e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period-ended
December 31, 2006
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 0-15495
Mesa Air Group, Inc.
(Exact name of registrant as
specified in its charter)
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Nevada
(State or other
jurisdiction of
incorporation or organization)
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85-0302351
(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
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 last
90 days. Yes þ No 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
Rule 12b-2
of the Exchange
Act). Yes o No þ
On February 1, 2007, the registrant had outstanding
33,142,268 shares of Common Stock.
TABLE OF
CONTENTS
INDEX
2
PART 1. FINANCIAL
INFORMATION
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Item 1.
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Financial
Statements
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MESA AIR
GROUP, INC.
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Three Months Ended
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December 31,
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December 31,
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2006
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2005
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(Unaudited)
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(In thousands, except per share amounts)
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Operating revenues:
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Passenger
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$
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338,974
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$
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315,415
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Freight and other
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8,639
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8,202
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Total operating revenues
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347,613
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323,617
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Operating expenses:
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Flight operations
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96,722
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89,864
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Fuel
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117,798
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104,849
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Maintenance
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63,404
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55,539
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Aircraft and traffic servicing
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21,375
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16,210
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Promotion and sales
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1,573
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772
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General and administrative
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17,462
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18,391
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Depreciation and amortization
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10,710
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9,182
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Bankruptcy settlement
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(620
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)
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Total operating expenses
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328,424
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294,807
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Operating income
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19,189
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28,810
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Other income (expense):
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Interest expense
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(10,670
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)
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(9,585
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)
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Interest income
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4,545
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2,997
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Loss from equity method investment
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(70
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)
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Other income (expense)
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205
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(1,098
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)
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Total other expense
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(5,990
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)
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(7,686
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)
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Income before income taxes
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13,199
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21,124
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Income taxes
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5,187
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8,133
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Net income
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$
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8,012
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$
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12,991
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Income per common share:
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Basic
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$
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0.24
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$
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0.45
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Diluted
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$
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0.20
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$
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0.31
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See accompanying notes to condensed consolidated financial
statements.
3
MESA AIR
GROUP, INC.
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December 31,
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September 30,
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2006
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2006
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(In thousands, except share data)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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72,077
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$
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35,559
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Marketable securities
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172,184
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186,764
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Restricted cash
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12,001
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12,001
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Receivables, net
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49,587
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47,382
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Income tax receivable
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539
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615
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Expendable parts and supplies, net
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35,576
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32,771
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Prepaid expenses and other current
assets
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129,119
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139,563
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Deferred income taxes
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4,505
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4,115
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Total current assets
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475,588
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458,770
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Property and equipment, net
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688,774
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669,912
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Lease and equipment deposits
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27,394
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27,389
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Equity method investment
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12,440
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12,510
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Other assets
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63,784
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69,632
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Total assets
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$
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1,267,980
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$
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1,238,213
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LIABILITIES AND
STOCKHOLDERS EQUITY
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Current liabilities:
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Current portion of long-term debt
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$
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30,021
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$
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29,659
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Short-term debt
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143,354
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123,076
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Accounts payable
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57,234
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56,097
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Air traffic liability
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4,725
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6,677
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Accrued compensation
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8,468
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4,545
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Income taxes payable
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461
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1,008
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Other accrued expenses
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43,791
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42,001
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Total current liabilities
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288,054
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263,063
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Long-term debt, excluding current
portion
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535,371
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542,569
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Deferred credits
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102,556
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101,723
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Deferred income taxes
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50,025
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44,531
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Other noncurrent liabilities
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23,217
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22,117
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Total liabilities
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999,223
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974,003
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Commitments and contingencies
(notes 8, 9, 11 and 17)
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Stockholders equity:
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Preferred stock of no par value,
2,000,000 shares authorized; no shares issued and
outstanding
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Common stock of no par value and
additional paid-in capital, 75,000,000 shares authorized;
33,389,278 and 33,904,053 shares issued and outstanding,
respectively
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146,236
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149,701
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Retained earnings
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122,521
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114,509
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Total stockholders equity
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268,757
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264,210
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Total liabilities and
stockholders equity
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$
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1,267,980
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$
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1,238,213
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See accompanying notes to condensed consolidated financial
statements.
4
MESA AIR
GROUP, INC.
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Three Months Ended
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December 31,
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December 31,
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2006
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2005
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(Unaudited)
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(In thousands)
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Cash Flows from Operating
Activities:
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Net income
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$
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8,012
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$
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12,991
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Adjustments to reconcile net income
to net cash flows provided by (used in) operating activities:
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Depreciation and amortization
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10,710
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9,182
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Deferred income taxes
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5,104
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7,297
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Unrealized (gain) loss on
investment securities
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(45
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)
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303
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Equity in net loss of
unconsolidated subsidiary
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70
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Amortization of deferred credits
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(3,200
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)
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(1,933
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Amortization of restricted stock
awards
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349
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294
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Amortization of contract incentives
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994
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Stock based compensation expense
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354
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803
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Provision for obsolete expendable
parts and supplies
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|
378
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169
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Provision for doubtful accounts
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591
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530
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Changes in assets and liabilities:
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Net (purchases) sales of investment
securities
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14,625
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(15,275
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)
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Receivables
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(1,796
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)
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3,575
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Income tax receivables
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76
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(435
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)
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Expendable parts and supplies
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(3,158
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)
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1,825
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Prepaid expenses
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10,444
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21,158
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Other assets
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564
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Contract incentive payments
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(20,000
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)
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Accounts payable
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1,137
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(9,036
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)
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Income taxes payable
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(547
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)
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(2,863
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)
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Other accrued liabilities
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4,861
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8,214
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NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
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49,523
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16,799
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Cash Flows from Investing
Activities:
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|
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Capital expenditures
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(6,871
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)
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(3,076
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)
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Proceeds from sale of flight
equipment and expendable inventory
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|
43
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|
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15,965
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Change in restricted cash
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(2,824
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)
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Change in other assets
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4,165
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|
592
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Net returns (payments) of lease and
equipment deposits
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(5
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)
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617
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NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES
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(2,668
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)
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11,274
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Cash Flows from Financing
Activities:
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Principal payments on short and
long-term debt
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(10,202
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)
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(6,555
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)
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Proceeds from exercise of stock
options and issuance of warrants
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91
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|
720
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Proceeds (payments) on financing
rotable inventory
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(17,768
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)
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Tax benefit-stock compensation
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302
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Common stock purchased and retired
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(4,259
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)
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(193
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)
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Proceeds from receipt of deferred
credits
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4,033
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|
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NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES
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(10,337
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)
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|
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(23,494
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)
|
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|
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NET CHANGE IN CASH AND CASH
EQUIVALENTS
|
|
|
36,518
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|
|
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4,579
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CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD
|
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35,559
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|
|
|
143,428
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|
|
|
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CASH AND CASH EQUIVALENTS AT END OF
PERIOD
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$
|
72,077
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$
|
148,007
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|
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SUPPLEMENTAL CASH FLOW INFORMATION:
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Cash paid for interest, net of
amounts capitalized
|
|
$
|
10,247
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|
|
$
|
10,220
|
|
Cash paid for income taxes, net
|
|
|
554
|
|
|
|
3,985
|
|
SUPPLEMENTAL NON-CASH INVESTING AND
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Aircraft delivered under interim
financing provided by the manufacturer
|
|
$
|
23,644
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|
|
$
|
27,516
|
|
Receivable for credits related to
aircraft financing
|
|
|
1,000
|
|
|
|
|
|
Inventory and other credits
received in conjunction with aircraft financing
|
|
|
|
|
|
|
1,791
|
|
Conversion of convertible
debentures to common stock
|
|
|
|
|
|
|
4,800
|
|
Note receivable received from sale
of rotable spare parts
|
|
|
|
|
|
|
18,835
|
|
See accompanying notes to condensed consolidated financial
statements.
5
MESA AIR
GROUP, INC.
(UNAUDITED)
|
|
1.
|
Business
and Basis of Presentation
|
The accompanying unaudited, condensed consolidated financial
statements of Mesa Air Group, Inc. (Mesa or the
Company) have been prepared in accordance with
accounting principles generally accepted in the United States of
America for interim financial information and with the
instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted
in the United States of America for a complete set of financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation of the results for the periods presented
have been made. Operating results for the three-month period
ended December 31, 2006, are not necessarily indicative of
the results that may be expected for the fiscal year ending
September 30, 2007. These condensed consolidated financial
statements should be read in conjunction with the Companys
consolidated financial statements and notes thereto included in
the Companys annual report on
Form 10-K
for the fiscal year ended September 30, 2006.
The accompanying condensed consolidated financial statements
include the accounts of Mesa Air Group, Inc. and its
wholly-owned operating subsidiaries: 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, Ping Shan, SRL
(Ping Shan), a Barbados, West Indies based
investment company, Shan Yue (Shan Yue), SRL a
Barbados, West Indies based investment company, 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. Ping Shan and Shan Yue were established to
invest in a Joint Venture in the Peoples Republic of
China. Nilchii was established to invest in certain airline
related businesses. All significant intercompany accounts and
transactions have been eliminated in consolidation.
New
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
6
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Statement of Financial Accounting Standards 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
December 31, 2006, Mesa Airlines and Freedom Airlines
operated a fleet of 175 aircraft 110 CRJs, 36 ERJs
and 28 Dash-8s.
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
December 31, 2006, Air Midwest operated a fleet of 20
Beechcraft 1900D turboprop aircraft. Mesa Airlines, operating as
go!, provides independent inter-island Hawaiian
passenger service. As of December 31, 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.
7
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Other reportable segment includes Mesa Air Group (the
holding company), RAS, MPD, MAG-AIM, MAGI, Shan Yue, Ping Shan,
Nilchii and Ritz Hotel Management Corp. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Mesa/
|
|
|
Air Midwest
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 (000s)
|
|
Freedom
|
|
|
/go!
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
Total operating revenues
|
|
$
|
328,187
|
|
|
$
|
20,795
|
|
|
$
|
56,447
|
|
|
$
|
(57,816
|
)
|
|
$
|
347,613
|
|
Depreciation and amortization
|
|
|
9,049
|
|
|
|
539
|
|
|
|
1,122
|
|
|
|
|
|
|
|
10,710
|
|
Operating income (loss)
|
|
|
22,691
|
|
|
|
(3,396
|
)
|
|
|
7,466
|
|
|
|
(7,572
|
)
|
|
|
19,189
|
|
Interest expense
|
|
|
(8,424
|
)
|
|
|
|
|
|
|
(2,394
|
)
|
|
|
148
|
|
|
|
(10,670
|
)
|
Interest income
|
|
|
3,050
|
|
|
|
66
|
|
|
|
1,577
|
|
|
|
(148
|
)
|
|
|
4,545
|
|
Income (loss) before income tax
|
|
|
17,829
|
|
|
|
(3,330
|
)
|
|
|
6,272
|
|
|
|
(7,572
|
)
|
|
|
13,199
|
|
Income tax (benefit)
|
|
|
7,008
|
|
|
|
(1,309
|
)
|
|
|
2,464
|
|
|
|
(2,976
|
)
|
|
|
5,187
|
|
Total assets
|
|
|
1,455,801
|
|
|
|
17,725
|
|
|
|
518,898
|
|
|
|
(724,444
|
)
|
|
|
1,267,980
|
|
Capital expenditures (including
non-cash)
|
|
|
26,764
|
|
|
|
241
|
|
|
|
3,510
|
|
|
|
|
|
|
|
30,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Mesa/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 (000s)
|
|
Freedom
|
|
|
Air Midwest
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
Total operating revenues
|
|
$
|
308,525
|
|
|
$
|
13,023
|
|
|
$
|
41,931
|
|
|
$
|
(39,862
|
)
|
|
$
|
323,617
|
|
Depreciation and amortization
|
|
|
8,005
|
|
|
|
26
|
|
|
|
1,151
|
|
|
|
|
|
|
|
9,182
|
|
Operating income (loss)
|
|
|
31,032
|
|
|
|
(1,188
|
)
|
|
|
4,406
|
|
|
|
(5,440
|
)
|
|
|
28,810
|
|
Interest expense
|
|
|
(6,799
|
)
|
|
|
|
|
|
|
(2,932
|
)
|
|
|
146
|
|
|
|
(9,585
|
)
|
Interest income
|
|
|
3,056
|
|
|
|
5
|
|
|
|
82
|
|
|
|
(146
|
)
|
|
|
2,997
|
|
Income (loss) before income tax
|
|
|
26,766
|
|
|
|
(1,182
|
)
|
|
|
980
|
|
|
|
(5,440
|
)
|
|
|
21,124
|
|
Income tax (benefit)
|
|
|
10,326
|
|
|
|
(477
|
)
|
|
|
378
|
|
|
|
(2,094
|
)
|
|
|
8,133
|
|
Total assets
|
|
|
1,348,288
|
|
|
|
11,731
|
|
|
|
316,131
|
|
|
|
(510,154
|
)
|
|
|
1,165,996
|
|
Capital expenditures (including
non-cash)
|
|
|
29,054
|
|
|
|
8
|
|
|
|
1,530
|
|
|
|
|
|
|
|
30,592
|
|
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 $172.2 million in
marketable securities that include US Treasury notes, government
bonds and corporate bonds. 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 gains (losses)
relating to trading securities held at December 31, 2006
and September 30, 2006, were $0.1 million and
($0.3) million, respectively.
The Company has determined that investments in auction rate
securities (ARS) should be classified as short-term
investments. ARS generally have long-term maturities; however,
these investments have characteristics similar to short-term
investments because at predetermined intervals, generally every
28 days, there is a new auction process.
8
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As such, the Company classifies ARS as short-term investments.
The balance of marketable securities at September 30, 2006
includes investments in ARS of $17.4 million.
At December 31, 2006, the Company had $12.0 million in
restricted cash on deposit with two financial institutions. In
September 2004, the Company 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 at December 31, 2006 are collateralized
by amounts on deposit. The Company also maintains
$5.0 million on deposit with another financial institution
to collateralize its direct deposit payroll obligations.
The Company has code-share agreements with Delta Air Lines, US
Airways and United Airlines. Approximately 98% of the
Companys consolidated passenger revenue for the three
month period ended December 31, 2006 was derived from these
agreements. Accounts receivable from the Companys
code-share partners were 40% and 45% of total gross accounts
receivable at December 31, 2006 and September 30,
2006, respectively.
US Airways accounted for approximately 45% of the Companys
total passenger revenue in the three month period ended
December 31, 2006. 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 accounted for approximately 37% of the
Companys total passenger revenue in the three month period
ended December 31, 2006. 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 17% of the
Companys total passenger revenue in the three month period
ended December 31, 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 the Companys code-share
partners, has dropped its previous proposal to merge with Delta,
another of our code-share partners. If such a proposal were to
be made again and be accepted, the Company is unable to predict
what effect such a merger would have on its relationship with
the parties or on its financial condition and operations.
In May 2005, the Company amended its code-sharing arrangement
with United to allow the Company to put up to an additional 30
50-seat regional jet aircraft into the United Express system.
The 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. In connection with the
amendment, the Company made three $10 million payments to
United as follows: i) $10 million in June 2005,
ii) $10 million in October 2005, and
iii) $10 million in November 2005. 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.
Deferred credits consist of aircraft purchase incentives
provided by the aircraft manufacturers and deferred gains on the
sale and leaseback of interim financed aircraft. These
incentives include credits that may be used to
9
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
purchase spare parts, pay for training expenses or reduce other
aircraft operating costs. These deferred credits and gains are
amortized on a straight-line basis as a reduction of lease
expense over the term of the respective leases.
At December 31, 2006 and September 30, 2006, the
Company had $143.4 million and $123.1 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 six aircraft on interim financing
with the manufacturer at December 31, 2006. These interim
financings agreements are typically six months in length and
provide for monthly interest only payments at LIBOR plus three
percent (8.35% at December 31, 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. Subsequent to December 31, 2006,
the Company permanently financed these six aircraft with
$135 million in long-term debt.
|
|
9.
|
Notes Payable
and Long-Term Debt
|
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Notes payable to bank,
collateralized by the underlying aircraft, due 2019
|
|
$
|
324,593
|
|
|
$
|
329,478
|
|
Senior convertible notes due June
2023
|
|
|
37,834
|
|
|
|
37,834
|
|
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% (7.8% at December 31, 2006), collateralized
by the underlying aircraft
|
|
|
77,700
|
|
|
|
79,290
|
|
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
|
|
|
22,479
|
|
|
|
22,831
|
|
Note payable to manufacturer,
principal due semi-annually, interest at 7% due quarterly
through 2007
|
|
|
1,792
|
|
|
|
1,792
|
|
Mortgage note payable to bank,
principal and interest at
71/2%
due monthly through 2009
|
|
|
871
|
|
|
|
882
|
|
Other
|
|
|
123
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
565,392
|
|
|
|
572,228
|
|
Less current portion
|
|
|
(30,021
|
)
|
|
|
(29,659
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
535,371
|
|
|
$
|
542,569
|
|
|
|
|
|
|
|
|
|
|
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
10
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
outstanding during the periods presented. Diluted net income per
share reflects the potential dilution that could occur if
outstanding stock options and warrants were exercised. In
addition, dilutive convertible securities are included in the
denominator while interest on convertible debt, net of tax, is
added back to the numerator. A reconciliation of the numerator
and denominator used in computing net income per share is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Share calculation:
|
|
|
|
|
|
|
|
|
Weighted average
shares basic
|
|
|
33,632
|
|
|
|
28,677
|
|
Effect of dilutive outstanding
stock options and warrants
|
|
|
506
|
|
|
|
1,764
|
|
Effect of restricted stock
|
|
|
88
|
|
|
|
286
|
|
Effect of dilutive outstanding
convertible debt
|
|
|
10,704
|
|
|
|
16,455
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares diluted
|
|
|
44,930
|
|
|
|
47,182
|
|
|
|
|
|
|
|
|
|
|
Adjustments to net income:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,012
|
|
|
$
|
12,991
|
|
Interest expense on convertible
debt, net of tax
|
|
|
909
|
|
|
|
1,516
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income
|
|
$
|
8,921
|
|
|
$
|
14,507
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 717,639 and 460,224 shares of common
stock were outstanding during the quarters ended
December 31, 2006 and 2005, 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.
|
|
11.
|
Stock
Repurchase Program
|
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 December 31, 2006, the
Company has acquired and retired approximately 11.0 million
shares of its outstanding common stock at an aggregate cost of
approximately $71.0 million, leaving approximately
8.4 million shares available for purchase under the current
Board authorizations. Purchases are made at managements
discretion based on market conditions and the Companys
financial resources.
The Company repurchased the following shares for
$4.3 million during the three months ended
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Total Number 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
|
|
|
the Plan
|
|
|
October 2006
|
|
|
24,773
|
|
|
$
|
7.68
|
|
|
|
10,455,313
|
|
|
|
8,966,948
|
|
December 2006
|
|
|
505,452
|
|
|
$
|
8.05
|
|
|
|
10,960,765
|
|
|
|
8,461,496
|
|
|
|
12.
|
Beechcraft
1900D Cost Reductions
|
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
11
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company remaining current on its payment obligations to
Raytheon. The amount was subsequently reduced to
$5.3 million as a result of a reduction in the
Companys fleet of B1900D aircraft. Approximately
$1.3 million was recorded as a reduction to expense during
the three months ended December 31, 2006 and 2005. In
return, the Company granted Raytheon a warrant to purchase up to
233,068 shares of the Companys common stock at a per
share exercise price of $10. The Company recorded the issuance
of the warrant at a value of $0.4 million within
stockholders equity as a debit and credit to common stock.
The contra equity value of the warrant was being amortized to
expense over the vesting period of three years. Raytheon must
pay a purchase price of $1.50 per common share underlying
the warrant. The warrant was exercisable at any time over a
three-year period following its date of purchase. Raytheon is
completely vested in the 233,068 shares of common stock
underlying the warrant.
Included in interest expense on the statements of income was
interest expense related to aircraft financing of
$9.3 million and $7.1 million for the three months
ended December 31, 2006 and 2005, respectively.
|
|
14.
|
Bankruptcy
Settlement
|
In the first quarter of fiscal 2007, the Company received
approximately 13,000 shares of US Airways common stock from
its bankruptcy claim against US Airways, Inc. prior to its
merger with America West (Pre-Merger US Airways).
The Company sold the stock and realized proceeds of
$0.6 million.
|
|
15.
|
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 the first quarter of
fiscal 2007, the Company recorded equity method losses from this
investment of $0.1 million.
The Investee notes held by the Company bear interest at 17%. At
December 31, 2006, the Company has a receivable for and has
recorded interest income related to these notes in the amount of
$1.2 million.
|
|
16.
|
Stock-Based
Compensation
|
Stock based compensation expense is calculated by estimating the
fair value of stock options at the time of grant and amortized
over the stock options vesting period.
12
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following amounts were recognized for stock-based
compensation (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
General and administrative
expenses:
|
|
|
|
|
|
|
|
|
Stock options expense
|
|
$
|
354
|
|
|
$
|
803
|
|
Restricted stock expense
|
|
|
349
|
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
703
|
|
|
$
|
1,097
|
|
|
|
|
|
|
|
|
|
|
|
|
17.
|
Commitments
and Contingencies
|
As of December 31, 2006, the Company had firm orders with
Bombardier Aerospace, Inc. for two CRJ-700 aircraft and two
CRJ-900 which can be converted to CRJ-700s. In conjunction with
this purchase agreement, Mesa had $16.0 million on deposit
with Bombardier Regional Aircraft Division 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.
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
December 31, 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 and rotable spare parts. 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
13
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
upon certain operational assumptions and may vary if the engines
are operated differently than these assumptions. The rate is
also subject to escalation based on changes in certain price
indices. The agreement with Rolls-Royce also contains a
termination clause and look back provision to provide for any
shortfall between the cost of maintenance incurred by the
provider and the amount paid up to the termination date by the
Company and includes a 15% penalty on such amount. The Company
does not anticipate an early termination under the contract.
In May 2002, the Company entered into a six-year fleet
management program with PWC to provide maintenance for the
Companys Beechcraft 1900D turboprop engines. The contract
requires a monthly payment based upon flight hours incurred by
the covered aircraft. The hourly rate is subject to annual
adjustment based on changes in certain price indices and is
guaranteed to increase by no less than 1.5% per year.
Pursuant to the agreement, the Company sold certain assets of
its Desert Turbine Services unit, as well as all spare PT6
engines to PWC for $6.8 million, which approximated the net
book value of the assets. Pursuant to the agreement, the Company
provided a working capital loan to PWC for the same amount,
which is to be repaid through a reduced hourly rate being
charged for maintenance. The agreement covers all of the
Companys Beechcraft 1900D turboprop aircraft and engines.
The agreement also contains a termination clause and look back
provision to provide for any shortfall between the cost of
maintenance incurred by the provider and the amount paid up to
the termination date by the Company and provides for return of a
pro-rated share of the prepaid amount upon early termination.
The Company does not anticipate an early termination under the
contract.
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 (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 GE Commercial 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 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 as a liability.
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,
14
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 Company
believes the 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, 2006 seeking dismissal of all
claims based upon Hawaii Statutory Law that rest on Mesas
alleged below-cost pricing. Following the filing of Mesas
Motion to Dismiss, Aloha, on January 10, 2007, voluntarily
chose to dismiss the action filed in State Court, and
simultaneously filed a new complaint in the United States
District Court for the District of Hawaii (filed on
January 9, 2007). Alohas federal complaint abandoned
claims regarding below-cost pricing under Hawaiis
Statutory Law and instead asserted claims under federal contract
and antitrust law.
Mesa 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.
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.
15
|
|
Item 2.
|
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 Data contained elsewhere herein.
Forward-Looking
Statements
This Quarterly Report on
Form 10-Q
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-Q.
All references to we, our,
us, or Mesa refer to Mesa Air Group,
Inc. and its predecessors, direct and indirect subsidiaries and
affiliates.
All references to we, our,
us, or Mesa refer to Mesa Air Group,
Inc. and its predecessors, direct and indirect subsidiaries and
affiliates.
GENERAL
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 Condensed Consolidated Financial Statements
and the related notes thereto, contained elsewhere in this
Form 10-Q.
16
Executive
Overview
The first quarter of fiscal year 2007 marked a number of
milestones for us. We completed the transition of the last of
the jets into Delta operations as well as placing the remaining
Dash-8 aircraft into Deltas operational hub at New
Yorks JFK airport.
We also signed a Joint Venture agreement with Shenzhen Airlines
to create a new Chinese regional airline. The new airline is
expected to commence scheduled services within 12 months,
initially operating 50-seat regional jets on domestic routes
within the Peoples Republic of China. Cities for the new
services we intend to focus on will include Shenzhen, Beijing,
Chongqing, Xiamen, Nanjing, Kunming, Dalian, Shenyang, Xian,
Zhengzhou and Nanning.
Mesas independent operation in Hawaii, go!,
continues to perform in accordance with our expectations.
We also added five essential Air Service markets and one
guaranteed minimum revenue market.
Code-Share
Agreements
Delta has not yet assumed our jet code-share agreement in its
bankruptcy proceedings and could choose to terminate our
agreement at any time prior to its emergence from bankruptcy.
The Delta Dash-8 agreement was entered into post-petition and
does not need to be assumed in the bankruptcy proceedings.
Fleet
During the first quarter of fiscal 2007, we added three CRJ-700s
to our United fleet and added six Dash-8 aircraft into our Delta
fleet.
Aircraft in Operation at December 31, 2006
|
|
|
|
|
Type of Aircraft
|
|
|
|
|
CRJ-200/100 Regional Jet
|
|
|
60
|
|
CRJ-700 Regional Jet
|
|
|
18
|
|
CRJ-900 Regional Jet
|
|
|
38
|
|
Embraer 145 Regional Jet
|
|
|
36
|
|
Beechcraft 1900D
|
|
|
20
|
|
Dash-8
|
|
|
28
|
|
|
|
|
|
|
Total
|
|
|
200
|
|
|
|
|
|
|
Summary
of Financial Results
Mesa Air Group recorded consolidated net income of
$8.0 million in the first quarter of fiscal 2007,
representing diluted earnings per share of $0.20. This compares
to consolidated net income of $13.0 million or
$0.31 per share in the first quarter of fiscal 2006.
Approximately 98% of our consolidated passenger revenues for the
quarter ended December 31, 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 96% of our passenger revenue in the first quarter
of fiscal 2007 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 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
17
levels, as well as fuel prices. In the first quarter of fiscal
2007, approximately 96% of our fuel purchases were reimbursed
under revenue-guarantee code-share agreements.
The following tables set forth quarterly comparisons for the
periods indicated below:
OPERATING
DATA
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Passengers
|
|
|
3,981,291
|
|
|
|
3,489,416
|
|
Available seat miles (000s)
|
|
|
2,350,688
|
|
|
|
2,308,084
|
|
Revenue passenger miles
(000s)
|
|
|
1,712,664
|
|
|
|
1,655,501
|
|
Load factor
|
|
|
72.9
|
%
|
|
|
71.7
|
%
|
Yield per revenue passenger mile
(cents)
|
|
|
20.3
|
|
|
|
19.5
|
|
Revenue per available seat mile
(cents)
|
|
|
14.8
|
|
|
|
14.0
|
|
Operating cost per available seat
mile (cents)
|
|
|
14.0
|
|
|
|
12.8
|
|
Average stage length (miles)
|
|
|
369
|
|
|
|
407
|
|
Number of operating aircraft in
fleet
|
|
|
200
|
|
|
|
181
|
|
Gallons of fuel consumed
(000s)
|
|
|
56,807
|
|
|
|
51,353
|
|
Block hours flown
|
|
|
157,340
|
|
|
|
142,191
|
|
Departures
|
|
|
109,803
|
|
|
|
95,431
|
|
CONSOLIDATED
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Costs per
|
|
|
% of Total
|
|
|
Costs per
|
|
|
% of Total
|
|
|
|
ASM (cents)
|
|
|
Revenues
|
|
|
ASM (cents)
|
|
|
Revenues
|
|
|
Flight operations
|
|
|
4.1
|
|
|
|
27.8
|
%
|
|
|
3.9
|
|
|
|
27.8
|
%
|
Fuel
|
|
|
5.0
|
|
|
|
33.9
|
%
|
|
|
4.5
|
|
|
|
32.4
|
%
|
Maintenance
|
|
|
2.7
|
|
|
|
18.2
|
%
|
|
|
2.4
|
|
|
|
17.2
|
%
|
Aircraft and traffic servicing
|
|
|
0.9
|
|
|
|
6.1
|
%
|
|
|
0.7
|
|
|
|
5.0
|
%
|
Promotion and sales
|
|
|
0.1
|
|
|
|
0.5
|
%
|
|
|
0.0
|
|
|
|
0.2
|
%
|
General and administrative
|
|
|
0.7
|
|
|
|
5.0
|
%
|
|
|
0.8
|
|
|
|
5.7
|
%
|
Depreciation and amortization
|
|
|
0.5
|
|
|
|
3.1
|
%
|
|
|
0.4
|
|
|
|
2.8
|
%
|
Bankruptcy settlement
|
|
|
(0.0
|
)
|
|
|
(0.2
|
)%
|
|
|
0.0
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
14.0
|
|
|
|
94.5
|
%
|
|
|
12.8
|
|
|
|
91.1
|
%
|
Interest expense
|
|
|
(0.5
|
)
|
|
|
(3.1
|
)%
|
|
|
(0.4
|
)
|
|
|
(3.0
|
)%
|
Interest income
|
|
|
0.2
|
|
|
|
1.3
|
%
|
|
|
0.1
|
|
|
|
0.9
|
%
|
Loss from equity method investment
|
|
|
(0.0
|
)
|
|
|
(0.0
|
)%
|
|
|
0.0
|
|
|
|
0.0
|
%
|
Other income (expense)
|
|
|
0.0
|
|
|
|
0.1
|
%
|
|
|
(0.0
|
)
|
|
|
(0.3
|
)%
|
Note: numbers in table may not recalculate due to rounding
18
FINANCIAL
DATA BY OPERATING SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2006 (000s)
|
|
|
|
|
|
|
Air Midwest
|
|
|
|
|
|
|
|
|
|
|
|
|
Mesa/Freedom
|
|
|
/go!
|
|
|
Other
|
|
|
Elimination
|
|
|
Total
|
|
|
Total operating revenues
|
|
$
|
328,187
|
|
|
$
|
20,795
|
|
|
$
|
56,447
|
|
|
$
|
(57,816
|
)
|
|
$
|
347,613
|
|
Total operating expenses
|
|
|
305,496
|
|
|
|
24,191
|
|
|
|
48,981
|
|
|
|
(50,244
|
)
|
|
|
328,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
22,691
|
|
|
|
(3,396
|
)
|
|
|
7,466
|
|
|
|
(7,572
|
)
|
|
|
19,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2005 (000s)
|
|
|
|
Mesa/Freedom
|
|
|
Air Midwest
|
|
|
Other
|
|
|
Elimination
|
|
|
Total
|
|
|
Total operating revenues
|
|
$
|
308,525
|
|
|
$
|
13,023
|
|
|
$
|
41,931
|
|
|
$
|
(39,862
|
)
|
|
$
|
323,617
|
|
Total operating expenses
|
|
|
277,493
|
|
|
|
14,211
|
|
|
|
37,525
|
|
|
|
(34,422
|
)
|
|
|
294,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
31,032
|
|
|
|
(1,188
|
)
|
|
|
4,406
|
|
|
|
(5,440
|
)
|
|
|
28,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESULTS
OF OPERATIONS
For
the three months ended December 31, 2006 versus the three
months ended December 31, 2005
Operating
Revenues
In the quarter ended December 31, 2006, operating revenue
increased by $24.0 million, or 7.4%, from
$323.6 million in the quarter ended December 31, 2005
to $347.6 million in the quarter ended December 31,
2006. The increase in revenue is primarily attributable to a
$19.7 million increase in operating revenues in the
Mesa/Freedom segment, the largest component of which is a
$8.5 million increase in fuel reimbursements by our
code-share partners. Operating revenues in the Air
Midwest/go! segment increased $7.8 million,
$6.7 million as a result of the startup of go!
operations and $1.3 million from additional
Essential Air Service (EAS) cities. Revenue in the
other segment increased $14.5 million primarily as a result
of an increase in spare part sales from MAG-AIM to Mesas
operating subsidiaries. These sales are eliminated in
consolidation.
Operating
Expenses
Flight
Operations
In the quarter ended December 31, 2006, flight operations
expense increased $6.8 million, or 7.6%, to
$96.7 million from $89.9 million for the quarter ended
December 31, 2005. On an ASM basis, flight operations
expense increased 5.1% to 4.1 cents per ASM in the quarter ended
December 31, 2006 from 3.9 cents per ASM in the quarter
ended December 31, 2005. Flight operations expense in the
Mesa/Freedom segment increased $5.7 million, which included
a $3.2 million increase in flight crew wages and a
$1.3 million increase in lodging cost. The increase in
wages is due to the additional flying for Delta out of New
Yorks JFK airport and the increase in lodging cost is due
to flying in more expensive East coast cities. Flight operations
expense in the Air Midwest/go! segment increased
$2.2 million, which included a $0.8 million increase
in flight crew wages and a $1.2 million increase in
aircraft lease cost. These increases are primarily a result of
the startup of operations at go!
Fuel
In the quarter ended December 31, 2006, fuel expense
increased $13.0 million, or12.4%, to $117.8 million
from $104.8 million for the quarter ended December 31,
2005. On an ASM basis, fuel expense increased 11.1% to 5.0 cents
per ASM in the quarter ended December 31, 2006 from 4.5
cents per ASM in the quarter ended December 31, 2005.
Into-plane fuel cost in the first quarter of fiscal 2006
increased 3.0% from $2.01 per gallon in the first quarter
of fiscal 2006 to $2.07 per gallon in the first quarter of
fiscal 2007, resulting in a $3.3 million unfavorable price
variance. Consumption increased 9.0% in the first quarter of
fiscal 2006 resulting in a $9.7 million unfavorable volume
variance. In the first quarter of fiscal 2007, approximately 96%
of our fuel costs were reimbursed by our code-share partners.
19
Maintenance
Expense
In the quarter ended December 31, 2006, maintenance expense
increased $7.9 million, or 14.2%, to $63.4 million
from $55.5 million for the quarter ended December 31,
2005. On an ASM basis, maintenance expense increased 12.5% to
2.7 cents per ASM in the quarter ended December 31, 2006
from 2.4 cents per ASM in the quarter ended December 31,
2005. Maintenance expense in the Mesa/Freedom segment increased
$10.5 million, which included an $6.6 million increase
in aircraft heavy maintenance expense, a $3.8 million
increase in materials, repairs and servicing expenses, and a
$1.8 million increase in mechanic wage expenses. These
increases were offset by a $3.1 million decrease in engine
maintenance expense primarily due to the timing of ERJ-145
engine overhauls, which are not subject to power by the hour
agreements. The increase in heavy maintenance checks is due to
the timing and severity of the checks being performed. The
increase in materials expenses is due to the number of checks
being performed as well as aircraft coming off warranty. The
increase in wages is due to increases in headcount and wages to
support our Delta and United operations. Maintenance expense in
the Air Midwest/go! segment increased
$1.3 million. The increase was primarily due to the start
up of go! Maintenance expense in the Other Segment
decreased $3.9 million primarily due to reductions in
materials expenses.
Aircraft
and Traffic Servicing
In the quarter ended December 31, 2006, aircraft and
traffic servicing expense increased by $5.2 million, or
31.9%, to $21.4 million from $16.2 million for the
quarter ended December 31, 2005. On an ASM basis, aircraft
and traffic servicing expense increased 28.6% to 0.9 cents per
ASM in the quarter ended December 31, 2006 from
0.7 cents per ASM in the quarter ended December 31,
2005. Aircraft and traffic servicing expense in the Mesa/Freedom
segment increased $3.6 million, which included a
$2.3 million increase in station rents and a
$1.8 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 increased $1.8 million primarily due to the
start up of go!
Promotion
and Sales
In the quarter ended December 31, 2006, promotion and sales
expense increased by $0.8 million, or 103.8%, to
$1.6 million from $0.8 million for the quarter ended
December 31, 2005. On an ASM basis, promotion and sales
expense increased to $0.1 cents per ASM for the quarter ended
December 31, 2006 from 0.0 cents per ASM in the quarter
ended December 31, 2005. Promotion and sales expense in the
Air Midwest/go! segment increased
$0.8 million primarily due to the start up of go!
We do not pay promotion and sales expenses under our
regional jet revenue-guarantee contracts.
General
and Administrative
In the quarter ended December 31, 2006, general and
administrative expense decreased $0.9 million, or 5.1%, to
$17.5 million from $18.4 million for the quarter ended
December 31, 2005. On an ASM basis, general and
administrative expense decreased 12.5% to 0.7 cents per ASM for
the quarter ended December 31, 2006 from 0.8 cents per ASM
in the quarter ended December 31, 2005. The net decrease
was primarily a result of additional property tax expense
recorded in the prior year quarter.
Depreciation
and Amortization
In the quarter ended December 31, 2006, depreciation and
amortization expense increased $1.5 million, or 16.6%, to
$10.7 million from $9.2 million for the quarter ended
December 31, 2005. On an ASM basis, depreciation expense
increased 25.0% to 0.5 cents per ASM in the quarter ended
December 31, 2006 from 0.4 cents per ASM in the quarter
ended December 31, 2005. The increase was primarily due to
a $1.0 million increase in depreciation expense in the
Mesa/Freedom segment as a result of adding three additional
aircraft on interim financing and depreciation on aircraft
modifications to the Dash-8 aircraft added in fourth quarter of
fiscal 2006 and the first quarter of fiscal 2007.
20
Bankruptcy
Settlement
In the quarter ended December 31, 2006, the Company
received approximately 13,000 shares of US Airways common
stock as part of our bankruptcy claim against Pre-Merger US
Airways. The shares were valued at approximately $46 per
share, hence the Company recognized approximately
$0.6 million of income from its claim.
Interest
Expense
In the quarter ended December 31, 2006, interest expense
increased $1.1 million, or 11.3%, to $10.7 million
from $9.6 million for the quarter ended December 31,
2005. On an ASM basis, interest expense increased 25.0% to 0.5
cents per ASM in the quarter ended December 31, 2006 from
0.4 cents per ASM in the quarter ended December 31, 2005.
The net increase in interest expense is primarily due a
$2.2 million increase in interest expense on debt financed
CRJ-700s and 900s offset by a $1.0 million reduction in
convertible debt interest expense as a result of the conversion
from debt to equity in 2006. The increase in interest on jet
financing is due to three additional CRJ-700s on interim
financing and an increase in underlying floating rates.
Interest
Income
In the quarter ended December 31, 2006, interest income
increased $1.5 million to $4.5 million from
$3.0 million for the quarter ended December 31, 2005.
The increase is due to increased rates of return on our
portfolio of marketable securities.
Loss
from equity method investment
In the quarter ended December 31, 2006, the Companys
percentage loss from its equity method investment was
$0.1 million.
Other
Income (Expense)
In the quarter ended December 31, 2006, other income
(expense) increased $1.3 million from a loss of
$1.1 million for the quarter ended December 31, 2005
to income of $0.2 million for the quarter ended
December 31, 2006. In the quarter ended December 31,
2006, other income (expense) is primarily comprised of
$0.2 million of in gains on investment securities.
In the quarter ended December 31, 2005, other income
(expense) was primarily comprised of $0.9 million of debt
conversion costs and $0.3 million in unrealized losses on
investment securities.
Income
Taxes
In the first quarter of fiscal 2007, our effective tax rate
decreased from 40.1% for the first quarter of fiscal 2006 to
39.3% for the first quarter of fiscal 2007. The decrease in our
effective tax rate was mainly due to a large amount of incentive
stock option expense in fiscal 2006, which was not deductible
for tax purposes.
LIQUIDITY
AND CAPITAL RESOURCES
Sources
and Uses of Cash
At December 31, 2006, we had cash, cash equivalents, and
marketable securities (including restricted cash) of
$256.3 million, compared to $234.3 million at
September 30, 2006. 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.
Sources of cash included $34.9 million provided from
operations (excluding sales and gains on securities) and
$4.2 million from proceeds on notes receivable.
Uses of cash included capital expenditures of $6.9 million
attributable to the expansion of our regional jet fleet and
related provisioning of rotable inventory to support the
additional jets, $10.2 million in principal payments on
long-term debt and the purchase of $4.3 million of the
Companys outstanding common stock.
21
As of December 31, 2006, we had receivables of
approximately $49.6 million (net of an allowance for
doubtful accounts of $2.2 million), compared to receivables
of approximately $47.4 million (net of an allowance for
doubtful accounts of $1.6 million) as of September 30,
2006. The amounts due consist primarily of receivables due from
our code-share partners, subsidy payments due from Raytheon,
Federal excise tax refunds on fuel, insurance proceeds,
manufacturers credits and passenger ticket receivables due
through the Airline Clearing House. Accounts receivable from our
code-share partners was 40.2% of total gross accounts receivable
at December 31, 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. These leases are classified as
operating leases and are therefore excluded from our
consolidated balance sheets. At December 31, 2006, we
leased 158 aircraft with remaining lease terms ranging from one
to 18.3 years. Future minimum lease payments due under all
long-term operating leases were approximately $2.2 billion
at December 31, 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 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.
22
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 these senior convertible notes due 2023 converted
their notes into shares of Mesa common stock. In connection with
these conversions, we 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. We also wrote off $1.8 million in debt issue
costs related to these notes.
Interim
and Permanent Aircraft Financing Arrangements
At December 31, 2006, we had an aggregate of
$143.4 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 aircraft manufacturer. Any gain recognized on the sale and
leaseback transaction is deferred and amortized over the life of
the lease. At December 31, 2006, we had six aircraft on
interim financing with the aircraft 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. Subsequent to
December 31, 2006, we permanently financed these six
aircraft with $135 million in long-term debt.
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.
23
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 December 31, 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 December 31, 2006, we had $565.4 million of
long-term debt (including current maturities). This amount
consisted of $424.8 million in notes payable related to
owned aircraft, $137.8 million 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 December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
Obligations
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable related to CRJ700s and
900s(2)
|
|
$
|
35,007
|
|
|
$
|
46,086
|
|
|
$
|
45,206
|
|
|
$
|
44,320
|
|
|
$
|
43,395
|
|
|
$
|
297,553
|
|
|
$
|
511,567
|
|
2003 senior convertible debt notes
(assuming no conversions)
|
|
|
1,182
|
|
|
|
2,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,234
|
|
|
|
98,781
|
|
2004 senior convertible debt notes
(assuming no conversions)
|
|
|
3,625
|
|
|
|
3,625
|
|
|
|
1,813
|
|
|
|
|
|
|
|
|
|
|
|
171,409
|
|
|
|
180,472
|
|
Notes payable related to B1900Ds
|
|
|
8,954
|
|
|
|
11,938
|
|
|
|
11,938
|
|
|
|
29,537
|
|
|
|
25,950
|
|
|
|
9,509
|
|
|
|
97,826
|
|
Note payable related to CRJ200s(2)
|
|
|
2,250
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
14,952
|
|
|
|
29,202
|
|
Note payable to manufacturer
|
|
|
1,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,823
|
|
Mortgage note payable
|
|
|
82
|
|
|
|
109
|
|
|
|
824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,015
|
|
Other
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
52,948
|
|
|
|
67,148
|
|
|
|
62,806
|
|
|
|
76,882
|
|
|
|
72,370
|
|
|
|
588,682
|
|
|
|
920,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to
manufacturer interim financing(1)(2)
|
|
|
87,596
|
|
|
|
9,390
|
|
|
|
9,390
|
|
|
|
9,390
|
|
|
|
9,390
|
|
|
|
85,291
|
|
|
|
210,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments under operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash aircraft rental payments(2)
|
|
|
199,650
|
|
|
|
216,084
|
|
|
|
192,163
|
|
|
|
185,402
|
|
|
|
190,281
|
|
|
|
1,244,395
|
|
|
|
2,227,975
|
|
Lease payments on equipment and
operating facilities
|
|
|
1,014
|
|
|
|
1,392
|
|
|
|
962
|
|
|
|
947
|
|
|
|
956
|
|
|
|
1,198
|
|
|
|
6,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease payments
|
|
|
200,664
|
|
|
|
217,476
|
|
|
|
193,125
|
|
|
|
186,349
|
|
|
|
191,237
|
|
|
|
1,245,593
|
|
|
|
2,234,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future aircraft acquisition costs(3)
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
Rotable inventory financing
commitments
|
|
|
438
|
|
|
|
563
|
|
|
|
540
|
|
|
|
2,241
|
|
|
|
|
|
|
|
|
|
|
|
3,782
|
|
Minimum payments due under rotable
spare parts maintenance agreement
|
|
|
23,127
|
|
|
|
26,650
|
|
|
|
29,371
|
|
|
|
32,225
|
|
|
|
32,614
|
|
|
|
136,476
|
|
|
|
280,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
414,773
|
|
|
$
|
321,227
|
|
|
$
|
295,232
|
|
|
$
|
357,087
|
|
|
$
|
305,611
|
|
|
$
|
2,056,042
|
|
|
$
|
3,749,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 |
24
|
|
|
|
|
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. |
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 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 (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 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
25
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 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 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 reserve, valuation of assets held for
sale and costs to return aircraft and a valuation allowance for
certain deferred tax assets. We base our estimates on historical
experience and on various other assumptions that we believe are
reasonable under the circumstances. Such historical experience
and assumptions form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We have identified the accounting policies below as critical to
our business operations and the understanding of our results of
operations. The impact of these policies on our business
operations is discussed throughout Managements Discussion
and Analysis of Financial Condition and Results of Operations
where such policies affect our reported and expected financial
results. The discussion below is not intended to be a
comprehensive list of our accounting policies. For a detailed
discussion on the application of these and other accounting
policies, see Note 1 in the Notes to the Consolidated
Financial Statements for the year ended September 30, 2006,
which contains accounting policies and other disclosures
required by accounting principles generally accepted in the
United States of America.
Revenue
Recognition
The US Airways, United and Delta 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 costs, 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.
26
Under the Companys revenue-guarantee agreements with US
Airways, United and Delta, 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 the quarters ended
December 31, 2006 and 2005 was $65.3 million and
$61.5 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 represent market
rates for fuel for the Companys Pre-Merger US Airways
flying. The Company purchased 9.4 million gallons of fuel
under this arrangement in the quarter ended December 31,
2005.
The US Airways and Midwest Airlines B1900D turboprop code-share
agreements are pro-rate agreements. Under a prorate agreement,
we receive a percentage of the passengers fare based on a
standard industry formula that allocates revenue based on the
percentage of transportation provided. Revenue from our pro-rate
agreements and our independent operation is recognized when
transportation is provided. Tickets sold but not yet used are
included in air traffic liability on the condensed consolidated
balance sheets.
We also receive subsidies for providing scheduled air service to
certain small or rural communities. Such revenue is recognized
in the period in which the air service is provided. The amount
of the subsidy payments is determined by the United States
Department of Transportation on the basis of its evaluation of
the amount of revenue needed to meet operating expenses and to
provide a reasonable return on investment with respect to
eligible routes. EAS rates are normally set for two-year
contract periods for each city.
Allowance
for Doubtful Accounts
Amounts billed by the Company under revenue guarantee
arrangements are subject to our interpretation of the applicable
code-share agreement and are subject to audit by our code-share
partners. Periodically our code-share partners dispute amounts
billed and pay amounts less than the amount billed. Ultimate
collection of the remaining amounts not only depends upon Mesa
prevailing under audit, but also upon the financial well-being
of the code-share partner. As such, we periodically review
amounts past due and record a reserve for amounts estimated to
be uncollectible. The allowance for doubtful accounts was
$2.2 million and $1.6 million at December 31,
2006 and September 30, 2006, respectively. If our actual
ability to collect these receivables and the actual financial
viability of its partners is materially different than
estimated, the Companys 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 terms of the related leases. Additionally,
operating leases are not reflected in the Companys
condensed consolidated balance sheet and accordingly, neither a
lease asset nor an obligation for future lease payments is
reflected in the Companys condensed consolidated balance
sheet.
27
Accrued
Health Care Costs
We are 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
December 31, 2006 and September 30, 2006, we accrued
$2.9 million and $2.6 million, respectively, for the
cost of future health care claims. If the ultimate development
of these claims is significantly different than those that have
been estimated, the accrual for future health care claims could
be materially overstated or understated.
Accrued
Workers Compensation Costs
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 December 31, 2006 and September 30,
2006, we accrued $3.5 million and $3.4 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 unrealized portion is made and an allowance is
recorded. At December 31, 2006, we had a valuation
allowance of $0.6 million 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 the Company will generate sufficient taxable
income in the future to realize the benefits of its other
deferred tax assets. This belief is based upon the Company
having had pretax income in fiscal 2006, 2005 and 2004 and we
have taken steps to minimize the financial impact of its
unprofitable subsidiaries. Realization of these deferred tax
assets is dependent upon generating sufficient taxable income
prior to expiration of any net operating loss carryforwards.
Although realization is not assured, management believes it is
more likely than not that the remaining, recorded deferred tax
assets will be realized. If the ultimate realization of these
deferred tax assets is significantly different from our
expectations, the value of its deferred tax assets could be
materially overstated.
28
AIRCRAFT
The following table lists the aircraft owned and leased by the
Company for scheduled operations as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Aircraft
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating on
|
|
|
|
|
|
|
|
|
|
Interim
|
|
|
|
|
|
|
|
|
Dec. 31,
|
|
|
Passenger
|
|
Type of Aircraft
|
|
Owned
|
|
|
Financing
|
|
|
Leased
|
|
|
Total
|
|
|
2006
|
|
|
Capacity
|
|
|
CRJ-200/100 Regional Jet
|
|
|
2
|
|
|
|
|
|
|
|
58
|
|
|
|
60
|
|
|
|
60
|
|
|
|
50
|
|
CRJ-700 Regional Jet
|
|
|
5
|
|
|
|
3
|
|
|
|
10
|
|
|
|
18
|
|
|
|
18
|
|
|
|
66
|
|
CRJ-900 Regional Jet
|
|
|
11
|
|
|
|
3
|
|
|
|
24
|
|
|
|
38
|
|
|
|
38
|
|
|
|
86
|
|
Embraer 145 Regional Jet
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
36
|
|
|
|
36
|
|
|
|
50
|
|
Beechcraft 1900D
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
20
|
|
|
|
19
|
|
Dash-8
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
28
|
|
|
|
28
|
|
|
|
37
|
|
Embraer EMB-120
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
52
|
|
|
|
6
|
|
|
|
158
|
|
|
|
216
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fleet
Plans
CRJ
Program
As of December 31, 2006, we operated 116 Canadair Regional
Jets (60 CRJ-200/100, 18 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 December 31, 2006, we have taken delivery of 13
CRJ-900 aircraft and three CRJ-700 aircraft with two more
CRJ-700 aircraft scheduled for delivery in March 2007. The
delivery dates for the remaining two CRJ-900s (which can be
converted to CRJ-700s) has not been finalized.
ERJ
Program
As of December 31, 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 December 31, 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 December 31, 2006, we operated 28 Dash-8 aircraft. In
the fourth quarter of fiscal 2006, we took delivery of four
Dash-8 aircraft and placed them into revenue service during the
first quarter of fiscal 2007.
Aircraft
Financing Relationships with the Manufacturer
At December 31, 2006, we had an aggregate of
$143.4 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
29
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 December 31, 2006, we had six 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.
Subsequent to December 31, 2006, the Company permanently
financed these six aircraft with $135 million in long-term
debt.
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Item 3.
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Qualitative
and Quantitative Disclosure about Market Risk.
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There were no material changes in the Companys market risk
from September 30, 2006 to December 31, 2006.
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Item 4.
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Controls
and Procedures.
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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 Quarterly Report on
Form 10-Q,
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 Quarterly Report on
Form 10-Q
was being prepared. There were no changes in our internal
control over financial reporting during the quarter ended
December 31, 2006, that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
* * *
30
PART II.
OTHER INFORMATION
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Item 1.
|
Legal
Proceedings.
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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, 2006 seeking dismissal of all
claims based upon Hawaii Statutory Law that rest on Mesas
alleged below-cost pricing. Following the filing of Mesas
Motion to Dismiss, Aloha, on January 10, 2007, voluntarily
chose to dismiss the action filed in State Court, and
simultaneously filed a new complaint in the United States
District Court for the District of Hawaii (filed on
January 9, 2007). Alohas federal complaint abandoned
claims regarding below-cost pricing under Hawaiis
Statutory Law and instead asserted claims under federal contract
and antitrust law.
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.
31
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.
In addition to the other information set forth in this report,
you should carefully consider the factors discussed in
Part 1, Item 1A. Risk Factors in our
Annual Report on
Form 10-K
for the year ended September 30, 2006, which could
materially affect our business, financial condition or future
results. We caution the reader that these risk factors may not
be exhaustive. We operate in a continually changing business
environment and new risk facts emerge from time to time.
Management cannot predict such new risk factors, nor can we
assess the impact, if any, of such new risk factors, nor can we
assess the impact, if any, of such new risk factors on our
business or to the extent to which any factor or combination of
factors may impact our business. There have not been any
material changes during the quarter ended December 31, 2006
from the risk factors disclosed in the above-mentioned
Form 10-K
for the year ended September 30, 2006.
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|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
(A) None
(B) None
(C) The Companys Board of Directors authorized the
Company to purchase up to 19.4 million shares of the
Companys outstanding common stock. As of December 31,
2006, the Company has acquired and retired approximately
11.0 million shares of its outstanding common stock at an
aggregate cost of approximately $71.0 million, leaving
approximately 8.4 million shares available for purchase
under existing Board authorizations. Purchases are made at
managements discretion based on market conditions and the
Companys financial resources.
The Company repurchased the following shares for
$4.3 million during the three months ended
December 31, 2006:
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|
|
|
|
|
|
|
|
|
|
|
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Maximum
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|
|
|
|
|
|
|
|
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|
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Number of
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|
|
|
|
|
|
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|
Total Number of
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|
Shares That
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|
|
Total Number
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|
|
Average Price
|
|
|
Shares Purchased as
|
|
|
May yet be
|
|
|
|
of Shares
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|
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Paid per
|
|
|
Part of Publicly
|
|
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Purchased Under
|
|
Period
|
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Purchased
|
|
|
Share
|
|
|
Announced Plan
|
|
|
the Plan
|
|
|
October 2006
|
|
|
24,773
|
|
|
$
|
7.68
|
|
|
|
10,455,313
|
|
|
|
8,966,948
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December 2006
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|
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505,452
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$
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8.05
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10,960,765
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8,461,496
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Item 3.
|
Defaults
upon Senior Securities.
|
Not applicable
|
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Item 4.
|
Submission
of Matters to vote for Security Holders.
|
None
|
|
Item 5.
|
Other
Information.
|
None
32
|
|
|
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|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
31
|
.1
|
|
Certification Pursuant to
Rule 13a-14(a)/15d-14(a)of
the Securities Exchange Act of 1934, as Amended
|
|
*
|
|
31
|
.2
|
|
Certification Pursuant to
Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934, as Amended
|
|
*
|
|
32
|
.1
|
|
Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
*
|
|
32
|
.2
|
|
Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
*
|
33
SIGNATURES
Pursuant to the requirements 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.
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|
|
|
By:
|
/s/ GEORGE
MURNANE III
|
George Murnane III
Executive Vice President and CFO
Dated: February 9, 2007
34
Index to
Exhibits
|
|
|
|
|
Exhibits:
|
|
|
|
|
Exhibit 31
|
.1
|
|
Certification Pursuant to
Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934, as Amended
|
|
Exhibit 31
|
.2
|
|
Certification Pursuant to
Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934, as Amended
|
|
Exhibit 32
|
.1
|
|
Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
Exhibit 32
|
.2
|
|
Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|