DRAFT February14, 2005

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

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

 

**For thequarterly period ended December 31, 2004**

 

**OR**

 

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

 

**For thetransition period from           to          **

 

**CommissionFile No:  0-17895**

 

**MAIR HOLDINGS, INC.**

Incorporated under the laws ofMinnesota

 

**41-1616499**

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

 

**FifthStreet Towers, Suite 1720**

**150 SouthFifth Street**

**Minneapolis,MN  55402**

**(612)333-0021**

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15 (d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

 

Yes ý    Noo

 

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

 

Yes o    Noý

 

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

 
| **Class**                             | ** ** | **Outstanding as of January 31,  2005** |
|---------------------------------------|------------|----------------------------------------------|
| Common Stock Par value $.01 per share |       | 20,572,539                                   |

 

 

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**CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Statements in this Quarterly Report on Form 10-Q of MAIR Holdings, Inc.(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 informationcurrently available to the Company.  TheCompany, through its officers, directors or employees, may also from time totime make oral forward-looking statements. In connection with the “safe harbor” provisions of the PrivateSecurities Litigation Reform Act of 1995, the Company notes that a variety ofmaterial risks and uncertainties could cause actual results to differ materiallyfrom those contained in any forward-looking statement made by or on behalf ofthe Company.  Many important factors thatcould cause such a difference are described under the caption “Risk FactorsRelating to the Company and the Airline Industry” in Item 2 of this QuarterlyReport on Form 10-Q and in the Company’s Annual Report on Form 10-K for thefiscal year ended March 31, 2004.

 

Undue reliance should not be placed on theCompany’s forward-looking statements because the matters they describe aresubject to known and unknown risks, uncertainties and other unpredictablefactors, many of which are beyond the Company’s control.  The Company’s forward-looking statementsspeak only as of the date on which they are made.  Over time, actual results, performance orachievements will likely differ from the anticipated results, performance orachievements that are expressed or implied by the Company’sforward-looking statements, and such differences might be significantand materially adverse to the Company’s shareholders.

 

All written or oral forward-looking statements attributable to theCompany or persons acting on the Company’s behalf areexpressly 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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**PartI.  FINANCIAL INFORMATION**

 

**ITEM 1.**** CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**MAIRHOLDINGS, INC.**

**CONDENSED CONSOLIDATEDBALANCE SHEETS**

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

**(Unaudited)**

 
| ** **                                             | ** ** | **December 31  2004** | ** ** | **March 31  2004  (As restated-  see Note 13)** | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|------------------------------------------------------|------------|
| ASSETS                                                 |       |                       |       |                                                 |       |
|                                                   |       |                       |       |                                                 |       |
| CURRENT  ASSETS:                                       |       |                       |       |                                                 |       |
| Cash and  cash equivalents                             |       | $                          | 75,260     |                                                 | $          | 54,561 |   |
| Short-term  investments                                |       | 49,849                     |       | 67,285                                               |       |
| Accounts  receivable, net of reserves of $529 and $926 |       | 30,918                     |       | 28,453                                               |       |
| Inventories,  net                                      |       | 10,353                     |       | 8,664                                                |       |
| Prepaid  expenses and deposits                         |       | 7,477                      |       | 5,381                                                |       |
| Deferred  income taxes and other                       |       | 11,237                     |       | 11,449                                               |       |
| Total  current assets                                  |       | 185,094                    |       | 175,793                                              |       |
|                                                   |       |                       |       |                                                 |       |
| PROPERTY AND  EQUIPMENT:                               |       |                       |       |                                                 |       |
| Flight equipment                                       |       | 84,712                     |       | 81,891                                               |       |
| Other  property and equipment                          |       | 45,510                     |       | 41,901                                               |       |
| Less:  Accumulated depreciation and amortization       |       | (92,865                    | )          | (84,070                                              | )          |
| Net property  and equipment                            |       | 37,357                     |       | 39,722                                               |       |
|                                                   |       |                       |       |                                                 |       |
| NONCURRENT  ASSETS:                                    |       |                       |       |                                                 |       |
| Long-term  investments                                 |       | 42,596                     |       | 38,084                                               |       |
| Goodwill                                               |       | 2,503                      |       | 2,503                                                |       |
| Other  intangible assets, net                          |       | 2,921                      |       | 3,224                                                |       |
| Other  assets, net                                     |       | 7,076                      |       | 8,440                                                |       |
|                                                   |       | $                          | 277,547    |                                                 | $          | 267,766 |   |

 

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

 

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**MAIRHOLDINGS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS (Continued)**

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

**(Unaudited)**

 
| ** **                                                                                                            | ** ** | **December 31  2004** | ** ** | **March 31  2004  (As restated-  see Note 13)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------------------------------------|------------|
|                                                                                                                  |       |                       |       |                                                 |       |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                            |       |                       |       |                                                 |       |
|                                                                                                                  |       |                       |       |                                                 |       |
| CURRENT  LIABILITIES:                                                                                                 |       |                       |       |                                                 |       |
| Accounts  payable                                                                                                     |       | $                          | 20,629     |                                                 | $          | 18,981 |   |
| Accrued  liabilities:                                                                                                 |       |                       |       |                                                 |       |
| Payroll                                                                                                               |       | 15,432                     |       | 16,724                                               |       |
| Maintenance                                                                                                           |       | 17,810                     |       | 20,724                                               |       |
| Deferred  income                                                                                                      |       | 2,891                      |       | 2,504                                                |       |
| Other  current liabilities                                                                                            |       | 19,637                     |       | 17,124                                               |       |
| Total  current liabilities                                                                                            |       | 76,399                     |       | 76,057                                               |       |
|                                                                                                                  |       |                       |       |                                                 |       |
| OTHER  NONCURRENT LIABILITIES                                                                                         |       | 6,486                      |       | 7,448                                                |       |
|                                                                                                                  |       |                       |       |                                                 |       |
| COMMITMENTS  AND CONTINGENCIES (Note 11)                                                                              |       |                       |       |                                                 |       |
|                                                                                                                  |       |                       |       |                                                 |       |
| 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, 20,572,339 and  20,375,372 shares issued and outstanding |       | 206                        |       | 204                                                  |       |
| Paid-in  capital                                                                                                      |       | 54,527                     |       | 52,995                                               |       |
| Warrants                                                                                                              |       | 16,500                     |       | 16,500                                               |       |
| Accumulated  other comprehensive income (loss)                                                                        |       | (180                       | )          | 46                                                   |       |
| Retained  earnings                                                                                                    |       | 123,609                    |       | 114,516                                              |       |
| Total  shareholders’ equity                                                                                      |       | 194,662                    |       | 184,261                                              |       |
|                                                                                                                  |       | $                          | 277,547    |                                                 | $          | 267,766 |   |

 

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

 

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**MAIRHOLDINGS, INC.**

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
| ** **                                | ** ** | **Three Months Ended  December 31** | ** ** | **Nine Months Ended  December 31** | ** ** |
|-------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                | ** ** | **2004**                                 | ** ** | **2003  (As restated-  see Note 13)**   | ** ** | **2004** | ** ** | **2003  (As restated-  see Note 13)** | ** ** |
| OPERATING  REVENUES:                      |       |                                     |       |                                    |       |   |   |   |   |
| Passenger                                 |       | $                                        | 104,267    |                                    | $          | 107,161 |   | $ | 312,971 |   | $ | 323,606 |   |
| Freight and  other                        |       | 11,245                                   |       | 8,166                                   |       | 30,353 |   | 23,216 |   |
| Total  operating revenues                 |       | 115,512                                  |       | 115,327                                 |       | 343,324 |   | 346,822 |   |
|                                      |       |                                     |       |                                    |       |   |   |   |   |
| OPERATING  EXPENSES:                      |       |                                     |       |                                    |       |   |   |   |   |
| Wages and  benefits                       |       | 37,608                                   |       | 37,660                                  |       | 109,445 |   | 109,443 |   |
| Aircraft  fuel                            |       | 5,474                                    |       | 5,707                                   |       | 16,005 |   | 17,183 |   |
| Aircraft  maintenance                     |       | 21,963                                   |       | 21,399                                  |       | 63,704 |   | 60,354 |   |
| Aircraft  rents                           |       | 25,814                                   |       | 26,591                                  |       | 76,716 |   | 80,281 |   |
| Landing fees                              |       | 1,541                                    |       | 1,867                                   |       | 5,120 |   | 5,437 |   |
| Insurance  and taxes                      |       | 1,703                                    |       | 2,261                                   |       | 6,107 |   | 7,759 |   |
| Depreciation  and amortization            |       | 4,134                                    |       | 4,186                                   |       | 11,242 |   | 13,019 |   |
| Administrative  and other                 |       | 15,429                                   |       | 15,057                                  |       | 43,113 |   | 41,876 |   |
| Total  operating expenses                 |       | 113,666                                  |       | 114,728                                 |       | 331,452 |   | 335,352 |   |
| Operating  income                         |       | 1,846                                    |       | 599                                     |       | 11,872 |   | 11,470 |   |
|                                      |       |                                     |       |                                    |       |   |   |   |   |
| NONOPERATING  INCOME (EXPENSE):           |       |                                     |       |                                    |       |   |   |   |   |
| Interest  income and other                |       | 819                                      |       | 523                                     |       | 1,752 |   | 1,263 |   |
| Interest  expense                         |       | (16                                      | )          | (37                                     | )          | (50 | ) | (84 | ) |
| Government  grant income                  |       |                                     |       |                                    |       |   |   | 2,646 |   |
| Nonoperating income, net                  |       | 803                                      |       | 486                                     |       | 1,702 |   | 3,825 |   |
| Income  before provision for income taxes |       | 2,649                                    |       | 1,085                                   |       | 13,574 |   | 15,295 |   |
|                                      |       |                                     |       |                                    |       |   |   |   |   |
| PROVISION  FOR INCOME TAXES               |       | 1,156                                    |       | 370                                     |       | 4,481 |   | 7,228 |   |
| NET INCOME                                |       | $                                        | 1,493      |                                    | $          | 715 |   | $ | 9,093 |   | $ | 8,067 |   |
|                                      |       |                                     |       |                                    |       |   |   |   |   |
| NET INCOME  PER SHARE:                    |       |                                     |       |                                    |       |   |   |   |   |
| Earnings per  common share - basic        |       | $                                        | 0.07       |                                    | $          | 0.04 |   | $ | 0.44 |   | $ | 0.40 |   |
| Earnings per  common share - diluted      |       | $                                        | 0.07       |                                    | $          | 0.03 |   | $ | 0.43 |   | $ | 0.39 |   |
|                                      |       |                                     |       |                                    |       |   |   |   |   |
| WEIGHTED  AVERAGE SHARES OUTSTANDING:     |       |                                     |       |                                    |       |   |   |   |   |
| Basic                                     |       | 20,524                                   |       | 20,333                                  |       | 20,483 |   | 20,325 |   |
| Diluted                                   |       | 21,123                                   |       | 20,522                                  |       | 20,996 |   | 20,451 |   |

 

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

 

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**MAIRHOLDINGS, INC.**

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine Months Ended  December 31** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                                | ** ** | **2003  (As restated-  see Note 13)** | ** ** |
| CASH FLOWS  FROM OPERATING ACTIVITIES:                                             |       |                                    |       |   |   |
| Net income                                                                         |       | $                                       | 9,093      |   | $ | 8,067 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                                    |       |   |   |
| Depreciation  and amortization                                                     |       | 11,242                                  |       | 13,019 |   |
| Amortization  of investments                                                       |       | 1,557                                   |       | 1,245 |   |
| Amortization  of deferred credits                                                  |       | (861                                    | )          | (1,597 | ) |
| Stock-based  compensation                                                          |       | 173                                     |       | 752 |   |
| Changes in  current operating items:                                               |       |                                    |       |   |   |
| Accounts  receivable                                                               |       | (2,465                                  | )          | 9,462 |   |
| Inventories                                                                        |       | (1,689                                  | )          | 20 |   |
| Prepaid  expenses and deposits                                                     |       | (2,096                                  | )          | (1,238 | ) |
| Accounts  payable and other                                                        |       | 1,197                                   |       | 18,696 |   |
| Net cash  provided by operating activities                                         |       | 16,151                                  |       | 48,426 |   |
|                                                                               |       |                                    |       |   |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES:                                             |       |                                    |       |   |   |
| Purchases of  investments                                                          |       | (63,331                                 | )          | (69,176 | ) |
| Sales of  investments                                                              |       | 74,304                                  |       | 30,638 |   |
| Purchases of  property and equipment                                               |       | (7,514                                  | )          | (8,172 | ) |
| Net cash  provided by (used in) investing activities                               |       | 3,459                                   |       | (46,710 | ) |
|                                                                               |       |                                    |       |   |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES                                              |       |                                    |       |   |   |
| Repayment of  other noncurrent liabilities                                         |       | (101                                    | )          | (214 | ) |
| Proceeds  from issuance of common stock                                            |       | 1,190                                   |       | 179 |   |
| Net cash  provided by (used in) financing activities                               |       | 1,089                                   |       | (35 | ) |
|                                                                               |       |                                    |       |   |   |
| NET INCREASE  IN CASH AND CASH EQUIVALENTS                                         |       | 20,699                                  |       | 1,681 |   |
|                                                                               |       |                                    |       |   |   |
| CASH AND  CASH EQUIVALENTS:                                                        |       |                                    |       |   |   |
| Beginning of  period                                                               |       | 54,561                                  |       | 62,140 |   |
| End of  period                                                                     |       | $                                       | 75,260     |   | $ | 63,821 |   |
|                                                                               |       |                                    |       |   |   |
| SUPPLEMENTARY  CASH FLOW INFORMATION:                                              |       |                                    |       |   |   |
| Cash paid  during period for:                                                      |       |                                    |       |   |   |
| Interest                                                                           |       | $                                       | 57         |   | $ | 83 |   |
| Income taxes                                                                       |       | $                                       | 4,199      |   | $ | 3,241 |   |

 

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

 

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**MAIR HOLDINGS, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

The condensed consolidated financial statements included herein havebeen prepared by MAIR Holdings, Inc. (the “Company” or “Holdings”), withoutaudit, pursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”).  The information furnishedin the condensed consolidated financial statements includes normal recurringadjustments and reflects all adjustments, which are, in the opinion ofmanagement, necessary for a fair presentation of such condensed consolidatedfinancial statements.  The Company’sbusiness is seasonal and, accordingly, interim results are not indicative ofresults for a full year.  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America (“GAAP”) have been condensed or omitted pursuant tosuch rules and regulations, although the Company believes that the disclosuresare adequate to make the information presented not misleading.  These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements for the year ended March 31, 2004, and the notes thereto,included in the Company’s Annual Report on Form 10-K as filed with the SEC.

 

1.               Basis ofPresentation

 

The condensed consolidated financial statements include the accounts ofthe Company and its wholly owned subsidiaries, MesabaAviation, Inc. (“Mesaba”) and Big Sky TransportationCo. (“Big Sky”).  All significant intercompany transactions and balances havebeen eliminated in consolidation.

 

The preparation of the condensed consolidated financial statements inconformity with GAAP requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities, as well as the reported amounts of revenuesand expenses.  The most significant useof estimates relates to accrued maintenance expenses, aircraft property andequipment lives, inventory obsolescence reserves, valuation of goodwill andother intangible assets and accounting for income taxes.  Ultimate results could differ from thoseestimates.

 

Certain balances in the fiscal 2004 condensed consolidated financialstatements have been reclassified to conform to thefiscal 2005 presentation.  Thesereclassifications had no impact on net income or shareholders’ equity aspreviously reported.

 

2.               Business

 

*Mesaba*

Mesaba operatesas a regional air carrier providing scheduled passenger service as “Mesaba Airlines/Northwest Airlink”and “Mesaba Airlines/Northwest Jet Airlink” under two separate agreements with NorthwestAirlines, Inc., a wholly owned indirect subsidiary of Northwest AirlinesCorporation (“Northwest”).  As of December 31,2004, Mesaba served 111 cities in the United Statesand Canada from Northwest’s hub airports located in Minneapolis/St. Paul, Detroitand Memphis.

 

Under the Airline Services Agreement (the “AirlinkAgreement”), Mesaba operates Saab 340 jet-propaircraft (“Saab”) for Northwest.  Thisagreement provides for exclusive rights to designated service areas through June 30,2007.  Under the AirlinkAgreement, Mesaba recognizes revenue for eachcompleted “available seat mile” (“ASM”) (the number of seats available forpassengers, multiplied by the number of miles those seats are flown).  Under the AirlinkAgreement, Mesaba purchases fuel, ground handling andother services from Northwest.  Mesaba’s cost of fuel, includingtaxes and pumping fees, is 83.5 cents per gallon.  Mesaba paidNorthwest $7.8 million and $8.2 million for these services for the three monthsended December 31, 2004 and 2003.  Mesaba paid Northwest $26.0 million and $22.7 million forthese services for the nine months ended December 31, 2004 and 2003.  Either Northwest or Mesabamay terminate the Airlink Agreement on 365 daysnotice or it may be terminated immediately by either partyif the other party disposes of a substantial part of its assets.  The AirlinkAgreement may also be terminated in the event ofcertain breaches or defaults.

 

Under the Regional Jet Services Agreement (the “Jet Agreement”), Mesaba operates Avro RJ85regional jets (“RJ85”) for Northwest through April 25, 2007.  Under the Jet Agreement, Mesabarecognizes revenue for each “block hour” flown (the elapsed time betweenaircraft departing and arriving at a gate). Under the Jet Agreement, Northwest provides fuel and airport andpassenger related services at Northwest’s expense.  The Jet Agreement may beterminated immediately by Mesaba or Northwest ifthe other party disposes of a substantial part of its assets.  The Jet Agreement may alsobe terminated in the event of certain breaches or defaults.

 

Under the agreements, all Mesaba flightsappear in Northwest’s schedules and Mesaba receivesticketing and certain check-in, baggage and freight-handling services fromNorthwest at certain airports.  Mesaba also benefits from its relationship with

 

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Northwest through advertising and marketingprograms. The Airlink and Jet Agreements provide for certain incentive payments from Northwest to Mesaba based on achievement of certain operational orfinancial goals.  For the three monthsended December 31, 2004, Mesaba reduced itsrevenue by $0.1 million.  Incentives totaled$1.4 million for the three months ended December 31, 2003.  Incentives totaled $3.0 million and $3.9million for the nine months ended December 31, 2004 and 2003.  The incentive payments are included inpassenger revenues in the accompanying condensed consolidated statements ofoperations.  Approximately $26.3 millionor 85.0% and $21.1 million or 74.1% of the December 31, 2004 and March 31,2004 accounts receivable balances in the accompanying condensed consolidatedbalance sheets were due from Northwest. Substantially all of Mesaba’s operatingrevenue was from Northwest.  As of December 31,2004 and March 31, 2004, Mesaba owed Northwest $1.5million and $1.0 million, primarily for fuel and ground handling services.

 

Cancellation of the Airlink or Jet Agreementsor Northwest’s failure to make timely payment of amounts owed to Mesaba or to otherwise materially perform under the Airlink or Jet Agreements for any reason would have amaterial adverse effect on Mesaba’s and the Company’soperations, financial position and cash flows. Northwest and Mesaba review contractcompliance on a periodic basis.

 

*Big Sky*

Big Sky operates as a regional air carrier based in Billings, Montana,primarily providing scheduled passenger, airfreight, expresspackage and charter services.  As of December 31,2004, Big Sky provided scheduled air service to 18 communities in Montana,North Dakota, Washington and Idaho.  BigSky operates daily scheduled flights providing interline and online connectingservices and local market services.  BigSky also has code-sharing agreements with Alaska Airlines, America WestAirlines and Northwest, where its services are marketedjointly with those air carriers for connecting flights.  Big Sky participates in the Essential AirService (“EAS”) program with the U.S. Department of Transportation (“DOT”).  The EAS program subsidizes air carriers toprovide air service to designated rural communities throughout the country thatcould not otherwise economically justify that service based on its passengertraffic.  The DOT pays EAS subsidies foreach departure in a covered market.  BigSky purchased fuel from Northwest for $0.3 million and $0.4 million for thethree months ended December 31, 2004 and 2003.  Big Sky purchased fuel from Northwest for $1.3million and $1.4 million for the nine months ended December 31, 2004 and2003.

 

3.               Goodwill andOther Intangibles

 

InDecember 2002, the Company acquired Big Sky for $3.2 million, net of cashacquired of $0.3 million.  The excess ofthe Big Sky purchase price over the fair market value of the net assetsacquired was allocated to certain identifiableintangible assets, including Big Sky’s pilot labor contract and an air carriercertificate, and to goodwill.  Goodwilland other intangible assets and related accumulated amortization were asfollows, in thousands:

 
| ** **                     | ** ** | **December 31, 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                      |       | (844                          | )          | 1,996 |   | 2,840 |   | (541 | ) | 2,299 |   |
|                           |       | $                          | 6,268      |                          | $          | (844 | ) | $ | 5,424 |   | $ | 6,268 |   | $ | (541 | ) | $ | 5,727 |   |
|                                |            |                            |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amortizable intangible asset is amortizedover its estimated period of benefit. Intangible asset amortization expense for the three andnine months ended December 31, 2004 and 2003 was $0.1 million and$0.3 million.  Goodwill and theintangible assets are evaluated for impairment annually,at a minimum, or on an interim basis if events or circumstances indicate apossible inability to realize the carrying amounts.  The evaluation includes future cash flowprojections, strategic modeling and other management assumptions.  During the fourth quarter of each fiscal year,the Company completes its annual impairment test of goodwill and otherintangible assets.  The Company continuesto monitor goodwill and the intangible assets at Big Sky for impairment.

 

4.               Investments

 

Investments consist principally of 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 unrealizedgains

 

8

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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 less than 90 days as cashequivalents.  Investments with anoriginal maturity date of more than 90 days that mature within one year areclassified as short-term investments and greater than one year as long-terminvestments.  As of December 31,2004 and March 31, 2004, cash, cash equivalents, short-term and long-terminvestments totaled $167.7 million and $159.9 million.

 

Amortized cost, gross unrealized gains and lossesand fair value of short and long-term investments classified as debt securitiesavailable-for-sale were as follows, in thousands:

 
| ** **               | ** ** | **December 31, 2004** | ** ** | **March 31, 2004** | ** ** |
|--------------------------|------------|----------------------------|------------|-------------------------|------------|
| Amortized  cost          |       | $                          | 92,750     |                    | $          | 105,280 |   |
| Gross unrealized  gains  |       | 2                          |       | 127                     |       |
| Gross  unrealized losses |       | (307                       | )          | (38                     | )          |
| Fair value               |       | $                          | 92,445     |                    | $          | 105,369 |   |

 

For the three and nine months ended December 31, 2004 and 2003,gross realized gains and losses were insignificant as the Company generallyheld the fully amortized bonds to maturity.

 

5.               StockOptions

 

The Company accounts for its stock-based compensation plans using theintrinsic value method prescribed under Accounting Principles Board (“APB”) OpinionNo. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations.  The Company has issuedstock options to key employees and directors. As such, the Company records compensation expense for stock options andawards only if the exercise price is less than the fair market value of thestock on the measurement date.

 

For purposes of the pro forma disclosures of compensation expense underStatement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting forStock-Based Compensation” and SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure,” the Company uses the Black-Scholes option model to estimate the fair value of optionsnot subject to variable plan accounting.

 

The following information summarizes the pro forma effects assumingcompensation for such awards had been recorded basedupon the estimated fair value for the periods ended December 31, inthousands, except per share information:

 
|                                                                                                                                    |   | **Three Months Ended  December 31** |   | **Nine Months Ended  December 31** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                                                                    |   | **2004**                                 |   | **2003**                                |   | **2004** |   | **2003** |   |
| Net income  as reported                                                                                                                 |   | $                                        | 1,493  |                                    | $      | 715 |   | $ | 9,093 |   | $ | 8,067 |   |
| Add:  stock-based employee compensation expense included in reported net income,  net of related tax effects                            |   | 503                                      |   | 172                                     |   | 116 |   | 397 |   |
| Deduct:  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |   | (275                                     | )      | (365                                    | )      | (983 | ) | (966 | ) |
| Pro forma  net income                                                                                                                   |   | $                                        | 1,721  |                                    | $      | 522 |   | $ | 8,226 |   | $ | 7,498 |   |
|                                                                                                                                    |   |                                     |   |                                    |   |   |   |   |   |
| Earnings per  common share – basic:                                                                                                |   |                                     |   |                                    |   |   |   |   |   |
| As reported                                                                                                                             |   | $                                        | 0.07   |                                    | $      | 0.04 |   | $ | 0.44 |   | $ | 0.40 |   |
| Pro forma                                                                                                                               |   | $                                        | 0.08   |                                    | $      | 0.03 |   | $ | 0.40 |   | $ | 0.37 |   |
| Earnings per  common share – diluted:                                                                                              |   |                                     |   |                                    |   |   |   |   |   |
| As reported                                                                                                                             |   | $                                        | 0.07   |                                    | $      | 0.03 |   | $ | 0.43 |   | $ | 0.39 |   |
| Pro forma                                                                                                                               |   | $                                        | 0.08   |                                    | $      | 0.03 |   | $ | 0.39 |   | $ | 0.37 |   |

 

9

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InDecember 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.  As of December 31, 2004, 514,782 repriced options were outstanding.  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.  As a result of the repricing, for the three months ended December 31,2004 and 2003, the Company recorded compensation expense of $0.9 million and $0.3million.  For the nine months ended December 31,2004 and 2003, the Company recorded compensation expense of $0.2 million and$0.8 million.

 

6.               Earnings Per Share

 

Basic earnings per common share iscomputed by dividing net income by the weighted average number of shares ofcommon stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the sumof the weighted average number of shares of common stock outstanding plus alladditional common stock that would have been outstanding if potentiallydilutive common shares related to stock options and warrants had beenissued.  Stock options and warrants withan exercise price exceeding the fair market value of the Company’s common stockare considered  antidilutiveand are excluded from the calculation.

 

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

 
| ** **                                                                                                   | ** ** | **Three Months Ended  December 31** | ** ** | **Nine Months Ended  December 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2004**                                 | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income                                                                                                   |       | $                                        | 1,493      |                                    | $          | 715 |   | $ | 9,093 |   | $ | 8,067 |   |
| For earnings  per common share - basic:                                                                      |       |                                     |       |                                    |       |   |   |   |   |
| Weighted  average number of issued shares outstanding                                                        |       | 20,524                                   |       | 20,333                                  |       | 20,483 |   | 20,325 |   |
| Effect of  dilutive securities:                                                                              |       |                                     |       |                                    |       |   |   |   |   |
| Computed  shares outstanding under the Company’s stock option plan utilizing the  treasury stock method |       | 424                                      |       | 189                                     |       | 369 |   | 126 |   |
| Computed  shares outstanding under warrants issued utilizing the treasury stock method                       |       | 175                                      |       | —                                  |       | 144 |   | — |   |
| For earnings  per common share - diluted:                                                                    |       |                                     |       |                                    |       |   |   |   |   |
| Weighted  average common shares and potentially dilutive common shares                                       |       | 21,123                                   |       | 20,522                                  |       | 20,996 |   | 20,451 |   |
| Earnings per  common share – basic                                                                      |       | $                                        | 0.07       |                                    | $          | 0.04 |   | $ | 0.44 |   | $ | 0.40 |   |
| Earnings per  common share – diluted                                                                    |       | $                                        | 0.07       |                                    | $          | 0.03 |   | $ | 0.43 |   | $ | 0.39 |   |
|                                                                                                         |       |                                     |       |                                    |       |   |   |   |   |
| Antidilutive options and warrants                                                                            |       | 3,505                                    |       | 4,490                                   |       | 3,505 |   | 4,490 |   |

 

7.               Consolidated Comprehensive Income

 

The following table presents the calculation of comprehensiveincome.  The components of comprehensiveincome for the periods ended December 31 are as follows, inthousands:

 

10

----

 
| ** **                                                                     | ** ** | **Three Months Ended  December 31** | ** ** | **Nine Months Ended  December 31** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                                 | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income                                                                     |       | $                                        | 1,493      |                                    | $          | 715 |   | $ | 9,093 |   | $ | 8,067 |   |
| Unrealized  losses on investments classified as available for sale, net of tax |       | (136                                     | )          | (40                                     | )          | (46 | ) | (63 | ) |
| Comprehensive  income                                                          |       | $                                        | 1,357      |                                    | $          | 675 |   | $ | 9,047 |   | $ | 8,004 |   |
|                                                                                |            |                                          |            |                                         |            |  |  |  |  |  |  |  |  |  |

 

8.               SegmentInformation

 

The Company follows the provisions of SFAS No. 131, “Disclosures aboutSegments of an Enterprise and Related Information.”  SFAS No. 131 establishes annual and interimreporting standards for an enterprise’s business segments and relateddisclosures about its products, services, geographic areas and major customers.  The method for determining what informationto report is based upon the way management organizesthe operating segments within the Company for making operating decisions andassessing financial performance.  Operatingsegment information for Mesaba, Big Sky and Holdings forthe periods ended December 31 were as follows, in thousands:

 
| ** **                                  | ** ** | **Mesaba** | ** ** | **Big Sky** | ** ** | **Holdings and  Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|------------|------------|-------------|------------|--------------------------------|------------|------------------|------------|
| Three Months  Ended December 31, 2004: |       |       |       |        |       |                           |       |             |       |
| Operating  revenues                         |       | $          | 111,794    |        | $          | 3,718                          |       |             |       | $ | 115,512 |   |
| Depreciation  and amortization              |       | 3,947      |       | 183         |       | $                              | 4          |             | 4,134      |   |
| Interest  expense                           |       | —     |       | 65          |       | (49                            | )          | 16               |       |
| Income  (loss) before income taxes          |       | 3,703      |       | (495        | )          | (559                           | )          | 2,649            |       |
| Capital  expenditures (sales)               |       | 2,435      |       | (36         | )          | —                         |       | 2,399            |       |
| Total assets  at end of period              |       | 118,209    |       | 9,332       |       | 150,006                        |       | 277,547          |       |
| Three Months  Ended December 31, 2003: |       |       |       |        |       |                           |       |             |       |
| Operating  revenues                         |       | 111,221    |       | 4,106       |       |                           |       | 115,327          |       |
| Depreciation  and amortization              |       | 3,954      |       | 230         |       | 2                              |       | 4,186            |       |
| Interest  expense                           |       | —     |       | 75          |       | (38                            | )          | 37               |       |
| Income (loss)  before income taxes          |       | 2,117      |       | (1,092      | )          | 60                             |       | 1,085            |       |
| Capital  expenditures (sales)               |       | 3,391      |       | (16         | )          | 4                              |       | 3,379            |       |
| Total assets  at end of period              |       | 134,452    |       | 10,669      |       | 132,709                        |       | 277,830          |       |
| Nine Months  Ended December 31, 2004:  |       |       |       |        |       |                           |       |             |       |
| Operating  revenues                         |       | 332,045    |       | 11,279      |       |                           |       | 343,324          |       |
| Depreciation  and amortization              |       | 10,641     |       | 589         |       | 12                             |       | 11,242           |       |
| Interest  expense                           |       | —     |       | 210         |       | (160                           | )          | 50               |       |
| Income  (loss) before income taxes          |       | 14,998     |       | (2,408      | )          | 984                            |       | 13,574           |       |
| Capital  expenditures                       |       | 7,477      |       | 32          |       | 5                              |       | 7,514            |       |
| Nine Months  Ended December 31, 2003:  |       |       |       |        |       |                           |       |             |       |
| Operating  revenues                         |       | 334,066    |       | 12,756      |       |                           |       | 346,822          |       |
| Depreciation  and amortization              |       | 12,400     |       | 613         |       | 6                              |       | 13,019           |       |
| Interest  expense                           |       | —     |       | 235         |       | (151                           | )          | 84               |       |
| Income  (loss) before income taxes          |       | 16,824     |       | (2,169      | )          | 640                            |       | 15,295           |       |
| Capital  expenditures                       |       | 8,148      |       | 10          |       | 14                             |       | 8,172            |       |
|                                             |            |            |            |             |            |                                |            |                  |            |  |  |  |  |

 

9.               NonoperatingIncome

 

In April 2003, Congress enacted the Emergency Wartime SupplementalAppropriations Act.  Among other items,the legislation included a $2.3 billion government grant to U.S. airlines.  In accordance with this Act, in the firstquarter of fiscal 2004, Mesaba recognized $2.3million as “nonoperating income” and Big Skyrecognized $0.3 million as “nonoperating income” and$0.2 million as a reduction of “administrative and other expense” in theaccompanying condensed consolidated statements of operations.

 

11

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10.         Income Taxes

 

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 aresult of this settlement, the Company reduced its income tax payableand tax provision by $1.2 million in the first quarter of fiscal 2005.

 

11.         Commitments andContingencies

 

On October 4, 2002, FairbrookLeasing, Inc., Lambert Leasing, Inc. and Swedish Aircraft Holdings AB (“SaabLeasing”) filed a declaratory judgment action against Mesabarelating to 20 Saab 340A (“340A”) aircraft leased by Mesaba.  Saab Leasing sought a judicial declarationthat the terms of the leases applicable to each of the 340A aircraft are governed by a March 7, 1996 term sheet proposalrather than the short-term leases subsequently executed by the parties.  The case was broughtin the United States District Court for the District of Minnesota (“DistrictCourt”).  On December 8, 2003, theDistrict Court issued an order declaring that the term sheet proposalconstitutes a binding contract that required Mesabato execute or negotiate in good faith toward the execution of long-term leaseson each of the 340A aircraft.  TheDistrict Court concluded that the term sheet proposal is ambiguous with respectto whether lease extensions contemplated by that document are at Mesaba’s option or Saab Leasing’soption.  Mesabahas appealed the District Court’s summary judgment ruling.  On August 13, 2004, Saab Leasing filed acomplaint in the District Court alleging damages in the form of aircraft leasepayments they contend are due or will become due based upon the District Court’ssummary judgment ruling in the declaratory judgment action.  Saab Leasing alleges approximately $35million in past due and future aircraft lease obligations.  Mesaba denies theallegations in Saab Leasing’s complaint and contendsthat it has fulfilled and will continue to fulfill its existing leaseobligations.  The ultimate outcome ofthis dispute cannot be predicted with certainty.

 

12.         New AccountingPronouncements

 

InDecember 2004, the FASB issued SFAS 123(R), “Share-Based Payment,” which requires all public companiesaccounting for share-based payment transactions to account for these types oftransactions using a fair-value-based method. SFAS 123(R) eliminates the ability to account for share-basedcompensation transactions using APB Opinion No. 25.  SFAS 123(R) also requires the taxbenefits associated with these shared-based payments to beclassified as financing activities in the statement of cash flows ratherthan operating activities as is currently permitted.  SFAS 123(R) becomes effective forinterim or annual periods beginning after June 15, 2005.

 

TheCompany expects to adopt SFAS 123(R) on April 1, 2005, the beginning ofits first quarter of fiscal 2006, using the modified-prospective method.  Under this transition method, the Companywill record compensation expense for all awards it grants on a straight-linebasis over the vesting period.  Inaddition, the Company will record compensation expense for the unvested portionof previously granted awards that remain outstanding at the date of theadoption.  The Company has not completedits assessment of the impact of the standard on its financial condition orresults of operations.

 

In March 2004, the Emerging Issues Task Force (“EITF”) reached aconsensus on Issue 03-1, “The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments” regarding disclosure about unrealizedlosses on available for sale debt and equity securities accounted for underSFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities”.  The guidance for evaluating whether aninvestment is other than temporarily impaired should beapplied in such evaluations made in reporting periods beginning after June 15,2004.  The recognition and measurementguidance has been delayed and the disclosure guidanceremains in effect.  The Company does notexpect the implementation of EITF 03-1 to have a material effect on itsconsolidated financial statements.

 

12

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13.         Restatement

 

Duringthe fourth quarter of fiscal 2005, the Company determined that it hadincorrectly accounted for certain aircraft leases that contained reduced rentobligations over a portion of the lease term. This resulted in an understatement of other assets, net, other noncurrent liabilities and aircraft rents and anoverstatement of retained earnings, shareholders’ equity and net income inprior periods.  Although the Company doesnot believe that this error resulted in a material misstatement of the Company’sconsolidated financial statements for any annual or interim periods aspresented below, the effects of correcting the error currently would have had amaterial effect on the Company’s results of operations for the third quarter offiscal 2005.  The Company has restatedthe accompanying condensed consolidated financial statements as of March 31,2004 and for the three and nine months ended December 31, 2003 to recordaircraft rents on a straight-line basis over the lease terms.

 

TheCompany intends to include restated consolidated financial statements forfiscal 2004 and 2003 in its Annual Report on Form 10-K for the year ending March 31,2005, and to include restated consolidated financial statements for the fiscal2005 interim periods in its Quarterly Reports on Form 10-Q filed prospectively.

 

Asummary of the significant effects of the restatement on the Company’s interimcondensed consolidated financial statements for fiscal 2005 is as follows, inthousands, except per share information:

 
| ** **                                | ** ** | **Three Months Ended  June 30, 2004** | ** ** | **Three Months Ended  September 30, 2004** | ** ** | **Six Months Ended  September 30, 2004** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **As Previously  Reported**                | ** ** | **As  Restated**                                | ** ** | **As Previously  Reported**                   | ** ** | **As  Restated** | ** ** | **As Previously  Reported** | ** ** | **As  Restated** | ** ** |
| Consolidated  balance sheets:             |       |                                       |       |                                            |       |                                          |       |   |   |   |   |   |   |
| Other  assets, net                        |       | $                                          | 7,482      |                                            | $          | 7,958                                         |       | $ | 7,052 |   | $ | 7,558 |   | $ | 7,052 |   | $ | 7,558 |   |
| Total assets                              |       | 263,308                                    |       | 263,784                                         |       | 272,625                                       |       | 273,131 |   | 272,625 |   | 273,131 |   |
| Other noncurrent liabilities              |       | 5,889                                      |       | 7,077                                           |       | 5,428                                         |       | 6,690 |   | 5,428 |   | 6,690 |   |
| Retained  earnings                        |       | 118,091                                    |       | 117,379                                         |       | 122,872                                       |       | 122,116 |   | 122,872 |   | 122,116 |   |
| Total  shareholders’ equity          |       | 187,751                                    |       | 187,039                                         |       | 192,555                                       |       | 191,799 |   | 192,555 |   | 191,799 |   |
| Statements  of operations:                |       |                                       |       |                                            |       |                                          |       |   |   |   |   |   |   |
| Aircraft  rents                           |       | 25,032                                     |       | 25,106                                          |       | 25,722                                        |       | 25,796 |   | 50,754 |   | 50,902 |   |
| Total  operating expenses                 |       | 107,101                                    |       | 107,175                                         |       | 110,537                                       |       | 110,611 |   | 217,638 |   | 217,786 |   |
| Operating  income                         |       | 2,598                                      |       | 2,524                                           |       | 7,576                                         |       | 7,502 |   | 10,174 |   | 10,026 |   |
| Income  before provision for income taxes |       | 2,965                                      |       | 2,891                                           |       | 8,108                                         |       | 8,034 |   | 11,073 |   | 10,925 |   |
| Net income                                |       | 2,907                                      |       | 2,863                                           |       | 4,781                                         |       | 4,737 |   | 7,688 |   | 7,600 |   |
| Earnings per  common share - basic        |       | 0.14                                       |       | 0.14                                            |       | 0.23                                          |       | 0.23 |   | 0.38 |   | 0.37 |   |
| Earnings per  common share - diluted      |       | 0.14                                       |       | 0.14                                            |       | 0.23                                          |       | 0.23 |   | 0.37 |   | 0.36 |   |
|                                           |            |                                            |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

13

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Asummary of the significant effects of the restatement on the Company’s interimcondensed consolidated financial statements for fiscal 2004 is as follows, inthousands, except per share information:

 
| ** **                               | ** ** | **Three Months Ended   June 30, 2003** | ** ** | **Three Months Ended   September 30, 2003** | ** ** | **Six Months Ended   September 30, 2003** | ** ** | **Three Months Ended   December 31, 2003** | ** ** | **Nine Months Ended   December 31, 2003** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                               | ** ** | **As Previously   Reported**                | ** ** | **As   Restated**                                | ** ** | **As Previously   Reported**                   | ** ** | **As   Restated**                               | ** ** | **As Previously   Reported**                   | ** ** | **As   Restated** | ** ** | **As Previously   Reported** | ** ** | **As   Restated** | ** ** | **As Previously   Reported** | ** ** | **As   Restated** | ** ** |
| ** **                               | ** ** | ** **                                  | ** ** | ** **                                       | ** ** | ** **                                     | ** ** | ** **                                      | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Consolidated balance sheets:             |       |                                        |       |                                             |       |                                           |       |                                            |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Other assets, net                        |       | $                                           | 15,067     |                                             | $          | 15,424                                         |       | $                                               | 14,532     |                                           | $          | 14,919 |   | $ | 14,532 |   | $ | 14,919 |   | $ | 14,906 |   | $ | 15,323 |   | $ | 14,906 |   | $ | 15,323 |   |
| Total assets                             |       | 256,734                                     |       | 257,091                                          |       | 266,423                                        |       | 266,810                                         |       | 266,423                                        |       | 266,810 |   | 277,413 |   | 277,830 |   | 277,413 |   | 277,830 |   |
| Other noncurrent  liabilities            |       | 6,141                                       |       | 7,033                                            |       | 5,515                                          |       | 6,481                                           |       | 5,515                                          |       | 6,480 |   | 6,845 |   | 7,885 |   | 6,845 |   | 7,885 |   |
| Retained earnings                        |       | 114,017                                     |       | 113,482                                          |       | 117,951                                        |       | 117,372                                         |       | 117,951                                        |       | 117,372 |   | 118,710 |   | 118,087 |   | 118,710 |   | 118,087 |   |
| Total shareholders’ equity          |       | 181,451                                     |       | 180,916                                          |       | 185,892                                        |       | 185,313                                         |       | 185,892                                        |       | 185,313 |   | 187,012 |   | 186,389 |   | 187,012 |   | 186,389 |   |
| Statements of operations:                |       |                                        |       |                                             |       |                                           |       |                                            |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Aircraft rents                           |       | 26,778                                      |       | 26,852                                           |       | 26,764                                         |       | 26,838                                          |       | 53,542                                         |       | 53,690 |   | 26,517 |   | 26,591 |   | 80,059 |   | 80,281 |   |
| Total operating expenses                 |       | 109,290                                     |       | 109,364                                          |       | 111,186                                        |       | 111,260                                         |       | 220,476                                        |       | 220,624 |   | 114,654 |   | 114,728 |   | 335,130 |   | 335,352 |   |
| Operating income                         |       | 4,743                                       |       | 4,669                                            |       | 6,276                                          |       | 6,202                                           |       | 11,019                                         |       | 10,871 |   | 673 |   | 599 |   | 11,692 |   | 11,470 |   |
| Income before provision for income taxes |       | 7,722                                       |       | 7,648                                            |       | 6,636                                          |       | 6,562                                           |       | 14,358                                         |       | 14,210 |   | 1,159 |   | 1,085 |   | 15,517 |   | 15,295 |   |
| Net income                               |       | 3,506                                       |       | 3,462                                            |       | 3,934                                          |       | 3,890                                           |       | 7,440                                          |       | 7,352 |   | 759 |   | 715 |   | 8,199 |   | 8,067 |   |
| Earnings per common share - basic        |       | 0.17                                        |       | 0.17                                             |       | 0.19                                           |       | 0.19                                            |       | 0.37                                           |       | 0.36 |   | 0.04 |   | 0.04 |   | 0.40 |   | 0.40 |   |
| Earnings per common share - diluted      |       | 0.17                                        |       | 0.17                                             |       | 0.19                                           |       | 0.19                                            |       | 0.36                                           |       | 0.36 |   | 0.04 |   | 0.03 |   | 0.40 |   | 0.39 |   |
|                                          |            |                                             |            |                                                  |            |                                                |            |                                                 |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

14

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Asummary of the significant effects of the restatement on the Company’s annualconsolidated financial statements for fiscal 2004 and 2003 is as follows, inthousands, except per share information:

 
| ** **                               | ** ** | **Year Ended  March 31, 2004** | ** ** | **Year Ended  March 31, 2003** | ** ** |
|------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **As Previously  Reported**    | ** ** | **As  Restated**               | ** ** | **As Previously  Reported** | ** ** | **As  Restated** | ** ** |
| Consolidated balance sheets:             |       |                           |       |                           |       |   |   |   |   |
| Other assets, net                        |       | $                              | 7,994      |                           | $          | 8,440 |   | $ | 7,873 |   | $ | 8,200 |   |
| Total assets                             |       | 267,320                        |       | 267,766                        |       | 250,642 |   | 250,969 |   |
| Other noncurrent liabilities             |       | 6,334                          |       | 7,448                          |       | 6,344 |   | 7,161 |   |
| Retained earnings                        |       | 115,184                        |       | 114,516                        |       | 110,511 |   | 110,020 |   |
| Total shareholders’ equity          |       | 184,929                        |       | 184,261                        |       | 177,945 |   | 177,454 |   |
| Statements of operations:                |       |                           |       |                           |       |   |   |   |   |
| Aircraft rents                           |       | 105,163                        |       | 105,460                        |       | 107,547 |   | 107,844 |   |
| Total operating expenses                 |       | 444,756                        |       | 445,053                        |       | 448,252 |   | 448,549 |   |
| Operating income                         |       | 4,323                          |       | 4,026                          |       | 8,628 |   | 8,331 |   |
| Income before provision for income taxes |       | 8,756                          |       | 8,459                          |       | 8,887 |   | 8,590 |   |
| Net income                               |       | 4,673                          |       | 4,496                          |       | 4,329 |   | 4,151 |   |
| Earnings per common share - basic        |       | 0.23                           |       | 0.22                           |       | 0.21 |   | 0.20 |   |
| Earnings per common share - diluted      |       | 0.23                           |       | 0.22                           |       | 0.21 |   | 0.20 |   |
|                                          |            |                                |            |                                |            |  |  |  |  |  |  |  |  |

 

Therestatement also resulted in a decrease in retained earnings and shareholders’equity as of April 1, 2002 of $0.3 million.

 

15

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operationshas been updated to give effect to the restatement as discussed in Note 13to the condensed consolidated financial statements included in Item 1, andshould be read in conjunction with the accompanying condensed consolidatedfinancial statements.  The Company’soperations and financial results are subject to various risks and uncertaintiesassociated with the airline industry.  See“Risk Factors Relating to the Company and the Airline Industry” at the end ofthis Item 2.

 

RESULTS OF OPERATIONS

 

**Three Months Ended December 31, 2004 and 2003**

The Company’s consolidated net income for the quarter ended December 31,2004 was $1.5 million, or $0.07 per diluted share, compared with net income of$0.7 million, or $0.03 per diluted share, for the quarter ended December 31, 2003.  Comparative information on operations for thethree months ended December 31 was as follows:

 

***Mesaba***

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

 
| ** **                     | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|--------------------------------|------------|-----------|------------|-----------|------------|
| Passengers                     |       | 1,412,966 |       | 1,469,604 |       |
| Available seat miles (000s)    |       | 793,269   |       | 760,478   |       |
| Revenue passenger miles (000s) |       | 511,531   |       | 466,544   |       |
| Load factor                    |       | 64.5      | %          | 61.3      | %          |
| Departures                     |       | 52,423    |       | 56,239    |       |
| Revenue per ASM                |       | $         | 0.141      |      | $          | 0.146 |   |
| Cost per ASM                   |       | $         | 0.136      |      | $          | 0.144 |   |
| Aircraft in service (average)  |       | 99        |       | 102       |       |

 

Mesaba OperatingRevenues  Totaloperating revenues increased 0.5% in the third quarter of fiscal 2005 to $111.8million from $111.2 million in the prior year quarter primarily due to increasedground handling revenue in Detroit and Minneapolis/St Paul.  This was partially offset by a decrease inpassenger revenue, which was driven by the removal of five Saab A modelaircraft from the fleet, partially offset by increased RJ85 block hours.

 

Mesaba Operating Expenses Total operating expenses decreased 0.9%in the third quarter of fiscal 2005 to $108.2 million from $109.2 million inthe prior year quarter.  Mesaba’s operatingcosts per ASM for the three months ended December 31 were as follows:

 
| ** **                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Wages and benefits            |       | 4.4      | ¢     | 4.6      | ¢     |
| Aircraft fuel                 |       | 0.6      |       | 0.7      |       |
| Aircraft maintenance          |       | 2.7      |       | 2.7      |       |
| Aircraft rents                |       | 3.2      |       | 3.4      |       |
| Landing fees                  |       | 0.2      |       | 0.2      |       |
| Insurance and taxes           |       | 0.2      |       | 0.3      |       |
| Depreciation and amortization |       | 0.5      |       | 0.5      |       |
| Administrative and other      |       | 1.8      |       | 2.0      |       |
| Total                         |       | 13.6     | ¢     | 14.4     | ¢     |

 

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Wages and benefits decreased 0.8% to $34.9 million in the third quarterof fiscal 2005 from $35.2 million in the prior year quarter primarily due tothe $2.7 million retroactive pilot compensation accrued in the prior yearresulting from the pilots’ contract signed in January 2004 and reduced employeeincentive compensation due to reduced operational performance.  This was mostly offset by increased groundhandling wages due to increased ground handling activity, increased pilot wagesdue to the new pilots’ contract and increased benefit costs related to the 401(k)benefit plan and health and dental plans.

 

Aircraft fuel decreased 7.0% to $4.8 million in the third quarter offiscal 2005 from $5.2 million in the prior year quarter due to the reduction inthe number of Saab block hours flown. Provisions of the Airlink Agreement with Northwest protect Mesaba fromchanges in fuel prices.  Mesaba’s actualcost of fuel, including taxes and pumping fees, was 83.5 cents per gallon forboth periods.  Northwest is responsiblefor fuel for Mesaba’s RJ85 operations.

 

Aircraft maintenance, excluding wages and benefits, increased 5.2% to $21.5million in the third quarter of fiscal 2005 from $20.4 million in the prioryear quarter due to increased costs associated with expendable parts and repaircosts incurred to continue to maintain the fleet as it ages.

 

Aircraft rents decreased 2.7% to $25.3 million in the third quarter of fiscal2005 from $26.0 in the prior year quarter due to the return of five Saabaircraft and the reduction of one RJ85.

 

Landing fees decreased 17.6% to $1.5 million in the third quarter offiscal 2005 from $1.8 in the prior year quarter due to the recognition of anairport landing fee refund and a reduction in Saab departures offset by increasedrates.  Northwest is responsible for landingfees for Mesaba’s RJ85 operations.

 

Insurance and taxes decreased 23.8% to $1.5 million in the thirdquarter of fiscal 2005 from $1.9 million in the prior year quarter due primarilyto fewer insured aircraft and lower insurance rates.

 

Depreciation and amortization decreased 0.2% to $3.9 million in the thirdquarter of fiscal 2005 compared to $4.0 million in the prior year quarter dueprimarily to reduced capital spending over the last several years.  The reduction is because fewer capitalexpenditures are required to maintain the fleet versus investing in theinfrastructure to grow the fleet in previous years.

 

Administrative and other expenses remained relatively constant at $14.8million in both quarters due to increased consulting costs incurred to complywith the requirements of the Sarbanes-Oxley Act, which was offset by reducedcosts related to third party Saab ground handling, legal fees and pilottraining.

 

***Big Sky***

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

 
| ** **                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Passengers                     |       | 22,350   |       | 25,755   |       |
| Available seat miles (000s)    |       | 14,101   |       | 17,394   |       |
| Revenue passenger miles (000s) |       | 5,563    |       | 6,519    |       |
| Load factor                    |       | 39.5     | %          | 37.5     | %          |
| Departures                     |       | 4,813    |       | 5,325    |       |
| Revenue per ASM                |       | $        | 0.264      |     | $          | 0.236 |   |
| Cost per ASM                   |       | $        | 0.303      |     | $          | 0.294 |   |
| Aircraft in service (average)  |       | 8        |       | 10       |       |

 

Big SkyOperating Revenues  Total operating revenues decreased 9.4% to$3.7 million in the third quarter of fiscal 2005 from $4.1 million in the prioryear quarter due to a reduction in unprofitable flying.

 

Big SkyOperating Expenses  Total operating expenses decreased 16.5% inthe third quarter of fiscal 2005 to $4.3 million from $5.1 million in the prioryear quarter due to a decrease in variable costs related to the reduction inoperations, partially offset by increased fuel costs.

 

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***Consolidated***

Nonoperating Income (Expense) Nonoperating income increased to $0.8million in the third quarter of fiscal 2005 from $0.5 million in the prior yearquarter primarily due to increased interest income as a result of additionalfunds invested at higher interest rates.

 

Provision for Income Taxes The Company’s effective tax rate was43.6% in the third quarter of fiscal 2005 as compared to 34.1% in the prioryear quarter.  The Company adjusts itseffective tax rate quarterly based on forecasted operating results in thefiscal year.  The rate is affectedprincipally by the level of nondeductible expenses relative to projectedtaxable income.

 

**Nine Months Ended December 31, 2004 and 2003**

The Company’s consolidated net income for the nine months ended December31, 2004 was $9.1 million, or $0.43 per diluted share, compared with net incomeof $8.1 million, or $0.39 per diluted share, for the nine months ended December31, 2003.  Comparative information onoperations for the nine months ended December 31 was as follows:

 

***Mesaba***

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

 
| ** **                     | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|--------------------------------|------------|-----------|------------|-----------|------------|
| Passengers                     |       | 4,290,221 |       | 4,457,906 |       |
| Available seat miles (000s)    |       | 2,307,486 |       | 2,251,391 |       |
| Revenue passenger miles (000s) |       | 1,528,490 |       | 1,399,811 |       |
| Load factor                    |       | 66.2      | %          | 62.2      | %          |
| Departures                     |       | 156,383   |       | 170,305   |       |
| Revenue per ASM                |       | $         | 0.144      |      | $          | 0.148 |   |
| Cost per ASM                   |       | $         | 0.137      |      | $          | 0.142 |   |
| Aircraft in service (average)  |       | 98        |       | 104       |       |

 

Mesaba Operating Revenues Total operating revenues decreased 0.6% infiscal 2005 to $332.0 million from $334.1 million in the prior year period primarilydue to a decrease in passenger revenue that was driven by a combination of theremoval of six Saab A model aircraft from the fleet and decreased Saabutilization.  The decrease was partiallyoffset by increased RJ85 utilization and increased ground handling revenue inDetroit and Minneapolis/St Paul.

 

Mesaba Operating Expenses Total operating expenses decreased 0.8%in fiscal 2005 to $317.2 million from $319.7 million in the prior year period.  Mesaba’s operating costs per ASM for the ninemonths ended December 31 were as follows:

 
| ** **                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Wages and benefits            |       | 4.5      | ¢     | 4.5      | ¢     |
| Aircraft fuel                 |       | 0.6      |       | 0.7      |       |
| Aircraft maintenance          |       | 2.7      |       | 2.6      |       |
| Aircraft rents                |       | 3.3      |       | 3.5      |       |
| Landing fees                  |       | 0.2      |       | 0.2      |       |
| Insurance and taxes           |       | 0.2      |       | 0.3      |       |
| Depreciation and amortization |       | 0.5      |       | 0.6      |       |
| Administrative and other      |       | 1.7      |       | 1.8      |       |
| Total                         |       | 13.7     | ¢     | 14.2     | ¢     |

 

Wages and benefits increased 2.0% to $103.7 million in fiscal 2005 from$101.6 million in the prior year period primarily due to increased groundhandling wages and 401(k) benefit plan expenses, which were partially offset bya reduction in mechanic wages and health and dental claims costs.

 

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Aircraft fuel decreased 8.5% to $14.1 million in fiscal 2005 from $15.5million in the prior year period due primarily to a reduction in the number ofSaab block hours flown.  Provisions ofthe Airlink Agreement with Northwest protect Mesaba from changes in fuelprices.  Mesaba’s actual cost of fuel,including taxes and pumping fees, was 83.5 cents per gallon for bothperiods.  Northwest is responsible forfuel for Mesaba’s RJ85 operations.

 

Aircraft maintenance, excluding wages and benefits, increased 6.6% to $61.8million in fiscal 2005 from $58.0 million in the prior year period due toincreased costs associated with performing heavy maintenance and overhauls of landinggear for both fleets, which were partially offset by reductions in enginemaintenance costs.

 

Aircraft rents decreased 4.1% to $75.2 million in fiscal 2005 from $78.5in the prior year period due to the return of six Saab aircraft, the reductionof one RJ85 year-over-year and the temporary parking of five RJ85s that werereturned to service in the first quarter of fiscal 2005.

 

Landing fees decreased 4.6% to $4.9 million in fiscal 2005 from $5.2million in the prior year period due to the recognition of an airport landingfee refund and a reduction in Saab departures offset by increased rates.  Northwest is responsible for landing fees forMesaba’s RJ85 operations.

 

Insurance and taxes decreased 25.5% to $5.2 million in fiscal 2005 from$7.0 million in the prior year period due primarily to fewer insured aircraft andlower insurance rates.

 

Depreciation and amortization decreased 14.2% to $10.6 million infiscal 2005 compared to $12.4 million in the prior year period due primarily toreduced capital spending over the last several years.  The reduction is because fewer capitalexpenditures are required to maintain the fleet versus investing in theinfrastructure to grow the fleet in previous years.

 

Administrative and other expenses decreased 0.1% to $41.5 million infiscal 2005 compared to $41.6 million in the prior year period primarily due toreduced pilot training costs, third party Saab ground handling costs and legal fees,which was offset by increased consulting costs incurred to comply with therequirements of the Sarbanes-Oxley Act and costs associated with the growth ofMesaba’s ground handling business.

 

***Big Sky***

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

 
| ** **                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Passengers                     |       | 65,712   |       | 83,687   |       |
| Available seat miles (000s)    |       | 45,441   |       | 59,401   |       |
| Revenue passenger miles (000s) |       | 16,656   |       | 21,442   |       |
| Load factor                    |       | 36.7     | %          | 36.1     | %          |
| Departures                     |       | 14,928   |       | 18,423   |       |
| Revenue per ASM                |       | $        | 0.248      |     | $          | 0.215 |   |
| Cost per ASM                   |       | $        | 0.300      |     | $          | 0.252 |   |
| Aircraft in service (average)  |       | 8        |       | 10       |       |

 

Big Sky Operating Revenues Total operating revenues decreased 11.6%to $11.3 million in fiscal 2005 from $12.8 million in the prior year period dueto a reduction in unprofitable flying.

 

Big Sky Operating Expenses Total operating expenses decreased 8.9%in fiscal 2005 to $13.6 million from $15.0 million in the prior year period dueto a decrease in variable costs related to the reduction in operations, partiallyoffset by increased fuel costs.

 

***Consolidated***

Nonoperating Income (Expense)  Nonoperating income decreased to $1.7 millionin fiscal 2005 from $3.8 million in the prior year period primarily due to thereceipt of $2.6 million in fiscal 2004 related to government reimbursements ofsecurity costs under the Emergency Wartime Supplemental Appropriations Act,which was partially offset in fiscal 2005 by increased interest income, as aresult of the investment of additional funds.

 

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Provision for Income Taxes The Company’s effective tax rate was 33.0%,year to date, in fiscal 2005 as compared to 47.3% in fiscal 2004.  During the first quarter of fiscal 2005, theCompany received verification of a final settlement with the IRS concerning theIRS’ examination of the Company’s fiscal 1995 and 1996 income tax returns.  As a result of this settlement, the Companyreduced its income tax provision by $1.2 million in the first quarter of fiscal2005.  Without this one-time adjustment,the Company’s effective tax rate would have been 41.9%.  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 and investments increased 4.9% to $167.7 millionat December 31, 2004 from $159.9 million at March 31, 2004.  The Company’s working capital increased to $108.7million with a current ratio of 2.4 at December 31, 2004 compared to workingcapital of $99.7 million and a current ratio of 2.3 at March 31, 2004.

 

Investments consist principally of municipal securities and areclassified as available-for-sale.  Fair valueof investments is determined based on quoted market prices.  Available-for-sale investments are reportedat fair value with unrealized gains and losses excluded from operations andreported as a separate component of shareholders’ equity, except for other-than-temporaryimpairments, which are reported as a charge to current operations and result ina new cost basis for the investment.  TheCompany classifies investments with an original maturity date of less than 90days as cash equivalents.  Investmentswith an original maturity date of more than 90 days that mature within one yearare classified as short-term investments and greater than one year as long-terminvestments.

 

Approximately $26.3 million or 85.0% of the Company’s accountsreceivable balance as of December 31, 2004 was due from Northwest.  Cancellation of the Airlink or Jet Agreementsor Northwest’s failure to make timely payment of amounts owed to Mesaba or tootherwise materially perform under the Airlink or Jet Agreements for any reasonwould have a material adverse affect on Mesaba and the Company’s operations, financialposition and cash flows.

 

As of December 31, 2004, Mesaba’s fleet consisted of 99 aircraftcovered under operating leases with remaining terms of up to 12 years and aggregatemonthly lease payments of approximately $8.6 million.  Mesaba leases or subleases its Saab aircraft,either directly from aircraft leasing companies or through Pinnacle AirlinesCorp. under operating leases with initial terms of up to seven years or throughsubleases with Northwest under operating leases with initial terms of up to 17 years.  Mesaba leases its RJ85 aircraft fromNorthwest under operating leases with initial terms of up to 10 years.  The Company believes that Mesaba’s revenuesfrom the Airlink and Jet Agreements will continue to be sufficient to fund itsaircraft lease obligations.  If theAirlink Agreement terminates, then the Company’s obligation to continue to pay Saabaircraft leases will simultaneously terminate. Likewise, if the Jet Agreement terminates, then the Company’s obligationto continue to pay RJ85 aircraft leases will simultaneously terminate.

 

As of December 31, 2004, Big Sky’s fleet consisted of ten aircraftcovered under operating leases with remaining terms of two months to 29 monthsand aggregate monthly lease payments of approximately $0.2 million.  Big Sky leases all of its aircraft fromleasing companies.  Five of the leasesallow Big Sky to return the aircraft to the lessor upon the occurrence ofcertain events and contain purchase options. Funding of the monthly minimum lease payments is dependent on continuedpassenger boardings, Big Sky’s operations and potentially, funding from theCompany.  At the request of the lessor,Big Sky agreed to terminate the lease for one Metro, which was sold in January2005, leaving nine aircraft in Big Sky’s fleet.

 

InJanuary 2005, Big Sky entered a letter of intent to lease 10 Beechcraft B1900Daircraft from Mesa Airlines, Inc., a wholly owned subsidiary of Mesa Air Group,Inc.  Big Sky intends to begin flying theB1900D aircraft during March 2005.  TheMetro fleet will be removed from service during 2005.  Big Sky will attempt to obtain earlytermination on the remaining Metro aircraft through subleases or sales.

 

The Company’s aircraft operating leases do not contain any guaranteedlease residual provisions for which there would be a potential contingency atthe termination of the lease period.

 

The Company has historically relied on cash and cash equivalents,investments and internally generated funds to support its working capitalrequirements.  Absent adverse factorsoutside the control of the Company, management believes current liquidity andfunds from operations will be adequate resources for meeting current operationsand non-aircraft capital needs through fiscal 2006.

 

Cash and cash equivalents increased 37.9% to $75.3 million at December31, 2004 from $54.6 million at March 31, 2004.  A summary of cash flow activity is asfollows:

 

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*Operating Activities*

Net cash provided by operations for the nine months ended December 31,2004 was $16.2 million.  The primarysources of cash were from operations, which generated $9.1 million of netincome and $12.1 million of non-cash expenses, primarily depreciation andamortization.  The primary use of cashwas $5.1 million of net payments for current operating items.

 

*Investing Activities*

Net cash provided by investing for the nine months ended December 31,2004 was $3.5 million.  The sources ofcash for investing activities were the net sales of short-term investment andoperating activities.  The primary usesof cash were the net purchases of short and long-term investments, includingvariable securities classified as cash equivalents and purchases of property,plant and equipment of $7.5 million.

 

*Financing Activities*

Net cash provided by financing for the nine months ended December 31,2004 was $1.1 million.  This was primarilydue to the issuance of Company common stock upon the exercise of stock optionsfor $1.2 million, which was offset by the repayment of debt for $0.1 million.

 

OUTLOOK

Forthe remainder of fiscal 2005, the Company estimates year-over-year ASMs atMesaba will be up 15% in the fourth quarter. The projected increase year-over-year for the fourth fiscal quarter isdue to Mesaba being shut down for two days in January 2004 during final pilotcontract negotiations and five RJ85s temporarily removed from scheduled service.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of the Company’s consolidated financial statements inconformity with generally accepted accounting principles requires the use ofestimates, judgments and assumptions that affect the reported amounts of assetsand liabilities as of the date of the consolidated financial statements,revenues and expenses during the reporting period and related disclosures ofcontingent assets and liabilities in the consolidated financial statements andthe accompanying notes.  The SEC hasdefined a company’s most critical accounting policies as the ones that are mostimportant to the portrayal of the company’s financial condition and results,and which require the company to make its most difficult and subjectivejudgments, often as a result of the need to make estimates of matters that areinherently uncertain.  Based on thisdefinition, the Company has identified its critical accounting policies toinclude those discussed in the following paragraphs.  The Company also has other key accountingpolicies, which involve the use of estimates, judgments and assumptions.  See Note 2 “Summary of Significant AccountingPolicies” in the Notes to the Consolidated Financial Statements, included inthe Company’s Annual Report on Form 10-K filed with the SEC for the year endedMarch 31, 2004, for additional discussion of these items.

 

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

 

*Aircraft Property and Equipment*—Estimatedlives or the remaining terms of the Airlink and Jet Agreements are used torecord 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 Big Sky.  The foregoing may also affect depreciationrates, impairment or both.  Management ofMesaba and Big Sky regularly review the estimated useful lives and salvagevalues for aircraft property and equipment.

 

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

 

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

 

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certificateand goodwill.  Goodwill and otherintangible assets are evaluated for impairment annually, at a minimum, or on aninterim basis if events or circumstances indicate a possible inability torealize the carrying amounts.  The evaluationincludes future cash 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 goodwill and the intangible assets at Big Sky for impairment,particularly in light of its recent operating performance.

 

*Income Taxes*—TheCompany’s effective tax rate is based on expected income, statutory tax ratesand tax planning opportunities available in the various jurisdictions in whichthe Company operates.  In the event thatthere is a significant unusual or one-time item recognized, or expected to berecognized, in the Company’s operating results, the tax attributable to thatitem is separately calculated and recorded at the same time as the unusual orone-time item.  Significant judgment isrequired in determining the Company’s effective tax rate and in evaluating itstax positions.  The Company establishes incometax reserves if it believes that a position it has taken in a tax return may besubject to challenge.  The Companyadjusts these reserves in light of changing facts and circumstances, such asthe closing of a tax audit.  The effectivetax rate includes the impact of reserve provisions and changes to reserves thatare considered appropriate, as well as related interest.  This rate is then applied to the Company’squarterly operating results.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

InDecember 2004, the FASB issued SFAS 123(R), “Share-Based Payment”, which requires all public companiesaccounting for share-based payment transactions to account for these types oftransactions using a fair-value-based method. SFAS 123(R) eliminates the ability to account for share-basedcompensation transactions using APB Opinion No. 25.  SFAS 123(R) also requires the taxbenefits associated with these shared based payments be classified as financingactivities in the statement of cash flows rather than operating activities asis currently permitted.  SFAS 123(R)becomes effective for interim or annual periods beginning after June 15,2005.

 

TheCompany expects to adopt SFAS 123(R) on April 1, 2005, the beginning of itsfirst quarter of fiscal 2006, using the modified-prospective method.  Under this transition method, the Companywill record compensation expense for all awards it grants on a straight-linebasis over the vesting period.  Inaddition, the Company will record compensation expense for the unvested portionof previously granted awards that remain outstanding at the date of theadoption.  The Company has not completedits assessment of the impact of the standard on its financial condition orresults of operations.

 

In March 2004, the Emerging Issues Task Force (“EITF”) reached aconsensus on Issue 03-1, “The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments” regarding disclosure about unrealizedlosses on available for sale debt and equity securities accounted for underSFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities”.  The guidance for evaluating whether aninvestment is other than temporarily impaired should be applied in suchevaluations made in reporting periods beginning after June 15, 2004.  The recognition and measurement guidance hasbeen delayed and the disclosure guidance remains in effect.  The Company does not expect theimplementation of EITF 03-1 to have a material effect on its consolidatedfinancial statements.

 

**Certain Risk Factors Relating to the Companyand the Airline Industry**

 

The Company’s operations and financial results are subject to variousrisks and uncertainties, some of which are described below and in the Company’sAnnual Report on Form 10-K for the fiscal year ended March 31, 2004.  The Company could also be adversely affectedby additional risks and uncertainties not presently known or believed to bematerial.

 

*Dependence on Relationship with Northwest*

During the nine months ended December 31, 2004, 93.1% of the Company’s operatingrevenues were earned from Northwest.  Asa result, the Company’s business is sensitive to events and risks affectingNorthwest.  The Company’s business couldbe adversely affected by events such as a reorganization by Northwest throughChapter 11 bankruptcy proceedings, an inability by Northwest to reduce laborexpenses and other costs, continued and unsustainable operating losses atNorthwest, changes in Northwest’s business plan or model, employee strike orjob actions, significant curtailment of service, continued volatility of fuelcosts and terrorist events.  Loss of theCompany’s business relationship with Northwest or Northwest’s failure to maketimely payment of amounts owed to the Company would have a material adverseeffect on the Company’s operations, financial position and cash flows.

 

*Terrorist Events*

The terrorist attacks of September 11, 2001 materially affected andcontinue to affect the airline industry. Concerns about further terrorist attacks have had a negative impact onair travel demand.  In addition, securityprocedures introduced at 

 

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airports since the attacks have increased the inconvenience of airtravel, both in reality and in customer perception, leading to furtherreduction in demand.

 

*Government Regulations*

Airlines are subject to extensive regulatory and legal requirementsthat involve significant compliance costs that result in increased costs forpassengers and the Company.  Additionallaws, regulations, taxes and airport rates and charges are proposedperiodically.  If adopted, these measurescould have the effect of raising ticket prices, reducing revenue, increasingcosts and reducing demand for air travel, any of which could have a materialadverse effect on the Company’s business.

 

*Effect of General Economic Conditions*

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

 

*Aircraft Accident*

An accident involving Company aircraft could result in injuries and lossof life and the Company could experience significant claims from injured personsand surviving relatives.  An accidentcould also result in substantial property damage, loss of aircraft from serviceand adverse publicity for the Company.  Airlinesare required by the DOT to carry liability insurance.  Although the Company believes its liabilityinsurance is in amounts and of the type generally consistent with industrypractice, substantial claims resulting from an accident in excess of insurancecoverage would harm business and financial results.  Moreover, any aircraft accident, even iffully insured or not directly involving Mesaba or Big Sky, could cause a publicperception that flying is less safe or reliable than other transportationalternatives, which could harm the Company’s financial condition and results ofoperations.

 

*Failure to Successfully Expand Business*

The Company’s strategy to expand and grow its business depends on manyfactors, some of which are beyond control of the Company.  The Company cannot be certain that it will beable to successfully expand its business and the failure to do so could harmthe Company’s financial condition and results of operations.

 

*Collective Bargaining Agreements*

Labor costs are a significant component of the Company’s expenses.  Several of the Company’s employee groups haveseparate bargaining agreements and may make demands that would increaseoperating expenses, adversely affecting profitability.  Further, if the Company were unable to reachagreement on the terms of any collective bargaining agreement or were toexperience widespread employee dissatisfaction, there could be work slowdownsor stoppages.  Mesaba is currentlynegotiating with the Aircraft Mechanics Fraternal Association for a newagreement.  The existing agreement becameamendable in August 2003.  Mesaba is alsocurrently negotiating with the Transportation Workers Union.  The existing agreement will become amendablein May 2005.

 

*Factors Beyond Company Control*

The Company’s operations are subject to delays caused by factors beyondits control, including air traffic congestion at airports, adverse weatherconditions and increased security measures. Delays frustrate passengers, reduce aircraft utilization and increasecosts, all of which affect profitability and harm the Company’s financialcondition and results of operations.

 

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

 

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

 

Mesaba and Big Sky have not experienced difficulties with fuelavailability.  As a part of the AirlinkAgreement, Northwest bears the economic risk of fuel price fluctuations forMesaba’s fuel requirements.  As part ofthe Jet Agreement, Northwest provides all fuel at its expense to support Mesaba’sjet operations.  Big Sky is subject tofluctuations in fuel prices, but currently fuel expense is not a material costin relation to the Company’s total operating expenses.  The Company expects that its results ofoperations will not be materially affected by fuel price volatility.

 

The Company’s investment policy requires purchasing investments in highcredit quality issuers and limits the amount of credit exposure to any oneissuer.  The Company’s investmentsprincipally consist of municipal securities with varying maturity dates, all ofwhich are two years or less.  Because ofthe credit criteria within the Company’s investment policies, the primarymarket risk associated with these investments is interest rate risk.  The Company does not use derivative financialinstruments to manage interest rate risk or to speculate on future changes ininterest rates.

 

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**ITEM 4.  CONTROLS AND PROCEDURES**

 

*Evaluation of Disclosure Controls andProcedures*

The Company maintains disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in the Company’sreports filed with the Securities and Exchange Commission pursuant to the SecuritiesExchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarizedand reported within the time periods specified in the rules and forms of theCommission and that such information is accumulated and communicated tomanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosures.

 

During the fourth quarter of fiscal 2005, theCompany determined that it had incorrectly accounted for certain aircraftleases that contained reduced rent obligations over a portion of the leaseterm.  As a result, the Company has restated its condensed consolidatedfinancial statements as of March 31, 2004 and for the three and nine monthsended December 31, 2003 to record aircraft rents on a straight-line basis overthe lease terms.  The Company ispresently evaluating and testing the Company’s internal controls overfinancial reporting.  Based on the results of the evaluation and testing,the Company will implement corrective action to its internal control procedureswhere required to improve the effectiveness of internal controls.  The Company intends to complete theprocess of testing and remediation by the end of fiscal year 2005.  SeeNote 13 to the condensed consolidated financial statements included in thisreport.

 

As of the end of the period covered by thisreport, the Company conducted an evaluation under the supervision and with theparticipation of the Company’s management, including the Company’s Chief ExecutiveOfficer and Chief Financial Officer, regarding the effectiveness of the designand operation of the Company’s disclosure controls and procedurespursuant to Rule 13a-15(b) of the Exchange Act. The Company’s management is working to identify and implement correctiveactions where required to improve the effectiveness of the Company’s disclosurecontrols and procedures.  Specifically,the Company is implementing the following measures:

 

•      reviewingfinancial controls and procedures for accounting for leases;

•      additionaltraining of the Company’s legal and accounting staff on complex accountingmatters, including the accounting for leases;

•      modifyingfinancial controls and procedures to ensure appropriate treatment of theaccounting for leases at the inception of the lease.

 

Based in part on the foregoing, the ChiefExecutive Officer and Chief Financial Officer concluded that as of the end ofthe period covered by this report, December 31, 2004, the Company’sdisclosure controls and procedures were not effective to ensure that theinformation that is required to be disclosed by the Company in reports that itfiles under the Exchange Act are recorded, processed, summarized and reportedwithin the time period specifiedin the rules of the Securities and Exchange Commission.

 

*Changes in Internal Controls Over FinancialReporting*

There were no changes in theCompany’s internal control over financial reporting that occurred during theperiod covered by this report that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting, except as a result of the restatement discussed above, the Companyhas made and expects to continue to make improvements to the process foraccounting for leases.

 

**Part II. OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

On October 4, 2002, Fairbrook Leasing, Inc., LambertLeasing, Inc. and Swedish Aircraft Holdings AB (“Saab Leasing”) filed adeclaratory judgment action against Mesaba relating to 20 Saab 340A (“340A”)aircraft leased by Mesaba.  Saab Leasing soughta judicial 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.  The case was brought in the United StatesDistrict Court for the District of Minnesota (“District Court”).  On December 8, 2003, the District Courtissued an order declaring that the term sheet proposal constitutes a bindingcontract that required Mesaba to execute or negotiate in good faith toward theexecution of long-term leases on each of the 340A aircraft.  The District Court concluded that the termsheet proposal is ambiguous with respect to whether lease extensionscontemplated by that document are at Mesaba’s option or Saab Leasing’soption.  Mesaba has appealed the DistrictCourt’s summary judgment ruling.  OnAugust 13, 2004, Saab Leasing filed a complaint in the District Court allegingdamages in the form of aircraft lease payments they contend are due or willbecome due based upon the District Court’s summary judgment ruling in thedeclaratory judgment action.  Saab Leasingalleges approximately $35 million in past due and future aircraft leaseobligations.  Mesaba denies the allegationsin Saab Leasing’s complaint and contends that it has fulfilled and willcontinue to fulfill its existing lease obligations.  The ultimate outcome of this dispute cannotbe predicted with certainty.

 

**ITEM 6.  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.                                                                                                  |

 

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

 

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| 10T  |   | 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. |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10U  |   | 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.                                                  |
| 10V  |   | 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.                                                                                        |
| 10W  |   | 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.                                                                                   |
| 10X  |   | 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.                                                                                        |
| 10Y  |   | Management Compensation Agreement, executed October 21, 2004, by and  between MAIR Holdings, Inc. and Paul F. Foley. Incorporated by reference to  Exhibit 10.1 to the Company’s Form 8-K filed October 22, 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.                                                                                                                                                                       |

 

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SIGNATURES

 

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

 
|                     |   | MAIR Holdings, Inc.                                       |
|--------------------------|--------|-----------------------------------------------------------|
|                     |   |                                                      |
|                     |   |                                                      |
| Dated: February 14, 2005 |   | 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 Officer Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. Filed herewith. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                              |
| 31.2   |   | Chief Financial Officer Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. Filed herewith. |
|   |   |                                                                                                              |
| 32.    |   | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. Filed herewith.                         |

 

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