**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

**(Mark One)**

 
| **ý**                                        | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**     |
|---------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                              |                                                                                                    |
| **For the fiscal year ended March 31, 2005** |
| ** **                                        |
| **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**

 

**MAIRHOLDINGS, INC.**

(Exact name of registrant asspecified in its charter)

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

 

**150South Fifth Street, Suite 1360**

**Minneapolis,Minnesota 55402**

(Address of principal executiveoffices) (Zip Code)

 

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

 

Securities registered pursuantto Section 12(b) of the Act: **None**

 

Securities registered pursuantto Section 12(g) of the Act: **CommonStock, par value $.01**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to suchfiling requirements 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 in Rule 12b-2of the Act).  Yes ý     No o.

 

Theaggregate market value of voting stock held by nonaffiliates of the registrantas of September 30, 2004 was approximately $84,000,000.

 

Asof June 1, 2005, there were 20,574,340 shares of common stock of theregistrant issued and outstanding.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

Portionsof the definitive Proxy Statement for the registrant’s 2005 AnnualMeeting of Shareholders areincorporated by reference into the Part III Items 10, 11, 12, 13 and 14 ofthis Form 10-K.

 

 

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**MAIR HOLDINGS, INC.**

**Annual Report on Form 10-K**

**For the Fiscal Year Ended March 31, 2005**

 

**TABLE OF CONTENTS**

 
| CAUTIONARY NOTE REGARDING FORWARD-LOOKING  STATEMENTS                                                     |   |
|-----------------------------------------------------------------------------------------------------------|--------|
|                                                                                                      |   |
| PART I                                                                                               |   |
| Item 1. BUSINESS                                                                                          |   |
| Item 2. PROPERTIES                                                                                        |   |
| Item 3. LEGAL PROCEEDINGS                                                                                 |   |
| Item 4. SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS                                              |   |
|                                                                                                      |   |
| PART II                                                                                              |   |
| Item 5. MARKET FOR REGISTRANT’S COMMON  EQUITY AND RELATED SHAREHOLDER MATTERS                       |   |
| Item 6. SELECTED FINANCIAL DATA                                                                           |   |
| Item 7. MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS       |   |
| Item 7A. QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK                                      |   |
| Item 8. FINANCIAL STATEMENTS AND  SUPPLEMENTARY DATA                                                      |   |
| Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL  DISCLOSURE            |   |
| Item 9A. CONTROLS AND PROCEDURES                                                                          |   |
| Item 9B. OTHER INFORMATION                                                                                |   |
|                                                                                                      |   |
| PART III                                                                                             |   |
| Item 10. DIRECTORS AND EXECUTIVE OFFICERS  OF THE REGISTRANT                                              |   |
| Item 11. EXECUTIVE COMPENSATION                                                                           |   |
| Item  12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND  RELATED SHAREHOLDER MATTERS |   |
| Item 13. CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS                                                  |   |
| Item 14. PRINCIPAL ACCOUNTANT FEES AND  SERVICES                                                          |   |
|                                                                                                      |   |
| PART IV                                                                                              |   |
| Item 15. EXHIBITS AND FINANCIAL STATEMENT  SCHEDULES                                                      |   |
|                                                                                                      |   |
| SIGNATURES                                                                                                |   |
|                                                                                                      |   |
| EXHIBIT INDEX                                                                                        |   |

 

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**CAUTIONARY NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

Statements in this Annual Report on Form 10-K under the caption “Business”and “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and elsewhere in this report are forward-looking and are based uponinformation currently available to the Company. The Company, through its officers, directors or employees, may also fromtime to time make oral forward-looking statements.  In connection with the “safe harbor”provisions of the Private Securities Litigation Reform Act of 1995, the Companyis hereby identifying important factors that could cause actual results todiffer materially from those contained in any forward-looking statement made byor on behalf of the Company.  Any suchstatement is qualified by reference to these cautionary statements.

 

Undue reliance should not be placed on the Company’s forward-lookingstatements because the matters they describe are subject to known and unknownrisks, uncertainties and other unpredictable factors, many of which are beyondthe Company’s control.  The Company’sforward-looking statements are based on the information currently available andspeak only as of the date on which this report was filed with the United StatesSecurities and Exchange Commission (“SEC”). Over time, actual results, performance or achievements will likelydiffer from the anticipated results, performance or achievements that areexpressed or implied by the Company’s forward-looking statements, and suchdifferences might be significant and materially adverse to the Company’s shareholders.  Many important factors that could cause sucha difference are described in this Annual Report under the caption “Certain RiskFactors Relating to the Company and the Airline Industry” within Item 1 in thisAnnual Report on Form 10-K.

 

All subsequent written or oral forward-looking statements attributableto the Company or persons acting on the Company’s behalf are expresslyqualified by the factors described above. The Company assumes no obligation, and disclaims any obligation, toupdate information contained in this Annual Report on Form 10-K, includingforward looking statements, as a result of facts, events or circumstances afterthe date of this report, except as required by law in the normal course of itspublic disclosure practices.

 

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**PART I**

 

**Item 1.BUSINESS**

 

MAIR Holdings, Inc. (“Holdings”) is the holding company for MesabaAviation, Inc., a regional air carrier based in Minneapolis, Minnesota (“Mesaba”)and Big Sky Transportation Co., a regional air carrier based in Billings,Montana (“Big Sky”).  Mesaba and Big Skyare each wholly owned subsidiaries of Holdings.  Holdings, Mesaba and Big Sky are referred toherein collectively as the “Company.” Mesaba and Big Sky are the Company’s reportable segments that aremanaged independently.  Additional detailon segment reporting is included in Note 11 of the Notes to ConsolidatedFinancial Statements contained in thisAnnual Report on Form 10-K.

 

**Operations**

 

*Mesaba*

Mesaba operates as a regional air carrier providing scheduled passengerservice as “Mesaba Airlines/Northwest Airlink” and “Mesaba Airlines/NorthwestJet Airlink” under two separate agreements with Northwest Airlines, Inc.,a wholly owned indirect subsidiary of Northwest Airlines Corporation (“Northwest”),to 109 cities in the United States and Canada from Northwest’s hub airports in Minneapolis/St.Paul, Detroit and Memphis.

 

Under the Airline Services Agreement (the “Airlink Agreement”), Mesabaoperates Saab 340 jet-prop aircraft (“Saab”) for Northwest.  This agreement provides for exclusive rightsto designated service areas and extends through June 30, 2007.  Under the Airlink Agreement, Mesabarecognizes revenue for each completed “available seat mile” (the number ofseats in an aircraft 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.  Either Northwest or Mesaba may terminate theAirlink Agreement on 365 days notice. The Airlink Agreement may be terminated immediately by Mesaba or Northwestin the event that the other party is the subject of a bankruptcy or similar proceedingor is divested of a substantial part of its assets.  Additionally, the non-defaulting party mayterminate the agreement in the event of a breach of a non-monetary provision thatremains uncured for a period of more than 30 days after receipt of writtennotification of such default, or the breach of a monetary provision that remainsuncured for a period of more than ten days after receipt of writtennotification of such default.  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 the FederalAviation Administration (“FAA”) grounding a specific aircraft type for allcarriers.

 

Under the Regional Jet Services Agreement (the “Jet Agreement”), Mesabaoperates Avro RJ85 regional jets (“RJ85”) for Northwest.  The Jet Agreement extends through April 25,2007.  Under the Jet Agreement, Mesabarecognizes revenue for each “block hour” flown (the elapsed time betweenaircraft departing and arriving at a gate). Northwest provides fuel and airport and passenger related services atNorthwest’s expense.  Either Mesaba orNorthwest may immediately terminate the Jet Agreement in the event that theother party is the subject of a bankruptcy or similar proceeding or is divestedof a substantial part of its assets.  Additionally,the non-defaulting party may terminate the agreement in the event of a breachof a non-monetary provision that remains uncured for a period of more than30 days

 

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after receipt of written notification of such default, or the breach ofa monetary provision that remains uncured for a period of more than ten daysafter receipt of written notification of such default.  Northwest may also terminate the JetAgreement in the event of certain lease and other performance defaults; changein control events; revocation or failure to obtain DOT certification; failureto elect a chief executive officer of the Company and Mesaba reasonablyacceptable to Northwest; if more than 25% of the aircraft subject to theagreement are not operated for more than seven consecutive days, other than asa result of the FAA grounding all RJ85 aircraft for all carriers; or if thereis a strike, cessation or interruption of work involving Mesaba pilots, flightattendants or mechanics providing jet service.

 

Under the agreements, all scheduled flights that Mesaba operates aredesignated as Northwest flights using Northwest’s designator code in allcomputer reservation systems, including the Official Airline Guide, with anasterisk and a footnote indicating that Mesaba is the carrier providing theservice.  In addition, flight schedulesof Mesaba and Northwest are closely coordinated to facilitate interlineconnections, and Mesaba’s passenger gate facilities at the Minneapolis/St. PaulInternational Airport, Detroit Metropolitan Airport and Memphis InternationalAirport are integrated with Northwest’s facilities in the main terminalbuildings, rather than at the more remote commuter air terminals.  Mesaba’s RJ85 aircraft are painted in thecolors of Northwest Airlines and the Saab aircraft are painted in a distinctive“Northwest Airlink” configuration, with a Northwest logo in addition to Mesaba’sname.

 

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

 

Pursuant to a non-binding letter of intent, Mesaba and Northwest arecurrently negotiating a new omnibus airline services agreement intended toreplace the Airlink Agreement and Jet Agreement.  See the “Recent Developments” section below.

 

*Big Sky*

Big Sky operates as a regional carrier based in Billings, Montana,providing scheduled passenger, airfreight, express package and charterservices.  Big Sky provides scheduled airservice to 18 communities in Montana, Colorado, Idaho, North Dakota, Oregon, Washingtonand Wyoming via its Billings hub.  BigSky operates 65 scheduled flights per weekday with a reduced weekend schedule thatprovides interline and online connecting services, as well as local marketservices.  Big Sky also has code-sharingagreements with Alaska/Horizon Airlines, America West Airlines and Northwest,where its services are marketed jointly with those air carriers for connectingflights.

 

Big Sky also provides service between its Billings hub and seven communitiesprimarily in Central/Eastern Montana and between Moses Lake, Washington,Portland, Oregon and Boise, Idaho and between Sheridan, Wyoming and Denver,Colorado under contracts with the DOT’s Essential Air Service (“EAS”)program.  The EAS program subsidizes aircarriers to provide air service to designated rural communities throughout thecountry that could not otherwise economically justify that service based ontheir passenger traffic.  The DOT paysEAS subsidies for each departure in a covered market.  Big Sky bids on the EAS contracts every twoyears.  In addition, Big Sky continuallyreviews EAS flying opportunities and makes bids with the DOT for flying whereit is operationally and financially feasible.

 

**Competition**

 

The airline industry is highly competitive as a result of the AirlineDeregulation Act of 1978 (the “Deregulation Act”), which generally increasedcompetition by eliminating restrictions on fares and route selection.  The Deregulation Act also contributed to thewithdrawal of national and major carriers from

 

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short-haul markets by allowing them to more easily obtain additionallong-haul routes, which can be more efficiently and profitably served by largerjet aircraft.  Elimination of barriers toentry into new markets, however, also created greater potential for competingservice by other carriers operating small, fuel-efficient aircraft onshort-haul routes serving small and medium-sized cities.  Mesaba and Big Sky compete with other regionalairlines on most routes they serve. Mesaba and Big Sky also face competition from regional carriers offeringservice to alternative hubs for connecting flights.  Other carriers, including major carriers, canat any time institute competing service on routes served by Mesaba or Big Sky.

 

The Airlink Agreement and Jet Agreement do not prohibit Northwest fromcontracting with other regional airlines to provide the same services thatMesaba currently provides.  Northwestcurrently has an airline services agreement with Pinnacle Airlines Corp. (“Pinnacle”),and Pinnacle serves many of the same cities as Mesaba.  Northwest could choose to expand itsagreement with Pinnacle in competition with Mesaba.  Northwest could also choose to establishrelationships with other regional airlines.

 

Competitive factors in the airline industry generally include fares,frequency and dependability of service, convenience of flight schedules, typeof aircraft flown, airports served, relationships with travel agents, andefficiency and reliability of reservations systems and ticketing services.  The compatibility of flight schedules withthose of other airlines and the ability to offer through fares and convenientinter-airline flight connections are also important competitive factors.  Holdings believes its subsidiaries arecompetitive with respect to each of such factors because of their relationshipwith Northwest, established reputation, cost structure and an aircraft fleetthat is properly suited for the small and medium-sized cities served.

 

**Fuel**

 

The Company believes that the following arrangements assure an adequatesupply of fuel for current and future operations for both Mesaba and Big Sky,provided that Northwest does not experience a supply shortage.

 

*Mesaba*

Mesaba has arrangements with Northwest for its fuel requirements.  Certain provisions of the Airlink Agreementprotect Mesaba from fluctuations in aviation fuel prices while the JetAgreement requires Northwest to provide RJ85 fuel, at Northwest’s expense, toMesaba.

 

*Big Sky*

Big Sky purchases a majority of its fuel from Northwest.  Big Sky purchases the balance of its fuelunder arrangements with several fuel suppliers. None of these arrangements provides protection from fluctuations in fuelprices.

 

**Fares**

 

*Mesaba*

Mesaba derives its passenger revenues by selling its capacity toNorthwest at predetermined rates.  Mesabais primarily paid by Northwest per available seat mile under the AirlinkAgreement and per completed block hour under the Jet Agreement.

 

*Big Sky*

Big Sky generates its passenger revenues from passenger ticket salesthrough participation in Airline Reporting Corp., a clearinghouse for travelagencies, its own reservations center in Billings, a ticket by mail program andon-line E-ticketing.  Big Sky has ticketingand baggage agreements with all major

 

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airlines that serve its region, which allow its services to be sold bythose airlines.  Big Sky establishes itspassenger fares on a market-by-market basis utilizing a combination of factors,including the cost of providing the service based upon projected passengerlevels, the competitive price of alternative means of transportation (includingboth air and surface) and the distance between markets.  Big Sky also employs the use of discounts offthe base fares for advance ticket purchases and other special needs passengersthat are common throughout the airline industry.

 

**Regulations**

 

Pursuant to Federal aviation laws, the DOT and the FAA have certainregulatory authority over the operations of all air carriers.  The jurisdiction of the FAA extends primarilyto the safety and operational provisions of the Federal Aviation Act, while theresponsibility of the DOT involves principally the regulation of certain economicaspects of airline operations.

 

*FAA Regulation*

Mesaba and Big Sky each hold an Air Carrier Certificate issued by theFAA under Part 119 of the Federal Aviation Regulations, permitting Mesabaand Big Sky to conduct flight operations in compliance with Part 121 ofthe Federal Aviation Regulations, which are the same regulatory requirements applicableto major airlines.  The FAA regulationsto which Mesaba and Big Sky are subject are extensive and include, among otheritems, 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 requires airlines to obtain operating, airworthiness and othercertificates that are subject to suspension or revocation for cause.  Mesaba and Big Sky hold all certificatesnecessary for their operations.

 

*DOT Regulation*

Mesaba and Big Sky each hold a Certificate of Public Convenience and Necessityissued by the DOT under federal aviation laws. As certificated carriers, Mesaba and Big Sky are required to filequarterly reports with the DOT, including a report of aircraft operatingexpenses and related statistics.

 

*Transportation Security AdministrationRegulation*

In response to the terrorist attacks of September 11, 2001,Congress enacted the Aviation and Transportation Security Act of 2001 (the “ATSA”).  The ATSA created the Transportation Security Administration (the “TSA”)to oversee aviation and airport security. Among other security measures, the ATSA enhanced background checks,provided federal air marshals aboard flights, improved flight deck security,enhanced airline crew security training, improved training of security screeningpersonnel and enhanced airport perimeter access.

 

*Air Transportation Safety and SystemStabilization Act*

In September 2001, Congress enacted the Air Transportation Safetyand System Stabilization Act.  Thislegislation provided cash grants to U.S. airlines to compensate for “direct andincremental losses” incurred from September 11, 2001, through December 31,2001.  Mesaba recognized a pre-tax grantof approximately $0.3 million as “other nonoperating income” in theaccompanying consolidated statements of operations in fiscal 2003, inaccordance with DOT and applicable authoritative accounting guidance.  In addition, Big Sky recognized and received$0.2 million during the period from December 1, 2002 (date ofacquisition) to March 31, 2003 under the same program.

 

*Emergency Wartime Supplemental AppropriationsAct*

In April 2003, Congress enacted the Emergency Wartime Supplemental Appropriations Act (the “Wartime Act”),which included, among other items, a $2.3 billion government grant to U.S.airlines for security fees previously remitted to the TSA and $100 million forreimbursement of aircraft cockpit door

 

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reinforcement costs.  In connection with reimbursementsunder the Wartime Act, for the year ended March 31, 2004, Mesabarecognized $2.3 million as “other nonoperating income” and Big Sky recognized$0.3 million as “other nonoperating income” and $0.2 million as a reduction of “administrativeand other expense” in the accompanying consolidated statements of operations.  Retention of these funds requires compliancewith the provisions of the Wartime Act.

 

*Railway Labor Act*

The Company’s relations with its labor unions are governed by theRailway Labor Act (the “RLA”). Comprehensive provisions are set forth in the RLA establishing the rightof airline employees to organize and bargain collectively and impose a dutyupon air carriers and their employees to exert every reasonable effort to makeand maintain collective bargaining agreements. The RLA contains detailed procedures, which must be exhausted before alawful work stoppage may occur, including a formal declaration of animpasse by the National Mediation Board.

 

*Other Regulations*

Under the Noise Control Act of 1972 and the Aviation Safety and NoiseAbatement Act of 1979, the FAA has authority to monitor and regulate aircraftengine noise.  Management of Mesaba andBig Sky believe that their aircraft comply with or are exempt from suchregulations and that Mesaba and Big Sky comply with standards for aircraft exhaustemissions and fuel storage facilities issued by the Environmental ProtectionAgency.  As a foreign carrier operatingin Canada, Mesaba is subject to regulation by the Transport Canada and has beenissued a Foreign Air Carrier Operating Certificate and Canadian TransportationAgency economic licenses.  BecauseNorthwest maintains certain contracts with the Department of Defense, Mesaba issubject to that department’s periodic inspections.

 

**Insurance**

 

The Company carries the types of insurance customary in the airlineindustry, including coverage for public liability, passenger liability,property damage, aircraft loss or damage, baggage and cargo liability, andworkers’ compensation.  The Companybelieves that its insurance coverage is adequate as to the amounts and riskscovered.  However, there can be noassurance that the insurance carried would be sufficient to protect Mesaba andBig Sky adequately in the event of a catastrophic accident or event.

 

**Aircraft Maintenance**

 

The maintenance performed on the Company’s aircraft can be divided intotwo general categories: routine line maintenance and major overhauls.  Mesaba and Big Sky employ their own aircraft,avionics and engine maintenance staffs that perform substantially all routineline 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 at FAA authorized facilities.  Majoroverhauls on Big Sky’s fleets, including airframes, engines and other rotableparts, are performed internally or at FAA authorized facilities.

 

**Airport and Terminal Services**

 

Mesaba’s ticket counter and baggage-handling space is leased from localairport authorities or other airlines at all of the airports served.  In 45 of the cities it serves, Mesabareceives 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.

 

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Mesaba receives other revenue from Northwest, Pinnacle and otherairlines for ground handling services performed at the Minneapolis/St. Paul,Detroit and other spoke airports.

 

Big Sky leases airport counter, baggage and ramp space for groundservices and customer services at all of the cities it currently serves.  Big Sky contracts for ground handlingservices from other airlines as needed.

 

**Employees**

 

As of March 31, 2005, the Company and its subsidiaries employedapproximately 3,950 employees with approximately 45.6% of those employees representedby labor unions.  Mesaba hadapproximately 3,750 (913 part-time) employees and Big Sky had approximately 200(58 part-time) employees.  Neither Mesabanor Big Sky had any official work stoppages during fiscal 2005.  Management, in general, believes that itsrelations with the Company’s employees are good.  The Company’s labor agreements are asfollows:

 

*Mesaba*
| ** **                             | ** ** | **Approximate** | ** ** | ** **                                                   | ** ** | ** **        | ** ** |
|----------------------------------------|------------|-----------------|------------|--------------------------------------------------------------|------------|-------------------|------------|
| ** **                             | ** ** | **Number of**   | ** ** | ** **                                                   | ** ** | **Amendable**     | ** ** |
| **Employee Group**                     | ** ** | **Employees**   | ** ** | **Union**                                                    | ** ** | **Date**          | ** ** |
| Pilots                                 |       | 876             |       | Air Line  Pilots Association (“ALPA”)              |       | January 2009 |       |
| Mechanics                              |       | 244             |       | Aircraft  Mechanics Fraternal Association (“AMFA”) |       | August 2003  |       |
| Dispatchers                            |       | 23              |       | Transportation  Workers Union (“TWU”)              |       | May 2005     |       |
| Flight Attendants                      |       | 567             |       | Association  of Flight Attendants                            |       | April 2006   |       |
| Customer service agents                |       | 1,605           |       | None                                                         |       |              |       |
| Management / Administrative / Clerical |       | 435             |       | None                                                         |       |              |       |
|                                   |       | 3,750           |       |                                                         |       |              |       |

 

Mesaba negotiated a new agreement with ALPA under Section 6 of theRLA, which became effective January 31, 2004.  The mechanics, which constitute 6.5% of Mesaba’sworkforce, are currently working under an agreement that became amendable in August 2003.  Mesaba is currently negotiating with the AMFAunder Section 6 of the RLA for a new agreement.  Mesaba is also negotiating with the dispatchers,which constitute 0.6% of Mesaba’s workforce.

 

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*Big Sky*
| ** **                             | ** ** | **Approximate** | ** ** | ** **                                                     | ** ** | ** **         | ** ** |
|----------------------------------------|------------|-----------------|------------|----------------------------------------------------------------|------------|--------------------|------------|
| ** **                             | ** ** | **Number of**   | ** ** | ** **                                                     | ** ** | **Amendable**      | ** ** |
| **Employee Group**                     | ** ** | **Employees**   | ** ** | **Union**                                                      | ** ** | **Date**           | ** ** |
| Pilots                                 |       | 56              |       | United  Transportation Union                                   |       | December 2009 |       |
| Mechanics                              |       | 23              |       | International Association of Machinists and  Aerospace Workers |       | August 2010   |       |
| Dispatchers                            |       | 11              |       | United  Transportation Union                                   |       | December 2009 |       |
| Customer service agents                |       | 76              |       | None                                                           |       |               |       |
| Management / Administrative / Clerical |       | 34              |       | None                                                           |       |               |       |
|                                   |       | 200             |       |                                                           |       |               |       |

 

During fiscal 2004, Big Sky negotiated a new agreement with theInternational Association of Machinists and Aerospace Workers, which wasratified in January 2004.

 

**Cyclicality and Seasonality**

 

The airline industry generally is subject to cyclical moves in theeconomy.  Because both personaldiscretionary travel and business travel may be expected to decline duringperiods of economic weakness, the airline industry tends to experience poorerfinancial results during such periods.

 

Mesaba’s cyclicality is tied to the business and operating decisions ofNorthwest.  Operations of the majorairlines continue to be impacted by the rapid growth of low cost airlines, theincreasing number of businesses utilizing teleconferencing or web-basedmeetings and the advent of internet travel web sites, which enable consumers tofind travel alternatives.  Mesaba hashistorically shown greater revenues and earnings in the first and second fiscalquarters.  Northwest has historicallyseen increased leisure travel during these periods on domestic andinternational routes, which contributes to an increased number of flights forMesaba.

 

Seasonal factors, primarily weather conditions and passenger demand,historically have affected Big Sky’s monthly passenger boardings.  Big Sky has historically shown a higher levelof passenger boardings in the July through December period ascompared with the January through June period for many of the citiesserved.  As a result of such factors, BigSky’s revenues and earnings historically have been greater during the July throughDecember period.

 

**Recent Developments**

 

*Northwest Letter of Intent*

On April 20, 2005, Holdings and Mesaba executed a non-bindingletter of intent with Northwest to allow Mesaba to operate 15 Bombardier CRJ-200regional jets (“CRJ”) under the Northwest Airlink banner, with exclusive rightsto the next 20 CRJ-200 or CRJ-440 aircraft Northwest Airlines may order.  Mesaba expects to lease the aircraft fromNorthwest and expects the first aircraft to enter service before the end of2005.  Mesaba expects to enter into a new10-year omnibus airline services agreement with Northwest covering theoperation of the CRJs, Saabs and RJ85s that will replace the existing AirlinkAgreement and the Jet Agreement, which are set to expire in 2007.  As part of the letter of intent, Mesabaagreed to incur the costs necessary to bring the new CRJ fleet into service.

 

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Holdings and Mesaba are currently negotiating the definitive newomnibus airline services agreement with Northwest, which is subject to finalapproval by all parties.  Upon executionof the definitive agreement, Holdings expects to amend the currentlyoutstanding warrants held by Northwest to reduce the number of shares of theCompany’s common stock issuable upon exercise from 4,151,922 shares exercisableat prices from $7.25 to $21.25 per share to an aggregate of 4,112,500 shares exercisableat a price of $8.74 per share.  Thewarrants are expected to expire ten years from the date of the definitiveairline services agreement.  Sixtypercent of the shares are expected to become exercisable upon the delivery ofthe 15th CRJ aircraft to Mesaba, and an additional 4% of the shares areexpected to become exercisable with each subsequent delivery of the next tenCRJ aircraft.  Pursuant to the letter of intent,Holdings also agreed to enter into a registration rights agreement to registerthe shares of stock currently held by Northwest and the shares of stock thatwill be issuable to Northwest upon exercise of the warrants.

 

*Litigation Settlement*

On May 6, 2005, the Company executed a final settlement agreementwith an investment advisor who had, on the Company’s behalf, purchased debtsecurities issued by WorldCom in the principal amount of $3.2 million.  In March 2003, the debt securities weresold for approximately $0.8 million.  On May 9,2005, the Company received a settlement in the amount of $1.8 million incash.  The Company will recognize therecovery resulting from the settlement in the first quarter of fiscal 2006.

 

**Certain Risk Factors Relating to the Companyand the Airline Industry**

 

The Company’s operations and financial results are subject to variousrisks and uncertainties, some of which are described below.  The Company could also be adversely affectedby additional risks and uncertainties not presently known or believed to bematerial.

 

**Risks Related to the Mesaba’s Airlink Agreement and Jet Agreement**

 

*Mesaba is dependent on its relationship with Northwest as its majorcustomer, and the loss of this relationship would substantially harm theCompany’s financial results.*

 

During fiscal 2005, Northwest accounted for 92.7% of the Company’soperating revenues.  Additionally, Mesabaconsistently carries a receivable due from Northwest between $20 million to $30million.  Northwest has incurredsignificant losses in the last several years, including a net loss of $862million in 2004 and a net loss of $450 million in the first quarter of 2005.  If Northwest continues to incur operating losses,it may be unable to fulfill its financial obligations and may be forced toinitiate bankruptcy proceedings.  BecauseHoldings has no commitment to fund Mesaba’s operations, if Northwest defaultsor otherwise fails to make a payment to Mesaba prior to filing for bankruptcy,Mesaba would hold an unsecured prepetition bankruptcy claim that it may beunable to collect.  In suchcircumstances, if Mesaba is unable to secure alternate financing, it could beforced to file for bankruptcy protection. The Company’s business could also be adversely affected by events atNorthwest outside of bankruptcy, such as an inability by Northwest to reducelabor expenses and other costs, continued and unsustainable operating losses atNorthwest, changes in Northwest’s business plan or model, employee strike orjob actions, significant curtailment of service (and thus curtailment of theutilization of the Company’s aircraft), continued volatility of fuel costs andterrorist events.  Loss of the Company’sbusiness relationship with Northwest or Northwest’s failure to make timelypayment of amounts owed to the Company would have a material adverse effect onthe Company’s operations, financial position and cash flows.

 

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*If Mesaba’s Airlink Agreement or Jet Agreement with Northwest isterminated, the Company could lose its only significant source of revenue andearnings, Mesaba’s regional fleet, access to airport facilities and theservices Northwest provides.*

 

Any termination of the Airlink Agreement or Jet Agreement by Northwest,through bankruptcy or otherwise, would allow Northwest the right to terminate Mesaba’saircraft leases and subleases covered by the agreements.  Northwest would also be allowed to takeimmediate possession of the aircraft.  Asa result, the Company would have no significant sources of revenue orearnings.  Additionally, the Companyrisks losing the use of Northwest’s systems, airport facilities and otherservices that support the Company’s operations. The Company may not be able to find replacement services, or it may notbe able to find such services on terms or conditions as favorable as thosereceived from Northwest.

 

*Northwest has not guaranteed that it will grow Mesaba’s regional fleetand Northwest could opt to utilize other regional airlines.*

 

Neither the Airlink Agreement nor Jet Agreement provide that Mesaba’s fleetwill grow beyond its existing size. Additionally, the agreements do not prohibit Northwest from contractingwith other regional airlines to provide the same services that Mesaba currentlyprovides.  Finally, the Company’s letterof intent with Northwest is non-binding, so there is no guarantee thatNorthwest will place the new CRJ aircraft with Mesaba.  Northwest currently has an airline servicesagreement with Pinnacle, and Pinnacle serves many of the same cities asMesaba.  Northwest could choose to expandits agreement with Pinnacle in competition with Mesaba.  Northwest could also choose to establishrelationships with other regional airlines.

 

*The Airlink Agreement and Jet Agreement place constraints on Mesaba’sability to provide airline services to airlines other than Northwest.*

 

Both the Airlink Agreement and Jet Agreement provide that Mesaba cannotuse any of its officers, employees, facilities, equipment or aircraft that ituses to provide airline services to Northwest in any new operations withanother airline without the prior written consent of Northwest.  Any services provided to another airlinewould have to be provided by a subsidiary independent of Mesaba, and doing socould result in significant costs to the Company.

 

*In connection with the Company’s letter of intent with Northwest,Mesaba has incurred, and will continue to incur, significant expenses inconnection with bringing the CRJ aircraft into its fleet, and it may not bereimbursed for these expenses if a definitive agreement is not signed.*

 

The Company’s non-binding letter of intent with Northwest provides thatMesaba will place the first CRJ aircraft in service by October 15,2005.  Although the parties have not yetsigned a definitive agreement, Mesaba has incurred and will continue to incur substantialexpenses related to adding the CRJ aircraft to its fleet.  If an agreement with Northwest is notfinalized, there is no assurance that Mesaba will recognize revenue to offset thesestart-up expenses.

 

**Risks Related to the Company’s Business and Operations**

 

*The Company’s success is dependent on its ability to obtain allnecessary aircraft, engines, parts and related maintenance and support fromvarious aircraft manufacturers and vendors.*

 

The Company is dependent on various aircraft manufacturers and othervendors to provide sufficient parts and related maintenance and supportservices on a timely basis.  Additionally,the Company relies on various engine manufacturers for parts, repair andoverhaul services and other types of support services.  The failure of aircraft or enginemanufacturers and other vendors to provide parts or related services on a

 

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timely, cost-effective basis could materially and adversely affect theCompany’s business, financial condition and results of operations.

 

*Because the Company is unable to pass along increased operating costs,the Company’s earnings will be negatively affected as its fleets continue toage.*

 

As the Company’s fleet of aircraft age, the cost of maintaining theaircraft will likely increase.  Becausemany aircraft components are required to be replaced after specified numbers offlight hours or take-off and landing cycles, and because new aviationtechnology may be required to be retrofitted, the cost to maintain agingaircraft will generally exceed the cost to maintain newer aircraft.  Any material increase in such costs will havea material adverse effect on the Company’s business, financial condition andresults of operations.

 

*If Mesaba loses certain of its ground handling business, the Company’sresults of operations could be materially affected.*

 

Mesaba performs various ground handling services for Northwest andPinnacle at Minneapolis, Detroit and certain spoke stations.  Ground handling business is highlycompetitive, and airlines are constantly reviewing their cost structures tolocate the most cost-effective ground handling providers.  If Northwest or Pinnacle terminate Mesaba’sground handling services, the Company’s financial results would be materiallyaffected, both through a loss of revenue and increased transition expenses.

 

*The Company could incur significant costs if it experiences difficultyfinding, training and retaining employees.*

 

The Company’s business is labor-intensive, and the Company requireslarge numbers of pilots, flight attendants, maintenance technicians and otherpersonnel.  The airline industry has fromtime to time experienced a shortage of qualified personnel, specifically pilotsand maintenance technicians.  Inaddition, as is common with most of the Company’s competitors, the Company hasfaced considerable turnover of its employees. For example, the Company’s pilots, flight attendants and maintenancetechnicians occasionally leave to work for larger airlines, which generallyoffer higher salaries and more extensive benefit programs than regionalairlines are financially able to offer. In the event of a significant increase in the turnover of employees, theCompany would incur significantly higher training costs than would otherwise benecessary.  The Company cannot provideassurance that it will be able to recruit, train and retain the qualifiedemployees it requires to carry out its business plan.

 

*The Company could be adversely affected by the highly competitivenature of the airline industry.*

 

The airline industry is highly competitive, and Northwest competes notonly with other regional carriers, but also with low-cost airlines and majorairlines on many of its routes, including the routes that Mesaba flies.  Some of these competitors are significantlylarger and possess greater resources than Northwest.  Moreover, any new entry in the markets Mesabaserves could lessen the economic benefits Northwest derives from servicingthese markets.  Finally, Big Sky alsocompetes with low-cost and regional carriers on its routes, and it faces thesame competitive challenges described above.

 

*The Company’s ability to diversify within the airline industry may belimited by the terms of various collective bargaining agreements and by otherairlines’ business agreements.*

 

Mesaba’s labor collective bargaining agreement with its own pilotslimits the types of aircraft Big Sky may fly.  Mesaba’s and Big Sky’s ability to provideregional service to other major air carriers may also be limited by those

 

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carriers’ existing relationships with other regional operators.  Additionally, many of the labor collectivebargaining agreements of major airlines, including Northwest, contain scopeclause restrictions that limit the airlines’ ability to add new regionaljets.  These factors could prevent theCompany from pursuing future diversification opportunities.

 

*The Company’s compliance with various regulations governing the airlineindustry can be costly, and the Company could be harmed if it fails to complywith such regulations.*

 

Airlines are subject to extensive regulatory and legal requirementsthat involve significant compliance costs that result in increased costs forpassengers and the Company.  The FAA, DOTand TSA periodically propose additional laws, regulations, taxes and airportrates and charges.  Such measures couldhave the effect of raising ticket prices, reducing revenue, increasing costs orreducing demand for air travel.  TheCompany expects to continue incurring expenses to comply with existing andfuture regulations.  Moreover, if theCompany fails to comply with applicable regulations, it may be subject tosanctions, including the following:

 

•                  warningletters;

•                  fines;

•                  injunctions;

•                  ordersrelating to grounding of aircraft, inspection of aircraft, installation of newsafety-related items and removal and replacement of certain aircraft parts; or

•                  criminalprosecutions.

 

*Future terrorist attacks, other world events, general economicconditions and other factors beyond the Company’s control could substantiallyharm the Company.*

 

The terrorist attacks of September 11, 2001 and the prolonged unrestin the Middle East 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.  Additional terrorist attacks,the fear of such attacks or continued conflict in Iraq or other countries couldfurther affect the airline industry and could cause general instability infinancial markets.

 

Because a substantial portion of air travel, including business travel,is discretionary, the industry tends to experience adverse financial resultsduring general economic downturns.  Softeconomic conditions continue to put pressure on the profitability of theindustry.  Any general decline inpassenger traffic may harm the Company’s business.

 

The Company’s operations are also subject to delays caused by factorsbeyond its control, including air traffic congestion at airports, adverseweather conditions and increased security measures.  Such delays frustrate passengers, reduceaircraft utilization and increase costs, all of which may affect profitabilityand harm the Company’s financial condition and results of operations.

 

*The Company is increasingly dependent upon technology in itsoperations, and any failure of such technology could adversely affect theCompany.*

 

The Company has made, and will continue to make, substantialinvestments in technology to manage its operations.  In particular, the Company’s systemsoperations control center, which oversees daily flight operations, is dependenton a number of technology systems to operate effectively.  The Company’s

 

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technology systems may be vulnerable to various sources of interruptiondue to events beyond the Company’s control, including natural disasters,terrorist attacks, computer viruses and hackers.  In addition, large-scale interruption intechnology on which the Company depends, such as power, telecommunications orthe Internet, could substantially disrupt the Company’s operations.

 

*Any airline accident in which the Company is involved could subject theCompany to substantial liability and seriously harm the Company’s financialcondition and results of operations.*

 

An accident involving Company aircraft could result in injuries andloss of life, and the Company could experience significant claims from injuredpersons and surviving relatives.  Anaccident could also result in substantial property damage, loss of aircraftfrom service and adverse publicity for the Company.  Airlines are required by the DOT to carryliability insurance.  Although theCompany believes its liability insurance is in amounts and of the typegenerally consistent with industry practice, substantial claims resulting froman accident in excess of insurance coverage would harm the Company’s businessand financial results.  Any resultingclaims would also be costly to defend and could harm the Company’sreputation.  Moreover, any aircraftaccident, even if fully insured or not directly involving Mesaba or Big Sky,could cause a public perception that flying is less safe or reliable than othertransportation alternatives, which could harm the Company’s financial conditionand results of operations.

 

*The Company is subject to collective bargaining agreements with severalof its employee groups, and any failure to successfully negotiate theseagreements could subject the Company to strikes and increased labor costs,either of which could negatively impact the Company’s financial performance.*

 

Labor costs are a significant component of the Company’s expenses,comprising 33.2% of total operating expenses in fiscal 2005.  Several of the Company’s employee groups haveseparate bargaining agreements and may make demands that would increaseoperating expenses, adversely affecting profitability.  Mesaba is currently negotiating with AMFA fora new agreement.  The existing agreementbecame amendable in August 2003. Mesaba is also currently negotiating with the TWU, whose agreement becameamendable in May 2005.  The Companycannot predict the outcome of these negotiations.  If the Company is unable to reach agreementon the terms of any collective bargaining agreement or experiences widespreademployee dissatisfaction, there could be work slowdowns or stoppages.  Any sustained work stoppages couldadversely affect Mesaba’s ability to fulfill its obligations under the AirlinkAgreement and Jet Agreement and could have an adverse effect on the Company’sfinancial condition and results of operations.

 

**Risks Related to the Company’s Stock**

 

*Together, certain of the Company’s shareholders own or have the rightto acquire a significant portion of the Company’s stock and could ultimatelycontrol decisions regarding the Company.*

 

Northwest owns 27.5% of the Company’s common stock.  Northwest also owns warrants to purchase anaggregate of 4,151,922 shares of the Company’s common stock.  Additionally, several other shareholders alsoown significant blocks of the Company’s common stock.  Because the parties described above currentlyown a large portion of the Company’s stock, they may be able to determine orsignificantly influence the outcome of corporate actions requiring shareholderapproval.  As a result, these parties maybe in a position to control matters affecting the Company, including decisionsas to the Company’s direction and policies; future issuances of securities;incurrence of debt; amendments to the Company’s articles of incorporation andbylaws; payment of dividends on the Company’s common stock; and acquisitions,sales of the Company’s assets, mergers or similar transactions, includingtransactions involving a change of control. As a result, some investors may be unwilling to purchase the Company’scommon stock.  In addition, if the demandfor the Company’s common stock is reduced because of these

 

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shareholders’ control of the Company, the price of the Company’s commonstock could be materially depressed.

 

*Future sales of the Company’s common stock by its shareholders coulddepress the price of the Company’s stock.*

 

Sales of a large number of shares of the Company’s common stock or theavailability of a large number of shares for sale could adversely affect themarket price of the Company’s common stock. As of March 31, 2005, the Company had 20,574,340 shares of commonstock outstanding.  Several of theCompany’s shareholders own substantial blocks of the Company’s commonstock.  Additionally, along with theshares of stock it currently owns, Northwest could own an additional largeblock of the Company’s common stock upon exercise of its warrants.  In connection with the letter of intent withNorthwest, the Company has agreed to enter into a registration rights agreementto register the shares of stock owned by Northwest (including those sharesunderlying its warrants).  Following suchregistration, future sales of those shares, or future sales of other largeblocks of the Company’s common stock that are already registered, couldsubstantially depress the Company’s stock price.

 

*Any future exercises of warrants by Northwest could substantiallydilute the Company’s common stock.*

 

As of March 31, 2005, Northwest holds warrants exercisable for anaggregate of 4,151,922 shares of the Company’s common stock at prices rangingfrom $7.25 per share to $21.25 per share. As described in the previous “Recent Developments” section, if theCompany enters into an omnibus airline services agreement, it expects to amendthese warrants to change the exercise price to $8.74 per share and to decreasethe number of shares issuable upon exercise to 4,112,500 shares.  Holders of the Company’s common stock,therefore, could experience substantial ownership dilution if Northwest electsto exercise these warrants.

 

*The Company’s stock price may continue to be volatile.*

 

In the past two fiscal years, the market price of the Company’s commonstock has ranged from a low of $5.52 per share to a high of $10.11 pershare.  Because the Company’s stock isthinly traded, its market price is sensitive and may continue to experiencesubstantial fluctuations due to a variety of factors, including the following:

 

•                  failureof the Company’s operating results to meet analysts’ or investors’ expectationsin any quarter;

•                  securitiesanalysts’ estimates;

•                  materialannouncements by the Company, Northwest or the Company’s competitors;

•                  publicsales of a substantial number of shares of the Company’s common stock;

•                  regulatoryactions; or

•                  generalmarket conditions.

 

*Anti-takeover provisions of the Company’s articles of incorporation andbylaws and of Minnesota law could discourage, delay or prevent a change incontrol.*

 

The Company’s articles of incorporation and bylaws, along withMinnesota law, could discourage, delay or prevent persons from acquiring orattempting to acquire the Company.  TheCompany’s articles of incorporation authorize the board of directors, withoutaction by the Company’s shareholders, to designate and issue preferred stock inone or more series, with such rights, preferences and privileges as the boardof directors shall determine.  TheCompany’s articles of incorporation and bylaws also mandate

 

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a classified board of directors, which makes changing control of theboard more difficult.  The Company’sbylaws grant the board of directors the authority to adopt, amend or repeal allor any of such bylaws, subject to the power of the shareholders to change orrepeal such bylaws.  The Company’s bylawsalso limit who may call meetings of the Company’s shareholders.

 

As a public corporation, the Company is prohibited by the MinnesotaBusiness Corporation Act, except under certain specified circumstances, fromengaging in any merger, significant sale of stock or assets or businesscombination with any shareholder or group of shareholders who own at least 10%of the Company’s common stock.

 

**Available Information**

 

The Company maintains a website at www.mairholdings.com.  On its website, free of charge, the Companymakes available its Annual Report on Form 10-K and links to the SECwebsite for other public filings.  TheCompany’s Code of Ethics for its Chief Executive Officer and financial officersis also available on its website.  Allinformation is also available in print upon written request to the Company’sGeneral Counsel at 150 South Fifth Street, Suite 1360, Minneapolis, Minnesota55402.  The Company is not including theinformation contained on or available through its website as a part of, orincorporating such information by reference into, this Annual Report on Form 10-K.

 

**Item 2.PROPERTIES**

 

**Aircraft**

 

*Mesaba*

The following table sets forth certain information as to Mesaba’spassenger aircraft fleet as of March 31, 2005:

 
| ** **           | ** ** | ** **    | ** ** | ** **   | ** ** | **Approximate**   | ** ** | **Approximate**      | ** ** |
|----------------------|------------|---------------|------------|--------------|------------|-------------------|------------|----------------------|------------|
| ** **           | ** ** | **Number of** | ** ** | **Seating**  | ** ** | **Single Flight** | ** ** | **Average Cruising** | ** ** |
| **Type of Aircraft** | ** ** | **Aircraft**  | ** ** | **Capacity** | ** ** | **Range (miles)** | ** ** | **Speed (MPH)**      | ** ** |
| Avro RJ85            |       | 35            |       | 69           |       | 1,400             |       | 410                  |       |
| Saab 340             |       | 63            |       | 30/33/34     |       | 500               |       | 300                  |       |

 

The RJ85 aircraft are pressurized jet airplanes with galleys, dualclass cabins, standup headroom, lavatories, airborne communications addressingand reporting system, radar, ground proximity warning, traffic collisionavoidance and de-icing systems.  The Saabaircraft are pressurized jet-prop airplanes with galleys, standup headroom,lavatories, radar, global positioning, ground proximity warning, trafficcollision avoidance and de-icing systems. All of Mesaba’s aircraft comply fully with all current regulationsissued by the FAA.

 

Mesaba leases or subleases its RJ85 aircraft from Northwest underoperating leases with initial terms of up to ten 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.

 

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Mesaba leases its Saab aircraft, either directly from aircraft leasingcompanies, through leases with Pinnacle under operating leases with initialterms of 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 aircraft upon their return. The Airlink Agreement allows Mesaba to return aircraft to Northwest uponthe occurrence of certain events, including termination of the AirlinkAgreement.

 

As of March 31, 2005, Mesaba’s existing fleet of RJ85 and Saabaircraft had remaining lease terms of up to 11 years.  The current aggregate monthly lease paymentsfor all Mesaba aircraft is approximately $8.5 million.

 

*Big Sky*

The following table sets forth certain information as to Big Sky’spassenger aircraft fleet as of March 31, 2005.

 
| ** **           | ** ** | ** **    | ** ** | ** **   | ** ** | **Approximate**   | ** ** | **Approximate**      | ** ** |
|----------------------|------------|---------------|------------|--------------|------------|-------------------|------------|----------------------|------------|
| ** **           | ** ** | **Number of** | ** ** | **Seating**  | ** ** | **Single Flight** | ** ** | **Average Cruising** | ** ** |
| **Type of Aircraft** | ** ** | **Aircraft**  | ** ** | **Capacity** | ** ** | **Range (miles)** | ** ** | **Speed (MPH)**      | ** ** |
| Operating:           |       |          |       |         |       |              |       |                 |       |
| Metro III /23        |       | 4             |       | 19           |       | 750               |       | 300                  |       |
| Beechcraft 1900D     |       | 5             |       | 19           |       | 750               |       | 325                  |       |
| Non Operating:       |       |          |       |         |       |              |       |                 |       |
| Metro III            |       | 4             |       |         |       |              |       |                 |       |

 

All of Big Sky’s aircraft are pressurized jet-prop airplanes withradar, ground proximity warning, traffic collision avoidance and de-icingsystems.  All of Big Sky’s operating aircraftcomply fully with all current regulations issued by the FAA.

 

InJanuary 2005, Big Sky entered into a letter of intent to lease tenBeechcraft B1900D aircraft from Mesa Air Group, Inc., to transition fromits Metro fleet.  During March 2005,Big Sky parked four Metros, took delivery of five Beechcraft aircraft and began flying them.  Big Sky will take delivery of the remainingfive Beechcraft during fiscal 2006 and the Metro fleet will be removed fromservice.  Big Sky will attempt to disposeof the Metro aircraft through subleases or other means.

 

Big Sky leases all of its Metro aircraft from leasing companies and itsBeechcraft aircraft from Mesa Air Group. The lease agreements 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 Metro aircraft allow BigSky to return the aircraft to the lessor upon the occurrence of certain eventsand contain purchase options.

 

As of March 31, 2005, Big Sky’s operating fleet of Metro andBeechcraft aircraft had remaining lease terms of seven months to 60 monthsand aggregate monthly lease payments of approximately $0.2 million.  The four nonoperating Metro aircraft are parkedand pending disposition as part of the fleet transition.  The current aggregate monthly lease paymentsfor these nonoperating aircraft are approximately $50,000.  As of March 31, 2005, the Companyexpensed

 

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approximately $1.0 million related to the remaining lease payments onthe nonoperating aircraft and other estimated net costs of the aircraft’s returnto the lessor.

 

**Facilities**

 

*Holdings*

Holdings’ executive offices are located in downtown Minneapolis, Minnesota.  Holdings leases approximately 2,000 squarefeet of office space for approximately $3,800 per month.  The lease commenced in October 2003.  In May 2005, Holdings entered into a newlease in the same building for approximately 3,370 square feet of office spacewith lease payments of approximately $6,000 per month.  The lease expires on September 30, 2010but contains an early termination provision allowing the lease to be cancelledon September 30, 2007.

 

*Mesaba*

Mesaba leases an aircraft hangar facility from the MetropolitanAirports Commission.  Under this 25-year agreement,Mesaba leases approximately 366,000 square feet of maintenance facilities,maintenance offices, ramp, parking and unimproved land, of which approximately87,000 square feet is for the new maintenance hangar facility.  The lease payments of approximately $111,000per month commenced in October 2003. Mesaba has a ten-year lease agreement for approximately 33,000 squarefeet of office space for its principal executive offices located in Eagan,Minnesota.  The lease payments ofapproximately $35,000 per month commenced in January 2004.  The lease expires on December 31, 2013but contains an early termination provision allowing the lease to be cancelledat the end of seven years.

 

Mesaba subleases approximately 21,000 square feet of office andtraining support space at the Pan-Am International Flight Academy in Eagan,Minnesota for its flight operations training center.  Mesaba paysapproximately $27,000 per month under the terms of this sublease, which has aterm of 15 years and expires in January 2017.

 

Mesaba leases approximately 497,000 square feet of facilities, ramp,parking and unimproved land at the Cincinnati/Northern Kentucky Airport underseparate ground and facilities leases. The facilities lease covers approximately 126,000 square feet of hangarand maintenance space, and Mesaba pays monthly rentals of approximately $92,000until July 1, 2029 as part of a special facilities bond financing providedby the Cincinnati/Northern Kentucky Airport Authority.  Pursuant to the guaranty agreement, Holdingsunconditionally guarantees full and prompt payment of the bonds.  The ground lease has a 30-year termconcurrent with the facilities lease.  Mesabapays approximately $12,000 per month under the ground lease.

 

Mesaba leases approximately 334,000 square feet of ramp, parking andunimproved land at the Detroit Metropolitan Airport.  The hangar facility, of approximately 60,000 squarefeet, located on the property was paid in full in fiscal 2003.  The ground lease has a 20-year term withmonthly 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 approximately 38,000 square feet of hangar and officespace located on approximately 102,000 square feet of land and parking areas ofwhich Mesaba is ground lessee at the Central Wisconsin Airport in Mosinee,Wisconsin.  Mesaba pays approximately$3,000 per month under the terms of the ground and facility lease, which expireon December 31, 2011, subject to two ten-year renewal options.

 

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*Big Sky*

Big Sky’s main hangar and principal offices are located at the LoganInternational Airport in Billings, Montana. The main facility consists of a 12,000 square foot building that canhold three aircraft for maintenance, a parts warehouse, back shop area and twofloors of offices.  A two-story buildingadjacent to the hangar houses Big Sky’s general offices.  These buildings are situated on approximately83,000 square feet of land owned by the City of Billings and leased to Big Skyon long-term facility and ground leases. The facility lease has a 20-year term and the ground lease has a 26-yearterm.  The combined monthly lease paymentis approximately $7,000.

 

**Item 3.LEGAL PROCEEDINGS**

On October 4, 2002, Fairbrook Leasing, Inc.,Lambert Leasing, Inc. and Swedish Aircraft Holdings AB (“Saab Leasing”)filed a declaratory judgment action against Mesaba relating to 20 Saab 340A (“340A”)aircraft leased by Mesaba.  Saab Leasing sought a judicial declarationthat the terms of the leases applicable to each of the 340A aircraft aregoverned by a March 7, 1996 term sheet proposal rather than the parties’subsequent agreements and conduct.  In a December 8, 2003 order, theDistrict Court declared the term sheet proposal a binding preliminary agreementrequiring Mesaba to negotiate in good faith toward the execution of long-termagreements for each of the 340A aircraft.  Mesaba appealed the DistrictCourt’s ruling.

 

On August 13, 2004, relying on theDistrict Court’s declaratory judgment ruling, Saab Leasing filed a separateaction in the District Court alleging approximately $35 million in damages forpast due and future aircraft lease obligations.  Mesaba denies theallegations in Saab Leasing’s complaint and contends that it has fulfilled andwill continue to fulfill its existing obligations.

 

On May 19, 2005, the U.S. Court of Appeals for the Eighth Circuitaffirmed the District Court’s declaratory judgment ruling.  Despite theEighth Circuit’s ruling, Mesaba believes, based on advice from its legalcounsel, that it has defenses in the damages case that will limit Saab Leasing’sability to recover damages.  Nevertheless, there can be no assurance thatthe District Court in the damages case will agree with Mesaba’s analysis. Therefore, the ultimate outcome of this dispute cannot be predicted withcertainty.

 

As of March 31, 2005, the Company did not establish an accrualwith regard to this litigation. Accordingly, an adverse outcome to this matter could have a materialimpact on the Company’s financial condition and results of operation.

 

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

 

There were no matters submitted to a vote of the Company’s shareholdersduring the three month period ended March 31, 2005.

 

**PART II**

 

**Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS**

 

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

 

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The following table sets forth, for the periods indicated, the high andlow price per share for the Company’s common stock for the two most recent fiscalyears.  Quotations for such periods areas reported by NASDAQ for National Market issues.  The Company has not issued cash dividendssince September 1995 and does not currently intend to do so in the future.

 
| ** **  | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
|-------------|------------|-----------------|------------|-----------------|------------|
| **Quarter** | ** ** | **High**        | ** ** | **Low**         | ** ** | **High** | ** ** | **Low** | ** ** |
| First       |       | $               | 9.52       |            | $          | 7.11 |   | $ | 6.42 |   | $ | 5.52 |   |
| Second      |       | $               | 9.30       |            | $          | 7.55 |   | $ | 7.70 |   | $ | 5.86 |   |
| Third       |       | $               | 9.60       |            | $          | 8.11 |   | $ | 7.99 |   | $ | 6.02 |   |
| Fourth      |       | $               | 9.60       |            | $          | 7.97 |   | $ | 10.11 |   | $ | 7.22 |   |

 

On June 1, 2005, the number of holders of record of common stockwas 648.

 

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

 

**Equity Compensation Plan Information**

 
| ** **                         | ** ** | ** **                  | ** ** | ** **                         | ** ** | **Number of securities**        | ** ** |
|------------------------------------|------------|-----------------------------|------------|------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | ** **                  | ** ** | ** **                         | ** ** | **remaining available for**     | ** ** |
| ** **                         | ** ** | **Number of securities to** | ** ** | **Weighted average**               | ** ** | **future issuance under**       | ** ** |
| ** **                         | ** ** | **be issued upon exercise** | ** ** | **exercise price of**              | ** ** | **equity compensation plans**   | ** ** |
| ** **                         | ** ** | **of outstanding options,** | ** ** | **outstanding options,**           | ** ** | **(excluding securities**       | ** ** |
| **Plan Category**                  | ** ** | **warrants and rights (a)** | ** ** | **warrants & rights (b)** | ** ** | **reflected in column (a))(c)** | ** ** |
| Plans approved by security holders |       | 1,898,551                   |       | $                                  | 7.07       |                            | 800,251    |   |
|                                    |            |                             |            |                                    |            |                                 |            |  |

 

The equity compensation plans approved by the Company’s shareholdersare the 1994 Stock Option Plan, the 1996 Director Stock Option Plan and the2000 Stock Incentive Plan.  The 2000 StockIncentive Plan contains a provision that automatically increases the authorizedshares available for grant on September 1 of each year by the lesser of300,000 or 1% of the then outstanding common shares.  See Item 8, “Financial Statements andSupplementary Data” Note 9, for additional information regarding the Company’sequity compensation plans.

 

**Item 6.SELECTED FINANCIAL DATA**

 

The following tables set forth selected financial data with respect tothe Company as of the dates and for the periods indicated.  The selected financial data has been derivedfrom the Company’s audited consolidated financial statements, which have been restatedto give effect to the restatement discussed in Note 14 to the Company’sConsolidated Financial Statements.  Thefinancial data set forth below should be read in conjunction with the Company’sConsolidated Financial Statements and Notes thereto and “Management’s Discussionand Analysis of Financial Condition and Results of Operations” contained inItem 7.

 

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| ** **                                                                                      | ** ** | **For the Years Ended March 31  (in thousands, except per share data)** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                                                                      | ** ** | ** **                                                                   | ** ** | **As restated** | ** ** |
| ** **                                                                                      | ** ** | **2005**                                                                     | ** ** | **2004** | ** ** | **2003(1)** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Statement of Operations Data:                                                                   |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Operating revenues                                                                              |       | $                                                                            | 456,067    |   | $ | 449,079 |   | $ | 456,880 |   | $ | 416,913 |   | $ | 439,803 |   |
| Operating expenses                                                                              |       | 447,428                                                                      |       | 445,053 |   | 448,549 |   | 416,077 |   | 411,623 |   |
| Operating income                                                                                |       | $                                                                            | 8,639      |   | $ | 4,026 |   | $ | 8,331 |   | $ | 836 |   | $ | 28,180 |   |
|                                                                                            |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Net income                                                                                      |       | $                                                                            | 7,355      |   | $ | 4,496 |   | $ | 4,151 |   | $ | 7,828 |   | $ | 19,083 |   |
|                                                                                            |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Net income per share-basic                                                                      |       | $                                                                            | 0.36       |   | $ | 0.22 |   | $ | 0.20 |   | $ | 0.39 |   | $ | 0.94 |   |
| Weighted average number of issued shares  outstanding                                           |       | 20,505                                                                       |       | 20,334 |   | 20,308 |   | 20,289 |   | 20,288 |   |
|                                                                                            |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Net income per share-diluted                                                                    |       | $                                                                            | 0.35       |   | $ | 0.22 |   | $ | 0.20 |   | $ | 0.38 |   | $ | 0.91 |   |
| Weighted average common and potentially dilutive  common shares outstanding outstanding-diluted |       | 21,050                                                                       |       | 20,562 |   | 20,357 |   | 20,601 |   | 20,941 |   |

 

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

 
| ** **                                      | ** ** | **As of March 31 (in thousands)** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | ** **                             | ** ** | **As restated** | ** ** |
| ** **                                      | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003 (1)** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Balance Sheet Data:                             |       |                                   |       |   |   |   |   |   |   |   |   |
| Current assets                                  |       | $                                      | 187,547    |   | $ | 174,934 |   | $ | 158,976 |   | $ | 162,621 |   | $ | 156,740 |   |
| Property and equipment, net                     |       | 38,421                                 |       | 39,722 |   | 43,798 |   | 50,615 |   | 56,248 |   |
| Long-term investments                           |       | 43,240                                 |       | 39,984 |   | 32,162 |   | 4,068 |   | — |   |
| Other noncurrent assets, net                    |       | 11,746                                 |       | 14,167 |   | 15,052 |   | 8,758 |   | 10,966 |   |
| Total assets                                    |       | $                                      | 280,954    |   | $ | 268,807 |   | $ | 249,988 |   | $ | 226,062 |   | $ | 223,954 |   |
|                                            |       |                                   |       |   |   |   |   |   |   |   |   |
| Current liabilities                             |       | $                                      | 82,206     |   | $ | 77,098 |   | $ | 65,372 |   | $ | 44,781 |   | $ | 46,566 |   |
| Other noncurrent liabilities                    |       | 6,069                                  |       | 7,448 |   | 7,161 |   | 8,221 |   | 13,037 |   |
| Shareholders’ equity                       |       | 192,679                                |       | 184,261 |   | 177,455 |   | 173,060 |   | 164,351 |   |
| Total liabilities and shareholders’ equity |       | $                                      | 280,954    |   | $ | 268,807 |   | $ | 249,988 |   | $ | 226,062 |   | $ | 223,954 |   |

 

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(1)           Balance sheet dataincludes Big Sky, which was acquired on December 1, 2002.

 

22

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| ** **                      | ** ** | **For the Years Ended March 31** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003 (4)** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Selected Operating Data:        |       |                                  |       |   |   |   |   |   |   |   |   |
| *Mesaba*                        |       |                                  |       |   |   |   |   |   |   |   |   |
| Passengers                      |       | 5,623,731                             |       | 5,596,721 |   | 5,658,006 |   | 5,650,500 |   | 6,207,400 |   |
| Available seat miles (1)        |       | 3,064,167                             |       | 2,904,198 |   | 2,822,140 |   | 2,739,946 |   | 2,948,239 |   |
| Revenue passenger miles (2)     |       | 2,003,910                             |       | 1,774,931 |   | 1,646,114 |   | 1,571,042 |   | 1,725,460 |   |
| Load factor (3)                 |       | 65.4                                  | %          | 61.1 | % | 58.3 | % | 57.3 | % | 58.5 | % |
| Block hours flown               |       | 287,482                               |       | 290,270 |   | 300,049 |   | 298,349 |   | 339,198 |   |
| Departures                      |       | 207,067                               |       | 219,009 |   | 233,160 |   | 240,068 |   | 269,596 |   |
| Revenue per available seat mile |       | $                                     | 0.144      |   | $ | 0.149 |   | $ | 0.160 |   | $ | 0.152 |   | $ | 0.149 |   |
| Cost per available seat mile    |       | $                                     | 0.139      |   | $ | 0.145 |   | $ | 0.155 |   | $ | 0.152 |   | $ | 0.139 |   |
| *Big Sky*                       |       |                                  |       |   |   |   |   |   |   |   |   |
| Passengers                      |       | 85,455                                |       | 105,913 |   | 39,587 |   |   |   |   |   |
| Available seat miles (1)        |       | 59,284                                |       | 75,188 |   | 29,810 |   |   |   |   |   |
| Revenue passenger miles (2)     |       | 21,630                                |       | 27,066 |   | 10,630 |   |   |   |   |   |
| Load factor (3)                 |       | 36.5                                  | %          | 36.0 | % | 35.7 | % |   |   |   |   |
| Block hours flown               |       | 16,396                                |       | 20,307 |   | 9,456 |   |   |   |   |   |
| Departures                      |       | 19,423                                |       | 23,245 |   | 8,415 |   |   |   |   |   |
| Revenue per available seat mile |       | $                                     | 0.254      |   | $ | 0.219 |   | $ | 0.193 |   |   |   |   |   |
| Cost per available seat mile    |       | $                                     | 0.337      |   | $ | 0.267 |   | $ | 0.262 |   |   |   |   |   |

 

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

 

(2)           Revenue passengermiles are determined by multiplying the number of fare paying passengerscarried by the distance flown.  Amountsare in thousands.

 

(3)           Load factor isdetermined by dividing revenue passenger miles by available seat miles.

 

(4)           Selected operatingdata for Big Sky is from the date of acquisition, December 1, 2002.

 

**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operationshas been restated to give effect to the restatement discussed in Note 14 tothe consolidated financial statements included in Item 8, and should be readin conjunction with the accompanying consolidated financial statements.  The Company’s operations and financialresults are subject to various risks and uncertainties associated with theairline industry.  See “Certain RiskFactors Relating to the Company and the Airline Industry” in Item 2.

 

**Year in Review and Outlook**

 

*Summary*

Fiscal 2005 was a rebuilding year for the Company.  After Mesaba reached a new pilot agreementthat extends through January 2009 and reaffirmed the Jet Agreement withNorthwest through April 2007 in late fiscal 2004, Mesaba brought the fivegrounded RJ85s back into service in the first quarter of fiscal

 

23

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2005 and increased the utilization of that fleet.  Traffic built steadily in the summer, butMesaba subsequently faced some very challenging weather and irregularoperations in its hubs, especially in Detroit, during the Christmas and winterperiods.  Mesaba also focused on processdiscipline in the ground handling at its hub operations and began providing CRJdeicing and online luggage transfer for Northwest at Detroit.  By March, Mesaba was focused on responding toa request for proposal from Northwest for new 50 seat regional jetoperations.  Separately, Big Skyinitiated a fleet transition of its own from the Metros to the Beechcraft 1900D.  Big Sky completed a new fleet campaign byputting the Beechcraft 1900D on its air carrier certificate in 60 days.

 

*Outlook*

Given the airline industry’s continued economic uncertainty, theCompany’s will focus its efforts in fiscal 2006 on three main strategies:

 

•                  Maintainoutstanding operating performance at each subsidiary while the subsidiaries focuson the following initiatives:

 

*Mesaba*

•                  Mesabawill focus on finalizing a new omnibus airline services agreement withNorthwest, obtaining its CRJ certificate and bringing 15 new aircraft into thefleet, starting in October 2005 with expected completion by March 2006

 

•                  Mesabawill continue to negotiate a new contract with its mechanics and dispatcherswhile simultaneously building contingency plans to ensure safe, reliableoperations during potential labor unrest at Northwest or Mesaba

 

*Big Sky*

•                  BigSky will complete its fleet transition, retiring the remaining Metros fromoperations, and expand its route structure by bringing five additional Beechcraft1900Ds into the fleet

 

•                  Investin a new fleet at Mesaba which should improve the Company’s financial position andoperating results in fiscal 2007 and beyond

 

•                  Exploreadditional growth opportunities with existing subsidiaries and consideracquisitions to diversify in the airline industry.

 

**Fiscal Year Ended March 31, 2005 Compared with Fiscal Year Ended March 31,2004**

 

*Earnings Summary*

The Company reported net income of $7.4 million or $0.35 perdiluted share for fiscal 2005, compared to $4.5 million or $0.22 perdiluted share in fiscal 2004.  Diluted weightedaverage common and potentially dilutive common shares were 21.1 millionand 20.6 million in fiscal 2005 and 2004.

 

*Mesaba*

Mesaba Operating Revenues

Total operating revenues increased 1.9% in fiscal 2005 to $441.0 millionfrom $432.6 million in fiscal 2004. The increase is primarily attributable to incremental ground handlingrevenue due to Mesaba’s increased ground handling business in Minneapolis andDetroit.  This was partially offset by a0.4% decrease in passenger revenue as the reduction in Saab flying more thanoffset the incremental RJ85 flying year-over-year.

 

24

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Mesaba Operating Expenses

Total operating expenses in fiscal 2005 increased 1.0% to $426.5 millionfrom $422.2 million in fiscal 2004. The cost per ASM decreased 4.1% to $0.139 from $0.145.  The following table compares components ofoperating cost per ASM for the years ended March 31:

 
| ** **                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Wages and benefits            |       | 4.6      | ¢     | 4.6      | ¢     |
| Aircraft fuel                 |       | 0.6      |       | 0.7      |       |
| Aircraft maintenance          |       | 2.7      |       | 2.7      |       |
| Aircraft rents                |       | 3.3      |       | 3.5      |       |
| Landing fees                  |       | 0.2      |       | 0.2      |       |
| Insurance and taxes           |       | 0.2      |       | 0.3      |       |
| Depreciation and amortization |       | 0.5      |       | 0.6      |       |
| Administrative and other      |       | 1.8      |       | 1.9      |       |
| Total                         |       | 13.9     | ¢     | 14.5     | ¢     |

 

Wages and benefits increased 5.6% to $140.9 million in fiscal 2005from $133.5 million in fiscal 2004. Wages and benefits increased due to increased ground handling wages fromadditional ground handling activity, increased wages due to additional flyingand the new pilots’ contract and increased costs related to the 401(k) benefit plan.  These increases were slightly offset by lowerhealth and dental expenses resulting from improved experience.  Year-over-year comparisons were also affectedby the one-time $2.7 million retroactive pilot compensation expense in theprior year resulting from the pilots’ contract signed in January 2004.

 

Aircraft fuel decreased 16.0% to $16.9 million in fiscal 2005 from$20.1 million in fiscal 2004.  Thedecrease is partially attributable to a decrease of 6.5% in Saab block hoursflown.  In addition, there was a $1.8million decrease due to adjustments made to previously recorded accruals for estimatedfuel expense.  Certain provisions of theAirlink Agreement with Northwest protect Mesaba from changes in fuelprices.  Mesaba’s actual cost of fuel,including taxes and pumping fees, was 83.5 cents per gallon in both fiscal 2005and 2004.  Northwest is responsible forfuel for Mesaba’s RJ85 operations.

 

Aircraft maintenance costs, excluding wages and benefits, increased 5.8%to $81.9 million in fiscal 2005 from $77.4 million in fiscal 2004.  Aircraft maintenance costs increased primarilydue to a 9.5% increase in RJ85 block hours in fiscal 2005 and repair costsincurred to continue to maintain the fleet as it ages.

 

Aircraft rents decreased 2.2% to $100.5 million in fiscal 2005from $102.7 million in fiscal 2004. This decrease is attributable to four fewer Saab aircraft in serviceyear-over-year.

 

Landing fees decreased 3.9% to $6.5 million in fiscal 2005 from $6.8 millionin fiscal 2004.  The decrease isprimarily attributable to the 7.1% reduction of Saab departures partiallyoffset by airport rate increases during fiscal 2005.  Northwest is responsible for landing fees forMesaba’s RJ85 operations.

 

Insurance and taxes decreased 26.4% to $6.2 million in fiscal 2005from $8.4 million in fiscal 2004. The decrease is primarily attributable to fewer insured aircraft and areduction in the rates charged for hull and passenger liability insurance, aswell as the recognition of property tax refunds of $0.7 million.

 

25

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Depreciation and amortization decreased 15.1% to $13.8 million infiscal 2005 compared to $16.3 million in fiscal 2004.  The lower level of depreciation andamortization resulted from reduced capital spending over the last several years.

 

Administrative and other expenses increased 5.0% to $59.9 millionin fiscal 2005 from $57.0 million in fiscal 2004 primarily due toincreased outside services of $3.6 million related to consulting and audit costsincurred to comply with the requirements of the Sarbanes-Oxley Act and increasedTSA fees.  In addition, the increase wasdue to costs associated with irregular operations of approximately $1.2 million.  These increased costs were offset by reducedcosts related to third party Saab ground handling of $1.1 million and pilottraining of $1.4 million.

 

*Big Sky*

Big Sky Operating Revenues

Total operating revenues decreased 8.5% to $15.1 million in fiscal 2005from $16.5 million in fiscal 2004 due to a reduction in flying unprofitableroutes, resulting in a $1.7 million decrease in passenger revenue, partiallyoffset by a $0.3 million increase in EAS subsidies.

 

Big Sky Operating Expenses

Total operating expenses in fiscal 2005 decreased 0.5% to $20.0 millionfrom $20.1 million in fiscal 2004 primarily due to the reduced flyingyear-over-year, which were offset by $1.0 million costs associated with thepermanent grounding of four Metro aircraft: three due to the fleet transitionfrom Metros to Beechcraft 1900Ds and one due to significant aircraft damage.

 

*Consolidated Operating Income*

Operating income totaled $8.6 million in fiscal 2005, as comparedto $4.0 million in fiscal 2004.  TheCompany’s operating margin increased to 1.9% in fiscal 2005 from 0.9% in fiscal2004.

 

*Consolidated Nonoperating Income*

Nonoperating income (net) decreased to $2.3 million for fiscal 2005from $4.4 million in fiscal 2004.  Thedecrease is primarily due to the government grant of $2.6 million in fiscal2004, which was partially offset by increased interest income of $0.6 million earnedon the Company’s investments in fiscal 2005.

 

*Consolidated Provision for Income Taxes*

The provision for income taxes decreased 9.1% to $3.6 million infiscal 2005 from $4.0 million in fiscal 2004.  The Company’s blended effective tax rate was32.9% in fiscal 2005 as compared to 46.8% in fiscal 2004.  During the first quarter of fiscal 2005, theCompany received verification of a final settlement with the Internal RevenueService concerning its examination of the Company’s fiscal 1995 and 1996 incometax returns.  As a result of thissettlement, the Company reduced its income tax payable and tax provision by$1.2 million.  Without this one-timeadjustment, the Company’s effective tax rate would have been 43.8% in fiscal2005.  The Company adjusts its effectivetax rate quarterly based on forecasted operating results in the fiscalyear.  The rate isaffected principally by the level of nondeductible expenses relative toprojected taxable income.

 

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

 

*Earnings Summary*

The Company reported net income of $4.5 million or $0.22 perdiluted share for fiscal 2004, compared to $4.2 million or $0.20 perdiluted share in fiscal 2003.  Dilutedweighted average common and potentially dilutive common shares outstanding were20.6 million and 20.4 million in fiscal 2004 and 2003.

 

26

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On December 1, 2002, the Company acquired all the outstandingshares of Big Sky and accounted for the transaction using the purchase methodof accounting.  The Company hasconsolidated Big Sky’s results of operations from the acquisition date to March 31,2004.  For fiscal 2004, Big Sky generatedoperating revenues of $16.5 million and operating expenses of$20.1 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.

 

*Mesaba Operating Revenues*

Total operating revenues decreased 4.1% in fiscal 2004 to$432.6 million from $451.1 million in fiscal 2003.  The decrease is attributable to a decrease ofapproximately 6.7% in completed Saab ASMs due to the return of six Saab A-modelaircraft, the grounding of five RJ85 aircraft from December 2003 to March 2004and the temporary shutdown of service during final pilot negotiations in January 2004that resulted in the cancellation of 624 flights.

 

*Mesaba Operating Expenses*

Total operating expenses in fiscal 2004 decreased 3.6% to $422.5 millionfrom $438.4 million in fiscal 2003. The cost per ASM decreased 6.9% to $0.145 from $0.155.

 

The following table compares components of operating cost per ASM forthe 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 increased 1.7% to $133.5 million in fiscal 2004from $131.3 million in fiscal 2003. The increase is primarily the result of the new ALPA contract, whichincluded $2.7 million in retroactive pay, which was partially offset byproductivity improvement in maintenance and customer service.  Also contributing to the variance were significantincreases in health and dental insurance and workers’ compensation costs.

 

Aircraft fuel decreased 8.2% to $20.1 million in fiscal 2004 from$21.9 million in fiscal 2003.  Thedecrease is attributable primarily to a decrease of 6.6% in the number of Saabblock hours flown, favorable fuel burn rates and fuel credits received infiscal 2004.  Certain provisions of theAirlink Agreement with Northwest protect Mesaba from changes in fuel prices.  Mesaba’s actual cost of fuel, including taxesand pumping fees, was 83.5 cents per gallon in both fiscal 2004 and 2003.  Northwest is responsible for fuel for Mesaba’sRJ85 operations.

 

Aircraft maintenance costs, excluding wages and benefits, decreased5.5% to $77.4 million in fiscal 2004 from $81.9 million in fiscal2003.  Aircraft maintenance costsdecreased primarily due to a 2.3% reduction in flight hours flown in fiscal2004 and a reduction in aircraft damage expenses.

 

27

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Aircraft rents decreased 3.7% to $103.0 million in fiscal 2004from $107.0 million in fiscal 2003. This decrease is attributable to fewer aircraft in serviceyear-over-year.

 

Landing fees decreased 5.3% to $6.8 million in fiscal 2004 from$7.2 million in fiscal 2003.  Thedecrease is primarily attributable to the reduction of Saab departures duringfiscal 2004.  Northwest is responsiblefor landing fees for Mesaba’s RJ85 operations.

 

Insurance and taxes decreased 43.2% to $8.4 million in fiscal 2004from $14.7 million in fiscal 2003. The decrease is primarily attributable to a reduction in the ratescharged for hull and passenger liability insurance and favorable property taxcredits.

 

Depreciation and amortization decreased 12.2% to $16.3 million infiscal 2004 compared to $18.6 million in fiscal 2003.  The lower level of depreciation andamortization resulted from reduced capital spending over the last severalyears.  The reduction is because lesscapital expenditure is required to maintain the fleet versus investing in theinfrastructure to grow the fleet in previous fiscal years.

 

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

 

*Consolidated Operating Income*

Operating income totaled $4.0 million in fiscal 2004, as comparedto $8.3 million in fiscal 2003.  TheCompany’s operating margin decreased to 0.9% in fiscal 2004 from 1.8% in fiscal2003.

 

*Consolidated Nonoperating Income*

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

 

*Consolidated Provision for Income Taxes*

The provision for income taxes decreased 10.7% to $4.0 million infiscal 2004 from $4.4 million in fiscal 2003.  The Company’s blended effective tax rate was46.8% in fiscal 2004 as compared to 51.7% in fiscal 2003.  The effective tax rate decreased primarilydue to deducting certain meals and entertainment expenses that were previouslytreated as nondeductible expenses.

 

**Liquidity and Capital Resources**

 

Cash, cash equivalents and short and long-term investments increased 6.9%to $170.9 million at March 31, 2005 from $159.9 million at March 31,2004.  The Company’s working capital increasedto $105.3 million with a current ratio of 2.3 at March 31, 2005compared to $97.8 million and 2.3 at March 31, 2004.

 

Investments consist principally of municipal securities and areclassified as available-for-sale. Available-for-sale investments are reported at fair value withunrealized gains and losses excluded from operations and reported as a separatecomponent of shareholders’ equity, except for other-than-temporary impairments,which are reported as a charge to current operations and result in a new costbasis for the investment.  The Companyclassifies investments with an original maturity of more than 90 days thatmature within one year as short-term and greater than one year as long-term.

 

28

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The Company reclassified its investments in auction rate securitiesfrom cash and cash equivalents to short or long-term investments in theaccompanying consolidated balance sheets depending upon the original maturitydate.  These auction rate securities, whichhave interest rate resets every 90 days or less but maturity dates of greaterthan 90 days, were previously included in cash and cash equivalents in theamount of $1.9 million at March 31, 2004. The auction rate securities are classified as available-for-sale and arecarried at cost, which approximates market value.  The reclassifications had no impact on theCompany’s previously reported results of operations.

 

Approximately 83.0% of the Company’s accounts receivable balance as of March 31,2005 was due from Northwest and this receivable is not collateralized.  The Company’s business is sensitive to eventsand risks affecting Northwest.  Northwesthas incurred significant losses in the last several years, including a net lossof $862 million in 2004 and a net loss of $450 million in the first quarter of2005.  If Northwest continues to incuroperating losses, it may be unable to fulfill its financial obligations,including payments due to Mesaba under the Airlink Agreement and Jet Agreement.  Loss of Mesaba’s affiliation with Northwestor Northwest’s failure to make timely payment of amounts owed to Mesaba or tootherwise materially perform under the Airlink or Jet Agreement for any reasonwould have a material adverse effect on the Company’s results of operations andfinancial condition.

 

Cash and cash equivalents increased 10.1% to $58.0 million at March 31,2005 from $52.7 million at March 31, 2004.  A summary of cash flow activity is as follows:

 

*Operating Activities*

Net cash provided by operations in fiscal 2005 was $22.1 million.  The primary sources of cash were fromoperations, which generated $7.4 million of net income and $15.6 million of non-cashitems, primarily depreciation and amortization. The changes to current operating items resulted in a use of cash of $0.9million.

 

*Investing Activities*

Net cash used by investing activities in fiscal 2005 was $17.9million.  Cash that was generated fromoperations was the funding source for investing activities.  The primary uses were net purchases of shortand long-term investments of $8.2 million and purchases of property, plant andequipment of $9.7 million.

 

*Financing Activities*

Net cash provided by financing activities in fiscal 2005 was $1.1million.  This was primary due to therepayment of noncurrent liabilities of $0.1 million, which was offset by theproceeds from the issuance of common stock related to the exercise of options of$1.2 million.

 

*Outlook*

The Company has historically relied on cash and cash equivalents,investments and internally generated funds to support its working capitalrequirements.  Absent adverse factorsoutside the control of the Company, management believes current liquidity andfunds from operations will provide adequate resources for meeting currentoperations, investment in the new CRJ fleet and non-aircraft capital needs forfiscal 2006.

 

**Contractual Obligations, Commitments and Off-Balance Sheet Arrangements**

 

As of March 31, 2005, Mesaba’s fleet consisted of 98 aircraftcovered under operating leases with remaining terms of up to 11 years andaggregate monthly lease payments of approximately $8.5 million.  Mesaba leases its Saab aircraft, eitherdirectly from aircraft leasing companies, through Pinnacle under operatingleases with initial terms of up to seven years or through subleases withNorthwest under

 

29

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operating leases with initial terms of up to 17 years.  Mesaba leases its RJ85 aircraft fromNorthwest under operating leases with initial terms of up to ten years.  Mesaba believes that its revenues from theAirlink and Jet Agreements will continue to be sufficient to fund its aircraftlease obligations.  If the AirlinkAgreement terminates, then the Saab aircraft leases will simultaneously terminate.  Likewise, if the Jet Agreement terminates,then the RJ85 aircraft leases will simultaneously terminate.

 

As of March 31, 2005, Big Sky’s fleet consisted of 13 aircraftcovered under operating leases with remaining terms of seven months to60 months and aggregate monthly lease payments of approximately$0.2 million.  Big Sky leases eightof its aircraft from leasing companies and five from Air Midwest, a subsidiaryof Mesa Air Group.  Big Sky will lease anadditional five Beechcraft 1900Ds in fiscal 2006.  Five of the Metro leases allow Big Sky toreturn the aircraft to the lessor upon the occurrence of certain events andcontain purchase options.  Funding of themonthly minimum lease payments is dependent on continued passenger boardings,Big Sky’s operations and, potentially, funding from the Company.

 

The Company’s airline fleet operating leases do not contain anyguaranteed lease residual provisions for which there would be a potentialcontingency at the termination of the lease period.  The following table summarizes the Company’scommitments to make long-term debt and lease payments for the years ending March 31,in thousands:

 
| ** **            | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Operating leases: (1) |       |     |       |     |       |     |       |     |       |     |       |           |       |      |       |
| Aircraft (2)          |       | $        | 104,184    |     | $          | 104,283  |       | $        | 40,733     |     | $          | 37,473         |       | $         | 36,222     |   | $ | 174,946 |   | $ | 497,841 |   |
| Non-aircraft          |       | 9,156    |       | 8,996    |       | 7,898    |       | 6,841    |       | 6,697    |       | 52,764         |       | 92,352    |       |
| Long-term debt (3)    |       | 105      |       | 110      |       | 22       |       |     |       |     |       |           |       | 237       |       |
| Capital lease (4)     |       | 33       |       | 34       |       | 37       |       | 40       |       | 43       |       | 269            |       | 456       |       |
| Total                 |       | $        | 113,478    |     | $          | 113,423  |       | $        | 48,690     |     | $          | 44,354         |       | $         | 42,962     |   | $ | 227,979 |   | $ | 590,886 |   |

 

----

(1)           Amounts representminimum lease payments with initial or remaining terms of more than oneyear.  See Note 6 to the consolidatedfinancial statements for additional discussion of operating leases.

 

(2)           Amounts are based onlease terms, which have early terminations and extensions.  The Saab leases have initial terms of up to17 years with early terminations.  The RJ85leases have initial terms of up to ten years with extensions.

 

(3)           Amounts representprincipal payments only.  See Note 7to the consolidated financial statements for additional discussion of long-termdebt and future maturities.

 

(4)           See Note 6 tothe consolidated financial statements for additional discussion of the capitallease.

 

An off-balance sheet arrangement is any transaction, agreement or othercontractual arrangement involving an unconsolidated entity under which acompany has (i) guarantees; (ii) a retained or a contingent interestin transferred assets; (iii) an obligation under derivative instrumentsclassified as equity; or (iv) any obligation arising out of a materialvariable interest in an unconsolidated entity that provides financing,liquidity, market risk or credit risk support to the Company, or that engagesin leasing, hedging, or research and development arrangements with the Company.  The Company has no arrangements of the typesdescribed that may have a material current or future effect on the Company’sfinancial condition, liquidity or results of operations.

 

30

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**Critical Accounting Policies and Estimates**

 

The preparation of the Company’s consolidated financial statements inconformity with generally accepted accounting principles requires the use of estimates,judgments and assumptions that affect the reported amounts of assets andliabilities as of the date of the consolidated financial statements, revenuesand expenses during the reporting period and related disclosures of contingentassets and liabilities in the consolidated financial statements and theaccompanying notes.  The SEC has defineda company’s most critical accounting policies as the ones that are mostimportant to the portrayal of the company’s financial condition and results,and which require the company to make its most difficult and subjectivejudgments, often as a result of the need to make estimates of matters that areinherently uncertain.  Based on thisdefinition, the Company has identified its critical accounting policies to includethose discussed in the following paragraphs. The Company also has other key accounting policies, which involve theuse of estimates, judgments and assumptions.  See Note 2 “Summary of SignificantAccounting Policies” in the Notes to the Consolidated Financial Statements foradditional discussion of these items.

 

Management believes that its estimates and assumptions are reasonable,based on information presently available; however, changes in these estimates,judgments and assumptions will occur as a result of future events, andaccordingly actual results could differ from amounts estimated.

 

*Aircraft Property and Equipment*—Estimatedlives are used to record depreciation on aircraft property and equipment.  Aircraft utilization, Airlink and Jet Agreementcontractual lives, technology and changes in business strategy may affect theeconomic lives used to record depreciation by Mesaba or Big Sky.  The foregoing may also affect depreciationrates, impairment or both.  Management ofMesaba and Big Sky regularly review the estimated useful lives and salvagevalues for aircraft property and equipment.

 

*Excess and Obsolete Inventories*—Estimatedrecovery percentages are used to record obsolescence reserves for partsinventories.  Aircraft utilization, partsavailability 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*—Estimatedmaintenance costs and anticipated aircraft activity are used to determinemaintenance reserves.  Changes inmaintenance contracts, parts and labor costs and aircraft activity may affectthe maintenance 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.

 

*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 and itsair carrier certificate and goodwill.  Therecoverability of goodwill ($2.5 million) and other intangible assets ($2.8million) is evaluated annually, at a minimum, or on an interim basis if eventsor circumstances indicate a possible inability to realize the carryingamounts.  The evaluation includes futurecash flow projections, strategic modeling and other managementassumptions.  During the fourth quarterof fiscal 2005, the Company completed its annual impairment test of goodwilland other intangible assets and determined that no impairment charge wasnecessary.

 

*Income Taxes*—TheCompany’s effective tax rate was 32.9%, 46.8% and 51.7% in fiscal 2005, 2004and 2003.  The Company’s effective taxrate is based on expected income, statutory tax rates and tax planningopportunities available in the various jurisdictions in which the Companyoperates.  In the event that there is asignificant unusual or one-time item recognized, or expected to be recognized,in the Company’s operating results, the tax attributable to that item would beseparately calculated and recorded at the same

 

31

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time as the unusual or one-time item. Significant judgment is required in determining the Company’seffective tax rate and in evaluating its tax positions.  The Company establishes reserves when,despite its belief that the tax return positions are fully supportable, certainpositions are likely to be challenged and may not succeed.  The Company adjusts these reserves in lightof changing facts and circumstances, such as the closing of a tax audit.  The effective tax rate includes the impact ofreserve provisions and changes to reserves that are considered appropriate, aswell as related interest.  This rate isthen applied to the Company’s quarterly operating results.

 

*Workers Compensation Insurance*—TheCompany estimates the ultimate cost of an on-the-job injury at the time of theinjury to determine its workers compensation insurance reserves.  The Company uses the services of itsinsurance carrier and outside broker to assist in determining the reservelevels.  Injury severity, cost of careand the insurance contract affect the ultimate cost and ultimate reservesrecorded.  Management of Mesaba and BigSky regularly review workers compensation activity with outside consultants forany changes in the workers compensation reserve.

 

*Health and Dental Insurance*—TheCompany estimates the amount of incurred but not reported health and dentalclaims to determine its health and dental insurance reserves.  The Company uses the services of its insurancecarrier and outside broker to assist in determining the reserve levels.  Historical claims experience, claims severityand cost of care affect the ultimate cost and ultimate reserves recorded.  Management of Mesaba and Big Sky regularlyreview health and dental claims activity with outside consultants for anychanges in the health and dental insurance reserve.

 

*Property Taxes*—Estimatedproperty tax values and assessments are used to record property tax reservesfor the various jurisdictions in which the Company operates.  Aircraft and parts values, aircraft flightactivity, ground equipment values and the location of personnel may affect theultimate property tax obligation. Management of Mesaba and Big Sky periodically review the above items forany changes in the property tax reserves.

 

**New Accounting Pronouncements**

 

InDecember 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which requiresall public companies accounting for share-based payment transactions to accountfor these types of transactions using a fair-value-based method.  SFAS No. 123(R) eliminates theability to account for share-based compensation transactions using APB Opinion No. 25.  SFAS No. 123(R) also requires thetax benefits associated with these shared based payments to be classified asfinancing activities in the statement of cash flows rather than operatingactivities as is currently permitted. SFAS No. 123(R) becomes effective as of the beginningof the first****fiscal year beginning after June 15,2005.

 

TheCompany expects to adopt SFAS No. 123(R) on April 1, 2006 using themodified-prospective method.  Under thistransition method, the Company will record compensation expense for all awardsit grants on a straight-line basis over the vesting period.  In addition, the Company will recordcompensation expense for the unvested portion of previously granted awards thatremain outstanding at the date of the adoption. The Company has not completed its assessment of the impact of thestandard on its financial condition or results of operations.

 

**Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company’s principal market risks are the availability and price ofjet fuel and changes in interest rates.

 

32

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The Company believes its arrangements for fuel, primarily withNorthwest, assure an adequate supply of fuel for current and future operationsfor both Mesaba and Big Sky, provided that Northwest does not experience asupply shortage.  As a part of theAirlink Agreement, Northwest bears the economic risk of fuel price fluctuationsfor Mesaba’s fuel requirements.  As partof the Jet Agreement, Northwest provides all fuel at its expense to supportMesaba’s RJ85 operations.  Big Sky issubject to fluctuations in fuel prices, but currently fuel expense is not amaterial cost in relation to the Company’s total operating expenses.  The Company expects that its results ofoperations will not be materially affected by fuel price volatility.

 

The Company does not hold long-term interest-sensitive assets andtherefore is not exposed to significant interest rate fluctuations for itsassets.  The Company does not purchase orhold any derivative financial instruments for trading or speculative purposes.

 

**Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

The consolidated financial statements of the Company and the relatedreports of management and the Company’s independent registered publicaccounting firm are included in this Annual Report on Form 10-K on the pages indicatedbelow:

 
| Report of Management on Internal Control  Over Financial Reporting                                                                            |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Reports of Independent Registered Public  Accounting Firm on Consolidated Financial Statements and Internal Control  Over Financial Reporting |   |
| Consolidated Balance Sheets as of March 31, 2005 and 2004 (As  Restated)                                                                 |   |
| Consolidated Statements of Operations for  the Years Ended March 31, 2005, 2004 (As Restated) and 2003 (As  Restated)                    |   |
| Consolidated Statements of Shareholders’  Equity for the Years Ended March 31, 2005, 2004 (As Restated) and 2003  (As Restated)     |   |
| Consolidated Statements of Cash Flows for  the Years Ended March 31, 2005, 2004 (As Restated) and 2003 (As  Restated)                    |   |
| Notes to Consolidated Financial Statements                                                                                                    |   |

 

33

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**MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

The Company’s management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectivenessto future periods are subject to risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate. Under the supervision and with the participation of management,including the Chief Executive Officer and Chief Financial Officer, anevaluation was conducted of the effectiveness of internal control overfinancial reporting based on criteria established in *InternalControl — Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Management concluded that the Company maintained effective internalcontrol over financial reporting as of March 31, 2005.  Management’s assessment of the effectivenessof internal control over financial reporting as of March 31, 2005 has beenaudited by Deloitte & Touche LLP, an independent registered publicaccounting firm, as stated in their report that is included herein.

 

34

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THECONSOLIDATED FINANCIAL STATEMENTS**

 

To the Board of Directors and Shareholders ofMAIR Holdings, Inc.**Minneapolis, Minnesota

 

We have audited the accompanying consolidatedbalance sheets of MAIR Holdings, Inc. and subsidiaries (the “Company”) asof March 31, 2005 and 2004, and the related consolidated statements of operations,shareholders’ equity, and cash flows for each of the three years in the periodended March 31, 2005.  Thesefinancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financialstatements present fairly, in all material respects, the financial position ofthe Company as of March 31, 2005 and 2004, and the results of its operationsand its cash flows for each of the three years in the period ended March 31,2005 in conformity with accounting principles generally accepted in the UnitedStates of America.

 

We have also audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the effectiveness of theCompany’s internal control over financial reporting as of March 31, 2005,based on the criteria established in *Internal Control —Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated June 13,2005, expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting.

 

DELOITTE & TOUCHE LLP

 

Minneapolis, Minnesota

June 13, 2005

 

35

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNALCONTROL OVER FINANCIAL REPORTING**

 

To the Board of Directors and Shareholders ofMAIR Holdings, Inc.**Minneapolis, Minnesota

 

We have audited management’s assessment,included in the accompanying Management’s Report on Internal Control OverFinancial Reporting, that MAIR Holdings, Inc. and subsidiaries (the “Company”)maintained effective internal control over financial reporting as of March 31,2005, based on criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.  The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting.  Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects.  Our auditincluded obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we considered necessary in the circumstances.  Webelieve that our audit provides a reasonable basis for our opinions.

 

A company’s internal control over financialreporting is a process designed by, or under the supervision of, the company’sprincipal executive and principal financial officers, or persons performingsimilar functions, and effected by the company’s board of directors,management, and other personnel to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.  A company’s internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations ofinternal control over financial reporting, including the possibility ofcollusion or improper management override of controls, material misstatementsdue to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internalcontrol over financial reporting to future periods are subject to the risk thatthe controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, management’s assessment thatthe Company maintained effective internal control over financial reporting asof March 31, 2005, is fairly stated, in all material respects, based onthe criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.  Also in our opinion, theCompany maintained, in all

 

36

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material respects, effective internal controlover financial reporting as of March 31, 2005, based on the criteriaestablished in *Internal Control—IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission.

 

We have also audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets as of March 31, 2005 and 2004, and the relatedconsolidated statements of operations, shareholders’ equity, and cash flows foreach of the three years in the period ended March 31, 2005 of the Companyand our report dated June 13, 2005 expressed an unqualified opinion onthose financial statements.

 

DELOITTE &TOUCHE LLP

 

Minneapolis, MinnesotaJune 13, 2005

 

37

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**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**Consolidated Balance Sheets**

**As of March 31, 2005 and 2004**

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

 
| ** **                                                                                                           | ** ** | ** ** | ** ** | **As restated -** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                                                           | ** ** | ** ** | ** ** | **see Note 14**   | ** ** |
| ** **                                                                                                           | ** ** | **2005**   | ** ** | **2004**          | ** ** |
| ASSETS                                                                                                               |       |       |       |              |       |
| CURRENT ASSETS:                                                                                                      |       |       |       |              |       |
| Cash and cash equivalents                                                                                            |       | $          | 57,968     |              | $          | 52,661 |   |
| Short-term investments                                                                                               |       | 69,669     |       | 67,285            |       |
| Accounts receivable, net of reserves of  $601 and $926                                                               |       | 31,176     |       | 29,494            |       |
| Inventories, net                                                                                                     |       | 11,034     |       | 8,664             |       |
| Prepaid expenses and deposits                                                                                        |       | 5,808      |       | 5,381             |       |
| Deferred income taxes and other                                                                                      |       | 11,892     |       | 11,449            |       |
| Total current assets                                                                                                 |       | 187,547    |       | 174,934           |       |
| PROPERTY AND EQUIPMENT, net (Note 2)                                                                                 |       | 38,421     |       | 39,722            |       |
| NONCURRENT ASSETS:                                                                                                   |       |       |       |              |       |
| Long-term investments                                                                                                |       | 43,240     |       | 39,984            |       |
| Goodwill                                                                                                             |       | 2,503      |       | 2,503             |       |
| Other intangible assets, net                                                                                         |       | 2,819      |       | 3,224             |       |
| Other assets, net                                                                                                    |       | 6,424      |       | 8,440             |       |
|                                                                                                                 |       | $          | 280,954    |              | $          | 268,807 |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                           |       |       |       |              |       |
| CURRENT LIABILITIES:                                                                                                 |       |       |       |              |       |
| Accounts payable                                                                                                     |       | $          | 19,151     |              | $          | 17,008 |   |
| Accrued liabilities:                                                                                                 |       |       |       |              |       |
| Payroll                                                                                                              |       | 19,563     |       | 16,724            |       |
| Maintenance                                                                                                          |       | 20,281     |       | 23,738            |       |
| Deferred income                                                                                                      |       | 3,085      |       | 2,504             |       |
| Other current liabilities                                                                                            |       | 20,126     |       | 17,124            |       |
| Total current liabilities                                                                                            |       | 82,206     |       | 77,098            |       |
|                                                                                                                 |       |       |       |              |       |
| OTHER NONCURRENT LIABILITIES                                                                                         |       | 6,069      |       | 7,448             |       |
|                                                                                                                 |       |       |       |              |       |
| COMMITMENTS AND CONTINGENCIES (Notes 6, 7  and 12)                                                                   |       |       |       |              |       |
|                                                                                                                 |       |       |       |              |       |
| 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, 20,574,340 and 20,375,372 shares issued and outstanding |       | 206        |       | 204               |       |
| Paid-in capital                                                                                                      |       | 54,356     |       | 52,995            |       |
| Warrants                                                                                                             |       | 16,500     |       | 16,500            |       |
| Accumulated other comprehensive income  (loss)                                                                       |       | (254       | )          | 46                |       |
| Retained earnings                                                                                                    |       | 121,871    |       | 114,516           |       |
| Total shareholders’ equity                                                                                      |       | 192,679    |       | 184,261           |       |
|                                                                                                                 |       | $          | 280,954    |              | $          | 268,807 |   |

 

The accompanying notes are an integral part of these consolidated financialstatements.

 

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**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**Consolidated Statements of Operations**

**Years Ended March 31, 2005, 2004 and 2003**

**(in thousands, except per share information)**

 
| ** **                               | ** ** | ** ** | ** ** | **As restated-see Note 14** | ** ** |
|------------------------------------------|------------|------------|------------|-----------------------------|------------|
| ** **                               | ** ** | **2005**   | ** ** | **2004**                    | ** ** | **2003** | ** ** |
| OPERATING REVENUES:                      |       |       |       |                        |       |   |   |
| Passenger                                |       | $          | 413,855    |                        | $          | 417,300 |   | $ | 433,060 |   |
| Freight and other                        |       | 42,212     |       | 31,779                      |       | 23,820 |   |
| Total operating revenues                 |       | 456,067    |       | 449,079                     |       | 456,880 |   |
| OPERATING EXPENSES:                      |       |       |       |                        |       |   |   |
| Wages and benefits                       |       | 148,652    |       | 143,124                     |       | 134,508 |   |
| Aircraft fuel                            |       | 19,377     |       | 22,399                      |       | 22,987 |   |
| Aircraft maintenance                     |       | 84,276     |       | 80,700                      |       | 82,984 |   |
| Aircraft rents                           |       | 102,478    |       | 105,460                     |       | 107,844 |   |
| Landing fees                             |       | 6,759      |       | 7,108                       |       | 7,298 |   |
| Insurance and taxes                      |       | 7,383      |       | 9,347                       |       | 15,060 |   |
| Depreciation and amortization            |       | 14,634     |       | 17,144                      |       | 18,838 |   |
| Administrative and other                 |       | 63,869     |       | 59,771                      |       | 59,030 |   |
| Total operating expenses                 |       | 447,428    |       | 445,053                     |       | 448,549 |   |
| Operating income                         |       | 8,639      |       | 4,026                       |       | 8,331 |   |
| NONOPERATING INCOME (EXPENSE):           |       |       |       |                        |       |   |   |
| Interest income and other                |       | 2,381      |       | 1,888                       |       | 2,809 |   |
| Government grant income                  |       | —     |       | 2,646                       |       | 491 |   |
| Writedown of investment                  |       | —     |       | —                      |       | (2,994 | ) |
| Interest expense                         |       | (61        | )          | (101                        | )          | (47 | ) |
| Other nonoperating income, net           |       | 2,320      |       | 4,433                       |       | 259 |   |
| Income before provision for income taxes |       | 10,959     |       | 8,459                       |       | 8,590 |   |
|                                     |       |       |       |                        |       |   |   |
| PROVISION FOR INCOME TAXES               |       | 3,604      |       | 3,963                       |       | 4,439 |   |
| NET INCOME                               |       | $          | 7,355      |                        | $          | 4,496 |   | $ | 4,151 |   |
|                                     |       |       |       |                        |       |   |   |
| NET INCOME PER SHARE:                    |       |       |       |                        |       |   |   |
| Earnings per common share - basic        |       | $          | 0.36       |                        | $          | 0.22 |   | $ | 0.20 |   |
| Earnings per common share - diluted      |       | $          | 0.35       |                        | $          | 0.22 |   | $ | 0.20 |   |
|                                     |       |       |       |                        |       |   |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING:     |       |       |       |                        |       |   |   |
| Basic                                    |       | 20,505     |       | 20,334                      |       | 20,308 |   |
| Diluted                                  |       | 21,050     |       | 20,562                      |       | 20,357 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**Consolidated Statements of Shareholders’Equity**

**Years Ended March 31, 2005, 2004 and 2003**

**(in thousands, except share 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, 2002 (as previously reported)            |       | 20,298,141        |       | $           | 203        |         | $          | 50,508            |       | 4,151,922    |       | $                      | 16,500     |         | $          | (21        | )          | $                 | 106,182    |   | $ | 173,372 |   |   |   |
| Prior period  adjustment (see Note 14)                            |       |              |       |        |       |         |       |              |       |         |       |                   |       | (313         | )          | (313       | )          |              |       |
| Balance,  March 31, 2002 (as restated-see Note 14)           |       | 20,298,141        |       | 203         |       | 50,508       |       | 4,151,922         |       | 16,500       |       | (21                    | )          | 105,869      |       | 173,059    |       |              |       |
|                                                              |       |              |       |        |       |         |       |              |       |         |       |                   |       |         |       |       |       |              |       |
| Net income (as  restated-see Note 14)                             |       |              |       |        |       |         |       |              |       |         |       |                   |       | 4,151        |       | 4,151      |       | $                 | 4,151      |   |
| Exercise of stock  options                                        |       | 22,500            |       |        |       | 107          |       |              |       |         |       |                   |       |         |       | 107        |       |              |       |
| Unrealized gain  on investments, net of tax                       |       |              |       |        |       |         |       |              |       |         |       | 137                    |       |         |       | 137        |       | 137               |       |
| Balance,  March 31, 2003 (as restated-see Note 14)           |       | 20,320,641        |       | 203         |       | 50,615       |       | 4,151,922         |       | 16,500       |       | 116                    |       | 110,020      |       | 177,454    |       | 4,288             |       |
|                                                              |       |              |       |        |       |         |       |              |       |         |       |                   |       |         |       |       |       |              |       |
| Net income (as  restated-see Note 14)                             |       |              |       |        |       |         |       |              |       |         |       |                   |       | 4,496        |       | 4,496      |       | 4,496             |       |
| 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 (as restated-see Note 14)           |       | 20,375,372        |       | 204         |       | 52,995       |       | 4,151,922         |       | 16,500       |       | 46                     |       | 114,516      |       | 184,261    |       | 4,426             |       |
|                                                              |       |              |       |        |       |         |       |              |       |         |       |                   |       |         |       |       |       |              |       |
| Net income                                                        |       |              |       |        |       |         |       |              |       |         |       |                   |       | 7,355        |       | 7,355      |       | 7,355             |       |
| Exercise of stock  options                                        |       | 198,968           |       | 2           |       | 1,201        |       |              |       |         |       |                   |       |         |       | 1,203      |       |              |       |
| Compensation  expense for stock options under variable accounting |       |              |       |        |       | (13          | )          |              |       |         |       |                   |       |         |       | (13        | )          |              |       |
| Tax benefit on  stock options exercised                           |       |              |       |        |       | 173          |       |              |       |         |       |                   |       |         |       | 173        |       |              |       |
| Unrealized loss  on investments, net of tax                       |       |              |       |        |       |         |       |              |       |         |       | (300                   | )          |         |       | (300       | )          | (300              | )          |
| Balance,  March 31, 2005                                     |       | 20,574,340        |       | $           | 206        |         | $          | 54,356            |       | 4,151,922    |       | $                      | 16,500     |         | $          | (254       | )          | $                 | 121,871    |   | $ | 192,679 |   | $ | 7,055 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**Consolidated Statements of Cash Flows**

**Years Ended March 31, 2005, 2004 and 2003**

**(in thousands)**

 
| ** **                                                                         | ** ** | ** ** | ** ** | **As restated-see Note 14** | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **2005**   | ** ** | **2004**                    | ** ** | **2003** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |       |       |                        |       |   |   |
| Net income                                                                         |       | $          | 7,355      |                        | $          | 4,496 |   | $ | 4,151 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |       |       |                        |       |   |   |
| Depreciation and amortization                                                      |       | 14,634     |       | 17,144                      |       | 18,838 |   |
| Amortization of deferred credits                                                   |       | (1,399     | )          | (1,795                      | )          | (2,430 | ) |
| Stock-based compensation                                                           |       | (13        | )          | 1,987                       |       | — |   |
| Writedown of investment                                                            |       | —     |       | —                      |       | 2,994 |   |
| Deferred income taxes                                                              |       | 426        |       | (1,408                      | )          | (2,152 | ) |
| Amortization of investments                                                        |       | 2,081      |       | 1,719                       |       | — |   |
| Changes in current operating items, net of  acquisition:                           |       |       |       |                        |       |   |   |
| Accounts receivable                                                                |       | (1,682     | )          | 11,188                      |       | 2,371 |   |
| Inventories                                                                        |       | (2,370     | )          | (205                        | )          | 225 |   |
| Prepaid expenses and other                                                         |       | (2,366     | )          | (456                        | )          | (2,725 | ) |
| Accounts payable and other                                                         |       | 5,450      |       | 13,250                      |       | 14,017 |   |
| Net cash provided by operating activities                                          |       | 22,116     |       | 45,920                      |       | 35,289 |   |
|                                                                               |       |       |       |                        |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |       |       |                        |       |   |   |
| Acquisition of Big Sky, net of cash  acquired                                      |       | —     |       | —                      |       | (3,225 | ) |
| Purchases of investments                                                           |       | (105,702   | )          | (95,775                     | )          | (106,516 | ) |
| Sales of investments                                                               |       | 97,482     |       | 59,381                      |       | 104,875 |   |
| Purchases of property and equipment, net of  acquisition                           |       | (9,659     | )          | (10,717                     | )          | (7,399 | ) |
| Net cash used in investing activities                                              |       | (17,879    | )          | (47,111                     | )          | (12,265 | ) |
|                                                                               |       |       |       |                        |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                               |       |       |       |                        |       |   |   |
| Repayment of other noncurrent liabilities                                          |       | (133       | )          | (244                        | )          | (641 | ) |
| Proceeds from issuance of common stock                                             |       | 1,203      |       | 356                         |       | 107 |   |
| Net cash provided by (used in) financing  activities                               |       | 1,070      |       | 112                         |       | (534 | ) |
|                                                                               |       |       |       |                        |       |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                              |       | 5,307      |       | (1,079                      | )          | 22,490 |   |
| CASH AND CASH EQUIVALENTS:                                                         |       |       |       |                        |       |   |   |
| Beginning of year                                                                  |       | 52,661     |       | 53,740                      |       | 31,250 |   |
|                                                                               |       |       |       |                        |       |   |   |
| End of year                                                                        |       | $          | 57,968     |                        | $          | 52,661 |   | $ | 53,740 |   |
|                                                                               |       |       |       |                        |       |   |   |
| SUPPLEMENTARY CASH FLOW INFORMATION:                                               |       |       |       |                        |       |   |   |
| Cash paid during the year for:                                                     |       |       |       |                        |       |   |   |
| Interest                                                                           |       | $          | 61         |                        | $          | 83 |   | $ | 47 |   |
| Income taxes                                                                       |       | 5,073      |       | 2,850                       |       | 10,252 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

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

 

*Corporate Organization*

The consolidated financial statements include the accounts of MAIRHoldings, Inc. (formerly known as Mesaba Holdings, Inc.) (“Holdings”)and its wholly owned subsidiaries, Mesaba Aviation, Inc., a regional air carrierbased in Minneapolis, Minnesota (“Mesaba”) and Big Sky Transportation Co., aregional air carrier based in Billings, Montana (“Big Sky”).  Holdings, Mesaba and Big Sky are referred toherein collectively as the “Company.” Holdings acquired Big Sky on December 1, 2002 (seeNote 3).  All significantintercompany balances and transactions have been eliminated in consolidation.

 

*Business*

 

Mesaba

Mesaba operates as a regional air carrier providing scheduled passengerservice as “Mesaba Airlines/Northwest Airlink” and “Mesaba Airlines/NorthwestJet Airlink” under two separate agreements with Northwest Airlines, Inc.,a wholly owned indirect subsidiary of Northwest Airlines Corporation (“Northwest”),to 109 cities in the United States and Canada from Northwest’s hub airportslocated in Minneapolis/St. Paul, Detroit and Memphis.

 

Under the Airline Services Agreement (the “Airlink Agreement”), Mesabaoperates Saab 340 jet-prop aircraft (“Saab”) for Northwest.  This agreement provides for exclusive rightsto designated service areas and extends through June 30, 2007.  Under the Airlink Agreement, Mesabarecognizes revenue for each completed “available seat mile” (the number ofseats available for passengers multiplied by the number of miles those seatsare flown).  Additionally, under theAirlink Agreement, Mesaba purchases fuel, ground handling at spoke stations andother services from Northwest.  TheCompany, on a net basis, paid to Northwest $21.9 million, $19.7 million and $17.2million in fiscal 2005, 2004 and 2003, for these services.  Either Northwest or Mesaba may terminate theAirlink Agreement on 365 days notice or it may be terminated immediatelyby either party for certain provisions provided for in the Airlink Agreement.

 

Under the Regional Jet Services Agreement (the “Jet Agreement”), Mesabaoperates Avro RJ85 regional jets (“RJ85”) for Northwest.  The Jet Agreement extends through April 25,2007.  Under the Jet Agreement, Mesabarecognizes revenue for each “block hour” flown (the elapsed time betweenaircraft departing and arriving at a gate). Under the Jet Agreement, Northwest provides fuel and airport andpassenger related services at Northwest’s expense.  The Jet Agreement may be terminatedimmediately by Mesaba or Northwest in accordance with certain provisionsprovided for in the Jet Agreement.

 

Under the agreements, all Mesaba flights appear in Northwest’stimetables and Mesaba receives ticketing and certain check-in, baggage andfreight-handling services from Northwest at certain airports.  Mesaba also benefits from its relationshipwith Northwest through advertising and marketing programs.  The Airlink Agreement and Jet Agreementprovide for certain incentives from Northwest to Mesaba based on achievement ofcertain operational or financial goals. Approximately 83% and 75% of the March 31, 2005 and 2004 accountsreceivable balances in the accompanying consolidated balance sheets are duefrom Northwest and this receivable is not collateralized.  Approximately 92.7%, 92.9% and 96.5% of theCompany’s total operating revenue recognized in fiscal 2005, 2004 and 2003 wasfrom Northwest.  Accounts payable owed toNorthwest, primarily for ground handling was $0.4 million and $0.7 million asof March 31, 2005 and 2004.  Thereare other significant related party transactions and balances between Northwestand Mesaba disclosed throughout the Notes to the Consolidated FinancialStatements.

 

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For the years ended December 31, 2004, 2003 and 2002, Northwest’snet income (loss) was $(862) million, $248 million and $(798) million.  As of March 31, 2005, Northwest had astockholders’ equity deficit of $3.5 billion and negative working capital of $1.2billion.  If Northwest continues to incuroperating losses, it may be unable to fulfill its financial obligations,including payments due to Mesaba under the Airlink Agreement and JetAgreement.  Additionally, the Company’sbusiness could be adversely affected by events such as a reorganization byNorthwest through Chapter 11 bankruptcy proceedings, an inability by Northwestto reduce labor expenses and other costs, continued and unsustainable operatinglosses at Northwest, changes in Northwest’s business plan or model, employeestrike or job actions, significant curtailment of service (and thus curtailmentof the utilization of the Company’s aircraft), continued volatility of fuelcosts and terrorist events.  Loss of theCompany’s business relationship with Northwest or Northwest’s failure to maketimely payment of amounts owed to the Company would have a material adverseeffect on the Company’s operations, financial position and cash flows.

 

Big Sky

Big Sky operates as a regional air carrier based in Billings, Montana,primarily providing scheduled passenger, airfreight, express package andcharter services.  Big Sky providesscheduled air service to 18 communities in Montana, Colorado, Idaho, NorthDakota, Washington and Wyoming via its Billings hub.  Big Sky operates daily scheduled flightsproviding interline and online connecting services and local marketservices.  Big Sky also has code-sharing agreementswith Alaska/Horizon Airlines, America West Airlines and Northwest, where itsservices are marketed jointly with those air carriers for connecting flights.

 

Big Sky participates in the Essential Air Service (“EAS”) program withthe U.S. Department of Transportation (“DOT”). 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 its passenger traffic.  The DOT pays EAS subsidies for each departurein a covered market.  Big Sky recognizedrevenue from EAS subsidies of $7.4 million, $7.1 million and $2.2 million infiscal 2005, 2004 and 2003.

 

Big Sky purchased fuel from Northwest for $1.7 million, $1.9 million and$0 in fiscal 2005, 2004 and 2003.

 

**2.****              Summary ofSignificant Accounting Policies:**

 

The accounting policies of the Company conform to accounting principlesgenerally accepted in the United States of America.  Significant policies are described below.

 

*Use of Estimates*

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of financial statements and the reported amounts of revenues andexpenses during the reporting period. The most significant use of estimates relates to accrued maintenanceexpenses, aircraft property and equipment lives, inventory obsolescencereserves, valuation of goodwill and other intangible assets and accounting forincome taxes.  Actual results coulddiffer from those estimates.

 

*Cash and Cash Equivalents*

Cash equivalents consist primarily of U.S. government and municipal securitiesand interest-bearing deposits with original maturities of less than90 days and are stated at cost, which approximates fair value.

 

43

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*Investments*

Investments consist principally of municipal securities and areclassified as available-for-sale. Available-for-sale investments are reported at fair value withunrealized gains and losses excluded from operations and reported as a separatecomponent of shareholders’ equity, except for other-than-temporary impairments,which are reported as a charge to current operations and result in a new costbasis for the investment.

 

*Inventories*

Inventories are stated at the lower of cost or market and consist ofexpendable aircraft service parts, fuel and glycol (de-icing agent).  Mesaba uses the first-in, first-out inventorymethod and Big Sky uses average cost.  Expendableparts are charged to maintenance as used. A provision is recorded to reduce inventories to the estimated netrealizable value, if required.  As of March 31,2005 and 2004, this reserve balance was $2.3 million and $2.2 million.

 

*Property and Equipment*

Property and equipment are stated at cost.  Additions, improvements or major renewals arecapitalized, while expenditures that do not enhance or extend the asset’suseful life are charged to operating expense as incurred.  Depreciation is computed on a straight-linebasis for financial reporting purposes over estimated useful lives of 3 to 40 yearsor the remaining terms of the Airlink and Jet Agreements.  Leasehold improvements are amortized over thelife of the lease or the remaining estimated useful life of the asset.  Depreciation and amortization expense onproperty and equipment totaled $12.6 million, $15.1 million and $17.1 millionin fiscal 2005, 2004 and 2003.

 

Propertyand equipment and related accumulated depreciation and amortization were asfollows as of March 31, in thousands:

 
| ** **                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Flight equipment                                 |       | $        | 93,645     |     | $          | 84,490 |   |
| Ground services equipment                        |       | 14,268   |       | 14,091   |       |
| Office and general equipment                     |       | 13,189   |       | 12,615   |       |
| Buildings and leasehold improvements             |       | 8,321    |       | 8,415    |       |
| Maintenance shop equipment                       |       | 4,152    |       | 3,866    |       |
| Other                                            |       | 318      |       | 315      |       |
|                                             |       | 133,893  |       | 123,792  |       |
| Less: Accumulated depreciation and  amortization |       | (95,472  | )          | (84,070  | )          |
| Net property and equipment                       |       | $        | 38,421     |     | $          | 39,722 |   |

 

*Airframe and Engine Maintenance*

Routine airframe and engine maintenance is charged to expense asincurred.  Overhaul costs covered bythird-party maintenance agreements are accrued based on the hours flown andestimates of aircraft activity. 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.

 

44

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*Other Assets*

Warrants — In connection with the Jet Agreement, as amended, Mesabapaid Northwest contract rights fees in fiscal 1997 and 1999 in the form ofwarrants to purchase the Company’s common stock.  Contract rights totaled $11.7 million andrelated accumulated amortization totaled $10.0 million and $8.9 million as of March 31,2005 and 2004.  The contract rights arebeing amortized over the life of the warrants. The warrants issued in connection with the Jet Agreement consist of thefollowing:

 
| **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  |       |                |       |              |              |                 |              |

 

In connection with the Airlink Agreement, Mesaba paid Northwestcontract rights fees in the form of warrants to purchase 1,320,000 shares ofthe Company’s common stock at $9.42 per share, which were fully exercisableupon issuance and expire July 1, 2007. Contract rights totaled $4.8 million and related accumulatedamortization totaled $3.7 million and $3.2 million as of March 31, 2005and 2004.  Contract rights are amortizedon a straight-line basis to the expiration date of the Airlink Agreement.

 

*Other Current Liabilities*

Othercurrent liabilities were as follows as of March 31, in thousands:

 
| ** **             | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Other accrued expenses |       | $        | 15,936     |     | $          | 10,470 |   |
| Taxes payable          |       | 1,952    |       | 4,141    |       |
| Property taxes         |       | 2,238    |       | 2,513    |       |
|                   |       | $        | 20,126     |     | $          | 17,124 |   |

 

*Other Noncurrent Liabilities*

In order to assist the Company in integrating new aircraft into itsfleets, certain manufacturers provided Mesaba and Big Sky with spare parts or deferrals.  The Company has deferred these amounts andamortizes them over the terms of the agreements as a reduction of aircraft rentexpense.  Amortization of these creditsresulted in a reduction of rent expense of $1.2 million, $1.5 million and $2.0 millionduring fiscal 2005, 2004 and 2003.

 

Othernoncurrent liabilities were as follows as of March 31, in thousands:

 
| ** **                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Manufacturers credits            |       | $        | 3,653      |     | $          | 4,859 |   |
| Deferred rent                    |       | 1,861    |       | 1,899    |       |
| Long-term debt and capital lease |       | 555      |       | 690      |       |
|                             |       | $        | 6,069      |     | $          | 7,448 |   |

 

45

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*Stock Options*

The Company accounts for its stock-based compensation plans using theintrinsic value method prescribed under Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations.  The Company has issued stock options todirectors and key employees.  As such,the Company records compensation expense for stock options and awards only ifthe exercise price is less than the fair market value of the stock on themeasurement date.

 

For purposes of the pro forma disclosures of compensation expense underStatement of Financial Accounting Standards (“SFAS”) No. 123, “Accountingfor Stock-Based Compensation,” the Company uses the Black-Scholes option modelto estimate the fair value of options not subject to variable planaccounting.  The weighted average fairvalue of options granted during fiscal 2005 and 2003 were $3.41 and $3.60.  Weighted average assumptions used in thevaluation are summarized below:

 
| ** **                               | ** ** | **2005**   | ** ** | **2004 *** | ** ** | **2003**     | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| Risk free interest rate (%)              |       | 1.8 to 3.2 |       | N/A        |       | 3.3 to 4.4   |       |
| Expected life of option grants (years)   |       | 4.0 to 4.6 |       | N/A        |       | 6.0          |       |
| Expected volatility of option grants (%) |       | 46.7       |       | N/A        |       | 42.0 to 66.4 |       |

 

----

* There were no options granted in fiscal2004.

 

The following summarizes the pro forma effects assuming compensationfor such awards had been recorded based upon the estimated fair value for theyears ended March 31, in thousands, except per share information:

 
| ** **                                                                                                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income as reported                                                                                                                  |       | $        | 7,355      |     | $          | 4,496    |       | $ | 4,151 |   |
| Add: Stock-based employee compensation  expense (reduction) included in reported net income, net of related tax  effects                |       | (8       | )          | 1,061    |       | —   |       |
| Deduct: Stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | (1,187   | )          | (1,234   | )          | (2,757   | )          |
| Pro forma net income                                                                                                                    |       | $        | 6,160      |     | $          | 4,323    |       | $ | 1,394 |   |
|                                                                                                                                    |       |     |       |     |       |     |       |
| Earnings per share - basic:                                                                                                             |       |     |       |     |       |     |       |
| As reported                                                                                                                             |       | $        | 0.36       |     | $          | 0.22     |       | $ | 0.20 |   |
| Pro forma                                                                                                                               |       | $        | 0.30       |     | $          | 0.21     |       | $ | 0.07 |   |
| Earnings per share - diluted:                                                                                                           |       |     |       |     |       |     |       |
| As reported                                                                                                                             |       | $        | 0.35       |     | $          | 0.22     |       | $ | 0.20 |   |
| Pro forma                                                                                                                               |       | $        | 0.29       |     | $          | 0.21     |       | $ | 0.07 |   |

 

*Revenue Recognition*

Mesaba recognizes revenue for each completed available seat mile underthe Airlink Agreement and for each block hour flown under the JetAgreement.  Passenger, freight and otherrevenues are recognized as income when the respective services are rendered.

 

46

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In addition, the Airlink and Jet Agreements with Northwest includesemi-annual incentive payments based on achievement of certain operationaltargets, such as completion factor and on time performance.  Such incentives are earned and due based uponperformance over a given period (generally six months).  In periods prior to the finalization of suchoperational incentives, revenue is recognized when the targets have beenexceeded.  The amount recognized islimited to a ratable portion of the incentive payment as if the contract periodwere to terminate at the end of the interim period.  Such incentives totaled $3.1 million, $4.6 millionand $5.2 million in fiscal 2005, 2004 and 2003 and are included in passengerrevenues in the accompanying consolidated statements of operations.

 

Big Sky recognizes revenue when transportation has been provided,including scheduled passenger, airfreight, express package and charterservices.

 

*Income Taxes*

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

 

*Fair Value of Financial Instruments*

The Company’s financial instruments consist primarily of cash, cashequivalents, accounts receivable, accounts payable, accrued liabilities andother noncurrent liabilities of which carrying amounts do not significantlydiffer from fair value due to their either short-term nature or variableinterest rates.  See Note 5 foradditional information regarding the Company’s investments.

 

*Reclassifications*

Certain balances in the prior years’ consolidated financial statementshave been reclassified to conform to the current year presentation.  These reclassifications had no impact on netincome or shareholders’ equity as previously reported.

 

*New Accounting Pronouncements*

InDecember 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which requiresall public companies accounting for share-based payment transactions to accountfor these types of transactions using a fair-value-based method.  SFAS No. 123(R) eliminates theability to account for share-based compensation transactions using APB Opinion No. 25.  SFAS No. 123(R) also requires thetax benefits associated with these shared based payments to be classified asfinancing activities in the statement of cash flows rather than operatingactivities as is currently permitted. SFAS No. 123(R) becomes effective as of the beginningof the first****fiscal year beginning after June 15,2005.

 

TheCompany expects to adopt SFAS No. 123(R) on April 1, 2006 using themodified-prospective method.  Under thistransition method, the Company will record compensation expense for all awardsit grants on a straight-line basis over the vesting period.  In addition, the Company will recordcompensation expense for the unvested portion of previously granted awards thatremain outstanding at the date of the adoption. The Company has not completed its assessment of the impact of thestandard on its financial condition or results of operations.

 

**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.

 

47

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TheCompany funded the acquisition with cash from operations and accounted for theacquisition using the purchase method of accounting.  Accordingly, the purchase price was allocatedto the assets acquired and liabilities assumed based on their estimated fairmarket values at the date of acquisition. Assets and liabilities are recorded based upon their fair value as ofthe date of the acquisition.  The excessof the purchase price over the fair value of the net assets acquired wasallocated 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 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:**

 

Theexcess of the Big Sky purchase price over the fair market value of the net assetsacquired was allocated to certain identifiable intangible assets, including BigSky’s pilot labor contract and an air carrier certificate, and togoodwill.  The intangible assets were initiallyrecorded based upon preliminary estimates. A net reduction of $0.7 million was recorded to goodwill after the purchaseprice allocation was finalized in fiscal 2004. Goodwill and other intangible assets and related accumulatedamortization were as follows for the years ended March 31, in thousands:

 
| ** **                          | ** ** | **2005**   | ** ** | **2004**         | ** ** |
|-------------------------------------|------------|------------|------------|------------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Indefinite-lived intangible assets: |       |       |       |             |       |   |   |   |   |   |   |   |   |
| Air carrier certificate             |       | $          | 925        |             |       |   | $ | 925 |   | $ | 925 |   |   |   | $ | 925 |   |
| Goodwill                            |       | 2,503      |       |             |       | 2,503 |   | 2,503 |   |   |   | 2,503 |   |
| Amortizable intangible asset:       |       |       |       |             |       |   |   |   |   |   |   |   |   |
| Pilot labor contract                |       | 2,840      |       | (946             | )          | 1,894 |   | 2,840 |   | (541 | ) | 2,299 |   |
|                                |       | $          | 6,268      |             | $          | (946 | ) | $ | 5,322 |   | $ | 6,268 |   | $ | (541 | ) | $ | 5,727 |   |
|                                     |            |            |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amortizable intangible asset is being amortized over its estimatedperiod of benefit.  Based on the currentamount of intangible assets subject to amortization, estimated amortizationexpense for each of the succeeding five fiscal years will be $0.4 million peryear.  The recoverability of goodwill andthe intangible assets is evaluated annually, at a minimum, or on an interimbasis if events or circumstances indicate a possible inability to realize thecarrying amounts.  During the fourthquarter of fiscal 2005, the Company completed its annual impairment test ofgoodwill and other intangible assets and determined that no impairment chargewas necessary.

 

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

 

Investments consist principally of municipal securities and areclassified as available-for-sale.  Fairvalue of investments are determined based on quoted market prices.  The Company classifies investments with anoriginal maturity of more than 90 days that mature within one year as short-termand greater than one year as long-term.

 

The Company reclassified its investments in auction rate securities fromcash and cash equivalents to short or long-term investments in the accompanyingconsolidated balance sheets depending upon the original maturity date.  These auction rate securities, which haveinterest rate resets every 90 days or less

 

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but maturity dates of greater than 90 days, were previously included incash and cash equivalents in the amounts of $1.9 million and $8.4 million at March 31,2004 and 2003.  The auction ratesecurities are classified as available-for-sale and are carried at cost, whichapproximates market value.  Thereclassifications had no impact on the Company’s previously reported results ofoperations.

 

In addition, the accompanying consolidated statements of cash flowshave been revised to reflect the purchases and sales of these investments aspart of cash flows from investing activities.  In fiscal 2004, the reclassification resultedin an increase in purchases of investments of $4.6 million and an increase in salesof investments of $11.1 million, resulting in an increase of net cash used ininvesting activities of $6.5 million in the consolidated statements of cashflows.  In fiscal 2003, thereclassification resulted in an increase in purchases of investments of $14.1million and an increase in sales of investments of $5.7 million, resulting in adecrease in net cash used in investing activities of $8.4 million in theconsolidated statements of cash flows.

 

Amortized cost, gross unrealized gains and losses and fair value of shortand long-term investments classified as securities available for sale were asfollows for the years ended March 31, in thousands:

 
| ** **              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Amortized cost          |       | $        | 113,346    |     | $          | 107,180 |   |
| Gross unrealized gains  |       | 3        |       | 127      |       |
| Gross unrealized losses |       | (440     | )          | (38      | )          |
| Fair value              |       | $        | 112,909    |     | $          | 107,269 |   |

 

In fiscal 2005 and 2004, the gross realized gains and losses wereinsignificant as the Company generally held the investments until maturity.  In fiscal 2003, the Company recorded realizedgains of $0.6 million and realized losses of $0.1 million.  In fiscal 2003, the Company recorded another-than-temporary impairment loss of $3.0 million on its investment ina WorldCom bond.  In March 2003, theCompany sold its investment in WorldCom for $0.8 million, which resultedin a gain of approximately $0.4 million, which was recorded in interestincome and other in the consolidated statements of operations.

 

**6.****     Leases:**

 

*Aircraft Leases*

Mesaba’s airline fleet consisted of the following aircraft held underoperating leases as of March 31, 2005:

 
| ** **           | ** ** | **Number of** | ** ** | **Seating**  | ** ** |
|----------------------|------------|---------------|------------|--------------|------------|
| **Type of Aircraft** | ** ** | **Aircraft**  | ** ** | **Capacity** | ** ** |
| Avro RJ85            |       | 35            |       | 69           |       |
| Saab 340             |       | 63            |       | 30/33/34     |       |

 

Under the terms of the Jet Agreement, Mesaba leases or subleases itsRJ85 aircraft from Northwest under operating leases with initial terms of up toten years.  The RJ85 lease and subleaseagreements 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

 

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Mesaba to return aircraft to Northwest upon the occurrence of certainevents, including termination or breach of the Jet Agreement.

 

Mesaba leases its Saab 340 aircraft either directly from aircraftleasing companies, through leases with Pinnacle Airlines Corp. (“Pinnacle”)under operating leases with initial terms of up to seven years or throughsubleases with Northwest under operating leases with initial terms of up to 17 years.  The lease and sublease agreements with theaircraft leasing companies, Pinnacle and Northwest contain certain requirementsof Mesaba regarding the payment of taxes on the aircraft, acceptable use of theaircraft, the level of insurance to be maintained, the maintenance proceduresto be performed and the condition of the aircraft upon their return.  The Airlink Agreement allows Mesaba to returnaircraft to Northwest upon the occurrence of certain events includingtermination or breach of the Airlink Agreement.

 

Big Sky’s airline fleet consisted of the following aircraft held underoperating leases as of March 31, 2005:

 
| **Type of Aircraft** | ** ** | **Number of  Aircraft** | ** ** | **Seating  Capacity** | ** ** | **Approximate  Single Flight  Range (miles)** | ** ** | **Approximate  Average Cruising  Speed (MPH)** | ** ** |
|----------------------|------------|-------------------------|------------|-----------------------|------------|-----------------------------------------------|------------|------------------------------------------------|------------|
| Operating:           |       |                    |       |                  |       |                                          |       |                                           |       |
| Metro III / 23       |       | 4                       |       | 19                    |       | 750                                           |       | 300                                            |       |
| Beechcraft 1900D     |       | 5                       |       | 19                    |       | 750                                           |       | 325                                            |       |
| Non Operating:       |       |                    |       |                  |       |                                          |       |                                           |       |
| Metro III            |       | 4                       |       |                  |       |                                          |       |                                           |       |

 

Big Sky’s fleet consisted of 13 aircraft covered under operating leaseswith remaining terms of seven months to 60 months and aggregate monthlylease payments of approximately $0.2 million.  Big Sky leases eight of its aircraft fromleasing companies and five from Air Midwest, a subsidiary of Mesa AirGroup.  Big Sky will lease an additionalfive Beechcraft 1900Ds in fiscal 2006.  Fiveof the Metro leases allow Big Sky to return the aircraft to the lessor upon theoccurrence of certain events and contain purchase options.

 

The Company’s airline fleet operating leases do not contain anyguaranteed lease residual provisions for which there would be a potentialcontingency at the termination of the lease period.  As of March 31, 2005, the aircraftoperating leases for Mesaba and Big Sky require future minimum rental paymentsas follows, in thousands:

 
| **Year Ending March 31** | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
| 2006                          |       | $          | 104,184    |   |
| 2007                          |       | 104,283    |       |
| 2008                          |       | 40,733     |       |
| 2009                          |       | 37,473     |       |
| 2010                          |       | 36,222     |       |
| Thereafter                    |       | 174,946    |       |
|                          |       | $          | 497,841    |   |

 

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Rent expense for aircraft operating leases totaled $102.5 million, $105.5million and $107.8 million in fiscal 2005, 2004 and 2003 (including $59.5million, $66.0 million and $69.1 million paid to Northwest in fiscal 2005, 2004and 2003).

 

*Non-Aircraft Leases*

The Company leases land, offices, hangar facilities, equipment andcertain terminal facilities under operating leases through 2019, which providefor approximate future minimum rental payments as follows as of March 31,2005, in thousands:

 
| **Year Ending March 31** | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
| 2006                          |       | $          | 9,156      |   |
| 2007                          |       | 8,996      |       |
| 2008                          |       | 7,898      |       |
| 2009                          |       | 6,841      |       |
| 2010                          |       | 6,697      |       |
| Thereafter                    |       | 52,764     |       |
|                          |       | $          | 92,352     |   |

 

Rent expense for non-aircraft operating leases totaled approximately$15.4 million, $16.2 million and $11.3 million in fiscal 2005, 2004 and 2003.

 

*Capital Lease*

Future minimum lease payments under the capital lease and the presentvalue of future minimum capital lease payments as of March 31, 2005 wereas follows, in thousands:

 
| **Year Ending March 31**           | ** ** | **Amount** | ** ** |
|-----------------------------------------|------------|------------|------------|
| 2006                                    |       | $          | 68         |   |
| 2007                                    |       | 68         |       |
| 2008                                    |       | 68         |       |
| 2009                                    |       | 68         |       |
| 2010                                    |       | 68         |       |
| Thereafter                              |       | 331        |       |
| Total minimum lease payments            |       | 671        |       |
| Less interest                           |       | (215       | )          |
| Present value of minimum lease payments |       | $          | 456        |   |

 

The carrying value of the facility under capital lease net ofaccumulated depreciation was $0.5 million at both March 31, 2005 and 2004.

 

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

 

Long-term debt is recorded in other noncurrent liabilities in theconsolidated balance sheet and consists of the following as of March 31, 2005,in thousands:

 
| Variable rate installment note (6.75% at  March 31, 2005) due May 2007 secured by substantially  all assets of Big Sky |   | $    | 47     |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|------|--------|--------|
| 7.5% installment note due May 2007  secured by substantially all assets of Big Sky                                          |   | 190  |   |
|                                                                                                                             |   | 237  |   |
| Capitalized lease obligation, at imputed  interest rate of 8.5%, secured by Big Sky leased assets                                |   | 456  |   |
|                                                                                                                             |   | 693  |   |
| Less current portion                                                                                                             |   | (138 | )      |
|                                                                                                                             |   | $    | 555    |   |

 

Long-term debt maturities were as follows as of March 31, 2005, inthousands:

 
| **Year Ending March 31** | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
| 2006                          |       | $          | 105        |   |
| 2007                          |       | 110        |       |
| 2008                          |       | 22         |       |
| 2009                          |       | —     |       |
| 2010                          |       | —     |       |
| Thereafter                    |       | —     |       |
|                          |       | $          | 237        |   |

 

*Other Guarantees*

 

Mesaba has letters of credit to guarantee certain obligations, whichtotaled $3.4 million and $1.6 million as of March 31, 2005 and 2004.  There were no amounts drawn on these lettersof credit during fiscal 2005 or 2004.  Ascollateral for these letters of credit, Mesaba had $3.6 million in cash held inan investment account as of both March 31, 2005 and 2004.  This amount is restricted and has beenclassified within “Long-term investments” in the accompanying consolidatedbalance sheets.

 

At the Cincinnati/Northern Kentucky Airport under a facilities leasethat covers approximately 126,000 square feet of hangar and maintenance space,Mesaba pays monthly rentals of approximately $92,000 until July 1, 2029 aspart of a special facilities bond financing provided by the Cincinnati/NorthernKentucky Airport Authority.  Pursuant tothe guaranty agreement, Holdings unconditionally guarantees full and promptpayment of the bonds.

 

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

 

The provision for income taxes is comprised of the following elementsfor the years ended March 31, in thousands:

 
| ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Current:   |       |     |       |     |       |     |       |
| Federal    |       | $        | 2,328      |     | $          | 4,786    |       | $ | 5,347 |   |
| State      |       | 850      |       | 585      |       | 1,244    |       |
| Deferred   |       | 426      |       | (1,408   | )          | (2,152   | )          |
|       |       | $        | 3,604      |     | $          | 3,963    |       | $ | 4,439 |   |

 

The actual income tax expense differs from the statutory tax expense asfollows for the years ended March 31, in thousands:

 
| ** **                                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Computed tax expense at federal statutory  rate of 35% |       | $        | 3,830      |     | $          | 3,065    |       | $ | 3,110 |   |
| Increase (decrease) in income taxes  resulting from:   |       |     |       |     |       |     |       |
| State taxes, net of federal tax benefit                |       | 553      |       | 380      |       | 822      |       |
| Non-deductible meals and entertainment  expenses       |       | 393      |       | 385      |       | 635      |       |
| IRS audit settlement                                   |       | (1,200   | )          |     |       |     |       |
| Other, net                                             |       | 28       |       | 133      |       | (128     | )          |
|                                                   |       | $        | 3,604      |     | $          | 3,963    |       | $ | 4,439 |   |

 

The following is a table of the significant components of the Company’sdeferred tax assets and liabilities as of March 31, in thousands:

 
| ** **                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                               |       |     |       |     |       |
| Maintenance                                        |       | $        | 7,413      |     | $          | 7,487 |   |
| Warrants                                           |       | 1,407    |       | 1,679    |       |
| Inventories                                        |       | 861      |       | 860      |       |
| Net operating loss (“NOL”) carryforwards |       | 1,280    |       | 1,459    |       |
| Other accruals                                     |       | 7,570    |       | 7,615    |       |
| Gross deferred tax assets                          |       | 18,531   |       | 19,100   |       |
| Deferred tax liabilities:                          |       |     |       |     |       |
| Property and equipment                             |       | 2,780    |       | 2,907    |       |
| Other accruals                                     |       | 1,625    |       | 1,867    |       |
| Gross deferred tax liabilities                     |       | 4,405    |       | 4,774    |       |
| Net deferred tax assets                            |       | $        | 14,126     |     | $          | 14,326 |   |

 

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

 
| ** ** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------|------------|----------|------------|----------|------------|
| Current    |       | $        | 11,709     |     | $          | 11,146 |   |
| Long term  |       | 2,417    |       | 3,180    |       |
|       |       | $        | 14,126     |     | $          | 14,326 |   |

 

Deferred income taxes reflect the net tax effects of temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes.  At March 31, 2005, the Company’sdeferred tax assets included $3.7 million of Big Sky NOL carryforwards thatwill expire through 2022.  Section 382of the Internal Revenue Code restricts the annual utilization of certain NOLsincurred prior to a change in ownership. However, such limitation is not expected to impair the realization ofthese NOLs.  For financial reportingpurposes, the Company believes it is more likely than not that the NOLs andother deferred tax assets will be realized based on the Company’s projectedfuture taxable income and the timing of the expiring NOLs.

 

**9.****     Shareholders’Equity:**

 

*Capital Stock*

The Company’s authorized capital stock consists of 60,000,000 shares ofcommon stock, par value $0.01 per share, and 1,000,000 shares of undesignatedpreferred stock, having no specified par value. As of March 31, 2005, there were 20,574,340 shares of common stockissued and outstanding.  No shares ofpreferred stock have been issued.

 

Holders of common stock are entitled to one vote per share on anymatter presented to shareholders for approval. The common stock has no special voting rights or dividendpreferences.  Holders of common stock arenot allowed cumulative voting and do not possess any preemptive rights toacquire any new or additional shares of stock of the Company.  Dividends are paid if and when declared bythe Company’s board of directors.  In theevent of the liquidation of the Company, holders of common stock would beentitled to a pro rata distribution of any proceeds remaining after payment to allof the Company’s creditors.

 

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

 

*Stock Option Plans*

The Company has approved stock option plans for key employees,directors, consultants and advisors to the Company.  Options have been granted and are presentlyoutstanding under the Company’s 1994 Stock Option Plan, 1996 Director StockOption Plan and 2000 Stock Incentive Plan. The 2000 Stock Incentive Plan has a provision that automaticallyincreases the authorized shares available for grant on September 1 of eachyear by the lesser of 300,000 or 1% of the then outstanding common shares.  Under the plans, the compensation committeeof the board of directors grants the options with vesting and the exerciseperiod being determined at the time of the award.  The purchase price of the stock fornon-qualified and incentive stock options is determined at the time of the awardand is generally equal to the fair market value at the time of the award.

 

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

 
| ** **                     | ** ** | **Options  Outstanding** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Options  Exercisable** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|--------------------------------|------------|--------------------------|------------|--------------------------------------|------------|--------------------------|------------|--------------------------------------|------------|
| 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                                 |       |
| Granted                        |       | 330,000                  |       | 8.28                                 |       |                     |       |                                 |       |
| Exercised                      |       | (198,968                 | )          | 6.04                                 |       |                     |       |                                 |       |
| Canceled                       |       | (17,000                  | )          | 23.00                                |       |                     |       |                                 |       |
| Balance at March 31, 2005 |       | 1,898,551                |       | 7.07                                 |       | 1,272,426                |       | 6.85                                 |       |
|                                |            |                          |            |                                      |            |                          |            |                                      |            |  |  |

 

Options outstanding as of March 31, 2005:

 
| ** **          | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **          | ** ** | ** **              | ** ** | **Average Remaining**   | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| **Range of**        | ** ** | **Number**              | ** ** | **Contract Life**       | ** ** | **Average** | ** ** | **Number** | ** ** | **Average** | ** ** |
| **Exercise Prices** | ** ** | **Of Shares**           | ** ** | **(in years)**          | ** ** | **Exercise Price** | ** ** | **Of Shares** | ** ** | **Exercise Price** | ** ** |
| $5.97               |       | 804,782                 |       | 4.1                     |       | $ | 5.97 |   | 674,782 |   | $ | 5.97 |   |
| $6.00 -  $9.94      |       | 1,047,769               |       | 6.8                     |       | 7.67 |   | 551,644 |   | 7.46 |   |
| $10.56 -  $13.81    |       | 46,000                  |       | 1.1                     |       | 12.59 |   | 46,000 |   | 12.59 |   |
| $5.97 -  $13.81     |       | 1,898,551               |       | 5.5                     |       | 7.07 |   | 1,272,426 |   | 6.85 |   |
|                     |            |                         |            |                         |            |  |  |  |  |  |  |  |  |

 

As of March 31, 2005, there were 800,251 shares available forgrant under the Company’s 2000 Stock Incentive Plan.

 

In December 2002, the Company repriced stock options to purchase745,000 shares of the Company’s common stock with exercise prices ranging from$9.05 to $18.00 to an exercise price of $5.97, which represented the fairmarket value on the date of the repricing. In accordance with FASB Interpretation No. 44, “Accounting forCertain Transactions Involving Stock Compensation,” the Company has adoptedvariable plan accounting for these options from the date of the repricing.  In fiscal 2005, the Company had an immaterialreduction to compensation expense related to the repriced options.  The Company recorded compensationexpense of $2.0 million in fiscal 2004 as a result of the repricing.  No compensation expense was recorded in fiscal2003 since the options’ new exercise price exceeded the fair market value ofthe stock as of March 31, 2003.

 

55

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**10.****  EarningsPer Share:**

 

Basic earnings per common share is computed by dividing net income bythe weighted average number of shares of common stock outstanding during theyear.  Diluted earnings per share iscomputed by dividing net income by the sum of the weighted average number ofshares of common stock outstanding plus all additional common stock that wouldhave been outstanding if potentially dilutive common shares related to stockoptions and warrants had been exercised. Stock options and warrants with an exercise price exceeding the fairmarket value of the Company’s common stock at year-end are consideredantidilutive and are excluded from the calculation.  The following table reconciles the number ofshares utilized in the earnings per share calculations for the years ended March 31,in thousands, except per share data:

 
| ** **                                                                                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income                                                                                |       | $        | 7,355      |     | $          | 4,496    |       | $ | 4,151 |   |
| For earnings per common share - basic:                                                    |       |     |       |     |       |     |       |
| Weighted average number of issued shares  outstanding                                     |       | 20,505   |       | 20,334   |       | 20,308   |       |
| Effect of dilutive securities:                                                            |       |     |       |     |       |     |       |
| Computed shares outstanding under stock  option plans utilizing the treasury stock method |       | 388      |       | 226      |       | 49       |       |
| Computed shares outstanding under warrants  issued utilizing the treasury stock method    |       | 157      |       | 2        |       | —   |       |
| For earnings per common share - diluted:                                                  |       |     |       |     |       |     |       |
| Weighted average common and potentially  dilutive common shares outstanding               |       | 21,050   |       | 20,562   |       | 20,357   |       |
| Earnings per share – basic                                                           |       | $        | 0.36       |     | $          | 0.22     |       | $ | 0.20 |   |
| Earnings per share – diluted                                                         |       | $        | 0.35       |     | $          | 0.22     |       | $ | 0.20 |   |
|                                                                                      |       |     |       |     |       |     |       |
| Antidilutive options and warrants                                                         |       | 3,505    |       | 3,522    |       | 5,179    |       |

 

**11.****  SegmentInformation:**

 

The Company follows the provisions of SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information.”  SFAS No. 131 establishes annual andinterim reporting standards for an enterprise’s business segments and relateddisclosures about its products, services, geographic areas and major customers.  The method for determining what informationto report is based upon the way management organizes the operating segmentswithin the Company for making operating decisions and assessing financialperformance.

 

Prior to the acquisition of Big Sky on December 1, 2002, theCompany had one reportable segment: Mesaba. After the acquisition of Big Sky, the Company has determined that it hastwo reportable segments: Mesaba and Big Sky. The accounting policies of the segments are the same as those describedin the summary of significant accounting policies in Note 2.

 

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Operating segment information for Mesaba, Big Sky (from the date ofacquisition) and Holdings were as follows, in thousands:

 
| ** **                        | ** ** | ** ** | ** ** | ** **  | ** ** | **Holdings and** | ** ** | ** **       | ** ** |
|-----------------------------------|------------|------------|------------|-------------|------------|------------------|------------|------------------|------------|
| ** **                        | ** ** | **Mesaba** | ** ** | **Big Sky** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Year Ended March 31, 2005:   |       |       |       |        |       |             |       |             |       |
| Operating revenues                |       | $          | 440,990    |        | $          | 15,077           |       | $                | —     |   | $ | 456,067 |   |
| Depreciation and amortization     |       | 13,844     |       | 774         |       | 16               |       | 14,634           |       |
| Interest expense                  |       | —     |       | 278         |       | (217             | )          | 61               |       |
| Income (loss) before income taxes |       | 14,715     |       | (5,182      | )          | 1,426            |       | 10,959           |       |
| Capital expenditures              |       | 9,390      |       | 264         |       | 5                |       | 9,659            |       |
| Total assets at end of year       |       | 120,877    |       | 11,308      |       | 148,769          |       | 280,954          |       |
| 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 |       | 12,639     |       | (3,664      | )          | (516             | )          | 8,459            |       |
| Capital expenditures              |       | 10,661     |       | 25          |       | 31               |       | 10,717           |       |
| Total assets at end of year       |       | 126,758    |       | 10,190      |       | 131,859          |       | 268,807          |       |
| 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 |       | 13,124     |       | (1,905      | )          | (2,629           | )          | 8,590            |       |
| Capital expenditures              |       | 8,298      |       | (899        | )          | —           |       | 7,399            |       |
|                                   |            |            |            |             |            |                  |            |                  |            |  |  |  |  |

 

**12.****  Commitmentsand Contingencies:**

 

*Workforce*

Approximately 45.6% of Mesaba’s workforce are members of unionsrepresenting pilots, mechanics, dispatchers and flight attendants.  The collective bargaining agreements for thepilots, mechanics, dispatchers and flight attendants either became or willbecome amendable January 2009, August 2003, May 2005 and April 2006,respectively.

 

Approximately 45.0% of Big Sky’s workforce are members of unionsrepresenting pilots, mechanics and dispatchers. The collective bargaining agreements for the pilots, mechanics anddispatchers become amendable December 2009, August 2010 and December 2009,respectively.

 

The Railway Labor Act, which governs labor relations for unionsrepresenting airline employees, contains detailed provisions that must beexhausted before work stoppage can occur once a collective bargainingagreement becomes amendable.

 

*Benefit Plan*

Mesaba maintains a 401(k) benefit plan for eligible employees of Holdingsand Mesaba whereby Holdings or Mesaba will match 25% to 125% of employeecontributions to the plan, up to 10% of each employee’s eligible earnings,depending on the employee’s length of service. Holdings’ and Mesaba’s expense related to the plan totaled $3.9 million,$2.0 million and $1.7 million in fiscal 2005, 2004 and 2003.

 

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Big Sky maintains a 401(k) benefit plan covering substantially all ofits employees whereby Big Sky will match 30% of employee contributions to theplan, up to 5% of each employee’s eligible earnings.  Big Sky’s contribution to the plan was notsignificant in fiscal 2005, 2004 or 2003.

 

*Stock Appreciation Rights Plan*

During fiscal 2004, Mesaba approved a stock appreciation rights (“SAR”)plan for key employees and directors.  Theexercise price of each SAR is generally equal to the fair market value of theCompany’s common stock on the date of the award.  Cash is paid based on the difference betweenthe fair market value at the date of grant and the date the SAR is exercised.

 

During fiscal 2005, 365,000 SARs were issued at a weighted averageexercise price of $7.89 per SAR with four year vesting and expiration in tenyears.  During fiscal 2004, 715,000 SARswere issued at a weighted average exercise price of $9.81 per SAR with fouryear vesting and expiration in ten years. No SARs were exercised or cancelled in fiscal 2005 or 2004.  Compensation expense of $0.1 million wasrecognized in fiscal 2005 and none in fiscal 2004 since the SAR’s exerciseprice exceeded the fair market value of the stock.

 

*Regulatory Matters*

Mesaba and Big Sky are parties to ongoing Federal AviationAdministration proceedings arising in the ordinary course of business.  In the opinion of management, the resolutionof these matters will not have a material adverse effect on the Company’sconsolidated financial position, results of operations or cash flows.

 

*Litigation*

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

 

*Aircraft Leasing Lawsuit*

On October 4, 2002, Fairbrook Leasing, Inc.,Lambert Leasing, Inc. and Swedish Aircraft Holdings AB (“Saab Leasing”)filed a declaratory judgment action against Mesaba relating to 20 Saab 340A (“340A”)aircraft leased by Mesaba.  Saab Leasing sought a judicial declarationthat the terms of the leases applicable to each of the 340A aircraft aregoverned by a March 7, 1996 term sheet proposal rather than the parties’subsequent agreements and conduct.  In a December 8, 2003 order, theDistrict Court declared the term sheet proposal a binding preliminary agreementrequiring Mesaba to negotiate in good faith toward the execution of long-termagreements for each of the 340A aircraft.  Mesaba appealed the District Court’sruling.

 

On August 13, 2004, relying on theDistrict Court’s declaratory judgment ruling, Saab Leasing filed a separateaction in the District Court alleging approximately $35 million in damages forpast due and future aircraft lease obligations.  Mesaba denies theallegations in Saab Leasing’s complaint and contends that it has fulfilled andwill continue to fulfill its existing obligations.

 

On May 19, 2005, the U.S. Court of Appeals for the Eighth Circuitaffirmed the District Court’s declaratory judgment ruling.  Despite theEighth Circuit’s ruling, Mesaba, based on advice from its legal counsel,believes that it has defenses in the damages case that will limit Saab Leasing’sability to recover damages.  Nevertheless, there can be no assurance thatthe District Court in the damages case will agree with Mesaba’s analysis. Therefore, the ultimate outcome of this dispute cannot be predicted withcertainty.

 

58

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As of March 31, 2005, the Company did not establish an accrualwith regard to this litigation. Accordingly, an adverse outcome to this matter could have a materialimpact on the Company’s financial condition and results of operation.

 

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

 

In April 2003, Congress enacted the Emergency Wartime SupplementalAppropriations Act.  Among other items,the legislation included a $2.3 billion government grant to U.S. airlines.  In accordance with this Act, for the yearended March 31, 2004, Mesaba recognized $2.3 million as “other nonoperatingincome” and Big Sky recognized $0.3 million as “other nonoperating income” and$0.2 million as a reduction of “administrative and other expense” in theaccompanying consolidated statements of operations.

 

In September 2001, Congress enacted the Air Transportation Safetyand System Stabilization Act.  The legislationprovided cash grants to U.S. airlines to compensate for “direct and incrementallosses” incurred from September 11, 2001 through December 31, 2001.  Mesaba recognized a pre-tax grant of approximately$12.5 million as “other nonoperating income” in the accompanyingconsolidated statements of operations in fiscal 2003, in accordance with Departmentof Transportation and applicable authoritative accounting guidance.  Mesaba received 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.

 

**14.****  Restatement:**

 

Subsequentto the issuance of its consolidated financial statements for the year ended March 31,2004, the Company determined that it had incorrectly accounted for certainaircraft leases that contained reduced rent obligations over a portion of thelease term.  This resulted in anunderstatement of other assets, net, other noncurrent liabilities and aircraftrents and an overstatement of retained earnings, shareholders’ equity and netincome in prior periods.  Although theCompany does not believe that this error resulted in a material misstatement ofthe Company’s consolidated financial statements for any prior annual periods aspresented below, the effects of correcting the error as of December 31,2004 would have had a material effect on the Company’s results of operationsfor that period.  As a result, theaccompanying consolidated financial statements for the years ended March 31,2004 and 2003 have been restated from the amounts previously reported.

 

59

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Asummary of the significant effects of the restatement is as follows, inthousands, except per share information:

 
| ** **                               | ** ** | **2004**          | ** ** | **2003**     | ** ** |
|------------------------------------------|------------|-------------------|------------|--------------|------------|
| ** **                               | ** ** | **As Previously** | ** ** | **As**       | ** ** | **As Previously** | ** ** | **As** | ** ** |
| ** **                               | ** ** | **Reported**      | ** ** | **Restated** | ** ** | **Reported** | ** ** | **Restated** | ** ** |
| As of March 31:                     |       |              |       |         |       |   |   |   |   |
| Other assets, net                        |       | $                 | 7,994      |         | $          | 8,440 |   |   |   |   |   |
| Total assets                             |       | 267,320           |       | 268,807      |       |   |   |   |   |
| Other noncurrent liabilities             |       | 6,334             |       | 7,448        |       |   |   |   |   |
| Retained earnings                        |       | 115,184           |       | 114,516      |       |   |   |   |   |
| Total shareholders’ equity          |       | 184,929           |       | 184,261      |       |   |   |   |   |
| Year Ended March 31:                |       |              |       |         |       |   |   |   |   |
| Aircraft rents                           |       | 105,163           |       | 105,460      |       | 107,547 |   | 107,844 |   |
| Total operating expenses                 |       | 444,756           |       | 445,053      |       | 448,252 |   | 448,549 |   |
| Operating income                         |       | 4,323             |       | 4,026        |       | 8,628 |   | 8,331 |   |
| Income before provision for income taxes |       | 8,756             |       | 8,459        |       | 8,887 |   | 8,590 |   |
| Net income                               |       | 4,673             |       | 4,496        |       | 4,329 |   | 4,151 |   |
| Earnings per common share - basic        |       | 0.23              |       | 0.22         |       | 0.21 |   | 0.20 |   |
| Earnings per common share - diluted      |       | 0.23              |       | 0.22         |       | 0.21 |   | 0.20 |   |
|                                          |            |                   |            |              |            |  |  |  |  |  |  |

 

Therestatement also resulted in a decrease in retained earnings and shareholders’equity as of April 1, 2002 of $0.3 million.

 

**15.****  Valuationand Qualifying Account:**

 

The following is the activity within Company’s valuation and qualifyingaccount for fiscal 2005, 2004 and 2003, in thousands:

 
| ** **                       | ** ** | **Balances at** | ** ** | **Additions**   | ** ** | **Deductions** | ** ** | **Balances** | ** ** |
|----------------------------------|------------|-----------------|------------|-----------------|------------|----------------|------------|--------------|------------|
| ** **                       | ** ** | **Beginning**   | ** ** | **Charged**     | ** ** | **from**       | ** ** | **at End**   | ** ** |
| ** **                       | ** ** | **of Year**     | ** ** | **to Expenses** | ** ** | **Reserve**    | ** ** | **of Year**  | ** ** |
| Allowance for doubtful accounts: |       |            |       |            |       |           |       |         |       |
| Year Ended March 31, 2005   |       | $               | 926        |            | $          | 694            |       | $            | 1,019      |   | $ | 601 |   |
| Year Ended March 31, 2004   |       | 389             |       | 601             |       | 64             |       | 926          |       |
| Year Ended March 31, 2003   |       | 990             |       | —          |       | 601            |       | 389          |       |
|                                  |            |                 |            |                 |            |                |            |              |            |  |  |  |  |

 

60

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

 

The following is quarterly financial data for the fiscal year ended March 31,2005, in thousands, except per share data:

 
| ** **                                       | ** ** | **Quarters  Ended**     | ** ** | **Fiscal**                   | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **                                       | ** ** | **June 30,  2004** | ** ** | **September 30,  2004** | ** ** | **December 31,  2004** | ** ** | **March 31,  2005** | ** ** | **Year** | ** ** |
| ** **                                       | ** ** | **As  Previously**      | ** ** | **As**                       | ** ** | **As  Previously** | ** ** | **As** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Reported**            | ** ** | **Restated**                 | ** ** | **Reported** | ** ** | **Restated** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating  revenues                              |       | $                       | 109,699    |                         | $          | 109,699 |   | $ | 118,113 |   | $ | 118,113 |   | $ | 115,512 |   | $ | 112,743 |   | $ | 456,067 |   |
| Aircraft rents                                   |       | 25,032                  |       | 25,106                       |       | 25,722 |   | 25,796 |   | 25,814 |   | 25,762 |   | 102,478 |   |
| Total operating  expenses                        |       | 107,101                 |       | 107,175                      |       | 110,537 |   | 110,611 |   | 113,666 |   | 115,976 |   | 447,428 |   |
| Operating income  (loss)                         |       | 2,598                   |       | 2,524                        |       | 7,576 |   | 7,502 |   | 1,846 |   | (3,233 | ) | 8,639 |   |
| Income (loss)  before provision for income taxes |       | 2,965                   |       | 2,891                        |       | 8,108 |   | 8,034 |   | 1,156 |   | (877 | ) | 3,604 |   |
| Net income (loss)                                |       | 2,907                   |       | 2,863                        |       | 4,781 |   | 4,737 |   | 1,493 |   | (1,738 | ) | 7,355 |   |
| Earnings (loss)  per common share:               |       |                    |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                            |       | $                       | 0.14       |                         | $          | 0.14 |   | $ | 0.23 |   | $ | 0.23 |   | $ | 0.07 |   | $ | (0.08 | ) | $ | 0.36 |   |
| Diluted *                                        |       | $                       | 0.14       |                         | $          | 0.14 |   | $ | 0.23 |   | $ | 0.23 |   | $ | 0.07 |   | $ | (0.08 | ) | $ | 0.35 |   |
| Weighted average  common shares outstanding:     |       |                    |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                            |       | 20,452                  |       | 20,452                       |       | 20,471 |   | 20,471 |   | 20,524 |   | 20,574 |   | 20,505 |   |
| Diluted                                          |       | 20,976                  |       | 20,976                       |       | 20,947 |   | 20,947 |   | 21,123 |   | 20,574 |   | 21,050 |   |

 

----

*    The sum of the earnings (loss) per share for each of the individualquarters does not equal earnings per share for the fiscal year due to rounding.

 

The following is quarterly financial data for the fiscal year ended March 31,2004, in thousands except per share data:

 
| ** **                                       | ** ** | **Quarters  Ended**     | ** ** | ** **                   | ** ** | ** **                  | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **June 30,  2003** | ** ** | **September 30,  2003** | ** ** | **December 31,  2003** | ** ** | **March 31,  2004** | ** ** | **Fiscal  Year** | ** ** |
| ** **                                       | ** ** | **As  Previously**      | ** ** | **As**                       | ** ** | **As  Previously**          | ** ** | **As** | ** ** | **As  Previously** | ** ** | **As** | ** ** | **As  Previously** | ** ** | **As** | ** ** | **As  Previously** | ** ** | **As** | ** ** |
| ** **                                       | ** ** | **Reported**            | ** ** | **Restated**                 | ** ** | **Reported**                | ** ** | **Restated** | ** ** | **Reported** | ** ** | **Restated** | ** ** | **Reported** | ** ** | **Restated** | ** ** | **Reported** | ** ** | **Restated** | ** ** |
| Operating  revenues                              |       | $                       | 114,033    |                         | $          | 114,033                     |       | $ | 117,462 |   | $ | 117,462 |   | $ | 115,327 |   | $ | 115,327 |   | $ | 102,257 |   | $ | 102,257 |   | $ | 449,079 |   | $ | 449,079 |   |
| Aircraft rents                                   |       | 26,778                  |       | 26,852                       |       | 26,764                      |       | 26,838 |   | 26,517 |   | 26,591 |   | 25,104 |   | 25,179 |   | 105,163 |   | 105,460 |   |
| Total operating  expenses                        |       | 109,290                 |       | 109,364                      |       | 111,186                     |       | 111,260 |   | 114,654 |   | 114,728 |   | 109,626 |   | 109,701 |   | 444,756 |   | 445,053 |   |
| Operating income  (loss)                         |       | 4,743                   |       | 4,669                        |       | 6,276                       |       | 6,202 |   | 673 |   | 599 |   | (7,369) |   | (7,444) |   | 4,323 |   | 4,026 |   |
| Income (loss)  before provision for income taxes |       | 7,722                   |       | 7,648                        |       | 6,636                       |       | 6,562 |   | 1,159 |   | 1,085 |   | (6,761) |   | (6,836) |   | 8,756 |   | 8,459 |   |
| Net income (loss)                                |       | 3,506                   |       | 3,462                        |       | 3,934                       |       | 3,890 |   | 759 |   | 715 |   | (3,526) |   | (3,571) |   | 4,673 |   | 4,496 |   |
| Earnings (loss)  per common share:               |       |                    |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                            |       | $                       | 0.17       |                         | $          | 0.17                        |       | $ | 0.19 |   | $ | 0.19 |   | $ | 0.04 |   | $ | 0.04 |   | $ | (0.17) |   | $ | (0.18) |   | $ | 0.23 |   | $ | 0.22 |   |
| Diluted *                                        |       | $                       | 0.17       |                         | $          | 0.17                        |       | $ | 0.19 |   | $ | 0.19 |   | $ | 0.04 |   | $ | 0.03 |   | $ | (0.17) |   | $ | (0.18) |   | $ | 0.23 |   | $ | 0.22 |   |
| Weighted average  common shares outstanding:     |       |                    |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                            |       | 20,321                  |       | 20,321                       |       | 20,323                      |       | 20,323 |   | 20,333 |   | 20,333 |   | 20,360 |   | 20,360 |   | 20,334 |   | 20,334 |   |
| Diluted                                          |       | 20,322                  |       | 20,322                       |       | 20,540                      |       | 20,540 |   | 20,522 |   | 20,522 |   | 20,360 |   | 20,360 |   | 20,562 |   | 20,562 |   |

 

----

*    The sum of the earnings (loss) per share for each of the individualquarters does not equal earnings per share for the fiscal year due to rounding.

 

**17.****  SubsequentEvents:**

 

*Northwest Letter of Intent*

On April 20, 2005, Holdings and Mesaba executed a non-bindingletter of intent with Northwest to allow Mesaba to operate 15 Bombardier CRJ-200regional jets (“CRJ”) under the Northwest Airlink banner, with exclusive rightsto the next 20 CRJ-200 or CRJ-440 aircraft Northwest Airlines may order.  Mesaba expects to lease the aircraft fromNorthwest and expects the first aircraft to enter service before the end of2005.  Mesaba expects to enter into a new10-year omnibus airline services agreement with Northwest covering theoperation of the CRJs, Saabs and RJ85s that will replace the existing AirlinkAgreement and the Jet Agreement, which are set to expire in 2007.  As part of the letter of intent, Mesabaagreed to incur the costs necessary to bring the new CRJ fleet into service.

 

61

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Holdings and Mesaba are currently negotiating the definitive newomnibus airline services agreement with Northwest, which is subject to finalapproval by all parties.  Upon executionof the definitive agreement, Holdings expects to amend the currentlyoutstanding warrants held by Northwest to reduce the number of shares of theCompany’s common stock issuable upon exercise from 4,151,922 shares exercisableat prices from $7.25 to $21.25 per share to an aggregate of 4,112,500 shares exercisableat a price of $8.74 per share.  Thewarrants are expected to expire ten years from the date of the definitiveairline services agreement.  Sixtypercent of the shares are expected to become exercisable upon the delivery ofthe 15th CRJ aircraft to Mesaba, and an additional 4% of the shares areexpected to become exercisable with each subsequent delivery of the next tenCRJ aircraft.  Pursuant to the letter of intent,Holdings also agreed to enter into a registration rights agreement to registerthe shares of stock currently held by Northwest and the shares of stock thatwill be issuable to Northwest upon exercise of the warrants.

 

*Letter of Credit*

On April 22, 2005, Holdings obtained a $1.9 million letter ofcredit to guarantee certain obligations related to Big Sky’s Beechcraft 1900Daircraft.  As collateral for this letterof credit, Holdings obtained a $2.1 million U.S. Treasury note.

 

*Litigation Settlement*

On May 6, 2005, the Company executed a final settlement agreementwith an investment advisor who had, on the Company’s behalf, purchased debtsecurities issued by WorldCom in the principal amount of $3.2 million.  In March 2003, the debt securities weresold for approximately $0.8 million.  On May 9,2005, the Company received a settlement in the amount of $1.8 million incash.  The Company will recognize therecovery resulting from the settlement in the first quarter of fiscal 2006.

 

62

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**Item 9****. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE**

 

Not applicable.

 

**Item 9A****. CONTROLS AND PROCEDURES**

 

*Evaluation of Disclosure Controls Procedures*

As of March 31, 2005, the Company conducted an evaluation underthe supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer,regarding the effectiveness of the design and operation of the Company’sdisclosure controls and procedures pursuant to Rules 13a-15(b) ofthe Securities Exchange Act of 1934 (the “Exchange Act”).  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective as of the date of suchevaluation.

 

*Changes in Internal Controls*

While preparing its Form 10-Q for the period ended December 31,2004, the Company identified deficiencies in the Company’s internal controlover financial reporting that resulted in errors in accounting for aircraftleases that were corrected in the restated condensed consolidated financialstatements as disclosed in the Company’s Form 10-Q for the periodended December 31, 2004.  As aresult, the Company concluded that the Company did not maintain effective internalcontrol over financial reporting as of December 31, 2004, based oncriteria established in *Internal Control -Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

During the quarter ended March 31, 2005, the Company took thefollowing corrective actions to improve its internal control over financialreporting related to its controls over the accounting for leases and othermaterial contracts:

 

•                       reviewedthe existing controls and procedures related to the accounting for leases andother material contracts;

•                       obtainedadditional training for the Company’s legal and accounting staff on complexaccounting matters, including the accounting for leases and other materialcontracts; and

•                       modifiedexisting controls and procedures to ensure appropriate accounting for leasesand other material contracts at inception.

 

The changes above have materially affected the Company’s internalcontrol over financial reporting.  Therewere no other changes in internal control over financial reporting that had amaterial affect on internal control over financial reporting or are reasonablylikely to have a material affect on internal control over financial reporting.

 

**Item 9B****. OTHER INFORMATION**

 

None

 

**PART III**

 

**Item 10****. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Information regarding the directors and executive officers of theCompany is incorporated herein by reference to the descriptions set forth underthe caption “Election of Directors” in the Proxy Statement to be issued inconnection with the 2005 Annual Meeting of Shareholders (the “2005 ProxyStatement”).

 

63

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**Item 11.****EXECUTIVE COMPENSATION**

 

Information regarding executive compensation is incorporated herein byreference to the information set forth under the caption “Compensation ofExecutive Officers” in the 2005 Proxy Statement.

 

**Item 12.****SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED SHAREHOLDER MATTERS**

 

Information regarding security ownership of certain beneficial ownersand management of the Company is incorporated herein by reference to theinformation set forth under the caption “Security Ownership of Certain BeneficialOwners and Management” in the 2005 Proxy Statement.

 

**Item 13.****CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

Information regarding certain relationships and related transactionswith the Company is incorporated herein by reference to the information setforth under the caption “Certain Transactions” in the 2005 Proxy Statement.

 

**Item 14.****PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

Information regarding principal accountant fees and services isincorporated herein by reference to the information set forth under the caption“Ratification of Selection of Independent Registered Public Accounting Firm” inthe 2005 Proxy Statement.

 

**PART IV**

 

**Item 15****. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

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

 

Included in Item 8 of Part II of thisAnnual Report on Form 10-K are the following:  Report of Management onInternal Control Over Financial Reporting, Reports of Independent RegisteredPublic Accounting Firm on Consolidated Financial Statements and InternalControl Over Financial Reporting, Consolidated Balance Sheets, ConsolidatedStatements of Operations, Consolidated Statements of Shareholders’ Equity,Consolidated Statements of Cash Flows and Notes to Consolidated FinancialStatements.

 

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

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

 

**(a) (3) Exhibits**

The Exhibits filed or incorporated by reference herewith are asspecified in the Exhibit Index.

 

64

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**SIGNATURES**

 

Pursuant to the requirements of section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|                            |   | MAIR HOLDINGS, INC. |
|---------------------------------|--------|--------------------------|
|                            |   |                     |
|  Dated: June 14, 2005 |   | By:                      | /s/ PAUL F. FOLEY |   |
|                            |   |                     | Paul F. Foley |
|                            |   |                     | President and Chief Executive  Officer |

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 

 
| /s/ PAUL F. FOLEY         |               |                                       | President and Chief Executive Officer       |               |               |
|---------------------------|--------------------|--------------------------------------------|---------------------------------------------|--------------------|--------------------|
| Paul F. Foley             |               | (Principal Executive Officer) and Director |                                        | June 14, 2005 |
|                      |               |                                       |                                        |               |
| /s/ ROBERT E. WEIL        |               |                                       | Vice President, Chief Financial Officer and |               |               |
| Robert E. Weil            |               | Treasurer (Principal Financial Officer)    |                                        | June 14, 2005 |
|                      |               |                                       |                                        |               |
| *                         |               |                                       |                                        |               |
| Donald E. Benson          |               | Director                                   |                                        | June 14, 2005 |
|                      |               |                                       |                                        |               |
| *                         |               |                                       |                                        |               |
| Mickey P. Foret           |               | Director                                   |                                        | June 14, 2005 |
|                      |               |                                       |                                        |               |
| *                         |               |                                       |                                        |               |
| Pierson M. Grieve         |               | Director                                   |                                        | June 14, 2005 |
|                      |               |                                       |                                        |               |
| *                         |               |                                       |                                        |               |
| Carl R. Pohlad            |               | Director                                   |                                        | June 14, 2005 |
|                      |               |                                       |                                        |               |
| *                         |               |                                       |                                        |               |
| Robert C. Pohlad          |               | Director                                   |                                        | June 14, 2005 |
|                      |               |                                       |                                        |               |
| *                         |               |                                       |                                        |               |
| Douglas M. Steenland      |               | Director                                   |                                        | June 14, 2005 |
|                      |               |                                       |                                        |               |
| *                         |               |                                       |                                        |               |
| Raymond W. Zehr, Jr. |               | Director                                   |                                        | June 14, 2005 |
|                      |               |                                       |                                        |               |
| *By:                      | /s/ PAUL F. FOLEY  |                                       |                                        |               |               |   |
|                      | Paul F. Foley      |                                       |                                        |               |               |
|                      | *Attorney-in-fact* |                                       |                                        |               | June 14, 2005 |
|                           |                    |                                            |                                             |                    |                    |  |  |

 

65

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Document Description**                                                                                                                                                                                                                                                                                                                                                                                                         |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.1                 |       | Amended and Restated Articles of Incorporation. Incorporated by  reference to Exhibit 4.1 to the Company’s Form 8-K filed on  August 27, 2003.                                                                                                                                                                                                                                                               |
| 3.2                 |       | Bylaws. Filed herewith.                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1                 |       | 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.                                                                                                                                                                                                                                              |
| 4.2                 |       | 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.                                                                                                                                                                                                       |
| 4.3                 |       | 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.                                                                                                                                                                                                       |
| 4.4                 |       | Common Stock Purchase Warrant dated April 1, 1998 issued to  Northwest Airlines, Inc. Incorporated by reference to Exhibit 4A to  the Company’s 10-Q for the quarter ended June 30, 1998.                                                                                                                                                                                                               |
| 4.5                 |       | Common Stock Purchase Warrant dated June 2, 1998 issued to  Northwest Airlines, Inc. Incorporated by reference to Exhibit 4B to  the Company’s 10-Q for the quarter ended June 30, 1998.                                                                                                                                                                                                                |
| 10.1                |       | 1994 Stock Option Plan. Filed herewith.                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.2                |       | 1996 Directors’ Option Plan. Filed herewith.                                                                                                                                                                                                                                                                                                                                                                                |
| 10.3                |       | 2000 Stock Incentive Plan. Filed herewith.                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.4                |       | Mesaba Aviation, Inc. 2003 Incentive Award Plan. Filed herewith.                                                                                                                                                                                                                                                                                                                                                            |
| 10.5                |       | 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.                         |
| 10.6                |       | 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. |
| 10.7                |       | 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.                                                                                                                                                  |
| 10.8                |       | 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.                                                                                                                                                                     |
| 10.9                |       | 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.                                                                                                                                                             |
| 10.10               |       | Stock Purchase Agreement between the Company and Carl R. Pohlad dated  as of October 18, 1993. Filed herewith.                                                                                                                                                                                                                                                                                                              |

 

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| **Exhibit  Number** | ** ** | **Document Description**                                                                                                                                                                                                                                                                                                                                                                                                                                |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.11               |       | 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.                                                                |
| 10.12               |       | 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.                                                                                            |
| 10.13               |       | 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.                  |
| 10.14               |       | 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. |
| 10.15               |       | 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.   |
| 10.16               |       | 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.                                                                                                                                                                                                       |
| 10.17               |       | 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.                                                                                                                                                                                                     |
| 10.18               |       | 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 Exhibit 10.1 to the Company’s Form 8-K  filed November 23, 2001.                                                                                                                                |
| 10.19               |       | 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 for the quarter ended June 30, 2003.                                                                                                                                                  |
| 10.20               |       | 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 for the quarter  ended June 30, 2003.                                                                                                                                                                                                  |
| 10.21               |       | Amendment to Regional Jet Services Agreement by and among MAIR  Holdings, Inc., Mesaba Aviation, Inc. and Northwest  Airlines, Inc., dated October 7, 2003. Incorporated by reference to  Exhibit 10.1 to the Company’s Form 8-K/A filed October 9,  2003.                                                                                                                                                      |
| 10.22               |       | Amendment to Regional Jet Services Agreement by and among MAIR  Holdings, Inc., Mesaba Aviation, Inc. and Northwest  Airlines, Inc., dated December 15, 2003. Incorporated by reference  to Exhibit 10.1 to the Company’s Form 8-K filed on  December 15, 2003.                                                                                                                                                 |

 

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| **Exhibit  Number** | ** ** | **Document Description**                                                                                                                                                                                                                                                                                                           |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                         |
| 10.23               |       | Amendment to Regional Jet Services Agreement by and among MAIR  Holdings, Inc., Mesaba Aviation, Inc. and Northwest  Airlines, Inc., dated February 2, 2004. Incorporated by reference  to Exhibit 10.1 to the Company’s Form 8-K filed February 3,  2004.                                 |
| 10.24               |       | Management Compensation Agreement between the Company and Paul F.  Foley, dated October 1, 2004. Incorporated by reference to  Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on  October 22, 2004.                                                                                       |
| 10.25               |       | Amendment to Airline Services Agreement by and among MAIR  Holdings, Inc., Mesaba Aviation, Inc. and Northwest  Airlines, Inc., dated April 15, 2005 (certain portions of this  document have been deleted pursuant to an application for confidential  treatment under rule 24b-2). Filed herewith.      |
| 10.26               |       | Amendment to Regional Jet Services Agreement by and among MAIR  Holdings, Inc., Mesaba Aviation, Inc. and Northwest  Airlines, Inc., dated April 15, 2005 (certain portions of this  document have been deleted pursuant to an application for confidential  treatment under rule 24b-2). Filed herewith. |
| 14.1                |       | Code of Ethics. Incorporated by reference to Exhibit 14 of the  Company’s Form 10-K for the year ended March 31, 2004.                                                                                                                                                                                         |
| 21.1                |       | 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.                                                                                                                                                                                                                                                         |
| 24.1                |       | 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.                                                                                                                                                                                                             |
| 32.1                |       | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002. Filed herewith.                                                                                                                                                                                                                                     |

 

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