAS. In August 2005, Mesa notified GECAS of its intent to
terminate the agreement in order to enter into the AAR
agreement, and as such, the Company is required to repay the
19.7 million of outstanding financing at September 30,
2005. The agreement was terminated and this amount was repaid in
November 2005.
In October 2004, the Company permanently financed five CRJ-900
aircraft with $118.0 million in debt. The debt bears
interest at the monthly LIBOR plus three percent and requires
monthly principal and interest payments. These aircraft had
originally been financed with interim debt financing from the
manufacturer.
In December 2003, we assumed $24.1 million of debt in
connection with the purchase of two CRJ-200 aircraft in the
Midway Chapter 7 bankruptcy proceedings. The debt, due in
2013, bears interest at the rate of 7% per annum through
2008, converting to 12.5% thereafter, with principal and
interest due monthly.
In January and March 2004, the Company permanently financed five
CRJ-700 and six CRJ-900 aircraft with $254.7 million in
debt. The debt bears interest at the monthly LIBOR plus three
percent and requires monthly principal and interest payments.
In February 2004, the Company completed the private placement of
senior convertible notes (the February 2004 Notes)
due 2024, which resulted in gross proceeds of
$100.0 million ($97.0 million net). Cash interest is
payable on these notes at the rate of 2.115% per year on
the aggregate amount due at maturity, payable semiannually in
arrears on February 10 and August 10 of each year, beginning
August 10, 2004, until February 10, 2009. After that
date, the Company will not pay cash interest on these notes
prior to maturity, and they will begin accruing original issue
discount at a rate of 3.625% until maturity. On
February 10, 2024, the maturity date of these notes, the
principal amount of each note will be $1,000. The aggregate
amount due at maturity, including interest accrued from
February 10, 2009, will be $171.4 million. Each of the
Companys wholly-owned domestic subsidiaries guarantees
these notes on an unsecured senior basis. The February 2004
Notes and the note guarantees are senior unsecured obligations
and rank equally with the Companys existing and future
senior unsecured and unsubordinated indebtedness. These notes
and the note guarantees are junior to any secured obligations of
the Company and any of its wholly owned subsidiaries to the
extent of the collateral pledged.
The February 2004 Notes are convertible into shares of the
Companys common stock at a conversion rate of
40.3737 shares per $1,000 in principal amount at maturity
of the notes. This conversion rate is subject to adjustment in
certain circumstances. Holders of these notes may convert their
notes only if: (i) the sale price of the Companys
common stock exceeds 110% of the accreted conversion price for
at least 20 trading
58
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
days in the 30 consecutive days ending on the last trading day
of the preceding quarter; (ii) on or prior to
February 10, 2019, the trading price for these notes falls
below certain thresholds; (iii) these notes have been
called for redemption; or (iv) specified corporate
transactions occur. The Company may redeem these notes, in whole
or in part, beginning on February 10, 2009, at a redemption
price equal to the sum of the issue price, plus accrued original
issue discount, plus any accrued and unpaid cash interest. The
holders of these notes may require the Company to repurchase the
notes on February 10, 2009 at a price of $583.40 per
note plus accrued and unpaid cash interest, if any, on
February 10, 2014 at a price of $698.20 per note plus
accrued and unpaid cash interest, if any, and on
February 10, 2019 at a price of $835.58 per note plus
accrued and unpaid cash interest, if any. The Company has filed
a shelf registration statement with the U.S. Securities and
Exchange Commission covering the resale of the February 2004
Notes and the shares of common stock issuable upon conversion
thereof. The Company plans to use the net proceeds from the sale
of these notes for working capital and to fund its obligations
with respect to regional jet deliveries.
In June 2003, the Company completed the private placement of
senior convertible notes (the June 2003 Notes) due
2023, which resulted in gross proceeds of $100.1 million
($97.1 million net). Cash interest is payable on these
notes at a rate of 2.4829% per year on the aggregate amount
due at maturity, payable semiannually in arrears on June 16 and
December 16 of each year, beginning December 16, 2003,
until June 16, 2008. After that date, the Company will not
pay cash interest on these notes prior to maturity, and the
notes will begin accruing compounded interest at a rate of 6.25%
until maturity. On June 16, 2023, the maturity date of
these notes, the principal amount of each note will be $1,000.
The aggregate amount due at maturity, including interest accrued
from June 16, 2008, will be $252 million. The June
2004 Notes and the note guarantees are senior unsecured
obligations and rank equally with the Companys existing
and future senior unsecured indebtedness. These notes and the
note guarantees are junior to any secured obligations of the
Company and any of its wholly owned subsidiaries to the extent
of the collateral pledged.
The June 2003 Notes are convertible into shares of the
Companys common stock at a conversion rate of
39.727 shares per $1,000 in principal amount at maturity of
the notes. This conversion rate is subject to adjustment in
certain circumstances. Holders of these notes may convert their
notes only if: (i) the sale price of the Companys
common stock exceeds 110% of the accreted conversion price for
at least 20 trading days in the 30 consecutive trading days
ending on the last trading day of the preceding quarter;
(ii) prior to June 16, 2018, the trading price for
these notes falls below certain thresholds; (iii) these
notes have been called for redemption; or (iv) specified
corporate transactions occur. The Company may redeem these
notes, in whole or in part, beginning on June 16, 2008, at
a redemption price equal to the issue price, plus accrued
original issue discount, plus any accrued and unpaid cash
interest. The holders of these notes may require the Company to
repurchase the notes on June 16, 2008 at a price of
$397.27 per note plus accrued and unpaid cash interest, if
any, on June 16, 2013 at a price of $540.41 per note
plus accrued and unpaid cash interest, if any, and on
June 16, 2018 at a price of $735.13 per note plus
accrued and unpaid cash interest, if any. As the sale price of
our common stock exceeded 110% of the accreted conversion price
for at least 20 trading days in the 30 consecutive trading
day period ending September 30, 2003, these notes became
convertible September 30, 2003.
Repayment of the February 2004 and June 2003 Notes
(collectively, the Notes) is jointly and severally
guaranteed on an unconditional basis by the Companys
wholly owned domestic subsidiaries. Except as otherwise
specified in the indentures pursuant to which the Notes were
issued, there are no restrictions on the ability of such
subsidiaries to transfer funds to the Company in the form of
cash dividends, loans or advances. General provisions of
applicable state law, however, may limit the ability of any
subsidiary to pay dividends or make distributions to the Company
in certain circumstances.
Separate financial statements of the Companys subsidiaries
are not included herein because the aggregate assets,
liabilities, earnings, and equity of the subsidiaries are
substantially equivalent to the assets, liabilities, earnings,
and equity of the Company on a consolidated basis; the
subsidiaries are jointly and
59
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
severally liable for the repayment of the Notes; and the
separate financial statements and other disclosures concerning
the subsidiaries are not deemed by the Company to be material to
investors.
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Notes payable to bank, collateralized by the underlying
aircraft, due 2019
|
|
$ |
348,452 |
|
|
$ |
248,135 |
|
Senior convertible notes due June 2023
|
|
|
100,112 |
|
|
|
100,112 |
|
Senior convertible notes due February 2024
|
|
|
100,000 |
|
|
|
100,000 |
|
Notes payable to manufacturer, principal and interest due
monthly through 2011 at variable rates of interest ranging from
3.64% to 6.57% at September 30, 2005, collateralized by the
underlying aircraft.
|
|
|
87,949 |
|
|
|
93,900 |
|
Note payable to financial institution due 2013, principal and
interest due monthly at 7% per annum through 2008
converting to 12.5% thereafter, collateralized by the underlying
aircraft.
|
|
|
24,181 |
|
|
|
25,758 |
|
Note payable to manufacturer, principal due semi-annually,
interest at 7% due quarterly through 2007
|
|
|
2,578 |
|
|
|
3,363 |
|
Mortgage note payable to bank, principal and interest at
71/2%
due monthly through 2009
|
|
|
923 |
|
|
|
961 |
|
Other
|
|
|
174 |
|
|
|
234 |
|
|
|
|
|
|
|
|
Total debt
|
|
|
664,369 |
|
|
|
572,463 |
|
Less current portion
|
|
|
(27,787 |
) |
|
|
(21,850 |
) |
|
|
|
|
|
|
|
Long-term debt
|
|
$ |
636,582 |
|
|
$ |
550,613 |
|
|
|
|
|
|
|
|
Principal maturities of long-term debt for each of the next five
years and thereafter are as follows:
|
|
|
|
|
|
|
Years Ending | |
|
|
September 30, | |
|
|
| |
|
|
(In thousands) | |
2006
|
|
$ |
27,787 |
|
2007
|
|
|
30,050 |
|
2008
|
|
|
29,536 |
|
2009
|
|
|
31,741 |
|
2010
|
|
|
42,087 |
|
Thereafter
|
|
|
503,168 |
|
|
|
10. |
Common Stock Purchase and Retirement |
In December 1999, the Companys Board of Directors
authorized the Company to purchase up to 10%, or approximately
3.4 million shares of the Companys then-outstanding
common stock. In January 2001, October 2002, October 2004 and
April 2005, the Board of Directors amended its original purchase
plan and authorized the purchase of one million, two million,
two million and one million additional shares of common stock,
respectively. As of September 30, 2005, the Company has
acquired and retired approximately 8.0 million shares of
its outstanding common stock at an aggregate cost of
approximately $48.0 million, leaving approximately
1.4 million shares available for purchase under the current
Board authorizations. Purchases are made at managements
discretion based on market conditions and the Companys
financial resources. Subsequent to year end, the Companys
Board of Directors authorized the Company to purchase up to an
additional 10 million shares of the Companys
outstanding common stock.
60
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
1,720 |
|
|
$ |
|
|
|
$ |
777 |
|
|
State
|
|
|
1,954 |
|
|
|
176 |
|
|
|
1,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,674 |
|
|
|
176 |
|
|
|
2,008 |
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
28,905 |
|
|
|
16,765 |
|
|
|
13,278 |
|
|
State
|
|
|
2,720 |
|
|
|
1,958 |
|
|
|
424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,625 |
|
|
|
18,723 |
|
|
|
13,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,299 |
|
|
$ |
18,899 |
|
|
$ |
15,710 |
|
|
|
|
|
|
|
|
|
|
|
The difference between the actual income tax expense and the
statutory tax expense (computed by applying the
U.S. federal statutory income tax rate of 35 percent
to income or loss before income taxes) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Computed expected tax expense
|
|
$ |
32,258 |
|
|
$ |
15,813 |
|
|
$ |
14,357 |
|
Increase (reduction) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal taxes
|
|
|
3,029 |
|
|
|
2,134 |
|
|
|
966 |
|
|
Nondeductible compensation
|
|
|
6 |
|
|
|
987 |
|
|
|
|
|
|
Other
|
|
|
(356 |
) |
|
|
45 |
|
|
|
387 |
|
|
Increase (decrease) in valuation allowance
|
|
|
362 |
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,299 |
|
|
$ |
18,899 |
|
|
$ |
15,710 |
|
|
|
|
|
|
|
|
|
|
|
61
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Elements of deferred income tax assets (liabilities) are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$ |
31,396 |
|
|
$ |
47,707 |
|
|
Deferred credits
|
|
|
26,549 |
|
|
|
15,271 |
|
|
Other accrued expenses
|
|
|
5,839 |
|
|
|
5,115 |
|
|
Deferred gains
|
|
|
2,992 |
|
|
|
3,133 |
|
|
Allowance for doubtful receivables
|
|
|
3,392 |
|
|
|
2,710 |
|
|
Alternative minimum tax
|
|
|
3,638 |
|
|
|
1,918 |
|
|
Unrealized trading (gains) losses
|
|
|
197 |
|
|
|
664 |
|
|
Expendable parts
|
|
|
822 |
|
|
|
567 |
|
|
Intangibles
|
|
|
374 |
|
|
|
474 |
|
|
Other
|
|
|
3,655 |
|
|
|
237 |
|
|
Valuation allowance
|
|
|
(362 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$ |
78,492 |
|
|
$ |
77,796 |
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$ |
(92,289 |
) |
|
$ |
(62,923 |
) |
|
Other
|
|
|
(3,631 |
) |
|
|
(676 |
) |
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$ |
(95,920 |
) |
|
$ |
(63,599 |
) |
|
|
|
|
|
|
|
Deferred tax assets include benefits expected to be realized
from the utilization of alternative minimum tax credit
carryforwards of approximately $3.6 million that do not
expire and federal net operating loss carryforwards of
approximately $80.7 million that expire in years 2017
through 2024. The Company also has state net operating loss
carryforwards of approximately $78.4 million that expire in
years 2006 through 2019. During 2005, the Company established a
valuation allowance of $0.4 million for certain state net
operating loss carryforwards that are expected to expire
unutilized in the future. Realization of the remaining deferred
tax assets is dependent upon generating sufficient taxable
income prior to expiration of any net operating loss
carryforwards. Although realization is not assured, management
believes it is more likely than not that the recorded deferred
tax asset, net of the valuation allowance provided, will be
realized.
In March 2004, the Company granted 428,297 shares of restricted
stock to the Companys Chief Executive Officer and the
Companys President and Chief Operating Officer. The
restricted stock shares vest in one-third increments over a
three-year period beginning on April 1, 2004. The shares
under the grant were issued in March 2005. To recognize the
transaction, the Company recorded deferred compensation of
$3.5 million in stockholders equity. The deferred
compensation is amortized on a straight-line basis over the
vesting period of the grants.
In February 2004, the Company completed the private placement of
senior convertible notes due February 2024. At maturity, the
principal amount of each note will be $1,000 and the aggregate
amount due will be $171.4 million. These notes are
convertible into shares of the Companys common stock at a
conversion rate of 40.3737 shares per $1,000 in principal
amount at maturity of the notes, which equals an initial
conversion price of approximately $14.45 per share. This
conversion rate is subject to adjustment in certain
62
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
circumstances. Holders of these notes may convert their notes
only if: (i) the sale price of the Companys common
stock exceeds 110% of the accreted conversion price for at least
20 trading days in the 30 consecutive days ending on the last
trading day of the preceding quarter; (ii) on or prior to
February 10, 2019, the trading price for these notes falls
below certain thresholds; (iii) these notes have been
called for redemption; or (iv) specified corporate
transactions occur. The Company may redeem these notes, in whole
or in part, beginning on February 10, 2009, at a redemption
price equal to the sum of the issue price, plus accrued original
issue discount, plus any accrued and unpaid cash interest. The
holders of these notes may require the Company to repurchase the
notes on February 10, 2009 at a price of $583.40 per
note plus accrued and unpaid cash interest, if any, on
February 10, 2014 at a price of $698.20 per note plus
accrued and unpaid cash interest, if any, and on
February 10, 2019 at a price of $835.58 per note plus
accrued and unpaid cash interest, if any.
In June 2003, the Company completed the private placement of
senior convertible notes due June 2023. At maturity, the
principal amount of each note will be $1,000 and the aggregate
amount due will be $252 million. These notes are
convertible into shares of the Companys common stock at a
conversion rate of 39.727 shares per $1,000 in principal
amount at maturity of the notes which equals an initial
conversion price of approximately $10.00 per share. This
conversion rate is subject to adjustment in certain
circumstances. Holders of these notes may convert their notes
only if: (i) the sale price of our common stock exceeds
110% of the accreted conversion price for at least 20 trading
days in the 30 consecutive trading days ending on the last
trading day of the preceding quarter; (ii) prior to
June 16, 2018, the trading price for these notes falls
below certain thresholds; (iii) these notes have been
called for redemption; or (iv) specified corporate
transactions occur. The Company may redeem these notes, in whole
or in part, beginning on June 16, 2008, at a redemption
price equal to the issue price, plus accrued original issue
discount, plus any accrued and unpaid cash interest. The holders
of these notes may require the Company to repurchase the notes
on June 16, 2008 at a price of $397.27 per note plus
accrued and unpaid cash interest, if any, on June 16, 2013
at a price of $540.41 per note plus accrued and unpaid cash
interest, if any, and on June 16, 2018 at a price of
$735.13 per note plus accrued and unpaid cash interest, if
any.
In February 2002, the Company entered into an agreement with
Raytheon Aircraft Company (the Raytheon Agreement)
to, among other things, reduce the operating costs of the
Companys Beechcraft 1900D fleet. In connection with the
Raytheon Agreement and subject to the terms and conditions
contained therein, Raytheon agreed to provide up to
$5.5 million in annual operating subsidy payments to the
Company contingent upon the Company remaining current on its
payment obligations to Raytheon. Approximately
$5.3 million, $5.3 million and $6.0 million was
recorded as a reduction to flight operations during 2005, 2004
and 2003, respectively. In return, the Company granted Raytheon
a warrant to purchase up to 233,068 shares of our common
stock at a per share exercise price of $10. The Company recorded
the issuance of the warrant at a value of $0.4 million
within stockholders equity as a debit and credit to common
stock. The contra equity value of the warrant was being
amortized to expense over the vesting period of three years.
Raytheon must pay a purchase price of $1.50 per common
share underlying the warrant. The warrant was exercisable at any
time over a three-year period following its date of purchase.
Raytheon is completely vested in the 233,068 shares of
common stock underlying the warrant.. As of September 30,
2005, Raytheon has exercised its option to purchase all
components of the warrant.
At September 30, 2005, the Company sponsored the following
stock-based compensation plans:
|
|
|
In March 1993, and December 1994, the Company adopted stock
option plans for outside directors. These plans originally
provided for the grant of options to purchase up to
450,000 shares of the Companys common stock at fair
value on the date of grant. At September 30, 2005, there
were 52,000 options outstanding under this plan. There are
no options available for grant under this plan. |
|
|
In July 1998, the Company adopted a second stock option plan for
outside directors. This plan, as amended, provides for the grant
of options to purchase up to 275,000 shares of the
Companys common stock at fair value on the date of the
grant. On February 11, 2003 an additional 200,000 options
were |
63
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
approved by the stockholders to be granted under this plan. At
September 30, 2005, there were 235,739 options
outstanding and 92,299 options available for future grants under
this plan. |
|
|
In April 1996, the Company adopted an employee stock option plan
under the new management incentive program (the 1996 Stock
Option Plan) that provides for the granting of options to
purchase up to 2,800,000 shares of the Companys
common stock at the fair value on the date of grant. On
July 24, 1998, an additional 1,500,000 options were
approved by the stockholders to be granted under this plan. At
September 30, 2005, there were 2,140,308 options
outstanding. No future grants will be made under this plan. |
|
|
In June 1998, the Company adopted a Key Officer Stock Option
Plan for compensating the Companys Chief Executive Officer
and Chief Operating Officer, which provided for the grant of
options to purchase up to 1,600,000 shares of the
Companys common stock at the fair value on the date of
grant. At September 30, 2005 there were 1,112,533 options
outstanding. There are no options available for grant under this
plan. |
|
|
In June 1999, the Company adopted the 1999 Non-Qualified Stock
Option Plan in connection with the CCAir merger. At
September 30, 2005, there were 49,712 options outstanding
and there are no options available for future grants under this
plan. |
|
|
In October 2001, the Company adopted a Key Officer Stock Option
Plan for compensating the Companys Chief Executive Officer
and Chief Operating Officer, which provided for the grant of
options to purchase up to 2,000,000 shares of the
Companys common stock at the fair value on the date of
grant. At September 30, 2005 there were 1,000,000 options
outstanding and 1,000,000 options available for future grants
under this plan. |
|
|
In February 2005, the Companys shareholders approved the
adoption of the 2005 Employee Stock Incentive Plan. The plan
provides for the grant of options to purchase up to
1,500,000 shares of common stock to officers and key
employees. At September 30, 2005, there were 615,650
options outstanding and 1,256,892 options available for future
grants under this plan, which includes 372,542 options
authorized but not issued under the 1996 Option Plan. |
Generally, options granted to employees vest over a three-year
period and options granted to directors vest immediately upon
grant or six months following the grant.
Transactions involving stock options under these plans are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
|
|
Shares | |
|
Exercise | |
|
Shares | |
|
Exercise | |
|
Shares | |
|
Exercise | |
|
|
(000) | |
|
Price | |
|
(000) | |
|
Price | |
|
(000) | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Outstanding at beginning of year
|
|
|
4,572 |
|
|
$ |
7.05 |
|
|
|
4,376 |
|
|
$ |
6.73 |
|
|
|
3,843 |
|
|
$ |
7.10 |
|
Granted
|
|
|
947 |
|
|
|
6.58 |
|
|
|
430 |
|
|
|
9.89 |
|
|
|
1,019 |
|
|
|
4.96 |
|
Exercised
|
|
|
(166 |
) |
|
|
4.75 |
|
|
|
(110 |
) |
|
|
5.58 |
|
|
|
(270 |
) |
|
|
5.42 |
|
Canceled/ Forfeited
|
|
|
(147 |
) |
|
|
8.07 |
|
|
|
(124 |
) |
|
|
6.95 |
|
|
|
(216 |
) |
|
|
6.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
5,206 |
|
|
$ |
6.99 |
|
|
|
4,572 |
|
|
$ |
7.20 |
|
|
|
4,376 |
|
|
$ |
6.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
3,765 |
|
|
$ |
7.04 |
|
|
|
3,161 |
|
|
$ |
7.13 |
|
|
|
2,485 |
|
|
$ |
7.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2005, the range of exercise prices for the
aforementioned options was $2.31 to $12.56.
64
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information concerning options
outstanding at September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding | |
|
Stock Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Average | |
|
Average | |
|
|
|
Average | |
|
|
Number | |
|
Remaining | |
|
Exercise | |
|
Number | |
|
Exercise | |
Range of Exercise Prices |
|
Outstanding | |
|
Life | |
|
Price | |
|
Exercisable | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$ 1.73 - $ 3.45
|
|
|
28,723 |
|
|
|
2.0 Years |
|
|
$ |
2.44 |
|
|
|
26,256 |
|
|
$ |
2.37 |
|
$ 3.46 - $ 5.18
|
|
|
1,204,455 |
|
|
|
5.5 Years |
|
|
|
4.57 |
|
|
|
959,357 |
|
|
|
4.50 |
|
$ 5.19 - $ 6.90
|
|
|
1,580,592 |
|
|
|
6.2 Years |
|
|
|
6.09 |
|
|
|
889,068 |
|
|
|
5.99 |
|
$ 6.91 - $ 8.63
|
|
|
1,820,568 |
|
|
|
4.2 Years |
|
|
|
8.12 |
|
|
|
1,441,168 |
|
|
|
8.23 |
|
$ 8.64 - $10.35
|
|
|
92,956 |
|
|
|
5.9 Years |
|
|
|
9.59 |
|
|
|
86,489 |
|
|
|
9.57 |
|
$10.36 - $12.08
|
|
|
359,280 |
|
|
|
4.6 Years |
|
|
|
11.23 |
|
|
|
313,082 |
|
|
|
11.18 |
|
$12.09 - $13.80
|
|
|
119,368 |
|
|
|
3.8 Years |
|
|
|
12.51 |
|
|
|
49,502 |
|
|
|
12.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options at September 30, 2005
|
|
|
5,205,942 |
|
|
|
5.2 Years |
|
|
|
6.99 |
|
|
|
3,764,922 |
|
|
|
7.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has a 401(k) plan covering the employees of Mesa
Airlines, Freedom, Air Midwest and the airline support
operations (the Mesa Plan). Under the Mesa Plan,
employees may contribute up to 15 percent of their annual
compensation. Employer contributions are made at the discretion
of the Board of Directors. During fiscal 2005, the Company made
matching contributions of 25 percent of employee
contributions up to 10 percent of annual employee
compensation. Employees are eligible to participate in the plan
upon completion of one year of service. The employee vests
20% per year in employer contributions. Employees become
fully vested in employer contributions after completing six
years of employment. The Company has the right to terminate the
401(k) plan at any time. Contributions by the Company to the
Mesa Plan for the years ended September 30, 2005, 2004 and
2003 were approximately $0.9 million, $0.8 million and
$0.7 million, respectively.
At September 30, 2005, the Company leased 142 aircraft
under non-cancelable operating leases with remaining terms of up
to 18.5 years. The aircraft leases require the Company to
pay all taxes, maintenance, insurance and other operating
expenses. The Company has the option to terminate certain of the
leases at various times throughout the lease. Aggregate rental
expense under all operating leases totaled approximately
$194.7 million, $183.5 million and $130.2 million
for the years ended September 30, 2005, 2004 and 2003,
respectively.
Future minimum lease payments under non-cancelable operating
leases are as follows:
|
|
|
|
|
|
|
Years Ending | |
|
|
September 30, | |
|
|
| |
|
|
(In thousands) | |
2006
|
|
$ |
247,286 |
|
2007
|
|
|
229,636 |
|
2008
|
|
|
206,565 |
|
2009
|
|
|
186,690 |
|
2010
|
|
|
184,988 |
|
Thereafter
|
|
|
1,435,530 |
|
65
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities
(FIN 46), which requires the consolidation
of variable interest entities. The majority of the
Companys leased aircraft are owned and leased through
trusts whose sole purpose is to purchase, finance and lease
these aircraft to the Company; therefore, they meet the criteria
of a variable interest entity. However, since these are single
owner trusts in which the Company does not participate, the
Company is not at risk for losses and is not considered the
primary beneficiary. As a result, the Company is not required to
consolidate any of these trusts or any other entities in
applying FIN 46. Management believes that the
Companys maximum exposure under these leases is the
remaining lease payments.
Under the Companys leveraged lease agreements, the Company
typically agree to indemnify the equity/owner participant
against liabilities that may arise due to changes in benefits
from tax ownership of the respective leased aircraft. The terms
of these contracts range up to 18.5 years. The Company did
not accrue any liability relating to the indemnification to the
equity/owner participant because the probability of this
occurring is remote.
As of September 30, 2005, we owned 35 Beechcraft 1900D
aircraft and were operating 22 of these aircraft. During fiscal
year 2005, the Company leased four of its Beechcraft 1900D
aircraft to Gulfstream International Airlines, a regional
turboprop air carrier based in Ft. Lauderdale, Florida for
a term of five years. In January 2005, we entered into an
agreement to lease ten of our Beechcraft 1900D aircraft to Big
Sky Transportation Co. (Big Sky), a regional
turboprop carrier based in Billings, Montana. As of
September 30, 2005, we had leased nine aircraft to Big Sky
and leased the tenth aircraft to Big Sky in the first quarter of
fiscal 2006 for a term of five years.
|
|
15. |
Commitments and Contingencies |
In May 2005, the Company amended its code-sharing arrangement
with United to allow the Company to put up to an additional 30
50-seat regional jet aircraft into the United Express system.
The first of these aircraft were put into service in October
2005. The agreement with respect to the additional 30 50-seat
regional jet aircraft expires in April 2010. Additionally, the
expiration dates under the existing code-share agreement with
respect to certain aircraft were extended. The code-share
agreement for (i) the ten Dash-8 aircraft terminates in
July 2013, and United Airlines right to terminate earlier
will not begin until April 2010, (ii) the 15 50-seat
CRJ-200s now terminates in April 2010, (iii) the 15 70-seat
regional jets (to be delivered upon the withdrawal of the
50-seat regional jets) terminates on the earlier of ten years
from delivery date or October 2018 and (iv) the remaining
15 70-seat regional jets terminates in three tranches between
December 2011 and December 2013. In connection with the
amendment, the Company paid three $10 million payments to
United as follows: i) $10 million was paid in June
2005, ii) $10 million was paid in October 2005, and iii)
$10 million was paid in November 2005. Amounts paid are
recorded as a deferred charge and included in other assets on
the balance sheet. The deferred charge is being amortized over
the term of the code-share agreement as a reduction of passenger
revenue. Amortization of $0.2 million was recorded in
fiscal 2005.
In May 2005, the Company announced a code-share arrangement
between the Company, Freedom, and Delta that provides for
Freedom to become a Delta Connection partner. Under the terms of
the agreement, Freedom commenced operations in October 2005 and
will operate up to 30 50-seat regional jet aircraft on routes
throughout Deltas network. The arrangement required Mesa
to partially reimburse Deltas lease payments associated
with Deltas 30 Dornier Fairchild 328 jets throughout the
term of the agreement in exchange for performing flight services
under the agreement; however, the requirement to reimburse Delta
for certain lease costs was terminated when Delta filed for
bankruptcy protection. The code-share arrangement will terminate
with respect to each aircraft, on an aircraft-by-aircraft basis,
beginning in approximately twelve years. Delta may terminate the
code-share agreement at any time, with or without cause, upon
twelve months prior written notice following the sixth
anniversary of the in-service date of the 30th aircraft
added to the Delta
66
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Connection fleet. However, Delta has not yet assumed our
code-share agreement in its bankruptcy proceedings and could
choose to terminate this agreement at any time prior to its
emergence from bankruptcy.
As of September 30, 2005, the Company had firm orders with
Bombardier Aerospace, Inc. for eight CRJ-900 aircraft (seven of
which can be converted to CRJ-700s). In addition to the firm
orders, Mesa has an option to acquire an additional 72 CRJ-700
and CRJ-900 regional jets that are exercisable through 2009 and
40 CRJ-700 and CRJ-900 regional jets that are exercisable in
2010 and beyond. In conjunction with this purchase agreement,
Mesa had $15.0 million on deposit with BRAD that was
included in lease and equipment deposits at September 30,
2005. The remaining deposits are expected to be returned upon
completion of permanent financing on each of the last five
aircraft ($3.0 million per aircraft).
The Company accrues for potential income tax contingencies when
it is probable that a liability has been incurred and the amount
of the contingency can be reasonably estimated. The
Companys accrual for income tax contingencies is adjusted
for changes in circumstances and additional uncertainties, such
as amendments to existing tax law, both legislated and concluded
through the various jurisdictions tax court systems. At
September 30, 2005, the Company had an accrual for income
tax contingencies of approximately $2.9 million. If the
amounts ultimately settled are greater than the accrued
contingencies, the Company would record additional income tax
expense in the period in which the assessment is determined. To
the extent amounts are ultimately settled for less than the
accrued contingencies, or the Company determines that a
liability is no longer probable, the liability is reversed as a
reduction of income tax expense in the period the determination
is made.
In August 2005, the Company entered into a ten-year agreement
with AAR, for the management and repair of certain of the
Companys CRJ-200, -700, -900 and ERJ-145 aircraft rotable
spare parts inventory. Under the agreement, the Company is
required to pay AAR a monthly fee based upon flight hours for
access to and maintenance of the inventory. The agreement also
contains certain minimum monthly payments that Mesa must make to
AAR. At termination, the Company may elect to purchase the
covered inventory at fair value, but is not contractually
obligated to do so. The agreement is contingent upon the Company
terminating an agreement for the Companys CRJ-200 aircraft
rotable spare parts inventory with GECAS, and including these
rotables in the arrangement. The Company notified GECAS of its
intent to cancel that agreement in August and terminated the
agreement in November 2005.
Future minimum payments under the agreement are as follows:
|
|
|
|
|
|
|
Years Ending | |
|
|
September 30, | |
|
|
| |
|
|
(In thousands) | |
2006
|
|
$ |
19,129 |
|
2007
|
|
|
22,787 |
|
2008
|
|
|
26,158 |
|
2009
|
|
|
28,922 |
|
2010
|
|
|
31,969 |
|
Thereafter
|
|
|
172,295 |
|
The Company also has long-term contracts for the performance of
engine maintenance on some of its aircraft. A description of
each of these contracts is as follows:
|
|
|
In January 1997, the Company entered into a 10-year engine
maintenance contract with General Electric Aircraft Engines
(GE) for its CRJ-200 aircraft. The agreement was
subsequently amended in the first quarter of fiscal 2003. The
amended contract requires a monthly payment based upon the prior
months flight hours incurred by the covered engines. The
hourly rate increases over time based upon the engine overhaul
costs that are expected to be incurred in that year and is
subject to escalation based on |
67
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
changes in certain price indices. Maintenance expense is
recognized based upon the product of flight hours flown and the
rate in effect for the period. The contract also provides for a
fixed number of engine overhauls per year. To the extent that
the number of actual overhauls is less than the fixed number, GE
is required to issue to Mesa a credit for the number of events
less than the fixed number multiplied by an agreed upon price.
To the extent that the number of actual overhauls is greater
than the fixed number, Mesa is required to pay GE for the number
of events greater than the fixed number multiplied by the same
agreed upon price. Any adjustments payments or credits are
recognized in the period they occur. |
|
|
In April 1997, the Company entered into a 10-year engine
maintenance contract with Pratt & Whitney Canada Corp.
(PWC) for its Dash 8-200 aircraft. The contract
requires Mesa to pay PWC for the engine overhaul upon completion
of the maintenance based upon a fixed dollar amount per flight
hour. The rate under the contract is subject to escalation based
on changes in certain price indices. |
|
|
In April 2000, the Company entered into a 10-year engine
maintenance contract with Rolls-Royce Allison
(Rolls-Royce) for its ERJ aircraft. The contract
requires Mesa to pay Rolls-Royce for the engine overhaul upon
completion of the maintenance based upon a fixed dollar amount
per flight hour. The rate per flight hour is based upon certain
operational assumptions and may vary if the engines are operated
differently than these assumptions. The rate is also subject to
escalation based on changes in certain price indices. The
agreement with Rolls-Royce also contains a termination clause
and look back provision to provide for any shortfall between the
cost of maintenance incurred by the provider and the amount paid
up to the termination date by the Company and includes a 15%
penalty on such amount. The Company does not anticipate an early
termination under the contract. |
|
|
In May 2002, the Company entered into a six-year fleet
management program with PWC to provide maintenance for the
Companys Beechcraft 1900D turboprop engines. The contract
requires a monthly payment based upon flight hours incurred by
the covered aircraft. The hourly rate is subject to annual
adjustment based on changes in certain price indices and is
guaranteed to increase by no less than 1.5% per year.
Pursuant to the agreement, the Company sold certain assets of
its Desert Turbine Services unit, as well as all spare PT6
engines to PWC for $6.8 million, which approximated the net
book value of the assets. Pursuant to the agreement, the Company
provided a working capital loan to PWC for the same amount,
which is to be repaid through a reduced hourly rate being
charged for maintenance. The agreement covers all of the
Companys Beechcraft 1900D turboprop aircraft and engines.
The agreement also contains a termination clause and look back
provision to provide for any shortfall between the cost of
maintenance incurred by the provider and the amount paid up to
the termination date by the Company and provides for return of a
pro-rated share of the prepaid amount upon early termination.
The Company does not anticipate an early termination under the
contract. |
|
|
The Company is also involved in various legal proceedings and
FAA civil action proceedings that the Company does not believe
will have a material adverse effect upon its business, financial
condition or results of operations, although no assurance can be
given to the ultimate outcome of any such proceedings. |
|
|
16. |
Financial Instruments |
The carrying amount of cash and cash equivalents, receivables,
accounts payable, accrued compensation and other liabilities
approximates fair value due to the short maturity periods of
these instruments. The fair value of the Companys
marketable securities is based on quoted marked prices. The
Companys variable rate long-term debt had a carrying value
of approximately $436.4 million at September 30, 2005,
which approximates fair value because these borrowings have
variable interest rate terms that approximate market interest
rates for similar debt instruments. The Companys fixed
rate long-term debt, having a carrying value of approximately
$228.0 million at September 30, 2005, had a fair value
of approximately $193.9 million. The Company uses a
financial model to calculate the fair value of its senior
convertible debt.
68
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
17. |
Impairment and Restructuring Charges (Credits) |
|
|
|
Beechcraft 1900D Impairment and Restructuring
Charges |
In fiscal 2003, the Company returned the three remaining B1900D
aircraft permitted under its agreement with Raytheon, and as a
result of additional costs required of meeting the return
conditions of these and previous aircraft, the Company recorded
an additional impairment charge of $1.1 million.
In the fiscal 2004, the Company recognized an impairment and
restructuring charge of $12.4 million related to the
planned early return of seven leased B1900D aircraft with lease
expirations between December 2004 and September 2005. The
Company negotiated the terms of the early return with the
aircraft lessors and took a charge that included
$2.4 million for the present value of future lease
payments, $2.4 million for the negotiated settlement of
return conditions, $1.2 million for the cancellation of
maintenance agreements, $1.1 million for the difference
between the buyout option of two aircraft and the proceeds from
the subsequent sale of the aircraft, $0.8 million to reduce
maintenance deposits to net realizable value and
$4.5 million to reduce the value of rotable and expendable
inventory to fair value less costs to sell.
|
|
|
CCAir Impairment and Restructuring |
In fiscal 2002, as a result of the inability of CCAir to reduce
its operating costs and its continued history of operating
losses, as well as receiving a notification by US Airways of
their intent to cancel CCAirs pro-rate contract effective
November 3, 2002, management at CCAir elected to cease
operations on the effective date of US Airways
cancellation. As a result, the Company took an impairment and
restructuring charge of $19.8 million in fiscal 2002. At
the time of the shutdown, it was the Companys intention to
maintain the legal entity of CCAir as well as its operating
certificate with the possibility of either restructuring the
airline and operating it under amended labor agreements in the
future or affecting a sale of CCAir.
In fiscal 2003, CCAir surrendered its operating certificate to
the FAA and filed articles of dissolution with the State of
Delaware. As a result of these events and CCAirs lack of
liquidity, it became clear that CCAir would be unable to pay any
of its obligations. In fiscal 2003, in light of CCAirs
inability to pay its obligations and the resulting dissolution,
the Company reversed approximately $12 million of the
restructuring charges recorded in fiscal 2002. The reversal of
these charges was precipitated by the dissolution of CCAir and
the Companys subsequent determination, after consultation
with counsel, that the Company should not be held legally
responsible for the obligations incurred solely by CCAir and not
guaranteed by the Company. Including these charges and
reversals, CCAir had after tax net income of $8.3 million
in fiscal 2003.
In fiscal 2004, the Company reversed approximately
$0.5 million of the restructuring charges recorded in
fiscal 2002 as the recorded liabilities were no longer needed.
In fiscal 2002, the Companys sublease of two Shorts 360
aircraft the Company had been subleasing to an operator in
Europe expired and the Company did not anticipate the lease to
be renewed. As a result, the Company took a charge for
$3.6 million to accrue for the remaining lease payments and
the future costs of returning these aircraft to the lessor.
In fiscal 2005, the Company entered into an agreement with the
lessor for the early return of these two aircraft. The agreement
included the elimination of the aircraft return conditions and
called for a $1.3 million payment. As a result, the Company
reduced its reserve for the costs to return these aircraft to
the agreed upon amount.
69
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The changes in the impairment and restructuring charges for the
three fiscal years ended September 30, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve | |
|
|
|
Reversal | |
|
|
|
Non- | |
|
Reserve | |
|
|
|
|
|
Non- | |
|
Reserve | |
|
|
Oct. 1, | |
|
|
|
of | |
|
Cash | |
|
Cash | |
|
Sept. 30, | |
|
(Provision) | |
|
Cash | |
|
Cash | |
|
Sept. 30, | |
Description of Charge |
|
2002 | |
|
Provision | |
|
Charges | |
|
Utilized | |
|
Utilized | |
|
2003 | |
|
Reversal | |
|
Utilized | |
|
Utilized | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Restructuring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other
|
|
$ |
(658 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
110 |
|
|
$ |
|
|
|
$ |
(548 |
) |
|
$ |
482 |
|
|
$ |
66 |
|
|
$ |
|
|
|
$ |
|
|
Costs to return aircraft
|
|
|
(8,107 |
) |
|
|
(1,050 |
) |
|
|
4,593 |
|
|
|
2,097 |
|
|
|
250 |
|
|
|
(2,217 |
) |
|
|
(2,400 |
) |
|
|
2,400 |
|
|
|
|
|
|
|
(2,217 |
) |
Aircraft lease payments
|
|
|
(9,238 |
) |
|
|
|
|
|
|
7,414 |
|
|
|
120 |
|
|
|
516 |
|
|
|
(1,188 |
) |
|
|
(2,398 |
) |
|
|
2,542 |
|
|
|
594 |
|
|
|
(450 |
) |
Cancellation of maintenance agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,179 |
) |
|
|
1,179 |
|
|
|
|
|
|
|
|
|
Impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of surplus inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,517 |
) |
|
|
|
|
|
|
4,517 |
|
|
|
|
|
Impairment of maintenance deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(823 |
) |
|
|
|
|
|
|
823 |
|
|
|
|
|
Impairment of aircraft and other property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,060 |
) |
|
|
|
|
|
|
1,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(18,003 |
) |
|
$ |
(1,050 |
) |
|
$ |
12,007 |
|
|
$ |
2,327 |
|
|
$ |
766 |
|
|
$ |
(3,953 |
) |
|
$ |
(11,895 |
) |
|
$ |
6,187 |
|
|
$ |
6,994 |
|
|
$ |
(2,667 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[Continued from above, first column repeated]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve | |
|
|
|
|
|
Non- | |
|
Reserve | |
|
|
Sept. 30, | |
|
(Provision) | |
|
Cash | |
|
Cash | |
|
Sept. 30, | |
Description of Charge |
|
2004 | |
|
Reversal | |
|
Utilized | |
|
Utilized | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Restructuring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs to return aircraft
|
|
$ |
(2,217 |
) |
|
$ |
1,187 |
|
|
$ |
1,030 |
|
|
$ |
|
|
|
$ |
|
|
Aircraft lease payments
|
|
|
(450 |
) |
|
|
70 |
|
|
|
144 |
|
|
|
224 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(2,667 |
) |
|
$ |
1,257 |
|
|
$ |
1,174 |
|
|
$ |
224 |
|
|
$ |
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reserve balance above is included in other accrued expenses
on the accompanying consolidated balance sheets.
|
|
18. |
Related Party Transactions |
In February 1999, the Company entered into an agreement with
Barlow Capital, LLC (Barlow), whereby Barlow would
provide financial advisory services related to aircraft leases,
mergers and acquisitions, and certain other financing
arrangements. Under this agreement, the Company paid fees
totaling $0.6 million, $2.5 million and
$1.3 million to Barlow in fiscal 2005, 2004 and 2003,
respectively, for arranging for leasing companies to participate
in the Companys various aircraft financings. At
September 30, 2004, Jonathan Ornstein, the Companys
Chairman of the Board and Chief Executive Officer, and George
Murnane III, the Companys Executive Vice President
and Chief Financial Officer were each members of Barlow and each
held a 25% membership interest therein. Messrs. Ornstein
and Murnane disposed of their membership interest at the end of
the first quarter of fiscal 2005. Distributions to the members
of Barlow were determined by the members on a year-to-year
basis. Substantially all of Barlows revenues were derived
from its agreement with the Company.
On September 9, 1998, the Company entered into an agreement
with International Airline Support Group (IASG)
whereby the Company would consign certain surplus airplane parts
to IASG to sell on the open market. IASG in turn would submit
proceeds from such sales to the Company less a market-based fee.
70
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During fiscal 2003, the Company paid IASG approximately
$0.4 million in commissions on sales of surplus aircraft
parts. During 2003, IASG provided consultation on determining
the fair value of the Companys surplus inventory.
Mr. Ronald Fogleman, a member of the Companys Board
of Directors, and Mr. Murnane were members of the board of
directors of IASG during fiscal 2003 and Mr. Murnane was an
executive officer of IASG before joining the Company.
Messrs. Fogleman and Murnane resigned from the Board of
Directors of IASG in mid 2003. In September 2003, IASG ceased
operations and any inventory remaining at IASG was moved to
another consignment firm.
The Company provides reservation services to Europe-By-Air, Inc.
The Company billed Europe-By-Air approximately $57,000, $57,000
and $61,000 for these services during fiscal 2005, 2004 and
2003, respectively. At September 30, 2004, the Company had
receivables from Europe-By-Air of $24,000. There were no amounts
due as of September 30, 2005. Mr. Ornstein is a major
shareholder of Europe-By-Air.
The Company uses the services of the law firm of
Baker & Hostetler and Piper Rudnick for labor related
legal services. The Company paid the firms an aggregate of
$0.3 million, $0.2 million and $0.3 million for
legal-related services in 2005, 2004 and 2003, respectively.
Mr. Joseph Manson, a member of the Companys Board of
Directors, is a partner with Baker & Hostetler and a
former partner with Piper Rudnick.
During fiscal 2001, the Company established Regional Airline
Partners (RAP), a political interest group formed to
pursue the interests of regional airlines, communities served by
regional airlines and manufacturers of regional airline
equipment. RAP has been involved in various lobbying activities
related to maintaining funding for the Essential Air Service
program under which the Company operates certain of its B1900
aircraft. Mr. Maurice Parker, a member of the
Companys Board of Directors, is the Executive Director of
RAP. During 2005, 2004 and 2003, the Company paid RAPs
operating costs totaling approximately $312,000, $241,000 and
$200,000, respectively. Included in these amounts are the wages
of Mr. Parker, which amounted to $120,000, $87,000 and
$94,000 in fiscal 2005, 2004 and 2003, respectively. Since
inception, the Company has financed 100% of RAPs
operations.
In September 2001, the Company entered into an agreement to
form UFLY, LLC (UFLY), for the purpose of
making strategic investments in US Airways, Inc. UFLY had
investment gains of $28,000 during fiscal 2003.
Mr. Ornstein was a shareholder/owner and managing member of
UFLY. Mr. Ornstein received no additional compensation from
the Company or UFLY for his role as managing member of UFLY.
UFLYs assets were distributed and UFLY was dissolved in
fiscal 2003.
In fiscal 2003, Durango Pro-Focus used the services of the
Company for pilot training. The Company billed Durango Pro-Focus
$25,000 and $45,000 in fiscal year 2004 and 2003, respectively,
for pilot training services. In 2004, Durango Pro-Focus was
dissolved. Amounts due from Durango Pro-Focus of $70,000 were
written off in fiscal 2004. Mr. Fogleman was the President
and Chief Executive Officer of Durango Pro-Focus.
The Company 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.
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, requires disclosures
related to components of a company for which separate financial
information is available that is evaluated regularly by a
companys chief operating decision maker in deciding the
allocation of resources and assessing performance. The Company
has three airline operating subsidiaries, Mesa Airlines, Freedom
Airlines and Air Midwest, as well as various other subsidiaries
organized to provide support for the Companys airline
operations. In fiscal 2005, the Company aggregated these
subsidiaries into three reportable segments: Mesa Airlines, Air
Midwest/ Freedom and Other. Mesa Airlines operates all of the
Companys regional jets and Dash-8 aircraft pursuant to
revenue-guarantee code-share agreements. Air Midwest and Freedom
71
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
primarily operate the Companys Beech 1900 turboprop
aircraft pursuant to pro-rate code-share agreements. The Other
reportable segment includes Mesa Air Group (the holding
company), RAS, MPD, MAG-AIM, MAGI and Ritz Hotel Management
Corp., all of which support Mesas operating subsidiaries.
Prior to October 2004, the Company operated regional jets in
both Mesa and Freedom. In October 2004, the Company completed
its transition of regional jets from Freedom into Mesa and
transferred a B1900D aircraft from Air Midwest into Freedom. As
such, the Company has aggregated Freedom with Air Midwest
beginning in the first quarter of fiscal 2005. Operating
revenues in the Other segment are primarily sales of rotable and
expendable parts to the Companys operating subsidiaries.
Mesa Airlines provides passenger service with regional jets
under revenue-guarantee contracts with America West, United and
US Airways. Mesa Airlines also previously operated under a
code-share agreement with Frontier Airlines, Inc., which
terminated in December 2003. Mesa Airlines also provides
passenger service with Dash-8 aircraft under revenue-guarantee
contracts with United and America West. As of September 30,
2005, Mesa Airlines operated a fleet of 160 aircraft
108 CRJs, 36 ERJs and 16 Dash-8s.
Air Midwest and Freedom provide passenger service with
Beechcraft 1900D aircraft under pro-rate contracts with America
West, US Airways and Midwest, as well as independent operations
under the brand name of Mesa Airlines. As of September 30,
2005, Air Midwest and Freedom operated a fleet of
22 Beechcraft 1900D turboprop aircraft.
CCAir provided passenger service with Dash-8 and Jetstream 31
turboprop aircraft under pro-rate revenue contracts with US
Airways. CCAir ceased operations on November 3, 2002.
The Other category consists of Mesa Air Group, RAS, MPD,
MAG-AIM, MAGI and Ritz Hotel Management Corp. Mesa Air Group
performs all administrative functions not directly attributable
to any specific operating company. These administrative costs
are allocated to the operating companies based upon specific
criteria including headcount, available seat miles
(ASMs) and other operating statistics.
MPD operates pilot training programs in conjunction with
San Juan College in Farmington, New Mexico and Arizona
State University in Tempe, Arizona. Graduates of these training
programs are eligible to be hired by the Companys
operating subsidiaries. RAS primarily provides repair services
to the Companys operating subsidiaries. MAGI is a captive
insurance company located in Barbados. MAG-AIM is the
Companys inventory procurement and sales company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air | |
|
|
|
|
|
|
|
|
|
|
Midwest/ | |
|
|
|
|
|
|
Year Ended September 30, 2005 (000s) |
|
Mesa | |
|
Freedom | |
|
Other | |
|
Eliminations | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Total operating revenues
|
|
$ |
1,064,093 |
|
|
$ |
62,681 |
|
|
$ |
297,764 |
|
|
$ |
(288,270 |
) |
|
$ |
1,136,268 |
|
Depreciation and amortization
|
|
|
39,718 |
|
|
|
232 |
|
|
|
4,666 |
|
|
|
(385 |
) |
|
|
44,231 |
|
Operating income (loss)
|
|
|
138,310 |
|
|
|
(7,482 |
) |
|
|
41,855 |
|
|
|
(43,421 |
) |
|
|
129,262 |
|
Interest expense
|
|
|
(33,202 |
) |
|
|
|
|
|
|
(11,838 |
) |
|
|
574 |
|
|
|
(44,466 |
) |
Interest income
|
|
|
2,859 |
|
|
|
13 |
|
|
|
603 |
|
|
|
(574 |
) |
|
|
2,901 |
|
Income (loss) before income tax
|
|
|
113,001 |
|
|
|
(7,838 |
) |
|
|
30,424 |
|
|
|
(43,421 |
) |
|
|
92,166 |
|
Income tax (benefit)
|
|
|
43,280 |
|
|
|
(3,002 |
) |
|
|
(11,652 |
) |
|
|
(16,631 |
) |
|
|
35,299 |
|
Total assets
|
|
|
1,328,180 |
|
|
|
10,705 |
|
|
|
320,631 |
|
|
|
(491,845 |
) |
|
|
1,167,671 |
|
Capital expenditures (including non-cash)
|
|
|
376,181 |
|
|
|
49 |
|
|
|
19,518 |
|
|
|
|
|
|
|
395,748 |
|
72
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mesa/ | |
|
Air | |
|
|
|
|
|
|
Year Ended September 30, 2004 (000s) |
|
Freedom | |
|
Midwest | |
|
Other | |
|
Eliminations | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Total operating revenues
|
|
$ |
807,736 |
|
|
$ |
81,714 |
|
|
$ |
365,858 |
|
|
$ |
(358,496 |
) |
|
$ |
896,812 |
|
Depreciation and amortization
|
|
|
24,749 |
|
|
|
432 |
|
|
|
2,820 |
|
|
|
|
|
|
|
28,001 |
|
Operating income (loss)
|
|
|
81,761 |
|
|
|
(9,635 |
) |
|
|
52,615 |
|
|
|
(57,383 |
) |
|
|
67,358 |
|
Interest expense
|
|
|
(16,564 |
) |
|
|
(139 |
) |
|
|
(8,645 |
) |
|
|
285 |
|
|
|
(25,063 |
) |
Interest income
|
|
|
851 |
|
|
|
6 |
|
|
|
591 |
|
|
|
(285 |
) |
|
|
1,163 |
|
Income (loss) before income tax
|
|
|
67,311 |
|
|
|
(9,830 |
) |
|
|
45,082 |
|
|
|
(57,382 |
) |
|
|
45,181 |
|
Income tax (benefit)
|
|
|
28,156 |
|
|
|
(4,112 |
) |
|
|
18,858 |
|
|
|
(24,003 |
) |
|
|
18,899 |
|
Total assets
|
|
|
1,054,028 |
|
|
|
17,196 |
|
|
|
403,238 |
|
|
|
(352,923 |
) |
|
|
1,121,537 |
|
Capital expenditures (including non-cash)
|
|
|
474,449 |
|
|
|
243 |
|
|
|
39,527 |
|
|
|
|
|
|
|
514,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mesa/ | |
|
Air | |
|
|
|
|
|
|
|
|
Year Ended September 30, 2003 (000s) |
|
Freedom | |
|
Midwest | |
|
CCAir | |
|
Other | |
|
Eliminations | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total operating revenues
|
|
$ |
507,555 |
|
|
$ |
86,142 |
|
|
$ |
1,254 |
|
|
$ |
175,956 |
|
|
$ |
(170,917 |
) |
|
$ |
599,990 |
|
Depreciation and amortization
|
|
|
12,453 |
|
|
|
709 |
|
|
|
|
|
|
|
2,538 |
|
|
|
|
|
|
|
15,700 |
|
Operating income (loss)
|
|
|
45,537 |
|
|
|
(9,391 |
) |
|
|
11,810 |
|
|
|
44,034 |
|
|
|
(36,711 |
) |
|
|
55,279 |
|
Interest expense
|
|
|
(10,997 |
) |
|
|
|
|
|
|
(173 |
) |
|
|
(1,720 |
) |
|
|
226 |
|
|
|
(12,664 |
) |
Interest income
|
|
|
837 |
|
|
|
4 |
|
|
|
4 |
|
|
|
593 |
|
|
|
(275 |
) |
|
|
1,163 |
|
Income (loss) before income tax and minority interest
|
|
|
28,855 |
|
|
|
(6,817 |
) |
|
|
13,486 |
|
|
|
42,253 |
|
|
|
(36,757 |
) |
|
|
41,020 |
|
Income tax (benefit)
|
|
|
11,051 |
|
|
|
(2,611 |
) |
|
|
5,165 |
|
|
|
16,183 |
|
|
|
(14,078 |
) |
|
|
15,710 |
|
Total assets
|
|
|
610,228 |
|
|
|
19,073 |
|
|
|
441 |
|
|
|
310,095 |
|
|
|
(222,901 |
) |
|
|
716,936 |
|
Capital expenditures (including non- cash)
|
|
|
408,467 |
|
|
|
121 |
|
|
|
|
|
|
|
21,421 |
|
|
|
|
|
|
|
430,009 |
|
|
|
20. |
Valuation and Qualifying Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions/ | |
|
|
|
|
|
|
|
|
Subtractions | |
|
|
|
|
|
|
Balance at | |
|
Charged to | |
|
|
|
|
|
|
Beginning | |
|
Costs and | |
|
|
|
Balance at | |
|
|
of Year | |
|
Expenses | |
|
Deductions | |
|
End of Year | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Allowance for Obsolescence Deducted from Expendable Parts and
Supplies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005
|
|
$ |
1,481 |
|
|
$ |
1,195 |
|
|
$ |
(529 |
) |
|
$ |
2,147 |
|
September 30, 2004
|
|
|
1,906 |
|
|
|
1,269 |
|
|
|
(1,694 |
) |
|
|
1,481 |
|
September 30, 2003
|
|
|
267 |
|
|
|
1,639 |
|
|
|
|
|
|
|
1,906 |
|
Allowance for Doubtful Accounts Deducted from Accounts
Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005
|
|
$ |
7,077 |
|
|
$ |
6,915 |
|
|
$ |
(5,137 |
) |
|
$ |
8,855 |
|
September 30, 2004
|
|
|
4,681 |
|
|
|
4,315 |
|
|
|
(1,919 |
) |
|
|
7,077 |
|
September 30, 2003
|
|
|
12,799 |
|
|
|
(1,771 |
) |
|
|
(6,347 |
) |
|
|
4,681 |
|
73
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
21. |
Selected Quarterly Financial Data (Unaudited) |
The following table presents selected unaudited quarterly
financial data (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
|
| |
|
| |
|
| |
|
| |
2005(1)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$ |
264,804 |
|
|
$ |
263,816 |
|
|
$ |
298,578 |
|
|
$ |
309,070 |
|
Operating Income
|
|
|
28,290 |
|
|
|
28,405 |
|
|
|
36,763 |
|
|
|
35,804 |
|
Net income
|
|
|
13,876 |
|
|
|
10,848 |
|
|
|
17,135 |
|
|
|
15,008 |
|
Net income per share basic
|
|
$ |
0.47 |
|
|
$ |
0.37 |
|
|
$ |
0.59 |
|
|
$ |
0.52 |
|
Net income per share diluted
|
|
$ |
0.32 |
|
|
$ |
0.26 |
|
|
$ |
0.40 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
|
| |
|
| |
|
| |
|
| |
2004(2)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$ |
187,553 |
|
|
$ |
209,664 |
|
|
$ |
239,586 |
|
|
$ |
260,009 |
|
Operating Income
|
|
|
11,597 |
|
|
|
6,708 |
|
|
|
22,785 |
|
|
|
26,268 |
|
Net income
|
|
|
4,134 |
|
|
|
1,769 |
|
|
|
9,658 |
|
|
|
10,721 |
|
Net income per share basic
|
|
$ |
0.13 |
|
|
$ |
0.06 |
|
|
$ |
0.31 |
|
|
$ |
0.35 |
|
Net income per share diluted
|
|
$ |
0.12 |
|
|
$ |
0.05 |
|
|
$ |
0.25 |
|
|
$ |
0.25 |
|
|
|
(1) |
First quarter amounts include the reversal of certain Shorts
aircraft restructuring charges of $1.3 million (pretax). |
|
(2) |
Second quarter amounts include restructuring charges of
$11.3 million (pretax), third quarter amounts include
restructuring charges of $1.1 million, and fourth quarter
amounts include the reversal of certain CCAir restructuring
charges of $0.4 million (pretax). |
|
(3) |
The sum of quarterly earnings per share may not equal annual
earnings per share due to rounding. |
74
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
There were no disagreements with accountants on accounting and
financial disclosure.
|
|
Item 9A. |
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures.
In accordance with Rule 13a-15(b) of the Securities
Exchange Act of 1934, as amended (the Exchange Act),
as of the end of the period covered by this Annual Report on
Form 10-K, the Companys management evaluated,
with the participation of the Companys principal executive
officer and principal financial officer, the effectiveness of
the design and operation of the Companys disclosure
controls and procedures (as defined in Rule 13a-15(e) or
Rule 15d-15(e) under the Exchange Act). Based on their
evaluation of these disclosure controls and procedures, the
Companys chairman of the board and chief executive officer
and the Companys executive vice president and chief
financial officer have concluded that the disclosure controls
and procedures were effective as of the date of such evaluation
to ensure that material information relating to the Company,
including its consolidated subsidiaries, was made known to them
by others within those entities, particularly during the period
in which this Annual Report on Form 10-K was being
prepared. There were no changes in our internal control over
financial reporting during the quarter ended September 30,
2005, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Managements Report on Internal Control over
Financial Reporting.
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act
Rule 13a-15(f) and Rule 15d-15(f). Because of its
inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies
or procedures may deteriorate. Under the supervision and with
the participation of management, including the chief executive
officer and chief financial officer, an evaluation was conducted
of the effectiveness of internal control over financial
reporting based on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Management concluded that the Company maintained
effective internal control over financial reporting as of
September 30, 2005. Managements assessment of the
effectiveness of internal control over financial reporting as of
September 30, 2005 has been audited by Deloitte &
Touche, LLP, an independent registered public accounting firm,
as stated in their report that is included herein.
75
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Mesa Air Group, Inc.
Phoenix, Arizona
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting, that Mesa Air Group, Inc. and subsidiaries
(the Company) maintained effective internal control
over financial reporting as of September 30, 2005, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting
as of September 30, 2005, is fairly stated, in all material
respects, based on the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of September 30, 2005, based on the criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
September 30, 2005 of the Company and our report dated
December 14, 2005 expressed an unqualified opinion and
includes an explanatory paragraph relating to the Companys
significant code-sharing agreements.
Phoenix, Arizona
December 14, 2005
76
|
|
Item 9B. |
Other Information |
None.
PART III
All items in Part III are incorporated herein by reference
as indicated below to our definitive proxy statement for our
2006 annual meeting of stockholders anticipated to be held
February 7, 2006, which will be filed with the SEC, except
for information relating to executive officers under the heading
Executive Officers of the Registrant, which can be
found in Part I following Item 4.
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
The information required by Item 10 is incorporated herein
by reference to the information contained under the headings
Election of Directors and Executive
Officers as set forth in our definitive proxy statement
for our 2006 annual meeting of stockholders.
|
|
Item 11. |
Executive Compensation |
The information required by Item 11 relating to our
directors is incorporated herein by reference to the information
under the heading Compensation of Directors and the
information relating to our executive officers is incorporated
herein by reference to the information under the heading
Executive Compensation as set forth in our
definitive proxy statement for our 2006 annual meeting of
stockholders.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The information required by Item 12 is incorporated herein
by reference to the information under the headings
Election of Directors, Equity Compensation
Plan Information, and Security Ownership of Certain
Beneficial Owners and Management as set forth in our
definitive proxy statement for our 2006 annual meeting of
stockholders.
|
|
Item 13. |
Certain Relationships and Related Transactions |
The information required by Item 13 is incorporated herein
by reference to the information under the heading Certain
Relationships and Related Transactions as set forth in our
definitive proxy statement for our 2006 annual meeting of
stockholders.
|
|
Item 14. |
Principal Accountants Fees and Services |
Information regarding principal accounting fees and services is
incorporated herein by reference to the information under the
heading Disclosure Of Audit And Non-Audit Fees
contained in the Proxy Statement for our 2006 annual meeting of
stockholders.
PART IV
|
|
Item 15. |
Exhibits and Financial Statement, Schedules |
(A) Documents filed as part of this report:
|
|
|
1. Reference is made to Item 8 hereof. |
|
|
2. Exhibits |
77
The following exhibits are either filed as part of this report
or are incorporated herein by reference from documents
previously filed with the Securities and Exchange Commission:
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Reference |
|
|
|
|
|
|
3 |
.1 |
|
Articles of Incorporation of Registrant dated May 28, 1996 |
|
Filed as Exhibit 3.1 to Registrants Form 10-K
for the fiscal year ended September 30, 1996, incorporated
herein by Reference |
|
|
3 |
.2 |
|
Bylaws of Registrant as amended |
|
Filed as Exhibit 3.2 to Registrants Form 10-K
for the fiscal year ended September 30, 1996, incorporated
herein by Reference |
|
|
4 |
.1 |
|
Form of Common Stock certificate |
|
Filed as Exhibit 4.5 to Amendment No. 1 to
Registrants Form S-18, Registration No. 33-11765
filed March 6, 1987, incorporated herein by reference |
|
|
4 |
.2 |
|
Form of Common Stock certificate (issued after November 12,
1990) |
|
Filed as Exhibit 4.8 to Form S-1, Registration
No. 33-35556 effective December 6, 1990, incorporated
herein by reference |
|
|
4 |
.3 |
|
Indenture dated as of June 16, 2003 between the Registrant,
the guarantors signatory thereto and U.S. Bank National
Association, as Trustee, relating to Senior Convertibles Notes
due 2023 |
|
Filed as Exhibit 4.1 to Form 10-Q for the quarterly
period ended June 30, 2003, incorporated herein by reference |
|
|
4 |
.4 |
|
Registration Rights Agreement dated as of June 16, 2003
between the Registrant, the subsidiaries of the Registrant
listed on the signature pages thereto, and Merrill
Lynch & Co., as representatives of the Initial
Purchasers of Senior Convertibles Notes due 2023 |
|
Filed as Exhibit 4.2 to Form 10-Q for the quarterly
period ended June 30, 2003, incorporated herein by reference |
|
|
4 |
.5 |
|
Form of Guarantee (Exhibit A-2 to Indenture filed as
Exhibit 4.3 above) |
|
Filed as Exhibit 4.3 to Form 10-Q for the quarterly
period ended June 30, 2003, incorporated herein by reference |
|
|
4 |
.6 |
|
Form of Senior Convertible Note due 2023 (Exhibit A-1 to
Indenture filed as Exhibit 4.3 above) |
|
Filed as Exhibit 4.3 to Form 10-Q for the quarterly
period ended June 30, 2003, incorporated herein by reference |
|
|
4 |
.7 |
|
Indenture, dated as of February 10, 2004 between Mesa Air
Group, Inc., the guarantors named therein and U.S. Bank
National Association, as Trustee, relating to Senior Convertible
Notes due 2024 |
|
Filed as Exhibit 4.1 to Form S-3 filed on May 7,
2004, incorporated herein by reference |
|
|
4 |
.8 |
|
Registration Rights Agreement dated as of February 10, 2004
between Mesa Air Group, Inc., the subsidiaries of Mesa Air
Group, Inc. listed on the signature pages thereto, and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, As Initial
Purchaser of the Senior Convertible Notes due 2024 |
|
Filed as Exhibit 4.2 to Form S-3 filed on May 7,
2004, incorporated herein by reference |
|
|
4 |
.9 |
|
Form of Guarantee (included in Exhibit 4.7) |
|
Filed as Exhibit 4.1 to Form S-3 filed on May 7,
2004, incorporated herein by reference |
|
|
4 |
.10 |
|
Form of Senior Convertible Notes due 2024 (included in
Exhibit 4.7) |
|
Filed as Exhibit 4.1 to Form S-3 filed on May 7,
2004, incorporated herein by reference |
|
|
10 |
.1 |
|
1998 Key Officer Stock Option Plan |
|
Filed as Appendix A to Registrants Definitive Proxy
Statement, dated June 17, 1998 and incorporated herein by
reference |
78
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Reference |
|
|
|
|
|
|
|
10 |
.2 |
|
2001 Key Officer Stock Option Plan, as amended |
|
Filed as Exhibit 5.2 to Form 10-K for fiscal year
ended September 30, 2003 and incorporated herein by
reference |
|
|
10 |
.3 |
|
Outside Directors Stock Option Plan, as amended |
|
Filed as Exhibit 5.3 to Form 10-K for fiscal year
ended September 30, 2003 and incorporated herein by
reference |
|
|
10 |
.4 |
|
1996 Employee Stock Option Plan, as amended |
|
Filed as Exhibit 5.4 to Form 10-K for fiscal year
ended September 30, 2003 and Incorporated herein by
reference |
|
|
10 |
.5 |
|
2005 Employee Stock Incentive Plan |
|
Filed herewith |
|
|
10 |
.6 |
|
Deferred Compensation Plan, adopted July 13, 2001 |
|
Filed herewith |
|
|
10 |
.7 |
|
2005 Deferred Compensation Plan, adopted February 7, 2005 |
|
Filed herewith |
|
|
10 |
.8 |
|
Form of Directors and Officers Indemnification
Agreement |
|
Filed as Exhibit 10.1 to Form 10-K for fiscal year
ended September 30, 2002 and incorporated herein by
reference |
|
|
10 |
.9 |
|
Code Share and Revenue Sharing Agreement, dated as of
March 20, 2001, by and between Mesa Airlines, Inc. and
America West, Inc. (Certain portions deleted pursuant to
confidential treatment.) |
|
Filed as Exhibit 10.1 to Form 10-Q for the period
ended March 31, 2001, incorporated herein by reference |
|
|
10 |
.10 |
|
First Amendment to Code Share and Revenue Sharing Agreement
dated as of April 27, 2001, by and between Mesa Airlines,
Inc. and America West, Inc. |
|
Filed as Exhibit 10.10 to Form 10-K for Fiscal year
ended September 30, 2002 and incorporated herein by
reference |
|
|
10 |
.11 |
|
Second Amendment to Code Share and Revenue Sharing Agreement
dated as of October 24, 2002, by and between Mesa Airlines,
Inc. and America West, Inc. (Certain portions deleted pursuant
to confidential treatment.) |
|
Filed as Exhibit 10.4 to Form 10-K for fiscal year
ended September 30, 2003 and incorporated herein by
reference |
|
|
10 |
.12 |
|
Third Amendment to Code Share and Revenue Sharing Agreement
dated as of December 2, 2002, by and between Mesa Airlines,
Inc., Freedom Airlines, Inc. and America West, Inc. (Certain
portions deleted pursuant to confidential treatment.) |
|
Filed as Exhibit 10.5 to Form 10-K for fiscal year
ended September 30, 2003 and incorporated herein by
reference |
|
|
10 |
.13 |
|
Fourth Amendment to Code Share and Revenue Sharing Agreement
dated as of September 5, 2003, by and between Mesa
Airlines, Inc., Freedom Airlines, Inc., Air Midwest, Inc.
and America West, Inc. (Certain portions deleted pursuant to
confidential treatment.) |
|
Filed as Exhibit 10.6 to Form 10-K for fiscal year
ended September 30, 2003 and incorporated herein by
reference |
|
10 |
.14(1) |
|
Fifth Amendment to Code Share and Revenue Sharing Agreement
dated as of January 28, 2005, by and between Mesa Airlines,
Inc.,Freedom Airlines, Inc., Air Midwest, Inc. and America West,
Inc. |
|
Filed herewith |
79
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Reference |
|
|
|
|
|
|
|
10 |
.15(1) |
|
Sixth Amendment to Code Share and Revenue Sharing Agreement
dated as of July 27, 2005, by and between Mesa Airlines,
Inc., Freedom Airlines, Inc., Air Midwest, Inc. and America
West, Inc. |
|
Filed herewith |
|
|
10 |
.16 |
|
Service Agreement dated as of November 11, 1997 between
Mesa Airlines, Inc. and US Airways, Inc. |
|
Filed as Exhibit 10.86 to Form 10-K for fiscal year
ended September 30, 1998 and incorporated herein by
reference |
|
|
10 |
.17 |
|
First Amendment to Service Agreement dated as of
November 24, 1999, by and between Mesa Airlines, Inc. and
US Airways, Inc. |
|
Filed as Exhibit 10.15 to Form 10-K for fiscal year
ended September 30, 2002 and incorporated herein by
reference |
|
|
10 |
.18 |
|
Second Amendment to Service Agreement dated as of
October 6, 2000, by and between Mesa Airlines, Inc. and US
Airways, Inc. (Certain portions deleted pursuant to confidential
treatment.) |
|
Filed as Exhibit 10.16 to Form 10-K for fiscal year
ended September 30, 2002 and incorporated herein by
reference |
|
|
10 |
.19 |
|
Third Amendment to Service Agreement dated as of
October 17, 2002, by and between Mesa Airlines, Inc. and US
Airways (Certain portions deleted pursuant to confidential
treatment.) |
|
Filed as Exhibit 10.17 to Form 10-K for fiscal year
ended September 30, 2002 and incorporated herein by
reference |
|
|
10 |
.20 |
|
Fourth Amendment to Service Agreement dated as of
October 17, 2002, by and between Mesa Airlines, Inc. and US
Airways (Certain portions deleted pursuant to confidential
treatment.) |
|
Filed as Exhibit 10.18 to Form 10-K for fiscal year
ended September 30, 2002 and incorporated herein by
reference |
|
|
10 |
.21 |
|
Fifth Amendment to Service Agreement dated as of
October 17, 2002, by and between Mesa Airlines, Inc., and
US Airways (Certain portions deleted pursuant to confidential
treatment.) |
|
Filed as Exhibit 10.19 to Form 10-K for fiscal year
ended September 30, 2002 and incorporated herein by
reference |
|
|
10 |
.22 |
|
Sixth Amendment to Service Agreement dated as of August 14,
2003, by and between Mesa Airlines, Inc., and US Airways
(Certain portions deleted pursuant to confidential treatment.) |
|
Filed as Exhibit 10.13 to the Form 10-K for fiscal
year ended September 30, 2003 and incorporated herein by
reference |
|
|
10 |
.23 |
|
Seventh Amendment to Service Agreement dated as of
November 24, 2003, by and between Mesa Airlines, Inc., and
US Airways (Certain portions deleted pursuant to confidential
treatment.) |
|
Filed as Exhibit 10.3 to the Form 10-Q for the quarter
ended March 31, 2004 and incorporated herein by reference |
|
|
10 |
.24 |
|
Service Agreement between US Airways, Inc. and Air Midwest, Inc.
dated as of May 14, 2003 (Certain portions deleted pursuant
to confidential treatment.) |
|
Filed as Exhibit 10.14 to the Form 10-K for fiscal
year ended September 30, 2003 and incorporated herein by
reference |
|
|
10 |
.25(1) |
|
Amended and Restated United Express Agreement dated as of
January 28, 2004, between United Airlines, Inc. and Mesa
Air Group, Inc. (Certain portions deleted pursuant to
confidential treatment.) |
|
Previously filed as Exhibit 10.17 to the Form 10-K for
the year ended September 30, 2004 and incorporated herein
by reference |
80
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Reference |
|
|
|
|
|
|
|
10 |
.26 |
|
Amendment to United Express Agreement, dated as of June 3,
2005, between Mesa Air Group, Inc. and United Airlines, Inc.
(Certain portions deleted pursuant to confidential treatment.) |
|
Previously filed as Exhibit 10.1 to the Form 10-Q for
the quarter ended June 30, 2005 and incorporated herein by
reference |
|
|
10 |
.27 |
|
Delta Connection Agreement, dated May 3, 2005, between Mesa
Air Group, Inc. and Delta Air Lines, Inc. (Certain portions
deleted pursuant to confidential treatment.) |
|
Previously filed as Exhibit 10.2 to the Form 10-Q for
the quarter ended June 30, 2005 and incorporated herein by
reference |
|
|
10 |
.28 |
|
Reimbursement Agreement dated May 3, 2005, between Mesa Air
Group, Inc. and Delta Air Lines, Inc. (Certain portions deleted
pursuant to confidential treatment.) |
|
Previously filed as Exhibit 10.3 to the Form 10-Q for
the quarter ended June 30, 2005 and incorporated herein by
reference. |
|
|
10 |
.29 |
|
Master Purchase Agreement between Bombardier, Inc. and the
Registrant Dated May 18, 2001 (Certain portions deleted
Pursuant to confidential treatment) |
|
Filed as exhibit 10.1 to the Form 10-Q for the quarter
ended June 30, 2001 and incorporated herein by reference |
|
|
10 |
.30 |
|
Agreement between the Registrant and Barlow Capital, LLC, as
amended |
|
Filed as Exhibit 10.23 to Registrants Form 10-K
for fiscal year ended September 30, 2001 and incorporated
herein by reference |
|
|
10 |
.31 |
|
Employment Agreement dated as of March 31, 2004, between
the Registrant and Jonathan G. Ornstein |
|
Filed as Exhibit 10.1 to the Form 10-Q for the quarter
ended March 31, 2004 and incorporated herein by reference |
|
|
10 |
.32 |
|
Employee Agreement, dated as of March 31, 2004, between the
Registrant and Michael J. Lotz |
|
Filed as Exhibit 10.2 to Form 10-Q for the quarter
ended March 31, 2004 and incorporated herein by reference |
|
|
10 |
.33 |
|
Employment Agreement, dated as of December 6, 2001 between
the Registrant and George Murnane III, as amended |
|
Filed as Exhibit 10.27 to Form 10-K for fiscal year ended
September 30, 2002 and incorporated herein by reference and
incorporated herein by reference |
|
|
10 |
.34 |
|
Employment Agreement, dated April 30, 2005, entered into by
and between the Registrant and Brian Gillman |
|
Filed herewith |
|
|
10 |
.35 |
|
Three Gateway Office Lease between Registrant and DMB Property
Ventures Limited Partnership, dated October 16, 1998, as
amended, including Amendments 1 through 4 |
|
Filed as Exhibit 10.29 to Registrants Form 10-K
for fiscal year ended September 30, 2002 and incorporated
herein by reference |
|
|
10 |
.36(1) |
|
Amendments Number 5 through 8 to Three Gateway Office Lease
between Registrant and DMB Property Ventures Limited
Partnership, dated October 16, 1998 |
|
Filed herewith |
|
|
18 |
.1 |
|
Letter regarding change in accounting principle |
|
Filed as exhibit 18.1 to Registrants Form 10-K
for fiscal year ended September 30, 2000 and incorporated
herein by reference |
|
|
21 |
.1 |
|
Subsidiaries of the Registrant |
|
Filed herewith |
|
|
23 |
.1 |
|
Consent of Independent Registered Public Accounting Firm |
|
Filed herewith |
|
|
31 |
.1 |
|
Certification Pursuant to Rule 13a-14(a)/ 15d-14(a) of the
Securities Exchange Act of 1934, as amended |
|
Filed herewith |
81
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Reference |
|
|
|
|
|
|
|
31 |
.2 |
|
Certification Pursuant to Rule 13a-14(a)/ 15d-14(a) of the
Securities Exchange Act of 1934, as amended |
|
Filed herewith |
|
|
32 |
.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
|
Filed herewith |
|
|
32 |
.2 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
|
Filed herewith |
|
|
(1) |
The Company has sought confidential treatment of portions of the
referenced exhibits. |
82
SIGNATURES
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.
|
|
|
|
By: |
/s/ JONATHAN G. ORNSTEIN |
|
|
|
|
|
Jonathan G. Ornstein |
|
Chairman and Chief Executive Officer |
|
(Principal Executive Officer) |
|
|
|
|
By: |
/s/ GEORGE MURNANE III |
|
|
|
|
|
George Murnane III |
|
Chief Financial Officer |
|
(Principal Financial and Accounting Officer) |
Dated: December 14, 2005
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints JONATHAN G. ORNSTEIN,
BRIAN S. GILLMAN and GEORGE MURNANE III, and each of them,
his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution for him in his name,
place and stead, in any and all capacities, to sign any and all
amendments to this Form 10-K Annual Report, and to file the
same, with all exhibits thereto, and other documents in
connection therewith with the Securities and Exchange
Commission, granting onto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in
and about the premises as fully and to all intent and purposes
as he might or could do in person hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his
substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
|
/s/ JONATHAN G. ORNSTEIN
Jonathan
G. Ornstein |
|
Chairman of the Board,
Chief Executive Officer and Director |
|
December 14, 2005 |
|
/s/ DANIEL J. ALTOBELLO
Daniel
J. Altobello |
|
Director |
|
December 14, 2005 |
|
/s/ RONALD R. FOGLEMAN
Ronald
R. Fogleman |
|
Director |
|
December 14, 2005 |
|
/s/ MAURICE A. PARKER
Maurice
A. Parker |
|
Director |
|
December 14, 2005 |
|
/s/ JOSEPH L. MANSON
Joseph
L. Manson |
|
Director |
|
December 14, 2005 |
|
/s/ ROBERT BELESON
Robert
Beleson |
|
Director |
|
December 14, 2005 |
|
/s/ PETER F. NOSTRAND
Peter
F. Nostrand |
|
Director |
|
December 14, 2005 |
83
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Reference |
|
|
|
|
|
|
3 |
.1 |
|
Articles of Incorporation of Registrant dated May 28, 1996 |
|
Filed as Exhibit 3.1 to Registrants Form 10-K
for the fiscal year ended September 30, 1996, incorporated
herein by Reference |
|
|
3 |
.2 |
|
Bylaws of Registrant as amended |
|
Filed as Exhibit 3.2 to Registrants Form 10-K
for the fiscal year ended September 30, 1996, incorporated
herein by Reference |
|
|
4 |
.1 |
|
Form of Common Stock certificate |
|
Filed as Exhibit 4.5 to Amendment No. 1 to
Registrants Form S-18, Registration No. 33-11765
filed March 6, 1987, incorporated herein by reference |
|
|
4 |
.2 |
|
Form of Common Stock certificate (issued after November 12,
1990) |
|
Filed as Exhibit 4.8 to Form S-1, Registration
No. 33-35556 effective December 6, 1990, incorporated
herein by reference |
|
|
4 |
.3 |
|
Indenture dated as of June 16, 2003 between the Registrant,
the guarantors signatory thereto and U.S. Bank National
Association, as Trustee, relating to Senior Convertibles Notes
due 2023 |
|
Filed as Exhibit 4.1 to Form 10-Q for the quarterly
period ended June 30, 2003, incorporated herein by reference |
|
|
4 |
.4 |
|
Registration Rights Agreement dated as of June 16, 2003
between the Registrant, the subsidiaries of the Registrant
listed on the signature pages thereto, and Merrill
Lynch & Co., as representative of the Initial
Purchasers of Senior Convertibles Notes due 2023 |
|
Filed as Exhibit 4.2 to Form 10-Q for the quarterly
period ended June 30, 2003, incorporated herein by reference |
|
|
4 |
.5 |
|
Form of Guarantee (Exhibit A-2 to Indenture filed as
Exhibit 4.3 above) |
|
Filed as Exhibit 4.3 to Form 10-Q for the quarterly
period ended June 30, 2003, incorporated herein by reference |
|
|
4 |
.6 |
|
Form of Senior Convertible Note due 2023 (Exhibit A-1 to
Indenture filed as Exhibit 4.3 above) |
|
Filed as Exhibit 4.3 to Form 10-Q for the quarterly
period ended June 30, 2003, incorporated herein by reference |
|
|
4 |
.7 |
|
Indenture, dated as of February 10, 2004 between Mesa Air
Group, Inc., the guarantors named therein and U.S. Bank
National Association, as Trustee, relating to Senior Convertible
Notes due 2024 |
|
Filed as Exhibit 4.1 to Form S-3 filed on May 7,
2004, incorporated herein by reference |
|
|
4 |
.8 |
|
Registration Rights Agreement dated as of February 10, 2004
between Mesa Air Group, Inc., the subsidiaries of Mesa Air
Group, Inc. listed on the signature pages thereto, and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as Initial
Purchaser of the Senior Convertible Notes due 2024 |
|
Filed as Exhibit 4.2 to Form S-3 filed on May 7,
2004, incorporated herein by reference |
|
|
4 |
.9 |
|
Form of Guarantee (included in Exhibit 4.7). |
|
Filed as Exhibit 4.1 to Form S-3 filed on May 7,
2004, incorporated herein by reference |
|
|
4 |
.10 |
|
Form of Senior Convertible Notes due 2024 (included in
Exhibit 4.7). |
|
Filed as Exhibit 4.1 to Form S-3 filed on May 7,
2004, incorporated herein by reference |
|
|
10 |
.1 |
|
1998 Key Officer Stock Option Plan |
|
Filed as Appendix A to Registrants Definitive Proxy
Statement, dated June 17, 1998 and incorporated herein by
reference |
84
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Reference |
|
|
|
|
|
|
|
10 |
.2 |
|
2001 Key Officer Stock Option Plan, as amended |
|
Filed as Exhibit 5.2 to Form 10-K for fiscal year
ended September 30, 2003 and incorporated herein by
reference |
|
|
10 |
.3 |
|
Outside Directors Stock Option Plan, as amended |
|
Filed as Exhibit 5.3 to Form 10-K for fiscal year
ended September 30, 2003 and incorporated herein by
reference |
|
|
10 |
.4 |
|
1996 Employee Stock Option Plan, as amended |
|
Filed as Exhibit 5.4 to Form 10-K for fiscal year
ended September 30, 2003 and incorporated herein by
reference |
|
|
10 |
.5 |
|
2005 Employee Stock Incentive Plan |
|
Filed herewith |
|
|
10 |
.6 |
|
Deferred Compensation Plan, adopted July 13, 2001 |
|
Filed herewith |
|
|
10 |
.7 |
|
2005 Deferred Compensation Plan, adopted February 7, 2005 |
|
Filed herewith |
|
|
10 |
.8 |
|
Form of Directors and Officers Indemnification
Agreement |
|
Filed as Exhibit 10.1 to Form 10-K for fiscal year
ended September 30, 2002 and incorporated herein by
reference |
|
|
10 |
.9 |
|
Code Share and Revenue Sharing Agreement, dated as of
March 20, 2001, by and between Mesa Airlines, Inc. and
America West, Inc. (Certain portions deleted pursuant to
confidential treatment.) |
|
Filed as Exhibit 10.1 to Form 10-Q for the period
ended March 31, 2001 and incorporated herein by reference |
|
|
10 |
.10 |
|
First Amendment to Code Share and Revenue Sharing Agreement
dated as of April 27, 2001, by and between Mesa Airlines,
Inc. and America West, Inc. |
|
Filed as Exhibit 10.10 to Form 10-K for fiscal year
ended September 30, 2002 and incorporated herein by
reference |
|
|
10 |
.11 |
|
Second Amendment to Code Share and Revenue Sharing Agreement
dated as of October 24, 2002, by and between Mesa Airlines,
Inc. and America West, Inc. (Certain portions deleted pursuant
to confidential treatment.) |
|
Filed as Exhibit 10.4 to Form 10-K for fiscal year
ended September 30, 2003 and incorporated herein by
reference |
|
|
10 |
.12 |
|
Third Amendment to Code Share and Revenue Sharing Agreement
dated as of December 2, 2002, by and between Mesa Airlines,
Inc., Freedom Airlines, Inc. and America West, Inc. (Certain
portions deleted pursuant to confidential treatment.) |
|
Filed as Exhibit 10.5 to Form 10-K for fiscal year
ended September 30, 2003 and incorporated herein by
reference |
|
|
10 |
.13 |
|
Fourth Amendment to Code Share and Revenue Sharing Agreement
dated as of September 5, 2003, by and between Mesa
Airlines, Inc., Freedom Airlines, Inc., Air Midwest, Inc.
and America West, Inc. (Certain portions deleted pursuant to
confidential treatment.) |
|
Filed as Exhibit 10.6 to Form 10-K for fiscal year
ended September 30, 2003 and incorporated herein by
reference |
|
|
10 |
.14(1) |
|
Fifth Amendment to Code Share and Revenue Sharing Agreement
dated as of January 28, 2005, by and between Mesa Airlines,
Inc., Freedom Airlines, Inc., Air Midwest, Inc. and America
West, Inc. |
|
Filed herewith |
85
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Reference |
|
|
|
|
|
|
|
10 |
.15(1) |
|
Sixth Amendment to Code Share and Revenue Sharing Agreement
dated as of July 27, 2005, by and between Mesa Airlines,
Inc., Freedom Airlines, Inc., Air Midwest, Inc. and America
West, Inc. |
|
Filed herewith |
|
|
10 |
.16 |
|
Service Agreement dated as of November 11, 1997, between
Mesa Airlines, Inc. and US Airways, Inc. |
|
Filed as Exhibit 10.86 to Form 10-K for fiscal year
ended September 30, 1998 and incorporated herein by
reference |
|
|
10 |
.17 |
|
First Amendment to Service Agreement dated as of
November 24, 1999, by and between Mesa Airlines, Inc. and
US Airways, Inc. |
|
Filed as Exhibit 10.15 to Form 10-K for fiscal year
ended September 30, 2002 and incorporated herein by
reference |
|
|
10 |
.18 |
|
Second Amendment to Service Agreement dated as of
October 6, 2000, by and between Mesa Airlines, Inc. and US
Airways, Inc. (Certain portions deleted pursuant to confidential
treatment.) |
|
Filed as Exhibit 10.16 to Form 10-K for fiscal year
ended September 30, 2002 and incorporated herein by
reference |
|
|
10 |
.19 |
|
Third Amendment to Service Agreement dated as of
October 17, 2002, by and between Mesa Airlines, Inc. and US
Airways (Certain portions deleted pursuant to confidential
treatment.) |
|
Filed as Exhibit 10.17 to Form 10-K for fiscal year
ended September 30, 2002 and incorporated herein by
reference |
|
|
10 |
.20 |
|
Fourth Amendment to Service Agreement dated as of
October 17, 2002, by and between Mesa Airlines, Inc. and US
Airways (Certain portions deleted pursuant to confidential
treatment.) |
|
Filed as Exhibit 10.18 to Form 10-K for fiscal year
ended September 30, 2002 and incorporated herein by
reference |
|
|
10 |
.21 |
|
Fifth Amendment to Service Agreement dated as of
October 17, 2002, by and between Mesa Airlines, Inc., and
US Airways (Certain portions deleted pursuant to confidential
treatment.) |
|
Filed as Exhibit 10.19 to Form 10-K for fiscal year
ended September 30, 2002 and incorporated herein by
reference |
|
|
10 |
.22 |
|
Sixth Amendment to Service Agreement dated as of August 14,
2003, by and between Mesa Airlines, Inc., and US Airways
(Certain portions deleted pursuant to confidential treatment.) |
|
Filed as Exhibit 10.13 to the Form 10-K for fiscal
year ended September 30, 2003 and incorporated herein by
reference |
|
|
10 |
.23 |
|
Seventh Amendment to Service Agreement dated as of
November 24, 2003, by and between Mesa Airlines, Inc., and
US Airways (Certain portions deleted pursuant to confidential
treatment.) |
|
Filed as Exhibit 10.3 to the Form 10-Q for the quarter
ended March 31, 2004 and incorporated herein by reference |
|
|
10 |
.24 |
|
Service Agreement between US Airways, Inc. and Air Midwest, Inc.
dated as of May 14, 2003 (Certain portions deleted pursuant
to confidential treatment.) |
|
Filed as Exhibit 10.14 to the Form 10-K for fiscal
year ended September 30, 2003 and incorporated herein by
reference |
|
|
10 |
.25(1) |
|
Amended and Restated United Express Agreement dated as of
January 28, 2004 between United Airlines, Inc. and Mesa Air
Group, Inc. (Certain portions deleted pursuant to confidential
treatment.) |
|
Previously filed as Exhibit 10.17 to the Form 10-K for
the year ended September 30, 2004 and incorporated herein
by reference |
86
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Reference |
|
|
|
|
|
|
|
10 |
.26 |
|
Amendment to United Express Agreement, dated as of June 3,
2005, between Mesa Air Group, Inc. and United Airlines, Inc.
(Certain portions deleted pursuant to confidential treatment.) |
|
Previously filed as Exhibit 10.1 to the Form 10-Q for
the quarter ended June 30, 2005 and incorporated herein by
reference |
|
|
10 |
.27 |
|
Delta Connection Agreement , dated May 3, 2005, between
Mesa Air Group, Inc. and Delta Air Lines, Inc. (Certain portions
deleted pursuant to confidential treatment.) |
|
Previously filed as Exhibit 10.2 to the Form 10-Q for
the quarter ended June 30, 2005 and incorporated herein by
reference |
|
|
10 |
.28 |
|
Reimbursement Agreement, dated May 3, 2005, between Mesa
Air Group, Inc. and Delta Air Lines, Inc. (Certain portions
deleted pursuant to confidential treatment.) |
|
Previously filed as Exhibit 10.3 to the Form 10-Q for
the quarter ended June 30, 2005 and incorporated herein by
reference |
|
|
10 |
.29 |
|
Master Purchase Agreement between Bombardier, Inc. and the
Registrant dated May 18, 2001 (Certain portions deleted
Pursuant to confidential treatment) |
|
Filed as exhibit 10.1 to the Form 10-Q for the quarter
ended June 30, 2001 and incorporated herein by reference |
|
|
10 |
.30 |
|
Agreement between the Registrant and Barlow Capital, LLC, as
amended |
|
Filed as Exhibit 10.23 to Registrants Form 10-K
for fiscal year ended September 30, 2001 and incorporated
herein by reference |
|
|
10 |
.31 |
|
Employment Agreement dated as of March 31, 2004, between
the Registrant and Jonathan G. Ornstein |
|
Filed as Exhibit 10.1 to the Form 10-Q for the quarter
ended March 31, 2004 and incorporated herein by reference |
|
|
10 |
.32 |
|
Employee Agreement, dated as of March 31, 2004, between the
Registrant and Michael J. Lotz |
|
Filed as Exhibit 10.2 to Form 10-Q for the quarter
ended March 31, 2004 and incorporated herein by reference |
|
|
10 |
.33 |
|
Employment Agreement, dated as of December 6, 2001 between
the Registrant and George Murnane III, as amended |
|
Filed as Exhibit 10.27 to Form 10-K for fiscal year
ended September 30, 2002 and incorporated herein by
reference |
|
|
10 |
.34 |
|
Employment Agreement, dated April 30, 2005, entered into by
and between the Registrant and Brian Gillman |
|
Filed herewith |
|
|
10 |
.35 |
|
Three Gateway Office Lease between Registrant and DMB Property
Ventures Limited Partnership, dated October 16, 1998, as
amended, including Amendments 1 through 4 |
|
Filed as Exhibit 10.29 to Registrants Form 10-K
for fiscal year ended September 30, 2002 and incorporated
herein by reference |
|
|
10 |
.36(1) |
|
Amendments Number 5 through 8 to Three Gateway Office Lease
between Registrant and DMB Property Ventures Limited
Partnership, dated October 16, 1998 |
|
Filed herewith |
|
|
18 |
.1 |
|
Letter regarding change in accounting principle |
|
Filed as exhibit 18.1 to Registrants Form 10-K
for fiscal year ended September 30, 2000 and incorporated
herein by reference |
|
|
21 |
.1 |
|
Subsidiaries of the Registrant |
|
Filed herewith |
|
|
23 |
.1 |
|
Consent of Independent Registered Public Accounting Firm |
|
Filed herewith |
|
|
31 |
.1 |
|
Certification Pursuant to Rule 13a-14(a)/ 15d-14(a) of the
Securities Exchange Act of 1934, as amended |
|
Filed herewith |
87
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Reference |
|
|
|
|
|
|
|
31 |
.2 |
|
Certification Pursuant to Rule 13a-14(a)/ 15d-14(a) of the
Securities Exchange Act of 1934, as amended |
|
Filed herewith |
|
|
32 |
.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
|
Filed herewith |
|
|
32 |
.2 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
|
Filed herewith |
|
|
(1) |
The Company has sought confidential treatment of portions of the
referenced exhibits. |
88