<PAGE>
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, 1997
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 7, 1997
----- ----------------------------------
Common Stock
par value $.01 per share 12,845,696
<PAGE>
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 material changes in the relationship between the
Company and Northwest Airlines; 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.
<PAGE>
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
MESABA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
ASSETS
September 30, March 31
1997 1997
------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 57,774 $ 49,126
Accounts receivable, net 13,607 13,344
Inventories 3,423 2,077
Prepaid expenses and deposits 2,666 3,054
Deferred tax asset 3,512 3,600
--------- ---------
Total current assets 80,982 71,201
PROPERTY AND EQUIPMENT:
Facilities under capital lease 9,147 9,147
Flight equipment 26,706 18,655
Other property and equipment 14,804 12,008
Accumulated depreciation and amortization (22,329 (20,038)
--------- ---------
Net property and equipment 28,328 19,772
DEFERRED INCOME TAXES - 283
OTHER ASSETS AND DEFERRED COSTS 14,869 13,310
--------- ---------
TOTAL ASSETS $124,179 $104,566
========= =========
The accompanying notes to interim consolidated financial statements are an
integral part of these balance sheets.
<PAGE>
MESABA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except share information)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, March 31
1997 1997
------------- -------------
(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 447 $ 425
Accounts payable 17,458 11,932
Accrued liabilities
Payroll 8,023 6,589
Maintenance 6,288 7,469
Other 6,998 6,978
--------- ---------
Total current liabilities 39,214 33,393
LONG-TERM OBLIGATIONS, net of current maturities 4,960 5,194
DEFERRED CREDITS AND OTHER LIABILITIES 15,309 16,185
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 25,000,000
shares authorized, 12,844,846 and
12,784,046 shares issued and outstanding, 128 128
respectively
Paid-in capital 40,494 40,114
Warrants 7,900 3,100
Retained earnings 16,174 6,452
--------- ---------
Total shareholders' equity 64,696 49,794
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDER' EQUITY $124,179 $104,566
========= =========
The accompanying notes to interim consolidated financial statements are an
integral part of these balance sheets.
<PAGE>
MESABA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share information)
Three Months ended Six Months Ended
September 30, September 30,
------------------- ----------------
1997 1996 1997 1996
--------- --------- --------- ---------
OPERATING REVENUES:
Passenger $ 70,961 $ 46,230 $124,777 $ 88,160
Other 981 445 1,589 936
--------- --------- --------- ---------
Total operating revenues 71,942 46,675 126,366 89,096
OPERATING EXPENSES:
Wages and benefits 16,476 12,623 30,505 24,521
Aircraft fuel costs 6,073 4,341 11,600 8,257
Aircraft maintenance costs 9,922 6,032 17,489 11,389
Aircraft rents 12,562 7,725 22,187 15,151
Wet lease expense 4,642 - 4,642 -
Landing fees 1,561 1,253 2,982 2,382
Insurance and taxes 1,748 1,321 3,070 2,493
Depreciation and amortization 1,621 1,022 2,774 2,002
Administrative and other costs 8,182 5,858 15,753 11,332
--------- --------- --------- ---------
Total operating expenses 62,787 40,175 111,002 77,527
Operating income 9,155 6,500 15,364 11,569
NONOPERATING IINCOME (EXPENSE):
Interest expense (118) (128) (243) (261)
Other, net 543 297 1,039 543
--------- --------- --------- ---------
Other income, net 425 169 796 282
Income before income taxes 9,580 6,669 16,160 11,851
PROVISION FOR INCOME TAXES 3,832 2,809 6,439 4,990
--------- --------- --------- ---------
NET INCOME $ 5,748 $ 3,860 $ 9,721 $ 6,861
========= ========= ========= =========
NET INCOME PER SHARE:
Fully Diluted $ 0.41 $ 0.30 $ 0.71 $ 0.53
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Fully Diluted 13,916 12,962 13,611 12,970
========= ========= ========= =========
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
<PAGE>
MESABA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six Months Ended
September 30, March 31
1997 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 9,721 $ 6,861
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,774 2,002
Amortization of deferred credits (427) -
Accrued maintenance, long-term - (789)
Deferred Income tax provision (371) (530)
Changes in current operating items:
Accounts receivable, net (263) 2,019
Inventories (1,346) (915)
Prepaid expenses and deposits 388 (671)
Accounts payable and accrued liabilities 5,644 10,783
--------- ---------
Net cash provided by operating activities 16,120 18,760
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (7,254) (1,409)
Capitalized pre-operating costs (386) -
Other, net - (4)
--------- ---------
Net cash used for investing activities (7,640) (1,413)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 380 164
Repayment of long-term obligations (212) (231)
--------- ---------
Net cash provided by (used for) financing
activities 168 (67)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,648 17,280
CASH AND CASH EQUIVALENTS:
Beginning of period 49,126 29,428
--------- ---------
End of period $ 57,774 $ 46,708
========= =========
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 243 $ 128
========= =========
Income taxes $ 7,511 $ 2,437
========= =========
Noncash investing activities included the following:
Rotable and spare parts inventory acquired
with integration funds 3,909 4,354
========= =========
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
<PAGE>
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, 1997, 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 accounts of the Company
and its subsidiary, Mesaba Aviation, Inc. ("Mesaba"). 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 84 cities in the Upper Midwest and Canada. Mesaba
operates flights from Minneapolis/St. Paul and Detroit Metropolitan airport
as Mesaba/Northwest Airlink ("Airlink") under a cooperative marketing
agreement with Northwest Airlines, Inc. ("Northwest"). In October 1997,
Mesaba signed a new long-term Airline Services Agreement ("Airlink
Agreement") with Northwest for Mesaba to continue operating as Northwest
Airlink. The ten year agreement grants all turboprop Airlink flying out of
Northwest's Minneapolis/St. Paul hub to Mesaba effective August 1, 1997. The
agreement also continues Mesaba's right to provide all turboprop Airlink
service out of Northwest's Detroit Metropolitan airport. Mesaba and Northwest
each have the right to terminate the Airlink Agreement without cause upon 365
days written notice at any time after July 1, 2000. As consideration for the
additional flights, the Company issued a warrant to allow Northwest to
purchase 880,000 shares of the Company's common stock at an exercise price of
$14.125 per share. The warrant expires on July 1, 2007 or upon termination
of the Airlink Agreement. Additionally, the agreement continues Northwest's
current right to approve any new Chief Executive Officer.
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 72% of Mesaba's passengers connected with
Northwest in fiscal 1997. 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.
Mesaba and Northwest entered into a Regional Jet Services Agreement dated
October 25, 1996 (the "Jet Agreement"), under which Mesaba will operate 12
<PAGE>
Avro/Ai(R) RJ85 ("RJ85") regional jets for Northwest. The aircraft will be
subleased from Northwest and will be operated as Northwest Jet Airlink from
Minneapolis/St. Paul and Detroit hubs according to routes and schedules
determined by Northwest. Jet service began June 6, 1997.
Mesaba and Express Airlines I, Inc. ("Express") a wholly owned subsidiary
of Northwest, entered into an agreement dated June 3, 1997 (the "Wet Lease
Agreement"), under which Express will provide aircraft, crew services,
maintenance, insurance and other services to Mesaba beginning August 1,
1997. The aircraft will be operated as a part of the expanded
Minneapolis/St. Paul Airlink flying granted to Mesaba as a part of the new
Airlink Agreement with Northwest. The Wet Lease Agreement is expected to
continue until on or about January 31, 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 and warrants.
4. AIRCRAFT ADDITIONS
In March 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. The Company also entered
into an option agreement for 10 additional new Saab 340BPlus aircraft and
12 additional used Saab 340A aircraft. As of September 30, 1997, Mesaba
has taken delivery of 15 Saab 340A and 22 Saab 340BPlus aircraft. The
balance of the aircraft order is expected to be phased into service over
the next 15 months to replace Mesaba's remaining fleet of 23 deHavilland
Dash 8 aircraft.
In January 1997, Mesaba entered into a preliminary agreement with Saab to
lease four used Saab 340B aircraft. Mesaba leases or will lease the Saab
340B aircraft under operating leases from aircraft leasing companies with
terms up to one year. As of September 30, 1997, Mesaba had taken delivery
of all of the Saab 340B aircraft.
In October 1997, Mesaba entered into an agreement with Saab to acquire an
additional 19 new Saab 340BPlus aircraft. The aircraft are to be phased
into service at a rate of approximately two aircraft per month beginning in
February 1998. All previous option agreements with Saab were cancelled.
The Jet 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. Mesaba leases or will lease the RJ85 aircraft under operating
leases from Northwest with terms up to 10 years. As of September 30, 1997,
Mesaba had taken delivery of six RJ85 aircraft.
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.
Amortization of $427 was recorded during the period ended September 30, 1997.
<PAGE>
6. RECLASSIFICATIONS
Certain balances in the fiscal 1997 consolidated financial statements have
been reclassified to conform to the fiscal 1998 presentation. These
reclassifications had no impact on net income or shareholders' equity.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 128, "Earnings per
Share" ("Statement No. 128"), issued in February 1997 and effective for
interim and annual periods ending after December 15, 1997, establishes and
simplifies standards for computing and presenting earnings per share
("EPS"). The Company will adopt Statement No. 128 in the quarter ending
December 31, 1997 and does not expect that its adoption will have a
material impact on the Company's computation or presentation of EPS, as
the Company's common stock equivalents either have had no material effect
on earnings per share amounts or have been anti-dilutive with respect to
losses.
Financial Accounting Standards Statement No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"), issued in June 1997 and effective for fiscal
years beginning after December 15, 1997, establishes standards of reporting
and display of the total of net income and all nonowner changes in equity,
or comprehensive income, either below the net income (loss) in the
statement of operations, in a separate statement of comprehensive income
(loss) or within the statement of changes in shareholders' equity. The
Company has had no significant items of other comprehensive income.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Item 2.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(As used herein, "unit cost" means operating cost per avialable seat
mile. Dollars and shares outstanding are expressed in thousands)
EARNINGS SUMMARY. The Company reported net income of $5,748 or $0.41 per
share for the three months ended September 30, 1997, compared to $3,860 or
$0.30 per share in the same period of fiscal 1997. Weighted average shares
outstanding increased to 13,916 from 12,962.
OPERATING REVENUES. Total operating revenues increased 54.1% in the second
quarter of fiscal 1998 to $71,942 from $46,675 in the year earlier quarter,
and revenue passenger miles increased 75.0% to 207,691 from 118,714.
Passenger revenue per available seat mile ("RASM") decreased to $0.196 from
$0.212 in the previous year's second quarter. Mesaba's average load factor
was 57.4% in the current quarter compared to 54.3% during the same period a
year ago. The improvement in traffic and load factor are attributable to
the introduction of six RJ85 aircraft and the first two months of expanded
turboprop activity at the Minneapolis/St. Paul airport as well as overall
increases in passenger travel within the industry.
Three months ended
Operating Costs Per September 30,
Available Seat Mile (Unit Cost) 1997 1996
- -------------------------------------------------------------
Wages and benefits 4.6 Cents 5.8 Cents
Aircraft fuel costs 1.7 2.0
Aircraft maintenance costs 2.7 2.8
Aircraft rents 3.5 3.5
Wet lease expense 1.3 -
Landing fees 0.4 0.6
Insurance and taxes 0.5 0.6
Depreciation and amortization 0.4 0.5
Administrative and other costs 2.2 2.6
------ ------
Total 17.3 Cents 18.4 Cents
Three months ended
September 30,
Operating statistics 1997 1996
- --------------------------------------------------------------
Revenue passengers carried 890,500 525,700
Revenue passenger miles (000) 207,691 118,714
Available seat miles (000) 361,957 218,472
Passenger load factor 57.4% 54.3%
Passenger revenue per available seat mile $0.196 $0 .212
Departures 52,728 38,033
Aircraft in service 70 56
<PAGE>
OPERATING EXPENSES. Total operating expenses increased 56.3% to $62,787
from $40,175 in the prior year's second quarter. Mesaba's unit cost
decreased 6.0% to $0.173 from $0.184 as a result of a 65.7% increase in
available seat miles to 361,957 in the second quarter of fiscal 1998 from
218,472 in the year earlier quarter. The increase in ASMs was accomplished
by the acquisition of six RJ85 and 36 Saab 340 aircraft offset by the
retirement of 26 Metro III and two Dash 8 aircraft since June 30, 1996. As
of June 30, 1997, all of the Metro III aircraft have been removed from
revenue service and as of September 30, 1997, all but four have been
returned to lessors.
Wages and benefits increased 30.5% to $16,476 in the second quarter of
fiscal 1998 from $12,623 in the second quarter of fiscal 1997. However the
increased capacity generated by the additional jet and turboprop equipment
has caused these costs to be reduced on a unit cost basis. The majority of
the increase is a result of higher cost of flight crews due to a 20.8%
increase in block hours and the addition of flight crews to support the
introduction of the RJ85 as well as the continuing Saab fleet transition
program. Mesaba also experienced an increase in wage and benefit costs
paid to support personnel due to a 32.7% increase in scheduled turboprop
operations.
Fuel costs increased 39.9% to $6,073 in this year's second quarter compared
to $4,341 in last year's second quarter. The increase is primarily
attributable to a 36.3% increase in consumption. The remainder of the
increase was due to credits in the prior year as a result of certain
provisions of the Airlink Agreement which lowered the effective price per
gallon. These provisions of the Airlink Agreement with Northwest protect
Mesaba from future increases in fuel prices. The actual cost of fuel,
including taxes and pumping fees, was 83.5 cents per gallon both in the
current quarter and a year ago. Unit cost decreased 15.0% to 1.7 cents
from 2.0 cents. Mesaba is not required to provide fuel for the jet
operation.
Direct maintenance expense, excluding wages and benefits, increased 64.5%
to $9,922 in the second quarter of fiscal 1998 from $6,032 in the second
quarter of fiscal 1997. This increase was primarily attributable to the
addition of 36 Saab 340 and six RJ85 aircraft to the fleet and higher heavy
maintenance costs associated with the Dash 8 fleet. The additional
maintenance costs for the Saab 340, RJ85 and Dash 8 aircraft were partially
offset by lower maintenance costs related to the phase-out of the Metro III
fleet resulting from the return of 22 aircraft to lessors. However, unit
cost decreased 3.6% to 2.7 cents from 2.8 cents.
Aircraft rents increased 62.6% to $12,562 in the second quarter of fiscal
1998 from $7,725 in the second quarter of fiscal 1997. This increase is
primarily attributable to the addition of 36 Saab 340 and six RJ85 aircraft
while returning 22 Metro III and two Dash 8 aircraft to lessors. Mesaba
has taken delivery of nine Saab 340 and three RJ85 aircraft during the
current period. Due to the additional capacity generated by the jet and
larger turboprop equipment, unit cost remained unchanged.
Wet lease expense in the second quarter of fiscal 1998 was $4,642 which is
a result of the expanded activity out of the Minneapolis/St. Paul hub.
Mesaba had no wet leased aircraft in the year earlier period.
Total landing fees increased 24.6% to $1,561 in the second quarter of
fiscal 1998 compared to $1,253 for the second quarter of fiscal 1997. The
increase is attributable to a 13.1% increase in departures and a 29.3%
increase in the average gross landing weight due to the mix of the aircraft
in the fleet and offset by a 3.7% decrease in the overall effective landing
fee rate. Unit cost decreased 33.3% to 0.4 cents from 0.6 cents. Mesaba
is not required to pay for landing fees for the jet operation.
<PAGE>
Insurance and taxes increased 32.3% to $1,748 in the second quarter of
fiscal 1998 compared to $1,321 for the second quarter of fiscal 1997. This
is due primarily to an increase in passenger liability insurance associated
with increased passenger volume and increased hull values associated with
the Saab 340 and RJ85 aircraft (compared to the Metro III) offset by a
reduction in passenger liability insurance rates and reduced amounts paid
for hull insurance caused by the normal decline in fleet values. Due to
the additional capacity generated by the jet and larger turboprop
equipment, unit cost decreased 16.7% to 0.5 cents from 0.6 cents.
Depreciation and amortization increased 58.6% to $1,621 in the second
quarter of fiscal 1998 compared to $1,022 in the second quarter of fiscal
1997. The higher level of depreciation and amortization resulted from the
acquisition of spare parts to support the Saab fleet, which are generally
funded by credits issued by the manufacturer. In October 1996, the
Company paid a contract rights fee in the form of a stock purchase warrant
issued to Northwest as a part of the Regional Jet Service Agreement ("Jet
Agreement"). Contract rights are being amortized on a straight-line basis
over the minimum term of the Jet Agreement through October 2002. The
Company paid a contract rights fee in the form of a stock purchase warrant
issued to Northwest as a part of the new Airlink Agreement. Contract rights
are being amortized on a straight-line basis over the term of the Airlink
Agreement through June 2007. The increases were partially offset by a
reduction in warrant amortization related to previous warrants issued to
Northwest that were fully amortized as of March 31, 1997. Due to the
additional capacity generated by the jet and larger turboprop equipment,
unit cost decreased 20.0% to 0.4 cents from 0.5 cents.
Administrative and other costs increased 39.7% to $8,182 in the second
quarter of fiscal 1998 compared to $5,858 in the second quarter of fiscal
1997. This increase is primarily attributable to higher crew related
expenses excluding wages and benefits associated with increased flying and
increased airport and passenger related expenses due to an increase in
traffic and the number of cities served. Due to the additional capacity
generated by the jet and larger turboprop equipment, unit cost decreased
15.4% to 2.2 cents from 2.6 cents. Mesaba is generally not required to
provide airport and passenger related expenses for the jet operation.
OPERATING INCOME. Operating income totaled $9,155 in the current period,
an increase of 40.8% from $6,500 a year ago. Mesaba's operating margin
decreased to 12.7% from 13.9% in the prior year's second quarter.
NONOPERATING INCOME. Nonoperating income increased to $425 in the current
quarter from $169 in the prior year's second quarter as a result of higher
levels of interest income.
PROVISION FOR INCONE TAXES. The Company's effective tax rate was 40.0% in
the second quarter of fiscal 1998 and 42.1% in the comparable quarter in
fiscal 1997. The lower effective tax rate is due to lower levels of
nondeductible expenses in the current period.
<PAGE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(As used herein, "unit cost" means operating cost per avialable seat
mile. Dollars and shares outstanding are expressed in thousands)
EARNINGS SUMMARY. The Company reported net income of $9,721 or $0.71 per
share for the six months ended September 30, 1997, compared to $6,861 or
$0.53 per share in the same period of fiscal 1997. Weighted average shares
outstanding increased to 13,611 from 12,970.
OPERATING REVENUES. Total operating revenues increased 41.8% in the first
half of fiscal 1998 to $126,366 from $89,096 in the year earlier period,
and revenue passenger miles increased 58.4% to 353,176 from 222,926.
Passenger revenue per available seat mile ("RASM") decreased to $0.199 from
$0.213 in the year earlier period. Mesaba's average load factor was 56.4%
in the current period compared to 53.9% during the same period a year ago.
The improvement in traffic and load factor are attributable to the
introduction of six RJ85 aircraft and the first two months of expanded
activity at the Minneapolis/St. Paul airport as well as overall increases
in passenger travel within the industry.
Six months ended
Operating Costs Per September 30,
Available Seat Mile (Unit Cost) 1997 1996
- -----------------------------------------------------------------
Wages and benefits 4.9 Cents 5.9 Cents
Aircraft fuel costs 1.9 2.0
Aircraft maintenance costs 2.8 2.8
Aircraft rents 3.5 3.7
Wet lease expense 0.7 -
Landing fees 0.5 0.6
Insurance and taxes 0.5 0.6
Depreciation and amortization 0.4 0.5
Administrative and other costs 2.5 2.6
------ ------
Total 17.7 Cents 18.7 Cents
Six months ended
September 30,
Operating statistics 1997 1996
- ---------------------------------------------------------------
Revenue passengers carried 1,513,800 996,300
Revenue passenger miles (000) 353,176 222,926
Available seat miles (000) 625,808 413,490
Passenger load factor 56.4% 53.9%
Passenger revenue per available seat mile $0.199 $0 .213
Departures 92,161 72,143
Aircraft in service 70 56
<PAGE>
OPERATING EXPENSES. Total operating expenses increased 43.2% to $111,002
from $77,527 in the prior year's first half. Mesaba's unit cost decreased
5.3% to $0.177 from $0.187 as a result of a 51.3% increase in available
seat miles to 625,808 in the first half of fiscal 1998 from 413,490 in the
year earlier period. The increase in ASMs was primarily accomplished by
the acquisition of six RJ85 and 36 Saab 340 aircraft offset by the
retirement of 26 Metro III and two Dash 8 aircraft when compared to one
year ago. As of June 30, 1997, all of the Metro III aircraft have been
removed from revenue service and as of September 30, 1997, all but four
have been returned to lessors.
Wages and benefits increased 24.4% to $30,505 in the first half of fiscal
1998 from $24,521 in the first half of fiscal 1997. The majority of the
increase is a result of higher cost of flight crews due to a 28.4% increase
in block hours and the addition of flight crews to support the introduction
of the RJ85 as well as the continuing Saab fleet transition program.
Mesaba also experienced an increase in wage and benefit costs paid to
support personnel due to a 24.2% increase in scheduled operations.
However, the increased capacity generated by the additional jet and
turboprop equipment has caused these costs to be reduced on a unit cost
basis 17.0% to 4.9 cents from 5.9 cents.
Fuel costs increased 40.5% to $11,600 in this year's first half compared to
$8,257 in last year's first half. The increase is primarily attributable
to a 35.3% increase in consumption. The remainder of the increase was due
to credits in the prior year as a result of certain provisions of the
Airlink Agreement which lowered the effective price per gallon. These
provisions of the Airlink Agreement with Northwest protect Mesaba from
future increases in fuel prices. The actual cost of fuel, including taxes
and pumping fees, was 83.5 cents per gallon both in the current quarter and
a year ago. Unit cost decreased 5.0% to 1.9 cents from 2.0 cents. Mesaba
is not required to provide fuel for the jet operation.
Direct maintenance expense, excluding wages and benefits, increased 53.6%
to $17,489 in the first half of fiscal 1998 from $11,389 in the first half
of fiscal 1997. This increase was primarily attributable to the addition of
36 Saab 340 and six RJ85 aircraft to the fleet and higher heavy maintenance
costs associated with the Dash 8 fleet. The additional maintenance costs
for the Saab 340, RJ85 and Dash 8 aircraft were partially offset by lower
maintenance costs related to the phase-out of the Metro III fleet
resulting from the return of 22 aircraft to lessors. However, unit costs
remained unchanged.
Aircraft rents increased 46.4% to $22,187 in the first half of fiscal 1998
from $15,151 in the first half of fiscal 1997. This increase is primarily
attributable to the addition of 36 Saab 340 and six RJ85 aircraft while
returning 22 Metro III and two Dash 8 aircraft to lessors. Mesaba has
taken delivery of 17 Saab 340 and six RJ85 aircraft during the current
period. Due to the additional capacity generated by the larger jet and
turboprop equipment, unit cost decreased 5.4% to 3.5 cents from 3.7 cents.
Wet lease expense in the first half of fiscal 1998 was $4,642 which is a
result of the expanded activity out of the Minneapolis/St. Paul hub.
Mesaba had no wet leased aircraft in the year earlier period.
Total landing fees increased 25.2% to $2,982 in the first half of fiscal
1998 compared to $2,382 for the first half of fiscal 1997. The increase is
attributable to a 13.9% increase in turboprop departures and a 34.3%
increase in the average gross landing weight due to the mix of the aircraft
in the fleet and offset by a 6.8% decrease in the overall effective landing
fee rate. Unit cost decreased 16.7% to 0.5 cents from 0.6 cents. Mesaba
is not required to pay landing fees for the wet lease or jet operation.
Insurance and taxes increased 23.1% to $3,070 in the first half of fiscal
1998 compared to $2,493 for the first half of fiscal 1997. This is due
primarily to an increase in passenger liability insurance associated with
increased passenger volume and increased hull values associated with the
Saab 340 and RJ85 aircraft (compared to the Metro III) offset by a
<PAGE>
reduction in passenger liability insurance rates and reduced amounts paid
for hull insurance caused by the normal decline in fleet values. Due to
the additional capacity generated by the larger jet and turboprop
equipment, unit cost decreased 16.7% to .05 cents from 0.6 cents.
Depreciation and amortization increased 38.6% to $2,774 in the first half
of fiscal 1998 compared to $2,002 in the first half of fiscal 1997. The
higher level of depreciation and amortization resulted from increased
expenditures associated with ground support equipment to support the
additional cities served as a part of the expanded flights out of the
Minneapolis/St. Paul hub and the acquisition of spare parts to support the
Saab fleet, which are generally funded by credits issued by the
manufacturer. In October 1996, the Company paid a contract rights fee in
the form of a stock purchase warrant issued to Northwest as a part of the
Regional Jet Service Agreement ("Jet Agreement"). Contract rights are
being amortized on a straight-line basis over the minimum term of the Jet
Agreement through October 2002. The Company paid a contract rights fee in
the form of a stock purchase warrant issued to Northwest as a part of the
new Airlink Agreement. Contract rights are being amortized on a
straight-line basis over the term of the Airlink Agreement through June
2007. The increases were partially offset by a reduction in warrant
amortization related to previous warrants issued to Northwest that were
fully amortized as of March 31, 1997. Due to the additional capacity
generated by the larger jet and turboprop equipment, unit cost decreased
20.0% to 0.4 cents from 0.5 cents.
Administrative and other costs increased 39.0% to $15,753 in the first half
of fiscal 1998 compared to $11,332 in the first half of fiscal 1997. This
increase is primarily attributable to higher crew related expenses,
excluding wages and benefits, associated with increased flying and
increased airport and passenger related expenses due to an increase in
traffic and the number of cities served. Due to the additional capacity
generated by the larger jet and turboprop equipment, unit cost decreased
3.8% to 2.5 cents from 2.6 cents.
OPERATING INCOME. Operating income totaled $15,364 in the current period,
an increase of 32.8% from $11,569 a year ago. Mesaba's operating margin
decreased to 12.2% from 13.0% in the prior year's first half.
NONOPERATING INCOME. Nonoperating income increased to $796 in the current
period from $282 in the prior year's first half as a result of higher
levels of interest income.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 39.8% in
the first half of fiscal 1998 and 42.1% in fiscal 1997. The lower
effective tax rate is due to lower levels of nondeductible expenses in the
current period.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to $41,768 with a current ratio of
2.1 at September 30, 1997 compared to $37,808 and 2.1 at March 31, 1997.
Cash and cash equivalents increased by $8,648 to $57,774 at September 30,
1997. Net cash flows provided by operating activities totaled $16,120 in
the first half of 1998 compared to $18,760 in the first half of fiscal
1997. Net cash flows used for investing activities amounted to $7,640
during the six months ended September 30, 1997 compared to $1,413 in the
same period last year. Net cash flows used for financing activities
through September 30, 1997 totaled $168 compared to a use of $67 in the
same period last year.
Long-term obligations, net of current maturities, totaled $4,960 at
September 30, 1997 compared to $5,194 at March 31, 1997. The ratio of long-
term debt to stockholders' equity decreased to .08 at September 30, 1997
from .10 at March 31, 1997.
As of October, 1997, Mesaba's fleet consisted of 70 aircraft covered under
operating leases with remaining terms of two months to 16 years and an
aggregate monthly lease payments of approximately $4.3 million. Operating
leases have been Mesaba's primary method of acquiring aircraft, and
management expects to continue relying on this method to meet most of its
future aircraft needs. Mesaba leases all of its Saab 340 aircraft, either
directly from aircraft leasing companies or through subleases with
Northwest under operating leases with terms up to 17.5 years. Mesaba has
negotiated a financing agreement with the airframe manufacturer whereby
operating lease financing for the remaining new and used Saab 340 aircraft
are committed to the Company on competitive rates and terms. Mesaba leases
its RJ85 aircraft from Northwest under operating leases with terms of up to
10 years. Mesaba will lease the remaining 6 RJ85 aircraft under firm
contract from Northwest the remaining undelivered RJ85 aircraft.
The Company has historically relied upon cash reserves, internally
generated funds and borrowings to support its working capital requirements.
The Company has an approved 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 1998.
<PAGE>
Part II.
Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company files with the Securities and Exchange Commission a
definitive proxy date July 17, 1997 in connection with its annual meeting
of shareholders held on August 20, 1997. Both persons nominated by
management for election as Class Three directors, as discussed in the
definitive proxy statement, were elected. Shareholders approved an
amendment to the Company's Articles of Incorporation to increase the
number of Authorized shares of Common Stock from 15,000,000 to 25,000,000,
casting 11,635,990 votes in favor of the amendment, 218,131 against the
amendment and 17,799 abstentions. There were no broker nonvotes.
Shareholders also approved an amendment to the 1994 Stock Option Plan,
casting 11,086,923 votes in favor of the amendment, 738,955 votes against
the amendment and 46,042 abstentions. There were no broker nonvotes. In
addition, shareholders ratifies the appointment of Arthur Andersen LLP as
the Company's independent auditors for the fiscal year ending March 31,
1998, casting 11,828,504 votes in favor of the ratification, 8,403 votes
against the ratification and 35,013 abstentions. There were no broker
nonvotes.
Item 5. OTHER INFORMATION
The Company, Mesaba and Northwest entered into a definitive
Airline Services Agreement dated July 1, 1997 (the "Airlink Agreement"),
under which Mesaba has exclusive rights to provide all turboprop Airlink
services to and from the Minneapolis/St. Paul and Detroit hubs. The
Airlink Agreement replaces the prior Airline Services Agreement with
Northwest, which had been in effect, through various amendments and
restatements, since September 1988. Mesaba also flies RJ85 jet aircraft
under a separate Regional Jet Services agreement with Northwest, dated
October 26, 1996.
Under the new Airlink Agreement, Mesaba provides air service
according to routes and schedules determined by Northwest. All flights
are designated as Northwest flights using Northwest's designator code.
Mesaba is responsible for providing all flight and cabin crews, dispatch
control, aircraft maintenance and repair services, hull and passenger
liability insurance, passenger and gate check-in, aircraft loading and
unloading, ticketing, ramp services and fuel and fueling services, except
at cities where Northwest also flies, where Northwest will provide
passenger ticketing. Mesaba may employ agents, including Northwest, to
perform certain of these functions. Mesaba pays a fixed rate for fuel
over the life of the Airlink Agreement.
Mesaba will sublease Saab 340 aircraft from Northwest, or a
Northwest affiliate, and has agreed not to lease aircraft for any purpose
other than service under the Airlink Agreement. Mesaba also currently
flies 25 Dash 8 aircraft to provide Airlink Service.
In connection with the Airlink Agreement, Northwest assigned
additional routes to Mesaba which had been previously operated by Express
Airlines I, Inc. ("Express"), now a wholly owned subsidiary of Northwest.
In order to provide for this expanded service from the Minneapolis/St.
Paul hub, Mesaba and express entered into a Wet Lease Agreement dated June
3, 1997. On August 1, 1997, Express began providing Mesaba with aircraft
and cabin crews, maintenance, insurance and other services. The
arrangement is expected to continue into the fourth quarter of the current
fiscal year.
Under the Airlink Agreement, Mesaba will receive monthly payments
from Northwest based on the number of passengers enplaned and Mesaba's
competed available seat miles. Mesaba will also receive incentive
payments or be required to pay penalties, depending upon its performance
under specified service standards, including completion factor, on-time
reliability, mishandled luggage, customer complaints and denied
boardings. In the event that Mesaba exceeds certain costs and margin
factors, Northwest has a right of setoff against the monthly payments to
Mesaba. All revenue from ticket sales and other activities associated
with the operation of Mesaba's aircraft are the property of Northwest,
except for revenue derived from beverage services, nonrevenue pass travel
and cargo handling services.
The Airlink Agreement continues in effect until June 30, 2007,
unless terminated earlier in accordance with its provisions. The Airlink
Agreement may be terminated immediately by Mesaba or Northwest in the
event that the other party is subject to 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 Airlink Agreement 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. Either
party may also terminate the Airlink Agreement without cause upon 365 days
written notice given not earlier than July 1, 2000. Northwest may
terminate the Airlink Agreement in the event certain lease and other
performance faults by Mesaba, a change in control of the Company or
Mesaba, revocation or failure to maintain Mesaba's DOT certification,
failure of the Company or Mesaba to elect a chief executive officer
reasonably acceptable to Northwest, or a failure to nominate and recommend
for election nominees designated by Northwest sufficient to provide for
three Northwest members on the Company's and Mesaba's board of directors.
In consideration of entering into the Airlink Agreement, the
Company issued a warrant to Northwest dated October 17, 1997, for the
purchase of 880,000 shares of the Company's common stock at an initial
exercise price of $14.125 per share. The warrant became execisable on
October 17, 1997 and expires at 5:00 p.m. Minneapolis time, on July 1,
2007, unless terminated earlier. The warrant will terminate (I)
immediately upon the termination of the Airlink Agreement, if the Airlink
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
Airlink Agreement, if the Airlink Agreement is terminates as a result of
such a notice. The number of shares subject to purchase under the
warrants, and the purchase price, are subject to customary antidilution
provisions.
Approximately 72& of Mesaba's passenger connected with Northwest
flights in fiscal 1997. Substantially all of Mesaba's operating revenues
are expected to be derived from payments by Northwest under the Airlink
Agreement. Loss of Mesaba's relationship with Northwest or Northwest's
failure to make timely payments of amounts owed to Mesaba or otherwise
materially perform under the Airlink Agreement for any reason would have a
material adverse effect on the Company's operations and financial
position.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
3A. Articles of Amendment to the Company's Articles of
Incorporation.
4A. Common Stock Purchase Warrant dated October 17, 1997
issued to Northwest Airlines, Inc.
10A. Airline Services Agreement between Mesaba Aviation,
Inc., Mesaba holdings, Inc., and Northwest Airlines,
Inc. dated July 1, 1997 (certain portions of this
document have been deleted pursuant to an application
for confidential treatment under Rule 24b-2, and such
portions have been filed separately with the
Securities and Exchange Commission).
10B. 1994 Stock option Plan (as amended July 1, 1997).
b) The Registrant did not file any reports on form 8-K during the
quarter ended September 30, 1997.
<PAGE>
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, 1997 BY: /s/ Robert H. Cooper
----------------------
Robert H. Cooper
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Jon R. Meyer
----------------------
Jon R. Meyer
Director of Accounting/Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
EXHIBIT NO EXHIBIT
- ---------- -------
3A. Articles of Amendment to the Company's Articles of
Incorporation.
4A. Common Stock Purchase Warrant dated October 17, 1997
issued to Northwest Airlines, Inc.
10A. Airline Services Agreement between Mesaba Aviation,
Inc., Mesaba holdings, Inc., and Northwest Airlines,
Inc. dated July 1, 1997 (certain portions of this
document have been deleted pursuant to an application
for confidential treatment under Rule 24b-2, and such
portions have been filed separately with the
Securities and Exchange Commission).
10B. 1994 Stock option Plan (as amended July 1, 1997).
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 57774
<SECURITIES> 0
<RECEIVABLES> 13607
<ALLOWANCES> 0
<INVENTORY> 3423
<CURRENT-ASSETS> 80982
<PP&E> 50657
<DEPRECIATION> 22329
<TOTAL-ASSETS> 124179
<CURRENT-LIABILITIES> 39214
<BONDS> 0
0
0
<COMMON> 128
<OTHER-SE> 64568
<TOTAL-LIABILITY-AND-EQUITY> 124179
<SALES> 126366
<TOTAL-REVENUES> 126366
<CGS> 111002
<TOTAL-COSTS> 111002
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 243
<INCOME-PRETAX> 16160
<INCOME-TAX> 6439
<INCOME-CONTINUING> 9721
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9721
<EPS-PRIMARY> .71
<EPS-DILUTED> .71
</TABLE>
<PAGE>
ARTICLES OF AMENDMENT
TO
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
MESABA HOLDINGS, INC.
Mesaba Holdings, Inc., a corporation organized and existing
under the laws of the State of Minnesota (herein referred to as the
"corporation"), in accordance with the provisions of Minnesota Statutes,
Section 302A.139, hereby certifies as follows:
1. The name of the corporation is Mesaba Holdings, Inc.
2. Section 3.01 of Article III of the Amended and Restated
Articles of Incorporation of the corporation is hereby amended in
its entirety to read as follows:
3.01 The aggregate number of
shares of Common Stock which this corporation
shall have the authority to issue is twenty-
five million (25,000,000) shares of Common
Stock each with $.01 par value. Such shares
shall be designated as this corporation's
"Common Stock."
3. The amendment of the Amended and Restated Articles of
Incorporation of the corporation has been duly adopted by the Board of
Directors and the shareholders pursuant to the Minnesota Business
Corporation Act, Minnesota Statutes, Chapter 302A.
IN WITNESS WHEREOF, these Articles of Amendment of Mesaba Holdings,
Inc. are hereby executed on behalf of the corporation this 8th day of
September, 1997.
MESABA HOLDINGS, INC.
By /s/ Bryan K. Bedford
----------------------
Bryan K. Bedford
President and Chief Executive
Officer
<PAGE>
WARRANT
To Purchase Common Stock
of
Mesaba Holdings, Inc.
This warrant, dated as of October 17, 1997, 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"), 880,000 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 Airline Services Agreement dated as of July 1, 1997 between
Northwest, the Company and Mesaba Aviation, Inc. (the "Airlink Agreement").
This Warrant is subject to the following provisions, terms, and
conditions:
1. The exercise price is $14.125 per share, subject to adjustment as
hereinafter provided (the "Exercise Price").
2. This Warrant shall become exercisable in full on October 17, 1997.
This Warrant will expire at 5:00 p.m. Minneapolis time, on July 1, 2007,
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.
<PAGE>
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
<PAGE>
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:
a. 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;
b. 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;
c. 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
d. 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
<PAGE>
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 Airlink Agreement, if
the Airlink 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 Airlink Agreement, if the Airlink Agreement is terminated as the
result of such notice.
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 17th day of October, 1997.
MESABA HOLDINGS, INC.
By /s/ Bryan K. Bedford
------------------------
Bryan K. Bedford
Its President and Chief Executive
Officer
<PAGE>
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 identification
number)
Dated: ______________, _____
___________________________________
Signature
(Signature must conform in all
respects to name of holder as
specified on the face of this Warrant.)
<PAGE>
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.)
AIRLINE SERVICES AGREEMENT
THIS AIRLINE SERVICES AGREEMENT (the "Agreement") is made
effective as of the 1st day of July, 1997 by and between MESABA
AVIATION, INC., a Minnesota corporation ("Mesaba"), MESABA
HOLDINGS, INC., a Minnesota corporation ("Holdings"), 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 connecting commercial
turboprop air transportation services to and from Minneapolis/St.
Paul, Minnesota and Detroit, Michigan;
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 I.1 Definitions. For all purposes of this
Agreement, except as otherwise expressly provided or unless the
context otherwise requires:
Note: The level 3 paragraph numbering has been conformed to the
original document for Section 1.1. It does not and should not
correspond to the level three paragraph numbering in the rest of
the document. That is, in the rest of the document, level 3 is
(a), (b), etc. In Section 1.1, it is and should remain (1), (2),
etc.
(1) the terms as defined in this Article have the
meanings assigned to them in this Article and include the
plural as well as the singular;
(2) all accounting terms not otherwise defined herein
have the meanings assigned to them in accordance with
generally accepted accounting principles; and
(3) the words "herein", "hereof" and "hereunder" and
other words of similar import refer to this Agreement as a
whole and not to any particular Article, Section or other
subdivision.
Affiliate means any entity or person directly or indirectly
controlling, controlled by, or under direct or indirect common
control with, Northwest or Holdings, as the case may be. For
purpose of this definition, "control" when used with respect to
either Northwest or Holdings means the power to direct the
management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract
<PAGE>
or otherwise, and the terms "controlling" and "controlled" have
meanings correlative to the foregoing. For purposes of this
Agreement, in no event shall Northwest be deemed to be an
Affiliate of either Mesaba or Holdings nor shall either Mesaba or
Holdings be deemed to be an Affiliate of Northwest.
Air Cargo means air freight, United States mail and small
package services appropriate for the Aircraft.
Air Cargo Handling Services means the Air Cargo handling
services to be performed pursuant to Section 4.10.
Aircraft means (i) the thirteen (13) Saab 340A and seventeen
(17) Saab 340B+ turboprop aircraft in Mesaba's fleet as of the
Effective Date, (ii) the additional nineteen (19) Saab 340A and
twenty-three (23) Saab 340B+ turboprop aircraft which are the
subject of the Term Sheet when, as and if such aircraft are added
to Mesaba's fleet pursuant to Sections 3.2 and 3.3, (iii) all
additional Saab 340 Series aircraft when, as and if such aircraft
are added to Mesaba's fleet pursuant to Sections 3.2 and 3.3,
(iv) the twenty-five (25) Dash 8 turboprop aircraft and the four
(4) Saab 340B turboprop aircraft in Mesaba's fleet as of the
Effective Date, and (v) the aircraft which are subject to the Wet
Lease Agreement.
Annual Operating Plan shall have the meaning ascribed to
such term in Section 2.12.
ASM means an Available Seat Mile, i.e. one aircraft seat
scheduled to be flown one statute mile on a Scheduled Flight.
ASM/Passenger Payment means the payment to be made pursuant
to Section 5.2(b).
ASM/Passenger Report means the payment to be made pursuant
to Section 5.2(a).
Baggage Handling Services means the baggage handling
services to be performed pursuant to Section 4.9.
[*]
[*]
[*]
[*]
Charter Flights means charter flights using the Aircraft,
which charter flights, operational arrangements and the
compensation to be received by Mesaba in respect thereof are
mutually agreed to by Mesaba and Northwest from time to time.
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
Complementary Service Cities means those Service Cities
which Northwest serves or may subsequently serve to and from one
or both of the Hub Cities during the term of this Agreement and
which Mesaba also serves (or may serve) to and from one or both
of the Hub Cities.
Default means the occurrence of an event set forth in
Article X, and the expiration of any cure period provided therein
without cure or other remedial action having occurred, permitting
termination of this Agreement.
Designator means "NW" or such other designator code as
Northwest may specify to identify Northwest's own flights.
Direct Costs means Northwest's or Mesaba's, as applicable,
actual costs for goods and services without any surcharge for
administrative or general overhead expense.
DOT means the United States Department of Transportation or
any successor to its functions with respect to the regulation of
air transportation.
DOT Certification means any and all certifications and
approvals by the DOT, the 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.
Effective Date means the date specified in Section 10.1 of
this Agreement.
Existing Saab 340B+ Subleases shall have the meaning
ascribed to such term in Section 3.3.
FAA means the Federal Aviation Administration.
[*]
GAAP means generally accepted accounting practice and
principles at the time prevailing for companies engaged in
businesses similar to that of Mesaba, consistently applied.
Governmental Regulations means the 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 means Minneapolis/St. Paul, Minnesota ("MSP") and
Detroit, Michigan ("DTW").
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
Identification means the trade name (including "Northwest
Airlink" 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 Regional Airline Services to be provided by Mesaba, whether
or not such identification is copyrightable or otherwise
protected or protectable under federal law.
[*]
[*]
[*]
Northwest Nominee means an individual designated to serve as
a director of Holdings and Mesaba by Northwest (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 Regulations of the Securities and Exchange
Commission.
Northwest Tickets shall have the meaning ascribed to such
term in Section 4.8(a).
[*]
Performance Period means each six (6) month period ending on
a June 30 or December 31 occurring during the term of this
Agreement.
PPI means Producer Price Index for finished goods published
by the United States Department of Labor, Bureau of Labor
Statistics, and any comparable successor index.
Primary Service Cities means those Service Cities to which
Mesaba provides service, but which are not served by Northwest.
[*]
Regional Airline Services means the provisioning by Mesaba
to Northwest of Scheduled Flights using the Aircraft in
accordance with this Agreement and includes Scheduled Flights
operated by Express Airlines I, Inc. pursuant to the Wet Lease
Agreement.
Regional Jet Services Agreement means the Regional Jet
Services Agreement dated as of October 25, 1996 among Holdings,
Mesaba and Northwest.
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
Scheduled Flights means revenue passenger flights (other
than charters) 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 timetables.
Service Cities means those cities identified from time to
time by Northwest to which Mesaba shall provide Regional Airline
Services.
Stock Purchase Warrant shall have the meaning ascribed to
such term in Section 12.16.
Subleases means the sub-subleases, subleases and/or leases
to be entered into pursuant to Section 3.3 and the Existing Saab
340B+ Subleases.
Subsidiary means a corporation more than 50% of the
outstanding equity interest of which is owned, directly or
indirectly, by Mesaba or by one or more other Subsidiaries, or by
Mesaba and one or more other Subsidiaries, which equity interest
entitles the owner(s) thereof to direct the policies and
operations of such corporation.
Support Agreements shall have the meaning ascribed to such
term in Section 3.6.
Term Sheet means the Term Sheet Proposal for the Acquisition
of Saab 340 Aircraft by Mesaba Aviation, Inc, signed by Mesaba,
Fairbrook Leasing, Inc., and Saab Aircraft of America, Inc. on
March 7, 1996.
Termination Date means the date on which this Agreement
terminates whether by its term or as a result of a Default.
Ticketing Services means the ticketing services to be
performed pursuant to Section 4.8.
Wet Lease Agreement means the Aircraft Wet Lease Agreement
dated as of June 3, 1997 between Express Airlines I, Inc. and
Mesaba.
ARTICLE II
PROVISION OF REGIONAL AIRLINE SERVICES
Section II.1 Operation 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 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, crew training and Aircraft rotation requirements.
Block times shall be mutually agreed to by Mesaba and Northwest
and set in conformity with standard industry practices and
Aircraft type.
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
Section II.2 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 all facilities, equipment, uniforms and printed
materials used in connection with the Regional Airline Services;
provided, however, all Mesaba uniforms (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. Northwest shall have
exclusive control over the use and display of the Designator and
Identification. Any use of the Identification by Mesaba not
specifically approved by this Agreement shall be subject to the
prior written approval of Northwest.
Section II.3 Use of Other Designators. 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 II.4 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.
Section II.5 Inventory Management. Northwest shall have
complete control over all inventory management functions for all
Scheduled Flights operated pursuant to this Agreement, including,
without limitation, overbooking levels, discount seat levels and
allocation of seats among the various fare buckets. In
performing Mesaba's inventory management, Northwest shall conform
with its own procedures and standards, taking into account the
type of Aircraft operated by Mesaba.
Section II.6 Passenger Fares. Northwest shall be the sole
authority for filing tariffs for Scheduled Flights operated
pursuant to this Agreement and Northwest shall establish all
passenger fares for Scheduled Flights operated pursuant to this
Agreement. All charges for filing of fares or tariffs for
Scheduled Flights operated pursuant to this Agreement shall be
paid by Northwest.
Section II.7 DOT Certification. Mesaba has and shall
maintain DOT Certification and all other permits, licenses,
certificates and insurance required by governmental authorities
and Article IX hereof to enable Mesaba to perform the services
required by this Agreement.
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
Section II.8 Compliance With Governmental Regulations.
All flight operations, dispatch operations and flights and all
other operations undertaken by Mesaba pursuant to this Agreement
shall be conducted and operated by Mesaba in strict compliance
with all Governmental Regulations, including, without limitation,
those relating to airport security, the use and transportation of
hazardous materials, 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.
Section II.9 Quality of Service. Northwest procedures,
performance standards and means of measurement thereof concerning
the provision of air passenger and air cargo services shall be
applicable to all services provided by Mesaba under this
Agreement and Mesaba shall achieve the same quality of airline
service provided by Northwest, subject to limitations imposed by
the type of Aircraft used by Mesaba, its route network and the
availability of equipment and facilities at certain Service
Cities. Mesaba shall maintain adequate staffing levels to ensure
the same level of customer service and operational efficiency
that Northwest achieves; 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 Regional
Airline Services; and Mesaba shall maintain new hire and
recurrent training programs for all job descriptions.
Section II.10 Service Standards. Without limiting Section
2.9, Mesaba shall achieve the following specific performance
standards.
(a) Minimum Completion Factor. Mesaba shall achieve
not less than [*] completion factor for all Scheduled
Flights which are scheduled to be operated by Mesaba during
each Performance Period. [*].
(b) Minimum On-Time Reliability. Mesaba shall achieve
[*] on-time arrival factor for all Scheduled Flights which
are scheduled to be operated by Mesaba during each
Performance Period. [*]
(c) Mishandled Luggage Factor. The number of
incidences of mishandled luggage by Mesaba shall not exceed
[*] per 1,000 enplaned revenue passengers during any
Performance Period. [*].
(d) Customer Complaints Factor. The number of
customer complaints received by Northwest in respect of
Regional Airline Services shall not exceed [*] per 1,000
enplaned revenue passengers during any Performance Period.
(e) Operational Oversales Factor. The number of
denied boardings by Mesaba due to operational oversales in
respect of Regional Airline Services shall not exceed [*]
per 1,000 enplaned revenue passengers during any Performance
Period. [*].
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
Section II.11 Passenger Amenities. [*].
Section II.12 Annual Operating Plan. At least 90 days
prior to January 1 of each year during the term of this
Agreement, Mesaba and Northwest shall confer and prepare an
operating plan for the succeeding calendar year, which plan shall
include (i) Northwest's determination with respect to the
schedule and routing for all Scheduled Flights for such year,
(ii) Northwest's designation of the Service Cities to which
Mesaba shall operate Regional Airline Services, (iii) Northwest's
schedule of specific dates for the commencement of service to new
Service Cities, if any, (iv) Northwest's determination of the
number of Aircraft to be added to or removed from Mesaba's fleet
(subject to Section 3.2), and (v) such other matters as Northwest
and Mesaba shall determine (as amended in accordance with this
Section 2.12, the "Annual Operating Plan"). Northwest and Mesaba
shall meet and confer on a quarterly basis (or more frequently if
requested by either Northwest or Mesaba) to review the
implementation of the Annual Operating Plan and to discuss any
changes to the Annual Operating Plan. In the event Northwest
elects to alter the Annual Operating Plan during the course of a
year, Northwest shall provide at least 60 days prior notice to
Mesaba. Notwithstanding the foregoing provisions of Section
2.12, Northwest agrees that it shall promptly notify Mesaba of
any determination by Northwest to increase or decrease Mesaba's
fleet size but in no event shall Northwest provide Mesaba less
than 60 days prior notice.
Section II.13 Inflight Supplies. Northwest shall furnish
Mesaba, at [*] and at Mesaba's request, adequate supplies of its
customary inflight supplies including, but not limited to, the
Northwest inflight magazine, cups, napkins and sugar in a form
similar or identical to that used by Northwest.
Section II.14 Exclusivity. Except for the rights of
Express Airlines I, Inc. during the term of the Wet Lease
Agreement, Mesaba shall have the exclusive right to use the
Identification and Designator for Scheduled Flights which (i)
originate or terminate at either of the Hub Cities and (ii) use
turboprop aircraft.
ARTICLE III
AIRCRAFT
Section III.1 Use of the Aircraft and Fleet Composition.
Mesaba agrees (a) that the Aircraft may be used only to provide
and/or support Charter Flights or the Regional Airline Services
contemplated by this Agreement, (b) that the Aircraft may not be
used by Mesaba for any other purpose without the prior written
consent of Northwest, and (c) that neither Mesaba (except as
contemplated by the Regional Jet Services Agreement) nor any of
its Subsidiaries shall acquire or lease any aircraft other than
the Aircraft.
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
Section III.2 Fleet Size and Related Matters.
(a) Determination of Fleet Size. Northwest and Mesaba
agree that all Saab 340 Series aircraft which are the
subject of the Term Sheet shall be acquired when, as and if
determined by Northwest (subject to contractual requirements
arising from the Term Sheet as such requirements may exist
from time to time) and that a Sublease shall be entered into
with respect to each such aircraft as contemplated by
Section 3.3. Northwest, in its sole discretion, shall have
the right to require additional Saab 340 Series aircraft to
be added to Mesaba's fleet beyond the number contemplated by
the Term Sheet and to require the removal of Aircraft from
Mesaba's fleet; provided, however, [*]. A Sublease shall be
entered into with respect to each such additional aircraft
as contemplated by Section 3.3. Mesaba shall determine the
appropriate level of spare Aircraft to be included in
Mesaba's fleet from time to time; provided, however, in no
event shall the number of spare Aircraft in Mesaba's fleet
exceed [*] of the total number of Aircraft then in Mesaba's
fleet.
(b) Induction and Termination Costs. All one-time
expenses which are associated with inducting Aircraft shall
be paid [*]. If Northwest determines to reduce the number
of Aircraft in Mesaba's fleet, Northwest agrees to terminate
the Sublease with respect to any excess Aircraft as of the
date of removal from Mesaba's fleet; the determination of
the number of excess Aircraft shall take into account
Northwest's determination of the number of scheduled
Aircraft and Mesaba's determination of the number of spare
Aircraft, and Aircraft not scheduled due to normal
reoccurring seasonal adjustments and maintenance
requirements shall not constitute excess Aircraft. All
return costs and expenses associated with the return of
excess Aircraft shall be paid by [*].
Section III.3 Sublease of the Aircraft. As of the
Effective Date, Mesaba and Northwest (and/or a Northwest
Affiliate) have entered into subleases with respect to the
seventeen (17) Saab 340B+ aircraft, each with [*] (the "Existing
Saab 340B+ Subleases"). 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 Sublease
with respect to (a) the thirteen (13) Saab 340A aircraft in
Mesaba's fleet as of the Effective Date, (b) the additional Saab
340A and Saab 340B+ aircraft which are the subject of the Term
Sheet when and as delivery of each such aircraft is made and (c)
each other Saab 340 Series aircraft (other than the four (4) Saab
340B turboprop aircraft in Mesaba's fleet as of the Effective
Date) when, if and as delivery of each such aircraft is made.
Section III.4 Terms of the Subleases. Each Sublease shall
have the following terms:
(a) with respect to Saab 340B+ and 340B Aircraft, the
term of each Sublease shall be for a period ending on the
Termination Date; and with respect to Saab 340A Aircraft,
the term of each Sublease shall be for a period ending on
the earlier of the Termination Date or the date which
corresponds [*] subject to the Sublease; provided, however,
no Sublease shall be for a term longer than the term of the
applicable head lease;
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
(b) with respect to Saab 340A Aircraft, the rent shall
not exceed [*] per month; and with respect to Saab 340B and
340B+ Aircraft, the rent shall not exceed [*] per month;
(c) the other terms of the Sublease shall be
substantially the same as the terms of the applicable head
lease; provided, however, (i) 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, (ii) 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 (iii) any events of default and/or
termination rights shall be the same as those set forth in
the Existing Saab 340B+ Subleases.
(d) 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.
Section III.5 Aircraft Maintenance, Servicing and Cleaning.
Mesaba shall be responsible for all aspects of the maintenance,
servicing and cleaning of the Aircraft (except for cleaning in
Complementary Service Cities pursuant to the ground handling
services agreement contemplated by Section 4.6).
Section III.6 Related Transfer Arrangements. All leases
and subleases of ground support equipment, tooling and spare
parts inventory agreements and vendor and/or maintenance
agreements with respect to the Aircraft (collectively "Support
Agreements") entered into by Mesaba after the Effective Date
shall be assignable to Northwest without the consent of the other
party to such Support Agreement on a termination of this
Agreement. Mesaba shall assign all such Support Agreements to
Northwest on a termination of this Agreement and shall use its
best efforts to obtain the consent of the other party to any such
Support Agreements in effect as of the Effective Date and,
subject to obtaining such consents, if necessary, shall assign
such Support Agreements to Northwest on a termination of this
Agreement. On a termination of this Agreement, Mesaba shall sell
to Northwest, and Northwest shall purchase from Mesaba, all
ground support equipment, tooling and spare parts inventory then
owned by Mesaba for an amount equal to [*].
Section III.7 Fuel. Northwest shall provide to Mesaba the
following administrative services: (i) Northwest's negotiation of
fuel supply, fuel storage and into-plane service contracts for
the Aircraft, (ii) payment of all into-plane and fuel invoices in
respect of the Aircraft, (iii) monthly reconciliations with
respect to fuel usage, inventory and purchases, and (iv) monthly
reports with respect to fuel usage by station, Aircraft type and
Aircraft. Mesaba shall pay to Northwest each month during the
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
term of this Agreement [*] multiplied by the number of gallons of
aircraft fuel used by Mesaba during such month. Northwest shall
bill Mesaba on a monthly basis and payment shall be made in
accordance with Section 5.7. Mesaba shall have the right to
audit on a semi-annual basis the determination of the number of
gallons of aircraft fuel used and shall report any disputes to
Northwest. Any dispute not reported to Northwest in writing
within thirty (30) days of the conclusion of such audit shall be
deemed waived.
Section III.8 Deicing and Glycol. Mesaba shall provide, at
its sole expense, all deicing services for its Aircraft at the
Hub Cities and the Primary Service Cities and Northwest shall
provide, at its sole expense, all deicing services at
Complementary Service Cities. Northwest and Mesaba shall
negotiate a separate agreement whereby Northwest will provide
glycol and back-up deicing services at the Hub Cities to Mesaba
and Mesaba shall reimburse Northwest on a monthly basis in
accordance with Section 5.7 for the Direct Cost of glycol used
and deicing services provided. If the amount of glycol used
cannot be calculated, then such invoices shall reflect estimates
based on average glycol use by Aircraft type and number of
applications.
ARTICLE IV
ANCILLARY ARRANGEMENTS
Section IV.1 Coordination with Mesaba.
(a) Schedules and Timetables. Northwest shall file
and maintain schedules with all applicable schedule
distribution systems for all Scheduled Flights, and such
schedules shall be filed and maintained by Northwest
together with the schedules for its flights. Northwest
shall include and list all Scheduled Flights providing
Regional Airline Services in the schedule publication
program of Northwest. Northwest shall, at its expense,
furnish to Mesaba, an adequate supply of current printed
Northwest timetables and contracts of carriage consistent
with Governmental Regulations and Northwest's timetable
publication program in Northwest's format and colors for use
by Mesaba. Northwest shall include Scheduled Flights
operated by Mesaba in all appropriate flight information
systems on which Northwest flights are listed.
(b) Travel Privileges. Northwest and Mesaba shall
enter into a separate agreement with respect to travel
privileges which each shall make available to the employees
and directors of the other. The terms of such travel
privileges shall be substantially as set forth on Exhibit B
attached hereto.
(c) U.S. Weather Bureau Information. Upon request of
Mesaba or its flight crews, Northwest shall at its sole cost
furnish Mesaba such U.S. Weather Bureau information or data
as may be available to Northwest; provided, however, that
neither Northwest nor its employees will be responsible or
liable for the accuracy thereof. So long as Northwest shall
maintain its communications link with the National Weather
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
Service, Northwest shall provide the necessary
communications to permit Mesaba to continue providing
weather data to the National Weather Service. Northwest
shall provide any available National Weather Service data
through computer link-up to Mesaba.
Section IV.2 Functions Provided by Mesaba. At Primary
Service Cities, Mesaba shall employ its own ground support
equipment and personnel or a contract agent to perform the
following functions: (a) all gate check-in activities, (b)
passenger enplaning/deplaning, (c) aircraft loading/unloading,
and (d) passenger ticketing. At Complementary Service Cities and
the Hub Cities, Mesaba shall use only its own personnel and
equipment (or, subject to the execution of the agreement
contemplated by Section 4.6, Northwest's personnel and equipment)
to perform the functions described in this Section 4.2, except
for (i) passenger ticketing at Complementary Service Cities and
Hub Cities and (ii) airside busing, sky cap and wheel chair
services at the Hub Cities, [*].
Section IV.3 Facilities.
(a) Hub Cities. Exhibits C and D hereto set forth the
facilities to be provided by Northwest to Mesaba at the Hub
Cities. Northwest shall bill to Mesaba and Mesaba agrees to
pay to Northwest as rentals the amounts calculated in
accordance with the formulas contained in Exhibits C and D.
In the event Mesaba requires additional facilities at either
of the Hub Cities caused by the expansion of Regional
Airline Services, Northwest shall supply such necessary,
additional facilities at no charge to Mesaba. Northwest and
Mesaba agree that Northwest may relocate Mesaba to
comparable facilities contiguous to Northwest leased
premises, ramp, gate and office space, provided that (i)
Northwest pays to Mesaba relocation expenses and unamortized
improvements expenses, and (ii) the rental costs payable by
Mesaba do not exceed the amounts calculated in accordance
with the formulas contained in Exhibits C and D; provided,
however, relocation expenses and unamortized improvement
expenses associated with Mesaba's move to the new Midfield
Terminal at DTW and its relocation within the Green
Concourse at MSP shall be borne [*].
(b) Service Cities. At Complementary Service Cities,
Northwest shall provide Mesaba with adequate facilities and
the parties will endeavor, subject to the legal requirements
of the lessors at such cities, to enter into agreements
whereby Mesaba will sublet such facilities from Northwest.
The rentals and/or the formulas for determining rentals for
subleases existing as of the Effective Date shall [*] and
the rentals and/or related formulas for future subleases
shall be mutually agreed to by Mesaba and Northwest.
Northwest shall cooperate with Mesaba's efforts to become a
signatory carrier at such airports. At Primary Service
Cities, Mesaba shall be solely responsible for all of its
facilities requirements; provided, however, if Northwest
leases facilities at a Primary Service City, Mesaba shall
sublease such facilities from Northwest provided (i) the
rentals with respect to such space do not exceed [*], and
(ii) the sublease of such facilities does not cause Mesaba
to cease to be a signatory carrier at such Primary Service
City.
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
(c) Passenger Facility Charges. Northwest shall be
responsible for the payment of all passenger facility
charges, if any, at all Service Cities and the Hub Cities.
(d) Landing Fees. Mesaba shall be responsible for
landing fees at all airports to which it provides Regional
Airline Services pursuant to this Agreement.
(e) Signage. Subject to Governmental Regulations,
Mesaba shall display at all ticketing and check-in locations
such signage or other forms of advertisement to identify and
promote Northwest's service as Northwest may specify. All
signage utilizing the Identification shall be provided by
Northwest at its expense and shall be the property of
Northwest.
Section IV.4 Data Communications. Mesaba shall pay to
Northwest monthly an amount not to exceed Northwest's Direct Cost
for telephone data circuit lines to all Service Cities.
Northwest shall provide at Primary Service Cities and Hub Cities,
at its sole expense, to Mesaba the use of computer reservation
terminals, printers and modems, including hardware, software and
maintenance support for such equipment.
Section IV.5 Security. As of the Effective Date,
Northwest has provided for Mesaba's use the security equipment in
place at all existing Primary Service Cities and the Hub Cities.
Northwest agrees to provide, at Northwest's sole expense, for
Mesaba's use at all new Primary Service Cities the same type of
security equipment. Any additional security equipment required
due to future Governmental Regulations shall be provided by
Mesaba at its sole expense, except at the Hub Cities at which
Northwest shall provide any such additional security equipment at
its expense. Mesaba agrees to pay: (i) at Primary Service Cities
all or its allocated share of all maintenance expenses associated
with all security equipment and to pay all or its allocated share
of all personnel expenses (including overtime) associated with
the operation of the equipment and all airport security related
functions, including, without limitation, passenger screening and
activities related to security directives imposed by Governmental
Regulations; (ii) at Complementary Service Cities its allocated
share of all such maintenance and personnel expenses (including
overtime); and (iii) at the Hub Cities, all of such maintenance
and personnel expenses (including overtime) associated with the
security equipment and passenger screening at the regional
terminals.
Section IV.6 Ground Handling Agreement. Subject to the
execution of a separate ground handling services agreement,
Northwest agrees to provide ground handling services specified in
Section 4.2 to Mesaba at all Complementary Service Cities at the
rate of [*]. Such rates shall be adjusted each April 1 by
increasing such rates by the percent increase, if any, in the
PPI, which increase occurred during the immediately preceding
twelve month period; but in no event shall an annual adjustment
result in an increase of more than [*]. Mesaba shall at its sole
expense provide to Northwest any specialized equipment necessary
to handle the Aircraft.
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
Section IV.7 Reservation Services. During the term of this
Agreement, Northwest personnel shall handle, at its sole expense,
reservations for all passenger air transportation on Scheduled
Flights operated pursuant to this Agreement. Reservations shall
be handled in the same manner and subject to the same standards
utilized by Northwest for its own reservations. All reservations
shall be made in the name of Northwest unless otherwise required
by Governmental Regulations.
Section IV.8 Ticketing Services and Ticketing Procedures.
(a) Ticketing Services. At all of its ticketing
locations, Northwest shall, [*], sell, issue and exchange
tickets for passenger air transportation on all Scheduled
Flights to be operated pursuant to this Agreement utilizing
Northwest ticket stock and all related accounting forms
printed with the Northwest logo, name and format ("Northwest
Tickets"); and at all of its ticketing locations, Mesaba
shall sell, issue and exchange Northwest Tickets for
passenger air transportation on all Scheduled Flights to be
operated pursuant to this Agreement and to be provided by
and over the routes of Northwest (collectively, "Ticketing
Services"). Tickets may also be issued by air carriers and
other agencies other than Northwest for travel to be
performed by Mesaba.
(b) Ticketing Procedures. The procedures followed and
standards applied by Northwest in performing the Ticketing
Services shall conform in all respects to Northwest's own
procedures and standards. Mesaba employees performing
Ticketing Services shall adhere to Northwest's procedures
and standards.
(c) Frequent Flyer Program. Mesaba agrees to accept
Northwest frequent flyer tickets. All travel under the
frequent flyer program solely on Mesaba shall entitle a
passenger to such credit as shall be equivalent to the
credit offered on Northwest for comparable mileage segments.
(d) Supplies. Northwest shall, [*], provide an
adequate supply of ticket office forms and specialized
supplies (such as baggage tags but excluding normal office
supplies such as paper, stationery, envelopes, memo pads and
the like) identified with Northwest's logo for use by
Mesaba.
(e) Ticketing Costs. All travel agency commissions
attributable to Scheduled Flights shall be [*]. [*] shall
pay all computer reservation system fees and net ticket or
fees attributable to passengers on Scheduled Flights. [*].
Section IV.9 Baggage Handling Services. "Baggage Handling
Services" shall consist of the following:
(a) At all Complementary and Hub Cities, Mesaba and
Northwest shall exchange and transfer baggage in accordance
with procedures to be mutually agreed upon and generally
utilized by the parties.
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
(b) The procedures utilized in performing such Baggage
Handling Services shall conform in all respects to
Northwest's own standards and procedures as adapted to
Mesaba's Aircraft and operations.
(c) For purposes of claims, Mesaba will be treated as
if it were a party to standard industry ticketing and
baggage agreements with Northwest and other air carriers.
Mesaba will make available at the request of any passenger
excess valuation insurance, if any, offered by Northwest to
the extent such insurance covers Mesaba's flights and
Northwest's flights.
Section IV.10 Air Cargo Handling Services. "Air Cargo
Handling Services" shall consist of the following:
(a) At each location at which Northwest operates
Ticketing Services, Northwest shall [*] accept Air Cargo for
and on behalf of Mesaba for shipment on flights to be
operated by and over the routes of Mesaba or Northwest.
Northwest shall issue air waybills for Mesaba covering Air
Cargo and shall prepare a "transfer manifest" for each
Mesaba flight on which there shall be an Air Cargo shipment
which transfer manifest shall set forth all Air Cargo to be
carried on the flight.
(b) Mesaba shall provide Air Cargo handling services
to Northwest at Mesaba's ticketing locations for and on
behalf of Northwest for flights to be operated by and over
the routes of Mesaba and Northwest in accordance with
Northwest's procedures and standards.
(c) For Air Cargo carried on both a Mesaba flight and
Northwest flight, Mesaba and Northwest shall charge rates in
accordance with Northwest's applicable rates and tariffs;
such revenues shall be [*]. Mesaba, in its discretion may
establish charges for Air Cargo service in markets where the
Air Cargo is carried solely on Mesaba and revenues from such
Air Cargo shall be retained by Mesaba.
(d) For purposes of claims, Mesaba will be treated as
if it were a party to standard industry ticketing and
baggage agreements with Northwest and other air carriers.
(e) Northwest shall, at its sole expense, supply
Mesaba with all necessary Air Cargo forms and supplies in an
agreed upon form with the Northwest logo and name.
Northwest and Mesaba shall utilize such forms when accepting
Air Cargo for transport on Mesaba's flights.
Section IV.11 Marketing Position. Mesaba shall employ one
incremental full-time marketing support person whose primary
function will be to maximize passenger revenue for Regional
Airline Services (the "Sales Manager"). The Sales Manager must
successfully complete the Northwest sales training course. The
duties for the Sales Manager shall include, but not to be limited
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
to, attending press release functions, city promotional
activities, coordinating travel agency functions, working
directly with the Northwest sales force to coordinate effective
Regional Airline Services marketing and sales plans and providing
monthly sales reports to Northwest. Mesaba shall provide the
Sales Manager with adequate office space and equipment,
administrative support and staff to perform these functions.
[*].
Section IV.12 Use of Comat. Northwest and Mesaba shall
each provide to the other, at no cost to the other and on a non-
discriminatory basis, access to its respective Comat system for
the movement and acquisition of priority aircraft maintenance
parts and other company material. Northwest's failure to deliver
timely a maintenance component via COMAT shall not be considered
a Northwest caused delay for purposes of calculating the on-time
performance and completion factors. All access shall be
consistent with Northwest's and Mesaba's respective published
Comat procedures and policies, as amended from time to time.
ARTICLE V
REVENUES; PAYMENTS; SETOFF
Section V.1 Revenues. Mesaba acknowledges and agrees
that all revenues resulting from the sale and issuance of
passenger tickets associated with the operation of the Aircraft
and all other sources of revenue associated with the operation of
the Aircraft are the sole property of Northwest, except revenue
in respect of (a) beverage services and nonrevenue pass travel
which shall be the property of Mesaba and (b) Air Cargo Handling
Services which shall be divided in accordance with Section
4.10(c). Northwest hereby appoints Mesaba as its agent, and
Mesaba hereby agrees to act as Northwest's agent, at all Mesaba
ticketing locations in connection with the sale and issuance of
all passenger tickets and airway bills by Mesaba and with the
same duties owed to Northwest in that capacity as is customary in
the industry between airlines. Mesaba agrees to observe all
Northwest procedures and standards applicable to the issuance of
tickets, to the collection and remittance of the proceeds of such
sales. Nothing in this Section 5.1 shall be deemed to alter or
conflict with the provisions of Section 9.1 hereof.
Section V.2 ASM/Passenger Payment to Mesaba.
(a) ASM/Passenger Reports. Mesaba shall provide to
Northwest periodic reports with respect to the number of
actual, completed ASMs and enplaned revenue passengers (each
in respect of Regional Airline Services) in accordance with
the following schedule in each calendar month during the
term of this Agreement:
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
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 ASM/Passenger Payment for the
period covered by the ASM/Passenger 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 ASM/Passenger 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 5.2, Mesaba's ASM/Passenger Payment for any period
will be equal to [*]. Adjustments arising from Northwest's
audit of the ASM/Passenger Report may be made within forty-
five (45) days following the end of each month.
(c) Destination By Other Means. If Mesaba transports
a revenue passenger to his or her destination by another
means (bus, train, taxi, etc.) due to a flight cancellation,
Northwest shall reimburse Mesaba for [*]. Mesaba shall
include such reimbursement request in its ASM/Passenger
Report pursuant to Section 5.2(a) and payment of the
reimbursement amount shall be included with the next wire
transfer in accordance with Section 5.2(b). Mesaba shall
use its best efforts to minimize the transportation of
passengers by other means and the costs associated
therewith.
Section V.3 ASM and [*]. [*].
Section V.4 Weather Related Adjustment. [*].
Section V.5 Incentives and Penalties. Mesaba shall be
subject to certain performance incentives and penalties described
in Sections 5.5(a), 5.5(b), 5.5(c), 5.5(d), 5.5(e), 5.5(f),
5.5(g) and 5.5(i) ("Performance Criteria") which shall be added
to or deducted from the ASM/Passenger 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 second month following the
end of the Performance Period in question pursuant to Section
5.2(b).
(a) Completion Factor. If Mesaba's completion factor
(calculated in accordance with Section 2.10(a)) is less than
[*] for a Performance Period, Northwest shall receive from
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
Mesaba [*] during the applicable Performance Period. If
Mesaba's completion factor is greater than [*] for a
Performance Period, Northwest shall pay to Mesaba [*] during
the applicable Performance Period, and if Mesaba's
completion factor is greater than [*] for such Performance
Period, Northwest shall also pay to Mesaba an additional [*]
during such Performance Period.
(b) On-Time Factor If Mesaba's on-time factor
(calculated in accordance with Section 2.10(b)) is less than
[*] for a Performance Period, Northwest shall receive from
Mesaba [*] during the applicable Performance Period. If
Mesaba's on-time factor is greater than [*] for a
Performance Period, Northwest shall pay to Mesaba [*] during
the applicable Performance Period, and if Mesaba's on-time
factor is greater than [*] for such Performance Period,
Northwest shall also pay to Mesaba an additional [*] during
such Performance Period.
(c) Mishandled Luggage Factor. If Mesaba's incidences
of mishandled luggage (calculated in accordance with Section
2.10(c)) is greater than [*] per 1,000 enplaned revenue
passengers for a Performance Period, Northwest shall receive
from Mesaba [*] during the applicable Performance Period.
If Mesaba's incidences of mishandled luggage is less than
[*] per 1,000 enplaned revenue passengers for a Performance
Period, Northwest shall pay to Mesaba [*] during the
applicable Performance Period, and if Mesaba's incidences of
mishandled luggage is less than [*] per 1,000 passengers for
such Performance Period, Northwest shall also pay to Mesaba
additional [*] during such Performance Period.
(d) Customer Complaints Factor. If Mesaba's number of
customer complaints (calculated in accordance with Section
2.10(d)) is greater than [*] per 1,000 enplaned revenue
passengers for a Performance Period, Northwest shall receive
from Mesaba [*] during the applicable Performance Period.
If Mesaba's number of customer complaints is less than [*]
per 1,000 enplaned revenue passengers, and if Mesaba's
number of customer complaints is less than [*] per 1,000
enplaned revenue passengers for such Performance Period,
Northwest shall also pay to Mesaba an additional [*] during
such Performance Period.
(e) Operational Oversales Factor. If the number of
denied boardings by Mesaba due to operational oversales
(calculated in accordance with Section 2.10(e)) is greater
than [*] per 1,000 enplaned revenue passengers for a
Performance Period, Northwest shall receive from Mesaba [*]
during the applicable Performance Period. If the number of
denied boardings by Mesaba due to operational oversales is
less than [*] per 1,000 enplaned revenue passengers for a
Performance Period, Northwest shall pay to Mesaba [*] for
such Performance Period.
(f) Average Denied Boarding Compensation Factor. If
Mesaba's average denied boarding compensation is greater
than [*] for a Performance Period, Northwest shall receive
from Mesaba [*] during the applicable Performance Period.
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
If Mesaba's average denied boarding compensation is less
than [*], Northwest shall pay to Mesaba [*] for such
Performance Period. [*]
(g) Involuntary Denied Boarding Factor. If the number
of involuntary denied boardings by Mesaba is greater than
[*] per 1,000 enplaned revenue passengers for [*] or if
thereafter the number of involuntary denied boardings by
Mesaba is greater than [*] per 1,000 enplaned revenue
passengers for any [*], Northwest shall receive from Mesaba
[*] during the applicable Performance Period. If the number
of involuntary denied boardings by Mesaba is less then [*]
per 1,000 enplaned revenue passengers for a Performance
Period, Northwest shall pay to Mesaba [*] for such
Performance Period.
(h) Reconciliation of Performance Standards. For each
Performance Period, (i) Mesaba shall prepare a
reconciliation of its actual performance to the targeted
performance with respect to its completion factor and its on-
time factor and (ii) Northwest shall prepare a
reconciliation of Mesaba's actual performance to targeted
performance with respect to Mesaba's incidences of
mishandled luggage, its number of customer complaints, its
number of denied boardings due to operational oversales, its
average denied boarding compensation factor and its number
of involuntary denied boardings. Such reconciliations will
be completed and delivered to the other within thirty (30)
days after the end of each Performance Period. Northwest
and Mesaba will have the right to audit the reconciliation
prepared by the other and shall report any discrepancies to
the other. Any discrepancy not reported 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 5.7.
(i) Additional Performance Criteria. During the term
of this Agreement, Northwest may propose 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 V.6 Annual Payments with Respect to [*].
(a) Calculation of [*]. 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 [*].
(b) [*] If the [*] for such fiscal year is less than
the applicable [*], Northwest shall receive from Mesaba an
amount determined as follows:
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
[*]
(c) [*] If the [*] is greater than [*], Northwest
shall receive from Mesaba an amount determined as follows:
[*]
(d) Audit of [*] Northwest shall have the right to
audit the calculation of [*] and shall report any disputes
to Mesaba. Any dispute not reported to Mesaba in writing
within thirty (30) days of the receipt of the [*] by
Northwest shall be deemed waived. The payment in respect of
any dispute shall be handled as a disputed amount in
accordance with Section 5.7.
(e) Calculations with Respect to Fiscal 1998. For the
fiscal year ending March 31, 1998, [*] shall be calculated
with respect to the twelve month period ending March 31,
1998 (which shall include the three month period immediately
preceding the Effective Date), and for purposes of such
calculations a [*] shall be calculated for such three month
period (i) in accordance with Section 5.3(c) as if Section
5.3(c) were in effect during such period and (ii) assuming
[*] for such purposes equals [*].
Section V.7 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 5.2(b). Disputed amounts must be paid by
Mesaba to Northwest when the dispute is resolved, provided that
Northwest may set off such amount against the next scheduled wire
transfer pursuant to Section 5.2(b) if the formerly disputed
amount is not paid within seven (7) days of resolution.
Northwest may also offset against the next scheduled wire
transfer pursuant to Section 5.2(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 V.8 Credit Card Chargebacks.
(a) Mesaba shall be billed for credit card chargebacks
resulting from Mesaba's noncompliance with Northwest's
credit card acceptance procedures. Northwest shall apply
the same chargeback procedures and standards to Mesaba as
applied to Northwest by Northwest's credit card contractors.
Northwest shall furnish Mesaba with copies of all agreements
with its credit card contractors.
(b) With respect to all credit card charge forms
returned to Mesaba by Northwest, Northwest will furnish
Mesaba with a complete written explanation of the reason
therefor accompanied by relevant documentation received from
the credit card issuer or credit card holder.
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
(c) Upon receipt of a chargeback, Mesaba shall have a
reasonable period of time, but not to exceed 60 days, to
review the validity of the chargeback notice. If the
chargeback is valid (within the scope of the circumstances
for the chargeback), Mesaba shall remit to Northwest a gross
amount equal to such credit card charge form. If, in
Mesaba's good faith opinion, the chargeback is not valid,
Mesaba will so notify Northwest and provide Northwest with a
complete written explanation of the transaction together
with any necessary supporting documentation within the 60-
day period.
(d) All revisions to Northwest's credit card
procedures must be in writing and must be submitted to
Mesaba at least 30 days in advance of the effective date of
such procedures or such shorter notification period as
Northwest may utilize in notifying its own personnel. All
warning notices must be current and stored in Northwest
computerized reservation credit card credit check system and
accessible to Mesaba on the transaction date.
ARTICLE VI
REPORTING OBLIGATIONS, AUDITING AND INSPECTIONS
Section VI.1 Reporting Obligations.
(a) 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, (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, and (d) any
proposed capital expenditures in excess of $1,000,000.
Mesaba shall also report to Northwest not later than the
last day of each month its completion factor and on-time
factor for the prior month.
(b) 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. Mesaba
shall also promptly provide to Northwest notice of and
adequate information regarding any material weaknesses or
reportable conditions noted in any management letters
received by Mesaba from its independent auditors and
Mesaba's responses thereto.
(c) Certain Notices to Mesaba. Northwest shall report
to Mesaba not later than the last day of each month the
number of incidences of mishandled luggage, the number of
customer complaints, the number of denied boardings due to
operational oversales, the average amount of denied boarding
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
compensation for Scheduled Flights, the [*] and the number
of involuntary denied boardings during the prior month.
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.
Section VI.2 Audits.
(a) Compliance Audits. Upon the reasonable prior
written request by Northwest made not more frequently than
once every twelve (12) 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.
(b) Inventory Audits. At the end of each fiscal year
during the term of this Agreement, Mesaba and Northwest
shall conduct an annual inventory audit of all spare parts,
tooling and ground support equipment owned by Northwest and
leased to Mesaba or owned by Northwest and supplied to
Mesaba. Such audit shall tabulate the quantity and type of
all spare parts and ground support equipment including
recognition of spare parts and ground support equipment
which were scrapped in the preceding year. Such audit, when
completed and agreed to by both parties, shall be final.
Section VI.3 Inspections. Northwest shall be entitled to
conduct on-site observations of Mesaba's in-flight service,
flight, maintenance, technical operations, gate-check in service,
ground operations, Aircraft cleaning and any and all other
services and operations performed under this Agreement 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's compliance with applicable Governmental
Regulations, state and local laws, equipment manufacturer's
instructions and the standards established by this Agreement.
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 VI.4 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
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
others and shall keep confidential the terms of this Agreement
and any confidential, non-public information concerning the other
that it obtains as a result of or pursuant to this Agreement.
ARTICLE VII
NORTHWEST IDENTIFICATION
Section VII.1 Use of Identification. Northwest shall
establish and maintain an Identification for its program of
affiliation with Mesaba for Regional Airline Services and Mesaba
is granted the right to use such Identification pursuant to
Section 2.2 and this Article VII. 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 VII.2 Ownership of the Identification. Mesaba
hereby acknowledges Northwest's ownership of the names
"Northwest" and "Northwest Airlink" 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 the
Identification or directly or indirectly challenges the validity
of the Identification.
Section VII.3 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 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 VII.4 Revocation of License Upon Termination of
Agreement. Should this Agreement be canceled 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 Regional Jet Services
Agreement or any successor thereto, shall not thereafter be used
by Mesaba in connection with any operations of Mesaba. Mesaba
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
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 VII.5 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 7.1, require Mesaba to
use new or different Northwest Identification.
ARTICLE VIII
TAXES AND FEES
Section VIII.1 Taxes and Fees. Mesaba shall be liable for
and shall pay to Northwest the amount of any taxes, license fees,
assessments, and other charges, together with any interest and
penalties thereon, in any manner levied, assessed, or imposed
upon Northwest by any federal, state, or local taxing or airport
authority, but excluding any amount due with respect to income or
similar taxes, as a result of or attributable to its performance
of services to and for Mesaba pursuant to this Agreement.
Notwithstanding the foregoing, Mesaba may, in good faith, protest
or otherwise contest judicially or administratively in its name
or in Northwest's name, at its expense, the validity or
applicability of any such additional or increased taxes,
licenses, license fees, assessments, and other charges and such
payments to Northwest shall not be due until such protest is
decided with finality or if early payment is required, at the
time such payment is actually made.
Section VIII.2 Ticket Tax. All taxes imposed upon the
transportation of persons by air under Internal Revenue Code
Section 4261, as of the Effective Date or as subsequently
amended, shall be for Northwest's account.
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
ARTICLE IX
LIABILITY, INDEMNIFICATION AND INSURANCE
Section IX.1 Independent Contractor.
(a) Except for the limited purpose described in
Section 5.1 hereof, 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. Except for the
limited purpose described in Section 5.1 hereof, 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 procedure 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, and Mesaba assumes all risks of financial losses
which may result from the operation of the air services to
be provided by Mesaba hereunder.
(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 IX.2 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
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
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 IX.3 Insurance.
(a) Mesaba agrees, at its sole expense, to maintain in
full force and effect the following insurance coverages with
respect to Regional Airline Services:
(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 [*].
(2) Comprehensive airline and property damage
liability insurance with limits of not less than [*]
combined single limit per occurrence, including, but not
limited to, aircraft liability, passenger legal liability,
premises and property damage liability, hangar keepers
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 Regional Airline
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 9.3(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:
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
(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 X
TERM; TERMINATION
Section X.1 Term. This Agreement shall commence on and
shall be effective as of July 1, 1997 (the "Effective Date") and,
unless earlier terminated as provided herein, shall continue
until June 30, 2007.
Section X.2 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.
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
(b) Except as otherwise provided in Section 10.3, 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 X.3 Termination by Northwest. Notwithstanding
the provisions of Section 10.2(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 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 9.3 and, as a result thereof, the insurance required
thereunder is not in effect.
(d) More than [*] of the Aircraft are not operated for
more than [*] consecutive days or [*] of the Aircraft are
not operated for more than [*] consecutive days, in either
case other than as a result of a FAA order which grounds a
specific Aircraft type of all air carriers.
(e) Mesaba's DOT Certification is for any reason
suspended or revoked or otherwise not in full force and
effect so as to permit Mesaba to perform the Regional
Airline Services required under this Agreement.
(f) 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.
(g) 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
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
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.
(h) Holdings shall have failed to deliver to Northwest
the Stock Purchase Warrant on or before October 31, 1997 or
shall not have a sufficient number of authorized shares
available for reservation with respect to the number of
shares to be purchased on exercise of the Stock Purchase
Warrant taking into account all other prior reservations of
common stock by Holdings.
Section X.4 Early Termination. Notwithstanding any other
provision of this Agreement, each of Northwest and Mesaba shall
have the right to terminate this Agreement and the Subleases
without cause upon three hundred sixty-five (365) days' prior
written notice to the other; provided such notice may not be
given prior to July 1, 2000.
Section X.5 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
10.5(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
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
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 XI
WET LEASE AGREEMENT
Section XI.1 Acknowledgment of Wet Lease Agreement.
Northwest acknowledges (i) that certain of the Aircraft are
subject to the Wet Lease Agreement, (ii) that certain of the
Scheduled Flights to be operated pursuant to this Agreement will
be operated pursuant to the terms of the Wet Lease Agreement, and
(iii) that to the extent this Agreement imposes obligations on
Mesaba with respect to the use of the Identification, the use of
other airline designators, the provision of personnel and
dispatch control, aircraft maintenance and insurance such
obligations shall be deemed to be satisfied by compliance with
and enforcement of the terms of the Wet Lease Agreement
notwithstanding any express terms in this Agreement otherwise,
and Mesaba's compliance with and enforcement of the terms of the
Wet Lease Agreement to provide Scheduled Flights for Regional
Airline Services will not result in a Default under this
Agreement. Mesaba acknowledges that Section 3.7 shall not apply
to any Aircraft which are subject to the Wet Lease Agreement.
Section XI.2 [*].
Section XI.3 Performance Standards. During the term of
the Wet Lease Agreement, the performance standards set forth in
Section 2.10 shall be determined solely with reference to
Scheduled Flights operated by Mesaba which shall exclude
Scheduled Flights operated by Express Airlines I, Inc. pursuant
to the Wet Lease Agreement.
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
Section XI.4 Calculation of Incentives and Penalties.
During the term of the Wet Lease Agreement, the incentives and
penalties payable pursuant to Section 5.5 shall be calculated
based on the number of enplaned revenue passengers on Scheduled
Flights operated by Express Airlines I, Inc. pursuant to the Wet
Lease Agreement, during the applicable Performance Period.
ARTICLE XII
MISCELLANEOUS
Section XII.1 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 or serious accidents, 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 XII.2 Mutual Cooperation. Northwest and Mesaba
shall use their best efforts to cooperate with each other in
performing their respective obligations under this Agreement.
Section XII.3 Representations and Warranties. Except as
expressly set forth herein, neither Northwest, Holdings nor
Mesaba shall make any representations or warranties, expressed or
implied, under or in connection with this Agreement.
Section XII.4 Assignment. This Agreement may not be
assigned by any party without the prior written consent of the
other parties.
Section XII.5 Governing Law. This Agreement shall be
governed in accordance with the laws of the State of Minnesota.
Section XII.6 Interline and Other Agreements. Northwest
agrees, to the extent it has the right to do so, to permit Mesaba
to avail itself of all its rights, privileges and amenities
pursuant to its interline agreements and all industry trade or
other agreements between Northwest and any other air carriers.
Northwest shall take all action and execute such documents as may
be necessary to enable Mesaba to avail itself of the maximum
benefits afforded by such agreements.
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
Section XII.7 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, facsimile, or other expedient written
means, addressed as follows:
If to Northwest: Northwest Airlines, Inc.
Department A6100
5101 Northwest Drive
St. Paul, Minnesota 55111-3034
Attn: Vice President - Market Planning
Facsimile No: (612) 727-7113
With copies to: Northwest Airlines, Inc.
Department A1180
5101 Northwest Drive
St. Paul, Minnesota 55111-3034
Attn: Senior Vice President,
General Counsel and Secretary
Facsimile No: (612) 726-7123
Northwest Airlines, Inc.
Department A6030
5101 Northwest Drive
St. Paul, MN 55111-3034
Attn: Director of Airlink Planning
Facsimile No: (612) 727-7110
If to Mesaba or Mesaba Aviation, Inc.
Holdings: 7501 26th Avenue South
Minneapolis, Minnesota 55450
Attn: President
Facsimile No: (612) 726-1568
With a copy to: Mesaba Aviation, Inc.
7501 26th Avenue South
Minneapolis, Minnesota 55450
Attn: Vice President-Administration
and General Counsel
Facsimile No: (612) 726-1568
<PAGE>
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 XII.8 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 XII.9 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 XII.10 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 XII.11 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 XII.12 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 the notice from the nonbreaching party,
or (ii) the breaching party does not begin within ten (10)
days following receipt of the 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, such 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.
<PAGE>
(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 XII.13 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 XII.14 Integration and Entire Agreement. This
Agreement (including the Exhibits) and the Subleases and the
ancillary documents entered into in connection therewith are
intended by the parties as a complete statement of the entire
agreement and understanding of the parties with respect to the
subject matter hereof and all matters between the parties related
to the subject matter herein and therein set forth. This
Agreement may only be amended or modified by a written agreement
between Mesaba and Holdings, on the one hand, and Northwest, on
the other, which specifically references this Agreement and
expressly provides for such amendment. This Agreement is
entirely separate from and unrelated to the Regional Jet Services
Agreement.
Section XII.15 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 XII.16 Stock Purchase Warrant. Holdings agrees to
deliver to Northwest not later than the close of business on
October 31, 1997 an executed stock purchase warrant in the form
attached hereto as Exhibit F (the "Stock Purchase Warrant").
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the date and year first above written.
MESABA AVIATION, INC. NORTHWEST AIRLINES, INC.
By:/s/Bryan K. Bedford By:/s/J. Timothy Griffin
-------------------------- ----------------------
Name: Bryan K. Bedford Name: J. Timothy Griffin
Title: President and Chief Title: Senior Vice President
Executive Officer Market Planning and Systems
MESABA HOLDINGS, INC.
By:/s/Bryan K. Bedford
------------------------
Name: Bryan K. Bedford
Title: President and Chief
Executive Officer
<PAGE>
EXHIBIT A
[*]
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
EXHIBIT B - PASS POLICY
[*]
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
EXHIBIT C
AIRPORT FACILITIES - MSP
The attached diagrams define the exclusive space for use by
Mesaba at MSP. Rental rates chargeable to Mesaba for the defined
space shall be [*]. Utility expense chargeable to Mesaba for the
defined space shall be [*]. All other space utilized by Mesaba
at MSP will be billed directly by the MAC in accordance with
current practice and paid for [*].
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
EXHIBIT D
AIRPORT FACILITIES - DTW
The attached diagrams define the exclusive space for use by
Mesaba at DTW. Rental rates chargeable to Mesaba for the defined
space shall be [*]. Utility expense chargeable to Mesaba for the
defined space shall be [*].
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
EXHIBIT E - SAMPLE CALCULATIONS
[*]
[*] Confidential material omitted and filed separately with the Securities
and Exchange Commision pursuant for a request for confidential treatment
<PAGE>
EXHIBIT F
FORM OF STOCK PURCHASE WARRANT
[Definitive Warrant Agreement filed separately by Registrant.]
<PAGE>
MESABA HOLDINGS, INC.
1994 STOCK OPTION PLAN
(As amended by the Board of Directors
on August 29, 1995 & July 1, 1997)
(Formerly known as the AirTran Corporation
1994 Stock Option Plan)
MESABA HOLDINGS, INC.
1994 STOCK OPTION PLAN
<PAGE>
TABLE OF CONTENTS
Page
Purpose 1
Shares Subject to the Plan 1
Administration of the Plan 2
Grant of Options 2
Terms and Conditions of Options 3
(a) Option Period 3
(b) Exercise Price 3
(c) Exercise of Option 4
(d) Payment of Purchase Price upon Exercise 4
(e) Exercise in the Event of Death or Termination
of Employment 5
(f) Nontransferability 6
(g) Investment Representation 6
(h) Adjustments in Event of Change in Common Stock 6
(i) Incentive Stock Options 7
(j) No Rights as Shareholder 7
(k) No Rights to Continued Employment 7
Compliance with Other Laws and Regulations 7
Disposition of Shares 7
Amendment and Discontinuance 7
Effective Date of the Plan 8
Name 8
Effect on Other Stock Plans 8
<PAGE>
MESABA HOLDINGS, INC.
1994 STOCK OPTION PLAN
(As amended by the Board of Directors
on August 29, 1995 and July 1, 1997)
(Formerly known as the AirTran Corporation
1994 Stock Option Plan)
1. Purpose. The purpose of this Plan is to provide a
means whereby Mesaba Holdings, Inc. (the "Company") may, through the grant
of incentive stock options and nonqualified stock options to Key Employees,
as defined below, attract and retain persons of ability as employees and
motivate such employees to exert their best efforts on behalf of the
Company, its shareholders and any Subsidiary. By affording Key Employees
the opportunity to acquire proprietary interests in the Company and
any Subsidiary and by providing them incentives to put forth maximum efforts
for the success of the Company's business, the Plan seeks to contribute to
the attainment of those objectives.
As used herein, the term "Committee" shall mean the committee appointed
by the Board of Directors of the Company in accordance with Section 3. The
term "Subsidiary" shall mean any corporation which at the time an option is
granted under this Plan qualifies as a subsidiary of the Company under the
definition of "subsidiary corporation" contained in Section 424(f) of the
Internal Revenue Code of 1986, as amended from time to time (the "Code"), or
any similar provision hereafter enacted, except that such term shall not
include any corporation which is classified as a foreign corporation
pursuant to Section 7701 of the Code. The term "Key Employees" means those
employees (including officers and directors who are also employees) of the
Company or of any Subsidiary, who, in the judgment of the Committee referred
to in Section 3 below, are considered especially important to the future of
the Company. The term "incentive stock options" means options to purchase
Common Stock ($.01 par value) of the Company (the "Stock") which at the time
such options are granted under this Plan qualify as incentive stock options
within the meaning of Section 422 of the Code. The term "nonqualified stock
options" means options to purchase stock which at the time such options are
granted under this Plan do not qualify as incentive stock options.
2. Shares Subject to the Plan. Options may be granted by the Company
from time to time to Key Employees to purchase an aggregate of 800,000
shares of the Stock, and such number of shares shall be reserved for options
granted under the Plan (subject to adjustment as provided in Section 5(h)).
The shares issued upon exercise of options granted under the Plan may be
authorized and unissued shares or shares held by the Company (whether
acquired specifically for issuance under the Plan or otherwise) which are
available under applicable law to be issued under the Plan. If any option
granted under the Plan shall terminate, expire or, with the consent of the
optionee, be canceled as to any shares, new options may thereafter be
<PAGE>
granted under the Plan covering the number of shares subject to the
option which was thus terminated, expired or canceled.
3. Administration of the Plan. The Plan shall be administered by the
Compensation Committee of the Board of Directors of the Company (the
"Board") appointed by the Board and serving at the Board's pleasure, or such
other committee as the Board may from time to time appoint to serve as such
pursuant to this Section 3. Such Committee shall consist of not less than
two members of the Board. Any grants of options to officers who are subject
to Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), shall be made only by a Committee of two or more directors,
each of whom is a "disinterested person" as defined in Rule 16b-3(c)(2) of
the Exchange Act.
The Committee shall have plenary authority in its discretion, subject
to and not inconsistent with the express provisions of the Plan, to grant
options; to determine the purchase price of the Stock covered by each
option, the term of each option, the employees to whom, and the time or
times which, options shall be granted and the number of shares covered by
each option; to designate options as incentive stock options or
nonqualified options; with the consent of an optionee, to modify or amend an
Option; to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option previously granted
by the Board; to interpret the Plan; to prescribe, amend and rescind rules
and regulations relating to the Plan; to determine the terms and provisions
of the option agreements (which need not be identical); with the consent of
an optionee, to modify or amend an option; to authorize any person to
execute on behalf of the Company any instrument required to effectuate the
grant of an option previously granted by the Board; and to make all other
determinations deemed necessary or advisable for the administration of the
Plan. The Committee may delegate to one or more of its members or to one or
more agents such administrative duties as it may deem advisable, and the
Committee or any person to whom it has delegated its duties as aforesaid may
employ one or more persons to render advice with respect to the
responsibility the Committee or such person may have under the Plan.
The Committee may employ attorneys, consultants, accountants or other
persons and the Committee, the Company and its officers and directors shall
be entitled to rely upon the advice, opinions or valuations of any such
persons. All actions taken and all interpretations and determinations made
by the Committee in good faith shall be final and binding upon all persons
to whom options have been granted under the Plan, the Company and all other
interested persons. No member of the Committee shall be personally liable
for any action, determination or interpretation made in good faith with
respect to that Plan or the grant of any options made hereunder, and all
members of the Committee shall be fully protected by the Company in respect
of any such action, determination or interpretation.
4. Grant of Options. Subject to the provisions of the Plan, the
Committee shall (a) determine and designate from time to time those Key
Employees to whom options are to be granted; (b) authorize the granting of
incentive stock options, nonqualified stock options, or a combination of
incentive stock options and nonqualified stock options; (c) determine the
<PAGE>
number of shares subject to each option; and (d) determine the time or
times when and the manner in which each option shall be exercisable and the
duration of the exercise period; provided, however, that (i) no option shall
be granted after the expiration of 10 years from the Effective Date of the
Plan specified in Section 9 below and (ii) the aggregate fair market value
(determined as of the date the option is granted) of stock for which all of
an employee's incentive stock options first become exercisable during any
calendar year shall not exceed $100,000. No director of the Company who is
not also an employee of the Company or any Subsidiary shall be entitled to
receive any option under the Plan.
5. Terms and Conditions of Options. Each option granted under the
Plan shall be evidenced by an agreement in a form approved by the Committee.
Such agreement shall be subject to the following express terms and
conditions and to such other terms and conditions as the Committee may deem
appropriate:
(a) Option Period. Each option agreement shall specify the
period for which the option thereunder is granted and shall provide that the
option shall expire at the end of such period. The Committee may extend
such period provided that, in the case of in incentive stock option, such
extension shall not disqualify the option as an incentive stock option. In
no case shall such period, including any such extensions, exceed 10 years
from the date of grant; provided, however, that in the case of an incentive
stock option granted to an individual who, at the time of grant, owns stock
possessing more than 10% of the total combined voting power of all classes
of capital stock of the Company (a "Ten Percent Shareholder"), such period,
including extensions, shall not exceed five years from the date of grant.
(b) Exercise Price. The exercise price per share of Stock shall
be determined by the Committee at the time each option is granted and shall
be not less than (i) the fair market value or (ii) in the case of an
incentive stock option granted to a Ten Percent Shareholder, 110% of the
fair market value of one share of the Stock on the date the option is
granted, as determined by the Committee.
For purposes of this Section 5, the "fair market value" of the Stock
shall be determined as follows:
(A) if the Stock is listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange, the fair
market value on any given day shall be the closing sale price for
the Stock, or if no sale is made on such day, the closing bid price
for such day on such exchange;
(B) if the Stock is not listed on a national securities
exchange, the fair market value on any given day shall be the
closing sale price for the Stock as reported on the NASDAQ National
Market System on such day, or if no sale is made on such day, the
closing bid price for such day as entered by a market maker for the
Stock;
<PAGE>
(C) if the Stock is not listed on a national securities
exchange, is not admitted to unlisted trading privileges on any
such exchange, and is not eligible for inclusion in the NASDAQ
National Market System, the fair market value on any given day
shall be the average of the closing representative bid and asked
prices as reported by the National Quotation Bureau, Inc. or, if
the Stock is not quoted on the National Association of Securities
Dealers Automated Quotations System, then as reported in any
publicly available compilation of the bid and asked prices of the
Stock in any over-the-counter market on which the Stock is traded;
or
(D) if there exists no public trading market for the Stock of the
Company, the fair market value on any given day shall be an amount
determined by the Committee in such manner as it may reasonably
determine in its discretion, provided that such amount shall not be
less than the book value per share as reasonably determined by the
Committee as of the date of determination nor less than the par
value of the Stock.
(c) Exercise of Option. No part of any option may be exercised
until the optionee shall have remained in the employ of the Company or of a
Subsidiary for such period after the date on which the option is granted as
the Committee may specify in the option agreement, and the option agreement
may provide for exercisability in installments; provided, however, that no
option may be exercised for a period of six months after the date of grant.
Options granted under this Plan may be exercised without regard to the
status of previously granted options.
(d) Payment of Purchase Price upon Exercise. Each option shall
provide that the purchase price of the shares as to which an option shall be
exercised shall be paid to the Company at the time of exercise in cash;
provided, however, that the Committee may determine, in its sole discretion,
other forms of consideration to be appropriate for payment of the purchase
price of the shares as to which an option shall be exercised, including, but
not limited to, shares of Stock already owned by the optionee having a total
fair market value, as determined by the Committee, equal to the purchase
price, or a combination of cash and Stock having a total fair market value,
as so determined, equal to the purchase price.
The Company may make loans to such option holders as the Committee, in
its discretion, may determine (including a holder who is a director or
officer of the Company) in connection with the exercise of options granted
under the Plan; provided, however, that the Committee shall have no
discretion to authorize the making of any loan where the possession of such
discretion or the making of such loan would result in a "modification" (as
defined in Section 424(h) of the Code) of any incentive stock option. Such
loans shall be subject to the following terms and conditions and such other
terms and conditions not inconsistent with the Plan as the Committee shall
determine:
<PAGE>
(i) Such loans shall bear interest at such rates as the
Committee shall determine from time to time, which rates may be
below then current market rates (except in the case of incentive
stock options).
(ii) In no event may any such loan exceed the fair market
value, at the date of exercise, of the shares covered by the option
or portion thereof exercised by the holder.
(iii) No loan shall have an initial term exceeding five years,
but, any such loan may be renewable at the discretion of the
Committee.
(iv) When a loan shall have been made, shares of Common Stock
having a fair market value at least equal to the principal amount
of the loan, or such other collateral as may be deemed appropriate
by the Committee, shall be pledged by the holder to the Company as
security for payment of the unpaid balance of the loan.
(v) Every loan shall comply with all applicable laws,
regulations and rules of the Federal Reserve Board and any other
governmental agency having jurisdiction.
(e) Exercise in the Event of Death or Termination of Employment.
(i) If an optionee shall die while an employee of the
Company or a Subsidiary, his or her option may be exercised, to the
extent that the optionee shall have been entitled to do so on the
date of his or her death, by the person or persons to whom the
optionee's right under the option passes by will or applicable law,
or if no such person has such right, by his or her executors or
administrators, at any time or from time to time, but not later
than the expiration date specified in paragraph (a) of this Section
5 or two years after the optionee's death, whichever date
earlier.
(ii) If an optionee's employment by the Company or a
Subsidiary shall terminate because of his or her total disability,
he or she may exercise his or her option to the extent that he or
she shall have been entitled to do so at the date of the
termination of his or her employment, at any time or from time to
time, but not later than the expiration date specified in
paragraph (a) of this Section 5 or one year after termination of
employment, whichever date is earlier.
(iii) If an optionee's employment shall terminate by
reason of his or her retirement in accordance with the terms of the
Company's retirement plans or with the consent of the Committee or
involuntarily other than for cause, all rights to exercise his or
her option shall terminate at the expiration date specified in
paragraph (a) of this Section 5 or three months after termination
of employment, whichever date is earlier.
<PAGE>
(iv) If an optionee's employment shall terminate for
cause or voluntarily or involuntarily for any reason other than
death, total disability or retirement, all rights to exercise his
or her option shall terminate at the date of such termination of
employment, unless such termination is waived by the Committee in
its sole discretion.
"Termination for cause" shall include termination for
malfeasance or misfeasance in the performance of duties of the
optionee as an employee of the Company or conviction of illegal
activity in connection therewith or any conduct detrimental to the
interests of the Company or any Subsidiary, violation of the terms
of the optionee's employment agreement, if any, and in event, the
determination of the Committee with respect to the matter of
whether an optionee's employment has been terminated for cause
shall be final and conclusive. "Total disability" shall mean a
physical or mental condition of an employee resulting bodily
injury, disease, or mental disorder which renders the employee
incapable of continuing his or her usual and customary employment
with the Company.
(f) Nontransferability. No option granted under the Plan shall
be transferable other than by will or by the laws of descent and
distribution. During the lifetime of the optionee, an option shall be
exercisable only by the optionee or by the optionee's guardian or legal
representative (unless such exercise would disqualify an option as an
incentive stock option).
(g) Investment Representation. Each option agreement may provide
that, upon demand by the Committee for such a representation, the optionee
(or any person acting under paragraph 5(e)) shall deliver to the Committee
at the time of any exercise of an option or portion thereof a written
representation that the shares to be acquired upon such exercise are to be
acquired for investment and not for resale or with a view to the
distribution thereof. Upon such demand, delivery of such representation
prior to the delivery of any shares issued upon exercise of an option and
prior to the expiration of the option period shall be a condition precedent
to the right of the optionee or such other person to purchase any shares.
(h) Adjustments in Event of Change in Common Stock. In the event
of any change in the Common Stock of the Company by reason of any stock
dividend, recapitalization, reorganization, merger, consolidation, split-up,
combination, or exchange of shares, or rights offering to purchase Common
Stock at a price substantially below fair market value, or of any similar
change affecting the Common Stock, the number and kind of shares which
thereafter may be optioned and sold under the Plan and the number and kind
of shares subject to option in outstanding option agreements and the
purchase price per share thereof shall be appropriately adjusted consistent
with such change in such manner as the Committee may deem equitable to
prevent substantial dilution or enlargement of the rights granted to, or
available for, participants in the Plan.
<PAGE>
(i) Incentive Stock Options. Each option agreement which
provides for the grant of an incentive stock option to a participant shall
contain such terms and provisions as the Committee may determine to be
necessary or desirable in order to qualify such option as an incentive stock
option within the meaning of Section 422 of the Code, or any amendment
thereof or substitute therefor.
(j) No Rights as Shareholder. No optionee shall have any rights
as a shareholder with respect to any shares subject to his or her option
prior to the date of issuance to him or her of a certificate or certificates
for such shares.
(k) No Rights to Continued Employment. The Plan and any option
granted under the Plan shall not confer upon any optionee any right with
respect to continuance of employment by the Company or any Subsidiary, nor
shall the Plan and any option granted under the Plan interfere in any way
with the right of the Company or any Subsidiary by which an optionee is
employed to terminate his or her employment at any time.
6. Compliance with Other Laws and Regulations. The Plan, the grant
and exercise of options hereunder, and the obligation of the Company to sell
and deliver shares of Stock under such options, shall be subject to all
applicable federal and state laws, rules, and regulations and to such
approvals by any government or regulatory agency as may be required. The
Company shall not be required to issue or deliver any certificates for
shares of Stock prior to (a) the listing of such shares on any stock
exchange on which the Stock may then be listed and (b) the completion of any
registration or qualification of such shares under any federal or state law,
or any ruling or regulation of any government body which the Company shall,
in its sole discretion, determine to be necessary or advisable.
7. Disposition of Shares. Without the consent of the Committee, no
share of Stock acquired by an exercise of an incentive stock option granted
under the Plan shall be transferable other than by will or by the laws of
descent and distribution within two years of the date such option was
granted or within one year after the transfer of such share pursuant to
such exercise; provided, however, that an optionee may sell, transfer,
hypothecate, or otherwise dispose of the shares acquired upon exercise of an
incentive stock option at any time following exercise so long as adequate
provision is made for the payment to the Company of funds sufficient for
payment of any withholding and other taxes required by any governmental
authority in respect of the sale of such shares prior to one year following
the date of exercise.
8. Amendment and Discontinuance. The Board of Directors of the
Company may from time to time amend, suspend or discontinue the Plan;
provided, however, that, subject to the provisions of paragraph (h) of
Section 5, no action of the Board of Directors or of the Committee may (i)
increase the number of shares reserved for options pursuant to Section 2,
(ii) permit the granting of any option having an exercise price less than
that determined in accordance with paragraph (b) of Section 5, (iii) shorten
the period provided for in paragraph (c) of Section 5 which must elapse
between the date of granting an option and the date on which any part of an
option may be exercised, (iv) permit the granting of options which expire
<PAGE>
beyond the period provided for in paragraph (a) of Section 5, or (v) make
any change that would require shareholder approval pursuant to Rule 16b-3
under the Exchange Act, unless such approval is obtained. Without the
written consent of an optionee, no amendment or suspension of the Plan shall
alter or impair any option previously granted to him or her under the Plan.
Notwithstanding the foregoing, the Board of Directors may also amend or
modify the Plan to give effect to changes hereafter adopted in any law,
rule or regulation affecting incentive stock options. The Plan may be
amended, modified or terminated in any other manner as may be approved by
the shareholders of the Company.
9. Effective Date of the Plan. The Effective Date of the Plan shall
be May 19, 1994, the date of its adoption by the Board of Directors of the
Company, subject to approval by shareholders of the Company holding not less
than a majority of the shares present and voting at its next annual or
special shareholders' meeting.
10. Name. The Plan shall be known as the "Mesaba Holdings, Inc. 1994
Stock Option Plan."
11. Effect on Other Stock Plans. The adoption of the Plan shall have
no effect on options granted or to be granted pursuant to any other stock
option plans covering the employees of the Company, any Subsidiary, or any
predecessors or successors thereto.
