**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM10-Q**

 

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

 

**For the quarterly period ended June 30, 2004**

 

**OR**

 

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

 

**For the transition periodfrom          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 1720150 South Fifth StreetMinneapolis, 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    No o

 

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

 

Yes o    No ý

 

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 July 30, 2004** |
|----------------------------------------|------------|-------------------------------------|
| Common Stock Par value  $.01 per share |       | 20,463,609                          |

 

 

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**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Statements in this QuarterlyReport on Form 10-Q of MAIR Holdings, Inc. (the “Company”) under the caption“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and elsewhere in this report are forward-looking and are based uponinformation currently available to the Company. The Company, through its officers, directors or employees, may also fromtime to time make oral forward-looking statements.  Any such statement is qualified by referenceto these cautionary statements.  Inconnection with the “safe harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995, the Company is hereby identifying importantfactors that could cause actual results to differ materially from thosecontained in any forward-looking statement made by or on behalf of theCompany.  Many important factors thatcould cause such a difference are described in the Company’s Annual Report onForm 10-K for the year ended March 31, 2004 under the caption “Risk FactorsRelating to the Company and the Airline Industry.”

 

Undue reliance should not beplaced on the Company’s forward-looking statements because the matters theydescribe are subject to known and unknown risks, uncertainties and otherunpredictable factors, many of which are beyond the Company’s control.  The Company’s forward-looking statementsspeak only as of the date on which this report was filed with the United StatesSecurities and Exchange Commission.  Overtime, actual results, performance or achievements will likely differ from theanticipated results, performance or achievements that are expressed or impliedby the Company’s forward-looking statements, and such differences might besignificant and materially adverse to the Company’s stockholders.

 

All subsequent written or oralforward-looking statements attributable to the Company or persons acting on theCompany’s behalf are expressly qualified by the 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.

 

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**Part I.  FINANCIAL INFORMATION**

 

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

 

**MAIR HOLDINGS, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, exceptshare information)**

**(Unaudited)**

 
| ** **                                             | ** ** | **June 30  2004** | ** ** | **March 31  2004** | ** ** |
|--------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
|                                                   |       |              |       |               |       |
| ASSETS                                                 |       |              |       |               |       |
|                                                   |       |              |       |               |       |
| CURRENT ASSETS:                                        |       |              |       |               |       |
| Cash and cash equivalents                              |       | $                 | 50,513     |               | $          | 54,561 |   |
| Short-term investments                                 |       | 69,168            |       | 67,285             |       |
| Accounts receivable, net of reserves of  $838 and $926 |       | 29,086            |       | 28,453             |       |
| Inventories, net                                       |       | 9,387             |       | 8,664              |       |
| Prepaid expenses and deposits                          |       | 7,234             |       | 5,381              |       |
| Deferred income taxes and other                        |       | 11,383            |       | 11,449             |       |
| Total current assets                                   |       | 176,771           |       | 175,793            |       |
|                                                   |       |              |       |               |       |
| PROPERTY AND EQUIPMENT                                 |       |              |       |               |       |
| Flight equipment                                       |       | 82,762            |       | 81,891             |       |
| Other property and equipment                           |       | 43,795            |       | 41,901             |       |
| Less: Accumulated depreciation and  amortization       |       | (87,210           | )          | (84,070            | )          |
| Net property and equipment                             |       | 39,347            |       | 39,722             |       |
|                                                   |       |              |       |               |       |
| NONCURRENT ASSETS                                      |       |              |       |               |       |
| Long-term investments                                  |       | 34,082            |       | 38,084             |       |
| Goodwill                                               |       | 2,503             |       | 2,503              |       |
| Other intangible assets, net                           |       | 3,123             |       | 3,224              |       |
| Other assets, net                                      |       | 7,482             |       | 7,994              |       |
|                                                   |       | $                 | 263,308    |               | $          | 267,320 |   |

 

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

 

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**MAIR HOLDINGS, INC.**

**CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
| ** **                                                                                                           | ** ** | **June 30  2004** | ** ** | **March 31  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
|                                                                                                                 |       |              |       |               |       |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                           |       |              |       |               |       |
|                                                                                                                 |       |              |       |               |       |
| CURRENT LIABILITIES:                                                                                                 |       |              |       |               |       |
| Accounts payable                                                                                                     |       | $                 | 16,703     |               | $          | 18,981 |   |
| Accrued liabilities:                                                                                                 |       |              |       |               |       |
| Payroll                                                                                                              |       | 14,949            |       | 16,724             |       |
| Maintenance                                                                                                          |       | 17,982            |       | 20,724             |       |
| Deferred income                                                                                                      |       | 2,454             |       | 2,504              |       |
| Other current liabilities                                                                                            |       | 17,580            |       | 17,124             |       |
| Total current liabilities                                                                                            |       | 69,668            |       | 76,057             |       |
|                                                                                                                 |       |              |       |               |       |
| OTHER NONCURRENT LIABILITIES                                                                                         |       | 5,889             |       | 6,334              |       |
|                                                                                                                 |       |              |       |               |       |
| COMMITMENTS AND CONTINGENCIES (Note 2)                                                                               |       |              |       |               |       |
|                                                                                                                 |       |              |       |               |       |
| 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, 20,463,609 and 20,375,372 shares issued and outstanding |       | 205               |       | 204                |       |
| Paid-in capital                                                                                                      |       | 53,076            |       | 52,995             |       |
| Warrants                                                                                                             |       | 16,500            |       | 16,500             |       |
| Accumulated other comprehensive income  (loss)                                                                       |       | (121              | )          | 46                 |       |
| Retained earnings                                                                                                    |       | 118,091           |       | 115,184            |       |
| Total shareholders’ equity                                                                                      |       | 187,751           |       | 184,929            |       |
|                                                                                                                 |       | $                 | 263,308    |               | $          | 267,320 |   |

 

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

 

4

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**MAIR HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
| ** **                               | ** ** | **Three Months Ended  June 30** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| OPERATING REVENUES:                      |       |                            |       |   |   |
| Passenger                                |       | $                               | 100,968    |   | $ | 106,762 |   |
| Freight and other                        |       | 8,731                           |       | 7,271 |   |
| Total operating revenues                 |       | 109,699                         |       | 114,033 |   |
|                                     |       |                            |       |   |   |
| OPERATING EXPENSES:                      |       |                            |       |   |   |
| Wages and benefits                       |       | 35,300                          |       | 35,228 |   |
| Aircraft fuel                            |       | 5,111                           |       | 5,717 |   |
| Aircraft maintenance                     |       | 20,426                          |       | 18,380 |   |
| Aircraft rents                           |       | 25,032                          |       | 26,778 |   |
| Landing fees                             |       | 1,769                           |       | 1,765 |   |
| Insurance and taxes                      |       | 2,073                           |       | 2,827 |   |
| Depreciation and amortization            |       | 3,753                           |       | 4,499 |   |
| Administrative and other                 |       | 13,637                          |       | 14,096 |   |
| Total operating expenses                 |       | 107,101                         |       | 109,290 |   |
| Operating income                         |       | 2,598                           |       | 4,743 |   |
|                                     |       |                            |       |   |   |
| NONOPERATING INCOME (EXPENSE):           |       |                            |       |   |   |
| Interest income and other                |       | 385                             |       | 359 |   |
| Interest expense                         |       | (18                             | )          | (26 | ) |
| Government grant income                  |       | —                          |       | 2,646 |   |
| Nonoperating income, net                 |       | 367                             |       | 2,979 |   |
| Income before provision for income taxes |       | 2,965                           |       | 7,722 |   |
|                                     |       |                            |       |   |   |
| PROVISION FOR INCOME TAXES               |       | 58                              |       | 4,216 |   |
| NET INCOME                               |       | $                               | 2,907      |   | $ | 3,506 |   |
|                                     |       |                            |       |   |   |
| NET INCOME PER SHARE:                    |       |                            |       |   |   |
| Earnings per common share - basic        |       | $                               | 0.14       |   | $ | 0.17 |   |
| Earnings per common share - diluted      |       | $                               | 0.14       |   | $ | 0.17 |   |
|                                     |       |                            |       |   |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING:     |       |                            |       |   |   |
| Basic                                    |       | 20,452                          |       | 20,321 |   |
| Diluted                                  |       | 20,976                          |       | 20,322 |   |

 

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

 

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**MAIR HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended  June 30** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                            |       |   |   |
| Net income                                                                         |       | $                               | 2,907      |   | $ | 3,506 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                      |       | 3,753                           |       | 4,499 |   |
| Amortization of investments                                                        |       | 521                             |       | 358 |   |
| Amortization of deferred credits                                                   |       | (412                            | )          | (649 | ) |
| Stock-based compensation                                                           |       | (740                            | )          | — |   |
| Changes in current operating items:                                                |       |                            |       |   |   |
| Accounts receivable                                                                |       | (633                            | )          | 5,612 |   |
| Inventories                                                                        |       | (723                            | )          | (665 | ) |
| Prepaid expenses and deposits                                                      |       | (1,853                          | )          | (625 | ) |
| Accounts payable and other                                                         |       | (5,676                          | )          | 3,097 |   |
| Net cash provided by (used in) operating  activities                               |       | (2,856                          | )          | 15,133 |   |
|                                                                               |       |                            |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                            |       |   |   |
| Purchases of investments                                                           |       | (10,200                         | )          | (18,825 | ) |
| Sales of investments                                                               |       | 11,482                          |       | 6,807 |   |
| Purchases of property and equipment                                                |       | (2,971                          | )          | (2,441 | ) |
| Net cash used in investing activities                                              |       | (1,689                          | )          | (14,459 | ) |
|                                                                               |       |                            |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                               |       |                            |       |   |   |
| Repayment of other noncurrent liabilities                                          |       | (33                             | )          | (44 | ) |
| Proceeds from issuance of common stock                                             |       | 530                             |       | — |   |
| Net cash provided by (used in) financing  activities                               |       | 497                             |       | (44 | ) |
|                                                                               |       |                            |       |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                              |       | (4,048                          | )          | 630 |   |
|                                                                               |       |                            |       |   |   |
| CASH AND CASH EQUIVALENTS:                                                         |       |                            |       |   |   |
| Beginning of period                                                                |       | 54,561                          |       | 62,140 |   |
| End of period                                                                      |       | $                               | 50,513     |   | $ | 62,770 |   |
|                                                                               |       |                            |       |   |   |
| SUPPLEMENTARY CASH FLOW INFORMATION:                                               |       |                            |       |   |   |
| Cash paid during period for:                                                       |       |                            |       |   |   |
| Interest                                                                           |       | $                               | 21         |   | $ | 25 |   |
| Income taxes                                                                       |       | $                               | 463        |   | $ | 132 |   |

 

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

 

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**MAIR HOLDINGS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

The consolidated financialstatements included herein have been prepared by MAIR Holdings, Inc. (the“Company” or “Holdings”), without audit, pursuant to the rules and regulationsof the Securities and Exchange Commission (“SEC”).  The information furnished in the consolidatedfinancial statements includes normal recurring adjustments and reflects alladjustments, which are, in the opinion of management, necessary for a fairpresentation of such consolidated financial statements.  The Company’s business is seasonal and,accordingly, interim results are not indicative of results for a fullyear.  Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of America(“GAAP”) have been condensed or omitted pursuant to such rules and regulations,although the Company believes that the disclosures are adequate to make theinformation presented not misleading.  Itis suggested that these consolidated financial statements be read inconjunction with the consolidated financial statements for the year ended March31, 2004, and the notes thereto, included in the Company’s Annual Report onForm 10-K as filed with the SEC.

 

1.               Basis of Presentation

 

The consolidated financialstatements include the accounts of the Company and its wholly-ownedsubsidiaries, Mesaba Aviation, Inc. (“Mesaba”) and Big Sky Transportation Co.(“Big Sky”).  All significantintercompany transactions and balances have been eliminated in consolidation.

 

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

 

Certain balances in the fiscal 2004 consolidated financial statementshave been reclassified to conform to the fiscal 2005 presentation.  These reclassifications had no impact on netincome or shareholders’ equity as previously reported.

 

2.               Business

 

*Mesaba*

Mesaba operates as a regionalair carrier providing scheduled passenger service as “Mesaba Airlines/NorthwestAirlink” and “Mesaba Airlines/Northwest Jet Airlink” under two separateagreements with Northwest Airlines, Inc., a wholly-owned indirect subsidiary ofNorthwest Airlines Corporation (“Northwest”). As of June 30, 2004, Mesaba served 109 cities in the United States andCanada from Northwest’s hub airports located in Minneapolis/St. Paul, Detroitand Memphis.

 

Under the Airline ServicesAgreement (the “Airlink Agreement”), Mesaba operates Saab 340 jet-prop aircraft(“Saab”) for Northwest.  This agreementprovides for exclusive rights to designated service areas and extends throughJune 30, 2007.  Under the AirlinkAgreement, Mesaba recognizes revenue for each completed “available seat mile”(“ASM”) (the number of seats available for passengers, multiplied by the numberof miles those seats are flown).  Underthe Airlink Agreement, Mesaba purchases fuel, ground handling and otherservices from Northwest.  Mesaba paidNorthwest $8.2 million and $6.9 million for these services for the three monthsended June 30, 2004 and 2003.  EitherNorthwest or Mesaba may terminate the Airlink Agreement on 365 days notice orit may be terminated immediately by either party for certain provisionsprovided for in the Airlink Agreement.

 

Under the Regional Jet ServicesAgreement (the “Jet Agreement”), Mesaba operates Avro RJ85 regional jets(“RJ85”) for Northwest that extends through April 25, 2007.  Under the Jet Agreement, Mesaba recognizesrevenue for each “block hour” flown (the elapsed time between aircraftdeparting and arriving at a gate).  Underthe Jet Agreement, Northwest provides fuel and airport and passenger relatedservices at Northwest’s expense.  The JetAgreement may be terminated immediately by Mesaba or Northwest in accordancewith certain provisions provided for in the Jet Agreement.

 

Under the agreements, allMesaba flights appear in Northwest’s schedules and Mesaba receives ticketingand certain check-in, baggage and freight-handling services from Northwest atcertain airports.  Mesaba also benefitsfrom its relationship with Northwest through advertising and marketingprograms.  The Airlink and Jet Agreementsprovide for certain incentive payments from Northwest to Mesaba based onachievement of certain operational or financial goals.  Such incentives totaled

 

7

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$1.2 million and $1.8 millionfor the three months ended June 30, 2004 and 2003, and are included inpassenger revenues in the accompanying consolidated statements ofoperations.  Approximately 80.1% and74.4% of the June 30, 2004 and March 31, 2004 accounts receivable balances inthe accompanying consolidated balance sheets were due from Northwest.  Substantially all of Mesaba’s operatingrevenue was from Northwest.  As of June30, 2004 and March 31, 2004, Mesaba owed Northwest zero and $1.0 million,primarily for fuel.

 

Cancellation of the Airlink or Jet Agreements or Northwest’s failure tomake timely payment of amounts owed to Mesaba or to otherwise materiallyperform under the Airlink or Jet Agreements would have a material adverseeffect on Mesaba’s and the Company’s operations, financial position and cashflows.  Northwest and Mesaba reviewcontract compliance on a periodic basis.

 

*Big Sky*

Big Sky operates as a regionalair carrier based in Billings, Montana, primarily providing scheduledpassenger, airfreight, express package and charterservices.  As of June 30, 2004, Big Skyprovided scheduled air service to 19 communities in Montana, North Dakota,Washington and Idaho.  Big Sky operatesdaily scheduled flights providing interline and online connecting services andlocal market services.  Big Sky also hascode-sharing agreements with Alaska Airlines, America West Airlines andNorthwest, where its services are marketed jointly with those air carriers forconnecting flights.  Big Sky participatesin the Essential Air Service (“EAS”) program with the U.S. Department ofTransportation (“DOT”).  The EAS programsubsidizes air carriers to provide air service to designated rural communitiesthroughout the country that could not otherwise economically justify thatservice based on its passenger traffic. The DOT pays EAS subsidies for each departure in a covered market.  Big Sky purchased fuel from Northwest for$0.4 million for the three months ended June 30, 2004 and 2003.

 

3.               Goodwill and Other Intangibles

 

In December 2002, the Company acquired BigSky for $3.2 million, net of cash acquired of $0.3 million.  The excess of the Big Sky purchase price overthe fair market value of the net assets acquired was allocated to certainidentifiable intangible assets, including Big Sky’s pilot labor contract and anair carrier certificate, and to goodwill. Goodwill and other intangible assets and related accumulatedamortization were as follows, in thousands:

 
| ** **                    | ** ** | **June 30, 2004** | ** ** | **March 31, 2004**            | ** ** |
|-------------------------------|------------|-------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **Gross**         | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Indefinite-lived assets:      |       |              |       |                          |       |   |   |   |   |   |   |   |   |
| Air carrier certificate       |       | $                 | 925        |                          |       |   | $ | 925 |   | $ | 925 |   |   |   | $ | 925 |   |
| Goodwill                      |       | 2,503             |       |                          |       | 2,503 |   | 2,503 |   |   |   | 2,503 |   |
| Amortizable intangible asset: |       |              |       |                          |       |   |   |   |   |   |   |   |   |
| Pilot labor contract          |       | 2,840             |       | (642                          | )          | 2,198 |   | 2,840 |   | (541 | ) | 2,299 |   |
|                          |       | $                 | 6,268      |                          | $          | (642 | ) | $ | 5,626 |   | $ | 6,268 |   | $ | (541 | ) | $ | 5,727 |   |
|                               |            |                   |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amortizable intangible asset is amortized over its estimated periodof benefit.  Intangible assetamortization expense for the three months ended June 30, 2004 and 2003 was $0.1million.  The recoverability of goodwilland the intangible assets are evaluated annually, at a minimum, or on aninterim basis if events or circumstances indicate a possible inability torealize the carrying amounts.  TheCompany continues to monitor the recoverability of goodwill and the intangibleassets at Big Sky, particularly in light of its recent operating performance.

 

4.               Investments

 

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

 

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

 

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| ** **              | ** ** | **June 30, 2004** | ** ** | **March 31, 2004** | ** ** |
|-------------------------|------------|-------------------|------------|--------------------|------------|
| Amortized cost          |       | $                 | 103,478    |               | $          | 105,280 |   |
| Gross unrealized gains  |       | 19                |       | 127                |       |
| Gross unrealized losses |       | (247              | )          | (38                | )          |
| Fair value              |       | $                 | 103,250    |               | $          | 105,369 |   |

 

For the three months ended June30, 2004 and 2003, gross realized gains and losses were insignificant as theCompany generally held the fully amortized bonds to maturity.

 

5.               Stock Options

 

The Company accounts for itsstock-based compensation plans using the intrinsic value method prescribedunder Accounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees,” and related interpretations. The Company has 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 formadisclosures of compensation expense under Statement of Financial AccountingStandards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” and SFASNo. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,”the Company uses the Black-Scholes option model to estimate the fair value ofoptions not subject to variable plan accounting.

 

The following informationsummarizes the pro forma effects assuming compensation for such awards had beenrecorded based upon the estimated fair value for the periods ended June 30, inthousands, except per share information:

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended  June 30** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| Net income as reported                                                                                                                        |       | $                               | 2,907      |   | $ | 3,506 |   |
| Deduct: Stock-based employee compensation  expense reduction included in reported net income, net of related tax effects                      |       | (426                            | )          | — |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (474                            | )          | (304 | ) |
| Pro forma net income                                                                                                                          |       | $                               | 2,007      |   | $ | 3,202 |   |
|                                                                                                                                          |       |                            |       |   |   |
| Earnings per share – basic:                                                                                                              |       |                            |       |   |   |
| As reported                                                                                                                                   |       | $                               | 0.14       |   | $ | 0.17 |   |
| Pro forma                                                                                                                                     |       | $                               | 0.10       |   | $ | 0.16 |   |
| Earnings per share – diluted:                                                                                                            |       |                            |       |   |   |
| As reported                                                                                                                                   |       | $                               | 0.14       |   | $ | 0.17 |   |
| Pro forma                                                                                                                                     |       | $                               | 0.10       |   | $ | 0.16 |   |

 

In December 2002, the Company repriced stockoptions to purchase 745,000 shares of the Company’s common stock with exerciseprices ranging from $9.05 to $18.00 to an exercise price of $5.97, whichrepresented the fair market value on the date of the repricing.  In accordance with Financial AccountingStandards Board (“FASB”) Interpretation No. 44, “Accounting for CertainTransactions Involving Stock Compensation,” the Company has adopted variableplan accounting for these options from the date of the repricing.  The Company recorded a reduction tocompensation expense of $0.7 million and zero for the three months ended June30, 2004 and 2003 as a result of the repricing.

 

9

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6.               Earnings PerShare

 

Basic earningsper common share is computed by dividing net incomeby the weighted average number of shares of common stock outstanding during theperiod.  Diluted earnings per share iscomputed by dividing net income by the sum of the weighted average number ofshares of common stock outstanding plus all additional common stock that wouldhave been outstanding if potentially dilutive common shares related to stockoptions and warrants had been issued. Stock options and warrants with an exercise price exceeding the fairmarket value of the Company’s common stock are considered antidilutive and areexcluded from the calculation.

 

The following table reconcilesthe number of shares utilized in the consolidated earnings per sharecalculations for the three months ended June 30, in thousands, except per shareinformation:

 
| ** **                                                                                                  | ** ** | **Three Months Ended  June 30** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                  | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| Net income                                                                                                  |       | $                               | 2,907      |   | $ | 3,506 |   |
| For earnings per common share – basic:                                                                 |       |                            |       |   |   |
| Weighted average number of issued shares  outstanding                                                       |       | 20,452                          |       | 20,321 |   |
| Effect of dilutive securities:                                                                              |       |                            |       |   |   |
| Computed shares outstanding under the  Company’s stock option plan utilizing the treasury stock method |       | 387                             |       | 1 |   |
| Computed shares outstanding under warrants  issued utilizing the treasury stock method                      |       | 137                             |       | — |   |
| For earnings per common share – diluted:                                                               |       |                            |       |   |   |
| Weighted average common shares and common  share equivalents outstanding                                    |       | 20,976                          |       | 20,322 |   |
| Earnings per share – basic                                                                             |       | $                               | 0.14       |   | $ | 0.17 |   |
| Earnings per share – diluted                                                                           |       | $                               | 0.14       |   | $ | 0.17 |   |
|                                                                                                        |       |                            |       |   |   |
| Antidilutive options and warrants                                                                           |       | 3,505                           |       | 5,219 |   |

 

7.               Consolidated Comprehensive Income

 

The following table presentsthe calculation of comprehensive income. Comprehensive income has no impact on reported net income.  The components of comprehensive income forthe periods ended June 30 are as follows, in thousands:

 
| ** **                                                                             | ** ** | **Three Months Ended  June 30** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                             | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| Net income                                                                             |       | $                               | 2,907      |   | $ | 3,506 |   |
| Unrealized gains (losses) on investments  classified as available for sale, net of tax |       | (167                            | )          | — |   |
| Comprehensive income                                                                   |       | $                               | 2,740      |   | $ | 3,506 |   |

 

8.               SegmentInformation

 

The Company follows theprovisions of SFAS No. 131, “Disclosures about Segments of an Enterprise andRelated Information.”  SFAS No. 131establishes annual and interim reporting standards for an enterprise’s businesssegments and related disclosures about its products, services, geographic areasand major customers.  The method fordetermining what

 

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informationto report is based upon the way management organizes the operating segmentswithin the Company for making operating decisions and assessing financialperformance.  Operating segmentinformation for Mesaba, Big Sky and Holdings for the three months ended June 30were as follows, in thousands:

 
| ** **                        | ** ** | **Mesaba** | ** ** | **Big Sky** | ** ** | **Holdings and  Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------|------------|------------|------------|-------------|------------|--------------------------------|------------|------------------|------------|
| Three Months Ended June 30, 2004: |       |       |       |        |       |                           |       |             |       |
| Operating revenues                |       | $          | 106,090    |        | $          | 3,609                          |       | $                | —     |   | $ | 109,699 |   |
| Depreciation and amortization     |       | 3,542      |       | 207         |       | 4                              |       | 3,753            |       |
| Interest expense                  |       | —     |       | 77          |       | (59                            | )          | 18               |       |
| Income (loss) before income taxes |       | 2,720      |       | (1,089      | )          | 1,334                          |       | 2,965            |       |
| Capital expenditures              |       | 2,936      |       | 35          |       | —                         |       | 2,971            |       |
| Total assets at end of period     |       | 121,167    |       | 10,097      |       | 132,044                        |       | 263,308          |       |
| Three Months Ended June 30, 2003: |       |       |       |        |       |                           |       |             |       |
| Operating revenues                |       | 109,869    |       | 4,164       |       | —                         |       | 114,033          |       |
| Depreciation and amortization     |       | 4,305      |       | 191         |       | 3                              |       | 4,499            |       |
| Interest expense                  |       | —     |       | 26          |       | —                         |       | 26               |       |
| Income (loss) before income taxes |       | 7,771      |       | (474        | )          | 425                            |       | 7,722            |       |
| Capital expenditures              |       | 2,434      |       | 7           |       | —                         |       | 2,441            |       |
| Total assets at end of period     |       | 117,194    |       | 10,890      |       | 123,698                        |       | 251,782          |       |
|                                   |            |            |            |             |            |                                |            |                  |            |  |  |  |  |

 

9.               NonoperatingGain

 

In April 2003, Congress enactedthe Emergency Wartime Supplemental Appropriations Act.  Among other items, the legislation included a$2.3 billion government grant to U.S. airlines. In accordance with this Act, for the three months ended June 30, 2003,Mesaba recognized $2.3 million as “nonoperating income” and Big Sky recognized$0.3 million as “nonoperating income” and $0.2 million as a reduction of“administrative and other expense” in the accompanying consolidated statementsof operations.

 

10.         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.

 

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

 

RESULTS OF OPERATIONS

 

**Three Months Ended June 30, 2004 and 2003**

The Company’s consolidated net income for the quarter ended June 30,2004 was $2.9 million, or $0.14 per diluted share, compared with net income of$3.5 million, or $0.17 per diluted share, for the quarter ended June 30,2003.  Comparative information onoperations for the three months ended June 30 were asfollows:

 

***Mesaba***

Mesaba’s operating statistics for the three months ended June 30 wereas follows:

 
| ** **                           | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|--------------------------------------|------------|-----------|------------|-----------|------------|
| Passengers                           |       | 1,396,338 |       | 1,451,280 |       |
| Available seat miles (000’s)    |       | 714,716   |       | 714,550   |       |
| Revenue passenger miles (000’s) |       | 480,199   |       | 437,286   |       |
| Load factor                          |       | 67.2      | %          | 61.2      | %          |
| Departures                           |       | 50,421    |       | 56,015    |       |
| Revenue per ASM                      |       | $         | 0.148      |      | $          | 0.154 |   |
| Cost per ASM                         |       | $         | 0.145      |      | $          | 0.146 |   |
| Aircraft in service (average)        |       | 97        |       | 106       |       |

 

Mesaba Operating Revenues  Totaloperating revenues decreased in the first quarter of fiscal 2005 to $106.1million from $109.9 million in the prior year quarter primarily due to theremoval of six Saab A model aircraft from the fleet and the temporary groundingof five RJ85s.  All five of the RJ85swere returned to service by the end of June 2004.

 

Mesaba Operating Expenses  Totaloperating expenses decreased 1.1% in the first quarter of fiscal 2005 to $103.3million from $104.5 million in the prior year quarter.  Mesaba’s operating costs per ASM for thethree months ended June 30 were as follows:

 
| ** **                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Wages and benefits            |       | 4.8      | ¢     | 4.7      | ¢     |
| Aircraft fuel                 |       | 0.6      |       | 0.7      |       |
| Aircraft maintenance          |       | 2.8      |       | 2.5      |       |
| Aircraft rents                |       | 3.4      |       | 3.6      |       |
| Landing fees                  |       | 0.2      |       | 0.2      |       |
| Insurance and taxes           |       | 0.2      |       | 0.4      |       |
| Depreciation and amortization |       | 0.5      |       | 0.6      |       |
| Administrative and other      |       | 2.0      |       | 1.9      |       |
| Total                         |       | 14.5     | ¢     | 14.6     | ¢     |

 

Wages and benefits increased 3.9% to $34.1 million in the first quarterof fiscal 2005 from $32.8 million in the first quarter of fiscal 2004 primarilydue to an accrual of $1.1 million for contributions to be made to Mesaba’s401(k) benefit plan and the impact of higher pilot wages under their newcontract signed in January 2004, which were slightly offset by a reduction inhealth and dental claims costs.

 

Aircraft fuel decreased 10.8% to $4.6 million in the first quarter offiscal 2005 from $5.1 million in the first quarter of fiscal 2004 due primarilyto a reduction in the number of Saab block hours flownand favorable rates of fuel burn. Provisions of the Airlink Agreement with Northwest protect Mesaba fromchanges in fuel prices.  Mesaba’s actualcost of fuel, including taxes

 

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and pumping fees, was 83.5 cents per gallonfor both periods.  Northwest isresponsible for fuel for Mesaba’s RJ85 operations.

 

Aircraft maintenance, excluding wages and benefits, increased 11.5% to$19.7 million in the first quarter of fiscal 2005 from $17.7 million in thefirst quarter of fiscal 2004 due to the outsourcing of heavy maintenance andcosts incurred to continue to maintain the fleet as it ages.  The increase was offset by a $0.3 millionreduction to a prior accrual for required maintenance on the returned Saabaircraft.

 

Aircraft rents decreased 6.4% to $24.5 million in the first quarter offiscal 2005 from $26.2 in the first quarter of fiscal 2004 due to the return ofSaab aircraft and the temporary grounding of the five RJ85 aircraft.

 

Landing fees remained relatively constant quarter-over-quarter due to areduction in Saab departures offset by increased rates.  Northwest provides landing fees for Mesaba’sRJ85 operations.

 

Insurance and taxes decreased 33.1% to $1.8 million in the first quarterof fiscal 2005 from $2.6 million in the first quarter of fiscal 2004 dueprimarily to the recognition of favorable property tax credits and lowerinsurance rates.

 

Depreciation and amortization decreased 17.7% to $3.5 million in thefirst quarter of fiscal 2005 compared to $4.3 million in the first quarter offiscal 2004 due primarily to reduced capital spending over the last severalyears.  The reduction is because fewercapital expenditures are required to maintain the fleet versus investing in theinfrastructure to grow the fleet in previous years.

 

Administrative and other expenses decreased 4.6% to $13.4 million inthe first quarter of fiscal 2005 compared to $14.1 million in the first quarterof fiscal 2004 due to reductions in the levels of outsourced ground handling ofMesaba aircraft, outside legal and professional fees, pilot training costs andcrew travel expenses.

 

***Big Sky***

Big Sky’s operating statistics for the three months ended June 30 wereas follows:

 
| ** **                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Passengers                           |       | 21,174   |       | 27,877   |       |
| Available seat miles (000’s)    |       | 15,241   |       | 21,582   |       |
| Revenue passenger miles (000’s) |       | 5,491    |       | 7,319    |       |
| Load factor                          |       | 36.0     | %          | 33.9     | %          |
| Departures                           |       | 4,888    |       | 6,804    |       |
| Revenue per ASM                      |       | $        | 0.237      |     | $          | 0.193 |   |
| Cost per ASM                         |       | $        | 0.305      |     | $          | 0.224 |   |
| Aircraft in service (average)        |       | 12       |       | 15       |       |

 

Big Sky Operating Revenues  Totaloperating revenues decreased 13.3% to $3.6 million in the first quarter offiscal 2005 from $4.2 million in the prior year quarter due to a reduction inoperations from 15 aircraft to 12 year-over-year.

 

Big Sky Operating Expenses  Total operating expenses decreased 3.9% inthe in the first quarter of fiscal 2005 to $4.6 million from $4.8 million inthe prior year quarter due to a decrease in the variable costs related to thereduction in operations.

 

***Consolidated***

Nonoperating Income (Expense)  Nonoperatingincome decreased to $0.4 million in the first quarter of fiscal 2005 fromincome of $3.0 million for the prior year quarter primarily due to the receiptof $2.6 million in fiscal 2004 related to government reimbursements of securitycosts under the Emergency Wartime Appropriations Act.

 

Provision for Income Taxes  TheCompany’s effective tax rate was 2.0% for the first quarter of fiscal 2005 ascompared to 54.6% in the prior year quarter. 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

 

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$1.2 million in the first quarter of fiscal 2005.  Without this one-time adjustment, theCompany’s effective tax rate would have been 42.4%.  The Company adjusts its effective tax ratequarterly based on forecasted operating results for the fiscal year.  The rate is affected principally by the level of nondeductible expensesrelative to projected taxable income.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash, cash equivalents andinvestments decreased 3.9% to $153.8 million at June 30, 2004 from$159.9 million at March 31, 2004. The Company’s working capital increased to $107.1 million with a currentratio of 2.5 at June 30, 2004 compared to $99.7 million and 2.3 atMarch 31, 2004.

 

Investments consist principallyof municipal securities and are classified as available-for-sale.  Fair value of investments is determined basedon quoted market prices.  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 theinvestment.  The Company classifiesinvestments with an original maturity date of more than 90 days that maturewithin one year as short-term and greater than oneyear as long-term.

 

Approximately 80.1% of theCompany’s accounts receivable balance as of June 30, 2004 was due fromNorthwest.  Cancellation of the Airlinkor Jet Agreements or Northwest’s failure to make timely payment of amounts owedto Mesaba or to otherwise materially perform under the Airlink or JetAgreements for any reason would have a material adverse effect on Mesaba andthe Company’s operations, financial position and cash flows.

 

As of June 30, 2004, Mesaba’sfleet consisted of 99 aircraft covered under operating leases with remainingterms of up to 12 years and aggregate monthly lease payments of approximately$8.8 million.  Mesaba leases orsubleases its Saab aircraft, either directly from aircraft leasing companies,through Pinnacle Airlines Corp. under operating leases with initial terms of upto seven years or through subleases with Northwest under operating leases withinitial terms of up to 17 years.  Mesabaleases its RJ85 aircraft from Northwest under operating leases with initialterms of up to 10 years.  Mesaba believesthat its revenues from the Airlink and Jet Agreements will continue to besufficient to fund its aircraft lease obligations.  If the Airlink Agreement terminates, then theSaab aircraft leases will simultaneously terminate.  Likewise, if the Jet Agreement terminates,then the RJ85 aircraft leases will simultaneously terminate.

 

As of June 30, 2004, Big Sky’sfleet consisted of 12 aircraft covered under operating leases with remainingterms of four months to 32 months and aggregate monthly lease payments ofapproximately $0.2 million.  Big Skyleases 11 of its aircraft from leasing companies and one aircraft from amunicipality under operating leases with initial terms of up to six years.  Five of the leases allow Big Sky to returnthe aircraft to the lessor upon the occurrence of certain events and contain purchaseoptions.  Funding of the monthly minimumlease payments is dependent on continued passenger boardings and ultimately BigSky’s operations.

 

The Company’s airline fleetoperating leases do not contain any guaranteed lease residual provisions forwhich there would be a potential contingency at the termination of the leaseperiod.

 

Cash and cash equivalentsdecreased 7.4% to $50.5 million at June 30, 2004 from $54.6 million atMarch 31, 2003.  A summary of cashflow activity is as follows:

 

*OperatingActivities*

Net cash used in operations forthe three months ended June 30, 2004 was $2.9 million.  The primary sources of cash were fromoperations, which generated $2.9 million of net income and $3.1 million ofnon-cash items, primarily depreciation and amortization.  The primary use of cash was $8.9 million ofpayments for current operating items.

 

*InvestingActivities*

Net cash used by investing forthe three months ended June 30, 2004 was $1.7 million.  Cash that was generated from the sale ofinvestments and cash on hand were the sources for investing activities.  The investing activities were net sales ofshort and long-term investments of $1.3 million and purchases of property,plant and equipment of $3.0 million.

 

*FinancingActivities*

Net cash provided by financingfor the three months ended June 30, 2004 was $0.5 million.  This was primarily due to the issuance ofCompany common stock upon the exercise of stock options.

 

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*Outlook*

The Company has historicallyrelied on cash and cash equivalents, investments and internally generated fundsto support its working capital requirements. Absent adverse factors outside the control of the Company, managementbelieves current liquidity and funds from operations will be adequate resourcesfor meeting current operations and non-aircraft capital needs for the remainderof fiscal 2005.

 

For the remainder of fiscal 2005, the Companyestimates year-over-year ASMs at Mesaba to be essentially flat in the secondand third quarters and up approximately 15% in the fourth quarter.  The projected increase for the fourth fiscalquarter is due to the airline shutdown for two days during final pilot contractnegotiations and five RJ85s temporarily removed from scheduled service in thefourth quarter of fiscal 2004.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of theCompany’s consolidated financial statements in conformity with generallyaccepted accounting principles requires the use of estimates, judgments and assumptionsthat affect the reported amounts of assets and liabilities as of the date ofthe consolidated financial statements, revenues and expenses during thereporting period and related disclosures of contingent assets and liabilitiesin the consolidated financial statements and the accompanying notes.  The SEC has defined a company’s most criticalaccounting policies as the ones that are most important to the portrayal of thecompany’s financial condition and results, and which require the company to makeits most difficult and subjective judgments, often as a result of the need tomake estimates of matters that are inherently uncertain.  Based on this definition, the Company hasidentified its critical accounting policies to include those discussed in thefollowing paragraphs.  The Company alsohas other key accounting policies, which involve the use of estimates,judgments and assumptions.  See Note 2“Summary of Significant Accounting Policies” in the Notes to the ConsolidatedFinancial Statements, included in the Company’s Annual Report on Form 10-Kfiled with the SEC for the year ended March 31, 2004, for additional discussionof these items.

 

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

 

*Aircraft Property and Equipment*—Estimatedlives are used to record depreciation on aircraft property and equipment.  Aircraft utilization, Airlink and JetAgreement contractual lives, technology and changes in business strategy mayaffect the economic lives used to record depreciation by Mesaba or BigSky.  The foregoing may also affectdepreciation rates, impairment or both. Management of Mesaba and Big Sky regularly review the estimated usefullives and salvage values for aircraft property and equipment.

 

*Excess and Obsolete Inventories*—Estimated recovery percentages are used to recordobsolescence reserves for parts inventories. Aircraft utilization, parts availability and changes in parts cost mayaffect the valuation of parts inventories and obsolescence reserve levels.  Management of Mesaba and Big Sky regularlyreview recovery percentages, reserve levels and inventory valuations for partsinventories.

 

*Aircraft Maintenance*—Estimated maintenancecosts and anticipated aircraft activity are used to determine maintenancereserves.  Changes in maintenancecontracts, parts and labor costs and aircraft activity may affect themaintenance reserves.  Management ofMesaba and Big Sky regularly review airplane activity, expected aircraft returndates, changes in its maintenance contracts and parts and labor costs formaintenance reserves.

 

*Goodwill and Other Intangible Assets*—The excess of the Big Sky purchase price overthe fair market value of the net assets acquired was allocated to certainidentifiable intangible assets, including Big Sky’s pilot labor contract andits air carrier certificate and goodwill. The recoverability of goodwill and other intangible assets areevaluated annually, at a minimum, or on an interim basis if events orcircumstances indicate a possible inability to realize the carryingamounts.  The evaluation includes futurecash flow projections, strategic modeling and other managementassumptions.  During the fourth quarterof fiscal 2004, the Company completed its annual impairment test of goodwilland other intangible assets and determined that no impairment charge wasnecessary.  The Company continues tomonitor the recoverability of goodwill and the intangible assets at Big Sky,particularly in light of its recent operating performance.

 

*Income Taxes*—The Company’s effective tax rate is based on expectedincome, statutory tax rates and tax planning opportunities available in thevarious 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

 

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is required in determiningthe Company’s effective tax rate and in evaluating its tax positions.  The Company establishes reserves when,despite its belief that the tax return positions are fully supportable, certainpositions are likely to be challenged and that it 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.

 

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

 

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

 

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

 

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

 

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

 

*Evaluation of Disclosure Controls Procedures*

As of the end of the period covered by this report, the Companyconducted an evaluation under the supervision and with the participation of theCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, regarding the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures pursuant to Rules 13a-15(b) ofthe Securities Exchange Act of 1934 (the “Exchange Act”).  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective to ensure that informationthat is required to be disclosed by the Company in reports that it files underthe Exchange Act is recorded, processed, summarized and reported within thetime period specified in the rules of the Securities Exchange Commission.

 

*Changes in Internal Controls*

There were no changes in the Company’s internal control over financialreporting that occurred during the period covered by this report that havematerially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

**Part II.  OTHER INFORMATION**

 

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

 

On October 4, 2002, FairbrookLeasing, Inc., Lambert Leasing, Inc. and Swedish Aircraft Holdings AB (“Saab”)filed a declaratory judgment action against Mesaba relating to 20 Saab 340Aaircraft leased by Mesaba.  Saab sought ajudicial declaration that the terms of the leases applicable to each of the340A aircraft are governed by a March 7, 1996 term sheet proposal rather thanthe short-term leases subsequently executed by the parties.  On December 8, 2003, the Court issued anorder declaring that the term sheet proposal constitutes a binding contractthat required Mesaba to execute or negotiate in good faith toward the executionof long-term leases on each of the 340A aircraft.  The Court concluded that the term sheetproposal is ambiguous with respect to whether lease extensions contemplated bythat document are at Mesaba’s option or Saab’s option.  On August 13, 2004, Saab filed a complaint inthe United States District Court for the District of Minnesota alleging damagesin the form of aircraft lease payments they contend are due or will become duebased upon the District Court’s summary judgment ruling in the declaratoryjudgment action. Plaintiffs allege approximately $35 million in past due andfuture aircraft lease obligations. Mesaba has appealed the District Court’ssummary judgment ruling and contends that it has fulfilled and will continue tofulfill its existing lease obligations. The parties are continuing negotiations to settle the dispute and theultimate outcome cannot be predicted with certainty.

 

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

 
| **(a)** | **Exhibits** |
|---------|--------------|
|    |         |   |   |
|    | 3A           |   | Restated  Articles of Incorporation.   Incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K  filed August 27, 2003 |
|    | 3C           |   | Bylaws.  Incorporated by reference to Exhibit 3.2 to  the Form S-4, Registration No. 333-22977 |
|    | 4A           |   | Specimen  certificate for shares of the Common Stock of the Company.  Incorporated by reference to Exhibit 4.2 to  the Company’s Form 8-K filed August 27, 2003 |
|    | 4B           |   | Common Stock  Purchase Warrant dated October 25, 1996 issued to Northwest Airlines, Inc.  Incorporated by reference to Exhibit 4A to the Company’s 10-Q for the quarter  ended September 30, 1996 |
|    | 4C           |   | Common Stock  Purchase Warrant dated October 17, 1997 issued to Northwest Airlines, Inc.  Incorporated by reference to Exhibit 4A to the Company’s 10-Q for the quarter  ended September 30, 1997 |
|    | 9A           |   | Shareholder’s  Agreement regarding election of representative of Northwest Aircraft Inc. to  Board of Directors.  Incorporated by  reference to Exhibit 9A to Mesaba’s Registration Statement on Form S-1, Registration  No. 33-820 |
|    | 10A          |   | FAA Air  Carrier Operating Certificate.   Incorporated by reference Exhibit 10A to Mesaba’s Form 10-K for the  year ended March 31, 1989 |
|    | 10B          |   | CAB Part 298  Registration. Incorporated by reference to Exhibit 10G to Mesaba’s Form 10-K  for the year ended March 31, 1987 |
|    | 10C          |   | Airline  Services Agreement between Mesaba Aviation, Mesaba Holdings, Inc. and  Northwest Airlines, Inc. dated July 1, 1997 (certain potions of this  agreement are subject to an order granting confidential treatment pursuant to  Rule 24b-2).  Incorporated by reference  to Exhibit 10A to the Company’s Form 10-Q for the quarter ended September 30,  1997 |
|    | 10D          |   | Regional Jet  Services Agreement between Mesaba Holdings, Inc., Mesaba Aviation, Inc. and  Northwest Airlines, Inc., dated October 25, 1996 (certain provisions of this  agreement are subject to an order granting confidential treatment pursuant to  Rule 24b-2).  Incorporated by reference  to Exhibit 10A to the Company’s Form 10-Q for the quarter ended September 30,  1996 |
|    | 10E          |   | Foreign Air  Carrier Operating Certificates issued May 6, 1991 by the Canadian Department  of Transport.  Incorporated by  reference to Exhibit 10H to the Company’s Form 10-K for the year ended March  31, 1991 |
|    | 10F          |   | Special  Facilities Lease dated as of August 1, 1990 between Charter County of Wayne,  State of Michigan and Mesaba Aviation, Inc. Incorporated by reference to  Exhibit 10B to the Company’s Form 10-Q for the quarter ended September 30,  1990 |
|    | 10G          |   | Ground Lease  dated August 1, 1990 between Charter County of Wayne, State of Michigan and  Mesaba Aviation, Inc. Incorporated by reference to Exhibit 10C to the  Company’s Form 10-Q for the quarter ended September 30,1990 |
|    | 10H          |   | Letter  Agreement dated December 24, 1992 relating to the repurchase of shares of  Common Stock from Northwest Aircraft, Inc. Incorporated by reference to  Exhibit 10EE to the Company’s Form 10-K for the year ended March 31, 1993 |
|    | 10I          |   | DOT  Certificate of Public Convenience and Necessity dated October 26, 1992.  Incorporated by reference to Exhibit 10FF  of the Company’s Form 10-K for the year ended March 31, 1993 |
|    | 10J          |   | Stock  Purchase Agreement between the Company and Carl R. Pohlad dated as of October  18, 1993.  Incorporated by reference to  Exhibit 10 of the Company’s Form 8-K dated October 19, 1993 |
|    | 10K          |   | Term Sheet  Proposal for the Acquisition of Saab 340 Aircraft by Mesaba Aviation, Inc.  dated March 7, 1996 (certain portions of this document have been deleted  pursuant to an application for confidential treatment under Rule 24b-2).  Incorporated by reference to Exhibit 10U to  the Company’s Form 10-K/A for the year ended March 31, 1996 |
|    | 10L          |   | Letter  Agreement regarding Saab 340B Plus Acquisition Financing dated March 7, 1996  (certain portions of this document have been deleted pursuant to an  application for confidential treatment under Rule 24b-2).  Incorporated by reference to Exhibit 10V to  the Company’s Form 10-K/A for the year ended March 31, 1996 |
|    | 10M          |   | Letter  Agreement of October 25, 1996 relating to Regional Jet Services Agreement between  Mesaba Aviation, Inc. and Northwest Airlines, Inc. (certain portions of this  document have been deleted pursuant to an application for confidential  treatment under Rule 24b-2).   Incorporated by reference to Exhibit 10A to the Company’s Form 10-Q/A for  the quarter ended September 30, 1996 |

 

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

 

**(b)****          Reports on Form 8-K**

 

The Companyfiled the following reports on Form 8-K during the quarter ended June 30, 2004:

 

(a)          Form8-K filed on May 12, 2004 containing disclosure under Items 7 and 12 regardingthe Company’s earnings for the fiscal quarter and year ended March 31, 2004.

 

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SIGNATURES

 

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

 
|                    | MAIR  Holdings, Inc.                                                                                                              |
|-------------------------|-----------------------------------------------------------------------------------------------------------------------------------|
|                    |                                                                                                                              |
| Dated:  August 16, 2004 | By:                                                                                                                               | /s/ Robert  E. Weil |   |
|                    | Robert E.  Weil  Vice President, Chief Financial Officer and Treasurer  (principal financial officer and an authorized signatory) |

 

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EXHIBIT INDEX

 

 

31.1 Chief Executive OfficerCertification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  Filed herewith.

 

31.2 Chief Financial OfficerCertification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  Filed herewith.

 

32. Certification Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.

 

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