-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AYqnvRRJScCZBDLlbqG89mALhZrWraDTSOlgC8dE72NBbyrzqS0HfzfeJHPHvgXe +T3p8CklDnpLTtN9Dm1kaQ== 0000835768-99-000002.txt : 19990309 0000835768-99-000002.hdr.sgml : 19990309 ACCESSION NUMBER: 0000835768-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MESABA HOLDINGS INC CENTRAL INDEX KEY: 0000835768 STANDARD INDUSTRIAL CLASSIFICATION: 4512 IRS NUMBER: 411616499 STATE OF INCORPORATION: MN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-17895 FILM NUMBER: 99539976 BUSINESS ADDRESS: STREET 1: 7501 26TH AVE S CITY: MINNEAPOLIS STATE: MN ZIP: 55450 BUSINESS PHONE: 6127265151 MAIL ADDRESS: STREET 1: 7501 26TH AVE SOUTH CITY: MINNEAPOLIS STATE: MN ZIP: 55450 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q {X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended December 31, 1998 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to __________ Commission File No: 0-17895 MESABA HOLDINGS, INC. --------------------- Incorporated under the laws of Minnesota 41-1616499 (I.R.S. Employer ID No.) 7501 26th Avenue South Minneapolis, MN 55450 (612) 726-5151 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of February 1, 1999 ----- ---------------------------------- Common Stock Par value $.01 per share 19,853,329 PART I. FINANCIAL INFORMATION SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Statements in the Quarterly Report on Form 10-Q under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as oral statements that may be made by the Company or by officers, directors or employees of the Company acting on the Company's behalf, that are not historical fact constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward looking statements involve factors that could cause the actual results of the Company to differ materially from historical results or from any results expressed or implied by such forward-looking statements. The Company cautions the public not to place undue reliance on forward-looking statements, which may be based on assumptions and anticipated events that do not materialize. Factors which could cause the Company's actual results to differ from forward-looking statements include material changes in the relationship between the Company and Northwest Airlines; reductions or interruptions in Northwest Airlines' air service; changes in regulations affecting the Company, including DOT and FAA regulations or directives affecting airworthiness of aircraft; the acquisition and phase-in of a new aircraft; downturns in economic activity; seasonal factors; and labor relationships, including slow downs and/or work stoppages associated with the outcome of ongoing contract negotiations between the Company and the Aircraft Mechanics Fraternal Association, the mechanics union. Item 1. CONSOLIDATED FINANCIAL STATEMENTS MESABA HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share information) ASSETS ------ December 31, March 31, 1998 1998 ------------ ------------ (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 78,555 $ 66,554 Accounts receivable, net 15,621 13,610 Inventories 10,825 5,547 Prepaid expenses and deposits 2,471 3,788 Deferred tax asset 7,058 4,702 ------------ ------------ Total current assets 114,530 94,201 PROPERTY AND EQUIPMENT: Facilities under capital lease 9,147 9,147 Rotables and other spare parts 35,328 22,449 Other property and equipment 21,338 16,865 Accumulated depreciation and amortization (21,933) (16,364) ------------ ------------ Net property and equipment 43,880 32,097 OTHER ASSETS AND DEFERRED COSTS 14,297 10,893 ------------ ------------ TOTAL ASSETS $ 172,707 $ 137,191 ============ ============ The accompanying notes to interim consolidated financial statements are integral part of these balance sheets. MESABA HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (Continued) (in thousands, except share information) LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ December 31, March 31, 1998 1998 ------------ ------------ (Unaudited) CURRENT LIABILITIES: Current maturities of long-term obligations $ 385 $ 436 Accounts payable 22,243 18,093 Accrued liabilities Payroll 8,430 9,362 Maintenance 11,228 6,877 Other 8,622 7,741 ------------ ------------ Total current liabilities 50,908 42,509 LONG-TERM OBLIGATIONS, net of current liabilities 4,460 4,751 DEFERRED CREDITS AND OTHER LIABILITIES 15,891 14,385 SHAREHOLDERS' EQUITY: Common stock, $.01 par value; 60,000,000 shares authorized, 19,838,829 and 19,397,523 shares issued and outstanding, respectively 198 194 Paid-in capital 43,650 41,196 Warrants 16,500 7,900 Retained earnings 41,100 26,256 ------------ ------------ Total shareholders' equity 101,448 75,546 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 172,707 $ 137,191 ============ ============ The accompanying notes to interim consolidated financial statements are an integral part of these balance sheets. MESABA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share information) Three Months ended Nine Months Ended December 31, December 31, --------------------- --------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- OPERATING REVENUES: Passenger $ 88,977 $ 74,598 $ 239,202 $ 199,375 Other 664 845 2,597 2,434 ---------- ---------- ---------- ---------- Total operating revenues 89,641 75,443 241,799 201,809 OPERATING EXPENSES: Wages and benefits 20,395 17,587 58,331 48,092 Aircraft fuel costs 6,622 6,481 19,128 18,081 Aircraft maintenance costs 15,823 12,376 40,781 29,865 Aircraft rents 18,734 15,932 51,297 42,761 Landing fees 1,771 1,566 5,026 4,548 Insurance and taxes 2,313 1,793 6,433 4,863 Depreciation and amortization 2,467 1,788 6,799 4,562 Administrative and other costs 11,274 9,593 31,492 25,346 ---------- ---------- ---------- ---------- Total operating expenses 79,399 67,116 219,287 178,118 Operating income 10,242 8,327 22,512 23,691 NONOPERATING INCOME (EXPENSE): Interest expense (109) (109) (337) (352) Other, net 899 572 3,469 1,611 ---------- ---------- ---------- ---------- Other income, net 790 463 3,132 1,259 Income before income taxes 11,032 8,790 25,644 24,950 PROVISION FOR INCOME TAXES 4,302 3,498 10,001 9,937 ---------- ---------- ---------- ---------- NET INCOME BEFORE CHANGE IN CHANGE IN ACCOUNTING PRINCIPLE 6,730 5,292 15,643 15,013 PRE-OPERATING COST WRITE OFF, NET OF TAX - - 800 ---------- ---------- ---------- ---------- NET INCOME $ 6,730 $ 5,292 $ 14,843 $ 15,013 ========== ========== ========== ========== NET INCOME PER SHARE: Basic $ 0.34 $ 0.27 $ 0.75 $ 0.78 ========== ========== ========== ========== Diluted $ 0.32 $ 0.25 $ 0.69 $ 0.73 ========== ========== ========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 19,838 19,276 19,758 19,232 ========== ========== ========== ========== Diluted 21,230 21,021 21,541 20,618 ========== ========== ========== ========== The accompanying notes to interim consolidated financial statements are an integral part of these statements. MESABA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Nine Months Ended December 31, 1998 1997 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 14,843 $ 15,013 Adjustments to reconcile net income to net provided by operating activities: Depreciation and amortization 6,799 4,562 Amortization of deferred credits 1,506 (770) Gain on sale of inventory (799) - Deferred income tax benefit (2,356) 181 Changes in current operating items: Accounts receivable, net (733) (2,524) Inventories (3,932) (1,539) Prepaid expenses and deposits 1,317 (1,588) Accounts payable and accrued liabilities 9,762 6,727 ------------ ------------ Net cash provided by operating activities 26,407 20,062 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (16,544) (10,806) Other 23 (386) ------------ ------------ Net cash used for investing activities (16,521) (11,192) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 2,457 501 Repayment of long-term obligations (342) (320) ------------ ------------ Net cash provided by financing activities 2,115 181 ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 12,001 9,051 CASH AND CASH EQUIVALENTS: Beginning of period 66,554 49,126 ------------ ------------ End of period $ 78,555 $ 58,177 ============ ============ SUPPLEMENTARY CASH FLOW INFORMATION: Cash paid during period for: Interest $ 337 $ 361 ============ ============ Income taxes $ 10,984 $ 11,488 ============ ============ Noncash investing activities included the following: Rotable and spare parts inventory acquired with integration funds $ - $ 5,679 ============ ============ The accompanying notes to interim consolidated financial statements are an integral part of these statements. MESABA HOLDINGS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements included herein have been prepared by Mesaba Holdings, Inc. (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in the consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such consolidated financial statements. The Company's business is seasonal and, accordingly, interim results are not indicative of results for a full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the financial statements for the year ended March 31, 1998, and the notes thereto, included in the Company's Annual Report or Form 10-K filed with the Securities and Exchange Commission. 1. Basis of Presentation The consolidated financial statements include the accounts of the Company and its subsidiary, Mesaba Aviation, Inc. ("Mesaba"). All significant intercompany balances have been eliminated in consolidation. In April 1998, the Company declared a three-for-two stock split of the Company's common stock. The par value per share remained at $0.01. This stock split has been retroactively reflected in these financial statements. 2. Agreements with Northwest The Company operates a regional air carrier providing scheduled turbo-prop passenger and air freight service as Mesaba Airlines/Northwest Airlink under an Airline Services Agreement (the "Airlink Agreement") with Northwest Airlines, Inc. ("Northwest") to 91 cities in the Upper Midwest and Canada from Northwest's hub airports in Minneapolis/St. Paul and Detroit. The Airlink Agreement provides for exclusive turbo-prop rights to designated service areas and extends through June 30, 2007. Northwest has the right to terminate the Airlink Agreement without cause upon 365 days written notice, such notice not to be given before July 1, 2000. Mesaba also operates regional jet aircraft under a separate Regional Jet Services Agreement (the "Jet Agreement"), under which Mesaba will operate 36 Avro RJ85 ("RJ85") regional jets for Northwest. As of December 31, 1998, Mesaba had taken delivery of 18 RJ85 aircraft. The aircraft are subleased from Northwest and are operated as Northwest Jet Airlink currently from the Minneapolis/St. Paul and Detroit hubs. Under the Airlink and Jet Agreements, all Mesaba flights appear in Northwest's timetables and Mesaba receives ticketing and certain check-in, baggage and freight handling and other services from Northwest at certain airports. In addition, Mesaba receives its computerized reservation services from Northwest as well as performing all marketing schedules and yield management and pricing services for Mesaba flights. Loss of Mesaba's affiliation with Northwest or Northwest's failure to make timely payments of amounts owed to Mesaba or to otherwise materially perform under the Agreement's for any reason would have a material adverse effect on the Company's operations and financial position. Under both the Airlink and Jet Agreements, Northwest is not required to perform in the event of a material labor disruption at Northwest. On August 29, 1998 the Company temporarily suspended operations as a result of the pilot strike at Northwest Airlines. The Company resumed service on September 16, 1998. The suspension of operations had a material adverse affect on the results of operations for the current fiscal year. It did not have a material adverse affect on the liquidity or capital resources of the Company. 3. Earnings Per Share The table below sets forth the computation of earnings per common share. Quarter Ended Nine Months Ended ------------- ----------------- December 31, ------------ 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Net Income $ 6,730 $ 5,292 $ 14,843 $ 15,013 ========== ========== ========== ========== For Earnings Per Common Share - Basic: 19,838 19,276 19,758 19,232 Weighted average number of issued shares outstanding Effect of dilutive securities Computed shares outstanding under the Company's stock option plan utilizing the treasury stock method 317 583 528 415 Computed shares outstanding under warrants issued utilizing the treasury stock method 1,075 1,162 1,255 971 ---------- ---------- ---------- ---------- For earnings per Common Share - Diluted: Weighted average common shares and Common share equivalents outstanding 21,230 21,021 21,541 20,618 ========== ========== ========== ========== Earnings Per Share - Basic $ 0.34 $ 0.27 $ 0.75 $ 0.78 ========== ========== ========== ========== Earnings Per Share _ Diluted $ 0.32 $ 0.25 $ 0.69 $ 0.73 ========== ========== ========== ========== In April of 1998, the Company adopted AICPA Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-Up Activities" which requires all start- up costs to be charged to expense as incurred. The adoption of SOP 98-5 resulted in an $800 charge (net of tax) to operations, or $0.03 per basic and diluted share for previously capitalized start-up costs and was recorded as a cumulative effect of change in accounting principle. 4. Aircraft Additions In October 1997, Mesaba entered into an agreement with Saab Aircraft of America, Inc. ("Saab") for the acquisition of 19 new Saab 340BPlus and three used Saab 340A aircraft. All previous option agreements with Saab were canceled. As of December 31, 1998, Mesaba has taken delivery of all aircraft covered under this agreement. In April 1998, Mesaba signed an amendment to the Jet Agreement providing for the delivery of six additional RJ85 aircraft. As of December 31, 1998, Mesaba has taken delivery of all of these additional aircraft. On June 2, 1998, Mesaba signed an agreement with Northwest to fly 18 additional RJ85 aircraft for a total of 36 aircraft. Mesaba will begin taking delivery of these aircraft beginning in February 1999. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 2. Results of Operations for the Three Months Ended December 31, 1998 and 1997 - - --------------------------------------------------------------------------- (As used herein, "unit cost" means operating cost per available seat mile. Dollars and shares outstanding are expressed in thousands) EARNINGS SUMMARY The Company reported net income of $6,730 or $0.32 diluted earnings per share for the three months ended December 31, 1998, compared to $5,292 or $0.25 diluted earnings per share in the same period of fiscal 1998. Weighted average common shares and common share equivalents outstanding increased to 21,230 from 21,021. OPERATING REVENUE Total operating revenues increased 18.8% in the third quarter of fiscal 1999 to $89,641 from $75,443 in the year earlier quarter, and revenue passenger miles increased 36.7% to 303,153 from 221,746. Passenger revenue per available seat mile ("RASM") decreased to $0.163 from $0.183 in the previous year's third quarter. Mesaba's average load factor was 55.7% in the third quarter compared to 54.4% during the same period a year ago. The improvement in traffic is attributable to the introduction of 10 RJ85 and 26 Saab 340 aircraft when compared to one year ago offset by the return of 17 deHavilland Dash 8 aircraft as well as overall increases in passenger travel within the industry. Operating Costs Per Three months ended December 31, Available Seat Mile (Unit Cost) 1998 1997 - - ------------------------------------------------------------------------- Wages and benefits 3.8 CENTS 4.3 CENTS Aircraft fuel costs 1.2 1.6 Aircraft maintenance costs 2.9 3.0 Aircraft rents 3.4 3.9 Landing fees 0.3 0.4 Insurance and taxes 0.4 0.5 Depreciation and amortization 0.5 0.4 Administrative and other costs 2.1 2.4 ------------- ----------- Total 14.6 CENTS 16.5 CENTS Three months ended December 31, Operating statistics 1998 1997 - - ------------------------------------------------------------------------- Revenue passengers carried 1,212,100 908,000 Revenue passenger miles (000) 303,153 221,746 Available seat miles (000) 544,407 407,784 Passenger load factor 55.7% 54.4% Passenger revenue per available seat $0.163 $0.183 Departures 64,501 54,985 Aircraft in service 96 74 Operating Expenses. Total operating expenses increased 18.3% to $79,399 from $67,116 in the prior year's third quarter. Mesaba's unit cost decreased 11.5% to $0.146 from $0.165 as a result of a 33.5% increase in available seat miles to 544,407 in the third quarter of fiscal 1999 from 407,784 in the year earlier quarter. The increase in ASMs was accomplished by the acquisition of 10 RJ85 and 26 Saab 340 aircraft offset by the retirement of 17 Dash 8 aircraft since December 31, 1997. Wages and benefits increased 16.0% to $20,395 in the third quarter of fiscal 1999 from $17,587 in the third quarter of fiscal 1998. The increased capacity generated by the additional jet and turboprop equipment has caused these costs to be reduced on a unit cost basis. The majority of the increase is a result of higher costs of flight crews due to a 148.6% increase in block hours to support the RJ85 expansion program. Mesaba also experienced an increase in wages and benefits costs paid to support personnel due to a 6.5% increase in turbo-prop operating activity. Fuel costs increased 2.2% to $6,622 in this year's third quarter compared to $6,481 in last year's third quarter. The change is primarily attributable to a increase in consumption as a result of 2.9% more block hours flown by turbo- prop aircraft when compared to one year ago, offset by increased utilization of the more fuel efficient Saab 340 aircraft. Provisions of the Airlink Agreement with Northwest protect Mesaba from changes in fuel prices. The actual cost of fuel, including taxes and pumping fees, was 83.5 cents per gallon both in the third quarter and a year ago. Unit cost for fuel decreased 25.0% to 1.2 cents from 1.6 cents. Mesaba is not required to provide fuel for the jet operation. Direct maintenance expense, excluding wages and benefits, increased 27.9% to $15,823 in the third quarter of fiscal 1999 from $12,376 in the third quarter of fiscal 1998. This increase was primarily attributable to the addition of 26 Saab 340 and 10 RJ85 aircraft to the fleet. The additional maintenance costs for the Saab 340 and RJ85 aircraft were partially offset by lower maintenance costs related to the phase-out of the Dash 8 fleet resulting from the return of 17 aircraft to lessors. Unit cost for direct maintenance decreased 3.3% to 2.9 cents from 3.0 cents. Aircraft rents increased 17.6% to $18,734 in the third quarter of fiscal 1999 from $15,932 in the third quarter of fiscal 1998. This increase is primarily attributable to the addition of 26 Saab 340 and 10 RJ85 aircraft offset by returning 17 Dash 8 aircraft to lessors and not incurring any wet lease expenses during the third quarter. Mesaba has taken delivery of eight Saab 340 and one RJ85 aircraft during the third quarter. Unit cost for aircraft rents decreased 12.8% to 3.4 cents from 3.9 cents. Total landing fees increased 13.1% to $1,771 in the third quarter of fiscal 1999 compared to $1,566 for the third quarter of fiscal 1998. The increase is attributable to a 6.5% increase in turbo-prop departures and an increase in the overall effective landing fee rate. Unit cost for landing fees decreased 25.0% to 0.3 cents from 0.4 cents. Provisions of the Jet Agreement provide that Mesaba is not required to pay for landing fees for the jet operation. Insurance and taxes increased 29.0% to $2,313 in the third quarter of fiscal 1999 compared to $1,793 for the third quarter of fiscal 1998. This is due primarily to an increase in passenger liability insurance associated with increased passenger volume and increased hull values associated with the increase in the number of aircraft in the fleet. This was offset by a reduction in passenger liability insurance rates and reduced amounts paid for hull insurance caused by the normal decline in fleet values. Due to the additional capacity generated by the jet and turboprop equipment, unit cost for insurance and taxes decreased 20.0% to 0.4 cents from 0.5 cents. Depreciation and amortization increased 38.0% to $2,467 in the third quarter of fiscal 1999 compared to $1,788 in the third quarter of fiscal 1998. The higher level of depreciation and amortization resulted from the acquisition of spare parts to support the Saab 340 and RJ fleet. The Company paid contract rights fees in the form of stock purchase warrants issued to Northwest in connection with amendments to the Jet Agreement, which increased the number of aircraft to be flown by Mesaba from 12 to 36. These fees are being amortized on a straight-line basis over the remaining term of the Jet Agreement. Unit cost for depreciation and amortization increased 25.0% to 0.5 cents from 0.4 cents. Administrative and other costs increased 17.5% to $11,274 in the third quarter of fiscal 1999 compared to $9,593 in the third quarter of fiscal 1998. This increase is primarily attributable to higher pilot training and crew-related expenses, excluding wages and benefits, associated with increased flying. Unit cost for administrative and other costs decreased 12.5% to 2.1 cents from 2.4 cents. Mesaba is generally not required to provide airport and passenger related expenses for the jet operation. OPERATING INCOME. Operating income totaled $10,242 in the third quarter period, an increase of 23.0% from $8,327 a year ago. Mesaba's operating margin increased to 11.4% from 11.0% in the prior year's third quarter. NONOPERATING INCOME. Nonoperating income increased to $790 in the third quarter from $463 in the prior year's third quarter as a result of higher levels of interest income. PROVISION FOR INCOME TAXES The Company's effective tax rate was 39.0% in the third quarter of fiscal 1999 and 39.8% in the comparable quarter in fiscal 1998. The lower effective tax rate is due to lower levels of nondeductible expenses in the third quarter. Results of Operations for the Nine Months Ended December 31, 1998 and 1997 - - -------------------------------------------------------------------------- (As used herein, "unit cost" means operating cost per available seat mile. Dollars and shares outstanding are expressed in thousands) EARNINGS SUMMARY The Company reported net income of $14,843 or $0.69 per diluted share for the nine months ended December 31, 1998, compared to $15,013 or $0.73 per share in the same period of fiscal 1998. Weighted average shares outstanding increased to 21,541 from 20,618. On August 29, 1998 the Company temporarily suspended operations as a result of the pilot strike at Northwest Airlines. The Company resumed service on September 16, 1998. The suspension of operations had a material adverse affect on the results of operations for the current fiscal year. OPERATING REVENUES Total operating revenues increased 19.8% in the first nine months of fiscal 1999 to $241,799 from $201,809 in the year earlier period, and revenue passenger miles increased 42.5% to 819,130 from 574,922. Passenger revenue per available seat mile ("RASM") as anticipated, decreased to $0.165 from $0.193 in the year earlier period. Mesaba's average load factor was 56.5% in the current nine-month period compared to 55.6% during the same period a year ago. The improvement in traffic is attributable to the introduction of 10 RJ85 aircraft as well as overall increases in passenger travel within the industry offset by the 18-day suspension of service as a result of the pilot strike at Northwest Airlines. Operating Costs Per Nine months ended December 31, Available Seat Mile (Unit Cost) 1998 1997 - - ------------------------------------------------------------------------- Wages and benefits 4.0 CENTS 4.7 CENTS Aircraft fuel costs 1.3 1.7 Aircraft maintenance costs 2.8 2.9 Aircraft rents 3.5 4.1 Landing fees 0.4 0.4 Insurance and taxes 0.4 0.5 Depreciation and amortization 0.5 0.4 Administrative and other costs 2.2 2.5 ------------- ----------- Total 15.1 CENTS 17.2 CENTS Nine months ended December 31, Operating statistics 1998 1997 - - ------------------------------------------------------------------------- Revenue passengers carried 3,214,900 2,421,800 Revenue passenger miles (000) 819,130 574,922 Available seat miles (000) 1,449,567 1,033,592 Passenger load factor 56.5% 55.6% Passenger revenue per available seat $0.165 $0.193 Departures 174,555 147,146 Aircraft in service 96 74 OPERATING EXPENSE Total operating expenses increased 23.1% to $219,287 from $178,118 in the prior year's first nine months. Mesaba's unit cost decreased 12.2% to $0.151 from $0.172 as a result of a 40.2% increase in available seat miles to 1,449,567 in the first nine months of fiscal 1999 from 1,033,592 in the year earlier period. The increase in ASMs was primarily accomplished by the acquisition of 10 RJ85 and 26 Saab 340 aircraft offset by the retirement of 17 Dash 8 aircraft when compared to one year ago. Wages and benefits increased 21.3% to $58,331 in the first nine months of fiscal 1999 from $48,092 in the first nine months of fiscal 1998. The majority of the increase is a result of higher cost of flight crews due to a 20.2% increase in block hours and the addition of flight crews to support the introduction of the RJ85 as well as the continuing Saab fleet transition program. Mesaba also experienced an increase in wage and benefit costs paid to support personnel due to an 8.0% increase in scheduled turbo-prop operations. The increased capacity generated by the additional jet and turboprop equipment has caused these costs to be reduced on a unit cost basis 14.9% to 4.0 cents from 4.7 cents. Fuel costs increased 5.8% to $19,128 in this year's first nine months compared to $18,081 in last year's first nine months. The increase is primarily attributable to an increased consumption due to a 13.8% additional block hours flown offset by higher utilization of the more fuel-efficient Saab 340 aircraft. Provisions of the Airlink Agreement with Northwest protect Mesaba from fluctuations in fuel prices. The actual cost of fuel, including taxes and pumping fees, was 83.5 cents per gallon both in the current nine-month period and a year ago. Unit cost for fuel decreased 23.5% to 1.3 cents from 1.7 cents. Mesaba is not required to provide fuel for the jet operation. Direct maintenance expense, excluding wages and benefits, increased 36.6% to $40,781 in the first nine months of fiscal 1999 from $29,865 in the first nine months of fiscal 1998. This increase was primarily attributable to the addition of 26 Saab 340 and 10 RJ85 aircraft to the fleet. The additional maintenance costs for the Saab 340 and RJ85 aircraft were partially offset by lower maintenance costs resulting from the return of 17 Dash 8 aircraft to lessors. Unit costs for direct maintenance decreased 3.4% to 2.8 cents from 2.9 cents. Aircraft rents increased 20.0% to $51,297 in the first nine months of fiscal 1999 from $42,761 in the first nine months of fiscal 1998. This increase is primarily attributable to the addition of 26 Saab 340 and 10 RJ85 aircraft while returning 17 Dash 8 aircraft to lessors and not incurring any wet lease expense during the current fiscal year. Mesaba has taken delivery of 24 Saab 340 and eight RJ85 aircraft during the current nine-month period. Unit cost for aircraft rents decreased 14.6% to 3.5 cents from 4.1 cents. Total landing fees increased 10.5% to $5,026 in the first nine months of fiscal 1999 compared to $4,548 for the first nine months of fiscal 1998. The increase is attributable to a 13.2% increase in the total gross landed weight due to increased turbo-prop activity offset by a 2.6% decrease in the overall effective landing fee rate. Unit cost for landing fees remained unchanged at 0.4 cents. Provisions of the Jet Agreement with Northwest provide that Mesaba is not required to pay landing fees for the jet operation. Insurance and taxes increased 32.3% to $6,433 in the first nine months of fiscal 1999 compared to $4,863 for the first nine months of fiscal 1998. This is due primarily to an increase in passenger liability insurance associated with increased passenger volume and increased hull values associated with the Saab 340 and RJ85 aircraft offset by a reduction in passenger liability insurance rates and reduced amounts paid for hull insurance caused by the normal decline in fleet values. Due to the additional capacity generated by the larger jet and turboprop equipment, unit cost for insurance and taxes decreased 20.0 % to 0.4 cents from 0.5 cents. Depreciation and amortization increased 49.0% to $6,799 in the first nine months of fiscal 1999 compared to $4,562 in the first nine-month of fiscal 1998. The higher level of depreciation and amortization resulted from increased expenditures associated with ground support equipment to support the additional cities served as a part of the expanded flights out of the Minneapolis/St. Paul hub and the acquisition of spare parts to support the Saab fleet. Due to the lost capacity caused by the Northwest strike, unit cost for depreciation and amortization increased 25.0% to 0.5 cents from 0.4 cents. Administrative and other costs increased 24.2% to $31,492 in the first nine months of fiscal 1999 compared to $25,346 in the first nine months of fiscal 1998. This increase is primarily attributable to higher pilot training and crew related expenses, excluding wages and benefits, associated with increased flying. Due to the additional capacity generated by the larger jet and turboprop equipment, unit cost for administrative and other costs decreased 12.0% to 2.2 cents from 2.5 cents. OPERATING INCOME Operating income totaled $22,512 in the current nine-moonth period, a decrease of 5.0% from $23,691 a year ago. Mesaba's operating margin decreased to 9.3% from 11.7% in the prior year's first nine months. NONOPERATING INCOME Nonoperating income increased to $3,132 in the current nine-month period from $1,259 in the prior year's first nine months as a result of higher levels of interest income and the one-time gain on the sale of surplus aircraft parts. PROVISION FOR INCOME TAXES The Company's effective tax rate was 39.0% in the first nine months of fiscal 1999 and 39.8% in fiscal 1998. The lower effective tax rate is due to lower levels of nondeductible expenses in the current nine-month period. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital increased to $63,622 with a current ratio of 2.3 at December 31, 1998 compared to $51,692 and 2.2 at March 31, 1998. Cash and cash equivalents increased by $12,001 to $78,555 at December 31, 1998. Net cash flows provided by operating activities totaled $26,407 in the first nine months of 1999 compared to $20,062 in the first nine months of fiscal 1998. Net cash flows used for investing activities amounted to $16,521 during the nine months ended December 31, 1998 compared to $11,192 in the same period last year. Net cash flows provided by financing activities through December 31, 1998 totaled $2,115 compared to $181 in the same period last year. Long-term obligations, net of current maturities, totaled $4,460 at December 31, 1998 compared to $4,751 at March 31, 1998. The ratio of long-term debt to stockholders' equity decreased to .04 at December 31, 1998 from .06 at March 31, 1998. As of January, 1999, Mesaba's fleet consisted of 93 aircraft covered under operating leases with remaining terms of two months to 17.5 years and an aggregate monthly lease payments of approximately $6.4 million. Operating leases have been Mesaba's primary method of acquiring aircraft, and management expects to continue relying on this method to meet most of its future aircraft needs. Mesaba leases all of its Saab 340 aircraft, either directly from aircraft leasing companies or through subleases with Northwest under operating leases with terms up to 17.5 years. Mesaba leases its RJ85 aircraft from Northwest under operating leases with terms of up to 10 years. Northwest has agreed to lease a total of 36 RJ85 aircraft to Mesaba under similar terms. The Company has historically relied upon cash reserves, internally generated funds and borrowings to support its working capital requirements. The Company has an unsecured agreement with a bank that provides for borrowings of up to $15,000 under a revolving line of credit. No amounts were outstanding under the credit agreement. Management believes that funds from operations and existing credit lines will provide adequate resources for meeting non-aircraft capital needs in fiscal 1999. YEAR 2000 COMPLIANCE The Company has implemented a Year 2000 compliance program designed to ensure that the Company's internal information technology will function properly beyond 1999. This includes software applications, hardware and infrastructure which are essential for flight scheduling; aircraft maintenance; finance systems; internal communication and facilities management. The Company estimates that the overall cost of the Year 2000 compliance program will not exceed $500,000 and expects its Year 2000 date conversion program to be completed on a timely basis. Any expenditure will be funded through operating cash flows while any costs for new software will be capitalized and amortized over the software's useful life. The Company is working cooperatively with third parties having systems upon which the Company must rely. The Company can not give any assurance that the systems of other parties will be year 2000 compliant on a timely basis or the Company's or third parties contingency plans will mitigate the effects of noncompliance. Third parties with computer systems which the Company relies upon include: Federal Aviation Administration Air Traffic Control, Saab Aircraft, British Aerospace and Northwest Airlines. The Company's business, financial condition and/or results of operations could be materially affected by the failure of its systems or those operated by others (which the Company believes is the most reasonable worst case scenario) could result in the reduction or suspension of the Company's operation. The Company is reviewing and revising our business interruption contingency plans to address internal and external issues to the extent practicable. The review, together with any necessary revisions, will be completed by September 1999. The review of these plans will include how to maintain safety, carrying additional essential components, changing suppliers, performing certain functions and processes manually and reducing or suspending operations. Due to the uncertainty, related to year 2000 issues, the Company's contingency plan will be ongoing in nature and may require further modifications to existing systems as new information is made available and the Company further assesses the readiness of third parties upon which the Company relies. Part II. Item 5. Other Information Mesaba is in contract negotiations with the Aircraft Mechanics Fraternal Association ("AMFA"), its mechanics union. If contract talks are unsuccessful the National Mediation Board may declare an impasse in contract negotiations and may set a mandatory 30-day cooling off period. At the expiration of the 30-day cooling off period, the union would be allowed to implement "self-help" measures up to and including a work stoppage against the carrier. The Company would also be allowed to implement "0self-help" measures, which might include outsourcing maintenance activities currently handled by the carrier and by imposing the terms of the final contract offer. The Company expects that a curtailment of operations by Mesaba as the result of any strike could have a material adverse effect on the Company's business. Northwest Airlines is also in contract negotiations with certain of its labor groups. If contract talks are unsuccessful, a strike against Northwest could occur if the National Mediation Board declares an impasse in contract negotiations and a mandatory 30-day cooling off period expires. The Company expects that a curtailment or suspension of operations by Northwest Airlines would have a material adverse effect on the Company's business. Most of Mesaba's passengers are booked on connecting flights with Northwest Airlines. Northwest also provides Mesaba with computerized reservation services and with ticketing, check-in, baggage and freight handling services at certain airports. In the event of a strike by Northwest's labor, Northwest is not required to perform under the Airlink or Jet agreements. Mesaba believes that it would not receive payments or services from Northwest for the duration of a strike. Mesaba is likely to experience substantially reduced revenues during any period in which Northwest Airlines does not conduct normal flight operations. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MESABA HOLDINGS, INC. Date: February 12, 1999 BY: /s/ Robert H. Cooper --------------------------- Robert H. Cooper Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Jon R. Meyer --------------------------- Jon R. Meyer Director of Accounting/Controller (Principal Accounting Officer) EX-27 2
5 9-MOS MAR-31-1999 DEC-31-1998 78,555 0 15,621 0 10,825 114,530 65,813 21,933 172,707 50,908 0 0 0 198 101,250 172,707 241,799 241,799 219,287 219,287 0 0 337 25,644 10,001 15,643 0 0 800 14,843 0.75 0.69
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