** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**x****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934.**

 

**For the quarterly period ended June 30, 2008**

** **

**OR**

 

**o****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE 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**

 

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

 

Yes x  No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

 

Yes o    No x

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 
| **Class**                                     | ** **   | **Outstanding  as of  June 30, 2008** |
|-----------------------------------------------|--------------|-------------------------------------------------|
| ***Common  Stock, par value $.01 per share*** | *** *** | ***15,083,049***                                |

 

 

 

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# **CAUTIONARY NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

# ** **

Statementsin this Quarterly Report on Form 10-Q of MAIR Holdings, Inc. (“MAIR”or the “Company”) under the caption “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and elsewhere in this report areforward-looking and are based upon information currently available to theCompany.  The Company, through itsofficers, directors or employees, may also from time to time make oralforward-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 I of the Company’s Annual Report on Form 10-K, filedwith the United States Securities and Exchange Commission (the “SEC”) on May 30,2008.

 

Unduereliance should not be placed on the Company’s forward-looking statementsbecause the matters they describe are subject to known and unknown risks,uncertainties and other unpredictable factors, many of which are beyond theCompany’s control.  The Company’s forward-looking statements are based oninformation currently available and speak only as of the date on which thisreport was filed with the SEC.  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.

 

Allsubsequent written or oral forward-looking statements attributable to theCompany or persons acting on the Company’s behalf are expressly qualified bythe factors described above.  The Company assumes no obligation, anddisclaims any obligation, to update information contained in this QuarterlyReport on Form 10-Q, including forward-looking statements, as a result offacts, events or circumstances after the date of this report, except asrequired by law in the normal course of its public disclosure practices.

 

2

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# ** **

# **PART I. FINANCIALINFORMATION**

# ** **

## ***Item 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS***

## *** ***

**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statements of Net Assets (Liquidation Basis)**

**(in thousands)**

**(Unaudited)**

** **
| ** **                                                       | ** ** | **June 30** | ** ** | **March 31** | ** ** |
|------------------------------------------------------------------|------------|------------------|------------|-------------------|------------|
| ** **                                                       | ** ** | **2008**         | ** ** | **2008**          | ** ** |
| ASSETS                                                           |       |             |       |              |       |
| CURRENT ASSETS:                                                  |       |             |       |              |       |
| Cash                                                             |       | $                | 12,462     |              | $          | 15,897 |   |
| Short-term investments                                           |       | 4,220            |       | 4,901             |       |
| Receivable from liquidating trust of Mesaba  Aviation, Inc. |       | 27,336           |       | —            |       |
| Accounts receivable, net                                         |       | 411              |       | 1,334             |       |
| Inventories                                                      |       | 434              |       | 784               |       |
| Prepaid expenses and deposits                                    |       | 1,759            |       | 2,156             |       |
| Assets held for sale                                             |       | 19,149           |       | 19,734            |       |
| Investments held for sale                                        |       | 5,610            |       | 6,402             |       |
| Assets held for use                                              |       | 18               |       | 568               |       |
| Restricted cash                                                  |       | 13,153           |       | 13,330            |       |
| Total current assets                                             |       | $                | 84,552     |              | $          | 65,106 |   |
|                                                             |       |             |       |              |       |
| LIABILITIES  AND NET ASSETS AVAILABLE TO COMMON SHAREHOLDERS     |       |             |       |              |       |
| CURRENT LIABILITIES:                                             |       |             |       |              |       |
| Accounts payable                                                 |       | $                | 1,635      |              | $          | 3,401 |   |
| Accrued liabilities:                                             |       |             |       |              |       |
| Payroll                                                          |       | 1,251            |       | 1,922             |       |
| Accrued liquidation costs                                        |       | 3,152            |       | 4,808             |       |
| Other current liabilities                                        |       | 14,170           |       | 15,971            |       |
| Total current liabilities                                        |       | 20,208           |       | 26,102            |       |
| Net assets available to common shareholders                      |       | $                | 64,344     |              | $          | 39,004 |   |

 

**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statement of Changes in Net Assets**

**(in thousands)**

**(Unaudited)**

** **
| Net assets available to common shareholders  March 31, 2008 |   | $      | 39,004 |   |
|------------------------------------------------------------------|--------|--------|--------|--------|
| Receivable from liquidating trust of Mesaba  Aviation, Inc. |   | 27,336 |   |
| Costs incurred for the three months ended  June 30, 2008    |   | (1,996 | )      |
| Change in net assets in liquidation                              |   | 25,340 |   |
| Net assets available to common shareholders  June 30, 2008  |   | $      | 64,344 |   |

 

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

 

3

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**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statement of Operations**

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

**(Unaudited)**

** **
| ** **                                      | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **June 30**                 | ** ** |
| ** **                                      | ** ** | **2007**                         | ** ** |
| OPERATING REVENUES:                             |       |                             |       |
| Passenger                                       |       | $                                | 4,390      |   |
| EAS and other                                   |       | 2,720                            |       |
| Total operating revenues                        |       | 7,110                            |       |
| OPERATING EXPENSES:                             |       |                             |       |
| Wages and benefits                              |       | 4,009                            |       |
| Aircraft fuel                                   |       | 1,888                            |       |
| Aircraft maintenance                            |       | 1,075                            |       |
| Aircraft rents                                  |       | 453                              |       |
| Landing fees                                    |       | 177                              |       |
| Insurance and taxes                             |       | 328                              |       |
| Depreciation and amortization                   |       | 202                              |       |
| Administrative and other                        |       | 3,438                            |       |
| Total operating expenses                        |       | 11,570                           |       |
| Operating loss                                  |       | (4,460                           | )          |
| NONOPERATING INCOME (EXPENSE):                  |       |                             |       |
| Damage claim income from Mesaba Aviation,  Inc. |       | 9,429                            |       |
| Interest income and other                       |       | 1,653                            |       |
| Interest expense                                |       | (193                             | )          |
| Nonoperating income, net                        |       | 10,889                           |       |
| Income before benefit for income taxes          |       | 6,429                            |       |
|                                            |       |                             |       |
| BENEFIT FOR INCOME TAXES                        |       | 67                               |       |
|                                            |       |                             |       |
| NET INCOME                                      |       | $                                | 6,496      |   |
|                                            |       |                             |       |
| NET INCOME PER SHARE:                           |       |                             |       |
| Income per common share - basic                 |       | $                                | 0.43       |   |
| Income per common share - diluted               |       | $                                | 0.43       |   |
|                                            |       |                             |       |
| WEIGHTED AVERAGE SHARES OUTSTANDING:            |       |                             |       |
| Basic                                           |       | 15,016                           |       |
| Diluted                                         |       | 15,086                           |       |

** **

The accompanying notes are an integral part of this condensedconsolidated financial statement.

 

4

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** **

**MAIRHOLDINGS, INC. AND SUBSIDIARIES**

**CondensedConsolidated Statement of Cash Flows**

**(inthousands)**

**(Unaudited)**

** **
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **June 30**                 | ** ** |
| ** **                                                                     | ** ** | **2007**                         | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                          |       |                             |       |
|                                                                           |       |                             |       |
| Net income                                                                     |       | $                                | 6,496      |   |
| Adjustments to reconcile net income to net  cash used in operating activities: |       |                             |       |
| Depreciation and amortization                                                  |       | 202                              |       |
| Amortization of deferred credits                                               |       | (27                              | )          |
| Stock-based compensation                                                       |       | 43                               |       |
| Amortization of investment premiums                                            |       | (218                             | )          |
| Mesaba Aviation, Inc. tax payable  settlement                             |       | (813                             | )          |
| Changes in current operating items:                                            |       |                             |       |
| Accounts receivable                                                            |       | (523                             | )          |
| Inventories                                                                    |       | (176                             | )          |
| Prepaid expenses and deposits                                                  |       | 75                               |       |
| Receivable from liquidating trust of Mesaba  Aviation, Inc.               |       | (9,429                           | )          |
| Accounts payable and other                                                     |       | (245                             | )          |
| Net cash used in operating activities                                          |       | (4,615                           | )          |
|                                                                           |       |                             |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                          |       |                             |       |
| Purchases of investments                                                       |       | (8,667                           | )          |
| Proceeds from sale of investments                                              |       | 15,865                           |       |
| Purchases of property and equipment                                            |       | (374                             | )          |
| Proceeds from sale of property and  equipment                                  |       | 4                                |       |
| Change in restricted cash                                                      |       | (127                             | )          |
| Net cash provided by investing activities                                      |       | 6,701                            |       |
|                                                                           |       |                             |       |
| CASH FLOWS FROM FINANCING ACTIVITIES                                           |       |                             |       |
| Purchase of other noncurrent liabilities                                       |       | 1                                |       |
| Payment of long term debt and capital  leases                                  |       | (36                              | )          |
| Proceeds from exercise of stock options                                        |       | 358                              |       |
| Net cash provided by financing activities                                      |       | 323                              |       |
|                                                                           |       |                             |       |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                      |       | 2,409                            |       |
| CASH AND CASH EQUIVALENTS:                                                     |       |                             |       |
| Beginning of period                                                            |       | 28,593                           |       |
| End of period                                                                  |       | $                                | 31,002     |   |
|                                                                           |       |                             |       |
| SUPPLEMENTARY CASH FLOW INFORMATION:                                           |       |                             |       |
| Cash paid during the year for:                                                 |       |                             |       |
| Interest                                                                       |       | $                                | 25         |   |
| Income taxes                                                                   |       | 140                              |       |
|                                                                           |       |                             |       |
| SUPPLEMENTARY NON-CASH ACTIVITY:                                               |       |                             |       |
| Capital expenditures in accounts payable                                       |       | $                                | 206        |   |

 

The accompanying notes are an integral partof this condensed consolidated financial statement.

 

5

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**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**Notes to Condensed Consolidated Financial Statements**

**(Unaudited)**

 

Thecondensed consolidated financial statements included herein have been preparedby the Company without audit, pursuant to the rules and regulations of theSEC.  The information furnished in thecondensed consolidated financial statements includes normal recurringadjustments, unless otherwise noted, and reflects all adjustments that are, inthe opinion of management, necessary for the fair presentation of suchcondensed consolidated financial statements. The Company’s business was seasonal and, accordingly, interim resultsare not indicative of results for a full year. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) have been condensedor omitted pursuant to such rules and regulations, although the Companybelieves that the disclosures are adequate to make the information presentednot misleading.  These condensedconsolidated financial statements should be read in conjunction with the consolidatedfinancial statements for the year ended March 31, 2008, and the notesthereto, included in the Company’s Annual Report on Form 10-K filed withthe SEC on May 30, 2008.

 

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

 

MAIRis the holding company for Big Sky Transportation Co. (“Big Sky”), a regionalair carrier based in Billings, Montana that ceased operations on March 8,2008.  Until April 24, 2007, MAIRwas also the holding company for Mesaba Aviation, Inc. (“Mesaba”), aregional air carrier based in Minneapolis, Minnesota.  The Company’s consolidated financialstatements include the accounts of MAIR and Big Sky, as well as Mesaba untilMesaba’s bankruptcy filing on October 13, 2005 (the “Petition Date”).  All intercompany transactions and balanceshave been eliminated in consolidation. As discussed in Note 11 the accounts of Mesaba were deconsolidated fromthe Company’s condensed consolidated financial statements effective as of thePetition Date.

 

Duringfiscal year 2008, the Company made the decision to pursue an orderlyliquidation of the Company and return all excess cash to the Company’sshareholders.  This decision was madefollowing Mesaba’s exit from bankruptcy on April 24, 2007 as awholly-owned subsidiary of Northwest Airlines, Inc. (“Northwest”), and theCompany’s conclusion that Big Sky’s 19-seat operation was not viable and thatexisting growth and acquisition opportunities were not economicallyjustifiable.  On March 8, 2008, BigSky ceased all operations.  Infurtherance of the Company’s goal of returning excess cash to its shareholdersonce Big Sky’s future was determined, MAIR’s Board of Directors directedmanagement to prepare a formal plan of liquidation under which the Companywould convert its assets into cash, pay its creditors and return remaining cashto its shareholders.  At a SpecialMeeting of Shareholders held on June 25, 2008, the Company’s shareholdersapproved the proposed Plan of Liquidation. The Company’s business activities are now related solely to winding upits affairs, paying or contesting liabilities and claims and distributing anyremaining assets to the Company’s shareholders. In accordance with the company’s Plan of Liquidation, the Company’sstock was delisted from the NASDAQ Stock Exchange on July 7, 2008.  The Company also directed its transfer agentto cease recording transfers of the Company’s stock on July 7, 2008 andset July 7, 2008 as the record date for all liquidating distributions.

 

TheCompany adopted the liquidation basis of accounting effective March 9,2008. This basis of accounting is considered appropriate when, among otherthings, liquidation of a company is probable and the net realizable values ofassets are reasonably determinable. Under this basis of accounting, assets are valued at their netrealizable values and liabilities are stated at their estimated settlementamounts.  The conversion to theliquidation basis of accounting required management to make significantestimates and judgments to record assets at estimated net realizable values andliabilities at estimated settlement amounts. Consistent with the liquidation basis of accounting, the Company’sAnnual Report on Form 10-K, filed with the SEC on May 30, 2008,contained a consolidated statement of net assets as of March 31, 2008 anda consolidated statement of changes in net assets for the period March 9,2008 to March 31, 2008.  Consistentwith that presentation, for the three months ended June 30, 2008, theCompany is presenting a condensed consolidated statement of net assets and acondensed consolidated statement of changes in net assets.  Under the liquidation basis of accounting,the Company will no longer report a statement of operations or a statement ofcash flows.

 

6

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**Operations**

 

UntilMarch 8, 2008, Big Sky operated as a regional air carrier based inBillings, Montana, providing scheduled passenger, freight, express package andcharter services.  Big Sky participatedin the essential air service (“EAS”) program with the Department ofTransportation.  The EAS programsubsidizes air carriers to provide air service to designated rural communitiesthroughout the country that could not otherwise economically justify thatservice based on their passenger traffic. The Department of Transportation pays EAS subsidies for each departurein a covered market. During the three months ended June 30, 2007, Big Skyrecognized revenue from EAS subsidies of $2.1 million.

 

OnMarch 12, 2007, Big Sky expanded its operations to the east coast througha Hosted Prorate Agreement with Delta Airlines, Inc. (“Delta”) governingthe Boston operation, and in connection with that operation, Big Sky purchasedseven Beechcraft 1900D aircraft. However, due to substantial losses incurred during November and December 2007,Big Sky and Delta mutually agreed for Big Sky to cease its Delta connectionoperations in the eastern United States in January 2008.  Because it became uneconomical for MAIR tocontinue funding Big Sky’s losses, Big Sky ceased all remaining operations on March 8,2008.  The Company is now in the processof winding up its operations, addressing outstanding liabilities andliquidating its assets.

 

*Use of Estimates*

 

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities, as well asthe reported amounts of changes in net assets. The most significant use of estimates relates to the reported estimated valueof net realizable assets and settlement of liabilities.  Ultimate results could differ from thoseestimates.

 

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

 

On February 28, 2006, as a part of Mesaba’s bankruptcyproceedings, MAIR filed a proof of claim against Mesaba, with no recognition ofthis claim in the Company’s consolidated financial statements due to thesignificant uncertainty of any amount being ultimately collected.  In April 2007, the Bankruptcy Courtapproved a compromise for MAIR’s damage claim under which Mesaba allowed MAIR aclaim of up to $6.2 million relating to repayment of the guaranty of Mesaba’shangar lease at the Cincinnati/Northern Kentucky International Airport andmanagement fees.  Additionally, pursuantto a Stock Purchase Agreement between MAIR and Northwest, Northwest assignedits $7.3 million allowed claim against Mesaba to MAIR.  Therefore, as of April 24, 2007, thedate Mesaba exited bankruptcy (the “Exit Date”), MAIR’s unsecured creditors’claim in Mesaba’s bankruptcy totaled $13.5 million.

 

InJuly 2007, Mesaba’s liquidating trust made an interim distribution of 70%to all claimholders with allowed undisputed claims.  MAIR received $9.4 million of its $13.5million claim, which reflects the 70% interim distribution of its claim.  MAIR recorded these amounts as “Damage claimincome from Mesaba Aviation, Inc.” within the condensed consolidatedstatement of operations.

 

**3.****             ****Subsequent Events**

 

InJuly 2008, the trustee for Mesaba’s liquidating trust advised that it hadreached settlements regarding the two remaining significant claims with SaabLeasing and Goldman Sachs Credit Partners, L.P. and paid the remaining portiondue on all of the allowed unsecured claims, including $4.0 million to theCompany for MAIR’s unsecured claim.  Thetrustee also paid interest due on the unsecured claims, for which MAIR received$1.3 million.  Finally, on July 15,2008, the trustee distributed $22.0 million to MAIR for its equity interest inthe trust.  These amounts are recorded asreceivable from liquidating trust of Mesaba Aviation, Inc. in thecondensed consolidated statement of net assets as of June 30, 2008.  After all remaining expenses are paid and thetwo minor unsecured claims on appeal are resolved, MAIR expects that it couldreceive an additional $3.0 million for its equity interest in the trust.

 

In July 2008, Big Skysold two of its seven Beechcraft1900D aircraft at prices that approximated the carrying value.

 

7

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**4.****             ****Investments**

 

Investments consist principally of government, agency, corporate andmunicipal securities and are reported at fair market value.

 

As of June 30, 2008 and March 31, 2008, cash and investmentstotaled $22.3 million and $27.2 million, respectively.  As of June 30, 2008 and March 31,2008, the fair value of short-term investments totaled $4.2 million and $4.9million, respectively, and are considered to be securities available forsale.  As of June 30, 2008 and March 31,2008, the fair value of investments held for sale totaled $5.6 million and $6.4million, respectively, and are classified as investments held for sale.

 

Forthe three months ended June 30, 2008 and 2007, the Company’s gross unrealizedgains and losses were insignificant.

 

**5.****             ****Income Taxes**

 

SFASNo. 109, *Accounting for Income Taxes*,requires that all available evidence, both positive and negative be consideredto determine whether, based on the weight of that evidence, a valuationallowance is needed.  Future realizationof the tax benefits of an existing deductible temporary difference orcarryforward ultimately depends on the existence of sufficient taxable incomeof the appropriate character within the carryback or carryforward periodsavailable under the tax law.

 

TheCompany has performed such an analysis, and a full valuation allowance wasprovided at the end of fiscal 2006. The Company continues to record a fullvaluation allowance against its remaining deferred tax assets due to theuncertainty regarding the ultimate realization of those assets.  The Company will be required to update itsestimates of future taxable income based upon additional information managementobtains, and the Company will continue to evaluate the realizability of thedeferred tax assets on a quarterly basis.

 

TheCompany will file a consolidated federal income tax return for fiscal 2008which will include Mesaba’s income through the Exit Date.  Taxable income for both the Company andMesaba will be offset by the utilization of net operating loss carryforwardsfrom prior periods.   The equity MAIRreceives from the trust will have no tax effect as it will be treated as acapital contribution.

 

TheCompany’s adoption of the provisions of the Financial Accounting StandardsBoard (“FASB”) Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes,* (“FIN 48”) on April 1, 2007 did notimpact the Company’s consolidated financial statements. As of the adoption, thetotal amount of unrealized tax benefits for uncertain tax positions was $0.5million, which is classified as other current liabilities.  Of this amount, $0.3 million would affect theCompany’s effective tax rate if realized. It is not expected that the amount of unrealized tax benefit willsignificantly change within the next twelve months.

 

TheCompany’s continuing practice is to classify interest and penalties, if any, onuncertain tax positions as components of the provision for income taxes.  The total amount of interest and penaltyaccrued as of June 30, 2008 was insignificant.

 

TheCompany and its subsidiaries file a consolidated federal income tax return andvarious state income tax returns.  As ofthe date of adoption of FIN 48, the Company is generally no longer subject toU.S. federal and state income tax examinations by tax authorities for yearsprior to fiscal 2004.

 

**6.****             ****Stock-Based Compensation**

 

*Stock Option Plans*

 

The Company had approved stockoption plans for key employees, directors, consultants and advisors to theCompany.  As of June 30, 2008, options had been granted and wereoutstanding under the Company’s 1994 Stock Option Plan, 1996 Director StockOption Plan and 2000 Stock Incentive Plan.  The 2000 Stock Incentive Planhad a provision that automatically increased the authorized shares availablefor grant on September 1 of each year by the lesser of 300,000 or 1% ofthe then outstanding common shares.  Under the plans, the compensationcommittee of

 

8

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theboard of directors granted the options and determined the vesting and exerciseperiods at the time of the award.  The purchase price of the stock fornon-qualified and incentive stock options was determined at the time of theaward and was equal to the fair market value at the time of the award.

 

Inaccordance with the Company’s Plan of Liquidation approved by the Company’sshareholders on June 25, 2008, the Company voluntarily delisted its stockfrom the NASDAQ Stock Exchange effective July 7, 2008.  The Company also directed its transfer agentto cease recording transfers of shares on that date, and July 7, 2008 wasset as the record date for all liquidating distributions made by theCompany.  As a result, all unexercisedstock options outstanding as of July 7, 2008 were effectively cancelled.

 

Thefair value of each option grant was estimated on the date of grant using theBlack-Scholes option pricing model with the following assumptions:  risk-free interest rate, stock pricevolatility and expected life.  TheCompany established the risk-free interest rate using the U.S. Treasury yieldcurve as of the grant date.  The expectedvolatility assumption was set based primarily on historical volatility.  For options granted, the Company amortizedthe fair value on a straight-line basis over the vesting period of the options.

 

Foreach of the three months ended June 30, 2008 and 2007, SFAS 123R’s fairvalue method resulted in expense in the amount of $0.1 million related to stockoptions.  These amounts are included inthe “Wages and benefits” caption in the accompanying condensed consolidatedstatement of operations for the three months ended June 30, 2007 and inthe condensed consolidated statement of changes in net assets for the threemonths ended June 30, 2008.  SFAS123R also requires the benefits of tax deductions in excess of recognizedcompensation cost to be reported as a financing cash flow, rather than as anoperating cash flow as required prior to SFAS 123R.  As of June 30, 2007, the Company had noexcess tax benefits related to SFAS 123R; therefore there was no effect on theCompany’s condensed consolidated statement of cash flows.

 

A summary of stock option activity since the Company’s most recentfiscal year end is as follows:

 
| ** **                                       | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **         | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **         | ** ** |
|--------------------------------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|--------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|--------------------|------------|
| ** **                                       | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **         | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **         | ** ** |
| ** **                                       | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**      | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**      | ** ** |
| ** **                                       | ** ** | **Options**     | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**      | ** ** | **Options**     | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**      | ** ** |
| ** **                                       | ** ** | **Outstanding** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**          | ** ** | **Exercisable** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**          | ** ** |
|                                             |       |            |       |         |       |            |       | **(in thousands)** |       |            |       |         |       |            |       | **(in thousands)** |       |
| Balance at March 31, 2008                   |       | 835,000         |       | $            | 6.78       |            |       |               |       |            |       |         |       |            |       |               |       |   |
| Granted                                          |       | —          |       |         |       |            |       |               |       |            |       |         |       |            |       |               |       |
| Exercised                                        |       | —          |       |         |       |            |       |               |       |            |       |         |       |            |       |               |       |
| Expired / Cancelled                              |       | —          |       |         |       |            |       |               |       |            |       |         |       |            |       |               |       |
| Balance at June 30, 2008                    |       | 835,000         |       | 6.78         |       | 4.4             |       | $                  | —     |            | 763,750    |         | 6.76       |            | 4.2        |               | $          | — |   |
| Vested or expected to vest at June 30, 2008 |       | 763,750         |       | 6.76         |       | 4.2             |       | $                  | —     |            |       |         |       |            |       |               |       |   |
|                                                  |            |                 |            |              |            |                 |            |                    |            |                 |            |              |            |                 |            |                    |            |  |  |  |

 

Theaggregate intrinsic value of options outstanding at June 30, 2008 waszero.  The aggregate intrinsic value ofoptions exercised during the three months ended June 30, 2007 was notsignificant.  No options vested duringthe three months ended June 30, 2008.

 

*Unrecognized Compensation*

 

As of June 30, 2008, the Company had aninsignificant amount of unrecognized compensation cost related to non-vestedstock option compensation arrangements granted under all equity compensationplans.

 

**7.****             ****Earnings Per Share**

 

Basicearnings per common share is computed by dividing net income by the weightedaverage number of shares of common stock outstanding during the year.  Diluted earnings per share is computed bydividing net income by the sum of the weighted average number of shares ofcommon stock outstanding plus all additional common stock that would have beenoutstanding if potentially dilutive common shares related to stock options andwarrants had been exercised.  Stockoptions and warrants with an exercise price exceeding the fair market value ofthe Company’s common stock at quarter-end are considered antidilutive and areexcluded from the calculation.

 

9

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The following table reconciles the number of shares utilized in theearnings per share calculations for the three months ended June 30, 2007,in thousands, except per share data:

 
| Net income                                                                                |   | $      | 6,496  |   |
|-------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Net income per share - basic:                                                             |   |   |   |
| Weighted average number of issued shares  outstanding                                     |   | 15,016 |   |
| Effect of dilutive securities:                                                            |   |   |   |
| Computed shares outstanding under stock  option plans utilizing the treasury stock method |   | 70     |   |
| Net income per share - diluted:                                                           |   |   |   |
| Weighted average common and potentially dilutive  common shares outstanding               |   | 15,086 |   |
|                                                                                      |   |   |   |
| Net income per share - basic                                                              |   | $      | 0.43   |   |
| Net income per share - diluted                                                            |   | $      | 0.43   |   |
|                                                                                      |   |   |   |
| Antidilutive options and warrants                                                         |   | 425    |   |

 

**8.****             ****Comprehensive Income**

 

The following table presents the calculation of comprehensive incomefor the three months ended June 30, 2007, in thousands:

 
| Net income                                                         |   | $   | 6,496 |   |
|--------------------------------------------------------------------|--------|-----|-------|--------|
| Unrealized losses on investments classified  as available for sale |   | (70 | )     |
| Comprehensive income                                               |   | $   | 6,426 |   |

 

**9.****             ****Segment Information**

 

TheCompany follows the provisions of SFAS No. 131, *Disclosuresabout Segments of an Enterprise and Related Information*. SFAS No. 131establishes annual and interim reporting standards for an enterprise’s businesssegments and related disclosures about its products, services, geographic areasand major customers. The method for determining what information to report isbased upon the way management organizes the operating segments within theCompany for making operating decisions and assessing financial performance. AlthoughMesaba was deconsolidated from the Company’s consolidated financial statementsas of the Petition Date, the segment information presented below continues toinclude Mesaba in accordance with SFAS No. 131 and related guidance forequity-method investees. Mesaba’s results of operations after the Petition Dateare included in the “Eliminations” column.

 

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Operating segment information for Mesaba, BigSky and MAIR were as follows, in thousands:

 
| ** **                                | ** ** | **Mesaba** | ** ** | **Big Sky** | ** ** | **MAIR** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|------------|------------|------------------|------------|----------|------------|------------------|------------|------------------|------------|
| *Three Months Ended June 30, 2008*   |       |       |       |             |       |     |       |             |       |             |       |
| Current assets                            |       | $          | —     |             | $          | 21,758   |       | $                | 124,040    |             | $          | (61,246 | ) | $ | 84,552 |   |
| Total assets                              |       | —     |       | 21,758           |       | 124,040  |       | (61,246          | )          | 84,552           |       |
| Current liabilities                       |       | —     |       | 37,282           |       | 16,816   |       | (33,890          | )          | 20,208           |       |
| *Three Months Ended June 30, 2007*   |       |       |       |             |       |     |       |             |       |             |       |
| Operating revenues                        |       | 14,842     |       | 7,110            |       | —   |       | (14,842          | )          | 7,110            |       |
| Operating expenses                        |       | 15,831     |       | 9,394            |       | 2,176    |       | (15,831          | )          | 11,570           |       |
| Depreciation and amortization             |       | 433        |       | 198              |       | 4        |       | (433             | )          | 202              |       |
| Interest expense                          |       | —     |       | 97               |       | 167      |       | (71              | )          | 193              |       |
| Reorganization items, net                 |       | 40,367     |       | —           |       | —   |       | (40,367          | )          | —           |       |
| Income (loss) before income taxes         |       | 83,528     |       | (2,378           | )          | 8,807    |       | (83,528          | )          | 6,429            |       |
| Capital expenditures                      |       | —     |       | 370              |       | 4        |       | —           |       | 374              |       |
| Current assets                            |       | —     |       | 9,911            |       | 59,237   |       | (5,833           | )          | 63,315           |       |
| Total assets                              |       | —     |       | 14,143           |       | 112,900  |       | (29,365          | )          | 97,678           |       |
| Current liabilities                       |       | —     |       | 10,539           |       | 17,644   |       | (5,833           | )          | 22,350           |       |
| Total stockholders’ (deficit) equity |       | —     |       | 2,549            |       | 95,016   |       | (23,532          | )          | 74,033           |       |
|                                           |            |            |            |                  |            |          |            |                  |            |                  |            |  |  |  |  |  |

 

**10.****      ****Commitments and Contingencies**

 

*Benefit Plan*

 

UntilApril 15, 2008, when the plan was terminated, Big Sky maintained a 401(k) benefitplan covering substantially all of its employees whereby Big Sky matched 30% ofemployee contributions to the plan, up to 5% of each employee’s eligibleearnings. Big Sky’s contribution to the plan was not significant in fiscal 2008or 2007.

 

UntilApril 30, 2007, MAIR maintained its own 401(k) benefit plan coveringall of its employees whereby MAIR matched 50%, 75% or 100%, depending on lengthof employment, of employee contributions to the plan, up to 8% of each employee’seligible earnings. MAIR’s contribution to the plan was not significant infiscal 2008 or 2007.

 

BetweenApril 30, 2007 and April 15, 2008, MAIR participated in Big Sky’s 401(k) benefitplan. On April 15, 2008, the 401(k) plan was terminated and allinvested funds were distributed in accordance with the participants’instructions.

 

*Mesaba Bankruptcy*

 

FollowingMesaba’s exit from bankruptcy on April 24, 2007, Mesaba’s estate has beenadministered via a liquidating trust. As the former equity owner of Mesaba,MAIR will receive all funds remaining in the liquidating trust after theunsecured creditors are paid and after the expenses of the trust are paid. On July 15,2008, MAIR received a $22 million equity distribution from the trust. MAIRexpects that after the trust pays all remaining expenses and resolves the minorclaims that remain, MAIR could receive an additional $3 million in equitydistributions from the trust. MAIR records equity distributions from the trustwhen received.

* *

*Guaranty*

 

Priorto its bankruptcy, Mesaba leased a facility at the Cincinnati/Northern KentuckyInternational Airport, but vacated the facility and ceased making the requiredlease payments in November 2005. In 1999, MAIR unconditionally guaranteedfull and prompt payment of the ground lease and the bonds associated with theinitial financing of the facility. In accordance with this guaranty, MAIR hasmade the required bond and ground lease payments due since November 2005. InApril 2006, in exchange for the bondholders forbearing acceleration of thebonds, MAIR delivered a letter of credit to the bondholders to assure paymentof the bonds. Subsequently, Mesaba rejected the facilities lease associatedwith the facility, but assumed and assigned the related ground lease to MAIR. TheAirport Board consented to the assignment of the ground lease.

 

InAugust 2007, MAIR and the bondholders amended the original forbearance toallow MAIR until November 1, 2008 to identify a new tenant and execute asublease for the property. As of December 31, 2005, MAIR recorded a $4.8million liability with respect to the lease and guaranty, which assumed thatthe facility would remain vacant for two years, during which time MAIR wouldcontinue to make the bond and lease payments, and that thereafter

 

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MAIRwould be able to sublease the facility at a 20% discount. As of December 31,2007, MAIR recorded an additional $10.2 million liability, which assumed thatMAIR would pay the bondholders in full on or before November 1, 2008. Thisimpairment charge was based on negotiations between MAIR and the bondholders topay off the remaining bond balance and negotiations between MAIR and theairport regarding the ground lease.

 

Theletter of credit was issued by First Interstate Bank of Billings and iscurrently fully collateralized by MAIR’s cash account held at First InterstateBank. Under the agreement with the bondholders, MAIR is obligated to maintainthe letter of credit until all obligations under the bonds are satisfied. MAIR’sannual obligations with respect to the bonds and the ground lease for thefacility total approximately $1.2 million and are scheduled to continue throughJuly 2029 and increase at specified intervals in accordance with the termsof the bond documents.

 

Thebondholder agreement and the letter of credit provide that the amount of theletter of credit will automatically decrease each July in accordance withthe redemption schedule for the bonds. The bondholders may draw on the letterof credit upon the occurrence of an event of default under its agreement withMAIR, including if MAIR fails to make any payment when due to the bondholders,if MAIR fails to provide evidence that the letter of credit has been renewedannually (or if MAIR fails to renew the letter of credit), if the bondholdersreceive notice from First Interstate Bank of the bank’s intent not to renew theletter of credit, if the bonds become subject to mandatory redemption, if MAIRfails to comply with the terms of its agreement with the bondholders or if MAIRcommits any event of default under its guaranty of Mesaba’s bond obligations. Thecash supporting the letter of credit was classified as “Restricted cash” on theCompany’s condensed consolidated net assets as of June 30, 2008 and March 31,2008.

 

MAIRhas been negotiating with the airport and the bondholders regarding prepayingthe bonds and terminating the Ground Lease.

 

*Other Guaranties*

 

BigSky recorded $0.5 million of restricted cash in fiscal 2008 for certificates ofdeposit supporting letters of credit of $0.4 million for workers’ compensationinsurance. In May 2007 Big Sky established a $0.1 million certificate ofdeposit supporting a customs bond required for the June 2007 servicebetween Boston, Massachusetts and Quebec City and Fredericton, Canada. Big Skyhas been negotiating with both entities to reduce or return both the letters ofcredit and the customs bond.

 

*MAIR Pledge for Big Sky*

 

In August 2006, MAIR entered into a pledge agreement with U.S.Bank, pursuant to which MAIR pledged $0.8 million in exchange for U.S. Bankreducing the amount of funds that it held back from Big Sky when credit cardpayments were processed. U.S. Bank processed payments for Big Sky tickets madewith various credit cards. In the past, and consistent with industry practice,U.S. Bank held back a specified portion of those credit card payments until thetickets had been used. MAIR agreed to pledge its cash in lieu of the requiredhold back, which subsequently freed up those funds for Big Sky’s use. While BigSky was operating, MAIR was free to request a release of its collateral at anytime. Following such a request, U.S. Bank would again begin holding backamounts from Big Sky, and MAIR’s collateral would be returned 90 days after theheld back amounts total the requisite level pursuant to U.S. Bank’s credit cardprocessing policies. The amount of cash pledged is not recorded as restrictedcash. As of July 7, 2008, the amount of the pledge was reduced to $40,000.

 

*Litigation*

 

OnJune 4, 2008, the United Transportation Union Local 15 and PhoenixAcquisitions, LLC filed a lawsuit against MAIR and Big Sky. The lawsuit wasfiled in the United States District Court for the District of Montana. TheComplaint asserts claims for breach of contract/violation of the Railway LaborAct, wrongful discharge and tortious interference with prospective businessadvantage, all in connection with Big Sky’s cessation of service and the Company’sdecision to pursue dissolution and liquidation. The Company and Big Sky do notbelieve this lawsuit has any merit and believe they have acted properly withrespect to Big Sky’s shutdown. Accordingly, the Company and Big Sky have fileda motion to dismiss the lawsuit. The court has not yet ruled on the motion.

 

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

 

Mesabafiled a voluntary petition for relief under Chapter 11 of the Bankruptcy Codein the Bankruptcy Court on the Petition Date, after which Mesaba operated itsbusiness as a debtor-in-possession pursuant to the Bankruptcy Code. Mesabafiled its plan of reorganization on January 22, 2007, which provided forMesaba to exit bankruptcy as a wholly-owned subsidiary of Northwest. The planof reorganization was approved by the Bankruptcy Court on April 9, 2007. OnApril 24, 2007, the plan of reorganization became effective and Mesabaexited bankruptcy as a wholly-owned subsidiary of Northwest, and, therefore,was no longer owned by MAIR.

 

Dueto Mesaba’s bankruptcy and the uncertainties surrounding the nature, timing,and specifics of the bankruptcy proceedings, MAIR deconsolidated Mesaba’sfinancial results effective as of the Petition Date. As a result, Mesaba’sassets and liabilities have been removed from the Company’s consolidatedbalance sheet as of the Petition Date and through April 24, 2007. Mesaba’sresults of operations have been removed from the Company’s consolidated resultsof operations and cash flows since the Petition Date, but continue to beincluded in such consolidated financial statements for periods prior to thePetition Date.

 

Inaccordance with APB Opinion No. 18, **The Equity Method of Accounting forInvestments in Common Stock****,**MAIR accounted for Mesaba’s financial resultsunder the equity method of accounting following Mesaba’s bankruptcy filing onthe Petition Date. For the period from April 1, 2007 through the ExitDate, Mesaba reported net income of $83.5 million (unaudited). Upon Mesaba’semergence from bankruptcy and the corresponding transfer of MAIR’s equity inMesaba to Northwest, MAIR lost its ability to significantly influence Mesaba;therefore, the Company did not record any portion of Mesaba’s income under theequity method of accounting.

 

Theprovisions of Statement of Position 90-7, *Financial Reporting byEntities in Reorganization Under the Bankruptcy Code* (“SOP 90-7”),applied to Mesaba’s financial statements while Mesaba operated under the provisionsof Chapter 11 of the Bankruptcy Code. SOP 90-7 does not change the applicationof GAAP in the preparation of financial statements. However, SOP 90-7 doesrequire that the financial statements, for periods including and subsequent tothe filing of the Chapter 11 petition, distinguish transactions and events thatare directly associated with the reorganization from the ongoing operations ofthe business.

 

Asa result of the April 2007 settlement of MAIR’s proof of claim in Mesaba’sbankruptcy proceedings, MAIR may be responsible for certain of Mesaba’s taxobligations incurred through April 24, 2007, the effective date of Mesaba’splan of reorganization, for those states in which MAIR and Mesaba historicallyfiled a unitary tax return. Although management does not believe there is anyremaining exposure, under the settlement between MAIR and Mesaba, Mesaba agreedto relinquish its right to the $0.8 million intercompany balance so that MAIRcan use these funds to pay any Mesaba tax obligations that taxing authoritiesseek to collect from MAIR.

 

OnJanuary 22, 2007, Mesaba and Northwest entered into a Stock Purchase andReorganization Agreement (the “SPRA”), under which Northwest agreed to allowMesaba a $145 million claim in Northwest’s bankruptcy case. In exchange, Mesabaagreed to file a plan of reorganization under which Mesaba’s existing equitywould be cancelled and new equity would be issued to Northwest, making Mesaba awholly-owned operating subsidiary of Northwest.

 

TheSPRA authorized Mesaba to monetize its $145 million claim against Northwest toprovide Mesaba’s bankruptcy estate with cash to satisfy creditors’ claims. Mesaba’screditors’ committee conducted an auction on January 29, 2007, after whichThe Goldman Sachs Group, Inc. (the “Goldman Group”) and Mesaba enteredinto a forward contract by which the Goldman Group purchased the $145 millionclaim for approximately $125 million. The closing of the sale to the GoldmanGroup was contingent upon Northwest’s bankruptcy court allowing the $145 millionclaim and upon Mesaba’s plan of reorganization being approved by its ownBankruptcy Court. Following Northwest’s bankruptcy court’s February 27,2007 order allowing the $145 million claim and Mesaba’s Bankruptcy Court’s April 9,2007 approval of Mesaba’s plan of reorganization, the Goldman Group funded the$125 million purchase price. Mesaba exited bankruptcy on April 24, 2007,and all the outstanding stock of Mesaba is now owned by Northwest.

 

Theentire $125 million purchase price from the Goldman Group was placed in aliquidating trust, and the proceeds from the liquidating trust were used tosatisfy Mesaba’s creditors’ claims. The trustee paid Mesaba’s creditors infull, including interest, in July 2008. The trust also distributed $22million to MAIR for its equity interest in

 

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Mesaba.After payment of remaining expenses and resolving the appeals of certain minorunsecured claims, MAIR expects that it could receive an additional $3 millionfor its equity interest.

 

InJuly 2007, Mesaba’s liquidating trust made an interim distribution of 70%to all claimholders with allowed undisputed claims. MAIR received $9.4 millionof its $13.5 million claim, which reflects the 70% interim distribution of itsclaim. MAIR recorded these amounts as “Damage claim income from Mesaba Aviation, Inc.”within the condensed consolidated statement of operations.

 

**12.****      ****New Accounting Pronouncements**

 

InSeptember 2006, FASB issued SFAS No. 157, *Fair ValueMeasurements*(“SFAS No. 157”), to define fair value, establisha framework for measuring fair value in accordance with GAAP, and expanddisclosures about fair value measurements. SFAS No. 157 was effective forthe Company beginning April 1, 2008. The adoption of SFAS No. 157 didnot have an effect on the Company’s financial statements due to the Companyadopting the liquidation basis of accounting.

 

InFebruary 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities* (“SFAS 159”). SFAS 159 permits entities tochoose to measure many financial instruments and certain other items at fairvalue that are not currently required to be measured at fair value. SFAS 159was effective for fiscal year beginning April 1, 2008. The adoption of SFASNo. 159 did not have an effect on the Company’s financial statements dueto the Company adopting the liquidation basis of accounting.

 

**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operations shouldbe read in conjunction with the accompanying consolidated financial statements.The Company’s operations and financial results are subject to various risks anduncertainties as discussed under the caption “Risk Factors” in Item 1A of Part Iof the Company’s Annual Report on Form 10-K, filed with the SEC on May 30,2008.

 

The Company adopted the liquidation basis of accounting effective March 9,2008. This basis of accounting is considered appropriate when, among otherthings, liquidation of a company is probable and the net realizable values ofassets are reasonably determinable. Under this basis of accounting, assets arevalued at their net realizable values and liabilities are stated at theirestimated settlement amounts. The conversion to the liquidation basis ofaccounting required management to make significant estimates and judgments torecord assets at estimated net realizable values and liabilities at estimatedsettlement amounts. Consistent with the liquidation basis of accounting, theCompany’s Annual Report on Form 10-K, filed with the SEC on May 30,2008, contained a consolidated statement of net assets as of March 31,2008 and a consolidated statement of changes in net assets for the period March 9,2008 to March 31, 2008. Consistent with that presentation, for the threemonths ended June 30, 2008, the Company is presenting a condensedconsolidated statement of net assets and a condensed consolidated statement ofchanges in net assets. Under the liquidation basis of accounting, the Companywill no longer report a statement of operations or a statement of cash flows.

 

Duringfiscal year 2008, the Company made the decision to pursue an orderlyliquidation of the Company and return all excess cash to the Company’sshareholders. This decision was made following Mesaba’s exit from bankruptcy onApril 24, 2007 as a wholly-owned subsidiary of Northwest, and the Company’sconclusion that Big Sky’s 19-seat operation was not viable and that existinggrowth and acquisition opportunities were not economically justifiable. Big Skyceased all operations on March 8, 2008, and MAIR’s Board of Directorsconcluded that the prudent course of action would be to convert the Company’sassets to cash, satisfy outstanding liabilities and return all excess cash tothe Company’s shareholders. On June 25, 2008, the Company held a SpecialMeeting of Shareholders, at which the Company’s shareholders approved theCompany’s dissolution and Plan of Liquidation.

 

MAIRand Big Sky are continuing to liquidate their assets and are activelynegotiating to satisfy existing liabilities. MAIR ended the first quarter offiscal 2009 with approximately $22.3 million in cash and investments. During July 2008,MAIR also received an aggregate of $27.3 million in distributions from Mesaba’sliquidating trust, representing the final payment of $4.0 million for MAIR’sallowed claim, $1.3 million for interest on the allowed

 

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claim,and $22.0 million for its equity interest in Mesaba. After the trust satisfiesits remaining expenses, MAIR expects that it could receive an additional $3.0million for its equity interest in Mesaba. MAIR’s Board of Directors willdetermine the appropriate timing to make an interim liquidating distribution ofcash not required for operations to the Company’s shareholders.

 

**Changesin Net Assets in Liquidation**

 

Duringthe three months ended June 30, 2008, the Company’s net assets inliquidation increased to approximately $64.3 million from approximately $39.0million on March 31, 2008. The increase in net assets was primarily due toMAIR recording its $27.3 million receivable from Mesaba’s liquidating trust.The increase in net assets was offset by $2.0 million of operating costs from April 1,2008 to June 30, 2008.

 

**Resultsof Operations**

 

**ThreeMonths Ended June 30, 2007**

 

OnMarch 12, 2007, Big Sky expanded its operations through a Hosted ProrateAgreement with Delta governing the Boston operation, and in connection withthat operation, Big Sky purchased seven Beechcraft 1900D aircraft.

 

*Big Sky Operating Revenues*

 

Total operating revenues for the three months ended June 30, 2007totaled $7.1 million primarily as a result of Boston operations that began in April 2007.

 

*Big Sky Operating Expenses*

 

Total operating expenses for the three months ended June 30, 2007totaled $9.4 million primarily due to increased flying and the associated costof the Boston operation which began in April 2007.

 

*MAIR Operating Expenses*

 

Totaloperating expenses for the three months ended June 30, 2007 totaled $2.2 million which consistedprimarily of wages and benefits, legal and accounting fees.

* *

*Operating Loss*

 

Operating loss for the three months ended June 30, 2007 totaled $4.5 million due to the results ofMAIR and Big Sky described above.

 

*Nonoperating Income*

 

TheCompany reported nonoperating income, net of $10.9 million in the three monthsended June 30, 2007. The nonoperating income, net was primarily a resultof MAIR recording $9.4 million for its damage claim in Mesaba’s bankruptcy.

 

*Provisionfor Income Taxes*

 

TheCompany recorded $0.1million of tax benefit on its loss for the three monthsended June 30, 2007.

 

*EarningsSummary*

 

TheCompany reported consolidated net income of $6.5 million, or $0.43 per basicand diluted share, for the quarter ended June 30, 2007.

 

**Liquidity and Capital Resources**

 

Unrestrictedcash, cash equivalents and investments decreased to $22.3 million at June 30,2008 from $27.2 million at March 31, 2008. The Company’s working capitalincreased to $64.3 million at June 30, 2008 compared to working capital of$39.0 million at March 31, 2008 mainly due to collection of funds from theliquidating trust of Mesaba.

 

*Outlook*

 

TheCompany expects to have excess cash after liquidating its assets and satisfyingits liabilities, and the Company intends to distribute such excess cash to itsshareholders.

 

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**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Inits Annual Report on Form 10-K for the fiscal year ended March 31,2008, filed with the SEC on May 30, 2008, the Company identified thecritical accounting policies which affect its more significant estimates andassumptions used in preparing its consolidated financial statements. TheCompany has not changed these policies from those previously disclosed in itsAnnual Report on Form 10-K.

 

**NEW ACCOUNTING PRONOUNCEMENTS**

 

SeeITEM 1. Condensed Consolidated Financial Statements – Note 12. New AccountingPronouncements.

 

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

## *** ***

TheCompany’s earnings are affected by changes in interest rates due to the impactthose changes have on its interest income from cash and investments.

 

TheCompany does not purchase or hold any derivative financial instruments fortrading 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,assurance that the objectives of the control system are met. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the Company have been detected. The design of any system ofcontrols also is based in part upon certain assumptions about the likelihood offuture events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions; over time,control may become inadequate because of changes in conditions, or the degreeof compliance with the policies or procedures may deteriorate. Because of theinherent limitations in a cost-effective control system, misstatements due toerror or fraud may occur and not be detected.

 

Asof June 30, 2008, the Company conducted an evaluation under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and acting Chief Financial Officer,regarding the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (as that term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended). Basedupon that evaluation, the Chief Executive Officer and acting 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 June 30, 2008, there were no changes in internalcontrols over financial reporting that had a material effect on internalcontrol over financial reporting or were reasonably likely to have a materialeffect on internal control over financial reporting.

 

# **PART II. OTHERINFORMATION**

# ** **

## ***ITEM 1. LEGALPROCEEDINGS***

## *** ***

SeeITEM 1. Condensed Consolidated Financial Statements – Note 10. Commitments andContingencies – Litigation.

 

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**ITEM****1A. RISK FACTORS**

 

Therehave been no material changes in the risk factors previously disclosed in Item1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for thefiscal year ended March 31, 2008, filed with the SEC on May 30, 2008.

 

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

 

OnJune 25, 2008, the Company held a Special Meeting of Shareholders at whichthe shareholders approved the Company’s dissolution and proposed plan ofliquidation. At the meeting, 14,001,728 votes were cast in favor of theproposal, and 6,553 votes were cast against the proposal. There were 2,707abstentions and no broker non-votes.

 

**ITEM 6. EXHIBITS**

 

# **EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Document Description**                                                                                               |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                   |
| 31.1                |       | Chief Executive Officer Certification Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. Filed herewith. |
| 31.2                |       | Chief Financial Officer Certification Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. Filed herewith. |
| 32.1                |       | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002. Filed herewith.                         |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                       | MAIR  Holdings, Inc.                                               |
|----------------------------|-------------------------------------------------------------------------|
|                       |                                                                    |
|                       |                                                                    |
| Dated:  July 29, 2008 | By:                                                                     | /s/  Paul F. Foley |
|                       | Paul  F. Foley                                                          |
|                       | President,  Chief Executive Officer and acting Chief  Financial Officer |

 

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