**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**x****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934.**

 

**For the quarterly period ended December 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.**

 

Incorporated under the laws ofMinnesota

 
| **41-1616499**                      |
|-------------------------------------|
| (I.R.S. Employer ID No.)            |
|                                |
| **Fifth Street Towers, Suite 1720** |
| **150 South Fifth Street**          |
| **Minneapolis, MN  55402**     |
| **(612) 333-0021**                  |

 

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 (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes ý                    No o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 
| **Class**                              |   | **Outstanding  as of February 1, 2003** |
|----------------------------------------|--------|-----------------------------------------|
| Common Stock Par value  $.01 per share |   | 20,320,641                              |

 

 

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SPECIAL NOTEREGARDING FORWARD-LOOKING STATEMENTS

 

Statements in this QuarterlyReport on Form 10-Q under the caption “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” as well as oral statements thatmay be made by the Company or by officers, directors or employees of theCompany acting on the Company’s behalf, that are not historical fact mayconstitute “forward looking statements” within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  Suchforward looking statements involve factors that could cause the actual resultsof the Company to differ materially from historical results or from any resultsexpressed or implied by such forward-looking statements.  The Company cautions the public not to placeundue reliance on forward-looking statements, which may be based on assumptionsand anticipated events that do not materialize.  Factors which could cause the Company’s actual results to differfrom forward-looking statements include material changes in the relationshipbetween the Company and Northwest Airlines; reductions or interruptions inNorthwest Airlines’ air service; reduced passenger and flight activity as aresult of the terrorist events of September 11, 2001; expenses associated withrestructuring the Company’s operations; a general slow-down in the UnitedStates economy; increased operating costs due to the events of September 11,2001; the impact of United States government programs on the Company’soperations; changes in regulations affecting the Company, including DOT and FAAregulations or directives affecting airworthiness of aircraft; the acquisitionand phase-in of aircraft; seasonal factors; labor relationships, includinglabor shortages, slow downs and/or work stoppages associated with the outcomeof contract negotiations between the Company and its collectively bargainedemployees; unanticipated costs resulting from the acquisition of Big SkyTransportation Co.; and reductions in passenger demand that could result if theUnited States goes to war.

 

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Part I. FINANCIAL INFORMATION

 

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

 

MESABAHOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCESHEETS

(In thousands,except share and per share information)

 
|                                             |   | **December  31,  2002** |    | **March 31,  2002** |   |
|--------------------------------------------------|--------|-------------------------|---------|---------------------|--------|
|                                             |   | **(Unaudited)**         |    |                |   |
| ASSETS                                           |   |                    |    |                |   |
|                                             |   |                    |    |                |   |
| CURRENT ASSETS:                                  |   |                    |    |                |   |
| Cash and cash equivalents                        |   | $                       | 61,758  |                | $      | 31,250 |   |
| Short term investments                           |   | 29,239                  |    | 67,774              |   |
| Accounts receivable, net                         |   | 40,292                  |    | 41,202              |   |
| Inventories, net                                 |   | 8,707                   |    | 7,600               |   |
| Prepaid expenses and deposits                    |   | 5,306                   |    | 5,094               |   |
| Deferred income taxes and other                  |   | 8,510                   |    | 9,701               |   |
| Total current assets                             |   | 153,812                 |    | 162,621             |   |
|                                             |   |                    |    |                |   |
| PROPERTY AND EQUIPMENT:                          |   |                    |    |                |   |
| Flight equipment                                 |   | 77,587                  |    | 74,686              |   |
| Other property and equipment                     |   | 37,598                  |    | 32,103              |   |
| Less: Accumulated depreciation and  amortization |   | (69,711                 | )       | (56,174             | )      |
| Net property and equipment                       |   | 45,474                  |    | 50,615              |   |
|                                             |   |                    |    |                |   |
| LONG TERM INVESTMENTS                            |   | 26,321                  |    | 4,068               |   |
| OTHER ASSETS, net                                |   | 13,002                  |    | 8,550               |   |
|                                             |   | $                       | 238,609 |                | $      | 225,854 |   |

 

The accompanying notes are anintegral part of these unaudited condensed consolidated financial statements.

 

3

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|                                                                                                  |   | **December  31,  2002** |    | **March 31,  2002** |   |
|-------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|---------------------|--------|
|                                                                                                  |   | **(Unaudited)**         |    |                |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                            |   |                    |    |                |   |
|                                                                                                  |   |                    |    |                |   |
| CURRENT LIABILITIES:                                                                                  |   |                    |    |                |   |
| Accounts payable                                                                                      |   | $                       | 14,425  |                | $      | 13,184 |   |
| Accrued liabilities:                                                                                  |   |                    |    |                |   |
| Payroll                                                                                               |   | 11,163                  |    | 9,537               |   |
| Maintenance                                                                                           |   | 17,743                  |    | 16,529              |   |
| Deferred income                                                                                       |   | 3,407                   |    | 2,485               |   |
| Other, primarily property and income taxes                                                            |   | 6,089                   |    | 3,046               |   |
|                                                                                                  |   |                    |    |                |   |
| Total current liabilities                                                                             |   | 52,827                  |    | 44,781              |   |
|                                                                                                  |   |                    |    |                |   |
| OTHER NONCURRENT LIABILITIES                                                                          |   | 6,717                   |    | 7,701               |   |
|                                                                                                  |   |                    |    |                |   |
| SHAREHOLDERS’ EQUITY:                                                                            |   |                    |    |                |   |
| Common stock, $.01 par value; 60,000,000  shares authorized, 20,320,641 shares issued and outstanding |   | 203                     |    | 203                 |   |
| Paid-in capital                                                                                       |   | 50,674                  |    | 50,508              |   |
| Warrants                                                                                              |   | 16,500                  |    | 16,500              |   |
| Accumulated other comprehensive income  (loss)                                                        |   | 276                     |    | (21                 | )      |
| Retained earnings                                                                                     |   | 111,412                 |    | 106,182             |   |
| Total shareholders’ equity                                                                       |   | 179,065                 |    | 173,372             |   |
|                                                                                                  |   | $                       | 238,609 |                | $      | 225,854 |   |

 

The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.

 

4

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MESABAHOLDINGS, INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

(In thousands,except per share information)

(Unaudited)

 
|                                             |   | **Three  Months Ended December 31,** |    |
|--------------------------------------------------|--------|--------------------------------------|---------|
|                                             |   | **2002**                             |    | **2001** |   |
| OPERATING REVENUES:                              |   |                                 |    |   |   |
| Passenger                                        |   | $                                    | 106,675 |   | $ | 86,752 |   |
| Other                                            |   | 6,146                                |    | 3,928 |   |
| Total operating revenues                         |   | 112,821                              |    | 90,680 |   |
|                                             |   |                                 |    |   |   |
| OPERATING EXPENSES:                              |   |                                 |    |   |   |
| Wages and benefits                               |   | 33,762                               |    | 30,021 |   |
| Aircraft fuel                                    |   | 5,068                                |    | 5,081 |   |
| Aircraft maintenance                             |   | 20,227                               |    | 16,443 |   |
| Aircraft rents                                   |   | 27,024                               |    | 25,566 |   |
| Landing fees                                     |   | 1,791                                |    | 2,047 |   |
| Insurance and taxes                              |   | 3,824                                |    | 3,771 |   |
| Depreciation and amortization                    |   | 4,608                                |    | 4,997 |   |
| Administrative and other                         |   | 15,122                               |    | 12,016 |   |
| Total operating expenses                         |   | 111,426                              |    | 99,942 |   |
|                                             |   |                                 |    |   |   |
| Operating income (loss)                          |   | 1,395                                |    | (9,262 | ) |
|                                             |   |                                 |    |   |   |
| NONOPERATING INCOME (EXPENSE):                   |   |                                 |    |   |   |
| Interest income                                  |   | 631                                  |    | 874 |   |
| Interest expense                                 |   | (28                                  | )       | — |   |
| Other                                            |   | (10                                  | )       | 7,254 |   |
| Other income, net                                |   | 593                                  |    | 8,128 |   |
|                                             |   |                                 |    |   |   |
| Income (loss) before provision for income  taxes |   | 1,988                                |    | (1,134 | ) |
|                                             |   |                                 |    |   |   |
| PROVISION FOR INCOME TAXES                       |   | 705                                  |    | 164 |   |
| NET INCOME (LOSS)                                |   | $                                    | 1,283   |   | $ | (1,298 | ) |
|                                             |   |                                 |    |   |   |
| NET INCOME (LOSS) PER SHARE:                     |   |                                 |    |   |   |
| Earnings (loss) per share – basic           |   | $                                    | 0.06    |   | $ | (0.06 | ) |
| Earnings (loss) per share – diluted         |   | $                                    | 0.06    |   | $ | (0.06 | ) |
|                                             |   |                                 |    |   |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING:             |   |                                 |    |   |   |
| Basic                                            |   | 20,315                               |    | 20,288 |   |
| Diluted                                          |   | 20,315                               |    | 20,288 |   |

 

Theaccompanying notes are an integral part of these unaudited condensedconsolidated financial statements.

 

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MESABAHOLDINGS, INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

(In thousands,except per share information)

(Unaudited)

 
|                                     |   | **Nine  Months Ended December 31,** |    |
|------------------------------------------|--------|-------------------------------------|---------|
|                                     |   | **2002**                            |    | **2001** |   |
| OPERATING REVENUES:                      |   |                                |    |   |   |
| Passenger                                |   | $                                   | 328,747 |   | $ | 304,687 |   |
| Other                                    |   | 16,063                              |    | 10,054 |   |
| Total operating revenues                 |   | 344,810                             |    | 314,741 |   |
|                                     |   |                                |    |   |   |
| OPERATING EXPENSES:                      |   |                                |    |   |   |
| Wages and benefits                       |   | 99,518                              |    | 93,495 |   |
| Aircraft fuel                            |   | 17,174                              |    | 18,070 |   |
| Aircraft maintenance                     |   | 59,692                              |    | 55,394 |   |
| Aircraft rents                           |   | 80,548                              |    | 76,752 |   |
| Landing fees                             |   | 5,580                               |    | 5,340 |   |
| Insurance and taxes                      |   | 12,452                              |    | 6,939 |   |
| Depreciation and amortization            |   | 14,179                              |    | 14,924 |   |
| Administrative and other                 |   | 43,098                              |    | 43,362 |   |
| Total operating expenses                 |   | 332,241                             |    | 314,276 |   |
|                                     |   |                                |    |   |   |
| Operating income                         |   | 12,569                              |    | 465 |   |
|                                     |   |                                |    |   |   |
| NONOPERATING INCOME (EXPENSE):           |   |                                |    |   |   |
| Interest income                          |   | 2,083                               |    | 2,963 |   |
| Interest expense                         |   | (28                                 | )       | (53 | ) |
| Writedown of investment                  |   | (2,994                              | )       | — |   |
| Other                                    |   | 232                                 |    | 12,525 |   |
| Other income (expense), net              |   | (707                                | )       | 15,435 |   |
|                                     |   |                                |    |   |   |
| Income before provision for income taxes |   | 11,862                              |    | 15,900 |   |
|                                     |   |                                |    |   |   |
| PROVISION FOR INCOME TAXES               |   | 6,632                               |    | 8,267 |   |
| NET INCOME                               |   | $                                   | 5,230   |   | $ | 7,633 |   |
|                                     |   |                                |    |   |   |
| NET INCOME PER SHARE:                    |   |                                |    |   |   |
| Earnings per share – basic          |   | $                                   | 0.26    |   | $ | 0.38 |   |
| Earnings per share – diluted        |   | $                                   | 0.26    |   | $ | 0.37 |   |
|                                     |   |                                |    |   |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING:     |   |                                |    |   |   |
| Basic                                    |   | 20,304                              |    | 20,288 |   |
| Diluted                                  |   | 20,358                              |    | 20,480 |   |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements.

 

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MESABAHOLDINGS, INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 
|                                                                                         |   | **Nine Months  Ended December 31,** |   |
|----------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                         |   | **2002**                            |   | **2001** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                        |   |                                |   |   |   |
| Net income                                                                                   |   | $                                   | 5,230  |   | $ | 7,633 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities- |   |                                |   |   |   |
| Depreciation and amortization                                                                |   | 14,179                              |   | 14,924 |   |
| Writedown of investment                                                                      |   | 2,994                               |   | — |   |
| Amortization of deferred credits                                                             |   | (2,092                              | )      | (1,611 | ) |
| Changes in current operating items, net of  acquisition:                                     |   |                                |   |   |   |
| Accounts receivable, net                                                                     |   | 2,761                               |   | (21,426 | ) |
| Inventories, net                                                                             |   | (23                                 | )      | (2,167 | ) |
| Prepaid expenses and deposits                                                                |   | 61                                  |   | 568 |   |
| Accounts payable and other                                                                   |   | 2,216                               |   | (5,065 | ) |
| Net cash provided by (used in) operating  activities                                         |   | 25,326                              |   | (7,144 | ) |
|                                                                                         |   |                                |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                        |   |                                |   |   |   |
| Acquisition of Big Sky, net of cash  acquired                                                |   | (3,225                              | )      | — |   |
| Purchases of investments                                                                     |   | (81,663                             | )      | (55,626 | ) |
| Sales of investments                                                                         |   | 94,951                              |   | 84,680 |   |
| Purchases of property and equipment, net of  acquisition                                     |   | (4,987                              | )      | (11,789 | ) |
| Net cash provided by investing activities                                                    |   | 5,076                               |   | 17,265 |   |
|                                                                                         |   |                                |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                        |   |                                |   |   |   |
| Repayment of long-term obligations                                                           |   | —                              |   | (57 | ) |
| Proceeds from issuance of common stock                                                       |   | 106                                 |   | — |   |
| Net cash provided by (used in) financing  activities                                         |   | 106                                 |   | (57 | ) |
|                                                                                         |   |                                |   |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                                    |   | 30,508                              |   | 10,064 |   |
|                                                                                         |   |                                |   |   |   |
| CASH AND CASH EQUIVALENTS:                                                                   |   |                                |   |   |   |
| Beginning of period                                                                          |   | 31,250                              |   | 18,916 |   |
| End of period                                                                                |   | $                                   | 61,758 |   | $ | 28,980 |   |
| SUPPLEMENTARY CASH FLOW INFORMATION:                                                         |   |                                |   |   |   |
| Cash paid during period for:                                                                 |   |                                |   |   |   |
| Interest                                                                                     |   | $                                   | 48     |   | $ | 57 |   |
| Income taxes                                                                                 |   | $                                   | 6,253  |   | $ | 9,813 |   |

 

Theaccompanying notes are an integral part of these unaudited condensedconsolidated financial statements.

 

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MESABA HOLDINGS, INC.

NOTES TO THEINTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands unless otherwise noted)

(Unaudited)

 

The condensed consolidatedfinancial statements included herein have been prepared by Mesaba Holdings,Inc. (the “Company” or “Holdings”), without audit, pursuant to the rules andregulations of the Securities and Exchange Commission.  The information furnished in the condensedconsolidated 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 accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to such rules and regulations, althoughthe Company believes that the disclosures are adequate to make the informationpresented not misleading.  It issuggested that these condensed consolidated financial statements be read inconjunction with the consolidated financial statements for the year ended March31, 2002, and the notes thereto, included in the Company’s Annual Report onForm 10-K filed with the Securities and Exchange Commission.

 

1. Basis of Presentation

 

The condensed consolidatedfinancial statements include the accounts of the Company and its wholly-ownedsubsidiaries, Mesaba Aviation, Inc. (“Mesaba”) and Big Sky Transportation Co.(“Big Sky”).   All significantintercompany transactions have been eliminated in consolidation.

 

The preparation of thecondensed consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America (“GAAP”) requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent liabilities, as well asthe reported amounts of revenues and expenses. Significant estimates include assumptions used to record certain accruedliabilities and the estimated useful lives of property and equipment.  Actual results may differ from theseestimates.

 

2. Agreements with Northwest

 

Mesaba operates as a regionalair carrier providing scheduled passenger and airfreight service as MesabaAirlines/Northwest Airlink and Mesaba Airlines/Northwest Jet Airlink under twoseparate agreements with Northwest Airlines, Inc. (“Northwest”) to 108 citiesin the United States and Canada from Northwest’s hub airports, Minneapolis/St.Paul, Detroit, and Memphis.

 

Under the Airline ServicesAgreement (the “Airlink Agreement”), Mesaba operates SAAB 340 jet-prop aircraftfor Northwest.  This agreement providesfor exclusive rights to designated service areas and extends throughJune 30, 2007, automatically renewing indefinitely thereafter.  Either Northwest or Mesaba may terminate theAirlink Agreement on 365 days notice. In addition, Mesaba purchases fuel, ground handling, and other servicesfrom Northwest.  For these services,Mesaba paid to Northwest $4.7 million, $6.5 million, $15.1 million, and $19.4million for the three and nine months ended December 31, 2002 and 2001,respectively.

 

Under the Regional Jet ServicesAgreement (the “Jet Agreement”), Mesaba operates Avro RJ85 (“RJ85”) regionaljets for Northwest.  This agreementextends through April 30, 2007, automatically renewing indefinitelythereafter.  Northwest may terminate theJet Agreement on April 25, 2004 with at least 180 days or up to 365 days priornotice.  Under the Jet Agreement, Mesabais not required to provide fuel and airport and passenger related services.

 

8

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Under the agreements, allMesaba flights appear in Northwest’s timetables and Mesaba receives ticketingand certain check-in, baggage and freight-handling services from Northwest atcertain airports.  Mesaba also benefitsfrom its relationship with Northwest through advertising and marketingprograms.  The Airlink Agreement and JetAgreement provide for certain incentive payments from Northwest to Mesaba basedon achievement of certain operational or financial goals.  Such incentives totaled $1.0 million, $3.9million and $1.8 million for the three months ended December 31, 2002 and ninemonths ended December 31, 2002 and 2001, respectively, and are included inpassenger revenues in the accompanying condensed consolidated statements ofoperations.  For the three months endedDecember 31, 2001, Mesaba agreed to suspend the Northwest incentive program aspart of the concessions granted to Northwest post-September 11, 2001.  Approximately 76% and 69% of the December31, 2002 and March 31, 2002 accounts receivable balances in the accompanyingcondensed 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 materially performunder the Airlink or Jet Agreements would have a material adverse effect on theCompany’s operations, financial position and cash flows.  Northwest and Mesaba review contractcompliance on a periodic basis.

 

3. Acquisition

 

On September 26, 2002, the Company and Ranger Acquisition Corp., awholly-owned subsidiary of the Company (the “Purchaser”), executed a definitivemerger agreement (the “Merger Agreement”) providing for the acquisition of theBig Sky Transportation Co. a regional air carrier based in Billings, Montana(“Big Sky”), for $3.2 million, net of cash acquired of $0.3 million.

 

On October 29, 2002, the purchaser commenced a cash tender offer (the“Offer”) for all outstanding shares of common stock of Big Sky (the “Shares”)for $2.60 per share.  The Offer expiredon November 27, 2002 and the Company accepted the tendered shares for paymenteffective December 1. 2002. Approximately 90.9% of Big Sky’s issued and outstanding shares of commonstock were tendered in the Offer.

 

Effective December 3, 2002, the purchaser was merged with and into BigSky, with Big Sky surviving as a wholly-owned subsidiary of the Company.  Shareholders of Big Sky who did not tendertheir Shares (other than the Company and it’s subsidiaries and shareholdersexercising dissenters’ rights) are entitled to receive $2.60 per share, thesame price as in the Offer.

 

The terms and conditions of the acquisition (including the Offer andthe Merger) are more fully described in Schedule TO filed with the SEC onOctober 29, 2002 and in the Merger Agreement, which is attached as Exhibit 2 tothe Company’s Form 8-K filed with the SEC on September 27, 2002.

 

The Company funded the acquisition with cashfrom operations and accounted for the acquisition using the purchase method ofaccounting. Accordingly, the purchase price was allocated to the assetsacquired and liabilities assumed based on their estimated fair market values atthe date of acquisition. Certain of the liabilities assumed have been recordedbased upon preliminary estimates as of the date of the acquisition and aresubject to future adjustment pending completion of an independentappraisal.  The excess of the purchaseprice over the fair market value of the net assets acquired was allocated tointangible assets.  Results of Big Sky’soperations have been included in the accompanying condensed consolidatedfinancial statements since the date of acquisition.  Due to the lack of materiality of Big Sky’s operations, pro formafinancial results are not presented.

 

9

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4. Investments

 

Investments consist principallyof municipal securities and corporate bonds and are classified asavailable-for-sale as of December 31, 2002 and March 31, 2002.  Available-for-sale investments are reportedat fair value with unrealized gains and losses excluded from operations andreported as a separate component of shareholders’ equity, except forother-than-temporary impairments, which are reported as a charge to currentoperations and result in a new cost basis for the investment.  As of December 31, 2002, the Companyrecorded an other-than-temporary impairment of $3.0 million on one investmentand established a new cost basis for the investment of $.4 million.  The Company classifies investments thatmature within one year as short term. Investments with maturity dates greater than one year are classified aslong term.

 

As of December 31, 2002, the amortized cost, grossunrealized gains and losses, and fair value of cash, cash equivalents andinvestments were as follows (in millions):

 
|                                      |   | **Amortized  Cost** |    | **Gross  Unrealized  Gain** |   | **Gross  Unrealized  Losses** |   | **Fair  Value** |   |
|-------------------------------------------|--------|---------------------|---------|-----------------------------|--------|-------------------------------|--------|-----------------|--------|
| Cash and cash equivalents                 |   | $                   | 61,758  |                        | $      | 1                             |   | $               | (7     | ) | $ | 61,752 |   |
| Debt securities – available for sale |   | 55,560              |    | 676                         |   | (9                            | )      | 56,227          |   |
| Total cash and investments                |   | $                   | 117,318 |                        | $      | 677                           |   | $               | (16    | ) | $ | 117,979 |   |

 

During the three and nine monthperiods ended December 31, the Company recorded realized gains and losses onthe sale of investments as follows:

 
|                        |   | **Three  Months  Ended  December 31,** |   | **Nine  Months  Ended  December 31,** |       |
|-----------------------------|--------|----------------------------------------|--------|---------------------------------------|------------|
|                        |   | **2002**                               |   | **2001**                              | ** ** | **2002** | ** ** | **2001** | ** ** |
| Gross realized gains        |   | $                                      | 18     |                                  | $          | 278 |   | $ | 226 |   | $ | 367 |   |
| Gross realized losses       |   | —                                 |   | (22                                   | )          | (81 | ) | (73 | ) |
| Net realized gains (losses) |   | $                                      | 18     |                                  | $          | 256 |   | $ | 145 |   | $ | 294 |   |

 

5. Restructuring Charge

 

During September 2001, Mesabainitiated a reduction in personnel as a result of the impact of the terroristattacks of September 11, 2001.  Mesabarecorded a one-time pre-tax charge of approximately $1.1 million to cover theexpected severance and related costs in the second quarter of fiscal 2002.  The reduction in personnel was completed bySeptember 30, 2001 and affected 382 individuals in all areas of Mesaba.** **As of September 30, 2002, noliability remained as Mesaba paid and charged against the liabilityapproximately $0.8 million and reduced the liability by approximately $0.3million in the third quarter of fiscal 2002 due to the employment of certainterminated employees by others.

 

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6. Stock Options

 

In December 2002, the Company repriced stockoptions to purchase 745,000 shares of the Company’s common stock with exerciseprices ranging from $9.05 to $18.00 to an exercise price of $5.97 whichrepresented the fair market value on the date of the repricing. In accordancewith Financial Accounting Standards Board (“FASB”) Interpretation No. 44,“Accounting for Certain Transactions Involving Stock Compensation”, the Companyhas adopted variable plan accounting for these options from the date of therepricing. For the three and nine months ended December 31, 2002, the Companyrecorded compensation expense of $60 as a result of the repricing.

 

7. Earnings (Loss) Per Share

 

Basic earnings(loss) per common share is computed by dividing net income or loss by theweighted average number of shares of common stock outstanding during theperiod.  Diluted earnings (loss) pershare is computed by dividing net income or loss by the sum of the weightedaverage number of shares of common stock outstanding plus all additional commonstock that would have been outstanding if potentially dilutive common sharesrelated to stock options and warrants had been issued.  Options and warrants totaling 6,284 and5,663 for the three months ended December 31, 2002 and 2001 and 5,179 and 4,665for the nine months ended December 31, 2002 and 2001 were excluded from thecomputation of diluted earnings per share as the impact would have beenanti-dilutive.

 

The followingtables reconcile the number of shares utilized in the consolidated earnings(loss) per share calculations:

 
|                                                                                                        |   | **Three  Months Ended  December 31,** |   |
|-------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                                        |   | **2002**                              |   | **2001** |   |
|                                                                                                        |   |                                  |   |   |   |
| Net income (loss)                                                                                           |   | $                                     | 1,283  |   | $ | (1,298 | ) |
| For earnings (loss) per common share -  basic:                                                              |   |                                  |   |   |   |
| Weighted average number of issued shares  outstanding                                                       |   | 20,315                                |   | 20,288 |   |
| Effect of dilutive Securities:                                                                              |   |                                  |   |   |   |
| Computed shares outstanding under the  Company’s stock option plan utilizing the treasury stock method |   | —                                |   | — |   |
| Computed shares outstanding under warrants  issued utilizing the treasury stock method                      |   | —                                |   | — |   |
| For earnings (loss) per common share -  diluted:                                                            |   |                                  |   |   |   |
| Weighted average common shares and common  share equivalents outstanding                                    |   | 20,315                                |   | 20,288 |   |
| Earnings (loss) per share – basic                                                                      |   | $                                     | 0.06   |   | $ | (0.06 | ) |
| Earnings (loss) per share – diluted                                                                    |   | $                                     | 0.06   |   | $ | (0.06 | ) |

 

11

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|                                                                                                        |   | **Nine  Months Ended  December 31,** |   |
|-------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                                        |   | **2002**                             |   | **2001** |   |
|                                                                                                        |   |                                 |   |   |   |
| Net income                                                                                                  |   | $                                    | 5,230  |   | $ | 7,633 |   |
| For earnings per common share - basic:                                                                      |   |                                 |   |   |   |
| Weighted average number of issued shares  outstanding                                                       |   | 20,304                               |   | 20,288 |   |
| Effect of dilutive securities:                                                                              |   |                                 |   |   |   |
| Computed shares outstanding under the  Company’s stock option plan utilizing the treasury stock method |   | 54                                   |   | 192 |   |
| Computed shares outstanding under warrants  issued utilizing the treasury stock method                      |   | —                               |   | — |   |
| For earnings per common Share - diluted:                                                                    |   |                                 |   |   |   |
| Weighted average common shares and common  share equivalents outstanding                                    |   | 20,358                               |   | 20,480 |   |
| Earnings per share – basic                                                                             |   | $                                    | 0.26   |   | $ | 0.38 |   |
| Earnings per share – diluted                                                                           |   | $                                    | 0.26   |   | $ | 0.37 |   |

 

8. Consolidated Comprehensive Income (Loss)

 

The following table presentsthe calculation of consolidated comprehensive income (loss).  Comprehensive income (loss) has no impact onreported net income (loss).  The componentsof comprehensive income (loss) are as follows:

 
|                                                                       |   | **Three Months  Ended  December 31,** |   |
|----------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                       |   | **2002**                              |   | **2001** |   |
|                                                                       |   |                                  |   |   |   |
| Net income (loss)                                                          |   | $                                     | 1,283  |   | $ | (1,298 | ) |
| Unrealized gains (losses) on investments  classified as available for sale |   | 212                                   |   | (79 | ) |
| Comprehensive income (loss)                                                |   | $                                     | 1,495  |   | $ | (1,377 | ) |

 
|                                                              |   | **Nine  Months Ended  December 31,** |   |
|-------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                              |   | **2002**                             |   | **2001** |   |
|                                                              |   |                                 |   |   |   |
| Net income                                                        |   | $                                    | 5,230  |   | $ | 7,633 |   |
| Unrealized gains on investments classified  as available for sale |   | 276                                  |   | 69 |   |
| Comprehensive income                                              |   | $                                    | 5,506  |   | $ | 7,702 |   |

 

9. NewAccounting Pronouncements

 

In June 2001, the FASB issuedStatement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill andOther Intangible 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 was requiredto be applied starting with fiscal years beginning after December 15, 2001.  The Company adopted SFAS No. 142 on April 1,2002 and the adoption did not have a material impact on the Company’s resultsof operations, financial position or cash flows because the Company did nothave any goodwill or other intangible assets at the time of adoption.

 

12

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In August2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or disposalof Long-Lived Assets” which was required to be adopted for fiscal yearsbeginning after December 15, 2001.  SFASNo. 144 establishes accounting and reporting standards for the impairment ordisposal of long-lived assets.  TheCompany adopted SFAS No. 144 on April 1, 2002 and the adoption did not have amaterial effect on the Company’s consolidated results of operations, financialposition or cash flows.

 

In April 2002, the FASB issuedSFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment ofFASB Statement No. 13, and Technical Corrections”.  SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Lossesfrom Extinguishment of Debt,” which required all gains and losses fromextinguishment of debt to be classified as an extraordinary item.  SFAS No. 145 is effective for fiscal yearsbeginning after May 15, 2002, with early adoption encouraged.  The Company will adopt SFAS 145 as of April1, 2003.  The adoption of SFAS No. 145is not expected to have a material impact on the Company’s consolidated results of operations, financialposition or cash flows.

 

In June 2002, the FASB issued SFASNo. 146, “Accounting for Costs Associated with Exit or DisposalActivities”.  SFAS No. 146 addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3.The Company will be required to adopt SFAS No. 146 effective for any exit ordisposal activities that are initiated after December 31, 2002.  The adoption of SFAS No. 146 is not expectedto have a material impact on the Company’s consolidatedresults of operations, financial position or cash flows.

 

In  November  2002,  the FASB issued FASB  Interpretation  No. 45,  “Guarantor’sAccounting  and  Disclosure Requirements  for Guarantees,  Including  Indirect Guarantees  of Indebtedness  of  Others” (“FIN  45”).  FIN 45 clarifies the requirements for aguarantor’s accounting for and disclosure of certain issued and outstandingguarantees.  The initial recognition andinitial measurement provisions of FIN 45 are applicable to guarantees issued ormodified after December 31, 2002.  Thedisclosure requirements of FIN 45 are effective for financial statements ofinterim or annual periods ending after December 15, 2002.  The adoption of FIN 45 did not have amaterial impact on the Company’s consolidated balance sheet or results ofoperations, financial position, or cash flows.

 

In December 2002, the FASBissued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition andDisclosure”, which amends SFAS No. 123, “Accounting for Stock-Based Compensation”.  SFAS No. 148 provides alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, SFAS No. 148 amends thedisclosure requirements of SFAS No. 123 to require more prominent and morefrequent disclosures in financial statements of the effects of stock-basedcompensation.  The transition guidanceand annual disclosure provisions of SFAS No. 148 are effective for fiscal yearsending after December 15, 2002.  The interimdisclosure provisions are effective for financial reports containing condensedfinancial statements for interim periods beginning after December 15, 2002. Theadoption of SFAS No. 148 is not expected to have a material impact on theCompany’s consolidated results of operations, financial position, or cashflows.  The Company will provide theannual disclosures required by SFAS No. 148 for the year ending March 31,2003.  The Company will provide theinterim disclosures required by SFAS No. 148 beginning in the first quarter offiscal 2004.

 

13

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10. Segment Information

 

Operating segmentinformation for Mesaba, Big Sky (from the date of acquisition), and Holdingswere as follows (in thousands):

 
|                          |   | **Three Months Ended December 31,** |    | **Nine Months Ended December 31,** |   |
|-------------------------------|--------|-------------------------------------|---------|------------------------------------|--------|
|                          |   | **2002**                            |    | **2001**                           |   | **2002** |   | **2001** |   |
| Operating Revenues:           |   |                                |    |                               |   |   |   |   |   |
| Mesaba                        |   | $                                   | 111,083 |                               | $      | 90,680 |   | $ | 343,072 |   | $ | 314,741 |   |
| Big Sky from December 1, 2002 |   | 1,738                               |    | n/a                                |   | 1,738 |   | n/a |   |
| Holdings                      |   | —                              |    | —                             |   | — |   | — |   |
| Consolidated                  |   | $                                   | 112,821 |                               | $      | 90,680 |   | $ | 344,810 |   | $ | 314,741 |   |
|                          |   |                                |    |                               |   |   |   |   |   |
| Income (Loss)                 |   |                                |    |                               |   |   |   |   |   |
| Before Income Taxes:          |   |                                |    |                               |   |   |   |   |   |
| Mesaba                        |   | $                                   | 2,321   |                               | $      | (1,911 | ) | $ | 14,643 |   | $ | 13,211 |   |
| Big Sky from December 1, 2002 |   | (235                                | )       | n/a                                |   | (235 | ) | n/a |   |
| Holdings                      |   | (98                                 | )       | 777                                |   | (2,546 | ) | 2,689 |   |
| Consolidated                  |   | $                                   | 1,988   |                               | $      | (1,134 | ) | $ | 11,862 |   | $ | 15,900 |   |
|                          |   |                                |    |                               |   |   |   |   |   |
| Total Assets at               |   |                                |    |                               |   |   |   |   |   |
| End of Period:                |   |                                |    |                               |   |   |   |   |   |
| Mesaba                        |   | $                                   | 116,537 |                               | $      | 183,882 |   | $ | 116,537 |   | $ | 183,882 |   |
| Big Sky                       |   | 10,061                              |    | n/a                                |   | 10,061 |   | n/a |   |
| Holdings                      |   | 121,892                             |    | 71,794                             |   | 121,892 |   | 71,794 |   |
| Elimination                   |   | (9,881                              | )       | (32,870                            | )      | (9,881 | ) | (32,870 | ) |
| Consolidated                  |   | $                                   | 238,609 |                               | $      | 222,806 |   | $ | 238,609 |   | $ | 222,806 |   |

 

14

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Item 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations

(Dollars and shares outstanding are expressed in thousands unlessotherwise noted.)

 

Three Months Ended December 31, 2002 and 2001

The Company’s consolidated net income for the quarter ended December31, 2002 was $1.3 million, or $0.06 per diluted share, compared with a net lossof $1.3 million, or $0.06 per share, for the quarter ended December 31, 2001.Fiscal 2002 results were significantly impacted as a result of the aftermath ofthe terrorist events of September 11, 2001 and include the recognition of $7.2million in U.S. government grant proceeds. The Company’s consolidated operating income for the quarter ended December31, 2002 was $1.4 million compared with an operating loss of $9.3 million forthe quarter ended December 31, 2001. Due to the recent acquisition and materiality of Big Sky's operations,discussion of Big Sky’s operating results and statistics is not presented.

 

Mesaba Operating Revenues.  Total operating revenues increased 22.5% inthe third quarter of fiscal 2003 to $111,083 from $90,680 in the prior year’sthird fiscal quarter due primarily to the elimination of the prior year’sapproximate 10% rate reduction given to Northwest, a 9.8% increase in availableseat miles, increased ground handling activities and strong operatingperformance.  Operating statistics wereas follows:

 
|                                 |   | **Three  months ended December 31,** |   |
|--------------------------------------|--------|--------------------------------------|--------|
| **Operating statistics**             |   | **2002**                             |   | **2001** |   |
| Revenue passengers carried           |   | 1,414,666                            |   | 1,242,200 |   |
| Revenue passenger miles (000’s) |   | 411,068                              |   | 348,507 |   |
| Available seat miles (000’s)    |   | 694,351                              |   | 632,361 |   |
| Passenger load factor                |   | 59.2                                 | %      | 55.1 | % |
| Revenue per available seat mile      |   | $                                    | 0.160  |   | $ | 0.143 |   |
| Aircraft in service                  |   | 113                                  |   | 109 |   |
|                                      |        |                                      |        |  |  |  |  |

 

Mesaba Operating Expenses.  Total operating expenses increased 8.8% inthe third quarter of fiscal 2003 to $108,756 from $99,942 in the prior year’sthird fiscal quarter due primarily to the overall increase in flight activityand the labor associated with increased ground handling activities inMinneapolis/St. Paul and Detroit.  Thecosts per available seat mile (“CASM”) were as follows:

 
|                          |   | **Three  months ended December 31,** |   |
|-------------------------------|--------|--------------------------------------|--------|
|                          |   | **2002**                             |   | **2001** |   |
| Wages and benefits            |   | 4.7                                  | ¢ | 4.8 | ¢ |
| Aircraft fuel                 |   | 0.7                                  |   | 0.8 |   |
| Aircraft maintenance          |   | 2.9                                  |   | 2.6 |   |
| Aircraft rents                |   | 3.9                                  |   | 4.0 |   |
| Landing fees                  |   | 0.2                                  |   | 0.3 |   |
| Insurance and taxes           |   | 0.5                                  |   | 0.6 |   |
| Depreciation and amortization |   | 0.7                                  |   | 0.8 |   |
| Administrative and other      |   | 2.1                                  |   | 1.9 |   |
| Total                         |   | 15.7                                 | ¢ | 15.8 | ¢ |

 

Wages and benefits increased 9.5% to $32,875 in the third quarter offiscal 2003 from $30,021 in the third quarter of fiscal 2002 due primarily toincreased ground handling staffing at theMinneapolis/St. Paul and Detroit hub locations.

 

15

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Aircraft fuel decreased 5.9% to $4,783 in the third quarter of fiscal2003 from $5,081 in the third quarter of fiscal 2002 due primarily to theoffsetting impact of increased turbo-prop block hours and a reduction in theactual fuel burn rate.  Provisions ofthe Airlink Agreement with Northwest protect Mesaba from changes in fuelprices.  Mesaba’s actual cost of fuel,including taxes and pumping fees, was 83.5 cents per gallon for bothperiods.  Northwest provides fuel forthe jet operation at their expense.

 

Aircraft maintenance, excluding wages and benefits, increased 21.4% to$19,965 in the third fiscal quarter of fiscal 2003 from $16,443 in the thirdquarter of fiscal 2002 due primarily to the combined impact of increased hoursflown which increases Mesaba’s flight hour based maintenance costs, increased expendable costs to maintain an agingfleet, and increased levels of aircraft damage.

 

Aircraft rents increased 4.9% to $26,806 in the third quarter of fiscal2003 from $25,566 in the third quarter of fiscal 2002 due to the net additionof five turbo-prop aircraft.  Mesabaadded eleven Saab B model aircraft and returned six Saab A model aircraft to aleasing company since the third quarter a year ago.

 

Landing fees decreased 14.4% to $1,753 in the third quarter of fiscal2003 from $2,047 in the third quarter of fiscal 2002 primarily due to****ratereductions received from certain airport authorities.  Northwest provides landing fees for the jet operation at theirexpense.

 

Insurance and taxes decreased 1.5% to $3,715 in the third quarter offiscal 2003 from $3,771in the third quarter of fiscal 2002 due primarily to areduction in the passenger surcharge.

 

Depreciation and amortization decreased 8.6% to $4,565 in the thirdquarter of fiscal 2003 compared to $4,997 in the third quarter of fiscal 2002due primarily to reduced capital expenditures.

 

Administrative and other increased 19.0% to $14,294 in the thirdquarter of fiscal 2003 from $12,016 in the third quarter of fiscal 2002 dueprimarily to increases in the accounts receivable reserve and increased groundhandling in Minneapolis/St. Paul and Detroit.

 

Consolidated Nonoperating Income (Expense).  Nonoperating income decreased to $593 in thethird quarter of fiscal 2003 from income of $8,128 for the third quarter offiscal 2002 due primarily to the recognition of $7.2 million in federal grantproceeds a year ago and the reduction in interest earned on the Company’sinvestments.

 

Consolidated Provision for Income Taxes. TheCompany’s effective tax rate was 35.5% for the third quarter of fiscal 2003 ascompared to 14.5% in the year earlier quarter. Mesaba adjusts its effective tax rate quarterly based on forecastedoperating results for the fiscal year. The rate is affected principally by the levelof permanent differences relative to projected taxable income (loss).

 

Nine Months Ended December 31, 2002 and 2001

The Company’s consolidated net income for the nine months endedDecember 31, 2002 was $5.2 million, or $0.26 per diluted share, compared withnet income of $7.6 million, or $0.38 per diluted share, in the prior yearperiod.  The Company’s consolidatedoperating income for the third quarter of 2003 was $12.6 million compared withoperating income of $.5 million in 2002. The fiscal 2002 results were significantly impacted as a result of theterrorist events of September 11, 2001 and include the recognition of $12.5million in U.S. government grant proceeds. Due to the recent acquisition andmateriality of Big Sky’s operations, a discussion of Big Sky’s operating resultsand statistics are not presented.

 

16

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Mesaba Operating Revenues.  Total operating revenues increased 9.0% inthe first nine months of fiscal 2003 to $343,072 from $314,741 in the prioryear’s first nine months, due primarily to the elimination of the prior year’sapproximate 10% rate reduction given to Northwest in the third quarter offiscal 2002, a 2.3% increase in available seat miles, increased ground handlingin Minneapolis/St. Paul and Detroit hub locations and strong operatingperformance.  Mesaba’s operatingstatistics are as follows:

 
|                                 |   | **Nine  months ended December 31,** |   |
|--------------------------------------|--------|-------------------------------------|--------|
| **Operating statistics**             |   | **2002**                            |   | **2001** |   |
| Revenue passengers carried           |   | 4,418,524                           |   | 4,497,500 |   |
| Revenue passenger miles (000’s) |   | 1,271,591                           |   | 1,236,714 |   |
| Available seat miles (000’s)    |   | 2,134,352                           |   | 2,086,053 |   |
| Passenger load factor                |   | 59.6                                | %      | 59.3 | % |
| Revenue per available seat mile      |   | $                                   | .162   |   | $ | .151 |   |
| Aircraft in service                  |   | 113                                 |   | 109 |   |
|                                      |        |                                     |        |  |  |  |  |

 

Mesaba Operating Expenses.  Total operating expenses increased 4.6% inthe first nine months of fiscal 2003 to $328,821 from $314,276 in the priorfiscal year’s first nine months due primarily to the overall increase in flightactivity, the labor associated with increased ground handling in theMinneapolis/St. Paul and Detroit hub locations and increased insurancecosts.  The CASM was as follows:

 
|                          |   | **Nine  months ended December 31,** |   |
|-------------------------------|--------|-------------------------------------|--------|
|                          |   | **2002**                            |   | **2001** |   |
| Wages and benefits            |   | 4.6                                 | ¢ | 4.5 | ¢ |
| Aircraft fuel                 |   | 0.8                                 |   | 0.9 |   |
| Aircraft maintenance          |   | 2.8                                 |   | 2.6 |   |
| Aircraft rents                |   | 3.8                                 |   | 3.7 |   |
| Landing fees                  |   | 0.2                                 |   | 0.3 |   |
| Insurance and taxes           |   | 0.6                                 |   | 0.3 |   |
| Depreciation and amortization |   | 0.6                                 |   | 0.7 |   |
| Administrative and other      |   | 2.0                                 |   | 2.1 |   |
| Total                         |   | 15.4                                | ¢ | 15.1 | ¢ |

 

Wages and benefits increased 5.5% to $98,631 in the first nine monthsof fiscal 2003 from $93,495 in the first nine months of fiscal 2002 dueprimarily to increased ground handling atthe Minneapolis/St. Paul and Detroit hub locations partially offset bydecreased flight instructor costs.

 

Aircraft fuel decreased 6.5% to$16,889 in the first nine months of fiscal 2003 from $18,070 in the first ninemonths of fiscal 2002 due primarily to a reduction in the actual fuel burn rate.  Provisions of the Airlink Agreement with Northwest protect Mesabafrom changes in fuel prices.  Mesaba’sactual cost of fuel, including taxes and pumping fees, was 83.5 cents pergallon for both periods.  Northwestprovides fuel for the jet operation at their expense.

 

Aircraft maintenance, excluding wages and benefits, increased 7.3% to$59,430 in the first nine months of fiscal 2003 from $55,394 in the first ninemonths of fiscal 2002 due to increased aircraft utilization, increasedexpendable costs to maintain an aging fleet and increased levels of aircraftdamage.

 

Aircraft rents increased 4.7% to $80,330 in the first nine months offiscal 2003 from $76,752 in the first nine months of fiscal 2002 due to the netaddition of five turbo-prop aircraft. Mesaba added eleven Saab B model aircraft and returned six Saab Aaircraft to a leasing company since the first nine months of fiscal 2002.

 

17

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Landing fees increased 3.8% to $5,542 in the first nine months offiscal 2003 from $5,340 for the first nine months of fiscal 2002 due primarilyto increased landing fees charged by airports and increased flightactivity.  Northwest provides landingfees for the jet operation at their expense.

 

Insurance and taxes increased 76.6% to $12,253 in the first nine monthsof fiscal 2003 from $6,939 for the first nine months of fiscal 2002 dueprimarily to increased rates and surcharges imposed after September 11, 2001.

 

Depreciation and amortization decreased 5.3% to $14,136 in the firstnine months of fiscal 2003 compared to $14,924 in the first nine months offiscal 2002 due primarily to reduced capital expenditures.

 

Administrative and other decreased 4.0% to $41,610 in the first ninemonths of fiscal 2003 from $43,362 in the first nine months of fiscal 2002 due to reduced flight crew training and hotelcosts partially offset by increases in the accounts receivable reserve.

 

Consolidated Nonoperating Income (Expense).  Nonoperating expense totaled $707 for thefirst nine months of fiscal 2003 due primarily to the offsetting impact of therecognition of a $2,994 writedown of an investment in a WorldCom bond andinterest income earned on the Company’s remaining investments.  In fiscal 2002, nonoperating income of$15,435 was due primarily to the recognition of the $12.5 million in U.S.government grant proceeds.  Othernonoperating income was less in fiscal 2003 as compared to fiscal 2002 due tolower interest rates earned on the Company’s cash and investments.  The rate is affected principally by the levelof permanent differences relative to projected taxable income (loss).

 

Consolidated Provision for Income Taxes.  The Company’s blended effective tax rate was55.9% for the first nine months of fiscal 2003 as compared to 52.0% in the yearearlier period.  Mesaba adjusts itseffective tax rate quarterly based on forecasted operating results for thefiscal year. * *The rate is affected principally by the level of permanent differencesrelative to projected taxable income (loss). The effective tax rate increased due to consistent levels ofnondeductible expenses being applied over lower pre-tax earnings.

 

Liquidity and Capital Resources

 

The Company’s working capitaldecreased to $100,985 with a current ratio of 2.91 at December 31, 2002 ascompared to working capital of $117,840 and a current ratio of 3.63 at March31, 2002.  Cash and cash equivalentsincreased by $30,508 to $61,758 at December 31, 2002 due primarily to cash fromoperations of $25.3 million, a net change in the Company’s investments of $13.3million, the $3.2 million net purchase price for Big Sky, property andequipment additions of $5.0 million and the issuance of common stock of $0.1million.  The Company’s current ratioand level of cash and cash equivalents has fluctuated from March 31, 2002 dueto changes in the Company’s investment strategy and portfolios.  In February 2002, the Company implemented anew investment policy which reduced investment concentration from ten percentto five percent and allowed its investment managers to purchase investmentswith a maximum maturity of two years from one year and an average portfolio lifeto one year from six months.  Long terminvestments increased $22,253 to $26,321 at December 31, 2002 compared to$4,068 at March 31, 2002.

 

Investments consist principallyof municipal securities and corporate bonds and are classified as available-for-saleas of December 31, 2002 and March 31, 2002. Available-for-sale investments are reported at fair value withunrealized gains and losses excluded from operations and reported as a separatecomponent of shareholders’ equity, except for other-than-temporary impairments,which are reported as a charge to current operations and result in a new costbasis for the investment.  The Companyclassifies investments that mature within one year as short term.  Investments with maturities greater than oneyear are classified as long term.

 

18

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Because of the WorldCombankruptcy proceedings and market valuation of its bonds at September 30, 2002,the Company recorded within the nine months ended December 31, 2002 an other-than-temporaryimpairment loss of $2,994 in the condensed consolidated financial statementsregarding an investment in a WorldCom bond. Management established a new cost basis for the WorldCom investment of$402 based on the quoted market price as of September 30, 2002.  Any further impairment/loss to the value ofthe WorldCom investment will be recorded within the condensed consolidatedstatement of operations pending ultimate disposition of the investment.  Any increase in value of the WorldCom investmentfrom $402 will be recorded as an unrealized gain until the ultimate dispositionof the investment.

 

As of December 31, 2002, Mesaba’s fleet consisted of 113 aircraftcovered under operating leases with remaining terms of less than a month to 13years and aggregate monthly lease payments of approximately $9,095.  Mesaba has the ability to return to thelessor up to 17****turbo-prop aircraft which, if all were returned, would reducethe Mesaba’s aggregate monthly lease payment by a total of $527.  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 17.5 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.

 

Approximately 76% of Mesaba’s accountsreceivable balance as of December 31, 2002 was due from Northwest.  Loss of Mesaba’saffiliation with Northwest or Northwest’s failure to make timely payment ofamounts owed to Mesaba or to otherwise materially perform under the Airlink orJet Agreement for any reason would have a material adverse effect on theCompany’s operations and financial results.

 

The Company has historically relied upon cash and cash equivalents,investments and internally generated funds to support its working capitalrequirements.  Management believes thatfunds from operations will provide adequate resources for meeting non-aircraftcapital needs for the remainder of fiscal 2003.

 

New AccountingPronouncements

 

On June 1, 2001, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards (“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.  The Companyadopted SFAS No. 142 on April 1, 2002 and the adoption did not have a materialimpact on the Company’s results of operations, financial position or cashflows.

 

InAugust 2001, The FASB issued SFAS No. 144, “Accounting for the Impairment ordisposal of long-lived assets” which is required to be adopted for fiscal yearsbeginning after December 15, 2001.  SFASNo. 144 establishes accounting and reporting standards for the impairment ordisposal of long-lived assets.  TheCompany adopted SFAS No. 144 on April 1, 2002 and the adoption did not have amaterial effect on the Company’s consolidated results of operations, financialposition or cash flows.

 

In April 2002, the FASB issuedSFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment ofFASB Statement No. 13, and Technical Corrections”.  SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Lossesfrom Extinguishment of Debt,” which required all gains and losses fromextinguishment of debt to be classified as an extraordinary item.  SFAS No. 145 is effective for fiscal yearsbeginning after May 15, 2002, with early adoption encouraged.  The Company will adopt SFAS 145 as of April1, 2003.  The adoption of SFAS No. 145is not expected to have a material impact on the Company’s consolidated results of operations, financialposition or cash flows.

 

19

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In June 2002, the FASB issuedSFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities”.  SFAS No. 146 addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3.The Company will be required to adopt SFAS No. 146 effective for any exit ordisposal activities that are initiated after December 31, 2002.  The adoption of SFAS No. 146 is not expectedto have a material impact on the Company’s consolidatedresults of operations, financial position or cash flows.

 

In November  2002, the FASB issued FASB Interpretation  No. 45,  “Guarantor’s Accounting  and Disclosure Requirements  for  Guarantees, Including  IndirectGuarantees  of  Indebtedness  of  Others” (“FIN  45”).  FIN 45 clarifies the requirements for aguarantor’s accounting for and disclosure of certain issued and outstandingguarantees.  The initial recognition andinitial measurement provisions of FIN 45 are applicable to guarantees issued ormodified after December 31, 2002.  Thedisclosure requirements of FIN 45 are effective for financial statements ofinterim or annual periods ending after December 15, 2002.  The adoption of FIN 45 did not have amaterial impact on the Company’s consolidated balance sheet or results ofoperations, financial position or cash flows.

 

In December 2002, the FASBissued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition andDisclosure”, which amends SFAS No. 123, “Accounting for Stock-Based   Compensation”.  SFAS No. 148 provides alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation. In addition, SFAS No. 148 amends the disclosurerequirements of SFAS No. 123 to require more prominent and more frequentdisclosures in financial statements of the effects of stock-based compensation.  The transition guidance and annualdisclosure provisions of SFAS No. 148 are effective for fiscal years endingafter December 15, 2002.  The interimdisclosure provisions are effective for financial reports containing condensedfinancial statements for interim periods beginning after December 15, 2002. Theadoption of SFAS No. 148 is not expected to have a material impact on theCompany’s consolidated results of operations, financial position or cashflows.  The Company will provide theannual disclosures required by SFAS No. 148 for the year ending March 31,2003.  The Company will provide theinterim disclosures required by SFAS No. 148 beginning in the first quarter offiscal 2004.

 

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

The Company’s principal marketrisks are the availability 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 Airlink Agreement,Northwest bears the economic risk of fuel price fluctuations for Mesaba’s fuelrequirements.  As such, the Companyreasonably expects that its results of operations will not be directly affectedby fuel price volatility.

 

The Company’s investment policyrequires purchasing investments with high credit quality issuers and limits theamount of credit exposure to any one issuer. The Company’s investments principally consist of municipal securitiesand corporate bonds with varying maturity dates, all of which are two years orless.  Because of the credit criteria ofthe Company’s investment policies, the primary market risk associated withthese investments is interest rate risk. The Company does not use derivative financial instruments to manageinterest rate risk or to speculate on future changes in interest rates.

 

20

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Item 4.  CONTROLS AND PROCEDURES.

 

Based on an evaluation of theCompany’s disclosure controls and procedures as of a date within 90 days of thefiling date of this quarterly report, Paul F. Foley, President and ChiefExecutive Officer of the Company, and Robert E. Weil, Vice President, ChiefFinancial Officer and Treasurer of the Company, have concluded that theCompany’s disclosure controls and procedures are effective in ensuring thatinformation required to be disclosed by the Company in the reports that itfiles or submits under the Securities Exchange Act of 1934, as amended, isrecorded, processed, summarized and reported within the time periods specifiedby the Securities and Exchange Commission’s rules and forms.  There were no significant changes in theCompany’s internal controls or in other factors that could significantly affectthese controls subsequent to the date of the evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 

Part II.

 

Item1.  LEGAL PROCEEDINGS

 

On October 4, 2002, Fairbrook Leasing, Inc., LambertLeasing, Inc. and Swedish Aircraft Holdings AB (“Saab”) filed a declaratoryjudgment action against Mesaba relating to 20 Saab 340A aircraft leased byMesaba.  The lawsuit is pending in theUnited States District Court for the District of Minnesota.  Saab is requesting a judicial declarationthat the terms of the leases applicable to each of the 340A aircraft aregoverned by a March 7, 1996 term sheet proposal rather than the short-termleases subsequently executed by the parties. Mesaba has counterclaimed to resolve a dispute relating to the returnconditions applicable to the 340A aircraft. Mesaba believes that Saab’s claims are without merit and has brought asummary judgment motion asking the court to rule that the term sheet proposalis not a binding contract.  The ultimateoutcome of this lawsuit cannot be predicted with certainty.

 

As previously reported in the Company’s Form 10-Q forthe quarter ended September 30, 2002, Mesaba has brought suit against FederalInsurance Company, a subsidiary of The Chubb Corporation, for coverage of thebusiness interruption, extra expense and construction costs for the Detroithangar that was destroyed due to a severe storm in May 2000.  On December 19, 2002, the Court grantedMesaba’s motion for summary judgment with respect to coverage of a portion ofthe reconstruction costs.  Specifically,the Court ordered that Mesaba is entitled to the cost of installation of anupdated fire suppression system in the reconstructed hangar.  The parties are in discussion regarding apossible settlement of the claims.  Theultimate outcome of this lawsuit cannot be predicted with certainty.

 

Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

None.

 

Item 5. OTHER INFORMATION.

 

On September 26, 2002, the Company and Ranger Acquisition Corp., a whollyowned subsidiary of the Company (the “Purchaser”), executed a definitive mergeragreement (the “Merger Agreement”) providing for the acquisition of Big SkyTransportation Co., a regional air carrier based in Billings, Montana (“BigSky”), for approximately $3.5 million.

 

On October 29, 2002, the Purchaser commenced a cash tender offer (the“Offer”) for all outstanding shares of common stock of Big Sky (the “Shares”)for $2.60 per share.  The Offer expiredon November 27, 2002 and the Company accepted the tendered shares for paymenteffective December 1, 2002. Approximately 90.9% of Big Sky’s issued and outstanding shares of commonstock were tendered in the Offer.

 

Effective December 3, 2002, purchaser was merged with and into Big Sky,with Big Sky surviving as a wholly owned subsidiary of the Company.  Shareholders of Big Sky who did not tendertheir Shares (other than the Company and its subsidiaries and shareholdersexercising dissenters’ rights) are entitled to receive $2.60 per Share, thesame price as in the Offer.

 

21

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Big Sky serves 20 cities in Montana, North Dakota, Washington, Coloradoand Idaho using 15 Fairchild Metro III, 19 seat aircraft. Big Sky is based inBillings, Montana and commenced service in 1978. Big Sky has codeshareagreements with Northwest Airlines, Alaska Airlines, America West Airlines andHorizon Airlines. Big Sky is a significant provider of air service under theEssential Air Service program administered by the Department of Transportation.

 

The terms and conditions of the acquisition (including the Offer andthe Merger) are more fully described in Schedule TO filed with the SEC onOctober 29, 2002 and in the Merger Agreement, which is attached as Exhibit 2 tothe Company’s Form 8-K filed with the SEC on September 27, 2002.

 

The Company funded the acquisition with cashfrom operations and accounted for the acquisition using the purchase method ofaccounting. Accordingly, the purchase price was allocated to the assetsacquired and liabilities assumed based on their estimated fair market values atthe date of acquisition. Certain of the liabilities assumed have been recordedbased upon preliminary estimates as of the date of the acquisition and aresubject to future adjustment pending completion of an independent appraisal.The excess of the purchase price over the fair market value of the net assetsacquired was allocated to intangible assets. Results of Big Sky’s operations have been included in the accompanyingcondensed consolidated financial statements since the date of acquisition.  Due to the lack of materiality of Big Sky’soperations, pro forma financial results are not presented.

 

22

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Item 6.  EXHIBITS AND REPORTS ON FORM 8-K.

 
| (a)  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.                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                                                                 |
| 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. 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.                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10L. 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.                                                                                                                                                     |

 

23

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| 10M. 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.                                                                                                                                                          |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10N. 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.                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10O. 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.                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10P. 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.                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10Q.  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.                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10R.  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.                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10S. 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.                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10T. 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.                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10U. 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.           |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10V. 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. |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10W. 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.  |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10X.  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.  |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10Y.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.                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10Z.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.                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10AA.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.                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10BB.  Agreement and Plan of Merger among Mesaba  Holdings, Inc.  Ranger Acquisition  Corp. and Big Sky Transportation Co. dated September 26, 2002.  Incorporated by reference to the Company’s  Form 8-K filed September 27, 2002.                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10CC.  Employment Agreement between Big Sky  Transportation Co. and Kim B. Champney, dated April 3, 1998.  Incorporated by reference to Bug Sky’s  Form 10-KSB dated September 28, 1999.                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 21.  Subsidiaries.  Filed herewith.                                                                                                                                                                                                                                                                                                                                                                   |

 

 (b) Reports on Form 8-K

 

The Company did not file any reports on Form8-K during the quarter ended December 31, 2002.

 

24

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SIGNATURES

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                     |   | Mesaba Holdings, Inc.                                                                                             |
|--------------------------|--------|-------------------------------------------------------------------------------------------------------------------|
|                     |   |                                                                                                              |
| Dated: February 14, 2003 |   | By:                                                                                                               |  /s/ Robert  E. Weil |
|                     |   | Robert E. Weil                                                                                                    |
|                     |   | Vice President, Chief Financial Officer and  Treasurer (principal financial officer and an authorized  signatory) |

 

**CERTIFICATION**

 

I, Paul F.Foley, President and Chief Executive Officer of Mesaba Holdings, Inc., certifythat:

 

1.             I have reviewedthis quarterly report on Form 10-Q of Mesaba Holdings, Inc.;

 

2.             Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.             The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)           designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

(b)           evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)           presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)           allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

25

----

 

(b)           anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.             The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
|   | Date: February 14, 2003 |
|--------|-------------------------|
|   |                    |
|   |                    | By:  /s/ Paul F. Foley |
|   |                    | Paul  F. Foley |
|   |                    | President  and Chief Executive Officer |

 

**CERTIFICATION**

 

I, Robert E.Weil, Vice President, Chief Financial Officer and Treasurer of Mesaba Holdings,Inc., certify that:

 

1.             I have reviewedthis quarterly report on Form 10-Q of Mesaba Holdings, Inc.;

 

2.             Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.             The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)           designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

(b)           evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)           presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)           allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

26

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(b)           anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.             The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
|   | Date: February 14, 2003 |
|--------|-------------------------|
|   |                    |
|   |                    | By:  /s/ Robert E. Weil |
|   |                    | Robert E. Weil |
|   |                    | Vice President, Chief  Financial Officer and Treasurer |

 

CERTIFICATIONPURSUANT TO

SECTION906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report ofMesaba Holdings, Inc. (the “Company”) on Form 10-Q for the quarterly periodended December 31, 2002, as filed with the Securities and Exchange Commissionon the date hereof (the “Report”), the undersigned hereby certify pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, that: (1) the Report fully complies with therequirements of Section 12(a) or 15(d) of the Securities Exchange Act of 1934;and (2) the information contained in the Report fairly presents, in allmaterial respects, the financial condition and results of operations of theCompany.

 
| Dated:  February 14, 2003 |   | By:                                                   | /s/  Paul F. Foley  |
|---------------------------|--------|-------------------------------------------------------|---------------------|
|                      |   | Paul F. Foley                                         |
|                      |   | President and Chief Executive Officer                 |
|                      |   |                                                  |
| Dated:  February 14, 2003 |   | By:                                                   | /s/  Robert E. Weil |
|                      |   | Robert E. Weil                                        |
|                      |   | Vice President, Chief Financial Officer and Treasurer |

 

27

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EXHIBIT INDEX

 
| **Exhibit No.** |   | **Description**                       |
|-----------------|--------|---------------------------------------|
|            |   |                                  |
| 21              |   | Subsidiaries of Mesaba Holdings, Inc. |

 

 

28

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