**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K**

 

**(MarkOne)**

**x****        ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the fiscal year ended March 31, 2008**

** **

**or**

** **

**o****        TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the transition period from         to        **

 

**Commission File No. 0-17895**

 

**MAIR HOLDINGS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Minnesota**

(State or other jurisdiction of incorporation or organization) | ** ** | **41-1616499**

(I.R.S. Employer Identification No.) |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------|

 

**150 South Fifth Street, Suite 1360**

**Minneapolis, Minnesota  55402**

(Address of principal executive offices) (Zip Code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 
| ** **

**Title of Each Class**    | ** ** | **Name of Each Exchange**

**On Which Registered** |
|----------------------------------------|------------|----------------------------------------------------|
| Common Stock, par value $.01 per share |       | The NASDAQ Stock Market, LLC                       |

 

Securities registered pursuant to Section 12(g) of theAct:  **None**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

 

Yes  o     No  x

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.

 

Yes  o     No  x

 

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 (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  x    No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best ofregistrant’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.  x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer,  a non-acceleratedfiler, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

| Large  accelerated filer o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes  o     No  x

 

Theaggregate market value of the voting stock held by non-affiliates as of September 30,2007 was $67 million.

 

Asof May 1, 2008, there were 15,083,049 shares of the registrant’s Common Stockoutstanding.

 

**Documents Incorporated by Reference**

 

None.

 

 

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**MAIR HOLDINGS, INC.**

**Annual Report on Form 10-K**

**For the Fiscal Year Ended March 31, 2008**

** **

**TABLE OF CONTENTS**

 
| **CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**                                                                   | **1**      |
|----------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                 | ** ** |
| **PART I**                                                                                                            | **2**      |
| ** **                                                                                                                 | ** ** |
| ITEM 1.  BUSINESS                                                                                                          | 2          |
| ITEM  1A. RISK FACTORS                                                                                                     | 3          |
| ITEM 1B. UNRESOLVED STAFF COMMENTS                                                                                         | 4          |
| ITEM 2.  PROPERTIES                                                                                                        | 4          |
| ITEM  3. LEGAL PROCEEDINGS                                                                                                 | 5          |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                                               | 5          |
| EXECUTIVE OFFICERS OF THE REGISTRANT                                                                                       | 5          |
|                                                                                                                       |       |
| **PART II**                                                                                                           | **5**      |
| ** **                                                                                                                 | ** ** |
| ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED  SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | 5          |
| ITEM 6. SELECTED FINANCIAL DATA                                                                                            | 7          |
| ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        | 10         |
| ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK                                                       | 16         |
| ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                        | 17         |
| ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS  ON ACCOUNTING AND FINANCIAL DISCLOSURE                              | 49         |
| ITEM 9A. CONTROLS AND PROCEDURES                                                                                           | 49         |
| ITEM  9B. OTHER INFORMATION                                                                                                | 51         |
|                                                                                                                       |       |
| **PART III**                                                                                                          | **51**     |
| ** **                                                                                                                 | ** ** |
| ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE  GOVERNANCE                                                           | 51         |
| ITEM 11. EXECUTIVE COMPENSATION                                                                                            | 56         |
| ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS                   | 65         |
| ITEM 13. CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                        | 66         |
| ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                            | 67         |
| ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                        | 68         |
|                                                                                                                       |       |
| **SIGNATURES**                                                                                                             | **69**     |
| ** **                                                                                                                 | ** ** |
| **EXHIBIT INDEX**                                                                                                          | **70**     |

** **

i

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# ** **

# **CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Statementsin this Annual Report on Form 10-K of MAIR Holdings, Inc. (“MAIR” or the“Company”) under the caption “Business” and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and elsewhere inthis report are forward-looking and are based upon information currentlyavailable to the Company.  The Company,through its officers, directors or employees, may also from time to time makeoral forward-looking statements.  Inconnection with the “safe harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995, the Company is hereby identifying importantfactors that could cause actual results to differ materially from thosecontained in any forward-looking statement made by or on behalf of theCompany.  Many important factors thatcould cause such a difference are described in “Item 1A.  Risk Factors” in this Annual Report on Form 10-K.

 

Unduereliance should not be placed on the Company’s forward-looking statementsbecause the matters they describe are subject to known and unknown risks,uncertainties and other unpredictable factors, many of which are beyond theCompany’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’sshareholders.

 

Allsubsequent written or oral forward-looking statements attributable to theCompany or persons acting on the Company’s behalf are expressly qualified bythe factors described above.  The Companyassumes no obligation, and disclaims any obligation, to update informationcontained in this Annual Report on Form 10-K, including forward-lookingstatements, as a result of facts, events or circumstances after the date ofthis report, except as required by law in the normal course of its publicdisclosure practices.

 

1

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** **

**PART I**

** **

**Item 1. BUSINESS**

 

**General**

** **

MAIRis the holding company for Big Sky Transportation Co. (“Big Sky”), a regionalair carrier based in Billings, Montana. Until April 24, 2007, MAIR was also the holding company for MesabaAviation, Inc., (“Mesaba”), a regional air carrier based in Minneapolis,Minnesota.  The Company’s consolidatedfinancial statements include the accounts of MAIR and Big Sky.  All intercompany transactions and balanceshave been eliminated in consolidation.

 

Mesabafiled a voluntary petition for relief under Chapter 11 of the United StatesBankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Courtfor the District of Minnesota (“Bankruptcy Court”) on October 13, 2005 (the“Petition Date”), after which Mesaba operated its business as adebtor-in-possession pursuant to the Bankruptcy Code.  On April 24, 2007 (the “Exit Date”), Mesaba’sbankruptcy plan of reorganization became effective and Mesaba exited bankruptcyas a wholly-owned subsidiary of Northwest Airlines, Inc. (“Northwest”), and,therefore, is no longer owned by MAIR.

 

**Dissolutionof the Company**

 

FollowingMesaba’s bankruptcy filing in October 2005, MAIR reviewed a number of potentialacquisitions and other growth opportunities, the majority of which focused onopportunities within the airline industry. MAIR did not identify a business it believed would be in the bestinterests of MAIR to acquire. Additionally, the Company anticipated generating monthly profits fromoperations by December 2007.  Becausethese profits did not materialize, and because the Company did not expect themto materialize in the foreseeable future, MAIR and Big Sky made the decisionthat Big Sky would cease its eastern United States operations and begintransferring its remaining western operations to another carrier.  MAIR subsequently determined that it wasuneconomical to continue funding Big Sky’s losses, and on March 8, 2008, BigSky ceased all operations.  MAIR’s Boardof Directors then determined that the prudent course of action would be forMAIR to convert its assets into cash, pay its creditors and return remainingcash to the Company’s shareholders.  Tothat end, the Company has filed a preliminary proxy statement for the purposeof holding a Special Meeting of Shareholders at which the Company’sshareholders will vote whether to approve the Company’s dissolution andproposed Plan of Liquidation.

 

Assumingthe shareholders approve the Company’s proposed Plan of Liquidation, MAIR andBig Sky will begin taking actions to formally dissolve, including filing therequired documents with the Minnesota and Montana Secretary of Stateoffices.  MAIR and Big Sky will thencontinue to convert their remaining non-cash assets into cash for the purposeof winding up their affairs, pay or contest liabilities and claims anddistribute the remaining assets to the Company’s shareholders.  Assets will be applied first to pay (orprovide for the payment of) actual and contingent liabilities of the Company,including payment of expenses associated with the dissolution.  The Company also expects that its stock willbe delisted from the NASDAQ Stock Market within 20 days after the SpecialMeeting of Shareholders, and the Company intends to establish the final date oflisting on NASDAQ as the record date for all liquidating distributions.

 

**MesabaBankruptcy**

** **

FollowingMesaba’s exit from bankruptcy on April 24, 2007, Mesaba’s estate has beenadministered via a liquidating trust.  Asthe former equity owner of Mesaba, MAIR will receive all funds remaining in theliquidating trust after the unsecured creditors are paid and after the expensesof the trust are paid.  Based on theamounts at which certain claims have settled and other information available tothe Company, the Company currently estimates that MAIR will receiveapproximately $25 million for its equity interest in Mesaba.  The ultimate amount MAIR receives for itsequity distribution will be affected by the amounts at which the remainingunsecured claims are resolved.  MAIR hasnot recorded the contingent residual equity interest in the trust due to theuncertainties of the amount to be received.

 

Onesuch unresolved claim is the $35 million claim of Fairbrook Leasing, Inc., LambertLeasing, Inc. and Swedish Aircraft Holdings AB (“Saab Leasing”), whichoriginated from a lawsuit between Saab Leasing and Mesaba 

 

2

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regardingaircraft lease payments allegedly owed by Mesaba to Saab Leasing.  In July 2006, the District Court for theDistrict of Minnesota ruled that Saab Leasing was not eligible to receivedamages for the majority of its claims. In March 2008, the Eighth Circuit Court of Appeals affirmed the rulingby the District Court, and on May 1, 2008, the Eighth Circuit denied SaabLeasing’s petition for a rehearing.  SaabLeasing’s only remaining avenue is to request a hearing before the UnitedStates Supreme Court.  The liquidatingtrustee will continue to hold funds in reserve for Saab Leasing’s claim untilthe claim is finally resolved.

 

GoldmanSachs Credit Partners, L.P. (“Goldman Credit”) also has a $58 million claimagainst the liquidating trust relating to aircraft and equipment leases Mesabarejected in bankruptcy.  Goldman Credit has asserted that the stipulatedloss provisions of the applicable leases, under which liquidated damages arecalculated, should apply to determine the total claim amount due to GoldmanCredit.  Mesaba’s bankruptcy estate filed for summary judgment with theBankruptcy Court asserting that the liquidated damages constitute unenforceablepenalties.  Mesaba’s bankruptcy trustee instead believes that the claimallowed to Goldman Credit should reflect actual damages suffered.  TheBankruptcy Court heard the motion in September 2007, but has not yet ruled onthe motion.  The liquidating trustee hasbeen negotiating with Goldman Credit in an attempt to reach a settlement of theclaim, and MAIR’s estimate of its equity distribution from the liquidatingtrust assumes that the claim will be settled.

** **

**Employees**

 

Asof March 31, 2008, MAIR had five full-time employees, and Big Sky had 18full-time employees.

 

**AvailableInformation**

 

TheCompany 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 SEC website forother public filings.  The Company’s Codeof Ethics for its Chief Executive Officer and financial officer is alsoavailable 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.

 

## ***Item1A.  RISK FACTORS***

## *** ***

TheCompany’s proposed dissolution and liquidation is subject to various risks anduncertainties, some of which are described below.  The Company could also be adversely affectedby additional risks and uncertainties not presently known or believed to bematerial.

 

*Due touncertainties surrounding the Company’s liabilities and whether the Company isable to realize the full value of its assets, the Company cannot make anyassurances regarding the amount available for distribution to its shareholders.*

 

The Company has madecertain projections relating to the amount of cash the Company expects to haveto distribute to its shareholders upon dissolution of the Company.  These projections generally relate to threeareas:  the amount of liabilities of MAIRand of Big Sky which must be satisfied before the Company is dissolved, theamount MAIR and Big Sky expect to realize from their assets and the amount MAIRexpects to receive for its equity interest in Mesaba’s liquidating trust.  Most notably, the Company has estimated theprice Big Sky will receive for the sale of its aircraft, and if the actual saleprice differs materially from this estimate, the amount MAIR expects to realizefrom its investment in Big Sky will also be materially affected.  Each of the above projections is subject tomultiple variables, and a negative change in any of the above projections willreduce the amount of funds the Company expects to have available fordistribution to its shareholders.

 

*TheCompany may be unable to complete the dissolution and liquidation on as timelya basis as it would prefer.*

 

Assuming the shareholdersvote to approve the Company’s dissolution and proposed Plan of Liquidation, theCompany intends to make necessary filings and wind up its business as promptlyas possible.  The Company expects to makea liquidating distribution of excess funds not required to satisfy existingliabilities as soon as is practicable. However, there are a number of factors that could delay the Company’santicipated timetable, including the following:

 

3

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·                  delays in the payment, or arrangementfor payment or compromise, of remaining Company liabilities or obligations;

·                  delays in the liquidation of theCompany’s assets, including Big Sky’s aircraft;

·                  lawsuits or other claims asserted by theCompany or against the Company; and

·                  unanticipated legal, regulatory oradministrative requirements.

 

*If theCompany fails to make adequate payments to creditors prior to dissolution, orif a creditor makes a claim against the Company following dissolution, theCompany’s shareholders could be liable to such creditors.*

 

Section 727 of the MinnesotaBusiness Corporation Act requires that MAIR publish notice of its dissolutionto allow creditors time to present claims against the Company.  As a general rule, if a creditor fails topresent its claim within the statutory time period, the creditor is barred fromsuing on that claim or otherwise realizing upon or enforcing the claim.  However, under limited circumstances, withinone year after a company’s articles of dissolution have been filed, a creditormay, upon showing good cause for not having previously filed a claim, apply toa court to allow a claim against a dissolved company.  Such a claim may only be made against thecorporation’s undistributed assets or, if the undistributed assets are notsufficient to satisfy the claim, against a shareholder.  However, in such event, a shareholder’sliability is limited to a portion of the claim that is equal to the portion ofthe distributions the shareholder received in dissolution, and in no event cana shareholder’s liability exceed the amount which the shareholder actuallyreceived in the dissolution.

 

*TheCompany may continue to incur the expenses of complying with public companyreporting requirements.*

 

TheCompany expects to apply to the SEC for relief from the reporting obligationsunder the Securities Exchange Act of 1934, as amended, for a period beginningafter the Special Meeting of Shareholders. The Company cannot guarantee that the SEC will grant the requestedrelief.  If such relief is not granted,the Company will have an obligation to continue to comply with the applicablereporting requirements of the Securities Exchange Act of 1934, even thoughcompliance with such reporting requirements is economically burdensome.

 

## ***Item1B.  UNRESOLVED STAFF COMMENTS***

## *** ***

None.

 

## ***Item2.  PROPERTIES***

## *** ***

**Aircraft**

 

*Big Sky*

 

Thefollowing table sets forth certain information as to Big Sky’s passengeraircraft fleet as of March 31, 2008.

 
| **Type of Aircraft** | ** ** | **Number of  Aircraft** | ** ** | **Seating  Capacity** | ** ** | **Approximate  Single Flight  Range (miles)** | ** ** | **Approximate  Average Cruising  Speed (mph)** | ** ** |
|--------------------------------|------------|------------------------------|------------|-----------------------|------------|---------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Nonoperating:                  |       |                         |       |                  |       |                                                    |       |                                                     |       |
| Beechcraft 1900D               |       | 17                           |       | 19                    |       | 750                                                     |       | 325                                                      |       |

 

OnMay 14, 2008, MAIR, Big Sky and Mesa Air Group (“Mesa”) executed a SettlementAgreement and Mutual Release (the “Settlement Agreement”) under which Big Skyagreed to make a one-time payment of $1.5 million to Mesa in satisfaction ofall future lease liabilities for the ten aircraft Big Sky leased fromMesa.  All ten aircraft were returned toMesa on or before May 14, 2008.  TheSettlement Agreement provided that Mesa would retain $160,000 in lease depositspreviously paid by Big Sky and also provided for Mesa to retain  amounts prepaid by Big Sky to satisfy returnconditions related to the aircraft. Finally, following execution of the Settlement Agreement, Mesa agreed tocancel the $1.9 million letter of credit MAIR had established for Mesa’sbenefit.

 

4

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BigSky is in the process of selling its seven owned B1900D aircraft and hasengaged the services of a broker to assist in the sales process.

 

**Facilities**

 

*MAIR*

 

MAIR’sexecutive offices are located in downtown Minneapolis, Minnesota.  MAIR leases approximately 3,370 square feetof office space with lease payments of approximately $6,000 per month.  The lease expires on September 30, 2010.  MAIR is seeking to sublease this spacethrough the remaining term of the lease. If a subtenant is not found, MAIR will negotiate an early release fromits lease obligations.

 

*Big Sky*

 

BigSky’s main hangar and operations offices are located at the Billings 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, shop area and twofloors of offices.  A two-story buildingadjacent to the hangar houses Big Sky’s operations center and flightadministration offices.  These buildingsare situated on approximately 83,000 square feet of land owned by the City ofBillings and leased to Big Sky on long-term facility and ground leases.  The facility lease has an 11-year term, andthe ground lease has a 12-year term.  BigSky is in the process of negotiating an early exit from this lease.

** **

## ***Item3.  LEGAL PROCEEDINGS***

## *** ***

None.

 

## ***Item4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS***

## *** ***

None.

 

## ***EXECUTIVEOFFICERS OF THE REGISTRANT***

## *** ***

**Paul F.Foley**, age 55, has been the President and Chief ExecutiveOfficer of MAIR since October 1999 and was President and Chief ExecutiveOfficer of Mesaba from October 1999 to September 2002.  He is also a director of MAIR.  He was Vice President at Atlas Air, Inc. fromDecember 1996 to September 1999.  Mr.Foley graduated with a bachelor of science degree from Cornell University and amasters of business administration degree from Southern Methodist University inDallas, Texas.

 

**Ruth M.Timm**, age 38, joined the Company in April 2005 as its VicePresident, General Counsel.  Ms. Timm wasGeneral Counsel at Integris Metals, Inc. from October 2004 until February 2005,when the company was sold to a competitor. Ms. Timm was an associate in the corporate department of Leonard, Streetand Deinard Professional Association from October 2000 until September 2004,and an associate at Maun & Simon, PLC from September 1999 to October2000.  Ms. Timm served as a judicial lawclerk for the Honorable Paul A. Magnuson, Chief Judge, U.S. District Court forthe District of Minnesota from 1997 to 1999. She received her law degree from Valparaiso University School of Law in1997.

 

# **PARTII**

# ** **

## ***Item5.  MARKET FOR REGISTRANT’S COMMONEQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES***

## *** ***

TheCompany’s common stock is traded under the symbol “MAIR” on the NASDAQ Stock Market.

 

Thefollowing table sets forth, for the periods indicated, the high and low priceper 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 paid cash dividends sinceSeptember 1995.  However, in 

 

5

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connectionwith the Company’s dissolution, the Company expects to issue one or moreliquidating distributions to its shareholders.

 
| ** **  | ** ** | **Fiscal 2008** | ** ** | **Fiscal 2007** | ** ** |
|-------------|------------|----------------------|------------|----------------------|------------|
| **Quarter** | ** ** | **High**             | ** ** | **Low**              | ** ** | **High** | ** ** | **Low** | ** ** |
| First       |       | $                    | 7.45       |                 | $          | 6.20 |   | $ | 6.21 |   | $ | 4.67 |   |
| Second      |       | $                    | 6.70       |                 | $          | 5.87 |   | $ | 6.07 |   | $ | 5.03 |   |
| Third       |       | $                    | 6.10       |                 | $          | 4.24 |   | $ | 7.17 |   | $ | 5.25 |   |
| Fourth      |       | $                    | 4.90       |                 | $          | 3.80 |   | $ | 7.70 |   | $ | 6.51 |   |

 

OnMay 1, 2008, the number of holders of record of common stock was 506.

 

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

 

**EquityCompensation Plan Information**

 
| **Plan Category**              | ** ** | **Number of securities to be   issued upon exercise of   outstanding options, warrants  and rights  (a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities remaining   available for future issuance under  equity compensation plans  (excluding securities reflected in  column (a))  (c)** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Plans  approved by security holders |       | 835,000                                                                                                                                                               |       | $                                                                                                                | 6.78       |                                                                                                                                                                                                                            | 2,385,098  |   |
|                                     |            |                                                                                                                                                                       |            |                                                                                                                  |            |                                                                                                                                                                                                                                 |            |  |

 

Theequity compensation plans approved by the Company’s shareholders are the 1994Stock Option Plan, the 1996 Director Stock Option Plan and the 2000 StockIncentive Plan.  The 2000 Stock IncentivePlan contains a provision that automatically increases the authorized sharesavailable for grant on September 1 of each year by the lesser of 300,000 or 1%of the then outstanding common shares. See “Item 8. Financial Statements and Supplementary Data, Note 11 –Shareholders’ Equity” for additional information regarding the Company’s equitycompensation plans.

 

6

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**CompanyStock Performance**

 

Thefollowing graph provides a five-year comparison of the total cumulative returnsfor the Company’s Common Stock, the CRSP Index for the NASDAQ Stock Market(U.S. companies), and the CRSP Index for air carriers traded on NYSE, AMEX andNASDAQ.  The CRSP Indexes are prepared bythe Center for Research in Security Prices of the University of Chicago.  The total cumulative return for each period isbased on the investment of $100 on March 31, 2003, assuming compoundeddaily returns and the reinvestment of all dividends.

 

**Comparisonof Five-Year Cumulative Total Returns**

** **

****

** **

 ̈ Company Common Stock               ¡ NASDAQ Stock Index    Air Carrier Index

 
| ** **                         | ** ** | **March 31** | ** ** | **March 31** | ** ** | **March 31** | ** ** | **March 30** | ** ** | **March 31** | ** ** |
|------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                         | ** ** | **2004**          | ** ** | **2005**          | ** ** | **2006**          | ** ** | **2007**          | ** ** | **2008**          | ** ** |
| MAIR Holdings, Inc.                |       | 167.83            |       | 160.22            |       | 84.64             |       | 118.83            |       | 68.72             |       |
| NASDAQ Stock Market (US Companies) |       | 142.55            |       | 154.88            |       | 183.74            |       | 203.49            |       | 188.82            |       |
| NYSE/AMEX/NASDAQ Stocks (1)        |       | 110.34            |       | 134.36            |       | 168.00            |       | 192.29            |       | 142.69            |       |

 

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(1)Consists of U.S. Companies in Air Transportation, Scheduled and Air CourierServices

 

## ***Item6.  SELECTED FINANCIAL DATA***

## *** ***

Thefollowing tables set forth selected financial data with respect to the Companyas of the dates and for the periods indicated. The selected financial data has been derived from the Company’s auditedconsolidated financial statements.  As ofthe Petition Date, the accounts of Mesaba were deconsolidated from theCompany’s consolidated financial statements. Therefore, the financial data below excludes Mesaba from the PetitionDate forward.  The financial data setforth below should be read in conjunction with the Company’s ConsolidatedFinancial Statements and Notes thereto and “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.”

 

7

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Theinformation regarding changes to the Company’s net assets since the Company’sadoption of the liquidation basis of accounting on March 9, 2008 is presentedin the table below in a format consistent with our consolidated financialstatements under Item 15 of this Annual Report on Form 10-K.  The net asset value per share does not takeinto account the remaining $4.1 million MAIR expects to receive for its claimin Mesaba’s bankruptcy or the estimated $25 million MAIR expects to receive forits equity interest in Mesaba.

 

LiquidationBasis

(amountsin thousands except per share amounts)

 
| ** **                | ** ** | **Consolidated**                           | ** ** |
|---------------------------|------------|--------------------------------------------|------------|
| ** **                | ** ** | **Statement of Net Assets** | ** ** |
| ** **                | ** ** | **March 31, 2008**               | ** ** |
|                      |       |                                       |       |
| Total assets              |       | $                                          | 65,106     |   |
| Total liabilities         |       | 26,102                                     |       |
| Net assets in liquidation |       | 39,004                                     |       |
| Net asset value per share |       | $                                          | 2.59       |   |

 
| ** **                                | ** ** | **Consolidated**                                                | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                | ** ** | **Statement of Changes in Net Assets** | ** ** |
| ** **                                | ** ** | **For the period March 9, 2008**       | ** ** |
| ** **                                | ** ** | **to March 31, 2008**                            | ** ** |
|                                      |       |                                                            |       |
| Net assets in liquidation, March 9, 2008  |       | $                                                               | 51,932     |   |
| Changes in net assets in liquidation      |       | (12,928                                                         | )          |
| Net assets in liquidation, March 31, 2008 |       | $                                                               | 39,004     |   |

 
| ** **                                      | ** ** | **As of March 31 (in thousands)** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------------|------------|
| **Balance Sheet Data:**               | ** ** | **2007**                                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                            |       |                                                       |       |   |   |   |   |   |   |
| Current assets                                  |       | $                                                          | 63,339     |   | $ | 98,436 |   | $ | 187,547 |   | $ | 174,934 |   |
| Property and equipment, net                     |       | 1,680                                                      |       | 1,423 |   | 38,421 |   | 39,722 |   |
| Long-term investments                           |       | 11,357                                                     |       | 19,484 |   | 43,240 |   | 39,984 |   |
| Other noncurrent assets, net                    |       | 15,314                                                     |       | 2,599 |   | 11,746 |   | 14,167 |   |
| Total assets                                    |       | $                                                          | 91,690     |   | $ | 121,942 |   | $ | 280,954 |   | $ | 268,807 |   |
|                                            |       |                                                       |       |   |   |   |   |   |   |
| Current liabilities                             |       | $                                                          | 23,403     |   | $ | 12,571 |   | $ | 82,206 |   | $ | 77,098 |   |
| Other noncurrent liabilities                    |       | 1,081                                                      |       | 772 |   | 6,069 |   | 7,448 |   |
| Shareholders’ equity                       |       | 67,206                                                     |       | 108,599 |   | 192,679 |   | 184,261 |   |
| Total liabilities and shareholders’ equity |       | $                                                          | 91,690     |   | $ | 121,942 |   | $ | 280,954 |   | $ | 268,807 |   |

 

8

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| ** **                                                                          | ** ** | **For the Years Ended March 31** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                          | ** ** | **(in thousands, except share data)** | ** ** |
| **Statement of Operations Data:**                                    | ** ** | **2008**                                                  | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                |       | **(through  March 8)**                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                |       |                                                      |       |   |   |   |   |   |   |   |   |
| Operating revenues                                                                  |       | $                                                         | 28,403     |   | $ | 23,932 |   | $ | 256,279 |   | $ | 442,610 |   | $ | 432,789 |   |
| Operating expenses                                                                  |       | 55,218                                                    |       | 38,554 |   | 318,980 |   | 433,971 |   | 428,763 |   |
| Operating (loss) income                                                             |       | $                                                         | (26,815    | ) | $ | (14,622 | ) | $ | (62,701 | ) | $ | 8,639 |   | $ | 4,026 |   |
|                                                                                |       |                                                      |       |   |   |   |   |   |   |   |   |
| Equity in loss of Mesaba Aviation, Inc.                                             |       | $                                                         | —     |   | $ | — |   | $ | (39,953 | ) | $ | — |   | $ | — |   |
|                                                                                |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net (loss) income                                                                   |       | $                                                         | (15,501    | ) | $ | (7,405 | ) | $ | (82,848 | ) | $ | 7,355 |   | $ | 4,496 |   |
|                                                                                |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net (loss) income per share-basic                                                   |       | $                                                         | (1.03      | ) | $ | (0.36 | ) | $ | (4.02 | ) | $ | 0.36 |   | $ | 0.22 |   |
| Weighted average number of issued shares  outstanding-basic                         |       | 15,065                                                    |       | 20,333 |   | 20,584 |   | 20,505 |   | 20,334 |   |
|                                                                                |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net (loss) income per share-diluted                                                 |       | $                                                         | (1.03      | ) | $ | (0.36 | ) | $ | (4.02 | ) | $ | 0.35 |   | $ | 0.22 |   |
| Weighted average common and potentially  dilutive common shares outstanding-diluted |       | 15,065                                                    |       | 20,333 |   | 20,584 |   | 21,050 |   | 20,562 |   |

 
| ** **                                 | ** ** | **For the Years Ended March 31** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------|------------|
| **Selected Operating Data:**     | ** ** | **2008**                                                  | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | **(through March 8)**                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| *Big Sky*                                  |       |                                                      |       |   |   |   |   |   |   |   |   |
| Passengers                                 |       | 168,042                                                   |       | 112,917 |   | 113,525 |   | 85,455 |   | 105,913 |   |
| Available seat miles (“ASM”) (1) |       | 89,942                                                    |       | 83,829 |   | 77,786 |   | 59,284 |   | 75,188 |   |
| Revenue passenger miles (2)                |       | 42,939                                                    |       | 32,656 |   | 32,193 |   | 21,630 |   | 27,066 |   |
| Load factor (3)                            |       | 47.7                                                      | %          | 39.0 | % | 41.4 | % | 36.5 | % | 36.0 | % |
| Block hours flown                          |       | 26,314                                                    |       | 21,842 |   | 20,839 |   | 16,396 |   | 20,307 |   |
| Departures                                 |       | 24,637                                                    |       | 22,143 |   | 21,615 |   | 19,423 |   | 23,245 |   |
| Revenue per ASM                            |       | 0.316                                                     |       | 0.285 |   | 0.263 |   | 0.254 |   | 0.219 |   |
| Cost per ASM                               |       | 0.444                                                     |       | 0.344 |   | 0.363 |   | 0.337 |   | 0.267 |   |

 

----

(1)            ASM are determined by multiplying the numberof seats available for passengers by the number of miles flown.  Amounts are in thousands.

 

(2)            Revenue passenger miles are determined bymultiplying the number of fare-paying passengers carried by the distanceflown.  Amounts are in thousands.

 

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

 

9

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## *** ***

## ***Item7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS***

## *** ***

Management’sDiscussion and Analysis of Financial Condition and Results of Operations shouldbe read in conjunction with the accompanying consolidated financialstatements.  The Company’s operations andfinancial results are subject to various risks and uncertainties as discussedin “Item 1A.  Risk Factors.”

 

**Overview**

 

Althoughthe Company expected to achieve profitability during the third quarter offiscal 2008, several factors, most notably record-high fuel prices andunusually bad weather, resulted in Big Sky sustaining substantial losses inNovember and December of 2007.  As aresult, MAIR and Big Sky made the decision for Big Sky to terminate itsrelationship with Delta Airlines and cease serving as a Delta Connectioncarrier in the eastern United States.  Atthe same time, Big Sky sought to transfer its remaining western operations toanother carrier.  However, MAIR concludedthat it was uneconomical to continue funding Big Sky’s losses, and on March 8,2008, Big Sky ceased operations.  MAIR’sBoard of Directors then concluded that the prudent course of action would be toconvert the Company’s assets to cash, satisfy outstanding liabilities andreturn all excess cash to the Company’s shareholders.  The Company has filed a preliminary proxystatement to hold a Special Meeting of Shareholders for the purpose of votingon the Company’s dissolution and proposed Plan of Liquidation.

 

MAIRand Big Sky expect to continue liquidating their assets and are activelynegotiating to satisfy existing liabilities. MAIR ended fiscal 2008 with approximately $27.2 million in cash andinvestments on its balance sheet. Assuming the Company’s shareholders vote to approve the Company’sdissolution and Plan of Liquidation, MAIR’s Board of Directors will review theappropriate timing to make an interim liquidating distribution of cash notrequired for operations to the Company’s shareholders.  The timing and amount of such a distributionmay be affected by the Company’s ability to liquidate certain of its assets.

 

**LiquidationBasis of Accounting**

** **

Asa result of the Company’s Board of Directors directing management to prepare aPlan of Liquidation for the Company and the Board’s subsequent approval of thatPlan of Liquidation and recommendation that the Company’s shareholders approvethe Plan of Liquidation at a Special Meeting of Shareholders, the Companyadopted the liquidation basis of accounting effective March 9, 2008. This basisof accounting is considered appropriate when, among other things, liquidationof a company is probable and the net realizable values of assets are reasonablydeterminable.  Under this basis ofaccounting, assets are valued at their net realizable values and liabilitiesare stated at their estimated settlement amounts.  The conversion to the liquidation basis ofaccounting required management to make significant estimates and judgments torecord assets at estimated net realizable values and liabilities at estimatedsettlement amounts.

 

**Changesin Net Assets in Liquidation for the Period March 9, 2008 to March 31, 2008**

** **

Duringthe period March 9, 2008 to March 31, 2008, the Company’s net assets inliquidation decreased to approximately $39.0 million from approximately $51.9million on March 8, 2008. The decrease in net assets was primarily due to $2.1million of operating costs from March 9, 2008 to March 31, 2008, $6.5 millionof estimated costs of liquidation and $4.4 million required to adjust theCompany’s assets to fair market value.

 

10

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**Results of Operations**

 

**Period April 1, 2007 to March 8,2008 and Fiscal Year Ended March 31, 2007**

 

On March 12, 2007,Big Sky and Delta executed a Hosted Prorate Agreement governing the Bostonoperation, and in connection with that operation, Big Sky purchased sevenBeechcraft 1900D aircraft.  Although thediscussion below compares the results of operations for the period April 1,2007 to March 8, 2008 to fiscal 2007, several extraordinary events duringthe period April 1, 2007 to March 8, 2008 materially affected theresults of operations.  For example, BigSky experienced a substantial increase in revenue due to the Delta expansionduring the first half of fiscal 2008; however, Big Sky’s operating expensesduring the period April 1, 2007 to March 8, 2008 increased bothbecause of the Delta operation and expenses related to shutting down itsoperations.  All of these events affectedthe comparisons detailed below.

 

*Earnings Summary*

 

In fiscal 2007 theCompany reported a consolidated net loss of $7.4 million, or $0.36 per basicand diluted share.   For the period April 1,2007 to March 8, 2008, the Company reported a consolidated net loss of$15.5 million, or $1.03 per basic and diluted share.

 

*Big Sky*

 

Big Sky OperatingRevenues

 

Total operating revenuesincreased 18.8% to $28.4 million in the period April 1, 2007 to March 8,2008 from $23.9 million in fiscal 2007 due to an increase in passenger revenuesof 32.2% as a result of the Delta connection service that began in April 2007,offset by a lower average fare of $112 in the current year period compared toan average fare of $126 in fiscal 2007.

 

Big Sky OperatingExpenses

 

Total operating expensesincreased 37.0% to $39.5 million in the period April 1, 2007 to March 8,2008 from $28.8 million in fiscal 2007. The following table compares components of operating cost per ASM forthe period April 1, 2007 to March 8, 2008 and fiscal year ended March 31,2007, in thousands:

 
| ** **                    | ** ** | **Operating Expenses** | ** ** | **Operating Cost Per ASM** | ** ** |
|-------------------------------|------------|-----------------------------|------------|-------------------------------------------|------------|
| ** **                    | ** ** | **March 8,**           | ** ** | **March 31,**                        | ** ** | ** ** | ** ** | ** ** | ** ** | **March 8,** | ** ** | **March 31,** | ** ** |
| ** **                    | ** ** | **2008**                    | ** ** | **2007**                                  | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Wages and benefits            |       | $                           | 11,796     |                                      | $          | 9,270 |   | $ | 2,526 |   | 27.2 | % | 13.3 | ¢ | 11.1 | ¢ |
| Aircraft fuel                 |       | 8,590                       |       | 5,434                                     |       | 3,156 |   | 58.1 | % | 9.6 |   | 6.4 |   |
| Aircraft maintenance          |       | 3,831                       |       | 3,785                                     |       | 46 |   | 1.2 | % | 4.3 |   | 4.5 |   |
| Aircraft rents                |       | 1,700                       |       | 1,812                                     |       | (112 | ) | (6.2 | )% | 1.9 |   | 2.2 |   |
| Landing fees                  |       | 750                         |       | 347                                       |       | 403 |   | 116.1 | % | 0.8 |   | 0.4 |   |
| Insurance and taxes           |       | 471                         |       | 325                                       |       | 146 |   | 44.9 | % | 0.5 |   | 0.4 |   |
| Depreciation and amortization |       | 1,386                       |       | 676                                       |       | 710 |   | 105.0 | % | 1.6 |   | 0.8 |   |
| Administrative and other      |       | 10,202                      |       | 7,194                                     |       | 3,008 |   | 41.8 | % | 11.5 |   | 8.6 |   |
| Impairment and other charges  |       | 777                         |       | —                                    |       | 777 |   | N/M |   | 0.9 |   | 0.0 |   |
|                          |       | $                           | 39,503     |                                      | $          | 28,843 |   | $ | 10,660 |   | 37.0 | % | 44.4 | ¢ | 34.4 | ¢ |

 

During the period April 1,2007 to March 8, 2008, wages and benefits increased $2.5 million or 27.2%as a result of contractual rate increases and additional staffing andtraining requirements in flight, maintenance and stations for the Deltaconnection service.

 

Aircraft fuel expenseincreased 58.1% during the period April 1, 2007 to March 8, 2008 fromfiscal 2007 as a result of a 71 cent increase in the average price of jet fuel,from $2.13 per gallon in fiscal 2007 to $2.84 per gallon during the period April 1,2007 to March 8, 2008, and an increase of 20.5% in block hours from fiscal2007.

 

Landingfees increased 116.1% as a result of the increased level of operations andhigher landing fee charges associated with Big Sky’s Delta connection servicewhich commenced in fiscal 2008.

 

Administrativeand other expenses increased $3.0 million, or 41.8%, in the period April 1, 2007 to March 8,2008, primarily due to station and passenger related costs associated with theDelta connection service.

 

11

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Duringthe period April 1,2007 to March 8, 2008, as a result of Big Sky’s continued losses, aninterim impairment test of intangible assets was performed.  Based on the results of the interim testperformed, the Company determined Big Sky’s pilot labor contract was impairedand recorded a $0.8 million impairment charge.

 

*MAIR*

 

MAIR Operating Expenses

 

Total operating expensesin the period April 1, 2007 to March 8, 2008 increased $5.8 millionto $15.7 million from $9.9 million in fiscal 2007, primarily due to $10.2million in impairment and other charges for MAIR’s guaranty of Mesaba’sfacilities and ground lease for its facility at the Cincinnati/NorthernKentucky International Airport, offset by lower accounting and legal fees inthe period April 1, 2007 to March 8, 2008.

 

*Consolidated Operating Loss*

 

Operating losses totaled$26.8 million for the period April 1, 2007 to March 8, 2008, ascompared to $14.6 million in fiscal 2007.

 

*Consolidated Nonoperating Income*

 

Nonoperating income (net)increased to $11.1 million in the period April 1, 2007 to March 8,2008 from $5.2 million in fiscal 2007. The increase primarily resulted from MAIR recording $9.4 million for 70%of its damage claim in Mesaba’s bankruptcy. The increase is offset by lower interest income due to lower investmentbalances in the period April 1, 2007 to March 8, 2008.

 

*Consolidated Provision for IncomeTaxes*

 

The Company recorded atax benefit of $0.2 million in the period April 1, 2007 to March 8,2008.  The Company’s tax benefit forfiscal 2007 was $0.2 million. The Company’s effective tax rate was (1.25)% forthe period April 1, 2007 to March 8, 2008, compared to (21.2)% infiscal 2007.

 

**Fiscal Year Ended March 31,2007 Compared with Fiscal Year Ended March 31, 2006**

 

*Earnings Summary*

 

The Company reported aconsolidated net loss of $7.4 million, or $0.36 per basic and diluted share,for fiscal 2007, compared to net loss of $82.8 million, or $4.02 per basic anddiluted share, in fiscal 2006.

 

*Big Sky*

 

Big Sky OperatingRevenues

 

Total operating revenuesincreased 17.2% to $23.9 million in fiscal 2007 from $20.4 million in fiscal2006.  Passenger revenues increased 19.6%as a result of a 20.3% increase in average fare offset by a 0.5% decrease inpassengers transported. Other revenue increased 14.0% as a result of the newChicago-Midway to Springfield, Illinois and Eau Claire, Wisconsin air service.

 

Big Sky OperatingExpenses

 

Total operating expensesincreased 2.2% to $28.8 million in fiscal 2007 from $28.2 million in fiscal2006.  The following table comparescomponents of operating cost per ASM for the years ended March 31, inthousands:

 
| ** **                    | ** ** | **Operating Expenses** | ** ** | **Operating Cost Per ASM** | ** ** |
|-------------------------------|------------|-----------------------------|------------|-------------------------------------------|------------|
| ** **                    | ** ** | **2007**                    | ** ** | **2006**                                  | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Wages and benefits            |       | $                           | 9,270      |                                      | $          | 7,484 |   | $ | 1,786 |   | 23.9 | % | 11.1 | ¢ | 9.6 | ¢ |
| Aircraft fuel                 |       | 5,434                       |       | 4,826                                     |       | 608 |   | 12.6 | % | 6.4 |   | 6.2 |   |
| Aircraft maintenance          |       | 3,785                       |       | 3,302                                     |       | 483 |   | 14.6 | % | 4.5 |   | 4.2 |   |
| Aircraft rents                |       | 1,812                       |       | 2,014                                     |       | (202 | ) | (10.0 | )% | 2.2 |   | 2.6 |   |
| Landing fees                  |       | 347                         |       | 340                                       |       | 7 |   | 2.1 | % | 0.4 |   | 0.4 |   |
| Insurance and taxes           |       | 325                         |       | 390                                       |       | (65 | ) | (16.7 | )% | 0.4 |   | 0.5 |   |
| Depreciation and amortization |       | 676                         |       | 878                                       |       | (202 | ) | (23.0 | )% | 0.8 |   | 1.1 |   |
| Administrative and other      |       | 7,194                       |       | 6,488                                     |       | 706 |   | 10.9 | % | 8.6 |   | 8.4 |   |
| Impairment and other charges  |       | —                      |       | 2,503                                     |       | (2,503 | ) | N/M |   | 0.0 |   | 3.3 |   |
|                          |       | $                           | 28,843     |                                      | $          | 28,225 |   | $ | 618 |   | 2.2 | % | 34.4 | ¢ | 36.3 | ¢ |

 

12

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During fiscal 2007, wagesand benefits increased $1.8 million or 23.9% as a result of a 4.8% increase inblock hours, contractual rate increases and hiring and training of theadditional staffing requirements in flight, maintenance and stations for thenew Delta Connection service.

 

Aircraft fuel expenseincreased 12.6% from fiscal 2006 to fiscal 2007 as a result of a 15 centincrease in the average price of jet fuel, from $1.98 per gallon in fiscal 2006to $2.13 per gallon in fiscal 2007, and an increase of 4.8% in block hours infiscal 2007 from fiscal 2006.

 

Aircraft maintenanceexpense increased 14.6% due to increased flying year-over-year. Scheduled heavychecks and propeller overhaul events totaled $0.4 million in fiscal 2007,primarily due to a November 2006 Federal Aviation Administration wing sparairworthiness directive which mandated more rigorous inspection of the wingspar portion of the Beechcraft 1900D aircraft.

 

The elimination of Metroaircraft resulted in a 10.0% decrease in aircraft rents and a 23.0% decrease indepreciation and amortization expense during fiscal 2007.

 

Insurance and taxesdecreased 16.7% as the result of property tax and aircraft hull insuranceliability adjustments in fiscal 2007.

 

Administrative and otherexpenses increased 10.9%, or $0.7 million, in fiscal 2007 over fiscal 2006 as aresult of a $0.6 million bad debt reserve. Both fiscal 2007 and 2006 had similar expenses associated with the Metroaircraft returns of $0.8 million and $0.7 million, respectively.

 

Fiscal 2006 contained a$2.5 million goodwill impairment charge. The impairment was determined by comparing the fair value of theintangible asset to the current carrying value.

 

*MAIR*

 

MAIR Operating Expenses

 

Total operating expensesin fiscal 2007 decreased $11.2 million to $9.9 million from $21.1 million infiscal 2006, primarily due to $13.7 million in impairment and other charges infiscal 2006, consisting of an $8.9 million write-off of MAIR’s equityinvestment in its Mesaba subsidiary and a $4.8 million charge associated withMAIR’s guaranty of Mesaba’s facilities and ground lease for its facility at theCincinnati/Northern Kentucky International Airport.  These expenses were offset by a $1.4 millionincrease in legal and other professional services due to the Mesaba bankruptcy.

 

*Consolidated Operating Income*

 

Operating losses totaled$14.6 million in fiscal 2007, as compared to $62.7 million in fiscal 2006.  Fiscal 2006 included Mesaba’s operatinglosses for approximately six months through the Petition Date.

 

*Consolidated Nonoperating Income*

 

Nonoperating income (net)decreased to $5.2 million for fiscal 2007 from $6.0 million in fiscal2006.  The decrease was primarily due toa $1.8 million arbitration settlement with an investment advisor in the firstquarter of fiscal 2006, partially offset by additional interest incomegenerated by higher interest rates in fiscal 2007.

 

*Consolidated Provision for IncomeTaxes*

 

The Company recorded atax benefit of $2.0 million in fiscal 2007 compared to a benefit of $13.8million in fiscal 2006.  The Company’seffective tax rate was (21.2)% in fiscal 2007, as compared to (24.4)% in fiscal2006 after the deconsolidation of Mesaba’s financial results from the Company’sconsolidated financial statements as of the Petition Date.  In fiscal 2007, the benefit of $2.0 millionwas due to the $0.5 million federal benefit of a net operating loss (“NOL”)carryback and a $1.5 million benefit due to a January 2007 settlement withthe Internal Revenue Service (“IRS”) and the deconsolidation of Mesaba wherebyMesaba recorded the corresponding $1.5 million expense.  Under the settlement agreement MAIR agreed topay the IRS on behalf of Mesaba $1.7 million in taxes and interest foradjustments to taxable income for the reclassification of per diemamounts.  This settlement resulted in anadditional $0.2 million of tax expense at Mesaba in the third quarter of fiscal2007 as the Company had previously recorded a reserve of $1.5 million in theprior fiscal year.

 

13

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In fiscal 2007, theCompany recorded a valuation allowance against its net deferred tax assets of$3.5 million, which resulted in a valuation allowance balance of $6.9 millionat March 31, 2007.  The effectivetax rate would have been (36.7)% based on book income and permanent differencesexclusive of the valuation allowance.  Infiscal 2006, the Company recorded a valuation allowance against its netdeferred tax assets of $3.6 million.  Theeffective tax rate would have been (30.8)% exclusive of the valuationallowance.

 

**Liquidity and Capital Resources**

 

Unrestricted cash, cashequivalents and investments decreased $38.8 million, or 58.8%, to $27.2 millionat March 31, 2008 from $66.0 million at March 31, 2007.  The Company’s working capital decreased to$39.0 million at March 31, 2008 compared to working capital of $39.9million at March 31, 2007.

 

*Outlook*

 

The Company expects tohave excess cash after liquidating its assets and satisfying its liabilities,and the Company intends to distribute such excess cash to its shareholders.

 

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

 

*Big Sky*

 

As of March 31,2008, Big Sky’s fleet consisted of seven owned aircraft and ten aircraftcovered under operating leases with Mesa with terms of 22 to 32 months andaggregate monthly lease payments of approximately $0.2 million.  Following the Settlement Agreement amongMAIR, Big Sky and Mesa, Big Sky has no further liability with respect to theleases or the leased aircraft.

 

Following termination ofthe Mesa aircraft leases, the only other Big Sky commitments to make leasepayments is that relating to Big Sky’s hangar in Billings and several airportlocations. The following table summarizes the expected payments to finalizethese lease commitments for the year ending March 31, 2009 in thousands:

 
| Operating leases: (1)         |   | $   | 1,024  |   |
|-------------------------------|--------|-----|--------|--------|
| Capital lease obligations (2) |   | 678 |   |
| Total                         |   | $   | 1,702  |   |

 

----

(1)          See “Item 8. Financial Statements and Supplementary Data, Note 8 – Leases” foradditional discussion of operating leases.

(2)          See “Item 8. Financial Statements and Supplementary Data, Note 9 – Notes Payable andLong Term Debt” for additional discussion of capital lease obligations.

 

*MAIR*

 

In connection with MAIR’sguaranty of Mesaba’s obligations related to its facility at theCincinnati/Northern Kentucky International Airport, MAIR is obligated under thefacilities and ground leases for such facility. The only other MAIR commitment is to make lease payments on the Company’soffice space of approximately $6,000 per month. The lease expires on September 30,2010.  The following table summarizesMAIR’s guaranty to make lease payments for the years ending March 31, inthousands:

 
| ** **       | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Operating leases |       | 1,299    |       | 1,298    |       | 1,262    |       | 1,262    |       | 1,262    |       | 20,645         |       | 27,028    |       |
| Total            |       | $        | 1,299      |     | $          | 1,298    |       | $        | 1,262      |     | $          | 1,262          |       | $         | 1,262      |   | $ | 20,645 |   | $ | 27,028 |   |
|                  |            |          |            |          |            |          |            |          |            |          |            |                |            |           |            |  |  |  |  |  |  |  |

 

MAIR has been negotiatingwith the airport and the bondholders regarding prepaying the bonds andterminating the Ground Lease.  See “Item8. Financial Statements and Supplementary Data, Note 14 – Commitments andContingencies” for additional discussion of MAIR’s guaranty.

 

14

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**Critical Accounting Policies andEstimates**

 

The preparation of theCompany’s consolidated financial statements and Mesaba’s stand-alone condensedfinancial statements in conformity with GAAP 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 and its subsidiaries have identified their criticalaccounting policies to include those discussed in the followingparagraphs.  The Company and itssubsidiaries also have other key accounting policies that involve the use ofestimates, judgments and assumptions.

 

Management believes thatits estimates and assumptions are reasonable based on information presentlyavailable; however, changes in these estimates, judgments and assumptions willoccur as a result of future events, and, accordingly, ultimate results coulddiffer from amounts estimated.

 

*Liquidation Basis of Accounting –*As of March 9,2008 the Company adopted the liquidation basis of accounting, under which theCompany accrued liquidation expenses for severance, rent and directors andofficers insurance in the amount of $4.8 million that will be paid as a part ofthe orderly liquidation process.  TheCompany will continue to incur operating costs and receive income on itsinvestments throughout the liquidation period. On a regular basis, the Company evaluates its assumptions, judgments andestimates that can have a significant impact on the Company’s reported netassets in liquidation based on the most recent information available to theCompany, and when necessary will make changes accordingly.  Assets are recorded at management’s bestestimate of the cash the Company will ultimately receive upon liquidation ofthe asset.  Liabilities are recorded atmanagement’s best estimate of their ultimate settlement amount.   Actual costs and income may differ from theCompany’s estimates, which could reduce net assets available in liquidation tobe distributed to shareholders.

 

The policies belowreflect the Company’s critical accounting policies existing prior to March 9,2008.

 

*Allowance for Doubtful Accounts -*Big Sky grantedtrade credit to certain approved customers and performed monthly analyses ofoutstanding trade receivables to assess the likelihood of collection.  For balances where Big Sky did not expectfull payment of amounts owed, an allowance was recorded to adjust the tradereceivable to management’s best estimate of the amount that would ultimately becollected.

 

*Aircraft Property and Equipment* – Estimated lives were used to recorddepreciation on aircraft property and equipment.  Aircraft utilization, technology and changesin business strategy affected the economic lives used to record depreciation byBig Sky.  The foregoing also affecteddepreciation rates, impairment or both. Management of Big Sky regularly reviewed the estimated useful lives andsalvage values for aircraft property and equipment.

 

*Excess and Obsolete Inventories* – Estimated recovery percentages wereused to record obsolescence reserves for parts inventories.  Aircraft utilization, parts availability andchanges in parts cost affected the valuation of parts inventories and obsolescencereserve levels.  Management of Big Skyregularly reviewed recovery percentages, reserve levels and inventoryvaluations for parts inventories.

 

*Aircraft Maintenance* – Estimated maintenance costs andanticipated aircraft activity were used to determine maintenance reserves.  Changes in maintenance contracts, parts andlabor costs and aircraft activity affected the maintenance reserves.  Management of Big Sky regularly reviewedaircraft activity, expected aircraft return dates, changes in maintenancecontracts and parts and labor costs for maintenance reserves.

 

*Income Taxes* – The Company’s effective tax rate was(1.25)% for the period April 1, 2007 to March 8, 2008 and (21.1)% and(24.4)% in fiscal 2007 and 2006, respectively. In fiscal 2008 and 2007, the Company reflected a valuation allowanceagainst its net deferred tax assets in the amount of $42.4 million and $6.9million, respectively.  The Company’seffective tax rate is based on expected income, statutory tax rates and taxplanning opportunities available in the various jurisdictions in which theCompany operates.  In the event thatthere is a significant unusual

 

15

----

 

or one-time itemrecognized, or expected to be recognized, in the Company’s operating results,the tax attributable to that item would be separately calculated and recordedat the same time as the unusual or one-time item.  Significant judgment is required indetermining the Company’s effective tax rate and in evaluating its taxpositions.  The Company establishesreserves when, despite its belief that the tax return positions are fullysupportable, certain positions are likely to be challenged and may notsucceed.  The Company adjusts thesereserves in light of changing facts and circumstances, such as the closing of atax audit.  The effective tax rateincludes the impact of reserve provisions and changes to reserves that areconsidered appropriate, as well as related interest.  This rate is then applied to the Company’squarterly operating results.

 

Significant managementjudgment is required in determining the provisions for income taxes, deferredtax assets and liabilities and any valuation allowance recorded against netdeferred tax assets and determination of accounting for uncertain taxpositions.  For financial reportingpurposes, a valuation allowance is recorded to offset deferred tax assets that,more likely than not, will not be realized based on the Company’s projectedfuture taxable income, the timing of expiring net operating losses and the Company’stax planning strategies.  In the future,subsequent revisions to the estimated net realizable value of these deferredtax assets could cause the Company to record a valuation allowance on all or aportion of the deferred tax assets.  Thiscould cause the provision for income taxes to vary significantly from period toperiod, although the Company’s cash payments would remain unaffected until thebenefit of the net operating losses is completely utilized or expires unused.

 

*Workers’ Compensation Insurance* – Big Sky estimated the ultimate cost ofan on-the-job injury at the time of the injury to determine its workers’compensation insurance reserves.  Big Skyused the services of its insurance carriers and outside brokers to assist indetermining the reserve levels.  Injuryseverity, cost of care and the insurance contract affected the ultimate costand ultimate reserves recorded. Management of Big Sky regularly reviewed workers’ compensation activitywith outside consultants for any changes in the workers’ compensation reserve.

 

*Property Taxes* – Estimated property tax values andassessments were used to record property tax reserves for the variousjurisdictions in which Big Sky operated. Aircraft and parts values, aircraft flight activity, ground equipmentvalues and the location of personnel affected the ultimate property taxobligation.  Management of Big Skyperiodically reviewed the above items for any changes in the property taxreserves.

 

**New Accounting Pronouncements**

 

See “Item 8. FinancialStatements and Supplementary Data – Note 19 – New Accounting Pronouncements”for information pertaining to recently adopted accounting standards oraccounting standards to be adopted in the future.

 

## ***Item7A.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK***

## *** ***

The Company’s earningsare affected by changes in interest rates due to the impact those changes haveon its interest income from cash and investments.

 

The Company does notpurchase or hold any derivative financial instruments for trading or speculativepurposes.

 

16

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

## *** ***

The consolidatedfinancial statements of the Company and the related reports of management andthe Company’s independent registered public accounting firm are included inthis Annual Report on Form 10-K on the pages indicated below.

 
| Report  of Independent Registered Public Accounting Firms                                                                                                       | 18 |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|----|
| Consolidated  Statement of Net Assets (Liquidation Basis) as of March 31, 2008 Consolidated Balance Sheet as of March 31, 2007                        | 20 |
| Consolidated  Statement of Changes in Net Assets (Liquidation Basis) for the period  March 9, 2008 to March 31, 2008                                  | 21 |
| Consolidated  Statements of Operations for the Period April 1, 2007 to March 8,  2008 and the Years Ended March 31, 2007 and 2006                | 22 |
| Consolidated Statements of Shareholders’ Equity for  the Period April 1, 2007 to March 8, 2008 and the Years Ended  March 31, 2007 and 2006 | 23 |
| Consolidated Statements of Cash Flows for the Period  April 1, 2007 to March 8, 2008 and the Years Ended March 31,  2007 and 2006                | 24 |
| Notes to the  Consolidated Financial Statements                                                                                                                 | 25 |

 

17

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Boardof Directors and Shareholders

MAIRHoldings, Inc. and Subsidiaries

 

Wehave audited the accompanying consolidated statement of net assets of MAIRHoldings, Inc. and Subsidiaries (the “Company”) as of March 31, 2008,and the related consolidated statement of changes in net assets for the period March 9,2008 to March 31, 2008, statements of operations, shareholders’ equity andcomprehensive loss and cash flows for the period April 1, 2007 to March 8,2008.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

Asdiscussed in Notes 1 and 2 to the financial statement, the Company’s Board ofDirectors approved a plan of liquidation which commenced an orderly liquidationplan resulting in adjustments and financial statement disclosures regardingassets and liabilities on a liquidation basis of accounting from a goingconcern basis as prescribed by accounting principles generally accepted in theUnited States of America, effective March 8, 2008.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position of theCompany as of March 31, 2008, and the results of their changes in netassets for the period March 9, 2008 to March 31, 2008 and operationsand cash flows for the period April 1, 2007 to March 8, 2008, inconformity with accounting principles generally accepted in the United Statesof America.

 

Asdiscussed in Notes 1 and 2 to the financial statements, the Company adoptedFinancial Accounting Standards Board Statement No. 123(R), Share-BasedPayments (SFAS 123R) effective April 1, 2006.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the Company’s internal control overfinancial reporting as of March 31, 2008, based on criteria established inInternal Control–Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) and our report dated May 30,2008 expressed an unqualified opinion on the effectiveness of the Company’sinternal control over financial reporting

 

/s/Grant Thornton LLP

 

Minneapolis,Minnesota

May 30,2008

 

18

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directorsand Shareholders

MAIR Holdings, Inc.

Minneapolis, Minnesota

 

We have audited theaccompanying consolidated balance sheet of MAIR Holdings, Inc. andsubsidiaries (the “Company”) as of March 31, 2007, and the relatedconsolidated statements of operations, shareholders’ equity, and cash flows foreach of the two years in the period ended March 31, 2007.  Our audits also include the financialstatement schedule listed in the Index at Item 15. These financial statementsare the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of the Companyas of March 31, 2007, and the results of its operations and its cash flowsfor each of the two years in the period ended March 31, 2007, inconformity with accounting principles generally accepted in the United Statesof America.  Also, in our opinion, suchfinancial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

 

As discussed in Note 1 tothe consolidated financial statements, on April 9, 2007, the MesabaAviation, Inc. (Debtor-in-Possession), a wholly-owned subsidiary of theCompany, Bankruptcy Court entered an order confirming the plan ofreorganization, which became effective after the close of business on April 24,2007.  Under the plan of reorganization,the Company is required to comply with certain terms and conditions as morefully described in Note 15.

 

As discussed in Note 3 tothe consolidated financial statements, in 2007, the Company changed its methodof accounting for stock-based compensation.

 

/s/Deloitte & Touche LLP

 

Minneapolis, Minnesota

June 15, 2007

 

19

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**MAIRHOLDINGS, INC. AND SUBSIDIARIES**

**ConsolidatedStatement of Net Assets as of March 31, 2008 (Liquidation Basis)****ConsolidatedBalance Sheet as of March 31, 2007**

**(inthousands)**

** **
| ** **                                                                                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                                                               |       |     |       |     |       |
| CURRENT ASSETS:                                                                                                      |       |     |       |     |       |
| Cash                                                                                                                 |       | $        | 15,897     |     | $          | 28,593 |   |
| Short-term investments                                                                                               |       | 4,901    |       | 26,068   |       |
| Accounts receivable, net                                                                                             |       | 1,334    |       | 2,882    |       |
| Inventories                                                                                                          |       | 784      |       | 650      |       |
| Prepaid expenses and deposits                                                                                        |       | 2,156    |       | 4,592    |       |
| Assets held for sale                                                                                                 |       | 19,734   |       | —   |       |
| Investments held for sale                                                                                            |       | 6,402    |       | —   |       |
| Assets held for use                                                                                                  |       | 568      |       | —   |       |
| Restricted cash                                                                                                      |       | 13,330   |       | 554      |       |
| Total current assets                                                                                                 |       | 65,106   |       | 63,339   |       |
| PROPERTY AND EQUIPMENT, net (Notes 2 and 3)                                                                          |       | —   |       | 1,680    |       |
| NONCURRENT ASSETS:                                                                                                   |       |     |       |     |       |
| Long-term investments                                                                                                |       | —   |       | 11,357   |       |
| Restricted cash                                                                                                      |       | —   |       | 13,110   |       |
| Other intangible assets, net                                                                                         |       | —   |       | 2,007    |       |
| Other assets, net                                                                                                    |       | —   |       | 197      |       |
|                                                                                                                 |       | $        | 65,106     |     | $          | 91,690 |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                           |       |     |       |     |       |
| CURRENT LIABILITIES:                                                                                                 |       |     |       |     |       |
| Intercompany payable to Mesaba Aviation, Inc.                                                                   |       | $        | —     |     | $          | 813 |   |
| Accounts payable                                                                                                     |       | 3,401    |       | 3,063    |       |
| Stock repurchase payable to Northwest Airlines, Inc.                                                            |       | —   |       | 10,905   |       |
| Accrued liabilities:                                                                                                 |       |     |       |     |       |
| Payroll                                                                                                              |       | 1,922    |       | 1,575    |       |
| Deferred income                                                                                                      |       | —   |       | 737      |       |
| Accrued liquidation costs                                                                                            |       | 4,808    |       | —   |       |
| Other current liabilities                                                                                            |       | 15,971   |       | 6,310    |       |
| Total current liabilities                                                                                            |       | 26,102   |       | 23,403   |       |
|                                                                                                                 |       |     |       |     |       |
| OTHER NONCURRENT LIABILITIES                                                                                         |       | —   |       | 1,081    |       |
| Total liabilities                                                                                                    |       | 26,102   |       | 24,484   |       |
|                                                                                                                 |       |     |       |     |       |
| COMMITMENTS AND CONTINGENCIES (Notes 7, 8 and 14)                                                                    |       |     |       |     |       |
|                                                                                                                 |       |     |       |     |       |
| 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, 15,083,049  and 15,008,285 shares issued and outstanding |       | —   |       | 150      |       |
| Paid-in capital                                                                                                      |       | —   |       | 35,438   |       |
| Retained earnings                                                                                                    |       | —   |       | 31,618   |       |
| Total shareholders’ equity                                                                                      |       | —   |       | 67,206   |       |
| Total liabilities and shareholders’ equity                                                                      |       | 26,102   |       | $        | 91,690     |   |
| Net assets (liquidation basis - available to common shareholders)                                                    |       | $        | 39,004     |     |       |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

20

----

 

**MAIRHOLDINGS, INC. AND SUBSIDIARIES**

**ConsolidatedStatement of Changes in Net Assets (Liquidation Basis)****For theperiod March 9, 2008 to March 31, 2008**

**(inthousands)**

** **
| Net assets (liquidation basis) March 9, 2008                                      |   | $       | 51,932 |   |
|----------------------------------------------------------------------------------------|--------|---------|--------|--------|
| Costs incurred from March 9, 2008 to March 31, 2008                          |   | (2,050  | )      |
| Accrued estimated net costs in liquidation                                             |   | (6,472  | )      |
| Adjust assets to fair value                                                            |   | (4,406  | )      |
| Change in net assets in liquidation                                                    |   | (12,928 | )      |
| Net assets (liquidation basis) March 31, 2008 (available to  common shareholders) |   | $       | 39,004 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

21

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**MAIRHOLDINGS, INC. AND SUBSIDIARIES**

**ConsolidatedStatements of Operations****For theperiod April 1, 2007 to March 8, 2008 and****the YearsEnded March 31, 2007 and 2006**

**(inthousands, except share information)**

** **
| ** **                                                                             | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| OPERATING REVENUES:                                                                    |       |     |       |     |       |     |       |
| Passenger                                                                              |       | $        | 18,751     |     | $          | 14,185   |       | $ | 228,920 |   |
| EAS and other                                                                          |       | 9,652    |       | 9,747    |       | 27,359   |       |
| Total operating revenues                                                               |       | 28,403   |       | 23,932   |       | 256,279  |       |
| OPERATING EXPENSES:                                                                    |       |     |       |     |       |     |       |
| Wages and benefits                                                                     |       | 13,873   |       | 11,189   |       | 88,666   |       |
| Aircraft fuel                                                                          |       | 8,590    |       | 5,434    |       | 4,826    |       |
| Aircraft maintenance                                                                   |       | 3,831    |       | 3,785    |       | 49,940   |       |
| Aircraft rents                                                                         |       | 1,700    |       | 1,812    |       | 56,251   |       |
| Landing fees                                                                           |       | 750      |       | 347      |       | 5,781    |       |
| Insurance and taxes                                                                    |       | 1,224    |       | 1,900    |       | 5,368    |       |
| Depreciation and amortization                                                          |       | 1,404    |       | 697      |       | 8,127    |       |
| Administrative and other                                                               |       | 12,884   |       | 13,390   |       | 49,818   |       |
| Impairment and other charges                                                           |       | 10,962   |       | —   |       | 50,203   |       |
| Total operating expenses                                                               |       | 55,218   |       | 38,554   |       | 318,980  |       |
| Operating loss                                                                         |       | (26,815  | )          | (14,622  | )          | (62,701  | )          |
| NONOPERATING INCOME (EXPENSE):                                                         |       |     |       |     |       |     |       |
| Interest income and other                                                              |       | 11,632   |       | 5,447    |       | 6,039    |       |
| Interest expense                                                                       |       | (514     | )          | (227     | )          | (75      | )          |
| Other nonoperating income, net                                                         |       | 11,118   |       | 5,220    |       | 5,964    |       |
| Loss before benefit for income taxes and equity in loss of Mesaba  Aviation, Inc. |       | (15,697  | )          | (9,402   | )          | (56,737  | )          |
|                                                                                   |       |     |       |     |       |     |       |
| BENEFIT FOR INCOME TAXES                                                               |       | 196      |       | 1,997    |       | 13,842   |       |
| Loss before equity in loss of Mesaba Aviation, Inc.                               |       | (15,501  | )          | (7,405   | )          | (42,895  | )          |
|                                                                                   |       |     |       |     |       |     |       |
| EQUITY IN LOSS OF MESABA AVIATION, INC., net of tax                                    |       | —   |       | —   |       | (39,953  | )          |
|                                                                                   |       |     |       |     |       |     |       |
| NET LOSS                                                                               |       | $        | (15,501    | )        | $          | (7,405   | )          | $ | (82,848 | ) |
|                                                                                   |       |     |       |     |       |     |       |
| NET LOSS PER SHARE:                                                                    |       |     |       |     |       |     |       |
| Loss per common share - basic                                                          |       | $        | (1.03      | )        | $          | (0.36    | )          | $ | (4.02 | ) |
| Loss per common share - diluted                                                        |       | $        | (1.03      | )        | $          | (0.36    | )          | $ | (4.02 | ) |
|                                                                                   |       |     |       |     |       |     |       |
| WEIGHTED AVERAGE SHARES OUTSTANDING:                                                   |       |     |       |     |       |     |       |
| Basic                                                                                  |       | 15,065   |       | 20,333   |       | 20,584   |       |
| Diluted                                                                                |       | 15,065   |       | 20,333   |       | 20,584   |       |

 

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

 

22

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**MAIRHOLDINGS, INC. AND SUBSIDIARIES**

**Consolidated Statements of Shareholders’ Equity****For the period April 1, 2007to March 8, 2008 and****the Years Ended March 31,2007 and 2006**

**(inthousands, except share information)**

 
| ** **                                     | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **             | ** ** | ** ** | ** ** | ** **        | ** ** |
|------------------------------------------------|------------|-----------------------|------------|-------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|
| ** **                                     | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | **Other**              | ** ** | ** **             | ** ** | **Total**  | ** ** | **Comprehensive** | ** ** |
| ** **                                     | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Comprehensive** | ** ** | **Retained**           | ** ** | **Shareholders’** | ** ** | **Income** | ** ** |
| ** **                                     | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Income (Loss)** | ** ** | **Earnings**           | ** ** | **Equity** | ** ** | **(Loss)**        | ** ** |
| Balance, March 31, 2005                   |       | 20,574,340            |       | 206         |       | 70,856            |       | (254                   | )          | 121,871                |       | 192,679    |       | $                 | 7,055      |   |
|                                           |       |                  |       |        |       |              |       |                   |       |                   |       |       |       |              |       |
| Net loss                                       |       |                  |       |        |       |              |       |                   |       | (82,848                | )          | (82,848    | )          | (82,848           | )          |
| Exercise of stock options                      |       | 17,500                |       |        |       | 114               |       |                   |       |                   |       | 114        |       |              |       |
| Compensation benefit for stock options         |       |                  |       |        |       | (1,436            | )          |                   |       |                   |       | (1,436     | )          |              |       |
| Tax benefit on stock options exercised         |       |                  |       |        |       | 12                |       |                   |       |                   |       | 12         |       |              |       |
| Unrealized gain on investments                 |       |                  |       |        |       |              |       | 78                     |       |                   |       | 78         |       | 78                |       |
| Balance, March 31, 2006                   |       | 20,591,840            |       | 206         |       | 69,546            |       | (176                   | )          | 39,023                 |       | 108,599    |       | $                 | (82,770    | ) |
|                                           |       |                  |       |        |       |              |       |                   |       |                   |       |       |       |              |       |
| Net loss                                       |       |                  |       |        |       |              |       |                   |       | (7,405                 | )          | (7,405     | )          | (7,405            | )          |
| Exercise of stock options                      |       | 73,558                |       | 1           |       | 466               |       |                   |       |                   |       | 467        |       |              |       |
| Repurchase and cancellation of Northwest stock |       | (5,657,113            | )          | (57         | )          | (34,891           | )          |                   |       |                   |       | (34,948    | )          |              |       |
| Compensation expense for stock options         |       |                  |       |        |       | 317               |       |                   |       |                   |       | 317        |       |              |       |
| Unrealized gain on investments                 |       |                  |       |        |       |              |       | 176                    |       |                   |       | 176        |       | 176               |       |
| Balance, March 31, 2007                   |       | 15,008,285            |       | 150         |       | 35,438            |       | —                 |       | 31,618                 |       | 67,206     |       | $                 | (7,229     | ) |
|                                           |       |                  |       |        |       |              |       |                   |       |                   |       |       |       |              |       |
| Net loss                                       |       |                  |       |        |       |              |       |                   |       | (15,501                | )          | (15,501    | )          | (15,501           | )          |
| Exercise of stock options                      |       | 74,764                |       | 1           |       | 445               |       |                   |       |                   |       | 446        |       |              |       |
| Compensation expense for stock options         |       |                  |       |        |       | 140               |       |                   |       |                   |       | 140        |       |              |       |
| Unrealized loss on investments                 |       |                  |       |        |       |              |       | (359                   | )          |                   |       | (359       | )          | (359              | )          |
| Balance, March 8, 2008                    |       | 15,083,049            |       | $           | 151        |              | $          | 36,023                 |       | $                      | (359       | )          | $          | 16,117            |       | $ | 51,932 |   | $ | (15,860 | ) |
|                                                |            |                       |            |             |            |                   |            |                        |            |                        |            |            |            |                   |            |  |  |  |  |  |  |

 

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

 

23

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**MAIRHOLDINGS, INC. AND SUBSIDIARIES**

**Consolidated Statements of Cash Flows****For the period April 1, 2007to March 8, 2008 and****The Years Ended March 31,2007 and 2006**

**(inthousands)**

** **
| ** **                                                                                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                         |       |     |       |     |       |     |       |
|                                                                                          |       |     |       |     |       |     |       |
| Net loss                                                                                      |       | $        | (15,501    | )        | $          | (7,405   | )          | $ | (82,848 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:                  |       |     |       |     |       |     |       |
| Equity in loss of Mesaba  Aviation, Inc.                                                 |       | —   |       | —   |       | 39,953   |       |
| Depreciation and amortization                                                                 |       | 1,404    |       | 697      |       | 8,127    |       |
| Amortization of deferred credits                                                              |       | (99      | )          | (108     | )          | (813     | )          |
| Stock-based compensation                                                                      |       | 140      |       | 317      |       | (1,436   | )          |
| Deferred income taxes                                                                         |       | —   |       | 352      |       | (10,500  | )          |
| Amortization of investment (premiums)  discounts                                              |       | (443     | )          | (1,158   | )          | 141      |       |
| Loss on sale of investments                                                                   |       | (1,109   | )          |     |       |     |       |
| Gain on sale of property and equipment                                                        |       | 76       |       | —   |       | —   |       |
| Impairment and other charges                                                                  |       | 10,962   |       | —   |       | 50,203   |       |
| Changes in current operating items:                                                           |       |     |       |     |       |     |       |
| Accounts receivable                                                                           |       | 1,222    |       | 161      |       | (36,671  | )          |
| Income tax receivable                                                                         |       | —   |       | 941      |       | —   |       |
| Inventories                                                                                   |       | (740     | )          | (61      | )          | (791     | )          |
| Prepaid expenses and deposits                                                                 |       | 1,649    |       | (1,981   | )          | (2,279   | )          |
| Accounts payable and other                                                                    |       | (16,215  | )          | (803     | )          | 15,433   |       |
| Net cash used in operating activities                                                         |       | (18,654  | )          | (9,048   | )          | (21,481  | )          |
|                                                                                          |       |     |       |     |       |     |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                         |       |     |       |     |       |     |       |
| Purchases of investments                                                                      |       | (14,394  | )          | (36,270  | )          | (145,613 | )          |
| Proceeds from sale of invesments                                                              |       | 42,959   |       | 63,768   |       | 181,496  |       |
| Purchases of property and equipment                                                           |       | (21,983  | )          | (577     | )          | (6,482   | )          |
| Proceeds from sale of property and  equipment                                                 |       | 407      |       | —   |       | 617      |       |
| Change in restricted cash                                                                     |       | 355      |       | (13,664  | )          | (7,100   | )          |
| Net decrease in cash and cash equivalents from  deconsolidation of Mesaba Aviation, Inc. |       | —   |       | —   |       | (12,479  | )          |
| Net cash provided by investing activities                                                     |       | 7,344    |       | 13,257   |       | 10,439   |       |
|                                                                                          |       |     |       |     |       |     |       |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                          |       |     |       |     |       |     |       |
| Net tax refund payable to Mesaba  Aviation, Inc.                                         |       | (813     | )          | 759      |       | —   |       |
| Purchase (repayment) of other noncurrent  liabilities                                         |       | (62      | )          | 66       |       | (150     | )          |
| Net borrowings on line of credit                                                              |       | 773      |       | —   |       | 245      |       |
| Repurchase of common stock                                                                    |       | —   |       | (24,043  | )          |     |       |
| Proceeds from exercise of stock options                                                       |       | 445      |       | 467      |       | 114      |       |
| Net cash provided by (used in) financing  activities                                          |       | 343      |       | (22,751  | )          | 209      |       |
|                                                                                          |       |     |       |     |       |     |       |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                                     |       | (10,967  | )          | (18,542  | )          | (10,833  | )          |
| CASH AND CASH EQUIVALENTS:                                                                    |       |     |       |     |       |     |       |
| Beginning of period                                                                           |       | 28,593   |       | 47,135   |       | 57,968   |       |
| End of period                                                                                 |       | $        | 17,626     |     | $          | 28,593   |       | $ | 47,135 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**MAIRHOLDINGS, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

**YearsEnded March 31, 2008, 2007 and 2006**

 

**1.****             ****Basis of Presentation, CorporateOrganization and Business**

 

During fiscal year 2008, the Company made thedecision to pursue an orderly liquidation of the Company and return any excesscash to the Company’s shareholders.  Thisdecision was made following Mesaba’s exit from bankruptcy on April 24,2007 as a wholly-owned subsidiary of Northwest, the Company’s conclusion thatBig Sky’s 19-seat operation was not viable and the Company’s conclusion thatexisting growth and acquisition opportunities were not economicallyjustifiable.  Accordingly, on March 8,2008, Big Sky ceased all operations.  Infurtherance of the Company’s goal of returning excess cash to its shareholdersonce Big Sky’s future was determined, MAIR’s Board of Directors simultaneouslydirected management to prepare a formal plan of liquidation under which theCompany would convert its assets into cash, pay its creditors and returnremaining cash to its shareholders.  TheCompany reported Big Sky’s cessation of operations and the Company’s decisionto pursue a liquidation in a Current Report on Form 8-K filed with the SECon March 12, 2008.

 

MAIR’s Board of Directors approved ofmanagement’s proposed plan of liquidation and recommended to MAIR’sshareholders that they approve the plan of liquidation.  The proposed plan of liquidation was includedin the Company’s preliminary proxy statement that was filed with the SEC on May 1,2008.  The preliminary proxy statementindicated that the Company intends to hold a Special Meeting of Shareholders atwhich the Company’s shareholders will vote on the Company’s dissolution andproposed Plan of Liquidation.  TheCompany expects that its shareholders will approve the proposed Plan ofLiquidation, after which the Company’s sole business will be that related towinding up its affairs, paying or contesting liabilities and claims anddistributing any remaining assets to the Company’s shareholders.

 

As a result of the Company’s Board ofDirectors approving of management’s plan of liquidation and its recommendationthat the Company’s shareholders vote to approve the plan of liquidation, theCompany adopted the liquidation basis of accounting effective March 9,2008. This basis of accounting is considered appropriate when, among otherthings, liquidation of a company is probable and the net realizable values ofassets are reasonably determinable. Under this basis of accounting, assets are valued at their netrealizable values and liabilities are stated at their estimated settlementamounts.  The conversion to theliquidation basis of accounting required management to make significantestimates and judgments to record assets at estimated net realizable values andliabilities at estimated settlement amounts.

 

MAIR is the holding company for Big Sky, aregional air carrier based in Billings, Montana.  As of April 24, 2007, MAIR was also theholding company for Mesaba, a regional air carrier based in Minneapolis,Minnesota.  The Company’s consolidatedfinancial statements include the accounts of MAIR and Big Sky, as well asMesaba until Mesaba’s bankruptcy filing on the Petition Date.  All intercompany transactions and balanceshave been eliminated in consolidation. As discussed in Note 15 the accounts of Mesaba have been deconsolidatedfrom the Company’s consolidated financial statements effective as of thePetition Date.

 

**Operations**

 

*Big Sky*

 

Until March 8, 2008, Big Sky operated asa regional air carrier based in Billings, Montana, providing scheduledpassenger, freight, express package and charter services.  Big Sky participated in the essential airservice (“EAS”) program with the Department of Transportation.  The EAS program subsidizes air carriers toprovide air service to designated rural communities throughout the country thatcould not otherwise economically justify that service based on their passengertraffic.  The Department ofTransportation pays EAS subsidies for each departure in a covered market.During the period April 1, 2007 to March 8, 2008, and the years endedMarch 31, 2007 and 2006, Big Sky recognized revenue from EAS subsidies of$8.9 million, $7.9 million, and $8.0 million, respectively.

 

On March 12, 2007, Big Sky and Deltaexecuted a Hosted Prorate Agreement governing the Boston operation, and inconnection with that operation, Big Sky purchased seven Beechcraft 1900D aircraft.  However, due to substantial 

 

25

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losses incurred during November and December 2007,Big Sky and Delta mutually agreed for Big Sky to cease its Delta connectionoperations in the eastern United States in January 2008.  Because it became uneconomical for MAIR tocontinue funding Big Sky’s losses, Big Sky ceased all remaining operations on March 8,2008.

 

**2.****             ****Summary of Significant AccountingPolicies – Post-liquidation**

 

The accounting policies of the Companyfollowing its adoption of the liquidating basis of accounting conform toaccounting principles generally accepted in the United States of America.  Significant policies are described below.

 

*Use of Estimates*

 

The preparation of financial statements inconformity with GAAP requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities, as well as the reported amounts of changesin net assets.  The most significant useof estimates relates to the reported estimated value of net realizable assetsand settlement of liabilities.  Ultimateresults could differ from those estimates.

 

*Cash*

 

Cash represents funds held in depositaccounts.

 

*Investments*

 

Investments consist principally ofgovernment, agency, corporate and municipal securities and are reported at fairmarket value.

 

*Inventories*

 

Inventories consist primarily of expendableaircraft services and are stated at fair market value based on management’s estimateof the ultimate realizable value.

 

*Assets Held for Sale*

 

Assets held for sale consistof property and equipment and are stated at the fair market value based onmanagement’s estimate of the ultimate realizable value.  In determining this value, the Company madecertain estimates to determine future net cash flows to be generated by theassets.  The value was determined by information management has receivedregarding sales values of similar assets net of estimated selling costs.  If there are subsequent changes in theseestimates, or if actual results differ from these estimates, additional fairvalue adjustments may be required.

 

*Assets Held for Use*

 

Assets held for userepresent software and office furniture and are stated at the fair market valuebased on management’s estimate of the ultimate realizable value.

 

*Identifiable intangibleassets*

 

The Company’s identifiable intangible assetsconsisted of Big Sky’s air carrier certificate and airport slots.  The Company determined these assets wereimpaired and recorded $1.1 million of impairment charges based on expectedfuture cash flows.  The balance of theseassets at March 31, 2008 was zero.

 

*Other Current Liabilities*

 

The Company’s consolidated other currentliabilities were as follows as of March 31, 2008 in thousands:

 
| Cincinnati hangar guarantee |   | $     | 12,676 |   |
|-----------------------------|--------|-------|--------|--------|
| Line of credit              |   | 1,143 |   |
| Other accrued expenses      |   | 750   |   |
| Other current liabilities   |   | 1,177 |   |
|                        |   | $     | 15,971 |   |

 

26

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* *

*Stock Options*

 

Effective April 1, 2006, the Companyadopted the fair value recognition provisions of SFAS No. 123R, *Share-Based Payment,*(“SFAS 123R”),**using the modified prospective transition method.Under that transition method, compensation expense that the Company recognizesbeginning on that date includes expense associated with the fair value of allawards granted on and after April 1, 2006, and expense for the unvestedportion of previously granted awards outstanding on April 1, 2006. Resultsfor prior periods have not been restated. Under SFAS 123R, forfeitures areestimated at the time of valuation and reduce expense ratably over the vestingperiod.  This estimate is adjustedperiodically based on the extent to which actual forfeitures differ, or areexpected to differ, from the previous estimate.

 

There were no options granted after March 8,2008.

 

*Income Taxes*

 

The Company accounts for income taxes underthe asset and liability method whereby deferred income tax assets andliabilities are computed annually for differences between the financialstatement and tax basis of assets and liabilities.  These differences will result in taxable ordeductible amounts in the future based on enacted tax laws and rates applicableto the periods in which the differences are expected to affect taxable income.

 

Under the provisions of SFAS No. 109, *Accounting for Income Taxes*, the realization of the futuretax benefits of a deferred tax asset is dependent on future taxable incomeagainst which such tax benefits can be applied. All available evidence must beconsidered in the determination of whether sufficient future taxable incomewill exist. Such evidence includes, but is not limited to, the Company’sfinancial performance, the market environment in which the Company operates,the utilization of past tax credits, and the length of relevant carryback andcarryforward periods. Sufficient negative evidence, such as cumulative netlosses during a three-year period that includes the current year and the priortwo years, may require that a valuation allowance be established with respectto existing and future deferred tax assets. A valuation allowance is recorded when deferred tax assets are notconsidered more likely than not to be realized.

 

**3.****             ****Summary of Significant AccountingPolicies – Pre-liquidation**

 

The accounting policies of the Company priorto its adoption of the liquidation basis of accounting conform to accountingprinciples generally accepted in the United States of America.  Significant policies are described below.

 

*Use of Estimates*

 

The preparation of financial statements inconformity with GAAP requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities, as well as the reported amounts of revenuesand expenses.  The most significant useof estimates relates to the allowance for doubtful accounts, accruedmaintenance expenses, aircraft property and equipment lives, inventoryobsolescence reserves, valuation of other intangible assets and accounting forincome taxes.  Ultimate results coulddiffer from those estimates.

 

*Cash*

 

Cash represents funds held in depositaccounts.

 

*Investments*

 

Investments consist principally ofgovernment, agency, corporate and municipal securities and are classified asavailable-for-sale.  Available-for-saleinvestments are reported at fair value with unrealized gains and lossesexcluded from operations and reported as a separate component of shareholders’equity, except for other-than-temporary impairments, which are reported as acharge to current operations and result in a new cost basis for the investment.

 

*Inventories*

 

Inventories are stated at the lower of costor market and consist of expendable aircraft service parts and fuel.  Big Sky uses the average cost method. Expendable parts are charged to maintenance as used.  A provision isrecorded to reduce inventories to the estimated net realizable value, ifrequired.

 

27

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*Property and Equipment*

 

Property and equipment are stated atcost.  Additions, improvements or majorrenewals are capitalized, while expenditures that do not enhance or extend theasset’s useful life are charged to operating expense as incurred.  Depreciation is computed on a straight-linebasis for financial reporting purposes over estimated useful lives of three to40 years.  Leasehold improvements areamortized over the shorter of the life of the lease or the remaining estimateduseful life of the asset.  The Company’sdepreciation and amortization expense on property and equipment for the period April 1,2007 to March 8, 2008 was $0.3 million. The Company’s depreciation and amortization expense on property andequipment was $0.3 million and $7.7 million in fiscal 2007 and 2006,respectively.

 

The Company’s consolidated property andequipment and related accumulated depreciation and amortization were as followsas of March 31, 2007, in thousands:

 
| Flight equipment                                 |   | $     | 847    |   |
|--------------------------------------------------|--------|-------|--------|--------|
| Ground services equipment                        |   | 297   |   |
| Office and general equipment                     |   | 238   |   |
| Buildings and leasehold improvements             |   | 558   |   |
| Maintenance shop equipment                       |   | 247   |   |
| Other                                            |   | 384   |   |
|                                             |   | 2,571 |   |
| Less: Accumulated depreciation and  amortization |   | (891  | )      |
| Net property and equipment                       |   | $     | 1,680  |   |

 

*Valuation of Long-LivedAssets*

 

The Company evaluates long-livedassets for potential impairments in compliance with SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*. The Company records impairment losses on long-lived assets when events andcircumstances indicate the assets might be impaired and the undiscounted cashflows estimated to be generated by those assets are less than their carryingamounts.  Impairment losses are measured by comparing the fair value ofthe assets to their carrying amounts.  In determining the need to recordimpairment charges, the Company is required to make certain estimates regardingsuch things as the current fair market value of the assets and future net cashflows to be generated by the assets.  The current fair market value isdetermined by independent appraisal or published sales values of similar assetsand the future net cash flows are based on assumptions such as assetutilization, expected remaining useful lives, future market trends andprojected salvage values. Impairment charges are recorded in “Impairment andother charges” on the Company’s statements of operations.  If there aresubsequent changes in these estimates, or if actual results differ from theseestimates, additional impairment charges may be required.

 

*Identifiable intangibleassets*

 

The Company’s identifiable intangible assetsinclude Big Sky’s air carrier certificate and pilot labor contract. Under theprovisions of SFAS No. 142, *Goodwill and OtherIntangible Assets*, identifiable intangibles with finite lives areamortized, and those identifiable intangibles with indefinite lives are notamortized. Identifiable intangible assets that are subject to amortization areevaluated for impairment whenever events or changes in circumstances indicatethat the carrying amount may not be recoverable. Identifiable intangible assetsnot subject to amortization are tested for impairment annually or morefrequently if events warrant. The impairment test consists of a comparison ofthe fair value of the intangible asset with its carrying amount. During thethird quarter of fiscal 2008, the Company determined that Big Sky’s pilot laborcontract was impaired and recorded an impairment charge of approximately $0.8million.  The impairment charges wererecorded in “Impairment charges” in the accompanying consolidated statement ofoperations.

 

*Airframe and Engine Maintenance*

 

Routine airframe and engine maintenance ischarged to expense as incurred. Modifications that enhance the operating performance or extend theuseful lives of airframes or engines are capitalized and amortized over theshorter of the remaining estimated useful life of the asset or the lease term.

 

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*Other Current Liabilities*

 

The Company’s consolidated other currentliabilities were as follows as of March 31, 2007 in thousands:

 
| ** **                  | ** ** | **2007** | ** ** |
|-----------------------------|------------|----------|------------|
| Cincinnati hangar guarantee |       | $        | 3,429      |   |
| Other accrued expenses      |       | 1,715    |       |
| Taxes payable               |       | 796      |       |
| Line of credit              |       | 370      |       |
|                        |       | $        | 6,310      |   |

 

*Other Noncurrent Liabilities*

 

In order to assist the Company in integratingnew aircraft into its fleet, certain manufacturers provided Big Sky with spareparts or rent deferrals.  The Company hasdeferred these amounts and amortizes them over the terms of the leaseagreements as a reduction of aircraft rent expense.  The Company’s amortization of these creditsresulted in a reduction of rent expense of $0.1 million, during the period April 1,2007 to March 8, 2008 and $0.1 million and $0.6 million during fiscal 2007and 2006, respectively.  The Company’sconsolidated other noncurrent liabilities were as follows as of March 31,2007 in thousands:

 
| ** **                       | ** ** | **2007** | ** ** |
|----------------------------------|------------|----------|------------|
| Deferred rent                    |       | $        | 39         |   |
| Manufacturers credits            |       | 213      |       |
| Deferred tax liability           |       | 352      |       |
| Long-term debt and capital lease |       | 477      |       |
|                             |       | $        | 1,081      |   |

 

*Stock Options*

 

Effective April 1, 2006, the Companyadopted the fair value recognition provisions of SFAS No. 123R, *Share-Based Payment,*(“SFAS 123R”),**using the modified prospective transition method.Under that transition method, compensation expense that the Company recognizesbeginning on that date includes expense associated with the fair value of allawards granted on and after April 1, 2006, and expense for the unvestedportion of previously granted awards outstanding on April 1, 2006. Resultsfor prior periods have not been restated.

 

Under SFAS 123R, forfeitures are estimated atthe time of valuation and reduce expense ratably over the vesting period.  This estimate is adjusted periodically basedon the extent to which actual forfeitures differ, or are expected to differ,from the previous estimate.  Under SFAS No. 123,*Accounting for Stock-Based Compensation*and APB 25, *Accounting for Stock Issued to Employees,*theCompany elected to account for forfeitures when awards are actually forfeited,at which time all previous pro forma expense will be reversed to reduce proforma expense for that period.

 

The fair value of each option grant isestimated on the date of grant using the Black-Scholes option pricing modelwith the following assumptions: risk-free interest rate, stock price volatility and expected life.  The Company establishes the risk-freeinterest rate using the U.S. Treasury yield curve as of the grant date.  The estimated expected term is consistentwith the simplified method identified in SEC Staff Accounting Bulletin (“SAB”) No. 107*, Share-Based Payment*, for share-based awards granted duringfiscal 2007.  The simplified method calculates the expected term as theaverage of the vesting and contractual terms of the award.  The expected volatility assumption is setbased primarily on historical volatility. For options granted, the Company amortizes the fair value on astraight-line basis over the vesting period of the options.

 

The weighted average fair value of optionsgranted during fiscal 2007 was $2.61. There were no options granted during the period April 1, 2007 to March 8,2008 or fiscal 2006.  Weighted averageassumptions used in the valuation for the year ended March 31, 2007 aresummarized below:

 
| Risk free interest rate (%)              |   | 4.7  |   |
|------------------------------------------|--------|------|--------|
| Expected life of option grants (years)   |   | 6.3  |   |
| Expected volatility of option grants (%) |   | 36.6 |   |
| Expected dividend yield (%)              |   | 0.0  |   |

 

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*Pro Forma Results*

 

Priorto April 1, 2006, the Company accounted for share-based paymentsusing the intrinsic value method prescribed by APB 25 and SFAS 123. Under APB25, if the exercise price of the Company’s employee stock options equaled themarket price of the underlying stock on the date of the grant, no compensationexpense was recognized. Because the Company’s stock options were granted withexercise prices at the market price of the underlying stock on the date ofgrant, no compensation expense had been recognized under APB 25. The followingtable illustrates the effect on net loss and loss per share assuming thecompensation costs for the Company’s stock option plan had been recorded infiscal 2006 based on the fair value method under SFAS 123R, in thousands:

 
| Net loss as reported                                                                                                                    |   | $      | (82,848 | ) |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|---|
| Add: Stock-based employee compensation  reduction included in reported net loss, net of related tax effects                             |   | (1,436 | )       |
| Deduct: Stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |   | (808   | )       |
|                                                                                                                                    |   | $      | (85,092 | ) |
| Loss per share - basic and diluted:                                                                                                     |   |   |    |
| As reported                                                                                                                             |   | $      | (4.02   | ) |
| Pro forma                                                                                                                               |   | $      | (4.13   | ) |

 

*Revenue Recognition*

 

Big Sky recognizes revenue when transportation has been provided,including scheduled passenger, airfreight, express package and charterservices.  Tickets sold, but not yetused, are reported as deferred income. Estimates are used to determine deferredincome due to complex pricing structures, refund and exchange policies, andinterline agreements with other airlines. These estimates are reviewed monthly and are based on the Company’shistorical data.

 

*Income Taxes*

 

The Company accounts for income taxes underthe asset and liability method whereby deferred income tax assets andliabilities are computed annually for differences between the financialstatement and tax basis of assets and liabilities.  These differences will result in taxable ordeductible amounts in the future based on enacted tax laws and rates applicableto the periods in which the differences are expected to affect taxable income.

 

Under the provisions of SFAS No. 109, *Accounting for Income Taxes*, the realization of the futuretax benefits of a deferred tax asset is dependent on future taxable incomeagainst which such tax benefits can be applied. All available evidence must beconsidered in the determination of whether sufficient future taxable incomewill exist. Such evidence includes, but is not limited to, the Company’sfinancial performance, the market environment in which the Company operates,the utilization of past tax credits, and the length of relevant carryback andcarryforward periods. Sufficient negative evidence, such as cumulative netlosses during a three-year period that includes the current year and the priortwo years, may require that a valuation allowance be established with respectto existing and future deferred tax assets. A valuation allowance is recorded when deferred tax assets are notconsidered more likely than not to be realized.

 

*Fair Value of FinancialInstruments*

 

The Company’s financial instruments consistprimarily of cash, cash equivalents, accrued liabilities and other noncurrentliabilities of which carrying amounts do not significantly differ from fairvalue due to their short-term nature or variable interest rates.  See Note 7 for additional informationregarding the Company’s investments.

 

**4.****             ****Intangible Assets**

 

The Company purchased Big Sky in December 2002.  The excess of the Big Sky purchase price overthe fair market value of the net assets acquired was allocated to certainidentifiable intangible assets, including Big Sky’s pilot labor contract andits air carrier certificate, and to goodwill. Goodwill and the intangible assets are evaluated for impairmentannually, at a minimum, or on an interim basis if events or circumstancesindicate a possible inability to

 

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realize the carrying amounts.  During the fourth quarter of fiscal 2007, theCompany completed its annual impairment test of intangible assets anddetermined that no additional impairment charge was necessary.

 

Intangible assets and related accumulatedamortization were as follows for the year ended March 31, 2007 inthousands:

 
| ** **                          | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                          | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| Indefinite-lived intangible assets: |       |       |       |             |       |       |       |
| Air carrier certificate             |       | $          | 925        |             |       |       | $          | 925 |   |
| Amortizable intangible asset:       |       |       |       |             |       |       |       |
| Pilot labor contract                |       | 2,840      |       | (1,758           | )          | 1,082      |       |
|                                |       | $          | 3,765      |             | $          | (1,758     | )          | $ | 2,007 |   |
|                                     |            |            |            |                  |            |            |            |  |  |  |

 

During the period April 1, 2007 to March 8,2008, Big Sky purchased three slots at the Westchester County Airport in WhitePlains, New York with the intent to provide air service to Boston,Massachusetts in January 2008.

 

Due to continued losses at Big Sky, theCompany determined that an interim impairment test of intangible assets wasnecessary at December 31, 2007. Based on the results of the interim test performed at December 31,2007 the Company determined that Big Sky’s pilot labor contract was impairedand recorded an impairment charge of approximately $0.8 million.  The impairment charge was recorded in “Impairmentcharges” in the accompanying consolidated statement of operations.  Based on its analysis, the Company believedBig Sky’s air carrier certificate and airport slots continued to have value andwere not impaired.

 

**5.****             ****Impairment and Other Charges**

 

Impairment and other charges for the periodended March 8, 2008 were as follows, in thousands:

** **
| ** **                                                    | ** ** | ** ** | ** ** | **Refer to** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                    | ** ** | ** ** | ** ** | **Note**          | ** ** |
| Additional provision for guaranty of  Cincinnati hangar lease |       | $          | 10,185     |              | 4          |   |
| Impairment of Big Sky pilot labor contract                    |       | 777        |       | 14                |       |
|                                                          |       | $          | 10,962     |              |       |   |

 

In August 2007, MAIR and the bondholdersamended the original forbearance to allow MAIR until November 1, 2008 toidentify a new tenant and execute a sublease for the property.  As of December 31,2005, MAIR recorded a $4.8 million liability with respect to the lease andguaranty, which assumed that the facility would remain vacant for two years,during which time MAIR would continue to make the bond and lease payments, andthat thereafter MAIR would be able to sublease the facility at a 20%discount.  As of December 31, 2007, MAIR recorded an additional $10.2million liability, which assumed that MAIR would pay the bondholders in full onor before November 1, 2008, but that MAIR may receive value for its rightsunder the ground lease.  This impairmentcharge was based on negotiations between MAIR and the bondholders to pay offthe remaining bond balance and negotiations between MAIR and the airportregarding the ground lease.

 

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Impairment and other charges for the periodended March 31, 2006 were as follows, in thousands:

 
| ** **                                                      | ** ** | ** ** | ** ** | **Refer to** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | **Note**          | ** ** |
| Cancellation of Northwest warrants                              |       | $          | 2,106      |              | see below  |   |
| Provision for loss associated with  Northwest bankruptcy filing |       | 31,900     |       | see below         |       |
| Impairment of Big Sky goodwill                                  |       | 2,503      |       | see below         |       |
| Provision for guarantee of Cincinnati  hangar lease             |       | 4,759      |       | 14                |       |
| Impairment of equity investment in Mesaba                       |       | 8,935      |       | 15                |       |
|                                                            |       | $          | 50,203     |              |       |   |

 

In connection with certain agreements betweenMesaba and Northwest, Northwest received contract rights in the form ofwarrants to purchase an aggregate of 4,151,922 shares of MAIR’s common stock atexercise prices ranging from $7.25 to $21.25 per share.  Mesaba amortizedthe contract rights over the life of the warrants.  Upon execution of a newairline services agreement in August 2005, and pursuant to a separateagreement between MAIR and Northwest, the prior warrants were replaced by anamended and restated warrant to purchase 4,112,500 shares of MAIR’s stock (the “AmendedWarrant”).  As of March 31, 2006,the Amended Warrant remained unvested.  When the Amended Warrant wasissued, Mesaba wrote off $2.1 million, which amount represented the remainingunamortized portion of the prior warrants issued in connection with Mesaba’sand Northwest’s prior agreements.  On March 12,2007, MAIR purchased from Northwest all shares of MAIR stock owned byNorthwest.  At that time, the AmendedWarrant was also cancelled.

 

At the time of Northwest’s bankruptcy filingon September 14, 2005, Mesaba estimated that Northwest owed Mesabaapproximately $31.9 million under the airline services agreement and relatedagreements, net of amounts that Mesaba owed to Northwest under theseagreements.  After analyzing thecollectability of the prepetition receivables due to Mesaba from Northwest, thecompany concluded that it was necessary to establish a reserve of $31.9 millionfor amounts that Mesaba may not ultimately collect.

 

Based on the results of an interim impairmenttest performed at September 30, 2005, the Company determined that all ofBig Sky’s goodwill was impaired and recorded an impairment charge of $2.5million in the second quarter of fiscal 2006.

 

**6.****             ****MAIR’s Proof of Claim in Mesaba’sBankruptcy**

 

On February 28, 2006, as a part ofMesaba’s bankruptcy proceedings, MAIR filed a proof of claim against Mesaba,with no recognition of this claim in the Company’s consolidated financialstatements due to the significant uncertainty of any amount being ultimatelycollected.  In April 2007, theBankruptcy Court approved a compromise for MAIR’s damage claim under whichMesaba allowed MAIR a claim of up to $6.2 million relating to repayment of theguaranty of Mesaba’s hangar lease at the Cincinnati/Northern KentuckyInternational Airport and management fees. Additionally, pursuant to a Stock Purchase Agreement between MAIR andNorthwest, Northwest assigned its $7.3 million allowed claim against Mesaba toMAIR.  Therefore, as of the Exit Date,MAIR’s total unsecured creditors’ claim in Mesaba’s bankruptcy totaled $13.5 million.

 

In July 2007, the liquidating trust madean interim distribution of 70% to all claimholders with allowed undisputedclaims.  MAIR received $9.4 million ofits $13.5 million claim, which reflects the 70% interim distribution of itsclaim.  MAIR recorded these amounts as “Interestincome and other” within the consolidated statement of operations.  In fiscal 2009, the Company expects toreceive, and will record upon receipt, the remaining $4.1 million, or 30%, ofMAIR’s unsecured claim.

 

**7.****             ****Investments**

 

Investments consist principally ofgovernment, agency, corporate and municipal securities and are classified asavailable-for-sale.  Fair value ofinvestments is determined based on quoted market prices.  The Company classifies investments with anoriginal maturity of more than 90 days that mature within one year asshort-term and greater than one year as long-term.

 

As of March 31, 2008 and 2007, cash andinvestments totaled $27.2 million and $66.0 million, respectively.

 

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Amortized cost, gross unrealized gains andlosses and fair value of short and long-term investments classified assecurities available for sale were as follows as of March 31, inthousands:

 
| ** **              | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Amortized cost          |       | $        | 11,705     |     | $          | 37,409 |   |
| Gross unrealized gains  |       | 147      |       | 50       |       |
| Gross unrealized losses |       | (549     | )          | (34      | )          |
| Fair value              |       | $        | 11,303     |     | $          | 37,425 |   |

 

In fiscal 2008 gross realized losses were$1.1 million as the Company began liquidating its long-term assets.  In fiscal 2007 the gross realized gains andlosses were insignificant, as the Company generally held the investments untilmaturity.   In fiscal 2006, grossrealized losses were $0.2 million as the Company incurred some losses when itchanged its investment profile focus from tax-exempt municipal securities totaxable securities.

 

**8.****             ****Leases**

 

*Aircraft Leases*

 

Big Sky

 

Big Sky’s airline fleet included of thefollowing aircraft held under operating leases as of March 31, 2008:

 
| ** **                     | ** ** | ** **         | ** ** | ** **   | ** ** | **Approximate**        | ** ** | **Approximate**           | ** ** |
|--------------------------------|------------|--------------------|------------|--------------|------------|------------------------|------------|---------------------------|------------|
| ** **                     | ** ** | **Number of** | ** ** | **Seating**  | ** ** | **Single Flight** | ** ** | **Average Cruising** | ** ** |
| **Type of Aircraft** | ** ** | **Aircraft**       | ** ** | **Capacity** | ** ** | **Range (miles)** | ** ** | **Speed (mph)**      | ** ** |
| Nonoperating:                  |       |               |       |         |       |                   |       |                      |       |
| Beechcraft 1900D               |       | 17                 |       | 19           |       | 750                    |       | 325                       |       |

 

On May 14, 2008, MAIR, Big Sky and Mesaexecuted the Settlement Agreement under which Big Sky agreed to make a one-timepayment of $1.5 million to Mesa in satisfaction of all future lease liabilitiesfor the ten aircraft Big Sky leased from Mesa. All ten aircraft were returned to Mesa on or before May 14,2008.  The Settlement Agreement providedthat Mesa would retain $160,000 in lease deposits previously paid by Big Skyand also provided for Mesa to retain amounts prepaid by Big Sky to satisfy return conditions related to theaircraft.  Finally, following executionof the Settlement Agreement, Mesa agreed to cancel the $1.9 million letter ofcredit MAIR had established for Mesa’s benefit.

 

Big Sky is in the process of selling itsseven owned B1900D aircraft and has engaged the services of a broker to assistin the sales process.

 

Consolidated rent expense for aircraftoperating leases, excluding Mesaba after its deconsolidation on the PetitionDate, was $1.7 million for the period April 1, 2007 to March 8, 2008and $1.8 million and $56.3 million in fiscal 2007 and 2006, respectively.

 

33

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*Non-Aircraft Leases*

 

The Company leases land, offices, hangarfacilities, equipment and certain terminal facilities under operating leasesthrough 2019, which provide for approximate future minimum rental payments asfollows as of March 31, in thousands:

 
| **Year Ending March 31** | ** ** | **Amount** | ** ** |
|-----------------------------------------|------------|------------|------------|
| 2009                                    |       | $          | 2,929      |   |
| 2010                                    |       | 1,345      |       |
| 2011                                    |       | 1,348      |       |
| 2012                                    |       | 1,262      |       |
| 2013                                    |       | 1,262      |       |
| Thereafter                              |       | 20,644     |       |
|                                    |       | $          | 28,790     |   |

 

The Company’s consolidated rent expense fornon-aircraft operating leases was approximately $1.5 million for the periodended March 8, 2008 and $1.5 million and $1.1 million in fiscal 2007 and2006, respectively.

 

As described in Note 14, MAIR has guaranteedMesaba’s obligations with respect to Mesaba’s facility at the Cincinnati/NorthernKentucky International Airport.  SinceMesaba’s bankruptcy filing, MAIR has made the payments owed by Mesaba under theground lease and facilities lease, which payments total approximately $1.2million annually.    Substantially all ofthe contractual minimum lease payment in the table above relate to MAIR’sguaranty.  MAIR has been in negotiationswith the bondholders and the airport to prepay the bonds and obtain a releasefrom its obligations under the ground lease. MAIR anticipates that this matter will be resolved in the first half offiscal 2009.

 

**9.****             ****Notes Payable and Long Term Debt**

 

*Capital Lease*

 

The present value of future minimum leasepayments under Big Sky’s capital lease for its hangar facility is $0.4 millionto be paid in fiscal 2009 and consists of $0.7 million of total minimum leasepayments less interest of $0.3 million. The present value of future minimum capital lease payments is recordedin other current liabilities in the consolidated statement of net assets(liquidation basis) as of March 31, 2008.

 

The carrying value of the facility undercapital lease net of accumulated depreciation was $0.3 million for the period April 1,2007 to March 8, 2008 and $0.4 million at March 31, 2007.

 

As of March 31, 2007, long-term debt of$0.5 million was recorded in other noncurrent liabilities in the consolidatedbalance sheet and consisted of a variable rate (10.75% at March 31, 2007)installment note of $5,000, a 7.5% installment note of $25,000 and Big Sky’scapital lease of $0.5 million at an imputed interest rate of 8.5%, secured byBig Sky’s leased assets, less the current portion of long term debt of $64,000.

 

*Lines of Credit*

 

In February 2005, Big Sky obtained arevolving line of credit in the principal amount of $250,000 from FirstInterstate Bank of Billings.  In March 2006,the principal amount available under the line increased to $370,000.  The line of credit charges a variableinterest rate based on the prime rate published in the *Wall StreetJournal*.  At March 31,2008, the rate was 5.25%.  The line ofcredit is collateralized by Big Sky’s inventory, accounts receivable andequipment and is scheduled to mature in June 2007.  The balance of the line of credit was$369,140 as of March 31, 2008 and $370,000 as of March 31, 2007.

 

In September 2007, Big Sky obtained asecond line of credit with a principal amount of $1,000,000 from FirstInterstate Bank of Billings.  The linecharged a fixed interest rate of 5.5%. The line of credit was collateralized by a $1,000,000 certificate ofdeposit accruing interest of 5.25%.  Thebalance of the line at March 31, 2008 was $774,019, and the line wascancelled and paid in full on April 28, 2008.

 

34

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**10.****      ****Income Taxes**

 

The Company’s consolidated benefit for income taxes was comprised ofthe following elements for the period April 1, 2007 to March 8, 2008and the years ended March 31, 2007 and 2006, in thousands:

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Current:   |       |     |       |     |       |     |       |   |   |   |
| Federal    |       | $        | (136       | )        | $          | (1,929   | )          | $ | (2,418 | ) |
| State      |       | (60      | )          | (420     | )          | —   |       |
| Deferred   |       |     |       |     |       |     |       |
| Federal    |       | —   |       | 324      |       | (10,453  | )          |
| State      |       | —   |       | 28       |       | (971     | )          |
|       |       | $        | (196       | )        | $          | (1,997   | )          | $ | (13,842 | ) |

 

The actual income tax benefit differs from the statutory tax expense asfollows for the period April 1, 2007 to March 8, 2008 and the yearsended March 31, 2007 and 2006, in thousands:

 
| ** **                                            | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Computed tax benefit at Federal statutory rate of 35% |       | $        | (5,494     | )        | $          | (3,291   | )          | $ | (19,858 | ) |
| Increase (decrease) in income taxes resulting from:   |       |     |       |     |       |     |       |
| State taxes, net of federal tax benefit               |       | (470     | )          | (282     | )          | (1,845   | )          |
| Non-deductible meals and entertainment expenses       |       | 7        |       | 14       |       | 264      |       |
| Non-deductible goodwill impairment                    |       | —   |       | —   |       | 957      |       |
| Non-deductible loss in subsidiary                     |       | (26,980  | )          | —   |       | 3,418    |       |
| Favorable IRS audit settlement                        |       | —   |       | (1,472   | )          | —   |       |
| Valuation allowance                                   |       | 33,148   |       | 3,450    |       | 3,630    |       |
| Other, net                                            |       | (407     | )          | (416     | )          | (408     | )          |
|                                                  |       | $        | (196       | )        | $          | (1,997   | )          | $ | (13,842 | ) |

 

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

 
| ** **                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:           |       |     |       |     |       |
| Capital loss carryforward      |       | $        | 26,980     |     | $          | — |   |
| NOL carryforwards              |       | 6,095    |       | 6,117    |       |
| Impairment                     |       | 1,704    |       |     |       |
| Other accruals                 |       | 8,542    |       | 2,020    |       |
| Gross deferred tax assets      |       | $        | 43,321     |     | $          | 8,137 |   |
|                           |       |     |       |     |       |
| Deferred tax liabilities:      |       |     |       |     |       |
| Property and equipment         |       | $        | 189        |     | $          | 189 |   |
| Other accruals                 |       | 1,128    |       | 1,360    |       |
| Gross deferred tax liabilities |       | 1,317    |       | 1,549    |       |
| Less valuation allowance       |       | (42,356  | )          | (6,940   | )          |
| Net deferred tax liabilities   |       | $        | (352       | )        | $          | (352 | ) |

 

The net deferred tax liability was classified as follows as of March 31,in thousands:

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------|------------|----------|------------|----------|------------|
| Current    |       | $        | (352       | )        | $          | — |   |
| Long term  |       | —   |       | (352     | )          |
|       |       | $        | (352       | )        | $          | (352 | ) |

 

35

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SFAS No. 109, *Accounting for IncomeTaxes*, requires that all available evidence, both positive andnegative, be considered to determine whether, based on the weight of thatevidence, a valuation allowance is needed. Future realization of the tax benefits of an existing deductibletemporary difference or carryforward ultimately depends on the existence ofsufficient taxable income of the appropriate character within the carryback orcarryforward periods available under the tax law.

 

The Company has performed such an analysis, and a valuation allowancehas been provided against deferred tax assets to the extent they cannot be usedto offset future income arising from the expected reversal of taxabledifferences.  A valuation allowance of$42.4 million and $6.9 million as of March 31, 2008 and March 31,2007, respectively, has been provided due to the significance of the Company’slosses and significant uncertainties of its ability to realize theseassets.  Due to the liquidation of theCompany it is not expected that the assets will be realized.

 

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, 2008, the Company’s federaldeferred tax assets included $6.1 million of NOL carryforwards (excludingMesaba’s NOL carryforwards discussed below). Of these NOL carryforwards, $3.7 million are federal NOLs related to BigSky and are subject to Section 382 of the Internal Revenue Code, whichrestricts the annual utilization of certain NOLs incurred prior to a change inownership.  These Big Sky NOLcarryforwards expire through 2022.  Theremaining $12.0 million balance is for MAIR’s federal NOLs which expire in 2026and 2027.  MAIR and Big Sky also have$21.0 million in state NOLs (excluding Mesaba’s state NOL carryforwardsdiscussed below) which expire over the next four to twenty years.

 

During the fourth quarter of fiscal 2007, the Company receivedverification of a final settlement with the IRS concerning the IRS’ examinationof the Company’s income tax returns for fiscal 2001 through 2004.  As a result of this favorable settlement, theCompany reduced its income tax payable and tax provision by $1.5 million in thefourth quarter of fiscal 2007.

 

The Company’s adoption of the provisions of the Financial AccountingStandards Board (“FASB”) Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes,* on April 1, 2007 did not havea significant impact the Company’s consolidated financial statements. As of theadoption, the total amount of unrecognized tax benefits for uncertain taxpositions was $0.5 million, which is classified as non-currentliabilities.  Of this amount, $0.3million would affect the Company’s effective tax rate if recognized.  As a result of the finalization of Mesaba’sbankruptcy proceedings, $0.3 million of the unrecognized tax benefits wasrecognized in fiscal 2008.

 

As a result of the deconsolidation of Mesaba in the third quarter offiscal 2006, all of Mesaba’s net deferred tax assets were no longer presentedin the accompanying consolidated balance sheet at March 31, 2007.  MAIR owned 100% of Mesaba until April 24,2007, at which time Northwest became the sole owner of Mesaba through Mesaba’sbankruptcy plan of reorganization (see Note 15).  MAIR will include Mesaba in its consolidatedtax return filings as of March 31 2007. Mesaba’s short period ending April 24, 2007 will be included inMAIR’s consolidated tax return filings for the period ending March 31,2008.

 

As a result of the April 2007 settlement of MAIR’s proof of claimin Mesaba’s bankruptcy proceedings, MAIR may be responsible for certain ofMesaba’s tax obligations incurred through April 24, 2007, the effectivedate of Mesaba’s plan of reorganization, for those states in which MAIR andMesaba historically filed a unitary tax return.  Although management doesnot believe there is any remaining exposure, under the settlement between MAIRand Mesaba, Mesaba agreed to relinquish its right to the $0.8 millionintercompany balance so that MAIR can use these funds to pay any Mesaba taxobligations that taxing authorities seek to collect from MAIR.

 

**11.****      ****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, 2008, there were 15,083,049 shares of common stockissued and outstanding.  No shares ofpreferred stock have been issued.

 

36

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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 a liquidation of the Company, holders of common stock would beentitled to a pro rata distribution of any proceeds remaining after payment toall of 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.

 

In January 2007, MAIR and Northwest entered into a Stock PurchaseAgreement under which MAIR agreed to repurchase all of Northwest’s common stockof MAIR, subject to approval by Northwest’s Bankruptcy Court.  MAIR agreed to purchase 5,657,113 shares ofstock from Northwest at a purchase price of $6.25 per share, payable in twotranches.  The closing for the stock purchaseoccurred on March 12, 2007, at which time MAIR paid Northwest $4.25 pershare, or approximately $24 million, and Northwest returned all of the sharesto MAIR for cancellation.  Northwest’sAmended Warrant to purchase additional shares of MAIR’s stock was alsocancelled on that date.  MAIR paidNorthwest the remaining $2.00 per share, or approximately $11.3 million, in October 2007.

 

*Stock Option Plans*

 

The Company has approved stock option plans for key employees,directors, consultants and advisors to the Company.  Options have beengranted and are presently outstanding under the Company’s 1994 Stock OptionPlan, 1996 Director Stock Option Plan and 2000 Stock Incentive Plan.  The2000 Stock Incentive Plan has a provision that automatically increases theauthorized shares available for grant on September 1 of each year by thelesser of 300,000 or 1% of the then outstanding common shares.  Under theplans, the compensation committee of the board of directors grants the optionsand determines the vesting and exercise periods at the time of the award. The purchase price of the stock for non-qualified and incentive stock optionsis determined at the time of the award and is equal to the fair market value atthe time of the award.

 

During fiscal 2008 and 2007, the adoption of SFAS 123R has resulted inadditional expense in the amount of $0.2 million and $0.3 million,respectively, related to stock options. These amounts are included in the “Wages and benefits” caption in theaccompanying consolidated statements of operations for the period April 1,2007 to March 8, 2008 and the fiscal year ended March 31, 2007.  SFAS 123R also requires the benefits of taxdeductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow as required prior toSFAS 123R.  As the Company currently hasno excess tax benefits related to SFAS 123R, its adoption has not affected theCompany’s consolidated statement of cash flows. The impact of adopting SFAS123R on future results will depend on, among other things, levels of stockoptions granted in the future, actual forfeiture rates and the timing of optionexercises.

 

37

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Stock option transactions for the above three plans for the three yearsended March 31 were as follows:

 
| ** **                                         | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **          | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **          | ** ** |
|----------------------------------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|---------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|---------------------|------------|
| ** **                                         | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **          | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **          | ** ** |
| ** **                                         | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**       | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**       | ** ** |
| ** **                                         | ** ** | **Options**     | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**       | ** ** | **Options**     | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**       | ** ** |
| ** **                                         | ** ** | **Outstanding** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**           | ** ** | **Exercisable** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**           | ** ** |
| ** **                                         | ** ** | ** **      | ** ** | ** **   | ** ** | ** **      | ** ** | **(in  thousands)** | ** ** | ** **      | ** ** | ** **   | ** ** | ** **      | ** ** | **(in  thousands)** | ** ** |
| Balance at  March 31, 2005                    |       | 1,898,551       |       | $            | 7.07       |            |       |                |       |            | 1,272,426  |         | $          | 6.85            |       |                |       |   |   |
| Exercised                                          |       | (17,500         | )          | 6.54         |       |            |       |                |       |            |       |         |       |            |       |                |       |
| Expired /  Cancelled                               |       | (321,875        | )          | 8.04         |       |            |       |                |       |            |       |         |       |            |       |                |       |
| Balance at  March 31, 2006                    |       | 1,559,176       |       | 6.87         |       |            |       |                |       | 1,341,676       |       | 6.74         |       |            |       |                |       |
| Granted                                            |       | 45,000          |       | 5.62         |       |            |       |                |       |            |       |         |       |            |       |                |       |
| Exercised                                          |       | (73,558         | )          | 6.35         |       |            |       |                |       |            |       |         |       |            |       |                |       |
| Expired /  Cancelled                               |       | (72,500         | )          | 6.53         |       |            |       |                |       |            |       |         |       |            |       |                |       |
| Balance at  March 31, 2007                    |       | 1,458,118       |       | 6.87         |       |            |       |                |       | 1,308,118       |       | 6.80         |       |            |       |                |       |
| Exercised                                          |       | (74,764         | )          | 5.97         |       |            |       |                |       |            |       |         |       |            |       |                |       |
| Expired /  Cancelled                               |       | (548,354        | )          | 7.13         |       |            |       |                |       |            |       |         |       |            |       |                |       |
| Balance at  March 31, 2008                    |       | 835,000         |       | 6.78         |       | 4.7             |       | $                   | —     |            | 763,750    |         | 6.76       |            | 4.4        |                | $          | — |   |
| Vested or  expected to vest at March 31, 2008 |       | 835,000         |       | 6.78         |       | 4.7             |       | $                   | —     |            |       |         |       |            |       |                |       |   |
|                                                    |            |                 |            |              |            |                 |            |                     |            |                 |            |              |            |                 |            |                     |            |  |  |  |  |

 

The aggregate intrinsic value of options outstandingat March 31, 2008 was zero.  Theaggregate intrinsic value of options exercised during fiscal 2008, 2007 and2006 was not significant.  The total fairvalue of options vested was $0.2 million, $0.4 million and $0.4 million as of March 31,2008, 2007 and 2006, respectively.

 

Options outstanding as of March 31, 2008 were as follows:

 
| ** **               | ** ** | **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** | ** ** |
| $5.62 - $5.96            |       | 45,000                       |       | 8.3                          |       | $ | 5.62 |   | 11,250 |   | $ | 5.62 |   |
| $5.97 - $6.53            |       | 310,000                      |       | 3.7                          |       | 5.97 |   | 310,000 |   | 5.97 |   |
| $6.54 - $6.54            |       | 240,000                      |       | 3.6                          |       | 6.54 |   | 240,000 |   | 6.54 |   |
| $6.55 - $11.50           |       | 240,000                      |       | 6.4                          |       | 8.28 |   | 202,500 |   | 8.28 |   |
| $5.62 - $11.50           |       | 835,000                      |       | 4.7                          |       | 6.78 |   | 763,750 |   | 6.76 |   |
|                          |            |                              |            |                              |            |  |  |  |  |  |  |  |  |

 

As of March 31, 2008, there were 2,385,098 shares available forgrant under the Company’s 2000 Stock Incentive Plan.  No shares are available for futuregrants under either the 1994 Stock Option Plan or the 1996 DirectorStock Option Plan.

 

*Unrecognized Compensation*

 

As of March 31, 2008, the Company had $0.1million of total unrecognized compensation cost related to non-vested stockoption compensation arrangements granted under all equity compensationplans.  Total unrecognized compensationwill be adjusted for future changes in estimated forfeitures.  The Company expects to recognize theremaining cost over the first two quarters of fiscal 2009.

 

**12.****      ****Loss Per Share**

 

Basic loss per common share is computed by dividing net loss by theweighted average number of shares of common stock outstanding during theyear.  Diluted earnings per share iscomputed by dividing net loss 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.

 

38

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The following table reconciles the number of shares utilized in theearnings per share calculations for the years ended March 31, inthousands, except per share data:

 
| ** **                                                                                | ** ** | **2008**                        | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                | ** ** | **(through March 8)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                      |       |                            |       |       |       |       |       |
| Net loss                                                                                  |       | $                               | (15,501    | )          | $          | (7,405     | )          | $ | (82,848 | ) |
| For loss per share - basic:                                                               |       |                            |       |       |       |       |       |
| Weighted average number of issued shares outstanding                                      |       | 15,065                          |       | 20,333     |       | 20,584     |       |
| Effect of dilutive securities:                                                            |       |                            |       |       |       |       |       |
| Computed shares outstanding under stock option plans utilizing the  treasury stock method |       | —                          |       | —     |       | —     |       |
| Computed shares outstanding under warrants issued utilizing the treasury  stock method    |       | —                          |       | —     |       | —     |       |
| For loss per share - diluted:                                                             |       |                            |       |       |       |       |       |
| Weighted average common and potentially dilutive common shares  outstanding               |       | 15,065                          |       | 20,333     |       | 20,584     |       |
|                                                                                      |       |                            |       |       |       |       |       |
| Loss per share - basic                                                                    |       | $                               | (1.03      | )          | $          | (0.36      | )          | $ | (4.02 | ) |
| Loss per share - diluted                                                                  |       | $                               | (1.03      | )          | $          | (0.36      | )          | $ | (4.02 | ) |
|                                                                                      |       |                            |       |       |       |       |       |
| Antidilutive options and warrants                                                         |       | 835                             |       | 1,458      |       | 5,672      |       |

 

**13.****      ****Segment Information**

 

The Company follows the provisions of SFAS No. 131, *Disclosures about 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 majorcustomers.  The method for determiningwhat information to report is based upon the way management organizes the operatingsegments within the Company for making operating decisions and assessingfinancial performance.  Although Mesabahas been deconsolidated from the Company’s consolidated financial statements asof the Petition Date, the segment information presented below continues toinclude Mesaba in accordance with SFAS No. 131 and related guidance forequity-method investees.  Mesaba’sresults of operations after the Petition Date are included in the “Eliminations”column.

 

Operating segment information for Mesaba (2008 amounts are unaudited),Big Sky and MAIR were as follows, in thousands:

 

39

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| ** **                                         | ** ** | **Mesaba** | ** ** | **Big Sky** | ** ** | **MAIR** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------|------------|------------|------------|------------------|------------|----------|------------|------------------|------------|------------------|------------|
| *Period April 1, 2007 to March 8, 2008:* |       |       |       |             |       |     |       |             |       |             |       |
| Operating revenues                                 |       | $          | 14,842     |             | $          | 28,403   |       | $                | —     |             | $          | (14,842 | ) | $ | 28,403 |   |
| Operating expenses                                 |       | 15,831     |       | 39,503           |       | 15,715   |       | (15,831          | )          | 55,218           |       |
| Depreciation and amortization                      |       | 433        |       | 1,386            |       | 18       |       | (433             | )          | 1,404            |       |
| Interest expense                                   |       | —     |       | 1,116            |       | 375      |       | (977             | )          | 514              |       |
| Income (loss) before income taxes                  |       | 83,528     |       | (13,617          | )          | (2,080   | )          | (83,528          | )          | (15,697          | )          |
| Capital expenditures                               |       | —     |       | 21,975           |       | 8        |       | —           |       | 21,983           |       |
| *Year Ended March 31, 2008*                   |       |       |       |             |       |     |       |             |       |             |       |
| Current assets                                     |       | —     |       | 6,563            |       | 76,676   |       | (18,133          | )          | 65,106           |       |
| Total assets                                       |       | —     |       | 26,844           |       | 128,651  |       | (90,389          | )          | 65,106           |       |
| Current liabilities                                |       | —     |       | 25,390           |       | 17,151   |       | (16,439          | )          | 26,102           |       |
| Total stockholders’ (deficit) equity          |       | —     |       | (17,693          | )          | 111,251  |       | (93,558          | )          | —           |       |
| *Year Ended March 31, 2007:*                  |       |       |       |             |       |     |       |             |       |             |       |
| Operating revenues                                 |       | $          | 268,303    |             | $          | 23,932   |       | $                | 234        |             | $          | (268,537 | ) | $ | 23,932 |   |
| Operating expenses                                 |       | 290,230    |       | 28,843           |       | 9,945    |       | (290,464         | )          | 38,554           |       |
| Depreciation and amortization                      |       | 9,021      |       | 676              |       | 21       |       | (9,021           | )          | 697              |       |
| Interest expense                                   |       | 220        |       | 599              |       | 35       |       | (627             | )          | 227              |       |
| Reorganization items, net                          |       | 40,060     |       | —           |       | —   |       | (40,060          | )          | —           |       |
| Loss before income taxes                           |       | (68,596    | )          | (5,505           | )          | (3,897   | )          | 68,596           |       | (9,402           | )          |
| Capital expenditures                               |       | 2,319      |       | 567              |       | 10       |       | (2,319           | )          | 577              |       |
| Current assets                                     |       | 46,457     |       | 7,090            |       | 57,807   |       | (48,015          | )          | 63,339           |       |
| Total assets                                       |       | 72,120     |       | 10,942           |       | 105,838  |       | (97,210          | )          | 91,690           |       |
| Current liabilities                                |       | 44,320     |       | 6,638            |       | 18,323   |       | (45,878          | )          | 23,403           |       |
| Total stockholders’ (deficit) equity          |       | (68,310    | )          | 3,223            |       | 87,515   |       | 44,778           |       | 67,206           |       |
| *Year Ended March 31, 2006:*                  |       |       |       |             |       |     |       |             |       |             |       |
| Operating revenues                                 |       | $          | 408,814    |             | $          | 20,441   |       | $                | 3,184      |             | $          | (176,160 | ) | $ | 256,279 |   |
| Operating expenses                                 |       | 448,939    |       | 28,225           |       | 21,086   |       | (179,270         | )          | 318,980          |       |
| Depreciation and amortization                      |       | 12,243     |       | 878              |       | 18       |       | (5,012           | )          | 8,127            |       |
| Interest expense                                   |       | —     |       | 390              |       | —   |       | (315             | )          | 75               |       |
| Reorganization items, net                          |       | 22,650     |       | —           |       | —   |       | (22,650          | )          | —           |       |
| (Loss) income before income taxes                  |       | (62,326    | )          | 8,090            |       | (12,106  | )          | 9,605            |       | (56,737          | )          |
| Capital expenditures                               |       | 8,101      |       | 743              |       | 20       |       | (2,382           | )          | 6,482            |       |

 

**14.****      ****Commitments and Contingencies**

 

*Benefit Plan*

 

Until April 15, 2008, when the plan was terminated, Big Skymaintained a 401(k) benefit plan covering substantially all of itsemployees whereby Big Sky matched 30% of employee contributions to the plan, upto 5% of each employee’s eligible earnings. Big Sky’s contribution to the plan was not significant in fiscal 2008,2007 or 2006.

 

Until April 30, 2007, MAIR maintained its own 401(k) benefitplan covering all of its employees whereby MAIR matched 50%, 75% or 100%,depending on length of employment, of employee contributions to the plan, up to8% of each employee’s eligible earnings. MAIR’s contribution to the plan was not significant in fiscal 2008, 2007or 2006.

 

Between April 30, 2007 and April 15, 2008, MAIR participatedin Big Sky’s 401(k) benefit plan. On April 15, 2008, the 401(k) plan was terminated and allinvested funds were distributed in accordance with the participant’sinstructions.

 

*Mesaba Bankruptcy*

 

Following Mesaba’s exit from bankruptcy on April 24, 2007, Mesaba’sestate has been administered via a liquidating trust.  As the former equity owner of Mesaba, MAIRwill receive all funds remaining in the liquidating trust after the unsecuredcreditors are paid and after the expenses of the trust are paid.  Based on the amounts at which certain claimshave ultimately settled and other information available to the Company, theCompany currently estimates that MAIR will receive approximately $25 millionfor its equity interest in Mesaba.  Theultimate equity distribution MAIR receives will be affected by the amounts atwhich the remaining unsecured claims are resolved.  

 

40

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MAIR has not recorded the contingent residual equity interest in thetrust due to the uncertainties of the ultimate amount to be received.

 

One such unresolved claim is Saab Leasing’s $35 million claim whichoriginated from a lawsuit between Saab Leasing and Mesaba regarding aircraftlease payments allegedly owed by Mesaba to Saab Leasing.  In July 2006, the District Court for theDistrict of Minnesota ruled that Saab Leasing was not eligible to receivedamages for the majority of its claims. In March 2008, the Eighth Circuit Court of Appeals affirmed   the ruling by the District Court, and on April 24,2008, the Eighth Circuit denied Saab Leasing’s petition for a rehearing.  Saab Leasing’s only remaining avenue is torequest a hearing before the United States Supreme Court.  The liquidating trustee will continue to holdfunds in reserve for Saab Leasing’s claim until the claim is finally resolved.

 

Goldman Credit also has a $58 million claim against the liquidating trustrelating to aircraft and equipment leases Mesaba rejected in bankruptcy. Goldman Credit has asserted that the stipulated loss provisions of theapplicable leases, under which liquidated damages are calculated, should applyto determine the total claim amount due to Goldman Credit.  Mesaba’sbankruptcy estate filed for summary judgment with the Bankruptcy Courtasserting that the liquidated damages constitute unenforceable penalties. Mesaba’s bankruptcy trustee instead believes that the claim allowed to GoldmanCredit should reflect actual damages suffered.  The Bankruptcy Court heardthe motion in September 2007, but has not yet ruled on the motion.  The liquidating trustee has been negotiatingwith Goldman Credit in an attempt to reach a settlement of the claim, and MAIR’sestimate of its equity distribution from the liquidating trust assumes that theclaim will be settled.

 

*Guaranty*

 

Prior to its bankruptcy, Mesaba leased a facility atthe Cincinnati/Northern Kentucky International Airport, but vacated thefacility and ceased making the required lease payments on it in November 2005. In 1999, MAIR unconditionally guaranteed full and prompt payment of the groundlease and the bonds associated with the initial financing of thefacility.  In accordance with this guaranty, MAIR has made the requiredbond and ground lease payments due since November 2005.  In April 2006,in exchange for the bondholders forbearing acceleration of the bonds, MAIRdelivered a letter of credit to the bondholders to assure payment of thebonds.  Subsequently, Mesaba rejected the facilities lease associated withthe facility, but assumed and assigned the related ground lease to MAIR. The Airport Board consented to the assignment of the ground lease.

 

In August 2007, MAIR and the bondholders amended the originalforbearance to allow MAIR until November 1, 2008 to identify a new tenantand execute a sublease for the property. As of December 31, 2005, MAIR recorded a $4.8 million liabilitywith respect to the lease and guaranty, which assumed that the facility wouldremain vacant for two years, during which time MAIR would continue to make thebond and lease payments, and that thereafter MAIR would be able to sublease thefacility at a 20% discount.  As of December 31, 2007, MAIR recordedan additional $10.2 million liability, which assumed that MAIR would pay thebondholders in full on or before November 1, 2008.  This impairment charge was based onnegotiations between MAIR and the bondholders to pay off the remaining bondbalance and negotiations between MAIR and the airport regarding the groundlease.

 

The letter of credit was issued by First Interstate Bank of Billingsand is currently fully collateralized by MAIR’s cash account held at FirstInterstate Bank.  Under the agreement with the bondholders, MAIR isobligated to maintain the letter of credit until all obligations under thebonds are satisfied.  MAIR’s annual obligations with respect to the bondsand the ground lease for the facility total approximately $1.2 million and arescheduled to continue through July 2029 and increase at specifiedintervals in accordance with the terms of the bond documents.  However,MAIR anticipates that any agreement it reaches with the bondholders to prepaythe bonds will also include a release of MAIR’s obligations under the groundlease.

 

The bondholder agreement and the letter of credit provide that theamount of the letter of credit will automatically decrease each July inaccordance with the redemption schedule for the bonds.  The bondholders may draw on the letter ofcredit upon the occurrence of an event of default under its agreement withMAIR, including if MAIR fails to make any payment when due to the bondholders,if MAIR fails to provide evidence that the letter of credit has been renewedannually (or if MAIR fails to renew the letter of credit), if the bondholdersreceive notice from First Interstate Bank of the bank’s intent not to renew theletter of credit, if the bonds become subject to mandatory redemption, if MAIRfails to comply with the terms of its agreement with the bondholders or if MAIRcommits any event of default under its guaranty of Mesaba’s bondobligations.  The cash supporting the letter of credit was 

 

41

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classified as “Restricted cash” on the Company’s consolidated netassets as of March 31, 2008 and the Company’s consolidated balance sheetat March 31, 2007.

 

*Other Guaranties*

 

Big Sky recorded $0.7 million of restricted cash in fiscal 2008 forcertificates of deposit supporting letters of credit of $0.4 million forworkers’ compensation insurance and $0.3 million for aircraft fuel and airportlease agreements.

 

In May 2007 Big Sky established a $0.1 million certificate ofdeposit supporting a customs bond required for the June 2007 servicebetween Boston, Massachusetts and Quebec City and Fredericton, Canada.

 

*MAIR Pledge for Big Sky*

 

In August 2006, MAIR entered into a pledge agreement with U.S.Bank, pursuant to which MAIR pledged $0.8 million in exchange for U.S. Bankreducing the amount of funds that it held back from Big Sky when credit cardpayments were processed.  U.S. Bank processed payments for Big Sky ticketsmade with various credit cards.  In the past, and consistent with industrypractice, U.S. Bank held back a specified portion of those credit card paymentsuntil the tickets had been used.  MAIR agreed to pledge its cash in lieuof the required hold back, which subsequently freed up those funds for Big Sky’suse.  While Big Sky was operating, MAIR was free to request a release ofits collateral at any time.  Following such a request, U.S. Bank wouldagain begin holding back amounts from Big Sky, and MAIR’s collateral would bereturned 90 days after the held back amounts total the requisite level pursuantto U.S. Bank’s credit card processing policies.  The amount of cashpledged is not recorded as restricted cash. As of May 7, 2008, the amount of the pledge was reduced to$250,000.

 

**15.****      ****Effect of Mesaba Bankruptcy and Mesaba Plan of Reorganization**

 

Mesaba filed a voluntary petition for relief under Chapter 11 of theBankruptcy Code in the Bankruptcy Court on the Petition Date, after whichMesaba operated its business as a debtor-in-possession pursuant to theBankruptcy Code.  Mesaba filed its planof reorganization on January 22, 2007, which provided for Mesaba to exitbankruptcy as a wholly-owned subsidiary of Northwest.  The plan of reorganization was approved bythe Bankruptcy Court on April 9, 2007. On April 24, 2007, the plan of reorganization became effective andMesaba exited bankruptcy as a wholly-owned subsidiary of Northwest, and,therefore, is no longer owned by MAIR.  As a result, Mesaba’s financial statements are reported in Note 20 on acondensed basis.

 

Due to Mesaba’s bankruptcy and the uncertainties surrounding thenature, timing, and specifics of the bankruptcy proceedings, MAIRdeconsolidated Mesaba’s financial results effective as of the PetitionDate.  As a result, Mesaba’s assets andliabilities have been removed from the Company’s consolidated balance sheets asof the Petition Date and through April 24, 2007.  Mesaba’s results of operations have beenremoved from the Company’s consolidated results of operations and cash flowssince the Petition Date, but continue to be included in such consolidatedfinancial statements for periods prior to the Petition Date.

 

MAIR has accounted for Mesaba’s financial results under the equitymethod of accounting since Mesaba’s bankruptcy filing on the PetitionDate.  In accordance with APB Opinion No. 18,**TheEquity Method of Accounting for Investments in Common Stock****, MAIR**evaluated whether its investment in Mesaba had experienced another-than-temporary impairment as of March 31, 2006.  MAIR’s evaluation utilized a market andincome approach, including a discounted cash flow analysis.  After analyzing Mesaba’s actual losses infiscal 2006, projected losses in fiscal 2007 as it transitioned to a Saab-onlyoperation, Mesaba’s five-year Saab business plan and Mesaba’s liabilitiessubject to compromise as of March 31, 2006, MAIR concluded that itsremaining investment in Mesaba had experienced an other-than-temporaryimpairment.  Accordingly, effective March 31,2006, MAIR recorded an $8.9 million impairment charge to write off itsremaining equity investment in Mesaba. The impairment charge was recorded in “Impairment and other charges” inthe fiscal 2006 consolidated statement of operations.

 

For the fiscal year ended March 31, 2007, Mesaba reported a netloss of $71.3 million.  MAIR did notrecord any additional losses in its consolidated financial statements due toMAIR not having any further obligations to fund any of Mesaba’s additionallosses.

 

For the period from April 1, 2007 through the Exit Date, Mesabareported net income of $83.5 million (unaudited).  Upon Mesaba’s emergence from bankruptcy andthe corresponding transfer of MAIR’s equity in Mesaba to Northwest, 

 

42

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MAIR lost its ability to significantly influence Mesaba; therefore, theCompany did not record any portion of Mesaba’s income under the equity methodof accounting.

 

The provisions of Statement of Position 90-7, *FinancialReporting by Entities in Reorganization Under the Bankruptcy Code* (“SOP90-7”), applied to Mesaba’s financial statements while Mesaba operated underthe provisions of Chapter 11 of the Bankruptcy Code.  SOP 90-7 does not change the application ofGAAP in the preparation of financial statements.  However, SOP 90-7 does require that thefinancial statements, for periods including and subsequent to the filing of theChapter 11 petition, distinguish transactions and events that are directlyassociated with the reorganization from the ongoing operations of the business.

 

Since the Petition Date, intercompany balances between MAIR and Mesabahave not been eliminated. As of March 31, 2007 and 2006, MAIR had anintercompany payable to Mesaba of $0.8 million and $0.1 million, respectively,and Mesaba had equal intercompany amounts receivable from MAIR.  During the third quarter of fiscal 2007, MAIRreceived $5.5 million in tax refunds related to net operating loss carrybackclaims for fiscal 2006 and 2005, of which $2.9 million was payable to Mesaba inaccordance with the Company’s tax sharing agreement.  During the fourth quarter of fiscal 2007,MAIR, Mesaba and the IRS reached a settlement regarding Mesaba’s accounting forper diem allowances during fiscal years 2001 through 2004.   Under the settlement agreement MAIR agreedto pay the IRS $1.7 million in taxes and interest on behalf of Mesaba foradjustments to taxable income for the reclassification of per diem amounts forfiscal years 2002 and 2003.  The IRSadjustment and NOL carryback for fiscal 2004 created an additional $0.2 millionreceivable from Mesaba to MAIR.  The taxreturn for fiscal 2005 was amended to incorporate the IRS adjustments and alsonetted an additional $0.2 million receivable from Mesaba to MAIR.

 

As a result of the April 2007 settlement of MAIR’s proof of claimin Mesaba’s bankruptcy proceedings, MAIR may be responsible for certain ofMesaba’s tax obligations incurred through April 24, 2007, the effectivedate of Mesaba’s plan of reorganization, for those states in which MAIR andMesaba historically filed a unitary tax return.  Although management doesnot believe there is any remaining exposure, under the settlement between MAIRand Mesaba, Mesaba agreed to relinquish its right to the $0.8 millionintercompany balance so that MAIR can use these funds to pay any Mesaba taxobligations that taxing authorities seek to collect from MAIR.

 

On January 22, 2007, Mesaba and Northwest entered into a StockPurchase and Reorganization Agreement (the “SPRA”), under which Northwestagreed to allow Mesaba a $145 million claim in Northwest’s bankruptcycase.  In exchange, Mesaba agreed to filea plan of reorganization under which Mesaba’s existing equity would becancelled and new equity would be issued to Northwest, making Mesaba awholly-owned operating subsidiary of Northwest.

 

The SPRA authorized Mesaba to monetize its $145 million claim againstNorthwest to provide Mesaba’s bankruptcy estate with cash to satisfy creditors’claims.  Mesaba’s creditors’ committeeconducted an auction on January 29, 2007, after which The Goldman SachsGroup, Inc. (the “Goldman Group”) and Mesaba entered into a forwardcontract by which the Goldman Group purchased the $145 million claim forapproximately $125 million.  The closingof the sale to the Goldman Group was contingent upon Northwest’s bankruptcycourt allowing the $145 million claim and upon Mesaba’s plan of reorganizationbeing approved by its own Bankruptcy Court. Following Northwest’s bankruptcy court’s February 27, 2007 orderallowing the $145 million claim and Mesaba’s Bankruptcy Court’s April 9,2007 approval of Mesaba’s plan of reorganization, the Goldman Group funded the$125 million purchase price.  Mesabaexited bankruptcy on April 24, 2007, and all the outstanding stock ofMesaba is now owned by Northwest.

 

The entire $125 million purchase price from the Goldman Group was placedin a liquidating trust, and the proceeds from the liquidating trust willultimately be used to satisfy Mesaba’s creditors’ claims.  Prior to the order approving Mesaba’s plan ofreorganization, MAIR worked with Mesaba’s creditors’ committee to resolve themajority of Mesaba’s creditors’ claims. The two remaining significant unresolved claims are held by GoldmanCredit and Saab Leasing and are discussed more fully in Note 14.  Based on information received from theliquidating trustee, after Mesaba’s creditors are paid in full, includinginterest, MAIR could receive an additional $25 million for its equity interestin Mesaba.  However, in the event thetotal allowed creditors’ claims exceed $125 million, MAIR would not receive anydistributions for its equity ownership of Mesaba.  In such event, the trust assets would bedistributed pro-rata to all of Mesaba’s unsecured creditors, including MAIR.

 

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In July 2007, the liquidating trust made an interim distributionof 70% to all claimholders with allowed undisputed claims.  MAIR received $9.4 million of its $13.5million claim, which reflects the 70% interim distribution of its claim.  MAIR recorded these amounts as “Interestincome and other” within the condensed consolidated statement ofoperations.  MAIR will record theremaining $4.1 million when it is received.

 

**16.****      ****Valuation and Qualifying Account**

 

The following is the activity within the Company’s consolidatedvaluation and qualifying account for fiscal 2008, 2007 and 2006, in thousands:

 
| ** **                       | ** ** | **Balances at** | ** ** | **Additions**       | ** ** | **Deductions** | ** ** | **Balances at** | ** ** |
|----------------------------------|------------|----------------------|------------|---------------------|------------|----------------|------------|----------------------|------------|
| ** **                       | ** ** | **Beginning**        | ** ** | **Charged**         | ** ** | **from**       | ** ** | **End**              | ** ** |
| ** **                       | ** ** | **of Year**     | ** ** | **to Expense** | ** ** | **Reserve**    | ** ** | **of Year**     | ** ** |
| Allowance for doubtful accounts: |       |                 |       |                |       |           |       |                 |       |
| Year ended March 31, 2008   |       | $                    | 570        |                | $          | 716            |       | $                    | 76         |   | $ | 1,210 |   |
| Year ended March 31, 2007   |       | 33                   |       | 541                 |       | 4              |       | 570                  |       |
| Year ended March 31, 2006   |       | 601                  |       | 31,985              |       | 32,553         | *          | 33                   |       |
|                                  |            |                      |            |                     |            |                |            |                      |            |  |  |  |  |

 

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*$31.9 million of deductions was due to the deconsolidation of Mesaba.

 

44

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**17.****      ****Quarterly Financial Data (Unaudited)**

 

Thefollowing is quarterly financial data for each of the three months ended June 30,2007, September 30, 2007 and December 31, 2007 and the period January 1,2008 to March 8, 2008, in thousands, except per share data:

 
| ** **                                     | ** ** | **Quarter Ended**      | ** ** | **January 1, 2008 to** | ** ** | **April 1, 2007 to** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                     | ** ** | **June 30, 2007** | ** ** | **September 30, 2007**      | ** ** | **December 31, 2007**     | ** ** | **March 8, 2008** | ** ** | **March 8, 2008** | ** ** |
|                                           |       |                        |       |                                  |       |                                |       |   |   |   |   |
| Operating revenues                             |       | $                           | 7,110      |                                  | $          | 9,052                               |       | $ | 9,868 |   | $ | 2,373 |   | $ | 28,403 |   |
| Total operating expenses                       |       | 11,570                      |       | 12,479                                |       | 25,498                              |       | 5,671 |   | 55,218 |   |
| Operating loss                                 |       | (4,460                      | )          | (3,427                                | )          | (15,630                             | )          | (3,298 | ) | (26,815 | ) |
| Income (loss) before provision of income taxes |       | 6,429                       |       | (2,539                                | )          | (15,569                             | )          | (4,018 | ) | (15,697 | ) |
| Net Income (loss)                              |       | 6,496                       |       | (2,525                                | )          | (15,229                             | )          | (4,243 | ) | (15,501 | ) |
| Loss per common share:                         |       |                        |       |                                  |       |                                |       |   |   |   |   |
| Basic                                          |       | $                           | 0.43       |                                  | $          | (0.17                               | )          | $ | (1.01 | ) | $ | (0.28 | ) | $ | (1.03 | )(1) |
| Diluted                                        |       | $                           | 0.43       |                                  | $          | (0.17                               | )          | $ | (1.01 | ) | $ | (0.28 | ) | $ | (1.03 | )(1) |
| Weighted average common shares outstanding:    |       |                        |       |                                  |       |                                |       |   |   |   |   |
| Basic                                          |       | 15,016                      |       | 15,078                                |       | 15,083                              |       | 15,083 |   | 15,065 |   |
| Diluted                                        |       | 15,086                      |       | 15,078                                |       | 15,083                              |       | 15,083 |   | 15,065 |   |

 

Thefollowing is quarterly financial data for the fiscal year ended March 31,2007, in thousands, except per share data:

 
| ** **                                  | ** ** | **Quarter Ended**      | ** ** | **Fiscal**                       | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **June 30, 2006** | ** ** | **September 30, 2006** | ** ** | **December 31, 2006** | ** ** | **March 31, 2007** | ** ** | **Year** | ** ** |
|                                        |       |                        |       |                             |       |   |   |   |   |   |   |
| Operating revenues                          |       | $                           | 6,043      |                             | $          | 6,183 |   | $ | 5,952 |   | $ | 5,754 |   | $ | 23,932 |   |
| Total operating expenses                    |       | 9,837                       |       | 9,603                            |       | 8,387 |   | 10,727 |   | 38,554 |   |
| Operating loss                              |       | (3,794                      | )          | (3,420                           | )          | (2,435 | ) | (4,973 | ) | (14,622 | ) |
| Loss before provision of income taxes       |       | (2,494                      | )          | (2,195                           | )          | (1,121 | ) | (3,592 | ) | (9,402 | ) |
| Net loss                                    |       | (2,494                      | )          | (2,536                           | )          | (1,131 | ) | (1,244 | ) | (7,405 | ) |
| Loss per common share:                      |       |                        |       |                             |       |   |   |   |   |   |   |
| Basic                                       |       | $                           | (0.12      | )                                | $          | (0.12 | ) | $ | (0.05 | ) | $ | (0.06 | ) | $ | (0.36 | )(1) |
| Diluted                                     |       | $                           | (0.12      | )                                | $          | (0.12 | ) | $ | (0.05 | ) | $ | (0.06 | ) | $ | (0.36 | )(1) |
| Weighted average common shares outstanding: |       |                        |       |                             |       |   |   |   |   |   |   |
| Basic                                       |       | 20,592                      |       | 20,592                           |       | 20,592 |   | 19,556 |   | 20,333 |   |
| Diluted                                     |       | 20,592                      |       | 20,592                           |       | 20,592 |   | 19,556 |   | 20,333 |   |

 

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(1) The sum of theearnings (loss) per share for each of the individual quarters does not equalearnings per share for the fiscal year due to rounding.

 

45

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**18.****      ****Supplemental Cash Flow Information**

 

Thefollowing tables present supplementary cash flow information and non-cashactivity for the period April 1, 2007 to March 8, 2008 and the yearsended March 31, 2007 and 2006, in thousands:

 
| ** **                                                 | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| SUPPLEMENTARY CASH FLOW INFORMATION:                       |       |     |       |     |       |     |       |
| Cash paid (refund received) during the year  for:          |       |     |       |     |       |     |       |
| Interest                                                   |       | $        | 88         |     | $          | 64       |       | $ | 76 |   |
| Income taxes                                               |       | 88       |       | (4,768   | )          | (1,735   | )          |
| Repurchase of Northwest’s outstanding  shares in MAIR |       | —   |       | 10,905   |       | —   |       |
|                                                            |            |          |            |          |            |          |            |  |  |  |

 
|                                                | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| SUPPLEMENTAL NON-CASH ACTIVITY:           |       |     |       |     |       |     |       |
| Capital expenditures in accounts payable            |       | $        | 976        |     | $          | —   |       | $ | — |   |
|                                                |       |     |       |     |       |     |       |
| Effect of deconsolidation of Mesaba  Aviation, Inc: |       |     |       |     |       |     |       |
| Short-term investments                              |       | $        | —     |     | $          | —   |       | $ | 2,799 |   |
| Restricted cash and cash equivalents                |       | —   |       | —   |       | 6,921    |       |
| Accounts receivable, net                            |       | —   |       | —   |       | 31,817   |       |
| Inventories, net                                    |       | —   |       | —   |       | 11,236   |       |
| Prepaid expenses and deposits                       |       | —   |       | —   |       | 5,476    |       |
| Deferred income taxes and other                     |       | —   |       | —   |       | 22,446   |       |
| Property and equipment, net                         |       | —   |       | —   |       | 35,608   |       |
| Long-term investments and other                     |       | —   |       | —   |       | 11,587   |       |
| Accounts payable and accrued liabilities            |       | —   |       | —   |       | (87,560  | )          |
| Other noncurrent liabilities                        |       | —   |       | —   |       | (3,936   | )          |

 

**19.****      ****New Accounting Pronouncements**

 

InSeptember 2006, FASB issued SFAS No. 157, *Fair ValueMeasurements*(“SFAS No. 157”), to define fair value, establisha framework for measuring fair value in accordance with GAAP, and expanddisclosures about fair value measurements. SFAS No. 157 will be effective for the Company beginning April 1,2008. The Company does not anticipate the adoption of SFAS No. 157 willhave an effect on its financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities* (“SFAS 159”). SFAS 159 permits entities tochoose to measure many financial instruments and certain other items at fairvalue that are not currently required to be measured at fair value. SFAS 159 iseffective for fiscal years beginning April 1, 2008. The Company does notanticipate the adoption of SFAS No. 159 will have an effect on its financialstatements.

 

InDecember 2007, the FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated FinancialStatements*.  This statement is effective for fiscal yearsbeginning after December 15, 2008 and provides guidance for theclassification and disclosure of noncontrolling interests (formerly calledminority interests), as well as deconsolidation of subsidiaries.  TheCompany does not anticipate the adoption of SFAS No. 160 will have aneffect on its financial statements.

 

InDecember 2007, the FASB issued SFAS No. 141 (Revised 2007), *Business Combinations*(“SFAS No. 141R”). This statement is effective for fiscal years beginning after December 15,2008 and adjusts certain guidance related to recording nearly all transactionswhere one company gains control of another.  The statement revises themeasurement principle to require fair value measurements on the acquisitiondate for recording acquired assets and liabilities.  It also changes therequirements for recording acquisition-related costs and liabilities. Additionally, the statement revises the treatment of valuation allowanceadjustments related to income tax benefits in existence prior to a businesscombination.  The current standard, SFAS No. 141, requires thatadjustments to these valuation allowances be recorded as adjustments togoodwill, while the new standard will require companies to adjust current 

 

46

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incometax expense.  The Company does not anticipate the adoption of SFAS No. 141will have an effect on its financial statements.

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities, an amendment of FASBStatement No. 133* (“SFAS 161”). Thisnew standard requires enhanced disclosures for derivative instruments,including those used in hedging activities. It is effective for fiscal yearsand interim periods beginning after November 15, 2008.  The Company does not anticipate the adoptionof SFAS No. 161 will have an effect on its financial statements.

 

**20.****      ****Financial Information of Mesaba**

 

Asdiscussed in Note 15, MAIR has accounted for Mesaba’s financial results underthe equity method of accounting since the Petition Date.  In accordance with APB Opinion No. 18, **The EquityMethod of Accounting for Investments in Common Stock****, MAIR**evaluated whether its investment in Mesaba has experienced another-than-temporary impairment as of March 31, 2006.  MAIR’s evaluation utilized a market andincome approach, including a discounted cash flow analysis.  After analyzing Mesaba’s actual losses infiscal 2006, projected losses in fiscal 2007 as it transitioned to a Saab-onlyoperation, Mesaba’s five-year Saab business plan and Mesaba’s liabilitiessubject to compromise as of March 31, 2006, MAIR concluded that itsremaining investment in Mesaba had experienced an other-than-temporaryimpairment.  Accordingly, effective March 31,2006, MAIR recorded an $8.9 million impairment charge to write off itsremaining equity investment in Mesaba. The impairment charge was recorded in “Impairment and other charges” inthe fiscal 2006 consolidated statement of operations.

 

Asof March 31, 2007, Mesaba reported a net loss of $71.3 million.  MAIR did not record any additional Mesabaequity method losses in MAIR’s consolidated financial statements because MAIRdid not have any further obligations to fund any of Mesaba’s additional losses.

 

Forthe period from April 1, 2007 through the Exit Date, Mesaba reported netincome of $83.5 million (unaudited). Upon Mesaba’s emergence from bankruptcy and the corresponding transferof MAIR’s equity in Mesaba to Northwest, MAIR lost its ability to significantlyinfluence Mesaba; therefore, the Company did not record any portion of Mesaba’sincome under the equity method of accounting.

 

Thefollowing condensed financial statements of Mesaba have been prepared inconformity with SOP 90-7, which requires that the liabilities subject tocompromise by the Bankruptcy Court be segregated from liabilities not subjectto compromise, and that all transactions directly associated with thereorganization be identified. Liabilities subject to compromise include prepetition unsecured claimsthat may be settled at amounts that differ from those recorded in Mesaba’scondensed financial statements.

 

Thefinancial information is also prepared on a going concern basis, whichcontemplates the realization of assets and the liquidation of liabilities inthe ordinary course of business. However, as a result of the bankruptcy filing, such realization ofassets and liquidation of liabilities is subject to significant uncertainty.

 

MAIRhas deconsolidated Mesaba, its wholly-owned subsidiary, from the Company’s March 31,2008 and 2007 consolidated balance sheets and the consolidated statements of operationsand cash flows since Mesaba’s bankruptcy filing on October 13, 2005through April 24, 2007.  The Mesabafinancial statements as of April 24, 2007 and for the period April 1,2007 to April 24, 2007 are unaudited because the deconsolidated wholly-ownedsubsidiary was not considered significant as of March 31, 2008.  All of MAIR’s previously reportedconsolidated balance sheets, statements of operations and cash flows prior to October 13,2005 continue to include Mesaba’s financial position, results of operations andcash flows.

 

47

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**MESABA AVIATION, INC.**

**(Debtor-in-Possession)**

**Condensed Balance Sheets**

**As of April 24, 2007 and March 31, 2007**

**(in thousands)**

** **
| ** **                                             | ** ** | **April 24, 2007** | ** ** | **March 31, 2007** | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                             | ** ** | **(unaudited)**              | ** ** | **(audited)**                | ** ** |
| ASSETS:                                                |       |                         |       |                         |       |
| Cash, cash equivalents and short-term  investments     |       | $                            | —     |                         | $          | 12,961 |   |
| Other current assets                                   |       | —                       |       | 33,496                       |       |
| Net property and equipment                             |       | —                       |       | 19,697                       |       |
| Other long-term assets, net                            |       |                         | —     |                         | 5,966      |   |
|                                                   |       | $                            | —     |                         | $          | 72,120 |   |
| LIABILITIES AND SHAREHOLDER’S (DEFICIT)  EQUITY : |       |                         |       |                         |       |
| Current liabilities                                    |       | $                            | —     |                         | $          | 44,320 |   |
| Other liabilities and deferred credits                 |       | —                       |       | 1,713                        |       |
| Liabilities subject to compromise (A)                  |       | —                       |       | 94,397                       |       |
| Shareholder’s deficit                             |       |                         | —     |                         |       | (68,310 | ) |
|                                                   |       | $                            | —     |                         | $          | 72,120 |   |

 

**MESABA AVIATION, INC.**

**(Debtor-in-Possession)**

**Condensed Statements of Operations**

**Period April 1, 2007 to April 24, 2007**

**Years Ended March 31, 2007 and 2006**

**(in thousands)**

 
| ** **                                                                | ** ** | **2008**        | ** ** | **2007**      | ** ** | **2006**      | ** ** |
|---------------------------------------------------------------------------|------------|-----------------|------------|---------------|------------|---------------|------------|
| ** **                                                                | ** ** | **(unaudited)** | ** ** | **(audited)** | ** ** | **(audited)** | ** ** |
| OPERATING REVENUES:                                                       |       |            |       |          |       |          |       |
| Passenger                                                                 |       | $               | 12,808     |          | $          | 238,195       |       | $ | 373,031 |   |
| Freight and other                                                         |       | 2,034           |       | 30,108        |       | 35,783        |       |
| Total operating revenues                                                  |       | 14,842          |       | 268,303       |       | 408,814       |       |
|                                                                      |       |            |       |          |       |          |       |
| OPERATING EXPENSES:                                                       |       |            |       |          |       |          |       |
| Wages and benefits                                                        |       | 6,983           |       | 120,237       |       | 145,495       |       |
| Aircraft maintenance                                                      |       | 2,031           |       | 49,212        |       | 83,368        |       |
| Aircraft rents                                                            |       | 2,375           |       | 50,261        |       | 92,948        |       |
| Administrative and other                                                  |       | 4,442           |       | 70,520        |       | 127,128       |       |
| Total operating expenses                                                  |       | 15,831          |       | 290,230       |       | 448,939       |       |
|                                                                      |       |            |       |          |       |          |       |
| Operating loss                                                            |       | (989            | )          | (21,927       | )          | (40,125       | )          |
|                                                                      |       |            |       |          |       |          |       |
| NONOPERATING INCOME (EXPENSE):                                            |       |            |       |          |       |          |       |
| Income from claim in Northwest  Airlines, Inc. bankruptcy            |       | 124,881         |       | —        |       | —        |       |
| Interest income (expense) and other income                                |       | 3               |       | (6,102        | )          | 449           |       |
| Reorganization items, net                                                 |       | (40,367         | )          | (40,060       | )          | (22,650       | )          |
| Nonoperating income (expense), net                                        |       | 84,517          |       | (46,162       | )          | (22,201       | )          |
| Income (loss) before income taxes                                         |       | 83,528          |       | (68,089       | )          | (62,326       | )          |
|                                                                      |       |            |       |          |       |          |       |
| PROVISION FOR INCOME TAXES                                                |       | (70             | )          | (2,666        | )          | (8,408        | )          |
| Income (loss) before cumulative effect of change  in accounting principle |       | 83,458          |       | (70,755       | )          | (70,734       | )          |
|                                                                      |       |            |       |          |       |          |       |
| Cumulative effect of change in accounting  principle (B)                  |       | —          |       | 507           |       | —        |       |
|                                                                      |       |            |       |          |       |          |       |
| NET INCOME (LOSS)                                                         |       | $               | 83,458     |          | $          | (71,262       | )          | $ | (70,734 | ) |

 

48

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Thefollowing table presents Mesaba’s condensed results of operations for theperiod April 1, 2005 to October 13, 2005 (the date of Mesaba’sChapter 11 bankruptcy filing) which are included in Mesaba’s results ofoperations for the year ended March 31, 2006 above and within the Company’sconsolidated results of operations prior to deconsolidation:

 
| Operating revenues                     |   | $       | 235,763 |   |
|----------------------------------------|--------|---------|---------|--------|
| Operating expenses                     |   | 272,778 |    |
| Operating loss                         |   | (37,015 | )       |
| Other non operating income             |   | 474     |    |
| Loss before provision for income taxes |   | (36,541 | )       |
| Benefit for income taxes               |   | 11,732  |    |
| Net loss                               |   | $       | (24,809 | )      |

 

**(A)****      ****Liabilities Subject to Compromise**

 

Liabilitiessubject to compromise in Mesaba’s condensed balance sheets at March 31,2007 and March 31, 2006 refers to both secured and unsecured obligationsthat were to be accounted for under a plan of reorganization, including claimsincurred prior to the Petition Date. They represent the estimated amount Mesaba expected to be allowed onknown or potential claims to be resolved through the Chapter 11 bankruptcyprocess.

 

 Mesaba estimated the value of the claims thatwould be allowed by the Bankruptcy Court at $94.4 million.   Liabilities subject to compromise at March 31,2007 and 2006 were as follows, in thousands:

 
| ** **                             | ** ** | **March 31** | ** ** | **March 31** | ** ** |
|----------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                             | ** ** | **2007**          | ** ** | **2006**          | ** ** |
| Accounts payable and other liabilities |       | $                 | 28,395     |              | $          | 34,936 |   |
| Damage claims                          |       | 60,233            |       | 20,066            |       |
| Secured claims                         |       | 3,365             |       | 2,520             |       |
| Priority tax claims                    |       | 2,404             |       | 2,451             |       |
|                                   |       | $                 | 94,397     |              | $          | 59,973 |   |

 

Theultimate amount of allowed claims was determined through decisions made by theBankruptcy Court and negotiated settlements with the creditors.  The proceeds from the sale of Mesaba’s claimin Northwest’s bankruptcy were placed in a liquidating trust and are being heldfor distribution to Mesaba’s creditors and MAIR.  A liquidating trustee has been appointed tocontinue to resolve any outstanding proofs of claim.

 

**(B) Cumulative Effect ofChange in Accounting Principle**

 

Uponadoption on April 1, 2006, in accordance with SFAS 123R, Mesaba recorded$0.5 million for the cumulative effect of a change in accounting principleduring the first quarter of fiscal 2007 as a result of valuing stockappreciation rights under the fair value method.

 

## ***Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE***

## *** ***

None.

 

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

## *** ***

*Evaluationof Disclosure Controls and Procedures*

 

Asof March 31, 2008, the Company conducted an evaluation under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and acting Chief Financial Officer,regarding the effectiveness of the design and operation of the Company’sdisclosure controls and procedures pursuant to Rule 13a-15(b) of theSecurities Exchange Act of 1934 (the “Exchange Act”).  Based upon that 

 

49

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evaluation,the Chief Executive Officer and acting Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures were effective as of the dateof such evaluation.

 

*Management’sReport on Internal Control Over Financial Reporting*

 

TheCompany’s management is responsible for establishing and maintaining adequateinternal control over financial reporting, as such term is defined in ExchangeAct Rule 13a-15(f).  Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject torisk that controls may become inadequate because of changes in conditions, orthat the degree of compliance with the policies or procedures maydeteriorate.  Under the supervision andwith the participation of management, including the Chief Executive Officer andacting Chief Financial Officer, an evaluation was conducted of theeffectiveness of the internal control over financial reporting based oncriteria established in *Internal Control –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, 2008.

 

*Changesin Internal Controls*

 

Duringthe fourth quarter of fiscal 2008, there were no changes in internal controlover financial reporting that had a material effect on internal control overfinancial reporting or were reasonably likely to have a material effect oninternal control over financial reporting.

 

*Reportof Independent Registered Public Accounting Firm on Internal Control OverFinancial Reporting*

 

Tothe Board of Directors and Shareholders MAIR Holdings, Inc. Minneapolis, Minnesota

 

Wehave audited MAIR Holdings, Inc. and Subsidiaries’ (the “Company”)internal control over financial reporting as of March 31, 2008, based on criteria established in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(“COSO”).  The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Management’sReport on Internal Control over Financial Reporting.  Our responsibility is to express an opinionon the effectiveness of the Company’s internal control over financial reportingbased on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financialreporting was maintained in all material respects.  Our audit included obtaining an understandingof internal control over financial reporting, evaluating management’sassessment, testing and evaluating the design and operating effectiveness ofinternal control, and performing such other procedures as we considerednecessary in the circumstances.  Webelieve that our audit provides a reasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become 

 

50

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inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

Inour opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of March 31, 2008, based oncriteria established in *Internal Control –Integrated Framework* issued by COSO.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated financialstatements as of and for the period March 9, 2008 to March 31, 2008and for the period April 1, 2007 to March 8, 2008 of the Company andour report dated May 30, 2008 expressed an unqualified opinion on thosefinancial statements.

 

Minneapolis,Minnesota

 

May 30,2008

 

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

## *** ***

None.

 

# **PART III**

# ** **

## ***Item 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATEGOVERNANCE***

## *** ***

**Directors**

** **

The following informationabout directors of the Company is based upon information furnished to theCompany by the respective directors.

 

**John J.Ahn**, age 42, a Class One director, became a director ofthe company in 2007.  Mr. Ahn is aprincipal of Riley Investment Management LLC (“RIM”) which is the generalpartner of Riley Investment Partners Master Fund, L.P. (together, “Riley”). As of May 1, 2008, Riley and investment advisory clients of RIM ownedapproximately 7.2% of the Company’s Common Stock.  Prior to joiningRIM, from 2003 to 2004, Mr. Ahn was a Managing Director at MaxcorFinancial Group in its high yield and distressed bond group. In March 2004,Mr. Ahn joined B. Riley and Co. Inc. as a registered representativeand also managed ISA Capital LP, a hedge fund for friends and family.  ISACapital was closed in late 2005 when Mr. Ahn joined RIM.  Mr. Ahn also serves as a director ofRegent Communications, Inc.

 

**DonaldE. Benson,**age 77, a Class Two director, became adirector of the Company in June 1995. Mr. Benson has been Executive Vice President and a director ofMarquette Financial Companies, formerly Marquette Bancshares, Inc., since January 1993and with predecessor organizations since 1968. Mr. Benson is also a director of First California Financial Group, Inc.,Mass Mutual Corporate Investors, Mass Mutual Participation Investors, and adirector and Vice President of Twins Sports, Inc., the managing generalpartner of the Minnesota Twins Baseball Club.

 

**Paul F.Foley**.  See “ExecutiveOfficers of the Registrant” in Part I of this Annual Report on Form 10-Kfor Mr. Foley’s biography.

 

**James A.Lee**, age 68, a Class Three director, became a directorof the Company in December 2005.  Mr. Leehas been engaged in financial consulting work since 2001.  From 1987 to 2001, Mr. Lee was SeniorVice President and Chief Financial Officer of Canadian Pacific Railway and itspredecessor company.  He was alsoPresident of Canadian Pacific (U.S.) Finance Inc. from 1993 to 2001.  Mr. Lee also served on the Board ofDirectors of Big Sky Transportation Co., a wholly-owned subsidiary of theCompany, from December 2002 to December 2005.

 

51

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**PiersonM. Grieve**, age 80, a Class One director, became adirector of the Company in October 1999. Mr. Grieve has been a member of Palladium Equity Partners, LLC, aNew York private investment firm, since November 1998.  He was Chairman of the Metropolitan AirportsCommission – State of Minnesota from April 1995 to April 1999.

 

**Carl R.Pohlad**, age 92, a Class Two director served as Chairmanof the Board from 1995 to March 2006. Mr. Pohlad has been Chairman of the Board, President and a directorof Marquette Financial Companies, formerly Marquette Bancshares, Inc.,since 1993.  Prior to 1993, Mr. Pohladwas President and Chief Executive Officer of Marquette Bank Minneapolis andBank Shares Incorporated.  Mr. Pohladis also an owner, director and the Chairman of the Board of Twins Sports, Inc.,the managing general partner of the Minnesota Twins Baseball Club.  He is the father of Robert C. Pohlad, adirector and Chairman of the Board of the Company.

 

**Robert C.Pohlad**, age 54, a Class Three director, became adirector of the Company in September 1995 and became the Chairman of theBoard in March 2006.  Mr. Pohladhas been a director and President of Pohlad Companies since 1987.  Mr. Pohlad became the Chief ExecutiveOfficer of PepsiAmericas, Inc. in November 2000 and became Chairmanin January 2002.  Mr. Pohladserved as Chairman, Chief Executive Officer and a director of P-Americas, Inc.from July 1998 until P-Americas, Inc. merged with a subsidiary ofPepsiAmericas, Inc. He is the son of Carl R. Pohlad, a director of theCompany.

 

**RaymondW. Zehr, Jr.**, age 61, a Class One director, becamea director of the Company in June 1995. Mr. Zehr has been Chief Investment Manager and Chief FinancialManager of CRP Holdings, LLC since 1994 and 2003, respectively.  He is also Vice President of Twins Sports, Inc.,the managing general partner of the Minnesota Twins Baseball Club, has beenExecutive Vice President and Treasurer of Pohlad Companies since 2000 and hasserved in various other capacities with Pohlad Companies since 1971.

 

**Committees**

** **

The Board of Directorshas established Audit, Compensation, Executive, Safety and Nominating Committees.

 

**AuditCommittee**.  TheAudit Committee has been established in accordance with Section 3(a)(58)(A) ofthe Securities Exchange Act of 1934.  Themembers of the Audit Committee are Donald E. Benson, James A. Lee and Raymond W.Zehr, Jr., each of whom is independent as defined by the listing standards ofthe Nasdaq National Market (NASD Marketplace Rule 4200(a)(15)) and Rule 10A-3of the Securities Exchange Act of 1934.  Mr.Benson is the Chairman of the Audit Committee. The Board of Directors has determined that each of Mr. Benson, Mr. Zehrand Mr. Lee is an “audit committee financial expert,” as defined by Item 401(h)of Regulation S-K.  Mr. Zehr wasappointed to the Audit Committee in October 1995, Mr. Benson was appointed tothe Audit Committee in October 1999 and Mr. Lee was appointed to the AuditCommittee in December 2005.

 

The Audit Committeeassists the Board of Directors in fulfilling its oversight responsibility tothe Company’s shareholders, potential shareholders and the investment communityrelating to accounting and reporting practices of the Company and the quality,objectivity and integrity of the Company’s financial reports.  In consultation with the Company’s financedepartment and its independent registered public accounting firm, the AuditCommittee reviews the Company’s accounting and auditing policies andprocedures, the results of the Company’s audits and significant accounting andreporting issues.  The Audit Committee isalso responsible for engaging the Company’s independent registered publicaccounting firm and for approving any non-audit services provided by such firm.

 

**CompensationCommittee**.  Themembers of the Compensation Committee are Donald E. Benson, Pierson M. Grieve,James A. Lee and Raymond W. Zehr, Jr., each of whom is independent asdefined by the listing standards of the Nasdaq National Market.    Mr. Zehr is the Chairman of theCompensation Committee.  The CompensationCommittee is authorized by the Board of Directors to set the annual salary ofeach of the executive officers of the Company, including bonus and incentiveprograms, to grant options and to otherwise administer the Company’s stockoption plans, and to review and approve compensation and benefit plans of theCompany.  The Compensation Committeeconsists exclusively of non-employee directors. Messrs. Benson and Zehr were appointed to the CompensationCommittee in October 1995, and Messrs. Grieve and Lee were appointedto the Compensation Committee in March 2006.

 

52

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TheCompensation Committee considers recommendations from the Chief ExecutiveOfficer regarding total compensation for those executives and officersreporting directly to him and approves compensation for those executives andofficers. Management provides to the Compensation Committee historical andprospective summaries of the compensation components for each executiveofficer.

 

The Compensation Committee’s charter also grants theCompensation Committee the authority to retain outside consultants and otheradvisors to assist it in the performance of its duties and responsibilities, orto otherwise advise or inform the Compensation Committee.  The Compensation Committee did not engage anycompensation consultants during fiscal year 2008.

 

**Executive Committee**.   The members of theExecutive Committee are Paul F. Foley, Carl R. Pohlad, Robert C. Pohlad andRaymond W. Zehr, Jr.  Mr. RobertC. Pohlad is the Chairman of the Executive Committee.  The Executive Committee is delegated the fulland complete powers of the Board of Directors to act in place of the full Boardduring all periods between regularly scheduled meetings of the Board and at anyother time at which a meeting of the full Board is not practicable for anyreason. Mr. Carl R. Pohlad was appointed to the Executive Committeein October 1995, Mr. Foley was appointed to the Executive Committeein October 1999 and Messrs. Robert C. Pohlad and Zehr were appointedto the Executive Committee in March 2006.

 

**SafetyCommittee**.  Themembers of the Safety Committee are Paul F. Foley, Pierson M. Grieve and JamesA. Lee.  Mr. Grieve is the Chairmanof the Safety Committee.  The SafetyCommittee is empowered to review safety and regulatory compliance issues.  The Safety Committee meets with personnel responsiblefor regulatory compliance and safety programs at the Company’s subsidiary.  Messrs. Foley and Grieve were appointedto the Safety Committee in September 2003, and Mr. Lee was appointedto the Safety Committee in March 2006.

 

**NominatingCommittee**.  Themembers of the Nominating Committee are John J. Ahn, Donald E. Benson, James A.Lee and Raymond W. Zehr, Jr., each of whom is independent as defined bythe listing standards of the Nasdaq National Market.  Mr. Zehr is the Chairman of theNominating Committee.  The NominatingCommittee is authorized by the Board of Directors to recommend the structureand makeup of the Board of Directors and recommends the nomination of membersto the Board to fill vacancies or for election by the shareholders of the Company.  Mr. Benson was appointed to theNominating Committee in September 2003, Mr. Zehr was appointed to theNominating Committee in August 2004, Mr. Lee was appointed to theNominating Committee in March 2006 and Mr. Ahn was appointed to theNominating Committee in February 2007.

 

**CommitteeCharters**.  A copyof each of the charters for the Audit Committee, Compensation Committee andNominating Committee are available on the Company’s website atwww.mairholdings.com.

 

**Report of the AuditCommittee**

** **

The Audit Committee ofthe Board of Directors consists of three members, none of whom are officers oremployees of the Company or its subsidiaries. All members of the Audit Committee are “independent,” as defined in Rule 10A-3under the Securities Exchange Act of 1934 and Rule 4200(a)(14) of theMarketplace Rules contained in the National Association of SecuritiesDealers Manual, and are financially literate. Information about the committee members and their duties is provided onelsewhere in this Annual Report on Form 10-K.  The Audit Committee met five times during thefiscal year ended March 31, 2008. During each quarter, the Audit Committee met with the Company’sindependent registered public accounting firm to review a wide range of issuesrelating to the Company’s accounting and auditing policies and procedures,internal controls and financial reporting.

 

The Audit Committee,together with management and representatives of Grant Thornton, LLP, reviewedand discussed the audited consolidated financial statements contained in theCompany’s Annual Report on Form 10-K for the fiscal year ended March 31,2008.  The Audit Committee discussed withGrant Thornton, LLP the matters required to be discussed by Statement onAuditing Standards No. 61, “Communication with Audit Committees,” asamended.  Additionally, the AuditCommittee received and discussed written disclosures and the letter from GrantThornton, LLP required by Independence Standards Board No. 1, “IndependenceDiscussions with Audit Committees,” describing that firm’s independence from,and relationships with, the Company. Based on the review and discussions referred to above, the members ofthe Audit Committee recommended to the Board that the audited consolidatedfinancial statements be included in the Company’s Annual Report on Form 10-Kfor the fiscal year 

 

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ended March 31,2008, for filing with the Securities and Exchange Commission.  The Audit Committee also determined thatGrant Thornton, LLP’s fees and services for the fiscal year ended March 31,2008 were consistent with the maintenance of their independence as the Company’sindependent registered public accounting firm.

 

All non-audit servicesperformed by Grant Thornton, LLP during fiscal 2008 were approved by the AuditCommittee in accordance with the procedures set forth in the Audit CommitteeCharter.

 
|   | Respectfully  submitted,   |
|--------|----------------------------|
|   |                       |
|   | THE AUDIT COMMITTEE        |
|   |                       |
|   | Donald E. Benson, Chairman |
|   | James A. Lee               |
|   | Raymond W.  Zehr, Jr. |

 

**Meetings and Attendance**

** **

During the fiscal yearended March 31, 2008, the Board of Directors held five meetings, theExecutive Committee held five meetings, the Audit Committee held five meetings,the Compensation Committee held two meetings, the Nominating Committee held onemeeting and the Safety Committee held three meetings.  In the fiscal year ended March 31, 2008,each of the directors attended at least 75% of the meetings held by the Boardand held by each committee of which such director was a member, with theexception of John J. Ahn, who attended 60% of the meetings held by the fullBoard.  Board members are not required toattend the Company’s annual meeting of shareholders.  Six directors attended the Company’s fiscal2007 annual meeting of shareholders.

 

**Compensation of Directors**

** **

Each of the Company’snon-employee directors earn an annual retainer of $40,000 plus out-of-pocketexpenses.  Directors’ fees are currentlyset at $10,000 per quarter.  In additionto the annual retainer, directors are also compensated for each meetingattended.  Accordingly, with theexception of the Audit Committee, the Company pays each director a fee of$1,000 for each board or committee meeting attended in person and a fee of $500for each Board or committee meeting attended via telephone.  The Company pays a fee of $2,500 to eachAudit Committee member for each Audit Committee meeting attended in person and$1,250 for each Audit Committee meeting attended via telephone.  The Company also pays the Audit Committeechair additional compensation of $5,000 per year, and each of the chairs of theCompensation, Safety and Nominating Committees additional compensation of$2,500 per year.

 

Stock option awards madeto non-employee directors have historically been at the discretion of theCompensation Committee.  The Company’sdirector compensation program does not require annual option grants todirectors, and no stock options were granted to directors during fiscal 2008.

 

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Thefollowing table shows fiscal 2008 compensation for the Company’s non-employeedirectors.

 

**2008Director Compensation Table**

 
| ** **                | ** ** | **Fees Earned or** | ** ** | ** ** | ** ** |
|---------------------------|------------|------------------------------|------------|------------|------------|
| **Name**                  | ** ** | **Paid in Cash**   | ** ** | **Total**  | ** ** |
| ** **                | ** ** | ** **                   | ** ** | ** ** | ** ** |
| John J. Ahn               |       | $                            | 43,000     |       | $          | 43,000 |   |
| Donald E. Benson          |       | 63,000                       |       | 63,000     |       |
| Pierson M. Grieve         |       | 48,500                       |       | 48,500     |       |
| James A. Lee              |       | 62,000                       |       | 62,000     |       |
| Carl R. Pohlad            |       | 48,500                       |       | 48,500     |       |
| Robert C. Pohlad          |       | 49,500                       |       | 49,500     |       |
| Raymond W. Zehr, Jr. |       | 70,500                       |       | 70,500     |       |
|                           |            |                              |            |            |            |  |  |

 

**NominatingProcess**

 

The Nominating Committeerecommends the nomination of candidates to serve on the Board.  The Board may appoint directors to fill anyvacancy occurring as a result of the resignation, death or removal of adirector or from an increase in the size of the Board.  Shareholders elect directors whose terms areexpiring at the annual meeting of shareholders.

 

Director candidates areevaluated on the basis of their overall fitness to serve on the Company’s Boardof Directors.  Relevant factors includeintegrity of character, business experience, knowledge of the airline industry,educational achievement, leadership skills, standing in the business communityand willingness and enthusiasm to serve as a director.

 

The Nominating Committeewill give equal consideration to potential candidates without regard to the sourceof the recommendation.  Typically,recommendations have been made by the Company’s officers and directors.

 

The Nominating Committeewill consider director candidates recommended by shareholders for election atfuture annual meetings of shareholders, provided that there is a vacancy on theBoard.  To submit a recommendation to theNominating Committee, a shareholder must provide the following information inwriting to the Company’s President at the address of the Company set forth onthe front cover of this Annual Report on Form 10-K:

 

·                  The written consent of the personrecommended as a director candidate being named as a nominee in a proxystatement and to serve as a director, if elected.

 

·                  The biographical information aboutthe director candidate required to be included in a proxy statement conformingto Regulation 14A under the Securities Exchange Act of 1934.

 

·                  Other information about the directorcandidate concerning his or her qualifications to serve on the Company’s Boardof Directors.

 

·                  The name and address of theshareholder submitting the recommendation and proof of ownership of shares ofthe Company.

 

Typically, recommendations must be received in advanceof the preparation and mailing of proxy materials.  However, because the Company intends to holda special meeting for its shareholders to approve the Company’s dissolution andproposed Plan of Liquidation, the Company does not intend to hold an annualmeeting of shareholders.

 

55

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Shareholders are alsoentitled to nominate director candidates in accordance with the procedures setforth in the Company’s Bylaws.  Underthose procedures, a shareholder must give written notice either by personaldelivery or by United States mail, postage prepaid, to an officer of theCompany not later than (i) with respect to an election to be held at anannual meeting of the shareholders, 90 days prior to the anniversary date ofthe immediately preceding annual meeting, and (ii) with respect to anelection to be held at a special meeting of shareholders for the election ofdirectors, the close of business on the 10th day following the date on whichnotice of such meeting is first given to shareholders.  Each such notice must set forth the name andaddress of the shareholder who intends to make the nomination and of the personor persons to be nominated; a representation that the shareholder is a holderof record of the capital stock of the Company entitled to vote at such meetingand intends to appear in person or by proxy at the meeting to nominate theperson or persons specified in the notice; a description of all arrangements orunderstandings between the shareholder and each nominee and any other person orpersons (naming such person or persons) pursuant to which the nomination ornominations are to be made by the shareholder; such other information regardingeach nominee proposed by such shareholder as would be required to be includedin a proxy statement filed pursuant to the proxy rules of the Securitiesand Exchange Commission, had the nominee been nominated, or intended to benominated, by the Board of Directors; and the consent of each nominee to serveas a director of the Company if so elected.

 

**ShareholderCommunications with the Board of Directors**

 

Shareholders may sendwritten communications to the Board of Directors as a whole or to individualdirectors.  Such written communicationsshould be addressed to the Board or specified members at MAIR Holdings, Inc.,Fifth Street Towers, 150 South Fifth Street, Suite 1360, Minneapolis,Minnesota 55402.  Unless addressed to oneor more specified directors, communications will be screened for relevance tothe Company’s business.

 

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

 

**Compensation** Committee Report

 

TheCompensation Committee has reviewed and discussed with management the followingCompensation Discussion and Analysis section of the Company’s Annual Report on Form 10-Kfor the fiscal year ended March 31, 2008. Based on its review anddiscussions with management, the Compensation Committee recommended to theBoard of Directors that the Compensation Discussion and Analysis be included inthe Company’s Annual Report on Form 10-K.

 

Respectfully submitted,

 

THECOMPENSATION COMMITTEE

 

Raymond W.Zehr, Jr., Chairman

Donald E. Benson

Pierson M. Grieve

James A. Lee

 

**Compensation Discussion and Analysis**

** **

As stated in itscharter, the Compensation Committee is responsible for establishing the Company’sgeneral compensation philosophy and determining the annual salary and incentivecompensation of each of the executive officers of the Company.  The Compensation Committee also reviews andapproves overall compensation levels and

 

56

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benefit plans ofthe Company.  The Company’s ChiefExecutive Officer and the officers and directors of the Company’s subsidiarieshave principal responsibility for determining compensation and benefits fornon-executive employees of the Company and employees of the Company’ssubsidiaries.

 

***Principles of the Company’sCompensation Program***

 

The Company’s executivecompensation policies, as endorsed by the Compensation Committee, are designedto:

 

·                  Attract, motivate and retainexecutives whom the Compensation Committee believes are critical to thelong-term success of the Company;

 

·                  Reward individual contributions tothe Company’s accomplishment of certain strategic and operational goals;

 

·                  Promote a pay-for-performancephilosophy by placing a significant portion of total compensation “at risk”while providing a level of compensation opportunity that is competitive withcompanies of similar complexity and size; and

 

·                  Provide an opportunity to own theCompany’s common stock so that executives will have common interests with theCompany’s shareholders.

 

While historicallythese have been the Company’s compensation policies, the Company has been****in an unprecedented period of transition with the transferof Mesaba to Northwest and the Company’s decision to hold a special meeting forits shareholders to approve the Corporation’s dissolution and proposed Plan ofLiquidation.  As a result, theCompensation Committee has deemed it appropriate to not make any long-termequity incentive grants to the executives for performance in fiscal 2008.

 

***Performance Objectives***

** **

In the past, theCompany and the Compensation Committee sought to link executive compensationdirectly to earnings performance and, consequently, to increases in shareholdervalue.  Therefore, historically,executive compensation has been based on three elements:

 

·                  Financialresults of the Company and its subsidiaries;

·                  Operational and safety performance ofthe Company and its subsidiaries; and

·                  Individual performance.

 

The bankruptcy ofMesaba in the middle of fiscal year 2006 and Mesaba’s subsequent exit frombankruptcy early in fiscal 2008 altered the factors the Compensation Committeeconsiders in setting executive compensation. Consequently, the Compensation Committee for fiscal year 2008 hascontinued to recognize the effect of the Mesaba bankruptcy on the Company, theperformance of the Company’s executive officers relating to the bankruptcy andthe importance of continuity of executives during this unusual transitionalperiod for the Company.  The CompensationCommittee also considered the following goals of the Company in determining executivecompensation for fiscal year 2008:

 

·                  Maintainingsafety performance;

·                  Maximizingthe return from the Company’s former equity ownership of Mesaba;

·                  Disposingof Big Sky Airlines; and

·                  Finalizinga definitive strategy to maximize shareholder value with the Company’sremaining assets.

 

***Elements of ExecutiveCompensation***

** **

The CompensationCommittee establishes the base salary and incentive compensation of the ChiefExecutive Officer and General Counsel. The compensation program for the Company’s executive officers consistsof the following elements:

 

·                  Base salaries;

·                  Annual cash incentive (bonus) awards;

 

57

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·                  Long-term equity incentive awards,historically in the form of stock option grants;

·                  Retention compensation;

·                  Benefits; and

·                  Perquisites.

 

The Committeebelieves that the above elements of compensation create a flexible package thatcan reward both short and long-term performance of the Company and theindividual.

 

***Base Salaries***

 

Base salariesallow for a fixed amount of compensation for the executive’s regular work. Basesalary levels are reviewed annually by the Compensation Committee and adjustedbased upon competitive market factors and the officer’s ability to contributeto the overall success of the Company’s mission.  The effective date of base salary meritincreases, if applicable, typically is June 1st of each year.Increases in salaries are based on both individual performance and the Company’soverall budget for the year.  Any salaryadjustments for an elected corporate officer must be approved by theCompensation Committee.  Due to theCompany’s proposed dissolution, the Compensation Committee did not increasebase salaries for fiscal year 2009.

 

***Annual Cash Incentive Awards***

 

Annual cashincentive awards are designed to reward short-term performance and achievementby executives.  Target bonuses areestablished annually, in conjunction with base salary determinations and areintended to provide a competitive level of compensation when the executivesand/or the Company as a whole achieve certain performance objectives.  Incentive compensation is based on theindividual’s contribution to the Company’s satisfaction of its performanceobjectives discussed above in the narrative following “Performance Objectives,”as determined and approved by the Compensation Committee.  Bonus levels are determined as a percentageof each executive’s base salary.  Incentive compensation generally will not exceed 100% of an officer’sbase salary, although officers may on occasion receive a larger portion of theirtotal compensation through incentive compensation than from salary.  Additionally, in June 2007, theCompensation Committee, for the purpose of encouraging retention of executives,guaranteed that executives would receive a minimum of 50% of their target bonusfor their performance in fiscal year 2008.

 

***Long-Term Equity Incentive Awards***

 

Equity-basedcompensation and ownership ensures that the Company’s executive officers have acontinuing stake in the long-term success of the Company.  Equity incentive awards are granted under theCompany’s 2000 Stock Incentive Plan, which authorizes grants of stock options,performance awards, restricted stock, stock appreciation rights and otherstock-based awards that the Compensation Committee deems advisable in its solediscretion.

 

Historically, theCompensation Committee has limited its equity-based compensation awards tostock options.  In addition,historically, the Company has provided an annual grant of stock options to itsexecutive officers.  As stated earlier,the Compensation Committee has determined that, in light of the fact that theCompany intends to dissolve, it is not appropriate to grant stock options toits executive officers at this time.

 

***Retention Payments***

 

Although theCompensation Committee does not have a set policy to authorize retentionpayments to executives, Mr. Foley’s October 1, 2004 employmentagreement with the Company contains a retention component.  Under the agreement, Mr. Foley is alsoentitled to a vesting retention bonus, of which $100,000 was paid upon thesecond anniversary, $100,000 was paid upon the third anniversary, and $200,000is to be paid upon the fourth anniversary of the effective date of theagreement, provided that Mr. Foley remains employed by the Company as ofsuch dates.  At the time Mr. Foley’semployment agreement was executed, the Compensation Committee acknowledged theinstability of the airline industry and concluded that it was in the bestinterest of the Company to retain Mr. Foley’s leadership.  Mr. Foley’s Management CompensationAgreement is discussed more fully below under the heading, “Evaluation ofExecutive Performance in Fiscal 2008.”

 

58

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In addition, in July 2007,the Compensation Committee approved Executive Retention Bonus Agreements with Mr. Foleyand Ms. Timm in connection with the Company’s objective of maximizing thevalue realized from the Mesaba liquidating trust established by the Mesaba planof reorganization as a result of the Company’s former equity interest inMesaba.  The Executive Retention BonusAgreements were established to encourage these Company executives to continuein employment with the Company during this important transition period and to takeall actions possible to facilitate and maximize the equity disbursements.  The retention bonuses will be payable if theexecutive remains in active employment through the date the equity disbursementis received.  Bonuses will also be paidif the executive’s employment is terminated without cause after a change incontrol.  The Company’s dissolution andliquidation will constitute a change in control.  The following table sets forth informationconcerning potential retention bonuses payable to such executive officers basedon the amount of equity disbursements from the liquidating trust:

 
| ** **    | ** ** | **Amount of Equity Disbursement** | ** ** |
|---------------|------------|--------------------------------------------------|------------|
| ** **    | ** ** | ** **                                       | ** ** | **From** | ** ** | **From** | ** ** | **From** | ** ** | ** ** | ** ** |
| ** **    | ** ** | **Less than**                               | ** ** | **$10 Million up to** | ** ** | **$15 Million up to** | ** ** | **$20 Million up to** | ** ** | **Above** | ** ** |
| **Name**      | ** ** | **$10 million**                             | ** ** | **$15 Million** | ** ** | **$20 Million** | ** ** | **$25 Million** | ** ** | **$25 Million** | ** ** |
|          |       |                                             |       |   |   |   |   |   |   |   |   |
| Paul F. Foley |       | None                                             |       | $250,000 plus  2.0% of amounts  above $10 Million |   | $350,000 plus  1.5% of amounts  above $15 Million |   | $425,000 plus  1.0% of amounts  above $20 Million |   | $475,000 plus  0.5% of amounts  above $25 Million |   |
|          |       |                                             |       |   |   |   |   |   |   |   |   |
| Ruth M. Timm  |       | None                                             |       | $83,333 plus  0.66% of amounts  above $10 Million |   | $116,667 plus  0.5% of amounts  above $15 Million |   | $141,667 plus  0.33% of amounts  above $20 Million |   | $158,334 plus  0.16% of amounts  above $25 Million |   |

 

***Benefits***

** **

The Company allowsits employees, including the executive officers, to participate in a 401(k) plan.  Previously, the Company’s employeesparticipated in the 401(k) plan administered by Mesaba, although theCompany made all of its own matching contributions.  Following Mesaba’s exit from bankruptcy as anoperating subsidiary of Northwest, the Company began participating in the 401(k) planadministered by Big Sky up until April 15, 2008, when Big Sky’s plan wasterminated.  The Company also providesother benefits such as medical, dental, life insurance and long-term disabilitycoverage, as well as vacation and other paid holidays. These benefits areavailable to all employees, including each named executive officer, and arecomparable to those provided at other companies. These programs are designed toprovide certain basic quality of life benefits and protections to the Company’semployees and at the same time enhance the Company’s attractiveness as anemployer of choice.

 

***Perquisites***

** **

The Companyprovides Mr. Foley and Ms. Timm with additional benefits such asannual physicals and additional life and disability insurance.  The additional insurance coverage is providedbecause the Company’s standard policy limits are less than the benefit thatshould be provided to certain executives based on their base salary.  The Company also provides a car allowance to Mr. Foley.

 

***Evaluation of ExecutivePerformance in Fiscal 2008***

** **

*ExecutivePerformance*.  TheCompensation Committee is responsible for evaluation of CEO performance.  The Compensation Committee, working with theCEO, evaluates the performance of the other named executive officers andelected officers.  The Committee does notrely solely on predetermined formulas or a limited set of criteria when it evaluatesthe performance of these officers, but rather focuses on their individualobjectives which typically reflect short-term and certain strategic goals.  See the narrative above under the caption, “PerformanceObjectives.”  In

 

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evaluating executivefiscal 2008 performance, the Compensation Committee considered management’sperformance against its short- and long-term goals, which include thefollowing:

 

·                  *Maintaining Safety Performance*.  TheCompany continued to focus on safety performance as a bedrock expectation andkey component of its culture.  In fiscalyear 2008, all safety performance targets were achieved, notwithstanding theunusually difficult operating environment.

 

·                  *Financial Performance of theCompany*.  The Company incurred significant losses infiscal year 2008 as a result in part from the decision to expand to thenortheastern United States through the Delta agreement and from the decision toshut down all of Big Sky’s operations.

 

·                  *Maximizing the Return from theCompany’s Former Equity Ownership of Mesaba*.  During fiscal year 2008,management continued to work directly with Mesaba, and subsequently with thetrustee for Mesaba’s liquidating trust, to manage and settle the creditors’claims that were filed against Mesaba. The number of unresolved claims was already significantly reduced by April 24,2007, when Mesaba exited bankruptcy. Management has continued to work to protect the value of the Company’sequity interest in Mesaba.  As a resultof management’s assistance in managing Mesaba’s bankruptcy claims, the Companyexpects to receive approximately $25 million in equity distributions fromMesaba’s bankruptcy estate.  This amountis in addition to the $13.1 million the Company will receive as an unsecuredcreditor.

 

·                  *Disposing of Big Sky Airlines*. Early in fiscal year 2008, the Company decided to exit the 19-seatessential air service market.  Thisdecision was made for several reasons. First, the Company did not purchase the Big Sky certificate solely tooperate 19-seat aircraft, but also because of the limited growth opportunitiesand because of the small and restricted revenue base.  In consideration of these and other factors,management concluded that it could not justify the costs of remaining a publiccorporation solely to operate 19-seat aircraft. In light of this conclusion, the Company’s short-term plan was toattempt to achieve sustainable profitability at Big Sky so that Big Sky couldbe sold.  In fiscal 2008, Big Skycontinued its expansion via its agreement Delta Airlines.  The execution of this strategy was on planthrough October 2007, when a number of factors quickly and negativelyimpacted the business.  The most significantof these factors were record-high fuel prices and poor weather.  Management quickly assessed the situation andcorrectly concluded that it was in the best interest of the Company’sshareholders to cease Big Sky’s operations. In hindsight, this timely decision prevented what would have certainlybeen even more significant losses.  SinceDecember 2007, fuel prices have continued to soar, and numerous airlineshave incurred historic losses, ceased operations or filed for bankruptcyprotection.

 

·                  *Finalizing a definitive Strategyto Maximize Shareholder Values*.  Over the past several years, managementcontinued to identify and review strategic alternatives for the Company infurtherance of its goal to explore additional growth opportunities both withinand outside the airline industry.  Duringfiscal year 2008, the Company resolved to make a final decision to eitherpursue an acquisition or take steps to begin returning cash to the Company’sshareholders in a tax-efficient way. When management concluded that none of the strategic opportunitiesreviewed was likely to result in significant additional value to the Company’sshareholders, management evaluated and presented to the Board, and the Boardunanimously approved, the present alternative of pursuing the dissolution andliquidation of the Company.

 

The CompensationCommittee based its compensation decisions for Mr. Foley, as well as theother executive officers, on its assessment of the Company’s performance andthe individual’s performance based on the items listed above.

 

*IncentiveCompensation*.  Based onthe performance objectives described above, the Compensation Committeeconcluded that both Mr. Foley and Ms. Timm would not receive anybonus in excess of the 50% that was guaranteed for fiscal year 2008.

 

The fiscal 2008target incentive awards paid to each of the named executive officers are shownin the table below.  Although thepayments below were made in fiscal 2009, they were based on fiscal 2008 resultsand performance.  The actual cash incentiveawards shown below are also shown in the “Bonus” column of the SummaryCompensation Table set forth below.

 

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***Fiscal 2008 Annual Cash IncentiveAwards***

 
| ** **          | ** ** | **Target**         | ** ** | ** ** | ** ** | ** ** | ** ** | **Actual**        | ** ** |
|---------------------|------------|--------------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **          | ** ** | **Payout as** | ** ** | **Target** | ** ** | **Actual** | ** ** | **Award as** | ** ** |
| ** **          | ** ** | **% of**      | ** ** | **Bonus**  | ** ** | **Cash**   | ** ** | **% of**     | ** ** |
| **Name**            | ** ** | **Salary**         | ** ** | **Award**  | ** ** | **Award**  | ** ** | **Salary**        | ** ** |
|                |       |               |       |       |       |       |       |              |       |
| Paul F. Foley       |       | 100                | %          | $          | 350,000    |       | $          | 175,000           |       | 50 | % |
|                |       |               |       |       |       |       |       |              |       |
| Ruth M. Timm        |       | 40                 | %          | 56,000     |       | 28,000     |       | 20                | %          |
|                |       |               |       |       |       |       |       |              |       |
| Fred L. deLeeuw (1) |       | N/A                |       | —     |       | —     |       | —            |       |
|                     |            |                    |            |            |            |            |            |                   |            |  |  |

----

|   | (1) | Mr. deLeeuw is an  employee of Big Sky. Big Sky’s Board of Directors, with input from the  Company’s management, is responsible for all compensation decisions for Big  Sky’s executives, including awarding any potential bonus to Mr. deLeeuw. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

***Summary Compensation Table***

 
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** **         | ** ** | **All**          | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|--------------------|------------|------------------|------------|------------|------------|
| **Name and**              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **         | ** ** | **Other**        | ** ** | ** ** | ** ** |
| **Principal Position**    | ** ** | **Year**   | ** ** | **Salary** | ** ** | **Bonus (1)** | ** ** | **Compensation** | ** ** | **Total**  | ** ** |
|                           |       |       |       |       |       |               |       |             |       |       |       |
| Paul F. Foley                  |       | 2008       |       | $          | 350,000    |               | $          | 175,000          |       | 138,749    | (2)        | $ | 663,749 |   |
| President and Chief Executive  |       | 2007       |       | 363,462    |       | 550,000            |       | 156,779          | (3)        | 1,070,241  |       |
| Officer of the Company         |       |       |       |       |       |               |       |             |       |       |       |
|                           |       |       |       |       |       |               |       |             |       |       |       |
| Ruth M. Timm                   |       | 2008       |       | 140,000    |       | 28,000             |       | 5,514            | (4)        | 173,514    |       |
| Vice President,                |       | 2007       |       | 135,000    |       | 102,000            |       | 2,932            | (5)        | 239,932    |       |
| General Counsel of the Company |       |       |       |       |       |               |       |             |       |       |       |
|                           |       |       |       |       |       |               |       |             |       |       |       |
| Fred L. deLeeuw                |       | 2008       |       | 150,000    |       | —             |       | 3,399            | (6)        | 153,399    |       |
| President of Big Sky           |       | 2007       |       | 150,000    |       | 40,000             |       | 2,250            | (6)        | 192,250    |       |
|                                |            |            |            |            |            |                    |            |                  |            |            |            |  |  |  |

 

----

|   | (1)    | Incentive compensation for  services rendered has been included as compensation for the year earned even  though a portion of such compensation is paid in the following year.  Incentive compensation is based upon the achievement of Company and  individual performance criteria as described above.                                                                                                                                                                                                                                                                                             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | (2)    | Consists of a vehicle  allowance of $18,000 paid by the Company on Mr. Foley’s behalf, life  insurance premiums of $4,000 and disability insurance premiums of $10,718  paid by the Company on Mr. Foley’s behalf, matching contributions of  $6,031 made by the Company on Mr. Foley’s behalf pursuant to the  Company’s 401(k) Retirement Savings Plan and a $100,000 retention bonus  payable pursuant to Mr. Foley’s employment agreement.                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | (3)    | Consists of a vehicle  allowance of $9,844 paid by the Company on Mr. Foley’s behalf, life  insurance premiums of $4,000 and disability insurance premiums of $10,718  paid by the Company on Mr. Foley’s behalf, matching contributions of  $10,390 made by the Company on Mr. Foley’s behalf pursuant to the  Company’s 401(k) Retirement Savings Plan, a gross-up amount of $21,827  for reimbursement of taxes on insurance premiums and other benefits and a  $100,000 retention bonus payable pursuant to Mr. Foley’s employment  agreement. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | (4)    | Consists of life insurance  premiums of $577 paid by the Company on Ms. Timm’s behalf and matching  contributions of $4,937 made by the Company on Ms. Timm’s behalf  pursuant to the Company’s 401(k) Retirement Savings Plan.                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | (5)    | Consists of life insurance  premiums of $577 paid by the Company on Ms. Timm’s behalf, matching  contributions of $1,500 made by the Company on Ms. Timm’s behalf  pursuant to the Company’s 401(k) Retirement Savings Plan and a gross-up  amount of $855 for reimbursement of taxes on insurance premiums and other  benefits.                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | (6)    | Consists of matching  contributions made by the Company on Mr. deLeeuw’s behalf pursuant to  the Company’s 401(k) Retirement Savings Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

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*EmploymentAgreement with Paul F. Foley*. Mr. Foley became the President and Chief Executive Officer of theCompany in 1999.  Effective October 1,2004, the Company entered into a four-year Management Compensation Agreement(the “MCA”) with Mr. Foley.  Underthe terms of the MCA, Mr. Foley receives an annual base salary of $350,000and may also receive annual discretionary bonuses up to 100% of his annualizedbase salary, based upon achievement of personal and Company goals as determinedby the Compensation Committee.  Upon execution of the MCA, Mr. Foleyreceived a $500,000 one-time bonus.  Subject to certain exceptionsarticulated in the MCA, Mr. Foley must repay the Company a proratedportion of the one-time bonus if his employment terminates prior to the end ofthe four-year term.  Mr. Foley is also entitled to a vestingretention bonus, of which $100,000 was paid upon the second anniversary,$100,000 was paid upon the third anniversary, and $200,000 is to be paid uponthe fourth anniversary of the effective date of the MCA, provided that Mr. Foleyremains employed by the Company as of such dates.  Mr. Foley will alsoreceive this final retention bonus if his employment is terminated as a resultof the Company’s dissolution.  The MCAalso provides that Mr. Foley will receive an annual living expenseallowance of $75,000 and such fringe benefits as are made available to othersenior executives of the Company.  TheCompensation Committee terminated Mr. Foley’s annual living allowancefollowing his relocation to Minneapolis, Minnesota in September 2005.

 

Either the Companyor Mr. Foley may terminate the MCA without cause at any time, upon onemonth’s written notice to the other party.  The Company may terminate Mr. Foley’semployment and the MCA for cause without prior notice.  The MCA alsoterminates in the event of Mr. Foley’s death or other inability to carryout his essential job functions.  Upon any termination or upon expirationof the MCA, Mr. Foley will continue to be bound by certainconfidentiality, non-compete and non-recruitment obligations contained in theMCA.

 

The MCA providesfor the continued employment of Mr. Foley through September 30, 2008,and provides that Mr. Foley will be entitled to severance benefits if theCompany terminates his employment without cause, either during or after theterm of the MCA.  These severancebenefits include payments equal to two times Mr. Foley’s annual salary,health and dental benefits, the vesting of Mr. Foley’s retention bonus andstock options, and the continuance of any available flight privileges Mr. Foleymay be eligible to receive, for twelve months. The MCA also provides for similar severance benefits to Mr. Foleyif he resigns his employment with the Company within one year after a change incontrol of the Company that occurs during the term of the MCA.

 

In July 2007,the Company and Mr. Foley amended the MCA to clarify that any severancebenefits received by Mr. Foley under a Company plan or arrangement otherthen the MCA, by reason of termination of his employment without cause, will beapplied as an offset against amounts owed to Mr. Foley under the MCA.  See “Potential Payments Upon Termination orChange in Control” for a discussion of the Company’s Severance CompensationPlan.

 

*Fiscal 2008 Long-Term IncentiveGrants*

 

There were nolong-term incentive grants made to the named executive officers during fiscal 2008.  To date, all long-term incentive grants havebeen made in the form of stock options.

 

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*OutstandingEquity Awards at Fiscal Year-End*

 

The followingtable provides information about unexercised stock options for each namedexecutive officer outstanding as of March 31, 2008.

*** ***
| ** **      | ** ** | **Number of Securities Underlying** | ** ** | **Option**        | ** ** | **Option**     | ** ** |
|-----------------|------------|----------------------------------------------------|------------|-------------------|------------|----------------|------------|
| ** **      | ** ** | **Unexercised Options (#)**              | ** ** | **Exercise**      | ** ** | **Expiration** | ** ** |
| **Name**        | ** ** | **Exercisable**                                    | ** ** | **Unexercisable** | ** ** | **Price**      | ** ** | **Date** | ** ** |
|            |       |                                               |       |              |       |           |       |   |   |
| Paul F. Foley   |       | 150,000                                            |       | —            |       | $              | 6.54       |   | 11/16/2011 |   |
| Paul F. Foley   |       | 150,000                                            |       | —            |       | 5.97           |       | 12/3/2012 |   |
| Paul F. Foley   |       | 70,000                                             |       | —            |       | 5.97           |       | 6/28/2008 |   |
| Paul F. Foley   |       | 112,500                                            |       | 37,500            |       | 8.28           |       | 8/18/2014 |   |
|            |       |                                               |       |              |       |           |       |   |   |
| Ruth M. Timm    |       | 7,500                                              |       | 22,500            |       | 5.62           |       | 7/14/2016 |   |
|            |       |                                               |       |              |       |           |       |   |   |
| Fred L. deLeeuw |       | —                                             |       | —            |       | —         |       | — |   |
|                 |            |                                                    |            |                   |            |                |            |  |  |  |

 

***Option Exercises in Last FiscalYear***

 

The following table provides information about theexercise of stock options during the fiscal year ended March 31, 2008 foreach executive officer named in the Summary Compensation Table.

 
| ** **      | ** ** | **Option Awards** | ** ** |
|-----------------|------------|------------------------|------------|
| ** **      | ** ** | **Number of**     | ** ** | ** ** | ** ** |
| ** **      | ** ** | **Shares**             | ** ** | **Value** | ** ** |
| ** **      | ** ** | **Acquired**           | ** ** | **Realized** | ** ** |
| **Name**        | ** ** | **on Exercise**   | ** ** | **on Exercise (1)** | ** ** |
|            |       |                   |       |   |   |
| Paul F. Foley   |       | 39,982                 |       | $ | 17,959 |   |
|            |       |                   |       |   |   |
| Ruth M. Timm    |       | —                 |       | — |   |
|            |       |                   |       |   |   |
| Fred L. deLeeuw |       | —                 |       | — |   |
|                 |            |                        |            |  |  |  |

 

----

(1)          Value is calculated as theexcess of the market value of the common stock at the date of exercise over theexercise price.

 

***Compensation Consultants***

 

During fiscal year2007, the Compensation Committee retained PayCraft Consulting to provide andanalyze market compensation data and trends of relevant competitors.  In assisting the Compensation Committee,PayCraft assembled a list of 12 relevant competitors in the regional airlineindustry, as well as companies in all industries with revenue between $100million and $500 million.  PayCraft usedmarket data collected for each group of relevant competitors to compare theCompany’s compensation programs in each of the following areas:

 

·                  Base salary;

·                  Actualannual incentives;

·                  Actualtotal cash compensation;

·                  Long-termincentives; and

·                  Actualtotal direct compensation.

 

The CompensationCommittee did not retain any compensation consultants during fiscal 2008.

 

***Potential Payments uponTermination or Change in Control***

 

In July 2007,the Compensation Committee established the Severance Compensation Planproviding for severance payments upon a qualifying termination of employmentand accelerated vesting of options upon a qualifying termination of employmentor upon a change-in-control of the Company. This plan formalized the Company’s

 

63

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current practicewith respect to severance payments to terminated employees who have beenemployed by the Company for at least 12 months. The plan provides for severance compensation to be paid as follows:

 

·                  employees whoare not officers or management directors will receive 3 weeks of basecompensation for each year of service, with a minimum severance benefit of 12weeks and a maximum severance benefit of 52 weeks;

 

·                  employees who aremanagement directors will receive 3 weeks of base compensation for each year ofservice, with a minimum severance benefit of 16 weeks and a maximum severancebenefit of 52 weeks; and

 

·                  employees whoare officers will receive a severance benefit equal to 52 weeks of basecompensation.

 

“Base compensation”under the plan consists of annual salary and targeted annual incentive bonus,each determined as of the date of termination.

 

The events thatwould trigger a named executive officer’s entitlement to payments or otherbenefits upon termination, and the value of the estimated payments and benefitsare described in the following table, assuming a termination date and, whereapplicable, a change in control date of May 1, 2008 and a stock price of$3.40 per share, which was the closing price of one share of the Company’scommon stock on May 1, 2008:

 
| ** **                                                                 | ** ** | **Paul F. Foley** | ** ** | **Ruth M. Timm** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Involuntary Termination Without Cause Due  to Organizational Restructuring |       |                        |       |                       |       |
|                                                                       |       |                        |       |                       |       |
| Annual Salary / Targeted Incentive Bonus                                   |       | $                           | 700,000    |                       | $          | 196,000 |   |
| Benefits Continuation                                                      |       | 53,325                      |       | 11,244                     |       |
| Gain on accelerated Stock Options                                          |       | —                      |       | —                     |       |
| Total                                                                      |       | $                           | 753,325    |                       | $          | 207,244 |   |
|                                                                       |       |                        |       |                       |       |
| Involuntary Termination Within 12 Months  Following a Change in Control    |       |                        |       |                       |       |
|                                                                       |       |                        |       |                       |       |
| Annual Salary / Targeted Incentive Bonus                                   |       | $                           | 700,000    |                       | $          | 196,000 |   |
| Benefits Continuation                                                      |       | 53,325                      |       | 11,244                     |       |
| Gain on accelerated Stock Options                                          |       | —                      |       | —                     |       |
| Total                                                                      |       | $                           | 753,325    |                       | $          | 207,244 |   |
|                                                                       |       |                        |       |                       |       |
| Change in Control                                                          |       |                        |       |                       |       |
|                                                                       |       |                        |       |                       |       |
| Gain on accelerated Stock Options                                          |       | $                           | —     |                       | $          | — |   |
| Total                                                                      |       | $                           | —     |                       | $          | — |   |

 

**As discussed above, under the MCA Mr. Foleyis entitled to a retention bonus payment of $200,000 if he remains employed asof September 30, 2008.  If prior to September 30,2008, Mr. Foley’s employment is terminated due to a change in control, hewould receive the $200,000 retention bonus in addition to the amounts stated inthe table above.**

 

**CompensationCommittee Interlocks and Insider Participation**

 

No member of theCompensation Committee of the Board of Directors was an officer, former officeror employee of the Company or its subsidiaries during the fiscal year ended March 31,2008, nor did any member of the Compensation Committee have any materialrelationship or transaction with the Company requiring disclosure elsewhere inthis Annual Report on Form 10-K.  Noexecutive officer of the Company served as a member of the compensationcommittee or board of directors of another entity, one of whose executiveofficers served on the Company’s Compensation Committee or Board of Directorsduring the fiscal year ended March 31, 2008.

 

64

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## ***Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS***

 

The following tableprovides information regarding ownership of our common stock by (i) eachperson known to the Company to own beneficially more than 5% of its commonstock, (ii) each director, (iii) each executive officer named in theSummary Compensation Table in “Item 11. Executive Compensation” and (iv) all directors and executiveofficers as a group.  Unless otherwiseindicated, the information is as of May 1, 2008 and each person has solevoting and investment power as to the shares shown.

 

For the purposes of thisAnnual Report on Form 10-K, beneficial ownership is determined inaccordance with rules of the Securities and Exchange Commission, andincludes any shares for which the person has sole or shared investment powerand any shares the person has the right to acquire within 60 days of May 1,2008 through the exercise of stock options. The stock options referred to in the footnotes are employee and directoroptions issued under the Company’s plans. These options become partially or wholly exercisable beginning one yearafter the date of grant.  Therefore, thereported option shares relate to options granted on or before June 30,2007.

 
| ** **                                                       | ** ** | **Number of** | ** ** | **Percentage** | ** ** |
|------------------------------------------------------------------|------------|--------------------|------------|----------------|------------|
| **Beneficial Owner**                                        | ** ** | **Shares**         | ** ** | **Owned**      | ** ** |
|                                                             |       |               |       |           |       |
| FMR Corp.                                                        |       | 2,000,026          | (1)        | 13.26          | %          |
| 82 Devonshire Street, Boston, MA 02109                           |       |               |       |           |       |
|                                                             |       |               |       |           |       |
| Carl R. Pohlad                                                   |       | 2,003,715          | (2)        | 13.21          | %          |
| 60 South Sixth Street, Suite 3800,  Minneapolis, MN 55402   |       |               |       |           |       |
|                                                             |       |               |       |           |       |
| Aegis Financial Corporation                                      |       | 1,665,557          | (3)        | 11.04          | %          |
| 1100 North Glebe Road, Suite 1040,  Arlington, VA 22201     |       |               |       |           |       |
|                                                             |       |               |       |           |       |
| Lloyd I. Miller                                                  |       | 1,591,852          | (4)        | 10.55          | %          |
| 4550 Gordon Drive, Naples, FL 34102                              |       |               |       |           |       |
|                                                             |       |               |       |           |       |
| Donald Smith & Co.                                      |       | 1,493,900          | (5)        | 9.90           | %          |
| 152 West 57th Street, New York, NY 10019                         |       |               |       |           |       |
|                                                             |       |               |       |           |       |
| Dimensional Fund Advisors Inc.                                   |       | 1,493,540          | (6)        | 9.90           | %          |
| 1299 Ocean Avenue, 11th Floor, Santa  Monica, CA 90401           |       |               |       |           |       |
|                                                             |       |               |       |           |       |
| Riley Investment Management LLC                                  |       | 1,090,465          | (7)        | 7.23           | %          |
| 11100 Santa Monica Blvd., Suite 810,  Los Angeles, CA 90025 |       |               |       |           |       |
|                                                             |       |               |       |           |       |
| Schultze Asset Management, LLC                                   |       | 997,010            | (8)        | 6.61           | %          |
| 3000 Westchester Avenue, Purchase, NY 10577                      |       |               |       |           |       |
|                                                             |       |               |       |           |       |
| Paul F. Foley                                                    |       | 422,000            | (9)        | 2.72           | %          |
|                                                             |       |               |       |           |       |
| Donald E. Benson                                                 |       | 69,000             | (10)       |           | *          |
|                                                             |       |               |       |           |       |
| Robert C. Pohlad                                                 |       | 54,000             | (10)       |           | *          |
|                                                             |       |               |       |           |       |
| Raymond W. Zehr, Jr.                                        |       | 45,000             | (11)       |           | *          |
|                                                             |       |               |       |           |       |
| Pierson M. Grieve                                                |       | 45,000             | (11)       |           | *          |
|                                                             |       |               |       |           |       |
| Ruth M. Timm                                                     |       | 7,500              | (11)       |           | *          |
|                                                             |       |               |       |           |       |
| John J. Ahn                                                      |       | 4,000              | (12)       |           | *          |
|                                                             |       |               |       |           |       |
| Fred L. deLeeuw                                                  |       | —             |       |           | *          |
|                                                             |       |               |       |           |       |
| James A. Lee                                                     |       | —             |       |           | *          |
|                                                             |       |               |       |           |       |
| All Directors and Officers as a Group (10  Persons)              |       | 2,650,215          | (13)       | 16.80          | %          |

 

65

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----

| (1)  | According to a Form 13F filed by FMR Corp. on February 14,  2008.                                                                                                                                                                                                                               |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Includes 90,000 shares which may be purchased pursuant to stock  options exercisable within 60 days.                                                                                                                                                                                                      |
| (3)  | According to a Schedule 13G filed by Aegis Financial Corporation on  February 14, 2008.                                                                                                                                                                                                              |
| (4)  | According to a Schedule 13D/A filed by Mr. Miller on  April 10, 2008.                                                                                                                                                                                                                           |
| (5)  | According to a Schedule 13G filed by Donald Smith & Co. on  February 8, 2008.                                                                                                                                                                                                               |
| (6)  | According to a Schedule 13G filed by Dimensional Fund  Advisors, Inc. on February 6, 2008.                                                                                                                                                                                                      |
| (7)  | According to information provided to the Company by Riley Investment  Management LLC on May 1, 2008. Excludes 7,548 shares held by the B.  Riley & Co. Retirement Trust, for which Bryant Riley is a trustee.  Bryant Riley is also the managing member of Riley Investment Management LLC. |
| (8)  | According to a Schedule 13G filed by Schultze Master Fund, Ltd. on  January 18, 2008.                                                                                                                                                                                                                |
| (9)  | Includes 412,500 shares which may be purchased pursuant to stock  options exercisable within 60 days.                                                                                                                                                                                                     |
| (10) | Includes 45,000 shares which may be purchased pursuant to stock  options exercisable within 60 days.                                                                                                                                                                                                      |
| (11) | Consists of shares which may be purchased pursuant to stock options  exercisable within 60 days.                                                                                                                                                                                                          |
| (12) | Consists of shares owned by Mr. Ahn’s parents, for which  Mr. Ahn has voting and investment control.                                                                                                                                                                                       |
| (13) | Includes 690,000 shares which may be purchased pursuant to stock  options exercisable within 60 days.                                                                                                                                                                                                     |

 

**SECTION 16(A) BENEFICIALOWNERSHIP REPORTING COMPLIANCE**

 

Section 16(a) of the Securities Exchange Act of 1934 requiresdirectors and executive officers of the Company and persons who own more than10% of the Company’s common stock to file with the SEC initial reports ofownership and reports of changes in ownership of the Company’s commonstock.  Initial reports on Form 3are required to be filed within ten business days of an individual becoming adirector, executive officer or owner of 10% or more of the Company’s commonstock.  Reports of changes in ownershipare required to be filed within two business days after a change occurs.  All Section 16(a) filingrequirements applicable to the Company’s officers, directors and greater than10% beneficial owners required for the fiscal year ended March 31, 2008were completed on a timely basis.

 

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

** **

**Independenceof Directors**

 

TheBoard delegates to the Nominating Committee the responsibility of reviewing,with the assistance of legal counsel to the Company, the applicable independencestandards for Board member and Board committee independence and the responsesto annual questionnaires completed by each of the directors.  On the basis of this review, the NominatingCommittee has determined that John J. Ahn, Donald E. Benson, Pierson M. Grieve,James A. Lee and Raymond W. Zehr, Jr. are independent as defined by thelisting standards of the NASDAQ National Market and Rule 10A-3 of theSecurities Exchange Act of 1934.  TheNominating Committee also determined that Mr. Foley is not considered anindependent director because of his employment as President and Chief ExecutiveOfficer of the Company, Mr. Carl R. Pohlad is not considered independentbecause of the fees he received in fiscal 2006 for his service as Chairman ofthe Board and Mr. Robert C. Pohlad is not considered independent as aresult of his familial relationship with Mr. Carl R. Pohlad.  In making these determinations, theNominating Committee considered that in the ordinary course of business,transactions may occur between the Company and its subsidiaries and companiesor other entities for which some of the Company’s Directors are or have beenofficers.

 

**RelatedParty Transaction Approval Policy**

 

All transactions between the Company or itssubsidiaries and any related party are subject to the Company’s written RelatedParty Transaction Approval Policy that was approved by the Board of Directorsduring fiscal 2007.  Under the policy,any financial transaction, arrangement or relationship in which the Company orits subsidiary is a participant and in which a related person has a direct orindirect interest and which, when aggregated with the amount of all othertransactions between the related person and the Company, involve $120,000 ormore, must be approved by the Audit Committee of the Board of Directors.  The policy defines “related persons” as alldirectors and executive officers of the Company; any nominee for director; anyimmediate family member of a director,

 

66

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nominee for director or executive officer; and anyholder of more than five percent of the Company’s common stock, or an immediatefamily member of such holder.

 

In reviewing a proposed related party transaction,the Audit Committee is required to analyze the following factors, as well asany other factors the Audit Committee deems appropriate:

 

·                  Whetherthe terms are fair to the Company;

·                  Whetherthe transaction is material to the Company;

·                  Therole the related person has played in arranging the transaction at issue;

·                  Thestructure of the transaction at issue; and

·                  Theinterests of all related persons in the transaction at issue.

 

The Audit Committee may not approve a related partytransaction unless it determines that such transaction is beneficial to theCompany and the terms of such transaction are fair to the Company.  Additionally, the Audit Committee has thediscretion to condition its approval of a related party transaction upon theCompany and/or the related person taking specified actions deemed necessary andappropriate by the Audit Committee.

 

*Big SkySublease Agreement with Jon Marchi*

 

Big Sky TransportationCo., the Company’s wholly-owned subsidiary, subleases its hangar facility fromJon Marchi, who was a director of Big Sky until September 30, 2007.  The term of the sublease is through2019.  In fiscal 2008 Big Sky paid Mr. Marchi$72,596 in land and hangar rental payments. The Company’s Audit Committee did not approve the lease agreement inaccordance with the Related Party Transaction Approval Policy because the leasewas executed in 1994, before such policy was adopted.

 

*ConsultingAgreement with Robert Weil*

 

Robert Weil resigned as the Company’s Chief Financial Officer effectiveSeptember 30, 2007.   Prior to hisresignation, Mr. Weil had been serving on the oversight committee toMesaba’s bankruptcy liquidating trust, and the Company desired that Mr. Weilcontinue in his role to represent the Company’s interest in preserving thevalue of its equity interest in Mesaba. To that end, Mr. Weil’s consulting agreement provides that he willbe paid a success fee based on the aggregate amount of equity disbursements theCompany receives from Mesaba’s liquidating trust.  No success fee will be paid until equitydisbursements exceed $10 million, at which point Mr. Weil will be paid$75,000.  The Company will pay Mr. Weilan additional $25,000 at each interval when the equity disbursements total $15million or more, $20 million or more and $25 million or more.  Additionally, the Company will pay Mr. Weilan additional $5,000 for each additional $1 million in equity disbursementsthat exceeds $25 million.

 

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

 

**InformationRegarding Independent Registered Public Accounting Firm**

 

In the second quarter offiscal 2008, the Audit Committee engaged Grant Thornton, LLP as the Company’sindependent registered public accounting firm. Deloitte & Touche LLP served as the Company’s independentregistered public accounting firm for fiscal 2007 and for the first quarter offiscal 2008.

 

***Audit Fees***

 

The aggregate fees billedfor professional services rendered by Grant Thornton, LLP for the audit of theCompany’s annual financial statements for the fiscal year ended March 31,2008 and for the reviews of the Company’s quarterly financial statements, andreview of other documents filed with the SEC were $226,000.  The aggregate fees billed for professionalservices rendered by Deloitte & Touche LLP for the audit of theCompany’s annual financial statements for the fiscal year ended March 31,2007 and for the reviews of the Company’s quarterly financial statements, andreview of other documents filed with the SEC for those fiscal years were$657,000.

 

***Audit-Related Fees***

 

There were no auditrelated fees billed by Grant Thornton, LLP in the Company’s fiscal year 2008.  For the fiscal year ended March 31,2007, Deloitte & Touche LLP billed the Company $36,211, for audit ofemployee benefit

 

67

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plans, assurance andrelated services in connection with the performance of the audit or review ofthe Company’s financial statements, in addition to the audit fees disclosedabove.

 

***Tax Fees***

 

For the fiscal year endedMarch 31, 2008, Grant Thornton, LLP billed the Company $22,020 forprofessional services rendered in connection with tax compliance services.  For the fiscal year ended March 31,2007, Deloitte & Touche LLP billed the Company $187,042, forprofessional services rendered in connection with tax compliance services.  For fiscal years ended March 31, 2007,Deloitte & Touche LLP billed the Company $231,285, for tax planning andadvice services.

 

***All Other Fees***

 

Neither Grant Thornton,LLP nor Deloitte & Touche LLP rendered any other services to theCompany, other than the services described above, for the fiscal years ended March 31,2008 and 2007.

 

***Pre-Approval Policies and Independence***

 

The Audit Committee has a policy of approving the engagement of theindependent registered public accounting firm to perform all audit andnon-audit services on behalf of the Company. The Audit Committee did not rely on the waiver from the pre-approvalrequirement available under paragraph (c)(7)(i)(C) of Rule 2-01 ofRegulation S-X with respect to any of the services provided by the independentregistered public accounting firms.  TheAudit Committee has determined that the provision of services covered by theforegoing fees was compatible with maintaining the independent registeredaccounting firm’s independence.  See “Reportof the Audit Committee.”

 

# **PART IV**

 

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

 

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

 

Includedin Item 8 of Part II of this Annual Report on Form 10-K are thefollowing:  Report of IndependentRegistered Public Accounting Firms, Consolidated Net Assets, ConsolidatedBalance Sheet, Consolidated Statement of Changes in Net Assets (LiquidationBasis), Consolidated Statements of Operations, Consolidated Statements ofShareholders’ Equity, Consolidated Statements of Cash Flows and Notes toConsolidated Financial Statements. Included in Item 9A of Part II of this Annual Report on Form 10-Kis Management’s Report on Internal Control Over Financial Reporting and Reportof Independent Registered Public Accounting Firm on Internal Control OverFinancial Reporting.

 

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

 

Theinformation required in Schedule II is included in Item 8 of Part II ofthis Annual Report on Form 10-K.

 

**(a)(3)  Exhibits**

 

TheExhibits filed or incorporated by reference herewith are as specified in the Exhibit Index.

 

**(b)   Exhibits**

 

TheExhibits filed or incorporated by reference herewith are as specified in the Exhibit Index.

 

**(c) Financial Statements of Subsidiaries Not Consolidated**

 

Thefinancial statements of Mesaba Aviation, Inc. for fiscal 2007 were filedas an exhibit to the Company’s Annual Report on Form 10-K for the yearended March 31, 2007.

 

68

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# **SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
| ** **                | **MAIR  HOLDINGS, INC.** |
|---------------------------|--------------------------|
| ** **                | ** **               |
| Dated:  May 30, 2008 | By:                      |   | /s/  PAUL F. FOLEY |
|                      |                     |   | Paul  F. Foley |
|                      |                     | President  and Chief Executive Officer |

 

Eachof the undersigned directors and officers of MAIR Holdings, Inc. whosesignature appears below hereby constitutes and appoints Paul F. Foley and RuthM. Timm, or either of them, with power to act one without the other, his or hertrue and lawful attorney-in-fact and agent, with full power of substitution andresubstitution, for such individual and in such individual’s name, place andstead, in any and all capacities, to act on, sign and file with the Securitiesand Exchange Commission this Annual Report on Form 10-K, to be filedpursuant to Section 13 or 15(d) of the Securities Exchange Act of1934, as amended, including any amendment or amendments to such report,together with all exhibits and schedules thereto, granting unto saidattorney-in-fact and agent, full power and authority to do and perform each andevery act and thing necessary or advisable to be done in connection therewith,as fully to all intents and purposes as he or she might or could do in person,hereby ratifying and confirming all that said attorney-in-fact and agent, orhis or her substitute or substitutes, may lawfully do or cause to be done byvirtue hereof.

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
| /s/ PAUL F.  FOLEY        |   | President,  Chief Executive Officer and acting    | May 30, 2008 |
|---------------------------|--------|---------------------------------------------------|--------------|
| Paul F.  Foley            |   | Chief Financial  Officer (Principal Executive and |         |
|                      |   | Financial  Officer) and Director                  |         |
|                      |   |                                              |         |
| /s/ WENDY S.  OJALA       |   | Vice  President and Controller                    | May 30, 2008 |
| Wendy S.  Ojala           |   | (Principal  Accounting Officer)                   |         |
|                      |   |                                              |         |
| /s/ JOHN J.  AHN          |   | Director                                          | May 30, 2008 |
| John J. Ahn               |   |                                              |         |
|                      |   |                                              |         |
| /s/ DONALD  E. BENSON     |   | Director                                          | May 30, 2008 |
| Donald E.  Benson         |   |                                              |         |
|                      |   |                                              |         |
| /s/ PIERSON  M. GRIEVE    |   | Director                                          | May 30, 2008 |
| Pierson M.  Grieve        |   |                                              |         |
|                      |   |                                              |         |
| /s/ JAMES A.  LEE         |   | Director                                          | May 30, 2008 |
| James A. Lee              |   |                                              |         |
|                      |   |                                              |         |
| /s/ CARL R.  POHLAD       |   | Director                                          | May 30, 2008 |
| Carl R.  Pohlad           |   |                                              |         |
|                      |   |                                              |         |
| /s/ ROBERT  C. POHLAD     |   | Director                                          | May 30, 2008 |
| Robert C.  Pohlad         |   |                                              |         |
|                      |   |                                              |         |
| /s/ RAYMOND  W. ZEHR, JR. |   | Director                                          | May 30, 2008 |
| Raymond W.  Zehr, Jr.     |   |                                              |         |

 

69

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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 August 27, 2003. |
|                            | 3.2        |                          | Bylaws.  Incorporated by reference to the Company’s Form 10-K filed June 14,  2005. |
|                            | 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. |
| *                               | 10.1       |                          | 1994  Stock Option Plan. Incorporated by reference to Exhibit 10.1 to the  Company’s Form 10-K for the fiscal year ended March 31, 2005. |
| *                               | 10.2       |                          | 1996  Directors’ Option Plan. Incorporated by reference to Exhibit 10.2 to the  Company’s Form 10-K for the fiscal year ended March 31, 2005. |
| *                               | 10.3       |                          | 2000  Stock Incentive Plan. Incorporated by reference to Exhibit 10.3 to the  Company’s Form 10-K for the fiscal year ended March 31, 2005. |
|                            | 10.4       |                          | Stock  Purchase Agreement between the Company and Carl R. Pohlad dated as of  October 18, 1993. Incorporated by reference to Exhibit 10.10 to the  Company’s Form 10-K for the fiscal year ended March 31, 2005. |
|                            | 10.5       |                          | 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 fiscal year ended March 31,  2000. |
|                            | 10.6       |                          | 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 fiscal year ended  March 31, 2000. |
| *                               | 10.7       |                          | 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. |
|                            | 10.8       |                          | Agreement,  dated April 18, 2006, between MAIR Holdings, Inc. and UMB Bank,  N.A. Incorporated by reference to Exhibit 10.17 to the Company’s  Form 10-K for the fiscal year ended March 31, 2006. |
|                            | 10.9       |                          | Letter  of Credit Reimbursement Agreement, dated April 17, 2006, between MAIR  Holdings, Inc. and First Interstate Bank. Incorporated by reference to  Exhibit 10.18 to the Company’s Form 10-K for the fiscal year ended  March 31, 2006. |
|                            | 10.10      |                          | Irrevocable  Standby Letter of Credit dated April 17, 2006, in the amount of  $13,110,000. Incorporated by reference to Exhibit 10.19 to the Company’s  Form 10-K for the fiscal year ended March 31, 2006. |
|                            | 21.1       |                          | Subsidiaries.  Incorporated by reference to Exhibit 21.1 to the Company’s  Form 10-K for the fiscal year ended March 31, 2007. |
|                            | 23.1       |                          | Consent  of Independent Registered Public Accounting Firm – Grant Thornton LLP. Filed  herewith. |
|                            | 23.2       |                          | Consent  of Independent Registered Public Accounting Firm – Deloitte and Touche LLP.  Filed herewith. |
|                            | 24.1       |                          | Powers  of Attorney. Included in signature page. |
|                            | 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. |
|                            | 99.1       |                          | Mesaba  Aviation, Inc. Financial Statements. Incorporated by reference to  Exhibit 99.1 to the Company’s Form 10-K for the fiscal year ended  March 31, 2007. |

 

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|   | * |   | Denotes  management contract or compensatory plan or arrangement. |
|--------|---|--------|-------------------------------------------------------------------|

 

70

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