** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-K**

| **(Mark  One)** |
|-----------------|

 

| **ý** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------------|

 

**For the fiscal year ended March 31,2002**

 

**OR**

 

| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For the transition period from             to            **

 

**Commission File No. 0-17895**

 

**MESABA HOLDINGS, INC.**

(Exact name of registrant asspecified in its charter)

 

| **Minnesota**                                                                      |   | **41-1616499**                       |
|------------------------------------------------------------------------------------|--------|--------------------------------------|
| (State of other jurisdiction of incorporation or organization)                     |   | (I.R.S. Employer Identification No.) |
|                                                                               |   |                                 |
| **7501 26th Avenue South**                                                         |
| **Minneapolis, Minnesota  55450**                                             |
| (Address of principal executive offices) (Zip Code)                                |
|                                                                               |   |                                 |
| Registrant’s telephone number, including area code: ** (612)  726-5151** |

 

Securitiesregistered pursuant to Section 12(b) of the Act: **None**

 

Securities registered pursuant to Section 12(g) of theAct: **Common Stock, par value $.01**

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 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 informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ý

 

The aggregate market value of voting stock held by nonaffiliates of theregistrant as of May 15, 2002 was approximately $143,913,820.

 

As of May 15, 2002, there were 20,298,141 shares of Common Stock of theregistrant issued and outstanding.

 

 

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Documents Incorporated ByReference

 

Certain portions of the documents listed below have been incorporated byreference into the indicated part of this Form 10-K.

 

| Document Incorporated                                                                                   |   | Part of Form 10-K |
|---------------------------------------------------------------------------------------------------------|--------|-------------------|
|                                                                                                    |   |              |
| Proxy Statement for 2002 Annual Meeting of Shareholders         |   | Part III          |

 

CAUTIONARY STATEMENT UNDER THE

PRIVATE SECURITIES LITIGATIONREFORM ACT OF 1995

 

Statements in thisAnnual Report on Form 10-K under the caption “Business” and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” aswell as oral statements that may be made by the Company or by officers,directors or employees of the Company acting on the Company’s behalf, that arenot historical fact may constitute “forward looking statements” within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section21E of the Securities Exchange Act of 1934, as amended.  Such forward looking statements involvefactors that could cause the actual results of the Company to differ materiallyfrom historical results or from any results expressed or implied by suchforward-looking statements.  The Companycautions the public not to place undue reliance on forward-looking statements,which may be based on assumptions and anticipated events that do notmaterialize.  Factors which could causethe Company’s actual results to differ from forward-looking statements include****materialchanges in the relationship between the Company and Northwest Airlines;reductions or interruptions in Northwest Airlines’ air service; reducedpassenger and flight activity as a result of the terrorist events of September11, 2001; expenses associated with restructuring the Company’s operations; ageneral slow-down in the United States economy; increased operating costs dueto the events of September 11, 2001; the impact of United States governmentprograms on the Company’s operations; changes in regulations affecting theCompany, including DOT and FAA regulations or directives affectingairworthiness of aircraft; the acquisition and phase-in of aircraft; seasonalfactors; and labor relationships, including labor shortages, slow downs and/orwork stoppages associated with the outcome of contract negotiations between theCompany and the Air Line Pilots Association.

 

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PART I

 

Item 1.             BUSINESS

 

Mesaba Holdings,Inc. (“Holdings” or the “Company”) is the holding company for Mesaba Aviation,Inc. (“Mesaba”).  Mesaba is a regionalairline currently providing scheduled passenger service under the name “MesabaAirlines/Northwest Airlink” or “Mesaba Airlines/Northwest Jet Airlink”.  As of May 1, 2002, Mesaba is flying to 102cities and metropolitan areas in 26 states and four provinces in Canada. Allflights currently operated by Mesaba are designated as Northwest Airlinesflights under agreements with Northwest Airlines, Inc. (“Northwest”).  Mesaba’s flight schedules are coordinatedwith those of Northwest to facilitate interline connections at theMinneapolis/St. Paul International Airport, Detroit Metropolitan Airport andthe Memphis International Airport.

 

Agreements withNorthwest 

 

Mesaba operates as a regional air carrier providing scheduled jet-proppassenger and airfreight service as Mesaba Airlines/Northwest Airlink under anAirline Services Agreement (the “Airlink Agreement”).  As of May 1, 2002, Mesaba serves 82 cities in the United Statesand Canada from Northwest’s hub airports in Minneapolis/St. Paul, Detroit andMemphis.  The Airlink Agreement providesfor exclusive jet-prop rights to designated service areas and extends throughJune 30, 2007. Either Northwest or Mesaba has the right to terminate theAirlink Agreement without cause upon 365 days notice.

 

Mesaba also operates regional jet aircraft under a separate Regional JetServices Agreement (the “Jet Agreement”), under which Mesaba operates Avro RJ85(“RJ85”) regional jets for Northwest. As of May 1, 2002, Mesaba served 40 cities under the Jet Agreement.  The aircraft are subleased from Northwestand are operated as Northwest Jet Airlink from the Minneapolis/St. Paul,Detroit and Memphis hubs. Northwest has the right to terminate the Jet Agreementon April 25, 2004 with at least 180 days or up to 365 days prior notice.

 

Under the agreements, all flights that Mesaba currently operates aredesignated as Northwest flights using Northwest’s designator code in allcomputer reservations systems, including the Official Airline Guide, with anasterisk and a footnote indicating that Mesaba is the carrier providing theservice.  In addition, flight schedulesof Mesaba and Northwest are closely coordinated to facilitate interlineconnections, and Mesaba’s passenger gate facilities at the Minneapolis/St. PaulInternational Airport, Detroit Metropolitan Airport and Memphis InternationalAirport are integrated with Northwest’s facilities in the main terminalbuildings, rather than at the more remote commuter air terminals.  The agreements with Northwest also permitMesaba to offer its passengers fares between the cities served by Mesaba andall of the destinations served by Northwest as well as participation inNorthwest’s frequent flyer program. Mesaba’s jet aircraft are painted in thecolors of Northwest Airlines and the jet-prop aircraft are painted in adistinctive “Northwest Airlink” configuration, with a Northwest Airlines logoin addition to Mesaba’s name.

 

Mesaba, throughthe agreements, receives ticketing and certain check–in, baggage, freightand aircraft handling services from Northwest at certain airports.  In addition, Mesaba receives itscomputerized reservations services from Northwest.  Northwest also performs all marketing, schedules, yield managementand pricing services for Mesaba’s flights.

 

Mesaba believesthat its competitive position is enhanced as a result of its marketing andother agreements with Northwest, particularly through the ability of Mesaba tooffer its passengers coordinated flight schedules to the destinations served byNorthwest.  The Airlink Agreement andthe Jet Agreement can each be terminated immediately by a party in the event ofan uncured breach by, or the insolvency of, the other party.  Northwest can also terminate eitheragreement immediately if Mesaba violates certain covenants, including failureto make aircraft lease payments or maintain insurance coverage.  Loss of Mesaba’s affiliation with Northwestor Northwest’s failure to materially perform under the Airlink Agreement or JetAgreement would have a material adverse effect on the Company’s operations andfinancial position.

 

 

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Route System

 

The following sets forth certain information with respect to Mesaba’sscheduled route system for May 2002.

 

 Cities served from Minneapolis/St. Paul:Aberdeen, SD, Appleton, WI, Bemidji, MN, Bismarck, ND, Bloomington, IL,Brainerd, MN, Cedar Rapids, IA, Champaign, IL, Cincinnati, OH, Columbus, OH,Des Moines, IA, Dubuque, IA, Duluth, MN, Eau Claire, WI, Flint, MI, Fort Dodge,IA, Grand Forks, ND, Grand Rapids, MI, Grand Rapids, MN, Green Bay, WI,Houghton/Hancock, MI, Hibbing, MN, International Falls, MN, Kalamazoo, MI,LaCrosse, WI, Lincoln, NE, Madison, WI, Marquette, MI, Mason City, IA, Moline,IL, Oklahoma City, OK, Omaha, NE, Peoria, IL, Pierre, SD, Pittsburgh, PA,Regina, Saskatchewan, Rhinelander, WI, Rochester, MN, Rockford, IL, Saginaw,MI, St. Cloud, MN, St. Louis, MO, Sioux City, IA, Sioux Falls, SD, Thief RiverFalls, MN, Thunder Bay, Ontario, Traverse City, MI, Waterloo, IA, Watertown,SD, Wausau, WI, White Plains, NY, Winnipeg, Manitoba.

 

Cities served from Detroit: Akron/Canton, OH, Allentown, PA, Alpena, MI,Appleton, WI, Binghamton, NY, Birmingham, AL, Bloomington, IL, Buffalo, NY,Champaign, IL, Charleston, WV, Charlotte, NC, Cincinnati, OH, Cleveland, OH,Columbus, OH, Dayton, OH, Des Moines, IA, Dubuque, IA, Elmira, NY, Erie, PA,Evansville, IN, Flint, MI, Fort Wayne, IN, Harrisburg, PA, Houghton/Hancock,MI, Kalamazoo, MI, Knoxville, TN, Lafayette, IN, Lansing, MI, Lexington, KY,London, Ontario, Louisville, KY, Marquette, MI, Moline, IL, Montreal, Quebec,Muskegon, MI, Ottawa, Ontario, Pellston, MI, Peoria, IL, Pittsburgh, PA,Roanoke, VA, Rochester, NY, Saginaw, MI, Sault Ste. Marie, MI, South Bend, IN,State College, PA, Toledo, OH, Traverse City, MI, Wausau, WI, White Plains,NY,  Youngstown, OH.

 

Cities served from Memphis: Alexandria, LA, Baton Rouge, LA,Biloxi/Gulfport, MS, Birmingham, AL, Charlotte, NC, Cincinnati, OH, Cleveland,OH, Columbus, OH, Columbus, MS, Des Moines, IA, Evansville, IN, Fayetteville,AR, Fortsmith, AR, Huntsville, AL, Jackson, MS, Joplin, MO, Knoxville, TN,Lafayette, LA, Lexington, KY, Moline, IL, Louisville, KY, Nashville, TN, PanamaCity, FL, St. Louis, MO, Tallahassee, FL, Tri-cities, TN.

 

Other cities that Mesaba flies to on a seasonal basis are Aspen, CO,Ely, MN, Fargo, ND, and Portland, ME.

 

From time to time, Mesaba reviews the feasibility of expanding thefrequency of its service to airports currently being served, as well asinitiating passenger service to additional cities generally within its servicearea.  Mesaba works closely withNorthwest to coordinate flight schedules and to facilitate connections betweenMesaba and Northwest.  See “Business —Agreements with Northwest.”

 

Aircraft

 

The following table sets forth certain information as to Mesaba’spassenger aircraft fleet as of May 20, 2002:

 
| **Type of  Aircraft** |   | **Number of  Aircraft** |   | **Seating  Capacity** |   | **Approximate  Single  Flight  Range  (miles)** |   | **Approximate  Average  Cruising  Speed  (M.P.H.)** |   |
|-----------------------|--------|-------------------------|--------|-----------------------|--------|-------------------------------------------------|--------|-----------------------------------------------------|--------|
| Avro RJ85             |   | 36                      |   | 69                    |   | 1,400                                           |   | 410                                                 |   |
| Saab 340              |   | 80                      |   | 30/33/34              |   | 500                                             |   | 300                                                 |   |

 

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Mesaba leases or sub-leases its Avro RJ85 aircraft from Northwest underoperating leases with terms of up to 10 years. The Jet Agreement allows Mesaba to return aircraft to Northwest upon theoccurrence of certain events. The Avro RJ85 aircraft are pressurized jetairplanes with galleys, dual class cabins, standup headroom, lavatories, ACARS,radar, ground proximity warning, traffic collision avoidance and de-icingsystems.

 

Mesaba leases all of its Saab 340 aircraft, either directly fromaircraft leasing companies or through sub-leases with Northwest under operatingleases with initial terms of up to 17 years. The Airlink Agreement allows Mesaba to return aircraft to Northwest uponthe occurrence of certain events.  TheSaab 340 aircraft are fast, fuel efficient, pressurized jet-prop airplanes withgalleys, standup headroom, lavatories, radar, global positioning, groundproximity warning, traffic collision avoidance and de-icing systems.

 

Under the agreements with Northwest, the Company has the ability toenter into arrangements with other air carriers for service to cities notserved by Northwest, so long as the Company does not use the “NW” designatorcode, Avro RJ85 or Saab 340 aircraft with respect to such service.  The Company would need to acquire additionalaircraft if it entered into an arrangement for service to carriers other thanNorthwest.

 

All of Mesaba’s aircraft comply fully with all current Federal AviationRegulations issued by the Federal Aviation Administration (“FAA”).

 

As of May 2002, Mesaba’s existing fleet of Avro RJ85 and Saab 340aircraft had remaining lease terms of four months to 14 years.  The current aggregate monthly lease paymentsfor all aircraft is approximately $9.2 million.

 

Competition

 

The airline industry is highly competitive as a result of the AirlineDeregulation Act of 1978 (the “Deregulation Act”).  In general, the Deregulation Act increased competition byeliminating restrictions on fares and route selection.  The Deregulation Act also contributed to thewithdrawal of national and major carriers from short–haul markets byallowing them to more easily obtain additional long–haul routes, whichcan be more efficiently and profitably served by larger jet aircraft.  Elimination of barriers to entry into newmarkets, however, also creates greater potential for competing service by othercarriers operating small, fuel–efficient aircraft on short–haulroutes serving small and medium–sized cities.  Mesaba currently competes directly with other regional airlineson some routes it serves.  Mesaba alsofaces competition from regional carriers offering service to alternative hubsfor connecting flights.  No assurancecan be given that other carriers, including major carriers, will not institutecompeting service on routes served by Mesaba.

 

Competitive factors in the airline industry generally include fares,frequency and dependability of service, convenience of flight schedules, typeof aircraft flown, airports served, relationships with travel agents, andefficiency and reliability of reservations systems and ticketing services.  The compatibility of flight schedules withthose of other airlines and the ability to offer through fares and convenientinter–airline flight connections are also important competitivefactors.  The Company believes thatMesaba is competitive with respect to each of such factors because of itsestablished reputation, cost structure, aircraft fleet which is properly suitedfor the small and medium–sized cities served, and especially itsrelationship with Northwest.

 

Fuel

 

The cost of aviation fuel accounted for 5.4% of total operating costsfor the year ended March 31, 2002, 6.3% the year ended March 31, 2001, and 7.5%for the year ended March 31, 2000.

 

The Company has arrangements with Northwest and ten major fuel suppliersfor substantial portions of its fuel requirements.  The Company believes that such arrangements assure an adequatesupply of fuel for current and anticipated future operations.  Both the cost and availability of fuel, however,are subject to factors beyond the control of the Company.  Certain provisions of the Airlink Agreementprotect Mesaba from fluctuations in aviation fuel prices while the JetAgreement requires Northwest to provide jet fuel to Mesaba at its expense.

 

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Fares

 

Mesaba derives its passenger revenues by selling its capacity toNorthwest at predetermined rates. Passenger fares vary primarily in relation to the length of the flightand other factors and are established by Northwest.  Under the agreements with Northwest, the Company has the abilityto enter into arrangements with other air carriers for service to cities notserved by Northwest, so long as the Company does not use the “NW” designatorcode, Avro RJ85 or Saab 340 aircraft with respect to such service.  The Company would need to acquire additionalaircraft if it entered into an arrangement for service to carriers other thanNorthwest.

 

Regulation

 

Pursuant to the Federal Aviation Act of 1958, as amended (the “AviationAct”), the Federal Department of Transportation (“DOT”), principally throughthe FAA, has certain regulatory authority over the operations of all aircarriers.  The jurisdiction of the FAAextends primarily to the safety and operational provisions of the Aviation Act,while the responsibility of the DOT involves principally the regulation ofcertain economic aspects of airline operations.

 

FAA Regulation.  Mesabaholds an “Air Carrier Certificate” from the FAA, under Part 119 of the FederalAviation Regulation, permitting it to conduct flight operations in compliancewith Part 121 of the Federal Aviation Regulations.  The Part 121 regulations are the same regulatory requirementsapplied to major airlines. The FAA regulations to which Mesaba is subject areextensive and include, among other items, regulation of aircraft maintenanceand operations, equipment, ground facilities, dispatch, communications,training, weather observation, flight personnel and other matters affecting airsafety.  To ensure compliance with itsregulations, the FAA requires airlines to obtain operating, airworthiness andother certificates that are subject to suspension or revocation for cause.  Mesaba holds all certificates necessary forits operations.

 

DOT Regulation.  Mesabaholds a Certificate of Public Convenience and Necessity under Section 401 ofthe Aviation Act.  As a certificatedcarrier, Mesaba is required to file certain additional quarterly reports withthe DOT, including a report of aircraft operating expenses and relatedstatistics.  The Certificate of PublicConvenience and Necessity is a prerequisite for operations with aircraft largerthan 60 seats.

 

Other Regulation.  Underthe Noise Control Act of 1972 and the Aviation Safety and Noise Abatement Actof 1979, the FAA has authority to monitor and regulate aircraft engine noise.  Management of the Company believes thatMesaba’s aircraft comply with or are exempt from such regulations and thatMesaba complies with standards for aircraft exhaust emissions and fuel storagefacilities issued by the Environmental Protection Agency.  The Company is also required to comply withthe drug-testing program adopted under Part 14 CFR by the DOT.  As a foreign carrier operating in Canada,the Company is subject to regulation by the Canadian Department of Transportand has been issued Foreign Air Carrier Operating Certificates by suchagency.  Because Northwest maintainscertain contracts with the Department of Defense (the “DOD”), Mesaba is subjectto periodic inspections by the DOD.

 

Insurance

 

Mesaba carries the types 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.  The Company believes thatthis insurance is adequate as to amounts and risks covered.  There can be no assurance that the insurancecarried would be sufficient to protect the Company adequately in the event of acatastrophic accident.

 

Aircraft Maintenance

 

Mesaba employs its own aircraft, avionics and engine maintenance staff thatperform substantially all routine maintenance to its aircraft and engines.  Major overhauls on its airframes, engines,and other rotable parts on Saab 340 and RJ85 aircraft are performed internallyor at FAA authorized facilities.

 

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Airport and Terminal Facilities and Services

 

Mesaba’s ticket counter and baggage-handling space is leased from localairport authorities or other airlines at all of the airports served.  In 52 of the cities it serves, Mesabareceives support service under agreements with Northwest.

 

Mesaba pays local airport authorities for the use of landing fields atrates that are based on the number of flights per day, fixed fees, or on thenumber of aircraft landings and aircraft weight.

 

Properties

 

The Company’s principal executive offices are located at theMinneapolis/Saint Paul International Airport. Mesaba leases approximately 293,000 square feet of facilities, ramp,parking and unimproved land at the airport under separate ground and facilitiesleases with the Metropolitan Airports Commission (“MAC”).  Mesaba’s primary facility containsapproximately 83,000 square feet of office, shop, and hangar space.  Mesaba is obligated to make payments ofapproximately $35,000 per month under the lease for the hangar, office andmaintenance facility, in addition to approximately $17,000 per month under theground lease for the underlying land and access ramp.  Mesaba has entered into an agreement with the MAC to terminatethese leases in September 2003, to accommodate planned runwayconstruction.  As part of the runwayexpansion plan, Mesaba will relocate its hangar facilities to the western sideof the airport and is currently evaluating lease options with the MAC.

 

Mesaba leases approximately 394,000 square feet of facilities, ramp,parking and unimproved land at the Detroit Metropolitan Airport under separateground and facilities leases.  Thefacilities lease covers approximately 60,000 square feet of hangar andmaintenance space and obligates Mesaba to pay monthly rentals ranging betweenapproximately $29,000 and $31,000 until June 1, 2010 as part of SpecialFacilities Bond financing provided by Wayne County, Michigan. The ground leasehas a 20-year term concurrent with the facilities lease, which expires June 1,2010.  Monthly lease payments ofapproximately $10,000 are currently required under the ground lease, subject toan annual adjustment on January 1 each year based upon the percentage change inan index published by the Bureau of Labor Statistics of the U.S. Department ofCommerce.   On May 9, 2000, the previoushangar collapsed due to a severe storm. During reconstruction, Mesaba expandedthe facility to approximately 60,000 square feet.  Due to the hangar incident and corresponding reconstruction, thelease was reclassified from a capital to an operating lease.  The hangar facility reopened on June 1,2001.

 

Mesaba owns approximately 38,000 square feet of hangar and office spacelocated on approximately 102,000 square feet of land and parking areas of whichMesaba is ground lessee, at the Central Wisconsin Airport in Mosinee,Wisconsin.  Mesaba pays approximately$800 per month under the terms of the ground lease relating to such facility,which expires on December 31, 2011, subject to two 10–year renewaloptions.

 

Mesaba leases approximately 19,000 square feet of office space in Eagan,Minnesota.  Mesaba pays approximately$18,000 per month under the terms of the lease which expires on February 2017.

 

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Mesaba leasesapproximately 497,000 square feet of facilities, ramp, parking and unimprovedland at the Cincinnati/Northern Kentucky Airport under separate ground andfacilities leases.  The facilities leasecovers approximately 126,000 square feet of hangar and maintenance space andMesaba pays monthly rentals of approximately $92,000 until January 29, 2029 aspart of Special Facilities Bond financing provided by the Cincinnati/NorthernKentucky Airport Authority.  The groundlease has a 30-year term concurrent with the facilities lease, which expiresJanuary 29, 2029.  Monthly leasepayments of approximately $10,500 are required under the ground lease.

 

Employees

 

As of May 1, 2002, Mesaba employed approximately 3,800 persons, of whom940 were pilots, 350 were management, administrative and clerical personnel,360 were aircraft maintenance personnel, 1,600 were station managers, stationagents and line services personnel, and 550 were flight attendants.  Approximately 1,000 of Mesaba’s employeesare part-time.

 

The Air Line Pilots Association (“ALPA”) represents Mesaba’spilots.  Mesaba concluded negotiationswith ALPA and reached a collective bargaining agreement effective June 1, 1996,with a term of four years.  In October1996, Mesaba and ALPA reached agreement on a modification of the collectivebargaining agreement which, in addition to other enhancements, extended theterm of the agreement to June 1, 2002. Mesaba is currently negotiating with the pilots under Section 6 of theRailway Labor Act.

 

The Aircraft Mechanics Fraternal Association (“AMFA”) representsMesaba’s mechanics.  Mesaba concludednegotiations with AMFA and reached a new collective bargaining agreementeffective August 22, 1999, with a term of four years.

 

The Transportation Workers Union (“TWU”) represents Mesaba’sdispatchers. Mesaba concluded negotiations with the TWU and reached a newcollective bargaining agreement effective May 26, 2000, with a term of fiveyears.

 

The Association of Flight Attendants (“AFA”) represents Mesaba’s flightattendants. Mesaba concluded negotiations with the AFA and reached a newcollective bargaining agreement effective April 1, 2002, with a term of fouryears.

 

The Railway Labor Act precludes any job action without a formaldeclaration of an impasse by the National Mediation Board, which has notoccurred.  Any work stoppage, whetherfrom a failure to enter into a new collective bargaining agreement orotherwise, could have a material adverse impact on the Company.  Mesaba has had no work stoppages andmanagement, in general, believes that its relations with its employees aregood.

 

Cyclicality and Seasonality

 

The airlineindustry generally is subject to cyclical moves in the economy.  Because both personal discretionary traveland business travel may be expected to decline during periods of economicweakness, the airline industry tends to experience poorer financial resultsduring such periods.  Seasonal factors,primarily weather conditions and passenger demand, historically have affectedMesaba’s monthly passenger boardings. The first and second fiscal quarters have typically shown a higher levelof passenger boardings as compared with the third and fourth quarters for manyof the cities served by Mesaba.  As aresult of such factors, the Company’s revenues and earnings historically havebeen higher during the first six months of the fiscal year.

 

After September11, 2001 and the mandated Federal Aviation Administration shutdown of theairline industry, Northwest immediately reduced Mesaba’s flight activity toapproximately 80% of pre-September 11 operations.  Through the remainder of fiscal 2002, Mesaba’s jet flightactivity gradually returned to levels that existed prior to September 11, whileMesaba’s jet-prop fleet has remained at the 80% level.

 

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Northwest AcquisitionOffer

 

On November 1,2000, Northwest presented the Company with an offer to purchase all of theCompany’s outstanding shares not currently owned by Northwest at a price of$13.00 per share.  Northwest owns 5.7million shares, or approximately 28% of the Company’s current sharesoutstanding.  The Company’s Board ofDirectors appointed a special committee of independent directors to considerand act upon Northwest’s offer and other alternatives on behalf of the Companyand its public shareholders.  On June14, 2001, Northwest announced that it had withdrawn its offer to purchase theCompany’s shares.

 

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EXECUTIVE OFFICERS OF THE COMPANY

 

The following table sets forth certain information regarding theexecutive officers of the Company and its subsidiary, Mesaba Aviation, Inc.

 
| **Name**              |   | **Age** |   | **Position**                                                                     |   | **Officer  Since** |   |
|-----------------------|--------|---------|--------|----------------------------------------------------------------------------------|--------|--------------------|--------|
|                  |   |    |   |                                                                             |   |               |   |
| Carl R. Pohlad        |   | 86      |   | Chairman  of the Company and Mesaba                                              |   | 1995               |   |
|                  |   |    |   |                                                                             |   |               |   |
| Paul F. Foley         |   | 49      |   | President  and Chief Executive Officer of the Company and Mesaba                 |   | 1999               |   |
|                  |   |    |   |                                                                             |   |               |   |
| Robert E. Weil        |   | 37      |   | Vice  President, Chief Financial Officer and Treasurer of the Company and Mesaba |   | 2000               |   |
|                  |   |    |   |                                                                             |   |               |   |
| John G. Spanjers      |   | 47      |   | Vice  President, Flight Operations of Mesaba                                     |   | 1999               |   |
|                  |   |    |   |                                                                             |   |               |   |
| Scott R. Bussell      |   | 49      |   | Vice  President, Technical Operations of Mesaba                                  |   | 2000               |   |
|                  |   |    |   |                                                                             |   |               |   |
| Jeffrey W. Wehrenberg |   | 42      |   | Vice  President, Minneapolis Hub Operations of Mesaba                            |   | 2001               |   |
|                  |   |    |   |                                                                             |   |               |   |
| William T. Poerstel   |   | 41      |   | Vice  President, Detroit Hub Operations of Mesaba                                |   | 2002               |   |
|                  |   |    |   |                                                                             |   |               |   |
| Robert T. Meekin      |   | 40      |   | Vice  President, People and Processes of Mesaba                                  |   | 2001               |   |

 

Carl R. Pohlad isa Class Two director and Chairman of the Board of Directors.  Mr. Pohlad has been Chairman of the Board,President and a director of Marquette Financial Companies, formerly MarquetteBancshares, Inc., since 1993.  Prior to1993, Mr. Pohlad served as President and Chief Executive Officer of MarquetteBank Minneapolis and Bank Shares Incorporated. Mr. Pohlad was Chairman of the Board of MEI Corporation from 1972 to1986 and Chairman of the Board of MEI Diversified Inc. from 1986 to 1994.  Mr. Pohlad is also an owner, director andthe President of CRP Sports, Inc., the managing general partner of theMinnesota Twins baseball club, and is a director of Genmar Holdings, Inc.

 

Paul F. Foley is aClass Three director and President and Chief Executive Officer of the Companyand Mesaba.  Mr. Foley was appointedPresident and Chief Executive Officer of the Company and Mesaba in October1999.  Prior to joining the Company andMesaba, Mr. Foley was Vice President of Operations Support at Atlas Air, Inc.from December 1996 to September 1999. In this position, Mr. Foley was responsible for Airline Flight Crew andGround Operations in 66 cities and 33 countries.  Mr. Foley was previously at LSG Lufthansa Service/Sky Chefs asGroup Vice President of Operations, North America.  Mr. Foley also served as President of Continental Airline’ssubsidiary, Chelsea Catering Corporation. Mr. Foley holds a Bachelor of Science degree from Cornell University anda Masters Degree in Business Administration (“MBA”) from the Cox School ofBusiness at Southern Methodist University.

 

Robert E. Weil****was named Vice President, Chief FinancialOfficer and Treasurer of the Company and Mesaba in January 2000.  Mr. Weil was the Managing Director of Finance – Ground Operations for NorthwestAirlines from December 1997 until joining the Company and Mesaba.  He also held the position of Controller –Ground Operations and held various other finance positions at Northwest since1991.  Mr. Weil holds a Masters degreein Management from the Kellogg Graduate School of Management at NorthwesternUniversity.

 

John G. Spanjerswas named Vice President, Flight Operations of Mesaba in November 1999.  Mr. Spanjers was the Director PerformanceEngineering for Northwest from April 1997 until November 1999.  Mr. Spanjers also held various otherpositions within the SOC organization at Northwest since June 1988.  Prior to that, Mr. Spanjers held variousoperational positions within the regional and charter airline industry.  Mr. Spanjers holds a Bachelor of Sciencedegree from the University of Minnesota.

 

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Scott R. Bussell****was named Vice President, TechnicalOperations of Mesaba in May 2000.  Mr.Bussell joined Mesaba in October 1995 as Director of Maintenance.  Before joining Mesaba in 1995, Mr. Bussell held the position ofDirector of Maintenance for Renown Aviation in Roswell, NM.  From 1977 to 1994, Mr. Bussell held numerouspositions in technical operations while employed at Continental Airlines andFrontier Airlines in Denver, CO. Mr. Bussell graduated with honors fromColorado Aero Tech and holds a FAA Airframe and Powerplant License.

 

Jeffrey W. Wehrenberg wasnamed Vice President, Minneapolis Hub Operations of Mesaba in March 2001.  Mr. Wehrenberg joined Mesaba in September2000 as Director of Systems Operations Control.  Before joining Mesaba, Mr. Wehrenberg held the position of SeniorVice President and Chief Operating Officer at TransMeridian Airlines from May1999.  He also was President and ChiefOperating Officer at Chicago Express Airlines between November 1998 and May1999 and served in a variety of senior operational positions with ExpressAirlines I, between 1995 and 1998, including Vice President of Customer Serviceand Vice President and General Manager of the company’s northern region.

 

William T. Poerstel wasnamed Vice President, Detroit Hub Operations of Mesaba in May 2002.  Before joining Mesaba, Mr. Poerstel heldvarious positions at United Airlines from 1986 to October 2001, most recentlyas Quality Service Director.  He alsoserved as UAL/US Airways Integration Program Director - Operations, SystemWorkload Manager, Manager Aircraft Maintenance Operations, and Manager HangarMaintenance for United.  Mr. Poerstelholds a Bachelor of Science degree in Aeronautics and Bachelor of Sciencedegree in Aircraft Maintenance Engineering and Aircraft Maintenance Managementfrom St. Louis University.

 

Robert T. Meekinwas named Vice President, People and Processes of Mesaba in March 2001.  Before joining Mesaba, Mr. Meekin held theposition of Director of Organization Development for Becton Dickinson, amedical technology company in Franklin Lakes, NJ.  Mr. Meekin held numerous positions in human resource managementand organizational development at Becton Dickinson since 1997, The PerrierGroup of America from 1992 to 1997 and Exxon Corporation from 1987 to1992.  Mr. Meekin holds a Masters Degreein Labor and Industrial Relations from the University of Minnesota and aMasters Degree in Management and Organizational Development from AmericanUniversity.

 

11

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Item 2.             PROPERTIES

 

See information provided under the captions “Business — Aircraft,” “—Airport and Terminal Facilities and Services,” and “— Properties” in Item 1herein.

 

Item 3.             LEGAL PROCEEDINGS

 

Northwest Acquisition Offer

 

In early November2000, the Company was served with four lawsuits in Hennepin County DistrictCourt and one lawsuit in Dakota County District Court.  The Dakota County suit was subsequentlytransferred to Hennepin County.  Thelawsuits were styled as purported class actions on behalf of the Company’sshareholders.  Also named as defendantsin the lawsuits were each of the Company’s current directors and Northwest.

 

The lawsuits aroseout of the proposal by Northwest to acquire all of the outstanding shares ofthe Company’s common stock which Northwest did not presently own.  The lawsuits alleged that the defendants hadbreached their fiduciary duties to the Company’s shareholders in connectionwith the proposed transaction.  Each ofthe lawsuits sought to enjoin the defendants from proceeding with the proposedtransaction and, if the transaction was completed, to rescind the transactionor to compensate the Company’s shareholders for alleged damages.  The complaints also sought legal fees andother expenses on behalf of the plaintiffs.

 

During fiscal2002, the Company obtained orders dismissing without prejudice each of thelawsuits.

 

Insurance Lawsuit

 

On March 2, 2002,Mesaba filed a lawsuit in Minnesota State Court against Federal InsuranceCompany, a subsidiary of The Chubb Corporation, for coverage of the businessinterruption, extra expense and fire suppression for the Detroit hangar thatwas destroyed due to a severe storm in May 2000.  The ultimate outcome of this lawsuit cannot be predicted withcertainty.

 

Item 4.             SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS DURINGFOURTH QUARTER OF FISCAL YEAR

 

There were nomatters submitted to a vote of the Company’s shareholders during the three–monthperiod ended March 31, 2002.

 

12

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PART II

 

Item 5.             MARKET FOR REGISTRANT’S COMMON STOCK AND RELATEDSTOCKHOLDER MATTERS

 

The Company’s Common Stock is traded under the symbol “MAIR” on theNASDAQ National Market.

 

The following table sets forth the range of high and low sale prices forthe Company’s Common Stock and the dividends per share for each of the fiscalquarters of the two years ended March 31, 2002.  Quotations for such periods are as reported by NASDAQ forNational Market issues.  The Company hasnot issued cash dividends since September 1995.

 

Stock Quotations

 

|           |   | **($) High** |   | **($) Low** |   |
|----------------|--------|--------------|--------|-------------|--------|
|           |   |         |   |        |   |
| Fiscal 2001    |   |         |   |        |   |
| First quarter  |   | 12.88        |   | 9.13        |   |
| Second quarter |   | 11.06        |   | 9.00        |   |
| Third quarter  |   | 14.00        |   | 10.25       |   |
| Fourth quarter |   | 13.50        |   | 10.25       |   |
|           |   |         |   |        |   |
| Fiscal 2002    |   |         |   |        |   |
| First quarter  |   | 11.70        |   | 8.45        |   |
| Second quarter |   | 9.64         |   | 5.47        |   |
| Third quarter  |   | 7.92         |   | 5.62        |   |
| Fourth quarter |   | 9.38         |   | 7.40        |   |

 

On May 24, 2002, the number of holders of record of Common Stock was757.

 

The transfer agent for the Company’s Common Stock is Wells Fargo BankMinnesota, National Association, 161 North Concord Exchange, South St. Paul,Minnesota, 55075–0738, telephone: (651) 450–4064.

 

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Item 6.    SELECTED FINANCIAL DATA AND STATISTICAL COMPARISON

 

The following table sets forth selected financial data with respect tothe Company as of the dates and for the periods indicated.  The selected financial data has been derivedfrom the audited consolidated financial statements.  The financial data set forth below should be read in conjunctionwith the Company’s Consolidated Financial Statements and Notes thereto and“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” contained in Item 7.

 
|                                                                                                     |   | **For the Year Ended March 31,** |    |
|----------------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|
|                                                                                                     |   | **2002**                         |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                                                                     |   | **(dollars in thousands)**       |    |
| Statement of Operations Data:                                                                            |   |                             |    |   |   |   |   |   |   |   |   |
| Operating  revenues                                                                                      |   | $                                | 416,913 |   | $ | 439,803 |   | $ | 406,199 |   | $ | 331,753 |   | $ | 277,225 |   |
|                                                                                                     |   |                             |    |   |   |   |   |   |   |   |   |
| Operating  expenses                                                                                      |   | 416,107                          |    | 410,455 |   | 359,364 |   | 299,531 |   | 246,856 |   |
|                                                                                                     |   |                             |    |   |   |   |   |   |   |   |   |
| Operating  income                                                                                        |   | 806                              |    | 29,348 |   | 46,835 |   | 32,222 |   | 30,369 |   |
|                                                                                                     |   |                             |    |   |   |   |   |   |   |   |   |
| Net  income                                                                                              |   | $                                | 7,810   |   | $ | 19,784 |   | $ | 31,061 |   | $ | 21,271 |   | $ | 19,804 |   |
|                                                                                                     |   |                             |    |   |   |   |   |   |   |   |   |
| Net  income per share - Basic                                                                            |   | $                                | 0.38    |   | $ | 0.98 |   | $ | 1.54 |   | $ | 1.07 |   | $ | 1.03 |   |
|                                                                                                     |   |                             |    |   |   |   |   |   |   |   |   |
| Weighted  average number of common shares outstanding - Basic                                            |   | 20,289                           |    | 20,288 |   | 20,177 |   | 19,793 |   | 19,270 |   |
|                                                                                                     |   |                             |    |   |   |   |   |   |   |   |   |
| Net  income per share - Diluted                                                                          |   | $                                | 0.38    |   | $ | 0.94 |   | $ | 1.48 |   | $ | 0.99 |   | $ | 0.95 |   |
|                                                                                                     |   |                             |    |   |   |   |   |   |   |   |   |
| Weighted  average number of common shares   outstanding and common share equivalents – Diluted |   | 20,601                           |    | 20,941 |   | 21,043 |   | 21,512 |   | 20,846 |   |

 
|                                            |   | **As of March 31,**        |    |
|-------------------------------------------------|--------|----------------------------|---------|
|                                            |   | **2002**                   |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                            |   | **(dollars in thousands)** |    |
| Balance Sheet Data:                             |   |                       |    |   |   |   |   |   |   |   |   |
|                                            |   |                       |    |   |   |   |   |   |   |   |   |
| Current assets                                  |   | $                          | 162,621 |   | $ | 156,740 |   | $ | 139,952 |   | $ | 116,369 |   | $ | 89,499 |   |
|                                            |   |                       |    |   |   |   |   |   |   |   |   |
| Net property and equipment                      |   | 50,615                     |    | 56,248 |   | 54,109 |   | 47,195 |   | 32,097 |   |
|                                            |   |                       |    |   |   |   |   |   |   |   |   |
| Long-term investments                           |   | 4,068                      |    | — |   | — |   | — |   | — |   |
|                                            |   |                       |    |   |   |   |   |   |   |   |   |
| Other noncurrent assets                         |   | 8,550                      |    | 10,746 |   | 13,663 |   | 15,659 |   | 15,595 |   |
|                                            |   |                       |    |   |   |   |   |   |   |   |   |
| Total assets                                    |   | $                          | 225,854 |   | $ | 223,734 |   | $ | 207,724 |   | $ | 179,223 |   | $ | 137,191 |   |
|                                            |   |                       |    |   |   |   |   |   |   |   |   |
| Current liabilities                             |   | $                          | 44,781  |   | $ | 46,566 |   | $ | 44,686 |   | $ | 48,674 |   | $ | 42,509 |   |
|                                            |   |                       |    |   |   |   |   |   |   |   |   |
| Long-term liabilities                           |   | 7,701                      |    | 12,487 |   | 18,320 |   | 21,310 |   | 19,136 |   |
|                                            |   |                       |    |   |   |   |   |   |   |   |   |
| Shareholders’ equity                       |   | 173,372                    |    | 164,681 |   | 144,718 |   | 109,239 |   | 75,546 |   |
|                                            |   |                       |    |   |   |   |   |   |   |   |   |
| Total liabilities and shareholders’ equity |   | $                          | 225,854 |   | $ | 223,734 |   | $ | 207,724 |   | $ | 179,223 |   | $ | 137,191 |   |

 

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|                                           |   | **Year ended March 31,** |   |
|------------------------------------------------|--------|--------------------------|--------|
|                                           |   | **2002**                 |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| Selected Operating Data:                       |   |                     |   |   |   |   |   |   |   |   |   |
| Revenue passengers carried                     |   | 5,650,500                |   | 6,207,400 |   | 5,667,600 |   | 4,342,200 |   | 3,324,146 |   |
| Revenue passenger miles  (000’s) (1) |   | 1,571,042                |   | 1,725,460 |   | 1,534,116 |   | 1,112,050 |   | 805,495 |   |
| Available seat miles (000’s) (2)          |   | 2,739,946                |   | 2,948,239 |   | 2,677,712 |   | 1,994,626 |   | 1,469,229 |   |
| Revenue per available seat mile                |   | $                        | .152   |   | $ | .149 |   | $ | .152 |   | $ | .166 |   | $ | .189 |   |
| Cost per available seat mile                   |   | $                        | .152   |   | $ | .139 |   | $ | .134 |   | $ | .150 |   | $ | .168 |   |
| Passenger load factor (3)                      |   | 57.3                     | %      | 58.5 | % | 57.3 | % | 55.8 | % | 54.8 | % |
| Yield per revenue passenger mile (4)           |   | $                        | .256   |   | $ | .249 |   | $ | .262 |   | $ | .295 |   | $ | .340 |   |
| Departures                                     |   | 240,068                  |   | 269,596 |   | 274,357 |   | 236,209 |   | 201,622 |   |

 

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(1)                                  “Revenue passenger miles” are determined bymultiplying the number of fare paying passengers carried by the distance flown.

 

(2)                                  “Available seat miles” are determined bymultiplying the number of seats available for passengers by the number of milesflown.

 

(3)                                  “Passenger load factor” is determined by dividing revenuepassenger miles by available seat miles.

 

(4)                                  “Yield per revenue passenger mile” is determinedby dividing passenger revenue by revenue passenger miles.

 

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Item 7.             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (As used herein, “unit cost” means operatingcost per available seat mile.  Dollarsand shares outstanding are expressed in millions.)

 

## The following table comparescomponents of Mesaba’s operating cost per ASM for the years ended March 31,2002, 2001 and 2000:

 
| **Operating Costs Per  Available Seat Mile (Unit Cost)** |     | **Fiscal  year ended March 31,** |     |
|----------------------------------------------------------|----------|----------------------------------|----------|
|                                                     | **2002** |                             | **2001** |   | **2000** |   |
| Wages  and benefits                                      |     | 4.6                              | ¢   | 3.9 | ¢ | 3.7 | ¢ |
| Aircraft  fuel                                           |     | 0.8                              |     | 0.9 |   | 1.0 |   |
| Aircraft  maintenance                                    |     | 2.8                              |     | 2.6 |   | 2.6 |   |
| Aircraft  rents                                          |     | 3.7                              |     | 3.4 |   | 3.3 |   |
| Landing  fees                                            |     | 0.2                              |     | 0.2 |   | 0.3 |   |
| Insurance  and taxes                                     |     | 0.3                              |     | 0.2 |   | 0.2 |   |
| Depreciation  and amortization                           |     | 0.7                              |     | 0.6 |   | 0.5 |   |
| Administrative  and other                                |     | 2.1                              |     | 2.1 |   | 1.8 |   |
| Total                                                    |     | 15.2                             | ¢   | 13.9 | ¢  | 13.4 | ¢  |

 

**Results of Operations for the FiscalYears Ended March 31, 2002 and 2001**

 

Fiscal Year 2002 Overview  

 

After September 11, 2001 and the mandated FederalAviation Administration shutdown of the airline industry, Northwest immediatelyreduced Mesaba’s flight activity to approximately 80% of pre-September 11operations.  Through the remainder offiscal 2002, Mesaba’s jet flight activity gradually returned to levels thatexisted prior to September 11, while Mesaba’s jet-prop fleet has remained atthe 80% level.  In addition, Mesabareduced the rates it charged Northwest by 10% for service from October 1through December 31, 2001.  Mesaba haspartially compensated for the overall revenue decline of 5.2% during the fiscalyear ended March 31, 2002 by consistently achieving high levels of operatingperformance.

 

Certain expensesof Mesaba vary directly with the level of flight activity, such as fuel andcertain costs of maintenance contracts. Other expenses are relatively fixed in nature and are incurred by Mesabaregardless of the level of flight activity, such as aircraft rentals anddepreciation and amortization.  Theremaining expenses, such as wages and benefits and administrative and other,are variable in nature.  After September11, 2001, management initiated various cost reduction programs to reduceMesaba’s variable expenses to be more in line with the reduced operatingrevenues. Such programs included the completion of personnel reductions, vendorrenegotiations and the elimination of certain discretionary expenditures.  However, certain expenses have increasedsubstantially post September 11.  Thosecosts include insurance, security and airport landing fees.

 

On September 22, 2001, President Bush signed into lawthe Air Transportation Safety and System Stabilization Act (“StabilizationAct”). The Stabilization Act provides for direct cash grants to U.S. airlinesto compensate for “direct and incremental losses” (as defined in the Act andDepartment of Transportation instructions) incurred from September 11, 2001,through December 31, 2001, and resulting from the attacks. Mesaba recognized apre-tax grant of approximately $12.5 million as “other nonoperating income” inthe accompanying consolidated statements of operations in accordance withDepartment of Transportation and Financial Accounting Standards Board (“FASB”)guidance.  Mesaba received approximately$10.6 million in cash and has recorded the additional $1.9 million within“accounts receivable, net” in the accompanying consolidated balance sheets as ofMarch 31, 2002.  Mesaba has applied toobtain the remaining $1.9 million with the ultimate collection being subject tothe approval by the Department of Transportation.

 

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Earnings Summary

 

The Company reported net income of $7.8 million or $0.38 per dilutedshare for the fiscal year ended March 31, 2002, compared to $19.8 millionor $0.94 per diluted share in fiscal 2001. Weighted average common shares and common share equivalents outstandingwere 20.6 and 20.9 million in fiscal 2002 and 2001, respectively.

 

OperatingRevenues.  Totaloperating revenues decreased 5.2% in fiscal 2002 to $416.9 million from $439.8in fiscal 2001, and revenue passenger miles decreased 8.9% to 1,571,042 from1,725,460.  Total revenue per availableseat mile (“RASM”) increased to $0.152 in fiscal 2002 from $0.149 in fiscal2001.  Mesaba’s average passenger loadfactor was 57.3% for fiscal year 2002 compared to 58.5% in fiscal 2001. Thedecrease in revenue passenger miles is directly attributable to the impact ofthe events of September 11 and the economic recession.   Other revenue increased 50.1% due toincreased ground-handling activities.

 

Operating Expenses.****Totaloperating expenses in fiscal 2002 increased 1.4% to $416.1 million from $410.5million in 2001.  Mesaba’s cost peravailable seat mile (“CASM”) increased 9.4% to $0.152 from $0.139.  Available seat miles decreased 7.1% to2,739,946 in fiscal 2002 from 2,948,239 in fiscal 2001. The significant change in unit cost year over year was due to therelationship of fixed operating costs to reduced flight activity, the impact ofMesaba’s restructuring initiatives, and increases in landing fees, insuranceand security.

 

Wages and benefitsincreased 9.5% to $125.0 in fiscal 2002 from $114.1 in fiscal 2001. The increase is a result of several areasincluding higher health insurance costs, management salaries, employee bonusesdue to Mesaba's strong operating performance, workers compensation claims, andadditional ground handling activities. Normal wage and benefitincreases also contributed to the increased expenses.  Overall, personnel levels (measured on a full time equivalentbasis at the fiscal year end) decreased to approximately 3,300 from 3,400.

 

Aircraft fuelcosts decreased 13.2% to $22.5 million for fiscal 2002 from $25.9 for fiscal2001. The decrease is attributable to the reduced jet-prop flight activityafter September 11.  Provisions of theAirlink Agreement with Northwest protect Mesaba from changes in fuel prices.Mesaba’s actual cost of fuel, including taxes and pumping fees, was 83.5 centsper gallon in fiscal 2002 and 2001 per the Airlink Agreement. Northwestprovides fuel for the jet operation at its expense.

 

Aircraftmaintenance costs, excluding wages and benefits, decreased 2.8% to $76.2 forfiscal 2002 from $78.4 for fiscal 2001. This decrease was primarily due toreduced fleet utilization after September 11, which lowered flight hour basedmaintenance costs.  The decrease wasoffset by an increase in rotable repair costs due to the aging of the fleet.

 

Aircraft rentsincreased 1.5% to $101.6 million for fiscal 2002 from $100.0 million in fiscal2001.  This increase is primarilyattributable to the full year impact of the three additional RJ85 aircraft thatwere delivered during the first quarter offiscal 2001, the addition of five Saab 340 aircraft that were received duringthe fourth quarter of fiscal 2002 and the return of three Saab 340 aircraft atthe end of the third quarter of fiscal 2002.

 

Landing feesincreased 4.0% to $6.6 million in fiscal 2002 from $6.3 million in fiscal 2001.The increase is primarily attributable to higher landing fees charged byairports after September 11.  Northwestprovides landing fees for the jet operation at its expense.

 

Insurance andtaxes increased 55.8% to $8.3 million in fiscal 2002 from $5.3 million infiscal 2001. The increase is primarily attributable to increased rates andsurcharges imposed after September 11.

 

Depreciation andamortization totaled $19.8 million in fiscal 2002 compared to $17.8 million infiscal 2001.  The higher level ofdepreciation and amortization resulted from the purchase of spare aircraftparts, ground service equipment, computer systems, and maintenance facilityimprovements.

 

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Administrative andother decreased 10.3% to $56.2 for fiscal 2002 from $62.6 in fiscal 2001. The significant change in year over year costsare the $0.8 million restructuring charge in fiscal 2002 which was offset byreduced pilot training, reduced outside services, and fewer passengeraccommodation charges due to the high levels of operational performance.

 

Operating Income.  Operating income totaled $0.8 million forfiscal 2002, as compared to $29.3 million a year ago.  Mesaba’s operating margin decreased to 0.2% in fiscal 2002 from6.7% in fiscal 2001.* *Fiscal 2002 operatingmargins decreased due to lower aircraft utilization after September 11 and theeconomic recession, increased variable expenses such as insurance, security,and landing fees and static fixed expenses such as aircraft rents.

 

Nonoperating Income.  Nonoperating income increased to $15.3million for fiscal 2002 from $5.6 million in fiscal 2001 as a result ofMesaba’s recognition of the $12.5 million federal grant.  This was offset by lower interest income dueto lower interest rates and lower average levels of funds available forinvestment as a result of the extended payment terms Mesaba granted Northwestfor the three months ended December 31, 2001. Nonoperating income in fiscal 2002 included a $0.9million charge to write-off aircraft components.  Nonoperating income infiscal 2001 included a $0.7 million one-time charge to reclassify the Detroithangar capital lease to an operating lease.

 

Provision forIncome Taxes.  Theprovision for income taxes decreased 45.7% to $8.3 million in the fiscal year2002 from $15.2 million in fiscal 2001. The Company’s blended effective tax rate was 51.4% for fiscal 2002 ascompared to 43.5% in fiscal 2001. Mesaba adjusts its effective tax ratequarterly based on forecasted operating results for the fiscal year.**Theeffective tax rate increased due to consistent levels of nondeductible expensesbeing applied over less pre-tax earnings.

 

**Results of Operations for the FiscalYears Ended March 31, 2001 and 2000**

 

Earnings Summary

 

The Company reported net income of $19.8 million or $0.94 per dilutedshare in fiscal 2001 compared to $31.1 million or $1.48 per diluted share infiscal 2000.  Weighted average commonshares and common share equivalents outstanding were 20.9 million and 21.0million in fiscal 2001 and 2000, respectively.

 

Operating Revenues.Operating revenues increased 8.3% to $439.8million in fiscal 2001 from $406.2 million in fiscal 2000.  RASM decreased 2.0% to $0.149 from $0.152 in2000 primarily due to additional deliveries of the higher capacity RJ85aircraft.  Mesaba’s RASM is lower on theRJ85 than the Saab 340 because Northwest provides more services under the JetAgreement.  Mesaba’s average passengerload factor was 58.5% in 2001, up from 57.3% in 2000. The improvements intraffic and load factor are attributable to the introduction of three RJ85aircraft as well as overall increases in passenger demand within the industry,offset by lower levels of planned capacity in response to adverse weatherconditions and higher than planned pilot attrition.

 

Operating Expenses.****Operating expenses increased 14.2% to $410.5million in 2001 from $359.4 million in 2000 primarily due to the additionalaircraft as well as adverse weather and high levels of pilot attrition.  Mesaba experienced a 3.7% increase in theCASM to $0.139 compared with $0.134 in 2000. Seat capacity (measured in available seat miles or “ASM”) increased10.1% in 2001 to 2,948,239, primarily as a result of the introduction of threeRJ85 aircraft.

 

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Wages and benefitsincreased 15.2% to $114.1 million in fiscal 2001 compared to $99.1 million infiscal 2000. The overall dollar increase is a result of the increased cost offlight crews due to a 2.0% increase in block hours flown, the addition offlight crews to support the continued induction of the RJ85 aircraft and theincrease in pilot attrition year over year. Wage and benefit costs of mechanicsincreased with the opening of a new maintenance facility in Cincinnati.  Wage and benefit costs of airport personnelalso increased due to an increase in scheduled operations and introduction ofRJ85 ground handling at the Minneapolis/St. Paul Hub.  Normal wage and benefit increases also contributed to the higherexpenses.  Overall, personnel levels(measured on a full time equivalent basis at the fiscal year end) increased toapproximately 3,400 from 3,000.

 

Fuel expense decreased3.2% to $25.9 million in fiscal 2001 from $26.8 million in fiscal 2000.  The change is attributable to decreasedconsumption caused by a decrease in block hours flown by the jet-propoperation.  Certain provisions of theAirlink Agreement protect Mesaba from fluctuations in fuel prices.

 

Maintenance expense,excluding wages and benefits costs, increased to $78.4 million in fiscal 2001from $69.8 million in fiscal 2000.  Thisincrease was attributable to the aging of the fleet as well as the addition ofthree RJ85 aircraft to the fleet during fiscal 2001.

 

Aircraft rentals were$100.0 million in fiscal 2001, and $88.9 million in fiscal 2000.  Mesaba added three RJ85 aircraft duringfiscal 2001.  The new aircraft, combinedwith the full year effect of the 11 aircraft added in fiscal 2000, led to the12.6% increase.

 

Landing fees were $6.3million in fiscal 2001 compared to $7.5 million in fiscal 2000.  The decrease in 2001 is attributable to a9.8% decrease in jet-prop departures, which caused a decrease in the totalgross landing weight as well as a one-time credit of $0.6 million from theDetroit Wayne County airport due to a budget surplus at the airport. Northwestprovides landing fees for the jet operation at its expense.

 

Insurance and taxes were$5.3 million in fiscal 2001 compared to $5.7 million in fiscal 2000.  The 6.0% decrease in fiscal 2001 compared tofiscal 2000 is due primarily to decreasing fleet values partially offset by anincrease in passenger volume.

 

Depreciation andamortization totaled $17.8 million in fiscal 2001 compared to $14.4 million infiscal 2000.  The higher level ofdepreciation and amortization resulted from the acquisition of spare parts tosupport the operations of the additional aircraft. The Company paid contractrights fees in the form of stock purchase warrants issued to Northwest inconnection with amendments to the Jet Agreement, which increased the number ofaircraft to be flown by Mesaba from 12 to 36. These fees are being amortized ona straight-line basis over the remaining term of the Jet Agreement.

 

Administrative and othertotaled $62.6 million in fiscal 2001 compared to $47.3 million in fiscal2000.  This increase of 32.3% isprimarily attributable to higher crew related expenses due to increased flyingand training to support the RJ85 and Saab 340 fleet as well as a significantincrease in pilot attrition levels. Pilot attrition increased to approximately 20% annually in fiscal 2001,primarily due to increased hiring at the major airlines.  Additionally, higher passenger and airportrelated expenses were incurred due to increases in traffic, adverse weather andthe number of cities served.  Mesaba isgenerally not required to provide airport and passenger related services forthe jet operation.

 

Operating Income.The Company’s operating income was $29.3 million in fiscal 2001, a 37.4%decrease from $46.8 million in fiscal 2000. Mesaba’s operating margins were 6.7% in 2001 and 11.5% in 2000.  Fiscal 2001 operating margins decreased dueto higher expenses associated with pilot attrition, adverse weather, and theDTW hangar collapse.

 

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Nonoperating Income.  Nonoperating income was$5.6 million in fiscal 2001 a 28.9% increase from $4.4 million in fiscal2000.  Interest income increased $2.0 millionto $6.7 million in 2001 from $4.3 million in 2000 due to higher yields on cashand investment balances.  Nonoperatingincome in fiscal 2001 includes a $0.7 million one-time charge to reclassify theDetroit hangar capital lease to an operating lease.

 

Provision for IncomeTaxes.The provision for income taxes was $15.2 millionin fiscal 2001 and $20.2 million in fiscal 2000.  The effective tax rate was 43.5% in 2001, and 39.4% in 2000.  The effective tax rate increased due tohigher levels of nondeductible expenses.

 

**Liquidity and Capital Resources**

 

The Company’s workingcapital increased to $117.8 million with a current ratio of 3.6 at March 31,2002 compared to $110.2 million and 3.4 at March 31, 2001.  Cash and cash equivalents increased 65.2% to$31.3 million at March 31, 2002 from $18.9 million at March 31, 2001.

 

On September 22, 2001,President Bush signed into law the Air Transportation Safety and SystemStabilization Act (“Stabilization Act”). The Stabilization Act provides fordirect cash grants to U.S. airlines to compensate for “direct and incrementallosses” (as defined in the Act and Department of Transportation instructions)incurred from September 11, 2001, through December 31, 2001, and resulting fromthe attacks.  Mesaba recognized a pre-taxgrant of approximately $12.5 million as “other nonoperating income” in theaccompanying consolidated statements of operations in accordance withDepartment of Transportation and Financial Accounting Standards Board (“FASB”)guidance.  Mesaba received approximately$10.6 million in cash and has recorded the additional $1.9 million within“accounts receivable, net” in the accompanying consolidated balance sheets asof March 31, 2002.  Mesaba has appliedto obtain the remaining $1.9 million with the ultimate collection being subjectto the approval by the Department of Transportation.

 

DuringSeptember 2001, Mesaba initiated a reduction in personnel as a result of theimpact of the terrorist attacks of September 11, 2001.  Mesaba recorded within “Administrative andother” in the accompanying consolidated statements of operations for the secondquarter of fiscal year 2002 a one-time pre-tax charge of approximately $1.1million to cover the expected severance and related costs.  The reduction in personnel was completed bySeptember 30, 2001 and affected 382 individuals in all areas of Mesaba.** **As of March 31, 2002, Mesaba haspaid and charged against the liability $600,000 and reduced the liability byapproximately $300,000 during the third quarter due to the employment ofcertain terminated employees by others. The remaining cost of approximately $200,000 is expected to be fundedthrough a combination of cash from operations and available cash throughSeptember 2002.

 

As of March 31, 2002,Mesaba’s fleet consisted of 111 aircraft covered under operating leases withremaining terms of six months to 14 years and aggregate monthly lease paymentsof approximately $8.8 million. Operating leases have been Mesaba’s primary method of acquiringaircraft, and management expects to continue relying on this method to meetmost of its future aircraft needs, including the addition over time of up toeleven Saab 340B aircraft that will be serving the Memphis hub.  Mesaba leases all of its Saab 340 aircraft,either directly from aircraft leasing companies or through subleases withNorthwest under operating leases with original terms up to 17 years.  Mesaba leases its RJ85 aircraft fromNorthwest under operating leases with terms of up to 10 years.  Continued funding of the monthly minimumlease payments is ensured as long as the current operating contracts withNorthwest are in effect.

 

20

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During June 2001, Mesabaentered into an agreement with the Metropolitan Airports Commission (“MAC”) toterminate the Minneapolis/St. Paul maintenance hangar and general office leaseson January 1, 2003, to accommodate planned runway construction. In October2001, Mesaba received a notice from the MAC informing Mesaba that the leasetermination date had been delayed to September 2003.  Mesaba expects to receive an early lease termination fee of $2.0million at that time and is accounting for this as a reduction to lease expenseover the term of the agreement.  Due tothe lease termination agreement, the lease was reclassified from a capital toan operating lease in the first quarter of fiscal 2002.  Mesaba will relocate its hangar facilitiesto the west side of the airport and is currently evaluating future leaseoptions with the MAC.

 

During fiscal 2001, Mesaba committed to reconstructits maintenance facility located at the Detroit Metropolitan Airport.  The new facility reopened on June 1, 2001and is approximately 25% larger than the previous hangar, which experiencedsignificant damage on May 9, 2000 due to severe weather.  Mesaba has paid $2.7 million as of March 31,2002 for the additional space, which will not be covered by insuranceproceeds.  The Company maintains property and businessinterruption insurance coverage on its facilities. On March 2, 2002,Mesaba filed a lawsuit in Minnesota State Court against Federal InsuranceCompany, a subsidiary of The Chubb Corporation, for coverage of the businessinterruption, extra expense and fire suppression equipment for the Detroithangar.  The ultimate outcome of thislawsuit cannot be predicted with certainty.  No amounts have been recorded under thislawsuit as of March 31, 2002.  Recoveryamounts will be recorded upon resolution of the lawsuit.

 

Approximately 69% ofMesaba’s accounts receivable balance as of March 31, 2002 are due fromNorthwest.  Lossof Mesaba’s affiliation with Northwest or Northwest’s failure to make timelypayment of amounts owed to Mesaba or to otherwise materially perform under theAirlink or Jet Agreement for any reason would have a material adverse effect onthe Company’s operations and financial results.

 

The Company hashistorically relied upon cash and cash equivalents and investments andinternally generated funds to support its working capital requirements.   Management believes that funds fromoperations will provide adequate resources for meeting non-aircraft capitalneeds in fiscal 2003.

 

Outlook

 

Management believes the economic forces and conditionsthat existed post September 11, 2001 are likely to persist throughout fiscal2003.  In fiscal 2003, managementexpects to continue to concentrate on excellent operating performance, carefulresource management and a new agreement with Mesaba's pilots.

 

Management believes the Company is in a soundoperating position at the beginning of fiscal 2003 with a cash, cash equivalentand investments balance of approximately $103.1 million.  Mesaba's ASM's are expected to continue torebound from the fiscal 2002 third quarter low with an expected three to fivepercent year over year growth. Operating expenses are expected to increase as well due primarily to thefull year effect of the post September 11 increased insurance and aircraftrental fees.  As a result, managementexpects the Company will report a diluted earnings per share of $0.15 to $0.25for fiscal 2003.

 

Critical Accounting Policies andEstimates 

 

The preparation of theCompany’s financial statements in conformity with generally accepted accountingprinciples requires the use of estimates, judgments and assumptions that affectthe reported amounts of assets and liabilities as of the date of the financialstatements, revenues and expenses during the reporting period and relateddisclosures of contingent assets and liabilities in the financial statementsand the accompanying notes. The U.S. Securities and Exchange Commission (“SEC”)has defined a company’s most critical accounting policies as the ones that aremost important to the portrayal of the company’s financial condition andresults, and which require the company to make its most difficult andsubjective judgments, often as a result of the need to make estimates ofmatters that are inherently uncertain. Based on this definition, the Companyhas identified its critical accounting policies to include those discussed inthe following paragraphs. The Company also has other key accounting policies,which involve the use of estimates, judgments and assumptions. See Note 2“Summary of Significant Accounting Policies” in the Notes to the FinancialStatements for additional discussion of these items. Management believes thatits estimates and assumptions are reasonable, based on information presentlyavailable; however, changes in these estimates, judgments and assumptions willoccur as a result of future events, and accordingly actual results could differfrom amounts estimated.

 

Estimated lives are used to record depreciation onaircraft property and equipment. Aircraft utilization, technology, and changes in the business strategymay affect the economic lives used to record depreciation by Mesaba. Theforegoing may also impact depreciation rates, impairment, or both.  Mesaba’s management regularly reviews theestimated useful lives and salvage values for Mesaba’s aircraft property andequipment.

 

 

21

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Estimated recovery percentages are used to recordobsolescence reserves for parts inventories. Aircraft utilization, partsavailability, and changes in parts cost may affect the valuation of partsinventories and obsolescence reserve levels. Mesaba’s management regularly reviews recovery percentages, reservelevels and inventory valuations for parts inventories.

 

Estimated maintenance costs and anticipated aircraftactivity are used to determine maintenance reserves.  Changes in maintenance contracts, parts and labor costs andaircraft activity may affect the maintenance reserves. Mesaba’s managementregularly reviews airplane activity, expected aircraft return dates, changes inits maintenance contracts and parts and labor costs for maintenance reserves.

 

New Accounting Pronouncements

 

The Companyadopted SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities” as amended on April 1, 2001. SFAS No. 133 requires all derivative contracts to be reported on thebalance sheet at fair value through earnings currently, unless special hedgeaccounting criteria are met.  Since theCompany does not have any of these types of instruments, the adoption of SFASNo. 133 did not have an impact on the Company’s results of operations,financial position or cash flows.

 

On June 1, 2001, the FASB issued SFAS No. 141,“Business Combinations”.  SFAS No. 141requires all business combinations to be accounted for by the purchase methodof accounting after July 1, 2001.  Sincethe Company did not have any business combinations, the adoption of SFAS No.141 did not have an impact on the Company’s results of operations, financialposition or cash flows.

 

On June 1, 2001,the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”.  SFAS No. 142 addresses how goodwill andother intangible assets that are acquired individually or with a group of otherassets (but not those acquired in a business combination) should be accountedfor in financial statements upon their acquisition and after they have beeninitially recognized.  The provisions ofSFAS No. 142 are required to be applied starting with fiscal years beginningafter December 15, 2001.  Management ofthe Company does not believe the adoption of SFAS No. 142 will have a materialimpact on the Company’s results of operations, financial position or cashflows.

 

 

Item 7A. Quantitative andQualitative Disclosures about Market Risk

 

The Company’s principal market risks are theavailability of jet fuel and changes in interest rates.

 

The Company has not experienced difficulties with fuelavailability and expects to be able to obtain fuel at prevailing prices inquantities sufficient to meet its future requirements. As a part of the AirlinkAgreement, Northwest bears the economic risk of fuel price fluctuations forMesaba’s fuel requirements.  As such,the Company reasonably expects that its results of operations will not bedirectly affected by fuel price volatility.

 

The Company does not hold long-term interest sensitiveassets and therefore is not exposed to interest rate fluctuations for itsassets. The Company does not purchase or hold any derivative financialinstruments for trading purposes.

 

22

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Item 8.             FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

 

The consolidatedfinancial statements of the Company and the related Report of IndependentPublic Accountants are included in this Form 10-K on the pages indicated below.

 
| Report of  Independent Public Accountants                                                                |
|----------------------------------------------------------------------------------------------------------|
|                                                                                                     |
| Consolidated Balance Sheets  as of March 31, 2002 and 2001                                               |
|                                                                                                     |
| Consolidated  Statements of Operations for the Years Ended March 31, 2002, 2001 and 2000                 |
|                                                                                                     |
| Consolidated  Statements of Shareholders’ Equity for the Years Ended March 31, 2002, 2001  and 2000 |
|                                                                                                     |
| Consolidated  Statements of Cash Flows for the Years Ended March 31, 2002, 2001 and 2000                 |
|                                                                                                     |
| Notes to  Consolidated Financial Statements                                                              |   |

 

23

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REPORT OF THE INDEPENDENTPUBLIC ACCOUNTANTS

 

To Mesaba Holdings, Inc.:

 

We have audited the accompanying consolidated balance sheets of MesabaHoldings, Inc. (a Minnesota corporation) and Subsidiary as of March 31,2002 and 2001, and the related consolidated statements of operations,shareholders’ equity and cash flows for each of the three years in the periodended March 31, 2002.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Mesaba Holdings,Inc. and Subsidiary as of March 31, 2002 and 2001, and the results oftheir operations and their cash flows for each of the three years in the periodended March 31, 2002, in conformity with accounting principles generallyaccepted in the United States.

 
| Arthur Andersen LLP     |
|-------------------------|
|                    |
|                    |
| Minneapolis, Minnesota, |
| May 2, 2002             |

 

24

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# MESABA HOLDINGS, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(In Thousands, ExceptShare and Per Share Information)

 
|                                                                                                                                |   | **As of March 31,** |    |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|
|                                                                                                                                |   | **2002**            |    | **2001** |   |
| ASSETS                                                                                                                              |   |                |    |   |   |
| CURRENT ASSETS:                                                                                                                     |   |                |    |   |   |
| Cash and cash  equivalents                                                                                                          |   | $                   | 31,250  |   | $ | 18,916 |   |
| Short term investments                                                                                                              |   | 67,774              |    | 78,049 |   |
| Accounts receivable,  net of reserves of $990 and $400                                                                              |   | 41,202              |    | 35,771 |   |
| Inventories, net                                                                                                                    |   | 7,600               |    | 8,046 |   |
| Prepaid expenses and  deposits                                                                                                      |   | 5,094               |    | 5,583 |   |
| Deferred income taxes  and other                                                                                                    |   | 9,701               |    | 10,375 |   |
| Total current assets                                                                                                                |   | 162,621             |    | 156,740 |   |
|                                                                                                                                |   |                |    |   |   |
| PROPERTY AND  EQUIPMENT:                                                                                                            |   |                |    |   |   |
| Facilities under  capital lease                                                                                                     |   | —              |    | 4,862 |   |
| Flight equipment                                                                                                                    |   | 74,686              |    | 69,480 |   |
| Other property and  equipment                                                                                                       |   | 32,103              |    | 23,681 |   |
| Less: Accumulated  depreciation and amortization                                                                                    |   | (56,174             | )       | (41,775 | ) |
| Net property and  equipment                                                                                                         |   | 50,615              |    | 56,248 |   |
|                                                                                                                                |   |                |    |   |   |
| LONG TERM INVESTMENTS                                                                                                               |   | 4,068               |    | — |   |
| OTHER ASSETS, net                                                                                                                   |   | 8,550               |    | 10,746 |   |
|                                                                                                                                |   | $                   | 225,854 |   | $ | 223,734 |   |
|                                                                                                                                |   |                |    |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                           |   |                |    |   |   |
| CURRENT LIABILITIES:                                                                                                                |   |                |    |   |   |
| Current maturities of  capital lease obligations                                                                                    |   | $                   | —  |   | $ | 229 |   |
| Accounts payable                                                                                                                    |   | 13,184              |    | 15,819 |   |
| Accrued liabilities-                                                                                                                |   |                |    |   |   |
| Payroll                                                                                                                             |   | 9,537               |    | 7,626 |   |
| Maintenance                                                                                                                         |   | 16,529              |    | 14,246 |   |
| Deferred income                                                                                                                     |   | 2,485               |    | 2,579 |   |
| Other, primarily property  and income taxes                                                                                         |   | 3,046               |    | 6,067 |   |
| Total current  liabilities                                                                                                          |   | 44,781              |    | 46,566 |   |
|                                                                                                                                |   |                |    |   |   |
| CAPITAL LEASE  OBLIGATIONS, net of current maturities                                                                               |   | —              |    | 2,172 |   |
|                                                                                                                                |   |                |    |   |   |
| OTHER NONCURRENT  LIABILITIES                                                                                                       |   | 7,701               |    | 10,315 |   |
|                                                                                                                                |   |                |    |   |   |
| COMMITMENTS AND  CONTINGENCIES (NOTES 3 and 6)                                                                                      |   |                |    |   |   |
|                                                                                                                                |   |                |    |   |   |
| SHAREHOLDERS’ EQUITY:                                                                                                          |   |                |    |   |   |
| Common stock, $.01 par  value, 60,000,000 shares authorized; 20,298,141 and 20,288,141 shares issued  and outstanding, respectively |   | 203                 |    | 203 |   |
| Paid-in capital                                                                                                                     |   | 50,508              |    | 49,606 |   |
| Warrants                                                                                                                            |   | 16,500              |    | 16,500 |   |
| Other comprehensive  income (loss)                                                                                                  |   | (21                 | )       | — |   |
| Retained earnings                                                                                                                   |   | 106,182             |    | 98,372 |   |
| Total shareholders’  equity                                                                                                    |   | 173,372             |    | 164,681 |   |
|                                                                                                                                |   | $                   | 225,854 |   | $ | 223,734 |   |

 

The accompanying notesare an integral part of these consolidated balance sheets.

 

25

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# MESABA HOLDINGS, INC. AND SUBSIDIARY

## Consolidated Statements of Operations

## (In Thousands, Except Per Share Information)

 
|                                                                                                      |   | **For the Years Ended March 31,** |    |
|-----------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                                      |   | **2002**                          |    | **2001** |   | **2000** |   |
|                                                                                                      |   |                              |    |   |   |   |   |
| OPERATING REVENUES:                                                                                       |   |                              |    |   |   |   |   |
| Passenger                                                                                                 |   | $                                 | 401,912 |   | $ | 429,811 |   | $ | 401,342 |   |
| Freight and other                                                                                         |   | 15,001                            |    | 9,992 |   | 4,857 |   |
| Total operating  revenues                                                                                 |   | 416,913                           |    | 439,803 |   | 406,199 |   |
|                                                                                                      |   |                              |    |   |   |   |   |
| OPERATING EXPENSES:                                                                                       |   |                              |    |   |   |   |   |
| Wages and benefits                                                                                        |   | 124,962                           |    | 114,082 |   | 99,070 |   |
| Aircraft fuel                                                                                             |   | 22,534                            |    | 25,946 |   | 26,809 |   |
| Aircraft maintenance                                                                                      |   | 76,202                            |    | 78,364 |   | 69,767 |   |
| Aircraft rents                                                                                            |   | 101,582                           |    | 100,048 |   | 88,877 |   |
| Landing fees                                                                                              |   | 6,574                             |    | 6,322 |   | 7,520 |   |
| Insurance and taxes                                                                                       |   | 8,314                             |    | 5,336 |   | 5,677 |   |
| Depreciation and amortization                                                                             |   | 19,772                            |    | 17,768 |   | 14,354 |   |
| Administrative and  other                                                                                 |   | 56,167                            |    | 62,589 |   | 47,290 |   |
| Total operating  expenses                                                                                 |   | 416,107                           |    | 410,455 |   | 359,364 |   |
|                                                                                                      |   |                              |    |   |   |   |   |
| Operating income                                                                                          |   | 806                               |    | 29,348 |   | 46,835 |   |
|                                                                                                      |   |                              |    |   |   |   |   |
| NONOPERATING INCOME  (EXPENSE):                                                                           |   |                              |    |   |   |   |   |
| Interest expense                                                                                          |   | (53                               | )       | (367 | ) | (404 | ) |
| Government grant  income                                                                                  |   | 12,485                            |    | — |   | — |   |
| Interest income and  other                                                                                |   | 2,839                             |    | 6,014 |   | 4,785 |   |
| Income before  provision for income taxes                                                                 |   | 16,077                            |    | 34,995 |   | 51,216 |   |
|                                                                                                      |   |                              |    |   |   |   |   |
| PROVISION FOR INCOME  TAXES                                                                               |   | 8,267                             |    | 15,211 |   | 20,155 |   |
|                                                                                                      |   |                              |    |   |   |   |   |
| Net income                                                                                                |   | $                                 | 7,810   |   | $ | 19,784 |   | $ | 31,061 |   |
|                                                                                                      |   |                              |    |   |   |   |   |
| Earnings Per Common  Share - Basic                                                                        |   | $                                 | 0.38    |   | $ | 0.98 |   | $ | 1.54 |   |
|                                                                                                      |   |                              |    |   |   |   |   |
| Weighted Average  Number of Common Shares Outstanding – Basic                                        |   | 20,289                            |    | 20,288 |   | 20,177 |   |
|                                                                                                      |   |                              |    |   |   |   |   |
| Earnings Per Common  Share - Diluted                                                                      |   | $                                 | 0.38    |   | $ | 0.94 |   | $ | 1.48 |   |
|                                                                                                      |   |                              |    |   |   |   |   |
| Weighted Average  Number of Common Shares Outstanding and  Common Share Equivalents Outstanding - Diluted |   | 20,601                            |    | 20,941 |   | 21,043 |   |

 

The accompanying notesare an integral part of these consolidated statements.

 

26

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MESABA HOLDINGS, INC. ANDSUBSIDIARY

 

Consolidated Statements of Shareholders’ Equity

 

For the Years Ended March31, 2002, 2001 and 2000

 

(In Thousands, ExceptShare Information)

 
|                                                   |   | **Common Stock** |       | **Paid-In   Capital** |       | **Warrants** |   | **Other   Comprehensive   Income (Loss)** |   | **Retained  Earnings** |   | **Total   Shareholders’  Equity** |   |
|--------------------------------------------------------|--------|------------------|------------|-----------------------|------------|--------------|--------|-------------------------------------------|--------|------------------------|--------|----------------------------------------|--------|
| **Shares**                                             |   | **Amount**       | **Shares** |                  | **Amount** |
|                                                   |   |             |       |                  |       |         |   |                                      |   |                   |   |                                   |   |   |   |   |   |
| BALANCE,  March 31, 1999                               |   | 19,863,829       |       | $                     | 199        |         | $      | 45,013                                    |   | 4,151,922              |   | $                                      | 16,500 |   | $ | — |   | 47,527 |   | $ | 109,239 |   |
| Net  income                                            |   | —           |       | —                |       | —       |   | —                                    |   | —                 |   | —                                 |   | 31,061 |   | 31,061 |   |
| Exercise  of stock options, net of related tax effects |   | 403,312          |       | 4                     |       | 4,414        |   | —                                    |   | —                 |   | —                                 |   | — |   | 4,418 |   |
|                                                   |   |             |       |                  |       |         |   |                                      |   |                   |   |                                   |   |   |   |   |   |
| BALANCE,  March 31, 2000                               |   | 20,267,141       |       | 203                   |       | 49,427       |   | 4,151,922                                 |   | 16,500                 |   | —                                 |   | 78,588 |   | 144,718 |   |
| Net  income                                            |   | —           |       | —                |       | —       |   | —                                    |   | —                 |   | —                                 |   | 19,784 |   | 19,784 |   |
| Exercise  of stock options, net of related tax effects |   | 21,000           |       | —                |       | 179          |   | —                                    |   | —                 |   | —                                 |   | — |   | 179 |   |
|                                                   |   |             |       |                  |       |         |   |                                      |   |                   |   |                                   |   |   |   |   |   |
| BALANCE,  March 31, 2001                               |   | 20,288,141       |       | 203                   |       | 49,606       |   | 4,151,922                                 |   | 16,500                 |   | —                                 |   | 98,372 |   | 164,681 |   |
| Comprehensive  income (loss)                           |   |             |       |                  |       |         |   |                                      |   |                   |   |                                   |   |   |   |   |   |
| Net  income                                            |   | —           |       | —                |       | —       |   | —                                    |   | —                 |   | —                                 |   | 7,810 |   | 7,810 |   |
| Unrealized  loss on investments, net of tax            |   | —           |       | —                |       | —       |   | —                                    |   | —                 |   | (21                                    | )      | — |   | (21 | ) |
| Comprehensive  income (loss)                           |   |             |       |                  |       |         |   |                                      |   |                   |   |                                   |   |   |   | 7,789 |   |
| Exercise  of stock options, net of related tax effects |   | 10,000           |       | —                |       | 80           |   | —                                    |   | —                 |   | —                                 |   | — |   | 80 |   |
| Recognition  of tax impact of prior option activity    |   | —           |       | —                |       | 822          |   | —                                    |   | —                 |   | —                                 |   | — |   | 822 |   |
|                                                   |   |             |       |                  |       |         |   |                                      |   |                   |   |                                   |   |   |   |   |   |
| BALANCE,  March 31, 2002                               |   | 20,298,141       |       | $                     | 203        |         | $      | 50,508                                    |   | 4,151,922              |   | $                                      | 16,500 |   | $ | (21 | ) | $ | 106,182 |   | $ | 173,372 |   |
|                                                        |        |                  |            |                       |            |              |        |                                           |        |                        |        |                                        |        |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notesare an integral part of these consolidated statements.

 

27

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MESABA HOLDINGS, INC. ANDSUBSIDIARY

Consolidated Statements of Cash Flows

(In Thousands)

 
|                                                                               |   | **For the Years Ended March 31,** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                               |   | **2002**                          |   | **2001** |   | **2000** |   |
|                                                                               |   |                              |   |   |   |   |   |
| OPERATING ACTIVITIES:                                                              |   |                              |   |   |   |   |   |
| Net income                                                                         |   | $                                 | 7,810  |   | $ | 19,784 |   | $ | 31,061 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities- |   |                              |   |   |   |   |   |
| Depreciation and  amortization                                                     |   | 19,772                            |   | 17,768 |   | 14,354 |   |
| Gain on sale of  equipment                                                         |   | —                            |   | — |   | (125 | ) |
| Loss on disposition of  assets                                                     |   | 1,484                             |   | — |   | — |   |
| Loss on lease  conversion                                                          |   | —                            |   | 694 |   | — |   |
| Deferred income taxes                                                              |   | 1,598                             |   | (524 | ) | (2,889 | ) |
| Change in current  operating items:                                                |   |                              |   |   |   |   |   |
| Accounts receivable,  net                                                          |   | (5,431                            | )      | (15,681 | ) | (4,185 | ) |
| Inventories                                                                        |   | 446                               |   | (1,943 | ) | 461 |   |
| Prepaid expenses and  deposits                                                     |   | 489                               |   | (1,212 | ) | (652 | ) |
| Accounts payable and  other                                                        |   | (4,326                            | )      | (2,060 | ) | (6,521 | ) |
|                                                                               |   |                              |   |   |   |   |   |
| Net cash flows  provided by operating activities                                   |   | 21,842                            |   | 16,826 |   | 31,504 |   |
|                                                                               |   |                              |   |   |   |   |   |
| INVESTING ACTIVITIES:                                                              |   |                              |   |   |   |   |   |
| Purchases of  short-term investments                                               |   | (88,029                           | )      | (265,220 | ) | — |   |
| Sales of short-term  investments                                                   |   | 98,304                            |   | 187,171 |   | — |   |
| Purchases of long-term  investments                                                |   | (4,068                            | )      | — |   | — |   |
| Purchases of property  and equipment, net                                          |   | (15,738                           | )      | (19,784 | ) | (19,343 | ) |
| Proceeds from sale of  equipment                                                   |   | —                            |   | — |   | 898 |   |
|                                                                               |   |                              |   |   |   |   |   |
| Net cash flows used in  investing activities                                       |   | (9,531                            | )      | (97,833 | ) | (18,445 | ) |
|                                                                               |   |                              |   |   |   |   |   |
| FINANCING ACTIVITIES:                                                              |   |                              |   |   |   |   |   |
| Repayment of capital  lease obligations                                            |   | (57                               | )      | (428 | ) | (457 | ) |
| Proceeds from issuance  of common stock, net                                       |   | 80                                |   | 179 |   | 4,418 |   |
|                                                                               |   |                              |   |   |   |   |   |
| Net cash flows  provided by (used in) financing activities                         |   | 23                                |   | (249 | ) | 3,961 |   |
|                                                                               |   |                              |   |   |   |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                              |   | 12,334                            |   | (81,256 | ) | 17,020 |   |
| CASH AND CASH  EQUIVALENTS:                                                        |   |                              |   |   |   |   |   |
| Beginning of year                                                                  |   | 18,916                            |   | 100,172 |   | 83,152 |   |
|                                                                               |   |                              |   |   |   |   |   |
| End of year                                                                        |   | $                                 | 31,250 |   | $ | 18,916 |   | $ | 100,172 |   |
|                                                                               |   |                              |   |   |   |   |   |
| SUPPLEMENTARY  CASH FLOW INFORMATION:                                              |   |                              |   |   |   |   |   |
| Cash paid during the  year for-                                                    |   |                              |   |   |   |   |   |
| Interest                                                                           |   | $                                 | 57     |   | $ | 367 |   | $ | 404 |   |
|                                                                               |   |                              |   |   |   |   |   |
| Income taxes                                                                       |   | $                                 | 8,104  |   | $ | 17,121 |   | $ | 19,636 |   |

 

The accompanying notesare an integral part of these consolidated statements.

 

28

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# MESABA HOLDINGS, INC. AND SUBSIDIARY

## Notes to Consolidated Financial Statements

## (Dollars in Thousands, Except Share and Per ShareInformation)

##  

1.             CorporateOrganization and Business:

*** ***

***Corporate Organization***

*** ***

The consolidated financial statements include the accounts of MesabaHoldings, Inc. (the “Company”) and its subsidiary, Mesaba Aviation, Inc.(“Mesaba”).  All significantintercompany balances and transactions have been eliminated in consolidation.

*** ***

***Business***

 

Mesaba operates a regional air carrier providing scheduled passengerand airfreight service as Mesaba Airlines/Northwest Airlink and MesabaAirlines/Northwest Jet Airlink under two separate agreements with NorthwestAirlines, Inc. ("Northwest") to 102 cities in the United States andCanada from Northwest’s hub airports, Minneapolis/St. Paul, Detroit, andMemphis.  Approximately 76% of Mesaba’spassengers connected with Northwest in fiscal 2002, 75% in fiscal 2001 and 80%in fiscal 2000.

 

Under the Airline Services Agreement (the “Airlink Agreement”) Mesabaoperates SAAB 340 jet-prop aircraft for Northwest.  This agreement provides for exclusive rights to designatedservice areas and extends through June 30, 2007, automatically renewingindefinitely thereafter.  EitherNorthwest or Mesaba may terminate the Airlink Agreement on 365 days notice.  In addition, Mesaba purchases fuel,reservation systems, ground handling and other services from Northwest.  The Company paid to Northwest $25,469 infiscal 2002, $28,738 in fiscal 2001 and $20,645 in fiscal 2000 for theseservices.

 

Under the Regional Jet Services Agreement (the “Jet Agreement”) Mesaba operatesAvro RJ85 (“RJ85”) regional jets for Northwest.  This agreement extends through April 30, 2007, automaticallyrenewing indefinitely thereafter. Northwest may terminate the Jet Agreement onApril 25, 2004 with at least 180 days or up to 365 days prior notice.  Under the Jet Agreement, Mesaba is notrequired to provide fuel and airport and passenger related services.

 

Under the agreements, all Mesaba flights appear in Northwest’stimetables and Mesaba receives ticketing and certain check-in, baggage andfreight-handling services from Northwest at certain airports. Mesaba alsobenefits from its relationship with Northwest through advertising and marketingprograms. The Airlink Agreement and Jet Agreement provide for certain incentivepayments from Northwest to Mesaba based on achievement of certain operationalor financial goals.  Such incentivestotaled $3,717 in fiscal 2002, $3,165 in fiscal 2001, and $5,159 in fiscal 2000and are included in passenger revenues in the accompanying consolidated statementsof operations.  Approximately 69% and80% of the March 31, 2002 and 2001 accounts receivable balances in theaccompanying consolidated balance sheets are due from Northwest.

 

Although Mesaba maintains an expanding air system serving differentmarkets, loss of Mesaba’s affiliation with Northwest or Northwest’s failure tomake timely payment of amounts owed to Mesaba or to otherwise materiallyperform under the Airlink or Jet Agreements would have a material adverseeffect on the Company’s operations, financial position and cash flows.Northwest and Mesaba review contract compliance on a periodic basis.

 

2.             Summaryof Significant Accounting Policies:

*** ***

***Cash and Cash Equivalents***

 

Cash equivalents consist primarily of U.S. government securities andinterest-bearing deposits with original maturities of less than 90 days and arestated at cost, which approximates fair value.

 

29

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Investments

 

Investments consist principally of municipal securities and corporatebonds and are classified as available-for-sale as of March 31, 2002.Available-for-sale investments are reported at fair value with unrealized gainsand losses excluded from operations and reported as a separate component ofshareholders’ equity, except for other-than-temporary impairments, which arereported as a charge to current operations and result in a new cost basis forthe investment.  The amortized cost andfair value of the investments as of March 31, 2002 were not materiallydifferent. The Company classifies investments that mature within one year asshort term.  Investments with a maturitydate greater than one year are classified as long term.  Realized gains for the fiscal 2002 and 2001were not considered material.  Thefollowing table shows the fair value of each type of security as of March 31:

 

|                         |   | **2002** |   | **2001** |   |
|------------------------------|--------|----------|--------|----------|--------|
| Municipal  securities        |   | $        | 16,514 |     | $      | 43,845 |   |
| Corporate  bonds             |   | 53,718   |   | 28,699   |   |
| Asset backed  securities     |   | —   |   | 1,358    |   |
| U.S. government  obligations |   | 1,610    |   | 4,147    |   |
| Total                        |   | $        | 71,842 |     | $      | 78,049 |   |

 

Inventories

 

Inventories are stated at the lower of average cost or market andconsist of expendable aircraft service parts and fuel. Expendable parts arecharged to maintenance as used.  Aprovision is recorded to reduce inventories to the estimated net realizedvalue, if required.  As of March 31,2002 and 2001, this reserve balance was $1.5 million, and $1.3 million,respectively.

 

Property and Equipment

 

Property and equipment are stated at cost.  Additions, improvements or major renewalsare capitalized, while expenditures that do not enhance or extend the assetsuseful life are charged to operating expense as incurred.  Depreciation is computed on a straight-linebasis for financial reporting purposes over estimated useful lives of 5–10years for aircraft engines, flight equipment and rotable parts; 3–10 years forall other equipment; and 5–36 years for buildings and improvements.  Leasehold improvements are amortized overthe life of the lease or the remaining estimated useful life of the asset.  Depreciation and amortization expense onproperty and equipment totaled $17,689, $15,488 and $12,429 for fiscal 2002,2001 and 2000, respectively.

 

Airframe and Engine Maintenance

 

Routine maintenance, airframe and engine overhauls are charged to expenseas incurred, except engine overhaul costs covered by third-party maintenanceagreements and airframe inspections, which are accrued on the basis of hoursflown.  Modifications that enhance theoperating performance or extend the useful lives of airframes or engines arecapitalized and amortized over the remaining estimated useful life of theasset.

 

30

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***Other Assets***

 

In connection with the Jet Agreement, as amended, Mesaba paid Northwestcontract rights fees in fiscal 1998 and 1999 in the form of warrants topurchase the Company’s common stock. Contract rights totaled $11,700 and related accumulated amortizationtotaled $6,609 and $5,006 as of March 31, 2002 and 2001,respectively.  Previously, Mesaba amortizedthe contract rights over six years to coincide with the earliest date on whichthe Jet Agreement could be terminated by Northwest.  Effective April 1, 2001, Mesaba changed the amortization periodto ten years on a prospective basis to coincide with the term of the JetAgreement, because management does not believe that Northwest will exerciseearly termination.  The warrants issuedin connection with the Jet Agreement consisted of the following as of March 31,2002 and 2001:

 

| **Grant Date** |   | **Shares** |   | **Exercise  Price** |   | **Vesting  Date** |     | **Expiration  Date** |         |
|----------------|--------|------------|--------|---------------------|--------|-------------------|----------|----------------------|--------------|
| October 1996   |   | 922,500    |   | $                   | 7.25   |              | May 1998 |                 | October 2006 |   |
| April 1998     |   | 474,192    |   | 21.25               |   | October 1998      |     | October 2006         |         |
| June 1998      |   | 1,435,230  |   | 21.25               |   | May 2000          |     | October 2006         |         |
|                |        |            |        |                     |        |                   |          |                      |              |  |

 

In connection with the Airlink Agreement, Mesaba paid Northwestcontract rights fee in the form of warrants to purchase 1,320,000 shares of the Company’s common stock at$9.42 per share, which were fully exercisable upon issuance and expire July 1,2007.  Contract rights totaled $4,800and related accumulated amortization totaled $2,280 and $1,800 as ofMarch 31, 2002 and 2001, respectively. Contract rights are amortized on a straight-line basis over ten years tocoincide with the term of the Airlink Agreement.

 

Impairment of long-lived Assets

 

The Company periodically evaluates whether events and circumstanceshave occurred which may affect the estimated useful life or the recoverabilityof the remaining balance of its long-lived assets.  If such events or circumstances were to indicate that thecarrying amount of these assets would not be recoverable, the Company wouldestimate the future cash flows expected to result from the use of the assetsand their eventual disposition.  If thesum of the expected future cash flows (undercounted and without interestcharges) were less than the carrying amount of the intangible assets, theCompany would recognize an impairment loss. No such impairment losses were required to be recorded in the fiscal2002, 2001 and 2000.

 

Revenue Recognition

 

Mesaba is paid by Northwest for each completed flight.  Under the Airlink Agreement, Mesaba is paidfor each completed ASM and under the Jet Agreement, Mesaba is paid for eachblock hour flown.  Passenger revenuesare recorded as income when the respective services are rendered.

 

Frequent Flyer Awards

 

As a Northwest Airlink carrier, Mesaba participates in Northwest’sfrequent flyer program (“WorldPerks”), and passengers may use mileageaccumulated in that program to obtain discounted or free trips that mightinclude a flight segment on one of Mesaba’s flights.  However, under the Airlink and Jet Agreements, Northwest isresponsible for the administration of WorldPerks, and Mesaba receives revenuefrom Northwest for WorldPerks travel awards redeemed on Mesaba flight segments.  Therefore, no reserve for incremental costsof flying free passengers has been established.

 

Income Taxes

 

The Company accounts for income taxes under the liability methodwhereby deferred income tax assets and liabilities are computed annually fordifferences between the financial statement and tax bases of assets andliabilities.  These differences willresult in taxable or deductible amounts in the future based on enacted tax lawsand rates applicable to the periods in which the differences are expected toaffect taxable income.

 

31

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Other Noncurrent Liabilities

 

In order to assist Mesaba in integrating new aircraftinto its fleet, certain manufacturers provide Mesaba with spare parts or othercredits.  Mesaba has deferred theseamounts and amortizes them over the terms of the agreements as a reduction ofrent expense.  Amortization of thesecredits resulted in a reduction of rent expense of $2,978, $4,139 and $2,497during fiscal 2002, 2001 and 2000, respectively.

 

Use of Estimates

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent liabilities at the date of financialstatements and the reported amounts of revenues and expenses during thereporting period.  The most significantuse of estimates relate to accrued maintenance expenses and inventoryobsolescence reserves.  Ultimate resultscould differ from those estimates.

 

Segment Reporting

 

The Company has reviewed Statement of Financial Accounting Standards(SFAS) No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation” and determined that the aggregation criteria outlined in SFAS No.131 have been achieved and therefore the Company’s operations are reported as asingle reportable segment.

 

New Accounting Pronouncements

 

The Company adopted SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities” as amended on April 1, 2001.  SFAS No. 133 requires all derivativecontracts to be reported on the balance sheet at fair value through earningscurrently, unless special hedge accounting criteria are met.  Since the Company does not have any of thesetypes of instruments, the adoption of SFAS No. 133 did not have an impact onthe Company’s results of operations, financial position or cash flows.

 

On June 1, 2001, the FASB issued SFAS No. 141, “Business Combinations”.  SFAS No. 141 requires all businesscombinations to be accounted for by the purchase method of accounting afterJuly 1, 2001.  Since the Company did nothave any business combinations, the adoption of SFAS No. 141 did not have animpact on the Company’s results of operations, financial position or cashflows.

 

On June 1, 2001, the FASB issued SFAS No. 142, “Goodwill and OtherIntangible Assets”.  SFAS No. 142addresses how goodwill and other intangible assets that are acquiredindividually or with a group of other assets (but not those acquired in abusiness combination) should be accounted for in financial statements upontheir acquisition and after they have been initially recognized.  The provisions of SFAS No. 142 are requiredto be applied starting with fiscal years beginning after December 15,2001.  Management of the Company doesnot believe the adoption of SFAS No. 142 will have a material impact on theCompany’s results of operations, financial position or cash flows.

 

3.                                       Flight Equipment:

 

Mesaba’s airline fleet consisted of the following aircraft held underoperating leases as of March 31, 2002:

 

| **Number of   Aircraft** |   | **Type of Aircraft** |   | **Seating   Capacity** |   |
|--------------------------|--------|----------------------|--------|------------------------|--------|
|                     |   |                 |   |                   |   |
| 75                       |   | Saab 340             |   | 30/33/34               |   |
| 36                       |   | Avro RJ85            |   | 69                     |   |

 

Under terms of the Jet Agreement, Mesaba subleases its RJ85 aircraftfrom Northwest under operating leases with original terms of up to 10years.  The Jet Agreement allows Mesabato return aircraft to Northwest upon the occurrence of certain events,including termination or breach of the Jet Agreement.

 

32

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Mesaba leases all of its Saab 340 aircraft, eitherdirectly from aircraft leasing companies or through subleases with Northwestunder operating leases with terms of up to 17 years.  The Airlink Agreement allows Mesaba to return aircraft toNorthwest upon the occurrence of certain events.

 

The aircraft operating leases require future minimum rental payments asfollows as of March 31, 2002:

 

| 2003       |   | $       | 112,018 |   |
|------------|--------|---------|---------|--------|
| 2004       |   | 108,689 |    |
| 2005       |   | 105,961 |    |
| 2006       |   | 105,341 |    |
| 2007       |   | 104,819 |    |
| Thereafter |   | 363,874 |    |

 

Rent expense under aircraft operating leases totaled approximately$101,582 in fiscal 2002, $100,048 in fiscal 2001 and $88,877 in fiscal 2000(including $62,015, $61,598 and $48,422 paid to Northwest in fiscal 2002,fiscal 2001 and fiscal 2000, respectively).

 

4.                                       Income Taxes:

 

The provision for income taxes is comprised of the following elements:

 

|                              |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                              |   |     |   |     |   |     |   |
| Current:                          |   |     |   |     |   |     |   |
| Federal                           |   | $        | 5,102  |     | $      | 12,942   |   | $ | 19,213 |   |
| State                             |   | 1,567    |   | 2,793    |   | 3,831    |   |
| Deferred                          |   | 1,598    |   | (524     | )      | (2,889   | )      |
|                              |   |     |   |     |   |     |   |
| Total  provision for income taxes |   | $        | 8,267  |     | $      | 15,211   |   | $ | 20,155 |   |

 

Theactual income tax expense differs from the statutory tax expense as follows:

 
|                                                   |   | **2002** |   | **2001** |   | **2000** |   |
|--------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                   |   |     |   |     |   |     |   |
| Computed  tax expense at federal statutory rate of 35% |   | $        | 5,627  |     | $      | 12,248   |   | $ | 17,926 |   |
| Increase  (decrease) in income taxes resulting from:   |   |     |   |     |   |     |   |
| State  taxes, net of federal tax benefit               |   | 1,154    |   | 1,785    |   | 2,490    |   |
| Non-deductible  flight crew expenses                   |   | 600      |   | 769      |   | 877      |   |
| Other,  net                                            |   | 886      |   | 409      |   | (1,138   | )      |
|                                                   |   |     |   |     |   |     |   |
| Total  income tax expense                              |   | $        | 8,267  |     | $      | 15,211   |   | $ | 20,155 |   |

 

The net deferred tax assets listed below include a current net deferredtax asset of $8.9 million and $10.4 million and a long-term net deferred taxasset of $0.9 million and $1.1 million as of March 31, 2002, and 2001,respectively.

 

33

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Deferred tax assets and liabilities are comprised of the following asof March 31:

 
|                       |   | **2002** |   | **2001** |   | **2000** |   |
|----------------------------|--------|----------|--------|----------|--------|----------|--------|
| Deferred  tax assets:      |   |     |   |     |   |     |   |
| Maintenance                |   | $        | 4,590  |     | $      | 4,029    |   | $ | 4,064 |   |
| Prepaids                   |   | 994      |   | 1,153    |   | 1,938    |   |
| Warrants                   |   | 2,341    |   | 2,618    |   | 3,069    |   |
| Leases                     |   | —   |   | —   |   | 3,181    |   |
| Inventories                |   | 600      |   | 538      |   | 678      |   |
| Other  accruals            |   | 4,512    |   | 6,566    |   | 2,536    |   |
| Gross  deferred tax assets |   | 13,037   |   | 14,904   |   | 15,466   |   |
| Deferred  tax liabilities: |   |     |   |     |   |     |   |
| Property  and equipment    |   | 3,208    |   | 3,477    |   | 4,563    |   |
| Net  deferred tax assets   |   | $        | 9,829  |     | $      | 11,427   |   | $ | 10,903 |   |

** **

During fiscal 2002, the Company recognized $0.8 million as an increaseto additional paid in capital for previously exercised stock options due to thefiling of amended tax returns for fiscal 2000.

 

5.                                       Shareholders’ Equity:

*** ***

***Capital Stock***

 

The Company’s authorized capital stock consists of 60,000,000 shares ofCommon Stock, par value $0.01 per share, and 1,000,000 shares of undesignatedpreferred stock, having no specified par value.  As of March 31, 2002, there were 20,298,141shares of Common Stockissued and outstanding.  No shares ofpreferred stock have been issued.

 

Holders of Common Stock are entitled to one vote per share on anymatter presented to shareholders for approval. The Common Stock has no special voting rights or dividend preferences.  There is no cumulative voting by holders ofthe Common Stock and no preemptive rights to acquire any new or additionalshares of stock of the Company. Dividends are paid if and when declared by the Company’s board ofdirectors.  In the event of theliquidation of the Company, holders of Common Stock would be entitled to a prorata distribution of any proceeds remaining after payment of all of theCompany’s creditors.

 

The Company’s board of directors has the authority to designate one ormore series of preferred stock, and to fix the designations, powers,preferences, rights, qualifications, limitations and restrictions of suchseries.  If so designated by the boardof directors, the shares of any series of preferred stock will be senior to theCommon Stock with respect to distributions.

 

Stock Option Plans

 

The Company has stock option plans for key employees, directors,consultants and advisors to the Company and employees of its subsidiary orbusiness partner, which authorize the issuance of shares of common stock forsuch options.  Under the plans, thecompensation committee of the board of directors grants the options withvesting and the exercise period being determined at the time of the award.  The purchase price of the stock fornon-qualified and incentive stock options is determined at the time of theaward and is generally equal to the fair market value at the time of the award.

 

34

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Stock option transactions for the three years ended March 31 wereas follows:

 
|                                 |   | **Shares** |   | **Weighted Average  Exercise Price per share** |   |
|--------------------------------------|--------|------------|--------|------------------------------------------------|--------|
|                                 |   |       |   |                                           |   |
| Options  outstanding, March 31, 1999 |   | 1,025,787  |   | $                                              | 10.07  |   |
| Granted                              |   | 420,000    |   | 10.73                                          |   |
| Exercised                            |   | (403,312   | )      | 6.28                                           |   |
| Canceled                             |   | (265,475   | )      | 12.66                                          |   |
|                                 |   |       |   |                                           |   |
| Options  outstanding, March 31, 2000 |   | 777,000    |   | 11.51                                          |   |
| Granted                              |   | 374,000    |   | 9.85                                           |   |
| Exercised                            |   | (21,000    | )      | 7.14                                           |   |
| Canceled                             |   | (61,500    | )      | 11.76                                          |   |
|                                 |   |       |   |                                           |   |
| Options  outstanding, March 31, 2001 |   | 1,068,500  |   | 11.00                                          |   |
| Granted                              |   | 1,197,500  |   | 7.69                                           |   |
| Exercised                            |   | (10,000    | )      | 8.00                                           |   |
| Canceled                             |   | (54,500    | )      | 12.17                                          |   |
|                                 |   |       |   |                                           |   |
| Options  outstanding, March 31, 2002 |   | 2,201,500  |   | 9.18                                           |   |
| Exercisable  as of March 31, 2002    |   | 611,200    |   | 11.14                                          |   |
|                                      |        |            |        |                                                |        |  |

 

Options outstanding as of March 31, 2002:

 

| **Price Range** |   | **Quantity** |   | **Average  remaining  contract life** |   |
|-----------------|--------|--------------|--------|---------------------------------------|--------|
| $4.75           |   | 22,500       |   | .57 years                             |   |
| $6.54           |   | 527,500      |   | 5.63 years                            |   |
| $8.00 - $14.25  |   | 1,554,500    |   | 2.77 years                            |   |
| $18.00 - $23.00 |   | 97,000       |   | 1.75 years                            |   |

 

As of March 31, 2002, there were 176,963 shares available for grantunder the Company's stock option plans.

 

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions summarized below:

 

|                                            |   | **2002**     |   | **2001**    |   | **2000**    |   |
|-------------------------------------------------|--------|--------------|--------|-------------|--------|-------------|--------|
| Risk free  interest rate                        |   | 3.65 - 5.16  | %      | 5.90 - 6.31 | %      | 5.26 - 6.23 | %      |
| Expected life of  option grants                 |   | 6 yrs.       |   | 6 yrs.      |   | 6 yrs.      |   |
| Expected  volatility of option grants           |   | 27.7 - 41.27 | %      | 42.83       | %      | 51.08       | %      |
| Weighted average  fair value of options granted |   | $            | 4.22   |        | $      | 5.02        |   | $ | 6.28 |   |
|                                                 |        |              |        |             |        |             |        |  |  |  |

 

35

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The Company applies Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations in accounting for its stock option plans.  Accordingly, no compensation cost has beenrecognized in the accompanying consolidated statements of operations.  Had compensation cost been recognized basedon the fair values of options at the grant dates consistent with the provisionsof SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s netincome and net income per common share would have been decreased to thefollowing pro forma amounts:

 

|                        |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net Income                  |   |     |   |     |   |     |   |
| As reported                 |   | $        | 7,810  |     | $      | 19,784   |   | $ | 31,061 |   |
| Pro forma                   |   | $        | 5,380  |     | $      | 18,305   |   | $ | 29,515 |   |
|                        |   |     |   |     |   |     |   |
| Basic Earnings  Per Share   |   |     |   |     |   |     |   |
| As reported                 |   | $        | 0.38   |     | $      | 0.98     |   | $ | 1.54 |   |
| Pro forma                   |   | $        | 0.27   |     | $      | 0.90     |   | $ | 1.46 |   |
|                        |   |     |   |     |   |     |   |
| Diluted Earnings  Per Share |   |     |   |     |   |     |   |
| As reported                 |   | $        | 0.38   |     | $      | 0.94     |   | $ | 1.48 |   |
| Pro forma                   |   | $        | 0.26   |     | $      | 0.87     |   | $ | 1.40 |   |

 

6.             Commitments andContingencies:

 

Lease Commitments

 

In addition to the aircraft described in Note 3, Mesaba leases land,office, hangar facilities and certain terminal facilities under operatingleases through 2019 which provide for approximate future minimum rentalpayments as follows as of March 31, 2002:

 
| 2003       |   | $      | 3,823  |   |
|------------|--------|--------|--------|--------|
| 2004       |   | 3,017  |   |
| 2005       |   | 2,618  |   |
| 2006       |   | 2,508  |   |
| 2007       |   | 2,387  |   |
| Thereafter |   | 21,043 |   |
|       |   | $      | 35,396 |   |

 

Rent expense under all facility operating leases totaled approximately$6,482 in fiscal 2002, $5,493 in fiscal 2001 and $4,530 in fiscal 2000. On May9, 2000, the Detroit hangar collapsed due to a severe storm. Duringreconstruction, Mesaba expanded the facility to approximately 60,000 squarefeet and it reopened on June 1, 2001. Due to the hangar incident and corresponding reconstruction, the leasewas reclassified from a capital to an operating lease.

 

36

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During June 2001, Mesaba entered into an agreement with theMetropolitan Airports Commission (“MAC”) to terminate the Minneapolis/St. Paulmaintenance hangar and general office leases on January 1, 2003, to accommodateplanned runway construction. In October 2001, Mesaba received a notice from theMAC informing the Company that the lease termination date had been delayed toSeptember 2003.  Mesaba expects toreceive an early lease termination fee of $2.0 million at that time and isaccounting for this as a reduction to lease expense over the term of theagreement.  Due to the lease terminationagreement, the lease was reclassified from a capital to an operating lease inthe first quarter of fiscal 2002. Mesaba will relocate its hangar facilities to the west side of theairport and is currently evaluating future lease options with the MAC.

 

Workforce

 

Approximately 49% of Mesaba’s workforce are members of unionsrepresenting pilots, mechanics, dispatchers and flight attendants.  The collective bargaining agreements for thepilots, mechanics, dispatchers and flight attendants become amendable on June1, 2002, August 22, 2003, May 26, 2005 and April 1, 2006, respectively.  The Railway Labor Act, which governs laborrelations for unions representing airline employees, contains detailedprovisions that must be exhausted before work stoppage can occur once acollective bargaining agreement becomes amendable.

 

Benefit Plan

 

The Company maintains a 401(k) benefit plan for eligible employeeswhereby the Company will match 25% to 75% of employee contributions to theplan, up to 8% of each employee’s compensation, depending on each employee’slength of service.  The Company’scontribution to the plan totaled $1,562 in fiscal 2002, $1,355 in fiscal 2001and $1,086 in fiscal 2000.

 

Regulatory Matters

 

Mesaba is a party to ongoing Federal Aviation Administrationproceedings arising in the ordinary course of business.  In the opinion of management, the resolutionof these matters will not have a material adverse effect on the Company’sconsolidated financial position, results of operations or its cash flows.

 

Litigation

 

The Company is a party to ongoing legal and tax proceedings arising inthe ordinary course of business.  In theopinion of management, the resolution of these matters will not have a materialadverse effect on the Company’s consolidated financial position, results ofoperations or its cash flows.

 

Shareholder Lawsuit

 

In early November 2000, the Company was served with four lawsuits inHennepin County District Court and one lawsuit in Dakota County DistrictCourt.  The Dakota County lawsuit wassubsequently transferred to Hennepin County. The lawsuits were styled as purported class actions on behalf of theCompany’s shareholders.  Also named asdefendants in the lawsuits were each of the Company’s current directors andNorthwest.

 

The lawsuits arose out of the proposal by Northwest to acquire all ofthe outstanding shares of the Company’s common stock which Northwest did notpresently own.  The lawsuits allegedthat the defendants had breached their fiduciary duties to the Company’sshareholders in connection with the proposed transaction.  Each of the lawsuits sought to enjoin thedefendants from proceeding with the proposed transaction and, if thetransaction was completed, to rescind the transaction or to compensate theCompany’s shareholders for alleged damages. The complaints also sought legal fees and other expenses on behalf ofthe plaintiffs.

 

During fiscal 2002, the Company obtained orders dismissing withoutprejudice each of the lawsuits.

 

37

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Insurance Lawsuit

 

On March 2, 2002, Mesaba filed a lawsuit in Minnesota State Courtagainst Federal Insurance Company, a subsidiary of The Chubb Corporation, forcoverage of the business interruption, extra expense and fire suppressionequipment for the Detroit hangar that was destroyed May 2000.  The ultimate outcome of this lawsuit cannotbe predicted with certainty.  As ofMarch 31, 2002, Mesaba has not recorded any contingent gain due to theoutstanding lawsuit.

 

Northwest Airlines Acquisition Offer

 

On November 1, 2000, Northwest presented the Company with an offer topurchase all of the Company’s outstanding shares not currently owned byNorthwest at a price of $13.00 per share. Northwest owns 5.7 million shares, or approximately 28% of the Company’scurrent shares outstanding.  TheCompany’s Board of Directors appointed a special committee of independentdirectors to consider and act upon Northwest’s offer and other alternatives onbehalf of the Company and its public shareholders.

 

On June 14, 2001, Northwest announced that it had withdrawn its offerto purchase the Company’s shares.

 

7.                                       Restructuring Charge:

 

During September 2001,Mesaba initiated a reduction in personnel as a result of the impact of theterrorist attacks of September 11, 2001. Mesaba recorded within “Administrative and other” in the accompanyingconsolidated statements of operations for the second quarter of fiscal year2002 a one-time pre-tax charge of approximately $1.1 million to cover theexpected severance and related costs. The reduction in personnel was completed by September 30, 2001 andaffected 382 individuals in all areas of Mesaba.** **As of March 31, 2002, Mesaba has paid and charged against theliability approximately $600,000 and reduced the liability by approximately$300,000 during the third quarter due to the employment of certain terminatedemployees by others.  The remainingreserve is approximately $200,000 as of March 31, 2002.

 

8.                                       Nonoperating Gain:

 

On September 22, 2001, President Bush signed into law the AirTransportation Safety and System Stabilization Act (“Stabilization Act”). TheStabilization Act provides for direct cash grants to U.S. airlines tocompensate for “direct and incremental losses” (as defined in the Act andDepartment of Transportation instructions) incurred from September 11, 2001,through December 31, 2001, and resulting from the attacks. Mesaba recognized apre-tax grant of approximately $12.5 million as “other nonoperating income” inthe accompanying consolidated statements of operations in accordance withDepartment of Transportation and Financial Accounting Standards Board (“FASB”)guidance.  Mesaba received approximately$10.6 million in cash and has recorded the additional $1.9 million within“accounts receivable, net” in the accompanying consolidated balance sheets asof March 31, 2002.  Mesaba has appliedto obtain the remaining $1.9 million with the ultimate collection being subjectto approval by the Department of Transportation.

 

38

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9.             EarningsPer Share:

 

Basic earnings per common share is computed by dividing net income bythe weighted average number of shares of common stock outstanding during theyear.  Diluted earnings per share iscomputed by dividing net income by the sum of the weighted average number ofshares of common stock outstanding plus all additional common stock that wouldhave been outstanding if potentially dilutive common shares related to stockoptions and warrants had been issued. Options and warrants totaling 6,041, 4,503 and 4,063 were excluded fromthe computation of diluted earnings per share for the fiscal 2002, fiscal 2001and fiscal 2000, respectively, as the impact would have beenanti-dilutive.  The following tablereconciles the number of shares utilized in the earnings per sharecalculations:

 
|                                                                                                         |   | **2002** |   | **2001** |   | **2000** |   |
|--------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                                         |   |     |   |     |   |     |   |
| Numerator:                                                                                                   |   |     |   |     |   |     |   |
| Net  Income                                                                                                  |   | $        | 7,810  |     | $      | 19,784   |   | $ | 31,061 |   |
| Denominator:                                                                                                 |   |     |   |     |   |     |   |
| For  Earnings per Common Share - Basic:                                                                      |   |     |   |     |   |     |   |
| Weighted  average number of issued shares outstanding                                                        |   | 20,289   |   | 20,288   |   | 20,177   |   |
| Effect  of dilutive securities:                                                                              |   |     |   |     |   |     |   |
| Computed  shares outstanding under the Company’s stock option plan utilizing the  treasury stock method |   | 169      |   | 130      |   | 230      |   |
| Computed  shares outstanding under warrants issued utilizing the  treasury stock method                      |   | 143      |   | 523      |   | 636      |   |
|                                                                                                         |   |     |   |     |   |     |   |
| For  Earnings per Common Share – Diluted:                                                               |   |     |   |     |   |     |   |
| Weighted  Average Common Shares and Common Share Equivalents Outstanding                                     |   | 20,601   |   | 20,941   |   | 21,043   |   |
| Earnings  per share – Basic                                                                             |   | $        | 0.38   |     | $      | 0.98     |   | $ | 1.54 |   |
| Earnings  per share – Diluted                                                                           |   | $        | 0.38   |     | $      | 0.94     |   | $ | 1.48 |   |

 

39

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10.                                 Quarterly Financial Data (Unaudited):

** **

**(In thousands except share and per share data)**

 
|                                                                         |   | **Quarters  of Fiscal Year Ended March 31, 2002** |    | **Fiscal Year  2002**    |   |
|------------------------------------------------------------------------------|--------|---------------------------------------------------|---------|--------------------------|--------|
|                                                                         |   | **June  30,  2001**                               |    | **September  30,  2001** |   | **December  31,  2001** |   | **March  31,  2002** |
|                                                                         |   |                                              |    |                     |   |   |   |   |   |   |   |
| Total  operating revenues                                                    |   | $                                                 | 115,226 |                     | $      | 108,835 |   | $ | 90,680 |   | $ | 102,172 |   | $ | 416,913 |   |
| Operating  income (loss)                                                     |   | 6,786                                             |    | 2,941                    |   | (9,262 | ) | 341 |   | 806 |   |
| Net  income (loss)                                                           |   | 4,671                                             |    | 4,260                    |   | (1,298 | ) | 177 |   | 7,810 |   |
| Earnings  (Loss) per Common Share - Basic                                    |   | $                                                 | 0.23    |                     | $      | 0.21 |   | $ | (0.06 | ) | $ | 0.01 |   | $ | 0.38 |   |
| Weighted  Average Common Shares Outstanding -  Basic                         |   | 20,288                                            |    | 20,288                   |   | 20,288 |   | 20,291 |   | 20,289 |   |
| Earnings  (Loss) per Common Share - Diluted                                  |   | $                                                 | 0.22    |                     | $      | 0.21 |   | $ | (0.06 | ) | $ | 0.01 |   | $ | 0.38 |   |
| Weighted  Average Common Shares and Share  Equivalents Outstanding - Diluted |   | 20,824                                            |    | 20,430                   |   | 20,288 |   | 20,570 |   | 20,601 |   |

 
|                                                                         |   | **Quarters  of Fiscal Year Ended March 31, 2001** |    | **Fiscal Year  2001**   |   |
|------------------------------------------------------------------------------|--------|---------------------------------------------------|---------|-------------------------|--------|
| **June  30,  2000**                                                          |   | **September  30,  2000**                          |    | **December  31,  2000** |   | **March  31,  2001** |
|                                                                         |   |                                              |    |                    |   |   |   |   |   |   |   |
| Total  operating revenues                                                    |   | $                                                 | 107,826 |                    | $      | 115,070 |   | $ | 105,621 |   | $ | 111,286 |   | $ | 439,803 |   |
| Operating  income                                                            |   | 11,725                                            |    | 13,411                  |   | 2,111 |   | 2,101 |   | 29,348 |   |
| Net  income                                                                  |   | 7,718                                             |    | 8,800                   |   | 2,280 |   | 986 |   | 19,784 |   |
| Earnings  per Common Share - Basic                                           |   | $                                                 | 0.38    |                    | $      | 0.43 |   | $ | 0.11 |   | $ | 0.05 |   | $ | 0.98 |   |
| Weighted  Average Common Shares Outstanding -  Basic                         |   | 20,269                                            |    | 20,278                  |   | 20,288 |   | 20,288 |   | 20,288 |   |
| Earnings  per Common Share - Diluted                                         |   | $                                                 | 0.37    |                    | $      | 0.43 |   | $ | 0.11 |   | $ | 0.05 |   | $ | 0.94 |   |
| Weighted  Average Common Shares and Share  Equivalents Outstanding - Diluted |   | 20,956                                            |    | 20,692                  |   | 21,134 |   | 20,983 |   | 20,941 |   |

 

40

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Report of independent public accountants

 

To MesabaHoldings, Inc.:

 

We have audited in accordance with auditing standards generallyaccepted in the United States, the consolidated financial statements of MesabaHoldings, Inc. and Subsidiary included in this Form 10-K and have issued ourreport thereon dated May 2, 2002. Our audit was made for the purpose of formingan opinion on the basic financial statements taken as a whole. Schedule II,Valuation and Qualifying Accounts, is the responsibility of the Company’smanagement and is presented for purposes of complying with the Securities andExchange Commission’s rules and is not a part of the basic financialstatements. This schedule has been subjected to the auditing procedures appliedin the audit of the basic consolidated financial statements and, in ouropinion, fairly states in all material respects the financial data required tobe set forth therein in relation to the basic consolidated financial statementstaken as a whole.

 
| Arthur Andersen LLP    |
|------------------------|
|                   |
| Minneapolis, Minnesota |
| May 2, 2002            |

 

41

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SCHEDULE II

MESABA HOLDINGS, INC.

VALUATION AND QUALIFYINGACCOUNTS

 
|                                  |   |                                |   | **ADDITIONS**             |   |           | **BALANCES  AT END  OF YEAR** |   |
|---------------------------------------|--------|-------------------------------------|--------|---------------------------|--------|----------------|-------------------------------|--------|
| **BALANCES  AT  BEGINNING OF   YEAR** |   | **CHARGED TO  COSTS AND  EXPENSES** |   | **CHARGED   TO  REVENUE** |   | **DEDUCTIONS** |
| FOR THE YEAR  ENDED MARCH 31, 2002:   |   |                                |   |                      |   |           |                          |   |   |   |   |
| Allowance for  doubtful accounts      |   | $                                   | 400    |                      | 590    |           | —                        |   | —  |   | $ | 990 |   |
| Accrued  severance and related costs  |   | $                                   | — |                      | 807    |           | —                        |   | 578 | (1) | $ | 229 |   |
|                                  |   |                                |   |                      |   |           |                          |   |   |   |   |   |
| FOR THE YEAR  ENDED MARCH 31, 2001:   |   |                                |   |                      |   |           |                          |   |   |   |   |
| Allowance for  doubtful accounts      |   | $                                   | 2,298  |                      | — |           | 5,175                         |   | 7,073 | (2) | $ | 400 |   |
|                                  |   |                                |   |                      |   |           |                          |   |   |   |   |   |
| FOR THE YEAR  ENDED MARCH 31, 2000:   |   |                                |   |                      |   |           |                          |   |   |   |   |
| Allowance for  doubtful accounts      |   | $                                   | 2,287  |                      | 688    |           | 2,295                         |   | 2,972 | (3) | $ | 2,298 |   |
|                                       |        |                                     |        |                           |        |                |                               |        |  |  |  |  |  |  |

 

----

(1)Represents severance payments.

(2) Write-off ofuncollectible receivables of $4,977 and recoveries of $2,096.

(3) Write-off ofuncollectible receivables.

 

42

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Item 9.    CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

PART III

 

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

Information regarding the directors of the Companyis incorporated herein by reference to the descriptions set forth under thecaption “Election of Directors” in the Proxy Statement for the 2002 AnnualMeeting of Shareholders (the “2002 Proxy Statement”).  Information regarding executive officers of the Company isincorporated herein by reference to Item 1 of this Form 10–K under thecaption “Executive Officers of the Company” on page 10.

 

Item 11.  EXECUTIVECOMPENSATION

 

Information regarding executive compensation isincorporated herein by reference to the information set forth under the caption“Compensation of Executive Officers” in the 2002 Proxy Statement.

 

Item 12.  SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

Information regarding security ownership ofcertain beneficial owners and management of the Company is incorporated hereinby reference to the information set forth under the caption “Security Ownershipof Certain Beneficial Owners and Management” in the 2002 Proxy Statement.

 

Item 13.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

 

Information regarding certain relationships andrelated transactions with the Company is incorporated herein by reference tothe information set forth under the caption “Certain Transactions” in the 2002Proxy Statement.

 

43

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PART IV

 

Item 14.  EXHIBITS,FINANCIAL STATEMENTSCHEDULES AND REPORTS ON FORM 8–K

 
| (a)           Documents filed with this report. |
|---------------------------------------------------------------------------------------------------|
|                                                                                              |   |   |
|                                                                                              | (1) | Financial  Statements of Mesaba Holdings, Inc. |
|                                                                                              |   |
|                                                                                              |   | Report of  Independent Public Accountants |
|                                                                                              |   |   |
|                                                                                              |   | Consolidated Balance Sheets  as of March 31, 2002 and 2001 |
|                                                                                              |   |   |
|                                                                                              |   | Consolidated  Statements of Operations for the Years Ended March 31, 2002, 2001 and  2000 |
|                                                                                              |   |   |
|                                                                                              |   | Consolidated  Statements of Shareholders’ Equity for the Years Ended March 31, 2002,  2001 and 2000 |
|                                                                                              |   |   |
|                                                                                              |   | Consolidated  Statements of Cash Flows for the Years Ended March 31, 2002, 2001 and  2000 |
|                                                                                              |   |   |
|                                                                                              |   | Notes to Consolidated  Financial Statements |
|                                                                                              |   |   |
|                                                                                              | (2) | Schedule II |
|                                                                                              |   |   |
|                                                                                              |   | Report  of independent public accountants |
|                                                                                              |   |   |
|                                                                                              |   | Schedule II |
|                                                                                                   |  |  |  |

 

44

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(3)                                  Exhibits

 
| 3A.  Restated  Articles of Incorporation.   Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q  for the quarter ended September 31, 1995.                                                                                                                                                                                                                                  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3B.  Articles  of Amendment to the Company’s Articles of Incorporation. Incorporated by  reference to exhibit 3A to the Company’s 10-Q for the quarter ended September  30, 1997.                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3C.   Bylaws.  Incorporated by  reference to Exhibit 3.2 to the Form S-4, Registration No. 333-22977                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4A.  Specimen  certificate for shares of the Common Stock of the Company.  Incorporated by reference to Exhibit 4A to  the Company’s Form 10-K for the year ended March 31, 1989.                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4B.  Common  Stock Purchase Warrant dated October 25, 1996 issued to Northwest Airlines,  Inc.  Incorporated by reference to  Exhibit 4A to the Company’s 10-Q for the quarter ended September 30, 1996.                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4C.  Common  Stock Purchase Warrant dated October 17, 1997 issued to Northwest Airlines,  Inc.  Incorporated by reference to  Exhibit 4A to the Company’s 10-Q for the quarter ended September 30, 1997.                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                                                                       |
| 9A.   Shareholder’s Agreement regarding election of representative of  Northwest Aircraft Inc. to Board of Directors.  Incorporated by reference to Exhibit 9A to Mesaba’s Registration  Statement on Form S-1, Registration No. 33-820.                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10A.  FAA Air  Carrier Operating Certificate.   Incorporated by reference Exhibit 10A to the Company’s Form 10-K for  the year ended March 31, 1989.                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10B.  1986  Stock Option Plan (as Amended).   Incorporated by reference to Exhibit 10D to the Company’s Form 10-K  for the year ended March 31, 1990.                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10C.  1991  Director Stock Option Plan.   Incorporated by reference to Exhibit 10(i) to the Company’s  Registration Statement on Form S-8, Registration No. 33-62386.                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10D.  CAB  Part 298 Registration.  Incorporated  by reference to Exhibit 10G to Mesaba’s Form 10-K for the year ended March  31, 1987.                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10E.   Revolving Credit and Term Loan Agreement Dated as of November 7, 1988  between Norwest Bank Minnesota, N.A. and Mesaba Aviation, Inc.  Incorporated by reference to Exhibit 10F  to the Company’s Form 10-K for the year ended March 31, 1989.                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10F.  Airline  Services Agreement between Mesaba Aviation, Mesaba Holdings, Inc. and  Northwest Airlines, Inc. dated July 1, 1997 (certain portions of this  agreement are subject to an order granting confidential treatment pursuant to  Rule 24b-2). Incorporated by reference to Exhibit 10A to the Company’s Form  10-Q for the quarter ended September 30, 1997.                          |
|                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10G.   Regional Jet Services Agreement between Mesaba Holdings, Inc., Mesaba  Aviation, Inc. and Northwest Airlines, Inc., dated October 25, 1996 (certain  provisions of this agreement are subject to an order granting confidential  treatment pursuant to Rule 24b-2).   Incorporated by reference to Exhibit 10A to the Company’s Form 10-Q  for the quarter ended September 30, 1996. |
|                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10H.  Foreign  Air Carrier Operating Certificates issued May 6, 1991 by the Canadian  Department of Transport.  Incorporated  by reference to Exhibit 10H to the Company’s Form 10-K for the year ended  March 31, 1991.                                                                                                                                                                    |

 

45

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| 10I.   Facility Lease and Operating Agreement dated April 18, 1988, between  the Metropolitan Airport Commission and Mesaba Aviation, Inc.  Incorporated by reference to Exhibit 10K  to the Company’s Form 10-K for the year ended March 31, 1989.  Incorporated by reference to Exhibit 10J  to the Company’s Form 10-K for the year ended March 31, 1997. |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                  |
| 10J.  Ninth  Amendment to Revolving Credit and Term Loan Agreement and Amendment to  Revolving Note between Mesaba Aviation, Inc. and Norwest Bank Minnesota,  National Association.  Incorporated by  reference to Exhibit 10J to the Company’s Form 10-K for the year ended March  31, 1997.                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                  |
| 10K.  Letter  of Credit and Reimbursement Agreement dated as of August 1, 1990 between  Mesaba Aviation, Inc. and Norwest Bank Minnesota, National Association.  Incorporated by reference to Exhibit 10A  to the Company’s Form 10-Q for the quarter ended September 30, 1990.                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                  |
| 10L.  Special  Facilities Lease dated as of August 1, 1990 between Charter County of Wayne,  State of Michigan and Mesaba Aviation, Inc. Incorporated by reference to  Exhibit 10B to the Company’s Form 10-Q for the quarter ended September 30,  1990.                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                                                  |
| 10M.  Ground  Lease dated August 1, 1990 between Charter County of Wayne, State of Michigan  and Mesaba Aviation, Inc.   Incorporated by reference to Exhibit 10C to the Company’s Form 10-Q  for the quarter ended September 30, 1990.                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                  |
| 10N.   Combination Leasehold Mortgage, Assignment of Rents, Security  Agreement and Fixture Financing Statement dated as of August 1, 1990 between  Mesaba Aviation, Inc. and Norwest Bank Minnesota, National Association.  Incorporated by reference to Exhibit 10D  to the Company’s Form 10-Q for the quarter ended September 30, 1990.                            |
|                                                                                                                                                                                                                                                                                                                                                                                  |
| 10O.  Letter  Agreement dated December 24, 1992 relating to the repurchase of shares of  Common Stock from Northwest Aircraft, Inc.   Incorporated by reference to Exhibit 10EE to the Company’s Form 10-K  for the year ended March 31, 1993.                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                  |
| 10P.  DOT  Certificate of Public Convenience and Necessity dated October 26, 1992.  Incorporated by reference to Exhibit 10FF  of the Company’s Form 10-K for the year ended March 31, 1993.                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                  |
| 10Q.  Stock  Purchase Agreement between AirTran Corporation and Carl R. Pohlad dated as of  October 18, 1993.  Incorporated by  reference to Exhibit 10 of the Company’s Form 8-K dated October 19, 1993.                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                  |
| 10R.  1994  Stock Option Plan (as amended July 1, 1997).   Incorporated by reference to Exhibit 10B to the Company’s Form 10-Q  for the quarter ended September 30, 1997.                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                  |
| 10S.   Agreement between AirTran Corporation, Mesaba Aviation, Inc.,  Northwest Aircraft, Inc., and Northwest Airlines, Inc. dated May 18,  1995.  Incorporated by reference to  Exhibit 10A of the Company’s Form 8-K as filed May 18, 1995.                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                  |
| 10T.   Preliminary Agreement between AirTran Corporation, Mesaba Aviation,  Inc. and Northwest Airlines, Inc. dated March 8, 1995.  Incorporated by reference to Exhibit 10 of  the Company’s Form 8-Kas filed March 8, 1995.                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                  |
| 10U.  Term  Sheet Proposal for the Acquisition of Saab 340 Aircraft by Mesaba Aviation,  Inc. dated March 7, 1996 (certain portions of this document have been deleted  pursuant to an application for confidential treatment under Rule 24b-2).  Incorporated by reference to Exhibit 10U  to the Company’s Form 10-K/A for the year ended March 31, 1996.            |
|                                                                                                                                                                                                                                                                                                                                                                                  |
| 10V.  Letter  Agreement regarding Saab 340B Plus Acquisition Financing dated March 7, 1996  (certain portions of this document have been deleted pursuant to an  application for confidential treatment under Rule 24b-2). Incorporated by  reference to Exhibit 10V to the Company’s Form 10-K/A for the year ended  March 31, 1996.                                       |

 

46

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| 10W.  Letter  Agreement of April 26, 1996 relating to Airline Services Agreement between  Mesaba Aviation, Inc. and Northwest Airlines,  Inc. (certain portions of this document have been deleted  pursuant to an application for confidential treatment under Rule 24b-2).  Incorporated by reference to Exhibit 10W  to the Company’s Form 10-K/A for the year ended March 31, 1996.           |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10X.  Letter  Agreement of October 25, 1996 relating to Regional Jet Services Agreement  between Mesaba Aviation, Inc. and Northwest Airlines, Inc. (certain portions  of this document have been deleted pursuant to an application for  confidential treatment under Rule 24b-2). Incorporated by reference to  Exhibit 10A to the Company’s Form 10-Q/A for the quarter ended September 30,  1996.       |
|                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10Y.   Amendment No. 1 to Regional Jet Services Agreement dated April 1, 1998  between Mesaba Holdings, Inc., Mesaba Aviation, Inc. and Northwest Airlines,  Inc. (certain portions of this document have been deleted pursuant to an  application for confidential treatment under Rule 24b-2). Incorporated by  reference to Exhibit 10A to the Company’s Form 10-Q for the quarter ended  June 30, 1998. |
|                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10Z.   Amendment No. 2 to Regional Jet Services Agreement dated June 2, 1998  between Mesaba Holdings, Inc., Mesaba Aviation, Inc. and Northwest Airlines,  Inc. (certain portions of this document have been deleted pursuant to an  application for confidential treatment under Rule 24b-2). Incorporated by  reference to Exhibit 10B to the Company’s Form 10-Q for the quarter ended  June 30, 1998.  |
|                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10AA.  Lease  Agreement, dated as of July 1, 1999, between Kenton County Airport Board and  Mesaba Aviation, Inc.  Incorporated by  reference to Exhibit 10AA to the Company’s Form 10-K for the year ended March  31, 2000.                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10BB.  Ground  Lease, dated as of September 1, 1999, between Kenton County Airport Board and  Mesaba Aviation, Inc. Incorporated by reference to Exhibit 10BB to the  Company’s Form 10-K for the year ended March 31, 2000.                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10CC.  Letter  Agreement, dated November 20, 2001, between Mesaba Holdings, Inc., Mesaba  Aviation, Inc. and Northwest Airlines, Inc. relating to service expansion and  rate reductions.  Incorporated by  reference to the Company’s Form 8-K filed November 23, 2001.                                                                                                                               |

 

21.  Subsidiaries.  Incorporated by reference to Exhibit 21 to the Company’s Form10-K for the year ended March 31, 1997.

 

23.  Consent of independent publicaccountants.  Filed herewith.

 

24.  Powers of Attorney.  Filed herewith.

 

99.  Letter Regarding Arthur Andersen LLP.  Filed herewith.

 

(b)  Reports on Form 8-K.  The Company did not file any reports on Form8-K for the three-month period ended March 31, 2002

 

47

----

 

SIGNATURES

 

Pursuant to therequirements of section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                      | MESABA HOLDINGS, INC. |
|---------------------------|-----------------------|
|                      |                  |
| Dated:  June 5, 2002 | By                    | /s/ Paul F. Foley |   |
|                      |                  | Paul F. Foley |
|                      |                  | President and Chief  Executive Officer |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| /s/  Paul F. Foley    |               | President  and Chief Executive Officer      | June 5, 2002 |
|-----------------------|--------------------|---------------------------------------------|--------------|
| Paul  F. Foley        |               | (Principal  Executive Officer) and Director |         |
|                  |               |                                        |         |
| /s/  Robert E. Weil   |               | Vice  President and Chief Financial Officer | June 5, 2002 |
| Robert  E. Weil       |               | (Principal  Financial Officer)              |         |
|                  |               |                                        |         |
| *                     |               |                                        |         |
| Donald  E. Benson     |               | Director                                    | June 5, 2002 |
|                  |               |                                        |         |
| *                     |               |                                        |         |   |
| Richard  H. Andersen  |               | Director                                    | June 5, 2002 |
|                  |               |                                        |         |
| *                     |               |                                        |         |   |
| Douglas  M. Steenland |               | Director                                    | June 5, 2002 |
|                  |               |                                        |         |
| *                     |               |                                        |         |   |
| Carl  R. Pohlad       |               | Director                                    | June 5, 2002 |
|                  |               |                                        |         |
| *                     |               |                                        |         |   |
| Robert  C. Pohlad     |               | Director                                    | June 5, 2002 |
|                  |               |                                        |         |
| *                     |               |                                        |         |   |
| Pierson  M. Grieve    |               | Director                                    | June 5, 2002 |
|                  |               |                                        |         |
| *                     |               |                                        |         |   |
| Raymond  W. Zehr, Jr. |               | Director                                    | June 5, 2002 |
|                  |               |                                        |         |
| * By                  | /s/  Paul F. Foley |                                        |         | Attorney-in-fact | June 5, 2002 |
|                  | Paul  F. Foley     |                                        |         |   |
|                       |                    |                                             |              |  |  |  |  |  |  |  |  |  |

 

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INDEX TO EXHIBITS

 
| Exhibit 23 |   | Consent of independent public accountants |
|------------|--------|-------------------------------------------|
|       |   |                                      |
| Exhibit 24 |   | Powers of Attorney                        |
|       |   |                                      |
| Exhibit 99 |   | Letter Regarding Arthur Andersen LLP      |

 

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