**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

| **ý****QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934.**             |
|---------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                      |
| **For the quarterly period ended  December 31, 2003**                                                                |
|                                                                                                                      |
| **OR**                                                                                                                    |
|                                                                                                                      |
| **o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                   |
|                                                                                                                      |
| **For the transition period  from       to       ** |
|                                                                                                                      |
| **Commission File No:  0-17895**                                                                                     |

 

**MAIR HOLDINGS, INC.**

Incorporatedunder the laws of Minnesota

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

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  ý    No  o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

 

Yes  o    No  ý

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

 

| **Class**                              | ** ** | **Outstanding as of February 2, 2004** |
|----------------------------------------|------------|---------------------------------------------|
| Common  Stock Par value $.01 per share |       | 20,348,141                                  |

 

 

 

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CAUTIONARYSTATEMENT UNDER THEPRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

Statements in this QuarterlyReport on Form 10-Q under the caption “Management’s Discussion and Analysisof  Financial Condition and Results ofOperations” and elsewhere in this report, as well as oral statements that maybe made by the Company or its subsidiaries or by officers, directors oremployees of the Company or its subsidiaries acting on the Company’s behalf,that are not historical fact may constitute “forward looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995. Suchforward-looking statements involve factors that could cause the actual resultsof the Company to differ materially from historical results or from any resultsexpressed or implied by such forward-looking statements.  The Company cautions the public not to placeundue reliance on forward-looking statements, which may be based on assumptionsand anticipated events that do not materialize. Factors which could cause the Company’s actual results to differ fromforward-looking statements include material changes in the relationship betweenthe Company, its subsidiaries and Northwest Airlines (“Northwest”); changes inNorthwest’s air service; reduced passenger and flight activity; a slow-down inthe overall United States economy; expenses associated with restructuringoperations; increased operating costs due to heightened security measures; theimpact of United States government programs on operations; changes inregulations affecting the airline industry, including those issued by theDepartment of Transportation (“DOT”), Transportation Security Administration(“TSA”) and Federal Aviation Administration (“FAA”); seasonal factors; laborrelations, including labor shortages, slow downs and/or work stoppages; andongoing legal proceedings.  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.

 

2

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**Part I. FINANCIAL INFORMATION**

 

**ITEM 1.****  CONSOLIDATED FINANCIALSTATEMENTS**

 

**MAIR HOLDINGS, INC.**

**CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
| ** **                                            | ** ** | **December 31  2003** | ** ** | **March 31  2003** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
|                                                  |       |                       |       |                    |       |
| ASSETS                                                |       |                       |       |                    |       |
|                                                  |       |                       |       |                    |       |
| CURRENT ASSETS:                                       |       |                       |       |                    |       |
| Cash and cash equivalents                             |       | $                          | 59,092     |                    | $          | 60,908 |   |
| Short term investments                                |       | 65,297                     |       | 40,464                  |       |
| Accounts receivable, net of reserves of $566 and $389 |       | 31,220                     |       | 40,682                  |       |
| Inventories, net                                      |       | 8,439                      |       | 8,459                   |       |
| Prepaid expenses and deposits                         |       | 6,163                      |       | 4,925                   |       |
| Deferred income taxes and other                       |       | 10,740                     |       | 10,706                  |       |
| Total current assets                                  |       | 180,951                    |       | 166,144                 |       |
|                                                  |       |                       |       |                    |       |
| PROPERTY AND EQUIPMENT:                               |       |                       |       |                    |       |
| Flight equipment                                      |       | 79,595                     |       | 78,549                  |       |
| Other property and equipment                          |       | 42,115                     |       | 37,916                  |       |
| Less: Accumulated depreciation and amortization       |       | (81,016                    | )          | (72,667                 | )          |
| Net property and equipment                            |       | 40,694                     |       | 43,798                  |       |
|                                                  |       |                       |       |                    |       |
| LONG TERM INVESTMENTS                                 |       | 34,111                     |       | 21,762                  |       |
| OTHER ASSETS, net                                     |       | 14,906                     |       | 15,706                  |       |
|                                                  |       | $                          | 270,662    |                    | $          | 247,410 |   |

 

Theaccompanying notes are an integral part of these unaudited consolidatedfinancial statements.

 

3

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**MAIR HOLDINGS, INC.**

**CONSOLIDATED BALANCE SHEETS (Continued)**

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

**(Unaudited)**

 
| ** **                                                                                                           | ** ** | **December 31  2003** | ** ** | **March 31  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
|                                                                                                                 |       |                       |       |                    |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                            |       |                       |       |                    |       |
|                                                                                                                 |       |                       |       |                    |       |
| CURRENT LIABILITIES:                                                                                                 |       |                       |       |                    |       |
| Accounts payable                                                                                                     |       | $                          | 15,769     |                    | $          | 15,285 |   |
| Accrued liabilities:                                                                                                 |       |                       |       |                    |       |
| Payroll                                                                                                              |       | 18,446                     |       | 14,295                  |       |
| Maintenance                                                                                                          |       | 19,410                     |       | 16,031                  |       |
| Deferred income                                                                                                      |       | 2,593                      |       | 2,619                   |       |
| Other, primarily property and income taxes                                                                           |       | 20,587                     |       | 14,445                  |       |
| Total current liabilities                                                                                            |       | 76,805                     |       | 62,675                  |       |
|                                                                                                                 |       |                       |       |                    |       |
| OTHER NONCURRENT LIABILITIES                                                                                         |       | 6,845                      |       | 6,790                   |       |
|                                                                                                                 |       |                       |       |                    |       |
| COMMITMENTS AND CONTINGENCIES (Notes 2 and 12)                                                                       |       |                       |       |                    |       |
|                                                                                                                 |       |                       |       |                    |       |
| SHAREHOLDERS’ EQUITY:                                                                                           |       |                       |       |                    |       |
| Common stock, $.01 par value; 60,000,000 shares authorized,  20,348,141 and 20,320,641 shares issued and outstanding |       | 203                        |       | 203                     |       |
| Paid-in capital                                                                                                      |       | 51,546                     |       | 50,615                  |       |
| Warrants                                                                                                             |       | 16,500                     |       | 16,500                  |       |
| Accumulated other comprehensive income                                                                               |       | 53                         |       | 116                     |       |
| Retained earnings                                                                                                    |       | 118,710                    |       | 110,511                 |       |
| Total shareholders’ equity                                                                                      |       | 187,012                    |       | 177,945                 |       |
|                                                                                                                 |       | $                          | 270,662    |                    | $          | 247,410 |   |

 

Theaccompanying notes are an integral part of these unaudited consolidatedfinancial statements.

 

4

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**MAIR HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(In thousands, except per shareinformation)**

**(Unaudited)**

 
| ** **                               | ** ** | **Three Months Ended  December 31** | ** ** | **Nine Months Ended  December 31** | ** ** |
|------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                               | ** ** | **2003**                                 | ** ** | **2002**                                | ** ** | **2003** | ** ** | **2002** | ** ** |
| OPERATING REVENUES:                      |       |                                     |       |                                    |       |   |   |   |   |
| Passenger                                |       | $                                        | 107,161    |                                    | $          | 106,675 |   | $ | 323,606 |   | $ | 328,747 |   |
| Freight and other                        |       | 8,166                                    |       | 6,146                                   |       | 23,216 |   | 16,063 |   |
| Total operating revenues                 |       | 115,327                                  |       | 112,821                                 |       | 346,822 |   | 344,810 |   |
|                                     |       |                                     |       |                                    |       |   |   |   |   |
| OPERATING EXPENSES:                      |       |                                     |       |                                    |       |   |   |   |   |
| Wages and benefits                       |       | 37,660                                   |       | 33,762                                  |       | 109,443 |   | 99,518 |   |
| Aircraft fuel                            |       | 5,707                                    |       | 5,068                                   |       | 17,183 |   | 17,174 |   |
| Aircraft maintenance                     |       | 21,399                                   |       | 20,227                                  |       | 60,354 |   | 59,692 |   |
| Aircraft rents                           |       | 26,517                                   |       | 27,024                                  |       | 80,059 |   | 80,548 |   |
| Landing fees                             |       | 1,867                                    |       | 1,791                                   |       | 5,437 |   | 5,580 |   |
| Insurance and taxes                      |       | 2,261                                    |       | 3,824                                   |       | 7,759 |   | 12,452 |   |
| Depreciation and amortization            |       | 4,186                                    |       | 4,608                                   |       | 13,019 |   | 14,179 |   |
| Administrative and other                 |       | 15,057                                   |       | 15,122                                  |       | 41,876 |   | 43,098 |   |
| Total operating expenses                 |       | 114,654                                  |       | 111,426                                 |       | 335,130 |   | 332,241 |   |
| Operating income                         |       | 673                                      |       | 1,395                                   |       | 11,692 |   | 12,569 |   |
|                                     |       |                                     |       |                                    |       |   |   |   |   |
| NONOPERATING INCOME (EXPENSE):           |       |                                     |       |                                    |       |   |   |   |   |
| Interest income                          |       | 450                                      |       | 631                                     |       | 1,268 |   | 2,083 |   |
| Other, net                               |       | 36                                       |       | (38                                     | )          | 2,557 |   | (2,790 | ) |
| Other nonoperating income (expense), net |       | 486                                      |       | 593                                     |       | 3,825 |   | (707 | ) |
| Income before provision for income taxes |       | 1,159                                    |       | 1,988                                   |       | 15,517 |   | 11,862 |   |
|                                     |       |                                     |       |                                    |       |   |   |   |   |
| PROVISION FOR INCOME TAXES               |       | 400                                      |       | 705                                     |       | 7,318 |   | 6,632 |   |
| NET INCOME                               |       | $                                        | 759        |                                    | $          | 1,283 |   | $ | 8,199 |   | $ | 5,230 |   |
|                                     |       |                                     |       |                                    |       |   |   |   |   |
| NET INCOME PER SHARE:                    |       |                                     |       |                                    |       |   |   |   |   |
| Earnings per common share – basic   |       | $                                        | 0.04       |                                    | $          | 0.06 |   | $ | 0.40 |   | $ | 0.26 |   |
| Earnings per common share – diluted |       | $                                        | 0.04       |                                    | $          | 0.06 |   | $ | 0.40 |   | $ | 0.26 |   |
|                                     |       |                                     |       |                                    |       |   |   |   |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING:     |       |                                     |       |                                    |       |   |   |   |   |
| Basic                                    |       | 20,333                                   |       | 20,315                                  |       | 20,325 |   | 20,304 |   |
| Diluted                                  |       | 20,522                                   |       | 20,315                                  |       | 20,451 |   | 20,358 |   |

 

Theaccompanying notes are an integral part of these unaudited consolidatedfinancial statements.

 

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**MAIR HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine Months Ended  December 31** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                         | ** ** | **2003**                                | ** ** | **2002** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                                    |       |   |   |
| Net income                                                                         |       | $                                       | 8,199      |   | $ | 5,230 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                    |       |   |   |
| Depreciation and amortization                                                      |       | 13,019                                  |       | 14,179 |   |
| Writedown of investment                                                            |       |                                    |       | 2,994 |   |
| Amortization of deferred credits                                                   |       | (1,597                                  | )          | (2,092 | ) |
| Stock-based compensation                                                           |       | 752                                     |       |   |   |
| Changes in current operating items:                                                |       |                                    |       |   |   |
| Accounts receivable                                                                |       | 9,462                                   |       | 2,761 |   |
| Inventories                                                                        |       | 20                                      |       | (23 | ) |
| Prepaid expenses and deposits                                                      |       | (1,238                                  | )          | 61 |   |
| Accounts payable and other                                                         |       | 15,447                                  |       | 2,216 |   |
| Net cash provided by operating activities                                          |       | 44,064                                  |       | 25,326 |   |
|                                                                               |       |                                    |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                                    |       |   |   |
| Acquisition of Big Sky, net of cash acquired                                       |       |                                    |       | (3,225 | ) |
| Purchases of investments                                                           |       | (65,206                                 | )          | (81,663 | ) |
| Sales of investments                                                               |       | 27,533                                  |       | 94,951 |   |
| Purchases of property and equipment, net                                           |       | (8,172                                  | )          | (4,987 | ) |
| Net cash provided by (used in) investing activities                                |       | (45,845                                 | )          | 5,076 |   |
|                                                                               |       |                                    |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                               |       |                                    |       |   |   |
| Repayment of other noncurrent liabilities                                          |       | (214                                    | )          |   |   |
| Proceeds from issuance of common stock                                             |       | 179                                     |       | 106 |   |
| Net cash provided by (used in) financing activities                                |       | (35                                     | )          | 106 |   |
|                                                                               |       |                                    |       |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                               |       | (1,816                                  | )          | 30,508 |   |
|                                                                               |       |                                    |       |   |   |
| CASH AND CASH EQUIVALENTS:                                                         |       |                                    |       |   |   |
| Beginning of period                                                                |       | 60,908                                  |       | 31,250 |   |
| End of period                                                                      |       | $                                       | 59,092     |   | $ | 61,758 |   |
|                                                                               |       |                                    |       |   |   |
| SUPPLEMENTARY CASH FLOW INFORMATION:                                               |       |                                    |       |   |   |
| Cash paid during period for:                                                       |       |                                    |       |   |   |
| Interest                                                                           |       | $                                       | 83         |   | $ | 48 |   |
| Income taxes                                                                       |       | $                                       | 3,241      |   | $ | 6,253 |   |

 

Theaccompanying notes are an integral part of these unaudited consolidatedfinancial statements.

 

6

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**MAIRHOLDINGS, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

The consolidated financialstatements included herein have been prepared by MAIR Holdings, Inc. (the“Company” or “Holdings”), formerly known as Mesaba Holdings, Inc., withoutaudit, pursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”).  The informationfurnished in the consolidated financial statements includes normal recurringadjustments and reflects all adjustments, which are, in the opinion ofmanagement, necessary for a fair presentation of such consolidated financialstatements.  The Company’s business isseasonal and, accordingly, interim results are not indicative of results for afull year.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”) have been condensed or omitted pursuant to such rules andregulations, although the Company believes that the disclosures are adequate tomake the information presented not misleading. It is suggested that these consolidated financial statements be read inconjunction with the consolidated financial statements for the year endedMarch 31, 2003, and the notes thereto, included in the Company’s AnnualReport on Form 10-K as filed with the SEC.

 

1. Basis of Presentation

 

The consolidated financialstatements include the accounts of the Company and its wholly owned subsidiaries,Mesaba Aviation, Inc. (“Mesaba”) and Big Sky Transportation Co. (“BigSky”).  All significant intercompanytransactions and balances have been eliminated in consolidation.

 

The preparation of theconsolidated financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities, as well asthe reported amounts of revenues and expenses. The most significant use of estimates relates to accrued maintenanceexpenses, aircraft property and equipment lives, and inventory obsolescencereserves.  Ultimate results could differfrom those estimates.

 

Certain balances in the fiscal2003 consolidated financial statements have been reclassified to conform with the fiscal 2004 presentation.  These reclassifications had no impact on netincome or shareholders’ equity as previously reported.

 

2. Operations

 

*Mesaba*

Mesaba operates as a regional aircarrier providing scheduled passenger service as Mesaba Airlines/NorthwestAirlink and Mesaba Airlines/Northwest Jet Airlink under two separate agreementswith Northwest Airlines, Inc. (“Northwest”). As of December 31, 2003, Mesaba served 112 cities in the UnitedStates and Canada from Northwest’s hub airports, Minneapolis/St. Paul, Detroitand Memphis.

 

Under the Airline ServicesAgreement (the “Airlink Agreement”), Mesaba operates Saab 340 jet-prop aircraft(“Saab”) for Northwest.  The Airlinkagreement provides for exclusive rights to designated service areas and extendsthrough June 30, 2007.  Under theAirlink Agreement, Mesaba recognizes revenue for each completed available seatmile.  Additionally, under the AirlinkAgreement, Mesaba purchases fuel, ground handling and other services fromNorthwest.  For these services, Mesabapaid to Northwest $8.2 million and $4.7 million for the three months endedDecember 31, 2003 and 2002 and $22.7 million and $15.1 million for thenine months ended December 31, 2003 and 2002.  Either Northwest or Mesaba may terminate theAirlink Agreement on 365 days notice or may be terminated immediately by eitherparty for certain provisions provided for in the Airlink Agreement.

 

Under the Regional Jet ServicesAgreement (the “Jet Agreement”), Mesaba operates Avro RJ85 regional jets(“RJ85”) for Northwest.  The JetAgreement extends through April 2007, unless terminated earlier inaccordance with its provisions.  Underthe Jet Agreement, Mesaba recognizes revenue for each block hour flown.  Northwest provides fuel and airport andpassenger related services at Northwest’s expense.  The Jet Agreement may be terminatedimmediately by Mesaba or Northwest in accordance with certain provisionsprovided in the Jet Agreement.  See thesubsequent event discussed at Note 12.

 

Under the agreements, all Mesabaflights appear in Northwest’s timetables and Mesaba receives ticketing andcertain check-in, baggage and freight-handling services from Northwest atcertain airports.  Mesaba also benefitsfrom its relationship with Northwest through advertising and marketingprograms.  The Airlink and Jet Agreementsprovide for certain incentive

 

7

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paymentsfrom Northwest to Mesaba based on achievement of certain operational or financialgoals.  Such incentives totaled $1.4million and $1.0 million for the three months ended December 31, 2003 and2002 and $3.9 million for the nine months ended December 31, 2003 and2002, and are included in passenger revenues in the accompanying consolidatedstatements of operations.  Approximately76.9% and 72.8% of the December 31, 2003 and March 31, 2003 accountsreceivable balances in the accompanying consolidated balance sheets are duefrom Northwest.

 

Cancellation of the Airlink orJet Agreements or Northwest’s failure to make timely payment of amounts owed toMesaba or to otherwise materially perform under the Airlink or Jet Agreementswould have a material adverse effect on Mesaba’s and the Company’s operations,financial position and cash flows. Northwest and Mesaba review contract compliance on a periodic basis.

 

*Big Sky*

Big Sky operates as a regionalcarrier based in Billings, Montana, primarily providing scheduled passenger,airfreight, express package and charter services.  Big Sky operates daily scheduled flightsproviding interline and online connecting services and local market services.

 

Big Sky provides scheduled airservice to 19 communities in Montana, North Dakota, Washington and Idaho viaits Billings, Montana hub.  Big Sky hascode-sharing agreements with Alaska Airlines/Horizon Airlines, America WestAirlines and Northwest, where its services are marketed jointly with those aircarriers for connecting flights.  Big Skyparticipates in the Essential Air Service (“EAS”) program with the DOT.  The EAS program subsidizes air carriers toprovide air service to designated rural communities throughout the country thatcould not otherwise economically justify that service on the basis of itspassenger traffic.  The DOT pays EASsubsidies for each departure in a covered market.

 

3. Acquisition

 

On September 26, 2002, theCompany executed a definitive merger agreement providing for the acquisition ofBig Sky for $3.2 million, net of cash acquired of $0.3 million.  The transaction closed on December 1,2002.

 

The Company funded the acquisition with cash from operations andaccounted for the acquisition using the purchase method of accounting.  Accordingly, the purchase price was allocatedto the assets acquired and liabilities assumed based on their estimated fairmarket values at the date of acquisition. Assets and liabilities are recorded based upon their fair market valueas of the date of the acquisition and may be subject to future tax adjustments.  The excess of the purchase price over thefair market value of the net assets acquired was allocated to certainintangible assets and goodwill.  Resultsof Big Sky’s operations have been included in the accompanying consolidatedfinancial statements since the date of acquisition.  Due to the lack of materiality of Big Sky’soperations, pro forma financial results are not presented.

 

4. Goodwill and OtherIntangibles

 

The excess of the Big Sky purchase price over the fair market value ofthe net assets acquired was allocated to certain identifiable intangibleassets, including Big Sky’s pilot labor contract and an air carriercertificate, and to goodwill.  Theintangible assets were recorded based upon preliminary estimates.  An additional $0.6 million was recorded togoodwill after the asset valuation was finalized during the quarter endedDecember 31, 2003.  Goodwill andother intangible assets and related accumulated amortization were as follows,in thousands:

 
| ** **                  | ** ** | **December 31, 2003** | ** ** | **March 31, 2003**       | ** ** |
|-----------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                  | ** ** | **Gross**                  | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Air carrier certificate     |       | $                          | 925        |                          |       |   | $ | 925 |   | $ | 925 |   |   |   | $ | 925 |   |
| Goodwill                    |       | 3,859                      |       |                          |       | 3,859 |   | 3,222 |   |   |   | 3,222 |   |
| Amortized intangible asset: |       |                       |       |                          |       |   |   |   |   |   |   |   |   |
| Pilot labor contract        |       | 2,840                      |       | (439                          | )          | 2,401 |   | 2,840 |   | (135 | ) | 2,705 |   |
|                        |       | $                          | 7,624      |                          | $          | (439 | ) | $ | 7,185 |   | $ | 6,987 |   | $ | (135 | ) | $ | 6,852 |   |
|                             |            |                            |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amortizable intangible assetis amortized over its estimated period of benefit.  Intangible asset amortization expense for thequarter and year to date ended December 31, 2003 was $0.1 million and $0.3million.  Based on the current amount ofintangible assets subject to amortization, estimated amortization expense foreach of the succeeding five fiscal years is $0.4

 

8

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millionper year.  The recoverability of goodwilland the intangible assets are evaluated annually, at a minimum, or on aninterim basis if events or circumstances indicate a possible inability torealize the carrying amounts.

 

5. Investments

 

Investments consist principallyof municipal securities and corporate bonds and are classified asavailable-for-sale as of December 31, 2003 and March 31, 2003.  Available-for-sale investments are reportedat fair value with unrealized gains and losses excluded from operations andreported as a separate component of shareholders’ equity, except forother-than-temporary impairments, which are reported as a charge to currentoperations and result in a new cost basis for the investment.  The Company recorded another-than-temporary impairment loss of $3.0 million on its investmentin a WorldCom bond during the period ended September 30, 2002 in theunaudited consolidated statements of operations.  In March 2003, the Company sold itsinvestment in WorldCom for $0.8 million, which resulted in a gain ofapproximately $0.4 million.  The Companyclassifies investments that mature within one year as short term.  Investments with maturity dates greater thanone year are classified as long term.

 

The amortized cost, grossunrealized gains and losses and fair value of investments, classified as debtsecurities available for sale, were as follows, in thousands:

 
| ** **              | ** ** | **December 31, 2003** | ** ** | **March 31, 2003** | ** ** |
|-------------------------|------------|----------------------------|------------|-------------------------|------------|
| Amortized costs         |       | $                          | 99,305     |                    | $          | 61,944 |   |
| Gross unrealized gains  |       | 126                        |       | 283                     |       |
| Gross unrealized losses |       | (23                        | )          | (1                      | )          |
| Fair value              |       | $                          | 99,408     |                    | $          | 62,226 |   |

 

 

The Company recorded realizedgains and losses on the sale of investments for the periods endedDecember 31 as follows, inthousands:

 
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2003**               | ** ** | **2002**              | ** ** | **2003** | ** ** | **2002** | ** ** |
| Gross realized gains        |       | $                      | —     |                  | $          | 18 |   | $ | 1 |   | $ | 226 |   |
| Gross realized losses       |       | —                 |       | —                |       | (2 | ) | (81 | ) |
| Net realized gains (losses) |       | $                      | —     |                  | $          | 18 |   | $ | (1 | ) | $ | 145 |   |

 

6. Nonoperating Gain

 

On April 16, 2003, PresidentBush signed into law the Emergency Wartime Supplemental AppropriationsAct.  Among other items, the legislationincludes a $2.3 billion government grant for airlines.  In accordance with this Act, for the ninemonths ended December 31, 2003, Mesaba recognized $2.3 million as “othernonoperating income” and Big Sky recognized $0.3 million as “other nonoperatingincome” and $0.2 million as a reduction of “administrative and other expense”in the accompanying consolidated statements of operations.

 

7. Stock Options

 

The Company accounts for itsstock-based compensation plans using the intrinsic value method prescribedunder Accounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees,” and related interpretations. The Company has approved stock option plans for key employees,directors, consultants and advisors to the Company.  As such, the Company records compensationexpense for stock options and awards only if the exercise price is less thanthe fair market value of the stock on the measurement date.

 

For purposes of the pro formadisclosures of compensation expense under Statement of Financial AccountingStandards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” and SFASNo. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,”the Company uses the Black-Scholes option model to estimate the fair value ofoptions not subject to variable plan accounting.

 

9

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The following informationsummarizes the pro forma effects assuming compensation for such awards had beenrecorded based upon the estimated fair value for the periods endedDecember 31, in thousands, exceptper share information:

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2003**               | ** ** | **2002**              | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income, as reported              |       | $                      | 759        |                  | $          | 1,283 |   | $ | 8,199 |   | $ | 5,230 |   |
| Stock-based compensation, net of tax |       | (365                   | )          | (391                  | )          | (966 | ) | (918 | ) |
| Pro forma net income                 |       | $                      | 394        |                  | $          | 892 |   | $ | 7,233 |   | $ | 4,312 |   |
|                                 |       |                   |       |                  |       |   |   |   |   |
| Earnings per share – basic:     |       |                   |       |                  |       |   |   |   |   |
| As reported                          |       | $                      | 0.04       |                  | $          | 0.06 |   | $ | 0.40 |   | $ | 0.26 |   |
| Pro forma                            |       | $                      | 0.02       |                  | $          | 0.04 |   | $ | 0.36 |   | $ | 0.21 |   |
| Earnings per share – diluted:   |       |                   |       |                  |       |   |   |   |   |
| As reported                          |       | $                      | 0.04       |                  | $          | 0.06 |   | $ | 0.40 |   | $ | 0.26 |   |
| Pro forma                            |       | $                      | 0.02       |                  | $          | 0.04 |   | $ | 0.35 |   | $ | 0.21 |   |

 

In December 2002, the Company repriced stock options to purchase745,000 shares of the Company’s common stock with exercise prices ranging from$9.05 to $18.00 to an exercise price of $5.97, which represented the fairmarket value on the date of the repricing. In accordance with Financial Accounting Standards Board (“FASB”)Interpretation No. 44, “Accounting for Certain Transactions Involving StockCompensation,” the Company has adopted variable plan accounting for theseoptions from the date of the repricing. The Company recorded compensation expense of $0.3 million and $0.8million for the quarter and year to date ended December 31, 2003 and nonein the prior year as a result of the repricing.

 

8. Earnings PerShare

 

Basic earningsper common share is computed by dividing net income by the weightedaverage number of shares of common stock outstanding during the period.  Diluted earnings per share is computed bydividing net income by the sum of the weighted average number of shares ofcommon stock outstanding plus all additional common stock that would have beenoutstanding if potentially dilutive common shares related to stock options andwarrants had been issued.

 

The following tables reconcilethe number of shares utilized in the consolidated earnings per sharecalculations for the periods ended December 31, in thousands, except per share information:

 
| ** **                                                                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                  | ** ** | **2003**               | ** ** | **2002**              | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income                                                                                                  |       | $                      | 759        |                  | $          | 1,283 |   | $ | 8,199 |   | $ | 5,230 |   |
| For earnings per common share – basic:                                                                 |       |                   |       |                  |       |   |   |   |   |
| Weighted average number of issued shares outstanding                                                        |       | 20,333                 |       | 20,315                |       | 20,325 |   | 20,304 |   |
| Effect of dilutive securities:                                                                              |       |                   |       |                  |       |   |   |   |   |
| Computed shares outstanding under the Company’s stock option plan  utilizing the treasury stock method |       | 189                    |       | —                |       | 126 |   | 54 |   |
| For earnings per common share – diluted:                                                               |       |                   |       |                  |       |   |   |   |   |
| Weighted average common shares and common share equivalents  outstanding                                    |       | 20,522                 |       | 20,315                |       | 20,451 |   | 20,358 |   |
| Earnings per share – basic                                                                             |       | $                      | 0.04       |                  | $          | 0.06 |   | $ | 0.40 |   | $ | 0.26 |   |
| Earnings per share – diluted                                                                           |       | $                      | 0.04       |                  | $          | 0.06 |   | $ | 0.40 |   | $ | 0.26 |   |
|                                                                                                        |       |                   |       |                  |       |   |   |   |   |
| Antidilutive options and warrants                                                                           |       | 4,490                  |       | 6,284                 |       | 4,490 |   | 5,179 |   |

 

10

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9. Consolidated Comprehensive Income

 

The following table presents thecalculation of comprehensive income. Comprehensive income has no impact on reported net income.  The components of comprehensive income forthe periods ended December 31 are as follows, in thousands:

 
| ** **                                                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                             | ** ** | **2003**               | ** ** | **2002**              | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income                                                                             |       | $                      | 759        |                  | $          | 1,283 |   | $ | 8,199 |   | $ | 5,230 |   |
| Unrealized gains (losses) on investments classified as available for  sale, net of tax |       | (40                    | )          | 212                   |       | (63 | ) | 276 |   |
| Comprehensive income                                                                   |       | $                      | 719        |                  | $          | 1,495 |   | $ | 8,136 |   | $ | 5,506 |   |

 

10. New AccountingPronouncements

 

In May 2003, the FASB issued SFASNo. 150, “Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity.”  SFAS No.150 establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  SFAS No. 150 is effective for financialinstruments entered into or modified after May 31, 2003, and otherwise becameeffective September 30, 2003.  Theadoption of SFAS No. 150 did not have a material impact on the Company’sconsolidated results of operations, financial position or cash flows.

 

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

 

11. Segment Information

 

The Company follows theprovisions of SFAS No. 131, “Disclosures about Segments of an Enterprise andRelated Information”.  SFAS No. 131establishes annual and interim reporting standards for an enterprise’s businesssegments and related disclosures about its products, services, geographic areasand major customers.  The method fordetermining what information to report is based upon the way managementorganizes the operating segments within the Company for making operatingdecisions and assessing financial performance.

 

Prior to the acquisition of BigSky on December 1, 2002, the Company had one reportable segment: Mesaba.  After the acquisition of Big Sky, the Companyhas determined that it has two reportable segments:  Mesaba and Big Sky.  Operating segment information for Mesaba, BigSky (from the date of acquisition), and Holdings for the periods endedDecember 31 were as follows, inthousands:

 

11

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| ** **                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2003**               | ** ** | **2002**              | ** ** | **2003** | ** ** | **2002** | ** ** |
| Operating revenues:                    |       |                   |       |                  |       |   |   |   |   |
| Mesaba                                 |       | $                      | 111,221    |                  | $          | 111,083 |   | $ | 334,066 |   | $ | 343,072 |   |
| Big Sky                                |       | 4,106                  |       | 1,738                 |       | 12,756 |   | 1,738 |   |
| Holdings and eliminations              |       | —                 |       | —                |       | — |   | — |   |
| Consolidated                           |       | $                      | 115,327    |                  | $          | 112,821 |   | $ | 346,822 |   | $ | 344,810 |   |
| Depreciation and amortization expense: |       |                   |       |                  |       |   |   |   |   |
| Mesaba                                 |       | $                      | 3,954      |                  | $          | 4,565 |   | $ | 12,400 |   | $ | 14,136 |   |
| Big Sky                                |       | 230                    |       | 43                    |       | 613 |   | 43 |   |
| Holdings and eliminations              |       | 2                      |       | —                |       | 6 |   | — |   |
| Consolidated                           |       | $                      | 4,186      |                  | $          | 4,608 |   | $ | 13,019 |   | $ | 14,179 |   |
| Interest expense:                      |       |                   |       |                  |       |   |   |   |   |
| Mesaba                                 |       | $                      | —     |                  | $          | — |   | $ | — |   | $ | — |   |
| Big Sky                                |       | 74                     |       | 28                    |       | 234 |   | 28 |   |
| Holdings and eliminations              |       | (38                    | )          | —                |       | (151 | ) | — |   |
| Consolidated                           |       | $                      | 36         |                  | $          | 28 |   | $ | 83 |   | $ | 28 |   |
| Income (loss) before income taxes:     |       |                   |       |                  |       |   |   |   |   |
| Mesaba                                 |       | $                      | 2,191      |                  | $          | 2,321 |   | $ | 17,046 |   | $ | 14,643 |   |
| Big Sky                                |       | (1,092                 | )          | (235                  | )          | (2,169 | ) | (235 | ) |
| Holdings and eliminations              |       | 60                     |       | (98                   | )          | 640 |   | (2,546 | ) |
| Consolidated                           |       | $                      | 1,159      |                  | $          | 1,988 |   | $ | 15,517 |   | $ | 11,862 |   |
| Capital expenditures (sales), net:     |       |                   |       |                  |       |   |   |   |   |
| Mesaba                                 |       | $                      | 3,391      |                  | $          | 1,431 |   | $ | 8,148 |   | $ | 6,283 |   |
| Big Sky                                |       | (16                    | )          | (1,329                | )          | 10 |   | (1,329 | ) |
| Holdings and eliminations              |       | 4                      |       | 33                    |       | 14 |   | 33 |   |
| Consolidated                           |       | $                      | 3,379      |                  | $          | 135 |   | $ | 8,172 |   | $ | 4,987 |   |
| Total assets at end of period:         |       |                   |       |                  |       |   |   |   |   |
| Mesaba                                 |       |                   |       |                  |       | $ | 127,284 |   | $ | 116,537 |   |
| Big Sky                                |       |                   |       |                  |       | 10,669 |   | 10,061 |   |
| Holdings                               |       |                   |       |                  |       | 140,789 |   | 121,892 |   |
| Eliminations                           |       |                   |       |                  |       | (8,080 | ) | (9,881 | ) |
| Consolidated                           |       |                   |       |                  |       | $ | 270,662 |   | $ | 238,609 |   |

 

12. Subsequent Events

 

*Jet Agreement*

On February 2, 2004, theCompany, Mesaba and Northwest entered into an amendment to the Jet Agreementthat removes an early termination provision that permitted Northwestto give notice of early termination on or before February 29, 2004.  A notice of termination would have resultedin a termination of the Jet Agreement as of June 30, 2004.

 

Mesaba and Northwest had agreedto remove five of the RJ85 aircraft from service.  Three of the RJ85 came out of service duringDecember 2003 and two in January 2004.  Mesaba expects that the five RJ85 aircraftwill be returned to service by June 2004.

 

*Pilot Negotiations*

On January 31, 2004, Mesabaentered into a new five-year agreement with the Air Line Pilots Association(“ALPA”), following ratification of the agreement by ALPA’s membership.  To account for a provision of the agreement,a $2.7 million accrual for retroactive pilot compensation was recorded to wagesand benefits expense in the quarter ended December 31, 2003.

 

12

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**ITEM 2.****  MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

RESULTS OF OPERATIONS

 

**Three Months Ended December 31, 2003 and 2002**

The Company’s consolidated netincome for the quarter ended December 31, 2003 was $0.8 million, or $0.04per diluted share, compared with net income of $1.3 million, or $0.06 perdiluted share, for the quarter ended December 31, 2002.  On December 1, 2002, the Companyacquired all the outstanding shares of Big Sky and accounted for thetransaction using the purchase method of accounting.  As such, the Company has consolidated BigSky’s results of operations from the acquisition date, December 1, 2002.  For the three months ended December 31,2003, Big Sky generated operating revenues of $4.1 million and incurredoperating expenses of $5.1 million.  Forthe one month ended December 31, 2002, Big Sky generated operatingrevenues of $1.7 million and incurred operating expenses of $2.0 million.  Because comparative information for Big Skyis not included, a detailed discussion of Big Sky’s operating results andstatistics is not presented.  Operatingstatistics for the three months ended December 31 were as follows.

 
| ** **                           | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|--------------------------------------|------------|-----------|------------|-----------|------------|
| Mesaba Operating Statistics          |       |      |       |      |       |
| Passengers                           |       | 1,469,604 |       | 1,414,666 |       |
| Available seat miles (000’s)    |       | 760,478   |       | 694,351   |       |
| Revenue passenger miles (000’s) |       | 466,544   |       | 411,068   |       |
| Load factor                          |       | 61.3      | %          | 59.2      | %          |
| Departures                           |       | 56,239    |       | 56,957    |       |
| Revenue per available seat mile      |       | $         | 0.146      |      | $          | 0.160 |   |
| Cost per available seat mile         |       | $         | 0.143      |      | $          | 0.157 |   |
| Aircraft in service (average)        |       | 102       |       | 113       |       |
| Big Sky Operating Statistics         |       |      |       |      |       |
| Passengers                           |       | 25,755    |       | n/a       |       |
| Available seat miles (000’s)    |       | 17,394    |       | n/a       |       |
| Revenue passenger miles (000’s) |       | 6,519     |       | n/a       |       |
| Load factor                          |       | 37.5      | %          | n/a       |       |
| Departures                           |       | 5,325     |       | n/a       |       |
| Revenue per available seat mile      |       | $         | 0.236      |      | n/a        |   |
| Cost per available seat mile         |       | $         | 0.294      |      | n/a        |   |
| Aircraft in service (average)        |       | 10        |       | n/a       |       |
|                                 |       |      |       |      |       |

 

Mesaba Operating Revenues  Total operating revenuesremained relatively constant, increasing in the current quarter of fiscal 2004to $111.2 million from $111.1 million in the prior year’s quarter primarily dueto a decrease of 1.6% in completed available seat miles under the AirlinkAgreement offset by an increase of 10.9% in block hours flown under the JetAgreement and an increase in ground handling activities.

 

13

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Mesaba Operating Expenses  Total operating expensesincreased 0.4% in the current quarter of fiscal 2004 to $109.2 million from$108.8 million in the prior year’s quarter. Mesaba’s operating costs per available seat mile for the three monthsended December 31were as follows:

 
| ** **                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Wages and benefits            | ** ** | 4.6      | ¢     | 4.7      | ¢     |
| Aircraft fuel                 | ** ** | 0.7      |       | 0.7      |       |
| Aircraft maintenance          | ** ** | 2.7      |       | 2.9      |       |
| Aircraft rents                | ** ** | 3.4      |       | 3.9      |       |
| Landing fees                  | ** ** | 0.2      |       | 0.2      |       |
| Insurance and taxes           | ** ** | 0.3      |       | 0.5      |       |
| Depreciation and amortization | ** ** | 0.5      |       | 0.7      |       |
| Administrative and other      | ** ** | 1.9      |       | 2.1      |       |
| Total                         | ** ** | 14.3     | ¢     | 15.7     | ¢     |

 

Wages and benefits increased 8.3%to $35.6 million in the third quarter of fiscal 2004 from $32.9 million in thethird quarter of fiscal 2003 primarily due to a $2.7 million accrual forretroactive pilot compensation resulting from the January 31, 2004 ALPA contract.

 

Aircraft fuel increased 7.7% to$5.2 million in the third quarter of fiscal 2004 from $4.8 million in the thirdquarter of fiscal 2003 due primarily to adjustments to fuel reserves in theprior period, which was partially offset by a slight decrease in the number ofSaab block hours flown and favorable rates of fuelburn.  Provisions of the AirlinkAgreement with Northwest protect Mesaba from changes in fuel prices.  Mesaba’s actual cost of fuel, including pumpingfees, was 83.5 cents per gallon for both periods.  Northwest is responsible for fuel for theRJ85 operation.

 

Aircraft maintenance, excludingwages and benefits, increased 2.2% to $20.4 million in the third quarter offiscal 2004 from $20.0 million in the third quarter of fiscal 2003 due to theoffsetting impact of a 3.9% increase in flight hours and adjustments tomaintenance reserves, which was offset by a reduction in aircraft damageexpenses.

 

Aircraft rents decreased 3.2% to$26.0 million in the third quarter of fiscal 2004 from $26.8 in the thirdquarter of fiscal 2003 due to the return of 11 Saab 340 aircraft.

 

Landing fees increased 2.6% dueto increased rates.  Northwest provideslanding fees for the RJ85 operation at their expense.

 

Insurance and taxes decreased48.1% to $1.9 million in the third quarter of fiscal 2004 from $3.7 million inthe third quarter of fiscal 2003 due primarily to a reduction in the ratescharged for hull and passenger liability insurance and favorable property taxcredits.

 

Depreciation and amortization decreased13.4% to $4.0 million in the third quarter of fiscal 2004 compared to $4.6million in the third quarter of fiscal 2003 due primarily to reduced capitalexpenditures.

 

Administrative and other expensesremained relatively constant at $14.3 million with an offsetting increase inoutside services due to activity associated with labor negotiations and therecognition of a bad debt reserve in the prior year.

 

Consolidated NonoperatingIncome (Expense)  Non-operatingincome decreased to $0.5 million in the third quarter of fiscal 2004 fromincome of $0.6 million for the prior year quarter primarily due to the impactof lower interest rates on the Company’s cash and investments.

 

Consolidated Provision forIncome Taxes The Company’s effective tax rate was 34.5% for the thirdquarter of fiscal 2004 as compared to 35.5% in the prior year quarter.  The Company adjusts its effective tax ratequarterly based on forecasted operating results for the fiscal year.  The rate is affectedprincipally by the level of nondeductible expenses relative to projectedtaxable income.

 

14

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**Nine Months Ended December 31, 2003 and 2002**

The Company’s consolidated netincome for the period ended December 31, 2003 was $8.2 million, or $0.40per diluted share, compared with net income of $5.2 million, or $0.26 perdiluted share, for the period ended December 31, 2002.  On December 1, 2002, the Companyacquired all the outstanding shares of Big Sky and accounted for thetransaction using the purchase method of accounting.  As such, the Company has consolidated BigSky’s results of operations from the acquisition date, December 1,2002.  For the nine months endedDecember 31, 2003, Big Sky generated operating revenues of $12.8 millionand incurred operating expenses of $15.0 million.  For the one month ended December 31,2002, Big Sky generated operating revenues of $1.7 million and incurredoperating expenses of $2.0 million. Because comparative information for Big Sky is not included, a detaileddiscussion of Big Sky’s operating results and statistics is not presented.  Operating statistics for the nine monthsended December 31 were as follows.

 
| ** **                           | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|--------------------------------------|------------|-----------|------------|-----------|------------|
| Mesaba Operating Statistics          |       |      |       |      |       |
| Passengers                           |       | 4,459,586 |       | 4,418,524 |       |
| Available seat miles (000’s)    |       | 2,251,391 |       | 2,134,352 |       |
| Revenue passenger miles (000’s) |       | 1,383,556 |       | 1,271,591 |       |
| Load factor                          |       | 61.5      | %          | 59.6      | %          |
| Departures                           |       | 170,746   |       | 178,774   |       |
| Revenue per available seat mile      |       | $         | 0.148      |      | $          | 0.162 |   |
| Cost per available seat mile         |       | $         | 0.142      |      | $          | 0.154 |   |
| Aircraft in service (average)        |       | 104       |       | 113       |       |
| Big Sky Operating Statistics         |       |      |       |      |       |
| Passengers                           |       | 83,687    |       | n/a       |       |
| Available seat miles (000’s)    |       | 59,401    |       | n/a       |       |
| Revenue passenger miles (000’s) |       | 21,442    |       | n/a       |       |
| Load factor                          |       | 36.1      | %          | n/a       |       |
| Departures                           |       | 18,423    |       | n/a       |       |
| Revenue per available seat mile      |       | $         | 0.215      |      | n/a        |   |
| Cost per available seat mile         |       | $         | 0.252      |      | n/a        |   |
| Aircraft in service (average)        |       | 10        |       | n/a       |       |

 

 

Mesaba Operating Revenues  Total operating revenuesdecreased 2.6% in the nine months ended December 31, 2003 to $334.1million from $343.1 million in the prior period primarily due to a decrease of6.7% in completed available seat miles under the Airlink Agreement offset by anincrease of 8.0% in block hours flown under the Jet Agreement and an increasein ground handling activities.

 

15

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Mesaba Operating Expenses  Total operating expensesdecreased 2.8% in the nine months ended December 31, 2003 to $319.5million from $328.8 million in the prior period.  Mesaba’s operating costs per available seatmile for the nine months ended December 31 were as follows:

 
| ** **                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Wages and benefits            |       | 4.5      | ¢     | 4.6      | ¢     |
| Aircraft fuel                 |       | 0.7      |       | 0.8      |       |
| Aircraft maintenance          |       | 2.6      |       | 2.8      |       |
| Aircraft rents                |       | 3.5      |       | 3.8      |       |
| Landing fees                  |       | 0.2      |       | 0.2      |       |
| Insurance and taxes           |       | 0.3      |       | 0.6      |       |
| Depreciation and amortization |       | 0.6      |       | 0.6      |       |
| Administrative and other      |       | 1.8      |       | 2.0      |       |
| Total                         |       | 14.2     | ¢     | 15.4     | ¢     |

 

Wages and benefits increased 4.4%to $103.0 million in the nine months ended December 31, 2003 from $98.6million in the prior period due primarily to a $2.7 million accrual forretroactive pilot pay resulting from the January 31, 2004 ALPA contractand increased health, dental and workers’ compensation insurance costs.

 

Aircraft fuel decreased 8.5% to$15.5 million in the nine months ended December 31, 2003 from $16.9million in the prior period due primarily to a decrease of 7.4% in the numberof Saab block hours flown and favorable rates of fuelburn.  Provisions of the AirlinkAgreement with Northwest protect Mesaba from changes in fuel prices.  Mesaba’s actual cost of fuel, includingpumping fees, was 83.5 cents per gallon for both periods.  Northwest is responsible for fuel for theRJ85 operation.

 

Aircraft maintenance, excludingwages and benefits, decreased 2.4% to $58.0 million in the nine months endedDecember 31, 2003 from $59.4 million in the prior period due primarily toa 1.7% reduction in flight hours flown in fiscal 2004 and a reduction inaircraft damage expenses, partially offset by adjustments to maintenancereserves.

 

Aircraft rents decreased 2.6% to$78.2 million in the nine months ended December 31, 2003 from $80.3million in the prior period due to the return of 11 Saab 340 model aircraftfollowing the first quarter of fiscal 2003.

 

Landing fees decreased 6.7% to$5.2 million in the nine months ended December 31, 2003 from $5.5 millionin the prior period due primarily to a 4.6% decrease in Saab departures.  Northwest provides landing fees for the RJ85operation at their expense.

 

Insurance and taxes decreased42.7% to $7.0 million in the nine months ended December 31, 2003 from$12.3 million in the prior period due primarily to a reduction in the ratescharged for hull and passenger liability insurance and favorable property taxcredits.

 

Depreciation and amortizationdecreased 12.3% to $12.4 million in the nine months ended December 31,2003 compared to $14.1 million in the prior period due primarily to reducedcapital expenditures.

 

Administrative and other expensedecreased 3.3% to $40.2 million in the nine months ended December 31, 2003from $41.6 million in the prior period primarily due to a current year increasein outside services due to activities associated with labor negotiations and anincrease in pilot training costs versus recognition of a bad debt reserve andincreased levels of passenger expenses in the prior year.

 

Consolidated NonoperatingIncome (Expense)  Non-operatingincome increased to $3.8 million in the nine months ended December 31,2003 from an expense of $0.7 million for the prior period primarily due to therecognition of $2.6 million in federal grant proceeds recorded in fiscal 2004for the reimbursement of security fees remitted to the TSA versus the Company’srecognition of a $3.0 million other-than-temporary impairment loss on itsinvestment in a WorldCom bond in fiscal 2003. The increase was partially offset by a decrease in interest income to$1.3 million from $2.1 million for the periods ended December 31, 2003 and2002 due to lower interest rates on the Company’s cash and investments.

 

16

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Consolidated Provision forIncome Taxes The Company’s effective tax rate was 47.2% for the nine monthsended December 31, 2003 as compared to 55.9% in the prior period.  The Company adjusts its effective tax ratequarterly based on forecasted operating results for the fiscal year.  The rate is affectedprincipally by the level of nondeductible expenses relative to projectedtaxable income.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s working capitalincreased to $104.1 million with a decreased current ratio of 2.4 atDecember 31, 2003 as compared to working capital of $103.5 million and acurrent ratio of 2.7 at March 31, 2003. Cash and cash equivalents decreased $1.8 million to $59.1 million atDecember 31, 2003 due primarily to cash from operations of $44.1 million,net expenditures on investments of $37.7 million and net property and equipmentadditions of $8.2 million.  Long andshort-term investments increased $37.2 million to $99.4 million atDecember 31, 2003 compared to $62.2 million at March 31, 2003.

 

Investments consist principallyof municipal securities and corporate bonds and are classified asavailable-for-sale as of December 31, 2003 and March 31, 2003.  Available-for-sale investments are reportedat fair value with unrealized gains and losses excluded from operations andreported as a separate component of shareholders’ equity, except forother-than-temporary impairments, which are reported as a charge to currentoperations and result in a new cost basis for the investment.  The Company classifies investments thatmature within one year as short term. Investments with maturities greater than one year are classified as longterm.

 

As of December 31, 2003,Mesaba’s fleet consisted of 99 aircraft covered under operating leases withremaining terms of less than a month to 12 years and aggregate monthly leasepayments of approximately $9.1 million. Mesaba has the ability to return to the lessor up to five****turbo-prop aircraft, which, if allwere returned, would reduce the Mesaba’s aggregate monthly lease payment by atotal of $0.2 million.  Mesaba leases allof its Saab 340 aircraft, either directly from aircraft leasing companies orthrough subleases with Northwest under operating leases with original terms upto 17 years.  Mesaba leases its RJ85aircraft from Northwest under operating leases with terms of up to 10years.  The Airlink Agreement and JetAgreement allow Mesaba to return aircraft to Northwest upon the occurrence ofcertain events.  The Company’s airlinefleet operating leases do not contain any guaranteed lease residual provisionsfor which there would be a potential contingency at the termination of the leaseperiod.  The Company believes that Mesabawill have sufficient revenues to make lease payments on its aircraft as long asthe current Airlink and Jet Agreements remain in effect.

 

As of December 31, 2003, BigSky’s fleet consisted of 12 aircraft financed with operating leases, throughnon-affiliated parties, with remaining terms of eleven to 47 months andaggregate monthly lease payments of approximately $0.2 million.  Five of the leases contain purchaseoptions.  Big Sky will depend onmaintaining or increasing passenger boardings to generate sufficient cash flowto pay its aircraft lease obligations.  Amaterial reduction in Big Sky’s passenger revenues could jeopardize its abilityto make lease payments.

 

Approximately 76.9%of the Company’s accounts receivable balance as of December 31, 2003 wasdue from Northwest.  Cancellation of the Airlink or Jet Agreementsor Northwest’s failure to make timely payment of amounts owed to Mesaba or tootherwise materially perform under the Airlink or Jet Agreement for any reasonwould have a material adverse effect on the Company’s results of operations,financial position and cash flows.

 

The Company has historicallyrelied upon cash and cash equivalents, investments and internally generatedfunds to support its working capital requirements.  Management believes that funds fromoperations will provide adequate resources for meeting non-aircraft capitalneeds for the remainder of fiscal 2004.

 

During the fourth quarter offiscal year 2004, the Company is estimating that there will be approximately a5.0% decline in available seat mile capacity year-over-year due primarily tothe day and a-half disruption in service associated with recent labornegotiations at Mesaba.  Alsocontributing to the projected capacity decline will be the five RJ85 aircraftout of service for the quarter, by agreement with Northwest.  The aircraft are expected to be back inservice by June 2004.  The annualimpact of the new Mesaba five year pilot contract isestimated to be an increase of approximately 1.0 to 1.5% to total operatingexpenses depending on the level of flying.

 

CRITICAL ACCOUNTING POLICIESAND ESTIMATES

 

The preparation of the Company’sconsolidated financial statements in conformity with GAAP requires the use ofestimates, judgments and assumptions that affect the reported amounts of assetsand liabilities as of the date of the consolidated financial statements,revenues and expenses during the reporting period and related disclosures ofcontingent assets and liabilities in the consolidated financial statements andthe accompanying notes.  The SEC hasdefined a company’s most

 

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critical accounting policies asthe ones that are most important to the portrayal of the company’s financialcondition and results of operations, and which require the company to make itsmost difficult and subjective judgments, often as a result of the need to makeestimates of matters that are inherently uncertain.  Based on this definition, the Company hasidentified its critical accounting policies to include those discussed in thefollowing paragraphs.  The Company alsohas other key accounting policies, which involve the use of estimates,judgments and assumptions.  See Note 2“Summary of Significant Accounting Policies” in the Notes to the ConsolidatedFinancial Statements for the year ended March 31, 2003 included in theCompany’s Annual Report on Form 10-K filed with the SEC, for additionaldiscussion of these items.

 

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

 

*Aircraft Property and Equipment –*Estimated lives are used torecord depreciation on aircraft property and equipment.  Aircraft utilization, technology and changesin the business strategy or operating agreements with Northwest may affect theeconomic lives used to record depreciation by Mesaba or Big Sky.  The foregoing may also impact depreciationrates, impairment, or both.  Managementof Mesaba and Big Sky regularly review the estimated useful lives and salvagevalues for aircraft property and equipment.

 

*Excess and Obsolete Inventories –*Estimated recovery percentagesare used to record obsolescence reserves for parts inventories.  Aircraft utilization, parts availability andchanges in the cost of parts may affect the valuation of parts inventories andobsolescence reserve levels.  Management ofMesaba and Big Sky regularly review recovery percentages, reserve levels andinventory valuations for parts inventories.

 

*Aircraft Maintenance –*Estimated maintenance costs and anticipatedaircraft activity are used to determine maintenance reserves.  Changes in maintenance contracts, parts andlabor costs and aircraft activity may affect the maintenance reserves.  Management of Mesaba and Big Sky regularlyreview airplane activity, expected aircraft return dates, changes in itsmaintenance contracts and parts and labor costs for maintenance reserves.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

In May 2003, the FASB issued SFASNo. 150, “Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity.”  SFAS No.150 establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  SFAS No. 150 is effective for financialinstruments entered into or modified after May 31, 2003, and otherwise becameeffective September 30, 2003.  Theadoption of SFAS No. 150 did not have a material impact on the Company’sconsolidated results of operations, financial position or cash flows.

 

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

 

**ITEM 3.****  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

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

 

Mesaba and Big Sky have notexperienced difficulties with fuel availability.  As a part of the Airlink Agreement, Northwestbears the economic risk of fuel price fluctuations for Mesaba’s fuelrequirements.  As part of the JetAgreement, Northwest provides all fuel at its expense to support Mesaba’s jetoperations.  Big Sky is subject tofluctuations in fuel prices, but currently fuel expense is not a material costin relation to the Company’s total operating expenses.  The Company expects that its results ofoperations will not be materially affected by fuel price volatility.

 

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

 

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**ITEM 4.****  CONTROLS AND PROCEDURES**

 

Based on an evaluation of theCompany’s disclosure controls and procedures as of the end of the periodcovered by this Quarterly Report on Form 10-Q, Paul F. Foley, President andChief Executive Officer of the Company, and Robert E. Weil, Vice President,Chief Financial Officer and Treasurer of the Company, have concluded that theCompany’s disclosure controls and procedures are effective in ensuring thatinformation required to be disclosed by the Company in the reports that itfiles or submits under the Securities Exchange Act of 1934, as amended, isrecorded, processed, summarized and reported within the time periods specifiedby the SEC’s rules and forms.  There wereno significant changes in the Company’s internal controls or in other factorsthat could significantly affect these controls subsequent to the date of theevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

**Part II. OTHER INFORMATION**

 

**ITEM 1.****  LEGAL PROCEEDINGS**

 

On October 4, 2002,Fairbrook Leasing, Inc., Lambert Leasing, Inc. and Swedish Aircraft Holdings AB(“Saab”) filed a declaratory judgment action against Mesaba relating to 20 Saab340A aircraft leased by Mesaba.  Thelawsuit is pending in the United States District Court for the District ofMinnesota.  Saab is requesting a judicialdeclaration that the terms of the leases applicable to each of the 340Aaircraft are governed by a March 7, 1996 term sheet proposal rather thanthe short-term leases subsequently executed by the parties.  Mesaba has counterclaimed to resolve adispute relating to the return conditions applicable to the 340A aircraft.  The parties filed cross-motions for summaryjudgment on the issue of whether the term sheet proposal constitutes a bindingcontract.  On December 8, 2003, theCourt issued an order declaring that the term sheet proposal constitutes abinding contract that required Mesaba to execute or negotiate in good faithtoward the execution of long term leases on each of the 340A aircraft.  The Court concluded that the term sheetproposal is ambiguous with respect to whether lease extensions contemplated bythat document are at Mesaba’s option or Saab’s option.  Accordingly, that issue, together with theissue of whether the term sheet proposal mandates any specific returnconditions on the aircraft will be determined at trial.  The lawsuit involves a declaratory judgmentaction rather than a claim for damages, and the ultimate outcome of thisdispute cannot be predicted with certainty.

 

**ITEM 4.****  SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

None

 

**ITEM 5.****  OTHER INFORMATION**

 

On October 7, 2003,Northwest announced that it was considering exercising its right to terminatethe Jet Agreement under which Mesaba leases and operates the 36 RJ85 jets.  At Mesaba’s request, the parties agreed toextend the early termination notice period under the Jet Agreement toDecember 15, 2003, to give Northwest additionaltime for analysis and review of operational and economic data relating to theRJ85 jet fleet.  Mesaba and Northwestalso agreed to remove five of the RJ85 aircraft from service.  Three of the RJ85 came out of service duringDecember 2003 and two in January 2004. On December 15, 2003, theparties further extended the early termination notice period toFebruary 29, 2004.

 

On February 2, 2004, theCompany, Mesaba and Northwest amended the Jet Agreement by deleting the earlytermination clause, because Northwest had determined not to exercise its earlytermination right.  Mesaba expects thatthe five RJ85 aircraft will be returned to service by June 2004.  The Jet Agreement expires on April 25,2007, unless terminated earlier under other existing provisions, as a result ofevents of default or other failures to perform under the contract.

 

During the quarter ended December 31, 2003, Mesaba and ALPA, whichrepresents Mesaba’s pilots, continued to negotiate under Section 6 of theRailway Labor Act for a new labor agreement. Mesaba and ALPA reached a tentative agreement on January 11, 2004,and entered into a final agreement on January 31, 2004, followingratification of the agreement by ALPA’s membership.

 

**ITEM 6.****  EXHIBITS AND REPORTS ON FORM8-K**

 
| **(a)**    | **Exhibits** |
|------------|--------------|
| ** ** | ** **   | ** ** | ** ** |
|       | 3A           |   | Restated Articles of  Incorporation.  Incorporated by  reference to Exhibit 4.1 to the Company’s Form 8-K filed August 27, 2003 |
|            |              |  |  |  |

 

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|   | 3C  |   | Bylaws.  Incorporated by reference to Exhibit 3.2 to  the Form S-4, Registration No. 333-22977                                                                                                                                                                                                                                                                                                                       |
|--------|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 4A  |   | Specimen certificate for shares  of the Common Stock of the Company.   Incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed  August 27, 2003                                                                                                                                                                                                                                           |
|   | 4B  |   | Common Stock Purchase Warrant  dated October 25, 1996 issued to Northwest Airlines, Inc. Incorporated  by reference to Exhibit 4A to the Company’s 10-Q for the quarter ended  September 30, 1996                                                                                                                                                                                                          |
|   | 4C  |   | Common Stock Purchase Warrant  dated October 17, 1997 issued to Northwest Airlines, Inc. Incorporated  by reference to Exhibit 4A to the Company’s 10-Q for the quarter ended  September 30, 1997                                                                                                                                                                                                          |
|   | 9A  |   | Shareholder’s Agreement  regarding election of representative of Northwest Aircraft Inc. to Board of  Directors.  Incorporated by reference  to Exhibit 9A to Mesaba’s Registration Statement on Form S-1, Registration  No. 33-820                                                                                                                                                                        |
|   | 10A |   | FAA Air Carrier Operating  Certificate.  Incorporated by reference  Exhibit 10A to Mesaba’s Form 10-K for the year ended March 31, 1989                                                                                                                                                                                                                                                                    |
|   | 10B |   | CAB Part 298 Registration.  Incorporated by reference to Exhibit 10G to  Mesaba’s Form 10-K for the year ended March 31, 1987                                                                                                                                                                                                                                                                              |
|   | 10C |   | Airline Services Agreement  between Mesaba Aviation, Mesaba Holdings, Inc. and Northwest Airlines, Inc.  dated July 1, 1997 (certain potions of this agreement are subject to an  order granting confidential treatment pursuant to Rule 24b-2).  Incorporated by reference to Exhibit 10A to  the Company’s Form 10-Q for the quarter ended September 30, 1997                                       |
|   | 10D |   | Regional Jet Services Agreement  between Mesaba Holdings, Inc., Mesaba Aviation, Inc. and Northwest Airlines,  Inc., dated October 25, 1996 (certain provisions of this agreement are  subject to an order granting confidential treatment pursuant to Rule 24b-2).  Incorporated by reference to Exhibit 10A to  the Company’s Form 10-Q for the quarter ended September 30, 1996                    |
|   | 10E |   | Foreign Air Carrier Operating  Certificates issued May 6, 1991 by the Canadian Department of Transport.  Incorporated by reference to Exhibit 10H to  the Company’s Form 10-K for the year ended March 31, 1991                                                                                                                                                                                            |
|   | 10F |   | Special Facilities Lease dated  as of August 1, 1990 between Charter County of Wayne, State of Michigan  and Mesaba Aviation, Inc. Incorporated by reference to Exhibit 10B to the  Company’s Form 10-Q for the quarter ended September 30, 1990                                                                                                                                                           |
|   | 10G |   | Ground Lease dated  August 1, 1990 between Charter County of Wayne, State of Michigan and  Mesaba Aviation, Inc. Incorporated by reference to Exhibit 10C to the  Company’s Form 10-Q for the quarter ended September 30,1990                                                                                                                                                                              |
|   | 10H |   | Letter Agreement dated  December 24, 1992 relating to the repurchase of shares of Common Stock  from Northwest Aircraft, Inc. Incorporated by reference to Exhibit 10EE to  the Company’s Form 10-K for the year ended March 31, 1993                                                                                                                                                                      |
|   | 10I |   | DOT Certificate of Public  Convenience and Necessity dated October 26, 1992.  Incorporated by reference to Exhibit 10FF  of the Company’s Form 10-K for the year ended March 31, 1993                                                                                                                                                                                                                 |
|   | 10J |   | Stock Purchase Agreement  between the Company and Carl R. Pohlad dated as of October 18,  1993.  Incorporated by reference to  Exhibit 10 of the Company’s Form 8-K dated October 19, 1993                                                                                                                                                                                                            |
|   | 10K |   | Term Sheet Proposal for the  Acquisition of Saab 340 Aircraft by Mesaba Aviation, Inc. dated March 7,  1996 (certain portions of this document have been deleted pursuant to an  application for confidential treatment under Rule 24b-2).  Incorporated by reference to Exhibit 10U to  the Company’s Form 10-K/A for the year ended March 31, 1996                                                  |
|   | 10L |   | Letter Agreement regarding Saab  340B Plus Acquisition Financing dated March 7, 1996 (certain portions of  this document have been deleted pursuant to an application for confidential  treatment under Rule 24b-2).   Incorporated by reference to Exhibit 10V to the Company’s Form 10-K/A  for the year ended March 31, 1996                                                                       |
|   | 10M |   | Letter Agreement of  October 25, 1996 relating to Regional Jet Services Agreement between  Mesaba Aviation, Inc. and Northwest Airlines, Inc. (certain portions of this  document have been deleted pursuant to an application for confidential  treatment under Rule 24b-2).   Incorporated by reference to Exhibit 10A to the Company’s Form 10-Q/A  for the quarter ended September 30, 1996       |
|   | 10N |   | Amendment No. 1 to Regional Jet  Services Agreement dated April 1, 1998 between Mesaba Holdings, Inc.,  Mesaba Aviation, Inc. and Northwest Airlines, Inc. (certain portions of this  document have been deleted pursuant to an application for confidential  treatment under rule 24b-2).   Incorporated by reference to Exhibit 10A to the Company’s Form 10-Q  for the quarter ended June 30, 1998 |

 

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|   | 10O  |   | Amendment No. 2 to Regional Jet  Services Agreement dated June 2, 1998 between Mesaba Holdings, Inc.,  Mesaba Aviation, Inc. and Northwest Airlines, Inc. (certain portions of this  document have been deleted pursuant to an application for confidential  treatment under rule 24b-2).   Incorporated by reference to Exhibit 10B to the Company’s Form 10-Q  for the quarter ended June 30, 1998 |
|--------|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10P  |   | Lease Agreement, dated as of  July 1, 1999, between Kenton County Airport Board and Mesaba Aviation,  Inc. Incorporated by reference to Exhibit 10AA to the Company’s Form 10-K for  the year ended March 31, 2000                                                                                                                                                                                        |
|   | 10Q  |   | Ground Lease, dated as of  September 1, 1999, between Kenton County Airport Board and Mesaba  Aviation, Inc. Incorporated by reference to Exhibit 10BB to the Company’s  Form 10-K for the year ended March 31, 2000                                                                                                                                                                                      |
|   | 10R  |   | Letter Agreement, dated  November 20, 2001, between Mesaba Holdings, Inc., Mesaba Aviation, Inc.  and Northwest Airlines, Inc. relating to service expansion and rate  reductions.  Incorporated by reference  to the Company’s Form 8-K filed November 23, 2001                                                                                                                                     |
|   | 10S  |   | Agreement and Plan of Merger  among Mesaba Holdings, Inc. Ranger Acquisition Corp. and Big Sky Transportation  Co. dated September 26, 2002.   Incorporated by reference to the Company’s Form 8-K filed  September 27, 2002                                                                                                                                                                         |
|   | 10T  |   | Employment Agreement between  Big Sky Transportation Co. and Kim B. Champney dated April 3, 1998.  Incorporated by reference to Big Sky’s Form  10-KSB dated September 28, 1999                                                                                                                                                                                                                      |
|   | 10U  |   | Aircraft Hangar Facility Lease  Agreement between Metropolitan Airports Commission Minneapolis - St. Paul and  Mesaba Aviation, Inc. dated September 30, 2002.  Incorporated by reference to Exhibit 10Y to  the Company’s Form 10-Q filed August 14, 2003.                                                                                                                                          |
|   | 10V  |   | Lease between Spectrum  Investment Group, L.L.C. and Mesaba Aviation, Inc. entered into as of  April 25, 2003.  Incorporated by  reference to Exhibit 10Z to the Company’s Form 10-Q filed August 14,  2003.                                                                                                                                                                                         |
|   | 10W  |   | Amendment to Regional Jet  Services Agreement, dated October 7, 2003.  Incorporated by reference to Exhibit 10.1  to the Company’s Form 8-K/A filed October 9, 2003                                                                                                                                                                                                                                  |
|   | 10X  |   | Amendment to Regional Jet  Services Agreement, dated December 15, 2003.  Incorporated by reference to Exhibit 10.1  to the Company’s Form 8-K filed on December 15, 2003                                                                                                                                                                                                                             |
|   | 10Y  |   | Amendment to Regional Jet  Services Agreement, dated February 2, 2004.  Incorporated by reference to Exhibit 10.1  to the Company’s Form 8-K filed February 3, 2004                                                                                                                                                                                                                                  |
|   | 21   |   | Subsidiaries.  Incorporated by reference to Exhibit 21 to  the Company’s Form 10-Q for the quarter ended December 31, 2002                                                                                                                                                                                                                                                                                |
|   | 31.1 |   | Chief Executive Officer  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.  Filed herewith                                                                                                                                                                                                                                                                                             |
|   | 31.2 |   | Chief Financial Officer  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.  Filed herewith                                                                                                                                                                                                                                                                                             |
|   | 32   |   | Certification Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.  Filed herewith                                                                                                                                                                                                                                                                                                                      |

 
| **(b)**    | **Reports on Form 8-K**                                                                               |
|------------|-------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                            | ** ** | ** ** |
|       | The Company filed the following  reports on Form 8-K during the quarter ended December 31, 2003: |
|       |                                                                                                  |   |   |
|       | (a)                                                                                                   |   | Form 8-K/A filed on  October 9, 2003 containing disclosure under Items 5 and 7 regarding an  amendment to the Regional Jet Services Agreement with Northwest Airlines,  Inc. |
|       |                                                                                                  |   |   |
|       | (b)                                                                                                   |   | Form 8-K filed on  October 30, 2003 containing disclosure under Items 7 and 12 regarding  the Company’s earnings for the quarter ended September 30, 2003. |
|       |                                                                                                  |   |   |
|       | (c)                                                                                                   |   | Form 8-K filed on  December 15, 2003 containing disclosure under Items 5 and 7 regarding an  amendment to the Regional Jet Services Agreement with Northwest Airlines,  Inc. |
|            |                                                                                                       |  |  |  |  |

 

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SIGNATURES

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf of the undersigned, thereunto duly authorized.

 
|                          | MAIR Holdings, Inc.                                        |
|-------------------------------|------------------------------------------------------------|
|                          |                                                       |   |
| Dated: February 17, 2004 | By:                                                        | /s/ Robert E. Weil |
|                          | Vice President, Chief Financial  Officer and Treasurer     |
|                          | (principal financial officer  and an authorized signatory) |

 

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EXHIBITINDEX

 
| 31.1   |   | Chief Executive Officer  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.  Filed herewith. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                          |
| 31.2   |   | Chief Financial Officer  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.  Filed herewith. |
|   |   |                                                                                                                          |
| 32.    |   | Certification Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.  Filed herewith.                          |

 

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