MESA AIR GROUP INC - Quarter Report: 2002 June (Form 10-Q)

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-Q

		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period-ended June 30, 2002
or
		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-15495

Mesa Air Group, Inc.

Registrant’s telephone number, including area code:
(602) 685-4000

         Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.    Yes        No    

         On August 8, 2002 the registrant had outstanding 32,478,858 shares of Common Stock.

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INDEX

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PART 1. FINANCIAL INFORMATION

Item 1.

MESA AIR GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes to consolidated financial statements

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MESA AIR GROUP, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

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MESA AIR GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements

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MESA AIR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.    Business and Basis of Presentation

         The accompanying unaudited consolidated financial statements of Mesa Air Group, Inc. (“Mesa” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for a complete set of financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the unaudited three and nine-month periods have been made. Operating results for the three and nine-month period ended June 30, 2002, are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2002. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2001.

         The consolidated financial statements include the accounts of Mesa Air Group, Inc. and its wholly owned subsidiaries, Mesa Airlines, Inc., WestAir Holdings, Inc., Air Midwest, Inc., CCAir, Inc., Mesa Leasing, Inc., MAGI Insurance, Ltd., Regional Aircraft Services, Inc., MPD, Inc. and Freedom Airlines, Inc. as well as the accounts of UFLY, LLC, a 50% owned subsidiary of which the Company is able to exercise significant influence. All significant intercompany balances and transactions have been eliminated in consolidation.

2.     Air Transportation Safety and System Stabilization Act

         In September 2001, the Company recorded as non-operating income $14.7 million associated with amounts claimed under the Airline Stabilization Act. As of June 30, 2002, the Company has received $12.4 million and the remaining $2.3 million is included in accounts receivable. Amounts paid or payable under the Airline Stabilization Act are subject to audit and adjustment by the Federal Government. The Company is still discussing final resolution of its claim with the Department of Transportation.

3.     Minority Interest

         In September 2001, the Company entered into an agreement to form UFLY, LLC (“UFLY”), for the purpose of making strategic investments in US Airways, Inc. In September 2001, UFLY began making investments in US Airways common stock on behalf of the Company and the other investors. In October 2001, UFLY was formally established and was capitalized with $5.0 million from the Company and $5.0 million from the other members. The Company owns 50% of UFLY. The Company’s Chairman and CEO is a minority shareholder/owner and the managing member of UFLY. As the managing member, he receives no additional remuneration or compensation in connection with his role as managing member of UFLY, LLC. Amounts included in the consolidated statements of income as minority interest reflect the after-tax portion of earnings of UFLY that are applicable to the minority interest partners.

         See discussion of US Airways bankruptcy filing in Note 15.

4.     Segment Reporting

         The Company has adopted SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The statement requires disclosures related to components of a company for which separate financial information is available that is evaluated regularly by a company’s chief operating decision maker in deciding the allocation of resources and assessing performance. The Company is engaged in one line of business, the scheduled and chartered transportation of passengers, which constitutes nearly all of its operating revenues.

5.     Marketable Securities

         The Company has a cash management program that provides for the investment of excess cash balances primarily in short-term money market instruments, intermediate-term debt instruments and common equity securities of companies operating in the airline industry.

         From time-to-time, the Company enters into short positions on common equity securities when management believes that the

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Company may capitalize on downward moves in particular securities or to hedge long positions in those securities or related securities. The Company marks short positions to market at each reporting period with changes in value reflected in current period earnings. Included in marketable securities are liabilities related to short positions on common equity securities of $5.1 and $3.5 million at June 30, 2002 and September 30, 2001, respectively. Unrealized losses relating to trading securities held at June 30, 2002 and September 30, 2001 were $2.2 million and $8.0 million, respectively.

         See discussion of US Airways bankruptcy filing in Note 15.

         SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” requires that all applicable investments be classified as trading securities, available for sale securities or held to maturity securities. All of the Company’s investments are classified as trading securities during the periods presented and accordingly, are carried at market value with changes in value reflected in current period operations.

6.     Accounts Receivable from Code Share Partners

         At September 30, 2001, the Company recorded a $14.3 million reserve on receivables related to its code share partners. The reserve was recorded as a result of the events of September 11th, whereby the Company was forced to question the financial well-being of its code share partners and the ultimate collection of these receivables. At present, the Company continues to pursue collection of these amounts from these partners; however, the Company is also in discussions with these partners regarding contractual adjustments or concessions that could offset the ultimate collection of these receivables. The Company believes that it is adequately reserved at June 30, 2002.

         See discussion of US Airways bankruptcy filing in Note 15.

7.      Aircraft and Parts Held for Sale

         Aircraft and parts held for sale consists of aircraft and parts that the Company has deemed to be surplus to its operating needs. Included in this account are 21 Beechcraft 1900D aircraft that have been written down to fair value. Under an agreement with Raytheon Aircraft Corporation (“RAC”), the Company has the right to return 15 Beechcraft 1900D aircraft to RAC at a fixed price. The Company anticipates returning all 15 of these aircraft in fiscal 2002. Also included in this account is excess rotable inventory valued at net realizable value, less cost to sell.

8.      Deferred Credits

         Deferred credits include the value of lease incentives, such as consumable and rotable inventory received at lease inception, and are amortized over the life of the related lease. In May 2001, Mesa restructured various past contractual claims it had against Bombardier Regional Aircraft Division. Under this restructuring, Mesa received $25.2 million in cash and will continue to receive $1.1 million in cash per month through May of 2003 to resolve these claims. Amounts received have been classified as deferred credits and are being amortized over 14 years, the remaining weighted average life of the aircraft leases.

9.     Notes Payable and Long-Term Debt

         At June 30, 2002, Mesa has 21 surplus Beechcraft 1900D aircraft classified as held for sale. Of the 21, the Company has a put option to return 15 to the manufacturer. Unpaid debt totaling $43.9 million associated with the put aircraft is classified as a current liability in the accompanying consolidated balance sheet.

         The Company has a $35 million line of credit facility with Fleet Capital, which expires on December 7, 2003. The line of credit is secured by certain of the Company’s inventory and receivables, and the amount available varies from time to time based on the then current value of the collateral. As of June 30, 2002, the Company had approximately $24.3 million available under the line of credit, including $14.3 million that was pledged against various letters of credit issued on behalf of the Company. As such, the net availability under the line was $10.0 million. There were no other amounts outstanding as of June 30, 2002.

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10.     Weighted Average Shares Outstanding

11.      Beechcraft 1900D Cost Reductions

         On February 7, 2002, the Company finalized an agreement with Raytheon Aircraft Company (the “Raytheon Agreement”) to reduce the operating costs of its Beechcraft 1900D fleet. In connection with the Raytheon Agreement and subject to the terms and conditions contained therein, Raytheon agreed to provide up to $5.5 million in annual operating subsidy payments to the Company contingent upon satisfying certain spending requirements and, among other things, the Company remaining current on its payment obligations to Raytheon. Approximately $4.6 million (which included $0.7 million relating to fiscal 2001) was recorded as a reduction to flight operations, maintenance and interest expense during the nine-months ended June 30, 2002.

         In return, the Company granted Raytheon an option to purchase up to 233,068 warrants at a purchase price of $1.50 per warrant. Each warrant entitles the holder to purchase one share of Common Stock at an exercise price of $10.00 per share. Each of the warrants is exercisable at any time over a three-year period following its date of purchase. Absent an event of default by the Company in which case vesting is accelerated, the option to purchase the warrants vest according to the following schedule: 13,401 warrants for fiscal year 2001; 116,534 warrants for fiscal year 2002; 58,267 warrants for fiscal year 2003 and 44,866 warrants for fiscal year 2004. As of June 30, 2002, Raytheon has exercised its option to purchase the 2001 warrants.

12.     Impairment of Long-Lived Assets

         In the second quarter of fiscal 2001, the Company recognized a charge of approximately $22.7 million on 21 B1900 aircraft the Company either intends to return to the manufacturer or actively market. The charge is comprised of an impairment loss to write the aircraft down to the contractual selling price (market) less the estimated costs to prepare the aircraft for return to the manufacturer.

         Due to the economic slowdown and the effects of the terrorist attacks in the fourth quarter of fiscal 2001, the Company performed an asset impairment test under the provisions of SFAS 121 “Accounting for the impairment of long-lived assets” related to its Beechcraft 1900 turboprop aircraft. Upon discerning impairment, the Company wrote off approximately $40.7 million related to its Beechcraft 1900 fleet. The charge is comprised of an impairment loss of $37.3 million related to 30 Beechcraft 1900D aircraft the Company is planning to continue to fly and an additional market impairment of $3.1 million on six aircraft the Company is holding for sale, but does not have the contractual right to return to the vendor at a specified price. The assets were written down to their estimated fair value based upon appraisals.

         In the fourth quarter of fiscal 2001, the Company made a decision to discontinue operating Jetstream Super 31 aircraft at its Charlotte hub. As a result of this decision, the Company took a $4.9 million charge at September 30, 2001. The charge is comprised of $3.6 million related to the remaining lease payments on nine Jetstream Super 31 aircraft, $1.2 million related to the costs to buyout the remaining term of the maintenance contract associated with these aircraft and $.1 million related to costs to return the aircraft. The aircraft were returned to the lessor in May 2002.

         The Company also elected to accelerate the disposition of excess rotable inventory. During the fourth quarter of fiscal year 2001, the Company hired an independent consulting firm to determine its inventory needs and to value its surplus inventory. Prior to September 11th, the Company had been selling off surplus inventory on a passive basis as opportunities arose. As a result of this analysis, the Company took a $3.2 million charge to reduce its surplus inventory to net realizable value, less costs to sell.

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         The changes in the impairment and restructuring charges for the period ended June 30, 2002 are included below:

13.     Other Income (Expense)

         Other income (expense) is primarily comprised of the results of the Company’s investment activities. The Company’s investment gains and losses include 100% of the investment gains and losses of UFLY; the minority interest is deducted out of the Company’s operations after income taxes. Other income for the quarter ended June 30, 2002, is primarily comprised of $6.9 million in investment losses from the Company’s portfolio of aviation related securities, including $6.1 million incurred by the Company’s subsidiary UFLY. For the nine months ended June 30, 2002, the Company had investment gains of $0.2 million. Excluding the Minority Interest portion of the UFLY investment loss of $0.9 million, the Company had investment gains $1.1 million.

14.      Contingency

         The Company’s subsidiary, CCAir, is in discussions with various lessors regarding the cost of operating of its Dash 8-100 aircraft. While these discussions have been ongoing, CCAir has not made payments on the leases associated with these aircraft and is currently in default under those lease agreements. CCAir has accrued approximately $4.0 million related to past due amounts on these leases, which are included in other accrued expenses at June 30, 2002. Subsequent to June 30, 2002, CCAir has resumed making payments on these aircraft and is in the process of settling its past due amounts.

         In May 2001, the Company filed a complaint in Arizona state court against the law firm of Beus Gilbert P.L.L.C. (“Beus Gilbert”) arising out of Beus Gilbert’s representation of the Company in a suit against United Airlines (“UAL litigation”) that was settled in March 2001. The suit seeks a judgment voiding the fee arbitration provision (the “arbitration provision”) of a contingency fee agreement between the Company and Beus Gilbert. The provision purports to require that all disputes as to attorneys’ fees payable to Beus Gilbert be submitted to arbitration for final determination. Notwithstanding the requirement to arbitrate, the provision further purports to grant Beus Gilbert the right, “in its sole and absolute discretion,” to reject the decision of the arbitrator, impose an award in the amount equal to five times the aggregate hourly rate of all attorneys and paralegals who worked on the legal matter (plus costs and expenses), and enforce that award as though it were a civil judgment. Relying on the arbitration provision, following the settlement of the UAL Litigation, Beus Gilbert demanded in excess of $23 million, which it claims to have computed by applying a 5X multiplier in

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the arbitration provision to fees that allegedly accrued in excess of $4 million.

         The suit against Beus Gilbert alleges that the arbitration provision is void as a matter of law because it is illusory and lacks mutual consideration; that it is also void because it violates a public purpose: a fair and equitable resolution of the parties’ fee dispute by an impartial arbitrator; and that it is unenforceable because it circumvents the legal and ethical requirements that attorneys’ fees be reasonable. The Company seeks a determination by the Court of the fee dispute between the parties. On November 27, 2001, the court granted Beus Gilbert’s motion to compel arbitration to resolve the dispute and ordered the arbitrator to decide whether the fee resulting from a 5X multiplier would be reasonable. On July 9, 2002, the arbitrator awarded Beus Gilbert $5,750,000 in attorneys fees plus accrued interest under the agreement. As a result of the decision, the Company booked $2.8 million in additional legal expense in the quarter. The Company has not yet determined whether it will appeal the arbitrator’s decision.

         The Company is also involved in various other legal proceedings and FAA civil action proceedings including two lawsuits involving the Air Line Pilots Association, International, the union representing the subsidiary's pilots, that the Company does not believe will have a material adverse effect upon the Company’s business, financial condition or results of operations, although no assurance can be given to the ultimate outcome of any such proceedings. The Company expects to record a charge in the fourth quarter relating to the shutdown of CCAir.

15.     Subsequent Events

         In July, the Company’s operating subsidiary in Charlotte, NC, CCAir, received notice from US Airways of its intention to cancel the CCAir pro rate contract for flying out of Charlotte effective November 4, 2002. On November 4, 2002, CCAir will cease flying and currently has no plans to resume operations.

         Subsequent to June 30, 2002, one of the Company’s major code share partners, US Airways, filed for Chapter 11 bankruptcy protection. As a result of this filing, US Airways may or may not accept the existing terms of its code share or cost plus agreements with Mesa. Not ratifying these contracts would have a material adverse impact on the financial statements and results of operations of the Company as revenue associated with the Company’s code share and cost plus agreements accounted for approximately 56% and 59% of the Company’s total revenue for the nine months ended June 30, 2002 and 2001, respectively. After the Chapter 11 filing, US Airways filed a motion with the bankruptcy court to assume US Airways’ interline agreement with the Airline Clearing House (“ACH”). On August 11, 2002, the bankruptcy court entered a bridge order authorizing US Airways to continue to honor its obligations under this agreement in the ordinary course pending final approval of the motion at a later date. As a result, Mesa believes that it will collect amounts currently due from US Airways under its code sharing agreements that are paid through the ACH. US Airways has also filed a motion with the bankruptcy court for the authority to continue to honor its obligations owed to Mesa under the cost plus contract. By a August 12, 2002 bridge order, the bankruptcy court granted US Airways authority to continue to honor its obligations under the cost plus contract in the ordinary course pending final approval of the motion at a later date. If US Airways does not accept the existing terms of its cost plus agreement with Mesa, the ultimate collection of amounts receivable from US Airways under this service agreement is somewhat uncertain. As of August 12, 2002, the Company had net receivables of approximately $7.2 million due from US Airways. On August 1, 2002, US Airways paid approximately one-half of the $12 million due to Mesa for the month of August under the cost plus agreement. Mesa and US Airways have been in discussions regarding this payment and US Airways has indicated its intent to pay the remaining amount on August 15, 2002. The Company, and its subsidiary UFLY, also hold certain investments in US Airways. As a result of the bankruptcy filing, the Company could potentially record a loss of $1.7 million related to their portion of the loss on these investments in the fourth quarter.

         In July, the Company entered into a ten year agreement with CAE, Inc. for flight simulator training for the Company’s fleet of Embraer and Bombardier regional jets (ERJ-145, CRJ-200, CRJ-700 and CRJ-900). Under the agreement, CAE could potentially provide flight simulators at a location near the Company’s Phoenix, Arizona operations.

         In July, the Company received payment in full from Jonathan Ornstein, Chairman of the Board and Chief Executive Officer and Michael J. Lotz, President and Chief Operating Officer for notes receivable outstanding.

16.      Reclassifications

         Certain 2001 amounts previously reported have been reclassified to conform with the 2002 presentation.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

         This Form 10-Q contains certain statements including, but not limited to, information regarding the replacement, deployment, and acquisition of certain numbers and types of aircraft, and projected expenses associated therewith; costs of compliance with FAA regulations and other rules and acts of Congress; the ability to pass taxes, fuel costs, inflation and various expenses to the consumer; the resolution of litigation in a favorable manner and certain projected financial obligations. These statements, in addition to statements made in conjunction with the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and similar expressions, are forward-looking statements within the meaning of the Safe Harbor provision of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These statements relate to future events or the future financial performance of Mesa and only reflect Management’s expectations and estimates. The following is a list of factors, among others, that could cause actual results to differ materially from the forward-looking statements: changing business conditions in certain market segments and industries; changes in Mesa’s code sharing relationships; US Airways’ rejection in bankruptcy of existing code share agreements; the ability of US Airways to successfully reorganize and emerge from bankruptcy; the inability of either America West or US Airways to pay its obligations under the code share agreements; the ability of Mesa to successfully retire portions of its turboprop fleet; the unavailability of, or inability to secure upon acceptable terms, financing necessary to purchase aircraft we have ordered: an increase in competition along the routes Mesa operates or plans to operate; delays in completion by the manufacturer of the ordered and yet-to-be delivered aircraft; changes in general and regional economic conditions; changes in fuel price; the increased cost and reduced availability of insurance: Mesa’s relationship with employees and the terms of future collective bargaining agreements; the impact of current and future laws: additional terrorist attacks; Congressional investigations, and governmental regulations affecting the airline industry and Mesa’s operations; bureaucratic delays; amendments to existing legislation; consumers unwilling to incur greater costs for flights; unfavorable resolution of negotiations with municipalities for the leasing of facilities; and risks associated with litigation outcomes. One or more of these or other factors may cause Mesa’s actual results to differ materially from any forward-looking statement. Mesa is not undertaking any obligation to update any forward -looking statements contained in this Form 10-Q.

GENERAL

         Mesa Air Group, Inc. and its subsidiaries (collectively referred to herein as “Mesa” or the “Company”) is an independently owned regional airline serving 147 cities in 36 states, Canada and Mexico. Mesa operates a fleet of 123 aircraft and has approximately 919 daily departures.

         Mesa’s airline operations are currently conducted by three regional airlines primarily utilizing hub-and-spoke systems. Mesa Airlines, Inc. (“MAI”), a wholly owned subsidiary of Mesa, operates as America West Express under a code share and revenue sharing agreement with America West Airlines, Inc. (“America West”), as US Airways Express under code sharing agreements with US Airways, Inc. (“US Airways”) and as Frontier Jet Express under a code sharing agreement with Frontier Airlines, Inc. (“Frontier). Air Midwest, Inc., a wholly owned subsidiary of Mesa, also operates under a code sharing agreement with US Airways and flies as US Airways Express and also operates an independent division, doing business as Mesa Airlines, from a hub in Albuquerque, New Mexico. Air Midwest also has a code sharing agreement with Midwest Express in Kansas City on flights operated as US Airways Express. CCAir, Inc. (“CCAir”), a wholly owned subsidiary of Mesa, currently operates under a code share agreement with US Airways that permits CCAir to operate under the name US Airways Express and to charge their joint passengers on a combined basis with US Airways. In addition, Freedom Airlines, Inc., a wholly owned subsidiary of Mesa Air Group, Inc., has applied for and received a certificate of public convenience and necessity issued by the DOT pursuant to 49 U.S.C. 41102. Freedom is in the process of obtaining an air carrier operating certificate issued by the FAA under Part 121 of the Federal Aviation Regulations. It is anticipated that Freedom will operate as America West Express under the current code share and revenue sharing contract with America West.

         For the quarter ended June 30, 2002, approximately 73% of Mesa’s passenger revenues were derived from cost plus agreements. All of MAI’s America West Express operations and US Airways Express jet operations are on a cost plus basis. The percentage of revenue generated under cost plus agreements is expected to increase beyond the current fiscal year as Mesa adds additional regional jets to its America West Express operation. The Company’s code sharing agreement with America West expires in 2012. Depending on the outcome of the bankruptcy proceedings, the Company’s code sharing agreements with US Airways expire on various dates from 2003 through 2005, with the regional jet agreement expiring in 2008. Mesa derives the remainder of its passenger revenues from pro rate revenue sharing agreements, whereby Mesa receives a negotiated portion of ticket revenue.

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         During fiscal 2000 several significant events have occurred:

         The Company reached an agreement with General Electric Capital Corporation to enter into leveraged lease transactions with respect to 10 64-seat Bombardier CRJ-700 and 10 80-seat CRJ-900 aircraft. Mesa has orders for 40 of the CRJ-700/900 aircraft to be operated under a contract with America West Airlines. The aircraft are larger versions of the CRJ-200, which MAI currently operates.

         In January, America West Airlines, one of the Company’s major code share partners, closed a term loan in the amount of $429 million and completed arrangements for more than $600 million in concessions, financing and financial assistance following final approval by the Air Transportation Stabilization Board of approximately $380 million in loan guarantees.

         In February, the Company launched its Frontier Jet Express operation in Denver, Colorado. The Company took delivery of two Bombardier CRJ-200 aircraft under short-term operating leases to initiate the service. Mesa currently operates five CRJ-200 jet aircraft as Frontier Jet Express flying from Denver to the following cities: Houston, San Jose, St. Louis, Ontario, San Diego and Minneapolis.

         On February 7, 2002, the Company finalized an agreement with Raytheon Aircraft Company (the “Raytheon Agreement”) to reduce the operating costs of its Beechcraft 1900D fleet. In connection with the Raytheon Agreement and subject to the terms and conditions contained therein, Raytheon agreed to provide up to $5.5 million in annual operating subsidy payments to the Company contingent upon satisfying certain spending requirements and, among other things, the Company remaining current on its payment obligations to Raytheon. Approximately $4.6 million (which included $0.7 million relating to fiscal 2001) was recorded as a reduction to flight operations, maintenance and interest expense during the nine months ended June 30, 2002. In return, the Company granted Raytheon an option to purchase up to 233,068 warrants at a purchase price of $1.50 per warrant. Each warrant entitles the holder to purchase one share of Common Stock at an exercise price of $10.00 per share. Each of the warrants is exercisable at any time over a three-year period following its date of purchase. Absent an event of default by the Company in which case vesting is accelerated, the option to purchase the warrants vests concurrently with Raytheon’s payment of the related annual operating subsidy for the following periods or January 15 of each year, whichever comes first. The warrants vest according to the following schedule: 13,401 warrants for a portion of 2001; 116,534 warrants for fiscal year 2002; 58,267 warrants for fiscal year 2003 and 44,866 warrants for fiscal year 2004. As of June 30, 2002, Raytheon has exercised its option to purchase the 2001 warrants.

         In April, the CCAir pilots, represented by the Air Line Pilots Association International (“ALPA”), overwhelmingly (72%) voted in favor of ratifying a new five-year labor agreement. The agreement, however, in accordance with ALPA bylaws, required execution by the International President of ALPA, who has not signed the contract. The new labor agreement, if approved, would include an agreement to add regional jet aircraft at CCAir if the Company were to be awarded flying under the recently approved “Jets-for-Jobs” initiative at US Airways.

         In May, the Company signed an agreement with Pratt & Whitney Canada (“Pratt”) to enter into a new fleet management program covering the maintenance of Beech 1900D engines. Pursuant to the agreement, the Company sold certain assets of its Desert Turbine Services unit, as well as all spare PT6 engines. No gain or loss was recorded on the transaction. The agreement with Pratt covers 58 Beech 1900Ds and 116 engines.

         Subsequent to June 30, 2002, one of the Company’s major code share partners, US Airways, filed for Chapter 11 bankruptcy protection. As a result of this filing, US Airways may or may not accept the existing terms of its code share or cost plus agreements with Mesa. Not ratifying these contracts would have a material adverse impact on the financial statements and results of operations of the Company as revenue associated with the Company’s code share and cost plus agreements accounted for approximately 56% and 59% of the Company’s total revenue for the nine months ended June 30, 2002 and 2001, respectively. After the Chapter 11 filing, US Airways filed a motion with the bankruptcy court to assume US Airways’ interline agreement with the Airline Clearing House (“ACH”). On August 11, 2002, the bankruptcy court entered a bridge order authorizing US Airways to continue to honor its obligations under this agreement in the ordinary course pending final approval of the motion at a later date. As a result, Mesa believes that it will collect amounts currently due from US Airways under its code sharing agreements that are paid through the ACH. US Airways has also filed a motion with the bankruptcy court for the authority to continue to honor its obligations owed to Mesa under the cost plus contract. By a August 12, 2002 bridge order, the bankruptcy court granted US Airways authority to continue to honor its obligations under the cost plus contract in the ordinary course pending final approval of the motion at a later date. If US Airways does not accept the existing terms of its cost plus agreement with Mesa, the ultimate collection of amounts receivable from US Airways under this service agreement is somewhat uncertain. As of August 12, 2002, the Company had net receivables of approximately $7.2 million due from US Airways. On August 1, 2002, US Airways paid approximately one-half of the $12 million due to Mesa for the month of August under the cost plus agreement. Mesa and US Airways have been in discussions regarding this payment and US Airways has indicated its intent to pay the remaining amount on August 15, 2002. The Company, and its subsidiary UFLY, also hold certain investments in US Airways. As a result of the bankruptcy filing, the Company could potentially record a loss of $1.7 million related to their portion of the loss on these investments in the fourth quarter.

         In July, the Company also took a further step towards operation of larger regional jets by taking delivery of the first two 64-seat CRJ-700 from Bombardier. The Company is in the process of obtaining the Part 121 operating certificate at Freedom Airlines and obtaining approval to operate these aircraft. Freedom Airlines is a new subsidiary formed to operate larger regional jets with revenue service expected to begin in late September.

         In July, the Company also announced it had been awarded a $6.7 million annual award in new Essential Air Service (EAS) subsidies for seven new markets in Oklahoma, Texas and Arkansas. This award by the DOT brings Mesa’s annual EAS subsidy to approximately $15.0 million per year.

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         In July, the Company’s operating subsidiary in Charlotte, NC, CCAir, received notice from US Airways of its intention to cancel the CCAir pro rate contract with US Airways for flying out of Charlotte effective November 4, 2002. On November 4, 2002, CCAir will cease flying and currently has no plans to resume operations.

         In July, the Company entered into a ten year agreement with CAE, Inc. for flight simulator training for the Company’s fleet of Embraer and Bombardier regional jets (ERJ-145, CRJ-200, CRJ-700 and CRJ-900). Under the agreement, CAE will provide flight simulators at a location near the Company’s Phoenix, Arizona operations.

         The following tables set forth quarterly and year to date comparisons for the periods indicated below:

OPERATING DATA

FINANCIAL DATA