-----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, Kv0cln+FJKUp3oAE8PaGPHw7U3RDLo/HCa47YOGzVUgpaBWnFMAIo0yBmtlVNxlK fCPAABSbTzQWEdn3EvGCpw== 0000950153-96-001095.txt : 19961227 0000950153-96-001095.hdr.sgml : 19961227 ACCESSION NUMBER: 0000950153-96-001095 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961226 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MESA AIR GROUP INC CENTRAL INDEX KEY: 0000810332 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 850302351 STATE OF INCORPORATION: NM FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15495 FILM NUMBER: 96686167 BUSINESS ADDRESS: STREET 1: 2325 E 30TH ST CITY: FARMINGTON STATE: NM ZIP: 87401 BUSINESS PHONE: 5053270271 MAIL ADDRESS: STREET 1: 2325 EAST 30TH STREET CITY: FARMINGTON STATE: NM ZIP: 87401 FORMER COMPANY: FORMER CONFORMED NAME: MESA AIRLINES INC DATE OF NAME CHANGE: 19950426 10-K 1 FORM 10-K ANNUAL REPORT FOR MESA AIR GROUP, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1996 Commission File Number 0-15495 MESA AIR GROUP, INC. (Exact name of registrant as specified in its charter) Nevada 85-0302351 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3753 Howard Hughes Parkway, Suite 200, Las Vegas 89109 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (702) 892-3733 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value (Title of class) Indicate by check mark 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of December 6, 1996: Common Stock, no par value: $268,378,620 On December 6, 1996, the Registrant had outstanding 28,250,381 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Documents Form 10-K Reference Proxy Statement for Annual Meeting of Shareholders scheduled in March 1997 Part III, Items 11, 12 -1- 2 PART I This Form 10-K includes certain forward-looking statements and information that are based on management's beliefs as well as on assumptions made by and information currently available to management. When used in this Form 10-K, the words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," and similar expressions are intended to identify such forward-looking statements. However, this Form 10-K also contains other forward-looking statements. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which could cause the Company's future results to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. Many of such factors are beyond the Company's ability to control or predict. Readers are cautioned not to put undue reliance on forward-looking statements. The Company disclaims any intent or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. See "FORWARD-LOOKING STATEMENTS." Item 1. Business GENERAL Mesa Air Group, Inc. (collectively referred to herein as "Mesa") is the largest independently owned regional airline in the world (based upon passenger enplanements), serving 164 cities in 30 states and the District of Columbia. Mesa has a fleet of 175 aircraft with approximately 1,900 daily departures. Mesa operates a regional airline utilizing a low-cost hub-and-spoke system under code-sharing agreements with America West Airlines, Inc. ("America West"), United Airlines ("United") and USAir, Inc. ("USAir"). Mesa's business strategy is to achieve sustained, profitable growth by utilizing its low cost structure and focused operating strategies to service routes not generally served by major air carriers. Mesa implements its strategy by carefully evaluating market demand on the routes it serves and utilizes its fleet of aircraft to meet that demand. In addition, Mesa is able to expand the markets it serves under existing code-sharing agreements with certain of the major air carriers to benefit from the name recognition, reservation systems and marketing and promotional efforts of these carriers. Mesa also controls operating expenses by utilizing a fleet of new and efficient aircraft and by performing most maintenance and overhaul work at its own facilities. By managing its fares and flight schedules to increase yields and by developing new markets, Mesa seeks to maximize gross revenues. CORPORATE REORGANIZATION In September 1996, Mesa redomesticated the Company in Nevada. After the redomestication and corporate restructuring, Mesa Air Group, Inc. now owns Mesa Airlines, Inc. ("MAI"), a Nevada corporation and certificated air carrier formed to hold all airline operations; WestAir Holding, Inc., a California corporation and owner of certificated air carrier WestAir Commuter Airlines, Inc.; Air Midwest, Inc., a Kansas corporation and certificated air carrier; and various non-airline operations. The Company is in the process of revising the management structure to centralize flight and maintenance controls and management in one location and will switch from the "division" management system to one focusing on its hubs. San Juan Pilot Training, Inc. dba Mesa Pilot Development, the Company's pilot training program, was reincorporated as MPD, Inc., a Nevada corporation. Four Corners Aviation, Inc. a fixed-base operation at Farmington, New Mexico, has been reincorporated in Nevada as FCA, Inc. -2- 3 The Company created two new corporations as part of the reorganization. Mesa Leasing, Inc. ("Mesa Leasing") and MAGI Insurance, Ltd. ("MAGI"). Mesa Leasing is a Nevada corporation established to assist the Company in the acquisition and leasing of aircraft. MAGI is a Barbados, West Indies- based insurance company established for the purpose of allowing the Company to attain favorable insurance rates. It is anticipated that MAGI will be relocated within the United States during the 1997 fiscal year. OPERATIONS Mesa operates as America West Express, Mesa Airlines, United Express and USAir Express as of December 6, 1996, organized throughout the United States by code-share and region as follows: AMERICA WEST EXPRESS Southwest: 18 destinations out of its Phoenix hub Mesa has 167 weekday departures out of Phoenix utilizing 15 aircraft: 11 Beechcraft 1900D Airliners ("Beech 1900Ds" or "1900Ds") which carry 19 passengers, two Embraer Brasilia EMB-120 aircraft ("EMB-120s" or "Brasilias") which carry 30 passengers, and two Fokkers 70s which carry 78 passengers. The Company plans to replace the two Fokker 70 aircraft with three 50-seat Canadair Regional Jet 200 aircraft ("CRJs") in 1997. An additional three CRJs are scheduled to be added in early 1998. MESA AIRLINES Southwest: 10 destinations out of its Albuquerque hub Flying under its own colors as Mesa Airlines, Mesa has 85 weekday departures out of Albuquerque utilizing six Beech 1900Ds. South: Proposed jet service from Fort Worth In May 1997, Mesa plans to begin service utilizing CRJs from Meacham International Airport ("Meacham") in Fort Worth, Texas to destinations throughout Texas and the Southwest. Initially, Mesa Airlines intends to offer 11 daily departures with an additional 50 departures projected within a year. Mesa plans to deploy the first four CRJ aircraft delivered at Meacham. An additional six aircraft may be added at a later date. UNITED EXPRESS Rocky Mountains: 34 destinations out of its Denver hub Mesa serves the Southwest and Rocky Mountain regions with 204 weekday departures, utilizing 26 aircraft: 14 Beech 1900Ds, eight Dash 8-200s (plus one 50-seat Dash 8-300 as a spare), and four Brasilias. In 1997, the Company plans to replace the four Brasilias with new Dash 8-200s. California: 17 destinations out of its Los Angeles hub and 16 destinations out of its San Francisco hub Mesa flies 212 weekday departures out of Los Angeles and 195 weekday departures from San Francisco, utilizing a total of 37 aircraft: 21 British Aerospace Jetstream 31 aircraft ("BAe Jetstream 31s" or "J31s") which carry 19 passengers, and 16 Brasilias. -3- 4 Pacific Northwest: 11 destinations out of its Portland and Seattle hubs Mesa has 194 weekday departures in the Northwest, utilizing 14 Beech 1900Ds. USAIR EXPRESS Northeast: 11 destinations out of its Boston hub Mesa operates 70 weekday departures out of Boston to cities in Massachusetts, Maine, New Hampshire, Connecticut and Pennsylvania, utilizing 11 Beech 1900Ds. Mid-Atlantic: 18 destinations out of its Philadelphia hub and 17 out of its Pittsburgh hub The Company serves the Mid-Atlantic states with 258 weekday departures, utilizing 26 Beech 1900Ds. Southeast: Nine destinations out of its Tampa hub, nine destinations out of its Orlando hub and eight destinations out of its New Orleans hub Mesa has 249 weekday departures in the states of Florida, Alabama and North Carolina and 54 weekday departures out of New Orleans, utilizing a total of 29 aircraft: 19 Beech 1900Ds and 10 Brasilias. Central: 16 destinations out of its Kansas City hub In the Central states Mesa has 158 weekday departures out of Kansas City, utilizing 13 Beech 1900Ds. -4- 5 MESA AIRCRAFT BY HUB AS OF SEPTEMBER 30, 1996
BEECH EMB- Fokker 1900 120 DASH 8 J31 70 ------------- ------------- -------------- ------------ ------------- Denver 14 4 6 Los Angeles 5 13 San Francisco 11 8 Portland/Seattle 14 Boston 12 Philadelphia 11 Pittsburgh 14 Tampa/Orlando/New Orleans 19 10 Kansas City 13 Phoenix 11 2 2 Albuquerque 6 ------------- ------------- -------------- ------------ ------------- TOTAL: 114 32 6 21 2 ------------- ------------- -------------- ------------ -------------
In addition to carrying passengers, Mesa carries freight and express packages on its passenger flights and has interline small cargo freight agreements with virtually all other carriers. Mesa has contracts with the U.S. Postal Service for hauling mail by air to the cities it serves and occasionally operates charter flights when aircraft are not otherwise utilized for scheduled service. Mesa also owns and operates MPD, Inc., providing flight training as "Mesa Pilot Development" in coordination with San Juan College in Farmington, New Mexico. In April 1992, Mesa acquired FCA, Inc., a fixed based operator located in Farmington, New Mexico which operates as Four Corners Aviation. Another subsidiary, Regional Aircraft Services, Inc., performs component overhaul and repairs at a facility in Reading, Pennsylvania. Desert Turbine Services, based in Farmington, New Mexico, provides power plant and component repair, maintenance and overhaul services for Mesa's airline divisions and subsidiaries. CODE-SHARING Approximately 95 percent of Mesa's consolidated revenues are derived from operations associated with codesharing agreements with America West, United and USAir. These code-sharing agreements allow use of the code-sharing partner's reservation system and flight designator code to identify flights and fares in the computer reservation system, permit use of the logo, service marks, exterior aircraft paint schemes, and uniforms similar to the code-sharing partners and to provide coordinated schedules, joint advertising and through fares. In addition, Mesa participates in the respective partners' frequent flyer programs. Mesa's passengers receive mileage credits in the respective frequent flyer programs, and credits in those programs can be used on Mesa's flights. Mesa has two separate code-sharing agreements with United and three separate code-sharing agreements with USAir. Although the terms of each of the code-sharing agreements with a particular code-sharing partner are quite similar, each agreement relates to a separate division and has a different expiration date. Renewal of one code-sharing agreement with a code-sharing partner does not guarantee the renewal of any other codesharing agreement with the same code-sharing partner. The code-sharing agreements provide for terms of nine to 10 years with respect to America West (expires in 2004), five to 10 years with respect to United (expire in 1998 in the Los Angeles and San Francisco hubs and in 2005 in the Denver, Portland and Seattle hubs) and nine to 10 years with respect to USAir (expire in 2000 in Kansas City hub, 2003 in Pittsburgh hub and 2004 in New Orleans, Boston, -5- 6 Philadelphia, Tampa and Orlando hubs). Although the provisions of the agreements vary, generally they are subject to cancellation should Mesa fail to meet certain operating and performance standards, the breach of other contractual terms and conditions, and, in the case of the USAir code-sharing agreements, upon six months' notice by either party. In connection with the extension of its code-sharing agreement with United until 2005, Mesa agreed not to enter into any new code-sharing agreement relating to services to and from Denver, Chicago, Washington, D.C., Los Angeles, Portland, San Francisco or Seattle. Other than the code-sharing agreement with United, which restricts United from competing with Mesa in certain markets by aircraft with less than 101 seats of capacity, the code-sharing agreements do not prohibit the major carrier from serving routes served by Mesa. A termination of any of Mesa's code-sharing agreements with America West, United or USAir would have a material adverse effect on Mesa's business. THE REGIONAL AIRLINE MARKET The regional airline industry has grown rapidly since airline deregulation in 1978 and airline enplanements have increased fivefold to 57.2 million passengers. This growth has included considerable consolidation and expanded relationships between the major and regional airlines. The airline industry is now divided into three primary groups: the major airlines (88 percent of industry revenues), the regional airlines (seven percent) and the low-fare airlines (five percent). Each airline group maintains a distinct niche in the industry. The major airlines carry connecting and longer-distance passengers, catering to more service- and convenience-oriented business travelers. The regional airlines operate primarily in low-density markets and feed business and leisure travelers to the hubs of their codesharing partners. The regional segment is defined by markets with low traffic density and the use of turboprop and regional jet aircraft. Competition from the majors and low-fare carriers in the regional market is limited because traffic density is generally insufficient for profitable operation of traditional narrow-body jet aircraft. Low-fare airlines such as Southwest Airlines and Carnival focus on leisure and price-sensitive business travelers, providing point-to-point service in medium- to high-density markets. The low-fare airlines utilize traditional narrow-body jet aircraft with 113 to 164 seats and tend to operate only in markets where higher traffic volumes allow their low fares. The regional airline market has undergone substantial consolidation, from 250 operators in 1981 to 124 in 1995. The remaining air carriers are generally stronger and more sophisticated. The large regionals all maintain code-sharing relationships with at least one major airline. Under these arrangements, the regional carriers' flights appear under the name of the major airline. This provides a substantial marketing advantage and allows the regional carrier to offer special fares and receive priority computer reservation system displays. Totally independent regional carriers account for only a marginal amount of regional passenger traffic in the United States. In the absence of marketing relationships with major airlines, these operators limit themselves to small niche areas. INDUSTRY GROWTH Since 1984, passenger enplanements for regional air carriers have grown from 26.1 million to 57.2 million in 1995. Revenue passenger miles have increased similarly from 4.17 billion to 12.8 billion over the same period. The number of aircraft operated by regionals in 1984 was 1,747 compared to 2,138 in 1995. This growth is expected to continue with the RAA forecasting for 2,700 regional aircraft by 2005 with most of the growth originating in the 30- to 50-seat segment. As major airlines continue to eliminate routes which are unprofitable under their cost structures, regional airlines will expand their operations. Lacking the higher labor costs and large corporate cultures of the majors, regional airlines operate very efficient systems which can respond swiftly to changing markets. MARKET FACTORS The key factors supporting the regional airline market are: -6- 7 - Service in low-density markets which remain unattractive to major airlines and low-fare carriers; - Relationships with the major airlines, operating feeder service to hubs for connecting passengers under code-sharing arrangements; - Allocation of new-generation, lower-cost turboprop aircraft to routes that were traditionally jet routes; - Ability to provide complementary service in existing major airline markets by operating flights in scheduling gaps between those of the major air carrier; and - Lower costs than a major airline operating a similar route due to lower wages, more flexible work rules and more suitable aircraft for that particular route. CORPORATE STRATEGY Mesa's business strategy is to operate a competitive and profitable, low-cost, high-frequency, quality-service airline, primarily with a hub-and-spoke route system. The strategy is implemented through a disciplined approach to the regional airline business which incorporates (i) the previously discussed regional diversification, (ii) a focus on profitable markets, (iii) consolidated operations, and (iv) a modern, efficient aircraft fleet that positions the airline to be able to capitalize on future growth opportunities. Mesa's market selection process is completed through an in-depth analysis on a route-by-route basis. Agreement is then reached where appropriate with Mesa's code-share partners regarding the level of service and fares. This selection process enhances the likelihood of profits in a given market. In the event expectations are not met in a particular region, Mesa can usually relocate aircraft and personnel to another region. For example, in early November 1996, eight 1900Ds were transferred from Los Angeles to serve routes in the Pacific Northwest, and eight J31s were transferred from routes in the Pacific Northwest to the Los Angeles hub. Also, five Brasilias were added to service routes out of Los Angeles. Mesa demonstrated its focus on profitability by its response to difficulties at its subsidiary WestAir Holding, Inc. ("WestAir"). Competition on the West Coast and high labor costs had contributed to lower earnings at WestAir in fiscal 1995. By (i) reducing capacity approximately 20%, (ii) negotiating reduced cost of operating leases on 21 J31 aircraft leased from the manufacturer and (iii) negotiating a higher fee per departure with its code-sharing partner in Los Angeles, the Company increased its earnings in fiscal 1996 from that realized in fiscal 1995. AIRLINE OPERATIONS Mesa recently announced a consolidation and centralization plan for its dispatch, flight operations and maintenance programs, bringing regional operations into its headquarters. The consolidation plan was prompted by an agreement with the FAA and in anticipation of future Company expansion and conversion from an FAR Part 135 to an FAR Part 121 air carrier. The centralization and growth of Mesa will require an expansion of MAI's corporate headquarters facility. The Company has reviewed alternatives to determine the best location for its headquarters and a consolidated training facility to accommodate MAI's size, its new jet operations and its geographic diversity. Following the review, the Company has decided to keep MAI's headquarters in Farmington, New Mexico while locating its primary training academy in the Dallas/Fort Worth metroplex. A specific location for the training academy has not yet been finalized. -7- 8 This action will serve to consolidate the Company's training in one central location instead of having several locations throughout the United States. The Company believes that this action will result in greater consistency and quality of training of its flight crewmembers and ground personnel. Mesa is gradually consolidating its fleet by aircraft type. The Company plans to eventually replace all J31s and EMB-120s, reducing the type of aircraft operated to three: 1900Ds, Dash 8-200s and CRJs. Mesa intends to phase out the J31s as they come off lease between 1998 and 2004, leaving the Beech 1900Ds as the 19-seat aircraft fleet type. EMB-120s will be replaced by Dash 8s and the CRJs, and all remaining EMB-120s will be redeployed to the Los Angeles and San Francisco hubs. The Fokker 70s will also be replaced by the new CRJs. Mesa has also been consolidating aircraft bases and certain maintenance facilities. The Company previously operated a combination of J31s and 1900Ds that required multiple maintenance bases in both the Northwest and in California. In early November 1996, the Company transferred aircraft creating a uniform 1900D fleet in the Northwest and a uniform J31 fleet in California. This allowed the closing of two maintenance facilities, the J31 maintenance base in Eugene, Oregon and the 1900D maintenance base in Bullhead City, Arizona. MESA'S JET SERVICE Mesa recently announced an order for 16 CRJs with 50 passenger seats as well as options for up to an additional 32 aircraft. Deliveries of the CRJs will begin in early 1997. In conjunction with the CRJ commitment, Mesa will trade in 12 Embraer Brasilias. The Company has been successful in utilizing jet aircraft on selected routes during the last 18 months. Mesa has selected the CRJ to meet the requirements of a market niche in Fort Worth currently not served and to expand jet service for its America West Express service out of Phoenix, Arizona. The Company plans to use the first four aircraft delivered to initiate service at Fort Worth's Meacham International Airport ("Meacham") beginning in May 1997. Mesa believes that Meacham, which is not currently utilized by scheduled air carriers, offers a unique market niche necessary to operate a successful, stand-alone airline operation. Fort Worth has a population of approximately 1.1 million people with about 70 percent of them living significantly closer to Meacham than Dallas/Fort Worth International Airport or Love Field. The CRJ can efficiently and comfortably serve both short and long routes from Fort Worth and will attract customers who demand jet service. Although customers will have to alter current travel habits, the proximity and convenience of Meacham should foster the change. By 1998, the Company plans to provide service out of Meacham with 10 of its 16 CRJ aircraft. As of December 7, 1996, Mesa and the City of Fort Worth had not reached a final agreement for the lease of terminal facilities. While the Company believes the remaining issues will be favorably resolved with the City of Fort Worth, there can be no assurance an agreement will be reached. If an agreement is not reached, the Company intends to establish an independent operation based at other locations it has considered and deploy jets in its America West Express or other code-share operations. After initiating service at Meacham or at another location with the first four CRJs delivered to Mesa, Mesa plans to use the next three jets delivered in the America West Express operation in Phoenix, replacing two Fokker 70 aircraft which are currently used on successful routes. The Company expects to add three additional CRJ aircraft to the America West Express operation by 1998, which will further expand jet capacity in a growing market. Mesa is also optimistic that future opportunities exist for other code-share partners to benefit from the jet service strategy. MARKETING -8- 9 Under Mesa's code-sharing agreements, America West, United, and USAir (the major partners) coordinate advertising and public relations within their respective regions. In addition, Mesa benefits from the major partners' advertising programs in regions outside those served by Mesa, with the major partners' customers becoming customers of Mesa as a result of through fares. Under these code-sharing arrangements, Mesa's passengers also benefit from through-fare ticketing with the major partners and greater accessibility to Mesa's flights on computer reservation systems and in the Official Airline Guide. Mesa's services are promoted through listings in computer reservation systems and the Official Airline Guide and through direct contact with travel agencies and corporate travel departments. Mesa participates in shared advertising with resort and rental property operators and ski areas in leisure markets in which it operates. Mesa's non-code-share operation, Mesa Airlines, utilizes SABRE, a computerized reservation system widely used by travel agents, corporate travel offices and other airlines. The reservation systems of Mesa's codesharing partners are also utilized in each of Mesa's other operations through their respective code-sharing agreements. Mesa also pays booking fees to owners of other computerized reservation systems based on the number of passengers booked by travel agents using such systems. Mesa believes that it has good relationships with the travel agents handling its passengers. FARES Since 1978, airlines in the United States have been free to set their own domestic fares without governmental regulation. Mesa derives its passenger revenues from a combination of local fares, through fares and joint fares. Local fares are fares for one-way and round-trip travel provided by Mesa within its route system. Local fares are also frequently used by passengers connecting with other carriers. A through fare is a fare offered to passengers by either America West, United or USAir which generally provides cost savings to the passenger who transfers to the major carrier's code-sharing partner on routes flown by the code-sharing partner. Through fares are prorated in accordance with standards specified in the various code-share agreements. Joint fares are single fares for travel combining flights with Mesa and other airlines which are not code-sharing partners with Mesa. With joint fares, the passenger generally pays a single lower fare than the sum of the local fares charged for the combined flights. Mesa has been able to negotiate joint-fare arrangements with major carriers as an additional means of deriving passengers connecting through its hub cities. COMPETITION The airline industry is highly competitive and volatile. Airlines compete in the areas of pricing, scheduling (frequency and timing of flights), on-time performance, type of equipment, cabin configuration, amenities provided to passengers, frequent flyer plans, travel agents' commissions and the automation of travel agents' reservation systems. Further, because of the Deregulation Act, airlines are currently free to set prices and establish new routes without the necessity of seeking governmental approval. At the same time, deregulation has allowed airlines to abandon unprofitable routes where the affected communities will not be left without air service. See "Essential Air Service Program" on page 11. Mesa believes that the Deregulation Act facilitated Mesa's entry into scheduled air service markets and will allow it to compete on the basis of service and fares. The Deregulation Act, however, makes possible the entry of other competitors which have substantial financial resources and experience, creating the potential for intense competition among regional air carriers in Mesa's markets. As discussed earlier, Mesa believes its code-sharing agreements provide a significant competitive advantage in hub airports where its major partner has a predominant share of the market. The ability to control connecting passenger traffic by offering a superior service makes it very difficult for other regional airlines to compete at such hubs. In addition to the enhanced competitive edge offered by the code-sharing -9- 10 agreements, Mesa competes with other airlines through offering frequent flights, flexible schedules, numerous fare levels and low aircraft operating cost. FUEL During its operating history, Mesa has experienced few problems with the availability of fuel, and it believes that it will be able to obtain fuel sufficient to meet its existing and anticipated future requirements at competitive prices. Standard industry contracts do not generally provide protection against fuel price increases, nor do they ensure availability of supply. Increased fuel costs during the Company's fiscal 1996 year have had an impact on the profitability of the airline market in general and on the Company in particular. The extent and the duration of fuel price increases are not predictable; however to the extent that fuel price increases cannot be passed on to the customer they are absorbed as an additional expense by the Company. MAINTENANCE OF AIRCRAFT AND TRAINING All mechanics and avionics specialists employed by Mesa have the appropriate training and experience and hold the required licenses issued by the FAA. Using its own personnel and facilities, Mesa maintains its aircraft on a scheduled and "as-needed" basis. Mesa emphasizes preventive maintenance and checks its aircraft engines and airframes as required. Mesa has also developed an inventory of spare parts specific to the aircraft it flies and has instituted a computerized tracking system to increase maintenance efficiency and to avoid excess inventories of spare parts. Mesa provides periodic in-house and outside training for its maintenance and flight personnel and also takes advantage of factory training programs that are offered when acquiring new aircraft. INSURANCE Mesa carries types and amounts of insurance customary in the airline industry, including coverage for public liability, passenger liability, property damage, aircraft loss or damage, baggage and cargo liability and workers' compensation. During 1996, Mesa created a captive insurance company, MAGI Insurance, Ltd., to handle baggage and freight claims in addition to a portion of Mesa's aviation insurance. EMPLOYEES Mesa currently has approximately 4,000 employees. Mesa's success is in part dependent upon its ability to continue to attract and retain qualified personnel. In the past Mesa has had no difficulty attracting qualified personnel to meet its requirements. Pilot turnover at times is a significant issue among regional carriers when major carriers are hiring experienced commercial pilots away from regional carriers. Mesa is working with its wholly owned subsidiary, MPD, Inc. dba Mesa Pilot Development, to train sufficient numbers of new pilots to maintain adequate staffing in its operations. No assurance can be given, however, that pilot turnover will not become a major problem in the future, particularly if major carriers expand. Similarly, there can be no assurance that sufficient numbers of new pilots will be available to support any future growth even if pilot turnover does not become a major problem for Mesa. During November 1996, Mesa reached a five-year agreement with the Air Line Pilots Association (ALPA) for a single pilot contract for Mesa Airlines, Inc. and Air Midwest, Inc. The contract provides for industry-average pay, economic work rules and excellent opportunities for advancement. This contract will result in -10- 11 additional annual pilot payroll expense of approximately $3.1 million. WestAir pilots are also represented by ALPA and are currently in federal mediation regarding their contract negotiations. Air Midwest mechanics are represented by the International Association of Machinists (IAM), flight attendants at WestAir and Mountain West, a division of Mesa Airlines, Inc., are represented by the Association of Flight Attendants (AFA). No other Mesa subsidiaries are parties to any other collective bargaining agreement or union contracts. ESSENTIAL AIR SERVICE PROGRAM The Deregulation Act allows airlines freedom to introduce, increase, and generally reduce or eliminate service to existing markets. Under the Essential Air Service program, which is administered by the U.S. Department of Transportation ("DOT"), certain communities that received scheduled air service prior to the passage of the Deregulation Act are guaranteed specified levels of "essential air service." The DOT may authorize federal subsidies to compensate a carrier for providing essential air service in otherwise unprofitable or minimally profitable markets. Mesa serves several subsidized Essential Air Service communities in its operations. Mesa also serves a number of unsubsidized Essential Air Service communities. The Essential Air Service subsidy orders are normally issued for a period of one or two years. Mesa received $3.5 million, $5.4 million, and $5.5 million in subsidy payments in fiscal 1996, 1995 and 1994, respectively. This represented 0.7 percent, 1.2 percent, and 1.4 percent of operating revenues in 1996, 1995 and 1994, respectively. An airline providing essential air services is required to give the DOT 90 days' advance notice before it may terminate or reduce service. The DOT may require the continuation of existing service until a replacement carrier is found, but in that event it must compensate the carrier for actual losses sustained in continuing to serve the community during this period. In November 1995, Congress reduced the federal program subsidizing service to small communities (the Essential Air Service program). The DOT unilaterally reduced funding to all Essential Air Service markets by 20 percent following the Congressional action. While the revenue from this program is less than one percent of Mesa's total revenue, Mesa believed this action by the DOT was illegal and began legal proceedings to recover its damages caused by the DOT's action. Mesa prevailed in the litigation which then allowed Mesa to leave the affected markets. Mesa is currently documenting its monetary damages for submission to the government. REGULATION As an interstate air carrier, Mesa is subject to the economic jurisdiction of and regulation by the DOT, which became responsible for most of the continuing functions of the Civil Aeronautics Board on January 1, 1985, and the FAA under the Federal Aviation Act of 1958, as amended (the "1958 Act"). Although economic regulation of the airline industry has been considerably diminished by the Deregulation Act, the DOT continues to exercise certain economic regulatory jurisdiction over airlines. In October 1990, Mesa Airlines, Inc. became a certificated air carrier under Section 401 of the 1958 Act. Previously, Mesa Airlines, Inc. operated under an exemption from the certificate requirement. The DOT is authorized to establish consumer protection regulations to prevent unfair methods of competition and deceptive practices, to prohibit certain pricing practices, to inspect a carrier's books, properties and records, and to mandate conditions of carriage. The DOT also has the power to bring proceedings for the enforcement of the air carrier economic regulations under the 1958 Act, including the assessment of civil penalties, and to seek criminal sanctions. Mesa has recently undergone a routine informal fitness review under direction of the DOT. No further actions have been taken as a result of this review. -11- 12 During September 1996, the Department of Transportation (DOT) requested supplemental information from Mesa as part of its continuing fitness review obligations. The DOT has stated the request was made because of the Company's expansion into jet service. Mesa has supplied all requested information, and it does not anticipate any action will be taken by the DOT. Mesa is subject to the jurisdiction of the FAA with respect to its aircraft maintenance and operations, including equipment, ground facilities, dispatch, communication, training, weather observation, flight personnel and other matters affecting air safety. To ensure compliance with its regulation, the FAA requires airlines to obtain an operating certificate which is subject to suspension or revocation for cause, and provides for regular inspections. During December 1995, the Federal Aviation Administration (FAA) announced rules which require commuter airlines with aircraft of 10 or more passenger seats operating under FAR Part 135 rules to begin operating those aircraft under FAR Part 121 regulations by the end of March 1997. Mesa is one of the largest regional airlines operating under FAR Part 135 regulations. In anticipation of Mesa's conversion to FAR Part 121 and to address issues raised in past inspections, the FAA began a special review of Mesa's operations in June 1996. As a result of the special review by the FAA of Mesa's operations, a consent order was signed in September 1996 assessing a compromise civil penalty of $500,000. Mesa paid $250,000 of the compromise amount, and the remaining $250,000 will be waived upon Mesa complying with provisions of the consent order. Under the consent order, Mesa has agreed to adopt operational standards that exceed the requirements of the Federal Aviation Regulations. The consent order requires that control of operational areas (maintenance, flight operations and training) be consolidated under one central management team. The Company has until March 1997 to complete the specified tasks, and as of December 6, 1996 was on or ahead of the schedule set forth in the order. Based on the required conversion to FAR Part 121 and the provisions of the FAA consent order, Mesa anticipates a one-time capital expenditure of approximately $1.0 million in fiscal 1997 to bring all aircraft currently being operated by Mesa into compliance with the enacted FAR Part 121 rules. In addition, Mesa presently anticipates ongoing operational costs in order to comply with the FAR Part 121 rules and consent order of approximately $2.5 million per year. Recent events in Mesa's Denver system have resulted in many consumer complaints regarding the quality of service in that system. A United States Senator and two Congressmen from Colorado have also complained publicly about the service in the Denver system and requested a Congressional investigation regarding the service level there. In response to these concerns, Mesa has made significant efforts to improve the Denver situation including hiring additional customer service personnel and placing spare aircraft with flight crew in Denver to assist in reducing flight cancellations. These actions have reduced the operational problems in Denver. The Company has retained the services of a public relations firm and a government affairs firm to address its relationships with local communities and government representatives. The Company has received no further indication that a Congressional investigation regarding the service level in Denver will occur. Mesa is subject to the jurisdiction of the Federal Communications Commission regarding the utilization of its radio facilities and to the jurisdiction of the United States Postal Service with respect to carriage of United States mail. Local governments in certain markets have adopted regulations governing various aspects of aircraft operations including noise abatement and curfews. Item 2. Properties -12- 13 Mesa's primary property consists of aircraft used in the operation of the business. The following table lists the aircraft operated by Mesa as of September 30, 1996:
Number of Aircraft ------------------------------------------------ Passenger Type of Aircraft Owned Leased Total Capacity - ---------------------------------------------------------------------------------------------- Beechcraft 1900 100 14 114 19 Embraer Brasilia 2 30 32 30 BAe Jetstream 31 21 21 19 Dash 8-200 5 5 37 Dash 8-300 1 1 50 Fokker 70 2 2 78 ----------------------------------------------- Total 102 73 175 -----------------------------------------------
See "Management's Discussion and Analysis - Liquidity and Capital Resources" regarding aircraft commitments. -13- 14 In addition to aircraft, Mesa has office and maintenance facilities to support its operations. The facilities are as follows:
Type Location Ownership Approximate Size ---- -------- --------- ---------------- Office Farmington, NM Owned 18,000 sq. ft. Training/Dorm Farmington, NM Owned 16,000 sq. ft. Hangar Farmington, NM Leased 30,000 sq. ft. Engine Shop Farmington, NM Leased 6,000 sq. ft. Hangar Fresno, CA Leased 50,000 sq. ft. Offices Fresno, CA Leased 20,000 sq. ft. Warehouse/Office Fresno, CA Leased 21,750 sq. ft. Hangar Eugene, OR Leased 7,200 sq. ft. Hangar/Office Wichita, KS Leased 30,000 sq. ft. Hangar/Office Jacksonville, FL Leased 30,256 sq. ft. Hangar Jamestown, NY Leased 30,000 sq. ft. Hangar/Office Dubois, PA Leased 23,000 sq. ft. Hangar Reading, PA Leased 56,250 sq. ft. Hangar/Office Grand Junction, NM Leased 32,768 sq. ft. Hangar/Office Yakima, WA Leased 14,500 sq. ft. Hangar/Office Bullhead City, AZ Leased 12,852 sq. ft. Office Phoenix, AZ Leased 3,570 sq. ft.
In addition, Mesa, as the lessee, leases space at each of the airports in which it operates to accommodate its operations. These leases are generally month-to-month or relatively short-term leases. Mesa, as the lessor, also leases commercial real estate of approximately 26,200 square feet in Farmington, New Mexico to unrelated entities. Item 3. Legal Proceedings During 1994, seven shareholder class action complaints were filed in the United States District Court for the District of New Mexico against Mesa, certain of its present and former corporate officers and directors, and certain underwriters who participated in Mesa's June 1993 public offering of common stock. During October 1995, the court granted class certification in the action. These complaints have been consolidated by court order, and, after the court granted in part a motion to dismiss in May 1996, a second amended consolidated complaint was filed alleging that during various periods the defendants caused or permitted Mesa to issue publicly misleading financial statements and other misleading statements in annual and quarterly reports to shareholders, press releases and interviews with securities analysts. The current complaint alleges that these statements misrepresented Mesa's financial performance and condition, its business, the status of its operations, its earnings, its capacity to achieve profitable growth and its future business prospects, all with the purpose and effect of artificially inflating the market price of common stock of Mesa throughout the relevant period. The complaint further alleges that certain officers and directors of the Company illegally profited from sales of Mesa common stock during these periods. The complaint seeks damages against the defendants in an amount to be determined at trial (including rescission and/or money damages as appropriate), disgorgement of all insider trading profits earned by defendants in connection with the sale of common stock of Mesa, and reasonable attorney, accountant and expert fees. Mesa has accrued approximately $5.7 million to vigorously defend the class action litigation, of which $4.1 million is included in Deferred Credits as of September 30, 1996. Mesa and the corporate officers and directors deny the allegations made against them in these lawsuits. Further, Mesa and the corporate officers and directors believe they have substantial and meritorious defenses against these allegations and intend to continue to defend their position vigorously. However, -14- 15 should an unfavorable resolution of this litigation occur, it is possible that Mesa's future results of operations or cash flows could be materially affected in a particular period. In a related case, in September 1994, a shareholder derivative suit was filed in the United States District Court for the District of New Mexico, purportedly on behalf of Mesa. The derivative lawsuit was dismissed by the Court on August 12, 1996. Mesa is also a party to legal proceedings and claims which arise during the ordinary course of business. In the belief of management, based upon information known at this time, the ultimate outcome of these proceedings and claims pending against Mesa is not expected to have a material adverse effect on Mesa's financial position. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters MARKET PRICE OF COMMON STOCK Presented below are the high and low sales prices of the Common Stock of Mesa Air Group, Inc. on the National Market System under the NASDAQ symbol MESA.
FISCAL 1996 FISCAL 1995 - -------------------------------------------------------- -------------------------------- Quarter HIGH LOW HIGH LOW - --------------------------------------- ---------------- ---------------- --------------- First $ 10.75 8.00 9.50 6.00 Second 13.25 7.75 9.50 5.75 Third 13.88 10.38 9.75 4.88 Fourth 12.13 8.44 12.00 9.00
On December 6, 1996, Mesa had 1,387 shareholders of record. Mesa has never paid cash dividends and does not intend to pay cash dividends in the future. -15- 16 Item 6. Selected Financial Data SELECTED FINANCIAL DATA AND OPERATING STATISTICS - -------------------------------------------------------------------------------- In thousands of dollars, except per share and average fare amounts and otherwise indicated
Years ended September 30 ------------------------ 1996 1995 1994 1993 1992 ----------------------------------------------------------------------------------- Operating revenues $ 500,363 $ 455,139 $ 396,134 $ 353,640 $ 316,615 Operating expenses 452,369 425,567 347,760 311,730 291,053 Operating income 47,994 29,572 48,374 41,910 25,562 Other income (expense) 14,302 (156) 3,534 3,797 1,365 Interest expense 12,777 6,395 7,916 5,366 4,472 Earnings before income taxes and extraordinary item 49,519 23,021 43,992 40,341 22,455 Earnings before extraordinary item 30,407 14,012 27,276 25,038 14,272 Net earnings 30,407 14,012 27,688 26,352 14,272 Earnings per common share before extraordinary item 1.00 0.42 0.75 0.73 0.50 Net earnings per common share 1.00 0.42 0.76 0.77 0.50 Working capital 70,860 115,378 134,186 125,706 35,754 Total assets 678,491 446,722 419,902 399,318 235,160 Long-term debt, excluding current portion 338,278 78,411 91,772 91,742 70,100 Stockholders' equity 224,666 255,883 234,316 215,394 99,116 Net book value per common share $ 7.96 $ 7.53 $ 7.16 $ 6.08 $ 3.22 - --------------------------------------------------------------------------------------------------------------------------- Passengers carried 6,463,690 6,086,782 5,170,252 4,449,492 3,801,756 Revenue passenger miles (000) 1,364,681 1,179,397 982,642 916,851 779,558 Available seat miles (000) 2,437,662 2,310,895 1,897,933 1,821,156 1,637,307 Average passenger journey 211 194 190 206 205 Average stage length 167 167 163 NA NA Load factor 56% 51% 51.8% 50.3% 47.6% Break-even passenger load factor 51.7% 49.2% 47.0% 45.8% 46.0% Revenue per available seat mile 20.5(cent) 19.7(cent) 20.9(cent) 19.4(cent) 19.3(cent) Cost per available seat mile 18.6(cent) 18.4(cent) 18.3(cent) 17.1(cent) 17.8(cent) Average yield per revenue passenger mile 35.9(cent) 37.5(cent) 38.9(cent) 37.3(cent) 38.7(cent) Average fare $ 75.72 $ 72.53 $ 74.11 $ 76.80 $ 79.31 Aircraft in service 175 177 166 146 125 Cities served 164 172 165 152 139 Number of employees 4,000 3,900 3,500 2,800 2,540 =========================================================================================================================== NA - Information not available
-16- 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS Mesa Air Group, Inc. ("Mesa") and its subsidiaries are a group of regional airlines and related companies providing service across the United States as America West Express, Mesa Airlines, United Express and USAir Express. The following tables set forth selected operating and financial data of Mesa for the years indicated below:
OPERATING DATA Years ended September 30 -------------------------------------------------------- 1996 1995 1994 -------------------------------------------------------- Passengers 6,463,690 6,086,782 5,170,252 Available seat miles (000) 2,437,662 2,310,895 1,897,933 Revenue passenger miles (000) 1,364,681 1,179,397 982,642 Load factor 56.0% 51.0% 51.8% Revenue per ASM 20.5(cent) 19.7(cent) 20.9(cent) Yield per RPM 35.9(cent) 37.5(cent) 38.9(cent) Cost per ASM 18.6(cent) 18.4(cent) 18.3(cent)
FINANCIAL DATA Years ended September 30 ------------------------------------------------------------------------------------ 1996 1995 1994 --------------------------- ---------------------------- --------------------------- Percent Cost Percent Cost Percent Cost Amount of per Amount of per Amount of per (000) Revenues ASM (000) Revenues ASM (000) Revenues ASM --------------------------- ---------------------------- --------------------------- Flight operations $166,151 33.2% 6.8(cent)$ 166,596 36.6% 7.2(cent) $126,954 32% 6.7(cent) Maintenance 81,400 16.3% 3.3(cent) 73,701 16.2% 3.2(cent) 68,908 17.4% 3.6(cent) Aircraft and traffic servicing 73,469 14.7% 3.0(cent) 64,120 14.1% 2.7(cent) 46,347 11.7% 2.4(cent) Promotion and sales 74,844 15.0% 3.1(cent) 73,289 16.1% 3.2(cent) 63,657 16.1% 3.4(cent) General and administrative 29,186 5.8% 1.2(cent) 26,921 5.9% 1.2(cent) 26,786 6.8% 1.4(cent) Depreciation and amortization 24,296 4.9% 1.0(cent) 20,940 4.6% 0.9(cent) 15,108 3.8% 0.8(cent) Aircraft return provision 3,023 0.6% 0.1(cent) -- -- -- -- -- -- --------------------------- ---------------------------- --------------------------- Total operating expenses $452,369 90.4% 18.6(cent)$ 425,567 93.5% 18.4(cent) $347,760 87.8% 18.3(cent) =========================== ============================ =========================== Interest expense $ 12,777 2.6% 0.5(cent) $ 6,395 1.4% 0.3(cent) $ 7,916 2.0% 0.4(cent) =========================== ============================ ===========================
-17- 18 REVENUE AND EXPENSE COMPARISON FISCAL 1996 VERSUS FISCAL 1995 Operating revenues increased $45.2 million (10 percent) for fiscal 1996 compared to the prior fiscal year. This increase in operating revenues is the result of a six percent increase in passengers and a four percent increase in average fares. Capacity, measured by available seat miles (ASMs), increased by 5.5 percent. The load factor increased from 51 percent to 56 percent and revenue per ASM increased from 19.7(cent) to 20.5(cent). The airline industry has a history of fare and traffic volatility; however, management expects revenue per available seat mile to remain relatively stable during the next fiscal year. Flight operations expense decreased from 7.2(cent) per ASM in 1995 to 6.8(cent) per ASM in 1996 primarily due to a reduction of fleet integration costs during the current year, a conversion of many aircraft from being operated under operating lease to owned aircraft, and the operation of jet aircraft throughout the entire 1996 fiscal year. However, this benefit was partially offset by higher-than-average pilot training costs in the third and fourth quarters caused by major airlines hiring more than the usual number of pilots and an increase in fuel related to a new tax on jet fuel and a general increase in price. Maintenance expense was essentially unchanged at 3.3(cent) per ASM in 1996. Aircraft and traffic servicing cost increased slightly from 2.7(cent) per ASM in 1995 to 3.0(cent) per ASM in 1996. This increase is primarily the result of increased operating fees at Denver International Airport. These costs include landing fees, station wages, rent and other station costs. Promotion and sales expense decreased slightly from 3.2(cent) in 1995 to 3.1(cent) per ASM in 1996. These costs include commissions, booking fees and other reservation costs and will vary with revenue. General and administrative expense remained constant at 1.2(cent) per ASM. Depreciation and amortization expense increased from 0.9(cent) per ASM in 1995 to 1.0(cent) per ASM in 1996 primarily due to additional depreciation on owned aircraft. Depreciation will continue to increase per ASM during 1997 as a result of additional owned aircraft. Interest expense increased from 0.3(cent) per ASM in 1995 to 0.5(cent) per ASM in 1996 as a result of financing more aircraft through use of debt rather than operating leases. Mesa incurred an effective tax rate of approximately 38.6 percent for the year 1996. This rate is lower than 1995 due in part to implementation of a state tax minimization program. The combination of the above factors, excluding a one-time accrual for Fokker return costs of 0.1(cent) per ASM, resulted in a slight increase in operating expenses from 18.4(cent) per ASM in 1995 to 18.6(cent) per ASM in 1996. FISCAL 1995 VERSUS FISCAL 1994 Operating revenues increased $59.0 million (15 percent) for fiscal 1995 compared to the prior fiscal year. Capacity measured by ASMs increased by 22 percent. During fiscal 1995 capacity grew at a higher rate than revenues primarily as a result of intense competition and negative publicity regarding regional airline safety which took place in the first six months of the 1995 fiscal year. The introduction of jet aircraft into the fleet in the last quarter of the fiscal year also increased capacity without corresponding increase in revenue per available seat mile. The load factor decreased slightly from 51.8 percent to 51 percent and the yield per RPM decreased from 38.9(cent) to 37.5(cent). The decrease in yield per RPM is primarily the result of -18- 19 lower air fares on the West Coast during the first six months of the year, which adversely affected financial results at the WestAir subsidiary. Flight operations cost increased by $39.6 million (31.2 percent) compared to a 22 percent increase in capacity. This resulted in an increase in cost per ASM from 6.7(cent) in 1994 to 7.2(cent) in 1995. The primary reason for the increase in flight operations expense was the integration costs related to introduction of DHC-8-300 and Fokker 70 jet aircraft into the fleet. These integration costs were expensed during the fiscal year. Maintenance expense decreased from 3.6(cent) per ASM in 1994 to 3.2(cent) per ASM in 1995. Excluding jet ASMs, the decrease was from 3.6(cent) per ASM in 1994 to 3.3(cent) per ASM in 1995. This decrease was primarily the result of a fewer number of scheduled engine overhauls in 1995 as compared to 1994. Aircraft and traffic servicing cost increased slightly from 2.4(cent) per ASM in 1994 to 2.7(cent) per ASM in 1995. These costs include landing fees, station wages, rent and other station costs. Promotion and sales expense decreased slightly from 3.4(cent) in 1994 to 3.2(cent) per ASM in 1995. These costs include commissions, booking fees and other reservation costs and will vary with revenue. General and administrative expense decreased from 1.4(cent) per ASM in 1994 to 1.2(cent) per ASM in 1995. Depreciation and amortization expense increased from 0.8(cent) per ASM in 1994 to 0.9(cent) per ASM in 1995 due to increased amortization resulting from an increase in intangibles. Interest expense decreased from 0.4(cent) per ASM in 1994 to 0.3(cent) per ASM in 1995 as a result of financing more aircraft through operating leases rather than debt and a decrease in the amount of long-term debt. Mesa incurred an effective tax rate of approximately 39 percent for the year 1995, a slightly higher rate than the prior year. Changes in tax law and the adoption of Financial Accounting Standards Board Statement 109 in 1994 did not have a material impact on the financial statements. The combination of the above factors resulted in a slight increase in operating expenses from 18.3(cent) per ASM in 1994 to 18.4(cent) per ASM in 1995. LIQUIDITY AND CAPITAL RESOURCES Mesa's cash, cash equivalents and marketable securities as of September 30, 1996 amounted to $60 million. This was a decrease of $35 million from the prior year resulting from utilization of cash in a stock repurchase program. Mesa generated approximately $42 million in cash from operating activities during 1996. Mesa's cash, cash equivalents and marketable securities are intended to be used for working capital, acquisitions, capital expenditures and a continuing stock buy-back program. Mesa had receivables of $41 million at September 30, 1996 which consist primarily of amounts due from code-sharing partners United and USAir. Under the terms of the United and USAir agreements, Mesa receives a substantial portion of its revenues through the Airline Clearing House. Historically, Mesa has generated adequate cash flow to meet its operating needs. Mesa currently has a $20 million line of credit, of which approximately $16 million is available. Amounts reserved under this line of credit have been used to facilitate the issuance of letters of credit. -19- 20 Mesa has significant operating lease obligations on existing aircraft. At September 30, 1996, Mesa leased 73 aircraft with remaining terms of up to 16.5 years. Future lease payments due under all aircraft operating leases were approximately $282 million at September 30, 1996. At September 30, 1996, Mesa had commitments to acquire nine Beechcraft model 1900D aircraft prior to December 31, 1996. Beech Acceptance Corporation has agreed to provide lease or debt financing, at Mesa's option. Mesa accepted delivery of two Fokker 70 jet aircraft during the summer of 1995. Mesa's purchase contract included an option to acquire six additional aircraft. The agreement with Fokker allowed Mesa the right to return the two aircraft to Fokker from 12 to 18 months after delivery, subject to a six-month notification. During January 1996, Fokker announced a suspension of payments to its creditors. By April 1996, Fokker had entered into liquidation and was unable to provide the six additional Fokker 70 aircraft under option to Mesa. Therefore, since management believed a fleet of two Fokker 70s could not be operated profitably, the Company noticed the return of the two Fokker 70 aircraft. Daimler-Benz, the owner of the Fokker aircraft, and Mesa have negotiated an agreement in principle which allows Mesa to continue operating the two aircraft through August 1997 at existing lease rates in exchange for the Company's agreement to pay for time-related costs use of the aircraft through the date of return. At June 30, 1996, the Company accrued a provision for the hours utilized on the aircraft through June 30, 1996. In addition, the Company will continue to accrue additional time-related aircraft costs on an hourly basis through the remainder of the lease term of the aircraft. At June 30, 1996 the Company accrued an aircraft return provision for all other estimated costs related to the return of these two aircraft. Mesa has an aircraft order with Bombardier, Inc. to acquire 25 de Havilland Dash 8-200 aircraft worth $262.5 million with deliveries scheduled in early 1996 through March 1997. Due to production delays, the delivery schedule was delayed and Mesa was granted an option to cancel up to five of the 25 aircraft on order. As of September 30, 1996, Mesa had taken delivery of only five of the scheduled 14 Dash 8-200 aircraft. Mesa has arranged financing commitments for 10 of the 25 aircraft and is presently arranging financing for the remaining aircraft on order. Bombardier will participate as needed to finance any new aircraft deliveries. Mesa also has an option to acquire 25 additional de Havilland Dash 8-200 aircraft. The Dash-8-200 aircraft purchase agreement provides for a spare parts supply program, which includes all required parts to maintain the aircraft, excluding engines and propellers, for a period of seven years. Mesa will pay a fixed hourly charge per flight hour for this spare parts supply program. During August 1996, Mesa entered into a memorandum of understanding to acquire 16 Canadair Regional 50-passenger jet aircraft ("CRJs") worth approximately $320 million with deliveries to begin in February 1997. Mesa will trade in 12 Embraer Brasilia aircraft on the 16 Canadair Regional jet aircraft on order. An $8.3 million deposit has been made to Bombardier, Inc. related to this commitment, and Bombardier will participate as needed to provide financing for the CRJs to be acquired by Mesa. Mesa has options to acquire an additional 32 CRJ aircraft. During December 1995, the Federal Aviation Administration (FAA) announced rules which require commuter airlines with aircraft of 10 or more passenger seats operating under FAR Part 135 rules to begin operating those aircraft under FAR Part 121 regulations by the end of March 1997. Mesa is one of the largest regional airlines operating under FAR Part 135 regulations. In anticipation of Mesa's conversion to FAR Part 121 and to address issues raised in past inspections, the FAA began a special review of Mesa's operations in June 1996. -20- 21 As a result of the special review by the FAA of Mesa's operations, a consent order was signed in September 1996 assessing a compromise civil penalty of $500,000. Mesa paid $250,000 of the compromise amount, and the remaining $250,000 will be waived upon Mesa complying with provisions of the consent order. Under the consent order, Mesa has agreed to adopt operational standards that exceed the requirements of the Federal Aviation Regulations. The consent order requires that control of operational areas (maintenance, flight operations and training) be consolidated under one central management team. The Company has until March 1997 to complete the specified tasks, and as of December 6, 1996 was on or ahead of the schedule set forth in the order. Based on the required conversion to FAR Part 121 and the provisions of the FAA consent order, Mesa anticipates a one-time capital expenditure of approximately $1.0 million in fiscal 1997 to bring all aircraft currently being operated by Mesa into compliance with the enacted FAR Part 121 rules. In addition, Mesa presently anticipates ongoing operational costs in order to comply with the FAR Part 121 rules and consent order of approximately $2.5 million per year. Mesa does not expect any material negative impact to its operations as a result of inflation. Mesa believes fares, and accordingly revenues, can be changed to offset the impact of inflation. Approximately 80 percent of Mesa's $355.4 million of indebtedness is at floating rates and may be affected by inflation if such inflation results in an increase in interest rates. A significant portion of the aircraft fleet is leased at fixed rates that would not be impacted by inflation. Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123) requires that companies can elect to account for stock-based compensation plans using a method based upon fair value or can continue measuring compensation expense for those plans using the "intrinsic value method" prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25). Companies electing to continue using the intrinsic value method must make pro forma disclosures in fiscal 1997 of net earnings and earnings per share as if the "fair value based method" had been applied. The Company will continue using APB 25; therefore, SFAS 123 is not expected to have an impact on the Company's results of operations or financial position. Mesa announced on December 20, 1996 that it anticipates falling short of analysts' earnings expectations for the first fiscal quarter of 1997 (October-December 1996). Disappointing revenues in November, along with several one-time costs associated with changes in its operations, are the primary causes of the anticipated shortfall. These changes relate to improvements in the Company's performance and customer service levels in the Denver system; the consolidation of operations on the West Coast by fleet type and the related closing of two maintenance facilities in that system. In addition, the Company incurred unusually high pilot training costs resulting from a transition into the deHavilland Dash 8-200 aircraft. The Company has also suffered the industry-wide consequences of dramatically increased fuel costs. As a result of these changes, which caused these one-time expenses, the Company expects to realize improving financial results going forward into the subsequent quarters. FORWARD LOOKING STATEMENTS This Form 10-K contains information regarding the replacement, deployment, and acquisition of certain numbers and types of aircraft, entry into an independent jet operation, and projected expenses associated therewith; costs of compliance with FAA 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 the Company; 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 that involve a number of risks and uncertainties. The following is a list of factors, among others, that could cause actual results to differ materially from the forward-looking statements: business conditions and growth in certain market segments and industries and the general economy; an increase in competition along the routes the Company plans to operate its newly acquired aircraft; material delays in completion by the manufacturer of the ordered and yet- to-be delivered aircraft; changes in general economic conditions, such as fuel price increases, and changes in regional economic conditions, making the costs of aircraft operation prohibitive in the targeted regions the Company plans to operate the newly acquired aircraft; the Company's relationship with employees and the terms of future collective bargaining agreements and the impact of current and future laws, Congressional investigations, and governmental regulations affecting the airline industry and the Company's operations; bureaucratic delays on amendments to existing legislation; consumers unwilling to incur greater costs for flights; unfavorable resolution of negotiations with municipalities for the leasing of facilities; and risks associated with trial outcomes. See page 2 of Form 10-K. -21- 22 Item 8. Financial Statements and Supplementary Data 1. Consolidated Financial Statements Page 23 - Independent Auditors' Report Page 24 - Consolidated Balance Sheets - September 30, 1996 and 1995 Page 26 - Consolidated Statements of Earnings - Years ended September 30, 1996, 1995, and 1994 Page 27 - Consolidated Statements of Cash Flows - Years ended September 30, 1996, 1995, and 1994 Page 28 - Consolidated Statements of Stockholders' Equity - Years ended September 30, 1996, 1995, and 1994 Page 29 - Notes to Consolidated Financial Statements All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not applicable, not required or the information has been furnished elsewhere. -22- 23 REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND STOCKHOLDERS MESA AIR GROUP, INC.: We have audited the accompanying consolidated balance sheets of Mesa Air Group, Inc. and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of earnings, cash flows, and stockholders' equity for each of the years in the three-year period ended September 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mesa Air Group, Inc. and subsidiaries as of September 30, 1996 and 1995 and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP November 22, 1996 Phoenix, Arizona -23- 24 MESA AIR GROUP, INC. CONSOLIDATED BALANCE SHEETS (in thousands except share amounts)
September 30 ----------------------- 1996 1995 - --------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 54,720 $ 53,675 Marketable securities (note 2) 5,300 40,901 Receivables, principally traffic 41,105 44,811 Expendable parts and supplies, less allowance for obsolescence of $1,350 and $1,200 26,956 24,682 Prepaid expenses and other current assets 6,394 6,923 ----------------------- Total current assets $134,475 $170,992 Property and equipment, net (notes 4 and 5) 452,273 170,899 Lease and equipment deposits (notes 9 and 10) 10,889 26,147 Intangibles, less amortization of $8,687 and $3,523 53,538 60,598 Other assets 27,316 18,086 ----------------------- Total assets $678,491 $446,722 =======================
See accompanying notes to consolidated financial statements. -24- 25 MESA AIR GROUP, INC. CONSOLIDATED BALANCE SHEETS (in thousands except share amounts)
September 30 ----------------------- 1996 1995 - --------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital leases (note 5) $ 17,127 $ 8,283 Accounts payable 13,811 23,205 Income taxes payable (note 6) 3,708 1,073 Air traffic liability 4,789 5,131 Accrued compensation 5,010 3,937 Other accrued expenses 19,170 13,985 ----------------------- Total current liabilities 63,615 55,614 Long-term debt and capital leases, excluding current portion (note 5) 338,278 78,411 Deferred credits 29,538 28,353 Deferred income taxes (note 6) 22,394 28,461 Stockholders' equity (note 7): Preferred stock of no par value, 2,000,000 shares authorized; no shares issued and outstanding -- -- Common stock of no par value, 75,000,000 shares authorized; 28,243,382 shares in 1996 and 33,460,742 shares in 1995 issued and outstanding 100,876 151,957 Retained earnings 121,283 90,876 Unrealized gain on marketable securities, net of deferred income taxes of $1,420 and $8,700 (note 2) 2,507 13,050 ----------------------- Total stockholders' equity 224,666 255,883 ----------------------- Commitments, contingencies and subsequent events (notes 3, 8, 9, 10, and 12) Total liabilities and stockholders' equity $678,491 $446,722 =======================
See accompanying notes to consolidated financial statements. -25- 26 MESA AIR GROUP, INC. CONSOLIDATED STATEMENTS OF EARNINGS (in thousands, except per share amounts)
Years Ended September 30 ---------------------------------------- 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------- Operating revenues: Passenger $489,432 $442,087 $383,162 Freight and other 7,387 7,636 7,467 Public service 3,544 5,416 5,505 ---------------------------------------- Total operating revenues 500,363 455,139 396,134 ---------------------------------------- Operating expenses: Flight operations 166,151 166,596 126,954 Maintenance 81,400 73,701 68,908 Aircraft and traffic servicing 73,469 64,120 46,347 Promotion and sales 74,844 73,289 63,657 General and administrative 29,186 26,921 26,786 Depreciation and amortization 24,296 20,940 15,108 Aircraft return provision (note 10) 3,023 -- -- ---------------------------------------- Total operating expenses 452,369 425,567 347,760 ---------------------------------------- Operating income 47,994 29,572 48,374 ---------------------------------------- Non-operating income (expenses): Interest expense (12,777) (6,395) (7,916) Interest income 2,274 1,970 3,607 Other (notes 2 and 12) 12,028 (2,126) (73) ---------------------------------------- Total non-operating expenses 1,525 (6,551) (4,382) ---------------------------------------- Earnings before income tax expense and extraordinary item 49,519 23,021 43,992 Income tax expense (note 6) 19,112 9,009 16,716 ---------------------------------------- Earnings before extraordinary item 30,407 14,012 27,276 Extraordinary item - gain on extinguishment of debt, net of income taxes of $252 in 1994 -- -- 412 ---------------------------------------- Net earnings $ 30,407 $ 14,012 $ 27,688 ======================================== Average common and common equivalent shares outstanding 30,449 33,363 36,559 ======================================== Earnings per common and common equivalent share: Earnings before extraordinary item $ 1.00 $ 0.42 $ 0.75 Extraordinary item -- -- 0.01 ---------------------------------------- Net earnings $ 1.00 $ 0.42 $ 0.76 ========================================
See accompanying notes to consolidated financial statements. -26- 27 MESA AIR GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended September 30 ---------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 30,407 $ 14,012 $ 27,688 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization 24,296 20,940 15,108 Provision for litigation and other liabilities 10,000 -- -- Deferred income taxes 10,473 493 6,074 (Gain) loss on disposal of property and equipment 689 (82) (1,069) (Gain) loss on sale of securities (22,008) 145 -- Extraordinary item - gain on extinguishment of debt -- -- (664) Amortization of deferred credits (3,271) (1964) 1,283 Stock bonus plan 970 538 979 Changes in assets and liabilities, net of acquisitions: Receivables 3,706 1,658 (9,627) Expendable parts and supplies (2,274) (5,281) (6,631) Prepaid expenses and other current assets 529 442 (4,248) Accounts payable (4,361) 12,485 1,074 Other accrued liabilities (6,109) (400) 7,037 ---------------------------------------- NET CASH FLOWS FROM OPERATING ACTIVITIES 43,047 42,986 37,004 ---------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (20,263) (92,296) (32,599) Proceeds from sale of property and equipment 1,616 99,634 3,366 Proceeds from maturities and sale of marketable securities 40,861 23,499 136,170 Purchases of marketable securities -- -- (89,946) Purchased intangibles -- (34,489) (15,505) Other assets (354) (2,492) (4,018) Lease and equipment deposits 699 (9,365) (3,300) ---------------------------------------- NET CASH FLOWS FROM INVESTING ACTIVITIES 22,559 (15,509) (5,832) ---------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds received from long-term debt -- 5,000 -- Principal payments on long-term debt and obligations under capital leases (12,141) (18,553) (11,129) Proceeds from issuance of common stock 1,510 1,592 2,631 Common stock repurchase and retirement (53,930) -- (24,503) Proceeds from deferred credits -- 2,592 1,275 ---------------------------------------- NET CASH FLOWS FROM FINANCING ACTIVITIES (64,561) (9,369) (31,726) ---------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 1,045 18,108 (554) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 53,675 35,567 36,121 ---------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 54,720 $ 53,675 $ 35,567 ========================================
See accompanying notes to consolidated financial statements. -27- 28 MESA AIR GROUP CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended September 30, 1996, 1995 and 1994 (in thousands except number of shares)
Available Number of Common Retained for sale shares stock earnings securities Total ------------------------------------------------------------------------- Balance at September 30, 1993 35,425,709 $166,218 $ 49,176 -- $215,394 Exercise of options (note 7) 534,129 2,631 -- -- 2,631 Stock bonus plan (note 8) 109,204 979 -- -- 979 Common stock repurchase (3,365,000) (24,503) -- -- (24,503) Tax benefits from sale of optioned stock -- 2,370 -- -- 2,370 Change in unrealized gains, net of tax -- -- -- 9,757 9,757 Net earnings -- -- 27,688 -- 27,688 ------------------------------------------------------------------------- Balance at September 30, 1994 32,704,042 $147,695 $ 76,864 $ 9,757 $234,316 Exercise of options (note 7) 687,487 1,592 -- -- 1,592 Stock bonus plan (note 8) 69,213 538 -- -- 538 Tax benefits from sale of optioned -- 2,132 -- -- 2,132 stock Change in unrealized gains, net of tax -- -- -- 3,293 3,293 (note 2) Net earnings -- -- 14,012 -- 14,012 ------------------------------------------------------------------------- Balance at September 30, 1995 33,460,742 $151,957 $ 90,876 $ 13,050 $255,883 Exercise of options (note 7) 194,759 1,510 -- -- 1,510 Stock bonus plan (note 8) 94,281 970 -- -- 970 Common stock repurchase (5,506,400) (53,930) -- -- (53,930) Tax benefits from sale of optioned stock -- 369 -- -- 369 Change in unrealized gains, net of tax (note 2) -- -- -- (10,543) (10,543) Net earnings -- -- 30,407 30,407 ------------------------------------------------------------------------- Balance at September 30, 1996 28,243,382 $100,876 $121,283 $ 2,507 $224,666 =========================================================================
See accompanying notes to consolidated financial statements. -28- 29 MESA AIR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended September 30, 1996, 1995 and 1994 1. Summary of Significant Accounting Policies a. Principles of Consolidation and Organization Mesa Air Group, Inc. ("Mesa") and its subsidiaries is a group of regional airlines providing service in various regions across the United States as America West Express, Mesa Airlines, United Express and USAir Express. Pursuant to ratification by Mesa's shareholders, during September 1996 Mesa (previously a New Mexico corporation) reincorporated in the state of Nevada. MPD, Inc. (formerly San Juan Pilot Training, Inc. dba Mesa Air Pilot Development) and FCA, Inc. (formerly Four Corners Aviation, Inc.) were also reincorporated as Nevada corporations. A new subsidiary, Mesa Airlines, Inc., a Nevada corporation, was formed to hold all airline operating divisions. The Company is in the process of revising the management structure to centralize flight and maintenance controls and management in one location and will switch from the "division" management system to one focusing on its hubs. The consolidated financial statements include the accounts of Mesa and its wholly owned subsidiaries Mesa Airlines, Inc., WestAir Holding, Inc., Air Midwest, Inc., MPD, Inc., and FCA, Inc., MAGI Insurance, Ltd. and Mesa Leasing, Inc. (collectively referred to as Mesa). All significant intercompany balances and transactions have been eliminated in consolidation. Mesa is a Nevada-based regional airline providing passenger service across the United States utilizing 173 turboprop aircraft and two jet aircraft. Mesa also operates four other related companies. The related companies are Desert Turbine Services, FCA, Inc., MPD, Inc. and Regional Aircraft Services, Inc. Mesa currently operates as America West Express under a code-sharing agreement which expires in 2004 with America West Airlines, Inc. ("America West") utilizing a Phoenix, Arizona hub. Mesa utilizes an Albuquerque hub as Mesa Airlines, serving the Southwest and Rocky Mountain regions. In addition, Mesa operates as United Express under two separate code-sharing agreements with United Airlines ("United"). One code-sharing agreement, expiring in 1998, covers operations on the West Coast originating out of hubs in San Francisco and Los Angeles. The other United code-sharing agreement provides for operations as United Express out of hubs in Denver, Portland and Seattle and expires in 2005. Mesa also operates as USAir Express under three code-sharing agreements with USAir, Inc. ("USAir"). One agreement covers operations utilizing a Kansas City hub and expires in 2000. Another USAir code-sharing agreement covers operations out of the Pittsburgh hub and expires in 2003. The third agreement covers hubs in New Orleans, Tampa, Orlando, Philadelphia and Boston hubs and expires in 2004. MPD, Inc. dba Mesa Pilot Development began operations in 1989 and provides flight training in coordination with a community college. FCA, Inc. dba Four Corners Aviation, which was acquired in 1992, is a fixed-base operation in Farmington, New Mexico. Regional Aircraft Services, Inc. and Desert Turbine Services provide aircraft and engine maintenance service to Mesa. -29- 30 MAGI Insurance, Ltd. is a captive insurance created to handle freight and baggage claims in addition to a portion of Mesa's aviation insurance. b. Cash and Cash Equivalents For purposes of the statements of cash flows, Mesa considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. c. Marketable Securities All marketable securities are considered to be available for sale. Any unrealized holding gains or losses on available-for-sale securities have been recorded net of deferred taxes through stockholders' equity. Premiums and discounts on debt securities are amortized over the term to maturity using the interest method. d. Receivables Mesa provides commercial air transportation into most regions of the United States. The majority of the passenger tickets collected by Mesa at the time of travel are sold by other air carriers largely as a result of the code-sharing agreements discussed above. As a result, Mesa has a significant concentration of its accounts receivable with other air carriers and does not have any collateral securing such accounts receivable. At September 30, 1996 and 1995, accounts receivable from air carriers totaled approximately $33.8 million and $36.5 million, respectively. Accounts receivable credit losses have not been significant and have been within management's expectations. e. Expendable Parts and Supplies Expendable parts and supplies are stated at the lower of average cost or market, less an allowance for obsolescence. Expendable parts and supplies are charged to expense as they are used. f. Property and Equipment Property and equipment are recorded at cost and depreciated to estimated residual values. Depreciation of property and equipment is provided on a straight-line basis over estimated useful lives as follows: Buildings 30 years Flight equipment 7-20 years Leasehold improvements Life or term of lease, whichever is less Equipment 5-12 years Furniture and fixtures 3-5 years Vehicles 5 years
Assets utilized under capital leases are amortized over the lesser of the lease term or the estimated useful life of the asset using the straight-line method. Amortization of capital leases is included in depreciation expense. g. Intangibles In February 1990, Mesa acquired the routes previously developed in the Rocky Mountain region by Aspen Airways, Inc. "Aspen" signed a 10-year noncompete agreement with the exception of a direct route to Aspen, Colorado. The cost of $3 million for this noncompete agreement is being amortized over a 10-year period. In July 1991, Mesa acquired Air Midwest, Inc. This acquisition resulted in purchased intangibles of approximately $10.2 million, which are being amortized over a 40-year -30- 31 period. Subsequently the intangibles were reduced by approximately $5.7 million for the recognition of the tax effects of net operating loss and investment tax credit carryovers acquired in the Air Midwest purchase. In February 1994, Mesa entered into an Asset Purchase Agreement with Crown Airways, Inc., now operating as USAir Express utilizing a Pittsburgh hub. Intangible assets of $11.3 million are being amortized over a 20-year period. In July 1994, Mesa entered into an Asset Purchase Agreement with USAir for certain aircraft and related assets of its subsidiary Pennsylvania Commuter Airlines, Inc. dba Allegheny Commuter Airlines now operating as USAir Express originating out of Boston, Philadelphia and New Orleans. Acquired intangibles of $10.5 million are being amortized over a 20-year period. During October 1994, Mesa reached an agreement with United to purchase 10 and assume leases on two de Havilland DHC-8 aircraft for a total contract price of $118.5 million. The agreement also provides for a 10-year extension of its code-sharing agreement with United in Los Angeles and Denver through 2005 and guarantees Mesa the exclusive right to operate as a United Express carrier in eight additional Denver markets. The purchase price has been allocated to the acquired aircraft based upon fair market values at the date of acquisition with acquired intangibles of approximately $34.5 million to be amortized over a 10-year period. Mesa continually evaluates the recoverability of these intangible assets by assessing whether the amortization over the remaining estimated life can be recovered through expected future operating results. h. Income Taxes Deferred income taxes are recognized for income and expense items that are recognized in the financial statement in different periods than the income tax returns. Effective October 1, 1994, Mesa adopted Statement of Financial Accounting Standards No. 109 (FAS No. 109), "Accounting For Income Taxes" which requires a change from the deferred method previously used by Mesa to the asset and liability method of accounting for income taxes. Under the asset and liability method of FAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled. Under FAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of earnings as an adjustment to the effective income tax rate in the period that includes the enactment date. Adoption of FAS 109 did not have a material effect on Mesa's financial position or result of operations. Mesa and its subsidiaries file a consolidated federal income tax return. i. Deferred Credits Deferred lease incentives consist of credits for parts or services and deferred gains from the sale and leaseback of aircraft. Deferred credits are amortized on a straight-line basis as a reduction of lease expense over the term of the respective leases. j. Revenues Passenger, freight and other revenues are recognized as earned when the service is provided. -31- 32 Mesa receives public service revenues for serving certain small communities. These revenues are recognized as earned in the period to which the payments relate. The amount of such payments is determined by the 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. As a code-share partner for America West, United, and USAir, Mesa participates in the frequent flyer programs of these airlines. Incremental costs for mileage accumulation relating to those programs is expensed as incurred. k. Maintenance Maintenance and repairs, including major engine overhauls, are charged to operating expenses as incurred. l. Earnings Per Common and Common Equivalent Share Earnings per common and common equivalent share are computed based on the weighted average number of common shares, and if dilutive, common stock equivalent shares (options and warrants) outstanding during the respective periods. Fully diluted earnings per share are not materially different than primary earnings per share and has not been presented. The number of shares used in the earnings-per-share computation are as follows:
September 30 1996 1995 1994 ----------------------------- (in thousands) Weighted average shares of common stock outstanding during the year 29,988 32,857 35,361 Common stock equivalent shares -- assumed exercise of options 461 506 1,198 ----------------------------- 30,449 33,363 36,559 =============================
m. New Accounting Standard Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123) requires that companies can elect to account for stock-based compensation plans using a method based upon fair value or can continue measuring compensation expense for those plans using the "intrinsic value method" prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25). Companies electing to continue using the intrinsic value method must make pro forma disclosures in fiscal 1997 of net earnings and earnings per share as if the "fair value based method" had been applied. The Company will continue using APB 25; therefore, SFAS 123 is not expected to have an impact on the Company's results of operations or financial position. n. Reclassifications Certain prior year balances have been reclassified to conform to the 1996 presentation. -32- 33 2. Marketable Securities Marketable securities available for sale are summarized as follows:
September 30 1996 1995 ------------------------------------------ (in thousands) ------------------------------------------ Cost Market Cost Market ------------------------------------------ Equity securities $ 3,903 $ 7,830 $18,743 $40,524 Debt securities: Corporate bonds -- -- 3,010 2,997 Municipal securities 1,001 1,001 2,055 2,038 ------------------------------------------ 4,904 8,831 23,808 45,559 Less equity securities classified as Other Assets (2,246) (3,531) (2,244) (4,658) ------------------------------------------ $ 2,658 $ 5,300 $21,564 $40,901 ==========================================
At September 30, 1996, all debt securities will mature within one year. Unrealized gains and losses at September 30, 1996 by security classification are as follows (in thousands):
Unrealized Unrealized Gains Losses Net ----------------------------------- Equity securities: available for sale $3,927 $-- $3,927 =================================
On August 25, 1994, Mesa entered into the AmWest Partners, L. P. partnership agreement, which governs the terms of an investment by the partnership in America West providing for the consummation of America West's Plan of Reorganization. Upon making the investment, the partnership was dissolved. In consideration of the investment of approximately $18.7 million, Mesa received 100,000 Class A shares of common stock, 2,183,343 Class B shares of common stock and 799,767 warrants. In February 1996, Mesa sold 1,984,970 shares of Class B common stock of America West, resulting in a realized gain of $22 million. At September 30, 1996, 100,000 Class A shares, approximately 200,000 Class B shares and warrants were classified as available for sale, and market appreciation was recorded (net of taxes) through equity. 3. Investment in Community Express Airlines, Limited. (CEAL) In May 1995, Mesa purchased approximately 49.9 percent of the outstanding voting common shares and all of the preferred shares of Community Express Airlines, Limited ("CEAL"), a start-up commuter airline in the United Kingdom with headquarters in Birmingham, England for approximately $1.3 million. During November 1995, an additional cash infusion was made and Mesa's preferred shares were converted to common shares and a nine-year interest-free loan resulting in a decrease in Mesa's interest in CEAL to 44 percent. By August 1996, CEAL had not yet attained break-even cash flow, and Mesa elected not to invest further resources in CEAL. In September 1996, CEAL ceased operations. As of September 30, 1996, Mesa's investment in CEAL was written off. 4. Property and Equipment -33- 34 Property and equipment consists of the following:
September 30 1996 1995 ----------------------- (in thousands) Flight equipment, substantially pledged $ 482,736 $190,502 Other equipment 20,047 19,425 Construction in progress 5 817 Leasehold improvements 4,571 4,178 Furniture and fixtures 2,355 3,058 Buildings 9,480 9,068 Land 525 526 Vehicles 2,200 1,953 ----------------------- 521,919 229,527 Less accumulated depreciation (69,646) (58,628) ----------------------- Net property and equipment $452,273 $170,899 =======================
As of September 30, 1996, Mesa had flight equipment consisting primarily of rotable parts held for sale with a fair value of approximately $11.7 million included in Other Assets. 5. Long-Term Debt, Capital Leases and Lines of Credit At September 30, 1996, Mesa had a line of credit with a bank of $20 million bearing interest at prime plus 1/2 percent (8.75% at September 30, 1996). At September 30, 1996, approximately $4 million letters of credit were outstanding under the line of credit. The line matures on March 31, 1997 and bears an annual fee of 1/4 percent. Mesa leases certain equipment under leases having noncancelable lease terms of more than one year which have been recorded as capital leases. In May 1996, Mesa refinanced operating leases on 66 aircraft as debt resulting in additional debt of approximately $234 million. Subsequent deliveries of 1900D aircraft have been financed by use of debt. -34- 35 Long-term debt and capital leases consist of the following:
September 30 1996 1995 ----------------------- (in thousands) Notes payable to Raytheon Aircraft Credit Corporation: Approximately $857,000 plus interest due monthly at prime and an Adjusted Libor Rate (7.06% to 8.25% at September 30, 1996) through 2011. Secured by aircraft. $297,327 $15,761 Notes payable to banks: Approximately $500,200 due monthly plus interest indexed to Adjusted Libor Rates (6.49% to 7.56% at September 30, 1996) through 2006. Secured by aircraft. 55,716 58,413 Various notes payable and capital leases; due in monthly installments through 2003; interest indexed to prime and an Adjusted Libor Rate Secured by aircraft. 2,362 12,520 ----------------------- Total long-term debt and capital leases 355,405 86,694 Less current portion (17,127) (8,283) ----------------------- Long-term debt and capital leases, excluding current portion $338,278 $78,411 -----------------------
PRINCIPAL MATURITIES OF LONG-TERM DEBT AND CAPITAL LEASES FOR EACH OF THE NEXT FIVE YEARS ARE AS FOLLOWS:
YEAR ENDING SEPTEMBER 30: ----------------------------- (in thousands) 1997 $17,127 1998 17,042 1999 17,573 2000 18,231 2001 19,116 =======
-35- 36 6. Income Taxes Income tax expense consists of the following:
September 30 1996 1995 1994 ---------------------------------- Current: (in thousands) Federal $ 7,912 $6,899 $ 8,679 State 727 1,617 1,462 ---------------------------------- 8,639 8,516 10,141 ---------------------------------- Deferred: Federal 8,457 399 5,627 State 2,016 94 948 ---------------------------------- 10,473 493 6,575 ---------------------------------- Total income tax expense $19,112 $9,009 $16,716 ==================================
The actual income tax expense differs from the "expected" tax expense (computed by applying the U.S. federal corporate income tax rate of 35 percent in 1996, 1995 and 1994 to earnings before income taxes and extraordinary item) as follows:
September 30 1996 1995 1994 ---------------------------- (in thousands) Computed "expected" tax expense $17,332 $8,058 $15,397 Increase (reduction) in income taxes resulting from: Intangibles 98 8 97 Investment tax credits (29) -- -- Tax exempt interest (32) (112) (505) State taxes, net of federal tax benefit 1,783 951 1,319 Other (40) 104 408 ---------------------------- Total income tax expense $19,112 $9,009 $16,716 ============================
-36- 37 Elements of deferred income tax assets (liabilities) are as follows:
September 30 Deferred tax assets: 1996 1995 --------------------- (in thousands) Inventory, parts and equipment reserves $ 1,288 $ 1,380 Accrued expenses 845 1,287 Deferred credit 3,514 3,345 Other accrued liabilities 4,380 (390) WestAir investment tax credit carryover -- 1,627 AMT credit carryover 5,507 12,290 Unrealized holding gain on marketable securities (1,420) (8,700) Benefit of net operating loss and tax credit carryforwards 1,708 3,091 --------------------- 15,822 13,930 Valuation allowance (1,000) (3,000) --------------------- Net deferred tax assets 14,822 10,930 Deferred tax liabilities: Depreciation and tax capital lease differences (37,216) 39,391) --------------------- Net deferred taxes $(22,394) $(28,461) =====================
Deferred tax assets include benefits estimated to be realized from the utilization of minimum tax credit carryforwards of $5.5 million which do not expire and from the utilization of investment tax credit carryforwards of $1 million which expire from 2000 through 2001. The tax benefits from the investment tax credit and loss carryforwards, which were obtained in the acquisition of Air Midwest, Inc., have been recorded as a reduction of intangibles. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. Mesa's U.S. federal income tax returns for 1989, 1990 and 1991 have been examined by the IRS. A tentative agreement on the audit issues has been reached with the IRS appeals division and will result in additional federal income tax payable in the 1989 through 1994 tax years of approximately $4 million. An additional net $2.5 million of state income taxes payable in the 1989 through 1994 tax years will result from settlement of the federal audit. Interest expense relating to the additional federal and state tax adjustments total $1.8 million as of September 30, 1996. Provision has been made for tax and interest payable from the audit, and the $6.5 million tax liability is reflected in current income taxes payable as of September 30, 1996. 7. Stockholders' Equity On June 2, 1992, Mesa adopted an employee stock option plan which provides for the granting of options to purchase up to 2,250,000 shares of Company common stock at the fair market value on the date of grant. Under this plan, 1,999,481 shares have been granted. In 1996 shareholders voted to reduce the number of options available for granting under the plan by 250,519. This depleted all remaining options available for granting under this plan. On December 1, 1995, Mesa adopted an additional employee stock option plan under the new management incentive program (Omnibus Plan) which provides for the granting of options to purchase up to 2,800,000 shares of Company common stock at the fair market value on the date of grant. Under this plan, 1,958,458 options have been granted. -37- 38 In March 1993, Mesa adopted a directors' stock option plan for outside directors. This plan provides for the grant of options for up to 800,000 shares of Mesa's common stock at fair market value on the date of grant. This is a formula-based plan under which 100,000 options have been granted. In 1996 shareholders voted to reduce the number of options available for granting under the plan by 590,000. There are 110,000 remaining options available for granting under this plan. On December 9, 1994, Mesa adopted an additional directors' stock option plan for outside directors. This plan provides for the grant of options for up to 50,000 shares of Mesa's common stock at fair market value on the date of grant. This is a formula-based plan under which 24,000 options have been granted. Transactions in stock options under these plans are summarized as follows:
Shares under Exercisable options Price range shares ----------------------------------------------- Outstanding at September 30, 1993 2,219,273 $1.34 - $19.25 1,124,042 Granted 658,400 $7.25 - $17.25 Exercised (534,129) $1.34 - $12.75 Canceled (118,324) $1.40 - $ 7.34 Outstanding at September 30, 1994 2,225,220 1,099,318 Granted 273,200 $6.00 - $ 8.38 Exercised (687,487) $1.34 - $ 7.75 Canceled (185,867) $7.09 - $17.25 Outstanding at September 30, 1995 1,625,066 946,204 Granted 2,007,125 $9.13 - $11.88 Exercised 194,759 $7.09 - $ 8.50 Canceled 48,385 $7.75 - $16.00 Outstanding at September 30, 1996 3,389,047 1,509,332
At September 30, 1996, there were 977,542 shares of common stock available for grant under these plans. At its December 1, 1995 meeting, the Board of Directors of Mesa approved a stock buy-back program under which cash generated by operations may be used to repurchase Mesa common stock. During fiscal year 1996, Mesa repurchased 5.5 million shares having a value of approximately $54 million. The Board's intent is that available cash not required for working capital, general corporate purposes or other investment opportunities be used to repurchase Mesa common stock. 8. Benefit Plans Mesa and WestAir have 401(k) plans under which employees may contribute up to 15 percent of their annual compensation, as defined. Mesa and WestAir currently make matching contributions of 50 percent of employee contributions up to 10 percent. To be eligible to participate in their respective plans, employees must be at least 21 years of age, have a minimum of one year of service with Mesa and have worked at least 1,000 hours. These plans are not available to certain union employees. Upon completing three years' service, the employee is 20 percent vested in employer contributions and the remainder of the employer contributions vest 20 percent per year. -38- 39 The employees become fully vested in employer contributions after seven years of employment. Mesa has the right to terminate the 401(k) plan at any time. Contributions by Mesa to the above plans for the years ended September 30, 1996, 1995 and 1994 were $1,286,746, $1,097,023, and $894,633, respectively. A management incentive program (Omnibus Plan), approved in September 1995 and ratified by shareholders at the April 1996 annual meeting, has a cash incentive provision that ties the corporate officers to an increase in the earnings per share over the previous year, and the division/subsidiary executives to a specified rate of return on revenue. The total incentive expense under the Omnibus Plan for fiscal year 1996 and 1995 was approximately $1.9 million and $165,000 respectively. On March 9, 1993, Mesa adopted an Employee Stock Bonus Plan which provides for employees of Mesa to receive shares of Common Stock in lieu of discretionary cash bonuses accrued each quarter. The custodian of the plan is empowered to determine the times at which and the conditions under which the plan, on behalf of participating employees, purchases shares of Common Stock. All purchases of Common Stock by the custodian will be made at prices approximating fair market value on the date of purchase, subject to the limitation that only 1,000,000 shares may be purchased over the life of the plan. The bonuses paid under the plan for the year ended September 30, 1996, 1995 and 1994 were $969,937, $541,044, and $2,059,000, respectively. Employees of Mesa who participate in Mesa's management incentive program are not eligible to receive a stock bonus under the employee plan. As of September 30, 1996, a total of 370,632 shares have been issued pursuant to the plan. 9. Lease Commitments a. Operating Leases At September 30, 1996, Mesa leased 73 aircraft under noncancelable operating leases with remaining terms ranging up to 16.5 years. The aircraft leases require Mesa to pay all taxes, maintenance, insurance and other operating expenses. Mesa has the option to terminate the leases at various times throughout the lease. Lease deposits totaling $1.0 million have been paid to secure the leases and are included in lease and equipment deposits on the accompanying consolidated balance sheet at September 30, 1996. Certain lease agreements contain provisions which, among other things, require Mesa to maintain (i) certain levels of net worth, (ii) the code-sharing agreement between United and WestAir, and (iii) certain debt and working capital ratios. Payment of cash dividends is also restricted. At September 30, 1996, Mesa was in compliance with these provisions. In accordance with provisions of certain aircraft lease agreements, Mesa is required to fund certain cash deposits to trustees based on flight hours incurred for the payment of certain engine and airframe maintenance costs of leased aircraft. In December 1990, Mesa negotiated an agreement which suspended certain of its cash deposit requirements. The aircraft lessors have agreed to continue to waive the payment requirements on a month-to-month basis. Aggregate rental expense totaled $59 million, $65.6 million (net of $0.8 million of sublease income), and $44.8 million (net of $8.2 million of sublease income) for the years ended September 30, 1996, 1995 and 1994, respectively. -39- 40 Future minimum lease payments under noncancelable operating leases are as follows:
Year ending September 30 -------------------------------- (in thousands) 1997 $ 38,649 1998 34,182 1999 32,774 2000 30,651 2001 27,335 Thereafter 118,301
10. Aircraft Acquisitions and Commitments At September 30, 1996, Mesa had commitments to acquire nine Beechcraft model 1900D aircraft prior to December 31, 1996. Beech Acceptance Corporation has agreed to provide lease or debt financing, at Mesa's option. Mesa has made a $25,000 deposit for each of these aircraft which is included in lease and equipment deposits at September 30, 1996 in the accompanying consolidated balance sheet. Mesa has the option under certain specified conditions to trade in at stipulated value its 1900C aircraft in "as-is" FAR Part 135 airworthy condition as new 1900D aircraft are received. As of September 30, 1996, five 1900C aircraft remained for trade-in which will be returned by December 31, 1996. Mesa accepted delivery of two Fokker 70 jet aircraft during the summer of 1995. Mesa's purchase contract included an option to acquire six additional aircraft. The agreement with Fokker allowed Mesa the right to return the two aircraft to Fokker from 12 to 18 months after delivery, subject to a six-month notification. During January 1996, Fokker announced a suspension of payments to its creditors. By April 1996, Fokker had entered into liquidation and was unable to provide the six additional Fokker 70 aircraft under option to Mesa. Therefore, since management believed a fleet of two Fokker 70s could not be operated profitably, the Company noticed the return of the two Fokker 70 aircraft. Daimler-Benz, the owner of the Fokker aircraft, and Mesa have negotiated an agreement in principle which allows Mesa to continue operating the two aircraft through August 1997 at existing lease rates in exchange for the Company's agreement to pay for time-related costs use of the aircraft through the date of return. At June 30, 1996, the Company accrued a provision for the hours utilized on the aircraft through June 30, 1996. In addition, the Company will continue to accrue additional time-related aircraft costs on an hourly basis through the remainder of the lease term of the aircraft. At June 30, 1996 the Company accrued an aircraft return provision for all other estimated costs related to the return of these two aircraft. Mesa has an aircraft order with Bombardier, Inc. to acquire 25 de Havilland Dash 8-200 aircraft worth $262.5 million with deliveries scheduled in early 1996 through March 1997. Due to production delays, the delivery schedule was delayed and Mesa was granted an option to cancel up to five of the 25 aircraft on order. As of September 30, 1996, Mesa had taken delivery of only five of the scheduled 14 Dash 8-200 aircraft. Mesa has arranged financing commitments for 10 of the 25 aircraft and is presently arranging financing for the remaining aircraft on order. Bombardier will participate as needed to finance any new aircraft deliveries. Mesa also has an option to acquire 25 additional de Havilland Dash 8-200 aircraft. The Dash-8-200 aircraft purchase agreement provides for a spare parts supply program, which includes all required parts to maintain the aircraft, excluding engines and propellers, for a period of seven years. Mesa will pay a fixed hourly charge per flight hour for this spare parts supply program. -40- 41 During August 1996, Mesa entered into a memorandum of understanding to acquire 16 Canadair Regional 50-passenger jet aircraft ("CRJs") worth approximately $320 million with deliveries to begin in February 1997. Mesa will trade in 12 Embraer Brasilia aircraft on the 16 Canadair Regional jet aircraft on order. An $8.3 million deposit has been made to Bombardier, Inc. related to this commitment, and Bombardier will participate as needed to provide financing for the CRJs. Mesa has options to acquire an additional 32 CRJ aircraft. 11. Supplemental Disclosures of Cash Flow Information
September 30 1996 1995 1994 ------------------------------ (in thousands) Cash paid for interest $12,047 $6,354 $7,861 Cash paid for income taxes $12,445 $4,961 $7,148
Mesa purchased property and equipment and made lease deposits upon which debt was assumed or incurred totaling approximately $110.8 million for the year ended September 30, 1994. In 1995, Mesa did not purchase any property or equipment upon which debt was assumed. During 1996 Mesa purchased property and equipment upon which debt was assumed of approximately $280 million. 12. Commitments and Contingencies During November 1996, Mesa Air Group reached a five-year agreement with the Air Line Pilots Association (ALPA) for a single pilot contract for all Mesa divisions and Air Midwest, Inc. The contract provides for industry-average pay, improved work rules and excellent opportunities for advancement. This contract will result in additional annual pilot payroll expense of approximately $3.1 million. WestAir pilots are also represented by ALPA and are currently in federal mediation regarding their contract negotiations. Air Midwest mechanics are represented by the International Association of Machinists (IAM) and WestAir flight attendants are represented by the Association of Flight Attendants (AFA). During the current year, Mountain West flight attendants voted to join AFA and are in contract negotiations. No Mesa Air Group divisions or subsidiaries are parties to any other collective bargaining agreement or union contracts. During December 1995, the Federal Aviation Administration (FAA) announced rules which require commuter airlines with aircraft of 10 or more passenger seats operating under FAR Part 135 rules to begin operating those aircraft under FAR Part 121 regulations by the end of March 1997. Mesa is one of the largest regional airlines operating under FAR Part 135 regulations. In anticipation of Mesa's conversion to FAR Part 121 and to address issues raised in past inspections, the FAA began a special review of Mesa's operations in June 1996. As a result of the special review by the FAA of Mesa's operations, a consent order was signed in September 1996 assessing a compromise civil penalty of $500,000. Mesa paid $250,000 of the compromise amount, and the remaining $250,000 will be waived upon Mesa complying with provisions of the consent order. Under the consent order, Mesa has agreed to adopt operational standards that exceed the requirements of the Federal Aviation Regulations. The consent order requires that control of operational areas (maintenance, flight operations and training) be consolidated under one central management team. The Company has until March 1997 to complete the specified tasks, and as of December 7, 1996 was on or ahead of the schedule set forth in the order. -41- 42 Based on the required conversion to FAR Part 121 and the provisions of the FAA consent order, Mesa anticipates a one-time capital expenditure of approximately $1.0 million in fiscal 1997 to bring all aircraft currently being operated by Mesa into compliance with the enacted FAR Part 121 rules. In addition, Mesa presently anticipates ongoing operational costs in order to comply with the FAR Part 121 rules and consent order of approximately $2.5 million per year. Recent events in Mesa's Denver system have resulted in many consumer complaints regarding the quality of service in that system. A United States Senator and two Congressmen from Colorado have also complained publicly about the service in the Denver system and requested a Congressional investigation regarding the service level there. In response to these concerns, Mesa has made significant efforts to improve the Denver situation including hiring additional customer service personnel and placing spare aircraft with flight crew in Denver to assist in reducing flight cancellations. These actions have reduced the operational problems in Denver. The Company has retained the services of a public relations firm and a government affairs firm to address its relationships with local communities and government representatives. The Company has received no further indication that a Congressional investigation regarding the service level in Denver will occur. During September 1996, the Department of Transportation (DOT) requested supplemental information from Mesa as part of its continuing fitness review obligations. The DOT has stated the request was made because of the Company's expansion into jet service. Mesa has supplied all requested information, and it does not anticipate any action will be taken by the DOT. WestAir Commuter Airlines, Inc. and ALPA were engaged in alleged unlawful misconduct litigation against each other. Each party sought injunctive relief and monetary damages. This matter was dismissed by mutual consent of both parties. During 1994, seven shareholder class action complaints were filed in the United States District Court for the District of New Mexico against Mesa, certain of its present and former corporate officers and directors, and certain underwriters who participated in Mesa's June 1993 public offering of common stock. These complaints have been consolidated by court order, and, after the court granted in part a motion to dismiss in May 1996, a second amended consolidated complaint was filed alleging that during various periods the defendants caused or permitted Mesa to issue publicly misleading financial statements and other misleading statements in annual and quarterly reports to shareholders, press releases and interviews with securities analysts. The current complaint alleges that these statements misrepresented Mesa's financial performance and condition, its business, the status of its operations, its earnings, its capacity to achieve profitable growth and its future business prospects, all with the purpose and effect of artificially inflating the market price of common stock of Mesa throughout the relevant period. The complaint further alleges that certain officers and directors of the Company illegally profited from sales of Mesa common stock during these periods. The complaint seeks damages against the defendants in an amount to be determined at trial (including rescission and/or money damages as appropriate), disgorgement of all insider trading profits earned by defendants in connection with the sale of common stock of Mesa, and reasonable attorney, accountant and expert fees. During October 1995, the court granted class certification in the action. Mesa has accrued approximately $5.7 million to vigorously defend the class action litigation, of which $4.1 million is included in Deferred Credits as of September 30, 1996. Mesa and the corporate officers and directors deny the allegations made against them in these lawsuits. Further, Mesa and the corporate officers and directors believe they have substantial and meritorious defenses against these allegations and intend to continue to defend their position vigorously. However, should an unfavorable resolution of this litigation occur, it is possible that Mesa's future results of operations or cash flows could be materially affected in a particular period. -42- 43 In a related case, in September 1994, a shareholder derivative suit was filed in the United States District Court for the District of New Mexico, purportedly on behalf of Mesa. The derivative lawsuit was dismissed by the Court on August 12, 1996. Mesa is also a party to legal proceedings and claims which arise during the ordinary course of business, none of which are expected to have a material adverse effect on Mesa's financial position. In the belief of management, based upon information known at this time, the ultimate outcome of these proceedings and claims pending against Mesa is not expected to have a material adverse effect on Mesa's financial position. 13. Financial Instrument Disclosure The carrying amount of cash and cash equivalents, receivables, notes receivable and accounts payable approximate fair value due to the short maturity periods of these instruments. The fair value of marketable securities is based on quoted market prices (see note 2). Substantially all of Mesa's long-term debt bears interest at rates which fluctuate with market rates and therefore the carrying amounts approximate fair value. 14. Valuation and Qualifying Accounts
Balance at Additions beginning of charged to costs Balance at end year and expenses Deductions of year ---------------------------------------------------------------- Allowance for obsolescence deducted from expendable parts and supplies September 30, 1996 1,200 150 -- 1,350 September 30, 1995 1,695 -- 495 1,200 September 30, 1994 1,250 600 155 1,695
During fiscal year 1995, $495,000 of allowance for obsolescence was transferred to Other Assets. -43- 44 15. Selected Quarterly Financial Data (Unaudited) The following table presents selected quarterly unaudited financial data (in thousands):
First Second Third Fourth 1996 Quarter Quarter Quarter Quarter - ---- --------------------------------------------- Operating revenues $120,029 $120,974 $130,274 $129,086 Operating income 7,602 8,324 14,305 17,763 Net earnings 3,874 11,865 6,525 8,143 Net earnings per share $ 0.12 $ 0.39 $ 0.23 $ 0.29 First Second Third Fourth 1995 Quarter Quarter Quarter Quarter - ---- --------------------------------------------- Operating revenues $101,828 $106,885 $118,076 $128,350 Operating income 5,779 2,264 7,141 14,388 Net earnings 2,745 63 3,615 7,589 Net earnings per share $ 0.08 $ 0.00 $ 0.11 $ 0.23 ---------------------------------------------
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. -44- 45 PART III Item 10. Directors and Executive Officers of the Registrant The following table sets forth the names and ages of the directors and executive officers of Mesa and certain additional information:
DIRECTOR NAME AGE POSITION SINCE - ---- --- -------- ----- Larry L. Risley(1) 52 Chief Executive Officer and Chairman of 1983 the Board of Directors of Mesa Air Group, Inc. Clark Stevens 46 Director, President of Mesa Air Group, Inc., 1995 and Chief Operating Officer Blaine M. Jones 42 Director 1985 E. Janie Risley(1) 50 Director 1983 George W. Pennington 68 Director 1986 Richard C. Poe 62 Director 1986 Jack Braly 55 Director 1993 W. Stephen Jackson 49 Chief Financial Officer, Treasurer -- and Vice President of Finance Gary E. Risley(1) 38 Secretary, Vice President of Legal -- Affairs and General Counsel
Larry L. and E. Janie Risley are husband and wife and Larry L. Risley is Gary E. Risley's uncle. The directors hold office until the next annual meeting of shareholders and until their successors are elected and qualified. Mesa pays each director who is not an officer of Mesa a nominal fee for each meeting of the Board of Directors attended and reimburses expenses incurred in attending meetings. LARRY L. RISLEY is Chief Executive Officer and Chairman of the Board of Directors of Mesa, positions he has held since Mesa was incorporated in 1983. He served as President of Mesa from 1983 until February 1995. From April 1979 until August 1982, Mr. Risley was President of Mesa Aviation Services, Inc., the fixed base operator at Farmington, New Mexico. E. JANIE RISLEY is a member of Mesa's Board of Directors. From August 1982 until June 1990, Ms. Risley was Executive Vice President and Vice President responsible for personnel management, reservations, and station operations. Larry L. Risley and E. Janie Risley are husband and wife. CLARK STEVENS was named President of Mesa Air Group, Inc. in February 1995 and became a member of the Board of Directors in March 1995. He served as President of FloridaGulf since February 1993. From December 1992 to February 1993, Mr. Stevens served as Vice President-DFW Division with Simmons Airlines dba American Eagle. From September 1990 to December 1992, he served as Executive Vice President of Metroflight, Inc. dba American Eagle ("Metro"). In 1991, Metro filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. Metro emerged from Bankruptcy -45- 46 during 1992. Prior to his service at Metro, from August 1975 to September 1990, Mr. Stevens served as President of Chaparral Airlines, Inc. BLAINE M. JONES is a member of the Board of Directors. Prior to his resignation from Mesa in March 1995, Mr. Jones held the position of President of Mountain West since July 1994 and Chief Financial Officer from April 1985 through March 1994 and Treasurer from December 1985 through July 1994. GEORGE W. PENNINGTON has been a director of Mesa since January 1986. Mr. Pennington is President of Farmer Family Center, Inc., a retail supermarket; President of REDROX, Inc., a real estate development company; and general partner of Pennington Partnerships, a real estate development company, all located in Bloomfield, New Mexico. RICHARD C. POE has been a director of Mesa since January 1986. He has been President and Chief Executive Officer of Dick Poe Chrysler-Plymouth, Inc. since 1962 and of Dick Poe Pontiac-Toyota, Inc. since 1980. He is also a director of M Bank, El Paso, Texas. JACK BRALY was appointed as director of Mesa in December 1993. Mr. Braly is currently serving as President of Sino Swearingen, a corporate jet manufacturer. He served as Vice President and General Manager -- North American Aircraft Modification of Rockwell International Corporation from June 1994 to August 1996. He served as the President of Beech Aircraft Corporation from March 1991 until July 1993. Mr. Braly began with Beech in 1978 and worked in various management positions including Vice President of Operations and Vice President of Manufacturing until becoming President in March 1991. GARY E. RISLEY is Secretary, Vice President of Legal Affairs and General Counsel for Mesa. He has held the position of General Counsel since September 1987 and the position of Corporate Secretary since March 1988. He has served as Vice President of Legal Affairs since February 1989. Mr. Risley is the nephew of Larry L. Risley, Chief Executive Officer and Chairman of the Board of Mesa. W. STEPHEN JACKSON, a Certified Public Accountant, was appointed Chief Financial Officer of Mesa Air Group, Inc. in March 1994. In July 1994 he assumed the additional responsibilities of Treasurer and Vice President of Finance. Immediately prior to joining Mesa Air Group, Inc., Mr. Jackson was President of WSJ Development Company, a financial consulting and real estate development firm. Before that, Mr. Jackson was a partner at KPMG Peat Marwick serving clients for over 20 years in the transportation, financial institution, real estate and high technology industries. Item 11. Executive Compensation The information set forth in the 1996 Proxy Statement to shareholders is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information set forth in the 1996 Proxy Statement to shareholders is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Mesa will enter into future business arrangements with related parties only where such arrangements are approved by a majority of disinterested directors and are on terms at least as favorable as available from unaffiliated third parties. -46- 47 PART IV Item 14. Exhibits, Schedules and Reports on Form 8-K (A) Documents filed as part of this report: 1. Reference is made to consolidated financial statement schedules in item 8 hereof. 2. Reports on Form 8-K Other events - August 19, 1996 Other events - September 27, 1996 3. Exhibits The following exhibits are either filed as part of this report or are incorporated herein by reference from documents previously filed with the Securities and Exchange Commission:
EXHIBIT NUMBER DESCRIPTION REFERENCE ------ ----------- --------- 2.1 Plan and Agreement of Merger of Mesa Air Filed herewith Group, Inc. into Mesa Holding, Inc. dated September 16, 1996 3.1 Articles of Incorporation of Mesa Air Filed herewith Holdings, Inc. dated May 28, 1996 3.2 Bylaws of Mesa Air Group, Inc., as Filed herewith amended to date 4.1 Form of Common Stock certificate Filed as Exhibit 4.5 to Amendment No. 1 to Registrant's Form S-18, Registration No. 33- 11765 filed March 6, 1987, incorporated herein by reference 4.2 Form of Common Stock certificate (issued Filed as Exhibit 4.8 to Form S-1, Registration after November 12, 1990) No. 33-35556 effective December 6, 1990, incorporated herein by reference 4.8 Form of Employee Non-Incentive Stock Filed as Exhibit 4.12 to Registrant's Form 10-K Option Plan, dated as of June 2, 1992 for the fiscal year ended September 30, 1992, Commission File No. 33-15495, incorporated herein by reference 4.9 Form of Non-Incentive Stock Option issued Filed as Exhibit 4.13 to Registrant's Form 10-K under Mesa Airlines, Inc. Employee Non- for the fiscal year ended September 30, 1992, Incentive Stock Option Plan, dated as of Commission File No. 33-15495, incorporated June 2, 1992 herein by reference 4.10 Form of Mesa Airlines, Inc. Filed as Exhibits 4.1, 4.2 and 4.3 to Outside Directors Stock Option Registration No. 33-09395 effective August 1, Plan, dated as of March 9, 1993 1996
-47- 48
EXHIBIT NUMBER DESCRIPTION REFERENCE ------ ----------- --------- 4.11 Form of Stock Option issued under Mesa Filed as Exhibit 4.4 to Registration No. 33- Airlines, Inc. Outside Director's Stock 09395 effective August 1, 1996 Option Plan, dated as of March 9, 1993 4.12 Form of Mesa Airlines, Inc. Filed as Exhibit 4.5 to Registration No. 33- Additional Outside Directors Stock 09395 effective August 1, 1996 Option Plan dated as of December 9, 1994 4.13 Form of Non-Qualified Stock Option Issued Filed as Exhibit 4.6 to Registration No. 33- Under Mesa Airlines, Inc. Additional 09395 effective August 1, 1996 Outside Directors' Stock Option Plan 4.14 Form of Mesa Air Group, Inc. Restated and Filed as Exhibit 4.1 to Registration No. 33- Amended Employee Stock Option Plan 02791 effective April 24, 1996 dated April 23, 1996 4.15 Form of Non-Qualified Stock Option issued Filed as Exhibit 4.2 to Registration No. 33- under Mesa Air Group, Inc. Restated and 02791 effective April 24, 1996 Amended Employee Stock Option Plan dated April 23, 1996 4.16 Form of Qualified Stock Option issued Filed as Exhibit 4.3 to Registration No. 33- under Mesa Air Group, Inc. Restated and 02791 effective April 24, 1996 Amended Employee Stock Option Plan dated April 23, 1996 10.17 Agreement between Beech Aircraft Filed as Exhibit 10.30 to Form S-1, Corporation and Mesa Airlines, Inc., dated Registration No. 33-35556 effective December April 30, 1990 6, 1990, incorporated herein by reference 10.18 Sublease Agreement between Air Midwest, Filed as Exhibit 10.32.1 to Form S-1, Inc. and Mesa Airlines, Inc., dated April 27, Registration No. 33-35556 effective December 1990 for Embraer Brasilia aircraft 120.180 6, 1990, incorporated herein by reference 10.20 Agreement between Air Midwest, Inc. and Filed as Exhibit 10.32.3 to Form S-1, Mesa Airlines, Inc., dated February 27, Registration No. 33-35556 effective December 1990, for purchase of four Embraer Brasilia 6, 1990, incorporated herein by reference aircraft 10.21 Letter Agreement between McDonnell Filed as Exhibit 10.32.4 to Form S-1, Douglas Finance Corporation, Air Midwest, Registration No. 33-35556 effective December Inc. and Mesa Airlines, Inc., dated March 6, 1990, incorporated herein by reference 19, 1990, as amended, regarding lease and sublease of four Embraer Brasilia aircraft 10.22 Sublease Agreement between Air Midwest Filed as Exhibit 10.32.5 to Form S-1, Inc. and Mesa Airlines, Inc., dated July 26, Registration No. 33-35556 effective December 1990, for Embraer Brasilia aircraft 120.193 6, 1990, incorporated herein by reference 10.23 Lease Agreement between McDonnell Filed as Exhibit 10.32.6 to Form S-1, Douglas Finance Corporation and Mesa Registration No. 33-35556 effective December Airlines, Inc., dated July 26, 1990, for 6, 1990, incorporated herein by reference Embraer Brasilia aircraft 120.193 10.24 Sublease Agreement between Air Midwest Filed as Exhibit 10.32.7 to Form S-1, Inc. and Mesa Airlines, Inc., dated Registration No. 33-35556 effective December September 26, 1990, for Embraer Brasilia 6, 1990, incorporated herein by reference aircraft 120.203
-48- 49
EXHIBIT NUMBER DESCRIPTION REFERENCE ------ ----------- --------- 10.25 Lease Agreement between McDonnell Filed as Exhibit 10.32.8 to Form S-1, Douglas Finance Corporation and Mesa Registration No. 33-35556 effective December 6, 1990, Airlines, Inc., dated September 26, 1990, for incorporated herein by reference Embraer Brasilia aircraft 120.203 10.27 Expanded Partner Agreement between Filed as Exhibit 19.3 to Registrant's Form 10-Q United Air Lines, Inc., and Mesa Airlines, for the quarterly period ended June 30, 1990, Inc., dated February 15, 1990 Commission File No. 0-15495, incorporated herein by reference 10.29 Form of Directors' and Officers' Filed as Exhibit 10.41 to Form S-1, Indemnification Agreement Registration No. 33-35556 effective December 6, 1990, incorporated herein by reference 10.31 Agreement Relating to the Settlement of Filed as Exhibit 10.45 to Form S-1, Interline Accounts through Airlines Clearing Registration No. 33-35556 effective December House, Inc., between Airlines Clearing 6, 1990, incorporated herein by reference House, Inc. and Mesa Airlines, Inc., dated September 2, 1981 10.32 Agreement between Beech Aircraft Filed as Exhibit 10.42 to Form 10-K for fiscal Corporation and Mesa Airlines, Inc., dated year ended September 30, 1991, Commission September 18, 1991 File No. 0-15495, incorporated herein by reference 10.33 Agreement between USAir, Inc. and Air Filed as Exhibit 10.43 to Form 10-K for fiscal Midwest, Inc. year ended September 30, 1991, Commission File No. 0-15495, incorporated herein by reference 10.34 Agreement between USAir, Inc. and Filed as Exhibit 10.44 to Form 10-K for fiscal FloridaGulf Airlines, Inc. year ended September 30, 1991, Commission File No. 0-15495, incorporated herein by reference 10.35 Sublease agreement between Trans States Filed as Exhibit 10.45 to Form 10-K for fiscal Airlines, Inc. and Air Midwest, Inc. year ended September 30, 1992, Commission File No. 0-15495, incorporated herein by reference 10.37 Agreement between Beech Aircraft Filed as Exhibit 10.47 to Form 10-K for fiscal Corporation, Beech Acceptance year ended September 30, 1992, Commission Corporation, Inc. and Mesa Airlines, Inc., File No. 0-15495, incorporated herein by dated August 21, 1992 reference 10.38 Agreement between America West Airlines, Filed as Exhibit 10.48 to Form 10-K for fiscal Inc. and Mesa Airlines, Inc. year ended September 30, 1992, Commission File No. 0-15495, incorporated herein by reference 10.39 Agreement between United Air Lines, Inc. Filed as Exhibit 10.49 to Form 10-K for fiscal and WestAir Commuter Airlines, Inc. year ended September 30, 1992, Commission (WestAir) File No. 0-15495, incorporated herein by reference 10.40 Plan and Agreement to Merge between Mesa Filed as Exhibit A to Form S-4 Registration Airlines, Inc., Mesa Acquisition Corporation No. 33-45638, effective April 17, 1992, and WestAir Holding, Inc., dated February incorporated herein by reference 7, 1992. 10.41 Certificate of Public Convenience and Filed as Exhibit 10.1(a) to WestAir Holding, Necessity for WestAir Commuter Airlines, Inc.'s Registration Statement on Form S-1, Inc. Commission File No. 33-24316, incorporated herein by reference
-49- 50
EXHIBIT NUMBER DESCRIPTION REFERENCE ------ ----------- --------- 10.42 Air Carrier Operating Certificate for Filed as Exhibit 10. to WestAir Holding, Inc.'s WestAir Registration Statement on Form S-1, Commission File No. 33-24316, incorporated herein by reference 10.46 Original Agreement to Lease dated as of Filed as Exhibit 10.44 to WestAir Holding, April 27, 1987 between NPA, Inc. ("NPA") Inc.'s Registration Statement on Form S-1, and British Aerospace, Inc. ("BAe") with a Commission File No. 33-24316, incorporated Letter to FG Holdings, Inc. ("FGH") dated herein by reference March 11, 1988 and Amendment No. 1 to Agreement to Lease dated as of March 3, 1988 between BAe and FGH 10.47 Side Letter Agreement to NPA from JACO Filed as Exhibit 10.48 to WestAir Holding, dated June 4, 1987 Inc.'s Registration Statement on Form S-1, Commission File No. 33-24316, incorporated herein by reference 10.49 Employment Agreement dated as of Filed as Exhibit 10.51(b) to WestAir Holding, September 1, 1988 between WestAir and Inc.'s Registration Statement on Form S-1, Maurice J. Gallagher Jr. Commission File No. 33-24316, incorporated herein by reference 10.50 Aviation Land and Building Lease and Filed as Exhibit 10.164 to the Pre-effective Agreement between City of Fresno, Amendment No. 1, filed October 19, 1988, to California and WestAir dated January 7, WestAir Holding, Inc.'s Registration Statement 1986 on Form S-1, Commission File No. 33-24316, incorporated herein by reference 10.51 Airport Operating Permit between Airport Filed as Exhibit 10.67 to WestAir Holding, Commission of City and County of San Inc.'s Registration Statement on Form S-1, Francisco and WestAir Commission File No. 33-24316, incorporated herein by reference 10.58 Promissory Note to Textron for spare parts Filed as Exhibit 10.80 to WestAir Holding, as executed by WestAir, dated December 30, Inc.'s Form 10-K dated December 31, 1988, 1988 Commission File No. 33-24316, incorporated herein by reference 10.59 Agreement to lease Jetstream model 3101 Filed as Exhibit 2.1 to WestAir Holding, Inc.'s aircraft and Jetstream model 3201 aircraft Form 8-K filed June 8, 1989, Commission File between BAe and WestAir, dated May 11, No. 33-24316, incorporated herein by reference 1989 10.60 Amendment to Agreement to Lease dated Filed as Exhibit 10.38 to WestAir Holding, May 11, 1989 between WestAir and BAe, Inc.'s Form 10-K for the year ended December dated February 15, 1990 31, 1989, Commission File No. 33-24316, incorporated herein by reference 10.61 Amended and Restated Stock Purchase Filed as Exhibit 10.42(a) to WestAir Holding, Agreement, dated September 30, 1991 Inc.'s Form 10-K for the year ended December among WestAir Holding, Inc., WestAir 31, 1991, Commission File No. 33-24316, Commuter Airlines, Inc. and Atlantic Coast incorporated herein by reference Airlines, Inc., relating to the sale of the Atlantic Coast division of WestAir Commuter Airlines, Inc.
-50- 51
EXHIBIT NUMBER DESCRIPTION REFERENCE ------ ----------- --------- 10.65 Agreement of Purchase and Sales of Assets Filed as Exhibit 10.90 to Mesa Airlines, Inc. by and among Crown Airways, Inc., Phillip Form 10-K for the year ended September 30, R. Burnaman, A. J. Beiga and Mesa 1994, Commission File No. 0-15495 Airlines, Inc., dated as of December 16, 1993 10.66 Supplemental Agreement No. 9/03/94 Filed as Exhibit 10.66 to Mesa Airlines, Inc. Beechcraft 1900 D Airliner Acquisition Form 10-K for the year ended September 30, Master Agreement between Mesa Airlines, 1994, Commission File No. 0-15495 Inc., Beech Aircraft Corporation and Beech Acceptance Corporation, Inc., dated as of September 23, 1994 10.67 Form of Lease Agreement between Beech Filed as Exhibit 10.67 to Mesa Airlines, Inc. Acceptance Corporation, Inc. and Mesa Form 10-K for the year ended September 30, Airlines, Inc., negotiated September 30, 1994, Commission File No. 0-15495 1994 for all prospective 1900 D Airliner leases. 10.68 Asset Purchase Agreement dated July 29, Filed as Exhibit 10.68 to Mesa Airlines, Inc. 1994 among Pennsylvania Commuter Form 10-K for the year ended September 30, Airlines, Inc., dba Allegheny Commuter 1994, Commission File No. 0-15495 Airlines, USAir Leasing and Services, Inc., and Mesa Airlines, Inc. 10.69 Letter Agreement in Principle dated as of Filed as Exhibit 10.69 to Mesa Airlines, Inc. October 16, 1994 among Air Wisconsin, Form 10-K for the year ended September 30, Inc., United Air Lines Inc. and Mesa 1994, Commission File No. 0-15495 Airlines, Inc. (Certain portions deleted pursuant to request for confidential treatment) (Referred to erroneously as Exhibit 10.94 in letter asking for confidential treatment to Securities and Exchange Commission dated 12-23-94 from Chapman & Cutler) 10.70 Subscription Agreement between AmWest Filed as Exhibit 10.70 to Mesa Airlines, Inc. Partners, L.P. and Mesa Airlines, Inc. dated Form 10-K for the year ended September 30, as of June 28, 1994 1994, Commission File No. 0-15495 10.71 Omnibus Agreement Filed as Exhibit 10.71 to Mesa Air Group, Inc. Form 10-Q for the quarter ended December 31, 1994, Commission File No. 0-15495 10.72 Aircraft Purchase and Sale Agreement Filed as Exhibit 10.72 to Mesa Air Group, Inc. Form 10-Q for the quarter ended December 31, 1994, Commission File No. 0-15495 10.73 Expendable and Rotable Spare Parts and Filed as Exhibit 10.73 to Mesa Air Group, Inc. Sale Agreement Form 10-Q for the quarter ended December 31, 1994, Commission File No. 0-15495 10.74 United Express Agreement Amendment Filed as Exhibit 10.74 to Mesa Air Group, Inc. Form 10-Q for the quarter ended December 31, 1994, Commission File No. 0-15495 10.75 Side Letter Agreement Filed as Exhibit 10.75 to Mesa Air Group, Inc. Form 10-Q for the quarter ended December 31, 1994, Commission File No. 0-15495
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EXHIBIT NUMBER DESCRIPTION REFERENCE ------ ----------- --------- 10.76 First Amendment to Omnibus Agreement Filed as Exhibit 10.76 to Mesa Air Group, Inc. Form 10-Q for the quarter ended December 31, 1994, Commission File No. 0-15495 10.77 Operating Lease Agreement Filed as Exhibit 10.77 to Mesa Air Group, Inc. Form 10-Q for the quarter ended December 31, 1994, Commission File No. 0-15495 10.78 Item 3. Legal Proceedings - Form 10-K Filed as Exhibit 10.78 to Mesa Air Group, Inc. dated September 30, 1994 Form 10-Q for the quarter ended December 31, 1994, Commission File No. 0-15495 10.79 Purchase Agreement B95-7701-PA-200 Filed as Exhibit 10.79 to Mesa Air Group, Inc. between Bombardier, Inc. and Mesa Form 10-Q for the quarter ended March 31, Airlines, Inc. 1995, Commission File No. 0-15495 10.81 Letter of Understanding between Mesa Filed as Exhibit 10.81 to Mesa Air Group, Inc. Air Group, Inc. and Raytheon Aircraft Form 10-Q for the quarter ended March 31, Company (RAC) dated April 12, 1996. 1996, Commission File No. 0-15495 (Request for confidential treatment submitted to SEC) *10.82 Supplemental Agreement No. 05/22/96, Filed herewith Beechcraft 1900D Airliner Acquisition Master Agreement between Mesa Air Group, Inc., Raytheon Aircraft Company and Raytheon Aircraft Credit Corporation 21.1 Subsidiaries list of Mesa Air Group, Inc. Filed herewith 23.1 Independent Auditors' Consent of KPMG Filed herewith Peat Marwick LLP Ex-27 Financial Data Schedule Filed herewith
- ------------- * This document has been filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. An excised version of the documents is being filed as an exhibit hereto. -52- 53 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MESA AIR GROUP, INC. By: /s/ Larry L. Risley ---------------------------- Larry L. Risley Chief Executive Officer and Chairman of the Board of Directors By: /s/ W. Stephen Jackson ---------------------------- W. Stephen Jackson Chief Financial Officer, Treasurer and Vice President of Finance Dated: December 23, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Larry L. Risley Chairman, Chief Executive Officer, Director December 23, 1996 - ----------------------------------- Larry L. Risley /s/ J. Clark Stevens President, Chief Operating Officer December 23, 1996 - ----------------------------------- J. Clark Stevens /s/ Jack Braly Director December 23, 1996 - ----------------------------------- Jack Braly /s/ Blaine M. Jones Director December 23, 1996 - ---------------------------------- Blaine M. Jones /s/ E. Janie Risley Director December 23, 1996 - ------------------------------------ E. Janie Risley /s/ Richard C. Poe Director December 23, 1996 - ---------------------------------- Richard C. Poe /s/ George W. Pennington Director December 23, 1996 - ---------------------------- George W. Pennington
-53- EX-2.1 2 PLAN AND AGREEMENT OF MERGER 1 EXHIBIT 2.1 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER ("Agreement") is made and entered into as of September 16, 1996, by and between MESA AIR GROUP, INC., a New Mexico corporation, 2325 East 30th Street, Farmington, New Mexico 87401 (hereinafter referred to as "Mesa NM"), and MESA HOLDINGS, INC., a Nevada corporation 50 West Liberty Street, Suite 650, Reno, Nevada 89501(hereinafter referred to as "Mesa NV"). R E C I T A L: WHEREAS, Mesa NM desires to merge into Mesa NV and thereby transfer to Mesa NV all rights and property owned by it, such merger (the "Merger") is provided for in this Agreement; NOW, THEREFORE, in consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Mesa NM and Mesa NV hereby agree as follows: A G R E E M E N T: SECTION 1. Merger and the Surviving Corporation. (a) Subject to the terms and conditions of this Agreement, Mesa NM shall be merged into Mesa NV (which shall be the surviving corporation in the Merger) in accordance with the New Mexico Business Corporation Act and the Nevada Revised Statutes. Following the filing of Articles of Merger with the Secretary of State of Nevada, the Merger shall become effective at the close of business on September 27, 1996 (the "Effective Time"). For purposes hereof, the term "Surviving Corporation" shall mean Mesa NV as the corporation surviving in the Merger which will be governed by the laws of the State of Nevada. (b) At the Effective Time, by virtue of the Merger, all the rights, privileges, immunities and franchises, of a public as well as of a private nature, of each of Mesa NM and Mesa NV and all property, real, personal and mixed, and all debts due on whatever account, including choses in action, and all and every other interest of or belonging to or due to each of Mesa NM and Mesa NV shall be taken and deemed to be transferred to and vested in the Surviving Corporation without further act or deed, and the Surviving Corporation shall be responsible and liable for all of the liabilities and obligations of each of Mesa NM and Mesa NV, all with the full effect provided for in the New Mexico Business Corporation Act and the Nevada Revised Statutes. (c) The Articles of Incorporation of Mesa NV in effect immediately prior to the Effective Time shall be the Articles of Incorporation of the Surviving Corporation, until amended in accordance with the provisions thereof and the Nevada Revised Statutes, except that the name of Mesa NV, the Surviving Corporation, shall be changed to Mesa Air Group, Inc. 2 (d) The Bylaws of Mesa NV in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation, until altered, amended or repealed. (e) The directors of Mesa NV in office immediately prior to the Effective Time shall be the directors of the Surviving Corporation, until their successors are elected in accordance with the Bylaws of the Surviving Corporation and shall have been duly qualified. (f) The officers of Mesa NV in office immediately prior to the Effective Time shall be the officers of the Surviving Corporation, holding the offices in the Surviving Corporation which they then hold in Mesa NV, until their successors are elected or appointed in accordance with the Bylaws of the Surviving Corporation and shall have been duly qualified. SECTION 2. Conversion of Stock. At the Effective Time: Section 2.1. Mesa NV. (a) Each share of the Common Stock, without par value, of Mesa NV which is issued immediately prior to the Effective Time (whether then outstanding or held in the treasury of Mesa NV) shall be canceled and returned to the status of authorized but unissued shares, without the payment of any consideration therefor; and (b) Each share of the Preferred Stock, without par value, of Mesa NV which is issued immediately prior to the Effective Time (whether then outstanding or held in the treasury of Mesa NV) shall be canceled and returned to the status of authorized but unissued shares without the payment of any consideration therefor. Section 2.2 Mesa NM. (a) Each share of the Common Stock, without par value, of Mesa NM which is issued immediately prior to the Effective Time (whether then outstanding or held in the treasury of Mesa MN) shall be changed and converted into one fully paid and non-assessable share of Mesa NV Common Stock; (b) Each share of the Preferred Stock, without par value, of Mesa NM which is issued immediately prior to the Effective Time (whether then outstanding or held in the treasury of Mesa NM) shall be changed and converted into one fully paid and nonassessable share of Mesa NV Preferred Stock; and (c) Each of the outstanding stock options granted by Mesa NM which is outstanding immediately prior to the Effective Time shall be changed and converted into a stock option of Mesa NV. Section 2.3 Stock Certificates. Each outstanding certificate that prior to the Effective Time represented one share of either Common Stock or Preferred Stock of Mesa NM shall be deemed for all purposes to evidence ownership of and to represent one share of Common Stock or Preferred Stock of Mesa NV, respectively, into which the share of Mesa NM represented by such certificate has been converted as provided herein and shall be so registered on the books and records of Mesa NV or its transfer agents. The registered owner of any such outstanding stock certificate shall, until such certificate shall have been surrendered for transfer or conversion or otherwise accounted for to Mesa NV or its transfer agent, have and be entitled to exercise any voting and other rights with respect to -2- 3 and to receive any dividend and other distributions upon the share of Mesa NV evidenced by such outstanding certificate as provided above. SECTION 3. Conditions Precedent. The obligations of the parties to effect the Merger shall be subject to (a) the approval of this Agreement by the Board of Directors of each of the constituent corporations and (b) the approval of this Agreement by the affirmative vote of the holders of at least a majority of the outstanding shares of Common Stock of each of the constituent corporations at meetings of the stockholders duly called and held. SECTION 4. Amendment. This Agreement may be amended by the parties hereto, with the approval of their respective Boards of Directors, at any time prior to the Effective Time, whether before or after approval of this Agreement by the stockholders of the constituent corporations, but, after such approval by the stockholders, no amendment shall be made which materially adversely affects the rights of the stockholders of the constituent corporations without further approval of such stockholders. This Agreement may not be amended, except by an instrument in writing signed on behalf of each of the parties hereto. SECTION 5. Dissenters' Rights; Termination. Section 5.1. Dissenters' Rights. Any holder of issued and outstanding shares of the Common Stock of Mesa NM who votes against the Merger and enters his dissent in compliance with Section 53-15-4 of the New Mexico Business Corporation Act, as amended (shares held by such shareholders shall be referred to herein as "Dissenting Shares"), shall, subject to Section 5.2 hereof, receive cash in the amount of the fair market value of the Dissenting Shares within the time and in the manner provided by Section 53-15-4 of the New Mexico Business Corporation Act. Section 5.2 Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval hereof by the shareholders or by the Board of Directors of either Mesa NV or Mesa NM: (a) At the option of the Board of Directors of Mesa NM, if the holders of 10 percent or more of Mesa NM's issued and outstanding shares of Common or Stock shall not have voted in favor of the Merger and such holders shall have filed written objection and notice of their intent to exercise dissenters' rights with the Secretary of Mesa NM before the taking of the vote on the Merger in accordance with the New Mexico Business Corporation Act; or (b) By mutual agreement of the Board of Directors of Mesa NM and Mesa NV. If this Agreement is terminated for any reason, no party hereto shall have any liability hereunder of any nature whatsoever to the others. SECTION 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada. -3- 4 SECTION 7. Further Assurances. From time to time after the Effective Time as and when requested by the Surviving Corporation and to the extent permitted by law, the officers and directors of each of Mesa NV and Mesa NM last in office shall execute and deliver such assignments, deeds and other instruments and shall take or cause to be taken such further or other actions as shall be necessary in order to vest or perfect in or to confirm of record or otherwise to the Surviving Corporation title to, and possession of, all of the assets, rights, franchises and interests of each of Mesa NV and Mesa NM in and to every type of property (real, personal and mixed) and choses in action, and otherwise to carry out the purposes of this Agreement, and the proper officers and directors of the Surviving Corporation are fully authorized to take any and all such actions in the name of Mesa NV or Mesa NM or otherwise. SECTION 8. Execution in Counterparts. This Agreement may be executed in two or more counterparts, which together shall constitute a single agreement. IN WITNESS WHEREOF, Mesa NV and Mesa NM have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first written above. MESA HOLDINGS, INC., a Nevada corporation By: _____________________________________ J. Clark Stevens, President ATTEST: _____________________________ Gary E. Risley, Secretary MESA AIR GROUP, INC., a New Mexico corporation By: _____________________________________ J. Clark Stevens, President ATTEST: _____________________________ Gary E. Risley, Secretary -4- EX-3.1 3 ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 ARTICLES OF INCORPORATION OF MESA HOLDINGS, INC. The undersigned, a natural person, for the purpose of organizing a corporation for conducting the business and promoting the purposes hereinafter stated, under the provisions and subject to the requirements of the laws of the State of Nevada (particularly Chapter 78 of the Nevada Corporation Code and the acts amendatory thereof and supplemental thereto) hereby certifies that: FIRST: The name of the corporation (hereinafter called the "Corporation") is: MESA HOLDINGS, INC. SECOND: The name and street address of the registered agent of the Corporation in the State of Nevada is Burton, Bartlett & Glogovac, 50 West Liberty Street, Suite 650, Reno, Nevada 89501. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the laws of the State of Nevada. FOURTH: The Corporation is authorized to issue two classes of shares of capital stock designated as "Common Stock" and "Preferred Stock." The total number of shares of voting Common Stock which the Corporation shall have authority to issue is Seventy-Five Million (75,000,000) shares, with no par value. Each share of Common Stock issued and outstanding shall be entitled to one vote. The total number of shares of Preferred Stock which the Corporation shall have authority to issue is two Million (2,000,000) shares, with no par value. The Board of Directors may divide the shares of Preferred Stock into classes or series and shall, by resolution, fix and determine the voting powers, designations, preferences, limitations, restrictions, relative rights and distinguishing designation of each class or series. The Board of Directors shall have the right to create and issue, whether or not in connection with the issuance and sale of any of its shares or other securities, rights or options entitling the holders thereof to purchase from the Corporation shares of its Common or Preferred Stock upon such terms, at such times and at such prices as the Board of Directors may determine. 2 FIFTH: The name and the mailing address of the incorporator is as follows: Paul R. Madden Chapman and Cutler Two North Central Avenue Suite 1100 Phoenix, Arizona 85004 SIXTH: The members of the governing board shall be styled "directors." The first Board of Directors shall consist of seven directors. The name and address of the members of the first Board of Directors who shall serve until the first annual meeting of Shareholders are: NAME MAILING ADDRESS Larry L. Risley 2325 E. 30th Street Farmington, New Mexico 87401 E. Janie Risley 2325 E. 30th Street Farmington, New Mexico 87401 J. Clark Stevens 2325 E. 30th Street Farmington, New Mexico 87401 Jack Braly 78805 Pina Street LaQuinta, California 92253 Blaine M. Jones 3405 N. Ridge Court Farmington, New Mexico 87401 George W. Pennington 401 W. Broadway Bloomfield, New Mexico 87413 Richard C. Poe 6501 Montana Avenue El Paso, Texas 79925 Thereafter, the number of persons to serve on the Board of Directors, their terms of office and the manner of their election shall be fixed in the manner provided in the Bylaws. SEVENTH: To the fullest extent allowable under the Nevada Revised Statutes, no director or officer shall have personal liability to the Corporation or its shareholders, or to any other person or entity, for monetary damages for breach of his fiduciary duty as a director, except where there has been: -2- 3 (a) acts or omissions which involve intentional misconduct, fraud or knowing violation of law; or (b) authorization of the unlawful payment of a dividend or other distribution on the Corporation's capital stock, or the unlawful purchase of its capital stock. EIGHTH: The Corporation may, to the fullest extent permitted by the provisions of Section 78.751 of the Corporation Code of the Nevada Revised Statutes as the same may be amended and supplemented, indemnify all persons whom it shall have power to indemnify under such section from and against any and all of the expenses, liabilities or other matters referred to in or covered by such section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. The Corporation may pay or otherwise advance all expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding as such expenses are incurred and in advance of the final disposition of the action, suit or proceeding, provided that the indemnified officer or director undertakes to repay the amounts so advanced if a court of competent jurisdiction ultimately determines that such officer or director is not entitled to be indemnified by the Corporation. Nothing herein shall be construed to affect any rights to advancement of expenses to which personnel other than officers or directors of the Corporation may be entitled under any contract or otherwise by law. NINTH: Pursuant to Section 78.434 of the Corporation Code of the Nevada Revised Statutes, as the same may be amended and supplemented, the Corporation elects not to be governed by Sections 78.411 to 78.444 inclusive of the Nevada Revised Statutes. Dated this 28th day of May, 1996. By ___________________________ Its Incorporator -3- 4 STATE OF ARIZONA ) ) ss. County of Maricopa ) The foregoing instrument was acknowledged before me this 28th day of May, 1996, by Paul R. Madden. ______________________________ Notary Public My Commission Expires: _____________________________ -4- EX-3.2 4 BYLAWS OF MESA AIR GROUP, INC. 1 EXHIBIT 3.2 BYLAWS OF MESA AIR GROUP, INC. (AS AMENDED, OCTOBER 15, 1996) ARTICLE I OFFICES AND CORPORATE SEAL 1.1 Offices. The registered office of the corporation in the State of Nevada shall be located at 530 Las Vegas Boulevard South, Las Vegas, Nevada 89101. The corporation may conduct business and may have such other offices, either within or without the state of incorporation, as the Board of Directors may designate or as the business of the corporation may from time to time require. 1.2 Corporate Seal. A corporate seal is not required on any instrument executed for the corporation. If a corporate seal is used, it shall be either a circle having on its circumference "Mesa Air Group, Inc.," and in the center "Incorporated 1996 Nevada," or a circle having on its circumference the words "Corporate Seal." ARTICLE II SHAREHOLDERS 2.1 Annual Meeting. The annual meeting of the shareholders shall be held on March 15 of each year, commencing in 1997, at 10:00 o'clock a.m., or at such other time or on such other day as shall be fixed by the Board of Directors, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday such meeting shall be held on the next succeeding business day. 2.2 Special Meetings. The Chairman of the Board may and the Chairman of the Board or the Secretary shall, on written request of two members of the Board of Directors or of shareholders owning not less than 50 percent of the outstanding voting shares of the corporation, call special meetings of the shareholders, for any purpose or purposes unless otherwise prescribed by statute. The written request and the notice of the special meeting shall state the purposes of the meeting and the business transacted at the meeting shall be limited to the purposes stated in the notice. 2.3 Place of Meeting. The Board of Directors and the Chairman of the Board or the Secretary shall fix the time and place of all meetings of shareholders. 2.4 Notice of Meeting. Written notice stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than 10 nor more than 60 days before the date of the meeting either personally or by mail to each shareholder of record entitled to vote at such meeting. If mailed, 2 such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at this address as it appears on the stock transfer books of the corporation, with postage thereon prepaid. 2.5 Fixing Date for Determination of Shareholders of Record. To determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to express written consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of shares or for the purpose of any other lawful action, the Board of Directors of the corporation may fix, in advance, a record date which shall not be more than 60 days nor less than 10 days before the date of such meeting, nor more than 60 days nor less than 10 days prior to any other action. 2.6 Shareholder List. The officer or agent having charge of the stock transfer books shall prepare, at least ten days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order with the address of and the number of shares held by each shareholder of record. 2.7 Quorum. A majority of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. All shares represented and entitled to vote on any single subject matter which may be brought before the meeting shall be counted for the purposes of a quorum. Only those shares entitled to vote on a particular subject matter shall be counted for the purposes of voting on that subject matter. Business may be conducted once a quorum is present and may continue until adjournment of the meeting notwithstanding the withdrawal or temporary absence of sufficient shares to reduce the number present to less than a quorum. Unless otherwise required by law, the affirmative vote of the majority of shares represented at the meeting and entitled to vote on a subject matter shall constitute the act of the shareholders; provided, however, that if the shares then represented are less than required to constitute a quorum, the affirmative vote must be such as would constitute a majority if a quorum were present and, provided further, that the affirmative vote of the majority of the shares then present is sufficient in all cases to adjourn the meeting. 2.8 Proxies. At all meetings of shareholders, a shareholder may vote in person or by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. No proxy shall be valid after six months from the date of its execution, unless otherwise provided in the proxy, but in no event shall the proxy be valid for greater than seven years. Subject to these restrictions, any proxy properly created is not revoked and continues in full force and effect until another instrument or transmission revoking it or a properly created proxy bearing a later date is filed with or transmitted to the Secretary. 2.9 Voting Rights. Unless otherwise provided in the Articles of Incorporation or by the Nevada Revised Statutes, each outstanding share of capital stock shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders. At each election for directors every shareholder entitled to vote at such election shall have the right to vote, in -2- 3 person or by proxy, the number of shares owned by him for as many persons as there are directors to be elected for whose election he has a right to vote. Cumulative voting shall not be permitted. The candidates receiving the highest number of votes up to the number of directors to be elected are elected. ARTICLE III BOARD OF DIRECTORS 3.1 General Powers. The business and affairs of the corporation shall be managed by its Board of Directors. The directors shall in all cases act as a Board, and they may adopt such rules and regulations for the conduct of their meetings and the management of the corporation, as they may deem proper, not inconsistent with these Bylaws and the laws of Nevada. 3.2 Number, Tenure and Qualifications. The Board of Directors shall consist of seven directors. Each director shall hold office until the next annual meeting of shareholders and until his successor shall have been elected and qualified, or until his earlier resignation or removal. Should the number of directors be fixed at nine or more, the Board may, by resolution, classify the Board into three classes of directors. Each class of directors shall be elected for staggered terms so that approximately one-third of the total number of directors shall be elected at each annual meeting. Directors need not be residents of the State of Nevada or shareholders of the corporation. 3.3 Annual Meetings. The Board of Directors shall hold its annual meeting immediately following the annual meeting of shareholders at the place announced at the annual meeting of shareholders. No notice is necessary to hold the annual meeting, provided a quorum is present. If a quorum is not present, the annual meeting shall be held at the next regular meeting or as a special meeting. 3.4 Regular Meetings. The Board of Directors may hold regular meetings without notice at the times and places determined by the Board of Directors. 3.5 Special Meetings. The Chairman of the Board or Secretary may, and on written request of two directors shall, call special meetings of the Board of directors on not less than two days' notice to each director personally or by telegram or telephone, or on not less than five days' notice to each director by mail. 3.6 Telephonic Meetings. Regular or special meetings of the Board of Directors may be held at any place within or without State of Nevada and may be held by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, their participation in such a meeting to constitute presence in person. 3.7 Waiver of Notice. Attendance of a director at a meeting shall constitute waiver of notice unless the director objects at the commencement of the meeting that the meeting is not -3- 4 lawfully called or convened. Any director may waive notice of any meeting by executing a written waiver of notice. 3.8 Quorum. A majority of the directors then serving shall constitute a quorum for the transaction of business, but if less than said number is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. The act of a majority of the directors present at a meeting at which a quorum is present, unless otherwise provided by the Nevada Revised Statutes, these Bylaws or the Articles of Incorporation, shall be the act of the Board of Directors. 3.9 Newly Created Directorships. The Board of Directors may increase the number of directors by a majority vote. Newly created directorships resulting from an increase in the number of directors may be filled by a majority vote of the directors then in office. The term of any newly created directorship shall be determined by the Board of Directors. 3.10 Removal of Directors. At a meeting of shareholders called expressly for that purpose and by a vote of the holders of not less than two-thirds of the shares then entitled to vote at an election of the directors, any director or the entire Board of Directors may be removed, with or without cause. 3.11 Vacancies. Directors shall be elected to fill any vacancy by a majority vote of the remaining directors, though not less than a quorum, or by a sole remaining director. A director elected to fill a vacancy caused by resignation, death or removal shall be elected to hold office for the unexpired term of his or her successor. 3.12 Committees of the Board. The Board of Directors, by resolution adopted by a majority of the Board of Directors, may designate from among its members an executive committee and one or more other committees each of which, to the extent provided in such resolution and permitted by the Nevada Revised Statutes, shall have and may exercise all the authority of the Board. The Board, with or without cause, may dissolve any such committee or remove any member thereof at any time. The designation of any such committee and the delegation thereto of authority shall not operate to relieve the Board, or any member thereof, of any responsibility imposed by law. No committee shall have the power or authority to amend the Articles of Incorporation or Bylaws; adopt a plan of merger or consolidation, recommend to the shareholders the sale, lease, or other disposition of all or substantially all the property and assets of its business, or recommend to the shareholders a voluntary dissolution of the corporation. Each committee shall keep regular minutes of its meetings. 3.13 Action without a Meeting. Any action required or permitted to be taken by the Board of Directors at a meeting may be taken without a meeting if all directors consent thereto in writing. Such consent shall have the same effect as a unanimous vote. The writing or writings shall be filed with the minutes of the Board of Directors. 3.14 Compensation. The corporation may pay, or reimburse the directors for, the expenses of attendance at each meeting of the Board of Directors. The corporation may pay the directors a fixed sum for attendance at each meeting of the Board of Directors and a stated -4- 5 salary as director or directors may be granted stock options or a combination thereof. The Board of Directors shall establish and set forth in its minutes the amount or rate of compensation of directors. 3.15 Presumption of Assent. A director of the corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action unless his dissent shall be entered in the minutes of the meeting or unless he shall file a written dissent to such action with the Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered or certified mail to the Secretary of the Corporation within three business days after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. ARTICLE IV OFFICERS 4.1 Number. The officers of the corporation shall be a Chairman of the Board, a President, a Secretary, a Chief Financial Officer, and a Treasurer, each of whom shall be appointed by the Board of Directors. Such other officers, assistant officers and agents as deemed necessary may be elected or appointed by the Board of Directors. Any two or more offices may be held by the same person, except the offices of President and Secretary. 4.2 Tenure and Duties of Officers. The officers of the corporation to be appointed by the Board of Directors at the annual meeting of the Board of Directors. Officers shall hold office at the pleasure of the Board and shall exercise the power and perform the duties determined from time to time by the Board of Directors until his successor shall have been duly elected and shall have qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. 4.3 Removal. Any officer or agent elected or appointed by the Board of Directors may be removed by the affirmative vote of a majority of the directors, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. 4.4 Chairman of the Board. The Chairman of the Board shall be the chief executive officer of the corporation and, subject to the control of the directors, shall in general supervise and control all of the business and affairs of the corporation. He shall, when present, preside at all meetings of the shareholders and of the directors and in general shall perform all duties incident to the office of Chairman of the Board and such other duties as may be prescribed by the directors from time to time. Unless otherwise ordered by the Board of Directors, the Chairman of the Board shall have full power and authority on behalf of the corporation to attend and to act and to vote at any meeting of security holders of other corporations in which the corporation may hold securities. At such meeting, the Chairman of the Board shall possess and may exercise any and all rights and powers incident to the ownership of such securities which the corporation might have possessed and exercised if it had been present. The Board of Directors from time to time may confer similar powers upon any other person or persons. -5- 6 4.5 President. In the absence of the Chairman of the Board or in the event of his inability or refusal to act, the President shall perform the duties of the Chairman of the Board, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Chairman of the Board. 4.6 Vice Presidents. There shall be as many vice presidents as the Board of Directors chooses to appoint. Vice Presidents shall perform the duties assigned to them by the Board of Directors of the Chairman of the Board or the President. Any one of the vice Presidents, as authorized by the Board of Directors, shall have all the powers and perform all the duties of President if the President is temporarily absent or unable to act. 4.7 Secretary. The Secretary shall attend all meetings of the Board of Directors and the shareholders and shall keep the minutes of the shareholders' and of the directors' meetings in one or more books provided for that purpose, see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law, have charge of the corporate records, books, and accounts, and keep a register of the post office address of each shareholder which shall be furnished to the Secretary by such shareholder, have general charge of the stock transfer books of the corporation, sign with the Chairman of the Board certificates for shares of the corporation, and in general perform all duties incident to the office of Secretary, and perform such other duties as from time to time may be assigned to him by the Board of Directors or the Chairman of the Board. 4.8 Chief Financial Officer/Treasurer. The Chief Financial Officer/Treasurer shall be the chief financial officer of the Corporation. If required by the Board of Directors, the Chief Financial Officer/Treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety as the directors shall determine. He shall have charge and custody of and be responsible for all funds and securities of the corporation; receive and give receipts for monies due and payable to the corporation from any source whatsoever, and deposit all such monies in the name of the corporation in such banks, trust companies or other depositories as shall be selected by the Board of Directors and in general perform all of the duties incident to the office of Chief Financial Officer/Treasurer and such other duties as from time to time may be assigned to him by the Chairman of the Board or by the directors. ARTICLE V CERTIFICATES FOR SHARES AND THEIR TRANSFER 5.1 Certificates for Shares. 5.1.1 Certificates representing the shares of the corporation shall be in such form as shall be determined by the Board of Directors. Such certificates shall be signed by the Chairman of the Board or President and by the Secretary or an Assistant Secretary of the corporation. The signatures of such officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar, other than the corporation itself or an employee of the corporation. No certificate shall be issued for any share until such share is fully paid. -6- 7 5.1.2 If the corporation is authorized to issue shares of more than one class, every certificate representing shares issued by the corporation shall set forth or summarize upon the face or back of the certificate, or shall state that the corporation will furnish to any shareholder upon request and without charge, a full statement of the designations, preferences, limitations and relative rights of the shares of each class authorized to be issued, together with the variations in the relative rights and preferences between the various shares. 5.1.3 Each certificate representing shares shall state upon the face thereof (i) that the corporation is organized under the laws of the State of Nevada, (ii) the name of the person to whom issued, (iii) the number, class and designation of the series, if any, which the certificate represents, and (iv) the par value of each share represented by the certificate or a statement that the shares are without par value; and the (v) date of issue. 5.1.4 Any restriction on the right to transfer shares and any reservation of lien on the shares shall be noted on the face or the back of the certificate by providing (i) a statement of the terms of such restriction or reservation, (ii) a summary of the terms of such restriction or reservation and a statement that the corporation will mail to the shareholder a copy of such restrictions or reservations without charge within five (5) days after receipt of written notice therefor, (iii) if the restriction or reservation is contained in the Articles of Incorporation or Bylaws of the corporation, or in an instrument in writing to which the corporation is a party, a statement of that effect and a statement that the corporation will mail to the shareholder a copy of such restriction or reservation without charge within five days after receipt of written request therefor, or (iv) if each such restriction or reservation is contained in an instrument in writing to which the corporation is not a party, a statement to that effect. 5.1.5 Each certificate for shares shall be consecutively numbered or otherwise identified. 5.2 Transfers of Shares. 5.2.1 Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, and cancel the old certificate; every such transfer shall be entered on the transfer book of the corporation. 5.2.2 The corporation shall be entitled to treat the holder of record of any shares as the holder in fact thereof, and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person whether or not it shall have express or other notice thereof, except as expressly provided by the laws of Nevada. 5.3 Lost, Destroyed, Mutilated, or Stolen Certificates. The holder of any shares of the corporation shall immediately notify the corporation of any loss, destruction, mutilation, or -7- 8 theft of the certificate therefor, and the Board of Directors, may, in its discretion, cause a new certificate or certificates to be issued to him, in case of mutilation of the certificate, upon the surrender of the mutilated certificate, or, in case of loss, destruction, or theft of the certificate, upon a satisfactory proof of such loss, destruction, or theft, and, if the Board of Directors shall so determine, the submission of a properly executed lost security affidavit and indemnity agreement, or the deposit of a bond in such form and in such sum, and with such surety or sureties, as the Board may direct. ARTICLE VI INDEMNIFICATION 6.1 Indemnification. Every person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or a person of whom he is the legal representative is or was a director or officer of the corporation or is or was serving at the request of the corporation or for its benefit as a director or officer of another corporation, or as its representative in a partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless to the fullest extent legally permissible under the general corporation law of the State of Nevada from time to time against all expenses, liability and loss (including attorneys' fees, judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered by him in connection therewith. The Board of Directors may in its discretion cause the expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding to be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the corporation. No such person shall be indemnified against, or be reimbursed for, any expense or payments incurred in connection with any claim or liability established to have arisen out of his own willful misconduct or gross negligence. Any right of indemnification shall not be exclusive of any other right which such directors, officers or representatives may have or hereafter acquire and, without limiting the generality of such statement, they shall be entitled to their respective rights of indemnification under any Bylaws, agreement, vote of stockholders, provision of law or otherwise, as well as their rights under this Article. 6.2 Insurance. The Board of Directors may cause the corporation to purchase and maintain insurance on behalf of any person who is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, or as its representative in a partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred in any such capacity or arising out of such status, whether or not the corporation would have the power to indemnify such person. 6.3 Right to Amend Indemnification Provisions. The Board of Directors may from time to time adopt further Bylaws with respect to indemnification and may amend these and -8- 9 such Bylaws to the full extent permitted by the General Corporation Law of the State of Nevada. ARTICLE VII REPEAL, ALTERATION OR AMENDMENT These Bylaws may be altered, amended or repealed or new Bylaws may be adopted by a vote of the majority of the Board of Directors. CERTIFICATE I, Gary E. Risley, the duly elected, qualified and acting Secretary of Mesa Air Group, Inc., a Nevada corporation, do hereby certify that the above and foregoing are the Bylaws of this corporation duly and regularly adopted by the Board of Directors. IN WITNESS WHEREOF, I have hereunto set my hand this ____ day of October, 1996. ______________________________ Secretary -9- EX-10.82 5 SUPPLEMENTAL AGREEMENT 1 Exhibit 10.82 SUPPLEMENTAL AGREEMENT NO. 05/22/96 BEECHCRAFT 1900D AIRLINER ACQUISITION MASTER AGREEMENT BETWEEN MESA AIR GROUP, INC (f/k/a MESA AIRLINES, INC.,) RAYTHEON AIRCRAFT COMPANY (f/k/a BEECH AIRCRAFT CORPORATION) AND RAYTHEON AIRCRAFT CREDIT CORPORATION (f/k/a BEECH ACCEPTANCE CORPORATION, INC.) DATE: MAY 28, 1996 [Confidential portions of this exhibit have been deleted and filed separately with the Securities and Exchange Commission] 2 SUPPLEMENTAL AGREEMENT NO. 05/22/96 BEECHCRAFT 1900D AIRLINER ACQUISITION MASTER AGREEMENT On this ____ day of May, 1996, this Supplemental Agreement No. 05/22/96 (hereafter "Supplemental Agreement") is made and entered into at Wichita, Kansas, by and between MESA AIR GROUP, INC. f/k/a MESA AIRLINES, INC., with its principal place of business at 2325 East 30th Street, Farmington, New Mexico 87401 (hereafter "Mesa"), RAYTHEON AIRCRAFT COMPANY f/k/a BEECH AIRCRAFT CORPORATION, with its principal place of business at 10511 East Central, Wichita, Kansas 67206 (hereafter "RAC"), and RAYTHEON AIRCRAFT CREDIT CORPORATION f/k/a Beech Acceptance Corporation, Inc., with its principal place of business at 10511 East Central, Wichita, Kansas 67206 (hereafter "RACC"). WITNESSETH: WHEREAS, the parties have previously entered into a Beechcraft 1900D Airliner Acquisition Master Agreement dated September 18, 1991 (hereafter "Master Agreement"), under the provisions of which Mesa agreed, among other things, to acquire fifty-eight (58) new Beechcraft Model 1900D Airliner airplanes either by purchase from RAC or lease from RACC (hereinafter occasionally referred to as "1900D Airliner Units 1 through 58"); and WHEREAS, certain provisions of the 1900D Master Agreement were previously amended by the parties in accordance with Supplemental Agreement No. 08/21/92 dated August 21, 1992; and WHEREAS, certain additional provisions of the 1900D Master Agreement were previously amended by the parties in accordance with Supplement No. 1 dated March 3, 1993, pursuant to which Mesa agreed to purchase and RAC agreed to sell twenty (20) additional Beechcraft Model 1900D Airliner airplanes (hereinafter occasionally referred to as "1900D Airliner Units 59 through 78"); and WHEREAS, certain additional provisions of the 1900D Master Agreement were previously amended by the parties in accordance with Supplemental Agreement No. 09/01/94 dated September 1, 1994, wherein certain additional provisions and Appendices pertaining to Mesa's lease of 1900D Airliners from RACC were amended; and WHEREAS, certain additional provisions of the 1900D Master Agreement were previously amended by the parties in accordance with Supplement No. 09/30/94 dated September 30, 1994 pursuant to which Mesa agreed to either purchase from RAC or lease from RACC forty (40) additional Beechcraft Model 1900D Airliner airplanes (hereinafter occasionally referred to as "1900D Airliner Units 79 through 118"); and 1 3 WHEREAS, certain provisions of the 1900D Master Agreement were previously amended by the parties in accordance with Supplemental Agreement No. 12/14/95 dated May 28, 1996; and WHEREAS, certain provisions of the 1900D Master Agreement were previously amended by the parties in accordance with Supplemental Agreement No. 05/15/96 dated May 28, 1996; and WHEREAS, Mesa has sixty-six (66) 1900D Airliners that are leased from RACC and said 1900D Airliners are listed by Serial Number on Exhibit "A" to this Supplemental Agreement; and WHEREAS, Mesa desires to exercise its right to purchase these 1900D Airliners provided in Article 17 of the Beechcraft 1900D Airliner Lease Agreements; and WHEREAS, the option to purchase provided in Article 17 of the Beechcraft 1900D Airliner Lease Agreements is exercisable on or after thirty-six (36) months of the lease term and sixty-four (64) of the Beechcraft 1900D Airliner Lease Agreements have not yet reached the thirty-sixth (36th) month of their lease terms; and WHEREAS, RAC and RACC are willing to waive the thirty-sixth (36th) month requirement and provide debt financing in consideration for the retention of [*] of the lease deposit for each of the sixty-three (63) 1900D Airliners. WHEREAS, RACC has agreed to finance the purchase of these sixty-six (66) 1900D Airliners by Mesa; and WHEREAS, RACC, RAC and Mesa wish to have the conversion of these sixty-six (66) leases to purchases effective on May 31, 1996; and WHEREAS, RAC will be returning seventeen (17) 1900C Airliners pursuant to the schedule set forth in the Letter of Agreement 191-96-DPT-073 dated April 25, 1996 between Mesa, RAC and RACC; NOW, THEREFORE, for and in consideration of the above-stated recitals and the mutual promises, covenants and agreements set forth herein, the parties hereby agree as follows: SECTION 1: AMENDMENTS TO 1900D MASTER AGREEMENT 1.1 Appendix 3.2(A): Appendix 3.2(A) of the Master Agreement entitled "Form of Negotiable Promissory Note" will be revised as set forth in the amended Appendix 3.2(A) attached hereto but only in so far as it concerns the 1900D Airliner Units identified in Exhibit "A" attached hereto. "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 2 4 1.2 Appendix 3.2(B): Appendix 3.2(B) of the Master Agreement entitled "Form of Aircraft Security Agreement" will be revised as set forth in the amended Appendix 3.2(B) attached hereto but only in so far as it concerns the 1900D Airliner Units identified in Exhibit "A" attached hereto. 1.3 Appendix 3.2(C): Appendix 3.2(C) of the Master Agreement entitled "Prorated Stipulated Values" is hereby added to the Master Agreement, and it contains the "Total Purchase Price" for each respective 1900D Airliner listed by Serial Number. 1.4 Appendix 3.6(B): Appendix 3.6(B) of the Master Agreement entitled "Terms of Payment and Financing for 1900D Airliner" will be revised as set forth in the amended Appendix 3.6(B) attached hereto but only in so far as it concerns the 1900D Airliner Units identified in Exhibit "A" attached hereto. SECTION 2: AMENDMENT TO 1900D AIRLINER LEASE AGREEMENT 2.1 Article 17: Mesa and RACC agree that the purchase price of the sixty-six (66) 1900D Airliners will be determined by Appendix 3.2(C) of the Master Agreement entitled "Prorated Stipulated Value" and not in accordance with the Stipulated Aircraft Value specified in Exhibit "G" of the Beechcraft 1900D Airliner Lease Agreement. SECTION 3: 1900D AIRLINER LEASE TERMINATIONS 3.1 Mesa and RACC agree to terminate the leases for the 1900D Airliners listed in Exhibit "A" of this Supplemental Agreement on or about May 31, 1996 in conjunction with the purchase by Mesa of the 1900D Airliners and financing of these 1900D Airliners by RACC effective May 31, 1996. 3.2 RACC agrees to transfer title to each of the 1900D Airliners to Mesa effective on or about May 31, 1996 or the date of the applicable lease termination and finance transaction. SECTION 4: FINANCE CONVERSION PROVISIONS 4.1 The terms and conditions pertaining to Mesa's payment of the Total Purchase Price are set forth in Appendix 3.6(B) attached hereto. 3 5 4.2 The terms and conditions of financing to be provided by RACC in conjunction with Mesa's purchase of the 1900D Airliners are set forth in Appendix 3.6(B) attached hereto and in the Negotiable Promissory Note and the Aircraft Security Agreement forms attached hereto as, respectively, Appendices 3.2(A) and 3.2(B). Specific financial agreements reached between RAC, RACC and Mesa with regard to this conversion transaction are also contained in Appendix 3.6(B) attached hereto. 4.3 As a fee for completing this conversion transaction, it is agreed that RAC shall retain [*] of the [*] Lease Deposit applicable to sixty-three (63) of the 1900D Airliners identified in Exhibit "A" attached hereto (excluding 1900D Airliner Serial No.'s UE-2, UE-46, and UE-51). The remaining [*] of the [*] Lease Deposit applicable to these sixty-three (63) 1900D Airliners will be credited to the Principal Reduction Amount as shown in Appendix 3.6(B) attached hereto. With regard to 1900D Airliner Serial No.'s UE-2, UE-46, and UE-51, the entire [*] Lease Deposit applicable to these three (3) 1900D Airliners will be credited to the Principal Reduction Amount. 4.4 Mesa shall be financing with RACC [*] of the Total Purchase Price of each 1900D Airliner; therefore, the Total Purchase Price for each 1900D Airliner equals the Principal Sum as defined in each Negotiable Promissory Note. Immediately upon execution of the Negotiable Promissory Notes for the sixty-six (66) 1900D Airliners by Mesa, Mesa shall pay RACC a Principal Reduction Payment in an amount sufficient to reduce the Principal Sum to [*] of the price of the 1900D Airliner at the time the 1900D Airliner was originally delivered. RACC agrees to credit towards this Principal Reduction Payment so much of the Lease Deposits as is due Mesa upon termination of the sixty-six (66) leases (reference 4.3 above). In addition, with respect to the lease deposits of the seventeen (17) 1900C Airliners Mesa will be returning pursuant to the Master Agreement, RACC will credit Mesa [*] per 1900D Airliner) towards this Principal Reduction Payment. For twenty-three (23) of the 1900D Airliners, the credit provided by the Lease Deposits is sufficient to reduce the Principal Sum to [*] percent of the price of the 1900D at the time of its delivery. For the remaining forty-three (43) 1900D Airliners, a lump sum payment of [*] (reference Appendix 3.2(C)) shall be paid by Mesa to RACC on May 31, 1996 by wire "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 4 6 transfer to the following account: RAYTHEON AIRCRAFT CREDIT CORPORATION, Bank IV, Kansas, N.A., ABA Routing [*], RACC account [*]. SECTION 5: ADDITIONAL PROVISIONS 5.1 Scope of Amendment: Except as specifically amended by this Supplemental Agreement, all remaining provisions of the 1900D Master Agreement and all prior amendments thereto will remain unchanged and in full force and effect. The amended terms and conditions as set forth in this Supplemental Agreement will be applicable with respect to all the 1900D Airliners listed in Exhibit "A" to this Supplemental Agreement. 5.2 Defined Terms: All capitalized terms used in this Supplemental Agreement which are not specifically defined herein will have the same meaning as ascribed to said terms in the 1900D Master Agreement and/or the various Appendices attached thereto. 5.3 Entire Agreement: This Supplemental Agreement constitutes the entire agreement of the parties and supersedes any and all prior agreements between the parties, both written and oral, with respect to the transactions herein contemplated, and specifically supersedes all of RAC's and RACC's proposals and presentations to Mesa prior to the date hereof pertaining to the various matters addressed and amended herein, including the Letter of Understanding between Mesa and RAC dated April 12, 1996. 5.4 The parties agree to: 1) terminate each of the Lease Agreements for the 1900D Airliners listed in Exhibit "A"; 2) execute any and all Bills of Sale, Promissory Notes, and Security Agreements; and 3) execute any other documents necessary to effectuate the provisions of this Supplemental Agreement. "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 5 7 IN WITNESS OF the mutual promises, covenants and agreements set forth herein, the parties have caused their duly authorized officers to execute this Supplemental Agreement at Wichita, Kansas, as of the day and year first written above. MESA AIR GROUP, INC. (f/k/a Mesa Airlines, Inc.) By: /s/ W. Stephen Jackson ________________________________ W. Stephen Jackson Date of Execution: May 28, 1996 "Mesa" RAYTHEON AIRCRAFT COMPANY (f/k/a Beech Aircraft Corporation) By: /s/ Michael J. Scheidt ________________________________ Michael J. Scheidt, Vice President - Airline Sales Date of Execution: 5/24/96 "RAC" RAYTHEON AIRCRAFT CREDIT CORPORATION (f/k/a Beech Acceptance Corporation, Inc.) By: /s/ John S. Myers ________________________________ John S. Myers, Vice President Date of Execution: 5/24/96 "RACC" 8 Appendix 3.2(A) APPENDIX 3.2(A) FORM OF NEGOTIABLE PROMISSORY NOTE [See attached form.] 9 Page 1 of 7 AIRLINER NEGOTIABLE PROMISSORY NOTE DATE: MAY 28, 1996
Table 1: PARTIES AND TERMS (a) SECURED PARTY: (c) DEBTOR: Raytheon Aircraft Credit Corporation Mesa Air Group, Inc. P.O. Box 85 2325 East 30th Street Wichita, Kansas 67201 Farmington, New Mexico 87401 (b) AIRCRAFT: (d) COMMENCEMENT DATE: May 31, 1996 Manufacturer: Raytheon Aircraft Company (e) PRINCIPAL SUM: $____________ Model: Beech 1900D Airliner (f) FINANCING TERM: ____ months Serial No.: UE-______ (g) DUE DATE: Reg. No.: N________ (h) LIABILITY INSURANCE: [*]
For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Debtor unconditionally promises to pay to the order of Secured Party, or its assigns, the Principal Sum, together with accrued interest at the applicable Interest Rate specified in Table 2 (see Section 3) and such other charges and fees as herein provided. This Negotiable Promissory Note is sometimes hereinafter referred to as the "Promissory Note" or "Agreement". The Principal Sum and accrued interest shall be repaid by Debtor during the Financing Term in accordance with the terms and subject to the conditions specified below: 1. Interest Rate. In addition to Debtor's repayment of the Principal Sum, Debtor shall pay interest to Secured Party on the unpaid balance of the Principal Sum at the applicable rate of interest, if any, specified in Table 2. Debtor's payment of accrued interest shall be made in conjunction with its monthly payments of principal as specified in Table 2. The term [*] as used in Table 2 and elsewhere in this agreement refers to the interest rate that is [*]. The effective rate of interest shall be adjusted on the first business day of each calendar year quarter (i.e., January 1, April 1, July 1 and October 1) to reflect any increase or decrease in the [*] as of that date, plus the percent per annum specified in Table 2. The annual rate of interest applicable hereunder from time to time, as specified above, is sometimes referred to herein as the "Interest Rate". All interest shall be calculated on the basis of a 360-day year and actual days outstanding. Notwithstanding anything set forth herein to the contrary, in no event shall the Interest Rate payable hereunder be higher than the maximum amount permitted under applicable law. 2. Payment of Principal and Interest. The Principal Sum shall be repaid by Debtor to Secured Party, together with accrued interest at the applicable Interest Rate specified in Table 2, in consecutive monthly installments during the Financing Term specified in Table 1(f). Debtor's first monthly installment payment shall be due and payable one month following the Commencement Date identified in Table 1(d). Each subsequent monthly installment payment shall be paid by Debtor on the same date of each succeeding calendar month. The final monthly installment payment shall be due and payable on the Due Date. 3. Payments. The amount of Debtor's monthly payments of principal and accrued interest are specified below in Table 2. The following definitions apply to the "Payment Type" which may be specified in Table 2: "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 10 Page 2 of 7 a) May 31, 1996 payment - This Principal Reduction Payment shall be an amount sufficient to reduce the principal Sum to [*] of the price of the 1900D Airliner at the time the 1900D Airliner was originally delivered. Mesa will receive a credit for $[*] of the lease deposit Mesa has paid on this 1900D Airliner. In addition, a per aircraft prorated credit will be received from returned 1900C Airliner lease deposits in the amount of $_______. If the total lease deposit credits are not sufficient to reduce the Principal Sum to [*] of the price of the 1900D at the time of its original delivery, the difference, or $______, will be paid by Mesa on May 31, 1996, in a lump sum via wire transfer to the following account: RAYTHEON AIRCRAFT CREDIT CORPORATION, Bank IV, Kansas, N.A., ABA Routing #[*] RACC Account No. [*]. b) FIXED - Debtor's monthly payments to Secured Party will remain fixed at the specified payment amount for the specified period. c) VARIABLE - The amount of Debtor's monthly payment of principal and accrued interest shall be calculated by Secured Party, and advised to Debtor in writing, at the beginning of each calendar year quarter, based upon the LIBOR in effect on the first business day of said quarter plus the specified percent per annum. Each of Debtor's monthly payments during this period shall be sufficient in amount to fully amortize the Principal Sum, less any Balloon Payment, on the Due Date. d) BALLOON - an amount payable as a Balloon Payment. TABLE 2: PAYMENT AND INTEREST SCHEDULE
PAYMENT PAYMENT AMOUNT INTEREST RATE AND TYPE PER ANNUM May 31, 1996 Payment $_________ Zero __-__("Fixed Payment [*] Fixed [*] Period") __-___("Variable Variable [*] Plus [*]% Payment Period") ___ Last Month of Variable [*] Plus [*]% Term Plus $[*] Balloon
THE ACTUAL PAYMENT WILL BE CALCULATED AND ADVISED TO DEBTOR IN ACCORDANCE WITH SECTION 3(b). 4. Fixed Interest Rate Option during Fixed Payment Period ("Option"). During the Fixed Payment Period Mesa may elect to convert to a fixed interest rate by providing RACC with written notice of its intention to convert to a fixed interest rate seven (7) days prior to the conversion to the fixed interest rate. Mesa is entitled to receive this fixed interest rate for any full months remaining during the Fixed Payment Period of the Financing Term commencing after the conversion referred to above. The fixed interest rate will be [*] basis points over the composite U.S. government treasury interest rate yield for the term of the Fixed Payment Period plus [*] additional basis points, or [*] basis points over the above noted composite U.S. government treasury interest rate yield. The fixed interest rate will be determined seven (7) days after Mesa provides RACC with written notice of its intention to convert to a fixed interest rate. The monthly payments due and payable to RACC during the Option period will remain at $[*]. If Mesa elects to convert to a fixed interest rate and then does not continue to finance the 1900D Airliner through the Fixed Payment period, Mesa will pay RACC for any costs RACC may incur as a result of the early termination of the financing. These costs, hereinafter referred to as "Breakage Costs", are described in Section 5. 5. Breakage Costs. In order to provide fixed interest rate financing to Mesa, RACC will enter into a "VARIABLE FOR FIXED INTEREST RATE SWAP AGREEMENT" with a financial institution. If Mesa does not continue to "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 11 Page 3 of 7 finance the 1900D Airliner at the fixed interest rate through the Fixed Payment Period, that portion of said financing which would cease to be operative for the remaining portion of the Fixed Payment Period will be subject to an "Unwinding". Such Unwinding will be achieved by RACC entering into an offsetting "FIXED FOR VARIABLE INTEREST RATE SWAP AGREEMENT" for the unused portion of the original "VARIABLE FOR FIXED INTEREST RATE SWAP AGREEMENT". The swaps referred to above are based upon the prevailing U.S. treasury bills, note and/or bond interest rate yields for specific maturities at the time of entering into such swap agreements plus a swap spread, which are both determined by the financial market to adjust for the difference between a commercial borrower and the sovereign undertaking of the U.S. Government and the duration of the swap. Accordingly, to Unwind a VARIABLE FOR FIXED INTEREST RATE SWAP AGREEMENT, RACC would enter into a FIXED FOR VARIABLE INTEREST RATE SWAP AGREEMENT with the variable interest rate components offsetting each other since the components are based on the same benchmark, i.e., Thirty (30) Day [*]. A cost may result due to the difference between the fixed interest rate yield and swap spread components of the VARIABLE FOR FIXED INTEREST RATE SWAP AGREEMENT and the FIXED FOR VARIABLE INTEREST RATE SWAP AGREEMENT. If a cost results due to the difference described above, RACC will provide Mesa written notice of the Breakage Costs due RACC as a result of Mesa's termination of the fixed interest rate financing. Said notice will be provided Mesa within ten (10) days following termination of the fixed interest rate financing with RACC. Payment of the Breakage Costs are due and payable to RACC immediately upon receipt of said notice by Mesa. 6. Repayment and Prepayment. The aforesaid payments of principal and interest shall be made to Secured Party at its office in Wichita, Kansas. All payments shall be due and payable, without demand or notice to Debtor, in strict accordance with the aforesaid monthly schedule of payments. Any payment due on a non-business day may be made on the next succeeding business day. Debtor's payments hereunder, when received, shall be applied first to the payment of accrued interest (computed upon the unpaid balance of the Principal Sum) and any late payment charges owed as of the date such payment is received by Secured Party (if any), and the remainder of Debtor's payment shall be applied to payment of the unpaid Principal Sum. The unpaid Principal Sum and all accrued interest and late payment charges due hereunder must be paid in full on the Due Date. Debtor may prepay the unpaid balance of the Principal Sum in part or in full at any time and without any penalty, except as provided in Section 5. 7. Late Payment Charge. In the event Debtor is more than [*] days late in making any payment due hereunder as specified above, a late payment charge in an amount equal to [*] of the amount of the delayed payment shall be assessed against Debtor and added to the amount of the delayed payment due hereunder for the purpose of defraying Secured Party's expenses incident to handling the delinquent payment. Any late payment charge assessed against Debtor shall be immediately due and payable to Secured Party. The late payment charge shall be in addition to, and not in lieu of, any other remedy provided to Secured Party in this Agreement for default by Debtor. 8. Secured Transaction. To secure the payment of Debtor's obligation hereunder and any and all other indebtedness owed by Debtor to Secured Party (whether now existing or hereafter arising), as well as any renewals, extensions or changes in the form of said obligations or indebtedness, Debtor has contemporaneously herewith executed an Aircraft Security Agreement (hereinafter "Security Agreement") granting to Secured Party a security interest in the property set forth therein, together with all instruments, avionics, equipment, parts and accessories attached to or installed in said aircraft; all aircraft and engine log books; all additions, accessions and substitutions of any of the foregoing property; all of Debtor's inventory (whether now existing or hereafter acquired) of air carrier aircraft engines, propellers, appliances, spare parts, avionics, accessories, instruments, rotables, equipment (including ground support equipment), subassemblies, tools, kits, consumables, components and related items for installation in or use in connection with the Aircraft described in Table 1(b) not to exceed an aggregate of $[*] per Aircraft, all unearned insurance premiums and insurance proceeds of any of the foregoing property; and the proceeds of all of the foregoing property. "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 12 Page 4 of 7 The above-mentioned property is hereinafter collectively referred to (as appropriate within the context of this Agreement) as either the "Aircraft" or the "Collateral". Secured Party's security interest in the Collateral is a purchase money security interest under the Kansas Uniform Commercial Code. The proceeds of this loan (i.e., the Principal Sum) will be used by Debtor to purchase the Collateral described therein. 9. PURPOSE OF LOAN. Debtor warrants and represents to Secured Party that this loan is for business, commercial or agricultural purposes and not primarily for personal, family or household purposes. 10. DEBTOR'S DEFAULT. The parties agree that the occurrence of any of the following events shall constitute an "Event of Default": (a) Debtor's failure to make any timely payment of either principal, interest, late payment charges required hereunder, or Debtor's failure to make any payment required under any other promissory note, security agreement or lease agreement between Debtor and Secured Party, if such failure continues for a period of [*] days beyond the due date of such payment. (b) Debtor's failure to perform any promise, agreement, obligation, warranty or covenant made by it herein or in the Security Agreement if such failure continues for a period of [*] days after the Secured Party has given Debtor notice of such failure; (c) Debtor's failure to maintain the insurance coverage as specified in the Security Agreement; (d) any material misrepresentation made by Debtor to Secured Party in connection with the Security Agreement or this Agreement; (e) entry of a money judgment against Debtor, if such judgment is nonappealable and remains undischarged or unstayed for a period in excess of [*] days; (f) dissolution, termination of existence, insolvency, business failure, inability to pay debts as they mature, assignment for the benefit of creditors, or the commencement, with respect to Debtor, of any proceedings (either voluntary or involuntary) under any bankruptcy or insolvency laws; (g) appointment of a receiver of any material part or all of Debtor's assets if such appointment or proceeding continues for a period of more than [*] days; (h) Debtor entering into any transaction, without the prior written consent of Secured Party, whereby all or substantially all of Debtor's undertakings, property and assets would become the property of any other company, whether by way of reconstruction, reorganization, consolidation, amalgamation, merger, transfer, sale or otherwise; which transaction would reasonably justify Secured Party is deeming itself insecure; provided, however, that this subparagraph (h) shall not apply to any transaction involving Debtor and any "Permitted Assignee" (reference 17 below); (i) default in the payment by Debtor of any indebtedness for borrowed money owed to any creditor resulting in the acceleration of a material amount of indebtedness that would reasonably justify Secured Party in deeming itself insecure, unless such default is being disputed by Debtor in good faith; (j) the prospect of payment, performance or realization on the Collateral is significantly impaired; "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 13 Page 5 of 7 (k) Debtor's ceasing to be licensed pursuant to U.S. law to operate a commercial air service; or (l) the occurrence of a [*]. Should an Event of Default occur, Secured Party may employ all remedies allowed by law, including declaring all indebtedness owned hereunder, [*], immediately due and payable. Additionally, Secured Party may require Debtor to [*]. The requirements of the Kansas Uniform Commercial Code for reasonable notification to Debtor of the time and place of any proposed public sale of the Collateral or of the time after which any private sale or other intended disposition of the Collateral is to be made shall be met if such notice is mailed, postage prepaid, to Debtor's address, as specified herein, at least [*] days before the time of the sale or disposition. After deduction of all reasonable expenses incurred in realizing on Secured Party's security interest, and after the payment of all principal, interest and late payment charges due under this Agreement, the balance of the proceeds of sale, if any, may be applied to the [*]. Debtor shall be liable for any deficiency in its financial obligation under this Agreement after application of such proceeds. Debtor agrees to pay the reasonable attorneys' fees incurred by Secured Party to repossess the Collateral as well as the attorneys' fees incurred in pursuing and collecting any deficiency. If, after a default by Debtor, the Collateral is returned to or recovered by Secured Party, Debtor agrees that Secured Party may fly or otherwise move the Collateral for demonstration and other purposes reasonably related to a proposed public or private sale or other disposition of the Collateral. 11. Obligation to Make Payments. Debtor acknowledges and agrees that its obligation to make all payments due and owing under the provisions hereof shall be [*]. 12. Waivers. Debtor hereby waives any requirements pertaining to presentment, demand for payment, notice of dishonor, and all other notices or demands in connection with the delivery, acceptance, performance, default or endorsement of this Promissory Note. No waiver of any covenant, warranty or condition of this Agreement, nor of any breach or default hereunder, shall be effective for any purpose whatsoever unless such waiver is in writing and signed by an officer of Secured Party. It is expressly agreed that Secured Party's waiver of any breach or default by Debtor shall constitute a waiver only as to such particular breach or default and not a waiver of any future breach or default. 13. Legal, Valid, Binding and Enforceable Obligation. Debtor represents and warrants to Secured Party that this Promissory Note, upon execution and delivery, will constitute the legal, valid and binding obligation of Debtor and shall be enforceable in accordance with its terms. Debtor agrees to furnish Secured Party with written legal opinions, satisfactory in form and substance to Secured Party, verifying the aforesaid representation and warranty. 14. Changes of Address. Debtor shall immediately notify Secured Party in writing of any change of address from that shown in Table 1(c) in this Agreement. 15. GOVERNING LAW AND FORUM CHOICE. THIS AGREEMENT WAS MADE AND ENTERED INTO IN THE STATE OF KANSAS AND THE LAW GOVERNING THIS TRANSACTION SHALL BE THAT OF THE STATE OF KANSAS AS IT MAY FROM TIME TO TIME EXIST. THE LAW OF THE STATE OF KANSAS SHALL APPLY TO ANY AND ALL MATTERS ARISING FROM OR RELATED TO THIS AGREEMENT AND TRANSACTION, INCLUDING ANY ACTIONS UNDERTAKEN BY SECURED PARTY SHOULD AN "EVENT "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 14 Page 6 of 7 OF DEFAULT" OCCUR, SUCH AS AN ACTION TO OBTAIN POSSESSION OF AND FORECLOSE UPON THE COLLATERAL, AND ALL OTHER REMEDIES WHICH MAY BE AVAILABLE INCLUDING SEEKING A DEFICIENCY JUDGMENT AGAINST DEBTOR, THE PARTIES AGREE THAT ANY LEGAL PROCEEDING BASED UPON THE PROVISIONS OF THIS AGREEMENT SHALL BE BROUGHT EXCLUSIVELY IN EITHER THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS AT WICHITA, KANSAS, OR IN THE EIGHTEENTH JUDICIAL DISTRICT COURT OF SEDGWICK COUNTY, KANSAS, TO THE EXCLUSION OF ALL OTHER COURTS AND TRIBUNALS. NOTWITHSTANDING THE ABOVE, IN THE EVENT AN "EVENT OF DEFAULT" SHOULD OCCUR, SECURED PARTY (AT ITS SOLE OPTION) MAY INSTITUTE A LEGAL PROCEEDING IN ANY JURISDICTION AS MAY BE APPROPRIATE IN ORDER FOR SECURED PARTY TO OBTAIN POSSESSION OF AND FORECLOSE UPON THE COLLATERAL. THE PARTIES HEREBY CONSENT AND AGREE TO BE SUBJECT TO THE JURISDICTION OF THE AFORESAID COURTS IN SUCH PROCEEDINGS. 16. ENFORCEABILITY. The provisions of this Agreement shall be severable and, if any provisions are for any reason determined to be invalid, void or unenforceable, in whole or in part, the remaining provisions shall remain in full force and effect; provided that the purpose of the remaining valid, effective and enforceable provisions is not frustrated; and provided further that no party is substantially and materially prejudiced thereby. 17. ASSIGNABILITY. Secured Party shall have the absolute right to assign, transfer or sell any of its rights under this Promissory Note to any party of its choosing upon giving written notice thereof to Debtor. If under any assignment the Assignor (Secured Party) shall continue to be the party for collection of Debtor's monthly payments of principal and interest owned hereunder, no Assignee may declare a default for non-payment of the monthly payments or interfere in Debtor's peaceful possession of the Aircraft for non-payment of such monthly payments, so long as Debtor has not failed to pay Assignor (Secured Party), when due, any monthly payment owned hereunder. Debtor may not assign, or delegate any of its rights or obligations hereunder without the prior written consent of Secured Party; provided however, that Debtor may assign its rights and obligations hereunder to (a) any of its wholly-owned subsidiaries, (b) its parent company if Debtor is a wholly-owned subsidiary thereof, or (c) any other company which is a wholly-owned subsidiary of the aforesaid parent company (collectively "Permitted Assignee"), subject to the condition that Debtor shall remain primarily liable hereunder, both jointly and severally, with any such Permitted Assignee. 18. BINDING AGREEMENT. All obligations of Debtor hereunder shall bind the heirs, legal representatives, successors and assigns of Debtor. If there be more than one Debtor hereunder, their liabilities shall be joint and several. All rights of Secured Party hereunder shall inure to the benefit of its successors and assigns. 19. ENTIRE AGREEMENT. This Agreement and the Security Agreement constitutes the entire agreement between and among the parties with respect to the subject matter hereof. There are no verbal understandings, agreements, representations or warranties between the parties which are not expressly set forth herein. This Agreement shall not be changed orally, but only in writing signed by the parties hereto. 20. NOTICES. Any notice pertaining to this Agreement shall be deemed sufficiently given if personally delivered or sent by registered or certified mail, return receipt requested, to the party to whom said notice is to be given. Notices sent by registered or certified mail shall be deemed given on the third day after the date of postmark. Until changed by written notice given by either party, the addresses of the parties shall be as stated in Table 1(a) and (c) of the Agreement. The designated addresses of both parties must be located with the United States of America. 15 Page 7 of 7 In witness of the foregoing, Debtor has caused its duly authorized officer to execute and deliver this Agreement at Wichita, Kansas on the Date herein stated. Mesa Air Group, Inc. By:__________________________ W. Stephen Jackson, CFO "Debtor" STATE OF KANSAS) ) ss: COUNTY OF SEDGWICK ) This instrument was acknowledged before me on the 28th day of May, 1996 by W. Stephen Jackson, who is the CFO of Mesa Air Group, Inc., on behalf of the corporation. Notary Public ______________________ My Commission Expires: __________________ 16 APPENDIX 3.2(B) APPENDIX 3.2(B) FORM OF AIRCRAFT SECURITY AGREEMENT [See attached form.] 17 Page 1 of 9 AIRLINER AIRCRAFT SECURITY AGREEMENT AND ENCUMBRANCE AGAINST AIR CARRIER AIRCRAFT ENGINES, PROPELLERS, APPLIANCES AND SPARE PARTS [Pursuant to 14 CFR Section 49.51 et seq.] Date:____________________
TABLE 1 - ------------------------------------------------------------------------------ (a) SECURED PARTY: (b) DEBTOR/OWNER: Raytheon Aircraft Credit Corporation Mesa Air Group, Inc. P.O. Box 85 2325 East 30th Street Wichita, Kansas 67201 Farmington, New Mexico - ------------------------------------------------------------------------------ (c) AIRCRAFT OPERATOR: (d) SPARE PARTS LOCATION: Mesa Air Group, Inc. See Exhibit "A" 2325 East 30th Street Farmington, New Mexico - ------------------------------------------------------------------------------ (e) REQUIRED LIABILITY INSURANCE: $[*] - ------------------------------------------------------------------------------
TABLE 2 - ------------------------------------------------------------------------------ AIRCRAFT ENGINES PROPELLERS --------------------------- ----------------- ----------------- Manufacturer Beechcraft Aircraft Corp. Pratt & Whitney Hartzell Model Beech Model 1900D Airliner PT6A-67D, 1280SHP HC-E4A-31 Serial No. UE-____ PCE-____ & PCE-____ HJ-____ & HJ-____ Reg No. N______ - ------------------------------------------------------------------------------
This Security Agreement is made and entered into on the date specified above, by and between Debtor and Secured Party. This Security Agreement is sometimes hereinafter referred to as the "Security Agreement" or the "Agreement". In consideration of the mutual promises, covenants and representations set forth herein and pursuant to the provisions of the Beechcraft 1900D Airliner Acquisition Master Agreement as amended, between Debtor, Secured Party and Raytheon Aircraft Company dated September 18, 1991 (hereinafter "1900D Master Agreement"), the parties hereto agree as follows: 1. GRANT OF SECURITY INTEREST. To secure the payment of Debtor's obligation under that certain Negotiable Promissory Note (hereinafter "Promissory Note") executed in conjunction with this Security Agreement and dated of even date herewith, together with any and all other indebtedness owned by Debtor to Secured Party (whether now existing or hereafter arising), as well as any renewals, extensions or changes in the form of said obligation or indebtedness, Debtor grants to Secured Party a security interest in the property described in Table 2 of this Agreement together with all instruments, avionics, equipment, parts and accessories attached to or installed in said aircraft; all aircraft and engine log books; all additions, accessions and substitutions of any of the foregoing property; all unearned insurance premiums and insurance proceeds of any of the foregoing property; and the proceeds of all of the foregoing property. The above-described airplane is hereinafter referred to as the "Aircraft". Debtor and Secured Party hereby acknowledge and agree that a portion of the loan proceeds due under the Promissory Note will be used by Debtor to purchase certain air carrier aircraft engines, propellers, appliances, spare parts, avionics, accessories, instruments, rotables, equipment (including ground support equipment), subassemblies, tools, kits consumables, components and related items for installation in or use in connection with Debtor's Beechcraft Model 1900D type airplanes not to exceed an aggregate of $[*] per Aircraft (hereinafter collectively "Spare "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 18 Page 2 of 9 Parts"). Thus, Debtor further grants to Secured Party a security interest in all of the aforesaid Spare Parts, whether now existing or hereafter acquired. In order to allow Secured Party to record and perfect its security interest in the Spare Parts pursuant to 14 CFR Section 49.51 et seq., Debtor hereby covenants and agrees that: (a) Debtor is an air carrier certificated under Section 604(b) of the Federal Aviation Act of 1958; and (b) All of the above-mentioned Spare Parts will at all times and until installed or used (in the ordinary course of Debtor's business) in an aircraft belonging to Debtor, be located and stored at Debtor's maintenance facility and/or hangar located at Debtor's facilities or hangers at the locations described in Exhibit "A" of the Agreement. Debtor shall not warehouse, inventory or store any of the Spare Parts at any other location without first obtaining the written consent of Secured Part and without first executing and filing with the FAA Registry a certificate pursuant to applicable sections of the Code of Federal Regulations (or otherwise acceptable to Secured Party) evidencing such change of location and such other documents as may be required by Secured Party. The above-described Aircraft and other items of personal property described in this Section 1 are sometimes hereinafter collectively referred to as the "Collateral". Secured Party's security interest in the Collateral is a purchase money security interest under the Kansas Uniform Commercial Code. The loan proceeds (i.e., Principal Sum) specified in the Promissory Note will be used by Debtor to purchase the above-described Collateral. 2. Debtor's Warranty of Title. Except for the security interest granted herein, Debtor warrants that it is (or, to the extent the Collateral is to be acquired hereafter, will be) the owner of the Collateral free from any security interest, lien or encumbrance arising subsequent to the transfer of title to the Collateral from Secured Party to Debtor. Debtor further warrants that it will defend the Collateral against all claims and demands of any person claiming any interest therein by virtue of any such security interest, lien or encumbrance. 3. Debtor Will Execute and Deliver Documents. At Secured Party's request, Debtor shall promptly furnish such information and execute and deliver such documents and do all such acts and things as Secured Party may reasonably request as are necessary or appropriate to assist Secured Party in establishing and maintaining a valid security interest in the Collateral and to assure that the Aircraft is properly titled and registered and that the security interest granted hereby is perfected to Secured Party's satisfaction. Debtor will pay the cost of filing all appropriate documents in all public offices where Secured Party deems such filings necessary or desirable. 4. Operation, Maintenance and Repair. Debtor shall use, operate, maintain, store and repair the Collateral and retain actual control and possession thereof in accordance with each of the following provisions: (a) Debtor shall use, operate, maintain, store and repair the Collateral, and all parts thereof, properly, carefully and in complete compliance with all applicable statutes, ordinances, regulations, policies of insurance, manufacturer's recommendations and manufacturer's operating and maintenance manuals and handbooks. (b) Debtor shall only allow properly qualified and licensed pilots to operate the Aircraft. (c) Debtor shall be responsible for and pay all expenses of owning and operating the Aircraft, including but not limited to storage, fuel, lubricants, service, inspections, overhauls, replacements, maintenance and repairs, all of which shall be accomplished in compliance with the manufacturer's operating and maintenance manuals and handbooks, U.S. Federal Aviation Administration (hereinafter "FAA") rules and regulations and Debtor's FAA approved maintenance program. Debtor shall properly maintain all records pertaining to the maintenance, operation and repair of the Aircraft. 19 Page 3 of 9 (d) Debtor shall at all times maintain the Aircraft in an airworthy condition and in good working order and shall make no modifications to the Aircraft which have the effect of reducing its value as a regional air transport. 5. Insurance. Debtor shall, at all times and at its sole expense, obtain and carry the types and amounts of insurance coverage specified below: (a) "All Risk" type hull insurance on the Aircraft in the kind and form satisfactory to Secured Party, including Comprehensive Ground and Flight Coverage and Fire and Extended Risk Coverage, both In-Flight and Not In-Flight, in amounts not less than [*]. All policies of insurance carried in accordance with this paragraph (a) shall name Secured Party as a Loss Payee and provide that the insurance proceeds from any loss involving the Aircraft shall be payable as follows: (1) any loss not exceeding U.S. [*] shall be payable solely to Debtor with notice to Secured Party, (2) any loss exceeding U.S. [*] shall be jointly payable to Secured Party and Debtor, and (3) any total loss of the Aircraft shall be payable solely to Secured Party up to the amount of the unpaid Principal Sum and accrued interest and any other charges owed by Debtor under the Promissory Note. The policies shall include coverage against the perils of strikes, riots, civil commotions or labor disturbances, and any act of vandalism, malice, sabotage, conversion or theft, and for war risks when operating the Aircraft outside of the United States. The policies shall also specify that (i) any losses shall be adjusted by the insurer with Debtor, with notice thereof being provided to Secured Party and the Aircraft manufacturer, and (ii) Secured Party and the Aircraft manufacturer shall have the right to fully inspect the Aircraft prior to, during and after repair of any loss involving the Aircraft. (b) Legal liability insurance, in the kind and form satisfactory to Secured Party, with limits no less than the amount prescribed in Table 1(e) of this Agreement of combined single limit per occurrence, for bodily injury and property damage (including passengers). All policies of insurance carried in accordance with this subsection (b) shall name Debtor as the primary insured and Secured Party as an additional insured thereunder. All insurance policies maintained by Debtor in accordance with subsections (a) and (b) above shall also comply with each of the following requirements: (1) be issued by insurers of recognized responsibility which are satisfactory to Secured Party; (2) provide that if such insurance is canceled for any reason whatsoever, or any substantial change is made in policy terms, conditions or coverage, or the policy is allowed to lapse for nonpayment of premium, such cancellation, change or lapse shall not be effective as to Secured Party until [*] days after Secured Party's receipt of written notice from Debtor's insurers of the cancellation, change or lapse in policy terms, conditions or coverage; (3) provide that in respect of the interest of Secured Party in such policies, the insurance shall not be invalidated by any action or inaction of Debtor (or any "Permitted Lessee" as defined below in Section 11) and shall insure Secured Party regardless of any breach or violation by Debtor (or any Permitted Lessee) of any warranty, declaration or condition contained in such policies; (4) be primary without right of contribution from any other insurance which is carried by Secured Party with respect to its interest in the Aircraft; "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 20 Page 4 of 9 (5) waive any right of subrogation of the insurer against Secured Party; provided, however, that the right of subrogation shall not be waived with respect to any acts or omissions on the part of Secured Party or the manufacturer of the Aircraft (or any of its subsidiaries) related to products sold, handled, distributed, repaired, serviced or maintained by said parties; (6) provide that the geographic limits, if any, contained in such policy shall include at a minimum all territories over which Debtor will operate the Aircraft; and (7) provide that Secured Party shall have no obligation or liability for premiums, commissions, assessments or calls in connection with such insurance policies. Debtor shall furnish to Secured Party evidence of the aforesaid insurance coverage in certificate form. Evidence of renewal of each policy shall thereafter be furnished to Secured Party in certificate form. Debtor covenants that it will not do any act or voluntarily suffer or permit any act to be done whereby an insurance required hereunder shall or may be suspended, impaired or defeated. 6. Debtor's Possession. Debtor may have possession of the Collateral and use in any lawful manner not inconsistent with this Agreement, except when an Event of Default has occurred and is continuing. In the event Debtor fails to undertake any of the following actions within [*] days after receipt of Secured Party's written demand for such action, Secured party, at its option and without assuming any obligation to do so, may discharge taxes, liens, security interests or other encumbrances levied or asserted against the Collateral, may place and pay for insurance thereon, may order and pay for the repair, maintenance and preservation thereof, and may pay necessary filing or recording fees. Any amounts paid by Secured Party under the preceding sentence shall be added to the unpaid principal balance under the Promissory Note, shall be secured by the Collateral, and shall be payable by Debtor upon demand by Secured Party together with interest at the rate provided for in the Promissory Note until paid in full. 7. Debtor's Covenants. As long as this Agreement remains in effect, Debtor shall furnish Secured Party with such information concerning the location, condition, use and operation of the Aircraft as Secured Party may reasonably request, and Debtor shall permit any person designated by Secured Party in writing to inspect the Collateral, wherever located, and all records and manuals maintained in connection therewith and to make copies of such records, and to visit and inspect the properties and facilities of Debtor, provided such visits do not unreasonably interfere with the operations of Debtor, and to discuss the affairs, finances and accounts of Debtor with the principal financial officers of Debtor, all at such reasonable times and as often as Secured Party may reasonably request. Secured Party shall have no duty to make any such inspection and shall not incur any liability or obligation or be deemed to have waived any right by reason of not making any such inspection. Debtor shall also furnish Secured Party with the following: (a) within fifteen (15) days after such report is filed, a copy of Debtor's quarterly report to the U.S. Securities and Exchange Commission on Form 10-Q; (b) within fifteen (15) days after such report is filed, a copy of Debtor's annual report to the U.S. Securities and Exchange Commission on Form 10-K; and (c) from time to time, such other information as Secured Party may reasonably request with respect to the financial condition and operations of Debtor in order to determine whether the covenants, terms and provisions of this Agreement have been complied with by Debtor; provided that Debtor shall be allowed a reasonable amount of time in which to respond to any such request from Secured Party. (d) from time to time, such other information as Secured Party may reasonably request with respect to the financial condition and operations of Debtor in order to determine whether the covenants, terms "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 21 Page 5 of 9 and provisions of this Agreement have been complied with by Debtor; provided that Debtor shall be allowed a reasonable amount of time in which to respond to any such request from Secured Party. 8. Debtor's Default. The parties agree that the occurrence of any of the following events shall constitute an "Event of Default": (a) Debtor's failure to make any timely payment of either principal, interest or late payment charges required under the Promissory Note, or Debtor's failure make any payment required under any other promissory note, security agreement or lease agreement between Debtor and Secured Party, if such failure continues for a period of [*] days beyond the due date of such payment; (b) Debtor's failure to perform any promise, agreement, obligation, warranty or covenant made by it herein or in the Promissory Note, if such failure continues for a period of [*] days after Secured Party has given Debtor notice of such failure; (c) Debtor's failure to maintain the insurance coverage as specified above in Section 5; (d) any material misrepresentation made by Debtor to secured Party in connection with the Promissory Note or this Agreement; (e) entry of a money judgment against Debtor, if such judgment is nonappealable and remains undischarged or unstayed for a period in excess of [*] days; (f) dissolution, termination of existence, insolvency, business failure, inability to pay debts as they mature, assignment for the benefit of creditors, or the commencement, with respect to Debtor, of any proceedings (either voluntary or involuntary) under any bankruptcy or insolvency laws; (g) appointment of a receiver of any material part or all of Debtor's, if such appointment or proceeding continues for period of more than [*] days; (h) Debtor entering into any transaction, without the prior written consent of Secured Party, whereby all or substantially all of Debtor's undertakings, property and assets would become the property of any other company (whether by way of reconstruction, reorganization, consolidation, amalgamation, merger, transfer, sale or otherwise);), which transaction would reasonably justify Secured Party in deeming itself insecure; provided, however, that this subparagraph (h) shall not apply to any transaction involving Debtor and (a) any of its wholly-owned subsidiaries, (b) its parent company if Debtor is a wholly-owned subsidiary thereof, or (c) any other company which is a wholly-owned subsidiary of the aforesaid parent company; (i) default in the payment by Debtor of any indebtedness for borrowed money [*] (j) the prospect of payment, performance or realization on the Collateral is significantly impaired; (k) Debtor's (or its Permitted Lessee) ceasing to be licensed pursuant to U.S. law to operate a commercial air service; or (l) the occurrence of a [*]. "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 22 Page 6 of 9 Should an Event of Default occur, Secured Party may employ all remedies allowed by law, including declaring all indebtedness owed under the Promissory Note, [*] immediately due and payable. Additionally, Secured Party may require Debtor to [*]. The requirements of the Kansas Uniform Commercial Code for reasonable notification to Debtor of the time and place of any proposed public sale of the Collateral or of the time after which any private sale or other intended disposition of the Collateral is to be made shall be met if such notice is mailed, postage prepaid, to Debtor's address, as specified herein, at least [*] days before the time of the sale or disposition. After deduction of all reasonable expenses incurred in realizing on this security interest, and after the payment of all principal, interest and late payment charges due under the Promissory Note, the balance of the proceeds of sale, if any, may be applied to the payment of [*]. Debtor shall be liable for any deficiency in its financial obligation under the Promissory Note and this Agreement after application of such proceeds. Debtor agrees to pay the reasonable attorneys' fees incurred by Secured Party to repossess the Collateral as well as the attorneys' fees incurred in pursuing and collecting any deficiency. If, after a default by Debtor, the Collateral is returned to or recovered by Secured Party, Debtor agrees that Secured Party may fly or otherwise move the Collateral for demonstration and other purposes reasonably related to a proposed public or private sale or other disposition of the Collateral. 9. Damage or Destruction. In the event of the loss, theft or confiscation of the Aircraft, or the substantial damage or destruction of the Aircraft to such an extent that repair thereof is impracticable (as determined by Secured Party in accordance with accepted industry standards), then Debtor shall pay to Secured Party the outstanding indebtedness of principal and accrued interest due under the Promissory Note, without prepayment penalty, within [*] days after demand by Secured Party. In the event that, following damage to the Aircraft, repair thereof is determined to be practical (as determined by Secured Party in accordance with accepted industry standards), then Debtor shall promptly repair and restore the Aircraft to its condition immediately prior to the damage. All insurance proceeds paid to Secured Party as a result of such damage pursuant to Section 5 hereof shall be available to reimburse Debtor for the reasonable costs of all required repairs, provided that no Event of Default has occurred and is continuing. Debtor shall furnish evidence satisfactory to Secured Party that the sums requested as reimbursement represent sums actually paid by Debtor or justly due for labor and materials. If requested by Secured Party, Debtor shall also furnish appropriate lien waivers. Any insurance proceeds remaining after all required repairs have been completed shall be immediately paid over to Debtor so long as no Event of Default has occurred and/or is continuing. 10. Waivers. No waiver of any covenant, warranty or condition of this Agreement, nor of any breach or default hereunder, shall be effective for any purpose whatsoever unless such waiver is in writing and signed by an officer of Secured Party. It is expressly agreed that Secured Party's waiver of any breach or default by Debtor shall constitute a waiver only as to such particular breach or default and not a waiver of any future breach or default. 11. Permitted Lessee. Debtor shall be allowed to lease the Aircraft to another party ("Permitted Lessee"), subject to the condition precedent that Secured Party expressly approves such lease in writing, which approval shall not be unreasonably withheld or delayed by Secured Party. As a minimum, the terms of any such lease shall provide that the rights of the Permitted Lessee to possession of the Aircraft are subordinate to those of Secured Party hereunder and shall further require the Permitted Lessee to perform all of Debtor's obligations contained herein in Sections 4, 5, 6, 7, 9, 13, 14 and 16. Contemporaneously with Secured Party's approval and the execution of such lease, Debtor shall execute an assignment of the lease to Secured Party as additional security for the payment of Debtor's obligations hereunder, which assignment shall be in form and substance reasonably acceptable to Secured Party and shall specifically provide that so long as no Event of Default has occurred or is continuing, Debtor shall retain the right to receive payments of rent thereunder. 12. Sale of Aircraft. Debtor shall be permitted, following [*] days' advance written notice to Secured Party, to sell the Aircraft to another party ("Permitted Buyer"), provided that the Permitted Buyer agrees to "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 23 Page 7 of 9 assume and discharge all of Debtor's promises, agreements, obligations, liabilities, warranties, covenants and representations as expressed in this Agreement, the Promissory Note and the 1900D Master Agreement as amended referenced above. Notwithstanding any such sale, Debtor shall continue to be primarily responsible hereunder, both jointly and severally, with any such Permitted Buyer until such time as the Promissory Note is paid in full. 13. Liens. Debtor shall not, directly or indirectly, create, incur, assume or suffer to exist any lien ("Lien") on or with respect to the Collateral, or any part thereof, except: (a) the Lien of Secured Party hereunder; (b) Liens for taxes, assessments or other governmental charges owing by Debtor, either not yet due or being contested in good faith (and for the payment of which adequate reserves have been provided) and by appropriate proceedings so long as such proceedings do not involve any material danger of the sale, forfeiture or loss of the Collateral or any part thereof; (c) materialmen's, mechanic's, workmen's, repairmen's, employees' Liens or any Lien of a similar nature arising in the ordinary course of Debtor's business, which Lien secures an obligation that is not yet delinquent or is being contested in good faith (and for the payment of which adequate reserves have been provided) and by appropriate proceedings so long as such proceedings do not involve any material danger of the sale, forfeiture or loss of the Collateral or any part thereof; (d) Liens arising out of any judgment or award against Debtor, provided that the judgment or award secured shall, within [*] days of entry thereof, have been discharged, vacated, reversed or execution thereof stayed pending appeal and shall have been discharged, vacated or reversed within [*] days after the expiration of such stay; and (e) any other Lien with respect to which Debtor shall have provided a bond or other means that precludes the holder of the Lien, in the reasonable judgment of Secured Party, from taking any recourse against the Collateral. Debtor shall promptly, at no expense to Secured Party, take (or cause to be taken) such action as may be necessary to duly discharge any Lien not excepted above if the same shall arise at any time with respect to the Collateral or any part thereof. 14. Taxes. Debtor shall pay or cause to be paid in the manner and at the time required by applicable law, all federal, state and local taxes (including sales, property, use, value-added, goods and service taxes), assessments and governmental charges or levies imposed upon, or in respect of, the Collateral, this Agreement, any payments made hereunder or under the Promissory Note, or upon or in respect of Debtor or Debtor's income or profits, or upon any property belonging to Debtor prior to the date on which penalties attach thereto and all lawful claims which, if not paid, become a Lien upon the property of Debtor (all of the above collectively "Taxes"). Debtor shall indemnify and hold Secured Party harmless from liability for the payment of any such Taxes. 15. Legal, Valid, Binding and Enforceable Obligation. Debtor represents and warrants to Secured Party that this Security Agreement, upon execution and delivery, will constitute the legal, valid and binding obligation of Debtor and shall be enforceable in accordance with its terms. Debtor agrees to furnish Secured Party with written legal opinions, satisfactory in form and substance to Secured Party, verifying the aforesaid representation and warranty. 16. Changes of Address and Change of Base. Debtor shall immediately notify Secured Party in writing of any change of addresses from that shown in Tables 1(b), 1(c) or 1(d) of this Agreement. Debtor will at all times keep the Aircraft based within the continental United States of America; provided, however, that Secured Party will favorably consider a change of base for the Aircraft to a location outside of the continental United States of America if Debtor can furnish Secured Party with evidence satisfactory to Secured Party that such a change of base location will "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 24 Page 8 of 9 not result in any material change in Secured Party's ability to timely repossess the Aircraft in the event of any breach or default hereunder by Debtor. 17. GOVERNING LAW AND FORUM CHOICE. THIS AGREEMENT WAS MADE AND ENTERED INTO IN THE STATE OF KANSAS AND THE LAW GOVERNING THIS TRANSACTION SHALL BE THAT OF THE STATE OF KANSAS AS IT MAY FROM TIME TO TIME EXIST. THE LAW OF THE STATE OF KANSAS SHALL APPLY TO ANY AND ALL MATTERS ARISING FROM OR RELATED TO THIS AGREEMENT AND TRANSACTION, INCLUDING ANY ACTIONS UNDERTAKEN BY SECURED PARTY SHOULD AN "EVENT OF DEFAULT" OCCUR, SUCH AS AN ACTION TO OBTAIN POSSESSION OF AND FORECLOSE UPON THE COLLATERAL, AND ALL OTHER REMEDIES WHICH MAY BE AVAILABLE INCLUDING SEEKING A DEFICIENCY JUDGMENT AGAINST DEBTOR. THE PARTIES AGREE THAT ANY LEGAL PROCEEDING BASED UPON THE PROVISIONS OF THIS AGREEMENT SHALL BE BROUGHT EXCLUSIVELY IN EITHER THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS AT WICHITA, KANSAS, OR IN THE EIGHTEENTH JUDICIAL DISTRICT COURT OF SEDGWICK COUNTY, KANSAS, TO THE EXCLUSION OF ALL OTHER COURTS AND TRIBUNALS. NOTWITHSTANDING THE ABOVE, IN THE EVENT AN "EVENT OF DEFAULT" SHOULD OCCUR, SECURED PARTY (AT ITS SOLE OPTION) MAY INSTITUTE A LEGAL PROCEEDING IN ANY JURISDICTION AS MAY BE APPROPRIATE IN ORDER FOR SECURED PARTY TO OBTAIN POSSESSION OF AND FORECLOSE UPON THE COLLATERAL. THE PARTIES HEREBY CONSENT AND AGREE TO BE SUBJECT TO THE JURISDICTION OF THE AFORESAID COURTS IN SUCH PROCEEDINGS. 18. Enforceability. The provisions of this Agreement shall be severable and, if any provisions are for any reason determined to be invalid, void or unenforceable, in whole or in part, the remaining provisions shall remain in full force and effect; provided that the purpose of the remaining valid, effective and enforceable provisions is not frustrated; and provided further that no party is substantially and materially prejudiced thereby. 19. Assignability. Secured Party shall have the absolute right to assign, transfer or sell any of its rights under this Agreement to any party of its choosing upon giving written notice thereof to Debtor. Debtor may not assign or delegate any of its rights or obligations hereunder without the prior written consent of Secured Party; provided, however, that Debtor may assign its rights and obligations hereunder to (a) any of its wholly-owned subsidiaries, (b) its parent company if Debtor is a wholly-owned subsidiary thereof, or (c) any other company which is a wholly-owned subsidiary of the aforesaid parent company (collectively "Permitted Assignee"), subject to the condition that Debtor shall remain primarily liable hereunder, both jointly and severally, with any such Permitted Assignee. 20. Binding Agreement. All obligations of Debtor hereunder shall bind the heirs, legal representatives, successors and assigns of Debtor. If there be more than one Debtor hereunder, their liabilities shall be joint and several. All rights of Secured Party hereunder shall inure to the benefit of its successors and assigns. 21. Entire Agreement. This Agreement and the Promissory Note constitute the entire agreement between and among the parties with respect to the subject matter hereof. There are not verbal understandings, agreements, representations or warranties between the parties which are not expressly set forth herein. This Agreement shall not be changed orally, but only in writing signed by the parties hereto. 22. Notices. Any notice pertaining to this Agreement shall be deemed sufficiently given if personally delivered or sent by registered or certified mail, return receipt requested, to the party to whom said notice is to be given. Notices sent by registered or certified mail shall be deemed given on the third day after the date of postmark. Until changed by written notice given by either party, the addresses of the parties shall be as set forth in Table 1(a) for the Secured Party and as set forth in Table 1(b) for the Debtor. The designated addresses of both parties must be located within the United States of America. 25 Page 9 of 9 In witness of the mutual promises, covenants and representations set forth herein, the parties have caused this Agreement to by duly executed and delivered at Wichita, Kansas, on the day and year first above written. RAYTHEON AIRCRAFT CREDIT CORPORATION By: -------------------------------- John Myers, Vice President "Secured Party" Mesa Air Group, Inc. By: -------------------------------- W. Stephen Jackson, CFO "Debtor" STATE OF KANSAS ) ) ss: COUNTY OF SEDGWICK ) This instrument was acknowledged before me on the 28th day of May, 1996, by W. Stephen Jackson who is the CFO on Mesa Air Group, Inc., on behalf of the corporation. --------------------------- Notary Public My Commission Expires: 26 EXHIBIT "A" TO SECURITY AGREEMENT MESA AIR GROUP, INC. SPARE PARTS LOCATIONS Air Midwest Desert Turbine Service, Inc. (US Air Express) 1140 West Navajo 2203 Air Cargo Rd. Hanger #3 Wichita, KS 67209 Farmington, NM 87401 Desert Sun Airlines Four Corners Aviation (America West Express) 1260 West Navajo 3737 E. Bonanza Way Farmington, NM 87401 Phoenix, AZ 85034 Florida Gulf Mesa A.L. Pilot Development (US Air Express) 1296 West Navajo 14000 Pecan Rd. Farmington, NM 87401 Jacksonville, FL 32218 Liberty Express Regional Aircraft Services (US Air Express) 1446 North Villa Avenue Dubois Jefferson City Airport Fresno, CA 93727 P.O. Box 366 Falls Creek, PA 15840 Mountain West Airlines US Air Express Maintenance (UAX-DEN, LAX/YV - ABQ/HPX-PHX) Reading Regional Airport 1140 W. Navajo RR9 Box 9399 Farmington, NM 87401 Reading, Pennsylvania 19605 West Air, Inc. Mountain West Maintenance (United Express) 600 Highway 95 5588 Air Terminal Drive Hangar 24 Fresno, CA 93727 Bullhead City, AZ 86429 Mountain West Maintenance 3112 West Washington Avenue Yakima, Washington 98903 27 Appendix 3.2(C) APPENDIX 3.2(C) PRORATED STIPULATED VALUES [See attached form.] 28 APPENDIX 3.2 (C) RAYTHEON AIRCRAFT CREDIT CORPORATION PRORATED STIPULATED VALUE AND NEW LOAN BALANCE FOR MESA AIR GROUP, INC. AS OF MAY 31, 1996 [*] "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" Page 1 29 APPENDIX 3.2 (C) RAYTHEON AIRCRAFT CREDIT CORPORATION PRORATED STIPULATED VALUE AND NEW LOAN BALANCE FOR MESA AIR GROUP, INC. AS OF MAY 31, 1996 [*] - --------------------------------------------------------------------------- (a) Total Purchase Price require June 1, 1996 payments being made per the existing lease contracts. Total Purchase Price Less Lease Deposit Credits as follows: [*] - --------------------------------------------------------------------------- "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" Page 2 30 Appendix 3.6(B) APPENDIX 3.6(B) TERMS OF PAYMENT AND FINANCING FOR 1900D AIRLINER [See attached document.] 31 Appendix 3.6(B) Page 1 of 6 APPENDIX 3.6(B) TERMS OF PAYMENT AND FINANCING FOR 1900D AIRLINER 1. Terms of Payment per 1900D Total Purchase Price/Principal Sum $ (*) (1) Less Principal Reduction Amount - (*) (2) ------------------- Principal Sum Balance $ (*) (3) (*) SEE APPENDIX 3.2(C) FOR UNIQUE AMOUNTS APPLICABLE TO EACH 1900D AIRLINER (1) The Total Purchase Price/Principal Sum of each 1900D Airliner is taken from Appendix 3.2(C) of the Master Agreement. (2) This Amount is calculated for each 1900D Airliner based upon the Purchase Price/Principal Sum set forth in Appendix 3.2(C) of the Master Agreement. The identified Principal Reduction Payment shall be reduced by the credits identified in Article 4.3 and 4.4 of Supplemental Agreement No. 05/22/96 as set forth in Appendix 3.2(C). (3) This amount is the remaining principal sum balance less the Principal Reduction Amount due on May 31, 1996. The terms and conditions pertaining to financing and Mesa's payment of the Principal Sum Balance are set forth below in Section 2 and in the Negotiable Promissory Note and the Aircraft Security Agreement forms for the 1900D Airliner. 2. Terms of Financing (A) Financing Structure: 1. RAC will cause its wholly-owned subsidiary, Raytheon Aircraft Credit Corporation ("RACC"), to finance the Principal Sum Balance of each 1900D Airliner to be purchased by Mesa in accordance with the terms and conditions set forth below. 2. The exact Financing Term for each Negotiable 32 Appendix 3.6(B) Page 2 of 6 Promissory Note shall be calculated by subtracting the number of months since the 1900D Airliner was delivered to Mesa (number of months before May 31, 1996 that delivery occurred) from [*] months. For example, if the 1900D Airliner was delivered to Mesa [*] months prior to May 31, 1996, the Financing Term would be [*] minus [*], or [*] months. The delivery dates for the 1900D Airliner are identified on Exhibit "A" to the Supplemental Agreement No. 05/22/96. The Financing Term for each 1900D Airliner shall commence on the date specified in the Negotiable Promissory Note. All months payments shall be due and payable, without demand or notice to Mesa, on the date specified in the Negotiable Promissory Note. 3. The "Fixed Payment Period" shall be calculated by subtracting the number of months since the 1900D Airliner was delivered to Mesa (number of months before May 31, 1996 that delivery occurred) from [*] months. For example, if the 1900D Airliner was delivered to Mesa [*] months prior to May 31, 1996, the Fixed Payment Period would be [*] minus [*], or [*] months. The amount of the monthly payments due during the Fixed Payment Period is [*] by agreement of RACC and Mesa. This amount shall be applied first against interest owed RACC equal to the amount of the current [*] in effect on the first business day of each calendar year quarter (i.e., January 1, April 1, July 1 and October 1), plus [*] and secondly against the unpaid balance of the Principal Sum due under the Promissory Note, subject to the condition that each such monthly payment must be paid by Mesa in a timely manner. 4. Fixed Interest Rate Option during Fixed Payment Period ("Option"). During the Fixed Payment Period Mesa may elect to convert to a fixed interest rate by providing RACC with written notice of its intention to convert to a fixed interest rate seven (7) days prior to the conversion to the fixed interest rate. Mesa is entitled to receive this fixed interest rate for any full months remaining "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 33 Appendix 3.6(B) Page 3 of 6 during the Fixed Payment period of the Financing Term commencing after the conversion referenced above. The fixed interest rate will be [*] for the term of the Fixed Payment Period plus [*] basis points, or [*] basis points over the above noted [*]. The fixed interest rate will be determined seven (7) days after Mesa provides RACC with written notice of its intention to convert to a fixed interest rate. The monthly payments due and payable to RACC during the Option period will remain at $[*]. If Mesa elects to convert to a fixed interest rate and then does not continue to finance the 1900D Airliner through the Fixed Payment Period, Mesa will pay RACC for any costs RACC may incur as a result of the early termination of the financing. These costs, hereinafter referred to as "Breakage Costs" are described below in Paragraph (C). 5. The "Variable Payment Period" shall be calculated by subtracting the number of months in the Fixed Payment Period from the number of months in the Financing Term. For example, if the Fixed Payment Period is [*] months and the Financing Term is [*] months, the Variable Payment Period would be [*] months. The annual rate of interest during the Variable Payment Period of the Financing Term shall be equal to the current [*] Rate in effect on the first business day of each calendar year quarter (i.e., January 1, April 1, July 1 and October 1), plus [*]. The rate of interest throughout the Financing Term shall increase or decrease in accordance with the current 90-Day LIBOR Rate on the first business day of each calendar year quarter plus [*]. Each monthly payment during the Variable Payment Period of the Financing Term shall be sufficient in amount to fully amortize the unpaid balance of the Principal Sum on the Due Date less the balloon payment due in the last month of the Financing Term. 6. A balloon payment of principal in an amount not to exceed U.S. $[*] shall be due and payable to RACC in the last month of the Financing Term in "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 34 Appendix 3.6(B) Page 4 of 6 addition to Mesa's regular monthly payment of principal and interest. Additionally, all unpaid principal, interest and late payment charges, shall be due and paid in full by Mesa in the last month of the Financing Term (the "Due Date"). 7. The Negotiable Promissory Note and the Aircraft Security Agreement will be [*] 8. The Negotiable Promissory Note and the Aircraft Security Agreement for each 1900D Airliner must be executed by Mesa and submitted to and approved by RACC prior to delivery of each respective 1900D Airliner. (B) Amount of Mesa's Monthly Payments (per 1900D Airliner) during the Financing Term:
Month Amount ----- ------ Fixed Payment Period (**) $ [*](1) Variable Payment Period (**) $ (**)(2) Last Month Of Financing $ [*](3) (**) As defined in paragraph 2.(A)3 and 2.(A)5. above
(1) The amount of the monthly payments due during the Fixed Payment Period of the Financing Term is fixed by agreement of Mesa and RACC. This amount shall be first credited against interest owed RACC at the current [*] Rate in effect on the first business day of each calendar year quarter (i.e., January 1, April 1, July 1 and October 1), plus [*] and then applied to Mesa's payment of the Principal Sum due hereunder, subject to the condition that Mesa must make each monthly payment in a timely manner. (2) The amount of monthly payments of principal and interest due during the Variable Payment Period of [CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] 35 Appendix 3.6(B) Page 5 of 6 the Financing Term is based upon the current [*] in effect on the first business day of each calendar year quarter (i.e., January 1, April 1, July 1 and October 1), plus [*]. The rate of interest throughout the Financing Term shall increase or decrease in accordance with the current [*] Rate on the first business day of each calendar year quarter plus [*]. Each monthly payment during the Variable Payment Period of the Financing Term shall be sufficient in amount to fully amortize the unpaid balance of the Principal Sum on the Due Date less the balloon payment due in the last month the Financing Term. (3) One (1) balloon payment of principal in an amount not to exceed U.S. $[*] is due and payable (in full) on the Due Date, in addition to the regular monthly payment of principal and interest. Additionally, all outstanding principal, interest and late payment charges must be paid in full by Mesa on or before the Due Date. (C) Determination of Breakage Costs: 1. In order to provide fixed interest rate financing to Mesa, RACC will enter into a "VARIABLE FOR FIXED INTEREST RATE SWAP AGREEMENT" with a financial institution. If Mesa does not continue to finance the 1900D Airliner at the fixed interest rate through the Fixed Payment Period, that portion of said financing which would cease to be operative for the remaining portion of the Fixed Payment Period will be subject to an "Unwinding". Such Unwinding will be achieved by RACC entering into an offsetting "FIXED FOR VARIABLE INTEREST RATE SWAP AGREEMENT" for the unused portion of the original "VARIABLE FOR FIXED INTEREST RATE SWAP AGREEMENT". The swaps referred to above are based upon the prevailing U.S. treasury bills, note and/or bond interest rate yields for specific maturities at the time of entering into such swap agreements plus a swap spread, which are both determined by the financial market to adjust for the difference between a commercial borrower and the sovereign undertaking of the U.S. Government and the duration of the swap. Accordingly, to Unwind a VARIABLE FOR FIXED INTEREST RATE SWAP AGREEMENT, RACC would "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 36 Appendix 3.6(B) Page 6 of 6 enter into a FIXED FOR VARIABLE INTEREST RATE SWAP AGREEMENT with the variable interest rate components offsetting each other since the components are based on the same benchmark, i.e., [*]. A cost may result due to the difference between the fixed interest rate yield and swap spread components of the VARIABLE FOR FIXED INTEREST RATE SWAP AGREEMENT and the FIXED FOR VARIABLE INTEREST RATE SWAP AGREEMENT. If a cost results due to the difference described above, RACC will provide Mesa written notice of the Breakage Costs due RACC as a result of Mesa's termination of the fixed interest rate financing. Said notice will be provided Mesa within ten (10) days following termination of the fixed interest rate financing with RACC. 2. Payment of the Breakfast Costs are due and payable to RACC by Mesa immediately upon receipt of said notice by Mesa. "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]" 37 EXHIBIT A (66) 1900D AIRLINERS FROM LEASE TO PURCHASE - ------------------------------------------------------------------------------- ACTUAL UNIT NO. SERIAL NO. DEL DATE [*] Supplemental Agreement No. 05/22/96 PAGE 1 "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]"
38 (66) EXHIBIT A 1900D AIRLINERS FROM LEASE TO PURCHASE - ------------------------------------------------------------------------------- ACTUAL UNIT NO. SERIAL NO. DEL DATE [*] Supplemental Agreement No. 05/22/96 PAGE 2 "[CONFIDENTIAL PORTION DELETED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION]"
EX-21.1 6 SUBSIDIARIES LIST 1 EXHIBIT 21.1 SUBSIDIARIES OF MESA AIR GROUP, INC. MESA AIRLINES, INC. - 2325 East 30th Street, Farmington, NM. Mesa Airlines, Inc. holds the airline operating divisions of Mesa Air Group, Inc. AIR MIDWEST, INC. - 2203 Air Cargo Road, Wichita, Kansas. Air Midwest, Inc. was acquired by Mesa Air Group, Inc. on July 12, 1991 and is doing business as USAir Express pursuant to a code-sharing agreement with USAir, Inc. WESTAIR HOLDING, INC. - 5570 Air Terminal Drive, Fresno, California. WestAir Holding, Inc. was acquired by Mesa Air Group, Inc. on May 29, 1992 and is the holding company for WestAir Commuter Airlines, Inc. and Regional Aircraft Services, Inc. WESTAIR COMMUTER AIRLINES, INC. - 5570 Air Terminal Drive, Fresno, California. WestAir Commuter Airlines, Inc. was acquired as a subsidiary of WestAir Holding, Inc. by Mesa Air Group, Inc. on May 29, 1992 and is doing business as United Express pursuant to a code-sharing agreement with United Air Lines, Inc. REGIONAL AIRCRAFT SERVICES, INC. - 1446 North Villa Avenue, Fresno, CA 93727; provides aircraft and engine maintenance service to Mesa. FCA, INC. DBA FOUR CORNERS AVIATION, INC. - 1260 West Navajo, Farmington, New Mexico 87401. Four Corners was acquired in 1992 and is a fixed-base operation. MPD, INC. DBA MESA PILOT DEVELOPMENT - 2325 East 30th Street, Farmington, New Mexico 87401. Mesa Pilot Development began operations in 1989 and provides flight training coordination with a community college. MAGI INSURANCE, LTD. - P. O. Box 1304, Financial Services Centre, Bishop's Court Hill, St. Michael, Barbados, WI. Magi Insurance, Ltd., is an insurance company established for the purpose of obtaining favorable insurance rates. MESA LEASING, INC. 3753 Howard Hughes Parkway, Suite 200, Las Vegas, Nevada. Mesa Leasing, Inc. is a Nevada corporation established to aid in the acquisition and leasing of aircraft. EX-23.1 7 CONSENT OF KPMG PEAT MARWICK LLP 1 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT ----------------------------- The Board of Directors Mesa Air Group, Inc.: We consent to incorporation by reference in the Registration Statements (Nos. 33-15495, 33-09395 and 33-02791) on Form S-8 of Mesa Air Group, Inc. of our report dated November 22, 1996, relating to the consolidated balance sheets of Mesa Air Group, Inc. and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of earnings, cash flows and stockholders' equity for each of the years in the three-year period ended September 30, 1996, which report appears in the September 30, 1996 annual report on Form 10-K of Mesa Air Group, Inc. Phoenix, Arizona December 19, 1996 EX-27 8 FINANCIAL DATA SCHEDULE
5 0000810332 MESA AIR GROUP, INC. 1,000 YEAR SEP-30-1996 OCT-01-1996 SEP-30-1996 54,720 5,300 41,377 272 26,956 134,475 515,850 63,577 678,491 63,615 0 0 0 100,876 123,790 678,491 500,363 500,363 452,369 452,369 0 91 12,777 49,519 19,112 30,407 0 0 0 30,407 1.00 0
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