**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(MarkOne)**

 

| **ý** |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|------------|--------|-----------------------------------------------------------------------------------------------|
|       |   |                                                                                          |
|       |   | **For the fiscal year ended March 31,  2004**                                            |
|       |   |                                                                                          |
|       |   | **or**                                                                                        |
|       |   |                                                                                          |
| **o**      |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from          to        **

 

**CommissionFile No. 0-17895**

 

**MAIR HOLDINGS, INC.**(Exact name of registrant as specified in its charter)

 

| **Minnesota**                                                   |   | **41-1616499**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State of other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification No.) |

 

**Fifth Street Towers, Suite 1720**

**150 South Fifth Street**

**Minneapolis, Minnesota 55402**

(Address of principal executive offices) (ZipCode)

 

Registrant’s telephone number, including areacode: **(612) 333-0021**

Securities registered pursuant toSection 12(b) of the Act: **None**

Securities registered pursuant toSection 12(g) of the Act: **Common Stock,par value $.01**

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý    No  o.

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.   o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act). Yes  o    No  ý.

 

Theaggregate market value of voting stock held by nonaffiliates of the registrantas of September 30, 2003 was approximately $67,891,846.

 

Asof June 1, 2004, there were 20,458,359 shares of Common Stock of the registrantissued and outstanding.

 

DOCUMENTS INCORPORATED BYREFERENCE

 

Portions of the definitiveProxy Statement for the registrant’s 2004 Annual Meeting of Shareholders areincorporated by reference into the Part III Items 10, 11, 12, 13 and 14 of thisForm 10-K.

 

 

----

 

**MAIR HOLDINGS, INC.**

**Annual Report on Form10-K**

**For the Fiscal YearEnded March 31, 2004**

 

**TABLE OF CONTENTS**

 
| Cautionary  Note Regarding Forward-Looking Statements | 3         |
|-------------------------------------------------------|-----------|
|                                                  |      |   |   |
| Part I                                                |      | 4 |
|                                                  | Item 1.   | Business | 4 |
|                                                  | Item 2.   | Properties | 13 |
|                                                  | Item 3.   | Legal Proceedings | 15 |
|                                                  | Item  4.  | Submission  Of Matters To A Vote Of Security Holders | 15 |
|                                                  |      |   |   |
| Part II                                               |      | 16 |
|                                                  | Item  5.  | Market  For Registrant’s Common Equity And Related Stockholder Matters | 16 |
|                                                  | Item 6.   | Selected Financial Data | 17 |
|                                                  | Item 7.   | Management’s Discussion  And Analysis Of Financial Condition And Results Of Operations | 19 |
|                                                  | Item 7A.  | Quantitative And  Qualitative Disclosures About Market Risk | 28 |
|                                                  | Item  8.  | Financial  Statements And Supplementary Data | 28 |
|                                                  | Item  9.  | Changes  In And Disagreements With Accountants On Accounting And Financial Disclosure | 56 |
|                                                  | Item 9A.  | Controls And  Procedures | 56 |
|                                                  |      |   |   |
| Part III                                              |      | 57 |
|                                                  | Item  10. | Directors  And Executive Officers Of The Registrant | 57 |
|                                                  | Item 11.  | Executive Compensation | 57 |
|                                                  | Item  12. | Security  Ownership Of Certain Beneficial Owners And Management And Related Stockholder  Matters | 57 |
|                                                  | Item  13. | Certain  Relationships And Related Transactions | 57 |
|                                                  | Item  14. | Principal  Accountant Fees And Services | 57 |
|                                                  |      |   |   |
| Part IV                                               |      | 57 |
|                                                  | Item 15.  | Exhibits, Financial Statement Schedules And  Reports On Form 8-K | 57 |
|                                                  |      |   |   |
| Signatures                                            |      | 59 |
|                                                  |      |   |   |
| Exhibit Index                                         | 60        |

 

2

----

 

**CAUTIONARY NOTEREGARDING FORWARD-LOOKING STATEMENTS**

 

Statements in this AnnualReport on Form 10-K under the caption “Business” and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andelsewhere in this report are forward-looking and are based upon informationcurrently available to the Company.  TheCompany, through its officers, directors or employees, may also from time totime make oral forward-looking statements. In connection with the “safe harbor” provisions of the PrivateSecurities Litigation Reform Act of 1995, the Company is hereby identifyingimportant factors that could cause actual results to differ materially fromthose contained in any forward-looking statement made by or on behalf of theCompany.  Any such statement isqualified by reference to these cautionary statements.

 

Undue reliance should not beplaced on the Company’s forward-looking statements because the matters theydescribe are subject to known and unknown risks, uncertainties and otherunpredictable factors, many of which are beyond the Company’s control.  The Company’s forward-looking statements arebased on the information currently available and speak only as of the date onwhich this report was filed with the United States Securities and ExchangeCommission (“SEC”).  Over time, actualresults, performance or achievements will likely differ from the anticipatedresults, performance or achievements that are expressed or implied by theCompany’s forward-looking statements, and such differences might be significantand materially adverse to the Company’s stockholders.  Many important factors that could cause such a difference aredescribed in this Annual Report under the caption “Risk Factors Relating to theCompany and the Airline Industry” within Item 1 in this Annual Report on Form10-K.

 

All subsequent written or oralforward-looking statements attributable to the Company or persons acting on theCompany’s behalf are expressly qualified by the factors described above.  The Company assumes no obligation, anddisclaims any obligation, to update information contained in this Annual Reporton Form 10-K, including forward looking statements, as a result of facts,events or circumstances after the date of this report, except as required bylaw in the normal course of its public disclosure practices.

 

3

----

 

**PART I**

 

**Item1. BUSINESS**

 

MAIR Holdings, Inc.,formerly known as Mesaba Holdings, Inc., (“Holdings”) is the holding companyfor Mesaba Aviation, Inc., a regional air carrier based in Minneapolis,Minnesota (“Mesaba”) and Big Sky Transportation Co., a regional air carrierbased in Billings, Montana (“Big Sky”). Mesaba and Big Sky are each wholly-owned subsidiaries of Holdings.  Holdings, Mesaba and Big Sky are referred toherein collectively as the “Company”.

 

**Operations**

 

*Mesaba*

Mesaba operates as a regionalair carrier providing scheduled passenger service as “Mesaba Airlines/NorthwestAirlink” and “Mesaba Airlines/Northwest Jet Airlink” under two separateagreements with Northwest Airlines, Inc., a wholly-owned indirect subsidiary ofNorthwest Airlines Corporation (“Northwest”), to 106 cities in the UnitedStates and Canada from Northwest’s hub airports, in Minneapolis/St. Paul,Detroit and Memphis.

 

Under the Airline ServicesAgreement (the “Airlink Agreement”), Mesaba operates Saab 340 jet-prop aircraft(“Saab”) for Northwest.  This agreementprovides for exclusive rights to designated service areas and extends throughJune 30, 2007.  Under the AirlinkAgreement, Mesaba recognizes revenue for each completed “available seat mile”(the number of seats in an aircraft, multiplied by the number of miles thoseseats are flown).  Additionally, underthe Airlink Agreement, Mesaba purchases fuel, ground handling and otherservices from Northwest.  EitherNorthwest or Mesaba may terminate the Airlink Agreement on 365 daysnotice.  The Airlink Agreement may beterminated immediately by Mesaba or Northwest in the event that the other partyis the subject of a bankruptcy proceeding or is divested of a substantial partof its assets.  In the event of a breachof a non-monetary provision which remains uncured for a period of more than 30 daysafter receipt of written notification of such default, or the breach of amonetary provision which remains uncured for a period of more than 10 daysafter receipt of written notification of such default, the non-defaulting partymay terminate the agreement.  Northwestmay also terminate the Airlink Agreement in the event of certain lease andother performance defaults; change in control events; revocation or failure toobtain Department of Transportation (“DOT”) certification; failure to elect achief executive officer of the Company and Mesaba reasonably acceptable toNorthwest; or if more than 50% of the aircraft subject to the agreement are notoperated for more than seven consecutive days or 25% of such aircraft are notoperated for more than 21 consecutive days, other than as a result of theFederal Aviation Administration (“FAA”) grounding a specific aircraft type forall carriers.

 

Under the Regional Jet ServicesAgreement (the “Jet Agreement”), Mesaba operates Avro RJ85 regional jets(“RJ85”) for Northwest.  The JetAgreement extends through April 25, 2007. Under the Jet Agreement, Mesaba recognizes revenue for each “block hour”flown (the elapsed time between aircraft departing and arriving at agate).  Northwest provides fuel andairport and passenger related services at Northwest’s expense.  The Jet Agreement may be terminatedimmediately by Mesaba or Northwest in the event that the other party is thesubject of a bankruptcy proceeding or is divested of a substantial part of itsassets.  In the event of a breach of anon-monetary provision which remains uncured for a period of more than30 days after receipt of written notification of such default, or thebreach of a monetary provision which remains uncured for a period of more than10 days after receipt of written notification of such default, thenon-defaulting party may terminate the agreement.  Northwest may terminate the Jet Agreement in the event of certainlease and other performance defaults; change in control events;

 

4

----

 

revocation or failure to obtainDOT certification; failure to elect a chief executive officer of the Companyand Mesaba reasonably acceptable to Northwest; if more than 25% of the aircraftsubject to the agreement are not operated for more than seven consecutive days,other than as a result of the FAA grounding all RJ85 aircraft for all carriers;or if there is a strike, cessation or interruption of work involving Mesabapilots, flight attendants or mechanics providing jet service.

 

Under the agreements, allscheduled flights that Mesaba operates are designated as Northwest flightsusing Northwest’s designator code in all computer reservations systems,including the Official Airline Guide, with an asterisk and a footnoteindicating that Mesaba is the carrier providing the service.  In addition, flight schedules of Mesaba andNorthwest are closely coordinated to facilitate interline connections, andMesaba’s passenger gate facilities at the Minneapolis/St. Paul InternationalAirport, Detroit Metropolitan Airport and Memphis International Airport areintegrated with Northwest’s facilities in the main terminal buildings, ratherthan at the more remote commuter air terminals.  Mesaba’s RJ85 aircraft are painted in the colors of NorthwestAirlines and the Saab aircraft are painted in a distinctive “Northwest Airlink”configuration, with a Northwest logo in addition to Mesaba’s name.

 

Mesaba, through the agreements,receives ticketing and certain check-in, baggage, freight and aircraft handlingservices from Northwest at certain airports. In addition, Mesaba receives its computerized reservations services fromNorthwest.  Northwest also performs allmarketing, scheduling, yield management and pricing services for Mesaba’sflights.

 

Mesaba believes that itscompetitive position is enhanced because of its marketing and other agreementswith Northwest.

 

*Big Sky*

Big Sky operates as a regional carrier based in Billings, Montana,providing scheduled passenger, airfreight, express package and charterservices.  Big Sky provides scheduledair service to 19 communities in Montana, North Dakota, Washington and Idahovia its Billings hub.  Big Sky operatesdaily scheduled flights that provide interline and online connecting services,as well as local market services.  BigSky markets its services under its two-letter code, GQ.  Big Sky also has code-sharing agreementswith Alaska Airlines, America West Airlines and Northwest, where its servicesare marketed jointly with those air carriers for connecting flights.

 

Big Sky also provides servicebetween its Billings hub and seven communities in Central/Eastern Montana andbetween Seattle and Moses Lake, Washington under contracts with the DOT’sEssential Air Service (“EAS”) program. The EAS program subsidizes air carriers to provide air service todesignated rural communities throughout the country that could not otherwiseeconomically justify that service based on their passenger traffic.  The DOT pays EAS subsidies for eachdeparture in a covered market.  Big Skybids on the EAS contracts every two years. In addition, Big Sky continually reviews EAS flying opportunities andmakes bids with the DOT for flying where it is operationally and financiallyfeasible.

 

**RouteSystem**

 

*Mesaba*

The following sets forthcertain information with respect to Mesaba’s scheduled route system as of April30, 2004:

 

Cities served fromMinneapolis/St. Paul, MN: Aberdeen, SD; Appleton, WI; Bemidji, MN; Bismarck,ND; Brainerd, MN; Cedar Rapids, IA; Cincinnati, OH; Cleveland, OH; Columbus,OH; Dayton, OH; Des Moines, IA; Devil’s Lake, ND; Duluth, MN; Eau Claire, WI;Fargo, ND; Flint, MI; Fort Dodge, IA; Grand Forks, ND; Grand Rapids, MI;Hibbing, MN; Houghton/Hancock, MI; International Falls, MN;

 

5

----

 

Jamestown, ND; La Crosse, WI;Madison, WI; Mason City, IA; Norfolk, VA; Oklahoma City, OK; Peoria, IL;Pierre, SD; Pittsburgh, PA; Rapid City, SD; Regina, Saskatchewan; Rhinelander,WI; Rochester, MN; Saginaw, MI; St. Cloud, MN; St. Louis, MO; Salt Lake City,UT; Sioux City, IA; Sioux Falls, SD; South Bend, IN; Thief River Falls, MN;Thunder Bay, Ontario; Traverse City, MI; Waterloo, IA; Watertown, SD; Wausau,WI; White Plains, NY; and Winnipeg, Manitoba.

 

Cities served from Detroit, MI:Allentown, PA; Alpena, MI; Binghamton, NY; Bloomington, IL; Burlington,VT;  Canton, OH; Champaign, IL;Charleston, SC; Charleston, WV; Cincinnati, OH; Cleveland, OH; Columbus, OH;Dayton, OH; Des Moines, IA; Elmira, NY; Erie, PA; Evansville, IN; Flint, MI;Fort Wayne, IN; Green Bay, WI; Greensboro, NC; Kalamazoo, MI; Knoxville, TN;Lexington, KY; London, Ontario; Louisville, KY; Marquette, MI; Moline, IL;Montreal, Quebec; Muskegon, MI; Newark, NJ; Oklahoma City, OK; Pellston, MI;Pittsburgh, PA; Portland, ME; Roanoke, VA; Saginaw, MI; Sault Ste. Marie, MI;South Bend, IN; State College, PA; Toledo, OH; Toronto, Ontario; Traverse City,MI; Tri-Cities, TN; Wausau, WI; and White Plains, NY.

 

Cities served from Memphis, TN:Alexandria, LA; Atlanta, GA; Birmingham, AL; Chattanooga, TN; Dallas, TX; Evansville,IN; Fayetteville, AR; Fort Smith, AR; Greenville, MS; Gulfport, MS; Huntsville,AL; Jackson, MS; Kansas City, MO; Lafayette, LA; Laurel, MS; Lexington, KY;Monroe, LA; Montgomery, AL; Muscle Shoals, AL; Newark, NJ; Oklahoma City, OK;Paducah, KY; Pensacola, FL; Philadelphia, PA; Springfield, MO; St. Louis, MO;and Tupelo, MS.

 

Mesaba flies to Aspen, CO on aseasonal basis from Minneapolis/St. Paul, MN and Memphis, TN.

 

Mesaba works closely withNorthwest to coordinate flight schedules and to facilitate connections betweenMesaba and Northwest.

 

*Big Sky*

The following sets forthcertain information with respect to Big Sky’s scheduled route system as ofApril 30, 2004:

 

Cities served from Billings,MT: Bismarck, ND; Boise, ID; Glasgow, MT; Glendive, MT; Great Falls, MT; Havre,MT; Helena, MT; Kalispell, MT; Lewistown, MT; Miles City, MT; Missoula, MT;Sidney, MT; Spokane, WA; Williston, ND and Wolf Point, MT.

 

Non-hub routes are flownbetween Moses Lake, WA and Seattle, WA, and between Olympia, WA, and Spokane,WA.

 

From time-to-time, Big Skyreviews the feasibility of expanding the frequency of its service to airportscurrently being served, as well as initiating passenger service to additionalcities generally within its service area.

 

**Competition**

 

The airline industry is highlycompetitive as a result of the Airline Deregulation Act of 1978 (the“Deregulation Act”).  In general, theDeregulation Act increased competition by eliminating restrictions on fares androute selection.  The Deregulation Act alsocontributed to the withdrawal of national and major carriers from short-haulmarkets by allowing them to more easily obtain additional long-haul routes,which can be more efficiently and profitably served by larger jet aircraft.  Elimination of barriers to entry into newmarkets, however, also created greater potential for competing service by othercarriers operating small, fuel-efficient aircraft on short-haul routes servingsmall and medium-sized cities.  Mesabaand Big Sky compete with other regional airlines on most routes theyserve.  Mesaba and Big Sky

 

6

----

 

also face competition fromregional carriers offering service to alternative hubs for connectingflights.  No assurance can be given thatother carriers, including major carriers, will not institute competing serviceon routes served by Mesaba or Big Sky.

 

Competitive factors in theairline industry generally include fares, frequency and dependability ofservice, convenience of flight schedules, type of aircraft flown, airportsserved, relationships with travel agents, and efficiency and reliability ofreservations systems and ticketing services. The compatibility of flight schedules with those of other airlines andthe ability to offer through fares and convenient inter-airline flightconnections are also important competitive factors.  Holdings believes its subsidiaries are competitive with respectto each of such factors because of their established reputation, cost structureand an aircraft fleet that is properly suited for the small and medium-sizedcities served.

 

**Fuel**

 

The Company believes that thefollowing arrangements assure an adequate supply of fuel for current and futureoperations for both Mesaba and Big Sky.

 

*Mesaba*

Mesaba has arrangements withNorthwest for its fuel requirements. Certain provisions of the Airlink Agreement protect Mesaba fromfluctuations in aviation fuel prices while the Jet Agreement requires Northwestto provide RJ85 fuel, at Northwest’s expense, to Mesaba.

 

*Big Sky*

Big Sky purchases a majority ofits fuel from Northwest.  Big Skypurchases the balance of its fuel under arrangements with several fuelsuppliers.  None of these arrangements provideprotection from fluctuations in fuel prices.

 

**Fares**

 

*Mesaba*

Mesaba derives its passengerrevenues by selling its capacity to Northwest at predetermined rates.  Mesaba is primarily paid by Northwest peravailable seat mile under the Airlink Agreement and per completed block hourunder the Jet Agreement.

 

*Big Sky*

Big Sky generates its passengerrevenues from passenger ticket sales through participation in Airline ReportingCorp. clearinghouse for travel agencies, its own reservations center inBillings, a ticket by mail program, and a bulk ticketing program that targetssales of ten or more tickets to corporations and government agencies.  Big Sky has ticketing and baggage agreementswith all major airlines that serve its region, which allow its services to besold by those airlines.  Big Skyestablishes its passenger fares on a market-by-market basis utilizing acombination of factors, including the cost of providing the service based uponprojected passenger levels, the competitive price of alternative means oftransportation (including both air and surface) and the distance betweenmarkets.  Big Sky also employs the useof discounts off the base fares for advance ticket purchases and other specialneeds passengers that are common throughout the airline industry.

 

**Regulations**

 

Pursuant to Federal aviationlaws, the DOT, principally through the FAA, has certain regulatory authorityover the operations of all air carriers. The jurisdiction of the FAA extends primarily to the safety andoperational provisions of the Aviation Act, while the

 

7

----

 

responsibility of the DOTinvolves principally the regulation of certain economic aspects of airlineoperations.

 

*FAA Regulation*

Mesaba and Big Sky each hold anAir Carrier Certificate issued by the FAA under Part 119 of the FederalAviation Regulations, permitting Mesaba and Big Sky to conduct flightoperations in compliance with Part 121 of the Federal AviationRegulations.  The Part 121regulations are the same regulatory requirements applied to majorairlines.  The FAA regulations to whichMesaba and Big Sky are subject are extensive and include, among other items,regulation of aircraft maintenance and operations, equipment, groundfacilities, dispatch, communications, training, weather observation, flightpersonnel and other matters affecting air safety.  To ensure compliance with its regulations, the FAA requiresairlines to obtain operating, airworthiness and other certificates that aresubject to suspension or revocation for cause. Mesaba and Big Sky hold all certificates necessary for their operations.

 

*DOT Regulation*

Mesaba and Big Sky each hold aCertificate of Public Convenience and Necessity issued by the DOT under Federalaviation laws.  As certificatedcarriers, Mesaba and Big Sky are required to file quarterly reports with theDOT, including a report of aircraft operating expenses and related statistics.

 

*Transportation Security Administration Regulation*

In response to the terroristattacks of September 11, 2001, Congress enacted the Aviation and TransportationSecurity Act of 2001 (“ATSA”).  ATSAcreated the Transportation Security Administration(“TSA”), to oversee aviation and airport security.  ATSA enhanced background checks, provided federal air marshalsaboard flights, improved flight deck security, enhanced airline crew securitytraining, improved training of security screening personnel and enhancedairport perimeter access, among other security measures.

 

*Air Transportation Safety and System Stabilization Act*

In September 2001, Congressenacted the Air Transportation Safety and System Stabilization Act.  The legislation provided cash grants to U.S.airlines to compensate for “direct and incremental losses” incurred fromSeptember 11, 2001, through December 31, 2001.  Mesaba recognized a pre-tax grant ofapproximately $0.3 million and $12.5 million as “other nonoperatingincome” in the accompanying consolidated statements of operations in fiscal2003 and 2002, in accordance with the DOT and applicable authoritativeaccounting guidance.  Mesaba receivedapproximately $10.6 million in cash in fiscal 2002 and approximately$2.2 million in fiscal 2003.  Inaddition, Big Sky recognized and received $0.2 million during the periodfrom December 1, 2002 (date of acquisition) to March 31, 2003 underthe same program.

 

*Emergency Wartime Supplemental Appropriations Act*

In April 2003, Congress enactedthe Emergency Wartime SupplementalAppropriations Act (“Wartime Act”), which included, among other items, a $2.3billion government grant to U.S. airlines for security fees previously remittedto the TSA and $100 million for reimbursement of aircraft cockpit doorreinforcement costs.  Inconnection with reimbursements under the Wartime Act, for the year ended March31, 2004, Mesaba recognized $2.3 million as “other nonoperating income” and BigSky recognized $0.3 million as “other nonoperating income” and $0.2 million asa reduction of “administrative and other expense” in the accompanyingconsolidated statements of operations. Retention of these funds requires compliance with the provisions of theWartime Act.

 

8

----

 

*Railway Labor Act*

The Company’s relations withits labor unions are governed by the Railway Labor Act (“RLA”).  Comprehensive provisions are set forth inthe RLA establishing the right of airline employees to organize and bargaincollectively and impose a duty upon air carriers and their employees to exertevery reasonable effort to make and maintain collective bargainingagreements.  The RLA contains detailedprocedures, which must be exhausted before a lawful work stoppage may occur,including a formal declaration of an impasse by the National Mediation Board.

 

*Other Regulations*

Under the Noise Control Act of1972 and the Aviation Safety and Noise Abatement Act of 1979, the FAA has authorityto monitor and regulate aircraft engine noise. Management of Mesaba and Big Sky believe that their aircraft comply withor are exempt from such regulations and that Mesaba and Big Sky comply withstandards for aircraft exhaust emissions and fuel storage facilities issued bythe Environmental Protection Agency.  Asa foreign carrier operating in Canada, Mesaba is subject to regulation by theCanadian Department of Transport and has been issued Foreign Air CarrierOperating Certificates and a Canadian Transportation agency economiclicense.  Because Northwest maintainscertain contracts with the Department of Defense, Mesaba is subject to theirperiodic inspections.

 

**Insurance**

 

The Company carries the typesof insurance customary in the airline industry, including coverage for publicliability, passenger liability, property damage, aircraft loss or damage,baggage and cargo liability, and workers’ compensation.  The Company believes that its insurancecoverage is adequate as to the amounts and risks covered.  However, there can be no assurance that theinsurance carried would be sufficient to protect Mesaba and Big Sky adequatelyin the event of a catastrophic accident or event.

 

**AircraftMaintenance**

 

Mesaba and Big Sky employ theirown aircraft, avionics and engine maintenance staffs that perform substantiallyall routine maintenance to the aircraft and engines.  As of October 2003, Mesaba contracted out most of its majoroverhauls on airframes, engines and other rotable parts on the Saab and RJ85aircraft to an FAA authorized facility. Major overhauls on Big Sky’s Metro III and Metro 23 aircraft airframes,engines and other rotable parts are performed internally or at FAA authorizedfacilities.

 

**Airport andTerminal Services**

 

Mesaba’s ticket counter and baggage-handlingspace is leased from local airport authorities or other airlines at all of theairports served.  In 46 of the cities itserves, Mesaba receives support services under agreements with Northwest.  In accordance with the Airlink Agreement,Mesaba pays local airport authorities for the use of landing fields at ratesthat are based on the number of flights per day, fixed fees, or on the numberof aircraft landings and aircraft weight. Northwest pays for Mesaba’s landing fees under the Jet Agreement.

 

Mesaba receives other revenuefrom Northwest, Pinnacle Airlines Corp. (“Pinnacle”) and other airlines forground handling services performed at the Minneapolis/St. Paul, Detroit andother spoke airports.

 

Big Sky leases airport counter,baggage and ramp space for ground services and customer services at 14 citiescurrently served.  Big Sky contracts forground handling services from other airlines or service providers at eight ofthe airports it serves.

 

9

----

 

**Employees**

 

As of April 30, 2004, theCompany and its subsidiaries employed approximately 3,500 employees withapproximately 49% represented by labor unions. Mesaba had approximately 3,307 (748 part-time) employees and Big Sky hadapproximately 190 (47 part-time) employees. Neither Mesaba nor Big Sky have had any official work stoppages.  Management, in general, believes that itsrelations with the Company’s employees are good.  The Company’s labor agreements are as follows:

 

*Mesaba*
| **Employee Group**                     |   | **Approximate  Number of  Employees** |   | **Union**                                                    |   | **Amendable  Date** |   |
|----------------------------------------|--------|---------------------------------------|--------|--------------------------------------------------------------|--------|---------------------|--------|
| Pilots                                 |   | 829                                   |   | Air Line  Pilots Association (“ALPA”)              |   | January 2009        |   |
| Mechanics                              |   | 235                                   |   | Aircraft Mechanics Fraternal Association  (“AMFA”) |   | August 2003         |   |
| Dispatchers                            |   | 26                                    |   | Transportation  Workers Union                                |   | May 2005            |   |
| Flight Attendants                      |   | 524                                   |   | Association  of Flight Attendants                            |   | April 2006          |   |
| Customer service agents                |   | 1,339                                 |   | None                                                         |   |                |   |
| Management / Administrative / Clerical |   | 354                                   |   | None                                                         |   |                |   |
|                                   |   | 3,307                                 |   |                                                         |   |                |   |

 

Mesaba negotiated a newagreement with ALPA under Section 6 of the RLA, which became effective January31, 2004.  The mechanics are currentlyworking under an agreement reached in August 1999 with a term of fouryears.  Mesaba is currently negotiatingwith the AMFA under Section 6 of the RLA for a new agreement.

 

*Big Sky*
| **Employee Group**                     |   | **Approximate  Number of  Employees** |   | **Union**                                                      |   | **Amendable  Date** |   |
|----------------------------------------|--------|---------------------------------------|--------|----------------------------------------------------------------|--------|---------------------|--------|
| Pilots                                 |   | 51                                    |   | United  Transportation Union                                   |   | December 2009       |   |
| Mechanics                              |   | 26                                    |   | International Association of Machinists and  Aerospace Workers |   | August 2010         |   |
| Dispatchers                            |   | 9                                     |   | United  Transportation Union                                   |   | December 2009       |   |
| Customer service agents                |   | 57                                    |   | None                                                           |   |                |   |
| Management / Administrative / Clerical |   | 47                                    |   | None                                                           |   |                |   |
|                                   |   | 190                                   |   |                                                           |   |                |   |

 

During fiscal 2004, Big Skynegotiated a new agreement with the International Association of Machinists andAerospace Workers, which was ratified in January 2004.

 

10

----

 

**Cyclicalityand Seasonality**

 

The airline industry generallyis subject to cyclical moves in the economy. Because both personal discretionary travel and business travel may beexpected to decline during periods of economic weakness, the airline industrytends to experience poorer financial results during such periods.  The terrorist attacks of September 11,2001 had a profound negative impact on air travel and concerns over furtherterrorist activity continue to affect demand. The Iraq war and Severe Acute Respiratory Syndrome (“SARS”) have alsoaffected the major airlines as consumer demand has declined.

 

Mesaba’s cyclicality is tied tothe business and operating decisions of Northwest.  Operations of the major airlines continue to be impacted by therapid growth of low cost airlines, the increasing number of businessesutilizing teleconferencing or web-based meetings and the advent of internettravel web sites, which enable consumers to find travel alternatives.  Mesaba has historically shown greaterrevenues and earnings in the first and second fiscal quarters.  Northwest has historically seen increasedleisure travel during these periods on domestic and international routes, whichcontributes to an increased number of flights for Mesaba.

 

Seasonal factors, primarilyweather conditions and passenger demand, historically have affected Big Sky’smonthly passenger boardings.  Big Sky hashistorically shown a higher level of passenger boardings in the July throughDecember period as compared with the January through June period for many ofthe cities served.  As a result of suchfactors, Big Sky’s revenues and earnings historically have been greater duringthe July through December period.

 

**RiskFactors Relating to the Company and the Airline Industry**

 

The Company’s operations andfinancial results are subject to various risks and uncertainties, some of whichare described below.  The Company couldalso be adversely affected by additional risks and uncertainties not presentlyknown or believed to be material.

 

*Dependence on Relationship with Northwest*

During fiscal 2004, 92.9% ofthe Company’s revenue was earned from Northwest.  As a result, the Company’s business is sensitive to events andrisks affecting Northwest.  If adverseevents affect Northwest’s business, the Company’s business could also beadversely affected.  Such events includeNorthwest’s ability to avoid bankruptcy, changes in Northwest’s business planor model, employee strike or job actions, significant curtailment of serviceand terrorist events.  Loss of theCompany’s affiliation with Northwest or Northwest’s failure to make timely paymentof amounts owed to the Company would have a material adverse effect on theCompany’s operations, financial position and cash flows.

 

*Terrorist Events*

The terrorist attacks ofSeptember 11, 2001 materially affected and continue to affect the airlineindustry.  Concerns about furtherterrorist attacks have had a negative impact on air travel demand.  In addition, security procedures introducedat airports since the attacks have increased the inconvenience of air travel,both in reality and in customer perception, leading to further reduction indemand.

 

*Government Regulations*

Airlines are subject toextensive regulatory and legal requirements that involve significant compliancecosts that result in increased costs for passengers and the Company.  Additional laws, regulations, taxes and airportrates and charges are proposed periodically. If adopted, these measures could have the effect of raising ticketprices, reducing revenue, increasing costs or reduce demand for air travel.  There can be no assurance that these andother laws or regulations enacted in the future will not harm business.

 

11

----

 

*Effect of General Economic Conditions*

As a substantial portion of airtravel, including business travel, is discretionary, the industry tends toexperience adverse financial results during general economic downturns.  Soft economic conditions continue to putpressure on the profitability of the industry. Any general decline in passenger traffic may harm the Company’sbusiness.

 

*Airline Accident or Incident*

An accident or incidentinvolving a Company aircraft could involve a significant loss of life andresult in a loss of faith in the Company. The Company could experience significant claims from injured passengersand surviving relatives, as well as costs for the damaged aircraft andconsequential loss from service. Airlines are required by the DOT to carry liability insurance.  Although the Company believes its liabilityinsurance is in amounts and of the type generally consistent with industrypractice, the amount may not be adequate. Substantial claims resulting from an accident in excess of insurancecoverage would harm business and financial results.  Moreover, any aircraft accident or incident, even if fullyinsured or not directly involving Mesaba or Big Sky, could cause a publicperception that flying is less safe or reliable than other transportationalternatives, which would harm the Company’s financial condition and results ofoperations.

 

*Failure to Successfully Expand Business*

The Company’s strategy toexpand and grow its business is dependent on many variables, some of which arecontrollable and others are not.  TheCompany cannot be certain that it will be able to successfully expand itsbusiness and the failure to do so could harm the Company’s financial conditionand results of operations.

 

*Collective Bargaining Agreements*

Labor costs are a significantcomponent of the Company’s expenses, comprising 32.2% of total operatingexpenses in fiscal 2004.  Several of theCompany’s different employee groups have separate bargaining agreements and maymake demands that would increase operating expenses, adversely affectingprofitability.  Further, if the Companywas unable to reach agreement on the terms of any collective bargainingagreement or were to experience widespread employee dissatisfaction, therecould be work slowdowns or stoppages.

 

*Factors Beyond Company Control*

The Company’s operations aresubject to delays caused by factors beyond its control, including air trafficcongestion at airports, adverse weather conditions and increased securitymeasures.  Delays frustrate passengers,reduce aircraft utilization and increase costs, all of which affectprofitability and harm the Company’s financial condition and results ofoperations.

 

**AvailableInformation**

 

The Company maintains a websiteat www.mairholdings.com. On its website, free of charge, the Companymakes available its Annual Report on Form 10-K and links to the SEC website forother related filings.  The Company’sCode of Ethics for its Chief Executive Officer and financial officers isattached as an exhibit to this Annual Report on Form 10-K.  The Company is not including the informationcontained on or available through its website as a part of, or incorporatingsuch information by reference into, this Annual Report on Form 10-K.

 

12

----

 

**Item2. PROPERTIES**

 

**Aircraft**

 

*Mesaba*

The following table sets forthcertain information as to Mesaba’s passenger aircraft fleet as of April 30,2004:

 
| **Type of Aircraft** |   | **Number of  Aircraft** |   | **Seating  Capacity** |   | **Approximate  Single Flight  Range (miles)** |   | **Approximate  Average Cruising  Speed (MPH)** |   |
|----------------------|--------|-------------------------|--------|-----------------------|--------|-----------------------------------------------|--------|------------------------------------------------|--------|
| Avro RJ85            |   | 35                      |   | 69                    |   | 1,400                                         |   | 410                                            |   |
| Saab 340             |   | 64                      |   | 30/33/34              |   | 500                                           |   | 300                                            |   |

 

The RJ85 aircraft arepressurized jet airplanes with galleys, dual class cabins, standup headroom,lavatories, Airborne Communications Addressing and Reporting System, radar,ground proximity warning, traffic collision avoidance and de-icingsystems.  The Saab aircraft arepressurized jet-prop airplanes with galleys, standup headroom, lavatories,radar, global positioning, ground proximity warning, traffic collisionavoidance and de-icing systems.  All ofMesaba’s aircraft comply fully with all current Federal Aviation Regulationsissued by the FAA.

 

Mesaba leases or subleases itsRJ85 aircraft from Northwest under operating leases with initial terms of up to10-years.  The lease and subleaseagreements for the RJ85 with Northwest contain certain requirements of Mesabaregarding the payment of taxes on the aircraft, acceptable use of the aircraft,the level of insurance to be maintained, the maintenance procedures to beperformed and the condition of the aircraft upon their return toNorthwest.  The Jet Agreement allowsMesaba to return aircraft to Northwest upon the occurrence of certain events,including termination or breach of the Jet Agreement.

 

Mesaba leases its Saabaircraft, either directly from aircraft leasing companies, through leases withPinnacle under operating leases with initial terms of up to seven years, orthrough subleases with Northwest under operating leases with initial terms ofup to 17-years.  The lease and subleaseagreements with the aircraft leasing companies, Pinnacle and Northwest contain certainrequirements of Mesaba regarding the payment of taxes on the aircraft,acceptable use of the aircraft, the level of insurance to be maintained, themaintenance procedures to be performed and the condition of the aircraft upontheir return.  The Airlink Agreementallows Mesaba to return aircraft to Northwest upon the occurrence of certainevents, including termination of the Airlink Agreement.

 

As of March 31, 2004, Mesaba’sexisting fleet of RJ85 and Saab aircraft had remaining lease terms of up to12-years.  The current aggregate monthlylease payments for all Mesaba aircraft is approximately $8.7 million.

 

*Big Sky*

The following table sets forthcertain information as to Big Sky’s passenger aircraft fleet as of April 30,2004.

 

13

----

 
| **Type of Aircraft** |   | **Number of  Aircraft** |   | **Seating  Capacity** |   | **Approximate  Single Flight  Range (miles)** |   | **Approximate  Average Cruising  Speed (MPH)** |   |
|----------------------|--------|-------------------------|--------|-----------------------|--------|-----------------------------------------------|--------|------------------------------------------------|--------|
| Metro III            |   | 7                       |   | 19                    |   | 750                                           |   | 300                                            |   |
| Metro 23             |   | 5                       |   | 19                    |   | 750                                           |   | 300                                            |   |

 

The Metro aircraft arepressurized jet-prop airplanes with radar, ground proximity warning, trafficcollision avoidance and de-icing systems. All of Big Sky’s aircraft comply fully with all current Federal AviationRegulations issued by the FAA.

 

Big Sky leases six of its MetroIII and all Metro 23 aircraft from leasing companies and one Metro III from amunicipality under operating leases with initial terms of up to six years.  The lease agreements with the leasingcompanies and municipality contain certain requirements of Big Sky regardingthe payment of taxes on the aircraft, acceptable use of the aircraft, the levelof insurance to be maintained, the maintenance procedures to be performed andthe condition of the aircraft upon their return.  The leases on five aircraft allow Big Sky to return the aircraftto the lessor upon the occurrence of certain events and contain purchaseoptions.

 

As of March 31, 2004, Big Sky’sexisting fleet of Metro III and Metro 23 aircraft had remaining lease terms offour months to 35 months.  Thecurrent aggregate monthly lease payments for all Big Sky aircraft isapproximately $0.2 million.

 

**Facilities**

 

*Holdings*

Holdings’ executive offices arelocated in downtown Minneapolis, MN. Holdings leases approximately 2,000 square feet of office space forapproximately $2,000 per month.  Thelease commenced in October 2003 and extends through February 2005.

 

*Mesaba*

Mesaba’s principal executiveoffices and maintenance facility were located at the Minneapolis/St. PaulInternational Airport until October 2003. To accommodate new runway construction, Mesaba relocated its maintenancehangar facilities and entered into a 25-year Aircraft Hangar Facility LeaseAgreement with the Metropolitan Airports Commission.  Under this agreement, Mesaba leases approximately 366,000 squarefeet of maintenance facilities, maintenance offices, ramp, parking andunimproved land, of which approximately 87,000 square feet is for the newmaintenance hangar facility.  The leasepayments of approximately $111,000 per month commenced inOctober 2003.  Mesaba relocated itsprincipal executive offices to a new location in Eagan, Minnesota and enteredinto a 10-year lease agreement for approximately 33,000 square feet of officespace.  The lease payments ofapproximately $35,000 per month commenced in January 2004.  The lease expires on December 31, 2013 butcontains an early termination provision allowing the lease to be cancelled atthe end of seven years.

 

Mesaba leases approximately497,000 square feet of facilities, ramp, parking and unimproved land at theCincinnati/Northern Kentucky Airport under separate ground and facilitiesleases.  The facilities lease coversapproximately 126,000 square feet of hangar and maintenance space and Mesabapays monthly rentals of approximately $92,000 until July 1, 2029 as partof Special Facilities Bond financing provided by the Cincinnati/NorthernKentucky Airport Authority.  The groundlease has a 30-year term concurrent with the facilities lease.  Monthly lease payments of approximately$12,000 are required under the ground lease.

 

14

----

 

Mesaba leases approximately334,000 square feet of ramp, parking and unimproved land at the DetroitMetropolitan Airport.  The ground leasehas a 20-year term with monthly lease payments of approximately $10,000.  Lease payments are subject to an annualadjustment on January 1 each year based upon the percentage change in anindex published by the Bureau of Labor Statistics of the U.S. Department ofCommerce.

 

Mesaba leases approximately38,000 square feet of hangar and office space located on approximately 102,000square feet of land and parking areas of which Mesaba is ground lessee, at theCentral Wisconsin Airport in Mosinee, Wisconsin.  Mesaba pays approximately $3,000 per month under the terms of theground and facility lease, which expire on December 31, 2011, subject totwo 10-year renewal options.

 

Mesaba subleases approximately21,000 square feet of office and training support space at the Pan-AmInternational Flight Academy in Eagan, Minnesota for its flight operationstraining center.  Mesaba paysapproximately $21,000 per month under the terms of this sublease, which has aterm of 15-years and expires in January 2017.

 

*Big Sky*

Big Sky’s main hangar andprincipal offices are located at the Logan International Airport in Billings,MT.  The main facility consists of a12,000 square foot building that can hold three Metro aircraft for maintenance,a parts warehouse, back shop area, and two floors of offices.  A two story building adjacent to the hangarhouses Big Sky’s executive offices. These buildings are situated on approximately 83,000 square feet of landowned by the City of Billings and leased to Big Sky on long-term facility andground leases.  The facility lease has a20-year term and the ground lease has a 26-year term.  The combined monthly lease payment is approximately $7,000.

 

**Item3. LEGAL PROCEEDINGS**

 

On October 4, 2002,Fairbrook Leasing, Inc., Lambert Leasing, Inc. and Swedish Aircraft Holdings AB(“Saab”) filed a declaratory judgment action against Mesaba relating to 20 Saab340A aircraft leased by Mesaba.  Saabsought a judicial declaration that the terms of the leases applicable to eachof the 340A aircraft are governed by a March 7, 1996 term sheet proposal ratherthan the short-term leases subsequently executed by the parties.  On December 8, 2003, the Court issued anorder declaring that the term sheet proposal constitutes a binding contractthat required Mesaba to execute or negotiate in good faith toward the executionof long-term leases on each of the 340A aircraft.  The Court concluded that the term sheet proposal is ambiguouswith respect to whether lease extensions contemplated by that document are atMesaba’s option or Saab’s option. Mesaba intends to appeal the Court’s summary judgment ruling.  Mesaba also anticipates that Saab will makea claim for damages based upon the Court’s summary judgment ruling.  The parties are also continuing negotiationsto settle the dispute and the ultimate outcome cannot be predicted with certainty.

 

**Item 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

There were no matters submittedto a vote of the Company’s shareholders during the three month period endedMarch 31, 2004.

 

15

----

 

**PART II**

 

**Item 5. MARKET FOR REGISTRANT’S COMMON EQUITYAND RELATED STOCKHOLDER MATTERS**

 

The Company’s Common Stock istraded under the symbol “MAIR” on the NASDAQ National Market.

 

The following table sets forth,for the periods indicated, the high and low price per share for the Company’sCommon Stock for the two most recent fiscal years.  Quotations for such periods are as reported by NASDAQ forNational Market issues.  The Company hasnot issued cash dividends since September 1995 and does not currentlyintend to do so.

 
|        |   | **Fiscal  2004** |   | **Fiscal  2003** |   |
|-------------|--------|------------------|--------|------------------|--------|
| **Quarter** |   | **High**         |   | **Low**          |   | **High** |   | **Low** |   |
| First       |   | $                | 6.42   |             | $      | 5.52 |   | $ | 9.29 |   | $ | 5.30 |   |
| Second      |   | $                | 7.70   |             | $      | 5.86 |   | $ | 7.00 |   | $ | 4.50 |   |
| Third       |   | $                | 7.99   |             | $      | 6.02 |   | $ | 6.70 |   | $ | 4.33 |   |
| Fourth      |   | $                | 10.11  |             | $      | 7.22 |   | $ | 7.02 |   | $ | 5.28 |   |

 

On June 22, 2004, the number ofholders of record of Common Stock was 683.

 

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

 

**EquityCompensation Plan Information**

 
| **Plan Category**                  |   | **Number of  securities to  be issued upon exercise  of outstanding options,  warrants and rights (a)** |   | **Weighted-average  exercise price of  outstanding options,  warrants & rights (b)** |   | **Number of  securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))(c)** |    |
|------------------------------------|--------|---------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
| Plans approved by security holders |   | 1,784,519                                                                                               |   | $                                                                                        | 6.88   |                                                                                                                                                     | 908,425 |   |
|                                    |        |                                                                                                         |        |                                                                                          |        |                                                                                                                                                          |         |  |  |

 

The equity compensation plansapproved by the Company’s shareholders are the 1994 Stock Option Plan, the 1996Director Stock Option Plan and the 2000 Stock Incentive Plan.  The 2000 Stock Incentive Plan has aprovision that automatically increases the authorized shares available forgrant on September 1 of each year by the lesser of 300,000 or 1% of the thenoutstanding common shares.  See Item 8Consolidated Financial Statements and Supplementary Data, Note 9, foradditional information regarding the Company’s equity compensation plans.

 

16

----

 

**Item 6. SELECTED FINANCIAL DATA**

 

The following tables set forthselected financial data with respect to the Company as of the dates and for theperiods indicated.  The selectedfinancial data has been derived from the Company’s audited consolidatedfinancial statements.  The financialdata set forth below should be read in conjunction with the Company’sConsolidated Financial Statements and Notes thereto and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”contained in Item 7.

 
|                                                                     |   | **(in  thousands, except per share data)** |    |
|--------------------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                                     |   | **For the  Years Ended March 31**          |    |
|                                                                     |   | **2004**                                   |    | **2003 (1)** |   | **2002** |   | **2001** |   | **2000** |   |
| Statement of Operations Data:                                            |   |                                       |    |   |   |   |   |   |   |   |   |
| Operating revenues                                                       |   | $                                          | 449,079 |   | $ | 456,880 |   | $ | 416,913 |   | $ | 439,803 |   | $ | 406,199 |   |
| Operating expenses                                                       |   | 444,756                                    |    | 448,252 |   | 416,107 |   | 410,455 |   | 359,364 |   |
| Operating income                                                         |   | $                                          | 4,323   |   | $ | 8,628 |   | $ | 806 |   | $ | 29,348 |   | $ | 46,835 |   |
|                                                                     |   |                                       |    |   |   |   |   |   |   |   |   |
| Net income                                                               |   | $                                          | 4,673   |   | $ | 4,329 |   | $ | 7,810 |   | $ | 19,784 |   | $ | 31,061 |   |
|                                                                     |   |                                       |    |   |   |   |   |   |   |   |   |
| Net income per share-basic                                               |   | $                                          | 0.23    |   | $ | 0.21 |   | $ | 0.38 |   | $ | 0.98 |   | $ | 1.54 |   |
| Weighted average number of common shares  outstanding-basic              |   | 20,334                                     |    | 20,308 |   | 20,289 |   | 20,288 |   | 20,177 |   |
|                                                                     |   |                                       |    |   |   |   |   |   |   |   |   |
| Net income per share-diluted                                             |   | $                                          | 0.23    |   | $ | 0.21 |   | $ | 0.38 |   | $ | 0.94 |   | $ | 1.48 |   |
| Weighted average number of common share  equivalents outstanding-diluted |   | 20,562                                     |    | 20,357 |   | 20,601 |   | 20,941 |   | 21,043 |   |

 

----

(1)           Statement of operations data includes the results ofoperations of Big Sky since the date of acquisition, December 1, 2002.

 

17

----

 
|                                            |   |                               |    |
|-------------------------------------------------|--------|------------------------------------|---------|
|                                            |   | **As of  March 31 (in thousands)** |    |
|                                            |   | **2004**                           |    | **2003 (1)** |   | **2002** |   | **2001** |   | **2000** |   |
| Balance Sheet Data:                             |   |                               |    |   |   |   |   |   |   |   |   |
| Current assets                                  |   | $                                  | 175,793 |   | $ | 167,376 |   | $ | 162,621 |   | $ | 156,740 |   | $ | 139,952 |   |
| Property and equipment, net                     |   | 39,722                             |    | 43,798 |   | 50,615 |   | 56,248 |   | 54,109 |   |
| Long-term investments                           |   | 38,084                             |    | 23,762 |   | 4,068 |   | — |   | — |   |
| Other noncurrent assets, net                    |   | 13,721                             |    | 14,725 |   | 8,550 |   | 10,746 |   | 13,663 |   |
| Total assets                                    |   | $                                  | 267,320 |   | $ | 249,661 |   | $ | 225,854 |   | $ | 223,734 |   | $ | 207,724 |   |
|                                            |   |                               |    |   |   |   |   |   |   |   |   |
| Current liabilities                             |   | $                                  | 76,057  |   | $ | 65,372 |   | $ | 44,781 |   | $ | 46,566 |   | $ | 44,686 |   |
| Other noncurrent liabilities                    |   | 6,334                              |    | 6,344 |   | 7,701 |   | 12,487 |   | 18,320 |   |
| Shareholders’ equity                       |   | 184,929                            |    | 177,945 |   | 173,372 |   | 164,681 |   | 144,718 |   |
| Total liabilities and shareholders’ equity |   | $                                  | 267,320 |   | $ | 249,661 |   | $ | 225,854 |   | $ | 223,734 |   | $ | 207,724 |   |

 

(1)           Balance sheet data includes Big Sky, which was acquired onDecember 1, 2002.

----

 
|                            |   | **For the  Years Ended March 31** |   |
|---------------------------------|--------|-----------------------------------|--------|
|                            |   | **2004**                          |   | **2003 (4)** |   | **2002** |   | **2001** |   | **2000** |   |
| Selected Operating Data:        |   |                              |   |   |   |   |   |   |   |   |   |
| *Mesaba*                        |   |                              |   |   |   |   |   |   |   |   |   |
| Passengers                      |   | 5,596,721                         |   | 5,658,006 |   | 5,650,500 |   | 6,207,400 |   | 5,667,600 |   |
| Available seat miles (1)        |   | 2,904,198                         |   | 2,822,140 |   | 2,739,946 |   | 2,948,239 |   | 2,677,712 |   |
| Revenue passenger miles (2)     |   | 1,774,931                         |   | 1,646,114 |   | 1,571,042 |   | 1,725,460 |   | 1,534,116 |   |
| Load factor (3)                 |   | 61.1                              | %      | 58.3 | % | 57.3 | % | 58.5 | % | 57.3 | % |
| Departures                      |   | 219,512                           |   | 233,160 |   | 240,068 |   | 269,596 |   | 274,357 |   |
| Revenue per available seat mile |   | $                                 | 0.149  |   | $ | 0.160 |   | $ | 0.152 |   | $ | 0.149 |   | $ | 0.152 |   |
| Cost per available seat mile    |   | $                                 | 0.145  |   | $ | 0.155 |   | $ | 0.152 |   | $ | 0.139 |   | $ | 0.134 |   |
| *Big Sky*                       |   |                              |   |   |   |   |   |   |   |   |   |
| Passengers                      |   | 105,913                           |   | 39,587 |   |   |   |   |   |   |   |
| Available seat miles (1)        |   | 75,188                            |   | 29,810 |   |   |   |   |   |   |   |
| Revenue passenger miles (2)     |   | 27,066                            |   | 10,630 |   |   |   |   |   |   |   |
| Load factor (3)                 |   | 36.0                              | %      | 35.7 | % |   |   |   |   |   |   |
| Departures                      |   | 23,245                            |   | 8,415 |   |   |   |   |   |   |   |
| Revenue per available seat mile |   | $                                 | 0.219  |   | $ | 0.193 |   |   |   |   |   |   |   |
| Cost per available seat mile    |   | $                                 | 0.267  |   | $ | 0.262 |   |   |   |   |   |   |   |

 

(1)           Available seat miles (“ASM”) are determined by multiplyingthe number of seats available for passengers by the number of miles flown.  Amounts are in thousands.

 

(2)           Revenue passenger miles are determined by multiplying thenumber of fare paying passengers carried by the distance flown.  Amounts are in thousands.

 

(3)           Load factor is determined by dividing revenue passengermiles by available seat miles.

 

(4)           Selected operating data for Big Sky is from the date ofacquisition, December 1, 2002.

----

 

 

18

----

 

**Item 7. MANAGEMENT’S DISCUSSION****ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion shouldbe read in conjunction with the Company’s consolidated financial statements andthe related notes thereto and the “Cautionary Note Regarding Forward LookingStatements” in this Annual Report on Form 10-K.

 

**Year in Review and Outlook**

 

*Summary*

Fiscal 2004 continued to be achallenging year for both the airline industry and the Company.  It began with the Iraq war and SARS, whichsignificantly impacted both passenger demand and industry capacity in the firstquarter.  Labor negotiations withMesaba’s pilots became the focus in the summer and led to a 30 day cooling offperiod between December 2003 and January 2004. Northwest threatened to exercise its early termination rights in the JetAgreement in October 2003 and the Company agreed to extend the earlytermination provisions first until December 15, 2003 and then until February29, 2004 while Northwest reviewed the overall economics of the RJ85 fleet.  Mesaba also returned six Saab A-modelaircraft to their respective leasing companies.  Throughout the year, however, Mesaba maintained its focus onoperating performance, providing completion factors and on-time performanceamong the best in the industry and increased capacity 2.9% to 2.9 billion ASM,the highest since fiscal 2001.

 

Fiscal 2004 accomplishments forthe Company included the following:

 

•                  After extensivenegotiations and strike planning, Mesaba agreed to a new contract with itspilots that extends through January 2009. Management believes this contract should position Mesaba well to competefor growth with Northwest and provide Mesaba with the ability to manage itscosts through the continuing uncertainties in the airline industry.

 

•                  Mesaba adjustedbusiness plans for the temporary grounding of five RJ85 in the third and fourthquarters of fiscal 2004 and the potential early termination of the JetAgreement by Northwest.  Later in theyear, Mesaba reached an agreement with Northwest to return the five RJ85s toservice by summer 2004 and continue RJ85 operations through April 2007.

 

•                  Mesabasuccessfully completed two facility moves, moving into a new hangar at theMinneapolis/St. Paul International Airport and a general office building inEagan, MN that includes a new, state-of-the-art operations center.

 

•                  Big Skycontinued to improve its operations through a process designed to establishnear and long-term goals and measure performance against them.  These improvements produced full yearoperational performance better than in the past five years.

 

•                  Big Skycontinued with cost restructuring measures, including reduction of threeaircraft and the initiation of e-ticketing.

 

•                  Big Sky reacheda seven year labor contract with its mechanics that extends through August2010.

 

19

----

 

*Outlook*

The economic outlook for theCompany is dependent on business and consumer behavior, which continues to beaffected by lingering threats of terrorist activity post-September 11,2001, continued soft economic recovery and political unrest in the MiddleEast.  These factors are likely topersist throughout fiscal 2005.  Theairline industry’s economic crisis is forecasted to continue into fiscal 2005,with analysts predicting losses of $1 to $3 billion.  Key risks to the Company are discussed more fully in the “RiskFactors Relating to the Company and the Airline Industry” section of Item 1 inthis Annual Report on Form 10-K.

 

Given the airline industry’scontinued economic uncertainty, the Company’s three main business strategiesfor fiscal 2005 are:

 

•                  Operatingexcellence – Maintain outstanding operating performance at Mesaba and create anenvironment of accountability and performance management at Big Sky to improveoperating results.

 

•                  Improvefinancial position – Continue to focus on cost control without sacrificingoperating performance.

 

•                  Growth anddiversification – Explore growth with existing subsidiaries and consider acquisitionsto diversify from the regional airline industry.

 

**Fiscal Year Ended March 31, 2004Compared with Fiscal Year Ended March 31, 2003**

 

*Earnings Summary*

The Company reported net incomeof $4.7 million or $0.23 per diluted share for fiscal 2004, compared to$4.3 million or $0.21 per diluted share in fiscal 2003.  Diluted weighted average common shares andcommon share equivalents outstanding were 20.6 million and20.4 million in fiscal 2004 and 2003.

 

On December 1, 2002, theCompany acquired all the outstanding shares of Big Sky and accounted for thetransaction using the purchase method of accounting.  The Company has consolidated Big Sky’s results of operations fromthe acquisition date to March 31, 2004. For fiscal 2004, Big Sky generated operating revenues of$16.5 million and operating expenses of $20.1 million.  Due to the fact that year-over-year and fullyear information for Big Sky is not included, a detailed discussion of BigSky’s operating results and statistics is not presented.

 

*Mesaba Operating Revenues*

Total operating revenuesdecreased 4.1% in fiscal 2004 to $432.6 million from $451.1 millionin fiscal 2003.  The decrease isattributable to a decrease of approximately 6.7% in completed Saab ASM, under theAirlink Agreement due to the return of six Saab A-model aircraft, the groundingof five RJ85 aircraft from December 2003 to March 2004 and the temporaryshutdown of service during final pilot negotiations in January 2004 thatresulted in the cancellation of 624 flights.

 

*Mesaba Operating Expenses*

Total operating expenses infiscal 2004 decreased 3.6% to $422.2 million from $438.1 million infiscal 2003.  The cost per ASM decreased6.9% to $0.145 from $0.155.

 

20

----

 

The following table comparescomponents of operating cost per ASM for the years ended March 31:

 
|                          |   | **2004** |   | **2003** |   |
|-------------------------------|--------|----------|--------|----------|--------|
| Wages and benefits            |   | 4.6      | ¢ | 4.6      | ¢ |
| Aircraft fuel                 |   | 0.7      |   | 0.8      |   |
| Aircraft maintenance          |   | 2.7      |   | 2.9      |   |
| Aircraft rents                |   | 3.5      |   | 3.8      |   |
| Landing fees                  |   | 0.2      |   | 0.2      |   |
| Insurance and taxes           |   | 0.3      |   | 0.5      |   |
| Depreciation and amortization |   | 0.6      |   | 0.7      |   |
| Administrative and other      |   | 1.9      |   | 2.0      |   |
| Total                         |   | 14.5     | ¢ | 15.5     | ¢ |

 

Wages and benefits increased1.7% to $133.5 million in fiscal 2004 from $131.3 million in fiscal2003.  The increase is primarily theresult of the new ALPA contract, which included $2.7 million in retroactivepay, which was partially offset by productivity improvement in maintenance andcustomer service.  Also contributing tothe variance were significant increases in health and dental insurance andworkers’ compensation costs.

 

Aircraft fuel decreased 8.2% to$20.1 million in fiscal 2004 from $21.9 million in fiscal 2003.  The decrease is attributable primarily to adecrease of 6.6% in the number of Saab block hours flown, favorable fuel burnrates and fuel credits received in fiscal 2004.  Certain provisions of the Airlink Agreement with Northwestprotect Mesaba from changes in fuel prices. Mesaba’s actual cost of fuel, including taxes and pumping fees, was 83.5cents per gallon in both fiscal 2004 and 2003. Northwest is responsible for fuel for Mesaba’s RJ85 operations.

 

Aircraft maintenance costs,excluding wages and benefits, decreased 5.5% to $77.4 million in fiscal2004 from $81.9 million in fiscal 2003. Aircraft maintenance costs decreased primarily due to a 2.3% reductionin flight hours flown in fiscal 2004 and a reduction in aircraft damageexpenses.

 

Aircraft rents decreased 3.7%to $102.7 million in fiscal 2004 from $106.7 million in fiscal2003.  This decrease is attributable tofewer aircraft in service year-over-year.

 

Landing fees decreased 5.3% to$6.8 million in fiscal 2004 from $7.2 million in fiscal 2003.  The decrease is primarily attributable tothe reduction of Saab departures during fiscal 2004.  Northwest is responsible for landing fees for Mesaba’s RJ85operations.

 

Insurance and taxes decreased43.2% to $8.4 million in fiscal 2004 from $14.7 million in fiscal2003.  The decrease is primarilyattributable to a reduction in the rates charged for hull and passengerliability insurance and favorable property tax credits.

 

Depreciation and amortizationdecreased 12.2% to $16.3 million in fiscal 2004 compared to$18.6 million in fiscal 2003.  Thelower level of depreciation and amortization resulted from reduced capitalspending over the last several years. The reduction is because less capital expenditure is required tomaintain the fleet versus investing in the infrastructure to grow the fleet inprevious fiscal years.

 

Administrative and otherexpenses remained relatively constant, increasing 2.2% to $57.0 million infiscal 2004 from $55.8 million in fiscal 2003.

 

21

----

 

*Consolidated Operating Income*

Operating income totaled$4.3 million in fiscal 2004, as compared to $8.6 million in fiscal2003.  The Company’s operating margindecreased to 1.0% in fiscal 2004 from 1.9% in fiscal 2003.

 

*Consolidated Nonoperating Income*

Nonoperating income (net)increased to $4.4 million for fiscal 2004 from $0.3 million in fiscal2003.  Fiscal 2004 nonoperating incomerepresents a government grant of $2.6 million and interest income earned on theCompany’s investments.  Fiscal 2003nonoperating income represents the offsetting impact of the recognition of a$3.0 million writedown of an investment in a WorldCom bond and interestincome earned on the Company’s remaining investments.

 

*Consolidated Provision for Income Taxes*

The provision for income taxesdecreased 10.4% to $4.1 million in fiscal 2004 from $4.6 million infiscal 2003.  The Company’s blendedeffective tax rate was 46.6% in fiscal 2004 as compared to 51.3% in fiscal2003.  The effective tax rate decreasedprimarily due to deducting certain items that were previously treated asnondeductible expenses.

 

**Fiscal Year Ended March 31, 2003Compared with Fiscal Year Ended March 31, 2002**

 

*Earnings Summary*

The Company reported net incomeof $4.3 million or $0.21 per diluted share in fiscal 2003, compared to$7.8 million or $0.38 per diluted share in fiscal 2002.  Weighted average common shares and commonshare equivalents outstanding were 20.4 million and 20.6 million infiscal 2003 and 2002.

 

On December 1, 2002, theCompany acquired all the outstanding shares of Big Sky and accounted for thetransaction using the purchase method of accounting.  The Company has consolidated Big Sky’s results of operations fromthe acquisition date to March 31, 2003. From the date of acquisition to March 31, 2003, Big Sky generatedoperating revenues of $5.8 million and operating expenses of$7.8 million.  Due to the fact thatyear-over-year and full year information for Big Sky is not included, adetailed discussion of Big Sky’s operating results and statistics is notpresented.  The following comparativeinformation includes Holdings and Mesaba on a combined basis.

 

*Operating Revenues*

Total operating revenuesincreased 8.2% in fiscal 2003 to $451.1 million from $416.9 millionin fiscal 2002.  The increase isattributable to an increase of approximately 6% in completed ASM under the AirlinkAgreement and 1% in block hours flown under the Jet Agreement, the eliminationof certain concessions granted to Northwest following the terrorist attacks onSeptember 11, 2001 and an increase in ground handling activities resultingfrom the change in operations with two new terminals in Minneapolis/St. Pauland Detroit.

 

*Operating Expenses*

Total operating expenses infiscal 2003 increased 5.8% to $440.4 million from $416.1 million infiscal 2002.  The cost per ASM increased2.6% to $0.156 from $0.152.  Thesignificant change in unit cost year-over-year was due to the increased wagesassociated with the change in operations with two new terminals inMinneapolis/St. Paul and Detroit, increased aircraft maintenance costsassociated with maintaining an aging fleet, increased aircraft rents associatedwith a greater number of aircraft on lease and increased insurance costsfollowing the terrorist attacks on September 11, 2001.

 

22

----

 

The following table comparescomponents of operating cost per ASM for the years ended March 31:

 
|                          |   | **2003** |   | **2002** |   |
|-------------------------------|--------|----------|--------|----------|--------|
| Wages and benefits            |   | 4.7      | ¢ | 4.5      | ¢ |
| Aircraft fuel                 |   | 0.8      |   | 0.8      |   |
| Aircraft maintenance          |   | 2.9      |   | 2.8      |   |
| Aircraft rents                |   | 3.8      |   | 3.7      |   |
| Landing fees                  |   | 0.2      |   | 0.2      |   |
| Insurance and taxes           |   | 0.5      |   | 0.3      |   |
| Depreciation and amortization |   | 0.7      |   | 0.7      |   |
| Administrative and other      |   | 2.0      |   | 2.2      |   |
| Total                         |   | 15.6     | ¢ | 15.2     | ¢ |

 

Wages and benefits increased5.7% to $132.0 million in fiscal 2003 from $125.0 million in fiscal2002.  The increase is the result ofincreased ground handling personnel for the two new terminals inMinneapolis/St. Paul and Detroit and increased health and dental costs.

 

Aircraft fuel decreased 2.7% to$21.9 million in fiscal 2003 from $22.5 million in fiscal 2002.  The decrease is attributable to decreasedfuel consumption.  Certain provisions ofthe Airlink Agreement with Northwest protect Mesaba from changes in fuelprices.  Mesaba’s actual cost of fuelincluding taxes and pumping fees was 83.5 cents per gallon in both fiscal 2003and fiscal 2002.  Northwest isresponsible for fuel for Mesaba’s RJ85 operations.

 

Aircraft maintenance costs,excluding wages and benefits, increased 7.5% to $81.9 million for fiscal2003 from $76.2 million for fiscal 2002. Aircraft maintenance costs increased due to the costs associated withmaintaining an aging aircraft fleet and revisions to Mesaba’s estimate ofexpected overhaul costs.

 

Aircraft rents increased 5.0%to $106.7 million in fiscal 2003 from $101.6 million in fiscal2002.  This increase is attributable tothe full year impact of the 11 additional Saab 340 aircraft that were deliveredbetween the last quarter of fiscal 2002 and the first two quarters of fiscal2003, netted against the return of eight Saab 340 aircraft during the third andfourth quarters of fiscal 2003.  Alsocontributing to the increase are higher rental rates for the aircraft added infiscal 2003 versus aircraft disposed of in the same period.

 

Landing fees increased 8.9% to$7.2 million in fiscal 2003 from $6.6 million in fiscal 2002.  The increase is primarily attributable tohigher landing fees charged by airports due to new airport facilities andhigher costs of airport operation. Northwest is responsible for landing fees for Mesaba’s RJ85 operations.

 

Insurance and taxes increased79.4% to $14.9 million in fiscal 2003 from $8.3 million in fiscal2002.  The increase is primarilyattributable to increased rates and surcharges for aircraft hull insurance andpassenger liability insurance imposed after the terrorist attacks onSeptember 11, 2001.

 

Depreciation and amortizationdecreased 6.1% to $18.6 million in fiscal 2003 compared to$19.8 million in fiscal 2002.  Thelower level of depreciation and amortization resulted from reduced and delayedcapital spending.

 

Administrative and otherexpenses increased 1.9% to $57.2 million in fiscal 2003 from$56.2 million in fiscal 2002.  Thechange is attributable to a full-year impact of increased security costsfollowing the

 

23

----

 

terrorist attacks onSeptember 11, 2001, offset by reduced crew costs associated with fewerdepartures in fiscal 2003.

 

*Consolidated Operating Income*

Operating income totaled$8.6 million in fiscal 2003, as compared to $0.8 million in fiscal2002.  The Company’s operating marginincreased to 1.9% in fiscal 2003 from 0.2% in fiscal 2002.

 

*Consolidated Nonoperating Income*

Nonoperating income (net)decreased to $0.3 million for fiscal 2003 from $15.3 million infiscal 2002.  Fiscal 2003 nonoperatingincome represents the offsetting impact of the recognition of a$3.0 million write-down of an investment in a WorldCom bond and interestincome earned on the Company’s remaining investments.  In fiscal 2002, nonoperating income of $15.3 million was dueprimarily to the recognition of $12.5 million in U.S. government grantproceeds.

 

*Consolidated Provision for Income Taxes*

The provision for income taxesdecreased 44.9% to $4.6 million in fiscal 2003 from $8.3 million infiscal 2002.  The Company’s blendedeffective tax rate was 51.3% in fiscal 2003 as compared to 51.4% in fiscal2002.  The effective tax rate remainedconstant due to a similar change in the level of nondeductible expenses beingapplied over the Company’s earnings.

 

**Liquidity and Capital Resources**

 

Cash, cash equivalents andinvestments increased 26.6% to $159.9 million at March 31, 2004 from$126.4 million at March 31, 2003. The Company’s working capital decreased to $99.7 million with acurrent ratio of 2.3 at March 31, 2004 compared to $102.0 million and2.6 at March 31, 2003.

 

Investments consist principallyof municipal securities and are classified as available-for-sale as of yearend.  Available-for-sale investments arereported at fair value with unrealized gains and losses excluded fromoperations and reported as a separate component of shareholders’ equity, exceptfor other-than-temporary impairments, which are reported as a charge to currentoperations and result in a new cost basis for the investment.  The Company classifies investments, with anoriginal maturity of more than 90 days that mature within one year asshort-term and greater than one year as long-term.

 

Approximately 75% of theCompany’s accounts receivable balance as of March 31, 2004 was due fromNorthwest.  Loss of Mesaba’s affiliationwith Northwest or Northwest’s failure to make timely payment of amounts owed toMesaba or to otherwise materially perform under the Airlink or Jet Agreementfor any reason would have a material adverse effect on the Company’s operationsand financial results.

 

Cash and cash equivalentsdecreased 12.2% to $54.6 million at March 31, 2004 from$62.1 million at March 31, 2003. A summary of cash flow activity is as follows:

 

*Operating Activities*

Net cash provided by operationsin fiscal 2004 was $45.9 million.  Theprimary sources of cash were from operations, which generated $4.7 million ofnet income, $17.5 million of non-cash items, primarily depreciation andamortization and $23.8 million of changes to current operating items.

 

*Investing Activities*

Net cash used by investing infiscal 2004 was $53.6 million.  Cashthat was generated from operations was the source for investingactivities.  The primary uses were netpurchases of short and long-term investments of $42.9 million and purchases ofproperty, plant and equipment of $10.7 million.

 

24

----

 

*Financing Activities*

Net cash provided by financingin fiscal 2004 was $0.1 million.  Thiswas primary due to the repayment of noncurrent liabilities of $0.2 million,which was offset by the proceeds from the issuance of common stock of $0.3million.

 

*Outlook*

The Company has historicallyrelied on cash and cash equivalents, investments and internally generated fundsto support its working capital requirements. Absent adverse factors outside the control of the Company, managementbelieves current liquidity and funds from operations will be adequate resourcesfor meeting current operations and non-aircraft capital needs for fiscal 2005.

 

**Contractual Obligations, Commitments andOff-Balance Sheet Arrangements**

 

As of March 31, 2004,Mesaba’s fleet consisted of 99 aircraft covered under operating leases withremaining terms of up to 12-years and aggregate monthly lease payments ofapproximately $8.7 million.  Mesabaleases its Saab aircraft, either directly from aircraft leasing companies,through Pinnacle under operating leases with initial terms of up to seven yearsor through subleases with Northwest under operating leases with initial termsof up to 17-years.  Mesaba leases itsRJ85 aircraft from Northwest under operating leases with initial terms of up to10-years.  Mesaba believes that itsrevenues from the Airlink and Jet Agreements will continue to be sufficient tofund its aircraft lease obligations.  Ifthe Airlink Agreement terminates, then the Saab aircraft leases willsimultaneously terminate.  Likewise, ifthe Jet Agreement terminates, then the RJ85 aircraft leases will simultaneouslyterminate.

 

As of March 31, 2004, BigSky’s fleet consisted of 12 aircraft covered under operating leases withremaining terms of four months to 35 months and aggregate monthly leasepayments of approximately $0.2 million. Big Sky leases 11 of its aircraft from leasing companies and oneaircraft from a municipality under operating leases with initial terms of up tosix years.  Five of the leases allow BigSky to return the aircraft to the lessor upon the occurrence of certain eventsand contain purchase options.  Fundingof the monthly minimum lease payments is dependent on continued passengerboardings and ultimately Big Sky's operations.

 

The Company’s airline fleetoperating leases do not contain any guaranteed lease residual provisions forwhich there would be a potential contingency at the termination of the leaseperiod.

 

The following table summarizesthe Company’s commitments to make long-term debt and lease payments for theyears ending March 31, in thousands:

 
|                  |   | **2005** |    | **2006** |   | **2007** |   | **2008** |    | **2009** |   | **Thereafter** |   | **Total** |   |
|-----------------------|--------|----------|---------|----------|--------|----------|--------|----------|---------|----------|--------|----------------|--------|-----------|--------|
| Operating leases: (1) |   |     |    |     |   |     |   |     |    |     |   |           |   |      |   |
| Aircraft              |   | $        | 106,001 |     | $      | 104,442  |   | $        | 102,485 |     | $      | 38,921         |   | $         | 35,663 |   | $ | 208,633 |   | $ | 596,145 |   |
| Non-aircraft          |   | 8,924    |    | 8,828    |   | 8,681    |   | 7,652    |    | 6,709    |   | 59,280         |   | 100,074   |   |
| Long-term debt (2)    |   | 97       |    | 105      |   | 111      |   | 22       |    | —   |   | —         |   | 335       |   |
| Capital lease (3)     |   | 30       |    | 31       |   | 33       |   | 36       |    | 40       |   | 312            |   | 482       |   |
| Total                 |   | $        | 115,052 |     | $      | 113,406  |   | $        | 111,310 |     | $      | 46,631         |   | $         | 42,412 |   | $ | 268,225 |   | $ | 697,036 |   |

 

(1)           Amounts represent minimum lease payments with initial orremaining terms of more than one year. See Notes 6 and 11 to the consolidated financial statements foradditional discussion of operating leases.

----

 

25

----

 

(2)           Amounts represent principal payments only.  See Note 7 to the consolidatedfinancial statements for additional discussion of long-term debt and futurematurities.

 

(3)           See Note 11 to the consolidated financial statementsfor additional discussion of the capital lease.

----

 

An off-balance sheetarrangement is any transaction, agreement or other contractual arrangementinvolving an unconsolidated entity under which a company has (i) guarantees;(ii) a retained or a contingent interest in transferred assets; (iii) anobligation under derivative instruments classified as equity; or (iv) anyobligation arising out of a material variable interest in an unconsolidatedentity that provides financing, liquidity, market risk or credit risk supportto the company, or that engages in leasing, hedging, or research anddevelopment arrangements with the company. The Company has no arrangements of the types described that may have amaterial current or future effect on the Company’s financial condition,liquidity or results of operations.

 

**Critical Accounting Policies and Estimates**

 

The preparation of theCompany’s consolidated financial statements in conformity with generallyaccepted accounting principles requires the use of estimates, judgments andassumptions that affect the reported amounts of assets and liabilities as ofthe date of the consolidated financial statements, revenues and expenses duringthe reporting period and related disclosures of contingent assets andliabilities in the consolidated financial statements and the accompanyingnotes.  The SEC has defined a company’smost critical accounting policies as the ones that are most important to the portrayalof the company’s financial condition and results, and which require the companyto make its most difficult and subjective judgments, often as a result of theneed to make estimates of matters that are inherently uncertain.  Based on this definition, the Company hasidentified its critical accounting policies to include those discussed in thefollowing paragraphs.  The Company alsohas other key accounting policies, which involve the use of estimates,judgments and assumptions.  SeeNote 2 “Summary of Significant Accounting Policies” in the Notes to theConsolidated Financial Statements for additional discussion of these items.

 

Management believes that itsestimates and assumptions are reasonable, based on information presentlyavailable; however, changes in these estimates, judgments and assumptions willoccur as a result of future events, and accordingly actual results could differfrom amounts estimated.

 

*Aircraft Property and Equipment*—Estimatedlives are used to record depreciation on aircraft property and equipment.  Aircraft utilization, Airlink and JetAgreement contractual lives, technology and changes in business strategy mayaffect the economic lives used to record depreciation by Mesaba or BigSky.  The foregoing may also affectdepreciation rates, impairment or both. Management of Mesaba and Big Sky regularly review the estimated usefullives and salvage values for aircraft property and equipment.

 

*Excess and Obsolete Inventories*—Estimatedrecovery percentages are used to record obsolescence reserves for partsinventories.  Aircraft utilization,parts availability and changes in parts cost may affect the valuation of partsinventories and obsolescence reserve levels. Management of Mesaba and Big Sky regularly review recovery percentages,reserve levels and inventory valuations for parts inventories.

 

*Aircraft Maintenance*—Estimated maintenancecosts and anticipated aircraft activity are used to determine maintenancereserves.  Changes in maintenancecontracts, parts and labor costs and aircraft activity may affect themaintenance reserves.  Management ofMesaba and Big Sky regularly review airplane activity, expected aircraft returndates, changes in its maintenance contracts and parts and labor costs formaintenance reserves.

 

26

----

 

*Goodwill and Other Intangible Assets*—The excess of the Big Sky purchase price overthe fair market value of the net assets acquired was allocated to certainidentifiable intangible assets, including Big Sky’s pilot labor contract andits air carrier certificate and goodwill. The recoverability of goodwill and other intangible assets areevaluated annually, at a minimum, or on an interim basis if events orcircumstances indicate a possible inability to realize the carryingamounts.  The evaluation includes futurecash flow projections, strategic modeling and other managementassumptions.  During the fourth quarterof fiscal 2004, the Company completed its annual impairment test of goodwilland other intangible assets and determined that no impairment charge wasnecessary.

 

*Income Taxes*—The Company’s effective tax rate was 46.6%, 51.3% and51.4% in fiscal 2004, 2003 and 2002. The Company’s effective tax rate is based on expected income, statutorytax rates and tax planning opportunities available in the various jurisdictionsin which the Company operates.  In theevent that there is a significant unusual or one-time item recognized, orexpected to be recognized, in the Company’s operating results, the taxattributable to that item would be separately calculated and recorded at thesame time as the unusual or one-time item. Significant judgment is required in determining the Company’s effectivetax rate and in evaluating its tax positions. The Company establishes reserves when, despite its belief that the tax returnpositions are fully supportable, certain positions are likely to be challengedand that it may not succeed.  TheCompany adjusts these reserves in light of changing facts and circumstances,such as the closing of a tax audit.  Theeffective tax rate includes the impact of reserve provisions and changes toreserves that are considered appropriate, as well as related interest.  This rate is then applied to the Company’squarterly operating results.

 

**New Accounting Pronouncements**

 

In January 2003, the Financial Accounting Standards Board (“FASB”)issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN46”).  FIN 46 requires a variableinterest entity (“VIE”) to be consolidated when a company is subject to themajority of the risk of loss from the VIE’s activities or is entitled toreceive the majority of the entity’s residual returns, or both.  In December 2003, the FASB issued a revisionto FIN 46 (“FIN 46R”) which partially delayed the effective date of theinterpretation to March 31, 2004 and added additional scope exceptions.  The adoption of FIN 46R did not have amaterial impact on the Company’s consolidated results of operations, financialposition or cash flows as it does not have a VIE.

 

In May 2003, the FASB issuedSFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.”  SFAS No. 150 establishes standards for how an issuer classifiesand measures certain financial instruments with characteristics of bothliabilities and equity.  SFAS No. 150 iseffective for financial instruments entered into or modified after May 31,2003, and otherwise became effective September 30, 2003.  The adoption of SFAS No. 150 did not have amaterial impact on the Company’s consolidated results of operations, financialposition or cash flows.

 

In December 2003, the FASBissued SFAS No. 132 (revised 2003),“Employers’ Disclosures about Pensions and Other Postretirement Benefits.”  The revised SFAS No. 132 requires additionaldisclosures concerning the types of plan assets, investment strategy,measurement date(s), plan obligations, cash flows and components of netperiodic benefit costs of defined benefit pension plans and other definedbenefit postretirement plans.  Theadoption of revised SFAS No. 132 did not have an effect on the Company’sdisclosures as it has no defined benefit plans or other defined benefitpostretirement plans.

 

27

----

 

**Item 7A. QUANTITATIVE AND QUALITATIVE****DISCLOSURESABOUT MARKET RISK**

 

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

 

Mesaba and Big Sky have notexperienced difficulties with fuel availability.  As a part of the Airlink Agreement, Northwest bears the economicrisk of fuel price fluctuations for Mesaba’s fuel requirements.  As part of the Jet Agreement, Northwestprovides all fuel at its expense to support Mesaba’s RJ85 operations.  Big Sky is subject to fluctuations in fuelprices, but currently fuel expense is not a material cost in relation to theCompany’s total operating expenses.  TheCompany expects that its results of operations will not be materially affectedby fuel price volatility.

 

The Company does not holdlong-term interest sensitive assets and therefore is not exposed to interestrate fluctuations for its assets.  TheCompany does not purchase or hold any derivative financial instruments fortrading or speculative purposes.

 

**Item 8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

The consolidated financialstatements of the Company and the related report of independent registeredpublic accounting firm and report of independent public accountants areincluded in this Annual Report on Form 10-K on the pages indicated below:

 
| Report of Independent Registered Public  Accounting Firm                                                      | 29 |
|---------------------------------------------------------------------------------------------------------------|----|
| Report of Independent Public Accountants                                                                      | 30 |
| Consolidated Balance Sheets as of March 31, 2004 and 2003                                                     | 31 |
| Consolidated Statements of Operations for  the Years Ended March 31, 2004, 2003 and 2002                      | 32 |
| Consolidated Statements of Shareholders’  Equity for the Years Ended March 31, 2004, 2003  and 2002 | 33 |
| Consolidated Statements of Cash Flows for  the Years Ended March 31, 2004, 2003 and   2002               | 34 |
| Notes to Consolidated Financial Statements                                                                    | 35 |
| Supplemental  Schedule to Consolidated Financial Statements - Valuation and Qualifying  Accounts              | 56 |

 

28

----

 

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors andShareholders of

MAIR Holdings, Inc.

Minneapolis, Minnesota

 

We have audited theaccompanying consolidated balance sheets of MAIR Holdings, Inc. (formerlyknown as Mesaba Holdings, Inc.) and subsidiaries (the “Company”) as ofMarch 31, 2004 and 2003 and the related consolidated statements ofoperations, shareholders’ equity and cash flows for each of the two years inthe period ended March 31, 2004. These consolidated financial statements are the responsibility of theCompany’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.  Theconsolidated financial statements of the Company for the year endedMarch 31, 2002, before the change in composition of its reportablesegments and inclusion of disclosures as discussed in Note 10, wereaudited by other auditors who have ceased operations.  Those auditors expressed an unqualified opinion on thosefinancial statements in their report dated May 2, 2002.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States of America).  Thosestandards require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of the Company as of March 31,2004 and 2003 and the related consolidated statements of operations and cashflows for each of the two years in the period ended March 31, 2004 in conformitywith accounting principles generally accepted in the United States of America.

 

As discussed above, theconsolidated financial statements of the Company for the year endedMarch 31, 2002 were audited by other auditors who have ceasedoperations.  As described inNote 10, the Company changed the composition of its reportable segments infiscal 2003, and the amounts disclosed in the fiscal 2002 consolidatedfinancial statements relating to reportable segments have been restated toconform to the fiscal 2003 composition of reportable segments.  We audited the adjustments that were appliedto the restated disclosures for reportable segments reflected in the fiscal2002 consolidated financial statements. Our procedures included (1) comparing the adjustment amounts ofsegment income before income taxes and total assets to the Company’s underlyinganalysis obtained from management, and (2) testing the mathematicalaccuracy of the reconciliations of segment amounts to the consolidatedfinancial statements.  In our opinion,such adjustments have been properly applied. However, we were not engaged to audit, review, or apply any proceduresto the fiscal 2002 consolidated financial statements of the Company other thanwith respect to such adjustments and, accordingly, we do not express an opinionor any other form of assurance on the fiscal 2002 consolidated financialstatements taken as a whole.

 

DELOITTE & TOUCHE LLP

 

Minneapolis, Minnesota

June 18, 2004

 

29

----

 

**NOTICE: THE FOLLOWINGREPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BYARTHUR ANDERSEN LLP.  THIS REPORTRELATES TO PRIOR YEARS’ FINANCIALSTATEMENTS.  THIS REPORT HAS NOT BEENREISSUED BY ARTHUR ANDERSEN LLP.**

 

**REPORT OF INDEPENDENTPUBLIC ACCOUNTANTS**

 

To Mesaba Holdings, Inc.:

 

We have audited theaccompanying consolidated balance sheets of Mesaba Holdings, Inc. (aMinnesota corporation) and Subsidiary as of March 31, 2002 and 2001, andthe related consolidated statements of operations, shareholders’ equity andcash flows for each of the three years in the period ended March 31,2002.  These financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in the UnitedStates.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, thefinancial position of Mesaba Holdings, Inc. and Subsidiary as ofMarch 31, 2002 and 2001, and the results of their operations and theircash flows for each of the three years in the period ended March 31, 2002,in conformity with accounting principles generally accepted in the UnitedStates.

 

ARTHUR ANDERSEN LLP

 

Minneapolis, Minnesota,

May 2, 2002

 

30

----

 

**MAIRHOLDINGS, INC. AND SUBSIDIARIES**

**Consolidated Balance Sheets**

**As of March 31, 2004and 2003**

**(in thousands, exceptshare information)**

 
|                                                                                                                 |   | **2004** |    | **2003** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| ASSETS                                                                                                               |   |     |    |     |   |
| CURRENT ASSETS:                                                                                                      |   |     |    |     |   |
| Cash and cash equivalents                                                                                            |   | $        | 54,561  |     | $      | 62,140 |   |
| Short-term investments                                                                                               |   | 67,285   |    | 40,464   |   |
| Accounts receivable, net of reserves of  $926 and $389                                                               |   | 28,453   |    | 40,682   |   |
| Inventories, net                                                                                                     |   | 8,664    |    | 8,459    |   |
| Prepaid expenses and deposits                                                                                        |   | 5,381    |    | 4,925    |   |
| Deferred income taxes and other                                                                                      |   | 11,449   |    | 10,706   |   |
| Total current assets                                                                                                 |   | 175,793  |    | 167,376  |   |
|                                                                                                                 |   |     |    |     |   |
| PROPERTY AND EQUIPMENT, net (Note 2)                                                                                 |   | 39,722   |    | 43,798   |   |
|                                                                                                                 |   |     |    |     |   |
| NONCURRENT ASSETS:                                                                                                   |   |     |    |     |   |
| Long-term investments                                                                                                |   | 38,084   |    | 23,762   |   |
| Goodwill                                                                                                             |   | 2,503    |    | 3,222    |   |
| Other intangible assets, net                                                                                         |   | 3,224    |    | 3,630    |   |
| Other assets, net                                                                                                    |   | 7,994    |    | 7,873    |   |
|                                                                                                                 |   | $        | 267,320 |     | $      | 249,661 |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                           |   |     |    |     |   |
| CURRENT LIABILITIES:                                                                                                 |   |     |    |     |   |
| Accounts payable                                                                                                     |   | $        | 18,981  |     | $      | 18,729 |   |
| Accrued liabilities:                                                                                                 |   |     |    |     |   |
| Payroll                                                                                                              |   | 16,724   |    | 14,295   |   |
| Maintenance                                                                                                          |   | 20,724   |    | 16,021   |   |
| Deferred income                                                                                                      |   | 2,504    |    | 2,619    |   |
| Other current liabilities (Note 2)                                                                                   |   | 17,124   |    | 13,708   |   |
| Total current liabilities                                                                                            |   | 76,057   |    | 65,372   |   |
|                                                                                                                 |   |     |    |     |   |
| OTHER NONCURRENT LIABILITIES                                                                                         |   | 6,334    |    | 6,344    |   |
|                                                                                                                 |   |     |    |     |   |
| COMMITMENTS AND CONTINGENCIES (Notes 6, 7  and 11)                                                                   |   |     |    |     |   |
|                                                                                                                 |   |     |    |     |   |
| SHAREHOLDERS’ EQUITY:                                                                                           |   |     |    |     |   |
| Undesignated preferred stock, no specified  par value; 1,000,000 shares authorized, no shares issued and outstanding |   | —   |    | —   |   |
| Common stock, $.01 par value; 60,000,000  shares authorized, 20,375,372 and 20,320,641 shares issued and outstanding |   | 204      |    | 203      |   |
| Paid-in capital                                                                                                      |   | 52,995   |    | 50,615   |   |
| Warrants                                                                                                             |   | 16,500   |    | 16,500   |   |
| Accumulated other comprehensive income                                                                               |   | 46       |    | 116      |   |
| Retained earnings                                                                                                    |   | 115,184  |    | 110,511  |   |
| Total shareholders’ equity                                                                                      |   | 184,929  |    | 177,945  |   |
|                                                                                                                 |   | $        | 267,320 |     | $      | 249,661 |   |

 

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

 

31

----

 

**MAIRHOLDINGS, INC. AND SUBSIDIARIES**

**ConsolidatedStatements of Operations**

**Years Ended March 31,2004, 2003 and 2002**

**(in thousands, exceptper share information)**

 
|                                     |   | **2004** |    | **2003** |   | **2002** |   |
|------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| OPERATING REVENUES:                      |   |     |    |     |   |     |   |
| Passenger                                |   | $        | 417,300 |     | $      | 433,060  |   | $ | 401,912 |   |
| Freight and other                        |   | 31,779   |    | 23,820   |   | 15,001   |   |
| Total operating revenues                 |   | 449,079  |    | 456,880  |   | 416,913  |   |
| OPERATING EXPENSES:                      |   |     |    |     |   |     |   |
| Wages and benefits                       |   | 143,124  |    | 134,508  |   | 124,962  |   |
| Aircraft fuel                            |   | 22,399   |    | 22,987   |   | 22,534   |   |
| Aircraft maintenance                     |   | 80,700   |    | 82,984   |   | 76,202   |   |
| Aircraft rents                           |   | 105,163  |    | 107,547  |   | 101,582  |   |
| Landing fees                             |   | 7,108    |    | 7,298    |   | 6,574    |   |
| Insurance and taxes                      |   | 9,347    |    | 15,060   |   | 8,314    |   |
| Depreciation and amortization            |   | 17,144   |    | 18,838   |   | 19,772   |   |
| Administrative and other                 |   | 59,771   |    | 59,030   |   | 56,167   |   |
| Total operating expenses                 |   | 444,756  |    | 448,252  |   | 416,107  |   |
| Operating income                         |   | 4,323    |    | 8,628    |   | 806      |   |
| NONOPERATING INCOME (EXPENSE):           |   |     |    |     |   |     |   |
| Interest income and other                |   | 1,888    |    | 2,809    |   | 2,839    |   |
| Government grant income                  |   | 2,646    |    | 491      |   | 12,485   |   |
| Writedown of investment                  |   | —   |    | (2,994   | )      | —   |   |
| Interest expense                         |   | (101     | )       | (47      | )      | (53      | )      |
| Other nonoperating income, net           |   | 4,433    |    | 259      |   | 15,271   |   |
| Income before provision for income taxes |   | 8,756    |    | 8,887    |   | 16,077   |   |
|                                     |   |     |    |     |   |     |   |
| PROVISION FOR INCOME TAXES               |   | 4,083    |    | 4,558    |   | 8,267    |   |
| NET INCOME                               |   | $        | 4,673   |     | $      | 4,329    |   | $ | 7,810 |   |
|                                     |   |     |    |     |   |     |   |
| NET INCOME PER SHARE:                    |   |     |    |     |   |     |   |
| Earnings per common share - basic        |   | $        | 0.23    |     | $      | 0.21     |   | $ | 0.38 |   |
| Earnings per common share - diluted      |   | $        | 0.23    |     | $      | 0.21     |   | $ | 0.38 |   |
|                                     |   |     |    |     |   |     |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING:     |   |     |    |     |   |     |   |
| Basic                                    |   | 20,334   |    | 20,308   |   | 20,289   |   |
| Diluted                                  |   | 20,562   |    | 20,357   |   | 20,601   |   |

 

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

 

32

----

 

**MAIRHOLDINGS, INC. AND SUBSIDIARIES**

**ConsolidatedStatements of Shareholders’ Equity**

**Years EndedMarch 31, 2004, 2003 and 2002**

**(in thousands, exceptshare information)**

 
|                                                             |   |             |   |        |      |         |   |              |   |         |   | **Accumulated  Other** |         |         |   | **Total**    |   |   |          | **Comprehensive** |   |
|------------------------------------------------------------------|--------|------------------|--------|-------------|-----------|--------------|--------|-------------------|--------|--------------|--------|------------------------|--------------|--------------|--------|--------------|--------|--------|---------------|-------------------|--------|
|                                                             |   | **Common Stock** |   | **Paid-In** |      | **Warrants** |   | **Comprehensive** |   | **Retained** |   | **Shareholders’** |         |         |   | **Income**   |   |
|                                                             |   | **Shares**       |   | **Amount**  |      | **Capital**  |   | **Shares**        |   | **Amount**   |   | **Income  (Loss)**     |         | **Earnings** |   | **Equity**   |   |   |          | **(Loss)**        |   |
| Balance, March 31, 2001                                          |   | 20,288,141       |   | $           |  203 |         | $      |  49,606      |   | 4,151,922    |   | $                      |  16,500 |         | $      |  — |   | $      |  98,372  |              | $      |  164,681 |   |   |   | $ |   19,784 |   |
|                                                             |   |             |   |        |      |         |   |              |   |         |   |                   |         |         |   |         |   |   |          |              |   |
| Net income                                                       |   |             |   |        |      |         |   |              |   |         |   |                   |         | 7,810        |   | 7,810        |   |   |          | 7,810             |   |
| Exercise of stock options                                        |   | 10,000           |   |        |      | 80           |   |              |   |         |   |                   |         |         |   | 80           |   |   |          |              |   |
| Tax impact of prior options                                      |   |             |   |        |      | 822          |   |              |   |         |   |                   |         |         |   | 822          |   |   |          |              |   |
| Unrealized loss on investments, net of tax                       |   |             |   |        |      |         |   |              |   |         |   | (21                    | )            |         |   | (21          | )      |   |          | (21               | )      |
| Balance, March 31, 2002                                          |   | 20,298,141       |   | 203         |      | 50,508       |   | 4,151,922         |   | 16,500       |   | (21                    | )            | 106,182      |   | 173,372      |   |   |          | 7,789             |   |
|                                                             |   |             |   |        |      |         |   |              |   |         |   |                   |         |         |   |         |   |   |          |              |   |
| Net income                                                       |   |             |   |        |      |         |   |              |   |         |   |                   |         | 4,329        |   | 4,329        |   |   |          | 4,329             |   |
| Exercise of stock options                                        |   | 22,500           |   |        |      | 107          |   |              |   |         |   |                   |         |         |   | 107          |   |   |          |              |   |
| Unrealized gain on investments, net of tax                       |   |             |   |        |      |         |   |              |   |         |   | 137                    |         |         |   | 137          |   |   |          | 137               |   |
| Balance, March 31, 2003                                          |   | 20,320,641       |   | 203         |      | 50,615       |   | 4,151,922         |   | 16,500       |   | 116                    |         | 110,511      |   | 177,945      |   |   |          | 4,466             |   |
|                                                             |   |             |   |        |      |         |   |              |   |         |   |                   |         |         |   |         |   |   |          |              |   |
| Net income                                                       |   |             |   |        |      |         |   |              |   |         |   |                   |         | 4,673        |   | 4,673        |   |   |          | 4,673             |   |
| Exercise of stock options                                        |   | 54,731           |   | 1           |      | 355          |   |              |   |         |   |                   |         |         |   | 356          |   |   |          |              |   |
| Compensation expense for stock options under variable accounting |   |             |   |        |      | 1,987        |   |              |   |         |   |                   |         |         |   | 1,987        |   |   |          |              |   |
| Tax benefit on stock options exercised                           |   |             |   |        |      | 38           |   |              |   |         |   |                   |         |         |   | 38           |   |   |          |              |   |
| Unrealized loss on investments, net of tax                       |   |             |   |        |      |         |   |              |   |         |   | (70                    | )            |         |   | (70          | )      |   |          | (70               | )      |
| Balance, March 31, 2004                                          |   | 20,375,372       |   | $           |  204 |         | $      |  52,995      |   | 4,151,922    |   | $                      |  16,500 |         | $      |  46     |   | $      |  115,184 |              | $      |  184,929 |   |   |   | $ |   4,603 |   |

 

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

 

33

----

 

**MAIRHOLDINGS, INC. AND SUBSIDIARIES**

**Consolidated Statementsof Cash Flows**

**Years Ended March 31,2004, 2003 and 2002**

**(in thousands)**

 
|                                                                               |   | **2004** |   | **2003** |   | **2002** |   |
|------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |   |     |   |     |   |     |   |
| Net income                                                                         |   | $        | 4,673  |     | $      | 4,329    |   | $ | 7,810 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |     |   |     |   |     |   |
| Depreciation and amortization                                                      |   | 17,144   |   | 18,838   |   | 19,772   |   |
| Amortization of deferred credits                                                   |   | (2,092   | )      | (2,727   | )      | —   |   |
| Stock-based compensation                                                           |   | 1,987    |   | —   |   | —   |   |
| Writedown of investment                                                            |   | —   |   | 2,994    |   | —   |   |
| Deferred income taxes                                                              |   | (1,289   | )      | (2,033   | )      | 1,598    |   |
| Other noncash expenses                                                             |   | 1,719    |   | —   |   | 1,484    |   |
| Changes in current operating items, net of  acquisition:                           |   |     |   |     |   |     |   |
| Accounts receivable                                                                |   | 12,229   |   | 2,371    |   | (5,431   | )      |
| Inventories                                                                        |   | (205     | )      | 225      |   | 446      |   |
| Prepaid expenses and deposits                                                      |   | (456     | )      | (2,725   | )      | 489      |   |
| Accounts payable and other                                                         |   | 12,210   |   | 14,017   |   | (4,326   | )      |
| Net cash provided by operating activities                                          |   | 45,920   |   | 35,289   |   | 21,842   |   |
|                                                                               |   |     |   |     |   |     |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |   |     |   |     |   |     |   |
| Acquisition of Big Sky, net of cash  acquired                                      |   | —   |   | (3,225   | )      | —   |   |
| Purchases of investments                                                           |   | (91,140  | )      | (92,466  | )      | (92,097  | )      |
| Sales of investments                                                               |   | 48,246   |   | 99,225   |   | 98,304   |   |
| Purchases of property and equipment, net of  acquisition                           |   | (10,717  | )      | (7,399   | )      | (15,738  | )      |
| Net cash used in investing activities                                              |   | (53,611  | )      | (3,865   | )      | (9,531   | )      |
|                                                                               |   |     |   |     |   |     |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                               |   |     |   |     |   |     |   |
| Repayment of other noncurrent liabilities                                          |   | (244     | )      | (641     | )      | (57      | )      |
| Proceeds from issuance of common stock                                             |   | 356      |   | 107      |   | 80       |   |
| Net cash provided by (used in) financing  activities                               |   | 112      |   | (534     | )      | 23       |   |
|                                                                               |   |     |   |     |   |     |   |
| NET INCREASE (DECREASE) IN CASH & CASH  EQUIVALENTS                            |   | (7,579   | )      | 30,890   |   | 12,334   |   |
|                                                                               |   |     |   |     |   |     |   |
| CASH & CASH EQUIVALENTS:                                                       |   |     |   |     |   |     |   |
| Beginning of year                                                                  |   | 62,140   |   | 31,250   |   | 18,916   |   |
| End of year                                                                        |   | $        | 54,561 |     | $      | 62,140   |   | $ | 31,250 |   |
|                                                                               |   |     |   |     |   |     |   |
| SUPPLEMENTARY CASH FLOW INFORMATION:                                               |   |     |   |     |   |     |   |
| Cash paid during the year for:                                                     |   |     |   |     |   |     |   |
| Interest                                                                           |   | $        | 83     |     | $      | 47       |   | $ | 57 |   |
| Income taxes                                                                       |   | 2,850    |   | 10,252   |   | 8,104    |   |

 

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

 

34

----

 

**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**Notes to ConsolidatedFinancial Statements**

 

**1.****              CorporateOrganization and Business:**

 

*Corporate Organization*

The consolidated financialstatements include the accounts of MAIR Holdings, Inc. (formerly known asMesaba Holdings, Inc.) (“Holdings”) and its wholly-owned subsidiaries, MesabaAviation, Inc., a regional air carrier based in Minneapolis, Minnesota(“Mesaba”) and Big Sky Transportation Co., a regional air carrier based inBillings, Montana (“Big Sky”). Holdings, Mesaba and Big Sky are referred to herein collectively as the“Company”.  Holdings acquired Big Sky onDecember 1, 2002 (see Note 3). All significant intercompany balances and transactions have beeneliminated in consolidation.

 

*Business*

 

Mesaba

Mesaba operates as a regionalair carrier providing scheduled passenger service as “Mesaba Airlines/NorthwestAirlink” and “Mesaba Airlines/Northwest Jet Airlink” under two separateagreements with Northwest Airlines, Inc., a wholly-owned indirectsubsidiary of Northwest Airlines Corporation (“Northwest”), to 106 cities inthe United States and Canada from Northwest’s hub airports located inMinneapolis/St. Paul, Detroit and Memphis.

 

Under theAirline Services Agreement (the “Airlink Agreement”), Mesaba operates Saab 340jet-prop aircraft (“Saab”) for Northwest. This agreement provides for exclusive rights to designated service areasand extends through June 30, 2007. Under the Airlink Agreement, Mesaba recognizes revenue for eachcompleted “available seat mile” (the number of seats available for passengers,multiplied by the number of miles those seats are flown).  Additionally, under the Airlink Agreement,Mesaba purchases fuel, ground handling and other services from Northwest.  The Company paid to Northwest $29.8 million,$22.2 million and $25.5 million in fiscal 2004, 2003 and 2002, for theseservices.  Either Northwest or Mesabamay terminate the Airlink Agreement on 365 days notice or it may beterminated immediately by either party for certain provisions provided for inthe Airlink Agreement.

 

Under the Regional Jet ServicesAgreement (the “Jet Agreement”), Mesaba operates Avro RJ85 regional jets(“RJ85”) for Northwest.  The JetAgreement extends through April 25, 2007. Under the Jet Agreement, Mesaba recognizes revenue for each “block hour”flown (the elapsed time between aircraft departing and arriving at agate).  Additionally, under the JetAgreement, Northwest provides fuel and airport and passenger related servicesat Northwest’s expense.  The Jet Agreementmay be terminated immediately by Mesaba or Northwest in accordance with certainprovisions provided for in the Jet Agreement.

 

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 incentives from Northwest to Mesaba based onachievement of certain operational or financial goals.  Approximately 75% and 73% of theMarch 31, 2004 and 2003 accounts receivable balances in the accompanyingconsolidated balance sheets are due from Northwest.  Substantially all of Mesaba’s operating revenue recognized infiscal 2004, 2003 and 2002 was from Northwest. Accounts payable owed to Northwest, primarily for fuel, was $1.0 millionand $0.1 million as of March 31, 2004 and 2003.

 

35

----

 

Loss of Mesaba’s affiliationwith Northwest or Northwest’s failure to make timely payment of amounts owed toMesaba or to otherwise materially perform under the Airlink or Jet Agreementswould have a material adverse effect on Mesaba’s and the Company’s operations,financial position and cash flows. Northwest and Mesaba review contract compliance on a periodicbasis.  There are significant relatedparty transactions between Northwest and Mesaba disclosed throughout the Notesto the Consolidated Financial Statements.

 

Big Sky

Big Sky operates as a regionalair carrier based in Billings, Montana, primarily providing scheduledpassenger, airfreight, express package and charter services.  Big Sky provides scheduled air service to 19communities in Montana, North Dakota, Washington and Idaho via its Billingshub.  Big Sky operates daily scheduledflights providing interline and online connecting services and local marketservices.  Big Sky also has code-sharingagreements with Alaska Airlines, America West Airlines and Northwest, where itsservices are marketed jointly with those air carriers for connectingflights.  Big Sky participates in theEssential Air Service (“EAS”) program with the U.S. Department ofTransportation (“DOT”).  The EAS programsubsidizes air carriers to provide air service to designated rural communitiesthroughout the country that could not otherwise economically justify thatservice based on its passenger traffic. The DOT pays EAS subsidies for each departure in a covered market.  Big Sky purchased fuel from Northwest for$1.9 million in fiscal 2004 and none during fiscal 2003.

 

**2.****              Summaryof Significant Accounting Policies:**

 

The accounting policies of theCompany conform to accounting principles generally accepted in the UnitedStates of America.  Significant policiesare described below.

 

*Use of Estimates*

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of financial statements and thereported amounts of revenues and expenses during the reporting period.  The most significant use of estimatesrelates to accrued maintenance expenses, aircraft property and equipment lives,inventory obsolescence reserves, valuation of goodwill and other intangibleassets and accounting for income taxes. Ultimate results could differ from those estimates.

 

*Cash and Cash Equivalents*

Cash equivalents consistprimarily of U.S. government and municipal securities and interest-bearingdeposits with original maturities of less than 90 days and are stated atcost, which approximates fair value.

 

*Investments*

Investments consist principallyof municipal securities and are classified as available-for-sale.  Available-for-sale investments are reportedat fair value with unrealized gains and losses excluded from operations andreported as a separate component of shareholders’ equity, except forother-than-temporary impairments, which are reported as a charge to currentoperations and result in a new cost basis for the investment.

 

*Inventories*

Inventories are stated at thelower of cost or market and consist of expendable aircraft service parts, fueland glycol (de-icing agent).  Mesabauses the first-in, first-out inventory method and Big Sky uses averagecost.  Expendable parts are charged tomaintenance as used.  A provision isrecorded to reduce inventories to the estimated net realizable value, ifrequired.  As of March 31, 2004 and2003, this reserve balance was $2.2 million and $2.0 million.

 

36

----

 

*Property and Equipment*

Property and equipment are statedat cost.  Additions, improvements ormajor renewals are capitalized, while expenditures that do not enhance orextend the asset’s useful life are charged to operating expense as incurred.  Depreciation is computed on a straight-linebasis for financial reporting purposes over estimated useful lives of3-36 years or the remaining terms of the Airlink and Jet Agreements.  Leasehold improvements are amortized overthe life of the lease or the remaining estimated useful life of the asset.  Depreciation and amortization expense onproperty and equipment totaled $15.1 million, $17.1 million and $17.7 millionin fiscal 2004, 2003 and 2002.

 

Property, plant and equipment and relatedaccumulated depreciation and amortization were as follows as of March 31, in thousands:

 
|                                             |   | **2004** |   | **2003** |   |
|--------------------------------------------------|--------|----------|--------|----------|--------|
| Flight equipment                                 |   | $        | 81,891 |     | $      | 79,052 |   |
| Ground services equipment                        |   | 14,091   |   | 14,307   |   |
| Office and general equipment                     |   | 12,615   |   | 10,504   |   |
| Buildings and leasehold improvements             |   | 11,014   |   | 8,482    |   |
| Maintenance shop equipment                       |   | 3,866    |   | 3,833    |   |
| Other                                            |   | 315      |   | 313      |   |
|                                             |   | 123,792  |   | 116,491  |   |
| Less: Accumulated depreciation and  amortization |   | (84,070  | )      | (72,693  | )      |
| Net property and equipment                       |   | $        | 39,722 |     | $      | 43,798 |   |

 

*Airframe and Engine Maintenance*

Routine maintenance, airframeand engine overhauls are charged to expense as incurred, except engine overhaulcosts covered by third-party maintenance agreements and airframe inspections,which are accrued based on the hours flown. Modifications that enhance the operating performance or extend theuseful lives of airframes or engines are capitalized and amortized over theremaining estimated useful life of the asset or the remaining terms of theAirlink and Jet Agreements.

 

*Other Assets*

Warrants — In connection withthe Jet Agreement, as amended, Mesaba paid Northwest contract rights fees infiscal 1997 and 1999 in the form of warrants to purchase the Company’s commonstock.  Contract rights totaled $11.7million and related accumulated amortization totaled $8.9 million and $7.7million as of March 31, 2004 and 2003. The contract rights are being amortized over the life of thewarrants.  The warrants issued inconnection with the Jet Agreement consisted of the following:

 
| **Grant  Date** |   | **Shares** |   | **Exercise  Price** |   | **Vesting  Date** |         | **Expiration  Date** |         |
|-----------------|--------|------------|--------|---------------------|--------|-------------------|--------------|----------------------|--------------|
| October 1996    |   | 922,500    |   | $                   | 7.25   |              | May 1998     |                 | October 2006 |   |
| April 1998      |   | 474,192    |   | $                   | 21.25  |              | October 1998 |                 | October 2006 |   |
| June 1998       |   | 1,435,230  |   | $                   | 21.25  |              | May 2000     |                 | October 2006 |   |
|            |   | 2,831,922  |   |                |   |              |         |                 |         |

 

37

----

 

In connection with the AirlinkAgreement, Mesaba paid Northwest contract rights fees in the form of warrantsto purchase 1,320,000 shares of the Company’s common stock at $9.42 per share,which were fully exercisable upon issuance and expire July 1, 2007.  Contract rights totaled $4.8 million andrelated accumulated amortization totaled $3.2 million and $2.8 million as ofMarch 31, 2004 and 2003.  Contractrights are amortized on a straight-line basis to the expiration date of theAirlink Agreement.

 

*Other Current Liabilities*

Other current liabilities were as follows asof March 31, in thousands:

 
|             |   | **2004** |   | **2003** |   |
|------------------|--------|----------|--------|----------|--------|
| Accrued expenses |   | $        | 8,730  |     | $      | 7,973 |   |
| Taxes payable    |   | 4,141    |   | 1,937    |   |
| Property taxes   |   | 2,513    |   | 1,993    |   |
| Other            |   | 1,740    |   | 1,805    |   |
|             |   | $        | 17,124 |     | $      | 13,708 |   |

 

*Other Noncurrent Liabilities*

In order to assist Mesaba inintegrating new aircraft into its fleet, certain manufacturers provided Mesabawith spare parts or other credits. Mesaba has deferred these amounts and amortizes them over the terms of theagreements as a reduction of aircraft rent expense.  Amortization of these credits resulted in a reduction of rentexpense of $1.8 million, $2.3 million and $3.0 million during fiscal 2004, 2003and 2002.

 

Other noncurrent liabilities were as followsas of March 31, in thousands:

 
|                             |   | **2004** |   | **2003** |   |
|----------------------------------|--------|----------|--------|----------|--------|
| Manufacturers credits            |   | $        | 3,745  |     | $      | 5,377 |   |
| Deferred leasing costs           |   | 1,899    |   | 121      |   |
| Long-term debt and capital lease |   | 690      |   | 846      |   |
|                             |   | $        | 6,334  |     | $      | 6,344 |   |

 

*Stock Options*

The Company accounts for itsstock-based compensation plans using the intrinsic value method prescribedunder Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations.  The Company has issued stock options to directors and keyemployees.  As such, the Company recordscompensation expense for stock options and awards only if the exercise price isless than the fair market value of the stock on the measurement date.

 

For purposes of the pro formadisclosures of compensation expense under Statement of Financial AccountingStandards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” theCompany uses the Black-Scholes option model to estimate the fair value ofoptions not subject to variable plan accounting.  Weighted-average assumptions used in the valuation are summarizedbelow:

 

38

----

 
|                                                |   | **2004 *** |   | **2003**     |   | **2002**      |   |
|-----------------------------------------------------|--------|------------|--------|--------------|--------|---------------|--------|
| Risk free interest rate (%)                         |   | N/A        |   | 3.33 to 4.40 |   | 3.65 to 5.16  |   |
| Expected life of option grants (years)              |   | N/A        |   | 6            |   | 6             |   |
| Expected volatility of option grants (%)            |   | N/A        |   | 42.0 to 66.4 |   | 27.7 to 41.27 |   |
| Weighted average fair value of options  granted ($) |   | N/A        |   | 3.60         |   | 4.22          |   |

 

----

| *  There were no options granted in fiscal  2004, therefore this is not applicable. |   |
|------------------------------------------------------------------------------------------|--------|

 

The following summarizes thepro forma effects assuming compensation for such awards had been recorded basedupon the estimated fair value for the years ended March 31, in thousands,except per share information:

 
|                                 |   | **2004** |   | **2003** |   | **2002** |   |
|--------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net income as reported               |   | $        | 4,673  |     | $      | 4,329    |   | $ | 7,810 |   |
| Stock-based compensation, net of tax |   | (802     | )      | (2,757   | )      | (2,430   | )      |
| Pro forma net income                 |   | $        | 3,871  |     | $      | 1,572    |   | $ | 5,380 |   |
|                                 |   |     |   |     |   |     |   |
| Earnings per share - basic:          |   |     |   |     |   |     |   |
| As reported                          |   | $        | 0.23   |     | $      | 0.21     |   | $ | 0.38 |   |
| Pro forma                            |   | $        | 0.19   |     | $      | 0.08     |   | $ | 0.27 |   |
| Earnings per share - diluted:        |   |     |   |     |   |     |   |
| As reported                          |   | $        | 0.23   |     | $      | 0.21     |   | $ | 0.38 |   |
| Pro forma                            |   | $        | 0.19   |     | $      | 0.08     |   | $ | 0.26 |   |

 

*Revenue Recognition*

Mesaba recognizes revenue foreach completed available seat mile under the Airlink Agreement and for eachblock hour flown under the Jet Agreement. Passenger, freight and other revenues are recognized as income when therespective services are rendered.

 

In addition, the Airlink andJet Agreements with Northwest include semi-annual incentive payments based onachievement of certain operational targets, such as completion factor and ontime performance.  Such incentives areearned and due based upon performance over a given period (generally sixmonths).  In periods prior to thefinalization of such operational incentives, revenue is recognized when thetargets have been exceeded.  The amountrecognized is limited to a ratable portion of the incentive payment as if thecontract period were to terminate at the end of the interim period.  Such incentives totaled $4.6 million, $5.2million and $2.3 million in fiscal 2004, 2003 and 2002 and are included inpassenger revenues in the accompanying consolidated statements of operations.

 

Big Sky recognizes revenue whentransportation has been provided, including scheduled passenger, airfreight,express package and charter services.

 

*Income Taxes*

The Company accounts for incometaxes under the asset and liability method whereby deferred income tax assetsand liabilities are computed annually for differences between the financialstatement and tax bases of assets and liabilities.  These differences will result in taxable or deductible amounts inthe future

 

39

----

 

based on enacted tax laws andrates applicable to the periods in which the differences are expected to affecttaxable income.

 

*Fair Value of Financial Instruments*

The Company’s financialinstruments consist primarily of cash, cash equivalents, accounts receivable,accounts payable, accrued liabilities and other noncurrent liabilities of whichcarrying amounts do not significantly differ from fair value due to theireither short-term nature or variable interest rates.  See Note 5 for additional information regarding the Company’sinvestments.

 

*Reclassifications*

Certain balances in the prioryears’ consolidated financial statements have been reclassified to conform tothe current year presentation.  Thesereclassifications had no impact on net income or shareholders’ equity aspreviously reported.

 

*New Accounting Pronouncements*

In January 2003, the FinancialAccounting Standards Board (“FASB”) issued Interpretation No. 46, Consolidationof Variable Interest Entities (“FIN 46”). FIN 46 requires a variable interest entity (“VIE”) to be consolidatedwhen a company is subject to the majority of the risk of loss from the VIE’sactivities or is entitled to receive the majority of the entity’s residualreturns, or both.  In December 2003, theFASB issued a revision to FIN 46 (“FIN 46R”) which partially delayed theeffective date of the interpretation to March 31, 2004 and added additionalscope exceptions.  The adoption of FIN46R did not have a material impact on the Company’s consolidated results ofoperations, financial position or cash flows as it does not have a VIE.

 

In May 2003, the FASB issuedSFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.”  SFAS No. 150 establishes standards for how an issuer classifiesand measures certain financial instruments with characteristics of bothliabilities and equity.  SFAS No. 150 iseffective for financial instruments entered into or modified after May 31,2003, and otherwise became effective September 30, 2003.  The adoption of SFAS No. 150 did not have amaterial impact on the Company’s consolidated results of operations, financialposition or cash flows.

 

In December 2003, the FASBissued SFAS No. 132 (revised 2003),“Employers’ Disclosures about Pensions and Other Postretirement Benefits.”  The revised SFAS No. 132 requires additionaldisclosures concerning the types of plan assets, investment strategy,measurement date(s), plan obligations, cash flows, and components of netperiodic benefit costs of defined benefit pension plans and other definedbenefit postretirement plans.  Theadoption of revised SFAS No. 132 did not have an effect on the Company’sdisclosures as it has no defined benefit plans or other defined benefitpostretirement plans.

 

**3.****              Acquisition:**

 

On September 26, 2002, the Company executed a definitive mergeragreement providing for the acquisition of Big Sky for $3.2 million, net ofcash acquired of $0.3 million.  Thetransaction closed on December 1, 2002.

 

The Company funded the acquisition with cashfrom operations and accounted for the acquisition using the purchase method ofaccounting.  Accordingly, the purchaseprice was allocated to the assets acquired and liabilities assumed based ontheir estimated fair market values at the date of acquisition.  Assets and liabilities are recorded basedupon their fair market value as of the date of the acquisition and may besubject to future tax adjustments.  Theexcess of the purchase price over the fair market value of the net assetsacquired was allocated to certain identifiable intangible assets and goodwill.  Such goodwill is not deductible for incometax purposes.  Results of Big Sky’soperations have been included in the

 

40

----

 

accompanying consolidated financialstatements since the date of acquisition. Due to the lack of materiality of Big Sky’s operations, pro formafinancial results are not presented.

 

**4.****              Goodwilland Other Intangible Assets:**

 

The excess of the Big Sky purchase price overthe fair market value of the net assets acquired was allocated to certainidentifiable intangible assets, including Big Sky’s pilot labor contract and anair carrier certificate, and to goodwill. The intangible assets were initially recorded based upon preliminaryestimates.  A net reduction of $0.7million was recorded to goodwill after the purchase price allocation wasfinalized in fiscal 2004.

 

Goodwill and other intangible assets andrelated accumulated amortization were as follows for the years ended March 31,in thousands:

 
|                                |   | **2004**  |   | **2003**                      |   |
|-------------------------------------|--------|-----------|--------|-------------------------------|--------|
|                                |   | **Gross** |   | **Accumulated  Amortization** |   | **Net** |   | **Gross** |   | **Accumulated  Amortization** |   | **Net** |   |
| Indefinite-lived intangible assets: |   |      |   |                          |   |   |   |   |   |   |   |   |   |
| Air carrier certificate             |   | $         | 925    |                          |   |   | $ |  925 |   | $ |  925 |   |   |   | $ |  925 |   |
| Goodwill                            |   | 2,503     |   |                          |   | 2,503 |   | 3,222 |   |   |   | 3,222 |   |
| Amortizable intangible asset:       |   |      |   |                          |   |   |   |   |   |   |   |   |   |
| Pilot labor contract                |   | 2,840     |   | (541                          | )      | 2,299 |   | 2,840 |   | (135 | ) | 2,705 |   |
|                                |   | $         | 6,268  |                          | $      | (541 | ) | $ | 5,727 |   | $ | 6,987 |   | $ | (135 | ) | $ | 6,852 |   |
|                                     |        |           |        |                               |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amortizable intangible asset is amortized over its estimated periodof benefit.  Based on the current amountof intangible assets subject to amortization, estimated amortization expensefor each of the succeeding five fiscal years will be $0.4 million peryear.  The recoverability of goodwilland the intangible assets are evaluated annually, at a minimum, or on aninterim basis if events or circumstances indicate a possible inability torealize the carrying amounts.  Duringthe fourth quarter of fiscal 2004, the Company completed its annual impairmenttest of goodwill and other intangible assets and determined that no impairmentcharge was necessary.

 

**5.****              Investments:**

 

Investments consist principallyof municipal securities and are classified as available-for-sale.  Fair value of investments are determinedbased on quoted market prices.  The Companyclassifies investments, with an original maturity of more than 90 days thatmature within one year as short-term and greater than one year as long-term.

 

Amortized cost, grossunrealized gains and losses and fair value of investments classified as debtsecurities available for sale were as follows for the years endedMarch 31, in thousands:

 

41

----

 
|                    |   | **2004** |    | **2003** |   |
|-------------------------|--------|----------|---------|----------|--------|
| Amortized cost          |   | $        | 105,280 |     | $      | 63,944 |   |
| Gross unrealized gains  |   | 127      |    | 283      |   |
| Gross unrealized losses |   | (38      | )       | (1       | )      |
| Fair value              |   | $        | 105,369 |     | $      | 64,226 |   |

 

The Company recorded realizedgains and losses on the sale of investments as follows for the years endedMarch 31, in thousands:

 
|                        |   | **2004** |   | **2003** |   | **2002** |   |
|-----------------------------|--------|----------|--------|----------|--------|----------|--------|
| Gross realized gains        |   | $        | — |     | $      | 605      |   | $ | 418 |   |
| Gross realized losses       |   | —   |   | (90      | )      | (82      | )      |
| Net realized gains (losses) |   | $        | — |     | $      | 515      |   | $ | 336 |   |

 

In fiscal 2004, the grossunrealized gains and losses were insignificant as the Company generally heldthe fully amortized bonds until maturity. In fiscal 2003, the Company recorded an other-than-temporary impairmentloss of $3.0 million on its investment in a WorldCom bond.  In March 2003, the Company sold itsinvestment in WorldCom for $0.8 million, which resulted in a gain ofapproximately $0.4 million, which was recorded in interest income andother in the consolidated statements of operations.

 

**6.****              AircraftLeases:**

 

Mesaba’s airline fleetconsisted of the following aircraft held under operating leases as ofMarch 31, 2004:

 
| **Type of Aircraft** |   | **Number of  Aircraft** |   | **Seating  Capacity** |   |
|----------------------|--------|-------------------------|--------|-----------------------|--------|
| Avro RJ85            |   | 35                      |   | 69                    |   |
| Saab 340             |   | 64                      |   | 30/33/34              |   |

 

Under the terms of the JetAgreement, Mesaba leases or subleases its RJ85 aircraft from Northwest underoperating leases with initial terms of up to 10-years.  The lease and sublease agreements for theRJ85 with Northwest contain certain requirements of Mesaba regarding thepayment of taxes on the aircraft, acceptable use of the aircraft, the level ofinsurance to be maintained, the maintenance procedures to be performed and thecondition of the aircraft upon their return to Northwest.  The Jet Agreement allows Mesaba to returnaircraft to Northwest upon the occurrence of certain events, includingtermination or breach of the Jet Agreement.

 

Mesaba leases its Saab 340aircraft, either directly from aircraft leasing companies, through leases withPinnacle Airlines Corp. (“Pinnacle”) under operating leases with initial termsof up to seven years, or through subleases with Northwest under operatingleases with initial terms of up to 17-years. The lease and sublease agreements with the aircraft leasing companies,Pinnacle and Northwest contain certain requirements of Mesaba regarding thepayment of taxes on the aircraft, acceptable use of the aircraft, the level ofinsurance to be maintained, the maintenance procedures to be performed and thecondition of the

 

42

----

 

aircraft upon theirreturn.  The Airlink Agreement allowsMesaba to return aircraft to Northwest upon the occurrence of certain eventsincluding termination or breach of the Airlink Agreement.

 

Big Sky’s airline fleetconsisted of the following aircraft held under operating leases as ofMarch 31, 2004:

 
| **Type of Aircraft** |   | **Number of  Aircraft** |   | **Seating  Capacity** |   |
|----------------------|--------|-------------------------|--------|-----------------------|--------|
| Metro III            |   | 7                       |   | 19                    |   |
| Metro 23             |   | 5                       |   | 19                    |   |

 

Big Sky leases six of its MetroIII and all Metro 23 aircraft from leasing companies and one Metro III from amunicipality under operating leases with initial terms of up to six years.  The lease agreements with the leasingcompanies and municipality contain certain requirements of Big Sky regarding thepayment of taxes on the aircraft, acceptable use of the aircraft, the level ofinsurance to be maintained, the maintenance procedures to be performed and thecondition of the aircraft upon their return. The leases on five aircraft allow Big Sky to return the aircraft to thelessor upon the occurrence of certain events and contain purchase options.

 

The Company’s airline fleetoperating leases do not contain any guaranteed lease residual provisions forwhich there would be a potential contingency at the termination of the leaseperiod.  As of March 31, 2004, theaircraft operating leases for Mesaba and Big Sky require future minimum rentalpayments as follows, in thousands:

 
| **Years Ending March 31** |   | **Amount** |    |
|---------------------------|--------|------------|---------|
| 2005                      |   | $          | 106,001 |   |
| 2006                      |   | 104,442    |    |
| 2007                      |   | 102,485    |    |
| 2008                      |   | 38,921     |    |
| 2009                      |   | 35,663     |    |
| Thereafter                |   | 208,633    |    |
|                      |   | $          | 596,145 |   |

 

Rent expense under aircraftoperating leases totaled $105.2 million, $107.5 million and $101.6 million infiscal 2004, 2003 and 2002 (including $66.0 million, $69.1 million and $62.0 millionpaid to Northwest in fiscal 2004, 2003 and 2002).

 

**7.****              NotesPayable and Long-Term Debt:**

 

Long-term debt is recorded inother noncurrent liabilities in the consolidated balance sheet and consists ofthe following as of March 31, 2004, in thousands:

 

43

----

 
| Variable rate installment note  (7% at March 31, 2004) due May 2007 secured by substantially all  assets of Big Sky |   | $    | 65     |   |
|---------------------------------------------------------------------------------------------------------------------|--------|------|--------|--------|
| 7.5% installment note due May 2007 secured  by substantially all assets of Big Sky                                  |   | 270  |   |
|                                                                                                                |   | 335  |   |
| Capitalized lease obligation, at imputed  interest rate of 8.5%, secured by Big Sky leased assets                   |   | 482  |   |
|                                                                                                                |   | 817  |   |
| Less current portion                                                                                                |   | (127 | )      |
|                                                                                                                |   | $    | 690    |   |

 

Long-term debt maturities wereas follows as of March 31, 2004, in thousands:

 
| **Years Ending March 31** |   | **Amount** |   |
|---------------------------|--------|------------|--------|
| 2005                      |   | $          | 127    |   |
| 2006                      |   | 136        |   |
| 2007                      |   | 144        |   |
| 2008                      |   | 58         |   |
| 2009                      |   | 40         |   |
| Thereafter                |   | 312        |   |
|                      |   | $          | 817    |   |

 

Mesaba has letters of credit(“LOC”) to guarantee certain obligations, which totaled $1.6 million and $1.7million as of March 31, 2004 and 2003. There were no amounts drawn on the LOC during fiscal 2004 or 2003.  As collateral for the LOC, Mesaba had $2.0million in cash held in an investment account as of both March 31, 2004 and2003.  This amount has been classifiedwithin “Long-term investments” in the accompanying consolidated balance sheets.

 

**8.****              IncomeTaxes:**

 

The provision for income taxesis comprised of the following elements for the years ended March 31, inthousands:

 
|     |   | **2004** |   | **2003** |   | **2002** |   |
|----------|--------|----------|--------|----------|--------|----------|--------|
| Current: |   |     |   |     |   |     |   |
| Federal  |   | $        | 4,787  |     | $      | 5,347    |   | $ | 5,102 |   |
| State    |   | 585      |   | 1,244    |   | 1,567    |   |
| Deferred |   | (1,289   | )      | (2,033   | )      | 1,598    |   |
|     |   | $        | 4,083  |     | $      | 4,558    |   | $ | 8,267 |   |

 

44

----

 

The actual income tax expensediffers from the statutory tax expense as follows for the years ended March 31,in thousands:

 
|                                                   |   | **2004** |   | **2003** |   | **2002** |   |
|--------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Computed tax expense at federal statutory  rate of 35% |   | $        | 3,065  |     | $      | 3,110    |   | $ | 5,627 |   |
| Increase (decrease) in income taxes  resulting from:   |   |     |   |     |   |     |   |
| State taxes, net of federal tax benefit                |   | 380      |   | 822      |   | 1,154    |   |
| Non-deductible flight crew expenses                    |   | 385      |   | 635      |   | 600      |   |
| Other, net                                             |   | 253      |   | (9       | )      | 886      |   |
|                                                   |   | $        | 4,083  |     | $      | 4,558    |   | $ | 8,267 |   |

 

The following is a table of thesignificant components of the Company’s deferred tax assets and liabilities asof March 31, in thousands:

 
|                             |   | **2004** |   | **2003** |   |
|----------------------------------|--------|----------|--------|----------|--------|
| Deferred tax assets:             |   |     |   |     |   |
| Maintenance                      |   | $        | 7,487  |     | $      | 6,413 |   |
| Warrants                         |   | 1,679    |   | 2,054    |   |
| Inventories                      |   | 860      |   | 740      |   |
| Net operating loss carryforwards |   | 1,459    |   | 935      |   |
| Other accruals                   |   | 7,169    |   | 5,032    |   |
| Gross deferred tax assets        |   | 18,654   |   | 15,174   |   |
| Deferred tax liabilities:        |   |     |   |     |   |
| Property and equipment           |   | 2,896    |   | 2,556    |   |
| Other accruals                   |   | 1,878    |   | 1,506    |   |
| Gross deferred tax liabilities   |   | 4,774    |   | 4,062    |   |
| Net deferred tax assets          |   | $        | 13,880 |     | $      | 11,112 |   |

 

The net deferred tax asset isclassified as follows as of March 31, in thousands:

 
|      |   | **2004** |   | **2003** |   |
|-----------|--------|----------|--------|----------|--------|
| Current   |   | $        | 11,146 |     | $      | 10,112 |   |
| Long term |   | 2,734    |   | 1,000    |   |
|      |   | $        | 13,880 |     | $      | 11,112 |   |

 

Deferred income taxes reflectthe net tax effects of temporary differences between the carrying amounts ofassets and liabilities for financial reporting purposes and the amounts usedfor income tax purposes.  At March 31,2004, the Company’s deferred tax assets included $4.2 million of Big Sky netoperating loss carryforwards (“NOL”) that will expire through 2022.  Section 382 of the Internal Revenue Coderestricts the annual utilization of certain NOLs incurred prior to a change inownership.  However, such limitation is notexpected to impair the realization of these NOLs.  For financial reporting purposes, the Company

 

45

----

 

believes it is more likely thannot that the NOLs and other deferred tax assets will be realized based on theCompany’s projected future taxable income and the timing of the expiring NOLs.

 

**9.****              Shareholders’Equity:**

 

*Capital Stock*

The Company’s authorizedcapital stock consists of 60,000,000 shares of common stock, par value $0.01per share, and 1,000,000 shares of undesignated preferred stock, having nospecified par value.  As of March 31,2004, there were 20,375,372 shares of common stock issued and outstanding.  No shares of preferred stock have beenissued.

 

Holders of common stock areentitled to one vote per share on any matter presented to shareholders forapproval.  The common stock has nospecial voting rights or dividend preferences. There is no cumulative voting by holders of the common stock and nopreemptive rights to acquire any new or additional shares of stock of theCompany.  Dividends are paid if and whendeclared by the Company’s board of directors. In the event of the liquidation of the Company, holders of common stockwould be entitled to a pro rata distribution of any proceeds remaining afterpayment of all of the Company’s creditors.

 

The Company’s board of directorshas the authority to designate one or more series of preferred stock, and tofix the designations, powers, preferences, rights, qualifications, limitationsand restrictions of such series.  If sodesignated by the board of directors, the shares of any series of preferredstock will be senior to the common stock with respect to distributions.

 

*Stock Option Plans*

The Company has approved stockoption plans for key employees, directors, consultants and advisors to theCompany.  Options have been granted andare presently outstanding under the Company’s 1994 Stock Option Plan, 1996Director Stock Option Plan and 2000 Stock Incentive Plan.  The 2000 Stock Incentive Plan has aprovision that automatically increases the authorized shares available forgrant on September 1 of each year by the lesser of 300,000 or 1% of the thenoutstanding common shares.  Under theplans, the compensation committee of the board of directors grants the optionswith vesting and the exercise period being determined at the time of theaward.  The purchase price of the stockfor non-qualified and incentive stock options is determined at the time of theaward and is generally equal to the fair market value at the time of the award.

 

46

----

 

Stock option transactions forthe three years ended March 31 were as follows:

 
|                      |   | **Options  Outstanding** |   | **Weighted  Average  Exercise Price** |   | **Options  Exercisable** |   | **Weighted  Average  Exercise Price** |   |
|---------------------------|--------|--------------------------|--------|---------------------------------------|--------|--------------------------|--------|---------------------------------------|--------|
| Balance at March 31, 2001 |   | 1,068,500                |   | $                                     | 11.00  |                     |   |                                  |   |   |
| Granted                   |   | 1,197,500                |   | 7.69                                  |   |                     |   |                                  |   |
| Exercised                 |   | (10,000                  | )      | 8.00                                  |   |                     |   |                                  |   |
| Canceled                  |   | (54,500                  | )      | 12.17                                 |   |                     |   |                                  |   |
| Balance at March 31, 2002 |   | 2,201,500                |   | 9.18                                  |   | 611,200                  |   | $                                     | 11.14  |   |
| Granted                   |   | 380,000                  |   | 6.01                                  |   |                     |   |                                  |   |
| Exercised                 |   | (22,500                  | )      | 4.75                                  |   |                     |   |                                  |   |
| Canceled                  |   | (426,500                 | )      | 10.30                                 |   |                     |   |                                  |   |
| Balance at March 31, 2003 |   | 2,132,500                |   | 6.91                                  |   | 973,475                  |   | 6.94                                  |   |
| Granted                   |   | —                   |   | —                                |   |                     |   |                                  |   |
| Exercised                 |   | (54,731                  | )      | 6.51                                  |   |                     |   |                                  |   |
| Canceled                  |   | (293,250                 | )      | 7.17                                  |   |                     |   |                                  |   |
| Balance at March 31, 2004 |   | 1,784,519                |   | 6.88                                  |   | 1,203,519                |   | 6.90                                  |   |
|                           |        |                          |        |                                       |        |                          |        |                                       |        |  |  |

 

Options outstanding as ofMarch 31, 2004:

 
|                          |   | **Options  Outstanding** |   | **Options  Exercisable**                          |   |
|-------------------------------|--------|--------------------------|--------|---------------------------------------------------|--------|
| **Range of  Exercise Prices** |   | **Number  Of Shares**    |   | **Average  Remaining  Contract Life  (in years)** |   | **Weighted  Average  Exercise Price** |   | **Number  Of Shares** |   | **Weighted  Average  Exercise Price** |   |
| $5.97                         |   | 969,000                  |   | 4.7                                               |   | $ | 5.97 |   | 734,750 |   | $ | 5.97 |   |
| $6.00 - $9.94                 |   | 752,519                  |   | 6.5                                               |   | 7.34 |   | 415,269 |   | 7.38 |   |
| $10.56 - $13.81               |   | 46,000                   |   | 1.6                                               |   | 12.49 |   | 36,500 |   | 12.53 |   |
| $23.00                        |   | 17,000                   |   | 0.1                                               |   | 23.00 |   | 17,000 |   | 23.00 |   |
| $5.97 - $23.00                |   | 1,784,519                |   | 5.3                                               |   | 6.88 |   | 1,203,519 |   | 6.90 |   |
|                               |        |                          |        |                                                   |        |  |  |  |  |  |  |  |  |  |

 

As of March 31, 2004,there were 908,425 shares available for grant under the Company’s 2000 StockIncentive Plan.

 

In December 2002, the Companyrepriced stock options to purchase 745,000 shares of the Company’s common stockwith exercise prices ranging from $9.05 to $18.00 to an exercise price of$5.97, which represented the fair market value on the date of therepricing.  In accordance with FASBInterpretation No. 44, “Accounting for Certain Transactions InvolvingStock Compensation,” the Company has adopted variable plan accounting for theseoptions from the date of the repricing. The Company recorded compensation expense of $2.0 million infiscal 2004 as a resultof the repricing.  Nocompensation expense was recorded in fiscal 2003 since the options’ newexercise price exceeded the fair market value of the stock as of March 31,2003.

 

47

----

 

**10.****       SegmentInformation:**

 

The Company follows theprovisions of SFAS No. 131, “Disclosures about Segments of an Enterpriseand Related Information.”  SFASNo. 131 establishes annual and interim reporting standards for anenterprise’s business segments and related disclosures about its products,services, geographic areas and major customers.  The method for determining what information to report is basedupon the way management organizes the operating segments within the Company formaking operating decisions and assessing financial performance.

 

Prior to the acquisition of BigSky on December 1, 2002, the Company had one reportable segment:Mesaba.  After the acquisition of BigSky, the Company has determined that it has two reportable segments: Mesaba andBig Sky.  The accounting policies of thesegments are the same as those described in the summary of significantaccounting policies in Note 2.

 

Operating segment informationfor Mesaba, Big Sky (from the date of acquisition) and Holdings were asfollows, in thousands:

 
|                              |   | **Mesaba** |    | **Big Sky** |   | **Holdings  and  Eliminations** |   | **Consolidated** |   |
|-----------------------------------|--------|------------|---------|-------------|--------|---------------------------------|--------|------------------|--------|
| Year Ended March 31, 2004:        |   |       |    |        |   |                            |   |             |   |
| Operating revenues                |   | $          | 432,608 |        | $      | 16,471                          |   | $                | — |   | $ | 449,079 |   |
| Depreciation and amortization     |   | 16,299     |    | 836         |   | 9                               |   | 17,144           |   |
| Interest expense                  |   | —     |    | 300         |   | (199                            | )      | 101              |   |
| Income (loss) before income taxes |   | 12,936     |    | (3,664      | )      | (516                            | )      | 8,756            |   |
| Capital expenditures, net         |   | 10,661     |    | 25          |   | 31                              |   | 10,717           |   |
| Total assets at end of year       |   | 125,271    |    | 10,190      |   | 131,859                         |   | 267,320          |   |
| Year Ended March 31, 2003:        |   |       |    |        |   |                            |   |             |   |
| Operating revenues                |   | 451,123    |    | 5,757       |   | —                          |   | 456,880          |   |
| Depreciation and amortization     |   | 18,564     |    | 271         |   | 3                               |   | 18,838           |   |
| Interest expense                  |   | —     |    | 47          |   | —                          |   | 47               |   |
| Income (loss) before income taxes |   | 13,791     |    | (1,905      | )      | (2,999                          | )      | 8,887            |   |
| Capital expenditures (sales), net |   | 8,298      |    | (899        | )      | —                          |   | 7,399            |   |
| Total assets at end of year       |   | 123,274    |    | 10,886      |   | 115,501                         |   | 249,661          |   |
| Year Ended March 31, 2002:        |   |       |    |        |   |                            |   |             |   |
| Operating revenues                |   | 416,913    |    | N/A         |   | —                          |   | 416,913          |   |
| Depreciation and amortization     |   | 19,772     |    | N/A         |   | —                          |   | 19,772           |   |
| Interest expense                  |   | 53         |    | N/A         |   | —                          |   | 53               |   |
| Income before income taxes        |   | 16,034     |    | N/A         |   | 43                              |   | 16,077           |   |
| Capital expenditures, net         |   | 15,738     |    | N/A         |   | —                          |   | 15,738           |   |
|                                   |        |            |         |             |        |                                 |        |                  |        |  |  |  |  |

 

48

----

 

**11.****       Commitmentsand Contingencies:**

 

*Lease Commitments*

In addition to the aircraftleases described in Note 6, the Company leases land, offices, hangarfacilities, equipment and certain terminal facilities under operating leasesthrough 2019, which provide for approximate future minimum rental payments asfollows as of March 31, 2004, in thousands:

 
| **Years Ending March 31** |   | **Amount** |    |
|---------------------------|--------|------------|---------|
| 2005                      |   | $          | 8,924   |   |
| 2006                      |   | 8,828      |    |
| 2007                      |   | 8,681      |    |
| 2008                      |   | 7,652      |    |
| 2009                      |   | 6,709      |    |
| Thereafter                |   | 59,280     |    |
|                      |   | $          | 100,074 |   |

 

Rent expense under operatingleases totaled approximately $16.2 million, $11.3 million and $6.5 million infiscal 2004, 2003 and 2002.

* *

*Capital Lease*

Future minimum lease paymentsunder the capital lease and the present value of future minimum capital leasepayments as of March 31, 2004 were as follows, in thousands:

 
| **Years Ending March 31**               |   | **Amount** |   |
|-----------------------------------------|--------|------------|--------|
| 2005                                    |   | $          | 68     |   |
| 2006                                    |   | 68         |   |
| 2007                                    |   | 68         |   |
| 2008                                    |   | 68         |   |
| 2009                                    |   | 68         |   |
| Thereafter                              |   | 398        |   |
| Total minimum lease payments            |   | 738        |   |
| Less interest                           |   | (256       | )      |
| Present value of minimum lease payments |   | $          | 482    |   |

 

The carrying value of thefacility under capital lease net of accumulated amortization was $0.5 millionat both March 31, 2004 and 2003.

 

*Hangar and General Office Relocation*

To accommodate new runwayconstruction, Mesaba relocated its maintenance hangar facilities at theMinneapolis/St. Paul airport and entered into a 25-year Aircraft HangarFacility Lease Agreement with the Metropolitan Airports Commission in October2003.  Mesaba also relocated itsprincipal general office to a new location in Eagan, Minnesota and entered intoa 10-year lease agreement commencing January 2004, with an early terminationprovision allowing the lease to be cancelled at the end of seven years.  Both leases are being accounted for asoperating leases.

 

49

----

 

*Workforce*

Approximately 49% of Mesaba’sworkforce are members of unions representing pilots, mechanics, dispatchers andflight attendants.  The collectivebargaining agreements for the pilots, mechanics, dispatchers and flightattendants either became or will become amendable January 2009, August 2003,May 2005 and April 2006, respectively.

 

Approximately 45% of Big Sky’sworkforce are members of unions representing pilots, mechanics anddispatchers.  The collective bargainingagreements for the pilots, mechanics and dispatchers become amendable December2009, August 2010 and December 2009, respectively.

 

The Railway Labor Act, whichgoverns labor relations for unions representing airline employees, containsdetailed provisions that must be exhausted before work stoppage can occur oncea collective bargaining agreement becomes amendable.

 

*Benefit Plan*

Mesaba maintains a 401(k)benefit plan for eligible employees of Holdings and Mesaba whereby Holdings orMesaba will match 25% to 125% of employee contributions to the plan, up to 10%of each employee’s eligible earnings, depending on the employee’s length ofservice.  Holdings and Mesaba’scontributions to the plan totaled $2.0 million, $1.7 million and $1.6 millionin fiscal 2004, 2003 and 2002.

 

Big Sky maintains a 401(k)benefit plan covering substantially all of its employees whereby Big Sky willmatch 30% of employee contributions to the plan, up to 5% of each employee’seligible earnings.  Big Sky’scontribution to the plan was not significant in either fiscal 2004 or 2003.

 

*Stock Appreciation Rights Plan*

During fiscal 2004, Mesabaapproved a stock appreciation rights (“SAR”) plan for key employees anddirectors.    The exercise price of eachSAR is generally equal to the fair market value of the Company’s common stockat the time of the award.  Cash is paidbased on the difference between the fair market value at the date of grant andthe date the SAR is exercised.  Duringfiscal 2004, 715,000 SARs were issued at a weighted average exercise price of$9.81 per SAR with four year vesting and expire in 10-years.  No SARs were exercised or cancelled infiscal 2004.  No compensation expensewas recorded in fiscal 2004 since the SAR’s exercise price exceeded the fairmarket value of the stock as of March 31, 2004.

 

*Regulatory Matters*

Mesaba and Big Sky are partiesto ongoing Federal Aviation Administration proceedings arising in the ordinarycourse of business.  In the opinion ofmanagement, the resolution of these matters will not have a material adverseeffect on the Company’s consolidated financial position, results of operationsor cash flows.

 

*Litigation*

The Company is a party toongoing legal and tax proceedings arising in the ordinary course ofbusiness.  In the opinion of management,the resolution of these matters will not have a material adverse effect on theCompany’s consolidated financial position, results of operations or cash flows.

 

*Aircraft Leasing Lawsuit*

On October 4, 2002, FairbrookLeasing, Inc., Lambert Leasing, Inc. and Swedish Aircraft Holdings AB (“Saab”)filed a declaratory judgment action against Mesaba relating to 20 Saab 340Aaircraft leased by Mesaba.  Saab soughta judicial declaration that the terms of the leases applicable to each of the340A aircraft are governed by a March 7, 1996 term sheet proposal rather thanthe short-term leases subsequently executed by the parties.  On December 8, 2003, the Court issued anorder declaring that the

 

50

----

 

term sheet proposal constitutesa binding contract that required Mesaba to execute or negotiate in good faithtoward the execution of long-term leases on each of the 340A aircraft.  The Court concluded that the term sheetproposal is ambiguous with respect to whether lease extensions contemplated bythat document are at Mesaba’s option or Saab’s option.  Mesaba intends to appeal the Court’s summaryjudgment ruling.  Mesaba alsoanticipates that Saab will make a claim for damages based upon the Court’ssummary judgment ruling.  The partiesare also continuing negotiations to settle the dispute and the ultimate outcomecannot be predicted with certainty.

 

**12.****       RestructuringCharge:**

 

During September 2001,Mesaba initiated a reduction in personnel because of the impact of theterrorist attacks of September 11, 2001. Mesaba recorded within “Administrative and other” in the accompanyingconsolidated statements of operations for fiscal 2002 a pre-tax charge ofapproximately $1.1 million to cover the expected employee severance andrelated costs.  The reduction inpersonnel was completed by September 30, 2001 and affected 382 individualsin all areas of Mesaba.  As ofMarch 31, 2002, Mesaba paid and charged against the liabilityapproximately $0.6 million and reduced the liability by approximately$0.3 million due to the employment of certain terminated employees byothers, which terminated further severance payments.  During fiscal 2003, Mesaba charged the remaining$0.2 million against the liability.

 

**13.****       NonoperatingGain:**

 

In April 2003, Congress enactedthe Emergency Wartime Supplemental Appropriations Act.  Among other items, the legislation includeda $2.3 billion government grant to U.S. airlines.  In accordance with this Act, for the year ended March 31, 2004,Mesaba recognized $2.3 million as “other nonoperating income” and Big Skyrecognized $0.3 million as “other nonoperating income” and $0.2 million as areduction of “administrative and other expense” in the accompanyingconsolidated statements of operations.

 

In September 2001, Congressenacted the Air Transportation Safety and System Stabilization Act.  The legislation provided cash grants to U.S.airlines to compensate for “direct and incremental losses” incurred fromSeptember 11, 2001, through December 31, 2001.  Mesaba recognized a pre-tax grant ofapproximately $0.3 million and $12.5 million as “other nonoperatingincome” in the accompanying consolidated statements of operations in fiscal2003 and 2002, in accordance with Department of Transportation and applicableauthoritative accounting guidance. Mesaba received approximately $10.6 million in cash in fiscal 2002and approximately $2.2 million in fiscal 2003.  In addition, Big Sky recognized and received $0.2 millionduring the period from December 1, 2002 (date of acquisition) toMarch 31, 2003 under the same program.

 

**14.****       EarningsPer Share:**

 

Basic earnings per common shareis computed by dividing net income by the weighted average number of shares ofcommon stock outstanding during the year. Diluted earnings per share is computed by dividing net income by the sumof the weighted 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.  Stock options and warrants withan exercise price exceeding the fair market value of the Company’s common stockat year-end are considered antidilutive and are excluded from thecalculation.  The following tablereconciles the number of shares utilized in the earnings per share calculationsfor the years ended March 31, in thousands, except per share data:

 

51

----

 
|                                                                                      |   | **2004** |   | **2003** |   | **2002** |   |
|-------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net income                                                                                |   | $        | 4,673  |     | $      | 4,329    |   | $ | 7,810 |   |
| For earnings per common share - basic:                                                    |   |     |   |     |   |     |   |
| Weighted average number of issued shares  outstanding                                     |   | 20,334   |   | 20,308   |   | 20,289   |   |
| Effect of dilutive securities:                                                            |   |     |   |     |   |     |   |
| Computed shares outstanding under stock  option plans utilizing the treasury stock method |   | 226      |   | 49       |   | 169      |   |
| Computed shares outstanding under warrants  issued utilizing the treasury stock method    |   | 2        |   | —   |   | 143      |   |
|                                                                                      |   |     |   |     |   |     |   |
| For earnings per common share - diluted:                                                  |   |     |   |     |   |     |   |
| Weighted average common shares and common  share equivalents outstanding                  |   | 20,562   |   | 20,357   |   | 20,601   |   |
| Earnings per share – basic                                                           |   | $        | 0.23   |     | $      | 0.21     |   | $ | 0.38 |   |
| Earnings per share – diluted                                                         |   | $        | 0.23   |     | $      | 0.21     |   | $ | 0.38 |   |
|                                                                                      |   |     |   |     |   |     |   |
| Antidilutive options and warrants                                                         |   | 3,522    |   | 5,179    |   | 6,041    |   |

 

**15.****       QuarterlyFinancial Data (Unaudited):**

 

The following is quarterlyfinancial data for the fiscal year ended March 31, 2004, in thousands, exceptper share data:

 
|                                        |   | **Quarters  Ended** |    | **Fiscal**  |   |
|---------------------------------------------|--------|---------------------|---------|-------------|--------|
|                                        |   | **June 30**         |    | **Sept 30** |   | **Dec 31** |   | **March 31** |   | **Year** |   |
| Operating revenues                          |   | $                   | 114,033 |        | $      | 117,462 |   | $ | 115,327 |   | $ | 102,257 |   | $ | 449,079 |   |
| Operating income (loss)                     |   | 4,743               |    | 6,276       |   | 673 |   | (7,369 | ) | 4,323 |   |
| Net income (loss)                           |   | 3,506               |    | 3,934       |   | 759 |   | (3,526 | ) | 4,673 |   |
| Earnings (loss) per common share:           |   |                |    |        |   |   |   |   |   |   |   |
| Basic                                       |   | $                   | 0.17    |        | $      | 0.19 |   | $ | 0.04 |   | $ | (0.17 | ) | $ | 0.23 |   |
| Diluted                                     |   | $                   | 0.17    |        | $      | 0.19 |   | $ | 0.04 |   | $ | (0.17 | ) | $ | 0.23 |   |
| Weighted average common shares outstanding: |   |                |    |        |   |   |   |   |   |   |   |
| Basic                                       |   | 20,321              |    | 20,323      |   | 20,333 |   | 20,360 |   | 20,334 |   |
| Diluted                                     |   | 20,322              |    | 20,540      |   | 20,522 |   | 20,360 |   | 20,562 |   |

 

52

----

 

The following is quarterlyfinancial data for the fiscal year ended March 31, 2003, in thousands exceptper share data:

 
|                                        |   | **Quarters Ended** |    | **Fiscal**  |   |
|---------------------------------------------|--------|--------------------|---------|-------------|--------|
|                                        |   | **June 30**        |    | **Sept 30** |   | **Dec 31** |   | **March 31** |   | **Year** |   |
| Operating revenues                          |   | $                  | 113,354 |        | $      | 118,635 |   | $ | 112,821 |   | $ | 112,070 |   | $ | 456,880 |   |
| Operating income (loss)                     |   | 6,227              |    | 4,947       |   | 1,395 |   | (3,941 | ) | 8,628 |   |
| Net income (loss)                           |   | 1,576              |    | 2,371       |   | 1,283 |   | (901 | ) | 4,329 |   |
| Earnings (loss) per common share:           |   |               |    |        |   |   |   |   |   |   |   |
| Basic                                       |   | $                  | 0.08    |        | $      | 0.12 |   | $ | 0.06 |   | $ | (0.04 | ) | $ | 0.21 | * |
| Diluted                                     |   | $                  | 0.08    |        | $      | 0.12 |   | $ | 0.06 |   | $ | (0.04 | ) | $ | 0.21 | * |
| Weighted average common shares outstanding: |   |               |    |        |   |   |   |   |   |   |   |
| Basic                                       |   | 20,298             |    | 20,298      |   | 20,315 |   | 20,321 |   | 20,308 |   |
| Diluted                                     |   | 20,417             |    | 20,302      |   | 20,315 |   | 20,321 |   | 20,357 |   |

 

----

*                 Thesum of the earnings (loss) per share for each of the individual quarters doesnot equal earnings per share for the fiscal year due to rounding.

 

**16.****       SubsequentEvent:**

 

On June 7, 2004, the Companyreceived verification of a final settlement with the Internal Revenue Service(“IRS”) concerning the IRS’ examination of the Company’s fiscal 1995 and 1996income tax returns.  As a result of thissettlement, the Company will reduce its income tax payable and tax provision by$1.2 million in the first quarter of fiscal 2005.

 

53

----

 

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors andShareholders of

MAIR Holdings, Inc.

Minneapolis, Minnesota

 

We have audited theconsolidated financial statements of MAIR Holdings, Inc. (formerly knownas Mesaba Holdings, Inc.) and subsidiaries (the “Company”) as of March 31,2004 and 2003, and for each of the two years in the period ended March 31,2004, and have issued our report thereon dated June 18, 2004, which reportexpresses an unqualified opinion and includes an explanatory paragraph relatingto the application of procedures relating to certain disclosures of financialstatement amounts related to the fiscal 2002 consolidated financial statementsthat were audited by other auditors who have ceased operations and for which wehave expressed no opinion or other form of assurance other than with respect tosuch disclosures; such consolidated financial statements and report areincluded elsewhere in this Annual Report on Form 10-K. Our audit alsoincluded the fiscal 2004 and 2003 consolidated financial statement schedules ofthe Company, listed in Item 15.  Thefiscal 2004 and 2003 consolidated financial statement schedules are theresponsibility of the Company’s management. Our responsibility is to express an opinion based on our audits.

 

In our opinion, such fiscal2004 and 2003 consolidated financial statement schedules, when considered inrelation to the basic fiscal 2004 and 2003 consolidated financial statementstaken as a whole, present fairly in all material respects the information setforth therein.  The consolidatedfinancial statement schedule for the year ended March 31, 2002 was auditedby other auditors who have ceased operations. Those auditors expressed an opinion, in their report dated May 2,2002, that such fiscal 2002 consolidated financial statement schedule, whenconsidered in relation to the fiscal 2002 consolidated financial statementstaken as a whole, prior to the disclosures referred to above, presented fairly,in all material respects, the information set forth therein.

 

DELOITTE & TOUCHE LLP

 

Minneapolis, Minnesota

June 18, 2004

 

54

----

 

**NOTICE: THE FOLLOWINGREPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BYARTHUR ANDERSEN LLP.  THIS REPORTRELATES TO PRIOR YEARS’ FINANCIALSTATEMENTS.  THIS REPORT HAS NOT BEENREISSUED BY ARTHUR ANDERSEN LLP.**

 

**REPORT OF INDEPENDENTPUBLIC ACCOUNTANTS**

 

To Mesaba Holdings, Inc.:

 

We have audited in accordancewith auditing standards generally accepted in the United States, theconsolidated financial statements of Mesaba Holdings, Inc. and Subsidiaryincluded in this Form 10-K and have issued our report thereon datedMay 2, 2002.  Our audit was madefor forming an opinion on the basic financial statements taken as a whole.  Schedule II, Valuation and QualifyingAccounts, is the responsibility of the Company’s management and is presentedfor purposes of complying with the Securities and Exchange Commission’s rulesand is not a part of the basic financial statements.  This schedule has been subjected to the auditing proceduresapplied in the audit of the basic consolidated financial statements and, in ouropinion, fairly states in all material respects the financial data required tobe set forth therein in relation to the basic consolidated financial statementstaken as a whole.

 

ARTHUR ANDERSEN LLP

 

Minneapolis, Minnesota

May 2, 2002

 

55

----

 

**SCHEDULE II**

**MAIRHOLDINGS, INC. AND SUBSIDIARIES**

**VALUATION ANDQUALIFYING ACCOUNTS**

**(in thousands)**

 
|                                 |   | **Balances  at  Beginning  Of Year** |   | **Additions  Charged  To Expenses** |   | **Deductions  From  Reserve** |   | **Balances  At End  Of Year** |   |
|--------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|-------------------------------|--------|-------------------------------|--------|
| Allowance for doubtful accounts:     |   |                                 |   |                                |   |                          |   |                          |   |
| Year Ended March 31, 2004            |   | $                                    | 389    |                                | $      | 601                           |   | $                             | 64     |   | $ | 926 |   |
| Year Ended March 31, 2003            |   | 990                                  |   | —                              |   | 601                           |   | 389                           |   |
| Year Ended March 31, 2002            |   | 400                                  |   | 590                                 |   | —                        |   | 990                           |   |
| Accrued severance and related costs: |   |                                 |   |                                |   |                          |   |                          |   |
| Year Ended March 31, 2003            |   | 229                                  |   | —                              |   | 229                           | *      | —                        |   |
| Year Ended March 31, 2002            |   | —                               |   | 807                                 |   | 578                           | *      | 229                           |   |
|                                      |        |                                      |        |                                     |        |                               |        |                               |        |  |  |  |  |

 

----

*  Represents severance payments.

 

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

 

There were no changes in ordisagreements on any matters of accounting principles or financial statementdisclosure between the Company and its independent registered public accountingfirm.

 

**Item 9A. CONTROLS AND PROCEDURES**

 

*Evaluation of Disclosure Controls Procedures*

As of the end of the periodcovered by this report, the Company conducted an evaluation under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, regardingthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Rules 13a-15(b) of the Securities ExchangeAct of 1934 (the “Exchange Act”).  Basedupon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures are effectiveto ensure that information that is required to be disclosed by the Company inreports that it files under the Exchange Act is recorded, processed, summarizedand reported within the time period specified in the rules of the SecuritiesExchange Commission.

 

*Changes in Internal Controls*

There were no changes in theCompany’s internal control over financial reporting that occurred during theperiod covered by this report that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

56

----

 

**PART III**

 

**Item 10. DIRECTORS AND EXECUTIVE OFFICERS OFTHE REGISTRANT**

 

Information regarding thedirectors and executive officers of the Company is incorporated herein byreference to the descriptions set forth under the caption “Election ofDirectors” in the Proxy Statement to be issued in connection with the 2004Annual Meeting of Shareholders (the “2004 Proxy Statement”).

 

**Item 11. EXECUTIVE COMPENSATION**

 

Information regarding executivecompensation is incorporated herein by reference to the information set forthunder the caption “Compensation of Executive Officers” in the 2004 ProxyStatement.

 

**Item 12. SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

Information regarding securityownership of certain beneficial owners and management of the Company isincorporated herein by reference to the information set forth under the caption“Security Ownership of Certain Beneficial Owners and Management” in the 2004Proxy Statement.

 

**Item 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

Information regarding certainrelationships and related transactions with the Company is incorporated hereinby reference to the information set forth under the caption “CertainTransactions” in the 2004 Proxy Statement.

 

**Item 14. PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

Information regarding principalaccountant fees and services is incorporated herein by reference to theinformation set forth under the caption “Ratification of Selection ofIndependent Registered Public Accounting Firm” in the 2004 Proxy Statement.

 

**PART IV**

 

**Item 15.****EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 

**(a) (1) Financial Statements**

 

Includedin Item 8 of Part II of this Annual Report on Form 10-K are the following:  Report of IndependentRegistered Public Accounting Firm, Report of Independent Public Accountants,Consolidated Balance Sheets, Consolidated Statements of Operations,Consolidated Statements of Shareholders’ Equity, Consolidated Statements ofCash Flows and Notes to Consolidated Financial Statements.

 

57

----

 

**(a) (2) Financial Statement Schedules**

The information required in Schedule II isincluded in Item 8 of Part II of this Annual Report on Form 10-K.

 

**(b) Reports on Form 8-K**

The Company filed the followingreports on Form 8-K during the quarter ended March 31, 2004:

 

(a)          Form8-K filed on February 3, 2004 containing disclosure under Items 5 and 7regarding an amendment to the Regional Jet Services Agreement with NorthwestAirlines, Inc. and the new five year contract with the Air Line PilotsAssociation.

 

(b)         Form8-K filed on February 3, 2004 containing disclosure under Items 7 and 12regarding the Company’s earnings for the quarter ended December 31, 2003.

 

**(c) Exhibits**

The Exhibits filed orincorporated by reference herewith are as specified in the Exhibit Index.

 

58

----

 

**SIGNATURES**

 

Pursuant to the requirements ofsection 13 or 15(d) of the Securities Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                             | MAIR  HOLDINGS, INC. |
|----------------------------------|---------------------------|
|                             |                      |
|   Dated: June 29, 2004 | By:                       | /s/ PAUL F.  FOLEY |   |
|                             |                      | Paul F.  Foley |
|                             |                      | President and Chief Executive Officer |

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 

 
| /s/ PAUL F.  FOLEY         |   | President  and Chief Executive Officer       |           |
|----------------------------|--------|----------------------------------------------|----------------|
| Paul F.  Foley             |   | (Principal  Executive Officer) and Director  | June 29,  2004 |
|                       |   |                                         |           |
| /s/ ROBERT  E. WEIL        |   | Vice  President, Chief Financial Officer and |           |
| Robert E.  Weil            |   | Treasurer  (Principal Financial Officer)     | June 29,  2004 |
|                       |   |                                         |           |
| /s/ DONALD  E. BENSON*     |   |                                         |           |
| Donald E.  Benson          |   | Director                                     | June 29,  2004 |
|                       |   |                                         |           |
| /s/ MICKEY  P. FORET*      |   |                                         |           |
| Mickey P.  Foret           |   | Director                                     | June 29,  2004 |
|                       |   |                                         |           |
| /s/ PIERSON  M. GRIEVE*    |   |                                         |           |
| Pierson M.  Grieve         |   | Director                                     | June 29,  2004 |
|                       |   |                                         |           |
| /s/ CARL R.  POHLAD*       |   |                                         |           |
| Carl R.  Pohlad            |   | Director                                     | June 29,  2004 |
|                       |   |                                         |           |
| /s/ ROBERT  C. POHLAD*     |   |                                         |           |
| Robert C.  Pohlad          |   | Director                                     | June 29,  2004 |
|                       |   |                                         |           |
| /s/ DOUGLAS  M. STEENLAND* |   |                                         |           |
| Douglas M.  Steenland      |   | Director                                     | June 29,  2004 |
|                       |   |                                         |           |
| /s/ RAYMOND  W. ZEHR, JR*  |   |                                         |           |
| Raymond W.  Zehr, Jr.      |   | Director                                     | June 29,  2004 |

 

----

| *By:   | /s/ PAUL F.  FOLEY |   |   |           |
|--------|--------------------|--------|--------|----------------|
|   | Paul F.  Foley     |   |   |           |
|   | *Attorney-in-fact* |   |   | June 29,  2004 |
|   |               |   |   |

 

59

----

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** |   | **Document Description**                                                                                                                                                                                                                                                                                                                                                                        |
|---------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                                                                                                                            |
| 3A                  |   | Restated  Articles of Incorporation.   Incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K  filed August 27, 2003.                                                                                                                                                                                                                                                     |
| 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 4.2  to the Company’s Form 8-K filed August 27, 2003.                                                                                                                                                                                                                      |
| 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 Mesaba’s Form 10-K for the  year ended March 31, 1989.                                                                                                                                                                                                                                             |
| 10B                 |   | CAB Part 298  Registration.  Incorporated by  reference to Exhibit 10G to Mesaba’s Form 10-K for the year ended March 31,  1987.                                                                                                                                                                                                                                                      |
| 10C                 |   | Airline  Services Agreement between Mesaba Aviation, Mesaba Holdings, Inc. and  Northwest Airlines, Inc. dated July 1, 1997 (certain potions 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.                    |
| 10D                 |   | 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. |
| 10E                 |   | 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.                                                                                                                                                                    |
| 10F                 |   | 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.                                                                                                                                         |
| 10G                 |   | 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.                                                                                                                                                             |
| 10H                 |   | 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.                                                                                                                                                     |
| 10I                 |   | 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.                                                                                                                                                                                                |

 

60

----

 
| **Exhibit  Number** |   | **Document Description**                                                                                                                                                                                                                                                                                                                                                                                        |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10J                 |   | Stock  Purchase Agreement between the Company 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.                                                                                                                                                                                                           |
| 10K                 |   | 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.                                                 |
| 10L                 |   | 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.                                                                       |
| 10M                 |   | 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.      |
| 10N                 |   | 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. |
| 10O                 |   | 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. |
| 10P                 |   | 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.                                                                                                                                                                                        |
| 10Q                 |   | 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.                                                                                                                                                                                      |
| 10R                 |   | 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.                                                                                                                                     |
| 10S                 |   | 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.                                                                                                                                                                          |
| 10T                 |   | Employment  Agreement between Big Sky Transportation Co. and Kim B. Champney dated April  3, 1998.  Incorporated by reference to  Big Sky’s Form 10-KSB dated September 28, 1999.                                                                                                                                                                                                                     |
| 10U                 |   | Aircraft  Hangar Facility Lease Agreement between Metropolitan Airports Commission  Minneapolis — St. Paul and Mesaba Aviation, Inc. dated September 30,  2002.  Incorporated by reference to  Exhibit 10Y to the Company’s Form 10-Q filed August 14, 2003.                                                                                                                                     |

 

61

----

 
| **Exhibit  Number** |   | **Document Description**                                                                                                                                                                                               |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                   |
| 10V                 |   | Lease  between Spectrum Investment Group, L.L.C. and Mesaba Aviation, Inc. entered  into as of April 25, 2003.   Incorporated by reference to Exhibit 10Z to the Company’s Form 10-Q  filed August 14, 2003. |
| 10W                 |   | Amendment to  Regional Jet Services Agreement, dated October 7, 2003.  Incorporated by reference to Exhibit 10.1  to the Company’s Form 8-K/A filed October 9, 2003.                                         |
| 10X                 |   | Amendment to  Regional Jet Services Agreement, dated December 15, 2003.  Incorporated by reference to Exhibit 10.1  to the Company’s Form 8-K filed on December 15, 2003.                                    |
| 10Y                 |   | Amendment to  Regional Jet Services Agreement, dated February 2, 2004.  Incorporated by reference to Exhibit 10.1  to the Company’s Form 8-K filed February 3, 2004.                                         |
| 14                  |   | Code of  Ethics.  Filed herewith.                                                                                                                                                                                 |
| 21                  |   | Subsidiaries.  Incorporated by reference to Exhibit 21 to  the Company’s Form 10-Q for the quarter ended December 31, 2002.                                                                                  |
| 23.1                |   | Consent of  Independent Registered Public Accounting Firm.  Filed herewith.                                                                                                                                       |
| 23.2                |   | Notice  regarding consent of Arthur Andersen LLP.   Incorporated by reference to Exhibit 23.2 to the Company’s Form 10-K  for the year ended March 31, 2003.                                                 |
| 24                  |   | Powers of  Attorney.  Filed herewith.                                                                                                                                                                             |
| 31.1                |   | Chief  Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.  Filed herewith.                                                                                               |
| 31.2                |   | Chief  Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.  Filed herewith.                                                                                               |
| 32                  |   | Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  Filed herewith.                                                                                                                        |

 

62

----