**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934.**

 

**For the quarterly period ended September 30,2002**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

 

**For the transition period from           to**

 

**Commission File No:  0-17895**

 

| **MESABA  HOLDINGS, INC.**                                                                               |
|----------------------------------------------------------------------------------------------------------|
|                                                                                                     |
| Incorporated under the laws of Minnesota                                                                 |
|                                                                                                     |
| **41-1616499**                                                                                           |
| (I.R.S. Employer ID No.)                                                                                 |
|                                                                                                     |
| **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 November 5, 2002** |
|----------------------------------------|--------|-----------------------------------------|
| Common Stock Par value  $.01 per share |   | 20,320,641                              |

 

 

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PART I. FINANCIAL INFORMATION

 

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 the Companyacting on the Company’s behalf, that are not historical fact may constitute“forward looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended.  Such forwardlooking statements involve factors that could cause the actual results of theCompany 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.  For a discussion of the factors, which could cause the Company’sactual results to differ from forward-looking statements, please see Item 1 ofthe Company’s Form 10-K for the year ended March 31, 2002.

 

2

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Item 1. CONSOLIDATED FINANCIAL STATEMENTS

 

MESABAHOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCESHEETS

(In thousands,except share and per share information)

 
|                                             |   | **September  30,  2002** |    | **March 31,  2002** |   |
|--------------------------------------------------|--------|--------------------------|---------|---------------------|--------|
|                                             |   | **(Unaudited)**          |    |                |   |
| ASSETS                                           |   |                     |    |                |   |
|                                             |   |                     |    |                |   |
| CURRENT ASSETS:                                  |   |                     |    |                |   |
| Cash and cash equivalents                        |   | $                        | 74,291  |                | $      | 31,250 |   |
| Short term investments                           |   | 24,910                   |    | 67,774              |   |
| Accounts receivable, net                         |   | 34,633                   |    | 41,202              |   |
| Inventories, net                                 |   | 7,163                    |    | 7,600               |   |
| Prepaid expenses and deposits                    |   | 6,353                    |    | 5,094               |   |
| Deferred income taxes and other                  |   | 9,602                    |    | 9,701               |   |
| Total current assets                             |   | 156,952                  |    | 162,621             |   |
|                                             |   |                     |    |                |   |
| PROPERTY AND EQUIPMENT:                          |   |                     |    |                |   |
| Flight equipment                                 |   | 76,895                   |    | 74,686              |   |
| Other property and equipment                     |   | 34,746                   |    | 32,103              |   |
| Less: Accumulated depreciation and  amortization |   | (64,932                  | )       | (56,174             | )      |
| Net property and equipment                       |   | 46,709                   |    | 50,615              |   |
|                                             |   |                     |    |                |   |
| LONG TERM INVESTMENTS                            |   | 21,872                   |    | 4,068               |   |
| OTHER ASSETS, net                                |   | 8,516                    |    | 8,550               |   |
|                                             |   | $                        | 234,049 |                | $      | 225,854 |   |

 

The accompanying notes to the interim condensed consolidated financialstatements are an integral part of these unaudited condensed consolidatedbalance sheets.

 

3

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|                                                                                                        |   | **September  30,  2002** |    | **March 31,  2002** |   |
|-------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|---------------------|--------|
|                                                                                                        |   | **(Unaudited)**          |    |                |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                  |   |                     |    |                |   |
|                                                                                                        |   |                     |    |                |   |
| CURRENT LIABILITIES:                                                                                        |   |                     |    |                |   |
| Accounts payable                                                                                            |   | $                        | 10,622  |                | $      | 13,184 |   |
| Accrued liabilities-                                                                                        |   |                     |    |                |   |
| Payroll                                                                                                     |   | 9,614                    |    | 9,537               |   |
| Maintenance                                                                                                 |   | 17,418                   |    | 16,529              |   |
| Deferred income                                                                                             |   | 2,485                    |    | 2,485               |   |
| Other, primarily property and income taxes                                                                  |   | 10,203                   |    | 3,046               |   |
|                                                                                                        |   |                     |    |                |   |
| Total current liabilities                                                                                   |   | 50,342                   |    | 44,781              |   |
|                                                                                                        |   |                     |    |                |   |
| OTHER NONCURRENT LIABILITIES                                                                                |   | 6,303                    |    | 7,701               |   |
|                                                                                                        |   |                     |    |                |   |
| SHAREHOLDERS’ EQUITY:                                                                                  |   |                     |    |                |   |
| Common stock,  $.01 par value; 60,000,000 shares authorized, 20,298,141 shares  issued and outstanding |   | 203                      |    | 203                 |   |
| Paid-in capital                                                                                             |   | 50,508                   |    | 50,508              |   |
| Warrants                                                                                                    |   | 16,500                   |    | 16,500              |   |
| Other comprehensive income (loss)                                                                           |   | 64                       |    | (21                 | )      |
| Retained earnings                                                                                           |   | 110,129                  |    | 106,182             |   |
| Total shareholders’ equity                                                                             |   | 177,404                  |    | 173,372             |   |
|                                                                                                        |   | $                        | 234,049 |                | $      | 225,854 |   |

 

The accompanying notes to the interim condensed consolidated financialstatements are an integral part of these unaudited condensed consolidatedbalance sheets.

 

4

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MESABAHOLDINGS, INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

(In thousands,except per share information)

(Unaudited)

 
|                                     |   | **Three  Months Ended September 30,** |    |
|------------------------------------------|--------|---------------------------------------|---------|
|                                     |   | **2002**                              |    | **2001** |   |
| OPERATING REVENUES:                      |   |                                  |    |   |   |
| Passenger                                |   | $                                     | 113,042 |   | $ | 105,631 |   |
| Other                                    |   | 5,593                                 |    | 3,204 |   |
| Total operating revenues                 |   | 118,635                               |    | 108,835 |   |
|                                     |   |                                  |    |   |   |
| OPERATING EXPENSES:                      |   |                                  |    |   |   |
| Wages and benefits                       |   | 33,967                                |    | 32,001 |   |
| Aircraft fuel                            |   | 6,399                                 |    | 6,313 |   |
| Aircraft maintenance                     |   | 19,953                                |    | 18,392 |   |
| Aircraft rents                           |   | 27,022                                |    | 25,575 |   |
| Landing fees                             |   | 2,127                                 |    | 1,622 |   |
| Insurance and taxes                      |   | 4,303                                 |    | 1,561 |   |
| Depreciation and amortization            |   | 4,708                                 |    | 5,008 |   |
| Administrative and other                 |   | 15,209                                |    | 15,422 |   |
| Total operating expenses                 |   | 113,688                               |    | 105,894 |   |
|                                     |   |                                  |    |   |   |
| Operating income                         |   | 4,947                                 |    | 2,941 |   |
|                                     |   |                                  |    |   |   |
| NONOPERATING INCOME (EXPENSE):           |   |                                  |    |   |   |
| Write down of investment                 |   | (243                                  | )       | — |   |
| Other, net                               |   | 861                                   |    | 6,115 |   |
| Other nonoperating income (expense), net |   | 618                                   |    | 6,115 |   |
|                                     |   |                                  |    |   |   |
| Income before provision for income taxes |   | 5,565                                 |    | 9,056 |   |
|                                     |   |                                  |    |   |   |
| PROVISION FOR INCOME TAXES               |   | 3,194                                 |    | 4,796 |   |
| NET INCOME                               |   | $                                     | 2,371   |   | $ | 4,260 |   |
|                                     |   |                                  |    |   |   |
| NET INCOME PER SHARE:                    |   |                                  |    |   |   |
| Earnings per share – Basic          |   | $                                     | 0.12    |   | $ | 0.21 |   |
| Earnings per share – Diluted        |   | $                                     | 0.12    |   | $ | 0.21 |   |
|                                     |   |                                  |    |   |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING:     |   |                                  |    |   |   |
| Basic                                    |   | 20,298                                |    | 20,288 |   |
| Diluted                                  |   | 20,302                                |    | 20,293 |   |

 

Theaccompanying notes to the interim condensed consolidated financial statementsare an integral part of these unaudited condensed consolidated financial statements.

 

5

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MESABAHOLDINGS, INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

(In thousands,except per share information)

(Unaudited)

 
|                                     |   | **Six Months  Ended September 30,** |    |
|------------------------------------------|--------|-------------------------------------|---------|
|                                     |   | **2002**                            |    | **2001** |   |
| OPERATING  REVENUES:                     |   |                                |    |   |   |
| Passenger                                |   | $                                   | 222,072 |   | $ | 217,935 |   |
| Other                                    |   | 9,917                               |    | 6,126 |   |
| Total operating revenues                 |   | 231,989                             |    | 224,061 |   |
|                                     |   |                                |    |   |   |
| OPERATING EXPENSES:                      |   |                                |    |   |   |
| Wages and benefits                       |   | 65,756                              |    | 63,474 |   |
| Aircraft fuel                            |   | 12,106                              |    | 12,989 |   |
| Aircraft maintenance                     |   | 39,465                              |    | 38,951 |   |
| Aircraft rents                           |   | 53,524                              |    | 51,186 |   |
| Landing fees                             |   | 3,789                               |    | 3,293 |   |
| Insurance and taxes                      |   | 8,628                               |    | 3,168 |   |
| Depreciation and amortization            |   | 9,571                               |    | 9,927 |   |
| Administrative and other                 |   | 27,976                              |    | 31,346 |   |
| Total operating expenses                 |   | 220,815                             |    | 214,334 |   |
|                                     |   |                                |    |   |   |
| Operating income                         |   | 11,174                              |    | 9,727 |   |
|                                     |   |                                |    |   |   |
| NONOPERATING INCOME (EXPENSE):           |   |                                |    |   |   |
| Interest expense                         |   | —                              |    | (53 | ) |
| Write down of investment                 |   | (2,994                              | )       | — |   |
| Other, net                               |   | 1,694                               |    | 7,360 |   |
| Other nonoperating income (expense), net |   | (1,300                              | )       | 7,307 |   |
|                                     |   |                                |    |   |   |
| Income before provision for income taxes |   | 9,874                               |    | 17,034 |   |
|                                     |   |                                |    |   |   |
| PROVISION FOR INCOME TAXES               |   | 5,927                               |    | 8,103 |   |
| NET INCOME                               |   | $                                   | 3,947   |   | $ | 8,931 |   |
|                                     |   |                                |    |   |   |
| NET INCOME PER SHARE:                    |   |                                |    |   |   |
| Earnings per share – Basic          |   | $                                   | 0.19    |   | $ | 0.44 |   |
| Earnings per share – Diluted        |   | $                                   | 0.19    |   | $ | 0.44 |   |
|                                     |   |                                |    |   |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING:     |   |                                |    |   |   |
| Basic                                    |   | 20,298                              |    | 20,288 |   |
| Diluted                                  |   | 20,318                              |    | 20,293 |   |

 

Theaccompanying notes to the interim condensed consolidated financial statementsare an integral part of these unaudited condensed consolidated financialstatements.

 

6

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MESABAHOLDINGS, INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 
|                                                                               |   | **Six Months  Ended September 30,** |   |
|------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                               |   | **2002**                            |   | **2001** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |   |                                |   |   |   |
| Net income                                                                         |   | $                                   | 3,947  |   | $ | 8,931 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities- |   |                                |   |   |   |
| Depreciation and amortization                                                      |   | 9,571                               |   | 9,927 |   |
| Write down of investment                                                           |   | 2,994                               |   | — |   |
| Amortization of deferred credits                                                   |   | (1,398                              | )      | (953 | ) |
| Changes in current operating items:                                                |   |                                |   |   |   |
| Accounts receivable, net                                                           |   | 6,569                               |   | 1,529 |   |
| Inventories, net                                                                   |   | 437                                 |   | (1,926 | ) |
| Prepaid expenses and deposits                                                      |   | (1,259                              | )      | 498 |   |
| Accounts payable and other                                                         |   | 4,966                               |   | (3,023 | ) |
| Net cash provided by operating activities                                          |   | 25,827                              |   | 14,983 |   |
|                                                                               |   |                                |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |   |                                |   |   |   |
| Purchases of short term investments                                                |   | (12,390                             | )      | (46,936 | ) |
| Sales of short term investments                                                    |   | 52,260                              |   | 54,890 |   |
| Purchases of long term investments                                                 |   | (49,204                             | )      | — |   |
| Sales of long term investments                                                     |   | 31,400                              |   | — |   |
| Purchases of property and equipment, net                                           |   | (4,852                              | )      | (9,506 | ) |
| Net cash used in investing activities                                              |   | 17,214                              |   | (1,552 | ) |
|                                                                               |   |                                |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |   |                                |   |   |   |
| Repayment of capital lease obligations                                             |   | —                              |   | (57 | ) |
| Net cash used in financing activities                                              |   | —                              |   | (57 | ) |
|                                                                               |   |                                |   |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                          |   | 43,041                              |   | 13,374 |   |
|                                                                               |   |                                |   |   |   |
| CASH AND CASH EQUIVALENTS:                                                         |   |                                |   |   |   |
| Beginning of period                                                                |   | 31,250                              |   | 18,916 |   |
| End of period                                                                      |   | $                                   | 74,291 |   | $ | 32,290 |   |
| SUPPLEMENTARY CASH FLOW INFORMATION:                                               |   |                                |   |   |   |
| Cash paid during period for:                                                       |   |                                |   |   |   |
| Interest                                                                           |   | $                                   | — |   | $ | 57 |   |
| Income taxes                                                                       |   | $                                   | 1,127  |   | $ | 9,533 |   |

 

Theaccompanying notes to the interim condensed consolidated financial statementsare an integral part of these unaudited condensed consolidated financialstatements.

 

7

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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”), without audit, pursuant to the rules and regulations ofthe Securities and Exchange Commission. The information furnished in the condensed consolidated financialstatements includes normal recurring adjustments and reflects all adjustments,which are, in the opinion of management, necessary for a fair presentation ofsuch consolidated financial statements. The Company’s business is seasonal and, accordingly, interim results arenot indicative of results for a full year. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to such rules and regulations, although the Company believesthat the disclosures are adequate to make the information presented notmisleading.  It is suggested that thesecondensed consolidated financial statements be read in conjunction with theconsolidated financial statements for the year ended March 31, 2002, and thenotes thereto, included in the Company’s Annual Report on Form 10-K filed withthe Securities and Exchange Commission.

 

1.               Basis ofPresentation

 

The condensed consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries, Mesaba Aviation, Inc. (“Mesaba”) and Ranger AcquisitionCorp.   All significant intercompany balancesand transactions have been eliminated in consolidation.

 

2.               Agreements withNorthwest 

 

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, reservation systems, and groundhandling and other services from Northwest. For these services, Mesaba paid to Northwest $5.5 million, $6.2 million,$10.4 million and $12.9 million for the three and six months ended September30, 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.

 

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 $0.9 million, $1.2million, $2.9 million and $2.7 million for the three and six monthsended September 30, 2002 and 2001, respectively, and are included in passengerrevenues in the accompanying condensed consolidated statements of operations.  Approximately 75% and 69% of the September30, 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 materiallyperform under the Airlink or Jet Agreements would have a material adverseeffect on the Company’s operations, financial position and cash flows.  Northwest and Mesaba review contractcompliance on a periodic basis.

 

8

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3.               Investments

 

Investments consist principallyof municipal securities and corporate bonds and are classified asavailable-for-sale as of September 30, 2002 and March 31, 2002.  Available-for-sale investments are reportedat fair value with unrealized gains and losses excluded from operations and reportedas 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 September 30, 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.  Investmentswith maturity dates greater than one year are classified as long term.

 

As of September 30, 2002, theamortized cost, gross unrealized gains and losses, and fair value of cash, cashequivalents and investments were as follows:

 
|                                      |   | **Amortized  Cost** |    | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |    | **Fair  Value** |   |
|-------------------------------------------|--------|---------------------|---------|------------------------------|--------|-------------------------------|---------|-----------------|--------|
|                                      |   |                |    |                         |   |                          |    |            |   |
| Cash and Cash Equivalents                 |   | $                   | 74,291  |                         | $      | 1                             |    | $               | — |   | $ | 74,292 |   |
| Debt Securities – Available for Sale |   | 46,782              |    | 170                          |   | (10                           | )  | 46,942          |   |
| Total Cash and Investments                |   | $                   | 121,073 |                         | $      | 171                           |    | $               | (10    | )  | $ | 121,234 |   |

 

During the three and six monthperiods ended September 30, 2002, the Company recorded realized gains andlosses on the sale of investments as follows:

 
|                        |   | **Three  Months  Ended  September 30,** |    | **Six Months  Ended  September 30,** |    |
|-----------------------------|--------|-----------------------------------------|---------|--------------------------------------|---------|
|                        |   | **2002**                                |    | **2001**                             |    | **2002** |   | **2001** |   |
| Gross Realized Gains        |   | $                                       | 183     |                                 | $       | 83 |   | $ | 208 |   | $ | 89 |   |
| Gross Realized Losses       |   | (81                                     | )  | (51                                  | )  | (81 | )  | (51 | )  |
| Net Realized Gains (Losses) |   | $                                       | 102     |                                 | $       | 32 |   | $ | 127 |   | $ | 38 |   |

 

4.               RestructuringCharge 

 

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 year2002.  The reduction in personnel wascompleted by September 30, 2001 and affected 382 individuals in all areas ofMesaba.** **As of September 30, 2002, noliability remains as Mesaba has paid and charged against the liabilityapproximately $.8 million and reduced the liability by approximately $.3million in the third quarter of fiscal year 2002 due to the employment ofcertain terminated employees by others.

 

5.               Earnings PerShare

 

Basic earnings per common share is computedby dividing net income by the weighted average number of shares of common stockoutstanding during the period.  Dilutedearnings per share is computed by dividing net income by the sum of theweighted average number of shares of common stock outstanding plus alladditional common stock that would have been outstanding if potentiallydilutive common shares related to stock options and warrants had beenissued.  Options and warrants totaling5,964 and 4,150 for the three months ended September 30, 2002 and 2001 and5,282 and 2,491 for the six months ended September 30, 2002 and 2001 wereexcluded from the computation of diluted earnings per share as the impact wouldhave been anti-dilutive.

 

9

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The following tables reconcile the number ofshares utilized in the earnings per share calculations:

 
|                                                                                                        |   | **Three  Months Ended  September 30,** |   |
|-------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                                                        |   | **2002**                               |   | **2001** |   |
|                                                                                                        |   |                                   |   |   |   |
| Net Income                                                                                                  |   | $                                      | 2,371  |   | $ | 4,260 |   |
| For Earnings Per Common Share - Basic:                                                                      |   |                                   |   |   |   |
| Weighted average number of issued shares  outstanding                                                       |   | 20,298                                 |   | 20,288 |   |
| Effect of Dilutive Securities:                                                                              |   |                                   |   |   |   |
| Computed shares outstanding under the Company’s  stock option plan utilizing the treasury stock method |   | 4                                      |   | 5 |   |
| 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                                    |   | 20,302                                 |   | 20,293 |   |
| Earnings Per Share - Basic                                                                                  |   | $                                      | 0.12   |   | $ | 0.21 |   |
| Earnings Per Share - Diluted                                                                                |   | $                                      | 0.12   |   | $ | 0.21 |   |

 
|                                                                                                        |   | **Six Months  Ended  September 30,** |   |
|-------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                                        |   | **2002**                             |   | **2001** |   |
|                                                                                                        |   |                                 |   |   |   |
| Net Income                                                                                                  |   | $                                    | 3,947  |   | $ | 8,931 |   |
| For Earnings Per Common Share - Basic:                                                                      |   |                                 |   |   |   |
| Weighted average number of issued shares  outstanding                                                       |   | 20,298                               |   | 20,288 |   |
| Effect of Dilutive Securities:                                                                              |   |                                 |   |   |   |
| Computed shares outstanding under the  Company’s stock option plan utilizing the treasury stock method |   | 20                                   |   | 5 |   |
| 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                                    |   | 20,318                               |   | 20,293 |   |
| Earnings Per Share - Basic                                                                                  |   | $                                    | 0.19   |   | $ | 0.44 |   |
| Earnings Per Share - Diluted                                                                                |   | $                                    | 0.19   |   | $ | 0.44 |   |

 

6.               Comprehensive Income

 

The following tables presentthe calculation of comprehensive income. Comprehensive income has no impact on reported net income.  The components of comprehensive income areas follows:

 
|                                                                          |   | **Three  Months Ended  September 30,** |   |
|-------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                          |   | **2002**                               |   | **2001** |   |
|                                                                          |   |                                   |   |   |   |
| Net Income                                                                    |   | $                                      | 2,371  |   | $ | 4,260 |   |
| Unrealized gains of investments classified  as available for sale, net of tax |   | 206                                    |   | 99 |   |
| Comprehensive income                                                          |   | $                                      | 2,577  |   | $ | 4,359 |   |

 

10

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|                                                                          |   | **Six Months  Ended  September 30,** |   |
|-------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                          |   | **2002**                             |   | **2001** |   |
|                                                                          |   |                                 |   |   |   |
| Net Income                                                                    |   | $                                    | 3,947  |   | $ | 8,931 |   |
| Unrealized gains of investments classified  as available for sale, net of tax |   | 64                                   |   | 148 |   |
| Comprehensive income                                                          |   | $                                    | 4,011  |   | $ | 9,079 |   |

 

7.               New Accounting Pronouncements

 

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.

 

In August 2001, The FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” which isrequired to be adopted for fiscal years beginning after December 15, 2001.  SFAS No. 144 establishes accounting andreporting standards for the impairment or disposal of long-lived assets.  The Company adopted SFAS No. 144 on April 1,2002 and the adoption did not have a material impact on the Company’s resultsof operations, financial position or cash flows.

 

The FASB recently issuedStatement Nos. 143, 145 and 146. Management of the Company is in the process of evaluating each of thesestatements but does not believe the adoption of these statements will have amaterial impact on the Company’s results of operations, financial position orcash flows.

 

8.               Acquisition

 

On September 26, 2002, theCompany and Ranger Acquisition Corp., a wholly owned subsidiary of the Company(the “Purchaser”), executed a definitive merger agreement (the “MergerAgreement”) providing for the acquisition of Big Sky Transportation Co., aregional air carrier based in Billings, Montana (“Big Sky”), for approximately$3.5 million.

 

On October 29, 2002, thePurchaser commenced a cash tender offer (the “Offer”) for all outstandingshares of common stock of Big Sky (the “Shares”) for $2.60 per share.  Completion of the Offer is subject to thesatisfaction of certain conditions which include, among other things, that thereshall have been validly tendered and not withdrawn a number of Shares which,together with all Shares owned, directly or indirectly, by the Company orPurchaser, represents at least two-thirds of Big Sky’s outstanding Shares on afully-diluted basis, assuming the exercise of all outstanding stock options.

 

Following the completion of theOffer (and subject to certain conditions), Purchaser will be merged with andinto Big Sky, with Big Sky surviving as a wholly owned subsidiary of theCompany (the “Merger”).  In the Merger,those shareholders of Big Sky who did not tender their Shares (other than theCompany and its subsidiaries and shareholders exercising dissenters’ rights)will be entitled to receive the same price per Share that is offered in theOffer for each Share held by them.

 

The terms and conditions of theacquisition (including the Offer and the Merger) are more fully described inthe Schedule TO filed with the SEC on October 29, 2002 and in the MergerAgreement, which is attached as Exhibit 2 to the Company’s Form 8-K filed withthe SEC on September 27, 2002.

11

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

 

**Resultsof Operations for the Three Months Ended September 30, 2002 and 2001**

(As used herein, “unit cost” means operating cost per available seatmile.  Dollars and shares outstandingare expressed in thousands unless otherwise noted.)

 

Earnings Summary. The Company reported netincome of $2,371 or $0.12 diluted earnings per share for the three months endedSeptember 30, 2002, compared to $4,260 or $0.21 diluted earnings per share forthe three months ended September 30, 2001.

 

Operating Revenues.  Total operating revenues increased 9.0% in the second quarter offiscal 2003 to $118,635 from $108,835 in the prior year’s second fiscalquarter, and revenue passenger miles increased 7.3% to 450,811 from420,335.  Revenue per available seatmile (“RASM”) increased to $0.159 from $0.154 in the previous year’s secondfiscal quarter due to Mesaba’s strong operating performance and increasedground handling activities.  Mesaba’saverage passenger load factor (percentage of seats filled on each aircraft onaverage = RPMs / ASMs ) was 60.6% in the second fiscal quarter compared to59.5% during the same period a year ago.

 

|                                                    |   | **Three  months ended September 30,** |   |
|---------------------------------------------------------|--------|---------------------------------------|--------|
| **Operating statistics**                                |   | **2002**                              |   | **2001** |   |
| Revenue passengers carried                              |   | 1,577,336                             |   | 1,547,835 |   |
| Revenue passenger miles (“RPMs”) (000’s) |   | 450,811                               |   | 420,335 |   |
| Available seat miles (“ASMs”) (000’s)    |   | 744,514                               |   | 705,978 |   |
| Passenger load factor                                   |   | 60.6                                  | %      | 59.5 | % |
| Revenue per available seat mile                         |   | $                                     | .159   |   | $ | .154 |   |
| Departures                                              |   | 63,148                                |   | 64,295 |   |
| Aircraft in service                                     |   | 116                                   |   | 109 |   |
|                                                         |        |                                       |        |  |  |  |  |

 

 

Operating Expenses.  Total operating expenses increased 7.4% in the second quarter offiscal 2003 to $113,688 from $105,894 in the prior year’s second fiscalquarter.  Cost per available seat mile(“CASM”) increased to $0.153 from $0.149 in the previous year’s second fiscalquarter due primarily to increased insurance costs.  Available seat miles increased to 744,514 in the second quarterof fiscal 2003 from 705,978 in the year earlier quarter due to an increasednumber of aircraft and the negative impacton flight activity following the September 11, 2001 terrorist attacks.

 

| **Operating Costs Per  Available Seat Mile (Unit Cost)** |     | **Three  months ended September 30,** |     |
|----------------------------------------------------------|----------|---------------------------------------|----------|
|                                                     | **2002** |                                  | **2001** |   |
| Wages and benefits                                       |     | 4.6                                   | ¢   | 4.5 | ¢ |
| Aircraft fuel                                            |     | 0.9                                   |     | 0.9 |   |
| Aircraft maintenance                                     |     | 2.7                                   |     | 2.6 |   |
| Aircraft rents                                           |     | 3.6                                   |     | 3.6 |   |
| Landing fees                                             |     | 0.3                                   |     | 0.2 |   |
| Insurance and taxes                                      |     | 0.6                                   |     | 0.2 |   |
| Depreciation and amortization                            |     | 0.6                                   |     | 0.7 |   |
| Administrative and other                                 |     | 2.0                                   |     | 2.2 |   |
| Total                                                    |     | 15.3                                  | ¢   | 14.9 | ¢ |

 

Wages and benefits increased 6.1% to $33,967 in the second quarter offiscal 2003 from $32,001 in the second quarter of fiscal 2002 due primarily toincreased customer service staffing at theMinneapolis/St. Paul and Detroit hub locations and health insurance.

 

12

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Aircraft fuel increased 1.4% to$6,399 in the second quarter of fiscal 2003 from $6,313 in the second quarterof fiscal 2002 due primarily to the offsetting impact of reduced turbo-propaircraft utilization and an increase in the number of turbo-prop aircraft.  Fuel usage was higher than the same quarterlast year, which was reduced due to the events of September 11, 2001.  Provisions of the Airlink Agreement withNorthwest protect Mesaba from changes in fuel prices.  Mesaba’s actual cost of fuel, including taxes and pumping fees,was 83.5 cents per gallon for both periods. Northwest provides fuel for the jet operation at its expense under theJet Agreement.

 

Aircraft maintenance, excluding wages and benefits, increased 8.5% to$19,953 in the second fiscal quarter of fiscal 2003 from $18,392 in the secondquarter of fiscal 2002 due primarily to the combined impact of increased hoursflown which increases Mesaba’s flight hour based maintenance costs and price increases in the flight hour basedmaintenance cost rates.

 

Aircraft rents increased 5.7% to $27,022 in the second quarter offiscal 2003 from $25,575 in the second quarter of fiscal 2002 due to the netaddition of seven turbo-prop aircraft. Mesaba added eleven aircraft from Pinnacle Airlines and returned fouraircraft to a leasing company since the second quarter a year ago.

 

Landing fees increased 31.1% to $2,127 in the second quarter of fiscal2003 from $1,622 for the second quarter of fiscal 2002 primarily due toincreased landing fees charged by airports as a result of increased securitycosts following the events of September 11, 2001.  Northwest provides landing fees for the jet operation at theirexpense under the Jet Agreement.

 

Insurance and taxes increased 175.7% to $4,303 in the second quarter offiscal 2003 from $1,561 for the second quarter of fiscal 2002 due primarily toincreased rates and surcharges imposed after September 11, 2001.

 

Depreciation and amortization decreased 6.0% to $4,708 in the secondquarter of fiscal 2003 compared to $5,008 in the second quarter of fiscal2002.  The reduction in expense is attributableto reduced capital expenditures and extending the ARJ warrant amortizationschedule.

 

Administrative and other decreased 1.4% to $15,209 in the secondquarter of fiscal 2003 from $15,422 in the second quarter of fiscal 2002 dueprimarily to the offsetting impact of $1.1 million restructuring charge takenlast year following the events of September 11, 2001 and increased securityfees required by the Department of Transportation during fiscal year 2003.

 

Operating Income.  Operating income totaled $4,947 in the second fiscal quarter of2003 as compared to operating income of $2,941 a year ago.  Mesaba’s operating margin increased to 4.2%from 2.7% in the prior year’s second fiscal quarter.

 

Nonoperating Income (Expense).  Nonoperating income decreased to $618 in thesecond quarter of fiscal 2003 from income of $6,115 for the second quarter offiscal 2002 due primarily to the $5,250 government grant received last yearfollowing September 11, 2001. Nonoperating income also decreased due to lower interest rates earned onthe Company’s cash and investments and the additional write down on the valueof the WorldCom bond.

 

Provision for Income Taxes. The Company’sblended effective tax rate was 57.4% for the second fiscal quarter of 2003 ascompared to 53.0% in the year earlier quarter. Mesaba adjusts its effective tax rate quarterly based on forecastedoperating results for the fiscal year. * *Theeffective tax rate increased due to consistent levels of nondeductible expensesbeing applied over lower pre-tax earnings.

 

**Resultsof Operations for the Six Months Ended September 30, 2002 and 2001**

(As used herein, “unit cost” means operating cost per available seatmile.  Dollars and shares outstandingare expressed in thousands unless otherwise noted.)

 

Earnings Summary. The Company reported netincome of $3,947 or $0.19 diluted earnings per share for the six months endedSeptember 30, 2002, compared to $8,931 or $0.44 diluted earnings per share forthe six months ended September 30, 2001.

 

Operating Revenues.  Total operating revenues increased 3.5% in the first six monthsof fiscal 2003 to $231,989 from $224,061 in the prior year’s first six months,and revenue passenger miles decreased 3.1% to 860,523 from 888,207.  Revenue per available seat mile (“RASM”)increased to $0.161 from $0.154 in the previous year’s first six months due toMesaba’s strong operating performance and increased ground handlingactivities.  Mesaba’s average passengerload factor (percentage of seats filled on each aircraft on average = RPMs /ASMs ) was 59.8% in the first six months compared to 61.1% during the sameperiod a year ago.

 

13

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|                                 |   | **Six months  ended September 30,** |   |
|--------------------------------------|--------|-------------------------------------|--------|
| **Operating statistics**             |   | **2002**                            |   | **2001** |   |
| Revenue passengers carried           |   | 3,003,858                           |   | 3,255,250 |   |
| Revenue passenger miles (000’s) |   | 860,523                             |   | 888,207 |   |
| Available seat miles (000’s)    |   | 1,440,001                           |   | 1,453,692 |   |
| Passenger load factor                |   | 59.8                                | %      | 61.1 | % |
| Revenue per available seat mile      |   | $                                   | .161   |   | $ | .154 |   |
| Departures                           |   | 121,817                             |   | 132,544 |   |
| Aircraft in service                  |   | 116                                 |   | 109 |   |
|                                      |        |                                     |        |  |  |  |  |

 

Operating Expenses.  Total operating expenses increased 3.0% in the first six monthsof fiscal 2003 to $220,815 from $214,334 in the prior fiscal year’s first sixmonths.  Cost per available seat mile(“CASM”) increased to $0.153 from $0.147 in the previous fiscal year’s firstsix months due to increased insurance costs and labor associated with groundhandling activities.  Available seatmiles decreased to 1,440,001 in the first six months of fiscal 2003 from1,453,692 in the year earlier six-month period due to decreased aircraftutilization.  The significant change in unit cost year over year was due to therelationship of fixed operating costs to reduced aircraft utilization.

 

| **Operating Costs Per**             |   | **Six****months ended  September 30,** |   |
|-------------------------------------|--------|----------------------------------------|--------|
| **Available Seat Mile (Unit Cost)** |   | **2002**                               |   | **2001** |   |
| Wages and benefits                  |   | 4.6                                    | ¢ | 4.4 | ¢  |
| Aircraft fuel                       |   | 0.8                                    |   | 0.9 |   |
| Aircraft maintenance                |   | 2.7                                    |   | 2.6 |   |
| Aircraft rents                      |   | 3.7                                    |   | 3.5 |   |
| Landing fees                        |   | 0.3                                    |   | 0.2 |   |
| Insurance and taxes                 |   | 0.6                                    |   | 0.2 |   |
| Depreciation and amortization       |   | 0.7                                    |   | 0.7 |   |
| Administrative and other            |   | 1.9                                    |   | 2.2 |   |
| Total                               |   | 15.3                                   |   | 14.7 |   |

 

Wages and benefits increased 3.6% to $65,756 in the first six months offiscal 2003 from $63,474 in the first six months of fiscal 2002 due primarilyto increased customer service staffing atthe Minneapolis/St. Paul and Detroit hub locations.

 

Aircraft fuel decreased 0.7% to$12,106 in the first six months of fiscal 2003 from $12,989 in the first sixmonths of fiscal 2002 due primarily to the offsetting impact of reduced turbo-propaircraft utilization and seven additional turbo-prop aircraft.  Provisions of the Airlink Agreement withNorthwest protect Mesaba from changes in fuel prices.  Mesaba’s actual cost of fuel, including taxes and pumping fees,was 83.5 cents per gallon for both periods. Northwest provides fuel for the jet operation at its expense under theJet Agreement.

 

Aircraft maintenance, excluding wages and benefits, increased 0.1% to$39,465 in the first six months of fiscal 2003 from $38,951 in the first six monthsof fiscal 2002, due to higher rates on maintenance contracts and agingaircraft.

 

Aircraft rents increased 4.6% to $53,524 in the first six months offiscal 2003 from $51,186 in the first six months of fiscal 2002 due to the netaddition of seven turbo-prop aircraft. Mesaba added eleven aircraft from Pinnacle Airlines and returned fouraircraft to a leasing company since the first six months of fiscal 2002.

 

Landing fees increased 15.1% to $3,789 in the first six months offiscal 2003 from $3,293 for the first six months of fiscal 2002 primarily dueto increased landing fees charged by airports and partially offset by a declinein turbo-prop departures.  Northwestprovides landing fees for the jet operation at their expense under the JetAgreement.

 

Insurance and taxes increased 172.3% to $8,628 in the first six monthsof fiscal 2003 from $3,168 for the first six months of fiscal 2002 dueprimarily to increased rates and surcharges imposed after September 11, 2001.

 

Depreciation and amortization decreased 3.6% to $9,571 in the first sixmonths of fiscal 2003 compared to $9,927 in the first six months of fiscal2002. The reduction in expense is attributable to reduced capital expenditures,and extending the ARJ warrant amortization schedule.

 

14

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Administrative and other decreased 10.8% to $27,976 in the first sixmonths of fiscal 2003 from $31,346 in the first six months of fiscal 2002 due to reduced flight crew training and hotelcosts incurred as a result of the reduction in flight activity and a $1.1million restructuring charge taken last year following September 11, 2001.

 

Operating Income.  Operating income totaled $11,174 in the first six months offiscal 2003, as compared to operating income of $9,727 a year ago.  Mesaba’s operating margin increased to 4.8%from 4.3% in the prior year’s first fiscal six months.

 

Nonoperating Income (Expense).  Nonoperating expense of $1,300 for the firstsix months of fiscal 2003 was primarily due to the recognition of a $2,994write down of an investment in a WorldCom bond.  In fiscal 2002, nonoperating income of $7,307 was primarily dueto the recognition of $5,250 in a government grant following the events ofSeptember 11, 2001.  Other nonoperatingincome decreased in fiscal 2003 as compared to fiscal 2002 due to lowerinterest rates earned on the Company’s cash and investments.

 

Provision for Income Taxes. The Company’sblended effective tax rate was 60.0% for the first six months of fiscal 2003 ascompared to 47.6% in the year earlier period. Mesaba adjusts its effective tax rate quarterly based on forecastedoperating results for the fiscal year. * *Theeffective tax rate increased due to consistent levels of nondeductible expensesbeing applied over lower pre-tax earnings.

 

**Liquidityand Capital Resources**

 

The Company’s working capitaldecreased to $106,610 with a current ratio of 3.12 at September 30, 2002 ascompared to $117,840 and 3.63 at March 31, 2002.  Cash and cash equivalents increased by $43,041 to $74,291 atSeptember 30, 2002.  The primary changein the Company’s working capital, current ratio and level of cash and cashequivalents is the purchase of investments with maturities in excess of oneyear.  In February 2002, the Companyimplemented a new investment policy which reduced investment concentration fromten percent to five percent and allowed its investment managers to purchaseinvestments with a maximum maturity of two years from one year and an averageportfolio life to one year from six months. Long term investments increased $17,804 to $21,872 at September 30, 2002compared to $4,068 at March 31, 2002.

 

Investments consist principallyof municipal securities and corporate bonds and are classified asavailable-for-sale as of September 30, 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 for other-than-temporaryimpairments, which are reported as a charge to current operations and result ina new cost basis for the investment. The Company classifies investments that mature within one year as shortterm.  Investments with maturitiesgreater than one year are classified as long term.

 

Because of the WorldCombankruptcy proceedings and current market valuation of its bonds, the Companyrecorded within the six months ended September 30, 2002 an other-than-temporaryimpairment of $2,994 in the condensed consolidated financial statements regardingan 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 to the value of theWorldCom investment will be recorded within the condensed consolidatedstatement of operations pending ultimate disposition of the investment.  Management does not believe the write downof the WorldCom investment will materially impact the remainder of theCompany’s investment portfolio.

 

During the six months ending September 30, 2002, Mesaba’s fleetconsisted of 115 aircraft covered under operating leases with remaining termsof less than a month to 14 years and aggregate monthly lease payments ofapproximately $9,126.  Mesaba has theability to return to the lessor up to 20 turbo-prop aircraft which, if all werereturned, would reduce the Mesaba’s aggregate monthly lease payment by a totalof $620.  Mesaba leases all of its Saab340 aircraft, either directly from aircraft leasing companies or throughsubleases with Northwest under operating leases with original terms up to 17.5years.  Mesaba leases its RJ85 aircraftfrom Northwest 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.

 

Approximately75% of the Company’s accounts receivable balance as of September 30, 2002 wasdue from Northwest.  Loss of the Company’s affiliation with Northwestor Northwest’s failure to make timely payment of amounts owed to the Company orto otherwise materially perform under the Airlink or Jet Agreements for anyreason would have a material adverse effect on the Company’s operations andfinancial results.

 

15

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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 in fiscal 2003.

 

**NewAccounting Pronouncements**

 

On June 1, 2001, the FASBissued SFAS No. 142, “Goodwill and Other Intangible Assets”.  SFAS No. 142 addresses how goodwill andother intangible assets that are acquired individually or with a group of otherassets (but not those acquired in a business combination) should be accountedfor in financial statements upon their acquisition and after they have beeninitially recognized.  The provisions ofSFAS No. 142 are required to be applied starting with fiscal years beginningafter December 15, 2001.  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.

 

In August 2001, The FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” which isrequired to be adopted for fiscal years beginning after December 15, 2001.  SFAS No. 144 establishes accounting andreporting standards for the impairment or disposal of long-lived assets.  The Company adopted SFAS No. 144 on April 1,2002 and the adoption did not have a material impact on the Company’s resultsof operations, financial position or cash flows.

 

The FASB recently issuedStatement Nos. 143, 145 and 146. Management of the Company is in the process of evaluating each of thesestatements but does not believe the adoption of these statements will have amaterial impact on the Company’s results of operations, financial position orcash flows.

 

16

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Item 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company’s principal marketrisks are the availability of jet fuel and changes in interest rates.

 

The Company has not experienceddifficulties with fuel availability and expects to be able to obtain fuel atprevailing prices in quantities sufficient to meet its futurerequirements.  As a part of the AirlinkAgreement, Northwest bears the economic risk of fuel price fluctuations forMesaba’s fuel requirements.  As such,the Company reasonably expects that its results of operations will not bedirectly affected by fuel price volatility.

 

The Company’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.

 

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 material weaknesses.

 

Part II.

 

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

 

The Company filed with theSecurities and Exchange Commission a definitive proxy statement dated July 18,2002 in connection with its annual meeting of shareholders held on August 22,2002.  At the annual meeting, theCompany’s shareholders elected the following persons as Class Two directors,each for a term of three years:

 

|                 |   | **Votes For** |   | **Votes  Withheld** |   |
|----------------------|--------|---------------|--------|---------------------|--------|
| Donald E. Benson     |   | 19,600,488    |   | 185,090             |   |
| Carl R. Pohlad       |   | 18,573,533    |   | 1,212,045           |   |
| Douglas M. Steenland |   | 19,600,236    |   | 185,342             |   |

 

The Company’s shareholders alsoratified the appointment of Deloitte & Touche LLP as the Company’sindependent public accountants for the fiscal year ending March 31, 2003, with19,677,404 votes “FOR,” 72,614 votes “against” and 35,560 abstentions.  There were no brokers non-votes.

 

Item 5.    Other Information.

 

On September 26, 2002, theCompany and Ranger Acquisition Corp., a wholly owned subsidiary of the Company(the “Purchaser”), executed a definitive merger agreement (the “MergerAgreement”) providing for the acquisition of Big Sky Transportation Co., aregional air carrier based in Billings, Montana (“Big Sky”), for approximately$3.5 million.

 

On October 29, 2002, thePurchaser commenced a cash tender offer (the “Offer”) for all outstandingshares of common stock of Big Sky (the “Shares”) for $2.60 per share.  Completion of the Offer is subject to thesatisfaction of certain conditions which include, among other things, thatthere shall have been validly tendered and not withdrawn a number of Shareswhich, together with all Shares owned, directly or indirectly, by the Companyor Purchaser, represents at least two-thirds of Big Sky’s outstanding Shares ona fully-diluted basis, assuming the exercise of all outstanding stock options.

 

Following the completion of theOffer (and subject to certain conditions), Purchaser will be merged with andinto Big Sky, with Big Sky surviving as a wholly owned subsidiary of theCompany (the “Merger”).  In the Merger,those shareholders of

 

17

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Big Sky who did not tendertheir Shares (other than the Company and its subsidiaries and shareholdersexercising dissenters’ rights) will be entitled to receive the same price perShare that is offered in the Offer for each Share held by them.

 

The terms and conditions of theacquisition (including the Offer and the Merger) are more fully described inthe Schedule TO filed with the SEC on October 29, 2002 and in the MergerAgreement, which is attached as Exhibit 2 to the Company’s Form 8-K filed withthe SEC on September 27, 2002.

 

18

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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.                                                                                                                                                     |

 

19

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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.                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                            |
| 21.  Subsidiaries.  Filed herewith.                                                                                                                                                                                                                                                                                                                                                                        |

 

20

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(b)           Reports on Form 8-K

 

The Companyfiled two reports on Form 8-K during the quarter ended September 30, 2002.

 

On July 17,2002, the Company filed a Form 8-K reporting the dismissal of Arthur AndersenLLP and the appointment of Deloitte & Touche LLP as the Company’sindependent auditor.  On September 27,2002, the Company filed a Form 8-K announcing a definitive Agreement and Planof Merger to acquire Big Sky Transportation Co., a regional air carrier basedin Billings, Montana.

 

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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: November 13, 2002 | 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 MesabaHoldings, Inc., certify that:

 

1.             I have reviewed this quarterlyreport 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)           designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

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

 

(c)           presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

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)           all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)           any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

22

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6.             The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:  | November 13,  2002                     |
|--------|----------------------------------------|
|   |                                   |
|   | By: /s/ Paul  F. Foley                 |
|   | Paul F.  Foley                         |
|   | President  and Chief Executive Officer |

 

CERTIFICATION

 

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

 

1.             I have reviewed thisquarterly 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)           designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

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

 

(c)           presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

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)           all significantdeficiencies in the design or operation of internal controls which could adverselyaffect the registrant’s ability to record, process, summarize and reportfinancial data and have identified for the registrant’s auditors any materialweaknesses in internal controls; and

 

(b)           any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

23

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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:  | November 13,  2002                                      |
|--------|---------------------------------------------------------|
|   |                                                    |
|   | By: /s/  Robert E. Weil                                 |
|   | Robert E.  Weil                                         |
|   | Vice  President, Chief Financial Officer  and Treasurer |

 

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with theQuarterly Report of Mesaba Holdings, Inc. (the “Company”) on Form 10-Q for thequarterly period ended September 30, 2002, as filed with the Securities andExchange Commission on the date hereof (the “Report”), the undersigned herebycertify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-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: November 13, 2002 | By:                                                    | /s/ Paul F. Foley  |
|--------------------------|--------------------------------------------------------|--------------------|
|                     | Paul F. Foley                                          |
|                     | President and Chief Executive Officer                  |
|                     |                                                   |
| Dated: November 13, 2002 | By:                                                    | /s/ Robert E. Weil |
|                     | Robert E. Weil                                         |
|                     | Vice President, Chief Financial Officer and  Treasurer |

 

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