Atlantic Coast Suitor Does Business With Some Directors Through Partnerships
The chief executive and most of the directors of Mesa Air Group Inc., the regional airline that made an unsolicited bid to take over Dulles-based Atlantic Coast Airlines Holdings Inc., are involved in business entities that have done business with and earned fees from Phoenix-based Mesa.
Mesa's chief executive and chairman, Jonathan G. Ornstein, has interests in partnerships that have received $3 million in fees from Mesa since 1999. Two other members of Mesa's nine-member board of directors, one of them also an executive at Mesa, also have interests in those partnerships.
Corporate governance experts said boards of directors, especially the independent board members, are supposed to scrutinize such deals to protect shareholders. But seven of the nine Mesa directors have outside business ties to Mesa. Three outside Mesa directors are executives or directors of companies that do business with Mesa. Another director heads a lobbying organization created and funded by Mesa.
The other two members of Mesa's board have no disclosed financial ties to the company, except for the base $15,000-a-year director fees they earn. Except for Ornstein, Mesa's directors did not return phone calls, declined to comment or could not be reached last week.
Substantial business dealings between directors and officers and the company they oversee "raise a red flag," said Nell Minow, editor of the Corporate Library LLC, a corporate governance consulting group.
Charles M. Elson, director of the corporate governance center at the University of Delaware, said a business deal in which a chief executive is on both sides of a transaction "raises concerns."
"You have to demonstrate this is fair to the company," Elson said.
In an interview, Ornstein declined to say how much he earns from the partnerships, but said the arrangements were fully disclosed to the board and shareholders and that shareholders benefited from the close relationships.
"I think we have the best board in the business, and I think our results prove that," Ornstein said.
Ornstein said board members who did outside work for the company were chosen to do so because of their skill.
Still, Ornstein said he is reconsidering the role of Mesa's board in light of the current focus on board member independence to guard against conflicts of interest that might harm public shareholders.
"A number of these things happened before the new approach to corporate governance really came into effect," Ornstein said. "To the extent we need to make changes, we certainly will." He said some of the directors' duties may change at the next annual meeting, scheduled for March.
Atlantic Coast officials declined to comment on any aspect of Mesa's governance or how it plans to answer Mesa's $512 million stock offer for Atlantic. Representatives of Atlantic Coast's largest institutional investors either did not return phone calls or declined to comment.
Lucrative Partnerships
Ornstein, a stockbroker for 10 years before getting into the airline business, has been involved in various airlines or airline-related businesses for the past 20 years as an executive and investor.
Many of his dealings in the airline business since the early 1990s have involved James E. Swigart and George Murnane III, both of whom are directors of Mesa. Murnane is also an executive vice president.
Ornstein said he and Murnane have been friends since they attended the University of Pennsylvania together.
Swigart was an investment banker at Lehman Brothers who in the early 1990s did work for Mesa. When Swigart left Lehman in 1993, Ornstein, who was then executive vice president at Mesa, suggested to Larry Risley, who then was Mesa's chief executive, that Swigart join Mesa's board. Swigart and Ornstein later teamed up when Ornstein left Mesa to run Continental Express in 1994. Swigart became the chief financial officer at Continental Express, and treasurer at its parent company, Continental Airlines Inc.
In 1996, the three men formed a group of partnerships, all using the name Barlow -- the maiden name of Murnane's mother-in-law -- to invest in regional airlines and conduct other airline-related business. At the time, Ornstein was chief executive of Virgin Express. Swigart, Murnane and Ornstein were in the Barlow partnerships from the beginning, Ornstein said, with a "loose collection of people" rounding out the other investors. Ornstein said that in some of the partnerships, he, Murnane and Swigart have no interest. Depending on the nature of the business -- whether advisory services, direct stock investments or other business dealings -- there are different partnerships: Barlow Capital, Barlow Partners I, Barlow Partners II, and Barlow Management.
The three men figured prominently in Mesa's 1999 acquisition of CCAir Inc., another regional airline. After years in which Ornstein's, Swigart's and Murnane's partnerships acquired stock and the three men gained significant influence over both companies, Mesa bought CCAir in a deal that generated a $1.1 million fee for a Barlow partnership, according to securities filings pertaining to the acquisition.
In 1996, the Barlow partnerships began amassing stock in Mesa, Ornstein said. The partnerships reported to the Securities and Exchange Commission on Jan. 12 that they owned 5.31 percent of the company's stock. Later that month, Ornstein and Swigart were voted onto the board of Mesa.
Also in 1996, the Barlow partnerships revealed their interest in CCAir Inc., a Charlotte-based carrier that was a major feeder for US Airways. A partnership called Barlow Partners LP bought a 6.6 percent stake in CCAir in December 1996, according to Barlow securities filings. Murnane was put on the board of CCAir in January 1997.
In April 1997, CCAir announced that it had retained Barlow Partners as a consultant to help upgrade its fleet. CCAir also hired Barlow Partners to be its sole financial adviser in any merger or acquisition transaction.
Ornstein became chief executive of Mesa on May 1, 1998, after Risley left the company.
In August 1998, Mesa and CCAir signed a letter of intent for Mesa to acquire CCAir. About a year later, when CCAir was acquired by Mesa, Barlow Partners received 2 percent of the purchase price as an advisory fee, which came to $1.1 million. Murnane abstained from CCAir's board vote to approve the acquisition, as did Swigart and Ornstein.
Ornstein said that Barlow invested in CCAir because he believed that his and Murnane's involvement could improve the company's operations and that, ultimately, Barlow would make a profit on its investment. The idea originally was not to merge CCAir into Mesa.
"We did a lot of work for CCAir to keep it alive," Ornstein said.
Ornstein said that it was only after he became Mesa's chief executive that he decided CCAir would be a good acquisition for Mesa. The decision had nothing to do with the fact that Barlow Partners would benefit from the acquisition, he said.
"While CCAir itself may not have looked to be successful, Mesa had no presence in Charlotte prior to CCAir," Ornstein said. "Mesa is now the largest operator for USAir in Charlotte. That was the idea."
Another company controlled by Ornstein, Swigart and Murnane has received more than $1.9 million in fees from Mesa since Ornstein took control of the company. Barlow Capital LLC , according to Mesa's 2002 proxy statement, was hired by Mesa to advise the company on aircraft leases and merger and acquisitions. Ornstein said all the fees earned by Barlow Capital have been for arranging aircraft-lease financing for Mesa.
Ornstein, Murnane and Swigart each own 20 percent of Barlow Capital, according to Mesa's proxy statement. Ornstein declined to name who owns the other 40 percent of Barlow, saying it is a private partnership.
Most regional airlines hire third parties to arrange aircraft leases and financing, said Tony Cristello, an analyst at BB&T Capital Markets in Richmond.
According to the company's proxy statement filed in January, Mesa paid fees totaling $846,000, $627,000 and $409,000 to Barlow Capital in fiscal 2002, 2001 and 2000, respectively.
Mesa's president and chief operating officer, Michael J. Lotz, defended the arrangement.
"The rates that are paid to Barlow are below-market rates," Lotz said. "All of our . . . company's related party transactions are reviewed by the board. It's a good deal for the company that got the benefit of having some of the best lease rates in the industry and paid Barlow below-market fees for their services."
"Barlow was hired by Mesa a long time ago to do work. They will continue to do work," Ornstein said. "We will put our lease rates up against everyone in the industry. I don't see how it's a conflict of interest. Mesa wants airplanes, Barlow gets paid if it gets airplanes."
Close Relationships
Mesa's board, which is responsible for assuring that any insider business deal with Mesa is done at arm's length, is made up mostly of people who also have other business dealings with Mesa.
According to Mesa's most recent proxy, director Herbert A. Denton owns investment banking company Providence Capital, which was paid $308,000 in 2001 and 2002 to manage a Mesa stock-buyback program. Director Ronald R. Fogleman also is a director of a company that was paid more than $1.5 million since 1999 to sell Mesa's spare airplane parts. Director Joseph L. Manson is a law partner at Piper Rudnick, which earned $571,333 from Mesa in 2002 to handle labor-related legal work. Director Maurice A. Parker is executive director of Regional Aviation Partners, a lobbying organization created in April 2001. Regional Aviation Partners and Parker's $84,185 annual salary are funded by Mesa and other airlines.
Parker is one of the three members of Mesa's compensation committee, which sets Ornstein's pay.
Ornstein's Mesa salary was about $200,000 for fiscal year 2002, and he was granted a $420,000 bonus. By comparison, Atlantic Coast Airlines chief executive Kerry B. Skeen was paid $400,535 in salary last year and was granted a $434,408 bonus. Compensation information is contained in the companies' most recent proxies.
Mesa guarantees Ornstein at least $200,000 in salary each year and at least $200,000 in deferred compensation. Under a contract that expires in 2005, Skeen's minimum base salary is $435,000, and Atlantic contributes at least that much to a deferred compensation account each year.
Stock has been a large part of both executives' compensation. Ornstein was given options on 366, 313 shares in fiscal 2002 at strike prices ranging from $4.04 to $11.99 a share. Mesa shares closed Friday at $12.10.
Skeen was granted options on 200,000 shares last year with a strike price of $9.25 a share. Atlantic Coast's stock closed Friday at $12.43.
Atlantic Coast's board members have no disclosed business ties to the company outside their role as directors or officers, according to Atlantic's proxy statement.
Douglas E. Abbey, an airline analyst with AvStat Associates Inc., said the business relationships of Mesa's directors probably would have little effect on an Atlantic Coast acquisition. "I don't think it changes the impact of the merger," he said. "I suspect few shareholders will ever investigate to this level. One would suspect they want the most return for their investment."
Several corporate governance experts who reviewed Mesa's board said Parker's role on the compensation committee was most troubling because Parker's salary is funded indirectly by Mesa. Ornstein agreed.
"I think that how Maurice is compensated, if he can't be on the committee because of that, we change," Ornstein said.
The chief executive and most of the directors of Mesa Air Group Inc., the regional airline that made an unsolicited bid to take over Dulles-based Atlantic Coast Airlines Holdings Inc., are involved in business entities that have done business with and earned fees from Phoenix-based Mesa.
Mesa's chief executive and chairman, Jonathan G. Ornstein, has interests in partnerships that have received $3 million in fees from Mesa since 1999. Two other members of Mesa's nine-member board of directors, one of them also an executive at Mesa, also have interests in those partnerships.
Corporate governance experts said boards of directors, especially the independent board members, are supposed to scrutinize such deals to protect shareholders. But seven of the nine Mesa directors have outside business ties to Mesa. Three outside Mesa directors are executives or directors of companies that do business with Mesa. Another director heads a lobbying organization created and funded by Mesa.
The other two members of Mesa's board have no disclosed financial ties to the company, except for the base $15,000-a-year director fees they earn. Except for Ornstein, Mesa's directors did not return phone calls, declined to comment or could not be reached last week.
Substantial business dealings between directors and officers and the company they oversee "raise a red flag," said Nell Minow, editor of the Corporate Library LLC, a corporate governance consulting group.
Charles M. Elson, director of the corporate governance center at the University of Delaware, said a business deal in which a chief executive is on both sides of a transaction "raises concerns."
"You have to demonstrate this is fair to the company," Elson said.
In an interview, Ornstein declined to say how much he earns from the partnerships, but said the arrangements were fully disclosed to the board and shareholders and that shareholders benefited from the close relationships.
"I think we have the best board in the business, and I think our results prove that," Ornstein said.
Ornstein said board members who did outside work for the company were chosen to do so because of their skill.
Still, Ornstein said he is reconsidering the role of Mesa's board in light of the current focus on board member independence to guard against conflicts of interest that might harm public shareholders.
"A number of these things happened before the new approach to corporate governance really came into effect," Ornstein said. "To the extent we need to make changes, we certainly will." He said some of the directors' duties may change at the next annual meeting, scheduled for March.
Atlantic Coast officials declined to comment on any aspect of Mesa's governance or how it plans to answer Mesa's $512 million stock offer for Atlantic. Representatives of Atlantic Coast's largest institutional investors either did not return phone calls or declined to comment.
Lucrative Partnerships
Ornstein, a stockbroker for 10 years before getting into the airline business, has been involved in various airlines or airline-related businesses for the past 20 years as an executive and investor.
Many of his dealings in the airline business since the early 1990s have involved James E. Swigart and George Murnane III, both of whom are directors of Mesa. Murnane is also an executive vice president.
Ornstein said he and Murnane have been friends since they attended the University of Pennsylvania together.
Swigart was an investment banker at Lehman Brothers who in the early 1990s did work for Mesa. When Swigart left Lehman in 1993, Ornstein, who was then executive vice president at Mesa, suggested to Larry Risley, who then was Mesa's chief executive, that Swigart join Mesa's board. Swigart and Ornstein later teamed up when Ornstein left Mesa to run Continental Express in 1994. Swigart became the chief financial officer at Continental Express, and treasurer at its parent company, Continental Airlines Inc.
In 1996, the three men formed a group of partnerships, all using the name Barlow -- the maiden name of Murnane's mother-in-law -- to invest in regional airlines and conduct other airline-related business. At the time, Ornstein was chief executive of Virgin Express. Swigart, Murnane and Ornstein were in the Barlow partnerships from the beginning, Ornstein said, with a "loose collection of people" rounding out the other investors. Ornstein said that in some of the partnerships, he, Murnane and Swigart have no interest. Depending on the nature of the business -- whether advisory services, direct stock investments or other business dealings -- there are different partnerships: Barlow Capital, Barlow Partners I, Barlow Partners II, and Barlow Management.
The three men figured prominently in Mesa's 1999 acquisition of CCAir Inc., another regional airline. After years in which Ornstein's, Swigart's and Murnane's partnerships acquired stock and the three men gained significant influence over both companies, Mesa bought CCAir in a deal that generated a $1.1 million fee for a Barlow partnership, according to securities filings pertaining to the acquisition.
In 1996, the Barlow partnerships began amassing stock in Mesa, Ornstein said. The partnerships reported to the Securities and Exchange Commission on Jan. 12 that they owned 5.31 percent of the company's stock. Later that month, Ornstein and Swigart were voted onto the board of Mesa.
Also in 1996, the Barlow partnerships revealed their interest in CCAir Inc., a Charlotte-based carrier that was a major feeder for US Airways. A partnership called Barlow Partners LP bought a 6.6 percent stake in CCAir in December 1996, according to Barlow securities filings. Murnane was put on the board of CCAir in January 1997.
In April 1997, CCAir announced that it had retained Barlow Partners as a consultant to help upgrade its fleet. CCAir also hired Barlow Partners to be its sole financial adviser in any merger or acquisition transaction.
Ornstein became chief executive of Mesa on May 1, 1998, after Risley left the company.
In August 1998, Mesa and CCAir signed a letter of intent for Mesa to acquire CCAir. About a year later, when CCAir was acquired by Mesa, Barlow Partners received 2 percent of the purchase price as an advisory fee, which came to $1.1 million. Murnane abstained from CCAir's board vote to approve the acquisition, as did Swigart and Ornstein.
Ornstein said that Barlow invested in CCAir because he believed that his and Murnane's involvement could improve the company's operations and that, ultimately, Barlow would make a profit on its investment. The idea originally was not to merge CCAir into Mesa.
"We did a lot of work for CCAir to keep it alive," Ornstein said.
Ornstein said that it was only after he became Mesa's chief executive that he decided CCAir would be a good acquisition for Mesa. The decision had nothing to do with the fact that Barlow Partners would benefit from the acquisition, he said.
"While CCAir itself may not have looked to be successful, Mesa had no presence in Charlotte prior to CCAir," Ornstein said. "Mesa is now the largest operator for USAir in Charlotte. That was the idea."
Another company controlled by Ornstein, Swigart and Murnane has received more than $1.9 million in fees from Mesa since Ornstein took control of the company. Barlow Capital LLC , according to Mesa's 2002 proxy statement, was hired by Mesa to advise the company on aircraft leases and merger and acquisitions. Ornstein said all the fees earned by Barlow Capital have been for arranging aircraft-lease financing for Mesa.
Ornstein, Murnane and Swigart each own 20 percent of Barlow Capital, according to Mesa's proxy statement. Ornstein declined to name who owns the other 40 percent of Barlow, saying it is a private partnership.
Most regional airlines hire third parties to arrange aircraft leases and financing, said Tony Cristello, an analyst at BB&T Capital Markets in Richmond.
According to the company's proxy statement filed in January, Mesa paid fees totaling $846,000, $627,000 and $409,000 to Barlow Capital in fiscal 2002, 2001 and 2000, respectively.
Mesa's president and chief operating officer, Michael J. Lotz, defended the arrangement.
"The rates that are paid to Barlow are below-market rates," Lotz said. "All of our . . . company's related party transactions are reviewed by the board. It's a good deal for the company that got the benefit of having some of the best lease rates in the industry and paid Barlow below-market fees for their services."
"Barlow was hired by Mesa a long time ago to do work. They will continue to do work," Ornstein said. "We will put our lease rates up against everyone in the industry. I don't see how it's a conflict of interest. Mesa wants airplanes, Barlow gets paid if it gets airplanes."
Close Relationships
Mesa's board, which is responsible for assuring that any insider business deal with Mesa is done at arm's length, is made up mostly of people who also have other business dealings with Mesa.
According to Mesa's most recent proxy, director Herbert A. Denton owns investment banking company Providence Capital, which was paid $308,000 in 2001 and 2002 to manage a Mesa stock-buyback program. Director Ronald R. Fogleman also is a director of a company that was paid more than $1.5 million since 1999 to sell Mesa's spare airplane parts. Director Joseph L. Manson is a law partner at Piper Rudnick, which earned $571,333 from Mesa in 2002 to handle labor-related legal work. Director Maurice A. Parker is executive director of Regional Aviation Partners, a lobbying organization created in April 2001. Regional Aviation Partners and Parker's $84,185 annual salary are funded by Mesa and other airlines.
Parker is one of the three members of Mesa's compensation committee, which sets Ornstein's pay.
Ornstein's Mesa salary was about $200,000 for fiscal year 2002, and he was granted a $420,000 bonus. By comparison, Atlantic Coast Airlines chief executive Kerry B. Skeen was paid $400,535 in salary last year and was granted a $434,408 bonus. Compensation information is contained in the companies' most recent proxies.
Mesa guarantees Ornstein at least $200,000 in salary each year and at least $200,000 in deferred compensation. Under a contract that expires in 2005, Skeen's minimum base salary is $435,000, and Atlantic contributes at least that much to a deferred compensation account each year.
Stock has been a large part of both executives' compensation. Ornstein was given options on 366, 313 shares in fiscal 2002 at strike prices ranging from $4.04 to $11.99 a share. Mesa shares closed Friday at $12.10.
Skeen was granted options on 200,000 shares last year with a strike price of $9.25 a share. Atlantic Coast's stock closed Friday at $12.43.
Atlantic Coast's board members have no disclosed business ties to the company outside their role as directors or officers, according to Atlantic's proxy statement.
Douglas E. Abbey, an airline analyst with AvStat Associates Inc., said the business relationships of Mesa's directors probably would have little effect on an Atlantic Coast acquisition. "I don't think it changes the impact of the merger," he said. "I suspect few shareholders will ever investigate to this level. One would suspect they want the most return for their investment."
Several corporate governance experts who reviewed Mesa's board said Parker's role on the compensation committee was most troubling because Parker's salary is funded indirectly by Mesa. Ornstein agreed.
"I think that how Maurice is compensated, if he can't be on the committee because of that, we change," Ornstein said.
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