-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Di2Zfo4Vdl1l4MetGOOHxCuNjFkbds8pRzAIFqpdqRShDtHPEsuwUAkUlFIDyJqN jGfR/j9BFoHFDAN71DINkw== 0000835768-96-000003.txt : 19961118 0000835768-96-000003.hdr.sgml : 19961118 ACCESSION NUMBER: 0000835768-96-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MESABA HOLDINGS INC CENTRAL INDEX KEY: 0000835768 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 411616499 STATE OF INCORPORATION: MN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17895 FILM NUMBER: 96662851 BUSINESS ADDRESS: STREET 1: 7501 26TH AVE S CITY: MINNEAPOLIS STATE: MN ZIP: 55450 BUSINESS PHONE: 6127265151 MAIL ADDRESS: STREET 1: 7501 26TH AVE SOUTH CITY: MINNEAPOLIS STATE: MN ZIP: 55450 10-Q 1 SEPTEMBER 30, 1996 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q {X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 1996 OR { }TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No: 0-17895 MESABA HOLDINGS, INC. Incorporated under the laws of Minnesota 41-1616499 (I.R.S. Employer ID No.) 7501 26th Avenue South Minneapolis, MN 55450 (612) 726-5151 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of November 6,1996 ------- --------------------------------- Common Stock par value $.01 per share 12,765,796 PART I. FINANCIAL INFORMATION SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Statements in the Quarterly Report on Form 10-Q under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as oral statements that may be made by the Company or by officers, directors or employees of the Company acting on the Company's behalf, that are not historical fact constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward looking statements involve factors that could cause the actual results of the Company to differ materially from historical results or from any results expressed or implied by such forward-looking statements. The Company cautions the public not to place undue reliance on forward- looking statements, which may be based on assumptions and anticipated events that do not materialize. Factors which could cause the Company's actual results to differ from forward-looking statements include the ability of the Company to secure an extended or expanded Airlink Agreement with Northwest Airlines; the price of aviation fuel; changes in regulations affecting the Company, including DOT and FAA regulations; the acquisition and phase-in of a new fleet of aircraft; downturns in economic activity; and seasonal factors. Item 1. CONSOLIDATED FINANCIAL STATEMENTS MESABA HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share information) ASSETS
September 30, March 31, 1996 1996 ------------- --------- (Unaudited) CURRENT ASSETS: Cash and short-term investments $ 46,708 $ 29,428 Accounts receivable, net 7,235 9,254 Inventories 2,581 1,666 Prepaid expenses and deposits 3,445 2,774 Deferred income taxes 1,901 1,343 -------- -------- Total current assets 61,870 44,465 -------- -------- PROPERTY AND EQUIPMENT: Facilities under capital lease 9,147 9,147 Flight equipment 12,985 10,439 Other property and equipment 10,602 9,644 Accumulated depreciation and amortization (18,308) (16,842) -------- --------- Net property and equipment 14,426 12,388 DEFERRED INCOME TAXES 284 312 OTHER ASSETS AND DEFERRED COSTS 16,012 1,039 --------- --------- $ 92,592 $ 58,204 ========= =========
The accompanying notes to interim consolidated financial statements are an integral part of these balance sheets. MESABA HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (Continued) (in thousands, except share information) LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, March 31, 1996 1996 ------------- ----------- (Unaudited) CURRENT LIABILITIES: Current maturities of capital lease obligations $ 413 $ 399 Accounts payable 10,402 7,323 Accrued liabilities Payroll 5,838 3,871 Maintenance 6,126 3,341 Other 5,340 2,389 ---------- --------- Total current liabilities 28,119 17,323 LONG-TERM OBLIGATIONS, net of current maturities 5,409 5,654 OTHER LIABILITIES AND DEFERRED CREDITS 17,623 812 SHAREHOLDERS' EQUITY: Common stock, $.01 par value; 15,000,000 shares authorized, 12,763,796 and 12,744,046 shares issued and outstanding 128 127 respectively Paid-in capital 39,985 39,822 Retained earnings (deficit) 1,328 (5,534) --------- --------- Total shareholders' equity 41,441 34,415 --------- --------- $ 92,592 $ 58,204 ========= =========
The accompanying notes to interim consolidated financial statements are an integral part of these balance sheets. MESABA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share information)
Three Months ended Six Months ended September 30, September 30, ------------------ ---------------- 1996 1995 1996 1995 ------- --------- --------- --------- OPERATING REVENUES: Passenger $ 46,230 $ 45,949 $ 88,160 $ 89,034 Freight and other 445 1,031 936 2,593 --------- --------- --------- --------- Total operating revenues 46,675 46,980 89,096 91,627 OPERATING EXPENSES: Wages and benefits 12,623 11,934 24,521 24,506 Aircraft fuel 4,341 4,914 8,257 9,637 Aircraft maintenance 6,032 5,283 11,389 9,386 Aircraft rents 7,725 8,224 15,151 16,503 Landing fees 1,253 960 2,382 2,203 Insurance and taxes 1,321 1,681 2,493 3,486 Depreciation and amort 1,022 1,390 2,002 2,859 Administrative and other 5,858 8,001 11,332 16,078 --------- --------- --------- --------- Total operating expenses 40,175 42,387 77,527 84,658 Operating income 6,500 4,593 11,569 6,969 NONOPERATING INCOME(EXPENSE Interest expense (128) (142) (261) (268) Other, net 297 49,738 543 50,221 --------- --------- --------- --------- Other income, net 169 49,596 282 49,953 Income before income taxes 6,669 54,189 11,851 56,922 PROVISION FOR INCOME TAXES 2,809 2,332 4,990 3,657 --------- --------- --------- --------- NET INCOME $ 3,860 $ 51,857 $ 6,861 $ 53,265 ========= ========= ========= ========= NET INCOME PER COMMON SHARE $ 0.30 $ 4.71 $ 0.53 $ 5.06 ========= ========= ========= ========= WEIGHTED AVERAGE SHARES OUTSTANDING 12,962 11,016 12,970 10,519 ========= ========= ========= =========
The accompanying notes to interim consolidated financial statements are an integral part of these financial statements. MESABA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)
Six Months ended September 30, --------------------- 1996 1995 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 6,861 $ 53,265 Adjustments to reconcile net income to net cash provided by operating activities: Gain on Distribution of Subsidiary - (49,303) Depreciation and amortization 2,002 2,859 Accrued maintenance, long term (789) (199) Deferred Income tax provision (530) (696) Changes in current operating items: Accounts receivable, net 2,019 (1,238) Income tax payable 1,920 1,887 Inventories (915) (97) Advance payments and deposits (671) (3,163) Accounts payable 3,079 5,711 Other accrued liabilities 5,784 2,285 ---------- ---------- Net cash provided by operating activities 18,760 11,311 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (1,409) (3,421) Other, net (4) (9) ---------- --------- Net cash used for investing activities (1,413) (3,430) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 164 8,072 Distribution of Subsidiary, (net) - (21,372) Repayment of long-term obligations (231) (153) Payment of cash dividend - (520) ---------- ---------- Net cash used for financing activities (67) (13,973) ---------- ---------- NET INCREASE (DECREASE) IN CASH AND SHORT-TERM 17,280 (6,092) INVESTMENTS CASH AND SHORT-TERM INVESTMENTS: Beginning of period 29,428 30,616 ---------- ---------- End of period $ 46,708 $ 24,524 SUPPLEMENTARY CASH FLOW INFORMATION: Cash paid during period for: Interest $ 128 $ 142 Income taxes $ 2,437 $ 2,325 Noncash investing activities for the three months ended September 30, 1996 included the following: Rotable and spare parts inventory acquired with integration funds $ 4,354 - ========= ==========
The accompanying notes to interim consolidated financial statements are an integral part of these statements. MESABA HOLDINGS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements included herein have been prepared by Mesaba Holdings, Inc. (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in the consolidated financial statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of such consolidated financial statements. The Company's business is seasonal and, accordingly, interim results are not indicative of results for a full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the financial statements for the year ended March 31, 1996, and the notes thereto, included in the Company's Annual Report or Form 10-K filed with the Securities and Exchange Commission. 1. Basis of Presentation The consolidated financial statements include the financial position and results of operations of the Company and its subsidiary, Mesaba Aviation, Inc. ("Mesaba"). The statements also include the results of operations of Airways Corporation ("Airways") and its subsidiary AirTran Airways, Inc. ("AirTran Airways") prior to the distribution of 100% of the outstanding common stock of Airways to the Company's shareholders in a spin-off approved by the shareholders on August 29, 1995 and occurring in early September 1995. Under the Distribution Agreement between the Company, Mesaba, Airways and AirTran Airways dated as of July 13, 1995, as amended September 8, 1995, such distribution was deemed to have occurred on August 31, 1995 for accounting purposes. All significant intercompany balances have been eliminated in consolidation. 2. Agreements with Northwest Mesaba is a regional air carrier providing scheduled passenger and air freight service to 62 cities in the Upper Midwest and Canada. Effective December 1, 1984, Mesaba began operating as Mesaba/Northwest Airlink ("Airlink") under a cooperative marketing agreement with Northwest Airlines, Inc. ("Northwest"). On September 15, 1988, the agreement was restated as the Airline Services Agreement and modified effective December 10, 1988 to add Airlink service for Northwest's hub airport in Detroit, Michigan. Mesaba and Northwest subsequently amended the Airline Services Agreement effective April 1, 1992 and January 1, 1996 (as amended, the "Airlink Agreement") to provide, among other things, a five-year extension to March 31, 1997, exclusive rights to designated service areas and support in acquiring new aircraft and equipment. Either party may terminate the agreement on eight months' notice any time after July 31, 1996. Mesaba, through the Airlink Agreement and other agreements, receives ticketing and certain check-in, baggage and freight handling services from Northwest at certain airports. In addition, Mesaba receives its computerized reservation services from Northwest. Northwest also performs all marketing schedules and yield management and pricing services for Mesaba's flights. Approximately 74% of Mesaba's passengers connected with Northwest during the period. Substantially all accounts receivable balances in the accompanying balance sheets are due from Northwest. Loss of Mesaba's affiliation with Northwest or Northwest's failure to make timely payments of amounts owed to Mesaba or to otherwise materially perform under the Airlink Agreement for any reason would have a material adverse effect on the Company's operations and financial position. The Company, Mesaba and Northwest entered into an agreement, dated October 25, 1996 (the "Jetlink Agreement"), under which Mesaba expects to operate 12 Avro/AI(R) RJ85 ("RJ85") regional jets for Northwest. The aircraft will be leased or subleased from Northwest and will be operated as Northwest Jetlink from the Minneapolis/Saint Paul and Detroit hubs according to routes and schedules determined by Northwest. Jet service is expected to begin in the first quarter of fiscal year 1998. 3. Earnings Per Share Net income per share has been computed based upon the weighted average number of common and common equivalent shares outstanding during each period. The equivalent shares include all shares issuable upon the exercise of stock options. 4. Aircraft Additions On March 7, 1996, Mesaba entered into a preliminary agreement with Saab Aircraft of America, Inc. ("Saab") for the acquisition of 30 new Saab 340BPlus aircraft and 20 used Saab 340A aircraft. 10 Saab 340A aircraft have been delivered during the current year and the balance of these aircraft are expected to be phased into service over the next two years to replace Mesaba's existing fleet of 25 deHavilland Dash 8 ("Dash 8") and 22 Fairchild Metro III ("Metro III") aircraft. The Company also entered into an option agreement for 10 additional new Saab 340BPlus aircraft and 12 additional used Saab 340A aircraft. The Jetlink Agreement provides for the delivery of 12 RJ85 regional jets to Mesaba, at a rate of approximately one aircraft per month, beginning in April 1997. 5. Deferred Credits In order to assist the Company in integrating new aircraft into its fleet, certain manufacturers provide the Company with spare parts or other credits. The Company has deferred these amounts and amortizes them over the terms of the related aircraft leases as a reduction of rent expense. $61 was amortized during the period ended September 30, 1996. 6. Reclassifications Certain balances in the fiscal 1996 consolidated financial statements have been reclassified to conform with the fiscal 1997 presentation. These reclassifications had no impact on net income or shareholders' equity as previously reported. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 2. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA) EARNINGS SUMMARY. The Company reported net income of $3,860 or $.30 per share for the three months ended September 30, 1996, compared to $51,857 or $4.71 per share in the same period last year. Earnings in the prior year included a one-time $49,303 nonoperating gain from the spin-off of Airways. Earnings per share without the gain were $.23 including a $.03 per share contribution from AirTran Airways. Weighted average shares outstanding increased 17.7% from 11,016 to 12,962, due primarily to the issuance of shares to Northwest Aircraft Inc. in lieu of shares of granted Airways as a result of the spin-off of Airways Corporation, Northwest exercising pre-existing warrants, and the exercise of stock options by current and former employees. OPERATING REVENUES. Total operating revenues decreased 0.6% in the second quarter of fiscal 1997 to $46,675 from $46,980 in the year earlier quarter, which included revenues of AirTran Airways. Mesaba's operating revenues increased 23.7% to $46,675 from $37,729, and revenue passenger miles increased 37.4% to 118,714 from 86,400. Passenger revenue per available seat mile ("RASM") increased 6.0% to $.212 from $.200 in the previous year's second quarter. Mesaba's average load factor was 54.3% in the current quarter compared to 46.6% during the same period a year ago. The improvement in traffic, load factor and RASM are attributable to the inclusion of Mesaba's fares in Northwest's discount fare programs as well as overall increases in passenger demand within the industry. OPERATING EXPENSES. Total operating expenses decreased 5.2% to $40,175 in the current quarter compared to $42,387 in the prior year's second quarter. The decrease is attributable to the elimination of AirTran Airways' operating expenses. Mesaba's operating expenses increased 19.2% to $40,175 from $33,707. Available seat miles ("ASMs") flown for Mesaba increased 17.8% to 218,472 in the second quarter of fiscal 1997 from 185,460 in the year earlier quarter. The increase in ASMs was primarily accomplished by increasing utilization of the existing Dash 8 and Metro III aircraft and the addition of the Saab 340A aircraft. Mesaba has taken delivery of 10 Saab 340A aircraft this year (six in the current quarter), eight of which were in revenue service at September 30, 1996. Four Metro III aircraft were returned to lessors during the current quarter. A discussion of the changes in Mesaba's operating expense line items follows: Wages and benefits increased to $12,623 in the second quarter of fiscal 1997 from $11,934 in the second quarter of fiscal 1996. Mesaba's direct labor expenses increased $1,913 or 17.9% from $10,710 in the same period last year. The majority of the increase was attributable to increased wages paid to flight crews due to a 17.2% increase in block hours flown and the addition of flight crews to support the fleet transition program. The remaining increase was due to increased personnel levels and normal wage and benefit increases. Fuel costs decreased to $4,341 in this year's second quarter compared to $4,914 in last year's second quarter. Mesaba's cost of fuel increased $850, or 24.3%, from $3,491 over the same period last year. The increase is attributable to a 13.4% increase in consumption and a 10.9% increase in fuel costs. The cost of fuel, including taxes and pumping fees, was 83.5 cents per gallon in the current quarter compared to 75.3 cents a year ago. Until October 1995, airlines were exempt from a 4.3 cents per gallon federal tax on aviation fuel. The remaining net decrease in fuel expense is related to the spin-off of AirTran Airways. Certain provisions of the Airlink Agreement with Northwest protects Mesaba from future increases in fuel prices. Direct maintenance expense, excluding wages and benefits, increased to $6,032 in the second quarter of fiscal 1997 from $5,283 in the second quarter of fiscal 1996. Mesaba's direct maintenance costs increased $1,895 or 45.8% from $4,137. This increase was primarily attributable to the addition of 10 Saab 340A aircraft to the fleet and the transfer of all costs of major overhaul and repairs on the Dash 8 fleet to Mesaba from Northwest. Under the terms of the amended Airlink Agreement, effective January 1, 1996, Mesaba became solely responsible for these costs. Prior to that date, those expenses were paid directly by Northwest. The additional maintenance costs for the Saab 340 and Dash 8 aircraft were partially offset by the lower costs of operating the Metro III aircraft due primarily to the one-time installation costs of FAA mandated TCAS upgrades and other repairs made to the Metro III fleet last year. Aircraft rents decreased to $7,725 in this year's second quarter compared to $8,224 a year ago. Mesaba's rents increased $225 or 3.0% from $7,500 in the second quarter of fiscal 1996. Mesaba added six Saab 340A aircraft during the quarter increasing the total fleet of Saab aircraft to 10. Mesaba also returned four Metro III aircraft to lessors during the current period. The last Fokker F27 ("F27") aircraft was retired during the second fiscal quarter of 1996. Total landing fees increased 30.5% to $1,253 in the second quarter of fiscal 1997 compared to $960 for the second quarter of fiscal 1996. Mesaba's landing fees increased $490 or 64.2% from $763 in the year earlier period. The increase is attributable to a 21.5% increase in departures, an increase in the average gross landing weight due to the changing mix of the aircraft in the fleet and an increase in the overall effective landing fee rate. Insurance and taxes decreased 21.4% to $1,321 in the second quarter of fiscal 1997 compared to $1,681 in the year earlier period. Mesaba's costs increased $63 or 5.0% from $1,258 in the comparable period last year. This is due primarily to an increase in passenger liability insurance due to increased traffic and an increase in property taxes, offset by lower expenses for hull insurance caused by the normal decline in fleet values. Depreciation and amortization totaled $1,022 in the second quarter of fiscal 1997 down from $1,390 in the second quarter of fiscal 1996. Mesaba's costs decreased $113 or 10.0% from $1,135 in the same period last year. The lower level of depreciation and amortization resulted from elimination of capitalized overhauls as part of the phase out of the F27 fleet. In April 1992, the Company paid a contract rights fee in the form of amended stock purchase warrants to Northwest as a part of the extension of the Airlink Agreement. Contract rights are being amortized on a straight-line basis over the extended term of the Airlink Agreement through March 31, 1997. Administrative and other costs amounted to $5,858 in the current quarter, down from $8,001 in the second quarter of fiscal 1996. Mesaba's administrative and other costs increased $1,209 or 26.0% in the current period from $4,649 in the same period last year. This increase is primarily attributable to higher crew related expenses associated with increased flying and training to support the fleet transition program and increased airport and passenger related expenses due to an increase in traffic and the number of cities served, offset by lower legal and other fees incurred in the prior year associated with the spin-off of Airways. OPERATING INCOME. Operating income totaled $6,500 in the current period, an increase of 41.5% from $4,593 a year ago. Mesaba's operating income increased $2,478 or 61.6% from $4,022. Mesaba's operating margin increased to 13.9% from 10.7% in the prior year's second quarter. NONOPERATING INCOME. Nonoperating income decreased to $169 in the current quarter from $49,596 in the prior year's second quarter as a result of a $49,303 nontaxable gain on the spin-off of Airways and lower interest income. During the current year the Company began investing in tax-free securities which lowers overall interest income but effectively maximizes the after-tax yield on its idle cash. PROVISION FOR INCOME TAXES. The Company's effective tax rate was 42.1% in the second quarter of fiscal 1997 and 47.7% in fiscal 1996 net of the $49,303 nontaxable gain reflecting lower levels of nondeductible expenses in the current period. A quarter-to-quarter comparison of operating costs per available seat mile and operating statistics is shown in the following tables. These previous period figures do not include the activity of Airways.
Three months ended September 30, ----------------------- Operating Costs Per Available Seat 1996 1995 - ----------------------------------------------------------------------- Mile Labor and related costs 5.8 Cents 5.8 Cents Aircraft fuel costs 2.0 1.9 Aircraft maintenance costs 2.8 2.2 Aircraft rents 3.5 4.0 Landing fees 0.6 0.4 Insurance and taxes 0.6 0.7 Depreciation and amortization 0.5 0.6 Administrative and other costs 2.6 2.6 ------------ ---------- Total 18.4 Cents 18.2 Cents Three months ended September 30, ----------------------------- Operating statistics 1996 1995 - ---------------------------------------------------------------------- Revenue passengers carried 525,700 396,000 Revenue passenger miles (000) 118,714 86,400 Available seat miles (000) 218,472 185,460 Passenger load factor 54.3% 46.6% Passenger revenue per available seat 21.2 CENTS 20.0 CENTS mile Yield per revenue passenger mile 38.9 CENTS 43.0 CENTS Departures 38,033 31,293 Aircraft in service 56 51
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (IN THOUSANDS EXCEPT PER SHARE DATA) EARNINGS SUMMARY. The Company reported net income of $6,861 or $.53 per share for the six months ended September 30, 1996, compared to $53,265 or $5.06 per share in the same period of fiscal 1996. Earnings in the prior year included a one-time $49,303 nonoperating gain from the spin-off of Airways. Earnings per share without the gain were $.38 including a $.03 per share contribution from Airtran Airways. Weighted average shares outstanding increased 23.3% from 10,519 to 12,970, due primarily to the issuance of shares to Northwest Aircraft Inc. in lieu of shares of Airways granted as a result of the spin-off of Airways Corporation, Northwest exercising pre-existing warrants, and the exercise of stock options by current and former employees. OPERATING REVENUES. Total operating revenues decreased 2.8% in the first half of fiscal 1997 to $89,096 from $91,627 in the year earlier period, which included revenues of AirTran Airways. Mesaba's operating revenues increased 22.1% from $72,962, and revenue passenger miles increased 33.5% to 222,926 from 166,958. RASM increased 7.0% to $.213 from $.199 in the previous year's first half. Mesaba's average load factor was 53.9% in the current period compared to 46.4% during the same period a year ago. The improvement in traffic, load factor and RASM are attributable to the inclusion of Mesaba's fares in Northwest's discount fare programs as well as overall increases in passenger demand within the industry. OPERATING EXPENSES. Total operating expenses decreased 8.4% to $77,527 in the current period compared to $84,658 in the prior year's first half. The decrease is attributable to the elimination of AirTran Airways' operating expenses. Mesaba's operating expenses increased 17.1% to $77,527 from $66,185. Available seat miles flown for Mesaba increased 14.8% to 413,490 in the first half of fiscal 1997 from 360,181 in the year earlier period. The increase in ASMs was primarily accomplished by increasing utilization of the existing Dash 8 and Metro III aircraft. Additionally, Mesaba took delivery of 10 Saab 340A aircraft during the current period, eight of which were in revenue service at September 30, 1996. Also, four Metro III aircraft were returned to lessors during the current period. A discussion of the changes in Mesaba's operating expense line items follows: Wages and benefits increased to $24,521 in the first half of fiscal 1997 from $24,506 in the first half of fiscal 1996. Mesaba's direct labor expenses increased $3,064 or 14.3% from $21,457 in the same period last year. The majority of the increase was attributable to increased wages paid to flight crews due to a 15.4% increase in block hours flown and the addition of flight crew personnel to support the fleet transition program. The remaining increase was due to increased personnel levels and normal wage and benefit increases. Fuel costs decreased to $8,257 in this year's first half compared to $9,637 in last year's first half. Mesaba's cost of fuel increased $1,522, or 22.6%, from $6,735 over the same period last year. The increase is attributable to a 11.7% increase in consumption and a 10.9% increase in fuel costs. The cost of fuel, including taxes and pumping fees, was 83.5 cents per gallon in the current half compared to 75 cents a year ago. Until October 1995, airlines were exempt from a 4.3 cents per gallon federal tax on aviation fuel. The remaining net decrease in fuel expense is related to the elimination of AirTran Airways. Certain provisions of the Airlink Agreement with Northwest protects Mesaba from future increases in fuel prices. Direct maintenance expense, excluding wages and benefits, increased to $11,389 in the first half of fiscal 1997 from $9,386 in the first half of fiscal 1996. Mesaba's direct maintenance expense increased $4,198 or 58.4% from $7,191. This increase was primarily attributable to the addition of 10 Saab 340A aircraft to the fleet and the transfer of all costs of major overhaul and repairs on the Dash 8 fleet to Mesaba from Northwest. Under the terms of the amended Airlink Agreement, effective January 1, 1996, Mesaba became solely responsible for these costs. Prior to that date, those expenses were paid directly by Northwest. Aircraft rents decreased to $15,151 in this year's first half compared to $16,503 a year ago. Mesaba's rents increased $150 or 1.0% from $15,001 in the first half of fiscal 1996. Mesaba added 10 Saab 340A aircraft during the period and returned four Metro III's aircraft to lessors. The last F27 aircraft was retired during the first fiscal half of 1996. Total landing fees increased 8.1% to $2,382 in the first half of fiscal 1997 compared to $2,203 for the first half of fiscal 1996. Mesaba's landing fees increased $639 or 36.7% from $1,743 in the year earlier period. The increase is attributable to a 19.5% increase in departures and an increase in the overall effective landing fee rate. Insurance and taxes decreased 28.5% to $2,493 in the first half of fiscal 1997 compared to $3,486 in the year earlier period. Mesaba's costs increased $18 or 0.7% from $2,475 in the comparable period last year. This is due primarily to an increase in passenger liability insurance due to increased traffic and an increase in property taxes, offset by lower expenses for hull insurance caused by the normal decline in fleet values. Depreciation and amortization totaled $2,002 in the first half of fiscal 1997 down from $2,859 in the first half of fiscal 1996. Mesaba's costs decreased $247 or 11.0% from $2,249 in the same period last year. The lower level of depreciation and amortization resulted from the elimination of capitalized overhauls as part of the phase out of the F27 fleet. In April 1992, the Company paid a contract rights fee in the form of amended stock purchase warrants to Northwest as a part of the extension of the Airlink Agreement. Contract rights are being amortized on a straight-line basis over the extended term of the Airlink Agreement through March 31, 1997. Administrative and other costs amounted to $11,332 in the current period, down from $16,078 in the first half of fiscal 1996. Mesaba's administrative costs increased $2,481 or 28.0% in the current period from $8,851 in the same period last year. This increase is primarily attributable to higher crew related expenses associated with increased flying , training to support the fleet transition program and increased airport and passenger related expenses due to an increase in traffic and the number of cities served but was offset by lower legal and professional fees associated with the spin-off of Airways. OPERATING INCOME. Operating income totaled $11,569 in the current period, an increase of 66.0% from $6,969 a year ago. Mesaba's operating margin increased to 13.0% from 10.1% in the prior year's first half. NONOPERATING INCOME. Nonoperating income decreased to $282 in the current half from $49,953 in the prior year's first half as a result of the $49,303 one time gain on the spin-off of Airways and lower interest income. During the current period the Company began investing in tax-free securities which lowers overall interest income but effectively maximizes the after-tax yield on its idle cash. PROVISION FOR INCOME TAXES. The Company's effective tax rate was 42.1% in the first half of fiscal 1996 and 48.0% in fiscal 1996 reflecting lower levels of nondeductible expenses in the current period. A six month to six month comparison of operating costs per available seat mile is shown in the following table. These figures do not include the activity of Airways.
Six months ended September 30, ----------------------------- Operating Costs Per Available Seat 1996 1995 - ----------------------------------------------------------------------- Mile Wages and benefits 5.9 CENTS 6.0 CENTS Aircraft fuel 2.0 1.9 Aircraft maintenance 2.8 2.0 Aircraft rents 3.7 4.2 Landing fees 0.6 0.5 Insurance and taxes 0.6 0.7 Depreciation and amortization 0.5 0.6 Administrative and other costs 2.6 2.5 ---------- ---------- Total 18.7 CENTS 18.4 CENTS Six months ended September 30, ----------------------------- Operating statistics 1996 1995 - ----------------------------------------------------------------------- Revenue passengers carried 996,000 764,000 Revenue passenger miles (000) 222,926 166,958 Available seat miles (000) 413,490 360,181 Passenger load factor 53.9% 46.4% Passenger revenue per available seat 21.3 CENTS 19.9 CENTS mile Yield per revenue passenger mile 39.5 CENTS 43.0 CENTS Departures 72,143 60,381 Aircraft in service 55 52
LIQUIDITY AND CAPITAL RESOURCES The Company's working capital increased to $33,751 with a current ratio of 2.2 at September 30, 1996 compared to $27,142 and 2.6 at March 31, 1996. Cash and short-term investments increased by $17,280 to $46,708 at September 30, 1996. Net cash flows provided by operating activities totaled $18,761 in the first half of 1997 compared to $11,311 in the first half of fiscal 1996. Net cash flows used for investing activities amounted to $1,413 during the six months ended September 30, 1996 compared to 3,430 in the year earlier period. Net cash flows used for financing activities through September 30, 1996 totaled $68 compared to $13,973 in the same period last year. Long-term obligations, net of current maturities, totaled $5,409 at September 30, 1996 compared to $5,654 at March 31, 1996. The ratio of long-term debt to shareholders' equity decreased to .13 at September 30, 1996 from .16 at March 31, 1996. The Company took delivery of 10 used Saab 340A aircraft during the period ended September 30, 1996. The Company has agreed to acquire a total of 30 new Saab 340BPlus and 20 used Saab 340A aircraft. These aircraft are scheduled for delivery at a rate of approximately two per month over the next two years. The Company also has options to acquire an additional 12 used Saab 340A and 10 new Saab 340BPlus aircraft. The Company has also negotiated a financing agreement with the airframe manufacturer whereby operating lease financing for both the new and used aircraft are committed to the Company on competitive rates and terms. The Company has assigned its rights to the Saab financing agreement to Northwest, and all currently operated Saab 340 aircraft are subleased from Northwest. The Company expects to sublease a substantial number of the future Saab 340 aircraft from Northwest. On October 25, 1996, the Company signed an agreement with Northwest to fly 12 RJ85 regional jets under a new Northwest Jetlink agreement. The Company will lease the aircraft from Northwest who ordered 12 aircraft from Aero International (Regional) along with options for an additional 24 aircraft. The Company will begin taking delivery of the RJ85's in April 1997 at a rate of approximately one per month. The Company has historically relied upon cash reserves, internally generated funds and borrowings to support its working capital requirements. The Company has an unsecured agreement with a bank that provides for borrowings of up to $5,000 under a revolving line of credit. No amounts were outstanding under the credit agreement. Management believes that funds from operations and existing credit lines will provide adequate resources for meeting non-aircraft capital needs in fiscal 1997. Part II. Item 4. Submission of Matters to a Vote of Security Holders The Company filed with the Securities and Exchange Commission a definitive Proxy statement dated July 22, 1996 in connection with its annual meeting of shareholders held on August 28, 1996. All three persons nominated by management for election as Class Two directors, as discussed in the definitive proxy statement, were elected. Shareholders also approved the Company's 1996 Director Stock Option Plan. Shareholders cast 11,321,172 votes in favor of the Plan, 382,888 votes against the Plan, and 75,034 abstentions. There were no broker nonvotes. In addition, shareholders ratified the appointment of Arthur Andersen LLP as the Company's independent auditors for the fiscal year ending March 31, 1997. Shareholders cast 12,087,114 votes in favor of the ratification, 10,972 votes against the ratification, and 37,878 abstentions. There were no broker nonvotes. Item 5. Other Information Regional Jet Services Agreement The Company, Mesaba and Northwest entered into an agreement, dated October 25, 1996 (the "Jetlink Agreement"), under which Mesaba is to operate 12 RJ85 regional jets for Northwest. The aircraft, which will be configured in a 69 seat, two class cabin, will be leased or subleased by Mesaba from Northwest. Mesaba anticipates that deliveries of the jet aircraft will begin in April 1997, at a rate of approximately one aircraft per month. The aircraft will be operated as Northwest Jetlink from the Minneapolis/Saint Paul and Detroit hubs according to routes and schedules determined by Northwest. All flights will be designated as Northwest flights using Northwest's designator code. Under the Jetlink Agreement, Mesaba will be responsible for providing all flight and cabin crews, dispatch control, aircraft maintenance and repair services and hull and passenger liability insurance. Northwest will provide passenger and gate check-in, aircraft loading and unloading, ticketing, ramp services and fuel and fueling services, or will compensate Mesaba for providing such services. In consideration of entering into the Jetlink Agreement, the Company issued a warrant to Northwest on October 25, 1996, for the purchase of 615,000 shares of the Company's common stock at an initial exercise price of $10.875 per share, the closing price of such stock on the NASDAQ National Market System on the date the warrant was issued. The warrant will become exercisable in installments cumulatively with respect to 1/12th of the shares on each date on which the first 12 aircraft enter service under the Jetlink Agreement. The warrant expires at 5:00 p.m. Minneapolis time, on October 25, 2006, unless terminated earlier. The warrant will terminate (i) immediately upon the termination of the Jetlink Agreement, if the Jetlink Agreement is terminated by Northwest or (ii) 30 days after Northwest's receipt of notice from the Company of the Company's termination of the Jetlink Agreement, if the Jetlink Agreement is terminated as the result of such notice. The number of shares subject to purchase under the warrant, and the purchase price, are subject to customary antidilution provisions. The Jetlink Agreement continues in effect until October 25, 2006, unless terminated earlier in accordance with its provisions. The Jetlink Agreement may be terminated immediately by Mesaba or Northwest in the event that the other party is the subject of a bankruptcy proceeding or is divested of a substantial part of its assets. In the event of a breach of a nonmonetary provision of the Jetlink Agreement which remains uncured for a period of more than 30 days after receipt of written notification of such default, or the breach of a monetary provision which remains uncured for a period of more than 10 days after receipt of written notification of such default, the nondefaulting party may terminate the agreement. Northwest may terminate the Jetlink Agreement as of the sixth anniversary of the effective date of the first jet aircraft lease if Northwest gives a termination notice to Mesaba not less than 180 days nor more than 365 days prior to such sixth anniversary. Northwest may also terminate the Jetlink Agreement in the event of certain lease and other performance defaults, change in control events, revocation or failure to obtain DOT certification, or failure to elect a chief executive officer of Mesaba Holdings and Mesaba reasonably acceptable to Northwest. Item 6. Exhibits and Reports on Form 8-K a) Exhibits 4A. Common Stock Purchase Warrant dated October 25, 1996 issued to Northwest Airlines, Inc. 10A. Regional Jet Services Agreement between Mesaba Holdings, Inc. and Northwest Airlines, Inc., dated October 25, 1996 (certain portions of this document have been deleted pursuant to an application for confidential treatment under Rule 24b-2). b) Registrant did not file any reports on Form 8-K during the quarter ended September 30, 1996. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MESABA HOLDINGS, INC. Date: November 14, 1996 BY: /s/ Robert H. Cooper ---------------------- Robert H. Cooper Director of Finance (Principal Financial Officer) /s/ Jon R. Meyer ---------------------- Jon R. Meyer Controller (Principal Accounting Officer) EXHIBIT INDEX MANUALLY NUMBERED PAGE EXHIBIT NO. EXHIBIT REFERENCES - ----------- ---------------------------------------------------------------- 4A. Common Stock Purchase Warrant dated October 25, 1996 issued to Northwest Airlines, Inc. 10A. Regional Jet Services Agreement between Mesaba Holdings, Inc., Mesaba Aviation, Inc. and Northwest Airlines, Inc., date October 25, 1996 (certain portions of this document have been deleted pursuant to an application for confidential treatment under Rule 24b-2 EX-4 2 WARRANT To Purchase Common Stock of Mesaba Holdings, Inc. This warrant, dated as of October 25, 1996, certifies that for value received Northwest Airlines, Inc., a Minnesota corporation ("Northwest"), or permitted assigns, is entitled to purchase from Mesaba Holdings, Inc., a Minnesota corporation (the "Company"), 615,000 shares (subject to adjustment as herein provided) of common stock of the Company (herein referred to as the "Common Shares") at the price determined as provided herein, and in all respects subject to the terms contained herein. This Warrant has been issued to Northwest in consideration of that certain Regional Jet Services Agreement dated as of October 25, 1996 between Northwest, the Company and Mesaba Aviation, Inc. (the "Jetlink Agreement"). This Warrant is subject to the following provisions, terms, and conditions: 1. The exercise price is $10.875 per share, subject to adjustment as hereinafter provided (the "Exercise Price"). 2. This Warrant shall become exercisable in installments cumulatively with respect to 1/12th of the Common Shares, as adjusted (initially 51,250 shares), on each date on which an Initial Aircraft enters scheduled passenger service under the Jetlink Agreement. As used herein, Initial Aircraft means the first 12 aircraft to enter service under the Jetlink Agreement. This Warrant will expire at 5:00 p.m. Minneapolis time, on October 25, 2006, unless terminated earlier pursuant to the terms hereof. Subject to the last sentence of this Section 2, the rights represented by this Warrant may be exercised by Northwest, in whole or in part, by written notice of exercise delivered to the Company accompanied by the surrender of this Warrant (properly endorsed if required) at the principal office of the Company together with payment by check payable in Minneapolis Clearing House funds to the order of the Company of the purchase price for such shares. The Company agrees that the shares so purchased shall be deemed to be issued as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. Certificates for the Common Shares so purchased shall be delivered to Northwest as soon as practicable after the purchase rights represented by this Warrant shall have been so exercised. This Warrant may not be exercised in part for the purchase of any number of Common Shares less than 50,000, unless such number represents the total number of Common Shares then remaining subject to purchase pursuant to this Warrant. 3. The Company covenants and agrees that all Common Shares issued upon the exercise of the purchase rights represented by this Warrant will, upon issuance, be validly issued, fully paid, nonassessable, and free from all taxes, liens and charges with respect to the issue thereof. The Company further covenants and agrees that until the expiration of this Warrant it will at all times have authorized and reserved for the purpose of issue or transfer upon exercise of the purchase rights evidenced by this Warrant a sufficient number of shares of its common stock to provide for the exercise of the purchase rights represented by this Warrant. 4. This Warrant shall not be transferable or assignable by Northwest and may be exercised only by Northwest; provided, however, that Northwest may transfer or assign this Warrant to any affiliate (as such term is defined in Rule 405 promulgated under the Securities Act of 1933, as amended) of Northwest and any successor corporation (or other entity) resulting from its merger, consolidation, or other reorganization or the sale of all or substantially all of its assets. 5. In case the Company shall declare a stock dividend or other distribution upon its common stock payable in common stock of the Company, then the total maximum number of Common Shares issuable upon the exercise of this Warrant shall be increased by an amount equal to the number of shares of common stock which would have been issued to Northwest as a result of the issuance of such dividend or other distribution if, immediately prior to the record date relating to such dividend or other distribution, Northwest had exercised its purchase rights under this Warrant with respect to the total number of Common Shares then remaining subject to purchase. The Exercise Price in effect immediately prior to such dividend or other distribution shall be proportionately reduced. 6. In case the Company shall at any time subdivide or split its outstanding shares of common stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision or split shall be proportionately reduced, and conversely, in case the outstanding shares of common stock of the Company shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased. Upon each adjustment of the Exercise Price pursuant to this Section 6, Northwest shall thereafter be entitled to purchase, at the then applicable Exercise Price, the number of shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the applicable Exercise Price resulting from such adjustment. 7. If any capital reorganization or reclassification of the capital stock of the Company or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of shares of common stock of the Company shall be entitled to receive stock, securities or assets with respect to or in exchange for common stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby Northwest shall thereafter have the right to receive upon the basis and upon the terms and conditions specified in this Warrant and in lieu of the Common Shares of the Company immediately theretofore receivable upon the exercise of this Warrant, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of common stock of the Company equal to the number of Common Shares immediately theretofore receivable upon the exercise of this Warrant had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of Northwest to the end that the provisions hereof (including without limitation provision for adjustments of the then applicable Exercise Price and of the number of shares or other kinds of securities or other property receivable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter receivable upon the exercise of this Warrant. The Company shall not effect any such consolidation, merger or sale, unless, prior to the consummation thereof, the surviving corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument executed and mailed to Northwest at the last address of Northwest appearing on the books of the Company, the obligation to deliver to Northwest such shares of stock, securities or assets as, in accordance with the foregoing provisions, Northwest may be entitled to receive. 8. Upon any adjustment of the Exercise Price or the number of Common Shares or other kinds of securities or other property receivable upon exercise of this Warrant, then and in each case the Company shall give written notice thereof, by first-class mail, postage prepaid, addressed to Northwest at the address as shown on the books of the Company, which notice shall state the then applicable Exercise Price resulting from such adjustment, and the increase or decrease, if any, in the number of Common Shares or other kinds of securities or other property receivable upon exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 9. In case any time: (i) the Company shall pay or make any stock dividend or other distribution payable in stock upon its common stock or make any distribution (other than regular cash dividends) to the holders of its common stock; (ii) the Company shall offer for subscription pro rata to the holders of its common stock any additional shares of stock of any class or other rights; (iii) there shall be any capital reorganization, reclassification of the capital stock of the Company, or consolidation or merger of the corporation with, or sale of all or substantially all of its assets to, another corporation; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of said cases, at least 21 days prior to the applicable date specified below, the Company shall give written notice, by first-class mail, postage prepaid, addressed to Northwest at the address as shown on the books of the Company, of the date on which (aa) the books of the Company shall close or a record shall be taken for such stock dividend, distribution or subscription rights, or (bb) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of common stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their shares of common stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Failure to give such notice or any defect therein shall not affect the legality or validity of any such proceeding or transaction and shall not affect the right of the holder to participate in any said dividend, distribution, subscription or exchange. 10. Any transfer of this Warrant permitted by Section 4 hereof may be effected at the principal office of the Company by a duly authorized officer or attorney of Northwest, upon surrender of this Warrant properly endorsed. Northwest and each permitted transferee consents and agrees that Northwest may be treated by the Company and all other persons dealing with this Warrant as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented by this Warrant, or to the transfer hereof on the books of the Company, in the absence of any actual written notice to the contrary. 11. This Warrant is exchangeable upon the surrender hereof by Northwest at the principal office of the Company for new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of Common Shares which may be subscribed for and purchased hereunder. 12. Notwithstanding any other provisions set forth in this Warrant to the contrary, the rights of Northwest granted in this Warrant shall terminate (i) immediately upon the termination of the Jetlink Agreement, if the Jetlink Agreement is terminated by Northwest or (ii) 30 days after Northwest's receipt of notice from the Company of the Company's termination of the Jetlink Agreement, if the Jetlink Agreement is terminated as the result of such notice. 13. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer this 25th day of October, 1996. MESABA HOLDINGS, INC. By /s/ Bryan K. Bedford ------------------------------- Its President and Chief Executive Officer ELECTION TO PURCHASE (To be executed by the registered holder if such holder desires to exercise the Warrant.) TO: Mesaba Holdings, Inc. The undersigned hereby irrevocably elects to exercise this Warrant to the extent of ______________ Common Shares and requests that certificates for such shares be issued, and any payment in lieu of fractional shares be made, in the name of: (Print name, address and social security or other tax identifica tion number) Dated: , _____ Signature (Signature must conform in all respects to name of holder as specified on the face of this Warrant.) FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Warrant.) FOR VALUE RECEIVED, hereby sells, assigns and transfers unto (Print name and address of transferee) this Warrant, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint Attorney, to transfer the within Warrant on the books of the Company, with full power of substitution. Dated: , _____ Signature (Signature must conform in all respects to name of holder as specified on the face of this Warrant.) EX-10 3 REGIONAL JET SERVICES AGREEMENT THIS REGIONAL JET SERVICES AGREEMENT(the "Agreement") is made as of the 25th day of October, 1996 by and between MESABA HOLDINGS, INC., a Minnesota corporation ("Holdings"), MESABA AVIATION, INC., a Minnesota corporation ("Mesaba"), and NORTHWEST AIRLINES, INC., a Minnesota corporation ("Northwest"). WITNESSETH: WHEREAS, Mesaba and Northwest desire to make certain arrangements between them (including aircraft lease arrangements) which will enable Mesaba to provide to Northwest commercial jet transportation services using Avro Regional Jet aircraft; WHEREAS, no franchise or similar arrangement is being granted or is intended to be granted hereby; and WHEREAS, Holdings, Mesaba and Northwest are each willing to perform in the manner and upon the conditions and terms hereinafter set forth. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Northwest, Mesaba and Holdings do hereby agree as follows: ARTICLE I DEFINITIONS Section 1.01 Definitions. As used in this Agreement, the following terms have the following respective meanings: Affiliate shall mean any entity or person controlling, controlled by, or under common control with, Northwest. Aircraft shall mean up to thirty-six (36) Avro Regional Jet aircraft which are the subject of the Letter of Intent when, as and if such aircraft are added to Mesaba's fleet pursuant to Section 2.01. Airport Landing Fees shall mean all landing fees, custom fees, airport user fees and assessments and amounts payable or assessed for joint or common use facilities to the extent such fees and assessments are attributable to or result from Jet Services. Block Hours Payment shall mean the payment to be made pursuant to Section 4.02, the amount of which is determined in accordance with Exhibit A attached hereto. Block Hours Report shall mean the reports to be prepared by Mesaba pursuant to Section 4.02(a). Buyer Furnished Equipment shall have the meaning ascribed to such term in the Letter of Intent. Default shall mean the occurrence of an event set forth in Article IX, and the expiration of any cure period provided therein without cure or other remedial action having occurred, permitting immediate termination of the Agreement. Designator shall mean "NW" or such other designator code as Northwest may specify to identify regional jet flights. Direct Costs shall mean Northwest's or Mesaba's actual costs for goods and services without any surcharge for administrative or general overhead expense. DOT shall mean the United States Department of Transportation or any successor to its functions with respect to the regulation of air transportation. DOT Certification shall mean any and all certifications and approvals by DOT, FAA and other regulatory agencies required for Mesaba to operate the Aircraft and to perform pursuant to the terms of this Agreement and all Governmental Regulations. Exisiting Services Agreement shall mean the Airline Services Agreement, dated as of September 15, 1988, as amended, between Mesaba and Northwest. FAA shall mean the Federal Aviation Administration. Governmental Regulations shall mean rules and regulations prescribed by any local, state or federal unit of government having authority and jurisdiction to regulate the business and affairs of an air carrier having DOT Certification, including without limitation, the DOT and the FAA. Hub Cities shall mean Minneapolis/St. Paul, Minnesota and Detroit, Michigan. Identification shall mean the trade name (including "Northwest Airlink", "Northwest Jetlink" or any similar or other name), trademarks, service marks, graphics, logo, distinctive color schemes and other identification selected by Northwest in its sole discretion for the Jet Services to be provided by Mesaba, whether or not such identification is copyrightable or otherwise protected under federal law. Jet Services shall mean the provisioning by Mesaba to Northwest of Scheduled Flights using the Aircraft in accordance with this Agreement. Letter of Intent shall mean the letter of intent between Northwest Aircraft Inc. and Aero International (Regional) dated as of October 18, 1996 with respect to the purchase of up to thirty-six (36) Avro Regional Jet aircraft, a copy of which is attached hereto as Exhibit B. Margin shall mean the {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} determined in accordance with Section 4.04. Northwest Nominee shall mean an individual designated to serve as a director of Holdings and Mesaba by Northwest and approved by the Northwest Directors (1) who is either an officer or director of Northwest or an individual of recognized standing and reputation in the airline industry and (2) with respect to whom Holdings would not be required to make any disclosures in its proxy statements of matters required to be disclosed pursuant to Item 401(f)(2) through (6) of Regulation S-K of the rules and regulation of the Securities and Exchange Commission. Performance Period shall mean each six (6) month period ending on a June 30 or December 31 occurring during the term of this Agreement; provided, however, the first Performance Period shall not commence until the earlier of (1) January 1, 1998 or (2) the first January 1 or July 1 occurring after the eighth Aircraft has commenced service pursuant to this Agreement. Phase-in Period shall mean the period commencing on the date the first Aircraft commences revenue service and ending on the date on which the Block Hours Payment Rate is equal to the Phase- in Period Block Hours Payment Rate determined in accordance with Exhibit A, but in no event later than the date on which the twelfth Aircraft commences revenue service. PPI shall have the meaning ascribed to such term in Exhibit A hereto. Scheduled Flights shall mean (i) revenue passenger flights which, regardless of frequency, are held out to the public and published in the customary and applicable schedule distribution systems, such as the OAG, or published by Northwest in its own system time tables or (ii) any Northwest scheduled charter flight. Service Cities shall mean those cities identified from time to time by Northwest to which Mesaba shall provide Jet Services. Start Date shall mean the later of April 6, 1997 or forty (40) days after the delivery of the first Aircraft to Mesaba. Subleases shall mean the sub-subleases, subleases and/or leases to be entered into by Mesaba and Northwest pursuant to Section 2.01. Termination Date means the date on which this Agreement terminates whether by its term or as a result of a Default. ARTICLE II COVENANTS AND UNDERTAKINGS OF MESABA Section 2.01 Use and Sublease of the Aircraft. (a) Use of the Aircraft. Mesaba agrees that the Aircraft may be used only to provide the Jet Services contemplated by this Agreement and that the Aircraft may not be used by Mesaba for any other purpose without the prior written consent of Northwest. (b) Sublease of the Aircraft. Mesaba and Northwest agree to enter into (or, as to Northwest, Northwest agrees to cause such Northwest Affiliate as Northwest may designate to enter into) a sub-sublease, sublease or lease with respect to each of the first twelve (12) Avro Regional Jet aircraft to be purchased pursuant to the Letter of Intent when, if and as Northwest takes delivery of each such Avro Regional Jet aircraft. Mesaba agrees to enter into a sub-sublease, sublease or lease with Northwest (or such Northwest Affiliate as Northwest may designate) with respect to the remaining twenty-four (24) Avro Regional Jet aircraft subject to the Letter of Intent when and as Northwest takes delivery of each such Avro Regional Jet aircraft if Northwest determines in its sole discretion to use such aircraft for Jet Services pursuant to this Agreement. Northwest shall have no obligation to lease or sublease the remaining twenty-four (24) Avro Regional Jet aircraft to Mesaba and nothing in this Agreement shall prohibit or limit Northwest (or a Northwest Affiliate) from using or leasing to other air carriers the remaining twenty-four (24) Avro Regional Jet aircraft. (c) Terms of the Subleases. Each Sublease shall have the following terms: (i) the term of each Sublease shall be for a period ending on the Termination Date; (ii) the rent payable under each Sublease shall {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT}; (iii) the other terms of the Sublease shall be substantially the same as the terms of the applicable head lease; provided, however, (A) unless Northwest agrees otherwise, each Sublease shall not contain any buyout rights, renewal options, purchase options or other similar rights or options provided for in the head lease, (B) in determining whether certain terms (such as those relating to self-insurance requirements and past due charges, for example) are substantially similar, the relative creditworthiness of Northwest and Mesaba shall be considered, and (C) any events of default and/or termination rights shall be substantially the same as those set forth in the draft subleases or sub-subleases to be entered into by Northwest and Mesaba with respect to the leasing of {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} aircraft as such drafts exist on the date hereof (provided that the termination of the Existing Services Agreement shall not be an event of default or otherwise give rise to a termination right). (iv) the Sublease shall contain such other terms as Northwest shall request of Mesaba to conform provisions of the Sublease to the head lease and any ancillary documents actually entered into by Northwest or its Affiliate in connection with such Aircraft. In the event Northwest or an Affiliate owns an Aircraft, Mesaba shall enter in a lease as lessee with Northwest or its Affiliate; such lease shall be on such terms and conditions as Mesaba would be able to obtain from an independent third party, subject to the terms of any debt financing associated with such Aircraft. Section 2.02 DOT Certification. Mesaba has or shall obtain not later than the later of (i) April 1, 1997, or (ii) thirty (30) days after the delivery of the first aircraft to Mesaba, DOT Certification and all other permits, licenses, certificates and insurance required by governmental authorities and Article VIII hereof to enable Mesaba to perform the services required by this Agreement. Section 2.03 Operation of Scheduled Flights. (a) Provision of Scheduled Flights. Subject to the terms and conditions of this Agreement, Mesaba shall use the Aircraft to operate Scheduled Flights between the Hub Cities and such Service Cities as shall be designated by Northwest from time to time in its sole discretion. All schedules, block times and aircraft routing for such Scheduled Flights and all utilization of the Aircraft shall be determined by Northwest from time to time, in its sole discretion, subject to the reasonable operating constraints of Mesaba taking into consideration reasonable maintenance and Aircraft rotation requirements. (b) Use of Designator, Identification and Related Matters. Mesaba shall operate the Scheduled Flights provided under this Agreement using the Designator. The Scheduled Flights shall be identified by Mesaba solely with flight numbers assigned by Northwest. Mesaba shall use the Identification determined by Northwest from time to time, in its sole discretion, for the Aircraft, and for the uniforms and printed materials used in connection with the Jet Services; provided, however, the uniforms for the flight and cabin crews (as opposed to the use of the Identification thereon) shall be determined by Mesaba provided that such uniforms shall at all times be consistent with Mesaba's existing uniform standards. (c) Personnel and Dispatch Control. Mesaba shall be responsible for providing all crews (flight and cabin) to operate the Scheduled Flights and for all aspects (personnel and other) of dispatch control. (d) Aircraft Maintenance, Servicing and Cleaning. Mesaba shall be responsible for all aspects of the maintenance, servicing and cleaning of the Aircraft (other than incidental cleaning provided by Northwest pursuant to Section 3.02(e)). (e) Compliance With Governmental Regulations. All flight operations, dispatch operations and flights shall be conducted and operated by Mesaba in strict compliance with all Governmental Regulations, including, without limitation, those relating to crew qualifications, crew training and hours. All Aircraft shall be operated and maintained by Mesaba in strict compliance with all Governmental Regulations, Mesaba's own operations manuals and maintenance manuals and procedures, and all applicable equipment manufacturer's instructions. At all times, Mesaba shall operate with the highest standards of care. (f) Quality of Service. Mesaba shall achieve the same quality of airline service provided by Northwest. In furtherance of that goal, (i) Mesaba shall maintain adequate staffing levels to ensure the same level of customer service and operational efficiency that Northwest achieves, and (ii) Mesaba shall cooperate with Northwest in any way necessary or desirable to provide such comparable level of customer service in connection with the operation of Jet Services. (g) Nonexclusive Arrangement. Nothing in this Agreement shall preclude Northwest from entering into similar or other arrangements with other carriers for the provisioning of regional jet services using Avro Regional Jets to or from the Hub Cities, the same Service Cities or elsewhere. (h) Mesaba Costs. Except as provided in Section 2.04, all costs necessary to provide the foregoing services (including (i) all personnel costs and costs in relation therewith such as positioning, hotel accommodations, salaries, pensions, benefits, employment taxes and per diems, (ii) all maintenance and repair costs associated with the Aircraft (including line maintenance, maintenance towing, hanger fees, local maintenance assistance, spare parts, repairables, rotables and engine overhauls), (iii) all flight dispatch costs, (iv) all related general and administrative costs, (v) any related capital expenditures, and (vi) other costs imposed pursuant to other sections of the Agreement) shall be the sole responsibility of and payable by Mesaba. Section 2.04 Airport Fees. Mesaba shall pay all Airport Fees associated with Scheduled Flights using the Aircraft, and Northwest shall reimburse Mesaba for such fees in a timely manner. Section 2.05 Minimum Completion Factor. Mesaba shall achieve not less than a {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} completion factor for all Scheduled Flights which are scheduled to be operated by Mesaba during each Performance Period. For purposes of this Agreement, all cancellations due to airport closure and weather minima at the Service Cities or the Hub Cities, or Northwest controllable events, will be excluded from this calculation. Section 2.06 Minimum On-Time Reliability. Mesaba shall achieve a {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} on-time arrival reliability factor for all Scheduled Flights which are scheduled to be operated by Mesaba during each Performance Period. For purposes of this Agreement, an arrival will be considered on-time if it arrives not later than {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} minutes after its published, scheduled arrival time, and all arrival delays due to air traffic control holds, airport closure and weather minima at the Service Cities or the Hub Cities or Northwest controllable events will be excluded from this calculation. Section 2.07 Fuel Burn. Mesaba shall operate the Aircraft in accordance with all manufacturer and vendor standards and requirements for optimal fuel burn performance and shall promptly remedy any operating factors that cause or contribute to fuel burn in excess of such optimal burn performance. Mesaba shall provide to Northwest such fuel burn information as is necessary or desirable to allow Northwest to monitor compliance with any manufacturer or vendor agreement. Section 2.08 Use of Other Designators. During the term of this Agreement, Mesaba shall not use on the Aircraft its own airline designator (except as otherwise required by Governmental Regulations) or the airline designator, logo, or any other identifying feature of another foreign or United States airline, without the express prior written consent of Northwest, or unless Northwest directs Mesaba to use such other designator, logo, or identifying feature. Section 2.09 Certain Notices to Northwest. Mesaba shall give prompt written notice to Northwest of (a) any litigation involving an uninsured claim of more than $1,000,000 against Mesaba, (b) any proceeding before any governmental agency which, if adversely determined, would materially and adversely affect Mesaba's financial condition, affairs, operations or prospects, and (c) any other matter which would materially and adversely affect the financial condition, affairs, operations or prospects of Mesaba or its ability to perform its obligations under this Agreement. Section 2.10 Financial and Reporting Covenants. Mesaba shall provide to Northwest promptly following the filing or providing thereof copies of all financial statement, reports, notices and proxy statements filed with or provided to the Securities and Exchange Commission by Mesaba. ARTICLE III COVENANTS AND UNDERTAKINGS OF NORTHWEST Section 3.01 Inflight Supplies. Northwest shall furnish or cause to be furnished to Mesaba, at Northwest's sole expense, adequate supplies (consistent with Northwest's level of customer service) of its customary inflight supplies including, but not limited to, beverages, cups, napkins, sugar and blankets and pillows in a form similar or identical to that used by Northwest. Section 3.02 Terminal Operations. Northwest shall provide or cause to be provided, at Northwest's sole expense, the following functions relating to Jet Services: (a) all passenger and gate check-in activities, including baggage check-in, (b) passenger enplaning/deplaning, (c) aircraft loading/unloading, (d) passenger ticketing, (e) aircraft cleaning between turns and while parked overnight consistent with Northwest's cleaning standards for DC-9 aircraft (unless the Aircraft when parked overnight is subject to maintenance at a Mesaba maintenance base in which event Mesaba shall clean the interior and exterior of the Aircraft in a manner consistent with Northwest's aircraft cleaning standards), (f) aircargo and small package service, (g) ramp and foul weather cleaning and glycol service, (h) the heating and air conditioning of the Aircraft while parked on the ramp, and (i) fuel for the Aircraft and into plane fueling services. Northwest shall use its own equipment to handle Scheduled Flights operated pursuant to this Agreement and shall, at its sole expense, provide sufficient personnel, equipment, gates and ramps for the functions described in this Section 3.02. Northwest shall have the option from time to time to require Mesaba to perform some or all of these services and activities at some or all of the Hub Cities and the Service Cities; provided that, in connection therewith, (i) Northwest shall give Mesaba not less than ninety (90) days' prior written notice as to the services and activities to be performed and the locations thereof; (ii) the period of Mesaba's services shall be not less than one (1) year; (iii) Northwest shall pay Mesaba an amount equal to {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT}; and (iv) Northwest shall bear the cost of the capital expenditures associated with any equipment required for Mesaba to perform such services. Section 3.03 Passenger Fares. Northwest shall be the sole authority for filing tariffs for flights operated pursuant to this Agreement. Northwest shall establish passenger fares for all flights operated pursuant to this Agreement. All charges for filing of fares or tariffs relating to flights operated pursuant to this Agreement shall be paid by Northwest. Section 3.04 Scheduling Coordination. Northwest shall use its best efforts to provide to Mesaba not less than sixty (60) days' prior written notice of changes in routing, scheduling or Service Cities; provided, however, Mesaba shall use its best efforts to effect such changes if less than sixty (60) days' prior notice is given. Northwest shall develop scheduling procedures for handling irregular operations and related matters. Section 3.05 Aircraft Interior and Seating. All matters relating to the interior of the Aircraft, including specifications and seating configurations, initially and from time to time thereafter shall be determined by Northwest in its sole discretion and all costs associated therewith shall be at Northwest's sole expense. Section 3.06 Pilot Transportation. Northwest shall provide {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} for Mesaba pilots traveling overseas for training related to the Jet Services. Section 3.07 Certain Notices to Mesaba. Northwest shall give prompt written notice to Mesaba of any litigation or proceeding before any governmental agency or any other matter, including Governmental Regulations, which, if adversely determined, would materially adversely affect Northwest's ability to perform its obligations under this Agreement. ARTICLE IV REVENUES; PAYMENTS; SETOFF Section 4.01 Revenues. Mesaba acknowledges and agrees that all revenues resulting from the sale and issuance of passenger tickets and cargo airway bills associated with the operation of the Aircraft and all other sources of revenue associated with the operation of the Aircraft (including without limitation, beverage service and excess baggage) are the sole property of Northwest. Section 4.02 Block Hour Payment to Mesaba. (a) Block Hours Reports. Mesaba shall provide to Northwest periodic reports with respect to the number of block hours of Jet Services flown by Mesaba in accordance with the following schedule in each calendar month during the term of this Agreement: DAY OF MONTH REPORT DUE PERIOD COVERED BY REPORT 22 1ST - 15TH OF MONTH 7 COMPLETE PREVIOUS MONTH (b) Payment Schedule. Northwest shall remit to Mesaba by wire transfer of immediately available funds by the close of business on the 26th day of each calendar month (or the next banking day if the 26th is a bank holiday), as a provisional payment, Mesaba's Block Hour Payment for Jet Services for the period covered by the Block Hours Report furnished by Mesaba on the 22nd day of the month. Northwest shall remit to Mesaba by wire transfer of immediately available funds by the close of business on the 11th day of each month (or the next banking day if the 11th is a bank holiday), as a final payment, Mesaba's Block Hour Payment for the preceding month, less the amount of the provisional payment made on the 26th day of the preceding month. For purposes of this Section 4.02, Mesaba's Block Hour Payment for any period will be computed by multiplying the then applicable rate set forth in Exhibit A attached hereto by the number of block hours reported in Mesaba's Block Hours Report for such period for Jet Services. Adjustments arising from Northwest's audit of the Block Hours Report may be made within forty-five (45) days following the end of each month. Section 4.03 Incentives and Penalties. Mesaba shall be subject to certain performance incentives and penalties described in Sections 4.03(a), 4.03(b) and 4.03(e) ("Performance Criteria") which shall be added to or deducted from the Block Hour Payment. If Mesaba exceeds any operational criterion an incentive payment shall be made by Northwest. If Mesaba does not achieve the performance criterion, then a penalty shall be charged against amounts owing to Mesaba. Any incentive payment or penalty charge incurred by meeting or failing to meet Performance Criteria shall be made in the wire transfer due on the 26th day of the month following the end of the Performance Period in question pursuant to Section 4.02(b). (a) Completion Factor. If Mesaba's completion factor (calculated in accordance with Section 2.05) is less than {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} for a Performance Period, Northwest shall receive from Mesaba {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} during the applicable Performance Period. If Mesaba's completion factor is greater than {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} for a Performance Period, Northwest shall pay to Mesaba {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} during the applicable Performance Period. (b) On-Time Factor. If Mesaba's on-time factor (calculated in accordance with Section 2.06) is less than {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} for a Performance Period, Northwest shall receive from Mesaba {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} during the applicable Performance Period. If Mesaba's on-time factor is greater than {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} for a Performance Period, Northwest shall pay to Mesaba {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} during the applicable Performance Period. (c) Reconciliation of Performance Standards. For each Performance Period, Mesaba shall prepare a reconciliation of its actual performance to the targeted performance. This reconciliation will be completed and delivered to Northwest within fifteen (15) days after the end of each Performance Period. Northwest will remit or setoff any incentive or penalty payment in the next wire transfer due to Mesaba. Northwest will have the right to audit the reconciliation and shall report any discrepancies to Mesaba. Any discrepancy not reported to Mesaba in writing within sixty (60) days of the end of any Performance Period shall be deemed waived. The payment of any discrepancy from Mesaba shall be handled as a disputed amount in accordance with Section 4.05. (d) Limitations on Incentives and Penalties. In no event shall the "net aggregate incentives" paid to Mesaba by Northwest or "net aggregate penalties" paid to Northwest by Mesaba during any calendar year exceed {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT}. For the purposes of this Section 4.03(d), the difference between the sum of all incentive payments made by Northwest during any calendar year to Mesaba pursuant to this Section 4.03 less the aggregate of all payments due to Northwest during the same calendar year by Mesaba with Northwest for its failure to achieve the Performance Criteria shall be the "net aggregate incentives" if the difference is a positive number and shall be "net aggregate penalties" if the difference is a negative number. (e) Additional Performance Criteria. During the term of this Agreement, Northwest may introduce other performance criteria for Mesaba's operations pursuant to this Agreement. The parties agree that they will meet upon the introduction of such additional performance goals for Northwest's operations, to develop similar performance targets for Mesaba, taking into account the differences in operations between the two companies, and shall use their best commercially reasonable efforts to develop a system of incentives and penalties for Mesaba's performance with respect thereto in a manner consistent with the performance standards agreed to herein. Section 4.04 Annual Payment with Respect to the Margin. (a) Calculation of the Margin. Not later than ninety (90) days following the end of each fiscal year of Mesaba ending during the term of this Agreement, Mesaba shall calculate and deliver to Northwest its {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} for Jet Services provided under this Agreement for the fiscal year then ended (the "Margin") by dividing (x) {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} by (y) {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT}. The result shall be expressed as a decimal rounded to the fourth place (e.g., .111171 shall be expressed as .1112). The calculation shall be derived from Mesaba's audited financial statements for such fiscal year, shall be determined in accordance with generally accepted accounting practice and principles consistently applied ("GAAP"), and shall take into account {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT}. (b) Margin Payment. If the Margin is greater than {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} but is less than or equal to {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT}, Northwest shall receive from Mesaba an amount determined as follows: {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} If the Margin is greater than {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT}, Northwest shall receive from Mesaba an amount determined as follows: {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} The amount payable by Mesaba pursuant to this Section 4.04(b) is the "Margin Payment." Northwest shall setoff any Margin Payment in the next wire transfer due to Mesaba. (c) Audit of the Margin. Northwest will have the right to audit the calculation of the Margin and the Margin Payment, and shall report any disputes to Mesaba. Any dispute not reported to Mesaba in writing within sixty (60) days of the receipt of the Margin calculation by Northwest shall be deemed waived. The payment in respect of any dispute shall be handled as a disputed amount in accordance with Section 4.05. Section 4.05 Billing. Northwest shall bill Mesaba on a monthly basis in respect of amounts owed to Northwest by Mesaba under this Agreement. If such billed items are not paid by Mesaba to Northwest or disputed by Mesaba within thirty (30) days of the statement date, Northwest may offset the aggregate amount of undisputed items against the next scheduled wire transfer pursuant to Section 4.02(b). Disputed amounts must be paid by Mesaba to Northwest when the dispute is resolved with interest at the rate of one percent (1%) per month from the date of the original bill, provided that Northwest may set off such amount against the next scheduled wire transfer pursuant to Section 4.02(b) if the formerly disputed amount is not paid within thirty (30) days of resolution. Northwest may also offset against the next scheduled wire transfer pursuant to Section 4.02(b) the amount of any rent payment under any Sublease with respect to which Mesaba shall have defaulted and shall have failed to cure before the expiration of any applicable grace period. Section 4.06 Allocation of Start-Up Expenses. Northwest and Mesaba agree that each shall be responsible for and shall pay those start-up costs and expenses associated with commencing Jet Services under this Agreement which are related to or result from those cost and expense obligations for which each is otherwise responsible under this Agreement. By way of example and without limiting the foregoing, Mesaba shall pay all costs associated with pilot, flight attendant and mechanic training, establishing maintenance bases and obtaining DOT Certification, and Northwest shall pay costs associated with Buyer Furnished Equipment, Aircraft livery, any required ground equipment and any additional ground and gate personnel. ARTICLE V AUDITING AND INSPECTIONS Section 5.01 Audits. Upon the reasonable prior written request by Northwest made not more frequently than once every six (6) months, Mesaba shall make available its books and the books of Holdings and all other direct and indirect subsidiaries of Holdings, and records for its operations with respect to this Agreement available for inspection by Northwest. Northwest shall also be entitled to make copies and notes of such information as it deems necessary and to discuss such records and the finances and accounts of Mesaba with its Chief Financial Officer or other employee or agent of Mesaba knowledgeable about such records. Section 5.02 Inspections. Northwest shall be entitled to conduct on site observations of Mesaba's in-flight service, flight, maintenance and technical operations to monitor Mesaba's operations in the same manner as similar functions are evaluated at Northwest. The purpose of such inspections shall be to determine Mesaba compliance with applicable Federal Aviation Regulations, DOT Regulations, state and local laws and equipment manufacturer's instructions. Mesaba's operation will be evaluated according to the same standard as Northwest taking into account the differences in size and operational capabilities between the two airlines. Such inspections may be announced or unannounced, but under no circumstances shall they interfere with the operation of Mesaba's business. Northwest shall report the findings of any such inspection to Mesaba in writing. Mesaba shall provide a timely written response detailing a plan of corrective action to remedy any deficiencies noted in an inspection. If any deficiency comes to the attention of Mesaba through audits or any other means, Mesaba shall take immediate corrective action. Section 5.03 Confidentiality. Each of Northwest and Mesaba agrees that, except as otherwise required by Governmental Regulations or any other applicable law, it shall not disclose to others and shall keep confidential any confidential, non-public information concerning the other that it obtains as a result of or pursuant to this Agreement. ARTICLE VI NORTHWEST IDENTIFICATION Section 6.01 Use of Identification. Northwest shall establish and maintain an Identification for its program of affiliation with Mesaba for Jet Services and Mesaba is granted the right to use such Identification pursuant to Section 2.03(b) and this Article VI. From time to time, Northwest may change the Identification applicable to the program, including program designation and trademark. Northwest shall have complete discretion to change the Identification applicable to the program. Such substitute Identification shall be used by Mesaba in lieu of any prior name to identify Mesaba's association with the program. If Northwest changes the Identification, Mesaba shall, as soon as practicable make such changes as are requested by Northwest to utilize the new name of the program and Northwest shall be liable for the reasonable expenses incurred by Mesaba in making such changes. Section 6.02 Ownership of the Identification. Mesaba hereby acknowledges Northwest's ownership of the name "Northwest" and all related Identification and further acknowledges the validity of the Identification. Mesaba agrees that it will not do anything which in any way infringes or abridges Northwest's rights in its Identification or directly or indirectly challenges the validity of the Identification. Section 6.03 Nonexclusive License. To the extent that Mesaba is licensed to use the Identification in accordance with this Agreement, Mesaba will use such Identification only in a manner permitted by Northwest or in conjunction with the services specifically contemplated by this Agreement. Nothing in this Agreement shall be construed to abridge Northwest's right to use and/or to license the Identification, and Northwest hereby reserves the right to the continued use of all the Identification, to license such other uses of the Identification and to enter into such agreements with other carriers providing for arrangements similar to those with Mesaba as Northwest may desire. No term or provision of this Agreement shall be construed to preclude the use of the trademark "Northwest Airlink" or "Northwest Jetlink" or other mark as a trademark of an affiliation program with Northwest or the use of any other Northwest Identification by other individuals or corporations not covered by this Agreement. Section 6.04 Revocation of License Upon Termination of Agreement. Should this Agreement be cancelled or otherwise terminated for any reason, all right to use the Identification provided Mesaba hereby shall immediately revert to Northwest and, except as otherwise permitted under the Existing Services Agreement or any successor thereto, shall not thereafter be used by Mesaba in connection with any operations of Mesaba. Mesaba shall, in such event, promptly, but in any event within ninety (90) days (one hundred twenty (120) days with respect to any distinctive color scheme), take such action as may be necessary to change its facilities, equipment, uniforms and supplies to avoid any customer confusion or the appearance that Mesaba is continuing to have an operating relationship with Northwest. Section 6.05 Alteration or Amendment of License. At any time during the life of the Agreement, Northwest may alter or amend the license to use the Identification granted under this Agreement so long as Mesaba's rights hereunder are not diminished, and may, subject to Section 6.01, require Mesaba to use new or different Northwest Identification. ARTICLE VII [Intentionally Omitted] ARTICLE VIII LIABILITY, INDEMNIFICATION AND INSURANCE Section 8.01 Independent Contractor. (a) Mesaba shall act as an independent contractor. The employees, agents and/or independent contractors of Mesaba engaged in performing any of the services Mesaba is obligated to perform pursuant to this Agreement shall be employees, agents and independent contractors of Mesaba for all purposes and under no circumstances shall employees, agents or independent contractors of Mesaba be deemed to be employees, agents or independent contractors of Northwest. In its performance of obligations under this Agreement, Mesaba shall act, for all purposes, as an independent contractor and not as an agent for Northwest. Northwest shall have no supervisory power or control over any employees, agents or independent contractors engaged by Mesaba in connection with Mesaba's performance of its obligations hereunder, and all complaints or requested changes in procedures shall, in all events, be transmitted by Northwest to a designated representative of Mesaba. Nothing contained in this Agreement is intended to limit or condition Mesaba's control over its operation or the conduct of its business as an air carrier. (b) Northwest shall act as an independent contractor. The employees, agents and/or independent contractors of Northwest engaged in performing any of the services Northwest is to perform pursuant to this Agreement shall be employees, agents and independent contractors of Northwest for all purposes and under no circumstances shall employees, agents and independent contractors of Northwest be deemed to be employees, agents or independent contractors of Mesaba. In performing its obligations under this Agreement, Northwest shall act, for all purposes, as an independent contractor and not as an agent for Mesaba. Mesaba shall have no supervisory power or control over any employees, agents or independent contractors engaged by Northwest in connection with the performance of its obligations hereunder, and all complaints or requested changes in procedure shall, in all events, be transmitted by Mesaba to a designated representative of Northwest. Nothing contained in this Agreement is intended to limit or condition Northwest's control over its operation or the conduct of its business as an air carrier. Section 8.02 Indemnification. Each party assumes full responsibility for any and all liability to its own officers, employees or agents on account of injury or death resulting from or sustained in the performance of their respective services under this Agreement. Each party shall indemnify, defend, protect, save and hold harmless the other party, its officers, employees, and agents from and against any and all liabilities, claims, demands, suits, judgments, damages and losses (including the costs, fees and expenses in connection therewith and incident thereto) brought against the other party, its officers, employees or agents by or on behalf of any other person, by reason of damage to or destruction of property of any such person, or injury to or death of such person, caused by or arising out of any act or omission by the indemnifying party occurring while this Agreement is in effect. Notwithstanding the foregoing, neither party shall be liable for indemnifying the other for claims of third parties if caused by the gross negligence or wilful misconduct of the other. Each party shall give the other party prompt and timely notice if it has actual knowledge of any claim made or suit instituted against the other party which in any way results in indemnification hereunder, and the other party shall have the right to compromise or participate in the defense of such claim or suit to the extent of its own interest. The obligations of Mesaba and Northwest under the indemnity and insurance provisions contained herein shall remain in effect and shall survive without limitation the termination of this Agreement with respect to any occurrence or claims arising during the term of or in connection with this Agreement. Section 8.03 Insurance. (a) Mesaba agrees, at its sole expense, to maintain in full force and effect the following insurance coverages: (1) Workers' compensation and occupational disease insurance, subject to the laws of the states wherein this Agreement is being performed. Such coverage shall include employers liability insurance up to a limit of at least {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT}. (2) Comprehensive airline and property damage liability insurance with limits of not less than {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT} combined single limit per occurrence, including, but not limited to, aircraft liability, passenger legal liability, premises and property damage liability, hangarkeepers liability and baggage and cargo liability. Such insurance shall include endorsements for personal injury and contractual liability. (3) All risk hull insurance on the Aircraft. (b) Prior to the commencement of Jet Services under this Agreement, Certificates of Insurance shall be delivered to Northwest evidencing compliance with the insurance terms of this Agreement. All of the above insurance shall be written through a company or companies reasonably satisfactory to Northwest, and the Certificates of Insurance shall be of a type that unconditionally obligates the insurer to notify Northwest in writing at least thirty (30) days in advance of the effective date in the event of any material change in or cancellation of such insurance. The policies of insurance required by paragraphs (2) and (3) of Section 8.03(a) shall provide coverage for events which occur during the policy period, are continuing in nature and not on a claims made basis, and shall include endorsements that provide: (1) That the Underwriters acknowledge that the indemnification and hold harmless provisions of this Agreement are insured under Mesaba's blanket contractual liability coverage. (2) That Northwest, its officers, agents and employees are named as an additional insureds thereunder. (3) That the insurance is primary with respect to the matters within such coverage, irrespective of any insurance carried by Northwest. (4) That as respects the interest of Northwest, the insurance shall not be invalidated by any breach of warranty by Mesaba. (5) That provide a severability of interest/cross liability endorsement. (6) That the insurer shall waive its subrogation rights against Northwest, its officers, agents and employees. (7) That any waiver of rights of subrogation against other parties by Mesaba will not affect the coverage provided with respect to Northwest. ARTICLE IX TERM; TERMINATION Section 9.01 Term. This Agreement shall commence on the date it is executed by both parties and unless earlier terminated as provided herein, shall continue until the tenth anniversary of the effective date of the first Sublease. Section 9.02 Termination by Either Party. (a) In the event that either Mesaba or Northwest (i) makes a general assignment for the benefit of creditors or becomes insolvent; (ii) files a voluntary petition in bankruptcy; (iii) petitions for or acquiesces in the appointment of any receiver, trustee or similar officer to liquidate or conserve its business or any substantial part of its assets; (iv) commences under the laws of any competent jurisdiction any proceeding involving its insolvency, bankruptcy, reorganization, readjustment of debt, dissolution, liquidation or any other similar proceeding for the relief of financially distressed debtors; (v) becomes the object of any proceeding or action of the type described in (iii) or (iv) above and such proceeding or action remains undismissed or unstayed for a period of at least thirty (30) days; or (vi) is divested of a substantial part of its assets for a period of at least thirty (30) days; then the other party may by written notice terminate this Agreement immediately. (b) Except as provided in Section 9.03, in the event of a breach of a nonmonetary provision of this Agreement by either party remaining uncured for more than thirty (30) days after receipt of written notification of such default by the nondefaulting party, or in the case of a breach requiring more than thirty (30) days notice to cure, the defaulting party does not begin and pursue with due diligence a method of cure within thirty (30) days after receipt of written notification specifying in reasonable detail the nature of such default from the nondefaulting party, then the nondefaulting party may terminate this Agreement at its sole option. (c) In the event of a breach of a monetary provision of this Agreement by either party and such default remaining uncured for more than ten (10) days after receipt of written notification specifying in reasonable detail the nature of such default from the nondefaulting party, then the nondefaulting party may terminate this Agreement at its sole option. Section 9.03 Termination by Northwest. Notwithstanding the provisions of Section 9.02(b), Northwest shall have the right to terminate this Agreement immediately and at its sole option if: (a) Mesaba shall default in the payment of any rental payment due under any Sublease or with respect to any other terms of any Sublease and such default shall continue for more than the period of grace, if any, specified therein and shall not have been waived. (b) Mesaba shall default with respect to any other terms of any Sublease, such default shall continue for more than the period of grace, if any, specified therein and such default shall constitute an "event of default" thereunder. (c) Mesaba shall fail to comply with the provisions of Section 8.03 and, as a result thereof, the insurance required thereunder is not in effect. (d) More than twenty-five percent (25%) of the Aircraft are not operated for more than seven (7) consecutive days other than as a result of a FAA order grounding all Avro Regional Jets of all air carriers. (e) There shall be a strike, cessation or interruption of work involving Mesaba's pilots, flight attendants or mechanics providing Jet Services. (f) Mesaba's DOT Certification is not obtained prior to the later of April 1, 1997 or thirty (30) days after the delivery of the first Aircraft to Mesaba or is for any reason suspended or revoked or otherwise not in full force and effect so as to permit Mesaba to perform the Jet Services required under this Agreement. (g) Mesaba shall fail to provide Jet Services on or before the Start Date. (h) The person elected to replace Bryan K. Bedford as Chief Executive Officer of Mesaba and Holdings and any successor chief executive officer of Mesaba and Holdings shall not be reasonably acceptable to Northwest. (i) The Board of Directors of Mesaba and Holdings shall fail to nominate and recommend for election by the stockholders of Mesaba and Holdings a sufficient number of Northwest Nominees so that if each such Northwest Nominee were elected there would be three (3) directors designated by Northwest then serving on the Boards of Directors of Holdings and Mesaba, or the Boards of Directors of Mesaba and Holdings shall fail to elect a Northwest Nominee to fill a vacancy created by the death, resignation or removal of another director previously designated by Northwest. Section 9.04 Early Termination. Notwithstanding any other provision of this Agreement, Northwest shall have the right to terminate this Agreement and the Subleases as of the sixth anniversary of the effective date of the first lease if Northwest shall have given a termination notice to Mesaba not less than one hundred eighty (180) days nor more than three hundred sixty-five (365) days prior to such sixth anniversary. Section 9.05 Revocation or Failure to Obtain DOT Certification. If this Agreement is terminated because Mesaba fails to obtain DOT Certification by the later of April 1, 1997 or thirty (30) days after the delivery of the first Aircraft to Mesaba or because Mesaba's DOT Certification is suspended or revoked or otherwise not in full force and effect so as to permit Mesaba to perform the Jet Services required under this Agreement, in addition to any other rights which Northwest may have, Mesaba shall pay to Northwest an amount equal to {CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT}. This Section 9.05 shall survive the termination of this Agreement. Section 9.06 Change in Control. Notwithstanding any other provision of this Agreement, Northwest shall have the right to terminate this Agreement immediately and at its sole option upon the occurrence of any one or more of the following: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (a "Person")) (other than Northwest) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of Holdings (the "Outstanding Holdings Common Stock") or (ii) the combined voting power of the then outstanding voting securities of Holdings entitled to vote generally in the election of directors (the "Outstanding Holdings Voting Securities"); provided, however, the term "Person" as used in this Section 9.06(a) shall not include Northwest, any Northwest assignee or transferee, or Carl R. Pohlad and his family or any affiliate of Carl R. Pohlad which beneficially owns directly or indirectly shares of Holdings common stock as of the date hereof; (b) Approval by the Board of Directors of Mesaba or Holdings of a reorganization, merger or consolidation (a "Business Combination"), in each case, unless, following such Business Combination, all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Holdings Common Stock and Outstanding Holdings Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 75% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns Holdings or Mesaba through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Holdings Stock and Outstanding Holdings Voting Securities, as the case may be; or (c) Approval by the Board of Directors of Mesaba or Holdings of (i) a complete liquidation or dissolution, or (ii) the sale or other disposition of all or substantially all of the assets of Mesaba or Holdings, other than to a corporation with respect to which following such sale or other disposition, more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Holdings Common Stock and Outstanding Holdings Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership immediately prior to such sale or other disposition of the Outstanding Holdings Common Stock and Outstanding Holdings Voting Securities, as the case may be. ARTICLE X LIMITATION ON PERFORMANCE; MISCELLANEOUS Section 10.01 Limitation on Performance. The obligation of either Northwest or Mesaba to perform under the terms of this Agreement shall be limited or modified by, and neither carrier shall be deemed to be in default hereunder as a result of any of the following causes: (a) Acts of God or the public enemy, civil war, insurrections or riots; fires, floods, explosions, embargoes, earthquakes, epidemics, or quarantine restrictions; any act of government, governmental priorities, allocations, orders or Governmental Regulations affecting materials or facilities; inability after due and timely diligence to procure materials, accessories, equipment or parts; or due to any other cause to the extent it is beyond that carrier's practical control or not occasioned by that carrier's fault or negligence. (b) Cessation, slow-down or interruption of work, or any other labor disturbance involving Northwest. Section 10.02 Mutual Cooperation. Northwest and Mesaba shall use their best efforts to cooperate with each other in performing their respective obligations under this Agreement. Section 10.03 Representations and Warranties. Except as expressly set forth herein, neither Northwest nor Mesaba shall make any representations or warranties, expressed or implied, under or in connection with this Agreement. Section 10.04 Assignment. This Agreement may not be assigned by either party, without the written consent of the other party. Section 10.05 Governing Law. This Agreement shall be governed in accordance with the laws of the State of Minnesota. Section 10.06 Notices. All notices given hereunder shall be given in writing and shall be delivered in person or deposited in the United States mail, certified or registered mail, return receipt requested, with adequate postage prepaid, or given by express courier, telex, telefacsimile, or other expedient written means, addressed as follows: If to Northwest: Northwest Airlines, Inc. Department A6030 5101 Northwest Drive St. Paul, Minnesota 55111-3034 Attn: Vice President-Market Planning with a copy to: Northwest Airlines, Inc. Department A1180 5101 Northwest Drive St. Paul, Minnesota 55111-3034 Attn: Senior Vice President, General Counsel and Secretary If to Mesaba: Mesaba Aviation, Inc. 7501 26th Avenue South Minneapolis, Minnesota 55450 Attn: President with a copy to: Mesaba Aviation, Inc. 7501 26th Avenue South Minneapolis, Minnesota 55450 Attn: Vice President-Administration and General Counsel or to such other address as the respective parties hereto shall designate by notice in writing to the other party. Notices shall be deemed received and given on the date of delivery or the date of refusal of delivery as shown by the return receipt. Section 10.07 Parties. Except as provided to the contrary herein, this Agreement, and the rights and obligations created hereunder, shall be binding upon and inure to the benefit of the respective parties hereto and their respective successors and permitted assigns. Section 10.08 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one agreement. Section 10.09 Severability. If any term of this Agreement shall be judicially determined to be illegal, invalid or unenforceable at law or in equity, it shall be deemed to be void and of no force and effect to the extent necessary to bring such term within the provisions of any such applicable law or laws, and such terms as so modified and the balance of the terms of this Agreement shall remain enforceable. Section 10.10 Captions, Section Headings and Table of Contents. Captions, section headings and the Table of Contents used herein are for convenience only and are not a part of this Agreement and shall not be used in construing it. Section 10.11 Availability of Equitable Remedies; Procedures. (a) In the event of a breach by either party of any provision of this Agreement, the nonbreaching party may give notice thereof to the breaching party, which notice shall specify in reasonable detail the nature of the breach and shall demand that the breaching party either cure the breach or refrain from conduct constituting the breach (herein the "conduct"), as may be applicable. If (i) the breaching party has not cured the breach or refrained from the conduct, as may be applicable, within ten (10) days following receipt of said notice from the nonbreaching party, or (ii) the breaching party does not begin within ten (10) days following receipt of said notice to pursue with reasonable diligence a method of cure or begin to take steps toward ceasing the conduct where the breach or conduct is such that it requires more than ten (10) days to cure or to cease, as may be applicable, then the nonbreaching party may seek to compel performance by the breaching party in accordance with the provisions of paragraph (b) below. If, upon receiving a notice contemplated by this paragraph (a), a breaching party believes that a breach has not occurred or that the conduct specified in the notice does not constitute a breach of the provisions of this Agreement, but the breaching party nonetheless cures the alleged breach or refrains from the conduct within ten (10) days following receipt of such notice, said party may thereafter proceed in accordance with the provisions of paragraph (b) below to seek a determination of whether a breach occurred or whether the specified conduct constituted a breach of the provisions of this Agreement. (b) Because a breach of the provisions of this Agreement could not adequately be compensated by money damages, any party shall be entitled, following notification in accordance with the provisions of paragraph (a) above, to an injunction restraining such breach or threatened breach and to specific performance of any provision of this Agreement and, in either case, no bond or other security shall be required in connection therewith, and the parties hereby consent to the issuance of such injunction and to the ordering of specific performance. Further, in the event any party refrains from the conduct of any activity alleged in a notice received pursuant to paragraph (a) above to constitute a breach of the provisions of this Agreement, such party may thereafter proceed promptly to bring an action in the District Court, County of Hennepin, State of Minnesota, for an expedited judicial determination as to whether the conduct specified constitutes a breach of the provisions of this Agreement and, upon a determination that the conduct does not constitute a breach, such party may promptly thereafter recommence such conduct. Section 10.12 Exhibits. The Exhibits attached hereto are intended to be an integral part of this Agreement and are incorporated into the Agreement by reference for all purposes. Section 10.13 Integration and Entire Agreement. This Agreement (including the Exhibits) and the Subleases and the ancillary documents entered into in connection therewith are intended by both parties as a complete statement of the entire agreement and understanding of the parties with respect to the subject matter herein and therein set forth. This Agreement may only be amended or modified by a written agreement between Mesaba and Northwest which specifically references this Agreement and expressly provides for such amendment. This Agreement is entirely separate from and unrelated to the Existing Services Agreement. Section 10.14 Relationship of Parties. Nothing in this Agreement shall be interpreted or construed as establishing between the parties a partnership, joint venture or other similar arrangement. Section 10.15 Stock Purchase Warrant. Holdings agrees to deliver to Northwest not later than the close of business on October 29, 1996 an executed stock purchase warrant which shall contain the following terms: (a) the warrant shall be with respect to 615,000 shares of Holdings common stock; (b) the exercise price shall be $10.875 per share; (c) the term shall be for ten (10) years but shall terminate (i) as of the termination date of this Agreement if this Agreement is terminated by Northwest or (ii) as of the later of the termination date of this Agreement or thirty (30) days after a termination notice if this Agreement is terminated by Mesaba; (d) the warrant shall contain customary anti-dilution provisions; and (e) the warrants shall vest proportionately as the twelve (12) Aircraft are delivered. Section 10.16 No Franchise Fees. Mesaba and Northwest acknowledge and agree that no payment under this Agreement or the Existing Services Agreement or any lease payments under the Subleases or other lease agreements entered into in connection with the Existing Services Agreement constitute a franchise fee within the meaning of Minn. Stat. 80C.01, subdivision 9. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first set forth above. WITNESS: MESABA HOLDINGS, INC. By: /s/ Bryan K. Bedford ------------------------ /s/ Andrea D. Peura Its President & CEO - ---------------------- WITNESS: MESABA AVIATION, INC. By: /s/ Bryan K. Bedford ------------------------ /s/ Andrea D. Peura Its President & CEO - --------------------- WITNESS: NORTHWEST AIRLINES, INC. By: /s/ Neal S. Cohen --------------------- /s/ Michael L. Miller Its Vice President-Market Planning - ----------------------- Assistant Secretary EX-27 4
5 1000 6-MOS MAR-31-1997 APR-01-1996 SEP-30-1996 46,708 0 7,235 0 2,581 61,870 32,734 18,308 92,592 28,119 0 0 0 128 41,313 92,592 89,096 89,096 77,527 77,527 0 0 261 11,851 4,990 6,861 0 0 0 6,861 .53 .53
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