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, 2006
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
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(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 100,
Phoenix, Arizona
(Address of principal
executive offices)
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85008
(Zip Code)
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Registrants telephone number, including area code:
(602) 685-4000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock. No Par Value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
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 a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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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 and non-voting common
equity held by non-affiliates of the Registrant as of
December 1, 2006: Common Stock, no par value:
$270.3 million.
On December 1, 2006, the Registrant had outstanding
33,956,878 shares of Common Stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain sections of the Companys Proxy Statement to be
filed in connection with the Companys 2007 Annual Meeting
of Stockholders to be held in March 2007 are incorporated by
herein at Part III, Items 10-14.
MESA AIR
GROUP, INC.
2006
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 Delta Air Lines, US Airways
or United Airlines to pay their obligations under the code-share
agreements; the inability of Delta Air Lines to successfully
restructure and emerge from bankruptcy; the ability of Delta Air
Lines to reject our regional jet code-share agreement in
bankruptcy; 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; our ability to operate our new Hawaiian airline
service profitably; unfavorable resolution of legal proceedings
involving Hawaiian Airlines and Aloha Airlines regarding our
Hawaiian operation; 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 principal
subsidiaries operate as regional air carriers providing
scheduled passenger and airfreight service. As of
September 30, 2006, the Company served 173 cities in
46 states, the District of Columbia, Canada, the Bahamas
and Mexico and operated a fleet of 191 aircraft with
approximately 1,200 daily departures.
Approximately 98% of our consolidated passenger revenues for the
fiscal year ended September 30, 2006 were derived from
operations associated with code-share agreements. Our
subsidiaries have code-share agreements with Delta Air Lines,
Inc. (Delta), Midwest Airlines, Inc. (Midwest
Airlines), United Airlines, Inc. (United
Airlines or United) and America West Airlines,
Inc. (America West) which currently operates as
US Airways and is referred to herein as
US Airways. The current US Airways is a result
of a merger between America West and US Airways, Inc.
(Pre-Merger 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 Mesa Airlines and go!
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, flies regional jet and turboprop aircraft and
operates as US Airways Express under code-share agreements
with US Airways, as United Express under a code-share
agreement with United Airlines and independently in Hawaii as
go! The go! flights are
Independent Operations and are not subject to a
code-sharing agreement with a major carrier.
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Air Midwest, Inc. (Air Midwest), a Kansas
corporation, flies Beechcraft 1900D 19-seat turboprop aircraft
and operates as US Airways Express under code-share
agreements with US Airways and Pre-Merger US Airways.
Air Midwests flights in Kansas City code-share with both
Midwest Airlines and US Airways. Air Midwest also operates
as Mesa Airlines 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, flies
ERJ-145
50-seat regional jets and 37-seat Dash-8 turboprop aircraft and
operates as Delta Connection under code-share agreements with
Delta.
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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.
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Nilchii, Inc., a Nevada corporation, was established to invest
in certain airline related businesses.
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Air Midwest, LLC, a Nevada limited liability company, was formed
for the purpose of a contemplated conversion of Air Midwest,
Inc. from a corporation to a limited liability company. This
conversion has not yet occurred.
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Aircraft
in Operation
The following table sets forth our aircraft fleet (owned and
leased) in operation by aircraft type and code-share service as
of September 30, 2006:
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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
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Total
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US Airways Express
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18
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38
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16
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6
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78
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United Express
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37
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15
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8
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10
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70
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Delta Connection
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28
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6
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34
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Mesa Airlines
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5
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4
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9
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Total
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60
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15
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38
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36
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20
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22
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191
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Code-Share
Agreements
Our airline subsidiaries have agreements with 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
US Airways (regional jet and Dash-8), Delta (regional jet
and Dash-8) and United (regional jet and Dash-8) 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,
Pre-Merger US Airways and Midwest Airlines 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,
2006 and 2005:
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Fiscal 2006
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Fiscal 2005
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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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(000s)
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(000s)
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(000s)
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(000s)
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(In thousands)
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US Airways (Revenue-Guarantee)
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3,605,297
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39
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%
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$
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609,232
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47
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%
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4,360,713
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50
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%
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$
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487,221
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44
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%
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United (Revenue-Guarantee)
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2,876,008
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31
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%
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477,151
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36
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%
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1,748,466
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20
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%
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260,541
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24
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%
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Pre-Merger US Airways
(Revenue-Guarantee)
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1,644,023
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18
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%
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58,511
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4
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%
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2,401,808
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28
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%
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316,072
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29
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%
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Delta (Revenue-Guarantee)
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811,420
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9
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%
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121,315
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9
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%
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US Airways (Pro-Rate)*
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102,732
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1
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%
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24,821
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2
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%
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133,505
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1
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%
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30,126
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2
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%
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Mesa Airlines, Independent
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55,552
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1
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%
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7,731
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1
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%
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71,257
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1
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%
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8,590
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1
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%
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go!
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44,308
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9,114
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1
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%
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Total
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9,139,340
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$
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1,307,875
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8,715,749
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$
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1,102,550
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5
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* |
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Amount includes the ASMs and Passenger Revenue associated
with the Midwest Airlines (Pro-Rate) code-share agreement. |
US Airways
Code-Sharing Agreements
Revenue-Guarantee
As of September 30, 2006, we operated 38
CRJ-900, 18
CRJ-200, and
six Dash-8
aircraft for US Airways 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. US Airways 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, 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 where both carriers operate. We
also receive a monthly payment from US Airways based on a
percentage of revenue from flights that we operate under the
code-share agreement. Under the amended code-share agreement,
US Airways 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). The Company has
received notice of US Airways intent to reduce one
CRJ-200 in
December 2006, two
CRJ-200s in
April 2007 and two
CRJ-200s in
September 2007. In addition, beginning in February 2007,
US Airways may eliminate the Dash-8 aircraft upon
180 days prior written notice. The code-share agreement
terminates on June 30, 2012 unless US Airways 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 US Airways 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 US Airways 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 US Airways fail 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, US Airways may
terminate the agreement.
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Pro-Rate
Pursuant to a turboprop code-share agreement with
US Airways, we operated three Beechcraft 1900D turboprop
aircraft primarily in Phoenix, Las Vegas and Salt Lake City
under a pro-rate revenue-sharing arrangement as of
September 30, 2006. 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
US Airways 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.
Pre-Merger
US Airways Code-Sharing Agreement
Pro-Rate
Pursuant to a turboprop code-sharing agreement with Pre-Merger
US Airways, we operated 13 Beechcraft 1900D turboprop
aircraft under a pro-rate revenue-sharing arrangement as of
September 30, 2006. We control scheduling, inventory and
pricing subject to US Airways concurrence that such
service does not adversely affect its
6
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.
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The turboprop code-share agreement was scheduled to terminate in
October 2006, but has been extended on its original terms as the
Company and US Airways negotiate the terms of a new
agreement. The Company expects to enter into a new agreement on
substantially similar terms.
United
Code-Sharing Agreement
As of September 30, 2006, we operated 37 CRJ-200, eight
ERJ-145, 15 CRJ-700 (In October 2006, we added three additional
CRJ-700s into service and removed three ERJ-145s from service)
and ten 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 CRJ-700 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 than April 30, 2010, which can be
accelerated up to two years at our discretion, (iii) the 30
50-seat regional jets terminates in July 2013, but can be
terminated early in April 2010, (iv) the 15 CRJ-700s (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 (v) the remaining 15 CRJ-700s
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
As of September 30, 2006, we operated 28 ERJ-145 and six
Dash-8 aircraft for Delta pursuant to two code-sharing
agreements. Flight operations for Delta are performed by our
wholly-owned subsidiary, Freedom Airlines. The regional jet and
turboprop code-share agreements provide that we increase our
fleet to 30 50-seat regional jet aircraft and 12 37-seat
turboprop aircraft, respectively. In exchange for performing the
flight services and our other obligations under the agreements,
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,
7
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 regional jet 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
30(th) aircraft added to the Delta Connection fleet by the
Company, or (ii) November 2012. However, Delta has not yet
assumed our regional jet code-share agreement in its bankruptcy
proceedings and could choose to terminate this agreement at any
time prior to its emergence from bankruptcy. In addition,
according to news reports, US Airways, one of our
code-share partners, has proposed to merge with Delta, another
of our code-share partners. According to these same reports,
Delta has rejected this proposal. We are unable, at this time,
to predict what effect such a merger would have on our
relationship with the parties or on our financial condition and
operations. The turboprop agreement terminates in March 2009. At
the end of the term, the turboprop agreement automatically
renews for successive one-year terms on the same terms and
conditions unless Delta provides us six months prior written
notice of its intention to not renew. In addition, Delta may
terminate the turboprop agreement, without cause, at any time
after nine months after the Effective Date upon not less than
six months prior written notice.
The agreements 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.
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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.
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Fleet
Plans
CRJ
Program
As of September 30, 2006, we operated 113 Canadair Regional
Jets (60
CRJ-200/100,
15 CRJ-700
and 38
CRJ-900s).
In January 2004, we exercised options to purchase 20 CRJ-900
aircraft (seven of which can be converted to
CRJ-700
aircraft). As of September 30, 2006, we have taken delivery
of 13
CRJ-900
aircraft and two
CRJ-700
aircraft. Subsequent to year end, we took delivery of a third
CRJ-700
aircraft with two more
CRJ-700
aircraft scheduled for delivery in March 2007. The delivery for
the remaining two
CRJ-900s
(which can be converted to
CRJ-700s)
has not been finalized.
8
ERJ
Program
As of September 30, 2006, we operated 36 Embraer 145
aircraft. We acquired all 36
ERJ-145s
through a June 1999 agreement with Empresa Brasiliera de
Aeronautica S.A. (Embraer). We also have options for
25 additional aircraft. In September 2006, our contract with
Embraer was amended to extend the option exercise date to August
2007 for deliveries beginning in January 2009.
Beechcraft
1900D
As of September 30, 2006, we owned 34 Beechcraft 1900D
aircraft and were operating 20 of these aircraft. We lease four
of our Beechcraft 1900D to Gulfstream International Airlines, a
regional turboprop air carrier based in Ft. Lauderdale,
Florida and lease an additional ten Beechcraft 1900D aircraft to
Big Sky Transportation Co., a regional turboprop carrier based
in Billings, Montana (Big Sky).
Dash-8
As of September 30, 2006, we operated 22
Dash-8
aircraft. In the fourth quarter of fiscal 2006, we took delivery
of an additional four
Dash-8
aircraft and placed them into revenue service during the first
fiscal quarter of 2007.
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 Delta, United and US Airways revenue-guarantee
code-share agreements, market selection, pricing and yield
management functions are performed by our respective partners.
The market selection process for our Beechcraft 1900D 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 regarding the level of service and
fares. We believe that this selection process enhances the
likelihood of profitability in a given market. For our
go! operations in Hawaii, we make all decisions on
market selection, pricing and yield management functions.
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
newspaper and radio promotions and advertisements, promotions on
our websites www.iflygo.com and www.mesa-air.com,
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.
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.
9
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.
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 Delta,
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 2006, approximately 96% of our fuel
purchases was associated with our Delta, United and US Airways
(regional jet) and Pre-Merger US Airways revenue-guarantee
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, 2006, we employed approximately 5,200
employees. Approximately 3,000 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
and Freedom Airlines flight attendants are represented by
the Association of
10
Flight Attendants (AFA). Both contracts covering
flight attendants became amendable in June 2006 and the Company
is in the early stages of negotiations with its flight
attendants. The pilots of Mesa Airlines, Freedom Airlines and
Air Midwest are collectively represented under a single contract
by the Air Line Pilot Association (ALPA). Our
contract with ALPA becomes amendable in September 2007.
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, 2006, we provided service to 30
such cities for an annualized subsidy of approximately
$21 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.
Investment
Activities
In fiscal 2006, we participated with a private equity fund in
making an investment in the common stock and notes of a closely
held airline related business (the Investee).
Through our subsidiary Nilchii, we invested $15 million,
which represents approximately 20% and 11.8% of the
Investees common stock and notes, respectively.
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.
11
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.
The following risk factors, in addition to the information
discussed elsewhere herein, should be carefully considered in
evaluating us and our business:
Risks
Related to Our Business
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
Delta Air Lines, 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 US Airways allows US Airways,
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, US Airways may eliminate the
Dash-8
aircraft upon 180 days prior written notice. US Airways has
notified the Company of its intent to reduce the maximum number
of CRJs in 2006 and 2007. US Airways has used this provision to
reduce the number of aircraft covered by the code-share
agreement and we anticipate they will continue to further reduce
the number of covered aircraft in accordance with the agreement.
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,
2006, our US Airways revenue-guarantee code-share agreement
accounted for 51% of our consolidated passenger revenues, our
Delta code-share agreement accounted for 9% of our consolidated
passenger revenue and our United code-share agreement accounted
for 36% of our consolidated passenger revenues.
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
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. 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
12
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. 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.
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 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
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, our partners have similar code-share
agreements with other competing regional airlines. According to
news reports, US Airways, one of our code-share partners, has
proposed to merge with Delta, another of our code-share
partners. According to these same reports, Delta has rejected
this proposal. We are unable, at this time, to predict what
effect such a merger would have on our relationship with the
parties or on our financial condition and operations.
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, 2006, we had approximately 5,200
employees, approximately 3,000 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 became amendable in
June 2006 and the Company is in the early stages of negotiations
with its flight attendants. 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 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.
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.
13
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 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.
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.
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
14
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, 2006 the average age of our regional jet
fleet is 4.0 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.
Our
fleet expansion program has required a significant increase in
our leverage.
The airline business is very capital intensive and we are highly
leveraged. For the year ended September 30, 2006, our debt
service payments, including principal and interest, totaled
$73.3 million and our aircraft lease payments totaled
$246.8 million. We have significant lease obligations with
respect to our aircraft and ground facilities, which aggregated
approximately $2.3 billion at September 30, 2006. As
of September 30, 2006, our growth strategy involves the
acquisition of three more Bombardier regional jets during fiscal
2007. As of September 30, 2006, we had permanently financed
all but five
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 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.
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
15
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.
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.
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.
In February 2006, Hawaiian Airlines, Inc. (Hawaiian)
filed a complaint against the Company in the United States
Bankruptcy Court for the District of Hawaii (the
Bankruptcy Court) alleging that the Company breached the
terms of a Confidentiality Agreement entered into in April 2004
with the Trustee in Hawaiians bankruptcy proceedings.
Hawaiians complaint alleges, among other things, that the
Company breached the Confidentiality Agreement by (a) using
the evaluation material to obtain a competitive advantage over
Hawaiian, through the development and implementation of a
business plan to compete with Hawaiian in the inter-island
market, and (b) failing to return or destroy any evaluation
materials after being notified by Hawaiian on or about
May 12, 2004 that the Company had not been selected as a
potential investor for a transaction with Hawaiian. Hawaiian, in
its complaint, seeks unspecified damages, requests that the
Company turn over to Hawaiian any evaluation material in the
Companys possession, custody or control (the
Turnover Claim), and an injunction preventing the
Company from providing inter-island transportation services in
the State of Hawaii for a period of two years from the date of
such injunctive relief.
The Company vigorously denies Hawaiians allegations and
requests for relief contained in its complaint. The Company
filed both an answer and an antitrust counterclaim against
Hawaiian in response to its complaint. In May 2006, the Company
filed a motion to dismiss the Turnover Claim contained in
Hawaiians complaint, but the Bankruptcy Court denied that
motion. On December 8, 2006 the Bankruptcy Court, based on
constitutional access to the courts, also granted
Hawaiians motion for summary judgment against the Company
on its antitrust counterclaim. The Company does not believe that
either of these decisions has a material impact on the
Companys position in the lawsuit. Finally, in October
2006, the Bankruptcy Court denied Hawaiians effort to
enjoin the Companys go! operation from
selling tickets claiming that go!s entry
into the inter-island air transport business was based on trade
secrets furnished to Mesa during the Hawaiian bankruptcy. The
Court found no such misuse of confidential information and
rejected Hawaiians motion for a preliminary injunction.
In June 2006, Hawaiian requested a preliminary injunction to
prevent the Company from issuing new airline tickets for the
Hawaiian inter-island market for a period of one year. In this
request, Hawaiian alleges that initial discovery conducted
reveals that the Company breached the Confidentiality Agreement.
The Court has recently denied Hawaiians request for a
preliminary injunction. The case will be tried sometime in 2007.
On October 13, 2006, Aloha Airlines filed suit against Mesa
Air Group and two of its Hawaii based employees, Charles
Lauritsen, go!s Chief Operating Officer and
Joe Bock, go!s Chief Marketing Officer. The
complaint was filed in state court in Hawaii and contains 11
counts and seeks damages and injunctive relief. The clear
purpose of
16
the complaint is to blunt Mesas entry into the Hawaii
inter-island market segment. Aloha alleges that Mesas
inter-island air fares are below cost and that Mesa is,
therefore, violating specific provisions of Hawaii antitrust and
unfair competition law. Aloha also alleges breach of contract
and fraud by Mesa in connection with two confidentiality
agreements, one in 2005 and the other in 2006.
In 1992, The Supreme Court of the United States decided
Morales v. TWA, in which it construed the Airline
Deregulation Act as prohibiting any state court, under any state
law legal theory, from adjudicating issues which implicated an
air carriers pricing (or other service) practices.
Accordingly, an airlines pricing decisions can be attacked
only under federal laws. In response to the complaint, Mesa
filed a motion on December 8 seeking dismissal of all claims
which rest on Mesas alleged below-cost pricing.
Mesa also denies any improper use of the data furnished by Aloha
while Mesa was considering a bid for Aloha during its
bankruptcy. The case is in its incipient stages and no trial
date has yet been set.
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,
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.
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 on our financial condition, results of operations
and the price of our common stock.
We may
be unable to profitably operate our Hawaiian airline, which
could negatively impact our business and
operations.
In June 2006, we launched our independent inter-island Hawaiian
airline operation named go! Providing service in
Hawaii will require ongoing investment of working capital by
Mesa and management attention and focus.
Further, in light of the costs and risks associated with
operating an independent low fare regional jet airline, we may
be unable to operate the Hawaiian airline profitably, which
would negatively impact our business, financial condition and
results of operations.
In addition, our results under our revenue-guarantee contracts
offer no meaningful guidance with respect to our future
performance in running an independent airline because we have
not previously operated as an independent regional jet carrier
in Hawaii. We are operating under a new brand that will
initially have limited market recognition. Future performance
will depend on a number of factors, including our ability to:
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establish a brand that is attractive to our target customers;
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maintain adequate controls over our expenses;
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monitor and manage operational and financial risks;
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17
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secure favorable terms with airports, suppliers and other
contractors;
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maintain the safety and security of our operations;
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attract, retain and motivate qualified personnel; and
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react to responses from competitors who are more established in
the Hawaiian markets.
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Risks
Related to Our Industry
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.
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.
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
18
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.
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.
Risks
Related to Our Common Stock
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.
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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.
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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19
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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.
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Unresolved
Staff Comments
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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, 2006.
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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
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Sept. 30, 2006
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Capacity
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CRJ-200/100
Regional Jet
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2
|
|
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|
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58
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|
|
60
|
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|
|
60
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|
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|
50
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CRJ-700
Regional Jet
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5
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|
2
|
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|
10
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|
17
|
|
|
|
15
|
|
|
|
66
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|
CRJ-900
Regional Jet
|
|
|
11
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|
|
3
|
|
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|
24
|
|
|
|
38
|
|
|
|
38
|
|
|
|
86
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Embraer 145 Regional Jet
|
|
|
|
|
|
|
|
|
|
|
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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|
34
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|
|
|
|
|
|
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|
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|
34
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|
|
|
20
|
|
|
|
19
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|
Dash-8
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
28
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|
|
|
22
|
|
|
|
37
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Embraer EMB-120
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|
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|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total
|
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|
52
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|
|
|
5
|
|
|
|
158
|
|
|
|
215
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
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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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|
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Approximate
|
Type
|
|
Location
|
|
Ownership
|
|
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
|
|
|
Phoenix, AZ
|
|
|
|
Leased
|
|
|
|
27,000
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|
Hangar/Office
|
|
|
Phoenix, AZ
|
|
|
|
Leased
|
|
|
|
22,000
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|
Engine Shop & Commissary
|
|
|
Phoenix, AZ
|
|
|
|
Leased
|
|
|
|
25,000
|
|
RAS Office/Component Overhaul
Facility
|
|
|
Phoenix, AZ
|
|
|
|
Leased
|
|
|
|
19,000
|
|
Customer Service Training/Storage
|
|
|
Phoenix, AZ
|
|
|
|
Leased
|
|
|
|
10,000
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|
Office (East Coast)
|
|
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Charlotte, NC
|
|
|
|
Leased
|
|
|
|
5,500
|
|
Hangar
|
|
|
Charlotte, NC
|
|
|
|
Leased
|
|
|
|
30,000
|
|
Hangar
|
|
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Columbia, SC
|
|
|
|
|
(1)
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|
|
20,000
|
|
Hangar
|
|
|
Columbia, SC
|
|
|
|
|
(1)
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|
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35,350
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|
Hangar
|
|
|
Grand Junction, CO
|
|
|
|
|
(1)
|
|
|
25,000
|
|
Hangar/Office
|
|
|
Wichita, KS
|
|
|
|
|
(1)
|
|
|
20,000
|
|
Training/Administration
|
|
|
Farmington, NM
|
|
|
|
|
(1)
|
|
|
10,000
|
|
Hangar
|
|
|
Farmington, NM
|
|
|
|
|
(1)
|
|
|
24,000
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|
Hangar/Office
|
|
|
Dubois, PA
|
|
|
|
|
(1)
|
|
|
23,000
|
|
Hangar
|
|
|
Orlando, FL
|
|
|
|
Leased
|
|
|
|
18,693
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|
Office
|
|
|
Honolulu, HI
|
|
|
|
Leased
|
|
|
|
7,793
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|
|
|
|
(1) |
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Building is owned, underlying land is leased. |
20
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. Delta, United and US Airways 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
|
In February 2006, Hawaiian Airlines, Inc. (Hawaiian)
filed a complaint against the Company in the United States
Bankruptcy Court for the District of Hawaii (the
Bankruptcy Court) alleging that the Company breached the
terms of a Confidentiality Agreement entered into in April 2004
with the Trustee in Hawaiians bankruptcy proceedings.
Hawaiians complaint alleges, among other things, that the
Company breached the Confidentiality Agreement by (a) using
the evaluation material to obtain a competitive advantage over
Hawaiian, through the development and implementation of a
business plan to compete with Hawaiian in the inter-island
market, and (b) failing to return or destroy any evaluation
materials after being notified by Hawaiian on or about
May 12, 2004 that the Company had not been selected as a
potential investor for a transaction with Hawaiian. Hawaiian, in
its complaint, seeks unspecified damages, requests that the
Company turn over to Hawaiian any evaluation material in the
Companys possession, custody or control (the
Turnover Claim), and an injunction preventing the
Company from providing inter-island transportation services in
the State of Hawaii for a period of two years from the date of
such injunctive relief.
The Company vigorously denies Hawaiians allegations and
requests for relief contained in its complaint. The Company
filed both an answer and an antitrust counterclaim against
Hawaiian in response to its complaint. In May 2006, the Company
filed a motion to dismiss the Turnover Claim contained in
Hawaiians complaint, but the Bankruptcy Court denied that
motion. On December 8, 2006 the Bankruptcy Court, based on
constitutional access to the courts, also granted
Hawaiians motion for summary judgment against the Company
on its antitrust counterclaim. The Company does not believe that
either of these decisions has a material impact on the
Companys position in the lawsuit. Finally, in October
2006, the Bankruptcy Court denied Hawaiians effort to
enjoin the Companys go! operation from
selling tickets claiming that go!s entry
into the inter-island air transport business was based on trade
secrets furnished to Mesa during the Hawaiian bankruptcy. The
Court found no such misuse of confidential information and
rejected Hawaiians motion for a preliminary injunction.
In June 2006, Hawaiian requested a preliminary injunction to
prevent the Company from issuing new airline tickets for the
Hawaiian inter-island market for a period of one year. In this
request, Hawaiian alleges that initial discovery conducted
reveals that the Company breached the Confidentiality Agreement.
The Court has recently denied Hawaiians request for a
preliminary injunction. The case will be tried sometime in 2007.
On October 13, 2006, Aloha Airlines filed suit against Mesa
Air Group and two if its Hawaii based employees, Charles
Lauritsen, go!s Chief Operating Officer and
Joe Bock, go!s Chief Marketing Officer. The
complaint was filed in state court in Hawaii and contains 11
counts and seeks damages and injunctive relief. The clear
purpose of the complaint is to blunt Mesas entry into the
Hawaii inter-island market segment. Aloha alleges that
Mesas inter-island air fares are below cost and that Mesa
is, therefore, violating specific provisions of Hawaii antitrust
and unfair competition law. Aloha also alleges breach of
contract and fraud by Mesa in connection with two
confidentiality agreements, one in 2005 and the other in 2006.
In 1992, The Supreme Court of the United States decided
Morales v. TWA, in which it construed the Airline
Deregulation Act as prohibiting any state court, under any state
law legal theory, from adjudicating issues which implicated an
air carriers pricing (or other service) practices.
Accordingly, an airlines pricing decisions can be attacked
only under federal laws. In response to the complaint, Mesa
filed a motion on December 8 seeking dismissal of all claims
which rest on Mesas alleged below-cost pricing.
Mesa also denies any improper use of the data furnished by Aloha
while Mesa was considering a bid for Aloha during its
bankruptcy. The case is in its incipient stages and no trial
date has yet been set.
21
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.
|
|
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:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Jonathan G. Ornstein
|
|
|
49
|
|
|
Chief Executive Officer
|
Michael J. Lotz
|
|
|
46
|
|
|
President and Chief Operating
Officer
|
George Murnane III
|
|
|
48
|
|
|
Executive Vice President and Chief
Financial Officer
|
Michael Ferverda
|
|
|
62
|
|
|
Senior Vice President
Operations
|
Brian S. Gillman
|
|
|
37
|
|
|
Senior Vice President, General
Counsel and Secretary
|
David K. Butler
|
|
|
51
|
|
|
Senior Vice President,
Administration & Human Resources
|
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
re-distributor 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
22
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, Senior 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 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.
David K. Butler, Senior Vice President,
Administration & Human Resources, joined the Company in
November 2006. From August 2003 to November 2006, he served as
Vice President for Human Resources of Arizona State University
in Tempe, Arizona. From May 1999 to August 2003, he served as
Vice President for Human Resources for the Durham and Manchester
campuses of the University of New Hampshire. Mr. Butler
received his Master of Arts in Organizational Management from
the University of Phoenix in 1998 and he received his Bachelor
of Arts in Human Services from California State University in
1980.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
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 Global Market under the
symbol MESA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
Quarter
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First
|
|
$
|
11.98
|
|
|
$
|
8.45
|
|
|
$
|
8.03
|
|
|
$
|
5.21
|
|
Second
|
|
|
12.70
|
|
|
|
10.47
|
|
|
|
7.93
|
|
|
|
6.29
|
|
Third
|
|
|
11.14
|
|
|
|
8.69
|
|
|
|
7.00
|
|
|
|
5.25
|
|
Fourth
|
|
|
10.18
|
|
|
|
7.36
|
|
|
|
8.66
|
|
|
|
6.76
|
|
On December 1, 2006, we had 1,024 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 October 2006, a
registration statement filed by the Company covering the resale
of the shares underlying the warrant was declared effective by
the Securities and Exchange Commission.
In June 2003, we completed the private placement of senior
convertible notes due 2023, raising approximately
$96.9 million net proceeds. The principal underwriter was
Merrill Lynch & Co. and the purchasers were qualified
23
institutional buyers. 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 a conversion price of $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. These notes became convertible
September 30, 2003. 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. The principal underwriter was
Merrill Lynch & Co. and the purchasers were qualified
institutional buyers. 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 a conversion price of $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. These notes are not yet convertible. 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, 2006.
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
|
|
|
July 2006
|
|
|
75,700
|
|
|
$
|
8.50
|
|
|
|
8,188,367
|
|
|
|
11,233,894
|
|
August 2006
|
|
|
1,768,796
|
|
|
$
|
7.77
|
|
|
|
9,950,863
|
|
|
|
9,465,098
|
|
September 2006
|
|
|
473,377
|
|
|
$
|
7.61
|
|
|
|
10,356,943
|
|
|
|
8,991,721
|
|
|
|
|
(1) |
|
Under resolutions adopted and publicly announced in December
1999, January 2001, October 2002, October 2004, April 2005 and
October 2005, our Board of Directors has authorized the
repurchase, of up to an aggregate of approximately
19.4 million shares of our common stock. Purchases are made
at managements discretion based on market conditions and
the Companys financial resources. As of September 30,
2006 the Company has spent approximately $66.7 million to
purchase and retire approximately 10.4 million shares of
its 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, 2006, 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.
Consolidated Statement of Operations and Balance Sheet data in
thousands of dollars.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006(1)
|
|
|
2005(2)
|
|
|
2004(3)
|
|
|
2003(4)
|
|
|
2002(5)
|
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,337,197
|
|
|
$
|
1,136,268
|
|
|
$
|
896,812
|
|
|
$
|
599,990
|
|
|
$
|
496,783
|
|
Operating expenses
|
|
|
1,236,395
|
|
|
|
1,007,006
|
|
|
|
829,454
|
|
|
|
544,711
|
|
|
|
503,343
|
|
Operating income (loss)
|
|
|
100,802
|
|
|
|
129,262
|
|
|
|
67,358
|
|
|
|
55,279
|
|
|
|
(6,560
|
)
|
Interest expense
|
|
|
37,305
|
|
|
|
44,466
|
|
|
|
25,063
|
|
|
|
12,664
|
|
|
|
7,983
|
|
Income (loss) before income taxes
|
|
|
56,706
|
|
|
|
92,166
|
|
|
|
45,181
|
|
|
|
41,020
|
|
|
|
(16,405
|
)
|
Net income (loss)
|
|
|
33,967
|
|
|
|
56,867
|
|
|
|
26,282
|
|
|
|
25,305
|
|
|
|
(11,268
|
)
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.01
|
|
|
$
|
1.95
|
|
|
$
|
0.83
|
|
|
$
|
0.80
|
|
|
$
|
(0.34
|
)
|
Diluted
|
|
|
0.84
|
|
|
|
1.35
|
|
|
|
0.66
|
|
|
|
0.76
|
|
|
|
(0.34
|
)
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficit)
|
|
$
|
195,707
|
|
|
$
|
236,112
|
|
|
$
|
16,046
|
|
|
$
|
(57,380
|
)
|
|
$
|
27,483
|
|
Total assets
|
|
|
1,238,213
|
|
|
|
1,167,671
|
|
|
|
1,121,537
|
|
|
|
716,936
|
|
|
|
399,161
|
|
Long-term debt, excluding current
portion
|
|
|
542,569
|
|
|
|
636,582
|
|
|
|
550,613
|
|
|
|
199,023
|
|
|
|
110,210
|
|
Stockholders equity
|
|
|
264,210
|
|
|
|
176,670
|
|
|
|
128,904
|
|
|
|
111,973
|
|
|
|
86,758
|
|
Consolidated Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passengers carried
|
|
|
14,839,701
|
|
|
|
13,088,872
|
|
|
|
10,239,915
|
|
|
|
6,444,459
|
|
|
|
5,118,839
|
|
Revenue passenger miles (000)
|
|
|
6,840,101
|
|
|
|
6,185,864
|
|
|
|
5,035,165
|
|
|
|
2,814,480
|
|
|
|
1,986,164
|
|
Available seat miles
(ASM) (000)
|
|
|
9,139,340
|
|
|
|
8,715,749
|
|
|
|
7,107,684
|
|
|
|
4,453,707
|
|
|
|
3,459,427
|
|
Block hours
|
|
|
571,827
|
|
|
|
571,339
|
|
|
|
513,881
|
|
|
|
393,335
|
|
|
|
352,323
|
|
Average passenger journey in miles
|
|
|
461
|
|
|
|
473
|
|
|
|
492
|
|
|
|
436
|
|
|
|
388
|
|
Average stage length in miles
|
|
|
397
|
|
|
|
389
|
|
|
|
390
|
|
|
|
337
|
|
|
|
298
|
|
Load factor
|
|
|
74.8
|
%
|
|
|
71.0
|
%
|
|
|
70.8
|
%
|
|
|
63.2
|
%
|
|
|
57.4
|
%
|
Break-even passenger load factor
|
|
|
61.1
|
%
|
|
|
53.3
|
%
|
|
|
53.6
|
%
|
|
|
46.3
|
%
|
|
|
60.1
|
%
|
Revenue per ASM in cents
|
|
|
14.6
|
|
|
|
13.0
|
|
|
|
12.6
|
|
|
|
13.4
|
|
|
|
14.4
|
|
Operating cost per ASM in cents
|
|
|
13.5
|
|
|
|
11.6
|
|
|
|
11.7
|
|
|
|
12.3
|
|
|
|
14.6
|
|
Average yield per revenue
passenger mile in cents
|
|
|
19.5
|
|
|
|
18.4
|
|
|
|
17.8
|
|
|
|
21.3
|
|
|
|
25.0
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006(1)
|
|
|
2005(2)
|
|
|
2004(3)
|
|
|
2003(4)
|
|
|
2002(5)
|
|
|
Average fare
|
|
$
|
87.96
|
|
|
$
|
84.25
|
|
|
$
|
84.81
|
|
|
$
|
89.44
|
|
|
$
|
93.93
|
|
Aircraft in service
|
|
|
191
|
|
|
|
182
|
|
|
|
180
|
|
|
|
150
|
|
|
|
124
|
|
Cities served
|
|
|
173
|
|
|
|
176
|
|
|
|
181
|
|
|
|
163
|
|
|
|
147
|
|
Number of employees
|
|
|
5,200
|
|
|
|
4,600
|
|
|
|
5,000
|
|
|
|
3,600
|
|
|
|
3,100
|
|
|
|
|
(1) |
|
Net income in fiscal 2006 includes a bankruptcy settlement of
$12.1 million (pretax) and debt conversion costs of
$13.1 million (pretax). |
|
(2) |
|
Net income in fiscal 2005 includes the net effect of reversing
certain impairment and restructuring charges of
$1.3 million (pretax). |
|
(3) |
|
Net income in fiscal 2004 includes the net effect of impairment
and restructuring charges of $11.9 million (pretax). |
|
(4) |
|
Net income in fiscal 2003 includes the effect of impairment and
restructuring charges of $1.1 million (pretax) and the
reversal of impairment and restructuring charges of
$12.0 million (pretax). |
|
(5) |
|
Net loss in fiscal 2002 includes the effect of impairment and
restructuring charges of $26.7 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 in this
Form 10-K.
Executive
Overview
Fiscal year 2006 was a year of transition for us. As a result of
Pre-Merger US Airways emergence from bankruptcy in
connection with their merger with America West Airlines and
their non-assumption of our code-share agreement, we worked with
Pre-Merger US Airways to provide for an orderly transition
of aircraft from Pre-Merger US Airways to United and Delta.
The transition of aircraft out of Pre-Merger US Airways was
completed in the third quarter, and we completed the placement
of the last of these aircraft into operations shortly after
fiscal year end. As a result of this transition, we were
negatively impacted by idle aircraft not earning revenue while
in transition as well as incurring significant costs in training
pilots while moving aircraft to the Freedom certificate,
operations under which perform services for Delta Air Lines.
Fiscal 2006 also saw the launch of go!,
Mesas independent operation in Hawaii. go!
provides inter-island service using five 50-seat CRJ-200
aircraft in a high quality, high frequency service, connecting
the islands of Hawaii with service to the Hilo, Honolulu, Kona,
Lihue and Maui (Kahului) markets. go! operates 62
flights per day between Honolulu and Lihue, Kahaluli and Kona.
Also during 2006:
Code-Share
Agreements
Freedom commenced operations with Delta in October 2005 and is
contracted to operate up to 30 50-seat regional jet aircraft on
routes throughout Deltas network. 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 March 2006,
Freedom expanded its strategic partnership with Delta by signing
a three-year agreement to fly up to twelve, 37-seat, De
Havilland Dash-8 aircraft in support of Deltas expanding
operations at its New York-JFK hub. This Dash-8 agreement was
entered into post-petition and does not need to be assumed in
the bankruptcy proceedings.
26
Fleet
The transition plan described above included moving 36 ERJ-145
and 23 CRJ-200 aircraft out of US Airways and into Delta
and United. As of September 30, 2006, we had moved 28
ERJ-145 aircraft into Delta operations and 23 CRJ-200 and eight
ERJ-145 aircraft into United operations. We transitioned two
ERJ-145 aircraft from United to Delta shortly after our fiscal
year end.
Also during fiscal 2006, we added one CRJ-900 to our
US Airways fleet, six CRJ-200s (five into our go!
operation and one into our United fleet) and removed two
CRJ-200s from our US Airways fleet. In addition, we added
six Dash-8 aircraft into our Delta fleet and reduced our
Beechcraft 1900D fleet by two by retiring one aircraft and
leasing one (the tenth) to Big Sky.
Aircraft in Operation at September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Aircraft
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
CRJ-200/100 Regional Jet
|
|
|
60
|
|
|
|
56
|
|
|
|
54
|
|
CRJ-700 Regional Jet
|
|
|
15
|
|
|
|
15
|
|
|
|
15
|
|
CRJ-900 Regional Jet
|
|
|
38
|
|
|
|
37
|
|
|
|
24
|
|
Embraer 145 Regional Jet
|
|
|
36
|
|
|
|
36
|
|
|
|
36
|
|
Beechcraft 1900D
|
|
|
20
|
|
|
|
22
|
|
|
|
35
|
|
Dash-8
|
|
|
22
|
|
|
|
16
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
191
|
|
|
|
182
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
to Equity Conversion
In the first and second quarters of fiscal 2006, holders of
$156.8 million in aggregate principal amount at maturity
($62.3 million carrying amount) of the Companys
Senior Convertible Notes due 2023 (the Notes)
converted their Notes into shares of Mesa common stock. In
connection with these conversions, the Company issued an
aggregate of 6.2 million shares of Mesa common stock and
also paid approximately $11.3 million in debt conversion
costs to these Noteholders. The Company also wrote off
$1.8 million in debt issue costs related to these notes.
Rotable
Spare Parts Maintenance Agreements
In fiscal 2005, we entered into a ten-year agreement with AAR
Corp. (the AAR Agreement), for the management and
repair of certain of our CRJ-200, -700, -900 and ERJ-145
aircraft rotable spare parts inventory. The agreement was
completed in November 2005. Under the AAR agreement, AAR
purchased certain of our existing rotable spare parts inventory
for $39.5 million in cash and $21.5 million in notes
receivable, which we will receive over the next three years.
Summary
of Financial Results
Mesa Air Group recorded consolidated net income of
$34.0 million in fiscal 2006, representing diluted earnings
per share of $0.84. This compares to consolidated net income of
$56.9 million or $1.35 per share in fiscal 2005 and
consolidated net income of $26.3 million or $0.66 per
share in fiscal 2004.
Approximately 98% of our consolidated passenger revenues for the
fiscal year ended September 30, 2006 were derived from
operations associated with code-share agreements. Our
subsidiaries have code-share agreements with US Airways,
Delta Air Lines, Midwest Airlines and United Airlines. The
remaining passenger revenues are derived from our independent
operations, go! and Mesa Airlines.
Approximately 97% of our passenger revenue was associated with
revenue-guarantee code-share agreements. Under the terms of our
revenue-guarantee agreements, our major carrier partner controls
the 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 receive a guaranteed
payment based upon a fixed minimum monthly amount plus amounts
related to departures and block hours flown in addition to
direct
27
reimbursement of expenses such as fuel, landing fees and
insurance. Among other advantages, revenue-guarantee
arrangements reduce our exposure to fluctuations in passenger
traffic and fare levels, as well as fuel prices. In fiscal 2006,
approximately 96% of our fuel purchases were reimbursed under
revenue-guarantee code-share agreements.
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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Passengers
|
|
|
14,839,701
|
|
|
|
13,088,872
|
|
|
|
10,239,915
|
|
Available seat miles
(ASM)(000s)
|
|
|
9,139,340
|
|
|
|
8,715,749
|
|
|
|
7,107,684
|
|
Revenue passenger miles (000s)
|
|
|
6,840,101
|
|
|
|
6,185,864
|
|
|
|
5,035,165
|
|
Load factor
|
|
|
74.8
|
%
|
|
|
71.0
|
%
|
|
|
70.8
|
%
|
Yield per revenue passenger mile
(cents)
|
|
|
19.5
|
|
|
|
18.4
|
|
|
|
17.8
|
|
Revenue per ASM (cents)
|
|
|
14.6
|
|
|
|
13.0
|
|
|
|
12.6
|
|
Operating cost per ASM (cents)
|
|
|
13.5
|
|
|
|
11.6
|
|
|
|
11.7
|
|
Average stage length (miles)
|
|
|
397
|
|
|
|
389
|
|
|
|
390
|
|
Number of operating aircraft in
fleet
|
|
|
191
|
|
|
|
182
|
|
|
|
180
|
|
Gallons of fuel consumed
|
|
|
211,434,140
|
|
|
|
202,410,695
|
|
|
|
170,867,222
|
|
Block hours flown
|
|
|
571,827
|
|
|
|
571,339
|
|
|
|
513,881
|
|
Departures
|
|
|
389,883
|
|
|
|
391,086
|
|
|
|
353,083
|
|
Operating
Expense Data
Years Ended
September 30, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
373,283
|
|
|
|
27.9
|
%
|
|
|
4.1
|
|
|
$
|
319,271
|
|
|
|
28.1
|
%
|
|
|
3.7
|
|
|
$
|
297,521
|
|
|
|
33.2
|
%
|
|
|
4.2
|
|
Fuel
|
|
|
459,608
|
|
|
|
34.4
|
%
|
|
|
5.0
|
|
|
|
304,256
|
|
|
|
26.8
|
%
|
|
|
3.5
|
|
|
|
194,510
|
|
|
|
21.7
|
%
|
|
|
2.7
|
|
Maintenance
|
|
|
233,603
|
|
|
|
17.5
|
%
|
|
|
2.6
|
|
|
|
198,695
|
|
|
|
17.5
|
%
|
|
|
2.3
|
|
|
|
163,463
|
|
|
|
18.2
|
%
|
|
|
2.3
|
|
Aircraft & traffic
servicing
|
|
|
79,645
|
|
|
|
6.0
|
%
|
|
|
0.9
|
|
|
|
68,475
|
|
|
|
6.0
|
%
|
|
|
0.8
|
|
|
|
66,223
|
|
|
|
7.4
|
%
|
|
|
0.9
|
|
Promotion & sales
|
|
|
5,222
|
|
|
|
0.4
|
%
|
|
|
0.1
|
|
|
|
3,906
|
|
|
|
0.3
|
%
|
|
|
0.0
|
|
|
|
5,806
|
|
|
|
0.6
|
%
|
|
|
0.1
|
|
General & administrative
|
|
|
60,595
|
|
|
|
4.5
|
%
|
|
|
0.7
|
|
|
|
69,429
|
|
|
|
6.1
|
%
|
|
|
0.8
|
|
|
|
62,035
|
|
|
|
6.9
|
%
|
|
|
0.9
|
|
Depreciation & amortization
|
|
|
36,537
|
|
|
|
2.7
|
%
|
|
|
0.4
|
|
|
|
44,231
|
|
|
|
3.9
|
%
|
|
|
0.5
|
|
|
|
28,001
|
|
|
|
3.2
|
%
|
|
|
0.4
|
|
Bankruptcy settlement
|
|
|
(12,098
|
)
|
|
|
0.9
|
%
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment and restructuring
charges (credits)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,257
|
)
|
|
|
(0.1
|
)%
|
|
|
(0.0
|
)
|
|
|
11,895
|
|
|
|
1.3
|
%
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,236,395
|
|
|
|
92.5
|
%
|
|
|
13.5
|
|
|
|
1,007,006
|
|
|
|
88.6
|
%
|
|
|
11.6
|
|
|
|
829,454
|
|
|
|
92.5
|
%
|
|
|
11.7
|
|
Interest expense
|
|
|
(37,305
|
)
|
|
|
2.8
|
%
|
|
|
(0.4
|
)
|
|
|
(44,466
|
)
|
|
|
3.9
|
%
|
|
|
(0.5
|
)
|
|
|
(25,063
|
)
|
|
|
2.8
|
%
|
|
|
(0.4
|
)
|
Interest income
|
|
|
12,116
|
|
|
|
0.9
|
%
|
|
|
0.1
|
|
|
|
2,901
|
|
|
|
0.3
|
%
|
|
|
0.0
|
|
|
|
1,163
|
|
|
|
0.1
|
%
|
|
|
0.0
|
|
Other income (expense)
|
|
|
(16,417
|
)
|
|
|
1.2
|
%
|
|
|
(0.2
|
)
|
|
|
4,469
|
|
|
|
0.4
|
%
|
|
|
0.1
|
|
|
|
1,723
|
|
|
|
0.0
|
%
|
|
|
0.0
|
|
Note: Numbers in the table above may not be recalculated
due to rounding
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Mesa/
|
|
|
Air Midwest/
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 (000s)
|
|
Freedom
|
|
|
go!
|
|
|
Other
|
|
|
Elimination
|
|
|
Total
|
|
|
Total operating revenues
|
|
$
|
1,272,206
|
|
|
$
|
61,459
|
|
|
$
|
247,474
|
|
|
$
|
(243,942
|
)
|
|
$
|
1,337,197
|
|
Total operating expenses
|
|
|
1,165,294
|
|
|
|
71,986
|
|
|
|
209,381
|
|
|
|
(210,266
|
)
|
|
|
1,236,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
106,912
|
|
|
|
(10,527
|
)
|
|
|
38,093
|
|
|
|
(33,676
|
)
|
|
|
100,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Mesa/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2004 (000s)
|
|
Freedom
|
|
|
Air 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of the Companys 34 Beechcraft 1900D aircraft are owned
by Mesa Airlines; however, the Company currently operates 20 of
these aircraft. The operating aircraft and debt are recorded on
the separate company financial statements of Mesa Airlines, but
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. The
non-operating aircraft are being subleased to other carriers
and, as a result, the sublease income, depreciation and interest
are included in the other segment.
Fiscal
2006 Versus Fiscal 2005
Operating
Revenues
In fiscal 2006, operating revenue increased by
$200.9 million, or 17.7%, from $1.1 billion in the
twelve months ended September 30, 2005 to $1.3 billion
in the twelve months ended September 30, 2006. The increase
in revenue is primarily attributable to a $208.1 million
increase in operating revenues in the Mesa / Freedom segment,
the largest component of which is a $155.8 million increase
in fuel reimbursements by our code-share partners. Operating
revenues in the Air Midwest / go! segment
decreased $1.2 million, primarily as a result of a
$1.9 million decrease in Essential Air Service
(EAS) revenue due to the timing of awards won and
lost during the year. In addition, prorate revenue increased
$2.9 million in the Air Midwest / go!
segment, primarily from the startup of operations at go!
This net increase was offset by a decrease in Air
Midwest prorate revenue as a result of leasing additional
Beechcraft 1900D aircraft to other carriers.
Operating
Expenses
Flight
Operations
In fiscal 2006, flight operations expense increased
$54.0 million, or 16.9%, to $373.3 million from
$319.3 million for fiscal 2005. On an ASM basis, flight
operations expense increased 10.8% to 4.1 cents per ASM in
fiscal 2006 from 3.7 cents per ASM in the fiscal 2005. Flight
operations expense in the Mesa / Freedom segment increased
$59.2 million, which included a $35.2 million increase
in aircraft lease cost due to the sale and leaseback of 15
CRJ-900 aircraft in September 2005, a $12.7 million
increase in flight crew wages, a $4.0 million increase in
lodging cost and a $2.6 million increase in flight
simulator lease expense. The increases in flight crew wages,
lodging cost and flight simulator expenses are a result of
training costs associated with the transition of aircraft onto
the Freedom certificate as well as the start up of the
Companys Delta Dash-8 operations at New Yorks JFK
airport. Flight operations expense in the Air Midwest /
go! segment increased $2.0 million primarily
as a result of the startup of operations at go!
29
Fuel
In fiscal 2006, fuel expense increased $155.3 million, or
51.1%, to $459.6 million from $304.3 million for
fiscal 2005. On an ASM basis, fuel expense increased 42.9% to
5.0 cents per ASM in fiscal 2006 from 3.5 cents per ASM in
fiscal 2005. Into-plane fuel cost in fiscal 2006 increased 44.7%
from $1.50 per gallon in fiscal 2005 to $2.17 per
gallon in fiscal 2006, resulting in a $136.1 million
unfavorable price variance. Consumption increased 4% in fiscal
2006 resulting in a $19.2 million unfavorable volume
variance. In fiscal 2006, approximately 96% of our fuel costs
were reimbursed by our code-share partners.
Maintenance
Expense
In fiscal 2006, maintenance expense increased
$34.9 million, or 17.6%, to $233.6 million from
$198.7 million for fiscal 2005. On an ASM basis,
maintenance expense increased 13.0% to 2.6 cents per ASM in
fiscal 2006 from 2.3 cents per ASM in fiscal 2005. Maintenance
expense in the Mesa / Freedom segment increased
$46.1 million, which included an $11.1 million
increase in aircraft heavy maintenance expense, an
$11.2 million increase in rotable spare part repair and
rent expense, a $7.8 million increase in engine
maintenance, a $5.0 million increase in materials, repairs
and servicing expenses, a $3.6 million increase in mechanic
wage expenses, and a $2.3 million increase in hangar rent.
The increase is due to the timing of certain maintenance events
for the Companys aircraft and the additional bases
established to support the United and Delta operations.
Maintenance expense in the Air Midwest / go!
segment decreased $2.6 million. The net decrease was due to
a $4.5 million reduction in maintenance expense primarily
due to the costs associated with preparing Beechcraft 1900
aircraft for lease to other carriers in fiscal 2005, this
decrease was offset by a $1.9 million increase as a result
of the start up of go!
Aircraft
and Traffic Servicing
In fiscal 2006, aircraft and traffic servicing expense increased
by $11.2 million, or 16.3%, to $79.6 million from
$68.5 million for fiscal 2005. On an ASM basis, aircraft
and traffic servicing expense increased 12.5% to 0.9 cents per
ASM in fiscal 2006 from 0.8 cents per ASM in fiscal 2005.
Aircraft and traffic servicing expense in the Mesa / Freedom
segment increased $10.7 million, which included a
$5.6 million increase in station rents and a
$4.5 million increase in passenger related costs, primarily
landing fees. These increases were primarily a result of moving
into higher cost East Coast cities for United and Delta. These
costs are reimbursed by our code-share partners. Aircraft and
traffic servicing expense in the Air Midwest / go!
segment remained relatively constant with decreases at
Air Midwest due to reduced capacity being offset by increases at
go! as a result of the startup.
Promotion
and Sales
In fiscal 2006, promotion and sales expense increased by
$1.3 million, or 33.7%, to $5.2 million from
$3.9 million for fiscal 2005. On an ASM basis, promotion
and sales expense increased 100% to 0.1 cents per ASM in the
twelve months ended September 30, 2006 from 0.0 cents per
ASM in the twelve months ended September 30, 2005.
Promotion and sales expense in the Air Midwest /
go! segment increased $1.3 million, with
increases at go! due to the startup being offset
by decreases at Air Midwest as a result of reduced capacity. We
do not pay promotion and sales expenses under our regional jet
revenue-guarantee contracts.
General
and Administrative
In fiscal 2006, general and administrative expense decreased
$8.8 million, or 12.7%, to $60.6 million from
$69.4 million for fiscal 2005. On an ASM basis, general and
administrative expense decreased 12.5% to 0.7 cents per ASM in
fiscal 2006 from 0.8 cents per ASM in fiscal 2005. The net
decrease included a $13.5 million reduction in bad debt
expense due to the reversal of reserves for $7.2 million as
a result of proceeds received from the Pre-Merger US Airways
bankruptcy settlement and other items which were established in
fiscal 2005, a $4.0 million reduction in medical expenses
due to a change in health plans, a $1.0 million reduction
in passenger liability insurance premiums as a result of lower
rates and a $2.1 million reduction in bonus wages as a
result of a failure to meet profitability targets. These
decreases were offset by a $2.3 million increase in stock
option expense due to the adoptions of SFAS 123(R), which
requires expensing stock options; a $1.9 million increase
in legal costs due to the litigation involving our commencement
of service in the Hawaii inter-island market in fiscal 2006 and
a $0.8 million
30
favorable settlement in fiscal 2005; and a $1.7 million
increase in workers compensation expense due to an increase in
claims.
Depreciation
and Amortization
In fiscal 2006, depreciation and amortization expense decreased
$7.7 million, or 17.4%, to $36.5 million from
$44.2 million for fiscal 2005. On an ASM basis,
depreciation expense decreased 20% to 0.4 cents per ASM in
fiscal 2006 from 0.5 cents per ASM in fiscal 2005. The decrease
was primarily due to a $7.2 million reduction in
depreciation expense in the Mesa / Freedom segment as a result
of permanently financing 15 CRJ-900 aircraft as operating leases
in the fourth quarter of fiscal 2005.
Bankruptcy
Settlement
In fiscal 2006, the Company received approximately
350,000 shares of US Airways common stock as part of our
bankruptcy claim against Pre-Merger US Airways. The shares were
valued at approximately $50 per share, hence the Company
recognized approximately $17.6 million in benefit from its
claim. Of the $17.6 million, $5.5 million was applied
to receivables that were previously reserved.
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.
Interest
Expense
In fiscal 2006, interest expense decreased $7.2 million, or
16.1%, to $37.3 million from $44.5 million for fiscal
2005. On an ASM basis, interest expense decreased 20% to 0.4
cents per ASM in fiscal 2006 from 0.5 cents per ASM in fiscal
2005. The net decrease in interest expense was primarily due a
$10.4 million reduction in interest expense as a result of
permanently financing 15 CRJ-900 aircraft with operating leases
in the fourth quarter of fiscal 2005, a $2.8 million
reduction in convertible debt interest expense as a result of
the conversion from debt to equity and a $1.0 million
reduction in interest expense related to the financing of
rotable inventory that was retired in the first quarter of
fiscal 2006. These decreases were partially offset by a
$6.4 million increase in interest expense on aircraft
financing as a result of increases in variable interest rates.
Interest
Income
In fiscal 2006, interest income increased $9.2 million to
$12.1 million from $2.9 million for fiscal 2005. The
increase is due to increases in the rates of return on our
portfolio of marketable securities.
Other
Income (Expense)
In fiscal 2006, other income (expense) decreased
$20.9 million from income of $4.5 million for fiscal
2005 to expense of $16.4 million for fiscal 2006. In fiscal
2006, other income (expense) is primarily comprised of
$13.1 million in debt conversion costs and
$2.5 million in losses on investment securities.
In fiscal 2005, other income was primarily comprised of net
investment income of $2.3 million from the Companys
portfolio of investment 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.
Income
Taxes
In fiscal 2006, the our effective tax rate increased from 38.3%
for fiscal 2005 to 40.1%. The increase in our effective tax rate
is mainly due to the inability to deduct stock option expense
related to incentive stock options for income tax purposes.
31
Fiscal
2005 Versus Fiscal 2004
Operating
Revenues
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 in the Air Midwest / Freedom segment. The
decrease in passenger revenue in the Air Midwest / Freedom
segment primarily due to reductions in capacity as the Company
has leased nine Beechcraft 1900 aircraft to Big Sky and four
Beechcraft 1900 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
Flight
Operations
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.
Fuel
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.
Maintenance
Expense
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.
Promotion
and Sales
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.
32
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 Beechcraft 1900D 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 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.
Interest
Expense
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 Beechcraft 1900 aircraft debt.
Other
Income (Expense)
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 investment 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 investment securities.
Income
Taxes
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.
33
Liquidity
and Capital Resources
Sources
and Uses of Cash
At September 30, 2006, we had cash, cash equivalents, and
marketable securities (including restricted cash and
held-to-maturity
securities) of $234.3 million, compared to
$280.4 million at September 30, 2005. In fiscal 2006,
we cancelled our rotable financing arrangement with GECAS and
were required to repay the $19.7 million liability that
remained outstanding. The liability was retired with cash of
$15.9 million and included offsetting $3.8 million in
notes receivable from GECAS. We then entered into a similar
arrangement with AAR whereby AAR was required to purchase
certain rotable spare parts for $39.6 million in cash and
$21.5 million in notes receivable.
Also in fiscal 2006, holders of $156.8 million in aggregate
principal amount at maturity ($62.3 million carrying
amount) of the Companys Senior Convertible Notes due 2023
(the Notes) converted their Notes into shares of
Mesa common stock. In connection with these conversions, the
Company paid approximately $11.3 million in debt conversion
costs to these Noteholders.
Other uses of cash included capital expenditures of
$42.6 million, which was primarily attributable to
preparing aircraft for service and provisioning of rotable
inventory to support additional bases of operations, and the
purchase of $18.6 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, 2006, we had receivables of
approximately $47.4 million (net of an allowance for
doubtful accounts of $1.6 million), compared to receivables
of approximately $29.0 million (net of an allowance for
doubtful accounts of $8.9 million) as of September 30,
2005. 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 45%
of total gross accounts receivable at September 30, 2006.
Code-Share
Partner in Bankruptcy
On September 14, 2005, Delta Air Lines, Inc. 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 seek to renegotiate
the agreement on terms less favorable to us or terminate this
agreement. As of the date of this report, the Company believes
that there is a reasonable likelihood that Delta will assume our
code-share agreement in such proceedings. This belief is based
primarily on the continued expansion of the aircraft we fly
under our agreement with Delta and our current business
relations with them. Notwithstanding this belief, no assurance
can be given that Delta will assume our code-share agreement or
otherwise seek to renegotiate the terms of the agreement. If
Delta and the Company did renegotiate the terms of the existing
agreement, the Companys profitability would be impacted
and liquidity would be reduced. However, if Delta was to
terminate our agreement, the Company would seek to mitigate the
effect of such event by seeking alternative code-share partners,
subleasing the aircraft to another carrier or carriers or
parking the aircraft. These options could have a material
adverse effect on our liquidity, financial condition and results
of operations.
Operating
Leases
We have significant long-term lease obligations primarily
relating to our aircraft fleet. The leases are classified as
operating leases and are therefore excluded from our
consolidated balance sheets. At September 30, 2006, we
leased 158 aircraft with remaining lease terms ranging from 1 to
17.5 years. Future minimum lease payments due under all
long-term operating leases were approximately $2.3 billion
at September 30, 2006.
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
34
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 were sold at an issue price of $583.40 per note
and are convertible into shares of our common stock at a
conversion rate of 40.3737 shares per note, which equals a
conversion price of $14.45 per share. 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. These notes are not yet convertible. 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.
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 were sold at an issue price of $397.27 per note
and are convertible into shares of our common stock at a
conversion rate of 39.727 shares per note, which equals a
conversion price of $10 per share. 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. These notes became convertible in 2003. 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.
In fiscal 2006, holders of $156.8 million in aggregate
principal amount at maturity ($62.3 million carrying
amount) of the Companys Senior Convertible Notes due 2023
(the Notes) converted their Notes into shares of
Mesa common stock. In connection with these conversions, the
Company issued an aggregate of 6.2 million shares of Mesa
common stock and also paid approximately $11.3 million in
debt conversion costs to these Noteholders. The Company also
wrote off $1.8 million in debt issue costs related to these
notes.
35
Interim
and Permanent Aircraft Financing Arrangements
At September 30, 2006, we had an aggregate of
$123.1 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, 2006, we had five aircraft on
interim financing with the manufacturer. These interim
financings agreements typically 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.
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.
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.
As of September 30, 2006, we had $12.0 million in
restricted cash on deposit collateralizing various letters of
credit outstanding and the ACH funding of our payroll.
Contractual
Obligations
As of September 30, 2006, we had $572.2 million of
long-term debt (including current maturities). This amount
consisted of $431.6 million in notes payable related to
owned aircraft, $137.8 in aggregate principal amount of our
senior convertible notes due 2023 and 2024 and $2.8 million
in other miscellaneous debt.
The following table sets forth our cash obligations (including
principal and interest) as of September 30, 2006.
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Payment Due by Period
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Obligations
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2007
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2008
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2009
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2010
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2011
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Thereafter
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Total
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(In thousands)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable related to CRJ700s and
900s(2)
|
|
$
|
46,896
|
|
|
$
|
46,116
|
|
|
$
|
45,234
|
|
|
$
|
44,346
|
|
|
$
|
43,419
|
|
|
$
|
297,645
|
|
|
$
|
523,656
|
|
2003 senior convertible debt notes
(assuming no conversions)
|
|
|
2,365
|
|
|
|
2,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,234
|
|
|
|
99,964
|
|
2004 senior convertible debt notes
(assuming no conversions)
|
|
|
3,625
|
|
|
|
3,625
|
|
|
|
1,813
|
|
|
|
|
|
|
|
|
|
|
|
171,409
|
|
|
|
180,472
|
|
Notes payable related to B1900Ds
|
|
|
11,947
|
|
|
|
11,939
|
|
|
|
11,940
|
|
|
|
28,982
|
|
|
|
25,156
|
|
|
|
9,049
|
|
|
|
99,013
|
|
Note payable related to CRJ200s(2)
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
14,952
|
|
|
|
29,952
|
|
Note payable to manufacturer
|
|
|
1,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,823
|
|
Mortgage note payable
|
|
|
109
|
|
|
|
109
|
|
|
|
824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,042
|
|
Other
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
69,790
|
|
|
|
67,179
|
|
|
|
62,836
|
|
|
|
76,353
|
|
|
|
71,600
|
|
|
|
588,314
|
|
|
|
936,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
Obligations
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to
manufacturer interim financing(1)(2)
|
|
|
53,111
|
|
|
|
9,409
|
|
|
|
9,409
|
|
|
|
9,409
|
|
|
|
9,409
|
|
|
|
126,171
|
|
|
|
216,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments under operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash aircraft rental payments(2)
|
|
|
245,021
|
|
|
|
216,084
|
|
|
|
192,163
|
|
|
|
185,402
|
|
|
|
190,281
|
|
|
|
1,244,395
|
|
|
|
2,273,346
|
|
Lease payments on equipment and
operating facilities
|
|
|
1,351
|
|
|
|
1,392
|
|
|
|
962
|
|
|
|
947
|
|
|
|
956
|
|
|
|
1,198
|
|
|
|
6,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease payments
|
|
|
246,372
|
|
|
|
217,476
|
|
|
|
193,125
|
|
|
|
186,349
|
|
|
|
191,237
|
|
|
|
1,245,593
|
|
|
|
2,280,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future aircraft acquisition costs(3)
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
Rotable inventory financing
commitments(4)
|
|
|
587
|
|
|
|
563
|
|
|
|
540
|
|
|
|
2,241
|
|
|
|
|
|
|
|
|
|
|
|
3,931
|
|
Minimum payments due under rotable
spare parts maintenance agreement
|
|
|
23,127
|
|
|
|
26,650
|
|
|
|
29,371
|
|
|
|
32,225
|
|
|
|
32,614
|
|
|
|
136,476
|
|
|
|
280,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
467,987
|
|
|
$
|
321,277
|
|
|
$
|
295,281
|
|
|
$
|
356,577
|
|
|
$
|
304,860
|
|
|
$
|
2,096,554
|
|
|
$
|
3,842,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the principal and interest on notes payable to the
manufacturer for interim financed aircraft. These notes payable
typically 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. |
Maintenance
Commitments
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 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
37
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.
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, the Company sold certain existing spare
parts inventory to AAR for $39.6 million in cash and
$21.5 million in notes receivable to be paid over four
years. The AAR agreement was 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 terminated the GECAS agreement and
finalized the AAR agreement in November 2005. Upon entering into
the agreement, the Company received $22.8 million
($23.8 million less $1 million deposit that was
retained by AAR), which was recorded as a deposit at
September 30, 2005, pending the termination of the GECAS
agreement. An additional $15.8 million was received in the
quarter ended December 31, 2005. Under the agreement, the
Company is required to pay AAR a monthly fee based upon flight
hours for access to and maintenance and servicing of the
inventory. The agreement also contains certain minimum monthly
payments that Mesa must make to AAR. Based on this arrangement,
the Company accounts for the transaction as a service agreement
and an operating lease of rotable spare parts with AAR. The sale
of the rotable spare parts resulted in a gain of
$2.1 million, which has been deferred and is being
recognized over the term of the agreement. At termination, the
Company may elect to purchase the covered inventory at fair
value, but is not contractually obligated to do so.
In June 2006, the Company entered into a separate two-year
agreement with AAR for the management and repair of the
Companys CRJ-200 aircraft rotable spare parts inventory
associated with its go! operations. Under this
agreement, the Company transferred certain existing spare parts
inventory to AAR for $1.2 million in cash. AAR is required
to purchase an additional $2.9 million in rotable spare
parts to support the agreement. 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. At termination, the
Company has guaranteed the fair value of the underlying
rotables. Based on this arrangement, the Company accounts for
the transaction as a financing arrangement, thus recording both
the rotable spare parts inventory as an asset and the related
payable to AAR as a liability.
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 and workers compensation claims
reserves, valuation of assets held for sale, 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.
38
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 accounting policies and
other disclosures required by accounting principles generally
accepted in the United States of America.
Revenue
Recognition
The Delta, United and 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
Delta, United and US Airways, 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 2006, 2005 and
2004 was $248.5 million, $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 Pre-Merger US Airways, the
Companys fuel reimbursement was capped at $0.85 per
gallon. Under this agreement, the Company had 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 have represented
market rates for fuel for the Companys Pre-Merger US
Airways flying. The Company purchased 12.7 million gallons,
67.4 million gallons and 68.1 million gallons of fuel
under this arrangement in fiscal 2006, 2005 and 2004,
respectively.
The US Airways and Midwest Airlines Beechcraft 1900D 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
39
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 record a
reserve for amounts estimated to be uncollectible. The allowance
for doubtful accounts was $1.6 million and
$8.9 million at September 30, 2006 and 2005,
respectively. If our actual ability to collect these receivables
and the actual financial viability of our partners is materially
different than estimated, our estimate of the allowance could be
materially understated or overstated.
Aircraft
Leases
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 term 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, 2006 and 2005, we accrued $2.6 million
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, 2006 and 2005, we accrued $3.4 million
and $1.6 million, respectively, 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
40
unrealized portion is made and an allowance is recorded. At
September 30, 2006 and 2005, we had a valuation allowance
of $0.6 million and $0.4 million, respectively, 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 deferred tax assets. We believe we
will generate sufficient taxable income in the future to realize
the benefits of our other deferred tax assets. This belief is
based upon the Company having had pretax income in fiscal 2006,
2005 and 2004 and we have taken steps to minimize the financial
impact of our 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
In June 2006, the Financial Accounting Standards Board
(FASB) ratified Emerging Issues Task Force Issue
No. 06-3
(EITF
06-3),
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation). EITF
06-3 applies
to any tax assessed by a governmental authority that is directly
imposed on a revenue-producing transaction between a seller and
a customer. EITF
06-3 allows
companies to present taxes either gross within revenue and
expense or net. If taxes subject to this issue are significant,
a company is required to disclose its accounting policy for
presenting taxes and the amount of such taxes that are
recognized on a gross basis. The Company currently presents such
taxes net. EITF
06-3 is
required to be adopted during the second quarter of fiscal 2007.
These taxes are currently not material to the Companys
consolidated financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 157, Fair
Value Measurements. This standard defines fair value,
establishes a framework for measuring fair value in accounting
principles generally accepted in the United States of America,
and expands disclosure about fair value measurements. This
pronouncement applies to other accounting standards that require
or permit fair value measurements. Accordingly, this statement
does not require any new fair value measurement. This statement
is effective for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The Company
will be required to adopt SFAS No. 157 in the first
quarter of fiscal year 2009. Management has not yet determined
the impact of adopting this statement.
In September, 2006, the FASB issued FASB Staff Position
(FSP) No. AUG AIR-1 Accounting for
Planned Major Maintenance Activities. This position amends
the existing major maintenance accounting guidance contained
within the AICPA Industry Audit Guide Audits of
Airlines and prohibits the use of the accrue in advance
method of accounting for planned major maintenance activities
for owned aircraft. The provisions of the announcement are
applicable for fiscal years beginning after December 15,
2006. Mesa currently uses the direct expense method of
accounting for planned major maintenance; therefore, the
adoption of FSP No. AUG AIR-1 will not have an impact on
the Companys consolidated financial statements.
In September 2006, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 108
(SAB 108). Due to diversity in practice among
registrants, SAB 108 expresses SEC staff views regarding
the process by which misstatements in financial statements are
evaluated for purposes of determining whether financial
statement restatement is necessary. SAB 108 is effective
for fiscal years ending after November 15, 2006. The
Company will adopt SAB 108 in fiscal 2007. Management does
not believe the adoption of SAB 108 will have a material
impact on the Companys consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting for
uncertainty in income taxes recognized in financial statements.
FIN 48 requires the impact of a tax position to be
recognized in the financial statements if that position is more
likely than not of being sustained by the taxing authority. Mesa
will be required to adopt FIN 48 in the first quarter of
fiscal year 2008. Management has not yet determined the impact
on the Companys consolidated financial statements.
41
|
|
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 $1.0 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 2006 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 Delta, 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 2006, approximately 96% 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
|
|
|
|
|
|
|
|
Page 44
|
|
|
|
|
Report of Independent Registered
Public Accounting Firm.
|
|
Page 45
|
|
|
|
|
Consolidated Statements of
Income Years ended September 30, 2006, 2005 and
2004.
|
|
Page 46
|
|
|
|
|
Consolidated Balance
Sheets September 30, 2006 and 2005.
|
|
Page 47
|
|
|
|
|
Consolidated Statements of Cash
Flows Years ended September 30, 2006, 2005 and
2004.
|
|
Page 49
|
|
|
|
|
Consolidated Statements of
Stockholders Equity Years ended
September 30, 2006, 2005 and 2004.
|
|
Page 50
|
|
|
|
|
Notes to Consolidated Financial
Statements.
|
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
have been omitted because they are not applicable, not required
or the information has been furnished elsewhere.
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, 2006 and 2005, and the related
consolidated statements of income, stockholders equity,
and cash flows for each of the three years in the period ended
September 30, 2006. 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 as of September 30, 2006
and 2005, and the results of their operations and their cash
flows for each of the three years in the period ended
September 30, 2006, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial
statements, on October 1, 2005, the Company adopted
Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, using the modified
prospective transition method.
As discussed in Note 2, substantially all of the
Companys passenger revenue is derived from code-share
agreements with United Airlines, Inc. (United),
Delta Air Lines, Inc. (Delta), and US Airways, Inc.
(US Airways). In September 2005, Delta 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, 2006, 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, 2006 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.
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
December 14, 2006
44
PART 1.
FINANCIAL INFORMATION
MESA AIR
GROUP, INC.
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
$
|
1,307,875
|
|
|
$
|
1,102,550
|
|
|
$
|
868,415
|
|
Freight and other
|
|
|
29,322
|
|
|
|
33,718
|
|
|
|
28,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
1,337,197
|
|
|
|
1,136,268
|
|
|
|
896,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight operations
|
|
|
373,283
|
|
|
|
319,271
|
|
|
|
297,521
|
|
Fuel
|
|
|
459,608
|
|
|
|
304,256
|
|
|
|
194,510
|
|
Maintenance
|
|
|
233,603
|
|
|
|
198,695
|
|
|
|
163,463
|
|
Aircraft and traffic servicing
|
|
|
79,645
|
|
|
|
68,475
|
|
|
|
66,223
|
|
Promotion and sales
|
|
|
5,222
|
|
|
|
3,906
|
|
|
|
5,806
|
|
General and administrative
|
|
|
60,595
|
|
|
|
69,429
|
|
|
|
62,035
|
|
Depreciation and amortization
|
|
|
36,537
|
|
|
|
44,231
|
|
|
|
28,001
|
|
Bankruptcy settlement
|
|
|
(12,098
|
)
|
|
|
|
|
|
|
|
|
Impairment and restructuring
charges (credits)
|
|
|
|
|
|
|
(1,257
|
)
|
|
|
11,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,236,395
|
|
|
|
1,007,006
|
|
|
|
829,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
100,802
|
|
|
|
129,262
|
|
|
|
67,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(37,305
|
)
|
|
|
(44,466
|
)
|
|
|
(25,063
|
)
|
Interest income
|
|
|
12,116
|
|
|
|
2,901
|
|
|
|
1,163
|
|
Loss from equity method investment
|
|
|
(2,490
|
)
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(16,417
|
)
|
|
|
4,469
|
|
|
|
1,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(44,096
|
)
|
|
|
(37,096
|
)
|
|
|
(22,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
56,706
|
|
|
|
92,166
|
|
|
|
45,181
|
|
Income taxes
|
|
|
22,739
|
|
|
|
35,299
|
|
|
|
18,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,967
|
|
|
$
|
56,867
|
|
|
$
|
26,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share basic
|
|
$
|
1.01
|
|
|
$
|
1.95
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share diluted
|
|
$
|
0.84
|
|
|
$
|
1.35
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
45
MESA AIR
GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except
|
|
|
|
share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
35,559
|
|
|
$
|
143,428
|
|
Marketable securities
|
|
|
186,764
|
|
|
|
128,162
|
|
Restricted cash
|
|
|
12,001
|
|
|
|
8,848
|
|
Receivables, net
|
|
|
47,382
|
|
|
|
28,956
|
|
Income tax receivable
|
|
|
615
|
|
|
|
704
|
|
Expendable parts and supplies, net
|
|
|
32,771
|
|
|
|
36,288
|
|
Prepaid expenses and other current
assets
|
|
|
139,563
|
|
|
|
98,267
|
|
Deferred income taxes
|
|
|
4,115
|
|
|
|
8,256
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
458,770
|
|
|
|
452,909
|
|
Property and equipment, net
|
|
|
669,912
|
|
|
|
642,914
|
|
Lease and equipment deposits
|
|
|
27,389
|
|
|
|
25,428
|
|
Equity method investment
|
|
|
12,510
|
|
|
|
|
|
Other assets
|
|
|
69,632
|
|
|
|
46,420
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,238,213
|
|
|
$
|
1,167,671
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
29,659
|
|
|
$
|
27,787
|
|
Short-term debt
|
|
|
123,076
|
|
|
|
54,594
|
|
Accounts payable
|
|
|
56,097
|
|
|
|
52,608
|
|
Air traffic liability
|
|
|
6,677
|
|
|
|
2,169
|
|
Accrued compensation
|
|
|
4,545
|
|
|
|
3,829
|
|
Deposit on pending sale of rotable
spare parts
|
|
|
|
|
|
|
22,750
|
|
Rotable spare parts financing
liability
|
|
|
|
|
|
|
19,685
|
|
Income taxes payable
|
|
|
1,008
|
|
|
|
2,863
|
|
Other accrued expenses
|
|
|
42,001
|
|
|
|
30,512
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
263,063
|
|
|
|
216,797
|
|
Long-term debt, excluding current
portion
|
|
|
542,569
|
|
|
|
636,582
|
|
Deferred credits
|
|
|
101,723
|
|
|
|
97,497
|
|
Deferred income taxes
|
|
|
44,531
|
|
|
|
25,684
|
|
Other noncurrent liabilities
|
|
|
22,117
|
|
|
|
14,441
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
974,003
|
|
|
|
991,001
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(notes 2, 8, 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;
33,904,053 and 28,868,167 shares issued and outstanding,
respectively
|
|
|
149,701
|
|
|
|
96,128
|
|
Retained earnings
|
|
|
114,509
|
|
|
|
80,542
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
264,210
|
|
|
|
176,670
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
1,238,213
|
|
|
$
|
1,167,671
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
46
MESA AIR
GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,967
|
|
|
$
|
56,867
|
|
|
$
|
26,282
|
|
Adjustments to reconcile net
income to net cash flows provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
36,537
|
|
|
|
44,231
|
|
|
|
28,001
|
|
Impairment and restructuring
charges (credits)
|
|
|
|
|
|
|
(1,257
|
)
|
|
|
11,895
|
|
Deferred income taxes
|
|
|
22,988
|
|
|
|
31,625
|
|
|
|
18,723
|
|
Unrealized loss on investment
securities
|
|
|
648
|
|
|
|
514
|
|
|
|
620
|
|
Equity in net loss of
unconsolidated sub
|
|
|
2,490
|
|
|
|
|
|
|
|
|
|
Amortization of deferred credits
|
|
|
(11,043
|
)
|
|
|
(6,202
|
)
|
|
|
(6,243
|
)
|
Amortization of restricted stock
awards
|
|
|
1,261
|
|
|
|
1,178
|
|
|
|
589
|
|
Amortization of contract incentives
|
|
|
3,488
|
|
|
|
|
|
|
|
|
|
Write off of debt issuance costs
|
|
|
1,800
|
|
|
|
|
|
|
|
|
|
Loss on sale of assets
|
|
|
611
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense
|
|
|
2,313
|
|
|
|
|
|
|
|
|
|
Tax benefit on stock compensation
|
|
|
|
|
|
|
160
|
|
|
|
137
|
|
Provision for obsolete expendable
parts and supplies
|
|
|
559
|
|
|
|
1,195
|
|
|
|
1,269
|
|
Provision for (recovery of)
doubtful accounts
|
|
|
(6,607
|
)
|
|
|
6,915
|
|
|
|
4,315
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net purchases of investment
securities
|
|
|
(59,250
|
)
|
|
|
(70,154
|
)
|
|
|
(45,584
|
)
|
Receivables
|
|
|
(9,447
|
)
|
|
|
6,709
|
|
|
|
(9,566
|
)
|
Income tax receivables
|
|
|
89
|
|
|
|
762
|
|
|
|
(1,466
|
)
|
Expendable parts and supplies
|
|
|
542
|
|
|
|
(2,693
|
)
|
|
|
(11,415
|
)
|
Prepaid expenses
|
|
|
(41,296
|
)
|
|
|
(58,704
|
)
|
|
|
(14,708
|
)
|
Other assets
|
|
|
1,159
|
|
|
|
|
|
|
|
|
|
Contract incentive payments
|
|
|
(20,707
|
)
|
|
|
(12,025
|
)
|
|
|
|
|
Accounts payable
|
|
|
3,489
|
|
|
|
5,787
|
|
|
|
4,921
|
|
Income taxes payable
|
|
|
(227
|
)
|
|
|
2,407
|
|
|
|
(440
|
)
|
Cost to return aircraft held for
sale
|
|
|
|
|
|
|
|
|
|
|
(2,392
|
)
|
Other accrued liabilities
|
|
|
20,060
|
|
|
|
(2,540
|
)
|
|
|
1,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
|
|
|
(16,576
|
)
|
|
|
4,775
|
|
|
|
6,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(44,561
|
)
|
|
|
(41,873
|
)
|
|
|
(50,283
|
)
|
Acquisition of Midway
|
|
|
|
|
|
|
|
|
|
|
(9,160
|
)
|
Proceeds from the sale of flight
equipment and expendable inventory
|
|
|
20,076
|
|
|
|
449
|
|
|
|
2,383
|
|
Equity method investment
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
Change in restricted cash
|
|
|
(3,153
|
)
|
|
|
636
|
|
|
|
(9,484
|
)
|
Change in other assets
|
|
|
3,410
|
|
|
|
4,088
|
|
|
|
(1,181
|
)
|
Lease and equipment deposits
|
|
|
(961
|
)
|
|
|
1,608
|
|
|
|
(5,491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES
|
|
|
(40,189
|
)
|
|
|
(35,092
|
)
|
|
|
(73,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
MESA AIR
GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on short-term
and long-term debt
|
|
|
(36,038
|
)
|
|
|
(28,911
|
)
|
|
|
(16,859
|
)
|
Proceeds from issuance of senior
convertible notes
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
Debt issuance costs
|
|
|
|
|
|
|
(3,177
|
)
|
|
|
(3,009
|
)
|
Proceeds from pending sale of
rotable inventory (customer deposits)
|
|
|
|
|
|
|
22,750
|
|
|
|
|
|
Proceeds from (repayments of)
financing rotable inventory
|
|
|
(15,882
|
)
|
|
|
|
|
|
|
15,000
|
|
Proceeds from exercise of stock
options and issuance of warrants
|
|
|
6,364
|
|
|
|
813
|
|
|
|
843
|
|
Common stock purchased and retired
|
|
|
(18,643
|
)
|
|
|
(11,252
|
)
|
|
|
(10,921
|
)
|
Proceeds from receipt of deferred
credits
|
|
|
13,095
|
|
|
|
20,412
|
|
|
|
2,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES
|
|
|
(51,104
|
)
|
|
|
635
|
|
|
|
87,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH
EQUIVALENTS
|
|
|
(107,869
|
)
|
|
|
(29,682
|
)
|
|
|
20,563
|
|
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
|
|
|
143,428
|
|
|
|
173,110
|
|
|
|
152,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END
OF YEAR
|
|
$
|
35,559
|
|
|
$
|
143,428
|
|
|
$
|
173,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
39,132
|
|
|
$
|
45,694
|
|
|
$
|
24,105
|
|
Cash paid (refunded) for income
taxes
|
|
|
(125
|
)
|
|
|
336
|
|
|
|
1,906
|
|
SUPPLEMENTAL NON-CASH INVESTING
AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft and engine delivered
under interim financing provided by manufacturer
|
|
$
|
74,657
|
|
|
$
|
351,187
|
|
|
$
|
463,936
|
|
Conversion of convertible
debentures to common stock
|
|
|
62,278
|
|
|
|
|
|
|
|
|
|
Aircraft and engine debt
permanently financed as operating lease
|
|
|
|
|
|
|
(397,432
|
)
|
|
|
(203,362
|
)
|
Short-term debt permanently
financed as long-term debt
|
|
|
|
|
|
|
(118,041
|
)
|
|
|
(254,728
|
)
|
Long-term debt assumed in Midway
asset purchase
|
|
|
|
|
|
|
|
|
|
|
24,109
|
|
Inventory and other credits
received in conjunction with aircraft financing
|
|
|
7,212
|
|
|
|
11,836
|
|
|
|
5,073
|
|
Note receivable received in
conjunction with sale/financing of rotable spare parts inventory
|
|
|
18,835
|
|
|
|
|
|
|
|
6,000
|
|
Deferred gain on sale/financing of
rotable spare parts inventory
|
|
|
2,174
|
|
|
|
|
|
|
|
|
|
Note receivable forgiven in
retirement of rotable spare parts financing liability
|
|
|
3,631
|
|
|
|
|
|
|
|
|
|
Rotable spare parts financed with
long-term payable
|
|
|
4,157
|
|
|
|
|
|
|
|
|
|
Other assets reclassified to
expendable inventory
|
|
|
1,677
|
|
|
|
|
|
|
|
|
|
Rotable spare parts reclassified
to other assets
|
|
|
1,982
|
|
|
|
4,248
|
|
|
|
|
|
Receivable for credits related to
aircraft financing
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
48
MESA AIR
GROUP, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
and Additional
|
|
|
Earnings
|
|
|
|
|
|
|
Number of
|
|
|
Paid-In
|
|
|
(Accumulated
|
|
|
|
|
Years Ended September 30, 2006, 2005, and 2004
|
|
Shares
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Total
|
|
|
Balance at October 1, 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
|
)
|
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
|
|
|
|
105,229
|
|
|
|
23,675
|
|
|
|
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
|
|
|
|
96,128
|
|
|
|
80,542
|
|
|
|
176,670
|
|
Conversion of debt to equity
|
|
|
6,227,845
|
|
|
|
62,278
|
|
|
|
|
|
|
|
62,278
|
|
Exercise of stock options and
warrants
|
|
|
1,198,720
|
|
|
|
6,364
|
|
|
|
|
|
|
|
6,364
|
|
Common stock purchased and retired
|
|
|
(2,390,679
|
)
|
|
|
(18,643
|
)
|
|
|
|
|
|
|
(18,643
|
)
|
Amortization of restricted stock
|
|
|
|
|
|
|
1,261
|
|
|
|
|
|
|
|
1,261
|
|
Stock based compensation
|
|
|
|
|
|
|
2,313
|
|
|
|
|
|
|
|
2,313
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
33,967
|
|
|
|
33,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
33,904,053
|
|
|
$
|
149,701
|
|
|
$
|
114,509
|
|
|
$
|
264,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
49
MESA AIR
GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2006, 2005 and 2004
|
|
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; Air Midwest, LLC, a Nevada limited liability
company, MPD, Inc., a Nevada corporation, doing business as Mesa
Pilot Development; Regional Aircraft Services, Inc.
(RAS) a California company; Mesa Air
Group Airline Inventory Management, LLC
(MAG-AIM), an Arizona Limited Liability Company;
Ritz Hotel Management Corp., a Nevada Corporation; Nilchii, Inc.
(Nilchii), a Nevada corporation and MAGI Insurance,
Ltd. (MAGI), a Barbados, West Indies based captive
insurance company. Air Midwest LLC was formed for the purpose of
a contemplated conversion of Air Midwest from a corporation to a
limited liability company (which has not yet occurred). 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. MAG-AIM purchases, distributes and
manages the Companys inventory of rotable and expendable
spare parts. Ritz Hotel Management is a Phoenix area hotel
property that is used for
crew-in-training
accommodations. MAGI is a captive insurance company established
for the purpose of obtaining more favorable aircraft liability
insurance rates. Nilchii was established to invest in certain
airline related businesses. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The Company is an independent regional airline serving
173 cities in 46 states, the District of Columbia,
Canada, the Bahamas and Mexico. At September 30, 2006, the
Company operated a fleet of 191 aircraft and had over 1,200
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) which currently operates as US
Airways and is referenced to herein as US Airways;
as United Express under a code-share agreement with United
Airlines (United); and independently as go!
The current US Airways is a result of a merger between
America West and US Airways, Inc. (Pre-Merger US
Airways). Freedom Airlines operates as Delta Connection
under code-share agreements with Delta Airlines, Inc.
(Delta). Air Midwest operates under code-share
agreements with US Airways, Pre-Merger US Airways and Midwest
Airlines, Inc. (Midwest). Air Midwest also operates
an independent division, doing business as Mesa Airlines, from
Albuquerque, New Mexico and select Essential Air Service
markets. Approximately 98% of the Companys consolidated
passenger revenues for 2006 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 US
Airways jet and Dash-8 code-share agreement, the Delta
agreements, and the United code-share 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 US Airways and the Pre-Merger US Airways Beechcraft 1900
agreements and the Midwest Airlines 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 the
50
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 US Airways
expire in 2012; the regional jet revenue-guarantee agreements
with Delta expires between January 2017 and January 2018, but
can be terminated earlier in November 2012 or immediately by
rejecting the contract in its bankruptcy proceedings; the
turboprop revenue-guarantee agreement with Delta expires in
March 2009, but can be terminated earlier in September 2007; the
agreement with United expires between 2010 and 2018. The
pro-rate agreement with Pre-Merger US Airways was scheduled to
terminate in October 2006, but have been extended as the terms
of a new agreement are negotiated. The Company expects to enter
into a new agreement on substantially similar terms. The
pro-rate agreement with Midwest can be terminated by either
party upon six months prior written notice. 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.
Restricted
Cash
At September 30, 2006, the Company had $12.0 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, $7.0 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.
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
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.
51
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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,
which ever is less
|
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 Beechcraft 1900D aircraft in
Essential Air Service markets (EAS). If the funding
under this program is terminated or significantly reduced 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 aircraft affected.
Interest related to deposits on aircraft purchase contracts is
capitalized as part of the aircraft. The Company capitalized
approximately $1.1 million, $0.9 million and
$1.0 million of interest in fiscal 2006, 2005 and 2004,
respectively.
Other
Long-Term Assets
Other long-term assets primarily consist of the capitalized
costs associated with establishing financing for aircraft,
contract incentive payments, prepaid maintenance, notes
receivable received pursuant to rotable spare parts financings
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
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. Revenue from
unused tickets is recognized when the tickets expire.
Income
Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in future years in which those temporary
differences are expected to be recovered or settled. The
52
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
Deferred
Credits
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.
Revenue
Recognition
The Delta, 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. Services and facilities provided by code-share
partners at no cost to the Company 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 Pre-Merger US Airways, the
Companys fuel reimbursement was capped at $0.85 per
gallon. Under this agreement, the Company had 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 Pre-Merger US Airways
flying. The Company purchased 12.7 million gallons,
67.4 million gallons and 68.1 million gallons of fuel
under this arrangement in fiscal 2006, 2005 and 2004,
respectively. In the third quarter of fiscal 2006, the Company
completed the transition of aircraft out of Pre-Merger
US Airways service, and as such, no longer purchases fuel
under this arrangement.
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
53
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
use of a specific type and number of aircraft over a
stated period of time. The amount deemed to be rental income
during fiscal 2006, 2005 and 2004 was $248.5 million,
$235.5 million and $189.0 million, respectively, and
has been included in passenger revenue on the Companys
consolidated statements of income.
The US Airways, Pre-Merger 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.
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.
Aircraft
Leased to Other Airlines
The Company currently leases four Beechcraft 1900D aircraft to
Gulfstream International Airlines and ten Beechcraft 1900D
aircraft to Big Sky Transportation Co. These leases have a
five-year term and are accounted for as operating leases.
Aircraft under operating leases are recorded at cost, net of
accumulated depreciation. Income from operating leases is
recognized ratably over the term of the leases. As of
September 30, 2006, the cost and accumulated depreciation
of aircraft under operating leases was approximately
$26.9 million and $5.2 million, respectively.
Minimum future rentals under noncancelable operating leases are
as follows:
|
|
|
|
|
2007
|
|
$
|
2.9 million
|
|
2008
|
|
|
2.9 million
|
|
2009
|
|
|
2.9 million
|
|
2010
|
|
|
1.2 million
|
|
Total
|
|
$
|
9.9 million
|
|
Maintenance
Expense
The Company charges the cost of engine and aircraft maintenance
to expense as incurred.
Earnings
Per Share
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
54
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding basic
|
|
|
33,487
|
|
|
|
29,215
|
|
|
|
31,490
|
|
Effect of dilutive outstanding
stock options and warrants
|
|
|
1,095
|
|
|
|
127
|
|
|
|
1,139
|
|
Effect of restricted stock
|
|
|
82
|
|
|
|
286
|
|
|
|
214
|
|
Effect of dilutive outstanding
convertible debt
|
|
|
10,704
|
|
|
|
16,931
|
|
|
|
14,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding diluted
|
|
|
45,368
|
|
|
|
46,559
|
|
|
|
47,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,967
|
|
|
$
|
56,867
|
|
|
$
|
26,282
|
|
Interest expense on convertible
debt, net of tax
|
|
|
4,251
|
|
|
|
6,097
|
|
|
|
5,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income
|
|
$
|
38,218
|
|
|
$
|
62,964
|
|
|
$
|
31,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 41,544, 2,890,756 and 577,039 shares of
common stock were outstanding during the years ended
September 30, 2006, 2005 and 2004, respectively, but were
excluded from the calculation of dilutive earnings per share
because the options exercise prices were greater than the
average market price of the common shares and, therefore, the
effect would have been antidilutive.
Stock
Based Compensation
Effective October 1, 2005, the Company accounts for all
stock-based compensation in accordance with the fair value
recognition provisions in SFAS No. 123(R),
Share-Based Payment. Under the fair value
recognition provisions of SFAS No. 123(R), stock-based
compensation cost is measured at the grant date based on the
value of the award and is recognized on a straight-line basis as
expense over the vesting period. Under
SFAS No. 123(R), the Company is required to use
judgment in estimating the amount of stock-based awards that are
expected to be forfeited. If actual forfeitures differ
significantly from the original estimate, stock-based
compensation expense and the results of operations could be
materially impacted.
Prior to the adoption of SFAS No. 123(R), the Company
accounted for stock-based employee compensation plans in
accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and its
related interpretations (APB No. 25), and
followed the pro forma net income, pro forma income per share
and stock-based compensation plan disclosure requirements set
forth in SFAS No. 123, Accounting for
Stock-Based Compensation.
The fair values of all stock options granted were estimated
using the Black-Scholes-Merton option pricing model. The
Black-Scholes-Merton model requires the input of highly
subjective assumptions.
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 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.
55
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Segment
Reporting
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/Freedom Airlines,
Air Midwest/go! and Other. Mesa Airlines and
Freedom Airlines transport passengers pursuant to
revenue-guarantee code-share agreements. Air Midwest and
go! (a separate operating division of Mesa
Airlines) transport passengers independently or pursuant to
pro-rate code-share agreements. The Other reportable segment
includes Mesa Air Group, Nilchii, RAS, MPD, MAG-AIM, Ritz Hotel
Management and MAGI, all of which support Mesas operating
subsidiaries. Air Midwest LLC will be included in Air
Midwest/go! if it begins operations.
Recent
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board
(FASB) ratified Emerging Issues Task Force Issue
No. 06-3
(EITF
06-3),
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation). EITF
06-3 applies
to any tax assessed by a governmental authority that is directly
imposed on a revenue-producing transaction between a seller and
a customer. EITF
06-3 allows
companies to present taxes either gross within revenue and
expense or net. If taxes subject to this issue are significant,
a company is required to disclose its accounting policy for
presenting taxes and the amount of such taxes that are
recognized on a gross basis. The Company currently presents such
taxes net. EITF
06-3 is
required to be adopted during the second quarter of fiscal 2007.
These taxes are currently not material to the Companys
consolidated financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 157, Fair
Value Measurements. This standard defines fair value,
establishes a framework for measuring fair value in accounting
principles generally accepted in the United States of America,
and expands disclosure about fair value measurements. This
pronouncement applies to other accounting standards that require
or permit fair value measurements. Accordingly, this statement
does not require any new fair value measurement. This statement
is effective for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The Company
will be required to adopt SFAS No. 157 in the first
quarter of fiscal year 2009. Management has not yet determined
the impact of adopting this statement.
In September, 2006, the FASB issued FASB Staff Position
(FSP)
No. AUG AIR-1
Accounting for Planned Major Maintenance Activities.
This position amends the existing major maintenance accounting
guidance contained within the AICPA Industry Audit Guide
Audits of Airlines and prohibits the use of the
accrue in advance method of accounting for planned major
maintenance activities for owned aircraft. The provisions of the
announcement are applicable for fiscal years beginning after
December 15, 2006. Mesa currently uses the direct expense
method of accounting for planned major maintenance; therefore,
the adoption of FSP
No. AUG AIR-1
will not have an impact on the Companys consolidated
financial statements.
In September 2006, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 108
(SAB 108). Due to diversity in practice among
registrants, SAB 108 expresses SEC staff views regarding
the process by which misstatements in financial statements are
evaluated for purposes of determining whether financial
statement restatement is necessary. SAB 108 is effective
for fiscal years ending after November 15, 2006. The
Company will adopt SAB 108 in fiscal 2007. Management does
not believe the adoption of SAB 108 will have a material
impact on the Companys consolidated financial statements.
56
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting for
uncertainty in income taxes recognized in financial statements.
FIN 48 requires the impact of a tax position to be
recognized in the financial statements if that position is more
likely than not of being sustained by the taxing authority. Mesa
will be required to adopt FIN 48 in the first quarter of
fiscal year 2008. Management has not yet determined the impact
on the Companys consolidated financial statements.
The Company has code-share agreements with Delta Air Lines,
US Airways and United Airlines. Approximately 98%, 99% and
99% of the Companys consolidated passenger revenue for the
years ended September 30, 2006, 2005 and 2004,
respectively, were derived from these agreements. Accounts
receivable from the Companys code-share partners were 45%
and 35% of total gross accounts receivable at September 30,
2006 and 2005, respectively.
Passenger revenue received from US Airways amounted to 53%,
75% and 78% of the Companys total passenger revenue in
fiscal 2006, 2005 and 2004, respectively. A termination of the
US Airways revenue-guarantee code-share agreements would
have a material adverse effect on the Companys business
prospects, financial condition, results of operations and cash
flows.
United Airlines, a subsidiary of UAL Corp., accounted for
approximately 36%, 24% and 20% of the Companys passenger
revenue in fiscal 2006, 2005 and 2004, respectively. A
termination of the United agreement would have a material
adverse effect on the Companys business prospects,
financial condition, results of operations and cash flows.
Delta Air Lines accounted for approximately 9% of the
Companys passenger revenue in fiscal 2006. A termination
of the Delta agreement or the failure of Delta to successfully
emerge from bankruptcy would have a material adverse effect on
the Companys business prospects, financial condition,
results of operations and cash flows. Delta has not yet assumed
our regional jet code-share agreement in its bankruptcy
proceedings and could choose to terminate the agreement at any
time prior to its emergence from bankruptcy. In addition,
according to news reports, US Airways, one of our
code-share partners, has proposed to merge with Delta, another
of our code-share partners. According to these same reports,
Delta has rejected this proposal. We are unable, at this time,
to predict what effect such a merger would have on our
relationship with the parties or on our financial condition and
operations.
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 $186.8 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, 2006 and 2005, were
$0.3 million and $0.5 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
57
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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, 2006 and 2005 includes investments in ARS of
$17.4 million and $46.7 million, respectively.
|
|
4.
|
Property
and Equipment
|
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Flight equipment, substantially
pledged
|
|
$
|
747,974
|
|
|
$
|
705,453
|
|
Other equipment
|
|
|
29,828
|
|
|
|
25,960
|
|
Leasehold improvements
|
|
|
4,378
|
|
|
|
2,883
|
|
Furniture and fixtures
|
|
|
1,470
|
|
|
|
1,117
|
|
Buildings
|
|
|
2,768
|
|
|
|
3,968
|
|
Vehicles
|
|
|
1,581
|
|
|
|
1,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
787,999
|
|
|
|
740,520
|
|
Less accumulated depreciation and
amortization
|
|
|
(118,087
|
)
|
|
|
(97,606
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
669,912
|
|
|
$
|
642,914
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2006 and 2005, the Company had
$123.1 million and $54.6 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 operating 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 five aircraft on interim financing with
the manufacturer at September 30, 2006. These interim
financings agreements are typically six months in length and
provide for monthly interest only payments at LIBOR plus three
percent (8.33% at September 30, 2006). 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.
|
Rotable
Spare Parts Financings
|
In June 2004, the Company entered into an agreement with
LogisTechs, Inc., a wholly-owned subsidiary of GE Capital
Aviation Services (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 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 was required to
repay the $19.7 million of outstanding financing at
September 30, 2005. The liability was retired with cash of
$15.9 million and included offsetting $3.8 million in
notes receivable from GECAS. The agreement was terminated and
this amount was repaid in November 2005.
58
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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,
replacing the above-mentioned agreement with GECAS. Under the
agreement, the Company sold certain existing spare parts
inventory to AAR for $39.6 million in cash and
$21.5 million in notes receivable (discounted to
$18.8 million) to be paid over four years. The AAR
agreement was 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 terminated the GECAS agreement and
finalized the AAR agreement in November 2005. Upon entering into
the agreement, the Company received $22.8 million
($23.8 million less $1 million deposit that was
retained by AAR), which was recorded as a deposit at
September 30, 2005, pending the termination of the GECAS
agreement. An additional $15.8 million was received in the
quarter ended December 31, 2005. Under the agreement, the
Company is required to pay AAR a monthly fee based upon flight
hours for access to and maintenance and servicing of the
inventory. The agreement also contains certain minimum monthly
payments that Mesa must make to AAR. Based on this arrangement,
the Company accounts for the transaction as a service agreement
and an operating lease of rotable spare parts with AAR. The sale
of the rotable spare parts resulted in a gain of
$2.1 million, which has been deferred and is being
recognized over the term of the agreement. At termination, the
Company may elect to purchase the covered inventory at fair
value, but is not contractually obligated to do so.
Future minimum payments under the agreement are as follows:
|
|
|
|
|
|
|
Years Ending
|
|
|
|
September 30,
|
|
|
|
(In thousands)
|
|
|
2007
|
|
$
|
23,127
|
|
2008
|
|
|
26,650
|
|
2009
|
|
|
29,371
|
|
2010
|
|
|
32,225
|
|
2011
|
|
|
32,614
|
|
Thereafter
|
|
|
136,476
|
|
In June 2006, the Company entered into a separate two-year
agreement with AAR, for the management and repair of the
Companys CRJ-200 aircraft rotable spare parts inventory
associated with its go! operations. Under the
agreement, the Company sold certain existing spare parts
inventory to AAR for $1.2 million in cash. AAR was required
to purchase an additional $2.9 million in rotable spare
parts to support the agreement. 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. At termination, the
Company has guaranteed the fair value of the underlying
rotables. Based on this arrangement, the Company accounts for
the transaction as a financing arrangement, thus recording both
the rotable spare parts inventory as an asset and the related
payable to AAR in other noncurrent liabilities.
The Company accounts for purchase incentives provided by
aircraft manufacturers as deferred credits. These credits are
amortized over the life of the related aircraft 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.
59
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 were sold at an issue price of
$583.40 per note and are convertible into shares of the
Companys common stock at a conversion rate of
40.3737 shares per note, which equals a conversion price of
$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 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. These notes
are not yet convertible. 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 (the June 2003 Notes) due
2023, which resulted in gross proceeds of $100.1 million
($96.9 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
2003 Notes and the note guarantees are senior unsecured
obligations and rank equally with the Companys existing
and future senior unsecured indebtedness. These notes
60
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 were sold at an issue price of
$397.27 per note and are convertible into shares of the
Companys common stock at a conversion rate of
39.727 shares per note, which equals a conversion price of
$10 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 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. 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. 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.
During fiscal 2006, holders of $156.8 million in aggregate
principal amount at maturity ($62.3 million carrying
amount) of the Companys Senior Convertible Notes due 2023
(the Notes) converted Notes into shares of Mesa
common stock. In connection with these conversions, the Company
issued an aggregate of 6,227,845 shares of Mesa common
stock in accordance with the terms of these Notes and also paid
approximately $11.3 million to these Noteholders. The
Company also wrote off $1.8 million in debt issue costs
related to these notes. Amounts paid to Noteholders and the
write-off of debt issue costs were recorded as Other Expense in
the condensed consolidated statement of income. Under the terms
of the Notes, each $1,000 of aggregate principal amount at
maturity of Notes is convertible into 39.727 shares of Mesa
common stock at the option of the Noteholders. The shares of
common stock issuable upon conversion of the Notes have
previously been included in the calculation of diluted earnings
per share. Consequently, issuance of the shares will not be
further dilutive to reported diluted earnings per share.
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 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.
61
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Notes payable to bank,
collateralized by the underlying aircraft, due 2019
|
|
$
|
329,478
|
|
|
$
|
348,452
|
|
Senior convertible notes due June
2023
|
|
|
37,834
|
|
|
|
100,112
|
|
Senior convertible notes due
February 2024
|
|
|
100,000
|
|
|
|
100,000
|
|
Notes payable to manufacturer,
principal and interest due monthly through 2011, interest at
LIBOR plus 1.8% (7.29% at September 30, 2006),
collateralized by the underlying aircraft
|
|
|
79,290
|
|
|
|
87,949
|
|
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
|
|
|
22,831
|
|
|
|
24,181
|
|
Note payable to manufacturer,
principal due semi-annually, interest at 7% due quarterly
through 2007
|
|
|
1,792
|
|
|
|
2,578
|
|
Mortgage note payable to bank,
principal and interest at
71/2%
due monthly through 2009
|
|
|
882
|
|
|
|
923
|
|
Other
|
|
|
121
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
572,228
|
|
|
|
664,369
|
|
Less current portion
|
|
|
(29,659
|
)
|
|
|
(27,787
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
542,569
|
|
|
$
|
636,582
|
|
|
|
|
|
|
|
|
|
|
Principal maturities of long-term debt for each of the next five
years and thereafter are as follows:
|
|
|
|
|
|
|
Years Ending
|
|
|
|
September 30,
|
|
|
|
(In thousands)
|
|
|
2007
|
|
$
|
29,659
|
|
2008
|
|
|
29,328
|
|
2009
|
|
|
31,738
|
|
2010
|
|
|
50,036
|
|
2011
|
|
|
49,653
|
|
Thereafter
|
|
|
381,814
|
|
|
|
9.
|
Common
Stock Purchase and Retirement
|
The Companys Board of Directors has authorized the Company
to purchase up to 19.4 million shares of the Companys
outstanding common stock. As of September 30, 2006, the
Company has acquired and retired approximately 10.4 million
shares of its outstanding common stock at an aggregate cost of
approximately $66.7 million, leaving approximately
9.0 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.
62
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(637
|
)
|
|
$
|
1,720
|
|
|
$
|
|
|
State
|
|
|
388
|
|
|
|
1,954
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(249
|
)
|
|
|
3,674
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
21,832
|
|
|
|
28,905
|
|
|
|
16,765
|
|
State
|
|
|
1,156
|
|
|
|
2,720
|
|
|
|
1,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,988
|
|
|
|
31,625
|
|
|
|
18,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,739
|
|
|
$
|
35,299
|
|
|
$
|
18,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Computed expected tax
expense
|
|
$
|
19,847
|
|
|
$
|
32,258
|
|
|
$
|
15,813
|
|
Increase (reduction) in income
taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal taxes
|
|
|
1,917
|
|
|
|
3,029
|
|
|
|
2,134
|
|
Nondeductible stock compensation
expense
|
|
|
406
|
|
|
|
|
|
|
|
|
|
Nondeductible compensation
|
|
|
204
|
|
|
|
6
|
|
|
|
987
|
|
Other
|
|
|
160
|
|
|
|
(356
|
)
|
|
|
45
|
|
Increase (decrease) in valuation
allowance
|
|
|
205
|
|
|
|
362
|
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,739
|
|
|
$
|
35,299
|
|
|
$
|
18,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Elements of deferred income tax assets (liabilities) are as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
41,900
|
|
|
$
|
31,396
|
|
Deferred credits
|
|
|
28,834
|
|
|
|
26,549
|
|
Other accrued expenses
|
|
|
5,085
|
|
|
|
5,839
|
|
Deferred gains
|
|
|
2,786
|
|
|
|
2,992
|
|
Other
|
|
|
2,758
|
|
|
|
3,655
|
|
Alternative minimum tax
|
|
|
3,174
|
|
|
|
3,638
|
|
Expendable parts
|
|
|
1,038
|
|
|
|
822
|
|
Equity in loss of unconsolidated
subsidiary
|
|
|
958
|
|
|
|
|
|
Allowance for doubtful receivables
|
|
|
613
|
|
|
|
3,392
|
|
Intangibles
|
|
|
275
|
|
|
|
374
|
|
Unrealized trading losses
|
|
|
116
|
|
|
|
197
|
|
Valuation allowance
|
|
|
(567
|
)
|
|
|
(362
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
86,970
|
|
|
$
|
78,492
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
(123,634
|
)
|
|
$
|
(92,289
|
)
|
Other
|
|
|
(3,752
|
)
|
|
|
(3,631
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
(127,386
|
)
|
|
$
|
(95,920
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets include benefits expected to be realized
from the utilization of alternative minimum tax credit
carryforwards of approximately $3.2 million that do not
expire and federal net operating loss carryforwards of
approximately $106.4 million that expire in years 2017
through 2024. The Company also has state net operating loss
carryforwards of approximately $82.7 million that expire in
years 2006 through 2019. The Company has a valuation allowance
of $0.6 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 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 fiscal 2006,
2005 and 2004, 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
64
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
|
|
12.
|
Stock-Based
Compensation
|
Prior to October 1, 2005, the Company accounted for
stock-based compensation plans under the recognition and
measurement provisions of Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock
Issued to Employees, and related interpretations, as
permitted by SFAS No. 123, Accounting for
Stock-Based Compensation. Effective October 1,
2005, the Company adopted the fair value recognition provisions
of SFAS No. 123(R), Share-Based
Payments, using 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 123(R). 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.
Stock-based compensation costs recognized in the financial
statements for the year ended September 30, 2006 include:
(a) compensation cost for all share-based payments granted
prior to October 1, 2005, based on the grant date fair
value estimated in accordance with the original provisions of
SFAS No. 123, and (b) compensation cost for all
share-based payments granted subsequent to September 30,
2005, based on the grant-date fair value estimated in accordance
with the provisions of SFAS No. 123(R).
On September 30, 2006, the Company had seven stock option
plans, which are described below. Generally, options are granted
with an exercise price equal to the market price of the
Companys stock at the date of grant. Options granted to
employees generally vest over a three-year period and have a
contractual term of ten years. Options granted to directors
generally vest immediately upon grant or six months following
the date of grant and have a contractual term of ten years.
The Compensation cost that has been charged against income for
those plans was $3.6 million for fiscal 2006. The total
income tax benefit recognized in the consolidated statement of
income for share based compensation arrangements was
$0.5 million for fiscal 2006.
Prior to the adoption of SFAS No. 123(R), the Company
presented all tax benefits resulting from the exercise of stock
options as operating cash flows in the condensed consolidated
statement of cash flows. SFAS No. 123(R) requires cash
flows resulting from excess tax benefits to be classified as
financing cash flows. Excess tax benefits result from tax
deductions in excess of the compensation cost recognized for
those options. For the fiscal year ended September 30, 2006
the Company did not recognized any excess tax benefits due to
federal and state net operating losses.
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, 2006, there
were 13,000 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 approved by the stockholders to be granted under this plan.
At September 30, 2006, there were 168,794 options
outstanding and 103,891 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
65
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 1,245,447 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. At September 30, 2006, there were 24,856
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, 2006 there were 836,000 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 or restricted
stock of up to 1,500,000 shares of common stock to officers
and key employees. At September 30, 2006, there were
516,110 options outstanding and 1,264,266 options available for
future grants under this plan, which includes 434,603 options
authorized but not issued under the 1996 Option Plan.
In July 2006, the Company granted 124,092 shares of
restricted stock to selected senior executives of the Company
under the 2005 Employee Stock Incentive Plan in lieu of stock
options owed to the executives under their respective employment
agreements. The restricted stock shares vest in one-third
increments over a three-year period beginning in July 2006. To
recognize the transaction, the Company recorded deferred
compensation of $1.2 million in additional paid-in capital
on the Companys balance sheet. The deferred compensation
is amortized on a straight-line basis over the vesting period of
the grants. Compensation costs related to these restricted stock
grants in fiscal 2006 totaled $0.1 million.
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. Compensation costs related to
these restricted stock grants totaled $1.2 million,
$1.2 million and $0.6 million in fiscal 2006, 2005 and
2004, respectively. Under the provisions of
SFAS No. 123(R), the recognition of deferred
compensation, a contra-equity account representing the amount of
unrecognized restricted stock expense is no longer required.
Therefore, at October 1, 2005, Unearned compensation
on restricted stock was combined with Common stock
of no par value and additional paid-in capital in the
Companys condensed consolidated balance sheet.
66
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A summary of award activity under the stock option plans as of
September 30, 2006, 2005 and 2004 and changes during the
years then ended are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
(000)
|
|
|
|
|
|
(000)
|
|
|
|
|
|
(000)
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
5,338
|
|
|
$
|
6.98
|
|
|
|
4,792
|
|
|
$
|
7.05
|
|
|
|
4,621
|
|
|
$
|
6.80
|
|
Granted
|
|
|
69
|
|
|
|
10.61
|
|
|
|
947
|
|
|
|
6.58
|
|
|
|
430
|
|
|
|
9.89
|
|
Exercised
|
|
|
(1,146
|
)
|
|
|
5.39
|
|
|
|
(166
|
)
|
|
|
4.75
|
|
|
|
(110
|
)
|
|
|
5.58
|
|
Forfeited
|
|
|
(140
|
)
|
|
|
7.11
|
|
|
|
(49
|
)
|
|
|
7.12
|
|
|
|
(105
|
)
|
|
|
7.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(204
|
)
|
|
|
8.24
|
|
|
|
(186
|
)
|
|
|
8.31
|
|
|
|
(44
|
)
|
|
|
10.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
3,917
|
|
|
$
|
7.44
|
|
|
|
5,338
|
|
|
$
|
6.98
|
|
|
|
4,792
|
|
|
$
|
7.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
3,185
|
|
|
$
|
7.48
|
|
|
|
3,806
|
|
|
$
|
7.07
|
|
|
|
3,323
|
|
|
$
|
5.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimates the fair value of stock options issued
using the Black-Scholes-Merton option pricing model. Expected
volatilities are based on the historical volatility of the
Companys stock and other factors. The Company uses
historical data to estimate option exercises and employee
terminations within the valuation model. Historically the
Company has not paid any dividends and does not anticipate
paying dividends in the near future. Expected volatilities are
based on historical volatility of the Companys stock. The
risk-free rates for the periods within the contractual life of
the option are based on the U.S. Treasury yield curve in
effect at the time of the grant. The forfeiture rate is based on
historical information and managements best estimate of future
forfeitures. The expected term of options granted is derived
from historical exercise experience and represents the period of
time the Company expects options granted to be outstanding.
Option valuation models require the input of subjective
assumptions including the expected volatility and lives. Actual
values of grants could vary significantly from the results of
the calculations. The following assumptions were used to value
stock option grants during the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected volatility
|
|
|
67.7
|
%
|
|
|
62.4
|
%
|
|
|
79.8
|
%
|
Risk-free interest rate
|
|
|
5.1
|
%
|
|
|
4.2
|
%
|
|
|
4.1
|
%
|
Forfeiture rate(1)
|
|
|
12.2
|
%
|
|
|
|
|
|
|
|
|
Expected term (in years)
|
|
|
6.1
|
|
|
|
6.1
|
|
|
|
6.1
|
|
|
|
|
(1) |
|
Prior to the adoption of SFAS No. 123(R), forfeitures
were recognized as they occurred. |
67
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A summary of option activity under the stock option plans as of
September 30, 2006, and changes during the year then ended
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
(000)
|
|
|
|
|
|
|
|
|
(000)
|
|
|
Outstanding at beginning of year
|
|
|
5,338
|
|
|
$
|
6.98
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
69
|
|
|
|
10.61
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,146
|
)
|
|
|
5.39
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(140
|
)
|
|
|
7.11
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(204
|
)
|
|
|
8.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
3,917
|
|
|
$
|
7.44
|
|
|
|
5.0
|
|
|
$
|
3,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
3,185
|
|
|
$
|
7.48
|
|
|
|
4.3
|
|
|
$
|
2,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted
during fiscal 2006, 2005 and 2004 was $6.72, $4.26, and $6.59,
respectively. The total intrinsic value of options exercised
during the years ended September 30, 2006, 2005 and 2004
was $3.9 million, $0.4 million and $0.4 million,
respectively.
A summary of the status of the Companys nonvested options
as of September 30, 2006 and changes during the year ended
September 30, 2006, is presented below:
|
|
|
|
|
|
|
Shares
|
|
|
|
(000)
|
|
|
Nonvested at October 1, 2005
|
|
|
1,114
|
|
Granted
|
|
|
69
|
|
Vested
|
|
|
(108
|
)
|
Forfeited
|
|
|
(140
|
)
|
Expired
|
|
|
(204
|
)
|
|
|
|
|
|
Nonvested at September 30,
2006
|
|
|
731
|
|
|
|
|
|
|
As of September 30, 2006, there was $0.8 million of
total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the plans.
That cost is expected to be recognized over a weighted average
period of 0.9 years. During fiscal year 2006 the Company
did not modify any of its outstanding stock-based compensation
plans.
68
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes information concerning options
outstanding at September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$ 2.31 - $ 5.50
|
|
|
672,619
|
|
|
|
5.2 Years
|
|
|
$
|
4.87
|
|
|
|
613,090
|
|
|
$
|
4.87
|
|
$ 5.55 - $ 6.25
|
|
|
607,073
|
|
|
|
5.5 Years
|
|
|
|
5.89
|
|
|
|
431,102
|
|
|
|
5.98
|
|
$ 6.27 - $ 7.40
|
|
|
703,545
|
|
|
|
7.3 Years
|
|
|
|
6.89
|
|
|
|
403,142
|
|
|
|
6.74
|
|
$ 7.49 - $ 8.06
|
|
|
165,701
|
|
|
|
6.5 Years
|
|
|
|
7.81
|
|
|
|
121,802
|
|
|
|
7.85
|
|
$ 8.25 - $ 8.25
|
|
|
1,169,890
|
|
|
|
2.5 Years
|
|
|
|
8.25
|
|
|
|
1,119,891
|
|
|
|
8.25
|
|
$ 8.31 - $12.37
|
|
|
497,912
|
|
|
|
5.9 Years
|
|
|
|
10.53
|
|
|
|
428,681
|
|
|
|
10.52
|
|
$12.56 - $12.56
|
|
|
100,000
|
|
|
|
7.3 Years
|
|
|
|
12.56
|
|
|
|
66,667
|
|
|
|
12.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options at September 30, 2006
|
|
|
3,916,740
|
|
|
|
5.0 Years
|
|
|
|
7.44
|
|
|
|
3,184,375
|
|
|
|
7.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation cost for options granted prior to October 1,
2005 was recognized on an accelerated amortization method over
the vesting period of the options. Compensation cost for options
granted after September 30, 2005 was recognized on a
straight-line basis over the vesting period. The following
amounts were recognized for stock-based compensation (in
thousands):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
General and administrative
expenses:
|
|
|
|
|
Stock options expense
|
|
$
|
2,313
|
|
Restricted stock expense
|
|
|
1,261
|
|
|
|
|
|
|
Total
|
|
$
|
3,574
|
|
|
|
|
|
|
The Company applied the provision of APB Opinion No. 25 and
related interpretations in accounting for its stock-based
compensation plans prior to October 1, 2005. Accordingly,
no compensation cost was recognized for awards made pursuant to
its stock option plans. Had the compensation cost for the
Companys stock-based compensation plans been determined
consistent with the measurement provision of
SFAS No. 148, Accounting for
69
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock-Based Compensation-Transition and Disclosure, the
Companys net income and net income per share would have
been as indicated by the pro forma amounts indicated below:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net income as reported
|
|
$
|
56,867
|
|
|
$
|
26,282
|
|
Stock option compensation expense
determined under fair value based method, net of related tax
effects
|
|
|
(968
|
)
|
|
|
(1,324
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
55,899
|
|
|
$
|
24,958
|
|
|
|
|
|
|
|
|
|
|
Income per share basic:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
1.95
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
1.91
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
Net income per share
diluted:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
1.35
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
1.33
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
The Company has a 401(k) plan covering all employees (the
Plan). Under the 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 2006, the Company made matching
contributions of
25-30 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 Plan at any time. Contributions by the Company to the Plan
for the years ended September 30, 2006, 2005 and 2004 were
approximately $1.2 million, $0.9 million and
$0.8 million, respectively.
At September 30, 2005, the Company leased 158 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
$237.4 million, $194.7 million and $183.5 million
for the years ended September 30, 2006, 2005 and 2004,
respectively.
Future minimum lease payments under non-cancelable operating
leases are as follows:
|
|
|
|
|
|
|
Years Ending
|
|
|
|
September 30,
|
|
|
|
(In thousands)
|
|
|
2007
|
|
$
|
246,372
|
|
2008
|
|
|
217,476
|
|
2009
|
|
|
193,125
|
|
2010
|
|
|
186,349
|
|
2011
|
|
|
191,237
|
|
Thereafter
|
|
|
1,245,593
|
|
70
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 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 agrees 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, 2006, we owned 34 Beechcraft 1900D
aircraft and were operating 20 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 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 place up to an additional 30
50-seat regional jet aircraft into the United Express system.
The first of these aircraft were placed 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
$3.5 million and $0.2 million was recorded in fiscal
2006 and 2005, respectively.
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 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 three CRJ-700 aircraft and two
CRJ-900 which can be converted to CRJ-700s. In conjunction with
this purchase agreement, Mesa
71
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
had $15.0 million on deposit with BRAD that was included in
lease and equipment deposits at September 30, 2006. 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, 2006, 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.
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 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
adjustment 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 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 loan had a balance of
$2.0 million and $2.8 million at September 30,
72
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2006 and 2005, respectively. 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.
In February 2006, Hawaiian Airlines, Inc. (Hawaiian)
filed a complaint against the Company in the United States
Bankruptcy Court for the District of Hawaii (the
Bankruptcy Court) alleging that the Company breached
the terms of a Confidentiality Agreement entered into in April
2004 with the Trustee in Hawaiians bankruptcy proceedings.
Hawaiians complaint alleges, among other things, that the
Company breached the Confidentiality Agreement by (a) using
the evaluation material to obtain a competitive advantage over
Hawaiian, through the development and implementation of a
business plan to compete with Hawaiian in the inter-island
market, and (b) failing to return or destroy any evaluation
materials after being notified by Hawaiian on or about
May 12, 2004 that the Company had not been selected as a
potential investor for a transaction with Hawaiian. Hawaiian, in
its complaint, seeks unspecified damages, requests that the
Company turn over to Hawaiian any evaluation material in the
Companys possession, custody or control (the
Turnover Claim), and an injunction preventing the
Company from providing inter-island transportation services in
the State of Hawaii for a period of two years from the date of
such injunctive relief.
The Company vigorously denies Hawaiians allegations and
requests for relief contained in its complaint. The Company
filed both an answer and an antitrust counterclaim against
Hawaiian in response to its complaint. In May 2006, the Company
filed a motion to dismiss the Turnover Claim contained in
Hawaiians complaint, but the Bankruptcy Court denied that
motion. On December 8, 2006 the Bankruptcy Court, based on
constitutional access to the courts, also granted
Hawaiians motion for summary judgment against the Company
on its antitrust counterclaim. The Company does not believe that
either of these decisions has a material impact on the
Companys position in the lawsuit. Finally, in October
2006, the Bankruptcy Court denied Hawaiians effort to
enjoin the Companys go! operation from
selling tickets claiming that go!s entry
into the inter-island air transport business was based on trade
secrets furnished to Mesa during the Hawaiian bankruptcy. The
Court found no such misuse of confidential information and
rejected Hawaiians motion for a preliminary injunction.
In June 2006, Hawaiian requested a preliminary injunction to
prevent the Company from issuing new airline tickets for the
Hawaiian inter-island market for a period of one year. In this
request, Hawaiian alleges that initial discovery conducted
reveals that the Company breached the Confidentiality Agreement.
The Court has recently denied Hawaiians request for a
preliminary injunction. The case will be tried sometime in 2007.
On October 13, 2006, Aloha Airlines filed suit against Mesa
Air Group and two of its Hawaii based employees, Charles
Lauritsen, go!s Chief Operating Officer and
Joe Bock, go!s Chief Marketing Officer. The
complaint was filed in State Court in Hawaii and contains 11
counts and seeks damages and injunctive relief. The clear
purpose of the complaint is to blunt Mesas entry into the
Hawaii inter-island market segment. Aloha alleges that
Mesas inter-island air fares are below cost and that Mesa
is, therefore, violating specific provisions of Hawaii antitrust
and unfair competition law. Aloha also alleges breach of
contract and fraud by Mesa in connection with two
confidentiality agreements, one in 2005 and the other in 2006.
In 1992, The Supreme Court of the United States decided
Morales v. TWA, in which it construed the Airline
Deregulation Act as prohibiting any state court, under any state
law legal theory, from adjudicating issues which implicated an
air carriers pricing (or other service) practices.
Accordingly, an airlines pricing decisions can be attacked
only under federal laws. In response to the complaint, Mesa
filed a motion on December 8 seeking dismissal of all claims
which rest on Mesas alleged below-cost pricing.
Mesa also denies any improper use of the data furnished by Aloha
while Mesa was considering a bid for Aloha during its
bankruptcy. The case is in its incipient stages and no trial
date has yet been set.
73
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 $408.8 million at September 30, 2006,
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
$163.5 million at September 30, 2006, had a fair value
of approximately $159.4 million. The Company uses market
prices and a financial model to calculate the fair value of its
senior convertible debt.
|
|
17.
|
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 and $2.5 million to Barlow in
fiscal 2005 and 2004, 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.
Prior to September 2006, the Company provided reservation
services to
Europe-By-Air,
Inc. The Company billed
Europe-By-Air
approximately $53,000, $57,000 and $57,000 for these services
during fiscal 2006, 2005 and 2004, respectively. At
September 30, 2006, the Company had receivables from
Europe-By-Air
of $5,500. There were no amounts due as of September 30,
2005. Mr. Ornstein is a major shareholder of
Europe-By-Air.
In September 2006,
Europe-By-Air
stopped using the Companys reservation services.
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, $0.3 million and $0.2 million for
legal-related services in 2006, 2005 and 2004, 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.
In 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 the majority of its
Beechcraft 1900 aircraft. Mr. Maurice Parker, a member of
the Companys Board of Directors, is the Executive Director
of RAP. During 2006, 2005 and 2004, the Company paid RAPs
operating costs totaling approximately $284,000, $312,000 and
$241,000, respectively. Included in these amounts are the wages
of Mr. Parker, which amounted to $119,000, $120,000 and
$87,000 in fiscal 2006, 2005 and 2004, respectively. Since
inception, the Company has financed 100% of RAPs
operations.
74
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
|
|
18.
|
Bankruptcy
Settlement
|
In fiscal 2006, the Company received 351,456 shares of
US Airways common stock from its Pre-Merger US Airways
bankruptcy claim. The Company sold the stock in the fourth
quarter of fiscal 2006, and realized proceeds of
$17.6 million. Proceeds of $5.5 million were first
applied to existing receivables that were previously reserved
and the remaining amount of $12.1 million was recorded as a
bankruptcy settlement in the consolidated statement of income.
|
|
19.
|
Equity
Method Investment
|
In fiscal 2006, the Company participated with a private equity
fund in making an investment in the common stock and notes of a
closely held airline related business (the
Investee). The Company, through its subsidiary
Nilchii, invested $15 million, which represents
approximately 20% and 11.8% of the Investees common stock
and notes, respectively.
The Company accounts for its investment using the equity method
of accounting. Under the equity method, the Company adjusts the
carrying amount of its investment for its share of the earnings
or losses of the Investee subsequent to the date of investment
and reports the recognized earnings or losses in income. The
Companys share of the Investees losses subsequent to
the date of investment have exceeded the carrying value of the
common stock investment, which has been reduced to zero. In
accordance with EITF Issue
No. 99-10,
Percentage Used to Determine the Amount of Equity Method
Losses, the Company recognized equity method losses based
on the ownership level of the Investee common stock held by the
Company until the carrying value of its investment in the common
stock was reduced to zero, then by the ownership level of the
Investee notes held by the Company. During fiscal 2006, the
Company recorded equity method losses from this investment of
$2.5 million.
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. The Company has aggregated these subsidiaries into
three reportable segments: Mesa Airlines / Freedom, Air Midwest
/ go! and Other. Operating revenues in the Other
segment are primarily sales of rotable and expendable parts to
the Companys operating subsidiaries and ground handling
services performed by employees of RAS for Mesa Airlines.
Mesa Airlines and Freedom Airlines provide passenger service
under revenue-guarantee contracts with United Airlines, Inc.
(United), Delta Air Lines, Inc. (Delta)
and US Airways, Inc. (US Airways). As of
September 30, 2006, Mesa Airlines and Freedom Airlines
operated a fleet of 166 aircraft 108 CRJs,
36 ERJs and
22 Dash-8s.
Prior to operating ERJ 145 aircraft, Freedom most recently
operated Beechcraft 1900D under a pro-rate agreement with US
Airways.
Air Midwest and Mesa Airlines, operating as go!,
provide passenger service where revenue is derived from ticket
sales either independently or through pro-rate agreements. Air
Midwest provides passenger service under pro-rate contracts with
US Airways, Pre-Merger US Airways and Midwest
Airlines, as well as independently under the brand name Mesa
Airlines. As of September 30, 2006, Air Midwest operated a
fleet of 20 Beechcraft 1900D
75
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
turboprop aircraft. Mesa Airlines, operating as go!,
provides independent inter-island Hawaiian passenger
service. As of September 30, 2006, Mesas go!
Operation operated a fleet of five
CRJ-200
aircraft. Air Midwest and Mesa, operating as go!,
do not receive contractually-guaranteed revenue for
their operations. Air Midwest LLC will be included in Air
Midwest / go! if it begins operations.
The Other reportable segment includes Mesa Air Group (the
holding company), RAS, MPD, MAG-AIM, MAGI, Nilchii and Ritz
Hotel Management Corp., all of which support Mesas
operating subsidiaries. Activity in the Other category consists
primarily of sales of rotable and expendable parts and ground
handling services to the Companys operating subsidiaries,
but also includes 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.
In October 2004 (fiscal 2005), the Company transitioned certain
of its regional jets from Freedom into Mesa and transferred a
Beechcraft 1900D aircraft from Air Midwest into Freedom. As a
result, Freedom was grouped with Air Midwest in fiscal 2005 for
segment purposes. In fiscal 2006, Freedom began operating under
a revenue-guarantee code-share agreement with Delta utilizing
ERJ-145
aircraft that were transitioned from Mesa Airlines. As such, the
Company has aggregated Freedom with Mesa Airlines beginning in
the first quarter of fiscal 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mesa/
|
|
|
Air Midwest
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2006
|
|
Freedom
|
|
|
/ go!
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(000s)
|
|
|
Total operating revenues
|
|
$
|
1,272,206
|
|
|
$
|
61,459
|
|
|
$
|
247,474
|
|
|
$
|
(243,942
|
)
|
|
$
|
1,337,197
|
|
Depreciation and amortization
|
|
|
31,000
|
|
|
|
684
|
|
|
|
4,853
|
|
|
|
|
|
|
|
36,537
|
|
Operating income (loss)
|
|
|
106,912
|
|
|
|
(10,527
|
)
|
|
|
38,093
|
|
|
|
(33,675
|
)
|
|
|
100,803
|
|
Interest expense
|
|
|
(27,238
|
)
|
|
|
(1
|
)
|
|
|
(10,650
|
)
|
|
|
584
|
|
|
|
(37,305
|
)
|
Interest income
|
|
|
11,070
|
|
|
|
76
|
|
|
|
1,554
|
|
|
|
(584
|
)
|
|
|
12,116
|
|
Income (loss) before income tax
|
|
|
88,366
|
|
|
|
(11,044
|
)
|
|
|
13,060
|
|
|
|
(33,676
|
)
|
|
|
56,706
|
|
Income tax (benefit)
|
|
|
35,435
|
|
|
|
(4,427
|
)
|
|
|
(5,235
|
)
|
|
|
(13,504
|
)
|
|
|
22,739
|
|
Total assets
|
|
|
1,419,206
|
|
|
|
16,059
|
|
|
|
510,014
|
|
|
|
(707,066
|
)
|
|
|
1,238,213
|
|
Capital expenditures (including
non-cash)
|
|
|
93,700
|
|
|
|
3,409
|
|
|
|
22,109
|
|
|
|
|
|
|
|
119,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest/
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2005
|
|
Mesa
|
|
|
Freedom
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(000s)
|
|
|
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)
|
|
|
377,741
|
|
|
|
49
|
|
|
|
15,270
|
|
|
|
|
|
|
|
393,060
|
|
76
MESA AIR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mesa/
|
|
|
Air
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2004
|
|
Freedom
|
|
|
Midwest
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(000s)
|
|
|
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
|
|
|
|
21.
|
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, 2006
|
|
$
|
2,147
|
|
|
$
|
559
|
|
|
$
|
|
|
|
$
|
2,706
|
|
September 30, 2005
|
|
|
1,481
|
|
|
|
1,195
|
|
|
|
(529
|
)
|
|
|
2,147
|
|
September 30, 2004
|
|
|
1,906
|
|
|
|
1,269
|
|
|
|
(1,694
|
)
|
|
|
1,481
|
|
Allowance for Doubtful
Accounts Deducted from Accounts
Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006(1)
|
|
$
|
8,855
|
|
|
$
|
(6,607
|
)
|
|
$
|
(650
|
)
|
|
$
|
1,598
|
|
September 30, 2005
|
|
|
7,077
|
|
|
|
6,915
|
|
|
|
(5,137
|
)
|
|
|
8,855
|
|
September 30, 2004
|
|
|
4,681
|
|
|
|
4,315
|
|
|
|
(1,919
|
)
|
|
|
7,077
|
|
|
|
|
(1) |
|
See note 18 Bankruptcy Settlement. |
|
|
22.
|
Selected
Quarterly Financial Data (Unaudited)
|
The following table presents selected unaudited quarterly
financial data (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
2006(1)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
323,617
|
|
|
$
|
312,064
|
|
|
$
|
339,037
|
|
|
$
|
362,479
|
|
Operating Income
|
|
|
28,810
|
|
|
|
27,937
|
|
|
|
27,462
|
|
|
|
16,594
|
|
Net income
|
|
|
12,991
|
|
|
|
5,288
|
|
|
|
10,929
|
|
|
|
4,759
|
|
Net income per share
basic
|
|
$
|
0.45
|
|
|
$
|
0.15
|
|
|
$
|
0.30
|
|
|
$
|
0.14
|
|
Net income per share
diluted
|
|
$
|
0.31
|
|
|
$
|
0.14
|
|
|
$
|
0.25
|
|
|
$
|
0.12
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
2005(2)(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
|
|
|
|
|
(1) |
|
Third quarter amounts include bankruptcy settlement of
$12.1 million (pretax). |
|
(2) |
|
First quarter amounts include the reversal of certain Shorts
aircraft restructuring charges of $1.3 million (pretax). |
|
(3) |
|
The sum of quarterly earnings per share may not equal annual
earnings per share due to rounding. |
|
|
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). Disclosure controls and procedures are
defined as those controls and other procedures of an issuer that
are designed to ensure that the information required to be
disclosed by the issuer in the reports it files or submits under
the Act is recorded, processed, summarized and reported, within
the time periods specified in the Commissions rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that
information required to be disclosed by an issuer in the reports
that it files or submits under the Act is accumulated and
communicated to the issuers management, including its
principal executive officer and principal financial officer, or
persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. 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.
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).
The term internal control over financial reporting
refers to the process of a company that is designed by, or under
the supervision of, the issuers principal executive and
principal financial officers, or persons performing similar
functions, and effected by the issuers 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 and
includes those policies and procedures that: (i) pertain to
the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the
assets of the issuer; (ii) 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 issuer are being made only in accordance
with authorizations of
78
management and directors of the issuer; and (iii) provide
reasonable assurance regarding the prevention or timely
detection of unauthorized acquisition, use or disposition of the
issuers assets that could have a material effect on the
financial statements. There were no changes in our internal
controls over financial reporting during the three months ended
September 30, 2006 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting, except as described below. 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.
Remediation
of Material Weaknesses
As disclosed in the Companys
Form 10-K/A
for the year ended September 30, 2005 and in the
Companys Quarterly Report on
Form 10-Q/A
for the quarterly period ending December 31 2005,
management of the Company had determined that, as of each of
those dates, a material weakness in internal control over
financial reporting then existed. A material weakness is a
control deficiency or combination of control deficiencies that
results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will
not be prevented or detected.
Description
Management determined that the Company did not maintain
effective controls over the accurate preparation and review of
its consolidated statements of cash flows. Specifically, the
Company did not maintain effective controls to ensure the
accurate presentation of the change in other assets for the
following components: parts held for sale, contract incentive
costs, prepaid rent costs, and debt issuance costs, as required
by generally accepted accounting principles. This control
deficiency resulted in the restatement of the Companys
consolidated statement of cash flows for the fiscal year ended
September 30, 2005 and the quarter ended December 31,
2005. Accordingly, management concluded that this control
deficiency constituted a material weakness in internal control
over financial reporting as of such dates.
Remediation
During the fourth quarter, the Company has taken the following
steps to remediate the material weakness related to the
consolidated statements of cash flows:
|
|
|
|
|
The Company has undertaken a thorough review of the
classification requirements of each component line item and the
individual elements that comprise each line item of the
consolidated statements of cash flows, in accordance with
SFAS 95.
|
|
|
|
The Company revised its existing control procedures for the
preparation and review of its consolidated statements of cash
flows.
|
|
|
|
The Company also refined and enhanced its standard cash flows
template.
|
Management has concluded that the material weakness described
above has been remediated as of September 30, 2006 and no
longer existed as of that date.
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 of
financial reporting as of September 30, 2006.
Managements assessment of the effectiveness of internal
control over financial reporting as of September 30, 2006
has been audited by Deloitte & Touche, LLP, an
independent registered public accounting firm, as stated in
their report that is included herein.
79
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, 2006, 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, 2006, 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, 2006, 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, 2006 of the Company and our report dated
December 14, 2006 expressed an unqualified opinion and
included an explanatory paragraph relating to the Companys
adoption of Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment, using
the modified prospective transition method, and an explanatory
paragraph relating to the Companys significant
code-sharing agreements.
/s/ DELOITTE & TOUCHE LLP
December 14, 2006
Phoenix, Arizona
81
|
|
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
2007 annual meeting of stockholders anticipated to be held
February 6, 2007, 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,
Executive Officers and Corporate Governancet
|
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 2007 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 2007 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 2007 annual meeting of
stockholders.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
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 2007 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 2007 annual meeting of
stockholders.
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
(A) Documents filed as part of this report:
1. Reference is made to Item 8 hereof.
82
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
|
83
|
|
|
|
|
|
|
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 as Exhibit 10.5 to
Form 10-K
for fiscal year ended September 30, 2005 and incorporated
herein by reference
|
|
10
|
.6
|
|
Deferred Compensation Plan,
adopted July 13, 2001
|
|
Filed as Exhibit 10.6 to
Form 10-K
for fiscal year ended September 30, 2005 and incorporated
herein by reference
|
|
10
|
.7
|
|
2005 Deferred Compensation Plan,
adopted February 7, 2005
|
|
Filed as Exhibit 10.7 to
Form 10-K
for fiscal year ended September 30, 2005 and incorporated
herein by reference
|
|
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(1)
|
|
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(1)
|
|
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(1)
|
|
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(1)
|
|
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 as Exhibit 10.14 to
Form 10-K
for fiscal year ended September 30, 2005 and incorporated
herein by reference
|
84
|
|
|
|
|
|
|
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 as Exhibit 10.15 to
Form 10-K
for fiscal year ended September 30, 2005 and incorporated
herein by reference
|
|
10
|
.24(1)
|
|
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
|
|
10
|
.26(1)
|
|
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(1)
|
|
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(1)
|
|
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(1)
|
|
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
|
|
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
|
.31
|
|
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
|
.32
|
|
Employment Agreement, dated as of
May 4, 2006 between the Registrant and George
Murnane III
|
|
Filed as Exhibit 10.37 to
Form 10-Q
for the quarter ended March 31, 2006 and incorporated
herein by reference
|
|
10
|
.33
|
|
Employment Agreement, dated
April 30, 2005, entered into by and between the Registrant
and Brian Gillman
|
|
Filed as Exhibit 10.34 to
Form 10-K
for fiscal year ended September 30, 2005 and incorporated
herein by reference
|
|
10
|
.34
|
|
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
|
.35(1)
|
|
Amendments Number 5 through 8 to
Three Gateway Office Lease between Registrant and DMB Property
Ventures Limited Partnership, dated October 16, 1998
|
|
Filed as Exhibit 10.36 to
Form 10-K
for fiscal year ended September 30, 2005 and incorporated
herein by reference
|
85
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
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
|
|
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. |
86
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.
MESA AIR GROUP, INC.
|
|
|
|
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, 2006
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, 2006
|
|
|
|
|
|
/s/ DANIEL
J. ALTOBELLO
Daniel
J. Altobello
|
|
Director
|
|
December 14, 2006
|
|
|
|
|
|
/s/ MAURICE
A. PARKER
Maurice
A. Parker
|
|
Director
|
|
December 14, 2006
|
|
|
|
|
|
/s/ JOSEPH
L. MANSON
Joseph
L. Manson
|
|
Director
|
|
December 14, 2006
|
|
|
|
|
|
/s/ ROBERT
BELESON
Robert
Beleson
|
|
Director
|
|
December 14, 2006
|
87
|
|
|
|
|
|
|
/s/ PETER
F. NOSTRAND
Peter
F. Nostrand
|
|
Director
|
|
December 14, 2006
|
|
|
|
|
|
/s/ CARLOS
BONILLA
Carlos
Bonilla
|
|
Director
|
|
December 14, 2006
|
|
|
|
|
|
/s/ RICHARD
THAYER
Richard
Thayer
|
|
Director
|
|
December 14, 2006
|
88
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
|
89
|
|
|
|
|
|
|
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 as Exhibit 10.14 to
Form 10-K
for fiscal year ended September 30, 2005 and incorporated
herein by reference
|
|
10
|
.6
|
|
Deferred Compensation Plan,
adopted July 13, 2001
|
|
Filed as Exhibit 10.14 to
Form 10-K
for fiscal year ended September 30, 2005 and incorporated
herein by reference
|
|
10
|
.7
|
|
2005 Deferred Compensation Plan,
adopted February 7, 2005
|
|
Filed as Exhibit 10.14 to
Form 10-K
for fiscal year ended September 30, 2005 and incorporated
herein by reference
|
|
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(1)
|
|
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(1)
|
|
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(1)
|
|
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(1)
|
|
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(1)
|
|
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 as Exhibit 10.14 to
Form 10-K
for fiscal year ended September 30, 2005 and incorporated
herein by reference
|
90
|
|
|
|
|
|
|
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 as Exhibit 10.14 to
Form 10-K
for fiscal year ended September 30, 2005 and incorporated
herein by reference
|
|
10
|
.24(1)
|
|
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
|
|
10
|
.26(1)
|
|
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(1)
|
|
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(1)
|
|
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(1)
|
|
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
|
|
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
|
.31
|
|
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
|
.32
|
|
Employment Agreement, dated as of
May 4, 2006 between the Registrant and George
Murnane III
|
|
Filed as Exhibit 10.37 to
Form 10-Q
for the quarter ended March 31, 2006 and incorporated
herein by reference
|
|
10
|
.33
|
|
Employment Agreement, dated
April 30, 2005, entered into by and between the Registrant
and Brian Gillman
|
|
Filed as Exhibit 10.14 to
Form 10-K
for fiscal year ended September 30, 2005 and incorporated
herein by reference
|
|
10
|
.34
|
|
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
|
.35(1)
|
|
Amendments Number 5 through 8 to
Three Gateway Office Lease between Registrant and DMB Property
Ventures Limited Partnership, dated October 16, 1998
|
|
Filed as Exhibit 10.14 to
Form 10-K
for fiscal year ended September 30, 2005 and incorporated
herein by reference
|
91
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
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
|
|
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. |
92