** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

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

 

**For the quarterly period ended September 30, 2001**

 

**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.**

Incorporated under the laws of Minnesota

 
| **41-1616499**                                    |
|---------------------------------------------------|
| (I.R.S. Employer  ID No.)                         |
|                                              |   |   |
| **7501  26th Avenue South Minneapolis, MN 55450** |
| **(612)  726-5151**                               |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

                                                                Yes ý    No o

 

Indicate the number ofshares outstanding of each of the issuer's classes of common stock, as of thelatest practicable date.

 

| Class                     |   | Outstanding as  of November 1, 2001 |
|---------------------------|--------|-------------------------------------|
| Common Stock              |   |                                |
| Par value $.01 per  share |   | 20,288,141                          |

 

 

PART I. FINANCIAL INFORMATION

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Statements in the Quarterly Report on Form 10-Q underthe caption “Management’s Discussion and Analysis of Financial Condition andResults of Operations” as well as oral statements that may be made by theCompany or by officers, directors or employees of the Company acting on theCompany’s behalf, that are not historical fact may constitute “forward lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E 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 includematerialchanges 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 new aircraft;seasonal factors; and labor relationships, including labor shortages, slowdowns and/or work stoppages associated with the outcome of contractnegotiations between the Company and the Association of Flight Attendants andthe Air Line Pilots Association. 

** **

Item 1.CONSOLIDATED FINANCIAL STATEMENTS

 

MESABA HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)

 
| ASSETS                                     |   |               |    |           |   |
|--------------------------------------------|--------|--------------------|---------|----------------|--------|
|                                       |   | **September  30,** |    | **March  31,** |   |
|                                       |   | **2001**           |    | **2001**       |   |
|                                       |   | **(Unaudited)**    |    |           |   |
| CURRENT  ASSETS:                           |   |               |    |           |   |
| Cash  and cash equivalents                 |   | $                  | 32,290  |           | $      | 18,916 |   |
| Short-term  investments available for sale |   | 70,348             |    | 78,049         |   |
| Accounts  receivable, net                  |   | 34,242             |    | 35,771         |   |
| Inventories                                |   | 9,972              |    | 8,046          |   |
| Prepaid  expenses and deposits             |   | 5,085              |    | 5,583          |   |
| Deferred  tax asset                        |   | 10,340             |    | 10,375         |   |
| Total  current assets                      |   | 162,277            |    | 156,740        |   |
|                                       |   |               |    |           |   |
| PROPERTY  AND EQUIPMENT:                   |   |               |    |           |   |
| Facilities  under capital lease            |   | -                  |    | 4,862          |   |
| Rotables  and other spare parts            |   | 74,717             |    | 69,480         |   |
| Other  property and equipment              |   | 28,102             |    | 23,681         |   |
| Accumulated  depreciation and amortization |   | (47,597            | )       | (41,775        | )      |
| Net  property and equipment                |   | 55,222             |    | 56,248         |   |
|                                       |   |               |    |           |   |
| OTHER  ASSETS AND DEFERRED COSTS           |   | 9,532              |    | 10,746         |   |
| TOTAL  ASSETS                              |   | $                  | 227,031 |           | $      | 223,734 |   |

 

The accompanying notes tothe interim consolidated financial statements are an integral part of theseconsolidated balance sheets.

 

 
| LIABILITIES AND  SHAREHOLDERS' EQUITY                                                                              |   |               |    |           |       |
|--------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|----------------|------------|
|                                                                                                               |   | **September  30,** |    | **March  31,** |       |
|                                                                                                               |   | **2001**           |    | **2001**       | ** ** |
|                                                                                                               |   | **(Unaudited)**    |    |           | ** ** |
| CURRENT  LIABILITIES:                                                                                              |   |               |    |           |       |
| Current  maturities of long-term obligations                                                                       |   | $                  | -       |           | $          | 229 |   |
| Accounts  payable                                                                                                  |   | 11,432             |    | 15,819         |       |
| Accrued  liabilities                                                                                               |   |               |    |           |       |
| Payroll                                                                                                            |   | 7,874              |    | 7,626          |       |
| Maintenance                                                                                                        |   | 14,041             |    | 14,246         |       |
| Other                                                                                                              |   | 10,263             |    | 8,646          |       |
| Total  current liabilities                                                                                         |   | 43,610             |    | 46,566         |       |
|                                                                                                               |   |               |    |           |       |
| LONG-TERM  OBLIGATIONS, net of current maturities                                                                  |   | -                  |    | 2,172          |       |
|                                                                                                               |   |               |    |           |       |
| DEFERRED  CREDITS AND OTHER LIABILITIES                                                                            |   | 9,660              |    | 10,315         |       |
|                                                                                                               |   |               |    |           |       |
| COMMITMENTS  AND CONTINGENCIES                                                                                     |   |               |    |           |       |
|                                                                                                               |   |               |    |           |       |
| SHAREHOLDERS’  EQUITY:                                                                                        |   |               |    |           |       |
| Common  stock,  $.01 par value;  60,000,000 shares authorized, 20,288,141  shares issued and outstanding |   | 203                |    | 203            |       |
| Paid-in  capital                                                                                                   |   | 49,607             |    | 49,606         |       |
| Warrants                                                                                                           |   | 16,500             |    | 16,500         |       |
| Other  comprehensive income                                                                                        |   | 148                |    | -              |       |
| Retained  earnings                                                                                                 |   | 107,303            |    | 98,372         |       |
| Total  shareholders’ equity                                                                                   |   | 173,761            |    | 164,681        |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                   |   | $                  | 227,031 |           | $          | 223,734 |   |

 

The accompanying notes to the interim consolidated financial statements are an integral part of theseconsolidated balance sheets.

 

MESABA HOLDINGS, INC.

CONSOLIDATED STATEMENTSOF OPERATIONS

(Unaudited)

(in thousands, except per share information)

 
|                                      |   | **Three Months Ended** |    | **Six Months Ended** |   |
|-------------------------------------------|--------|------------------------|---------|----------------------|--------|
|                                      |   | **September 30,**      |    | **September 30,**    |   |
|                                      |   | **2001**               |    | **2000**             |   | **2001** |   | **2000** |   |
| OPERATING  REVENUES:                      |   |                   |    |                 |   |   |   |   |   |
| Passenger                                 |   | $                      | 105,631 |                 | $      | 112,444 |   | $ | 217,935 |   | $ | 218,561 |   |
| Other                                     |   | 3,204                  |    | 2,626                |   | 6,126 |   | 4,335 |   |
| Total  operating revenues                 |   | 108,835                |    | 115,070              |   | 224,061 |   | 222,896 |   |
|                                      |   |                   |    |                 |   |   |   |   |   |
| OPERATING  EXPENSES:                      |   |                   |    |                 |   |   |   |   |   |
| Wages  and benefits                       |   | 32,001                 |    | 28,805               |   | 63,474 |   | 54,627 |   |
| Aircraft  fuel costs                      |   | 6,313                  |    | 6,635                |   | 12,989 |   | 13,199 |   |
| Aircraft  maintenance costs               |   | 18,392                 |    | 19,310               |   | 38,951 |   | 38,291 |   |
| Aircraft  rents                           |   | 25,575                 |    | 25,192               |   | 51,186 |   | 49,907 |   |
| Landing  fees                             |   | 1,622                  |    | 1,756                |   | 3,293 |   | 3,480 |   |
| Insurance  and taxes                      |   | 1,561                  |    | 1,560                |   | 3,168 |   | 3,086 |   |
| Depreciation  and amortization            |   | 5,008                  |    | 4,303                |   | 9,927 |   | 8,394 |   |
| Administrative  and other costs           |   | 15,422                 |    | 14,098               |   | 31,346 |   | 26,776 |   |
| Total  operating expenses                 |   | 105,894                |    | 101,659              |   | 214,334 |   | 197,760 |   |
|                                      |   |                   |    |                 |   |   |   |   |   |
| Operating  income                         |   | 2,941                  |    | 13,411               |   | 9,727 |   | 25,136 |   |
|                                      |   |                   |    |                 |   |   |   |   |   |
| NONOPERATING  INCOME (EXPENSE):           |   |                   |    |                 |   |   |   |   |   |
| Interest  expense                         |   | -                      |    | (93                  | )      | (53 | ) | (189 | ) |
| Other,  net                               |   | 6,115                  |    | 1,714                |   | 7,360 |   | 3,266 |   |
| Other  income, net                        |   | 6,115                  |    | 1,621                |   | 7,307 |   | 3,077 |   |
|                                      |   |                   |    |                 |   |   |   |   |   |
| Income  before provision for income taxes |   | 9,056                  |    | 15,032               |   | 17,034 |   | 28,213 |   |
|                                      |   |                   |    |                 |   |   |   |   |   |
| PROVISION  FOR INCOME TAXES               |   | 4,796                  |    | 6,232                |   | 8,103 |   | 11,695 |   |
| NET  INCOME                               |   | $                      | 4,260   |                 | $      | 8,800 |   | $ | 8,931 |   | $ | 16,518 |   |
|                                      |   |                   |    |                 |   |   |   |   |   |
| NET  INCOME PER SHARE:                    |   |                   |    |                 |   |   |   |   |   |
| Earnings  per share – Basic          |   | $                      | 0.21    |                 | $      | 0.43 |   | $ | 0.44 |   | $ | 0.81 |   |
| Earnings  per share – Diluted        |   | $                      | 0.21    |                 | $      | 0.43 |   | $ | 0.44 |   | $ | 0.79 |   |
|                                      |   |                   |    |                 |   |   |   |   |   |
| WEIGHTED  AVERAGE SHARES OUTSTANDING:     |   |                   |    |                 |   |   |   |   |   |
| Basic                                     |   | 20,288                 |    | 20,278               |   | 20,288 |   | 20,273 |   |
| Diluted                                   |   | 20,293                 |    | 20,692               |   | 20,293 |   | 20,824 |   |

 

The accompanyingnotes to the interim consolidated financial statements are an integral part ofthese consolidated financial statements.

 

MESABA HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 
|                                                                               |   | **Six Months Ended** |   |
|------------------------------------------------------------------------------------|--------|----------------------|--------|
|                                                                               |   | **September 30,**    |   |
|                                                                               |   | **2001**             |   | **2000** |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                             |   |                 |   |   |   |
| Net  income                                                                        |   | $                    | 8,931  |   | $ | 16,518 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |                 |   |   |   |
| Depreciation  and amortization                                                     |   | 9,927                |   | 8,394 |   |
| Amortization  of deferred credits                                                  |   | (953                 | )      | (2,037 | ) |
| Changes  in current operating items:                                               |   |                 |   |   |   |
| Accounts  receivable, net                                                          |   | 1,529                |   | (2,947 | ) |
| Inventories                                                                        |   | (1,926               | )      | 309 |   |
| Prepaid  expenses and deposits                                                     |   | 498                  |   | 70 |   |
| Accounts  payable and other                                                        |   | (3,023               | )      | 143 |   |
| Net  cash provided by operating activities                                         |   | 14,983               |   | 20,450 |   |
|                                                                               |   |                 |   |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                             |   |                 |   |   |   |
| Purchases  of short-term investments available for sale                            |   | (46,936              | )      | - |   |
| Sales  of short-term investments available for sale                                |   | 54,890               |   | - |   |
| Purchases  of property and equipment, net                                          |   | (9,506               | )      | (8,236 | ) |
| Net  cash used in investing activities                                             |   | (1,552               | )      | (8,236 | ) |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                             |   |                 |   |   |   |
| Issuance  of common stock                                                          |   | -                    |   | 86 |   |
| Repayment  of long-term obligations                                                |   | (57                  | )      | (209 | ) |
| Net  cash used in financing activities                                             |   | (57                  | )      | (123 | ) |
|                                                                               |   |                 |   |   |   |
| NET  INCREASE  IN CASH AND CASH EQUIVALENTS                                   |   | 13,374               |   | 12,091 |   |
| CASH  AND CASH EQUIVALENTS:                                                        |   |                 |   |   |   |
| Beginning  of period                                                               |   | 18,916               |   | 100,172 |   |
| End  of period                                                                     |   | $                    | 32,290 |   | $ | 112,263 |   |
| SUPPLEMENTARY  CASH FLOW INFORMATION:                     |   |                 |   |   |   |
| Cash  paid during period for:                                                      |   |                 |   |   |   |
| Interest                                                                           |   | $                    | 57     |   | $ | 209 |   |
| Income  taxes                                                                      |   | $                    | 9,533  |   | $ | 11,604 |   |

 

The accompanyingnotes to the interim consolidated financial statements are an integral part ofthese consolidated financial statements.

 

MESABA HOLDINGS, INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

# (Unaudited)

 

The consolidatedfinancial statements included herein have been prepared by Mesaba Holdings,Inc. (the "Company"), without audit, pursuant to the rules andregulations of the Securities and Exchange Commission.  The information furnished in theconsolidated financial statements includes normal recurring adjustments andreflects all adjustments, which are, in the opinion of management, necessaryfor a fair presentation of such consolidated financial statements.  The Company's business is seasonal and,accordingly, interim results are not indicative of results for a fullyear.  Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith generally accepted accounting principles have been condensed or omittedpursuant to such rules and regulations, although the Company believes that thedisclosures are adequate to make the information presented not misleading.  It is suggested that these consolidatedfinancial statements be read in conjunction with the consolidated financialstatements for the year ended March 31, 2001, and the notes thereto, includedin the Company's Annual Report or Form 10-K filed with the Securities andExchange Commission.

 

1.      Basis of Presentation

 

The consolidatedfinancial statements include the accounts of the Company and its subsidiary,Mesaba Aviation, Inc. ("Mesaba").  All significant intercompany balances have been eliminated inconsolidation.

 

2.      Agreements with Northwest 

 

The Company operates aregional air carrier providing scheduled turbo-prop passenger and air freightservice as Mesaba Airlines/Northwest Airlink under an Airline ServicesAgreement (the “Airlink Agreement”) with Northwest Airlines, Inc. (“Northwest”)to 77 cities in the Upper Midwest and Canada from Northwest’s hub airports,Minneapolis/St. Paul and Detroit.   TheAirlink Agreement provides for exclusive turbo-prop rights to designatedservice areas and extends through June 30, 2007. Either Northwest or Mesaba has the right to terminate the AirlinkAgreement without cause upon 365 days notice.

 

Mesaba also operates 36Avro RJ85 (“RJ85”) regional jets for Northwest under a separate Regional JetServices Agreement (the “Jet Agreement”), which extends through May 1, 2007.Northwest has the right to terminate the Jet Agreement without cause upon 180days written notice, such notice not to be given before May 1, 2003.  As ofSeptember 30, 2001, Mesaba currently serves 46 cities with its fleet of RJ85aircraft.  The aircraft aresubleased from Northwest and are operated as Northwest Jet Airlink from theMinneapolis/St. Paul, Detroit and Memphis hubs.

 

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 agreement with Northwest also permitsMesaba 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 the colors of Northwest Airlinesand the turbo-prop aircraft are painted in a distinctive "NorthwestAirlink" configuration, with a Northwest Airlines logo in addition toMesaba's name.

 

Mesaba, through the agreements, receives ticketing and certain check–in,baggage, freight and aircraft handling services from Northwest at certainairports.  In addition, Mesaba receivesits computerized reservations services from Northwest.  Northwest also performs all marketingschedules, yield management and pricing services for Mesaba's flights.

 

Mesaba believes that its competitive position is enhanced as a result ofits marketing and other agreements with Northwest, particularly through theability of Mesaba to offer its passengers coordinated flight schedules to thedestinations served by Northwest.  Lossof Mesaba's affiliation with Northwest or Northwest's failure to materiallyperform under the Airlink or Jet Agreement for any reason would have a materialadverse effect on the Company's operations and financial position.

 

3.      Restructuring Charge 

 

During the second fiscal quarter 2002, the Company initiated areduction in personnel as a result of the impact of the terrorist attacks ofSeptember 11, 2001. The Company recorded within other operating expenses in theaccompanying consolidated statements of operations for the fiscal periods endedSeptember 30, 2001 a one-time pre-tax charge of approximately $1.1 million tocover the expected severance and related costs.  The reduction in personnel was completed by September 30, 2001and affected 382 individuals in all areas of the Company.  As of September 30, 2001, no amounts havebeen paid regarding the one-time charge. However, the Company does expect the $1.1 million will be paid over thenext twelve months.

 

4.      Nonoperating Gain

 

On Sept. 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.  The Company has received one installment ofthe federal grant of approximately $6.6 million and has recognizedapproximately $5.3 million as “Nonoperating income” in the consolidatedstatements of operations in accordance with Department of Transportation andFinancial Accounting Standards Board (“FASB”) guidance.  The remaining federal grant proceeds of $1.3million is recorded within “Accrued liabilities – Other” in the consolidatedbalance sheets as of September 30, 2001.

 

5.      Earnings Per Share

 

Basic earnings per common share is computed by dividing net income bythe weighted average number of shares of common stock outstanding during theperiod.  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 5,526 and 4,762 were excluded from thecomputation of diluted earnings per share for the years ended September 30,2001 and 2000, respectively.  Thefollowing table reconciles the number of shares utilized in the earnings pershare calculations (in thousands, except per share information):

 
|                                                                                                         |   | **Three Months Ended** |   | **Six Months Ended** |   |
|--------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|----------------------|--------|
|                                                                                                         |   | **September 30,**      |   | **September 30,**    |   |
|                                                                                                         |   | **2001**               |   | **2000**             |   | **2001** |   | **2000** |   |
| Net  Income                                                                                                  |   | $                      | 4,260  |                 | $      | 8,800 |   | $ | 8,931 |   | $ | 16,518 |   |
| For Earnings Per  Common Share – Basic:                                                                 |   | 20,288                 |   | 20,278               |   | 20,288 |   | 20,273 |   |
| Weighted average  number of issued shares outstanding                                                        |   |                   |   |                 |   |   |   |   |   |
| Effect of  dilutive securities                                                                               |   |                   |   |                 |   |   |   |   |   |
| Computed shares  outstanding under the Company’s stock option plan utilizing the treasury  stock method |   | 5                      |   | 62                   |   | 5 |   | 102 |   |
| Computed  shares outstanding under warrants issued utilizing the treasury stock method                       |   | -                      |   | 352                  |   | - |   | 449 |   |
| For earnings per  Common Share – Diluted:                                                               |   |                   |   |                 |   |   |   |   |   |
| Weighted  average common shares and common share equivalents outstanding                                     |   | 20,293                 |   | 20,692               |   | 20,293 |   | 20,824 |   |
| Earnings  Per Share – Basic                                                                             |   | $                      | 0.21   |                 | $      | 0.43 |   | $ | 0.44 |   | $ | 0.81 |   |
| Earnings  Per Share – Diluted                                                                           |   | $                      | 0.21   |                 | $      | 0.43 |   | $ | 0.44 |   | $ | 0.79 |   |

 

6.     ComprehensiveIncome

 

The following table presents the calculation of comprehensiveincome.  Comprehensive income has noimpact on net income.  The components ofcomprehensive income are as follows (in thousands):

 
|                                                            |   | **Three Months Ended** |   | **Six Months Ended** |   |
|-----------------------------------------------------------------|--------|------------------------|--------|----------------------|--------|
|                                                            |   | **September 30,**      |   | **September 30,**    |   |
|                                                            |   | **2001**               |   | **2000**             |   | **2001** |   | **2000** |   |
|                                                            |   |                   |   |                 |   |   |   |   |   |
| Net Income                                                      |   | $                      | 4,260  |                 | $      | 8,800 |   | $ | 8,931 |   | $ | 16,518 |   |
| Unrealized  gains of available for sale investments, net of tax |   | 148                    |   | -                    |   | 148 |   | - |   |
| Total  comprehensive income                                     |   | $                      | 4,408  |                 | $      | 8,800 |   | $ | 9,079 |   | $ | 16,518 |   |

 

7.     Lease Reclassification

 

During June 2001, Mesaba entered into an agreement with theMetropolitan Airports Commission (the “MAC”) to terminate the Minneapolis/St.Paul maintenance hangar and general office leases on January 1, 2003, toaccommodate planned runway construction. In October 2001, Mesaba received a notice from the MAC informing theCompany that the lease termination date had been delayed to June 1, 2003.  Mesaba will receive an early leasetermination fee of $1,966 at that time. Due to the lease termination agreement, the lease was reclassified fromcapital to an operating lease in the first quarter of fiscal 2002.

 

8.     Effect of New Accounting Pronouncements

 

On June 1, 2001, the FASBissued SFAS No. 141, “Business Combinations”. SFAS No. 141 requires all business combinations to be accounted for bythe purchase method of accounting after July 1, 2001.  Since the Company does not have any pending businesscombinations, the adoption of SFAS No. 141 did not have an impact on theCompany’s results of operations, financial position or cash flows.

 

On June 1, 2001, the FASBissued 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 cash flows.

 

4.     MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Item 2.

 

Overview. On September 11, 2001, theFederal Aviation Administration (“FAA”) suspended all commercial airlineflights due to the terrorist attacks. From September 11, 2001, until theCompany resumed operations on September 14, the Company cancelled approximately2,500 flights. Although flight operations were suspended, the Company continuedto incur most of its normal operating expenses during this period. Totaloperating losses of $2.4 million were incurred during the time operations weresuspended. Once operations were resumed, the Company continued to incuroperating losses through the end of the quarter of $1.8 million due todepressed passenger traffic and revenues. 

 

The second fiscal quarterof 2002 results also include $1.1 million for restructuring costs arising fromthe September 11 attacks. The restructuring charge primarily covered severancecosts associated with the Company’s reduction in personnel. 

 

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 and Departmentof Transportation instructions) incurred from September 11, 2001, throughDecember 31, 2001, and resulting from the attacks.  The Company has received one installment of the federal grant of$6.6 million and has recognized $5.3 million as “Nonoperating income” in theconsolidated statements of operations in accordance with Department ofTransportation and Financial Accounting Standards Board (“FASB”) guidance.  The remaining federal grant proceeds of $1.3million is recorded within “Accrued liabilities – Other” in the consolidatedbalance sheets as of September 30, 2001. Additional installments of up to an additional $6.6 million may beavailable to the Company depending on future operating results and the Company’scompliance with the Stabilization Act and related government requirements.  Additional amounts recognized by the Companywithin the consolidated statements of operations may depend on whether or notthe Company can demonstrate that “direct and incremental losses” were incurredby the Company in the third fiscal quarter as a result of the attacks.

 

Since September 14, the Company’s flight activity has been reduced toapproximately 80% of pre-September 11 operations.  As a result and due to the seasonal nature of the Company’soperations, the Company anticipates a corresponding reduction in operatingrevenues for the third fiscal quarter 2002. At this time, the Company is unable to project operating revenues beyondDecember 31, 2001, due to the general level of uncertainty in the airline industry.

 

Due to the events of September 11, 2001, the Company initiated variouscost reduction programs to reduce the Company’s expense levels commensuratewith the reduced operating revenues. Management of the Company believes the 20%reduction will be accomplished several ways, including completion of theannounced personnel reductions, vendor negotiations and the elimination ofcertain discretionary expenditures. 

 

The Company expects its insurance and security costs to increase in thethird fiscal quarter of 2002 and future quarters as a result of the events ofSeptember 11, 2001.  Based on initialguidance from external vendors, the Company expects its insurance costs to morethan double from current rates and its security costs to continue to increaseas new security requirements are mandated by the FAA and other governmentbodies.

 

As a result of the expected overall decreases in operating revenues andexpenses and the potential utilization of additional federal government grants,management expects the Company to achieve approximately break-even results inthe third fiscal quarter of 2002.

 

Results of Operations forthe Three Months Ended September 30, 2001 and 2000 

(As used herein, “unitcost” means operating cost per available seat mile.  Dollars and shares outstanding are expressed in thousands.)

 

Earnings Summary.The Company reported net income of $4,260 or $0.21 diluted earnings per sharefor the three months ended September 30, 2001, compared to $8,800 or $0.43diluted earnings per share in the same period ended September 30, 2000.  Diluted weighted average common shares andcommon share equivalents outstanding decreased to 20,293 from 20,692.

 

Operating Revenues.  Total operating revenues decreased 5.4% inthe second quarter of fiscal 2002 to $108,835 from $115,070 in the year earlierquarter, and revenue passenger miles decreased 11.7% to 420,335 from475,983.  Passenger revenue peravailable seat mile (“RASM”) increased to $0.150 from $0.148 in the previousyear’s second quarter.  Mesaba's averagepassenger load factor (percentage of seats filled on each aircraft on average =RPMs / ASMs ) was 59.5% in the second quarter compared to 62.6% during the sameperiod a year ago.  The decrease intraffic is primarily due to the September 11 terrorist attacks andcorresponding suspension of all commercial air traffic for the equivalent ofthree days and the reduced flight activity for the remainder of September.Other revenue increased 22.0% due to increased regional jet ground handlingactivities at the Minneapolis/St. Paul airport.

 

|                                       |   | **Three months ended September 30,** |   |
|--------------------------------------------|--------|--------------------------------------|--------|
| **Operating  statistics**                  |   | **2001**                             |   | **2000** |   |
| Revenue  passengers carried                |   | 1,547,835                            |   | 1,691,545 |   |
| Revenue  passenger miles (000)             |   | 420,335                              |   | 475,983 |   |
| Available  seat miles (000)                |   | 705,978                              |   | 760,950 |   |
| Passenger  load factor                     |   | 59.5                                 | %      | 62.6 | % |
| Passenger  revenue per available seat mile |   | $                                    | 0.150  |   | $ | 0.148 |   |
| Departures                                 |   | 64,295                               |   | 69,409 |   |
| Aircraft  in service                       |   | 109                                  |   | 109 |   |
|                                            |        |                                      |        |  |  |  |  |

 

Operating Expenses.  Total operating expenses increased 4.2% to$105,894 from $101,659 in the prior year's second quarter.  Mesaba’s unit cost increased 11.2% to $0.149from $0.134.  Available seat milesdecreased to 705,978 in the second quarter of fiscal 2002 from 760,950 in theyear earlier quarter. The decrease in ASMsprimarily resulted from the events of September 11.  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 initiative, increases in pilot hiring and trainingexpenses prior to September 11, and wages associated with the RJ85 groundhandling activities at the Minneapolis/St. Paul airport.

 

| **Operating  Costs Per**            |   | **Three months ended September 30,** |         |
|-------------------------------------|--------|--------------------------------------|--------------|
| **Available Seat Mile (Unit Cost)** |   | **2001**                             |         | **2000** |   |
| Wages  and benefits                 |   | 4.5                                  | ¢  | 3.8 | ¢  |
| Aircraft  fuel costs                |   | 0.9                                  |         | 0.9 |   |
| Aircraft  maintenance costs         |   | 2.6                                  |         | 2.5 |   |
| Aircraft  rents                     |   | 3.6                                  |         | 3.3 |   |
| Landing  fees                       |   | 0.2                                  |         | 0.2 |   |
| Insurance  and taxes                |   | 0.2                                  |         | 0.2 |   |
| Depreciation  and amortization      |   | 0.7                                  |         | 0.6 |   |
| Administrative  and other costs     |   | 2.2                                  |         | 1.9 |   |
| Total                               |   | 14.9                                 | ¢       | 13.4 | ¢  |

 

Wages and benefitsincreased 11.1% to $32,001 in the second quarter of fiscal 2002 from $28,805 inthe second quarter of fiscal 2001.  Unitcost increased 18.4% to 4.5 cents from 3.8 cents.  The majority of the increaseis a result of increased pilot training costs, health care costs and additionalground handling activities for the RJ85 at the Minneapolis/St. Paul airport.

 

Fuel costs decreased 4.9%to $6,313 in this year's second quarter compared to $6,635 in last year'ssecond quarter. The change is primarily attributable to the offsetting impactof reduced flight activity after September 11 and an increase in fuelconsumption by the turbo-prop aircraft when compared to one year ago.  Provisions of the Airlink Agreement withNorthwest protect Mesaba from changes in fuel prices. Mesaba’s actual cost offuel, including taxes and pumping fees, was 83.5 cents per gallon both in thesecond quarter and a year ago.  Unitcost for fuel was unchanged at 0.9 cents. Northwest provides fuel for the jet operation at its expense.

 

Aircraft maintenancecosts, excluding wages and benefits, decreased 4.8% to $18,392 in the secondquarter of fiscal 2002 from $19,310 in the second quarter of fiscal 2001. Thisdecrease was primarily attributable to the offsetting impact of decreases infixed rate service contracts and an increase in rotable repair costs due to theaging of the fleet.  Unit cost for aircraft maintenanceincreased 4.0% to 2.6 cents from 2.5 cents.

 

Aircraft rents increased1.5% to $25,575 in the second quarter of fiscal 2002 from $25,192 in the firstquarter of fiscal 2001.  Unit cost for aircraft rents increased 9.1% dueto the fixed nature of these operating costs in relation to decreased flightactivity.

 

Landing fees decreased7.6% to $1,622 in the second quarter of fiscal 2002 compared to $1,756 for thesecond quarter of fiscal 2001.  Thedecrease is attributable to a decrease in flight activity and fewer turbo-propdepartures when compared to a year ago offset by higher landing fee ratescharged by airports.  Unit cost forlanding fees remained unchanged at 0.2 cents. Northwest provides landing fees for the jet operation at its expense.

 

Insurance and taxesremain relatively unchanged between years due to the fixed nature of the cost. Unit cost for insurance and taxes remainedunchanged at 0.2 cents.

 

Depreciation andamortization increased 16.4% to $5,008 in the second quarter of fiscal 2002compared to $4,303 in the second quarter of fiscal 2001.  The higher level of depreciation andamortization resulted from the acquisition of spare parts to support theaircraft. In addition, the Company paid contract rights fees in the form ofstock purchase warrants issued to Northwest in connection with amendments tothe Jet Agreement, which increased the number of aircraft to be flown by Mesabafrom 12 to 36. These fees are being amortized on a straight-line basis over theremaining term of the Jet Agreement. Unitcost for depreciation and amortization increased 16.7% to 0.7 cents from 0.6cents.

 

Administrative and othercosts increased 9.4% to $15,422 in the second quarter of fiscal 2002 comparedto $14,098 in the second quarter of fiscal 2001. The significant change in year over year costs was due to the $1.1million restructuring charge and increases in pilot hiring and trainingexpenses.  Unit cost for administrativeand other costs increased 15.8% to 2.2 cents from 1.9 cents.

 

Operating Income.  Operating income totaled $2,941 in thesecond quarter, a decrease of 78.1% from $13,411 a year ago.  Mesaba’s operating margin decreased to 2.7%from 11.7% in the prior year's second quarter.

 

Nonoperating Income.  Nonoperating income increased to $6,115 inthe second quarter from $1,621 in the prior year's second quarter as a result ofMesaba’s recognition of the $5.3 million federal grant which was offset bylower interest income due to lower interest rates and lower average levels ofcash and cash equivalents and short-term investments. 

 

Provision for IncomeTaxes.  The Company'seffective tax rate was 53% in the second quarter of fiscal 2002 and 41.5% inthe prior years second quarter 2001. Mesaba adjusted its effective tax rate in the second quarter of fiscal2002 primarily due to a revision in forecasted operating results for theremainder of fiscal year 2002. 

 

### **Resultsof Operations for the Six Months Ended September 30, 2001 and 2000**

 

Earnings Summary.The Company reported net income of $8,931 or $0.44 diluted earnings per sharefor the six months ended September 30, 2001, compared to $16,518 or $0.79diluted earnings per share in the same period ended September 30, 2000.  Weighted average common shares and commonshare equivalents outstanding decreased to 20,293 from 20,824.

 

Operating Revenues.  Total operating revenues increased 0.5% inthe first half of fiscal 2002 to $224,061 from $222,896 in the year earlierperiod, and revenue passenger miles decreased 3.0% to 888,207 from916,070.  Passenger revenue peravailable seat mile (“RASM”) increased to $0.150 from $0.146 in the same perioda year ago.  Mesaba's average passengerload factor (percentage of seats filled on each aircraft on average = RPMs /ASMs ) was 61.1% for the first six months of fiscal year 2002 compared to 61.4%during the same period a year ago. The decrease in revenue passenger miles isdirectly attributable to the impact of the events of September 11.   Other revenue increased 41.3% due toincreased RJ85 ground handling activities at the Minneapolis/St. Paul airport.

 

|                                       |   | **Six  months ended  September 30,** |   |
|--------------------------------------------|--------|------------------------------------------------|--------|
| **Operating statistics**                   |   | **2001**                                       |   | **2000** |   |
| Revenue  passengers carried                |   | 3,255,250                                      |   | 3,249,046 |   |
| Revenue  passenger miles (000)             |   | 888,207                                        |   | 916,070 |   |
| Available  seat miles (000)                |   | 1,453,692                                      |   | 1,492,901 |   |
| Passenger  load factor                     |   | 61.1                                           | %      | 61.4 | % |
| Passenger  revenue per available seat mile |   | $                                              | 0.150  |   | $ | 0.146 |   |
| Departures                                 |   | 132,544                                        |   | 137,286 |   |
| Aircraft  in service                       |   | 109                                            |   | 109 |   |
|                                            |        |                                                |        |  |  |  |  |

 

Operating Expenses.  Total operating expenses increased 8.4% to$214,334 from $197,760 in the prior year's first six months.  Mesaba’s unit cost increased 11.4% to $0.147from $0.132.  Available seat milesdecreased to 1,453,692 in the first six months of fiscal 2002 from 1,492,901 inthe year earlier period. The decrease inASMs resulted from the events of September 11 offset by the impact of three additionalRJ85 aircraft that were delivered during the first quarter of fiscal 2001. Thesignificant change in unit cost year over year was due to the relationship offixed operating costs to reduced flight activity, the impact of Mesaba’srestructuring initiative, increases in pilot hiring and training expenses, andwages associated with the RJ85 ground handling activities at theMinneapolis/St. Paul airport.

 

| **Operating  Costs Per**            |   | **Six  months ended September 30,** |         |
|-------------------------------------|--------|------------------------------------------|--------------|
| **Available Seat Mile (Unit Cost)** |   | **2001**                                 |         | **2000** |   |
| Wages  and benefits                 |   | 4.4                                      | ¢       | 3.7 | ¢  |
| Aircraft  fuel costs                |   | 0.9                                      |         | 0.9 |   |
| Aircraft  maintenance costs         |   | 2.6                                      |         | 2.5 |   |
| Aircraft  rents                     |   | 3.5                                      |         | 3.3 |   |
| Landing  fees                       |   | 0.2                                      |         | 0.2 |   |
| Insurance  and taxes                |   | 0.2                                      |         | 0.2 |   |
| Depreciation  and amortization      |   | 0.7                                      |         | 0.6 |   |
| Administrative  and other costs     |   | 2.2                                      |         | 1.8 |   |
| Total                               |   | 14.7                                     | ¢  | 13.2 | ¢ |

 

Wages and benefitsincreased 16.2% to $63,474 for the first six months of fiscal 2002 from $54,627for the first six months of fiscal 2001. Unit cost increased 18.9% to 4.4 cents from 3.7 cents. The majority of the increase is a result ofreduced flight activity and higher costs of flight crews due to increased pilottraining and additional ground handling activities for the RJ85 at theMinneapolis/St. Paul airport.

 

Aircraft fuel costsdecreased 1.6% to $12,989 for the first six months of fiscal 2002 from $13,199for the first six months of fiscal 2001. The change is primarily attributableto the offsetting impact of reduced flight activity after September 11 and anincrease in fuel consumption by the turbo-prop aircraft when compared to oneyear ago.  Provisions of the AirlinkAgreement with Northwest protect Mesaba from changes in fuel prices. Mesaba’sactual cost of fuel, including taxes and pumping fees, was 83.5 cents pergallon for the six months ended September 30, 2001 and for the same period ayear ago.  Unit cost for fuel wasunchanged at 0.9 cents.  Northwestprovides fuel for the jet operation at its expense.

 

Aircraft maintenancecosts, excluding wages and benefits, increased 1.7% to $38,951 for the firstsix months of fiscal 2002 from $38,291 for the first six months of fiscal 2001.This increase was primarily attributable to the offsetting impact of decreasesin fixed rate service contracts and an increase in rotable repair costs due tothe aging of the fleet.  Unit cost for aircraft maintenanceincreased 4.0% to 2.6 cents from 2.5 cents.

 

Aircraft rents increased2.6% to $51,186 for the first six months of fiscal 2002 from $49,907 for thefirst six months of fiscal 2001.  Thisincrease is primarily attributable to the full impact of the three additionalRJ85 aircraft that were delivered duringthe first quarter of fiscal 2001.Unitcost for aircraft rents increased 6.1% due to the fixed nature of theseoperating costs in relation to decreased flight activity.

 

Landing fees decreased5.4% to $3,293 for the first six months of fiscal 2002 from $3,480 for thefirst six months of fiscal 2001. The change is attributable to a decrease inflight activity and fewer turbo-prop departures when compared to a year agooffset by higher landing fee rates charged by airports.  Unit cost for landing fees remainedunchanged at 0.2 cents.  Northwestprovides landing fees for the jet operation at its expense.

 

Insurance and taxesincreased 2.7% to $3,168 for the first six months of fiscal 2002 from $3,086for the first six months of fiscal 2001. The increase is due to higher insurance premiums between years.  Unitcost for insurance and taxes remained unchanged at 0.2 cents.

 

Depreciation andamortization increased 18.3% to $9,927 for the first six months of fiscal 2002from $8,394 for the first six months of fiscal 2001.  The higher level of depreciation and amortization resulted fromthe acquisition of spare parts to support the aircraft. The Company paidcontract rights fees in the form of stock purchase warrants issued to Northwestin connection with amendments to the Jet Agreement, which increased the numberof aircraft to be flown by Mesaba from 12 to 36. These fees are being amortizedon a straight-line basis over the remaining term of the Jet Agreement. Unit cost for depreciation and amortizationincreased 16.7% to 0.7 cents from 0.6 cents.

 

Administrative and othercosts increased 17.1% to $31,346 for the first six months of fiscal 2002 from$26,776 for the first six months of fiscal 2001. The significant change in year over year costs was due to the $1.1million restructuring charge, increases in pilot hiring and training expensesand increases in crew travel expenses. Unit cost for administrative and other costs increased 22.2% to 2.2cents from 1.8 cents.

 

Operating Income.  Operating income totaled $9,727 for thefirst six months of fiscal 2002, a decrease of 61.3% from $25,136 a yearago.  Mesaba’s operating margindecreased to 4.3% from 11.2% in the prior year's first six months.

 

Nonoperating Income.  Nonoperating income increased to $7,307 forthe first six months of fiscal 2002 from $3,077 for the first six months offiscal 2001 as a result of Mesaba’s recognition of the $5.3 million federalgrant which was offset by lower interest income due to lower interest rates andlower average levels of cash and cash equivalents and short-term investments. 

 

Provision for IncomeTaxes.  The Company'sblended effective tax rate was 47.6% for the first six months of fiscal 2002 ascompared to 41.5% for the first six months of fiscal 2001. Mesaba adjusted itseffective tax rate in the second quarter of fiscal 2002 due to a revision inforecasted operating results for the remainder of fiscal year 2002.

 

Liquidity and CapitalResources

 

The Company's workingcapital increased to $118,667 with a current ratio of 3.7 at September 30, 2001compared to $110,174 and 3.4 at March 31, 2001.  Cash and cash equivalents increased by $13,374 to $32,290 at September30, 2001.  Net cash flows provided byoperating activities totaled **$**14,983 for the first six months of fiscal2002 compared to $20,450 for the first six months of fiscal 2001.  Net cash flows used for investing activitiestotaled **$**1,552forthe first six months of fiscal 2002 compared to $8,236 for the first six monthsof fiscal 2001.  Net cash flows used byfinancing activities totaled **$**57 for the first six months of fiscal 2002compared to $123 for the first six months of fiscal 2001. 

 

During the second fiscal quarter 2002, the Company initiated areduction in personnel as a result of the impact of the terrorist attacks ofSeptember 11, 2001.  The Companyrecorded within other operating expenses in the accompanying consolidatedstatements of operations for the fiscal periods ended September 30, 2001 aone-time pre-tax charge of approximately $1.1 million to cover the expectedseverance and related costs.  Thereduction in personnel was completed by September 30, 2001 and affected 382individuals in all areas of Mesaba.  Asof September 30, 2001, no amounts have been paid regarding the one-time charge.The cost of the personnel reduction is expected to be funded through acombination of cash from operations and available cash.  As a result of the personnel reduction andchanges to the Mesaba’s operating programs, we expect to realize a favorableannualized financial impact of approximately $5 million.

 

In an effort to align Mesaba’s operating expenses with its expectedreduced operating revenues, Mesaba has initiated several programs to reduce itsvariable operating expenses by a combined 20%. Management believes that the combination of completing the personnelreduction as noted above, vendor negotiations and the elimination ofdiscretionary expenditures along with any potential recognition of governmentgrant proceeds could enable Mesaba to achieve approximately break-evenoperating results for the third fiscal quarter. 

 

During June 2001, Mesaba entered into an agreement with theMetropolitan Airports Commission (the “MAC”) to terminate the Minneapolis/St.Paul maintenance hangar and general office leases on January 1, 2003, toaccommodate planned runway construction. In October 2001, Mesaba received anotice from the MAC informing the Company that the lease termination date hadbeen delayed to June 1, 2003.  Mesabawill receive an early lease termination fee of $1,966 at that time.  Due to the lease termination agreement, thelease was reclassified from a capital to an operating lease in the firstquarter of fiscal 2002.  Mesaba willrelocate its hangar facilities to the west side of the airport and is currentlyevaluating future lease options with the MAC.

 

As of September 2001,Mesaba’s fleet consisted of 109 aircraft covered under operating leases withremaining terms of three months to 15 years and aggregate monthly leasepayments of approximately $8.9 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. Mesaba leases all of its Saab 340 aircraft, either directly fromaircraft leasing companies or through subleases with Northwest under operatingleases with original terms up to 17.5 years. Mesaba leases its RJ85 aircraft from Northwest under operating leaseswith terms of up to 10 years.  Continuedfunding of the monthly minimum lease payments is ensured as long as the currentoperating contracts with Northwest are in effect.

 

During fiscal 2001, Mesaba committed to reconstruct its maintenancefacility located at the Detroit Metropolitan Airport.  The new facility reopened on June 1, 2001 and is approximately25% larger than the previous hangar, which experienced significant damage onMay 9, 2000 due to severe weather. Mesaba has paid **$**2.7 million as of September 30, 2001 forthe additional space that will not be covered by insurance proceeds. ** **The Company maintains property and businessinterruption insurance coverage on its facilities.  The Company has prepared a claim to recover certain lost revenuesand expenses under the business interruption policy related to the hangardamage.  No amounts have been recordedunder this claim as of September 30, 2001. Recovery amounts will be recorded upon resolution of the claim.

 

Approximately69% of the Company’s accountsreceivable balance as of September 30, 2001 are due from Northwest. Loss of theCompany's affiliation with Northwest or Northwest's failure to make timelypayment of amounts owed to the Company or to otherwise materially perform underthe Airlink or Jet Agreement for any reason would have a material adverseeffect on the Company's operations and financial results.  

 

The Company has historically relied upon cash balances and internallygenerated funds to support its working capital requirements.   Management believes that funds fromoperations will provide adequate resources for meeting non-aircraft capitalneeds in fiscal 2002. 

 

#### Effect of New Accounting Pronouncements

 

On June 1, 2001, the FASBissued SFAS No. 141, “Business Combinations”. SFAS No. 141 requires all business combinations to be accounted for bythe purchase method of accounting after July 1, 2001.  Since the Company does not have any pending businesscombinations, the adoption of SFAS No. 141 did not have an impact on theCompany’s results of operations, financial position or cash flows.

 

On June 1, 2001, the FASBissued 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.

 

Part II.

 

Item 1.    Legal Proceedings

 

                During July and August 2001, the Company obtainedorders dismissing without prejudice each of the five purported class actionlawsuits disclosed in previous SEC filings. The lawsuits, which were pending in Hennepin County District Court, hadbeen filed in November 2000 and named the Company, its current directors andNorthwest Airlines Corporation as defendants.

 

                The lawsuits arose out of the proposal by NorthwestAirlines Corporation to acquire all of the outstanding shares of the Company’scommon stock which Northwest did not own. The lawsuits alleged that the defendants breached their fiduciary dutiesto the Company’s shareholders in connection with the proposed transaction.  Each of the lawsuits sought to enjoin thedefendants from proceeding with the proposed transaction and, if thetransaction were completed, to rescind the transaction or to compensate theCompany’s shareholders for alleged damages. As of June 14, 2001, Northwest announced that it was no longer pursuingits offer to acquire the Company’s shares.

 

Item 4.    Submissions of Matters to a Vote ofSecurity Holders.

 

                The Company filed with the Securities and ExchangeCommission a definitive proxy statement dated July 27, 2001 in connection withits annual meeting of shareholders held on August 24, 2001.  At the annual meeting, the Company’sshareholders elected the following persons as Class One directors, each for aterm of three years:

 
|                  | **Votes For** |    | **Votes Withheld** |   |
|-----------------------|---------------|---------|--------------------|--------|
| Pierson M.  Grieve    | 17,479,007    | 262,673 |
| Raymond W. Zehr,  Jr. | 17,526,941    | 214,739 |

 

                The Company’sshareholders also ratified the appointment of Arthur Andersen LLP as theCompany’s independent public accountants for the fiscal year ending March 31,2002, with 17,522,198 votes “FOR,” 208,430 votes “against” and 11,052abstentions.  There were no brokersnon-votes.

 

Item 5. Other Information

 

The Company previously announced several actions as a result of theterrorist attacks on September 11, 2001.

 

On September 17, 2001, the Company announced the reduction of itsflight schedule by approximately 20 percent. On September 24, 2001, the Company announced that it expected to reducevariable expenses system-wide by 20 percent. 

 

On September 28, 2001,the Company announced additional details about the Company’s organizationalrestructuring.  The Company’s costsaving measures included cutting all discretionary expenses and payrollreductions. The payroll reductions involved a combination of voluntary andinvoluntary furloughs, reduction in full-time and part-time hours, layoffs,attrition and freezing open positions. The net cost savings of these actionsare equivalent to a payroll reduction of approximately 650 fulltimeemployees.  Initial reductions in staffbegan with a 30 percent reduction in officer and director level positions.There was a 16 percent reduction with the combined layoffs of salaried andadministrative personnel.  Thecombination of voluntary and involuntary furloughs resulted in approximately a10 percent reduction of the following employee groups combined: pilots,customer service agents, flight attendants, maintenance and dispatch.  Depending on years of service with theCompany or their furlough status, employees who were laid off or furloughedwere offered severance packages, continuation of health and flight benefits andoutplacement assistance. 

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)    Exhibits

 

3A.  Restated Articles of Incorporation.  Incorporated by reference to Exhibit 3.1 tothe Company's Form 10-Q for the quarter ended September 31, 1995.

 

3B.  Articles of Amendment to the Company’sArticles of Incorporation. Incorporated by reference to exhibit 3A to theCompany’s 10-Q for the quarter ended September 30, 1997.

 

3C.  Bylaws. Incorporated by reference to Exhibit 3.2 to the Form S-4, RegistrationNo. 333-22977.

 

4A.  Specimen certificate for shares of theCommon Stock of the Company. Incorporated by reference to Exhibit 4A to the Company's Form 10-K forthe year ended March 31, 1989.

 

4B.  Common Stock Purchase Warrant dated October25, 1996 issued to Northwest Airlines, Inc. Incorporated by reference to Exhibit 4A to the Company’s 10-Q for thequarter ended September 30, 1996.

 

4C.  Common Stock Purchase Warrant dated October17, 1997 issued to Northwest Airlines, Inc. Incorporated by reference to Exhibit 4A to the Company’s 10-Q for thequarter ended September 30, 1997.

 

9A.  Shareholder's Agreement regarding electionof representative of Northwest Aircraft Inc. to Board of Directors.  Incorporated by reference to Exhibit 9A toMesaba's Registration Statement on Form S-1, Registration No. 33-820.

 

10A. FAA Air CarrierOperating Certificate.  Incorporated byreference Exhibit 10A to the Company's Form 10-K for the year ended March 31,1989.

** **

10B. 1986 Stock OptionPlan (as Amended).  Incorporated byreference to Exhibit 10D to the Company's Form 10-K for the year ended March31, 1990.

 

10C. 1991 Director StockOption Plan.  Incorporated by referenceto Exhibit 10(i) to the Company's Registration Statement on Form S-8, RegistrationNo. 33-62386.

 

10D. CAB Part 298Registration.  Incorporated by referenceto Exhibit 10G to Mesaba's Form 10-K for the year ended March 31, 1987.

 

10E. Revolving Credit andTerm 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 forthe year ended March 31, 1989.

 

10F. Airline ServicesAgreement between Mesaba Aviation, Mesaba Holdings, Inc. and NorthwestAirlines, Inc. dated July 1, 1997 (certain portions of this agreement aresubject 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 thequarter ended September 30, 1997.

 

10G. Regional JetServices Agreement between Mesaba Holdings, Inc., Mesaba Aviation, Inc. andNorthwest Airlines, Inc., dated October 25, 1996 (certain provisions of thisagreement are subject to an order granting confidential treatment pursuant toRule 24b-2).  Incorporated by referenceto Exhibit 10A to the Company’s Form 10-Q for the quarter ended September 30,1996.

 

10H. Foreign Air CarrierOperating Certificates issued May 6, 1991 by the Canadian Department ofTransport.  Incorporated by reference toExhibit 10H to the Company's Form 10-K for the year ended March     31, 1991.

 

10I. Facility Lease andOperating Agreement dated April 18, 1988, between the Metropolitan AirportCommission and Mesaba Aviation, Inc. Incorporated by reference to Exhibit 10K to the Company's Form 10-K forthe year ended March 31, 1989. Incorporated by reference to Exhibit 10J to the Company’s Form 10-K forthe year ended March 31, 1997.

 

10J. Ninth Amendment toRevolving Credit and Term Loan Agreement and Amendment to Revolving Note betweenMesaba Aviation, Inc. and Norwest Bank Minnesota, National Association.  Incorporated by reference to Exhibit 10J tothe Company’s Form 10-K for the year ended March 31, 1997.

 

10K. Letter of Credit andReimbursement Agreement dated as of August 1, 1990 between Mesaba Aviation,Inc. and Norwest Bank Minnesota, National Association.  Incorporated by reference to Exhibit 10A tothe Company's Form 10-Q for the quarter ended September 30, 1990.

 

10L. Special FacilitiesLease dated as of August 1, 1990 between Charter County of Wayne, State ofMichigan and Mesaba Aviation, Inc. Incorporated by reference to Exhibit 10B tothe Company's Form 10-Q for the quarter ended September 30, 1990.

 

10M. Ground Lease datedAugust 1, 1990 between Charter County of Wayne, State of Michigan and MesabaAviation, Inc.  Incorporated byreference to Exhibit 10C to the Company's Form 10-Q for the quarter endedSeptember 30, 1990.

 

10N. CombinationLeasehold Mortgage, Assignment of Rents, Security Agreement and FixtureFinancing 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 Form10-Q for the quarter ended September 30, 1990.

 

10O. Letter Agreementdated December 24, 1992 relating to the repurchase of shares of Common Stockfrom Northwest Aircraft, Inc. Incorporated by reference to Exhibit 10EE to the Company's Form 10-K forthe year ended March 31, 1993.

 

10P. DOT Certificate ofPublic Convenience and Necessity dated October 26, 1992.  Incorporated by reference to Exhibit 10FF ofthe Company's Form 10-K for the year ended March 31, 1993.

 

10Q. Stock PurchaseAgreement between AirTran Corporation and Carl R. Pohlad dated as of October18, 1993.  Incorporated by reference toExhibit 10 of the Company's Form 8-K dated October 19, 1993.

 

10R. 1994 Stock OptionPlan (as amended July 1, 1997). Incorporated by reference to Exhibit 10B to the Company's Form 10-Q forthe quarter ended September 30, 1997.

 

10S. Agreement betweenAirTran Corporation, Mesaba Aviation, Inc., Northwest Aircraft, Inc., andNorthwest Airlines, Inc. dated May 18, 1995. Incorporated by reference to Exhibit 10A of the Company's Form 8-K asfiled May 18, 1995.

 

10T. PreliminaryAgreement between AirTran Corporation, Mesaba Aviation, Inc. and NorthwestAirlines, Inc. dated March 8, 1995. Incorporated by reference to Exhibit 10 of the Company's Form 8-Kasfiled March 8, 1995.

10U. Term Sheet Proposalfor the Acquisition of Saab 340 Aircraft by Mesaba Aviation, Inc. dated March7, 1996 (certain portions of this document have been deleted pursuant to anapplication for confidential treatment under Rule 24b-2).  Incorporated by reference to Exhibit 10U tothe Company’s Form 10-K/A for the year ended March 31, 1996.

 

10V. Letter Agreementregarding Saab 340B Plus Acquisition Financing dated March 7, 1996 (certainportions of this document have been deleted pursuant to an application forconfidential treatment under Rule 24b-2). Incorporated by reference to Exhibit10V to the Company’s Form 10-K/A for the year ended March 31, 1996.

 

10W. Letter Agreement ofApril 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 applicationfor confidential treatment under Rule 24b-2). Incorporated by reference to Exhibit 10W to the Company’s Form 10-K/Afor the year ended March 31, 1996.

 

10X. Letter Agreement ofOctober 25, 1996 relating to Regional Jet Services Agreement between MesabaAviation, Inc. and Northwest Airlines, Inc. (certain portions of this documenthave been deleted pursuant to an application for confidential treatment underRule 24b-2). Incorporated by reference to Exhibit 10A to the Company’s Form10-Q/A for the quarter ended September 30, 1996.

 

10Y. Amendment No. 1 toRegional Jet Services Agreement dated April 1, 1998 between Mesaba Holdings,Inc., Mesaba Aviation, Inc. and Northwest Airlines, Inc. (certain portions ofthis document have been deleted pursuant to an application for confidentialtreatment under Rule 24b-2). Incorporated by reference to Exhibit 10A to theCompany’s Form 10-Q for the quarter ended June 30, 1998.

 

10Z. Amendment No. 2 toRegional Jet Services Agreement dated June 2, 1998 between Mesaba Holdings,Inc., Mesaba Aviation, Inc. and Northwest Airlines, Inc. (certain portions ofthis document have been deleted pursuant to an application for confidentialtreatment under Rule 24b-2). Incorporated by reference to Exhibit 10B to theCompany’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 MesabaAviation, Inc.  Incorporated byreference to Exhibit 10AA to the Company’s Form 10-K for the year ended March31, 2000.

 

10BB.Ground Lease, datedas of September 1, 1999, between Kenton County Airport Board and MesabaAviation, Inc. Incorporated by reference to Exhibit 10BB to the Company’s Form10-K for the year ended March 31, 2000.

 

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

 

(b)   Reports onForm 8-K

 

The Company didnot file any reports on Form 8-K during the quarter ended September 30, 2001.

 

SIGNATURES

 

Pursuant to therequirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|   |              |   |                                          | MESABA HOLDINGS, INC. |
|--------|-------------------|--------|-----------------------------------------------|-----------------------|
|   |              |   |                                          |
| Date:  | November 13, 2001 | BY:    | /s/ Robert E. Weil                            |                  |
|   |              |   | Robert E. Weil                                |
|   |              |   | Vice President and  Chief Financial Officer   |
|   |              |   | (Principal Financial  and Accounting Officer) |
|        |                   |        |                                               |                       |  |