**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**ý****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934.**

 

**For the quarterly period ended December 31, 2005**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from           to           **

 

**Commission File No:  0-17895**

 

**MAIRHOLDINGS, INC.**

Incorporated under the laws of Minnesota

 

**41-1616499**

(I.R.S. Employer ID No.)

 

**Fifth Street Towers, Suite 1360**

**150 South Fifth Street**

**Minneapolis, MN  55402**

**(612) 333-0021**

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ý    Noo

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

 

Yes ý    Noo

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

 

Yes o    Noý

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 
| **Class**                              | ** ** | **Outstanding as of December 31, 2005** |
|----------------------------------------|------------|-----------------------------------------|
| Common Stock, par value $.01 per share |       | 20,591,840                              |

 

 

----

 

**CAUTIONARY NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

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

 

Undue reliance should not be placed on the Company’s forward-lookingstatements because the matters they describe are subject to known and unknownrisks, uncertainties and other unpredictable factors, many of which are beyondthe Company’s control.  The Company’sforward-looking statements speak only as of the date on which they are made.  Over time, actual results, performance orachievements will likely differ from the anticipated results, performance orachievements that are expressed or implied by the Company’s forward-lookingstatements, and such differences might be significant and materially adverse tothe Company’s shareholders.

 

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

 

2

----

 

**Part I. FINANCIAL INFORMATION**

 

**ITEM 1.  CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**MAIR HOLDINGS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
| ** **                                            | ** ** | **December 31** | ** ** | **March 31** | ** ** |
|-------------------------------------------------------|------------|-----------------|------------|--------------|------------|
| ** **                                            | ** ** | **2005**        | ** ** | **2005**     | ** ** |
| ASSETS                                                |       |            |       |         |       |
|                                                  |       |            |       |         |       |
| CURRENT ASSETS:                                       |       |            |       |         |       |
| Cash and cash equivalents                             |       | $               | 75,497     |         | $          | 57,968 |   |
| Short-term investments                                |       | 27,851          |       | 69,669       |       |
| Accounts receivable, net of reserves of $33  and $601 |       | 2,609           |       | 31,176       |       |
| Inventories, net                                      |       | 1,174           |       | 11,034       |       |
| Prepaid expenses and deposits                         |       | 2,328           |       | 5,808        |       |
| Deferred income taxes and other                       |       | 2,285           |       | 11,892       |       |
| Total current assets                                  |       | 111,744         |       | 187,547      |       |
|                                                  |       |            |       |         |       |
| PROPERTY AND EQUIPMENT:                               |       |            |       |         |       |
| Flight equipment                                      |       | 1,792           |       | 93,645       |       |
| Other property and equipment                          |       | 1,383           |       | 40,248       |       |
| Less: Accumulated depreciation and  amortization      |       | (1,089          | )          | (95,472      | )          |
| Net property and equipment                            |       | 2,086           |       | 38,421       |       |
|                                                  |       |            |       |         |       |
| NONCURRENT ASSETS:                                    |       |            |       |         |       |
| Long-term investments                                 |       | 9,901           |       | 43,240       |       |
| Investment in Mesaba Aviation, Inc.                   |       | 48,531          |       | —       |       |
| Goodwill                                              |       | —          |       | 2,503        |       |
| Other intangible assets, net                          |       | 2,514           |       | 2,819        |       |
| Other assets, net                                     |       | 1,709           |       | 6,424        |       |
|                                                  |       | $               | 176,485    |         | $          | 280,954 |   |

 

The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.

 

3

----

 
| ** **                                                                                                           | ** ** | **December 31** | ** ** | **March 31** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|--------------|------------|
| ** **                                                                                                           | ** ** | **2005**        | ** ** | **2005**     | ** ** |
|                                                                                                                 |       |            |       |         |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                            |       |            |       |         |       |
|                                                                                                                 |       |            |       |         |       |
| CURRENT LIABILITIES:                                                                                                 |       |            |       |         |       |
| Accounts payable                                                                                                     |       | $               | 2,436      |         | $          | 19,151 |   |
| Accrued liabilities:                                                                                                 |       |            |       |         |       |
| Payroll                                                                                                              |       | 1,155           |       | 19,563       |       |
| Maintenance                                                                                                          |       | 200             |       | 20,281       |       |
| Deferred income                                                                                                      |       | 713             |       | 3,085        |       |
| Other current liabilities                                                                                            |       | 8,216           |       | 20,126       |       |
| Total current liabilities                                                                                            |       | 12,720          |       | 82,206       |       |
|                                                                                                                 |       |            |       |         |       |
| OTHER NONCURRENT LIABILITIES                                                                                         |       | 883             |       | 6,069        |       |
| Total liabilities                                                                                                    |       | 13,603          |       | 88,275       |       |
|                                                                                                                 |       |            |       |         |       |
| COMMITMENTS AND CONTINGENCIES (Note 14)                                                                              |       |            |       |         |       |
|                                                                                                                 |       |            |       |         |       |
| SHAREHOLDERS’ EQUITY:                                                                                           |       |            |       |         |       |
| Undesignated preferred stock, no specified  par value; 1,000,000 shares authorized, no shares issued and outstanding |       | —          |       | —       |       |
| Common stock, $.01 par value; 60,000,000  shares authorized, 20,591,840 and 20,574,340 shares issued and outstanding |       | 206             |       | 206          |       |
| Paid-in capital                                                                                                      |       | 69,538          |       | 70,856       |       |
| Accumulated other comprehensive loss                                                                                 |       | (22             | )          | (254         | )          |
| Retained earnings                                                                                                    |       | 93,160          |       | 121,871      |       |
| Total shareholders’ equity                                                                                      |       | 162,882         |       | 192,679      |       |
|                                                                                                                 |       | $               | 176,485    |         | $          | 280,954 |   |

 

The accompanying notes are an integral part of these unaudited condensedconsolidated financial statements.

 

4

----

 

**MAIR HOLDINGS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

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

**(Unaudited)**

 
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                     | ** ** | **December 31**        | ** ** | **December 31**       | ** ** |
| ** **                                                                     | ** ** | ** **             | ** ** | **2004**              | ** ** | ** ** | ** ** | **2004** | ** ** |
| ** **                                                                     | ** ** | ** **             | ** ** | **(As restated-**     | ** ** | ** ** | ** ** | **(As restated-** | ** ** |
| ** **                                                                     | ** ** | **2005**               | ** ** | **see Note 15)**      | ** ** | **2005** | ** ** | **see Note 15)** | ** ** |
| OPERATING REVENUES:                                                            |       |                   |       |                  |       |   |   |   |   |
| Passenger                                                                      |       | $                      | 17,625     |                  | $          | 100,290 |   | $ | 225,280 |   | $ | 301,393 |   |
| Freight and other                                                              |       | 3,622                  |       | 11,245                |       | 25,556 |   | 30,353 |   |
| Total operating revenues                                                       |       | 21,247                 |       | 111,535               |       | 250,836 |   | 331,746 |   |
|                                                                           |       |                   |       |                  |       |   |   |   |   |
| OPERATING EXPENSES:                                                            |       |                   |       |                  |       |   |   |   |   |
| Wages and benefits                                                             |       | 7,647                  |       | 37,608                |       | 86,105 |   | 109,445 |   |
| Aircraft fuel                                                                  |       | 1,329                  |       | 680                   |       | 3,541 |   | 1,870 |   |
| Aircraft maintenance                                                           |       | 3,371                  |       | 21,963                |       | 48,978 |   | 63,704 |   |
| Aircraft rents                                                                 |       | 4,195                  |       | 25,814                |       | 55,825 |   | 76,716 |   |
| Landing fees                                                                   |       | 480                    |       | 2,358                 |       | 5,684 |   | 7,677 |   |
| Insurance and taxes                                                            |       | 876                    |       | 1,703                 |       | 4,690 |   | 6,107 |   |
| Depreciation and amortization                                                  |       | 611                    |       | 4,134                 |       | 7,920 |   | 11,242 |   |
| Administrative and other                                                       |       | 5,039                  |       | 15,429                |       | 45,029 |   | 43,113 |   |
| Impairment and other charges                                                   |       | 4,759                  |       | —                |       | 41,268 |   | — |   |
| Total operating expenses                                                       |       | 28,307                 |       | 109,689               |       | 299,040 |   | 319,874 |   |
| Operating (loss) income                                                        |       | (7,060                 | )          | 1,846                 |       | (48,204 | ) | 11,872 |   |
|                                                                           |       |                   |       |                  |       |   |   |   |   |
| NONOPERATING INCOME (EXPENSE):                                                 |       |                   |       |                  |       |   |   |   |   |
| Interest income and other                                                      |       | 685                    |       | 819                   |       | 2,800 |   | 1,752 |   |
| Interest expense                                                               |       | (18                    | )          | (16                   | )          | (50 | ) | (50 | ) |
| Arbitration settlement                                                         |       | —                 |       | —                |       | 1,800 |   | — |   |
| Nonoperating income, net                                                       |       | 667                    |       | 803                   |       | 4,550 |   | 1,702 |   |
| (Loss) income before income taxes and equity  in loss of Mesaba Aviation, Inc. |       | (6,393                 | )          | 2,649                 |       | (43,654 | ) | 13,574 |   |
|                                                                           |       |                   |       |                  |       |   |   |   |   |
| BENEFIT (PROVISION) FOR INCOME TAXES                                           |       | 2,269                  |       | (1,156                | )          | 15,227 |   | (4,481 | ) |
| (Loss) income before equity in loss of  Mesaba Aviation, Inc.                  |       | (4,124                 | )          | 1,493                 |       | (28,427 | ) | 9,093 |   |
|                                                                           |       |                   |       |                  |       |   |   |   |   |
| EQUITY IN LOSS OF MESABA AVIATION, INC.                                        |       | (334                   | )          | —                |       | (334 | ) | — |   |
|                                                                           |       |                   |       |                  |       |   |   |   |   |
| NET (LOSS) INCOME                                                              |       | $                      | (4,458     | )                     | $          | 1,493 |   | $ | (28,761 | ) | $ | 9,093 |   |
|                                                                           |       |                   |       |                  |       |   |   |   |   |
| NET (LOSS) INCOME PER SHARE:                                                   |       |                   |       |                  |       |   |   |   |   |
| (Loss) earnings per common share - basic                                       |       | $                      | (0.22      | )                     | $          | 0.07 |   | $ | (1.40 | ) | $ | 0.44 |   |
| (Loss) earnings per common share - diluted                                     |       | $                      | (0.22      | )                     | $          | 0.07 |   | $ | (1.40 | ) | $ | 0.43 |   |
|                                                                           |       |                   |       |                  |       |   |   |   |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING:                                           |       |                   |       |                  |       |   |   |   |   |
| Basic                                                                          |       | 20,592                 |       | 20,524                |       | 20,581 |   | 20,483 |   |
| Diluted                                                                        |       | 20,592                 |       | 21,123                |       | 20,581 |   | 20,996 |   |

 

The accompanying notes are an integral part of these unaudited condensedconsolidated financial statements.

 

5

----

 

**MAIR HOLDINGS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(in thousands)**

**(Unaudited)**

 
| ** **                                                                                          | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                          | ** ** | **December 31**       | ** ** |
| ** **                                                                                          | ** ** | ** **            | ** ** | **2004** | ** ** |
| ** **                                                                                          | ** ** | ** **            | ** ** | **(As restated-** | ** ** |
| ** **                                                                                          | ** ** | **2005**              | ** ** | **see Note 15)** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                               |       |                  |       |   |   |
| Net (loss) income                                                                                   |       | $                     | (28,761    | ) | $ | 9,093 |   |
| Adjustments to reconcile net (loss) income  to net cash provided by (used in) operating activities: |       |                  |       |   |   |
| Equity in loss of Mesaba Aviation, Inc.                                                             |       | 334                   |       | — |   |
| Depreciation and amortization                                                                       |       | 7,920                 |       | 11,242 |   |
| Amortization of investments                                                                         |       | 568                   |       | — |   |
| Amortization of deferred credits                                                                    |       | (789                  | )          | (681 | ) |
| Loss on disposition of assets                                                                       |       | 38                    |       | 1,557 |   |
| Deferred income taxes                                                                               |       | (12,785               | )          | — |   |
| Stock-based compensation                                                                            |       | (1,444                | )          | 173 |   |
| Impairment and other charges                                                                        |       | 41,268                |       | — |   |
| Changes in current operating items:                                                                 |       |                  |       |   |   |
| Accounts receivable                                                                                 |       | (35,150               | )          | (1,424 | ) |
| Inventories                                                                                         |       | (1,377                | )          | (1,689 | ) |
| Prepaid expenses and deposits                                                                       |       | (1,996                | )          | (2,096 | ) |
| Accounts payable and other                                                                          |       | 13,770                |       | (60 | ) |
| Net cash (used in) provided by operating  activities                                                |       | (18,404               | )          | 16,115 |   |
|                                                                                                |       |                  |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |       |                  |       |   |   |
| Purchases of investments                                                                            |       | (51,271               | )          | (79,381 | ) |
| Sales of investments                                                                                |       | 112,774               |       | 75,230 |   |
| Increase in restricted cash and cash  equivalents                                                   |       | (6,921                | )          | — |   |
| Purchases of property and equipment                                                                 |       | (6,183                | )          | (7,504 | ) |
| Net decrease in cash and cash equivalants from  deconsolidation of Mesaba Aviation, Inc.            |       | (12,479               | )          | — |   |
| Net cash provided by (used in) investing  activities                                                |       | 35,920                |       | (11,655 | ) |
|                                                                                                |       |                  |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                                |       |                  |       |   |   |
| Repayment of other non current liabilities                                                          |       | (101                  | )          | (101 | ) |
| Proceeds from issuance of common stock                                                              |       | 114                   |       | 1,190 |   |
| Net cash provided by financing activities                                                           |       | 13                    |       | 1,089 |   |
|                                                                                                |       |                  |       |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                                           |       | 17,529                |       | 5,549 |   |
|                                                                                                |       |                  |       |   |   |
| CASH AND CASH EQUIVALENTS:                                                                          |       |                  |       |   |   |
| Beginning of period                                                                                 |       | 57,968                |       | 54,561 |   |
| End of period                                                                                       |       | $                     | 75,497     |   | $ | 60,110 |   |

 

The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.

 

6

----

 

**MAIR HOLDINGS, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

The condensed consolidated financial statements included herein havebeen prepared by the Company without audit, pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”).  The information furnished in the condensed consolidatedfinancial statements includes normal recurring adjustments, unless otherwisenoted, and reflects all adjustments that are, in the opinion of management,necessary for the fair presentation of such condensed 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. These condensed consolidated financial statements should be read inconjunction with the consolidated financial statements for the year ended March31, 2005, and the notes thereto, included in the Company’s Annual Report onForm 10-K filed with the SEC on June 14, 2005.

 

1.     Basisof Presentation

 

The condensed consolidated financial statements include the accounts ofthe Company and its wholly-owned subsidiary, Big Sky Transportation Co. (“BigSky”).  As discussed below, the accountsof Mesaba Aviation, Inc. (“Mesaba”), a wholly owned subsidiary of the Company,have been deconsolidated from the Company’s condensed consolidated financialstatements effective October 13, 2005.  Allsignificant intercompany transactions and balances have been eliminated inconsolidation.

 

Asdiscussed in Note 3, Mesaba filed a voluntary petition for relief underChapter 11 of the United States Bankruptcy Code (“Bankruptcy Code”) in theUnited States Bankruptcy Court for the District of Minnesota (the “BankruptcyCourt”) on October 13, 2005.  Mesaba isoperating its business as a “debtor-in-possession” pursuant to the BankruptcyCode.  Mesaba’s financial statements have been prepared on agoing concern basis, which contemplatescontinuity of operations, realization of assets and liquidation of postpetitionliabilities in the ordinary course of business.

 

Regardless of Holdings’belief that it can retain ownership of Mesaba following Mesaba’s bankruptcy, GAAPand SEC guidance presume that a parent has lost control over a subsidiary inbankruptcy proceedings because the bankruptcy court must ultimately approve theplan of reorganization as well as all of Mesaba’s major transactions. Accordingly, uncertainties surrounding the nature, timing, and specifics of thebankruptcy proceedings require that Holdings deconsolidate Mesaba and reflectMesaba’s financial results under the equity method of accounting effectiveOctober 13, 2005.  As a result, Mesaba’sassets and liabilities have been removed from the Company’s condensedconsolidated balance sheet as of December 31, 2005 and replaced with Holdings’investment in Mesaba.  Mesaba’s resultsof operations have been removed from the Company’s condensed consolidatedresults of operations and cash flows since October 13, 2005, but continue to beincluded in such condensed consolidated financial statements for periods priorto October 13, 2005.  Because Holdingsowns all of the common stock of Mesaba, this change will not affect the amountof net income or loss Holdings reports resulting from Mesaba’s operations inany current or prior period, but will result in Mesaba’s net income or loss fromthe date of the bankruptcy forward being presented as “Equity in income (loss) ofMesaba Aviation, Inc.” rather than its results being included in eachindividual income statement line item, as was the case for periods prior to October13, 2005.

 

Subsequentto the bankruptcy filing date, the provisions of Statement of Position 90-7, *Financial Reporting by Entities in Reorganization Under the BankruptcyCode,* (“SOP 90-7”), apply to Mesaba’s financial statements whileMesaba operates under the provisions of Chapter 11.  SOP 90-7 does not change the application of GAAPin the preparation of financial statements.  However, SOP 90-7 does require that thefinancial statements, for periods including and subsequent to the filing of theChapter 11 petition, distinguish transactions and events that are directlyassociated with the reorganization from the ongoing operations of the business.See Note 16 for the condensed financial statements of Mesaba presented inaccordance with SOP 90-7 on a stand-alone basis as of December 31, 2005 andMarch 31, 2005 and for the three and nine months ended December 31, 2005 and2004.

 

*Use of Estimates*

The preparation of the condensed consolidated financial statements inconformity with GAAP requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities, as well as the reported amounts of revenuesand expenses.  The most significant useof estimates relates to the

 

7

----

 

estimated bad debt reserve due to the September 2005 Northwestbankruptcy filing, accrued maintenance expenses, aircraft property andequipment lives, inventory obsolescence reserves, valuation of goodwill andother intangible assets and accounting for income taxes.  Ultimate results could differ from thoseestimates.

 

*Reclassifications*

Certain amounts within shareholders’ equity previously reported in theaccompanying condensed consolidated balance sheet as of March 31, 2005 havebeen reclassified to conform to the fiscal 2006 presentation.  The reclassifications had no effect onpreviously reported total shareholders’ equity.

 

2.     Business

 

*Mesaba*

Mesaba operates as a regional air carrier providing scheduled passengerservice as “Mesaba Airlines/Northwest Airlink” and “Mesaba Airlines/NorthwestJet Airlink” under a ten-year omnibus Airline Services Agreement (“ASA”) withNorthwest Airlines, Inc. (“Northwest”) dated August 29, 2005.  (See Note 3 regarding Northwest filing forChapter 11 bankruptcy protection on September 14, 2005 and the effect of suchfiling on the ASA.)  Prior to the ASA,Mesaba provided regional airline services to Northwest pursuant to two separateagreements, an Airline Services Agreement (the “Airlink Agreement”) thatgoverned Mesaba’s operation of Saab 340 jet-prop aircraft (“Saabs”), and aRegional Jet Services Agreement (the “Jet Agreement”) that governed Mesaba’soperation of Avro RJ85 regional jets (“Avros”). The ASA is an omnibus agreement that incorporates the existing paymentterms for the Saabs and Avros contained in the Airlink Agreement and the JetAgreement, and adds new payment terms for the Canadair regional jets (“CRJs”)that Mesaba began operating in October 2005. As of December 31, 2005, Mesaba served 111 cities in the United Statesand Canada from Northwest’s hub airports located in Minneapolis/St. Paul,Detroit and Memphis.

 

Northwest purchases Mesaba’s entire capacity and pays Mesaba in arrearson the 11th and 26th of each month for regional airlineservices that Mesaba provides to Northwest utilizing the Saabs and Avros.  Beginning in October 2005, Northwest beganpaying Mesaba, on a regular bi-monthly basis, on the 1st and 16th of each month forregional airline services that Mesaba provides to Northwest utilizing the CRJs.  The CRJ payment made on the 1st of each month represents a prepayment based onan estimate of regional airline services to be provided by Mesaba for the first15 days of the month.  The CRJ paymentmade on the 16th of the month consists of a prepayment based onan estimate of regional airline services to be provided by Mesaba for the 16th through the endof the month, as well as a true-up amount paid for actual services provided byMesaba in the prior month.

 

For flights utilizing the Saabs, Mesaba recognizes revenue for eachcompleted “available seat mile,” or “ASM” (the number of seats in an aircraftmultiplied by the number of miles those seats are flown), and purchases fuelwhich is set at a fixed price of $0.835 per gallon, ground handling and otherservices from Northwest.  Mesaba paidNorthwest $4.8 million and $3.0 million for these services for the three monthsended December 31, 2005 and 2004, respectively. Mesaba paid Northwest $11.7 million and $16.0 million for these servicesfor the nine months ended December 31, 2005 and 2004, respectively.

 

For flights utilizing the Avros, Mesaba recognizes revenue for each “blockhour” flown (the elapsed time between aircraft departing and arriving at agate).  Northwest provides fuel andairport and passenger related services at Northwest’s expense for the Avros.

 

For flights utilizing the CRJs, Mesaba recognizes revenue throughmonthly expense reimbursement payments for actual expenses incurred relating toaircraft rent, maintenance, landing fees and fuel (which is set at a fixedprice of $0.70 per gallon for the CRJs); semi-monthly payments for each blockhour and cycle operated; a monthly fixed cost payment based on the size of theCRJ fleet (intended to cover Mesaba’s costs that are not reimbursed through themonthly reimbursement payments, which consist mainly of labor costs, groundhandling costs, overhead and depreciation) and margin payments based on therevenues described above calculated to achieve a target operating margin.  The target operating margin through April2007 is set at a fixed amount, after which time the target operating marginwill be based on the average operating margin of the publicly traded UnitedStates domestic regional airlines operating primarily regional jet aircraft,excluding Pinnacle Airlines Corp. (“Pinnacle”), and any regional carrier under bankruptcyprotection, subject to a margin cap and floor.

 

TheASA contains standard termination provisions that allow both Mesaba andNorthwest to terminate the ASA in the event the other party breaches theagreement, subject to the other party’s right to cure the breach within aprescribed time period.  Additionally,Northwest may terminate the ASA in the event of certain lease and otherperformance defaults by Mesaba; failure by Mesaba to maintain requiredinsurance coverage; failure by Mesaba to allow inspections pursuant to the ASA;change in control events; revocation or failure by Mesaba to obtain Departmentof Transportation (the “DOT”) certification; if Mesaba or its affiliatesoperate an aircraft type that causes Northwest to be in violation of itscollective bargaining

 

8

----

 

agreement with its pilots; failure to elect a chief executive officer/presidentof Holdings or Mesaba reasonably acceptable to Northwest; if a specifiedpercentage of the aircraft subject to the agreement are not operated for aspecified period of time, other than as a result of the Federal AviationAdministration (the “FAA”) grounding all aircraft for all carriers; if there isa strike, cessation or interruption of work involving Mesaba pilots, flightattendants or mechanics providing service; or if Holdings breaches itsagreement entered into with Northwest concurrently with the ASA.

 

Under the ASA, all scheduled flights that Mesaba operates aredesignated as Northwest flights using Northwest’s designator code in allcomputer reservation systems, including the Official Airline Guide, with anasterisk and a footnote indicating that Mesaba is the carrier providing theservice.  In addition, flight schedulesof Mesaba and Northwest are closely coordinated to facilitate interlineconnections, and Mesaba’s passenger gate facilities at the Minneapolis/St. PaulInternational Airport, Detroit Metropolitan Airport and Memphis InternationalAirport are integrated with Northwest’s facilities in the main terminalbuildings.

 

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

 

The ASA provides for incentive payments from Northwest to Mesaba basedon achievement of certain operational goals on a semi-annual basis.  Such incentives totaled $0.3 million and $0.1million for the three months ended December 31, 2005 and 2004, respectively.  Incentives totaled $2.5 million and $3.0 millionfor the nine months ended December 31, 2005 and 2004, respectively, and areincluded in passenger revenues in Mesaba’s condensed financial statements (see Note16).

 

Approximately $28.3 million, net of reserve, or 85.7%, and $25.9million, or 88.8%, of the December 31, 2005 and March 31, 2005 accountsreceivable balances in Mesaba’s condensed financial statements (see Note 16) weredue from Northwest and were not collateralized.

 

Upon execution of the ASA, and pursuant to a separate agreement betweenHoldings and Northwest, Holdings issued to Northwest an amended and restatedwarrant (the “Warrant”) to replace the warrants held by Northwest to reduce thenumber of shares of Holdings’ common stock issuable upon exercise from4,151,922 shares exercisable at prices ranging from $7.25 to $21.25 per shareto an aggregate of 4,112,500 shares exercisable at a price of $8.74 pershare.  The Warrant expires ten yearsfrom the date of the ASA.  Sixty percentof the shares will become exercisable upon the delivery by Northwest of the 15thCRJ aircraft to Mesaba, and an additional 4% of the shares will becomeexercisable with each subsequent delivery of each of the next ten CRJaircraft.  To date, Northwest hasdelivered only two CRJ aircraft to Mesaba. As part of its reorganization, Northwest has also requested bids fromregional airlines for the operation of up to 126 CRJ aircraft, 124 of which arecurrently operated by Pinnacle and two by Mesaba.  Mesaba has submitted a proposal to conductall CRJ flying for Northwest.  If Mesabais not awarded some or all of the CRJ business, Northwest will remove the twoCRJs that Mesaba currently operates.  IfMesaba is awarded additional CRJs by Northwest, Holdings expects that the termsof the Warrant will be renegotiated to reflect the new arrangement between theparties.  Holdings also entered into aregistration rights agreement to cover the registration of the shares of stockcurrently held by Northwest and the shares of stock that could be issued toNorthwest upon exercise of the Warrant.

 

In connection with the ASA, Mesaba incurred all of the start-up costsnecessary to bring the CRJ fleet into service. For the nine months ended December 31, 2005, Mesaba incurredapproximately $7.0 million in start-up costs related to adding the CRJ aircraftinto its fleet, and Holdings incurred approximately $0.3 million in relatedstart-up costs.

 

Finally, in connection with the ASA, and pursuant to its separateagreement with Northwest, Holdings made a capital contribution of approximately$31.7 million to Mesaba in September 2005, just prior to Northwest filing forbankruptcy (see Note 3).

 

*Big Sky*

Big Sky operates as a regional air carrier based in Billings, Montana,providing scheduled passenger, freight, express package and charterservices.  As of December 31, 2005, BigSky provided scheduled air service to 20 communities in Montana, Colorado,Idaho, Oregon, Washington and Wyoming. Big Sky operates daily scheduled flights providing interline and onlineconnecting services and local market services. Big Sky also has code-sharing agreements with Alaska Airlines, HorizonAir, America West Airlines, US Air and Northwest, where its services aremarketed jointly with those air carriers for connecting flights.  In January 2006, Big Sky began service to Pocatello,Idaho.

 

Big Sky participates in the Essential Air Service (“EAS”) program withthe DOT.  The EAS program subsidizes aircarriers to provide air service to designated rural communities throughout thecountry that could not otherwise economically justify

 

9

----

 

that service based on their passenger traffic.  The DOT pays EAS subsidies for each departurein a covered market.  For the threemonths ended December 31, 2005 and 2004, Big Sky recognized revenue from EASsubsidies of $2.0 million and $1.8 million, respectively.  For the nine months ended December 31, 2005and 2004, Big Sky recognized revenue from EAS subsidies of $6.0 million and $5.4million, respectively.  Big Sky wasrecently reselected as the EAS provider for seven Montana cities for a two-yearperiod beginning March 1, 2006.

 

Big Sky purchased fuel at market prices from Northwest for $0.1 millionand $0.3 million for the three month periods ended December 31, 2005 and 2004,respectively.  Big Sky purchased fuelfrom Northwest for $1.4 million and $1.3 million for the nine months ended December31, 2005 and 2004, respectively.

 

3.     Northwestand Mesaba Bankruptcy Filings

 

*Northwest Bankruptcy Filing*

OnSeptember 12, 2005, Northwest failed to make a payment of approximately$18.7 million due to Mesaba for services provided by Mesaba to Northwest fromAugust 15 to August 31, 2005.  Subsequently, onSeptember 14, 2005, Northwest filed in the Southern District of New Yorkfor bankruptcy protection under Chapter 11 of the Bankruptcy Code.  OnSeptember 26, 2005, Northwest made a payment of approximately $1.6 millionto Mesaba, which payment was for services provided by Mesaba to Northwest fromSeptember 1 to September 15, 2005.  Because Northwest’sbankruptcy petition was filed on September 14, Northwest paid only thatportion of the payment attributable to services provided by Mesabapost-petition.  Additionally, on October 11, 2005, Northwest paidMesaba approximately $15.7 million for services provided by Mesaba fromSeptember 16 to September 30, 2005.  Northwest deductedapproximately $3.3 million from the total amount due for amounts that Northwestasserts represent prepetition claims against Mesaba.  On October 26,2005, Northwest paid Mesaba approximately $10.5 million for services providedby Mesaba from October 1 to October 15, 2005.  Northwestdeducted approximately $6.1 million from the total amount due, the majority ofwhich related to aircraft payments Mesaba did not make to Northwest followingMesaba’s own bankruptcy filing on October 13, 2005 (see below).

 

At the time of Northwest’s bankruptcy filing on September 14, 2005, Mesabaestimated that Northwest owed Mesaba approximately $31.9 million under the ASAand related agreements, net of amounts that Mesaba owed to Northwest underthese agreements (principally for aircraft fuel). After analyzing thecollectibility of the prepetition receivables due to Mesaba from Northwest, theCompany concluded that it was necessary to establish a reserve of $31.9 millionfor amounts that Mesaba may not ultimately collect from Northwest.  Toarrive at its prepetition receivable, amounts owed by Northwest to Mesaba onSeptember 14, 2005 were offset by amounts owed by Mesaba to Northwest on thatdate of $7.0 million.  In concluding thatthis offsetting of balances was appropriate, Mesaba followed the guidanceprovided in Financial Accounting Standards Board (“FASB”) InterpretationNo. 39 *Offsetting of Amounts Related to Certain Contracts*.  Mesaba’s provision for the loss associated with Northwest’sbankruptcy of $31.9 million is included in “Impairment and other charges” inthe accompanying condensed consolidated statements of operations.  As of December 31, 2005, Mesabaupdated its reserve balance to $29.9 million, based on revised estimates of$38.6 million owed by Northwest to Mesaba and $8.7 owed by Mesaba toNorthwest.  The decrease in the reserveof $2.0 million recorded by Mesaba during the three months ended December 31,2005 has been included in Mesaba’s condensed financial statements (see Note 16).  AlthoughMesaba recorded the above provision, Mesaba will continue to actively seekreimbursement through the bankruptcy process and any other means, including anyfuture discussions Mesaba may have with Northwest regarding the ASA.

 

Generally, all amounts that Northwest owed to its creditors at the timeof its filing were stayed by the bankruptcy filing. Mesaba’s claims relating tosuch prepetition amounts are unsecured claims. At any time during Northwest’sbankruptcy proceedings, Northwest has the option to assume or reject the ASAand related agreements, pending approval of the bankruptcy court and acommittee representing Northwest’s unsecured creditors. If Northwest assumesthe ASA, prepetition amounts owed to Mesaba would become an administrativeclaim and Mesaba could receive payment in full. If Northwest rejects the ASA and related contracts, then prepetitionamounts owed to Mesaba would remain an unsecured claim, and Mesaba would likelyreceive only a small percentage of the amounts owed to it, and even then wouldonly receive such amounts after Northwest’s plan of reorganization is approvedby its bankruptcy court.  Mesaba believesthat, even if Northwest intends to assume the ASA, Northwest will attempt torenegotiate the ASA with Mesaba before Northwest will seek to assume theASA.  This renegotiation could include anegotiation of the amount that Northwest will ultimately pay Mesaba in settlementof the net prepetition amounts that Northwest owes to Mesaba.  However, the exact nature of Mesaba’s futurerelationship with Northwest may not be known until such time as Northwest andMesaba adopt their respective bankruptcy reorganization plans.

 

Since its bankruptcy filing, Northwest has also proposed andimplemented various changes to Mesaba’s fleet. Northwest idled nine of the Avros operated by Mesaba from Northwest’sschedule effective October 31, 2005.  Inaddition, Northwest idled an additional three Avros and removed 11 Saabs fromthe schedule effective January 4, 2006. Northwest has also

 

10

----

 

notified Mesaba that Northwest intends to remove three Saabs fromservice in April 2006 and to terminate the remaining Avro leases by the end ofcalendar 2006 subject to final lease negotiations between Northwest and itslessors.  Finally, Northwest issued arequest for proposal for flying up to 126 CRJs and notified Mesaba that if itis not awarded any additional CRJs, Northwest will remove the two CRJscurrently operated by Mesaba.  Mesabaintends to compete to operate the additional CRJs.  However, Mesaba also expects that itscompetitors, many with greater financial resources, will also seek to operatesuch aircraft.

 

*Mesaba Bankruptcy Filing*

Northwest’s missed payments to Mesaba and Northwest’s actions regardingits fleet and schedule changes adversely affected Mesaba.  Specifically, Mesaba determined that due toNorthwest’s failure to make the September 12, 2005 payment, the deductionstaken by Northwest against subsequent payments and the reduced revenues Mesabawould receive because of the fleet and schedule changes dictated by Northwest,Mesaba could not sustain its operations outside of court protection underChapter 11 of the Bankruptcy Code.  As aresult, on October 13, 2005 (the “Petition Date”), Mesaba filed for bankruptcyprotection under Chapter 11 of the Bankruptcy Code.  Mesaba continues to operate its business as a“debtor-in-possession” under the jurisdiction of the Bankruptcy Court and inaccordance with the applicable provisions of the Bankruptcy Code, the FederalRules of Bankruptcy Procedure and applicable court orders. In general, as a debtor-in-possession,Mesaba is authorized under Chapter 11 to continue to operate as an ongoingbusiness, but may not engage in transactions outside the ordinary course ofbusiness without the prior approval of the Bankruptcy Court.

 

Allof Mesaba’s vendors are being paid for all goods furnished and servicesprovided to Mesaba after the Petition Date in the ordinary course of business.However, under Section 362 of the Bankruptcy Code, actions to collect mostof Mesaba’s prepetition liabilities are automatically stayed, except forliabilities relating to certain qualifying aircraft, aircraft engines and otheraircraft-related equipment that are leased or subject to a security interest orconditional sale contract. Under Section 1110 of the Bankruptcy Code,actions to collect such aircraft-related prepetition liabilities areautomatically stayed for 60 days after the Petition Date (in Mesaba’s case,until December 12, 2005), except under two conditions: (a) the debtormay extend the 60-day period by agreement with the relevant financier or lessorand with court approval; or (b) the debtor may agree to perform all of theobligations under the applicable lease or financing and cure any defaults asrequired under the Bankruptcy Code. If neither of these conditions is met, thelessor or financier may demand the return of the aircraft and enforce any ofits contractual rights or remedies to sell, lease or otherwise retain ordispose of such property.

 

Under Section 365 of the Bankruptcy Code, Mesaba may assume, assume andassign, or reject certain executory contracts and unexpired leases, includingleases of real property, subject to the approval of the Bankruptcy Court andcertain other conditions.  In general, ifMesaba rejects an executory contract or unexpired lease, it is treated as aprepetition breach of the lease or contract in question and, subject to certainexceptions, relieves Mesaba of performing any future obligations. However, sucha rejection entitles the lessor or contract counterparty to a prepetitiongeneral unsecured claim for damages caused by such deemed breach and,accordingly, the counterparty may file a claim against Mesaba for such damages.As a result, liabilities subject to compromise are likely to change in thefuture as a result of damage claims created by Mesaba’s rejection of various aircraftleases, executory contracts and unexpired leases. Generally, if Mesaba assumesan aircraft financing agreement, executory contract or unexpired lease, Mesabais required to cure existing defaults under such contract or lease as acondition to such assumption.

 

On January 12, 2006, the Bankruptcy Court approved Mesaba’s rejectionof the leases for 11 Saab B model aircraft leased from Pinnacle.  The Bankruptcy Court has granted Mesaba anextension of the time in which Mesaba must make decisions regarding theremaining Saab and Avro aircraft. Because the remaining Avro, Saab B+ and CRJmodels are subleased from Northwest, Mesaba’s decision with respect to suchaircraft will be timed with Northwest’s fleet plans during bankruptcy.

 

Pursuant to Mesaba’s request for debtor-in possession financing,Holdings has provided a commitment letter and term sheet to Mesaba for suchfinancing.  The total commitment amountunder the commitment letter and term sheet is for $35 million of secureddebtor-in-possession financing, of which $15 million would be available subjectto usual and customary conditions to funding. The incremental $20 million would be available upon the satisfaction ofcertain additional conditions, including Mesaba’s delivery of an acceptablefive-year business plan by April 1, 2006. The commitment letter, term sheet and the financing to be providedthereunder are subject to approval by the Bankruptcy Court.  The hearing to approve finaldebtor-in-possession financing was extended and is now scheduled to be heard bythe Bankruptcy Court on March 14, 2006.  The automatic stay in Mesaba’sbankruptcy case effectively allowed Mesaba to withhold payment on certainprepetition amounts owed by Mesaba to its creditors.  As a result, absentany additional adverse actions by Northwest with respect to its payments owed toMesaba, Mesaba expects that it will have sufficient cash to fund its operationsthrough the end of the fiscal year, after which debtor-in-possessionfinancing should be available either through Holdings or another provider.

 

11

----

 

To successfully emerge from Chapter 11, in addition to obtaining exitfinancing if needed, the Bankruptcy Court must confirm a plan ofreorganization, the filing of which will depend on the timing and outcome ofnumerous ongoing matters in the Chapter 11 process and potentially includingthe outcome of Northwest’s Chapter 11 case. Mesaba intends to file a plan ofreorganization as soon as it is able to do so, but there can be no assurancethat the Bankruptcy Court will confirm a plan of reorganization or that anysuch plan will be implemented successfully. The reorganization plan will determine the rights and claims of variouscreditors and security holders. At this time, it is not possible to predictaccurately the effect of the Chapter 11 reorganization process on Mesaba’sbusiness, nor can Mesaba make any predictions concerning how the variouscreditor claims and interests of security holders will be determined in the bankruptcyproceedings.

 

It is possible that the relationship between Mesaba and Northwest maybe altered during the course of the Northwest and Mesaba bankruptcyproceedings; however, it is too early in that process to predict whether therewill be any alterations, what such alterations might be, or what the impactmight be to Mesaba’s operations.  Mesaba’s condensed balance sheet atDecember 31, 2005 (see Note 16) includes various items that could be impactedas a result of changes to Mesaba’s relationship with Northwest and its fleetcomposition, including inventory, aircraft and ground handling equipment,maintenance and other accruals. As Mesaba’s and Northwest’s bankruptcyprocesses continue, Mesaba will further evaluate these and other items foradjustments.

 

4.     Goodwilland Other Intangibles

 

TheCompany purchased Big Sky in December 2002. 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 its air carriercertificate, and to goodwill.  Goodwilland the intangible assets are evaluated for impairment annually, at a minimum,or on an interim basis if events or circumstances indicate a possible inabilityto realize the carrying amounts.

 

Dueto the continued rising costs of fuel and the resulting operating losses at BigSky, the Company determined that an interim impairment test of goodwill andother intangible assets was necessary at September 30, 2005.  Thegoodwill impairment test consists of two steps, the first of which is toevaluate the recoverability of goodwill for potential impairment. The fairvalue of the intangible asset is compared to the book value reported on thefinancial statements.  If the fair value is greater than the book value,no adjustment needs to be made to the financial statements.  Fair value isdetermined using discounted expected future cash flows.  If the fair valueis less than the book value, then goodwill is potentially impaired and step twois performed.  The second step is used to measure impairment of goodwill.The fair value of goodwill is calculated by allocating the fair value of areporting unit to its tangible and intangible assets and liabilities. Theexcess of goodwill reported on the balance sheet over the fair value ofgoodwill is calculated and written off in the financial statements.

 

Basedon results of the interim test performed at September 30, 2005, the Companydetermined that goodwill was impaired and recorded an impairment charge ofapproximately $2.5 million.  Theimpairment charge was recorded in “Impairment and other charges” in the condensedconsolidated statements of operations during the quarter ended September 30,2005.  Based on its analysis, the Companydetermined that the air carrier certificate and pilot labor contract were notimpaired, but will continue to monitor the intangible assets at Big Sky for potentialimpairment in the future.

 

Goodwilland other intangible assets and related accumulated amortization were asfollows, in thousands:

 
| ** **                    | ** ** | **December 31, 2005** | ** ** | **March 31, 2005** | ** ** |
|-------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                    | ** ** | ** **            | ** ** | **Accumulated**    | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Gross**             | ** ** | **Amortization**   | ** ** | **Net** | ** ** | **Gross** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Indefinite-lived assets:      |       |                  |       |               |       |   |   |   |   |   |   |   |   |
| Air carrier certificate       |       | $                     | 925        |               |       |   | $ | 925 |   | $ | 925 |   |   |   | $ | 925 |   |
| Goodwill                      |       | —                |       |               |       | — |   | 2,503 |   |   |   | 2,503 |   |
| Amortizable intangible asset: |       |                  |       |               |       |   |   |   |   |   |   |   |   |
| Pilot labor contract          |       | 2,840                 |       | (1,251             | )          | 1,589 |   | 2,840 |   | (946 | ) | 1,894 |   |
|                          |       | $                     | 3,765      |               | $          | (1,251 | ) | $ | 2,514 |   | $ | 6,268 |   | $ | (946 | ) | $ | 5,322 |   |
|                               |            |                       |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amortizable intangible asset is being amortized over its estimatedperiod of benefit of seven years on a straight-line basis.  Intangible asset amortization expense for thethree and nine months ended December 31, 2005 and 2004 was $0.1 million and$0.3 million, respectively.

 

12

----

 

5.     Investments

 

Investments consist principally of government, agency, corporate and municipalsecurities and are classified as available-for-sale.  Fair value of investments is determined basedon quoted market prices.  The Companyclassifies investments with an original maturity of more than 90 days thatmature within one year as short-term and greater than one year as long-term.

 

As of December 31, 2005 and March 31, 2005, cash, cash equivalents,short-term and long-term investments totaled $113.2 million (excluding $37.4million held by Mesaba due to Mesaba’s deconsolidation as of October 13, 2005 whichare reported separately in Note 16) and $170.9 million (including such cash andinvestments for Mesaba), respectively.

 

Amortized cost, gross unrealized gains and losses and fair value of shortand long-term investments classified as debt securities available-for-sale wereas follows, in thousands:

 
| ** **               | ** ** | **December 31, 2005** | ** ** | **March 31, 2005** | ** ** |
|--------------------------|------------|-----------------------|------------|--------------------|------------|
| Amortized  cost          |       | $                     | 37,771     |               | $          | 113,346 |   |
| Gross  unrealized gains  |       | 10                    |       | 3                  |       |
| Gross  unrealized losses |       | (29                   | )          | (440               | )          |
| Fair value               |       | $                     | 37,752     |               | $          | 112,909 |   |

 

For the three and nine months ended December 31, 2005, gross realizedlosses were $0.2 million as the Company incurred some losses when it changedits investment portfolio focus from municipal securities to taxable securities.  For the three and nine months ended December31, 2004, gross realized gains and losses were insignificant as the Companygenerally holds the fully amortized bonds to maturity.

 

6.     Impairmentand Other Charges

 

Impairment and other charges for the three and nine months ended December31, 2005 were as follows, in thousands:

 
| ** **                                                      | ** ** | **Three Months Ended  December 31, 2205** | ** ** | **Nine Months Ended  December 31, 2005** | ** ** | **Refer to  Note** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|--------------------|------------|
| Cancellation of Northwest warrants                              |       | —                                    |       | $                                        | 2,106      |               | 2          |   |
| Provision for loss associated with  Northwest bankruptcy filing |       | —                                    |       | 31,900                                   |       | 3                  |       |
| Impairment of Big Sky goodwill                                  |       | —                                    |       | 2,503                                    |       | 4                  |       |
| Provision for guarantee of Cincinnati  hangar lease             |       | 4,759                                     |       | 4,759                                    |       | 14                 |       |
|                                                            |       | $                                         | 4,759      |                                     | $          | 41,268             |       |   |   |
|                                                                 |            |                                           |            |                                          |            |                    |            |  |  |

 

Mesabareduced impairment and other charges $2.0 million in third quarter of fiscal2006 to adjust the Northwest bad debt reserve to $29.9 million from $31.9million primarily due to additional offsetting liabilities owed by Mesaba toNorthwest.  The $2.0 million reduction wasdetermined after the deconsolidation of Mesaba on October 13, 2005 (see Note 3)and is reflected in Mesaba’s condensed financial statements (see Note 16).

 

Duringthe three months ended December 31, 2005, Holdings recorded a $4.8 millioncharge classified in impairment and other charges in the statement ofoperations for the vacated Cincinnati/Covington hangar (see Note 14).  The reserve was established because Mesabavacated the hangar in October 2005 and Holdings is the guarantor of thefacility.  The accrual assumes that thefacility will remain vacant for the next two years, during which time Holdingswill continue to make bond and lease payments, and that thereafter the facilitywill be subleased at a 20% discount.

 

13

----

 

7.     SupplementalCash Flow Information

 
| ** **                                           | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **December 31**       | ** ** |
| ** **                                           | ** ** | ** **            | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | ** **            | ** ** | **(As restated-** | ** ** |
| ** **                                           | ** ** | **2005**              | ** ** | **see Note 15)** | ** ** |
| SUPPLEMENTAL  CASH FLOW INFORMATION:                 |       |                  |       |   |   |
| Cash paid (refund received) during period  for:      |       |                  |       |   |   |
| Interest                                             |       | $                     | 52         |   | $ | 57 |   |
| Income taxes                                         |       | (783                  | )          | 4,199 |   |
|                                                 |       |                  |       |   |   |
| SUPPLEMENTAL  NON CASH ACTIVITY:                     |       |                  |       |   |   |
| Effect of deconsolidation of Mesaba  Aviation, Inc.: |       |                  |       |   |   |
| Short-term investments                               |       | $                     | 2,799      |   | — |   |
| Restricted cash and cash equivalents                 |       | 6,921                 |       | — |   |
| Accounts receivable, net                             |       | 31,817                |       | — |   |
| Inventories, net                                     |       | 11,236                |       | — |   |
| Prepaid expenses and deposits                        |       | 5,476                 |       | — |   |
| Deferred income taxes and other                      |       | 22,446                |       | — |   |
| Property and equipment, net                          |       | 35,608                |       | — |   |
| Long-term investments and other                      |       | 11,587                |       | — |   |
| Accounts payable and accrued liabilities             |       | (87,560               | )          | — |   |
| Other noncurrent liabilities                         |       | (3,936                | )          | — |   |
|                                                      |            |                       |            |  |  |  |  |

 

8.     NonoperatingIncome

 

In the first quarter of fiscal 2006, the Company recognized $1.8 millionas nonoperating income as a result of a favorable arbitration settlement with aformer investment advisor.

 

9.     IncomeTaxes

 

During the first quarter of fiscal 2005, the Company receivedverification of a final settlement with the Internal Revenue Service (“IRS”)concerning the IRS’ examination of the Company’s fiscal 1995 and 1996 incometax returns.  As a result of thissettlement, the Company reduced its income tax payable and tax provision by$1.2 million in the first quarter of fiscal 2005.

 

Duringthe second quarter of fiscal 2006, in connection with the $31.9 million provisionfor the loss associated with the Northwest bankruptcy filing, Mesaba recorded adeferred tax benefit of $11.3 million, which represents the future federal andstate income tax deductions provided to Mesaba from this loss.

 

As aresult of the deconsolidation of Mesaba in the third quarter of fiscal 2006, allof Mesaba’s net deferred tax assets are no longer presented in the accompanyingcondensed consolidated balance sheet at December 31, 2005 but remain a part ofMesaba’s condensed financial statements at December 31, 2005 (see Note 16).

 

As of December 31, 2005 Mesaba has not recorded a valuation allowancefor any of Mesaba’s deferred tax assets as Mesaba believes that it is morelikely than not that all of the deferred tax assets will be realized.  Mesaba made this assessment based on theweight of the available evidence, which consisted principally of the following:(1) taxable income in prior carryback years (estimated to aggregateapproximately $18.0 million in fiscal 2005 and 2004), (2) tax-planningstrategies (including switching the Company’s investment portfolio fromtax-exempt municipal securities to taxable investments) and (3) estimatedfuture taxable income exclusive of reversing temporary differences andcarryforwards**. **Mesabawill be required to update its estimates of future taxable income based uponadditional information management obtains as Mesaba completes its bankruptcyreorganization plan.  As a result, realizationof Mesaba’s deferred tax assets will be dependent upon Holdings’ and Mesaba’sability to generate sufficient future income within the 20 year carryforwardperiod as long as Mesaba continues to be an 80%-owned subsidiary of Holdings,and those estimates could change materially in future periods as all availableevidence, both positive and negative, is assessed.  Based on the analysis at December 31, 2005,Mesaba believes it will generate sufficient future income to realize thedeferred tax assets.

 

14

----

 

10.   Stock Options

 

The Company accounts for its stock-based compensation plans using theintrinsic value method prescribed under Accounting Principles Board (“APB”) OpinionNo. 25, *Accounting for Stock Issued to Employees*,and related interpretations.  The Companyhas issued stock options to key employees and directors.  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 forma disclosures of compensation expense underStatement of Financial Accounting Standards (“SFAS”) No. 123, *Accounting for Stock-Based Compensation,* and SFAS No. 148, *Accounting for Stock-Based Compensation-Transition and Disclosure,*the Company uses the Black-Scholes option model to estimate the fair value ofoptions.

 

The following information summarizes the pro forma effects assumingcompensation for such awards had been recorded based upon the estimated fairvalue for the periods ended December 31, in thousands, except per shareinformation:

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                    | ** ** | **December 31**        | ** ** | **December 31**       | ** ** |
| ** **                                                                                                                                    | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net (loss)  income as reported                                                                                                                |       | $                      | (4,458     | )                     | $          | 1,493 |   | $ | (28,761 | ) | $ | 9,093 |   |
| Add: Stock-based employee compensation expense  (reduction) included in reported net (loss) income, net of related tax  effects               |       | —                 |       | 503                   |       | (957 | ) | 116 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (123                   | )          | (275                  | )          | (473 | ) | (983 | ) |
| Pro forma  net (loss) income                                                                                                                  |       | $                      | (4,581     | )                     | $          | 1,721 |   | $ | (30,191 | ) | $ | 8,226 |   |
|                                                                                                                                          |       |                   |       |                  |       |   |   |   |   |
| (Loss)  earnings per common share – basic:                                                                                               |       |                   |       |                  |       |   |   |   |   |
| As reported                                                                                                                                   |       | $                      | (0.22      | )                     | $          | 0.07 |   | $ | (1.40 | ) | $ | 0.44 |   |
| Pro forma                                                                                                                                     |       | $                      | (0.22      | )                     | $          | 0.08 |   | $ | (1.47 | ) | $ | 0.40 |   |
| (Loss)  earnings per common share – diluted:                                                                                             |       |                   |       |                  |       |   |   |   |   |
| As reported                                                                                                                                   |       | $                      | (0.22      | )                     | $          | 0.07 |   | $ | (1.40 | ) | $ | 0.43 |   |
| Pro forma                                                                                                                                     |       | $                      | (0.22      | )                     | $          | 0.08 |   | $ | (1.47 | ) | $ | 0.39 |   |

 

InDecember 2002, the Company repriced stock options to purchase 745,000 shares ofthe Company’s common stock with exercise prices ranging from $9.05 to $18.00 toan exercise price of $5.97, which represented the fair market value of theCompany’s stock on the date of the repricing. As of December 31, 2005, 404,782 repriced options were outstanding.  In accordance with Financial AccountingStandards Board (“FASB”) Interpretation No. 44, *Accountingfor Certain Transactions Involving Stock Compensation,* the Companyadopted variable plan accounting for these options from the date of therepricing.  For the three months ended December31, 2005, the Company did not record any compensation expenses or any reductionto compensation expense.  The Companyrecorded compensation expense of $0.9 million for the three months endedDecember 31, 2004.  For the nine monthsended December 31, 2005 and 2004, the Company recorded a reduction to compensationexpense of $1.4 million and compensation expense of $0.2 million, respectively.

 

InDecember 2004, the FASB issued SFAS No. 123(R), *Share-Based Payment,*which requires all public companies accounting for share-based paymenttransactions to account for these types of transactions using afair-value-based method.  SFAS No. 123(R)eliminates the ability to account for share-based compensation transactionsusing APB Opinion No. 25. SFAS No. 123(R) also requires the tax benefits associated withthese share-based payments to be classified as financing activities in thestatement of cash flows rather than as operating activities as is currentlypermitted.  SFAS No. 123(R) becomeseffective as of the beginning of the first****fiscal yearbeginning after June 15, 2005.

 

TheCompany expects to adopt SFAS No. 123(R) on April 1, 2006 using the modified-prospectivemethod.  Under this transition method,the Company will record compensation expense for all awards it grants on astraight-line basis over the

 

15

----

 

vestingperiod.  In addition, the Company will recordcompensation expense for the unvested portion of previously granted awards thatremain outstanding at the date of the adoption. The Company has not completed its assessment of the impact of SFAS No.123(R) on its financial condition or results of operations.

 

11.   Earnings(Loss) Per Share

 

Basic earnings (loss) per common share is computed by dividing netincome (loss) by the weighted average number of shares of common stockoutstanding during the period.  Dilutedearnings (loss) per share is computed by dividing net income (loss) by the sumof the weighted average number of shares of common stock outstanding plus alladditional common stock that would have been outstanding if potentiallydilutive common shares related to stock options and warrants had beenissued.  Stock options and warrants withan exercise price exceeding the fair market value of the Company’s common stockare considered antidilutive and are excluded from the calculation.  Incremental shares related to dilutivesecurities have an anti-dilutive impact on earnings per share when a net lossis reported and therefore are not included in the calculation.

 

The following table reconciles the number of shares utilized in the condensedconsolidated earnings (loss) per share calculations for the periods endedDecember 31, in thousands:

 
| ** **                                                                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                  | ** ** | **December 31**        | ** ** | **December 31**       | ** ** |
| ** **                                                                                                  | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net (loss) income                                                                                           |       | $                      | (4,458     | )                     | $          | 1,493 |   | $ | (28,761 | ) | $ | 9,093 |   |
| For earnings (loss) per common share -  basic:                                                              |       |                   |       |                  |       |   |   |   |   |
| Weighted average number of issued shares  outstanding                                                       |       | 20,592                 |       | 20,524                |       | 20,581 |   | 20,483 |   |
| Effect of dilutive securities:                                                                              |       |                   |       |                  |       |   |   |   |   |
| Computed shares outstanding under the  Company’s stock option plan utilizing the treasury stock method |       | —                 |       | 424                   |       | — |   | 369 |   |
| Computed shares outstanding under warrants  issued utilizing the treasury stock method                      |       | —                 |       | 175                   |       | — |   | 144 |   |
| For earnings (loss) per common share -  diluted:                                                            |       |                   |       |                  |       |   |   |   |   |
| Weighted average common shares and  potentially dilutive common shares                                      |       | 20,592                 |       | 21,123                |       | 20,581 |   | 20,996 |   |
|                                                                                                        |       |                   |       |                  |       |   |   |   |   |
| Antidilutive options and warrants                                                                           |       | 5,680                  |       | 3,505                 |       | 4,553 |   | 3,505 |   |
|                                                                                                             |            |                        |            |                       |            |  |  |  |  |  |  |  |  |

 

12.   Consolidated Comprehensive Income

 

The following table presents the calculation of comprehensiveincome.  The components of comprehensiveincome for the periods ended December 31 were as follows, in thousands:

 
| ** **                                                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                             | ** ** | **December 31**        | ** ** | **December 31**       | ** ** |
| ** **                                                                             | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss)                                                                      |       | $                      | (4,458     | )                     | $          | 1,493 |   | $ | (28,761 | ) | $ | 9,093 |   |
| Unrealized gains (losses) on investments  classified as available for sale, net of tax |       | 117                    |       | (136                  | )          | 232 |   | (46 | ) |
| Comprehensive income (loss)                                                            |       | $                      | (4,341     | )                     | $          | 1,357 |   | $ | (28,529 | ) | $ | 9,047 |   |

 

16

----

 

13.   SegmentInformation

 

The Company follows the provisions of SFAS No. 131, *Disclosures about Segments of an Enterprise and Related Information.*  SFAS No. 131 establishes annual and interimreporting standards for an enterprise’s business segments and relateddisclosures about its products, services, geographic areas and majorcustomers.  The method for determiningwhat information to report is based upon the way management organizes theoperating segments within the Company for making operating decisions andassessing financial performance. Although Mesaba has been deconsolidated from the Company’s condensedconsolidated financial statements as of the Petition Date, the segmentinformation presented below continues to include Mesaba in accordance with SFASNo. 131 and related guidance for equity-method investees.  Mesaba’s results of operations after thePetition Date are included in the “Holdings and Eliminations” column.  Operating segment information for Mesaba, BigSky and Holdings for the periods ended December 31 were asfollows, in thousands:

 
| ** **                                | ** ** | **Mesaba** | ** ** | **Big Sky** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|------------|------------|-------------|------------|------------------|------------|------------------|------------|
| *Three  Months Ended December 31, 2005:*  |       |       |       |        |       |             |       |             |       |
| Operating revenues                        |       | $          | 102,708    |        | $          | 5,296            |       | $                | (86,757    | ) | $ | 21,247 |   |
| Operating expenses                        |       | 98,207     |       | 6,504       |       | (76,404          | )          | 28,307           |       |
| Depreciation and amortization             |       | 2,718      |       | 230         |       | (2,337           | )          | 611              |       |
| Interest expense                          |       | —     |       | 112         |       | (94              | )          | 18               |       |
| Reorganization items, net                 |       | 3,156      |       | —      |       | (3,156           | )          | —           |       |
| Income (loss) before income taxes         |       | 1,635      |       | (1,320      | )          | (6,708           | )          | (6,393           | )          |
| Capital expenditures                      |       | 1,823      |       | 156         |       | —           |       | 1,979            |       |
| At end of period:                         |       |       |       |        |       |             |       |             |       |
| Current assets                            |       | 104,970    |       | 4,332       |       | 2,442            |       | 111,744          |       |
| Total assets                              |       | 151,956    |       | 9,833       |       | 14,696           |       | 176,485          |       |
| Current liabilities                       |       | 58,713     |       | 9,761       |       | (55,754          | )          | 12,720           |       |
| Total stockholders’ equity (deficit) |       | 48,531     |       | (811        | )          | 115,162          |       | 162,882          |       |
| *Three  Months Ended December 31, 2004:*  |       |       |       |        |       |             |       |             |       |
| Operating revenues                        |       | 107,817    |       | 3,718       |       | —           |       | 111,535          |       |
| Operating expenses                        |       | 104,232    |       | 4,273       |       | 1,184            |       | 109,689          |       |
| Depreciation and amortization             |       | 3,947      |       | 183         |       | 4                |       | 4,134            |       |
| Interest expense                          |       | —     |       | 65          |       | (49              | )          | 16               |       |
| Income (loss) before income taxes         |       | 3,703      |       | (495        | )          | (559             | )          | 2,649            |       |
| Capital expenditures (sales)              |       | 2,435      |       | (36         | )          | —           |       | 2,399            |       |
| At end of period:                         |       |       |       |        |       |             |       |             |       |
| Current assets                            |       | 73,493     |       | 2,510       |       | 109,091          |       | 185,094          |       |
| Total assets                              |       | 119,118    |       | 9,332       |       | 149,097          |       | 277,547          |       |
| Current liabilities                       |       | 70,924     |       | 5,751       |       | (276             | )          | 76,399           |       |
| Total stockholders’ equity           |       | 42,367     |       | 2,992       |       | 149,303          |       | 194,662          |       |
| *Nine  Months Ended December 31, 2005:*   |       |       |       |        |       |             |       |             |       |
| Operating revenues                        |       | 322,595    |       | 14,998      |       | (86,757          | )          | 250,836          |       |
| Operating expenses                        |       | 356,505    |       | 20,619      |       | (78,084          | )          | 299,040          |       |
| Depreciation and amortization             |       | 9,572      |       | 676         |       | (2,328           | )          | 7,920            |       |
| Interest expense                          |       | —     |       | 265         |       | (215             | )          | 50               |       |
| Reorganization items, net                 |       | 3,156      |       | —      |       | (3,156           | )          | —           |       |
| Income (loss) before income taxes         |       | (36,334    | )          | (5,808      | )          | (1,512           | )          | (43,654          | )          |
| Capital expenditures                      |       | 7,123      |       | 544         |       | (1,484           | )          | 6,183            |       |
| *Nine  Months Ended December 31, 2004:*   |       |       |       |        |       |             |       |             |       |
| Operating revenues                        |       | 320,467    |       | 11,279      |       | —           |       | 331,746          |       |
| Operating expenses                        |       | 305,629    |       | 13,619      |       | 626              |       | 319,874          |       |
| Depreciation and amortization             |       | 10,641     |       | 589         |       | 12               |       | 11,242           |       |
| Interest expense                          |       | —     |       | 210         |       | (160             | )          | 50               |       |
| Income (loss) before income taxes         |       | 14,998     |       | (2,408      | )          | 984              |       | 13,574           |       |
| Capital expenditures                      |       | 7,472      |       | 32          |       | —           |       | 7,504            |       |
|                                           |            |            |            |             |            |                  |            |                  |            |  |  |  |  |

 

17

----

 

14.   Commitmentsand Contingencies

 

*Saab Leasing Litigation*

On October 4, 2002, Fairbrook Leasing, Inc., Lambert Leasing, Inc. andSwedish Aircraft Holdings AB (“Saab Leasing”) filed a declaratory judgmentaction against Mesaba relating to 20 Saab 340A (“340A”) aircraft leased byMesaba.  Saab Leasing sought a judicial declaration that the terms of theleases applicable to each of the 340A aircraft are governed by a March 7, 1996term sheet proposal rather than the parties’ subsequent agreements and conduct. In a December 8, 2003 order, the District Court declared the term sheetproposal a binding preliminary agreement requiring Mesaba to negotiate in goodfaith toward the execution of long-term agreements for each of the 340Aaircraft.  Mesaba appealed the District Court’s ruling.

 

On August 13, 2004, relying on the District Court’s declaratoryjudgment ruling, Saab Leasing filed a separate action in the District Courtalleging approximately $35 million in damages for past due and future aircraftlease obligations.  Mesaba denied the allegations in Saab Leasing’scomplaint and contended that it had fulfilled and would continue to fulfill itsexisting obligations.

 

On May 19, 2005, the U.S. Court of Appeals for the Eighth Circuitaffirmed the District Court’s declaratory judgment ruling.  Despite theEighth Circuit’s ruling, Mesaba believes, based on advice from its legalcounsel, that it has defenses in the damages case that will limit Saab Leasing’sability to recover damages.  Nevertheless, there can be no assurance thatthe District Court in the damages case will agree with Mesaba’s analysis. Therefore, the ultimate outcome of this dispute cannot be predicted withcertainty.  On September 9, 2005, theDistrict Court heard oral arguments on Saab Leasing’s and Mesaba’scross-motions for summary judgment.  TheDistrict Court did not rule on these motions prior to Mesaba’s bankruptcypetition.

 

On October 14, 2005, Mesaba notified the District Court that Mesabaapplied for debtor protection under Chapter 11 of the Bankruptcy Code and thatsuch application operates to automatically stay the continuation of the SaabLeasing matter.  On October 27, 2005, SaabLeasing filed with the Bankruptcy Court a motion for relief from the automaticstay.  On January 19, 2006, theBankruptcy Court denied Saab Leasing’s motion and held that Saab Leasing couldnot continue with the case until at least May 1, 2006.  If and when the case proceeds, the amount ofany damages award to Saab Leasing would be deemed an unsecured prepetitionclaim against Mesaba.  As of December 31,2005, Mesaba had not established any accrual with regard to this litigationwithin its condensed financial statements (see Note 16).

 

*Other Litigation Matters*

Mesaba is also a defendant in various lawsuits arising in the ordinarycourse of business. While the outcome of these lawsuits and proceedings cannotbe predicted with certainty, it is the opinion of Mesaba’s management based oncurrent information and legal advice that the ultimate disposition of thesesuits will not have a material adverse effect on the separate financialstatements of Mesaba or the consolidated financial statements of the Company asa whole.

 

*Guaranty*

Mesaba currently leases a hangar facility at the Cincinnati/Covingtonairport.  Holdings hasunconditionally guaranteed full and prompt payment of the bonds associated withthe initial financing of the facility. In October 2005, following its bankruptcy filing, Mesaba vacated thefacility due to the reduced number of Avros that will require maintenance inthe future.  Mesaba also filed a motionwith the Bankruptcy Court to reject the lease associated with this facility,but later withdrew the motion to allow Holdings sufficient time to negotiate anassignment of the lease to a third party. Mesaba received a 180 day extension (until the earlier of June 10, 2006or the confirmation of a reorganization plan) on the period in which it mustdetermine whether to assume or reject the hangar lease.  In accordance with Holdings’ guaranty, Holdingshas made the required bond and ground lease payments due since November2005.  If Mesaba ultimately rejects thelease in bankruptcy and Holdings is unable to find an alternate sublessee forthe facility or successfully negotiate a satisfactory resolution for therepayment of the bonds, Holdings could be required to pay the full amount ofthe bonds outstanding, which is currently estimated to be approximately $13.0million.  It is also possible that theguaranty could be construed to require Holdings to pay the remaining amountsdue on the ground lease, which has a term through September 2029.  The ground lease payment is currentlyapproximately $0.1 million per year.

 

Because Mesaba vacated the hangar in October 2005 and Holdings is theguarantor of the facility, Holdings is currently seeking other sublessors tolease the facility.  As of December 31,2005, Holdings established a $4.8 million accrual related to this guaranty, whichassumes that the facility will remain vacant for the next two years, duringwhich time Holdings will continue to make bond and lease payments, and thatthereafter Holdings will be able to sublease the facility at a 20%discount.  Holdings will reassess thisreserve in future periods as material developments occur.

 

18

----

 

15.   Restatements

 

*Accounting forPass-Through Costs*

Subsequent to theissuance of its consolidated financial statements for the year ended March 31,2005 and the quarter ended June 30, 2005, the Company’s management determinedthat two categories of pass-through costs under the ASA with Northwest were notpresented in accordance with Emerging Issues Task Force (“EITF”)  No.99-19, *Reporting Revenue Gross as a Principal vs. Net asan Agent*, and EITF No. 01-14, *Income StatementCharacterization of Reimbursements Received for ‘Out-of-Pocket’ ExpensesIncurred*.  First, the Company determined that certain landingfees reimbursed by Northwest had not been recognized in the Company’sconsolidated statements of operations but should have been recorded as bothoperating revenue and operating expense in prior periods.  Second, theCompany determined that aircraft fuel purchased from Northwest for the Saabsshould have been shown as a reduction of revenue rather than as an operatingexpense in prior periods.  As a result of these misstatements, passengerrevenues, aircraft fuel expense, and landing fees expense have beenrestated from amounts previously reported. The restatement had no effect onpreviously reported operating income, income before income taxes, net income,earnings per share, net cash flows or the Company’s financial condition.

 

TheCompany intends to include restated condensed consolidated financial statementsfor the fiscal 2005 interim periods in its Quarterly Reports on Form 10-Q filedprospectively, and to include restated consolidated financial statements forfiscal 2005 and 2004 in its Annual Report on Form 10-K for the year endingMarch 31, 2006 filed prospectively.  A summaryof the significant effects of this restatement on the Company’s interimcondensed consolidated financial statements for the three months ended June 30,2005 is as follows, in thousands:

 
| ** **                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **June 30, 2005**      | ** ** |
| ** **                              | ** ** | **As Previously**      | ** ** | **As** | ** ** |
| ** **                              | ** ** | **Reported**           | ** ** | **Restated** | ** ** |
| Consolidated  statements of operations: |       |                   |       |   |   |
| Passenger revenues                      |       | 107,539                |       | 103,783 |   |
| Total operating revenues                |       | 118,439                |       | 114,683 |   |
| Aircraft fuel                           |       | 5,658                  |       | 958 |   |
| Landing fees                            |       | 1,676                  |       | 2,620 |   |
| Total operating expenses                |       | 119,357                |       | 115,601 |   |

 

A summary of the significant effects of thisrestatement on the Company’s interim condensed consolidated financialstatements for fiscal 2005 is as follows, in thousands:

 
| ** **                              | ** ** | **Three  Months Ended** | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended**   | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **June 30,  2004**      | ** ** | **September  30, 2004** | ** ** | **September  30, 2004** | ** ** | **December  31, 2004**  | ** ** | **December  31, 2004** | ** ** |
| ** **                              | ** ** | **As  Previously**      | ** ** | **As**                  | ** ** | **As  Previously**      | ** ** | **As**                  | ** ** | **As  Previously**     | ** ** | **As** | ** ** | **As  Previously** | ** ** | **As** | ** ** | **As  Previously** | ** ** | **As** | ** ** |
| ** **                              | ** ** | **Reported**            | ** ** | **Restated**            | ** ** | **Reported**            | ** ** | **Restated**            | ** ** | **Reported**           | ** ** | **Restated** | ** ** | **Reported** | ** ** | **Restated** | ** ** | **Reported** | ** ** | **Restated** | ** ** |
| Consolidated  statements of operations: |       |                    |       |                    |       |                    |       |                    |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Passenger  revenues                     |       | $                       | 100,968    |                    | $          | 97,314                  |       | $                       | 107,736    |                   | $          | 103,789 |   | $ | 208,704 |   | $ | 201,103 |   | $ | 104,267 |   | $ | 100,290 |   | $ | 312,971 |   | $ | 301,393 |   |
| Total operating revenues                |       | 109,699                 |       | 106,045                 |       | 118,113                 |       | 114,166                 |       | 227,812                |       | 220,211 |   | 115,512 |   | 111,535 |   | 343,324 |   | 331,746 |   |
| Aircraft fuel                           |       | 5,111                   |       | 550                     |       | 5,420                   |       | 640                     |       | 10,531                 |       | 1,190 |   | 5,474 |   | 680 |   | 16,005 |   | 1,870 |   |
| Landing fees                            |       | 1,769                   |       | 2,676                   |       | 1,810                   |       | 2,643                   |       | 3,579                  |       | 5,319 |   | 1,541 |   | 2,358 |   | 5,120 |   | 7,677 |   |
| Total operating  expenses               |       | 107,175                 |       | 103,521                 |       | 110,611                 |       | 106,664                 |       | 217,786                |       | 210,185 |   | 113,666 |   | 109,689 |   | 331,452 |   | 319,874 |   |
|                                         |            |                         |            |                         |            |                         |            |                         |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

19

----

 

A summary of the significant effects of thisrestatement on the Company’s consolidated financial statements for fiscal 2005and 2004 is as follows, in thousands:

 
| ** **                              | ** ** | **Year Ended**     | ** ** | **Year Ended**     | ** ** |
|-----------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                              | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
| ** **                              | ** ** | **As Previously**  | ** ** | **As**             | ** ** | **As Previously** | ** ** | **As** | ** ** |
| ** **                              | ** ** | **Reported**       | ** ** | **Restated**       | ** ** | **Reported** | ** ** | **Restated** | ** ** |
| Consolidated  statements of operations: |       |               |       |               |       |   |   |   |   |
| Passenger revenues                      |       | $                  | 413,855    |               | $          | 400,398 |   | $ | 417,300 |   | $ | 401,010 |   |
| Total operating revenues                |       | 456,067            |       | 442,610            |       | 449,079 |   | 432,789 |   |
| Aircraft fuel                           |       | 19,377             |       | 2,471              |       | 22,399 |   | 2,282 |   |
| Landing fees                            |       | 6,759              |       | 10,208             |       | 7,108 |   | 10,935 |   |
| Total operating expenses                |       | 447,428            |       | 433,971            |       | 445,053 |   | 428,763 |   |
|                                         |            |                    |            |                    |            |  |  |  |  |  |  |  |  |

 

20

----

 

16.   FinancialInformation of Mesaba Aviation, Inc.

 

Thefollowing condensed financial statements of Mesaba have been prepared inconformity with SOP 90-7, which requires that liabilities subject to compromiseby the Bankruptcy Court be segregated from liabilities not subject tocompromise, and that all transactions directly associated with thereorganization be identified. Liabilities subject to compromise includepre-petition unsecured claims that may be settled at amounts that differ fromthose recorded in Mesaba’s condensed financial statements.

 

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

 

Asdiscussed in Note 1, Holdings has deconsolidated Mesaba, its wholly-ownedsubsidiary, from Holdings’ December 31, 2005 consolidated balance sheet andthird quarter and year-to-date consolidated statement of operations and cashflows since Mesaba’s bankruptcy filing on October 13, 2005.  Holdings’ investment in Mesaba is accountedfor and reported on the equity method of accounting subsequent to the October13, 2005 deconsolidation date as required by GAAP and SEC guidance.  Allof Holdings’ previously reported consolidated balance sheets, statements ofoperations and cash flows prior to October 13, 2005 continue to include Mesaba’sfinancial position, results of operations and cash flows.

 

**MESABA AVIATION, INC.**

**(DEBTOR-IN-POSSESSION)**

**CONDENSED BALANCE SHEETS**

**(in thousands)(Unaudited)**

 
| ** **                                                | ** ** | **December 31** | ** ** | **March 31** | ** ** |
|-----------------------------------------------------------|------------|-----------------|------------|--------------|------------|
| ** **                                                | ** ** | **2005**        | ** ** | **2005**     | ** ** |
| ASSETS                                                    |       |            |       |         |       |
|                                                      |       |            |       |         |       |
| CURRENT  ASSETS:                                          |       |            |       |         |       |
| Cash and cash equivalents                                 |       | $               | 22,971     |         | $          | 20,357 |   |
| Short-term investments                                    |       | 2,961           |       | —       |       |
| Restricted cash and cash equivalents                      |       | 6,719           |       | —       |       |
| Accounts receivable, net of reserves of  $30,641 and $568 |       | 33,020          |       | 29,163       |       |
| Inventories, net                                          |       | 10,638          |       | 10,329       |       |
| Prepaid expenses and deposits                             |       | 6,211           |       | 4,777        |       |
| Deferred income taxes and other                           |       | 22,396          |       | 11,246       |       |
| Intercompany receivable from Holdings                     |       | 54              |       | 54           |       |
| Total current assets                                      |       | 104,970         |       | 75,926       |       |
|                                                      |       |            |       |         |       |
| PROPERTY AND  EQUIPMENT:                                  |       |            |       |         |       |
| Flight equipment                                          |       | 96,286          |       | 92,300       |       |
| Other property and equipment                              |       | 41,428          |       | 39,015       |       |
| Less: Accumulated depreciation and  amortization          |       | (103,012        | )          | (94,730      | )          |
| Net property and equipment                                |       | 34,702          |       | 36,585       |       |
|                                                      |       |            |       |         |       |
| NONCURRENT  ASSETS:                                       |       |            |       |         |       |
| Long-term investments                                     |       | 11,501          |       | 3,615        |       |
| Other assets, net                                         |       | 783             |       | 4,751        |       |
|                                                      |       | $               | 151,956    |         | $          | 120,877 |   |

 

21

----

 
| ** **                                  | ** ** | **December 31** | ** ** | **March 31** | ** ** |
|---------------------------------------------|------------|-----------------|------------|--------------|------------|
| ** **                                  | ** ** | **2005**        | ** ** | **2005**     | ** ** |
| LIABILITIES AND SHAREHOLDER’S EQUITY   |       |            |       |         |       |
|                                        |       |            |       |         |       |
| CURRENT  LIABILITIES:                       |       |            |       |         |       |
| Accounts payable                            |       | $               | 6,220      |         | $          | 17,422 |   |
| Accrued liabilities:                        |       |            |       |         |       |
| Payroll                                     |       | 17,231          |       | 18,190       |       |
| Maintenance                                 |       | 20,506          |       | 20,082       |       |
| Deferred income                             |       | 3,118           |       | 2,340        |       |
| Other current liabilities                   |       | 11,638          |       | 15,546       |       |
| Total current liabilities                   |       | 58,713          |       | 73,580       |       |
|                                        |       |            |       |         |       |
| OTHER  NONCURRENT LIABILITIES               |       | 3,187           |       | 5,367        |       |
| Total liabilities not subject to compromise |       | 61,900          |       | 78,947       |       |
|                                        |       |            |       |         |       |
| LIABILITIES  SUBJECT TO COMPROMISE (A)      |       | 41,525          |       | —       |       |
| Total liabilities                           |       | 103,425         |       | 78,947       |       |
|                                        |       |            |       |         |       |
| COMMITMENTS  AND CONTINGENCIES (Note 14)    |       |            |       |         |       |
|                                        |       |            |       |         |       |
| SHAREHOLDER’S  EQUITY:                 |       |            |       |         |       |
| Paid-in capital                             |       | 48,255          |       | 16,501       |       |
| Accumulated other comprehensive loss        |       | (9              | )          | —       |       |
| Retained earnings                           |       | 285             |       | 25,429       |       |
| Total shareholder’s equity             |       | 48,531          |       | 41,930       |       |
|                                        |       | $               | 151,956    |         | $          | 120,877 |   |

 

22

----

 

**MESABAAVIATION, INC.**

**(DEBTOR-IN-POSSESSION)**

**CONDENSED STATEMENTS OF OPERATIONS**

**(in thousands)(Unaudited)**

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **December 31**        | ** ** | **December 31**       | ** ** |
| ** **                            | ** ** | ** **             | ** ** | **2004**              | ** ** | ** ** | ** ** | **2004** | ** ** |
| ** **                            | ** ** | ** **             | ** ** | **(As restated-**     | ** ** | ** ** | ** ** | **(As restated-** | ** ** |
| ** **                            | ** ** | **2005**               | ** ** | **see Note 15)**      | ** ** | **2005** | ** ** | **see Note 15)** | ** ** |
| OPERATING  REVENUES:                  |       |                   |       |                  |       |   |   |   |   |
| Passenger                             |       | $                      | 93,612     |                  | $          | 98,423 |   | $ | 295,697 |   | $ | 295,632 |   |
| Freight and other                     |       | 9,096                  |       | 9,394                 |       | 26,898 |   | 24,835 |   |
| Total operating revenues              |       | 102,708                |       | 107,817               |       | 322,595 |   | 320,467 |   |
|                                  |       |                   |       |                  |       |   |   |   |   |
| OPERATING  EXPENSES:                  |       |                   |       |                  |       |   |   |   |   |
| Wages and benefits                    |       | 36,190                 |       | 34,925                |       | 111,745 |   | 103,720 |   |
| Aircraft maintenance                  |       | 19,841                 |       | 21,469                |       | 63,926 |   | 61,827 |   |
| Aircraft rents                        |       | 22,699                 |       | 25,322                |       | 73,330 |   | 75,204 |   |
| Landing fees                          |       | 2,301                  |       | 2,298                 |       | 7,343 |   | 7,486 |   |
| Insurance and taxes                   |       | 1,579                  |       | 1,469                 |       | 4,927 |   | 5,238 |   |
| Depreciation and amortization         |       | 2,718                  |       | 3,947                 |       | 9,572 |   | 10,641 |   |
| Administrative and other              |       | 14,879                 |       | 14,802                |       | 53,656 |   | 41,513 |   |
| Impairment and other charges          |       | (2,000                 | )          | —                |       | 32,006 |   | — |   |
| Total operating expenses              |       | 98,207                 |       | 104,232               |       | 356,505 |   | 305,629 |   |
| Operating income (loss)               |       | 4,501                  |       | 3,585                 |       | (33,910 | ) | 14,838 |   |
|                                  |       |                   |       |                  |       |   |   |   |   |
| NONOPERATING  INCOME (EXPENSE):       |       |                   |       |                  |       |   |   |   |   |
| Interest income and other             |       | 290                    |       | 118                   |       | 732 |   | 160 |   |
| Interest expense                      |       | —                 |       | —                |       | — |   | — |   |
| Reorganization items, net (B)         |       | (3,156                 | )          | —                |       | (3,156 | ) | — |   |
| Nonoperating income, net              |       | (2,866                 | )          | 118                   |       | (2,424 | ) | 160 |   |
| Income (loss) before income taxes     |       | 1,635                  |       | 3,703                 |       | (36,334 | ) | 14,998 |   |
|                                  |       |                   |       |                  |       |   |   |   |   |
| (PROVISION)  BENEFIT FOR INCOME TAXES |       | (999                   | )          | (1,643                | )          | 11,190 |   | (6,457 | ) |
| NET INCOME  (LOSS)                    |       | $                      | 636        |                  | $          | 2,060 |   | $ | (25,144 | ) | $ | 8,541 |   |

 

23

----

 

**MESABA AVIATION, INC.**

**(DEBTOR-IN-POSSESSION)**

**CONDENSED STATEMENTS OF CASH FLOWS**

**(in thousands)(Unaudited)**

 
| ** **                                                                                              | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                              | ** ** | **December 31**       | ** ** |
| ** **                                                                                              | ** ** | ** **            | ** ** | **2004** | ** ** |
| ** **                                                                                              | ** ** | ** **            | ** ** | **(As restated-** | ** ** |
| ** **                                                                                              | ** ** | **2005**              | ** ** | **see Note 15)** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                   |       |                  |       |   |   |
| Net (loss) income                                                                                       |       | $                     | (25,144    | ) | $ | 8,541 |   |
| Adjustments to reconcile net (loss) income  to net cash provided by (used in) operating activities:     |       |                  |       |   |   |
| Depreciation and amortization                                                                           |       | 9,572                 |       | 10,641 |   |
| Amortization of investments                                                                             |       | 39                    |       | — |   |
| Amortization of deferred credits                                                                        |       | (1,332                | )          | (681 | ) |
| Loss on disposition of assets                                                                           |       | 110                   |       | 133 |   |
| Deferred income taxes                                                                                   |       | (11,150               | )          | 206 |   |
| Impairment and other charges                                                                            |       | 32,006                |       | — |   |
| Changes in current operating items:                                                                     |       |                  |       |   |   |
| Accounts receivable                                                                                     |       | (33,661               | )          | (1,360 | ) |
| Inventories                                                                                             |       | (309                  | )          | (1,730 | ) |
| Prepaid expenses and deposits                                                                           |       | (1,434                | )          | (1,585 | ) |
| Accounts payable and other                                                                              |       | 30,142                |       | 3,167 |   |
| Net cash (used in) provided by operating  activities                                                    |       | (1,161                | )          | 17,332 |   |
|                                                                                                    |       |                  |       |   |   |
| CASH FLOWS FROM REORGANIZATION ACTIVITIES:                                                              |       |                  |       |   |   |
| Reorganization items, net                                                                               |       | (3,156                | )          | — |   |
| Net cash used in reorganization activities                                                              |       | (3,156                | )          | — |   |
|                                                                                                    |       |                  |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                   |       |                  |       |   |   |
| Purchases of investments                                                                                |       | (6,648                | )          | (1,571 | ) |
| Sales of investments                                                                                    |       | 5,228                 |       | — |   |
| Increase (decrease) in restricted cash                                                                  |       | (6,719                | )          | — |   |
| Purchases of property and equipment                                                                     |       | (7,123                | )          | (7,477 | ) |
| Net cash used in investing activities                                                                   |       | (15,262               | )          | (9,048 | ) |
|                                                                                                    |       |                  |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                                    |       |                  |       |   |   |
| Capital contribution from MAIR Holdings,  Inc.                                                          |       | 22,193                |       | — |   |
| Dividends paid to MAIR Holdings, Inc.                                                                   |       | —                |       | (18,000 | ) |
| Net cash provided by (used in) financing  activities                                                    |       | 22,193                |       | (18,000 | ) |
|                                                                                                    |       |                  |       |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                                   |       | 2,614                 |       | (9,716 | ) |
|                                                                                                    |       |                  |       |   |   |
| CASH AND CASH EQUIVALENTS:                                                                              |       |                  |       |   |   |
| Beginning of period, excluding restricted  cash and cash equivalents                                    |       | 20,357                |       | 26,988 |   |
| End of period, excluding restricted cash  and cash equivalents                                          |       | $                     | 22,971     |   | $ | 17,272 |   |
|                                                                                                    |       |                  |       |   |   |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                                     |       |                  |       |   |   |
| Cash paid (refund received) during period  for:                                                         |       |                  |       |   |   |
| Interest                                                                                                |       | $                     | —     |   | $ | 7 |   |
| Income taxes                                                                                            |       | (339                  | )          | 283 |   |
|                                                                                                    |       |                  |       |   |   |
| SUPPLEMENTAL NON CASH FINANCING ACTIVITY:                                                               |       |                  |       |   |   |
| Capital contribution through transfer of  short-term and long-term investments from MAIR Holdings, Inc. |       | 9,507                 |       | — |   |

 

24

----

 

The following table presents Mesaba’s condensed results of operationsfor the period October 1, 2005 to October 13, 2005 (the date of Mesaba’s Chapter11 bankruptcy filing) which are included in Mesaba’s results of operations forthe three and nine months ended December 31,2005 above and within the Company’sconsolidated results of operations prior the deconsolidation:

 

| Operating  revenues                       |   | $      | 15,876 |   |
|-------------------------------------------|--------|--------|--------|--------|
| Operating  expenses                       |   | 14,480 |   |
| Operating  income                         |   | 1,396  |   |
| Other non  operating income               |   | 32     |   |
| Income  before provision for income taxes |   | 1,428  |   |
| Provision  for income taxes               |   | (457   | )      |
| Net income                                |   | $      | 971    |   |

 

(A)

Liabilities subject to compromise in Mesaba’s condensed balance sheetat December 31, 2005 (see Note 16) refers to both secured and unsecuredobligations that will be accounted for under a plan of reorganization,including claims incurred prior to the petition date.  They represent the estimated amount expectedto be allowed on known or potential claims to be resolved through the Chapter11 bankruptcy process and remain subject to future adjustments arising fromnegotiated settlements, actions of the Bankruptcy Court, rejection of executorycontracts and unexpired leases, the determination as to the value of anycollateral securing claims, proofs of claim or other events.

 

Mesabahas endeavored to notify all of its known or potential creditors whose claimsare subject to Mesaba’s Chapter 11 case.  Subject to certain exceptionsunder the Bankruptcy Code, Mesaba’s Chapter 11 filing automatically stayed thecontinuation of any judicial or administrative proceedings or other actionsagainst Mesaba or its property to recover on, collect or secure a claim arisingprior to the Petition Date.  The deadline for creditors to file proofs ofclaim with the Bankruptcy Court (the “Bar Date”) isApril 11, 2006 for governmental entities and February 28, 2006 for all othercreditors.  A proof of claim arising fromthe rejection of an executory contract or an expired lease must be filed thelater of the Bar Date or thirty days from the effective date of any authorizedrejection.

 

TheBankruptcy Court will examine any differences between liability amounts Mesabahas estimated and future claims that are filed by Mesaba’s creditors, and theBankruptcy Court will make the final determination regarding allowableclaims.  The determination of how these liabilities will ultimately betreated will not be known until the Bankruptcy Court approves a plan ofreorganization and the claims resolution process is complete, which may occurwell after confirmation of a plan of reorganization.  Mesaba will continueto evaluate the amounts of these liabilities through the remainder of theChapter 11 process.  Mesaba will continue to recognize any additionalamounts subject to compromise that Mesaba identifies in the future.  As a result, the amounts of liabilitiessubject to compromise are subject to change.

 

Liabilities subject to compromise at December 31, 2005 were as follows,in thousands:

 

| Secured  claims                       |   | $      | 2,520  |   |
|---------------------------------------|--------|--------|--------|--------|
| Priority tax  claims                  |   | 2,451  |   |
| Trade and  other miscellaneous claims |   | 36,554 |   |
|                                  |   | $      | 41,525 |   |

 

(B)

Mesabarecorded $3.2 million in reorganization items for the three months endedDecember 31, 2005 for legal and professional fees incurred related to Mesaba’sbankruptcy and reorganization.

 

25

----

 

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

 

*General*

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operationshas been updated to give effect to the restatements discussed in Note 15 to thecondensed consolidated financial statements included in Item 1, and shouldbe read in conjunction with the accompanying condensed consolidated financialstatements.  The Company’s operations andfinancial results are subject to various risks and uncertainties associatedwith the airline industry.  See “RiskFactors” in Item 1A of Part II of this Quarterly Report on Form 10-Q.

 

*Overview*

 

The Company’s total operating revenues for the quarter ended December31, 2005 were $21.2 million, which represented $5.3 million attributed to BigSky and $15.9 million attributed to Mesaba’s operations between October 1through October 13, 2005, the date of Mesaba’s bankruptcy filing and MAIR’sdeconsolidation of Mesaba’s financial results (see Note 1 to the accompanying condensedconsolidated financial statements).  TheCompany’s operating expenses for the quarter ended December 31, 2005 were $28.3million, representing $6.5 million from Big Sky, $7.3 million from Holdings, and$14.5 million from Mesaba’s operations from October 1 through October 13, 2005.  The Company recorded a $0.3 million loss inequity in Mesaba for the period from October 13though December 31,2005 under the equity method of accounting. As discussed in Note 6 to the accompanying condensed consolidatedfinancial statements, the Company also recorded $4.8 million in impairment andother charges for the three months ended December 31, 2005.  As a result, the Company recorded a net lossof $4.5 million for the quarter ended December 31, 2005.

 

*Outlook*

 

As discussed in the accompanying Notes to Condensed ConsolidatedFinancial Statements, the Company’s financial results were, and will continueto be, directly impacted by the bankruptcy filings of Northwest andMesaba.  Northwest’s missed payments toMesaba prior to and following Northwest’s bankruptcy filing have resulted inMesaba holding a net unsecured prepetition claim against Northwest forapproximately $29.9 million as of December 31, 2005.  In addition to these missed payments, Northwesthas also made certain fleet changes that have directly affected Mesaba.  Northwest idled nine Avros operated by Mesabaas of October 31, 2005 and idled an additional three Avros and removed 11 Saabsfrom the schedule effective January 4, 2006. Northwest also notified Mesabathat Northwest intends to remove three Saabs from service in April 2006 and toterminate the remaining Avro leases by the end of calendar 2006, subject tofinal negotiations with its lessors. Finally, Northwest issued a request for proposal for flying up to 126CRJs and notified Mesaba that if it is not awarded any additional CRJs,Northwest will remove the two CRJs currently operated by Mesaba.  Mesaba intends to compete to operate theadditional CRJs.  However, Mesaba alsoexpects that its competitors, many with greater financial resources, will alsoseek to operate such aircraft.  Thesefleet changes have resulted in significant uncertainty regarding Mesaba’sfuture revenue from Northwest.  Thatuncertainty, along with Mesaba’s deteriorated liquidity as a result ofNorthwest’s missed payments, resulted in Mesaba filing for bankruptcyprotection under Chapter 11 of the Bankruptcy Code on October 13, 2005.

 

Northwest’s idling and removal of aircraft from Mesaba’s fleet has alsoforced Mesaba to adjust its costs to compensate for the loss in revenue.  Mesaba has begun to reduce its staffinglevels to realign its cost structure, and Mesaba will continue to makeadjustments to its workforce as it moves through its own bankruptcy proceeding.  Although certain of these reductions may bemade through voluntary employee leaves, Mesaba expects that the majority ofthese reductions will be obtained through involuntary furloughs.

 

Although Mesaba expects that, prior to any assumption of the ASA duringNorthwest’s bankruptcy proceedings, Northwest will seek to renegotiate terms ofthe ASA, management plans and expects to be able to successfully renegotiatethe ASA and to continue its relationship as a regional airline partner withNorthwest.  However, given the risks anduncertainties associated with Northwest’s bankruptcy proceedings, there can beno assurance that management’s current plans and expectations will be realizedin the future.

 

Mesaba expects its fourth quarter fiscal 2006 revenue and earnings todecline significantly due to the idling of the 12 Avros and the removal of 11 Saabsfrom its fleet.  If Northwest elects toidle or remove the remaining 23 Avros in the fourth quarter of fiscal 2006rather than by December 2006 as has been indicated, the reduction in Mesaba’srevenue will be greater.  Because of thedifficulty in predicting the changes Northwest will ultimately make in itsfleet plans, Mesaba is unable to estimate the exact effect of Northwest’s fleetchanges on Mesaba’s revenue and earnings.

 

26

----

 

RESULTS OF OPERATIONS

 

**Three Months Ended December 31, 2005 and 2004**

The Company’s consolidated net loss for the quarter ended December 31, 2005was $4.5 million, or $0.22 per basic and diluted share, compared with netincome of $1.5 million, or $0.07 per diluted share, for the quarter ended December31, 2004.  To allow for an accuratecomparison, Mesaba’s results of operations have been analyzed for the entirethree month periods ended December 31, 2005 and 2004 excluding thedeconsolidation of Mesaba from the Company’s consolidated financial statementsas of October 13, 2005, the date of Mesaba’s bankruptcy filing.  Mesaba’s condensed financial statements on astand-alone basis are presented in Note 16 of the accompanying Notes toCondensed Consolidated Financial Statements. Comparative information on operations for the three months endedDecember 31 follows.

 

***Mesaba***

Mesaba’s operating statistics for the three months ended December 31 wereas follows:

 
| ** **                                             | ** ** | **2005**  | ** ** | **2004**  | ** ** | **Change** | ** ** |
|--------------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Passengers                                             |       | 1,369,532 |       | 1,412,966 |       | (3.1       | )%         |
| Available  seat miles (000s)                           |       | 670,102   |       | 793,269   |       | (15.5      | )%         |
| Revenue  passenger miles (000s)                        |       | 459,739   |       | 511,531   |       | (10.1      | )%         |
| Load factor                                            |       | 68.6      | %          | 64.5      | %          | 4.1        | pts        |
| Block hours  flown                                     |       | 70,849    |       | 74,997    |       | (5.5       | )%         |
| Departures                                             |       | 49,576    |       | 52,423    |       | (5.4       | )%         |
| Revenue per  ASM                                       |       | $         | 0.153      |      | $          | 0.136      |       | 12.5 | % |
| Cost per ASM                                           |       | $         | 0.147      |      | $          | 0.131      |       | 12.2 | % |
| Cost per ASM  (excluding impairment and other charges) |       | $         | 0.150      |      | $          | 0.131      |       | 14.5 | % |
| Aircraft in  service (average)                         |       | 94        |       | 99        |       | (5         | )          |

 

Mesaba Operating Revenues  Totaloperating revenues decreased 4.7% in the third quarter of fiscal 2006 to $102.7million from $107.8 million in the prior year quarter.  The decrease is largelyattributed to a $9.4 million decrease resulting from a 24.5% decrease in Avro blockhours.  These decreases were offset by a $2.0million increase in Saab revenue resulting from a 3.1% increase in rate per ASMand a 5.3% increase in passengers and $2.6 million of additional revenue fromoperating the CRJs, which were not in operation in the prior quarter.

 

Mesaba Operating Expenses  Total operating expenses decreased 5.8% inthe third quarter of fiscal 2006 to $98.2 million from $104.2 million in theprior year quarter.  The decrease inexpenses was primarily due to decreases of $2.6 million in aircraft rentals, $1.6million in aircraft maintenance, $2.0 million in allowance for bad debt and $1.2million in depreciation expenses.  Thedecrease was offset by increases of $1.3 million in wages and benefits, $0.1million in both insurance and taxes and other expenses.  Mesaba’s operating costs per ASM for thethree months ended December 31 were as follows:

 
| ** **                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Wages and  benefits            |       | 5.4      | ¢     | 4.4      | ¢     |
| Aircraft  maintenance          |       | 3.0      |       | 2.7      |       |
| Aircraft  rents                |       | 3.4      |       | 3.2      |       |
| Landing fees                   |       | 0.4      |       | 0.3      |       |
| Insurance  and taxes           |       | 0.2      |       | 0.2      |       |
| Depreciation  and amortization |       | 0.4      |       | 0.5      |       |
| Administrative  and other      |       | 2.2      |       | 1.8      |       |
| Impairment  and other charges  |       | (0.3     | )          | —   |       |
|                           |       | 14.7     | ¢     | 13.1     | ¢     |

 

27

----

 

Wages and benefits increased 3.7% to $36.2 million in the third quarterof fiscal 2006 from $34.9 million in the prior year quarter, primarily due to expensesrelated to increased pilot wage rates and instructor costs and an increase ofsalaried personnel due to the addition of the CRJs.

 

Aircraft maintenance, excluding wages and benefits, decreased 7.9% to $19.8million in the third quarter of fiscal 2006 from $21.5 million in the prioryear quarter, primarily due to a reduction of 24.5% in Avro block hours.

 

Aircraft rents decreased 10.3% to $22.7 million in the third quarter offiscal 2006 from $25.3 million in the prior year quarter, primarily due to the nineAvro aircraft idled by Northwest effective October 31, 2005 (for whichNorthwest agreed to waive the required lease payments) and reduced postpetitionlease rates on the 11 Saabs removed from service in January 2006, partially offsetby the addition of two CRJ aircraft.

 

Landing fees remained relatively constant quarter-over-quarter.  Although Northwest is responsible for the Avrolanding fees for Mesaba’s operations, Mesaba pays several airports directly,and Northwest reimburses Mesaba for such payments.  The reimbursement from Northwest for theseAvro landing fees was $0.8 million for each of the three months ended December31, 2005 and 2004, and is recorded as both landing fees expense and passengerrevenue in Mesaba’s condensed statements of operations.

 

Insurance and taxes increased 6.7% to $1.6 million in the third quarterof fiscal 2006 from $1.5 million in the prior year quarter, primarily due to anincrease of $0.2 million in property tax expense.  This increase was partially offset bydecreases in liability insurance due to reduced flying.

 

Depreciation and amortization decreased 30.8% to $2.7 million in thethird quarter of fiscal 2006 from $3.9 million in the prior year quarterprimarily due to fully depreciated assets and a reduction in capitalexpenditures.

 

Administrative and other expenses increased 0.7% to $14.9 million inthe third quarter of fiscal 2006 from $14.8 million in the prior year quarter,primarily due to increased glycol expenses, ground handling costs, training,maintenance-related travel and professional fees, partially offset by thereversal of certain accruals related to Northwest.

 

Impairment and other charges was reduced $2.0 million in third quarterof fiscal 2006 to adjust the Northwest bad debt reserve to $29.9 million from$31.9 million, primarily due to additional offsetting liabilities owed byMesaba to Northwest.

 

Mesabaincurred fuel expenditures of $5.1 million, or 0.8 cents per ASM, in the thirdquarter of fiscal 2006.  In accordancewith Emerging Issues Task Force (“EITF”) Issue No. 99-19, *ReportingRevenue Gross as a Principal vs. Net as an Agent*, these costs areclassified as a reduction from revenue in Mesaba’s statements ofoperations.  Aircraft fuel remainedrelatively constant quarter-over-quarter. Mesaba’s actual cost of fuel for the Saab aircraft, includingtaxes and pumping fees, was 83.5 cents per gallon for both periods.  Mesaba’s actual cost of fuel for the CRJs,including taxes and pumping fees, was 70 cents per gallon.  These prices are fixed under the terms of theASA, thereby insulating Mesaba from fluctuations in the market price offuel.  Northwest is responsible for allfuel for Mesaba’s Avro operations.

 

Reorganization items for the three months ended December 31, 2005 were $3.2million, resulting from legal and professional fees incurred related toMesaba’s bankruptcy and reorganization.

 

Mesaba’s effective tax rate was 61.1% for the third quarter of fiscal2006 as compared to 44.4% in the prior year quarter.  This increase in rate was due principally tothe difference between the book income and the level of nondeductiblebankruptcy and reorganization costs recorded in the third quarter of fiscal2006. The Company adjusts its effective tax rate quarterly based on forecastedoperating results in the fiscal year. The rate is affected principally by the level of nondeductible expensesrelative to projected taxable income.

 

***Big Sky***

Big Sky’s operating statistics for the three months ended December 31were as follows:

 

28

----

 
| ** **                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Passengers                                            |       | 28,972   |       | 22,350   |       | 29.6       | %          |
| Available  seat miles (000s)                          |       | 19,823   |       | 14,101   |       | 40.6       | %          |
| Revenue  passenger miles (000s)                       |       | 8,158    |       | 5,563    |       | 46.6       | %          |
| Load factor                                           |       | 41.2     | %          | 39.5     | %          | 1.7        | pts        |
| Block hours  flown                                    |       | 5,405    |       | 3,982    |       | 35.7       | %          |
| Departures                                            |       | 5,265    |       | 4,813    |       | 9.4        | %          |
| Revenue per  ASM                                      |       | $        | 0.267      |     | $          | 0.264      |       | 1.1 | % |
| Cost per ASM                                          |       | $        | 0.328      |     | $          | 0.303      |       | 8.3 | % |
| Cost per ASM  (excluding impaiment and other charges) |       | $        | 0.328      |     | $          | 0.303      |       | 8.3 | % |
| Aircraft in  service (average)                        |       | 10       |       | 9        |       | 1          |       |

 

Big Sky Operating Revenues  Total operating revenues increased 43.2% to$5.3 million in the third quarter of fiscal 2006 from $3.7 million in the prioryear quarter due to a $1.2 million quarter-over-quarter increase in passengerrevenue as a result of increased passengers and average passenger fares.  During the quarter, the passenger load factorincreased 1.7 points and the average passenger fare increased $22.

 

Big Sky Operating Expenses  Total operating expenses increased 51.2% inthe third quarter of fiscal 2006 to $6.5 million from $4.3 million in the prioryear quarter as a result of the cost associated with incremental flying and theimpact of higher fuel prices.  Theaverage system fuel price per gallon rose 60 cents, from $1.90 in the third quarterof fiscal 2005 to $2.50 in the third quarter of fiscal 2006.

 

***Consolidated***

Nonoperating Income (Expense)  Nonoperating income decreased to $0.7 millionin the third quarter of fiscal 2006 from $0.8 million in the prior year quarterdue to lower interest income as a result of fewer funds invested at Holdings.

 

Impairment and Other Charges Impairment andother charges for the three months ended December 31, 2005 were $4.8 million dueto the accrual related to the required ground lease and bond payments for theCincinnati/Covington airport facility guaranteed by Holdings.

 

Provision for Income Taxes  The Company’s effective tax rate was 35.5% forthe third quarter of fiscal 2006 as compared to 43.6% in the prior year quarter. The Company adjusts its effective taxrate quarterly based on forecasted operating results in the fiscal year.  The rate is affected principally by the levelof nondeductible expenses, including reorganization charges, relative toprojected taxable income.

 

**Nine Months Ended December 31, 2005 and 2004**

The Company’s consolidated net loss for the nine months ended December31, 2005 was $28.8 million, or $1.40 per basic and diluted share, compared withnet income of $9.1 million, or $0.43 per diluted share, for the nine monthsended December 31, 2004.  To allow for anaccurate comparison, Mesaba’s results of operations have been analyzed for theentire nine months ended December 31, 2005 and 2004 excluding thedeconsolidation of Mesaba from the Company’s consolidated financial statementsas of October 13, 2005, the date of Mesaba’s bankruptcy filing.  Mesaba’s condensed financial statements on astand-alone basis are presented in Note 16 of the accompanying Notes toCondensed Consolidated Financial Statements. Comparative information on operations for the nine months ended December31 was as follows.

 

***Mesaba***

Mesaba’s operating statistics for the nine months ended December 31were as follows:

 

29

----

 
| ** **                                             | ** ** | **2005**  | ** ** | **2004**  | ** ** | **Change** | ** ** |
|--------------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Passengers                                             |       | 4,370,798 |       | 4,290,221 |       | 1.9        | %          |
| Available  seat miles (000s)                           |       | 2,196,688 |       | 2,307,487 |       | (4.8       | )%         |
| Revenue  passenger miles (000s)                        |       | 1,489,980 |       | 1,528,489 |       | (2.5       | )%         |
| Load factor                                            |       | 67.8      | %          | 66.2      | %          | 1.6        | pts        |
| Block hours  flown                                     |       | 216,178   |       | 218,688   |       | (1.1       | )%         |
| Departures                                             |       | 155,803   |       | 156,383   |       | (0.4       | )%         |
| Revenue per  ASM                                       |       | $         | 0.147      |      | $          | 0.139      |       | 5.7 | % |
| Cost per ASM                                           |       | $         | 0.162      |      | $          | 0.132      |       | 22.7 | % |
| Cost per ASM  (excluding impairment and other charges) |       | $         | 0.148      |      | $          | 0.132      |       | 12.1 | % |
| Aircraft in  service (average)                         |       | 98        |       | 98        |       | —     |       |

 

Mesaba Operating Revenues  Totaloperating revenues increased 0.7% in fiscal 2006 to $322.6 million from $320.5million in the prior year period.  The increase is attributed to a $5.6million increase in Saab revenue resulting from a 4.1% increase in rate per ASMand increased passengers, $2.8 million in CRJ flying and a $2.1 millionincrease in additional ground handling revenue in Detroit and Minneapolis/St.Paul.  These increases are offset by a$7.7 million decrease in Avro revenue due to a 7.5% decrease in block hours anda $0.8 million decrease in the incentive bonus accrual.

 

Mesaba Operating Expenses  Total operating expenses increased 16.7% infiscal 2006 to $356.6 million from $305.6 million in the prior year period.  The increase in expenses was primarily due tothe $29.9 million charge to establish a reserve on the unsecured prepetition receivablesdue from Northwest (net of certain offsetting liabilities) as a result of theSeptember 2005 Northwest bankruptcy filing. The increase was also due to $7.0 million of expenses related toincreased consulting costs and training costs incurred for CRJ certification, costsrelated to contingency planning for Northwest’s mechanics’ strike andbankruptcy planning, and higher ground handling cost.  Mesaba’s operating costs per ASM for the ninemonths ended December 31 were as follows:

 
| ** **                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Wages and  benefits            |       | 5.1      | ¢     | 4.5      | ¢     |
| Aircraft  maintenance          |       | 2.9      |       | 2.7      |       |
| Aircraft  rents                |       | 3.3      |       | 3.3      |       |
| Landing fees                   |       | 0.3      |       | 0.3      |       |
| Insurance  and taxes           |       | 0.2      |       | 0.2      |       |
| Depreciation  and amortization |       | 0.5      |       | 0.5      |       |
| Administrative  and other      |       | 2.4      |       | 1.7      |       |
| Impairment  and other charges  |       | 1.5      |       | —   |       |
|                           |       | 16.2     | ¢     | 13.2     | ¢     |

 

Wages and benefits increased 7.7% to $111.7 million in fiscal 2006 from$103.7 million in the prior year period, primarily due to increased personnel forCRJ operations and additional ground handling, and health and dental expenses.  These increases were partially offset byfavorable year-over-year costs associated with the 401(k) benefit plan due toincreased costs in the prior year and reduced bonuses due to missing certainoperating goals.

 

Aircraft maintenance, excluding wages and benefits, increased 3.4% to $63.9million in fiscal 2006 from $61.8 million in the prior year period, partiallydue to additional costs related to an aging fleet and preparations to returnaircraft.  The increase was offset by a 1.1%reduction in total block hours.

 

Aircraft rents decreased 2.5% to $73.3 million in fiscal 2006 from $75.2million in the prior year period due a 1.2% year-over-year reduction inaircraft.

 

Landing fees decreased 2.6% to $7.3 million in fiscal 2006 from $7.5million in the prior year period due to CRJ operations. Although Northwest isresponsible for the Avro landing fees for Mesaba’s operations, Mesaba paysseveral airports directly

 

30

----

 

and Northwest reimburses Mesaba for such payments.  The reimbursement from Northwest for theseAvro landing fees was $2.5 million for each of the nine months ended December31, 2005 and 2004, and is recorded as both landing fees expense and passengerrevenue in Mesaba’s condensed statements of operations.

 

Insurance and taxes decreased 5.8% to $4.9 million in fiscal 2006 from$5.2 million in the prior year period primarily due to decreased liability insurancedue to reduced flying.

 

Depreciation and amortization decreased 9.4% to $9.6 million in fiscal2006 from $10.6 million in the prior year period due to fully depreciatedassets.

 

Administrative and other expenses increased 29.4% to $53.7 million infiscal 2006 from $41.5 million in the prior year period primarily due to training,travel and professional fees related to CRJ certification, increased glycolexpenses, contingency planning for Northwest’s mechanics’ strike and bankruptcyplanning, all partially offset by the reversal of certain accruals related toNorthwest.

 

Impairment charges of $32.0 million were recorded in fiscal 2006 as aresult of establishing a $29.9 million reserve for the unsecured prepetitionreceivables due from Northwest (net of certain offsetting liabilities) as aresult of the September 2005 bankruptcy filing by Northwest and a $2.1 millionwrite-off of the warrants related to the prior Airlink and Jet Agreements.

 

Mesabaincurred fuel expenditures of $14.6 million, or 0.7 cents per ASM, in fiscal2006.  In accordance with EITF Issue No.99-19, *Reporting Revenue Gross as a Principal vs. Net asan Agent*, these costs are classified as a reduction from revenue inMesaba’s condensed statements of operations. Aircraft fuel remained relatively constant year-over-year.  Mesaba’s actual cost of fuel for theSaab aircraft, including taxes and pumping fees, was 83.5 cents per gallon forboth periods.  Mesaba’s actual cost offuel for the CRJs, including taxes and pumping fees, was 70 cents per gallonfor both periods.  These prices are fixedunder the terms of the ASA, thereby insulating Mesaba from fluctuations in themarket price of fuel.  Northwest isresponsible for all fuel for Mesaba’s Avro operations.

 

***Big Sky***

Big Sky’s operating statistics for the nine months ended December 31 wereas follows:

 
| ** **                                             | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Passengers                                             |       | 85,527   |       | 65,712   |       | 30.2       | %          |
| Available  seat miles (000s)                           |       | 57,134   |       | 45,441   |       | 25.7       | %          |
| Revenue  passenger miles (000s)                        |       | 24,372   |       | 16,646   |       | 46.4       | %          |
| Load factor                                            |       | 42.7     | %          | 36.7     | %          | 6.0        | pts        |
| Block hours  flown                                     |       | 15,337   |       | 12,590   |       | 21.8       | %          |
| Departures                                             |       | 15,970   |       | 14,928   |       | 7.0        | %          |
| Revenue per  ASM                                       |       | $        | 0.263      |     | $          | 0.249      |       | 5.6 | % |
| Cost per ASM                                           |       | $        | 0.361      |     | $          | 0.300      |       | 20.3 | % |
| Cost per ASM  (excluding impairment and other charges) |       | $        | 0.317      |     | $          | 0.300      |       | 5.7 | % |
| Aircraft in  service (average)                         |       | 10       |       | 9        |       | 1          |       |

 

Big Sky Operating Revenues  Total operating revenues increased 32.7% to $15.0million in fiscal 2006 from $11.3 million in the prior year period.  A 21.8% increase in block hours generated 25.7%more available seat miles and 46.4% more revenue passenger miles year-over-year.  The new Beechcraft 1900D aircraft contributedto flight completion improving from 92.8% in fiscal 2005 to 96.0% in fiscal2006.  New service was added betweenBoise, Idaho and both Bozeman, Montana and Jackson Hole, Wyoming.  A new EAS route was added connecting Sheridan,Wyoming and Denver, Colorado.

 

Big Sky Operating Expenses  Total operating expenses increased 51.4% infiscal 2006 to $20.6 million from $13.6 million in the prior year period due toan increased level of flying generated by both new service and improved flightcompletion, increased fuel prices and the $2.5 million goodwill impairment.  The average fuel price year over yearincreased 38 cents to $1.69 per gallon in fiscal 2006 from $1.31 per gallon in theprior year period.

 

31

----

 

***Consolidated***

Nonoperating Income (Expense)  Nonoperating income increased to $4.6 millionin fiscal 2006 from $1.7 million in the prior year due to a $1.8 million arbitrationsettlement with a prior investment advisor and interest income that increased asa result of funds invested at higher interest rates.

 

Impairment and Other Charges Impairment andother charges for the nine months ended December 31, 2005 were $41.3 million primarilydue to the $31.9 million charge to establish a reserve on the unsecuredprepetition receivables due from Northwest (net of certain offsettingliabilities) in the second fiscal quarter, the $4.8 million accrual related tothe required ground lease and bond payments for the Cincinnati/Covingtonairport facility, the $2.5 million goodwill impairment charge at Big Sky andthe $2.1 million write-off of the warrants related to the prior air servicesagreements.

 

Provision for Income Taxes The Company’seffective tax rate was at 34.6% for fiscal 2006 as compared to 33.0% in theprior year.  The Company adjusts iteffective tax rate quarterly based on forecasted operating results in thefiscal year.  The rate is affectedprincipally by the level of nondeductible expenses relative to projected taxableincome.

 

In the second quarter of fiscal 2005, the Company reduced its incometax payable and tax provision by $1.2 million as it received verification of afinal settlement with the IRS concerning its examination of the Company’sfiscal 1995 and 1996 tax returns. Without this adjustment, the Company’s effective tax rate would havebeen 42.4%.

 

In the second quarter of fiscal 2006, Mesaba recorded a deferred taxbenefit of $11.3 million, which represents the future federal and state incometax deductions provided to Mesaba from the loss due to the reserve against the Northwestreceivable.

 

As of December 31, 2005 Mesaba has not recorded a valuation allowancefor any of Mesaba’s deferred tax assets as Mesaba believes that it is morelikely than not that all of the deferred tax assets will be realized.  Mesaba made this assessment based on theweight of the available evidence, which consisted principally of the following:(1) taxable income in prior carryback years (estimated to aggregateapproximately $18.0 million in fiscal 2005 and 2004), (2) tax-planningstrategies (including switching the Company’s investment portfolio fromtax-exempt municipal securities to taxable investments) and (3) estimatedfuture taxable income exclusive of reversing temporary differences andcarryforwards**. **Mesabawill be required to update its estimates of future taxable income based uponadditional information management obtains as Mesaba completes its bankruptcyreorganization plan.  As a result,realization of Mesaba’s deferred tax assets will be dependent upon Holdings’and Mesaba’s ability to generate sufficient future income within the 20 yearcarryforward period as long as Mesaba continues to be an 80%-owned subsidiaryof Holdings, and those estimates could change materially in future periods asall available evidence, both positive and negative, is assessed.  Based on the analysis at December 31, 2005, Mesababelieves it will generate sufficient future income to realize the deferred taxassets.

 

LIQUIDITY AND CAPITAL RESOURCES

 

*Overview*

Unrestricted cash, cash equivalents and investments decreased 33.7% to$113.2 million at December 31, 2005 from $170.8 million at March 31, 2005 primarilydue to Holdings’ $31.7 million equity investment in Mesaba and a $12.5 millionreduction in cash and cash equivalents resulting from the deconsolidation ofMesaba effective October 13, 2005, the date of Mesaba’s Chapter 11 bankruptcyfiling.  The Company’s working capital decreasedto $99.0 million at December 31, 2005 compared to working capital of $105.3 millionat March 31, 2005.

 

Unrestricted investments consist principally of government, agency,corporate and municipal securities and are classified asavailable-for-sale.  Available-for-saleinvestments are reported at fair value with unrealized gains and lossesexcluded from operations and reported as a separate component of shareholders’equity, except for other-than-temporary impairments, which are reported as acharge to current operations and result in a new cost basis for the investment.  The Company classifies investments with anoriginal maturity date of more than 90 days that mature within one year asshort-term and greater than one year as long-term.

 

Holdings has sufficient cash and liquidity to meet its obligations.

 

*Mesaba*

Approximately $28.3 million, or 85.7%, of Mesaba’s accounts receivablebalance as of December 31, 2005 was due from Northwest, and this receivable wasnot collateralized.  Mesaba’s business issensitive to events and risks affecting Northwest.  On September 14, 2005, Northwest filed forbankruptcy protection under Chapter 11 of the Bankruptcy Code.  Prior to and following its bankruptcy filing,Northwest missed payments to Mesaba, resulting in Mesaba holding an unsecuredprepetition claim against Northwest for approximately $29.9 million, net ofcertain offsetting liabilities.  Sinceits bankruptcy filing, Northwest has also proposed and implemented variouschanges to Mesaba’s fleet.  Northwest temporarilyidled nine of the Avros operated by Mesaba effective October 31, 2005 andtemporarily idled an additional three Avros and removed 11 Saabs

 

32

----

 

B models effective January 4, 2006. Northwest also notified Mesaba that Northwest intends to remove threeSaabs from service in April 2006 and to terminate the remaining Avro leases bythe end of calendar 2006, subject to final negotiations with its lessors.  Finally, Northwest issued a request forproposal for flying up to 126 CRJs and notified Mesaba that if it is notawarded any additional CRJs, Northwest will remove the two CRJs currentlyoperated by Mesaba.  Mesaba intends tocompete to operate the additional CRJs. However, Mesaba also expects that its competitors, many with greaterfinancial resources, will also seek to operate such aircraft.  For a detailed discussion of the Company’srisks related to Northwest and Northwest’s bankruptcy, see “Risk Factors” inItem 1A of Part II of this Quarterly Report on Form 10-Q.  On October 13, 2005 Mesaba filed for bankruptcyprotection under Chapter 11 of the Bankruptcy Code.  Mesaba’s future liquidity will depend on thereorganization plan it adopts, among other items.

 

As of December 31, 2005, Mesaba’s fleet consisted of 91 aircraftcovered under operating leases with remaining terms of up to 11 years andaggregate monthly lease payments of approximately $6.5 million.  Mesaba leases or subleases its Saab aircraft,either directly from aircraft leasing companies under operating leases withinitial terms of up to seven years or through subleases with Northwest underoperating leases with initial terms of up to 17 years.  Mesaba subleases its Avros and CRJs fromNorthwest under operating leases with initial terms of up to ten years.  If the ASA terminates, the Company’s obligationto continue to pay aircraft leases will simultaneously terminate.  Additionally, because Northwest and Mesabahave both filed for bankruptcy protection, both Northwest’s and Mesaba’saircraft-related lease obligations are impacted by Section 1110 of theBankruptcy Code.  If Northwest, in itsbankruptcy, rejects certain leases for aircraft operated by Mesaba or altersthe fleet to be operated by Mesaba, Mesaba could reject the leases related tosuch aircraft in its own Chapter 11 case. To date, Mesaba has rejected the leases for 11 Saabs and has received anextension of the time in which it must make decisions regarding the remainingaircraft leases.  As aircraft are removedfrom Mesaba’s fleet and leases are terminated, Mesaba will adjust it maintenanceaccruals for any return conditions, write-off any capitalized aircraftmodifications that are returned with the aircraft, and record any estimateddamage claim from the rejected leases as a liability subject to compromise.

 

*Big Sky*

As of December 31, 2005, Big Sky’s operating fleet consisted of tenoperating aircraft and four nonoperating aircraft covered under operatingleases with remaining terms of 19 months to 59 months and aggregate monthlylease payments of approximately $0.2 million. Big Sky leases all of its aircraft. The leases for nonoperating aircraft allow Big Sky to return theaircraft to the lessor upon the occurrence of certain events and containpurchase options.  Funding of the monthlyminimum lease payments is dependent on continued passenger boardings, Big Sky’soperations and, potentially, funding from Holdings.

 

The aircraft operating leases for Mesaba and Big Sky do not contain anyguaranteed lease residual provisions for which there would be a potentialcontingency at the termination of the lease period.

 

*Cash Flows*

A summary of cash flow activity at Holdings and Mesaba is presentedbelow.  Cash flows provided by (used in) activities at Big Sky were $(2.7)million for operating activities, $(0.5) million for investing activities, and$3.2 million from financing activities.

 

*Operating Activities*

 

ConsolidatedNet cash used in operating activities for the nine months ended December 31,2005 was $18.4 million, primarily due to a net loss of $28.8 million and anincrease in accounts receivable of $35.2 million.  These uses of cash wereoffset by impairment and other charges of $41.3 million and depreciation andamortization of $7.9 million.

 

Mesaba Net cash used in operating activities for the nine months ended December 31,2005 was $1.2 million, primarily due to a net loss of $25.1 million and anincrease in accounts receivable of $33.7 million.  These uses of cash wereoffset by impairment and other charges of $32.0 million and depreciation andamortization of $9.6 million.

 

*Reorganization Activities*

 

MesabaNet cash used in reorganization activities for the nine months ended December31, 2005 was $3.2 million for legal and professional fees incurred related toMesaba’s bankruptcy and reorganization.

 

33

----

 

*Investing Activities*

 

ConsolidatedNet cash provided by investing activities for the nine months ended December31, 2005 was $35.9 million.  The source of cash from investing activitieswas the net sales of investments of $112.8 million.  The uses of cash werethe net purchases of short and long-term investments of $51.3 million, $6.9million for the funding of an irrevocable tax trust that Mesaba formed as apart of its bankruptcy planning, and purchases of property and equipment of $6.2million.  The Company also recorded a$12.5 million decrease in cash and cash equivalents from the deconsolidation ofMesaba as of October 13, 2005, the date of Mesaba’s Chapter 11 bankruptcyfiling.

 

Mesaba Net cash used in investing activities for the nine months ended December 31,2005 was $15.3 million.  The source of cash from investing activities wasthe net sales of investments of $5.2 million.  The uses of cash were thenet purchases of short and long-term investments of $6.6 million, $6.7 million forthe funding of an irrevocable tax trust that Mesaba formed as a part of itsbankruptcy planning, and purchases of property and equipment of $7.1 million.

 

*Financing Activities*

 

ConsolidatedNet cash provided by financing activities for the nine months ended December31, 2005 was not significant.

 

MesabaNet cash provided by financing activities for the nine months ended December31, 2005 was $22.2 million which was due to the $31.7 million capitalcontribution made by Holdings in September 2005 in connection with the ASA andpursuant to Holdings’ separate agreement with Northwest.  Of the $31.7million total investment made by Holdings, $22.2 million was paid in cash and$9.5 million was paid through the transfer of certain short-term and long-terminvestments from Holdings.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of the Company’s consolidated financial statements andMesaba’s stand-alone condensed financial statements in conformity withgenerally accepted accounting principles requires the use of estimates,judgments and assumptions that affect the reported amounts of assets andliabilities as of the date of the consolidated financial statements, revenuesand expenses during the reporting period and related disclosures of contingentassets and liabilities in the consolidated financial statements and theaccompanying notes.  The SEC has defineda company’s most critical accounting policies as the ones that are mostimportant to the portrayal of the company’s financial condition and results,and which require the company to make its most difficult and subjectivejudgments, often as a result of the need to make estimates of matters that areinherently uncertain.  Based on thisdefinition, the Company and Mesaba have identified their critical accountingpolicies to include those discussed in the following paragraphs.  The Company and Mesaba also have other keyaccounting policies that involve the use of estimates, judgments andassumptions.

 

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

 

*Allowance for Doubtful Accounts*

TheCompany and Mesaba grant trade credit to certain approved customers and performmonthly analyses of outstanding trade receivables to assess the likelihood ofcollection. For balances where the Company and Mesaba do not expect full paymentof amounts owed, an allowance is recorded to adjust the trade receivable tomanagement’s best estimate of the amount that will ultimately be collected.

 

Asdiscussed in Note 3, there is a significant amount of uncertainty surroundingthe Northwest and Mesaba bankruptcy processes, which may include negotiationswith Northwest regarding Mesaba’s ASA. As such, it is reasonably likely thatthe prepetition amounts Mesaba ultimately collects will be different,potentially by a material amount, than Mesaba’s current estimate.  Infuture periods, Mesaba will appropriately revise its estimate of recoverableamounts as it becomes aware of new information.

 

*Aircraft Property and Equipment*—Estimatedlives are used to record depreciation on aircraft property and equipment.  Aircraft utilization, ASA contractual lives,technology and changes in business strategy may affect the economic lives usedto record depreciation by Mesaba or Big Sky. The foregoing may also affect depreciation rates, impairment or both.  Management of Mesaba and Big Sky regularlyreview the estimated useful lives and salvage values for aircraft property andequipment.

 

34

----

 

Asdiscussed in Note 3 to the accompanying condensed consolidated financial statements,there is a significant amount of uncertainty surrounding Northwest’s fleetplan. As such, it is reasonably likely that Mesaba will alter the estimatedlives on the aircraft that are to be returned and accelerate depreciationaccordingly.  In future periods, Mesaba will appropriately revise itsestimates as it becomes aware of new information.

 

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

 

Asdiscussed in Note 3, Northwest intends to reduce Mesaba’s Saab fleet andeliminate the Avro fleet.  As such, it ispossible that Mesaba will have additional excess inventory reserves.  Infuture periods, Mesaba will appropriately revise its estimates as it becomesaware of new information.

 

*Aircraft Maintenance*—Estimatedmaintenance costs and anticipated aircraft activity are used to determinemaintenance reserves.  Changes inmaintenance contracts, parts and labor costs and aircraft activity may affect themaintenance reserves.  Management ofMesaba and Big Sky regularly review aircraft activity, expected aircraft returndates, changes in maintenance contracts and parts and labor costs formaintenance reserves.

 

Asdiscussed in Note 3, there is a significant amount of uncertainty surroundingNorthwest’s fleet plan. As such, Mesaba will alter maintenance accruals on theaircraft that are to be returned and reverse previously established reservesonce the aircraft are no longer in service.  In future periods, Mesaba willappropriately revise its estimates as it becomes aware of new information.

 

*Goodwill and Other Intangible Assets*—The excess of the Big Sky purchase price overthe fair market value of the net assets acquired was allocated to certainidentifiable intangible assets, including Big Sky’s pilot labor contract andits air carrier certificate and goodwill. The recoverability of goodwill ($2.5 million) and otherintangible assets ($2.7 million) is evaluated annually, at a minimum, or on aninterim basis if events or circumstances indicate a possible inability torealize the carrying amounts.  Theevaluation includes future cash flow projections, strategic modeling and othermanagement assumptions.  During the secondquarter of fiscal 2006, the Company completed an interim impairment test ofgoodwill and other intangible assets. Based on the results of the test, the Company recorded an impairmentcharge of approximately $2.5 million to write-off the entire amount of goodwillas of September 30, 2005.  The impairment amount was determined bycomparing the fair value of the intangible assets to the current carryingvalue. Fair value was derived using a discounted cash flow analysis.  Because the fair value was less than thecarrying value of the assets, the Company recorded an impairment charge toreduce the carrying value of the assets to fair value.

 

*Income Taxes*—The Company’s effective tax rate was 32.9%,46.8% and 51.7% in fiscal 2005, 2004 and 2003, respectively.  The Company’s effective tax rate is based onexpected income, statutory tax rates and tax planning opportunities availablein the various jurisdictions in which the Company operates.  In the event that there is a significantunusual or one-time item recognized, or expected to be recognized, in theCompany’s operating results, the tax attributable to that item would beseparately calculated and recorded at the same time as the unusual or one-timeitem.  Significant judgment is requiredin determining the Company’s effective tax rate and in evaluating its taxpositions.  The Company establishesreserves when, despite its belief that the tax return positions are fullysupportable, certain positions are likely to be challenged and may not succeed.  The Company adjusts these reserves in lightof changing facts and circumstances, such as the closing of a tax audit.  The effective tax rate includes the impact ofreserve provisions and changes to reserves that are considered appropriate, aswell as related interest.  This rate isthen applied to the Company’s quarterly operating results.

 

Significantmanagement judgment is required in determining the provision for income taxes,deferred tax assets and liabilities and any valuation allowance recordedagainst net deferred tax assets.  Forfinancial reporting purposes, a valuation allowance is recorded to offsetdeferred tax assets that, more likely than not, will not be realized based onthe Company’s projected future taxable income, the timing of expiring netoperating losses and the Company’s tax planning strategies.  In the future, subsequent revisions to theestimated net realizable value of these deferred tax assets could cause theCompany to record a valuation allowance on all or a portion the deferred taxassets.  This could cause the provisionfor income taxes to vary significantly from period to period, although theCompany’s cash payments would remain unaffected until the benefit of the netoperating losses is completely utilized or expires unused.

 

*Workers Compensation Insurance*—Mesaba and Big Sky estimate the ultimate cost of an on-the-job injury at thetime of the injury to determine their workers compensation insurancereserves.  Mesaba and Big Sky use theservices of their respective insurance carriers and outside brokers to assistin determining the reserve levels. Injury severity, cost of care and the

 

35

----

 

insurance contract affect the ultimate cost and ultimate reservesrecorded.  Management of Mesaba and BigSky regularly review workers compensation activity with outside consultants forany changes in the workers compensation reserve.

 

*Health and Dental Insurance*—Mesabaestimates the amount of incurred but not reported health and dental claims todetermine its health and dental insurance reserves.  Mesaba uses the services of its insurancecarriers and outside brokers to assist in determining the reserve levels.  Historical claims experience, claims severityand cost of care affect the ultimate cost and ultimate reserves recorded.  Management of Mesaba regularly review healthand dental claims activity with outside consultants for any changes in thehealth and dental insurance reserve. Holdings and Big Sky purchase health anddental insurance and, therefore, do not make estimates for heath and dentalclaims

 

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

 

NEW ACCOUNTING PRONOUNCEMENTS

 

InDecember 2004, the FASB issued SFAS No. 123(R), *Share-Based Payment*,which requires all public companies accounting for share-based paymenttransactions to account for these types of transactions using afair-value-based method.  SFAS No.123(R) eliminates the ability to account for share-based compensationtransactions using APB Opinion No. 25. SFAS No. 123(R) also requires the tax benefits associated withthese share-based payments to be classified as financing activities in thestatement of cash flows rather than operating activities as is currentlypermitted.  SFAS No. 123(R) becomeseffective as of the beginning of the first****fiscal yearbeginning after June 15, 2005.

 

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

 

**ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

The Company believes that Mesaba’s arrangements for fuel with Northwestassure an adequate supply of fuel for current and future operations, providedthat Northwest does not experience a supply shortage.  As a part of the ASA, the fuel price forMesaba’s Saabs is fixed at 83.5¢ per gallon, and the fuel price for Mesaba’sCRJs is fixed at 70¢ per gallon; thus, Northwest bears the economic risk of fuelprice fluctuations for Mesaba’s Saab fuel requirements.  Northwest provides all fuel at its expense tosupport Mesaba’s Avro operations.  BigSky is subject to fluctuations in fuel prices.

 

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

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

*Evaluation of Disclosure Controls Procedures*

 

TheCompany’s management does not expect that its disclosure controls andprocedures will prevent all errors and all fraud. A control system, no matterhow well conceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of the control system are met. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the Company have been detected. The design of any system of controlsalso is based in part upon certain assumptions about the likelihood of futureevents, and there can be no assurance that any design will succeed in achievingits stated goals under all potential future conditions; over time, control maybecome inadequate because of changes in conditions, or the degree of compliancewith the policies or procedures may deteriorate. Because of the inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected.

 

36

----

 

Asof December 31, 2005, the Company conducted an evaluation under the supervisionand with the participation of the Company’s management, including the Company’sChief Executive Officer and Chief Financial Officer, regarding theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as that term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures wereeffective as of the date of such evaluation.

 

*Changes in Internal Controls*

 

Duringthe quarter ended December 31, 2005, there were no changes in internal controlsover financial reporting that had a material effect on internal control overfinancial reporting or were reasonably likely to have a material effect oninternal control over financial reporting.

 

*Management’s Consideration of the Restatement*

 

Managementhas considered, among other things, the control deficiency related to theaccounting for certain pass-through costs, which resulted in the need torestate the Company’s previously issued financial statements as disclosed inNote 15 of Notes to Condensed Consolidated Financial Statements in thisQuarterly Report on Form 10-Q. After reviewing and analyzing theSecurities and Exchange Commission’s Staff Accounting Bulletin (“SAB”)No. 99, *Materiality*, AccountingPrinciples Board Opinion No. 28, *Interim FinancialReporting* paragraph 29 and SAB Topic 5-F, *AccountingChanges Not Retroactively Applied Due to Immateriality*, and takinginto consideration (i) that the restatement adjustments did not have amaterial impact on the consolidated financial statements of prior interim orannual periods taken as a whole; (ii) that the restatement adjustments hadno effect on previously reported operating income, income before income taxes,net income, earnings per share, net cash flows or the Company’s financialcondition in any prior interim or annual periods; and (iii) that theCompany decided to include restated condensed consolidated financial statementsfor the fiscal 2005 interim periods in its Quarterly Reports on Form 10-Qfiled prospectively, and to include restated consolidated financial statementsfor fiscal 2005 and 2004 in its Annual Report on Form 10-K for the yearending March 31, 2006 filed prospectively, management concluded that thecontrol deficiency that resulted in the restatement of the prior periodconsolidated financial statements was not itself a material weakness. Furthermore, management concluded that the control deficiency that resulted inthe restatement, when aggregated with other deficiencies, did not constitute amaterial weakness.

 

**Part II. OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

Incorporated by reference to Note 14, “Commitments and Contingencies,”of the Company’s Notes to Condensed Consolidated Financial Statements,contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

As described more fully in Note 3, “Northwest and Mesaba BankruptcyFilings,” of the Company’s Notes to Condensed Consolidated FinancialStatements, contained in Part I, Item 1 of this Quarterly Report on Form 10-Q,on October 13, 2005, Mesaba Aviation, Inc. filed for bankruptcy protectionunder Chapter 11 of the United States Bankruptcy Code in the United StatesDistrict Court for the District of Minnesota.

 

**ITEM 1A.  RISK FACTORS**

 

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

 

**Risks Related to Mesaba’s Bankruptcy**

 

*Mesaba’s successful operation during bankruptcy and its successfulemergence from bankruptcy will depend on Mesaba’s relationship with itscreditors’ committee.*

 

The United States Trustee for the District of Minnesota has appointedan official committee of unsecured creditors (the “Creditors’ Committee”) inMesaba’s bankruptcy case. The Creditors’ Committee and its legalrepresentatives have a right to be heard on all matters that come before theBankruptcy Court concerning Mesaba’s reorganization. There can be no

 

37

----

 

assurance that the Creditors’ Committee will support Mesaba’s positionsor its plan of reorganization, and any disagreements between the Creditors’Committee and Mesaba could protract the Chapter 11 process, hinder Mesaba’sability to operate during the Chapter 11 process and delay Mesaba’s emergencefrom Chapter 11.

 

*If Mesaba is unable to adopt a successful reorganization plan, it maybe unable to emerge from bankruptcy.*

 

In order for Mesaba to emerge from bankruptcy, the Bankruptcy Courtmust approve a reorganization plan for Mesaba. The reorganization plan will be subject to a vote by certain classes ofcreditors, including Mesaba’s secured creditors and unsecured creditors.  The Bankruptcy Court will generally notapprove a reorganization plan unless all impaired classes of creditors vote toaccept the plan; however, Mesaba may elect to invoke certain provisions of theBankruptcy Code in order to obtain confirmation of the plan over the vote of adissenting class of creditors.  Inaddition to the voting requirements for confirmation, Mesaba will have tosatisfy other provisions of the Bankruptcy Code in order to confirm itsreorganization plan, including showing that the plan is feasible.  If Mesaba is unable to meet theseconfirmation requirements, it may be unable to emerge from bankruptcy.

 

*If Holdings is unable to find an alternate sublessee for Mesaba’s Cincinnati/Covingtonfacility, or if Holdings is unable to negotiate a satisfactory resolution forthe repayment of the bonds associated with such facility, Holdings may berequired to pay the full amount of the remaining lease and bond payments due.*

 

Mesaba currently leases a facility at the Cincinnati/Covington airport,and Mesaba has filed a motion with the Bankruptcy Court to reject the leaseassociated with this facility.  Aspreviously disclosed in the Company’s public filings, Holdings hasunconditionally guaranteed full and prompt payment of the ground lease and thebonds associated with the initial financing of the facility.  In accordance with this guaranty, Holdingshas made the required bond and ground lease payments due since November 2005.  If Holdings is unable to find an alternatesublessee for the facility or successfully negotiate a satisfactory resolutionfor the repayment of the bonds, Holdings could be required to pay the fullamount of the bonds outstanding, which is currently approximately $13.0million.  Holdings could also potentiallybe required to pay the remaining amounts due on the ground lease, whichcontains a term through September 2029. The annual ground lease payment is currently approximately $0.1million.  As of December 31, 2005,Holdings recorded a $4.8 million liability with respect to the lease andguaranty, which assumed that the facility would remain vacant for the next twoyears, during which time Holdings would continue to make bond and leasepayments, and that thereafter Holdings would be able to sublease the facilityat a 20% discount.  However, there can beno assurances that Holdings will be able to negotiate such a sublease of thefacility.

 

*Any court-approved reorganization by Mesaba could result in Holdingslosing all or a portion of its equity in Mesaba.*

 

In general, the absolute priority rule in the Bankruptcy code requiresthat all of the debtor’s creditors must be paid in full, otherwise the equityholders in the debtor are not entitled to retain their equity interests, unlesscertain exceptions to the absolute priority rule are met.  Mesaba is early in its bankruptcy process,and it will be some time before Mesaba proposes a reorganization plan.  However, the outcome of any vote on Mesaba’sreorganization plan, as well as the terms and conditions of the plan itself,will determine whether Holdings risks losing some or all of its ownership inMesaba due to the application of the absolute priority rule.

 

*The amount of any debtor-in-possession financing provided by Holdingsto Mesaba will be at risk, and Holdings cannot guarantee that such financingwill be repaid.*

 

Holdings has proposed to provide an aggregate of $35 million ofdebtor-in-possession financing to Mesaba. The first $15 million of such financing will be fully collateralized,but the subsequent $20 million may not be fully collateralized and is subjectto Mesaba providing a satisfactory plan of reorganization prior to April 1,2006.  If the collateral securing thefinancing is of insufficient value or drops in value subsequent to closing thedebtor-in-possession financing, any foreclosure by Holdings on the collateralsecuring the loan would not provide full repayment to Holdings.  Additionally, if Mesaba is unable tosuccessfully reorganize through bankruptcy, the repayment of any debtor-in-possessionfinancing provided by Holdings will be at significant risk.

 

*Mesaba may need exit financing to emerge from bankruptcy, and there isno assurance Mesaba can obtain exit financing.*

 

The terms of the debtor-in-possession financing provided to Mesaba byHoldings require such financing to be repaid upon Mesaba’s exit frombankruptcy.  Accordingly, Mesaba willneed to provide for the repayment of the debtor-in-possession financing througha source of exit financing or through some other means.  There is no assurance that such exitfinancing will be available to Mesaba upon its exit from bankruptcy or thatMesaba will have the means to repay the debtor-in-possession financing withoutexit financing.

 

38

----

 

*Part of Mesaba’s bankruptcy strategy is to achieve labor cost savings,the threat of which could cause slowdowns or other labor unrest by Mesaba’slabor unions.*

 

Since November 2005, Mesaba has been engaged in negotiations with allof its unions to address the need for contracts that are consistent withchanging company and industry conditions. In January 2006, the Bankruptcy Court approved the agreement reachedbetween Mesaba and the Transport Workers’ Union.  While Mesaba remains committed to reachingnegotiated agreements with its remaining three unions (Air Line PilotsAssociation, Aircraft Mechanics Fraternal Association and Association of FlightAttendants), the Bankruptcy Court may need to impose new contract terms onthese unions.  It is possible thatmembers of these unions will participate in work slowdowns or other laborunrest to protest Mesaba’s new contract terms. Any labor unrest would result in a material adverse effect on Mesaba’sfinancial condition and operations.

 

*If, in the process of its investigation, Mesaba’s creditors’committee believes any impropriety exists regarding Mesaba’s relationship withHoldings, the creditors’ committee could assert claims against Holdings.*

 

Certain provisions of the Bankruptcy Code allow a debtor-in-possessionto recover transfers of cash or other property that were made prior to thedebtor’s bankruptcy filing.  As a result, one of the traditional duties ofan official committee of unsecured creditors appointed in a bankruptcy case isto examine transactions between a debtor-in-possession and itsaffiliates.  In Mesaba’s bankruptcy case, the unsecured creditors’committee has requested the right to review various documents concerningtransactions between Holdings and Mesaba and to take depositions in order tounderstand these transactions, including the payment of dividends from Mesabato Holdings.  Holdings believes all dividends paid by Mesaba wereappropriate and in compliance with the requirements of the Minnesota BusinessCorporation Act.  However, in order to address any questions about therelationship between Holdings and Mesaba, Holdings has entered into an agreedprotective order with the committee of unsecured creditors to voluntarilyprovide documents explaining the relationship between Holdings and Mesaba andto provide witness testimony concerning the documents provided.  Thecommittee of unsecured creditors has not completed its review of thetransactions between Holdings and Mesaba and, consequently, the creditors’ committeehas not yet advised Holdings of any specific claims arising from its review.

 

**Risks Related to Mesaba’s Relationship with Northwest**

 

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

 

During fiscal 2005, Northwest accounted for 95.0% of Mesaba’s operatingrevenues.  Additionally, Mesabaconsistently carries a receivable due from Northwest between $18 million to $25million that is not collateralized.  Dueto Northwest’s missed payments prior to and following its bankruptcy filing,Mesaba recorded an impairment charge to reflect the receivable due fromNorthwest through September 13, 2005, the date of Northwest’s bankruptcyfiling. Further, all of Mesaba’s contracts with Northwest are now at risk, asNorthwest has the option to assume or reject each of such contracts inconnection with its bankruptcy proceeding. Northwest may also attempt to renegotiate Mesaba’s contracts throughbankruptcy.  Mesaba is currentlycontinuing to operate flights for Northwest, but the exact nature of Mesaba’sfuture relationship with Northwest may not be known until such time asNorthwest adopts its bankruptcy reorganization plan.  To date, Northwest has removed 11 Saabs and12 Avros from Mesaba’s fleet.  In January2006, Northwest advised Mesaba that three additional Saabs will be removed fromservice in April 2006 and the remaining Avros operated by Mesaba will beremoved by the end of December 2006.  Northwesthas also requested bids from several regional airlines for the operation of 126regional jets.  If Mesaba is not awardedthe regional jets, Northwest will remove the two CRJs that Mesaba currentlyoperates.  In the event Northwest assumesthe ASA, the prepetition amounts owed to Mesaba would become an administrativeclaim, and Mesaba could receive payment in full.  If Northwest rejects the ASA or negotiates anew ASA, the prepetition amounts owed to Mesaba would remain an unsecured claim,and Mesaba would likely receive only a small percentage of the amounts owed toit, and even then would only receive such amounts after a plan ofreorganization is approved by Northwest’s bankruptcy court.

 

*Northwest has not guaranteed that it will grow Mesaba’s regional fleet,and Northwest could opt to operate new regional aircraft with its own newsubsidiary or utilize other regional airlines.*

 

As previously discussed, the ASA does not provide that Mesaba’s fleetwill grow beyond its existing size. Additionally, the ASA does not prohibit Northwest from contracting withother regional airlines to provide the same services that Mesaba currentlyprovides.  Northwest currently has anairline services agreement with Pinnacle, and Pinnacle serves many of the samecities as Mesaba.  Northwest has issued arequest for proposal for the operation of up to 126 CRJs (the total number ofCRJs currently operated by Mesaba and Pinnacle combined), and Northwest isnegotiating with its pilots regarding the possibility of Northwest forming anew subsidiary to operate regional aircraft. Accordingly, Northwest could choose to

 

39

----

 

expand its agreement with Pinnacle in competition with Mesaba or tocontract with other regional airlines or to replace regional airlines with aseparate Northwest subsidiary that would operate regional flights.

 

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

 

*Mesaba’s and Big Sky’s success is dependent on their ability to obtainall necessary aircraft, engines, parts and related maintenance and support fromvarious aircraft manufacturers and vendors.*

 

Mesaba and Big Sky are dependent on various aircraft manufacturers andother vendors to provide sufficient parts and related maintenance and supportservices on a timely basis.  Additionally,Mesaba and Big Sky rely on various engine manufacturers for parts, repair andoverhaul services and other types of support services.  Mesaba’s bankruptcy filing could furtherimpact Mesaba’s ability to obtain necessary parts and services.  The failure of aircraft or enginemanufacturers and other vendors to provide parts or related services on atimely, cost-effective basis could materially and adversely affect Mesaba’s orBig Sky’s business, financial condition and results of operations.

 

*Because Mesaba is unable to pass along increased operating costs,Mesaba’s earnings will be negatively affected as its fleet continues to age.*

 

As Mesaba’s fleet of aircraft age, the cost of maintaining the aircraftwill likely increase.  Because manyaircraft components are required to be replaced after specified numbers offlight hours or take-off and landing cycles, and because new aviationtechnology may require certain parts to be retrofitted, the cost to maintainaging aircraft will generally exceed the cost to maintain newer aircraft.  Any material increase in such costs will havea material adverse effect on Mesaba’s business, financial condition and resultsof operations.

 

*If Mesaba loses certain of its ground handling business, Mesaba’s resultsof operations could be materially affected.*

 

Mesaba performs various ground handling services for Northwest andPinnacle at Minneapolis, Detroit and certain other airport locations.  The ground handling business is highlycompetitive, and airlines are constantly reviewing their cost structures tolocate the most cost-effective ground handling providers.  Mesaba does not have any long-term agreementswith Northwest or Pinnacle.  If Northwestor Pinnacle terminate Mesaba’s ground handling services, Mesaba’s financialresults would be materially affected, both through a loss of revenue andincreased transition expenses.

 

*Mesaba and Big Sky could incur significant costs if they experiencedifficulty finding, training and retaining employees.*

 

Mesaba’s and Big Sky’s businesses are labor-intensive and require largenumbers of pilots, flight attendants, maintenance technicians and otherpersonnel.  The airline industry has fromtime to time experienced a shortage of qualified personnel, specifically pilotsand maintenance technicians.  Inaddition, as is common with most airline competitors, Mesaba and Big Sky havefaced turnover of their employees.  Forexample, Mesaba’s and Big Sky’s pilots, flight attendants and maintenancetechnicians occasionally leave to work for larger airlines, which generallyoffer higher salaries and more extensive benefit programs than regionalairlines are financially able to offer. In the event of a significant increase in the turnover of employees,Mesaba and Big Sky would incur significantly higher training costs than wouldotherwise be necessary.  Mesaba and BigSky cannot provide assurance that they will be able to recruit, train andretain the qualified employees they require to carry out their business plans.

 

*Mesaba and Big Sky could be adversely affected by the highlycompetitive nature of the airline industry.*

 

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

 

*The ability of Mesaba or Big Sky to diversify within the airlineindustry may be limited by the terms of various collective bargainingagreements and by other airlines’ business agreements.*

 

Holdings entered into a letter agreement with Mesaba’s pilot union thatcurrently limits the types of aircraft Big Sky may fly.  Although this limitation will be the subjectof Mesaba’s negotiations with its pilots in Mesaba’s bankruptcy proceedings,there is no guarantee that the pilots will agree to any modifications or thatthe Bankruptcy Court will agree to impose such modifications on thepilots.  Mesaba’s and Big Sky’s abilityto provide regional service to other major air carriers may also

 

40

----

 

be limited by those carriers’ existing relationships with otherregional operators.  Additionally, manyof the labor collective bargaining agreements of major airlines, includingNorthwest, contain scope clause restrictions that limit the airlines’ abilityto add new regional jets.  Northwest haspublicly announced that it is seeking relief from its pilots’ union to obtainflexibility in allowing feeder carriers to operate additional types ofaircraft.  However, there is no guaranteethat Northwest will obtain this flexibility, nor is there any guarantee thatMesaba or Big Sky will be selected to provide additional regional air servicesin the event Northwest obtains such flexibility.

 

*Mesaba’s and Big Sky’s compliance with various regulations governingthe airline industry can be costly, and Mesaba and Big Sky could be harmed ifthey fail to comply with such regulations.*

 

Airlines are subject to extensive regulatory and legal requirementsthat involve significant compliance costs that result in increased costs forpassengers and the airline.  The FAA, DOTand Transportation Security Administration periodically propose additionallaws, regulations, taxes and airport rates and charges.  Such measures could have the effect ofraising ticket prices, reducing revenue, increasing costs or reducing demandfor air travel.  Mesaba and Big Skyexpect to continue incurring expenses to comply with existing and futureregulations.  Moreover, if either Mesabaor Big Sky fails to comply with applicable regulations, they may be subject tosanctions, including the following:

 

•      warningletters;

•      fines;

•      injunctions;

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

•      criminalprosecutions.

 

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

 

The terrorist attacks of September 11, 2001 and the prolonged unrest inthe Middle East materially affected and continue to affect the airlineindustry.  Concerns about further terroristattacks have had a negative impact on air travel demand.  In addition, security procedures introducedat airports since the attacks have increased the inconvenience of air travel,both in reality and in customer perception, leading to further reduction indemand.  Additional terrorist attacks,the fear of such attacks or continued conflict in Iraq or other countries couldfurther affect the airline industry and could cause general instability infinancial markets.

 

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

 

Mesaba’s and Big Sky’s operations are also subject to delays caused byfactors beyond their control, including air traffic congestion at airports,adverse weather conditions and increased security measures.  Such delays frustrate passengers, reduceaircraft utilization and increase costs, all of which may affect profitabilityand harm the Company’s financial condition and results of operations.

 

*Mesaba and Big Sky are increasingly dependent upon technology in theiroperations, and any failure of such technology could adversely affect them.*

 

Mesaba and Big Sky have made, and will continue to make, substantialinvestments in technology to manage their operations.  In particular, the systems operations controlcenters, which oversee daily flight operations, are dependent on a number oftechnology systems to operate effectively. These technology systems may be vulnerable to various sources ofinterruption due to events beyond Mesaba’s or Big Sky’s control, includingnatural disasters, terrorist attacks, computer viruses and hackers.  In addition, large-scale interruption intechnology on which Mesaba and Big Sky depend, such as power,telecommunications or the Internet, could substantially disrupt their operations.

 

*Any airline accident in which Mesaba or Big Sky is involved couldsubject Mesaba or Big Sky to substantial liability and seriously harm theCompany’s financial condition and results of operations.*

 

An accident involving Mesaba or Big Sky aircraft could result ininjuries and loss of life and therefore result in significant claims frominjured persons and surviving relatives. An accident could also result in substantial property damage, loss ofaircraft from service and adverse publicity for the affected airline.  The DOT requires airlines to carry liabilityinsurance.

 

41

----

 

Although Mesaba and Big Sky believe their liability insurance is inamounts and of the type generally consistent with industry practice,substantial claims resulting from an accident in excess of insurance coveragewould harm the Company’s business and financial results.  Any resulting claims would also be costly todefend and could harm Mesaba’s or Big Sky’s reputation.  Moreover, any aircraft accident, even iffully insured or not directly involving Mesaba or Big Sky, could cause a publicperception that flying is less safe or reliable than other transportationalternatives, which could harm the Company’s financial condition and results ofoperations.

 

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

 

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

 

Northwest owns 27.5% of the Company’s common stock.  Northwest also owns a warrant to purchase anaggregate of 4,112,500 shares of the Company’s common stock, subject to certainvesting restrictions related to the future delivery by Northwest of CRJaircraft.  If Mesaba is awardedadditional CRJ aircraft by Northwest, the Company expects that the terms of thewarrant will be renegotiated to reflect the new arrangement between theparties.  Additionally, several othershareholders also own significant blocks of the Company’s common stock.  Because the parties described above currentlyown a large portion of the Company’s stock, they may be able to determine orsignificantly influence the outcome of corporate actions requiring shareholderapproval.  As a result, these parties maybe in a position to control matters affecting the Company, including decisionsas to the Company’s direction and policies; future issuances of securities;incurrence of debt; amendments to the Company’s articles of incorporation andbylaws; payment of dividends on the Company’s common stock; and acquisitions,sales of the Company’s assets, mergers or similar transactions, includingtransactions involving a change of control. As a result, some investors may be unwilling to purchase the Company’scommon stock.  In addition, if the demandfor the Company’s common stock is reduced because of these shareholders’control of the Company, the price of the Company’s common stock could bematerially depressed.

 

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

 

Sales of a large number of shares of the Company’s common stock or theavailability of a large number of shares for sale could adversely affect themarket price of the Company’s common stock. As of December 31, 2005, the Company had 20,591,840 shares of commonstock outstanding.  Several of theCompany’s shareholders own substantial blocks of the Company’s commonstock.  Additionally, along with theshares of stock it currently owns, Northwest could own an additional largeblock of the Company’s common stock upon exercise of its warrant.  In connection with the ASA, the Companyentered into a registration rights agreement to register the shares of stockowned by Northwest (including those shares underlying its warrant).  Prior to entering into the ASA, Northwest hadpledged certain of these shares to Boeing Capital Corporation, and Boeing isalso a party to the registration rights agreement.  Although the registration statement has not beenfiled (and will not be filed until a final resolution is reached with respectto the ASA), following such registration, future sales of those shares, orfuture sales of other large blocks of the Company’s common stock that arealready registered, could substantially depress the Company’s stock price.

 

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

 

As of December 31, 2005, Northwest held a warrant exercisable for anaggregate of 4,112,500 shares of the Company’s common stock at an exerciseprice of $8.74 per share.  To date, thiswarrant has not vested, and it will not begin to vest until Northwest deliversCRJs to Mesaba and the Company and Northwest have successfully renegotiated theterms of the warrant.  If and when the warrantdoes vest, holders of the Company’s common stock could experience substantialownership dilution if Northwest elects to exercise its warrant.

 

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

 

In the past two fiscal years, the market price of the Company’s commonstock has ranged from a low of $4.50 per share to a high of $10.11 pershare.  Because the Company’s stock isthinly traded, its market price is sensitive and may continue to experiencesubstantial fluctuations due to a variety of factors, including the following:

 

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

•      securitiesanalysts’ estimates;

•      materialannouncements by the Company, Northwest or the Company’s, Mesaba’s or Big Sky’scompetitors;

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

 

42

----

 

•      increasedshort sales due to the uncertainty surrounding Mesaba’s bankruptcy; as well asany purchase to cover short positions;

•      regulatoryactions; or

•      generalmarket conditions.

 

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

 

The Company’s articles of incorporation and bylaws, along withMinnesota law, could discourage, delay or prevent persons from acquiring orattempting to acquire the Company.  TheCompany’s articles of incorporation authorize the board of directors, withoutaction by the Company’s shareholders, to designate and issue preferred stock inone or more series, with such rights, preferences and privileges as the boardof directors shall determine.  TheCompany’s articles of incorporation and bylaws also mandate a classified boardof directors, which makes changing control of the board more difficult.  The Company’s bylaws grant the board ofdirectors the authority to adopt, amend or repeal all or any of such bylaws,subject to the power of the shareholders to change or repeal such bylaws.  The Company’s bylaws also limit who may callmeetings of the Company’s shareholders.

 

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

 

43

----

 

**ITEM 6.  EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Document Description**                                                                                                                                                                                                                                                                                                                                  |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                      |
| 3.1                 |       | Amended and Restated Articles of Incorporation. Incorporated by  reference to Exhibit 4.1 to the Company’s Form 8-K filed on August 27, 2003.                                                                                                                                                                                                        |
| 3.2                 |       | Bylaws. Incorporated by reference to Exhibit 3.2 to the Company’s  Form 10-K filed June 14, 2005.                                                                                                                                                                                                                                                    |
| 4.1                 |       | Specimen certificate for shares of the Common Stock of the Company.  Incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed  August 27, 2003.                                                                                                                                                                                      |
| 4.2                 |       | Amended and Restated Warrant dated August 29, 2005 issued to  Northwest Airlines, Inc. Incorporated by reference to Exhibit 4.2 to the  Company’s Form 10-Q filed on November 14, 2005.                                                                                                                                                              |
| 4.3                 |       | Registration Rights Agreement dated as of August 29, 2005 among MAIR  Holdings, Inc., Northwest Airlines, Inc., Boeing Capital Loan Corporation and  U.S. Bank National Association.Incorporated by reference to Exhibit 4.3 to  the Company’s Form 10-Q filed on November 14, 2005.                                                                 |
| 10.1                |       | 1994 Stock Option Plan. Incorporated by reference to Exhibit 10.1 to  the Company’s Form 10-K filed June 14, 2005.                                                                                                                                                                                                                                   |
| 10.2                |       | 1996 Directors’ Option Plan. Incorporated by reference to Exhibit  10.2 to the Company’s Form 10-K filed June 14, 2005.                                                                                                                                                                                                                         |
| 10.3                |       | 2000 Stock Incentive Plan. Incorporated by reference to Exhibit 10.3  to the Company’s Form 10-K filed June 14, 2005.                                                                                                                                                                                                                                |
| 10.4                |       | Mesaba Aviation, Inc. 2003 Incentive Award Plan. Incorporated by  reference to Exhibit 10.4 to the Company’s Form 10-K filed June 14, 2005.                                                                                                                                                                                                          |
| 10.5                |       | Airline Services Agreement dated as of August 29, 2005 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 10.5 to the  Company’s Form 10-Q filed on November 14, 2005. |
| 10.6                |       | Agreement dated as of August 29, 2005 between MAIR Holdings, 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 10.6 to the Company’s Form 10-Q  filed on November 14, 2005.                     |
| 10.7                |       | Special Facilities Lease dated as of June 1, 1990 between Charter  County of Wayne, State of Michigan and Mesaba Aviation, Inc. Incorporated by  reference to Exhibit 10.7 to the Company’s Form 10-Q filed on November 14,  2005.                                                                                                                   |
| 10.8                |       | Ground Lease dated May 18, 1990 between Charter County of Wayne,  State of Michigan and Mesaba Aviation, Inc. Incorporated by reference to  Exhibit 10.8 to the Company’s Form 10-Q filed on November 14, 2005.                                                                                                                                      |
| 10.9                |       | Stock Purchase Agreement between the Company and Carl R. Pohlad dated  as of October 18, 1993. Incorporated by reference to Exhibit 10.10 to the  Company’s Form 10-K filed June 14, 2005.                                                                                                                                                           |
| 10.10               |       | Term Sheet Proposal for the Acquisition of Saab 340 Aircraft by  Mesaba Aviation, Inc. dated March 7, 1996 (certain portions of this document  have been deleted pursuant to an application for confidential treatment under  Rule 24b-2). Incorporated by reference to Exhibit 10U to the Company’s Form  10-K/A for the year ended March 31, 1996. |
| 10.11               |       | Letter Agreement regarding Saab 340B Plus Acquisition Financing dated  March 7, 1996 (certain portions of this document have been deleted pursuant  to an application for confidential treatment under Rule 24b-2). Incorporated  by reference to Exhibit 10V to the Company’s Form 10-K/A for the year ended  March 31, 1996.                       |
| 10.12               |       | Lease Agreement, dated as of July 1, 1999, between Kenton County  Airport Board and Mesaba Aviation, Inc. Incorporated by reference to Exhibit  10AA to the Company’s Form 10-K for the year ended March 31, 2000.                                                                                                                                   |
| 10.13               |       | 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.                                                                                                                                 |

 

44

----

 
| **Exhibit  Number** | ** ** | **Document Description**                                                                                                                                                                                                                                                      |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                          |
| 10.14               |       | Aircraft Hangar Facility Lease Agreement between Metropolitan  Airports Commission Minneapolis - St. Paul and Mesaba Aviation, Inc. dated  September 30, 2002. Incorporated by reference to Exhibit 10Y to the Company’s  Form 10-Q for the quarter ended June 30, 2003. |
| 10.15               |       | Lease between Spectrum Investment Group, L.L.C. and Mesaba Aviation,  Inc. entered into as of April 25, 2003. Incorporated by reference to Exhibit  10Z to the Company’s Form 10-Q for the quarter ended June 30, 2003.                                                  |
| 10.16               |       | Management Compensation Agreement between the Company and Paul F.  Foley, dated October 1, 2004. Incorporated by reference to Exhibit 10.1 to  the Company’s Current Report on Form 8-K filed on October 22, 2004.                                                       |
| 31.1                |       | Chief Executive Officer Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. Filed herewith.                                                                                                                                                             |
| 31.2                |       | Chief Financial Officer Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. Filed herewith.                                                                                                                                                             |
| 32.1                |       | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. Filed herewith.                                                                                                                                                                                     |

 

45

----

 

SIGNATURES

 

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

 
|                    | MAIR Holdings, Inc.                                                                                                              |
|-------------------------|----------------------------------------------------------------------------------------------------------------------------------|
|                    |                                                                                                                             |   |
|                    |                                                                                                                             |   |
| Dated: February 9, 2006 | By:                                                                                                                              | /s/ Robert E. Weil |   |
|                    | Robert E. Weil  Vice President, Chief Financial Officer and Treasurer (principal financial  officer and an authorized signatory) |

 

46

----