UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 2003
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 Number 001-31898
PINNACLE AIRLINES CORP.
(Exact name of registrant as specified in its charter)
Delaware 03-0376558
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1689 Nonconnah Blvd, Suite 111
Memphis, Tennessee 38132
(Address of principal executive offices) (Zip Code)
901-348-4100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
-------------------- ------------------------------------------
Common Stock, $.01 par value Nasdaq National Market
Securities registered pursuant to section 12 (g) of the Act: None
Indicate by check mark whether 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ x ]
The aggregate market value of the voting and non-voting common equity stock
held by non-affiliates of the registrant was $0.0 as of June 30, 2003.
As of March 8, 2004, 21,892,060 shares of common stock were outstanding.
Documents Incorporated by Reference
Certain information called for by Part III of Form 10-K is incorporated by
reference to the Proxy Statement for our 2004 Annual Meeting of Stockholders to
be filed with the Commission within 120 days after December 31, 2003.
Table of Contents
Part I ........................................................................4
Item 1. Business .......................................................... 4
Our Company ...................................................... 4
Our Airline Services Agreement with Northwest .................... 4
Our Employees .................................................... 9
Maintenance of Aircraft ......................................... 10
Training ........................................................ 10
Safety and Security ............................................. 11
Insurance ....................................................... 11
Regulations ..................................................... 11
Markets and Routes .............................................. 12
Risk Factors Affecting Our Business ............................. 13
Item 2. Properties ....................................................... 19
Flight Equipment ................................................ 19
Facilities ...................................................... 19
Item 3. Legal Proceedings ................................................ 20
Environmental Matters ........................................... 20
Regulatory Matters .............................................. 20
Item 4. Submission of Matters to a Vote of Security Holders .............. 20
Part II ..................................................................... 21
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters .......................................................... 21
Item 6. Selected Financial Data .......................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 24
Overview ........................................................ 24
Basis of Presentation ........................................... 26
Revenues ........................................................ 27
Operating Expenses .............................................. 28
Certain Statistical Information ................................. 29
Results of Operations ........................................... 30
Liquidity and Capital Resources ................................. 32
Critical Accounting Policies .................................... 34
Forward Looking Statements ...................................... 35
Item 7A. Quantitative and Qualitative Disclosure About Market Risk ....... 36
Item 8. Financial Statements and Supplementary Data ..................... 37
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure ........................................ 61
Item 9A. Controls and Procedures ......................................... 61
2
Part III .................................................................... 62
Item 10. Directors and Executive Officers of the Registrant .............. 62
Item 11. Executive Compensation .......................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ................................. 62
Item 13. Certain Relationships and Related Transactions .................. 62
Item 14. Principal Accountant Fees and Services .......................... 62
Part IV ..................................................................... 63
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ..................................................... 63
SIGNATURES ................................................................ 69
3
Part I
Item 1. Business
Pinnacle Airlines Corp. and its wholly owned subsidiary, Pinnacle Airlines,
Inc. (which operates as "Northwest Airlink"), are collectively referred to in
this report as the "Company", "we" and "us" except as otherwise noted. Northwest
Airlines Corporation and its subsidiaries are collectively referred to as
"Northwest."
Our Company
We operate an all-regional jet fleet providing regional airline capacity to
Northwest and are one of the fastest growing regional airlines in the United
States based on year-over-year growth in available seat miles flown. In the year
ended December 31, 2003, we had a 56.2% increase in available seat miles flown
over the same period in 2002. We provide Northwest with regional airline
capacity as a Northwest Airlink carrier at its domestic hub airports in Detroit,
Minneapolis/St. Paul and Memphis. We operate a jet fleet of 76 Canadair Regional
Jet ("CRJ") aircraft and offer scheduled passenger service with approximately
490 daily departures to 81 cities in 29 states and two Canadian provinces. As of
December 31, 2002, we offered service with 51 CRJ aircraft with approximately
334 daily departures to 62 cities in 26 states and two Canadian provinces.
Pinnacle Airlines Corp. was incorporated in Delaware on January 10, 2002 to
be the holding company of Pinnacle Airlines, Inc., which was incorporated in
Georgia in 1985. Northwest acquired Pinnacle Airlines, Inc. in April 1997. Since
the acquisition, we have provided regional airline service exclusively to
Northwest. During the time that Northwest was our majority owner, we were
operated as a business unit of Northwest without regard to our stand-alone
profitability. Our operations were designed to increase overall Northwest system
revenues rather than to maximize our stand-alone profitability.
During 2003, Northwest transferred 19,400,000 shares, or 89% of our
outstanding common stock, to the Northwest Airlines Pension Plan for Contract
Employees, the Northwest Airlines Pension Plan for Pilot Employees and the
Northwest Airlines Pension Plan for Salaried Employees (collectively, the
"Northwest Airlines Pension Plan."). Northwest retained the remaining
outstanding shares of our common stock and one share of our Series A preferred
stock.
On November 25, 2003, we completed an initial public offering (the
"Offering") of our common stock, par value $.01 per share. In the Offering, the
Northwest Airlines Pension Plans sold all of our shares that it received during
2003. We did not receive any proceeds from the Offering.
Our Airline Services Agreement with Northwest
We provide regional airline services to Northwest under an Airline Services
Agreement ("ASA"), which we entered into with Northwest effective March 1, 2002.
The terms of the ASA are materially different from the terms of our historical
arrangement with Northwest. The initial agreement provided for a term from March
1, 2002, through February 29, 2012 and would have increased the Company's fleet
to 95 regional jets by December 31, 2004. During 2003, we entered into certain
amendments with Northwest regarding the ASA that, among other things, extended
the term of the agreement through December 31, 2017, provided for an increase in
the size of our fleet to 129 regional jets by December 31, 2005, eliminated
incentive payments based on certain performance criteria and lowered our target
operating margin from 14% to 10% effective December 1, 2003. At the end of its
term, the ASA automatically extends for additional five-year periods at the
option of Northwest.
4
Item 1. Business
Our Airlines Services Agreement (continued)
Our ASA with Northwest provides for the following payments:
Reimbursement payments: We receive monthly reimbursements for all expenses
relating to: passenger aircraft fuel; basic aircraft rentals; aviation
liability, war risk and hull insurance; third-party deicing services; CRJ
third-party engine and airframe maintenance; hub and maintenance facility
rentals; passenger security costs; ground handling in cities where Northwest has
ground handling operations; Detroit landing fees and property taxes. Since we
are reimbursed by Northwest for the actual expenses incurred for these items, we
have no financial risk associated with cost fluctuations.
Payments based on pre-set rates: We are entitled to receive semi-monthly
payments for each block hour and cycle we operate and a monthly fixed cost
payment based on the size of our fleet. The term "block hours" refers to the
elapsed time between an aircraft leaving a gate and arriving at a gate, and the
term "cycles" refers to an aircraft's departure and corresponding arrival. These
payments are designed to cover all of our expenses incurred with respect to the
ASA that are not covered by the reimbursement payments. The substantial majority
of these expenses relate to labor costs, ground handling costs in cities where
Northwest does not have ground handling operations, landing fees in cities other
than Detroit, overhead and depreciation.
Margin payments: We receive a monthly margin payment based on the revenues
described above calculated to achieve a target operating margin. The target
operating margin for the ten months ended December 31, 2002, and the eleven
months ended November 30, 2003 was 14%. In conjunction with the Offering, we
amended the ASA to lower our target operating margin to 10%, effective December
1, 2003. Under the amended ASA, our target operating margin will be reset to a
market-based percentage in 2008, but the reset target operating margin will be
no lower than 8% and no higher than 12%.
Under the ASA, we operate flights on behalf of Northwest. Northwest
controls our scheduling, pricing, reservations, ticketing and seat inventories
and is entitled to all revenues associated with the operation of our aircraft.
Through 2007, if our actual costs that are intended to be covered by the
revenues we receive based on pre-set rates deviate from the expected costs used
in developing those pre-set rates, and as a result our annual operating margin
is below the 9% floor or above the 11% ceiling for each year through 2005, or
below the 8% floor or above the 12% ceiling for 2006 and 2007, a year-end
adjustment in the form of a payment by Northwest or by the Company will be made
to adjust our operating margin to the floor or ceiling. Specified amounts are
excluded when determining whether our annual operating margin is below the floor
or above the ceiling.
Beginning in 2008, Northwest will not guarantee our minimum operating
margin, although we will still be subject to a margin ceiling above the revised
target-operating margin.
If our actual operating margin for any year beginning with 2008 exceeds the
revised target operating margin by up to five percentage points, we will make a
year-end adjustment payment to Northwest in an amount equal to half of the
excess. In addition, should our actual operating margin exceed the targeted
operating margin by more than five percentage points, we will pay Northwest all
of the excess above five percent. If necessary, we will record an amount each
quarter to reflect our right to receive or our obligation to pay this operating
margin adjustment payment and any net payment will be made annually. For the
years ended December 31, 2002 and 2003, no margin adjustments were required
pursuant to the terms of the ASA.
5
Item 1. Business
Our Airlines Services Agreement (continued)
The ASA and the other agreements we have entered into with Northwest to
provide us with various ongoing services were made in the context of our being a
subsidiary of Northwest and were negotiated in the overall context of the
initial contribution of shares to the Northwest Airlines Pension Plans. As a
result of Northwest's control of us when these agreements were negotiated, the
prices and other terms under these agreements may be different from the terms we
might have obtained in arm's-length negotiations with unaffiliated third parties
for similar services. Some of these terms may be more favorable to us than those
we would have been able to obtain otherwise. When we need to replace these
agreements, we will be negotiating with Northwest or third parties on an
arm's-length basis, and we may not be able to do so on as favorable terms.
These agreements generally contain cross-termination provisions such that
termination of the ASA will trigger a termination under the relevant agreement.
In addition, these agreements generally provide that they will terminate upon a
change of control of our company or our affiliates. Other Agreements with
Northwest in the notes to our consolidated financial statements, in Item 8 of
this Form 10-K includes a summary of the terms contained in our other agreements
with Northwest.
Scope of Agreement
The ASA covers all of our existing fleet, as well as the 53 additional
regional jets scheduled to become part of our fleet by December 31, 2005. We are
scheduled to receive 38 CRJs in 2004 and 15 CRJs in 2005. Northwest is entitled
to change the timing of the deliveries of the remaining 53 aircraft by either
delaying or accelerating the delivery of any aircraft but has agreed to deliver
a total of 129 CRJs by December 31, 2005, subject to Northwest receiving the
aircraft from Bombardier, the manufacturer of the CRJ, by that time. In addition
to those 53 regional jets, at its option Northwest may also add up to 175
additional regional jets to our fleet to be operated by us under the terms of
the ASA. However, once we have more than 129 regional jets, Northwest also has
the right to reduce the number of regional jets to as few as 129, or fewer in
the event of a strike. Northwest is also responsible for scheduling all aircraft
covered by the ASA.
Code-Sharing and Marketing
Our ASA with Northwest requires us to use its two-letter flight designator
code (NW) to identify our flights in the computerized reservation systems, to
paint our aircraft with its colors and/or logos and to market and advertise our
status as being a part of the Northwest route system. The agreement also gives
us a non-exclusive license to fly under the Northwest Airlink name. Under the
ASA, passengers on our aircraft participate in WorldPerks, Northwest's frequent
flyer program. We do not pay fees with respect to these services.
Aircraft Financing
We lease all of our regional jets from Northwest at a fixed monthly rate
under the ASA. We also sublease our spare engines from Northwest. The fixed
monthly rental rates on our regional jets include certain fleet management costs
of Northwest and are not representative of the rates paid by Northwest to
third-party lessors. Under the ASA, our aircraft rental expenses are reimbursed
in full by Northwest.
Northwest has obtained long-term financing commitments from Bombardier for
all of the additional regional jets that it has agreed to provide to us under
the ASA, eliminating the need for us to obtain financing with respect to these
aircraft.
6
Item 1. Business
Our Airlines Services Agreement (continued)
Airport Facilities and Ground Handling
Northwest grants us the right to use facilities that it leases from
authorities at various airports. In addition, at a number of airports where
Northwest operates, we do not maintain our own ground support equipment and
personnel and instead obtain ground handling services from Northwest. These
services include gate access, aircraft loading and unloading and passenger
enplaning and deplaning services. Under the ASA and our facilities agreements
with Northwest, we will be entitled to use Northwest's facilities and obtain
ground handling services to fulfill our obligations under the ASA but not to
service other carriers or operate flights under our own flight designator code
without the approval of Northwest. Northwest will be responsible for all capital
and start-up costs at its hub airports and at any other facilities where it
elects to provide ground handling services to us. We will be responsible for any
capital and start-up costs, excluding jetbridge expenses, associated with any
facilities at other airports at which we perform our own ground handling
functions.
At any airport at which we provide our own ground handling services,
subject to some exceptions, Northwest can require us at any time, including upon
cessation of operating scheduled flights on behalf of Northwest, to use our best
efforts to assign or sublease the ground handling facilities to Northwest or its
designee.
Furthermore, Northwest can require us, at any time, to transfer, subject to
applicable laws, to Northwest or its designee at no charge any of our airport
takeoff or landing slots, route authorities or other regulatory authorizations
used for our scheduled flights under the ASA.
Establishing New Operations
The ASA provides that we cannot use any of our officers, employees,
facilities, equipment or aircraft that are used to provide regional airline
services to Northwest in any new operations without the prior written consent of
Northwest except as follows: (1) our officers may engage in planning and
coordinating such activities, and (2) the following operational and corporate
functions of Pinnacle Airlines, Inc. may also be used to support new operations:
(a) information services personnel, equipment and other infrastructure; (b)
systems operation control management, personnel (excluding dispatchers) and
infrastructure, including but not limited to, facilities and computer systems;
and (c) corporate functions specifically defined as those traditionally
performed by the tax, treasury, internal audit, purchasing, and corporate
education (excluding pilot training performed via simulators) departments. As a
result, in order to provide regional airline services to another airline,
Pinnacle Airlines Corp. would have to establish new operations that would be
largely independent of Pinnacle Airlines, Inc.'s operations and could incur
significant incremental costs in the process. Additionally, Pinnacle Airlines
Corp. or a subsidiary other than Pinnacle Airlines, Inc. may only provide
airline services to other major airlines using aircraft certificated as having
(1) less than 60 seats and (2) a maximum gross takeoff weight of less than
70,000 pounds (or such greater seat or weight limits as may be established under
Northwest's collective bargaining agreement with its pilots).
Further, in the event we provide airline services to other airlines, we
have agreed to negotiate in good faith with Northwest an adjustment to our fixed
cost reimbursements under the ASA to account for resulting efficiencies. During
the term of our ASA, our arrangement with Northwest restricts us and our
affiliates from flying under our or another carrier's flight designator code to
or from Northwest's domestic hub airports without Northwest's prior written
consent. Hub airports are defined as airports to which Northwest, together with
its subsidiaries and Northwest Airlink carriers operating under Northwest's
designator code, operate an average of more than 50 departures per day during
any Northwest schedule period.
7
Item 1. Business
Our Airlines Services Agreement (continued)
Northwest's Ability to Use Other Regional Airlines
The ASA does not prohibit Northwest from competing, or from entering into
agreements with other airlines that would compete with routes we serve. Because
our license from Northwest to use the Northwest Airlink name and other
trademarks is non-exclusive, Northwest is not prohibited from permitting any
other regional airline to operate under the Northwest Airlink name, as Mesaba
Airlines does currently.
Labor Disruption
If, as a result of a strike affecting our employees, we do not operate more
than 50% of our aircraft for more than seven consecutive days or we do not
operate more than 25% of our aircraft for more than 21 consecutive days, other
than as a result of (1) an Federal Aviation Administration ("FAA") order
grounding all commercial flights or all air carriers or grounding a specific
aircraft type of all carriers, (2) a scheduling action by Northwest or (3)
Northwest's inability to perform its obligations under the ASA as a result of a
strike by Northwest employees, the ASA provides that Northwest will have the
right to: o terminate the ASA, which would immediately terminate the leases and
subleases for all of our CRJs; and o prior to electing to terminate the ASA,
immediately terminate the subleases for 79 of our CRJs, and if the strike
continues for more than 45 days, terminate the subleases for all but 50 of our
CRJs.
Term and Termination of Agreement; Remedies for Breach
The initial term of the agreement expires on December 31, 2017, subject to
renewal automatically for successive five-year renewal periods, unless Northwest
gives us at least two years' advance notice of non-renewal prior to the end of
any term. Northwest may terminate the agreement at any time for cause, which is
defined as:
- our failure to make any payment under any aircraft lease or sublease;
- an event of default by us of any term of any aircraft lease or sublease;
- an event of default under any of our other agreements with Northwest;
- our failure to make payments under our promissory note to Northwest;
- our failure to maintain required insurance coverages;
- our failure to comply with Northwest's inspection requirements;
- our failure to operate more than 50% of our aircraft for more than seven
consecutive days or our failure to operate more than 25% of our aircraft
for more than 21 consecutive days, other than as a result of:
1) an FAA order grounding all commercial flights or all air carriers or
grounding a specific aircraft type of all carriers,
2) a scheduling action by Northwest or
3) Northwest's inability to perform its obligations under the airline
services agreement as a result of a strike by Northwest employees;
- suspension or revocation of our authority to operate as an airline by the
FAA or DOT;
- a change of control of our company or our affiliates,
- operation by Pinnacle Airlines, Inc. or an affiliate of (1) an aircraft
type which causes Northwest to violate its collective bargaining agreement
with its pilots or (2) an aircraft certificated as having (A) 60 or more
seats or (B) a maximum gross takeoff weight of 70,000 pounds or more (or
such greater seat or weight limits as may be established under Northwest's
collective bargaining agreement with its pilots); and
- any replacement of the chief executive officer of either Pinnacle Airlines
Corp. or Pinnacle Airlines, Inc. that is not approved by Northwest.
8
Item 1. Business
Our Airlines Services Agreement (continued)
Term and Termination of Agreement; Remedies for Breach (continued)
Northwest may also terminate the agreement at any time upon our bankruptcy
or for any breach of the agreement by us that continues uncured for more than 30
days after we receive notice of the breach; provided that in the case of a
non-monetary default, Northwest may not terminate the agreement if the default
would take more than 30 days to cure and we are diligently attempting to cure
the default. In addition, Northwest and we are both entitled to seek an
injunction and specific performance for a breach of the agreement.
Treatment of Assets upon Termination
If Northwest terminates the ASA for cause, it will have the right to
terminate our leases or subleases for aircraft covered by the agreement at the
time of termination and to take possession of these aircraft. We currently
sublease all of our regional jets from Northwest, and we currently lease all of
our turboprops from third parties. Other Agreements with Northwest in the notes
to our consolidated financial statements in Item 8 of this Form 10-K includes a
summary of the terms of our turboprop lease agreements. If the ASA is terminated
by Northwest for cause, we would lose access to all of our regional jets and, as
a result, our business, operations and ability to generate future revenue would
be materially adversely affected.
In addition, in the case of any other termination of the ASA, Northwest
will have the right to require us (1) to terminate all leases, subleases and
agreements it has with us, (2) to assign, or use our best efforts to assign to
it, subject to some exceptions, any leases with third parties for facilities at
airports to which we fly scheduled flights on its behalf and (3) to sell or
assign to it facilities and inventory then owned or leased by us in connection
with the services we provide to Northwest for an amount equal to the lesser of
fair market value or depreciated book value of those assets.
Indemnification
In general, we have agreed to indemnify Northwest and Northwest has agreed
to indemnify us for any damages caused by any breaches of our respective
obligations under the agreement or caused by our respective actions or inaction
under the ASA.
Our Employees
As of December 31, 2003, we had approximately 2,250 active employees,
including 650 pilots, 370 flight attendants (of whom 90 are part-time), 680
customer service personnel (of whom 430 are part-time), 350 mechanics and other
maintenance personnel, 60 dispatchers/crew resource personnel and 140 management
and support personnel. The part-time employees work varying amounts of time, but
typically are half-time or less employees. As is customary in the airline
industry, we also use third parties to provide ground-handling personnel in some
stations. Currently, Northwest and Mesaba Airlines provide a majority of these
ground handling services.
Labor costs are a significant component of airline expenses and can
substantially impact our results. We believe we have generally good labor
relations and high labor productivity. Approximately 76% of our employees are
represented by unions.
9
Item 1. Business
Our Employees (continued)
The following table reflects our principal collective bargaining agreements
and their respective amendable dates as of December 31, 2003:
Employee Group Number of Employees Representing Union Contract Amendable Date
------------------ ---------------------- -------------------------------------- ---------------------------
Pilots 650 Air Line Pilots Association 4/30/2005
Flight Attendants 370 Paper, Allied-Industrial,Chemical and 7/31/2006
and Energy Workers International Union
Customer Service 680 Paper, Allied-Industrial, Chemical and Initial Contract is
Energy Workers International Union Currently in Negotiation
Maintenance of Aircraft
Using a combination of FAA-certified maintenance vendors and our own
personnel and facilities, we maintain our aircraft on a scheduled and
"as-needed" basis. We perform preventive maintenance and inspect our engines and
airframes in accordance with our FAA-approved preventive maintenance policies
and procedures.
The maintenance performed on our aircraft can be divided into three general
categories: line maintenance, heavy maintenance checks, and engine and component
overhaul and repair. Line maintenance consists of routine daily and weekly
scheduled maintenance checks on our aircraft, including pre-flight, daily,
weekly and overnight checks and any diagnostic and routine repairs. Our
technicians and third-party vendors perform all of our line maintenance on the
CRJs.
We contract with an affiliate of Bombardier, the CRJ manufacturer, to
perform certain routine maintenance checks on the CRJs for us. These maintenance
checks are regularly performed on a scheduled basis that is approved by the
manufacturer and the FAA.
Component overhaul and repair involves sending parts, such as engines,
landing gear and avionics to a third-party, FAA-approved maintenance facility
for repair or overhaul. We have a time and materials contract with General
Electric on our CRJ engines. We are also party to maintenance agreements with
various other vendors covering avionics, auxiliary power units and brakes.
The average age of the regional jets in our fleet is approximately 1.7
years. As we continue to receive new CRJs from Northwest pursuant to the ASA, we
will continue to have a young fleet. In general, the CRJ aircraft do not require
their first heavy maintenance checks until they have flown approximately 8,000
hours. Our first scheduled heavy airframe structural inspection was September
2003. Since Northwest is required to reimburse us for and pay a margin on these
maintenance expenses for our CRJs under the ASA, we expect that the profit we
derive from maintenance will be minimal while our fleet is young and will grow
as the aircraft age.
Training
We perform the vast majority of training of our flight personnel in our
Corporate Education Center in Memphis, Tennessee and the Memphis, Tennessee
simulator center operated by FlightSafety International. FlightSafety
International provides some overflow training at various other simulator centers
throughout the U.S. at our request. The Memphis simulator center currently
includes two CRJ full-motion simulators. Under our agreement with FlightSafety
International with regard to the Memphis simulator center, we have first call on
all of the simulator time available in the Memphis center. We expect that
essentially our entire simulator needs will be met by the Memphis center
throughout the delivery stream of the committed aircraft. Instructors used in
the Memphis center are typically either professional instructors or trained line
pilot instructors.
10
Item 1. Business
Training (continued)
We provide in-house and outside training for our maintenance personnel and
take advantage of manufacturers' training programs offered, particularly when
acquiring new aircraft.
Professional instructors conduct training of mechanics, flight attendants
and customer service personnel in the Corporate Education Center.
Safety and Security
We have taken numerous measures, as required by regulatory authorities, to
increase both the safety and security of our operations in the wake of the
terrorist attacks of September 11, 2001.
For example, we have implemented various security enhancements,
including:
-implementation of a system-wide positive bag match program;
-reinforcement of all cockpit doors; and
-implementation of strict in-flight cockpit access procedures,
including the removal of all cockpit access keys from within the main
cabin.
Insurance
We currently maintain insurance policies for: aviation liability, which
covers public liability, passenger liability, hangar keepers' liability, baggage
and cargo liability and property damage; war risk, which covers losses arising
from acts of war, terrorism or confiscation; hull insurance, which covers loss
or damage to our flight equipment; and workers' compensation insurance. The ASA
requires that we maintain specified levels of these types of policies.
Our aviation liability, war risk and hull insurance coverage is obtained
through a combined placement with Northwest. Under the ASA, our cost of aviation
liability, war risk and hull insurance will be capped at the lower of actual
cost and amounts based on the value of our fleet and the number of revenue
passengers we carry. Northwest will reimburse us and pay us a margin on these
costs. As a result, our operating margin would not be adversely affected if our
insurance costs for these items increased.
We were given the option under the Air Transportation Safety and
Stabilization Act, signed into law on September 22, 2001, to purchase certain
third-party war risk liability insurance from the U.S. government on an interim
basis at rates that are more favorable than those available from the private
market. We have purchased this insurance from the FAA as provided under the Act.
Regulations
We operate under an air carrier certificate issued by the FAA and under
commuter air carrier authorization issued by the Department of Transportation
("DOT"). This authorization may be altered, amended, modified or suspended by
the DOT if it determines that we are no longer fit to continue operations. The
FAA may suspend our revoke our air carrier certificate if we fail to comply with
the terms and conditions of our certificate. The DOT has established regulations
affecting the operations and service of the airlines in many areas, including
consumer protection, non-discrimination against disabled passengers, minimum
insurance levels and others. Failure to comply with FAA or DOT regulations can
result in civil penalties, revocation of our right to operate or criminal
sanctions. In addition, we operate in certain Essential Air Service markets, and
our ability to terminate service in those markets is subject to review and
approval of the DOT. FAA regulations are primarily in the areas of flight
operations, maintenance, ground facilities, security, transportation of
hazardous materials and other technical matters. The FAA requires each airline
to obtain an operating certificate authorizing the airline to operate at
specific airports using specified equipment. Under FAA regulations, we have
established, and the FAA has approved, a maintenance program for each type of
aircraft operated by us that provides for the ongoing maintenance of these
aircraft, ranging from frequent routine inspections to major overhauls.
11
Item 1. Business
Regulations (continued)
The Transportation Security Administration ("TSA") now regulates civil
aviation security under the Aviation and Transportation Security Act. Since the
events of September 11, 2001, Congress has mandated and the TSA has implemented
numerous security procedures that have imposed and will continue to impose
additional compliance responsibilities and costs on airlines. The DOT allows
local airport authorities to implement procedures designed to abate special
noise problems, provided such procedures do not unreasonably interfere with
interstate or foreign commerce or the national transportation system. Certain
airports, including the major airports at Boston, Washington, D.C., Chicago, Los
Angeles, San Diego, Orange County (California) and San Francisco, have
established airport restrictions to limit noise, including restrictions on
aircraft types to be used and limits on the number of hourly or daily operations
or the time of such operations. In some instances, these restrictions have
caused curtailments in services or increases in operating costs, and such
restrictions could limit our ability to commence or expand our operations at
affected airports. Local authorities at other airports are considering adopting
similar noise regulations.
Markets and Routes
As of December 31, 2003, we operated 76 CRJs serving 81 cities in 29 states
and two Canadian provinces out of Northwest's three hubs and our route network
spanned the entire eastern half of the United States. We fly as far west as
Bismarck, North Dakota, as far east as Bangor, Maine, as far north as Winnipeg,
Manitoba and as far south as San Antonio, Texas.
12
Item 1. Business
Risk Factors Affecting Our Business
Risks Relating to our Airline Services Agreement ("ASA") with Northwest
If our ASA with Northwest is terminated, we could lose our only significant
source of revenue and earnings, our regional jet fleet, access to our airport
facilities, and the services Northwest provides to us.
We generate substantially all of our revenues under our ASA with Northwest.
As a result, if the agreement is terminated, we will have no significant source
of revenue or earnings unless we are able to enter into satisfactory substitute
arrangements. The current term of the agreement expires on December 31, 2017. A
further discussion of our ASA is included in "Business--Our Airline Services
Agreement."
If Northwest terminates the ASA for cause, it will have the right to
terminate our leases and subleases with it for the regional jet aircraft covered
by the agreement and take immediate possession of these aircraft. We currently
sublease all of our regional jets from Northwest. We would also likely lose
access to all of the airport facilities (including maintenance facilities) and
services provided by Northwest that we are dependent on, such as aircraft
dispatch and ground handling services.
Reduced utilization levels of our aircraft under the ASA would reduce our
revenues and earnings.
Under the ASA, a portion of our revenues from Northwest is derived from our
actual flights. A portion of the compensation that we receive from Northwest is
based on block hours, cycles and reimbursable expenses that we incur only when
we fly. As a result, if Northwest reduces the utilization of our fleet, our
revenues and profits would decrease. Northwest is solely responsible for
scheduling our flights, but the ASA does not require Northwest to meet any
minimum utilization levels for our aircraft.
Our ASA may cause us to earn lower operating margins than we have targeted,
or to experience losses, if some of our future costs are higher than expected
and may limit our ability to benefit from improved market conditions or
increased operational efficiency. In addition, our target operating margin under
the ASA could be reduced beginning in 2008, and our operating margin will not be
subject to any guaranteed floor.
The payments we will receive from Northwest under our ASA based on pre-set
rates for block hours, cycles and fixed costs are not based on the actual
expenses we will incur in our operations. However, the rates on which these
payments are based were determined in a manner intended to cover all of our
expenses in respect of the ASA that are not directly reimbursed by Northwest.
The ASA also provides that we will earn an operating margin ranging from a floor
of 9% to a ceiling of 11%, with a target operating margin of 10%, for 2004 and
2005 and an operating margin ranging from a floor of 8% to a ceiling of 12%,
with a target operating margin of 10%, for 2006 and 2007. Our operating margin
could be less than the target operating margin for those periods if our actual
costs that are intended to be covered by the pre-set rates described above
deviate from the expected costs used in developing those pre-set rates. While
the capacity purchase business model and targeted operating margins reflected in
our ASA with Northwest reduce our financial risk and exposure to fluctuations in
many of our variable costs, they also limit our potential to experience higher
earnings growth from improved market conditions or increased operational
efficiency.
The rates we will receive for our services under the ASA will be reset in
2008 based on our historical and expected operating costs. In addition, the
target operating margin will be reset to a market-based percentage, provided
that it will be no lower than 8% and no higher than 12%. In addition, beginning
in 2008, Northwest will not guarantee us a minimum operating margin. If the
target operating margin is set to achieve less than a 10% target operating
margin, our revenues and earnings will decrease beginning in 2008 unless we
increase the level of regional airline services we provide.
13
Item 1. Business
Risks Relating to our ASA with Northwest (continued)
The ASA and other agreements we entered into with Northwest were not made
on an arm's-length basis and may not be representative of future agreements we
may enter into.
The ASA and the other contractual agreements we have with Northwest to
provide us with various ongoing services were made in the context of our being a
subsidiary of Northwest Airlines Corporation and were negotiated in the overall
context of the contribution of shares to the Northwest Airlines Pension Plans.
As a result of Northwest Airlines Corporation's control of us when these
agreements were negotiated, the prices and other terms under these agreements
may be different from the terms we might have obtained in arm's-length
negotiations with unaffiliated third parties for similar services. Some of these
terms may be more favorable to us than we would have been able to obtain
otherwise. When we need to replace these agreements or add additional aircraft,
we will be negotiating with Northwest or third parties on an arm's-length basis,
and may not be able to replace these agreements or acquire aircraft on as
favorable terms, or at all.
We are dependent on the services that Northwest provides to us.
We currently use Northwest's systems, facilities and services to support a
significant portion of our operations, including our information technology
support, dispatching, fuel purchasing, some ground handling services and some of
our insurance coverage. If Northwest terminates our ASA and no longer provides
these services to us, we may not be able to replace them with services of
comparable quality or on terms and conditions as favorable as those we receive
from Northwest, or at all.
A strike at Northwest could prevent us from operating.
If Northwest experiences a strike that causes it to cease operations, we
could be forced to cease or significantly reduce our operations. Northwest
provides us with a number of services that we need in order to operate, such as
information technology support, dispatching and ground handling. If Northwest
were to cease operations, it may not be able to provide these services to us.
Since our revenues and operating profits are dependent on our level of flight
operations, a strike at Northwest could adversely affect our financial condition
during the strike. Northwest has experienced strikes by its employees in the
past. On August 28, 1998, Northwest ceased its flight operations as a result of
a strike by its pilots represented by the Air Line Pilots Association,
International ("ALPA"). The cessation of flight operations lasted 18 days and we
ceased our own operations during that period. Northwest's current collective
bargaining agreements with its pilots and its employees represented by the
International Association of Machinists and Aerospace Workers ("IAM") became
amendable during 2003. Northwest is currently engaged in negotiations with ALPA
and IAM pursuant to the U.S. Railway Labor Act. Northwest could experience
strikes that require it and us to cease operations again in the future.
Northwest may decide not to grow our fleet beyond 129 CRJs or to use other
regional airlines, which could limit Northwest's utilization of our fleet or
limit our growth.
The ASA does not guarantee the growth of our fleet beyond 129 CRJs.
Northwest is permitted under the ASA to add an additional 175 CRJs to our fleet
on the same economic terms as the first 129 aircraft; however, Northwest may
instead choose to offer to lease or sublease any additional CRJs to us on
economic terms and with financing commitments that are less favorable to us than
those contained in the ASA. In the future, we may also agree to modifications to
the ASA that reduce certain benefits to us in order to obtain additional
aircraft from Northwest. The ASA does not prohibit Northwest from contracting
with other regional airlines to fly any aircraft, including regional jets and
turboprops, in any market. Northwest may decide, rather than leasing or
subleasing any additional CRJ aircraft to us, that it will lease or sublease the
additional aircraft to another regional carrier, such as Mesaba Airlines, which
would have a material adverse effect on our ability to grow.
14
Item 1. Business
Risks Relating to our ASA with Northwest (continued)
There are constraints on our ability to establish new operations to provide
airline services to major airlines other than Northwest.
The ASA provides that we cannot use any of our officers, employees,
facilities, equipment or aircraft that are used to provide regional airline
services to Northwest in any such new operations without the prior written
consent of Northwest with a few exceptions. Pursuant to the terms of the ASA, in
order to provide regional airline services to another airline, Pinnacle Airlines
Corp. would have to establish new operations that would be largely independent
of Pinnacle Airlines, Inc.'s operations and could incur significant incremental
costs in the process. Additionally, Pinnacle Airlines Corp. or a subsidiary
other than Pinnacle Airlines, Inc. may only provide airline services to other
major airlines using aircraft certificated as having (1) less than 60 seats and
(2) a maximum gross takeoff weight of less than 70,000 pounds (or such greater
seat or weight limits as may be established under Northwest's collective
bargaining agreement with its pilots).
Risks Relating to our Industry
Increased competition in the airline industry could reduce Northwest's need
to utilize our services and limit Northwest's desire to expand its relationship
with us.
The airline industry is highly competitive. Northwest competes with other
major carriers as well as low fare airlines on its routes, including the routes
we fly. Some of these airlines are larger and have significantly greater
financial and other resources than Northwest. Competitors could rapidly enter
markets we serve for Northwest and quickly discount fares, which could lessen
the economic benefit of our regional jet operations to Northwest.
Increased competition in the regional jet industry could affect our growth
opportunities.
Aside from the restrictions under our ASA with Northwest, our ability to
provide regional air service to other major U.S. airline networks is limited by
existing relationships that all of the major airlines have with other regional
operators. Additionally, some of the major airlines are subject to scope clause
restrictions under their collective bargaining agreements with employees that
restrict their ability to add new regional jet capacity.
In addition, new competitors may enter the regional jet industry and our
existing competitors may expand their regional jet fleet. Capacity growth by our
competitors in the regional jet market would lead to significantly greater
competition and may result in lower rates of return in our industry. Further,
many of the major airlines are focused on reducing costs, which may also result
in lower operating margins in our industry.
15
Item 1. Business
Risks Relating to our Industry (continued)
We may be affected by factors beyond our control, including weather
conditions, increased security measures and U.S. and world conditions and
events.
Like other airlines, we are subject to delays caused by factors beyond our
control, such as aircraft congestion at airports, adverse weather conditions and
increased security measures. During periods of fog, storms or other adverse
weather conditions or air traffic control problems, flights may be cancelled or
significantly delayed. To the extent that we reduce the number of our flights
for these reasons, our revenues, and hence our profits, will be reduced. We
believe that other material risks and uncertainties that could affect us, and
could affect whether Northwest provides us with additional aircraft or utilizes
our fleet, include the future level of air travel demand, our future load
factors and yields, the airline pricing environment, increased costs for
security, the price and availability of jet fuel, the possibility of additional
terrorist attacks or the fear of such attacks, concerns about communicable
disease outbreaks, labor negotiations both at other carriers and us, capacity
decisions of other carriers, the general economic condition of the U.S. and
other regions of the world, armed conflicts and civil disturbances, foreign
currency exchange rate fluctuations, inflation and other factors.
Many aspects of our operations are subject to increasingly stringent
federal, state and local laws. Future regulatory developments could adversely
affect operations and increase operating costs in the airline industry. Changes
in government regulation imposing additional requirements and restrictions on
our operations could increase our operating costs and result in service delays
and disruptions.
Airlines are subject to extensive regulatory and legal requirements, both
domestically and internationally, that involves significant compliance costs. In
the last several years, Congress has passed laws, and the DOT and FAA have
issued regulations relating to the operation of airlines that have required
significant expenditures. In addition to increased costs, the security measures
required to be implemented under the Aviation Security Act as well as additional
security measures issued by the FAA have resulted in a longer check-in process
for passengers and caused delays and disruptions in airline service, which has
led to customer frustration and reduced demand for air travel.
Additional laws, regulations, taxes and airport rates and charges have been
proposed from time to time that could significantly increase the cost of airline
operations or reduce the demand for air travel. If adopted, these measures could
have the effect of raising ticket prices, reducing revenue and increasing costs,
which could result in Northwest scheduling fewer flights for our company. These
and other laws or regulations enacted in the future may harm our business.
Aviation insurance is a critical safeguard of our financial condition. It
might become difficult to obtain adequate insurance at a reasonable rate in the
future.
We believe that our insurance policies are of types customary in the
industry and in amounts we believe are adequate to protect us against material
loss. It is possible, however, that the amount of insurance we carry will not be
sufficient to protect us from material loss.
Some aviation insurance could become unavailable or available only for
reduced amounts of coverage, which would result in our failing to comply with
the levels of insurance coverage required by the ASA, our other contractual
agreements or applicable government regulations. Additionally, war risk coverage
or other insurance might cease to be available to our vendors or might only be
available for reduced amounts of coverage.
16
Item 1. Business
Risks Relating to Our Company
We may experience difficulty finding, training and retaining employees,
which may interfere with our expansion plans.
Our business is labor-intensive. We require large numbers of pilots, flight
attendants, mechanics and other personnel. We anticipate that our rapid growth,
including the addition of 38 aircraft to our fleet in 2004, will require us to
locate, hire, train and retain a significant number of new employees over the
next several years. If we are unable to hire and retain qualified employees at a
reasonable cost, we may be unable to complete our expansion plans, which could
adversely affect our operating results and our financial condition.
Strikes or labor disputes with our employees may adversely affect our
ability to conduct our business and could result in the termination of the
airline services agreement or in significant reductions in the benefits of the
agreement to us.
If we are unable to reach agreement with any of our unionized work groups
on the terms of their collective bargaining agreements, we may be subject to
work interruptions or stoppages. Work stoppages may adversely affect our ability
to conduct our operations and fulfill our obligations under the ASA. Under the
ASA, adverse consequences could result from a strike or a work stoppage,
including possible termination of the ASA.
Increases in our labor costs, which constitute a substantial portion of our
total operating costs, may directly impact our earnings.
Labor costs constitute a significant percentage of our total operating
costs. Under the terms of our ASA, an increase in our labor costs over standard
industry wages could result in a material reduction in our earnings. Any new
collective bargaining agreements entered into by other regional carriers may
also result in higher industry wages and increased pressure on our company to
increase the wages and benefits of our employees.
We are highly leveraged, which could hurt our ability to meet our strategic
goals.
As of December 31, 2003, we had a stockholders' deficiency of $48.4 million
and our debt accounted for 151.7% of our total capitalization. As of December
31, 2003, we had maturities of our long-term debt of $12 million in each year
from 2004 through 2008, and $72 million in 2009, all of which are attributable
to our note payable to Northwest. Our high degree of leverage could:
- limit our ability to obtain additional financing to support capital
expansion plans and for working capital and other purposes;
- divert substantial cash flow from our operations and expansion plans
in order to service our debt;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
- place us at a possible competitive disadvantage compared to less
leveraged competitors and competitors that have better access to
capital resources.
Our revolving credit facility with Northwest contains covenants that may
limit our operations.
Our $50 million revolving credit facility with Northwest contains a number
of restrictive covenants applicable to us, including limitations on the
incurrence of debt, liens, the making of distributions and other transactions.
Until this facility is eliminated or replaced, the effect of these covenants is
to preclude us from providing airline services to other airlines without
obtaining the consent of Northwest. This facility expires December 31, 2005. If
not replaced at that time, our continuing operations could be adversely
affected.
17
Item 1. Business
Risks Relating to Our Company (continued)
Our quarterly results of operations will fluctuate.
The payments we will receive under the ASA are designed to provide us with
a target operating margin on an annual basis. However, our quarterly operating
margin could differ from the target margin based on a variety of factors,
including the timing of capital expenditures and changes in operating expenses,
such as personnel and maintenance costs over the course of a fiscal year.
Due to these factors, our quarterly operating results and
quarter-to-quarter comparisons of our operating results may not be good
indicators of our annual financial performance. In addition, it is possible that
in any quarter our operating results could be below the expectations of
investors and any published reports or analyses.
We may be unable to obtain all of the aircraft, engines, parts or related
maintenance and support services we require from Bombardier or General Electric,
which could have a material adverse impact on our business.
We are dependent on Bombardier as the sole manufacturer of all of our
regional jets. Any significant disruption or delay in the expected delivery
schedule of our regional jet fleet would affect our overall operations and could
have a material adverse impact on our operating results and our financial
condition. Our operations could also be materially and adversely affected by the
failure or inability of Bombardier to provide sufficient parts or related
maintenance and support services to us on a timely basis or the interruption of
our flight operations as a result of unscheduled or unanticipated maintenance
requirements for our aircraft. In addition, the issuance of FAA directives
restricting or prohibiting the use of Bombardier aircraft types operated by us
would have a material adverse effect on our business and operations.
We are also dependent on General Electric as the manufacturer of engines on
our aircraft. General Electric also provides parts, repair and overhaul services
and other types of support services on our engines. The failure or inability of
General Electric to provide sufficient parts or related support services on a
timely or economically reasonable basis, or the interruption of our flight
operations as a result of unscheduled or unanticipated maintenance requirements
for our aircraft, could materially adversely affect our operations.
Website
Our website address is www.nwairlink.com. All of our filings with the U.S.
Securities and Exchange Commission ("SEC") are available free of charge through
our website on the same day, or as soon as reasonable practicable after we file
them with, or furnish them to, the SEC. Printed copies of our annual Form 10-K
may be obtained by submitting a request at our website. Our website also
contains our Code of Conduct, which contains the code of business conduct and
ethics applicable to all of our directors and employees.
18
Item 2. Properties
Flight Equipment
As shown in the following table, our operating aircraft fleet consisted of
76 regional jets at December 31, 2003.
Aircraft Type Number of Aircraft Standard Seating Configuration
- ------------------------------------ ----------------------- ------------------------------------
Canadair Regional Jet 200 35 50
Canadair Regional Jet 440 41 44
-----------------------
76
=======================
In their standard configurations, CRJ200s are certificated as having 50
seats, while CRJ440s are certificated as having 44 seats. Our CRJ aircraft have
an average age of 1.7 years. The 76 CRJ aircraft are, and the additional 53 CRJs
that Northwest has agreed to provide to us under the terms of the ASA will be,
covered by operating leases expiring upon the termination of our ASA.
Facilities
We have the following significant dedicated facilities:
Location Description Square Footage Lease Expiration Date
-------------------- ----------------------------------- ----------------- -------------------------
Memphis, TN Corporate Headquarters and 34,000 August 2004
Corporate Education Center
Memphis, TN Hangar and Maintenance Facility 41,000 December 2016
Knoxville, TN Hangar and Maintenance Facility 55,000 Termination of the ASA
South Bend, IN Hangar and Maintenance Facility 30,000 Termination of the ASA
Ft. Wayne, IN Hangar and Maintenance Facility 18,000 December 2004
Detroit, MI Parts warehouse 6,000 February 2005
Minneapolis, MN Office space 2,150 December 2004
Also, in connection with the ASA, we entered into facilities use agreements
under which we have the right to use Northwest terminal gates, parking positions
and operations space at the Detroit, Minneapolis/St. Paul and Memphis airports.
These agreements are coterminous with the ASA.
19
Item 3. Legal Proceedings
We are a defendant in various lawsuits arising in the ordinary course of
our business. While the outcome of these lawsuits and proceedings cannot be
predicted with certainty, it is the opinion of our management, based on current
information and legal advice, that the ultimate disposition of these suits will
not have a material adverse effect on our financial position, results of
operations or cash flows.
Environmental Matters
We are subject to regulation under various environmental laws and
regulations, which are administered by numerous state and federal agencies,
including the Clean Air Act, the Clean Water Act and the Comprehensive
Environmental Response, Compensation and Liability Act of 1980. In addition,
many state and local governments have adopted environmental laws and regulations
to which our operations are subject. We are and may from time to time become
involved in environmental matters, including the investigation and/or
remediation of environmental conditions at properties used or previously used by
us. We are not, however, currently subject to any environmental cleanup orders
imposed by regulatory authorities, nor do we have any active investigations or
remediations at this time.
Regulatory Matters
We are subject to regulation under various laws and regulation, which are
administered by numerous state and federal agencies, including the FAA and the
DOT. We are involved in various matters with these agencies during the ordinary
course of our business. While the outcome of these matters cannot be predicted
with certainty, it is the opinion of our management, based on current
information and past experience, that the ultimate disposition of these matters
will not have a material adverse effect on our financial position, results of
operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
None.
20
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock trades on the NASDAQ Exchange. The table below shows the
high and low sales prices for our common stock as reported on the NASDAQ
Exchange beginning November 25, 2003, the date following the pricing date of our
initial public offering on which trading of our common stock on the NASDAQ
Exchange commenced.
High Low
---- ---
Fourth Quarter (beginning November 25, 2003)...... $14.05 $11.08
As of March 1, 2004, there were approximately six holders of record of our
common stock.
We have paid no cash dividends on our common stock and have no current
intention of doing so.
Our Certificate of Incorporation provides that no shares of capital stock
may be voted by or at the direction of persons who are not United States
citizens unless such shares are registered on a separate stock record. Our
Bylaws further provide that no shares will be registered on such separate stock
record if the amount so registered would exceed United States foreign ownership
restrictions. United States law currently limits to 25% the voting power in us
(or any other U.S. airline) of persons who are not citizens of the United
States.
2003 Stock Incentive Plan
We adopted the Pinnacle Airlines Corp. 2003 Stock Incentive Plan (the
"Plan") effective November 21, 2003. The Plan permits the grant of non-qualified
stock options, incentive stock options, stock appreciation rights, restricted
stock and other stock-based awards to employees or directors of Pinnacle
Airlines Corp. or our affiliates. A maximum of 1,152,000 shares of common stock
may be subject to awards under the Plan. The maximum number of shares of common
stock for which options and stock appreciation rights may be granted during a
calendar year to any participant will be 500,000. The number of shares issued or
reserved pursuant to the Plan (or pursuant to outstanding awards) is subject to
adjustment on account of mergers, consolidations, reorganizations, stock splits,
stock dividends and other dilutive changes in the common stock. Shares of common
stock covered by awards that expire, terminate or lapse will again be available
for grant under the Plan.
Number of securities to be Weighted-average Number of securities
issued upon exercise of exercise price of remaining available for future
outstanding options, outstanding options, issuance under equity compensation plans
warrants and rights warrants and rights (excluding securities reflected in column (a))
Plan Category (a) (b) (c)
- ---------------------------- -------------------------- -------------------- ---------------------------------------------
Equity compensation plans
approved by security holders 858,200 $14.00 294,000
Equity compensation plans
not approved by security
holders -- -- --
-------------------------- -------------------- --------------------------------------------
Total 858,200 $14.00 294,000
========================== ==================== ============================================
21
Item 6. Selected Financial Data
You should read this selected condensed consolidated financial data
together with the audited consolidated financial statements and related notes
contained in Item 8, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 and "Risk Factors
Affecting our Business" in Item 1 of this Form 10-K.
Like other air carriers, we disclose information regarding revenue
passengers, revenue passenger miles, available seat miles, passenger load factor
and revenue per available seat mile in "Other Data." While this data is often
used to assess the financial performance of a major carrier, for a regional
carrier such as Pinnacle Airlines, Inc. operating under a capacity purchase
agreement, this data is not directly relevant to our revenues or profitability.
However, it is provided to indicate the size and scope of our operations.
Year ended December 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ----------- ------------ ----------- --------------
Statement of Operations Data (in thousands, except per share data)
Total operating revenues $ 456,770 $ 331,568 $ 202,050 $ 131,923 $ 105,407
Total operating expenses 392,601 283,912 185,077 117,362 98,920
Operating income 64,169 47,656 16,973 14,561 6,487
Non operating income (expense) (6,770) 2,672 6,094 67 (323)
Net income 35,067 30,785 14,246 9,262 3,663
Basic and diluted net income per share $ 1.60 $ 1.41 $ 0.65 $ 0.42 $ 0.17
Shares used in computing basic and diluted net
income per share 21,892 21,892 21,892 21,892 21,892
As of December 31,
--------------------------------------------------------------------
Balance Sheet Data: 2003 2002 2001 2000 1999
------------ ----------- ------------ ----------- --------------
(in thousands)
Cash and cash equivalents $31,523 $4,580 $1,891 $8,232 $10,865
Property and equipment 34,286 26,631 32,785 24,072 10,366
Total assets 127,970 143,284 92,250 64,156 50,731
Lines of credit 10,000 4,245 4,245 - -
Long-term debt, including current maturities 132,000 - - 122 350
Stockholders' equity (deficiency) (48,382) 82,051 55,651 41,405 32,143
22
Item 6. Selected Financial Data
Year ended December 31,
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------- ------------- ------------ ------------ -------------
Other Data:
Revenue passengers (in thousands) 4,540 2,938 2,031 1,378 1,147
Revenue passenger miles (in thousands) (1) 1,797,631 1,091,181 673,395 404,404 318,920
Available seat miles (in thousands) (2) 2,678,000 1,714,151 1,153,620 687,059 535,218
Passenger load factor (3) 67.1% 63.7% 58.4% 58.9% 59.6%
Operating revenue per available seat mile (in cents) 17.06 19.34 17.51 19.20 19.69
Operating costs per available seat mile (in cents) 14.66 16.56 16.04 17.08 18.48
Block hours
CRJs 210,646 124,889 58,584 10,889 -
Turboprops (4) - 26,509 66,145 87,913 85,109
Cycles
CRJs 146,898 85,478 41,238 8,321 -
Turboprops (4) - 20,262 47,570 66,881 68,106
Average daily utilization (block hours)
CRJs 8.83 8.47 8.22 9.31 -
Turboprops (4) - 4.81 7.54 8.29 7.52
Average length of aircraft flight (miles) 384 353 318 262 238
Number of operating aircraft (end of period)
CRJs 76 51 30 9 -
Turboprops (4) - - 24 28 31
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Revenue passenger miles represents the number of miles flown by revenue passengers.
(2) Available seat miles represents the number of seats available for passengers multiplied by the
number of miles the seats are flown.
(3) Passenger load factor equals revenue passenger miles divided by available seat miles.
(4) As of December 31, 2002 all Saab turboprop aircraft were removed from our operating fleet.
23
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Where we are . . .
We provide Northwest with regional airline capacity as a Northwest Airlink
carrier at its domestic hub airports in Detroit, Minneapolis/St. Paul and
Memphis. We operate a jet fleet of 76 Canadair Regional Jet ("CRJ") aircraft and
offer scheduled passenger service with approximately 490 daily departures to 81
cities in 29 states and two Canadian provinces. For the year ended December 31,
2003, we reported annual net income of $35.1 million, or $1.60 a share. Net
income increased $4.3 million, or 13.9%, over 2002 net income of $30.8 million,
or $1.41 a share. Annual operating revenue in 2003 reached $456.8 million, up
37.8% from the prior year, yielding operating income of $64.2 million, up 34.7%
from the prior year. In 2003, our available seat miles flown increased 56.2%
over 2002. We operate in one business segment consisting of scheduled airline
passenger service
We operate for Northwest according to the terms of an airline services
agreement ("ASA"), which we entered into effective March 1, 2002. Our passenger
revenue consists of (i) reimbursement payments for certain operating expenses
incurred in providing regional airline capacity to Northwest and (ii) payments
based on pre-set rates for fixed costs, completed block hours and completed
cycles. We also receive margin payments on these items intended to achieve a
target operating margin. The term "block hours" refers to the elapsed time
between an aircraft leaving a gate and arriving at a gate, and the term "cycles"
refers to an aircraft's take-off and landing. A more detailed discussion of our
ASA can be found in this Form 10-K under Item 1 "Business--Airline Services
Agreement."
The following is a list of certain significant developments in our business
during 2003. Item 8, "Consolidated Financial Statements" and "Notes to
Consolidated Financial Statements" contain a more detailed discussion of these
and other events during 2003.
- Airline Services Agreement ("ASA") with Northwest: We completed our
first full year of operations under the ASA. We entered into certain
amendments in 2003 that, among other things, extended the term of the
agreement through December 31, 2017, eliminated incentive payments
based on certain performance criteria, lowered our target operating
margin from 14% to 10% effective December 1, 2003, and provided for an
increase in the size of our fleet to 129 regional jets by December 31,
2005.
- Change in our Fleet of Aircraft: Our fleet of aircraft consisted solely
of CRJs. We added 25 CRJs to our fleet during 2003, which represents an
increase of 49%. We are currently scheduled to receive 38 CRJs in 2004
and 15 CRJs in 2005, representing increases of 50% and 13%,
respectively, in the size of our fleet.
- Settlement of accounts with Northwest: We received a cash payment of
$15.4 million and issued a dividend of $15.5 million to Northwest in
settlement of all trade balances payable to, or due from, Northwest as
of December 31, 2002.
- Note Payable to Northwest and Line of Credit: We issued a $200.0
million note payable to Northwest as a dividend and we obtained a $50.0
million revolving credit facility ("Revolver") from Northwest.
- Initial public offering and change in ownership: Northwest ceased to be
our majority owner as they transferred 19,400,000 shares, or 89% of our
outstanding common stock, to the Northwest Airlines Pension Plans. On
November 25, 2003, we completed our initial public offering (the
"Offering") and the Northwest Airlines Pensions Plans sold their shares
of our common stock. We did not receive any of the proceeds from the
Offering.
24
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Where we are . . (continued).
Northwest Capital Contribution: In connection with the Offering, we
received a capital contribution of $50.0 million from Northwest, which we used
to reduce the outstanding principal balance on our note payable to Northwest.
Where we're going . . .
Operating a fleet of all-regional jet aircraft with strong operational
performance and cost efficiency is crucial to our growth. Northwest has
indicated its commitment to regional jets as part of its core strategy by
placing firm orders on 129 CRJs, all of which have been committed to us, and
acquiring options for an additional 175 CRJs. We believe that continued strong
operational performance and cost efficiency are necessary for us to be well
positioned to compete for the additional 175 CRJ aircraft that Northwest has on
option, which have not yet been exercised or committed to any regional airline.
Another element of our growth strategy is to seek opportunities to provide
regional airline service to other major carriers. Subject to certain
restrictions, our ASA allows us to establish separate operations to provide
airline services to other major carriers. We intend to actively pursue
opportunities with other major airlines that are interested in entering into a
business relationship with a high quality, cost-efficient regional airline
partner.
We are committed to communication, personal development and respect for all
of our People. We intend to continue to work with our People to achieve high
levels of operating performance and customer service at the lowest possible cost
consistent with achieving our service objectives. Our Corporate Education Center
will be instrumental in training and developing our People to meet these
objectives.
We currently are the only operator of 44-seat and 50-seat CRJs as a
code-share partner of Northwest. Mesaba Airlines, in which Northwest owns a 28%
equity interest, also operates as a regional code-share partner of Northwest,
operating out of the same three hub airports from which we operate. Mesaba
Airlines operates Saab 340 turboprop aircraft and 69-seat AVRO regional jets.
Additionally, Northwest code-shares with other regional airlines in other
regions of the United States, operating various types of aircraft. We have no
assurance that Northwest will not expand those relationships in competition with
us, or that Northwest will not establish relationships with other regional
carriers, including awarding them future deliveries of the 175 CRJs on which it
has option.
25
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Basis of Presentation
The historical financial information does not reflect what our financial
position, results of operations and cash flows would have been had we been a
stand-alone entity during the periods presented. During the time that it was our
majority owner, Northwest operated us as a business unit of Northwest without
regard to our stand-alone profitability. Our operations were designed to
increase overall Northwest system revenues rather than to maximize our
stand-alone profitability. Under our previous capacity purchase arrangements
Northwest retained the ability to adjust the revenues and margins we would
receive under those arrangements. In contrast to the prior arrangements, the ASA
establishes the compensation structure for our services throughout the term of
the agreement in a manner designed to better align our revenues and earnings
with our underlying cost drivers, such as block hours and cycles.
Our statements of operations for the years ending December 31, 2003, 2002
and 2001 can be compared as follows:
Increase/ Increase/
(Decrease) (Decrease)
2003 2002-2003 2002 2001-2002 2001
----------- ------------ ------------ ------------ -----------
Operating revenues:
Passenger $ 450,611 $ 325,386 $ 198,271
Other 6,159 6,182 3,779
----------- ------------ -----------
Total operating revenues 456,770 37.8% 331,568 64.1% 202,050
Operating expenses:
Salaries, wages and benefits 83,316 20.6% 69,086 21.4% 56,915
Aircraft fuel and taxes 55,007 62.1% 33,932 50.2% 22,588
Aircraft maintenance, materials and repairs 14,116 6.3% 13,276 (35.7%) 20,661
Aircraft rentals 136,273 56.6% 87,016 114.2% 40,628
Other rentals and landing fees 29,255 28.2% 22,818 166.9% 8,548
Ground handling services 44,622 90.5% 23,422 336.0% 5,372
Depreciation and amortization 2,912 (52.6%) 6,141 36.3% 4,505
Government reimbursements (1,114) - - - -
Other 28,214 0.0% 28,221 9.1% 25,860
----------- ------------ -----------
Total operating expenses 392,601 38.3% 283,912 53.4% 185,077
----------- ------------ -----------
Operating income 64,169 34.7% 47,656 180.8% 16,973
Nonoperating income (expense) (6,770) (353.4%) 2,672 (56.2%) 6,094
----------- ------------ -----------
Income before income taxes 57,399 14.0% 50,328 118.2% 23,067
Income tax expense 22,332 14.3% 19,543 121.6% 8,821
----------- ------------ -----------
Net income $ 35,067 13.9% $ 30,785 116.1% $ 14,246
=========== ============ ===========
26
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Revenues
In our historical statements of income, passenger revenues have been
derived from our capacity purchase arrangements with Northwest and since March
1, 2002 have been derived under our ASA. Other revenues have primarily consisted
of ground handling services that we provide to Northwest and Mesaba Airlines at
some airports and cargo fees, which were eliminated when we entered the ASA.
Ground handling revenues accounted for less than 2% of our total revenues. We
will continue to account for our ground handling services in other revenues.
The number of aircraft we operate will continue to have the largest effect
on the growth in our passenger revenue. A significant portion of the payments we
receive from Northwest are based on the actual operation of our aircraft.
Northwest is solely responsible for scheduling flights, and the ASA does not
require Northwest to meet any minimum utilization levels for our aircraft. As
noted in the discussion of our ASA, we receive reimbursement of certain
operating expenses necessary to provide regional airline capacity to Northwest
and payments based on pre-set rates for fixed costs, completed block hours and
completed cycles. We also receive margin payments on these items which are
intended to achieve a target operating margin. Our operating results are not
affected by any seasonality trends historically associated with the airline
industry.
The following is a summary of our passenger revenue by type, which includes
margin, for the year ending December 31, 2003, which was our first full year of
operations under an ASA (in thousands):
Reimbursement payments $ 296,257
Payments based on pre-set rates 154,354
-----------
Total passenger revenue $ 450,611
===========
The following summarizes our 2003 passenger revenue associated with the
reimbursement of operating expenses incurred under the ASA:
Year Ending December 31, 2003
-----------------------------------------------
Reimbursed Unreimbursed Total
--------------- --------------- ---------------
(in thousands)
Operating expenses:
Salaries, wages and benefits $ - $ 83,316 $ 83,316
Aircraft fuel and taxes 54,731 276 55,007
Aircraft maintenance, materials and repairs 6,548 7,568 14,116
Aircraft rentals 136,273 - 136,273
Other rentals and landing fees 16,512 12,743 29,255
Ground handling services 33,223 11,399 44,622
Depreciation and amortization - 2,912 2,912
Government reimbursements (1,000) (114) (1,114)
Other 9,600 18,614 28,214
--------------- --------------- ---------------
$ 255,887 $ 136,714 $ 392,601
=============== ===============
Margin on expense reimbursements 40,370
---------------
Passenger revenue from expense reimbursements $ 296,257
===============
27
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Operating Expenses
Our operating expenses include costs relating to wages, salaries and
benefits, aircraft rent and maintenance, fuel, hub facility and other rentals,
ground handling services, passenger liability, war risk and hull insurance. Our
operating expenses are as set forth above.
Salaries, wages and benefits. This expense includes employee salaries,
wages and benefits, as well as employee incentives and payroll taxes. These
expenses will fluctuate, based primarily on our level of operations and changes
in wage rates for contract and non-contract employees. Under the ASA, employee
bonuses and incentives exceeding levels specified in the ASA and employee
salaries exceeding standard industry wages will be excluded when determining
whether our annual operating margin is below the applicable floor or above the
applicable ceiling.
Aircraft fuel and taxes. This expense includes the cost of aircraft fuel,
associated fuel taxes and into-plane fees. Under the ASA, our passenger fuel
expense will be the lower of the actual cost or $0.78 per gallon and will be
reimbursed in full by Northwest; any excess over $0.78 is borne by Northwest and
does not yield a margin to us.
Aircraft maintenance, materials and repairs. Maintenance-related expenses
include all facilities, parts, materials, tooling and spares and use of
auxiliary power required to maintain our aircraft. Third-party engine and
airframe heavy maintenance provided by General Electric and Bombardier for our
CRJ aircraft will be reimbursed in full by Northwest under the ASA. The average
age of our CRJ aircraft is 1.7 years and will continue to be low as we take
delivery of additional new aircraft. We expect that many parts and maintenance
requirements associated with the CRJs will be covered under the manufacturers'
warranties during the first few years of operation and, therefore, our total
maintenance costs will be relatively low. Our maintenance costs will increase as
our fleet ages and these warranties expire.
Other rentals and landing fees. This expense is comprised of landing fees
paid to airport authorities, as well as rental fees paid for airport and
maintenance facilities.
Aircraft rentals. All of our CRJ aircraft are operated under long-term
leases with Northwest. Our Saab aircraft, which were removed from our operating
fleet as of December 31, 2002, were leased from third parties. Under the ASA, we
will lease or sublease all of our future deliveries of aircraft from Northwest.
Our lease payments associated with CRJ aircraft deliveries are fixed. The
monthly rental rates on our CRJs include certain fleet management costs of
Northwest and are not representative of the rates paid by Northwest to
third-party lessors. Northwest reimburses our aircraft rental expense in full
pursuant to the terms of our ASA.
Ground handling services. This expense includes ground handling fees and
deicing services provided at certain airports. Northwest has agreed to provide
ground handling services to us at a fixed price at some non-hub airports where
Northwest has station operations. Certain of these costs are included in the
block hour and cycle rates that we will receive from Northwest.
Other. This expense primarily includes insurance costs and recruitment,
property taxes and training expenses. Under the ASA, our cost of aviation
liability, war risk and hull insurance and property taxes will be reimbursed by
Northwest.
28
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain Statistical Information
Information with respect to our operating expenses per available seat mile
is as follows:
Year ended December 31,
-----------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ----------- ----------
Operating expenses per available seat mile (in cents):
Salaries, wages and benefits 3.11 4.03 4.93 5.67 5.75
Aircraft fuel and taxes 2.05 1.98 1.96 1.83 1.79
Aircraft maintenance, materials and repairs 0.53 0.77 1.79 2.68 3.66
Aircraft rentals 5.09 5.08 3.52 3.19 3.45
Other rentals and landing fees 1.09 1.33 0.74 0.82 0.95
Ground handling services 1.67 1.37 0.47 0.16 0.14
Depreciation and amortization 0.11 0.36 0.39 0.48 0.56
Government reimbursement (0.04) - - - -
Other 1.05 1.64 2.24 2.25 2.19
---------- ---------- ---------- ----------- ----------
Total Operating Expenses 14.66 16.56 16.04 17.08 18.49
========== ========== ========== =========== ==========
Under the Airline Stabilization Act that was enacted following the events
of September 11, 2001, we received a total of $5.6 million in compensation
payments, which is included in non-operating income (expense) in our 2001
statement of income.
During 2002, the Department of Transportation enacted legislation requiring
the strengthening of cockpit doors. We have modified our cockpit doors as
required by this legislation, and, in December 2002, we received a reimbursement
payment of $0.7 million for costs incurred complying with this legislation. In
September 2003, we received an additional payment of $0.5 million. These
reimbursements offset substantially all of our direct costs associated with the
modifications required by this legislation.
29
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
2003 Compared to 2002
An increase in operating revenue of $125.2 million was primarily caused by
the addition of 25 CRJ aircraft and provisions of our ASA with Northwest, which
became effective March 2002 and was in place for all of 2003. This increase was
partially offset by the decrease in revenue from the removal of Saab aircraft
from our fleet. CRJ block hours and cycles increased by 68.7% and 71.9%,
respectively, which accounted for increased revenue of $12.8 million and $10.4
million, respectively. As previously noted, our ASA was amended at the time of
our public offering to reduce our target operating margin from 14% to 10%
effective December 1, 2003. This reduction in target margin lowered our 2003
passenger revenue and operating income by $2.0 million.
Revenue associated with expense reimbursements increased by 61.4%, which
accounted for increased revenue of $112.7 million. The margin associated with
block hours, cycles, and expense reimbursements accounted for the remaining
increase in operating revenue in 2003, which was partially offset by the
elimination of performance incentives in 2003. Performance incentives accounted
for approximately $3.5 million of passenger revenue during 2002. Passenger
revenue per CRJ block hour for the years ending December 31, 2003 and 2002 were
$2,139 and $2,286 respectively, which represents a decrease of approximately
6.4%.
Operating Expenses. The increase in operating expenses during 2003 was
primarily due to the increase in the size of our aircraft fleet. Operating
expenses for the year ended December 31, 2003 included significant increases
related to the growth of our fleet, including higher wages and benefits, ground
handling services, hub fees, fuel costs, landing fees and aircraft rentals. The
increase in operating expenses was partially offset by a decrease in expense for
aircraft maintenance, depreciation and the refund of previously paid passenger
screening costs. The increases in wages and benefits, ground handling, fuel
costs, landing fees and aircraft rentals were primarily due to the increase in
our CRJ fleet, while hub facility fees increased pursuant to the terms of the
ASA. Operating expense per available seat mile decreased by 11.5% or 1.91 cents
per mile. This decrease is due primarily to the removal of Saab aircraft from
our fleet, which have fewer seats than the CRJ aircraft..
Salaries, wages and benefits increased primarily due to the increase in the
number of CRJ pilots, flight attendants and mechanics and wage rate and benefit
increases. The number of pilots, flight attendants and mechanics increased by
11%, 42% and 11%, respectively.
Aircraft fuel and tax expense increased primarily due to increased block
hours and the higher burn rate associated with jet equipment.
Aircraft maintenance, materials and repairs increased primarily due to the
increase in the size of our fleet and reflects the fact that our CRJs are still
covered by the manufacturers' warranties.
Aircraft rental expense increased primarily due to 25 additional leased CRJ
aircraft and higher CRJ rental rates under the ASAs. The increase in aircraft
rental expense was partially offset by the decrease in rent associated with our
leased Saab aircraft, which were removed from our fleet prior to 2003.
Other rentals and landing fees increased primarily due to capacity
increases and increased hub facility fees as provided by the terms of our ASA.
Ground handling services increased primarily due to increased flying
associated with the growth of the CRJ fleet.
30
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations (continued)
2003 Compared to 2002 (continued)
Depreciation and amortization expense decreased primarily due to increased
depreciation of approximately $2.4 million during 2002 on our flight equipment
to coincide with the removal of the Saab aircraft from our fleet. The decrease
was partially offset by the increased depreciation on aircraft spares, tools and
equipment for the CRJ aircraft.
Other expenses decreased primarily due to an increase in property taxes of
$1.1 million, which was more than offset by a decrease in other expenses,
primarily passenger liability insurance.
2002 Compared to 2001
An increase in operating revenue of $129.5 million was primarily caused by
the addition of 21 CRJ aircraft and entering the ASA with Northwest, offset by
the reduction of 24 Saab aircraft from our operating fleet.
Operating Revenues. Operating revenue increased primarily due to the
increased flying of CRJs and entering the ASA with Northwest in March 2002. The
increase in operating revenue during 2002 was partially offset by the decrease
in revenue from the transition of the Saab aircraft out of our active fleet. CRJ
block hours and cycles increased by 113.2% and 107.3%, respectively, which
accounted for increased revenue of $8.5 million and $9.0 million, respectively.
The remaining revenue increase is primarily due to revenue associated with
expense reimbursements and margin of $124.1 million and $33.0 million,
respectively. CRJ passenger revenue per CRJ block hour increased from $1,904 to
$2,286, or 20.1%, while our Saab passenger revenue per Saab block hour increased
from $1,310 to $1,503, or 14.7%.
Operating Expenses. Operating expenses increased primarily due to the
increase in the size of our aircraft fleet and entering the ASA with Northwest
in March 2002. The year ended December 31, 2002 included significant expenses
related to the growth of our fleet, including higher wages and benefits, ground
handling and deicing expenses, hub fees, fuel costs and aircraft rentals.
Operating expense per available seat mile increased by 0.52 cents, or 3.2%. This
increase was primarily due to an increase in expense per available seat mile of
1.56 cents and 0.90 cents for aircraft rentals and ground handling expenses,
respectively. The increases in aircraft rental and ground handling expenses were
due to the increase in our CRJ fleet, while hub facility fees increased pursuant
to the terms of the ASA. The increase in operating expenses was partially offset
by a decrease in expense per available seat mile of 0.90 cents and 1.02 cents
for salaries, wages and benefits and aircraft maintenance, respectively.
Salaries, wages and benefits increased primarily due to the increase in the
number of CRJ pilots, flight attendants and mechanics and wage rate and benefit
increases.
Aircraft fuel and tax expense increased primarily due to increased block
hours and the higher burn rate associated with jet equipment.
Aircraft maintenance, materials and repairs decreased primarily due to the
reduction in the size of our Saab fleet. In addition, maintenance expense
reflects the fact that our CRJs are still covered by the manufacturers'
warranties.
Other rentals and landing fees increased primarily due to capacity
increases and increased hub fees pursuant to our March 2002 ASA with Northwest.
Aircraft rental expense increased primarily due to 21 additional leased CRJ
aircraft and higher CRJ rental rates under the March 2002 ASA. The increase in
aircraft rental expense was partially offset by the removal of Saab aircraft
from our fleet, which was completed by the end of 2002.
31
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations (continued)
2002 Compared to 2001 (continued)
Ground handling services increased primarily due to increased flying
associated with the growth of the CRJ fleet and the higher rates provided for in
the ASA for ground handling services at airports serviced by Northwest,
Depreciation and amortization expense increased due to increased
depreciation on our flight equipment to coincide with the removal of the Saab
aircraft from our fleet. Additionally, depreciation increased with additional
aircraft spares, tools and equipment for the CRJ aircraft, offset by a reduction
in amortization of goodwill expense of $0.7 million due to the adoption of
Statement of Financial Accounting Standards No. 142.
Other expenses increased primarily due to an increase in passenger
liability and hull insurance of $3.1 million and an increase in property taxes
of $0.8 million, offset by a decrease in all other expenses of $1.5 million.
Liquidity and Capital Resources
As of December 31, 2003, we had $31.5 million in cash and cash equivalents.
Net cash provided by operating activities was $50.1 million during the year
ended December 31, 2003, due primarily to cash provided by net income of $35.1
million and depreciation of $2.9 million, and changes in operating assets and
liabilities of $10.1 million. As noted in our discussion of significant
developments during 2003, we settled all trade balances with Northwest during
January 2003, from which we received a cash payment of $15.4 million and issued
a dividend of $15.5 million to Northwest.
Debt and lease obligations. The following chart details our debt and lease
obligations on a pro forma basis at December 31, 2003. In addition, operating
lease information includes scheduled deliveries of aircraft under the ASA
through December 2005 at the basic aircraft rental rate provided in the ASA.
Under our ASA, amounts relating to operating leases will be directly reimbursed
by Northwest.
Payments Due by Period
(in thousands)
------------------------------------------------------------------------
Total Less than 1 2-3 years 4-5 years After 5 years
year
------------ ------------ ------------- ----------- --------------
Contractual Obligations:
Line of credit (1) $ 10,000 $ - $ 10,000 $ - $ -
Long term debt 132,000 12,000 24,000 24,000 72,000
Operating leases (2) 3,757,290 206,766 540,673 548,131 2,461,720
------------ ------------ ------------- ----------- --------------
Total contractual cash obligations $3,899,290 $218,766 $574,673 $572,131 $2,533,720
============ ============ ============= =========== ==============
(1) Borrowings outstanding as of December 31, 2003, under our revolving credit
facility with Northwest, which expires December 31, 2005.
(2) As of December 31, 2003, our obligations relating to operating leases,
excluding future scheduled deliveries of aircraft under the airline
services agreement, were as follows (in thousands):
Less than 1
Total year 1-3 years 4-5 years After 5 years
------------ ------------ ------------- ----------- --------------
$2,275,109 $163,558 $326,001 $325,531 $1,460,019
32
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations (continued)
Liquidity and Capital Resources (continued)
Borrowings under the Revolver from Northwest will bear interest at a rate
equal to the higher of the prime rate published by JPMorgan Chase or the most
recent overnight funds rate offered to JPMorgan Chase plus 1.0% per annum. We
are required to use our best efforts to obtain a replacement credit facility
with a third party lender at the earliest time possible. The revolving credit
facility contains a number of restrictive covenants applicable to Pinnacle,
including limitations on the incurrence of debt and liens, the making of
distributions and other transactions. The term of our revolving credit facility
extends through December 2005.
The current terms of our note payable to Northwest, which were amended at
the time of the Offering, requires quarterly principal payments of $3.0 million
through September 2009 with the remaining principal balance due December 2009.
The note payable also requires monthly payments to the extent that our cash and
cash equivalents balance exceeds $50.0 million. The note accrues interest at the
rate of 3.4%, which is payable quarterly
Operating activities. Net cash provided by operating activities was $0.05
million in the year ended December 31, 2002, due primarily to cash provided by
net income of $30.8 million and depreciation of $6.1 million, offset by an
increase in net receivables of $40.6 million primarily due to a change in cash
management policy implemented by Northwest following September 11, 2001. Net
cash used in operating activities was $8.6 million in the year ended December
31, 2001, due primarily to cash provided by net income of $14.2 million and
depreciation and amortization of $4.5 million, offset by an increase in net
receivables of $34.7 million primarily due to the 2001 change in Northwest's
cash management policy.
Investing activities. Investing activities consisted primarily of rotable
(renewable) parts purchases of $9.1 million, $4.4 million and $8.0 million for
the years ended December 31, 2003, 2002 and 2001, respectively. The remaining
balance of investing activities consisted primarily of ground equipment
purchases related to the new CRJ aircraft.
Financing activities. Cash used in financing activities for the year ended
December 31, 2003 totaled $12.2 million. We made principal payments to Northwest
on our note payable in the amount of $18.0 million during 2003 and received a
$50.0 million capital contribution from Northwest in conjunction with our
Offering, which we applied to our note payable. During 2003, we had net
borrowings of approximately $5.8 million under our lines of credit. Cash
provided by financing activities for the year ended December 31, 2002 totaled
$7.2 million and consisted primarily of the utilization of manufacturer credits
extended to Northwest for purchase of CRJ aircraft parts from that manufacturer.
Cash provided by financing activities for 2001 totaled approximately $15.2
million and consisted primarily of the utilization of $11.1 million of
manufacturer credits extended to Northwest and $4.2 million of proceeds from
borrowings under a line of credit with a bank. This amount was partially offset
by payment of $0.1 million of long-term debt obligations. As of December 31,
2003, we had a $40.0 million of available borrowings under our revolving credit
facility with Northwest and $0.9 million of standby letters of credit
outstanding. As of December 31, 2003, our borrowings under the credit facility
had an interest rate of 5.0%.
Capital commitments. We expect capital expenditures for 2004 to be
approximately $16.0 million, primarily relating to CRJ aircraft rotable and
expendable parts and tooling, software application and automation infrastructure
projects and maintenance and ground equipment. We are expecting to fund these
expenditures with cash flows generated from our operations.
Off-Balance Sheet Arrangements. None of our operating leases are reflected
on our balance sheet. We are responsible for all maintenance, insurance and
other costs associated with operating these aircraft; however, we have not made
any residual value or other guarantees to our lessors. We have no other
off-balance sheet arrangements.
33
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
General. Our discussion and analysis of our financial condition and results
of operations is based upon our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. We have identified the accounting policies below as
critical to our business operations and an understanding of our results of
operations. On an on-going basis, we evaluate our estimates. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
For all of these policies, we caution that future events rarely develop exactly
as forecasted, and the best estimates routinely require judgment. The discussion
below is not intended to be a comprehensive list of our accounting policies. For
a detailed discussion on the application of these and other accounting policies,
see Item 8 "Financial Statements and Supplementary Data -- Notes to Consolidated
Financial Statements -- Note 2".
Revenue recognition. We recognize our passenger revenue as services are
provided pursuant to the terms of our ASA with Northwest, as discussed in Item 1
"Our Airline Services Agreement." Revenue recognition involves the use of
estimates and assumptions, including estimates of revisions to revenue over the
course of a fiscal year to reflect the operating margins provided for in the ASA
and estimates of certain expense reimbursements. Previous estimates of revenues
earned from Northwest have been consistent with amounts ultimately realized.
Maintenance. We record maintenance and repair costs for our equipment and
for our leased equipment as the costs are incurred. When parts and equipment on
the aircraft become unserviceable or are due for scheduled maintenance, they are
removed and replaced with serviceable parts from inventory. The parts in need of
repair are sent to repair vendors, and a liability for that repair cost is
recognized in that calendar month. In the event that an actual quote is
received, the accrual will be based on the quote. Typically, repair costs are
initially estimated based on the historical cost of a like repair for that
specific part. The initial estimate is replaced by a quote from the repair
vendor after they inspect the part and determine what the actual cost will be.
The accrual is adjusted accordingly. Accruals are carried until the invoice is
received, approved and paid. Previous estimates of repair costs have proven to
be materially consistent with amounts ultimately paid.
Certain maintenance costs are covered by power-by-the hour contracts. The
power-by-the-hour contracts dictate the method by which we pay a vendor based on
our actual level of operations in exchange for vendor coverage on specific parts
and equipment on our aircraft when those parts and equipment are in need of
repair or replacement. Individual contracts are of varying terms and payment
procedures and typically require a monthly payment based upon a specific
operating statistic incurred. Accordingly, such payment amounts are expensed as
incurred. On average, power-by-the-hour arrangements represent approximately 50%
of our maintenance, materials and repair costs. These contracts reduce the
subjectivity of maintenance repair accruals and increase the predictability of
maintenance expense.
Spare parts. Non-renewable spare parts and maintenance supplies are
recorded as inventory when they are purchased and we charge the costs to
operations as this inventory is used. An allowance for obsolescence is provided
over the remaining estimated useful life of the related aircraft equipment, for
spare parts expected to be on hand at the date the aircraft are retired from
service, plus allowances for spare parts currently identified as obsolete or
excess. We will continue to analyze the reasonableness of these estimates as we
gain more experience with our CRJ fleet.
Property and equipment. We record property and equipment, which include
rotable spare parts, at our cost. We depreciate these assets to their estimated
residual values based on our estimate of the useful lives or the lease terms of
the aircraft, as appropriate. We will continue to analyze the reasonableness of
these estimates as we gain more experience with our CRJ fleet.
34
Item 7. Mangement's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies (continued)
In addition, we have made certain other estimates that, while not involving
the same degree of judgment, are important to understanding our financial
statements. We continually evaluate our accounting policies and the estimates we
use to prepare our consolidated financial statements. Our estimates as of the
date of the financial statements reflect our best judgment after giving
consideration to all currently available facts and circumstances. As such,
actual results may differ significantly from these estimates and may require
adjustment in the future, as additional facts become known or as circumstances
change. Management has discussed the development and selection of these critical
accounting estimates with the audit committee of our board of directors, and the
audit committee has reviewed the disclosures presented above relating to them.
Forward Looking Statements
Statements in this Form 10-K report (or otherwise made by Pinnacle Airlines
or on Pinnacle Airline's behalf) contain various forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, or
the Securities Act, and Section 21E of the Securities Act of 1934, as amended,
or the Exchange Act, which represent our management's beliefs and assumptions
concerning future events. When used in this document and in documents
incorporated by reference, forward-looking statements include, without
limitation, statements regarding financial forecasts or projections, our
expectations, beliefs, intentions or future strategies that are signified by the
words "expects", "anticipates", "intends", "believes" or similar language. These
forward-looking statements are subject to risks, uncertainties and assumptions
that could cause our actual results and the timing of certain events to differ
materially from those expressed in the forward-looking statements. All
forward-looking statements included in this report are based on information
available to us on the date of this report. It is routine for our internal
projections and expectations to change as the year or each quarter in the year
progress, and therefore it should be clearly understood that the internal
projections, beliefs and assumptions upon which we base our expectations may
change prior to the end of each quarter or the year. Although these expectations
may change, we may not inform you if they do. Our policy is generally to provide
our expectations only once per quarter, and not to update that information until
the next quarter.
You should understand that many important factors, in addition to those
discussed in this report, could cause our results to differ materially from
those expressed in the forward-looking statements. Some of the potential factors
that could affect our results are described in Item 1 "Business - Risk Factors"
and in this item under "Overview." In light of these risks and uncertainties,
and others not described in this report, the forward-looking events discussed in
this report might not occur, might occur at a different time, or might be of a
different magnitude than presently anticipated.
35
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We are not subject to any significant degree to market risks such as
commodity price risk (e.g., aircraft fuel prices) and interest rate risk.
Aircraft fuel. Under the ASA, Northwest bears the economic risk of our
passenger aircraft fuel price fluctuations as our future passenger fuel costs
are reimbursed by Northwest and capped at $0.78 per gallon.
Interest rates. All of our CRJs are operated under long-term operating
leases with Northwest. Our Saab aircraft, which are being subleased to Mesaba
Airlines, are leased from a third party. We also anticipate leasing all of our
future deliveries of aircraft. Under the ASA, the lease payments associated with
aircraft deliveries are fixed. We do not hold long-term interest sensitive
assets and, therefore, we are not exposed to interest rate fluctuations for our
assets. The note payable we issued to Northwest bears interest at a fixed rate,
but loans under our revolving credit facility bear interest at a floating rate.
We do not purchase or hold any derivative financial instruments to protect
against the effects of changes in interest rates.
36
Item 8. Financial Statements and Supplementary Data
Report of Independent Auditor .............................................. 38
Consolidated Statements of Income .......................................... 39
for the Years Ended December 31, 2003, 2002 and 2001
Consolidated Balance Sheets ................................................ 40
as of December 31, 2003 and 2002
Consolidated Statements of Stockholders' Equity (Deficiency) ............... 42
for the Years Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows ...................................... 43
for the Years Ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements ................................. 44
37
Report of Independent Auditors
Board of Directors
Pinnacle Airlines Corp.
We have audited the accompanying consolidated balance sheets of Pinnacle
Airlines Corp. (the "Company") as of December 31, 2003 and 2002, and the related
consolidated statements of income, stockholders' equity (deficiency) and cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 2003 and 2002, and the consolidated results of its operations and
its cash flows for the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements in 2002,
the Company adopted Statement of Financial Standards No. 142.
/s/ Ernst & Young LLP
January 21, 2004
Memphis, Tennessee
38
Pinnacle Airlines Corp.
Consolidated Statements of Income
(in thousands, except per share data)
Year Ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ -----------
Operating revenues:
Passenger $ 450,611 325,386 198,271
Other 6,159 6,182 3,779
------------ ------------ -----------
Total operating revenues 456,770 331,568 202,050
Operating expenses:
Salaries, wages and benefits 83,316 69,086 56,915
Aircraft fuel and taxes 55,007 33,932 22,588
Aircraft maintenance, materials and repairs 14,116 13,276 20,661
Aircraft rentals 136,273 87,016 40,628
Other rentals and landing fees 29,255 22,818 8,548
Ground handling services 44,622 23,422 5,372
Depreciation and amortization 2,912 6,141 4,505
Government reimbursements (1,114) - -
Other 28,214 28,221 25,860
------------ ------------ -----------
Total operating expenses 392,601 283,912 185,077
------------ ------------ -----------
Operating income 64,169 47,656 16,973
Nonoperating income (expense)
Airline Stabilization Act funds - - 5,591
Interest income 230 3,001 559
Interest expense (7,387) (409) (443)
Miscellaneous income, net 387 80 387
------------ ------------ -----------
Total nonoperating income (6,770) 2,672 6,094
------------ ------------ -----------
Income before income taxes 57,399 50,328 23,067
Income tax expense 22,332 19,543 8,821
------------ ------------ -----------
Net income $ 35,067 $ 30,785 $ 14,246
============ ============ ===========
Basic and diluted net income per share $ 1.60 $ 1.41 $ 0.65
============ ============ ===========
Shares used in computing basic and diluted net income per share 21,892 21,892 21,892
============ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
39
Pinnacle Airlines Corp.
Consolidated Balance Sheets
(in thousands, except share data)
December 31,
------------------------------
2003 2002
------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 31,523 $ 4,580
Receivables, principally from Northwest, net of allowances
of $146 and $536 at December 31, 2003 and 2002, respectively 17,307 64,818
Spare parts and supplies, net of allowances
of $2,606 and $2,603 at December 31, 2003 and 2002, respectively 3,773 2,822
Prepaid expenses and other assets 6,810 14,592
Deferred income taxes 2,549 2,494
------------- ------------
Total current assets 61,962 89,306
Property and equipment:
Aircraft and rotable spares 32,779 24,281
Other property and equipment 14,081 12,679
Office furniture and fixtures 1,258 1,288
------------- ------------
48,118 38,248
Less accumulated depreciation (13,832) (11,617)
------------- ------------
Net property and equipment 34,286 26,631
Deposits with Northwest 13,300 8,925
Cost in excess of net assets acquired, net 18,422 18,422
------------- ------------
Total assets $ 127,970 $ 143,284
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
40
Pinnacle Airlines Corp.
Consolidated Balance Sheets
(in thousands, except share data)
December 31,
----------------------------
2003 2002
------------ ------------
Liabilities and stockholders' equity (deficiency)
Current liabilities:
Accounts payable $ 9,798 $ 12,672
Accrued expenses 11,622 11,082
Line of credit 10,000 4,245
Income taxes payable to Northwest - 26,843
Income taxes payable 5,596 816
Current portion of deferred credits 217 180
Current portion of note payable to Northwest 12,000 -
------------ ------------
Total current liabilities 49,233 55,838
Deferred credits 719 936
Deferred income taxes 6,400 4,459
Note payable to Northwest 120,000 -
Commitments and contingencies
Stockholders' equity (deficiency):
Preferred stock, par value $0.01 per share; 1,000,000 shares authorized,
no shares issued - -
Series A preferred stock, stated value $100 per share; one share
authorized, issued and outstanding - -
Series common stock, par value $0.01 per share; 5,000,000 shares
authorized; no shares issued - -
Common stock, $0.01 par value:
Authorized shares--40,000,000
Issued and outstanding shares--21,892,060 219 219
Additional paid-in capital 84,973 34,973
Retained earnings (deficit) (133,574) 46,859
------------ ------------
Total stockholders' equity (deficiency) (48,382) 82,051
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 127,970 $ 143,284
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
41
Pinnacle Airlines Corp.
Consolidated Statements of Stockholders' Equity (Deficiency)
(in thousands, expect per share data)
Additional Retained
Common Paid-In Earnings
Stock Capital (Deficiency) Total
-------------- -------------- -------------- ------------
Balance, December 31, 2000 $ 219 $ 34,973 $ 6,213 $ 41,405
Net Income - - 14,246 14,246
-------------- -------------- -------------- ------------
Balance, December 31, 2001 219 34,973 20,459 55,651
Dividend to Northwest of spare parts and engines
($0.20 per share) - - (4,385) (4,385)
Net income - - 30,785 30,785
-------------- -------------- -------------- ------------
Balance, December 31, 2002 219 34,973 46,859 82,051
Contribution of capital by Northwest - 50,000 - 50,000
Dividend to Northwest ($9.84 per share) - - (215,500) (215,500)
Net income - - 35,067 35,067
-------------- -------------- -------------- ------------
Balance, December 31, 2003 $ 219 $ 84,973 $ (133,574) $ (48,382)
============== ============== ============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
42
Pinnacle Airlines Corp.
Consolidated Statements of Cash Flows
(in thousands)
Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- ----------
Operating activities
Net income $ 35,067 $ 30,785 $ 14,246
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization 2,912 6,141 4,505
Loss on disposal of equipment and rotable spares 225 43 397
Deferred income taxes 1,885 1,019 1,135
Provision for spare parts and supplies obsolescence 106 623 453
Reduction of deferred credits (180) (145) (114)
Changes in operating assets and liabilities:
Receivables 5,168 (40,622) (34,742)
Spare parts and supplies (954) (172) (756)
Prepaid expenses and other assets 3,407 (18,394) (3,593)
Accounts payable and accrued expenses (2,334) 3,278 2,364
Income taxes payable 4,780 17,398 7,471
----------- ----------- ----------
Cash provided by (used in) operating activities 50,082 (46) (8,634)
Investing activities
Purchases of property and equipment (10,894) (4,415) (12,886)
----------- ----------- ----------
Cash used in investing activities (10,894) (4,415) (12,886)
Financing activities
Payments on long-term debt (18,000) - (122)
Advances from Northwest for manufacturer credits - 7,150 11,056
(Repayments) borrowings on line of credit with bank (4,245) - 4,245
Net borrowings under line of credit with Northwest 10,000 - -
----------- ----------- ----------
Cash (used in) provided by financing activities (12,245) 7,150 15,179
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents 26,943 2,689 (6,341)
Cash and cash equivalents at beginning of year 4,580 1,891 8,232
----------- ----------- ----------
Cash and cash equivalents at end of year $ 31,523 $ 4,580 $ 1,891
=========== =========== ==========
Supplemental disclosure of cash flow information
Interest paid $ 6,345 $ 357 $ 339
Income tax payments $ 15,553 $ 1,024 $ 315
Other non-cash transactions
Dividend to Northwest of spare parts and engines $ - $ 4,385 $ -
Note payable issued to Northwest as a dividend $ 200,000 $ - $ -
Settlement of accounts with Northwest as a dividend (Note 7) $ 15,500 $ - $ -
Capital contribution from Northwest applied to note payable $ 50,000 $ - $ -
The accompanying notes are an integral part of these consolidated financial
statements.
43
Item 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
1. Description of Business
Pinnacle Airlines Corp. (the "Company"), operates through its wholly owned
subsidiary, Pinnacle Airlines, Inc., as a regional airline that provides airline
capacity to Northwest Airlines, Inc. ("Northwest"), a wholly owned indirect
subsidiary of Northwest Airlines Corporation. The Company operates as a
Northwest Airlink carrier at Northwest's domestic hub airports in Detroit,
Minneapolis/St. Paul and Memphis. The Company currently operates an all-regional
jet fleet of 76 Canadair Regional Jet ("CRJ") aircraft and offers scheduled
passenger service with approximately 490 daily departures to 81 cities in 29
states and two Canadian provinces. As of December 31, 2002, the Company offered
service with 51 CRJ aircraft with approximately 334 daily departures to 62
cities in 26 states and two Canadian provinces.
Pinnacle Airlines Corp. was incorporated in Delaware on January 10, 2002 to
be the holding company of Pinnacle Airlines, Inc., which is a predecessor to the
Company and was incorporated in Georgia in 1985. Pinnacle Airlines, Inc. was
acquired in April 1997 by Northwest Airlines Corporation. Since the acquisition,
Pinnacle Airlines Inc. has provided regional airline service exclusively to
Northwest. During the time that it was the majority owner, Northwest operated
the Company as a business unit of Northwest without regard to its stand-alone
profitability. The Company's operations were designed to increase overall
Northwest system revenues rather than to maximize its stand-alone profitability.
The historical financial information does not reflect what our financial
position, results of operations and cash flows would have been had the Company
been a stand-alone entity during the periods presented.
2. Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and include the accounts of Pinnacle Airlines Corp. and its wholly-owned
subsidiary, Pinnacle Airlines, Inc., as if Pinnacle Airlines Corp. existed for
all periods presented. All intercompany transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments, which
are readily convertible into cash and have initial maturities of three months or
less.
Revenue Recognition
Passenger and other revenues are recognized as earned when the service is
provided. The Company grants trade credit to certain approved customers. The
Company performs a monthly analysis of outstanding trade receivables to assess
the likelihood of collection. For balances where the Company does not expect
full payment of amounts owed, the Company will record an allowance to adjust the
trade receivable to the Company's best estimate of the amount it will ultimately
collect. At December 31, 2003 and 2002, the Company had recorded an allowance
for doubtful accounts of approximately $146 and $536, respectively.
Concentration of Credit Risk
Substantially all of the Company's revenues have been derived from
Northwest in the past and will continue to be derived from Northwest under the
operating agreement discussed in Note 3. As a result, the Company has a
significant concentration of its accounts receivable with Northwest with no
collateral.
44
Item 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
2. Significant Accounting Policies (continued)
Property and Equipment
Property and equipment, consisting primarily of flight equipment and other
property, are stated at cost. Expenditures for major renewals, modifications and
improvements are capitalized when such costs are determined to extend the useful
life of the asset. Property and equipment are depreciated to estimated residual
values using the straight-line method over the estimated useful lives of the
assets, which generally range from seven to fifteen years for flight equipment
and three to ten years for other property and equipment. Depreciation of flight
equipment is determined by allocating the cost, net of estimated residual value,
over the remaining lease terms of related aircraft.
Long-lived assets are reviewed for impairment whenever events or
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and carrying value of the asset. There were no impairment losses
recognized during the three years ended December 31, 2003.
Spare Parts and Supplies
Spare parts and supplies consist of expendable parts and maintenance
supplies related to flight equipment, which are carried at cost using the
first-in, first-out (FIFO) method. Spare parts and supplies are recorded as
inventory when purchased and charged to expense as used. An allowance for
obsolescence is provided over the remaining estimated useful life of the related
aircraft equipment, for spare parts expected to be on hand at the date the
aircraft are retired from service, plus allowances for spare parts currently
identified as obsolete or excess. These allowances are based on management
estimates, which are subject to change.
Maintenance
The Company operates under a Federal Aviation Administration-approved
continuous inspection and maintenance program. Maintenance and repair costs for
owned and leased flight equipment, including the overhaul of aircraft
components, are charged to operating expense as incurred, except for the
maintenance costs covered by power-by-the-hour agreement which are expenses
based on specific operational events. On average, power-by-the-hour arrangements
represent approximately 50% of our maintenance, materials and repair costs.
Manufacturer Credits
The Company purchases from Northwest certain manufacturer credits that are
used by the Company to acquire flight equipment, spare parts and supplies and
maintenance services. Under its operating agreement with Northwest, the Company
may decline to purchase credits that it does not plan to utilize within 180
days. Available manufacturer credits of $3,645 and $4,835 at December 31, 2003
and 2002, respectively, are included in prepaid expenses and other assets.
For the years ended December 31, 2003, 2002, and 2001, the Company obtained
manufacturer credits from Northwest in the amount of $8,935, $7,150, and
$11,056, respectively.
Aircraft Deposits
The Company pays to Northwest a deposit of $175,000 with the delivery of
each CRJ. As provided in the aircraft lease agreement between the Company and
Northwest, the deposits may be refunded to the Company upon the expiration of
the operating agreement between the Company and Northwest, or they may be used
in settlement of the final rent payment due to Northwest. These are shown as
deposits with Northwest in the Company's consolidated balance sheet.
45
Item 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
2. Significant Accounting Policies (continued)
Income Taxes
The Company accounts for income taxes under the liability method, which
requires that deferred taxes be recorded at the statutory rate to be in effect
when the taxes are paid. Deferred income taxes are provided for the tax effect
of temporary differences in the recognition of income and expenses for financial
reporting and income tax reporting.
Earnings Per Share
The Company accounts for earnings per share in accordance with Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standard
("SFAS") No. 128, "Earnings per Share." Basic earnings per common share ("Basic
EPS") excludes dilution and is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the periods presented. Diluted earnings per share ("Diluted EPS")
reflects the potential dilution that could occur if securities or other
obligations to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the earnings of
the Company. For all periods presented, the weighted average number of common
shares outstanding used in our basic and diluted earnings per share was 21,892.
Stock Options
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations ("APB 25"). Under APB 25,
if the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of the grant, no compensation expense
is recognized. Since the Company's stock options have all been granted with
exercise prices at fair value, no compensation expense has been recognized under
APB 25.
The initial grant of the employee stock options to purchase the Company's
common stock occurred in November 2003. The following table illustrates the
effect on net income and income per share assuming the compensation costs for
the Company's stock option and purchase plans had been determined using the fair
value method, prorated over the vesting periods, at the grant dates as required
under SFAS No. 123, "Accounting for Stock-Based Compensation" for the year ended
December 31, 2003:
Net income $ 35,067
Pro forma stock-based compensation expense, net of tax 121
------------
Pro forma net income $ 34,946
============
Pro forma net income per common share--basic and diluted $ 1.59
============
See Note 14, Stock Based Compensation, for the assumptions used to compute
the pro forma amounts above. The pro forma effect on net income per share is not
necessarily representative of the pro forma effects in future years.
46
Item 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
2. Significant Accounting Policies (continued)
Cost in Excess of Net Assets Acquired
In connection with the Northwest acquisition of the Company, cost in excess
of net assets acquired ("Goodwill") was recorded in the amount of $22,449.
Effective January 1, 2002, the Company adopted the provisions of SFAS No.
141, "Business Combinations," and No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, goodwill amortization ceases when the new standard
is adopted. The new rules also require an initial goodwill impairment assessment
in the year of adoption and annual impairment tests thereafter. In performing
the January 1, 2002, transitional impairment test of its existing goodwill, the
Company compared its carrying value to its estimated fair value, which was
determined using a discounted cash flow analysis of projected future earnings.
Based on this analysis and following the guidance of SFAS No. 142, the Company
concluded that its goodwill was not impaired. For purposes of this standard, the
Company determined that it operates in one reporting unit consisting of
scheduled airline passenger service. Each October, the Company performs the
annual impairment test. In conducting the test for 2003, the Company concluded
that its goodwill is not impaired. Other than goodwill, the Company has no
identifiable intangible assets.
Before January 1, 2002, goodwill was being amortized over a period of 30
years by the straight-line method. Effective January 1, 2002, we discontinued
amortization of goodwill, which resulted in reduced expense of approximately,
$447, net of income taxes, annually. Had the Company applied the
non-amortization provisions of SFAS No. 142 in 2001, pro forma net income and
basic and diluted earnings per share would have been $14,696 and $0.67.
Financial Instruments
Fair values of cash equivalents, receivables, other assets, and accounts
payable approximate their carrying amounts due to the short period of time to
maturity.
The Company invests cash nightly in a repurchase agreement with a bank. The
funds are used to purchase a fractional interest in an obligation of the U.S.
Government or its agencies (the "Purchased Securities"). The following day, the
bank repurchases the Purchased Securities from the Company and the funds and
interest are deposited into the Company's account. The overnight investment
balance was $403 and $6,115 at December 31, 2003 and 2002, respectively.
Deferred Credits
To assist the Company with the refurbishment of its airline fleet, in 1998
a lessor provided the Company with funds totaling $4,275. Portions of these
funds were used for aircraft refurbishment. The Company is amortizing the
remaining balance over the terms of the related leases.
Frequent Flyer Program
The Company participates in Northwest's WorldPerks frequent flyer program,
in which passengers may use mileage accumulated in that program to obtain
discounted or free trips that might include a flight segment on one of the
Company's flights. However, Northwest is responsible for the administration of
WorldPerks and the Company has no incremental cost and receives no revenue from
Northwest associated with travel awards redeemed on the Company's flight
segments.
47
Item 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
2. Significant Accounting Policies (continued)
Segment Reporting
The Company has adopted SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." This statement requires disclosures related
to the components of a company for which separate financial information is
available that is evaluated regularly by the Company's chief operating decision
maker in deciding how to allocate resources and in assessing performance. The
Company operates in one business segment consisting of scheduled airline
passenger service.
Comprehensive Income
The Company has no adjustments to net income to arrive at comprehensive
income.
Significant Concentration
One supplier manufactures the Company's CRJ aircraft. One supplier also
manufactures the engines used on the CRJ aircraft. These suppliers also provide
the Company with parts, repair and other support services for the CRJ aircraft
and its engines.
Reclassification
Certain prior year amounts have been reclassified to conform to current
year classifications.
Use of Estimates
The preparation of our consolidated financial statements requires the use
of estimates and assumptions that affect the reported amounts of assets and
liabilities, the reported amounts of revenues and expenses and the disclosure of
contingent liabilities. Management makes its best estimate of the ultimate
outcome for these items based on historical trends and other information
available when the financial statements are prepared. Changes in estimates are
recognized in accordance with the accounting rules for the estimate, which is
typically in the period when the new information becomes available to
management.
3. Change in Ownership and Public Offering
On January 15, 2003, Northwest transferred all of the outstanding common
stock of Pinnacle Airlines, Inc. to Pinnacle Airlines Corp., in exchange for
21,892 shares of the Pinnacle Airlines Corp. common stock, which constitutes all
of its outstanding common stock, and one share of Series A preferred stock. In
January 2003 and September 2003, Northwest contributed 2,828 shares and 16,572
shares, respectively, of Pinnacle Airlines Corp. common stock to the Northwest
Airlines Pension Plan for Contract Employees, the Northwest Airlines Pension
Plan for Pilot Employees and the Northwest Airlines Pension Plan for Salaried
Employees (collectively, the "Northwest Airlines Pension Plan.")
The Series A preferred stock has a stated value and liquidation preference
of $100. The Series A preferred stock gives Northwest the right to appoint two
directors to the Company's board of directors. No dividends are payable to the
shareholder of the Series A preferred stock, and it is redeemable by the
Company, at its option, for an amount equal to the liquidation preference, only
upon or following the occurrence of certain events, including the sale or other
disposition of the Series A preferred stock or the termination or expiration of
the airline services agreement between the Company and Northwest.
On November 25, 2003, the Company completed an initial public offering (the
"Offering") of its common stock, par value $.01 per share. In the Offering, the
Northwest Airlines Pension Plans sold the 19,400 shares that it received during
2003. The Company did not receive any proceeds from the Offering.
48
Item 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
4. Airline Services Agreement
The Company and Northwest operate under an Airline Services Agreement
("ASA"), pursuant to which the Company provides regional airline services to
Northwest. The Company and Northwest entered the ASA effective March 1, 2002,
and its terms were materially different from the terms of the historical
arrangement between the Company and Northwest. The initial agreement provided
for a term from March 1, 2002, through February 29, 2012 and would have
increased the Company's fleet to 95 regional jets by December 31, 2004. During
2003, the Company and Northwest entered into certain amendments to the ASA that,
among other things, extended the term of the agreement through December 31,
2017, eliminated incentive payments based on certain performance criteria,
lowered the Company's target operating margin from 14% to 10% effective December
1, 2003, and provided for an increase in the size of the Company's fleet to 129
regional jets by December 31, 2005.
Under the ASA, the Company receives the following payments from Northwest:
Reimbursement payments. The Company receives monthly reimbursements for all
expenses relating to: passenger aircraft fuel; basic aircraft rentals; aviation
liability, war risk and hull insurance; third-party deicing services; CRJ
third-party engine and airframe maintenance; hub and maintenance facility
rentals; passenger security costs; ground handling in cities where Northwest has
ground handling operations; Detroit landing fees and property taxes. Since the
Company is reimbursed by Northwest for the actual expenses incurred for these
items, the Company has no financial risk associated with cost fluctuations.
Payments based on pre-set rates. The Company is entitled to receive
semi-monthly payments for each block hour and cycle it operates and a monthly
fixed cost payment based on the size of its fleet. These payments are designed
to cover all of the Company's expenses incurred with respect to the ASA that are
not covered by the reimbursement payments. The substantial majority of these
expenses relate to labor costs, ground handling costs in cities where Northwest
does not have ground handling operations, landing fees in cities other than
Detroit, overhead and depreciation.
Margin payments. The Company receives a monthly margin payment based on the
revenues described above calculated to achieve a target operating margin. The
target operating margin for the ten months ended December 31, 2002, and the
eleven months ended November 30, 2003 was 14%. Following the Offering, the
Company and Northwest amended the ASA to lower the Company's target operating
margin to 10%, effective December 1, 2003. Under the amended ASA, the Company's
target operating margin will be reset to a market-based percentage in 2008, but
the reset target operating margin will be no lower than 8% and no higher than
12%.
The portion of any margin payments attributable to the reimbursement
payments will always be equal to the targeted operating margin for the relevant
period. However, since the payments based on pre-set rates are not based on the
actual expenses incurred, if the Company's expenses are not covered by these
payments, its actual operating margin could differ from its target operating
margin.
Through 2007, if the Company's actual costs that are intended to be covered
by the revenues the Company receives based on pre-set rates deviate from the
expected costs used in developing those pre-set rates, and as a result its
annual operating margin is below the 9% floor or above the 11% ceiling for each
year through 2005, or below the 8% floor or above the 12% ceiling for 2006 and
2007, a year-end adjustment in the form of a payment by Northwest or by the
Company will be made to adjust the Company's operating margin to the floor or
ceiling. Specified amounts are excluded when determining whether the Company's
annual operating margin is below the floor or above the ceiling.
Beginning in 2008, Northwest will not guarantee the Company a minimum
operating margin, although the Company will still be subject to a margin ceiling
above the revised target-operating margin.
49
Item 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
4. Airline Services Agreement (continued)
If the Company's actual operating margin for any year beginning with 2008
exceeds the revised target operating margin by up to five percentage points, the
Company will make a year-end adjustment payment to Northwest in an amount equal
to half of the excess. In addition, should the Company's actual operating margin
exceed the targeted operating margin by more than five percentage points, the
Company will pay Northwest all of the excess above five percent. If necessary,
the Company will record an amount each quarter to reflect the Company's right to
receive or the Company's obligation to pay this operating margin adjustment
payment, and any net payment will be made annually. For the years ended December
31, 2002 and 2003, no margin adjustments were required pursuant to the terms of
the ASA.
5. Other Agreements with Northwest
In connection with the services provided to Northwest under the ASA, the
Company and Northwest have also entered into several other agreements with
Northwest, including agreements necessary for the Company to provide regional
airline services to Northwest. Unless otherwise stated, the terms of these
agreements generally will continue so long as the ASA is in effect. These
agreements generally contain cross-termination provisions such that termination
of the ASA will trigger a termination under the relevant agreement. In addition,
these agreements generally provide that they will terminate upon a change of
control of the Company or its affiliates. The following is a summary description
of these agreements.
Aircraft and Spare Engine Lease Agreements. The Company has entered into
aircraft lease and sublease agreements and spare engine sublease agreements with
Northwest with respect to all of the aircraft and spare engines it leases or
subleases from Northwest. These agreements terminate on December 31, 2017, the
expiration date of the ASA.
Manufacturer Benefits Agreement. The manufacturer benefits agreement allows
the Company to take advantage of provisions related to guaranties, warranties,
inventory support, product support and maintenance services contained in
agreements Northwest has with Bombardier and General Electric with respect to
aircraft and engines in our fleet.
Sublease and Facilities Use Agreements. The Company has entered into
facility sublease agreements with Northwest for certain hangar and aircraft
maintenance, as well as facilities use agreements relating to terminal
facilities at Northwest's domestic hubs. These agreements are subject to the
terms of master leases under which Northwest leases the facilities from
third-party lessors. These agreements will expire on the earlier of the
expiration of Northwest's lease for the property and the termination of the ASA.
Preferential Pilot Hiring Agreement. The Company entered into an agreement
with Northwest under which the Company agreed to hire pilots who have been
furloughed by Northwest on a preferential basis, subject to the normal hiring
procedures and requirements of the Company. Beginning in January 2003 and
continuing through December 2017, no less than 75% of new pilot hires in a new
hire class at the Company will be filled by furloughed Northwest pilots provided
that the Company need not hire more than 15 furloughed Northwest pilots per new
hire class. Northwest may recall pilots hired under this agreement after 18
months of service at the Company; however, the Company may limit the number of
pilots recalled to service with Northwest to five per month.
Information Technology Support Agreement. The Company has entered into a
service agreement with Northwest under which Northwest provides information
technology services and support for its operations, including access to various
Northwest operational systems that are necessary for the Company to provide
regional airline service to Northwest.
50
Item 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
5. Other Agreements with Northwest (continued)
Family Assistance Services Agreement. The Company has entered into an
agreement with Northwest with respect to the responsibilities of each party in
jointly responding to an emergency and providing assistance to the victims of an
accident and their family members, as well as all necessary training to the
Company's employees on an ongoing basis.
Ground Handling Agreement. The Company and Northwest have entered into a
ground handling agreement whereby the Company will provide certain ground
handling functions to another regional airline that provides airline capacity to
Northwest. Such services will be provided at certain locations that are operated
by the Company through the term of the agreement, which expires December 31,
2017. Upon expiration, the agreement is automatically renewed for successive
five-year periods unless terminated by the Company or Northwest pursuant to the
terms of the agreement. The initial payment rate for these functions is
effective through December 31, 2003. On January 1, 2004, and each succeeding
January 1, the ground handling payment rate will be adjusted for certain cost
increases as defined in the agreement. For the years ending December 31, 2003,
2002 and 2001, the Company recorded revenue of approximately $6,010, $5,918 and
$2,491, respectively, for providing these services, which is included in other
operating revenue in the accompanying statements of income.
Sublease of Saab Aircraft. The Company transferred 11 Saab turboprops to
Mesaba Airlines ("Mesaba"), another regional carrier of Northwest, during 2002.
The Company entered into an aircraft sublease agreement with Mesaba with respect
to these Saab aircraft and two engines that it leases from third parties. The
term of the sublease will continue for the remainder of the term of the
Company's sublease with the third-party sublessors, subject to its right to
terminate the sublease in the event of default by Mesaba. Amounts due from
Mesaba under its sublease agreement with the Company are consistent with amounts
paid by the Company to third party lessors.
6. Summary of Passenger Revenue
As discussed in Note 4, the Company's passenger revenue consists of
reimbursement payments for certain operating expenses, payments based on pre-set
rates for fixed costs, completed block hours and completed cycles. The Company
also receives margin payments on these items to achieve a target operating
margin. The Company's passenger revenues by aircraft type are as follows:
Years Ending December 31,
-----------------------------------------------
2003 2002 2001
-------------- ------------ ------------
Regional jets (CRJs) $ 450,611 $ 285,505 $ 111,586
Turboprops - 39,881 86,685
-------------- ------------ ------------
Total passenger revenue $ 450,611 $ 325,386 $ 198,271
============== ============ ============
The following schedules summarize passenger revenue for the year ending
December 31, 2003, which as discussed in Note 4, was the Company's first full
year of operations under an ASA. As the terms of the ASA are materially
different from the terms of the historical arrangement between the Company and
Northwest, comparable information for the years ending December 31, 2002 and
2001 is not available.
The Company's passenger revenue by type, including margin, for 2003
consisted of the following:
Reimbursement payments $ 296,257
Payments based on pre-set rates 154,354
-----------
Total passenger revenue $ 450,611
===========
51
Item 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
6. Summary of Passenger Revenue (continued)
According to the terms of the ASA, the Company is reimbursed for certain
operating expenses incurred in providing airline capacity to Northwest. The
following is a summary of the Company's operating expenses and passenger revenue
from reimbursement payments during 2003:
Year Ending December 31, 2003
-----------------------------------------------
Reimbursed Unreimbursed Total
--------------- --------------- ---------------
(in thousands)
Operating expenses:
Salaries, wages and benefits $ - $ 83,316 $ 83,316
Aircraft fuel and taxes 54,731 276 55,007
Aircraft maintenance, materials and repairs 6,548 7,568 14,116
Aircraft rentals 136,273 - 136,273
Other rentals and landing fees 16,512 12,743 29,255
Ground handling services 33,223 11,399 44,622
Depreciation and amortization - 2,912 2,912
Government reimbursements (1,000) (114) (1,114)
Other 9,600 18,614 28,214
--------------- --------------- ---------------
$ 255,887 $ 136,714 $ 392,601
=============== ===============
Margin on expense reimbursements 40,370
---------------
Passenger revenue from expense reimbursements $ 296,257
===============
7. Note Payable and Dividends to Northwest
Effective January 1, 2003, the Company settled all balances payable to, or
due from, Northwest as of December 31, 2002. This transaction resulted in the
elimination of all balances between the Company and Northwest and the issuance
of a $15,500 dividend to Northwest. The balance was settled through a cash
payment to the Company of $15,446.
A summary of balances settled with Northwest is as follows:
Net receivables due from Northwest $ 59,632
Less: Income taxes payable to Northwest 26,843
Net deferred taxes payable to Northwest 1,843
Dividend to Northwest 15,500
--------------
Cash payment to the Company $ 15,446
==============
52
Item 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
7. Note Payable and Dividends to Northwest (continued)
On January 14, 2003, the Company issued a $200,000 note payable to
Northwest as a dividend. The note payable required quarterly principal payments
of $5,000 beginning in March 2003 and continuing through December 2009. The note
payable also required monthly payments to the extent that the Company's cash and
cash equivalents balance exceeds $40,000. The note accrues interest at the rate
of 3.4%, which is payable quarterly. In the event that the Company does not
satisfy its obligations under the note, Northwest has the right to set off any
such amounts against its payment obligations to the Company under the ASA.
Should Northwest terminate the ASA prior to December 2009, all outstanding
principal and interest would become immediately due and payable to Northwest.
Immediately following the Offering, Northwest made a capital contribution
to the Company in the amount of $50,000. The contribution of capital was used by
the Company to reduce the outstanding principal balance on the note payable. The
Company and Northwest subsequently amended the note payable to reflect the
outstanding principal balance of $135,000. Also, the quarterly principal
payments were lowered to $3,000, or to the extent that the Company's cash and
cash equivalents balance exceeds $50,000. No other significant changes were made
to the terms of the note payable.
8. Lines of Credit
In January 2003, the Company retired the $4,245 balance outstanding under
the line of credit with a bank as of December 31, 2002.
In January 2003, the Company obtained a Revolving Credit Facility
("Revolver") from Northwest, which allows for borrowings up to $50,000. The term
of the Revolver extends through December 31, 2005. The Revolver accrues interest
at the rate of 1% plus a margin that is equal to the higher of the most recent
prime rate offered by JP Morgan Chase Bank, or the most recent overnight federal
funds rate offered to JP Morgan Chase Bank plus .5%. Under the terms of the
Revolver, the Company must continue to operate under the ASA and is prevented
from issuing or declaring dividends or incurring any additional debt without the
approval of Northwest. The interest rate at December 31, 2003 was 5.0%.
9. Leases
The Company leases all of its aircraft and certain aircraft equipment,
buildings and office equipment under noncancelable operating leases that expire
in various years through 2017. The Company subleases its CRJ aircraft from
Northwest under operating leases that expire December 31, 2017. The lease
agreements contain certain requirements of the Company regarding the payment of
taxes on the aircraft, acceptable use of the aircraft, the level of insurance to
be maintained, the maintenance procedures to be performed and the condition of
the aircraft upon its return to Northwest. The monthly lease rates include
certain fleet management costs of Northwest and are not representative of the
rates paid by Northwest to third-party lessors. Northwest reimburses the
company's aircraft rental expense in full under the ASA.
Certain aircraft and equipment are leased under noncancelable operating
leases expiring in various years through 2009. As discussed in Note 5, 11 Saab
340 aircraft are being subleased to another regional airline carrier that
provides airline capacity to Northwest.
53
Item 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
9. Leases (continued)
The following is a summary of the Company's fleet of active aircraft
providing scheduled passenger service:
Fleet Size as of December 31,
------------------------------------------------
Aircraft Standard Seating Configuration 2003 2002 2001
----------------- ----------------------------------- --------------- ---------------- ---------------
CRJ 200 50 35 33 30
CRJ 440 44 41 18 --
Saab 340 33 -- -- 24
--------------- ---------------- ---------------
76 51 54
=============== ================ ===============
The following summarizes approximate minimum future rental payments, by
year and in the aggregate, required under noncancelable operating leases with
initial or remaining lease terms in excess of one year as of December 31, 2003:
Operating Leases
--------------------------------------
Aircraft Non-aircraft
------------------ ------------------
2004 $ 167,256 $ 4,058
2005 167,256 3,533
2006 167,065 3,429
2007 161,995 3,250
2008 160,992 3,081
Thereafter 1,436,458 23,619
------------------ ------------------
2,261,022 40,970
Sublease rental income (26,622) (261)
------------------ ------------------
Total minimum operating lease payments $ 2,234,400 $ 40,709
================== ==================
Rental expense for operating leases for the years ended December 31
consisted of the following:
2003 2002 2001
----------------- ------------------ -----------------
Gross rental expense $ 160,723 $ 106,548 $ 45,104
Sublease rental income (8,181) (5,831) -
----------------- ------------------ -----------------
Net rental expense $ 152,542 $ 100,717 $ 45,104
================= ================== =================
The above minimum future rentals and total rental expense do not include
landing fees which amounted to approximately $12,986, $9,117 and $4,072 for the
years ended December 31, 2003, 2002 and 2001, respectively.
54
Item 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
10. Accrued Expenses
Accrued expenses consisted of the following as of December 31:
2003 2002
----------------- ----------------
Aircraft rents $ 290 $ 350
Compensation 4,397 4,143
Taxes other than income 4,678 4,382
Insurance costs 1,848 1,529
Other 409 678
----------------- ----------------
$ 11,622 $ 11,082
================= ================
11. Employee Benefit Plan
The Company maintains a 401(k) Plan (the "Plan") for all eligible
employees, which is administered by officers of the Company. Participants can
make tax deferred contributions of up to 16% of their annual salary. The Company
match is based on the following graduated scale:
Years of Service Company Match
Through 5 years 25% of first 5%
6-9 years 40% of first 6%
10-12 years 60% of first 7%
13 years and more 70% of first 7%
The plan was amended effective March 1, 2002, to allow all flight
attendants and non-union employees to be immediately eligible to participate in
the plan and to immediately vest in the Company's matching contributions.
Additionally, the Company matching contribution has increased to 100% of
eligible employee contributions up to 3% of their annual salary and 67% on the
next 3% of eligible employee contributions. The Company made matching
contributions of approximately $1,253, $710 and $407 for the years ended
December 31, 2003, 2002 and 2001, respectively.
The Plan also contains a profit sharing provision allowing the Company to
make discretionary contributions to the Plan for the benefit of all plan
participants. For the three years ended December 31, 2003, the Company made no
discretionary contributions to the Plan.
12. Other Expenses
Other expenses consisted of the following for the years ended December 31:
2003 2002 2001
----------------- ----------------- ------------------
Passenger liability insurance $ 2,427 $ 4,317 $ 1,866
Hull insurance 1,150 1,189 579
Property and other taxes 5,635 4,657 3,820
Other 19,002 18,058 19,595
----------------- ----------------- ------------------
$ 28,214 $ 28,221 $ 25,860
================= ================= ==================
55
Item 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
13. Income Taxes
As discussed in Note 4, Northwest's majority ownership of the Company
ceased with its contribution of stock to the Northwest Airlines Pension Plan
during September 2003 and the Company prospectively separated from Northwest's
consolidated federal and state tax group. Prior to this change in ownership, the
Company and Northwest operated under a tax sharing agreement whereby Northwest
was responsible for the payment of all U.S. federal income taxes, unitary state
income taxes and foreign income taxes with respect to the Company for all
periods the Company was part of the Northwest Consolidated Group and for any
audit adjustments to such taxes. As a member of the Northwest consolidated tax
group, the Company's operating results were included in the consolidated federal
income tax return of Northwest, and in certain states, the consolidated income
tax return for Northwest also included the Company's results. While a member of
the Northwest consolidated tax group, the Company provided for income taxes as
if it were a separate stand-alone entity.
Through the date of the change in majority ownership, the Company has paid
Northwest for all income taxes expected to be ultimately paid by Northwest,
which have been shown in the accompanying balance sheets as current income taxes
payable to, or due from, Northwest.
The significant components of the Company's deferred tax assets and
liabilities as of December 31 are as follows:
December 31,
-----------------------------------
2003 2002
-------------- ----------------
Deferred tax assets:
Asset valuation reserves $ 1,136 $ 1,163
Vacation Pay 692 549
Other accruals 721 782
-------------- ----------------
Total deferred tax assets 2,549 2,494
Deferred tax liabilities:
Tax over book depreciation (6,400) (4,459)
-------------- ----------------
Net deferred tax asset (liability) $ (3,851) $ (1,965)
============== ================
For financial reporting purposes, the provision for income tax expense
includes the following components for the years ended December 31:
2003 2002 2001
------------------ ------------------ ------------------
Current:
Federal $ 17,293 $ 16,107 $ 6,912
State 3,154 2,417 260
------------------ ------------------ ------------------
20,447 18,524 7,172
Deferred:
Federal 1,454 909 1,183
State 431 110 466
------------------ ------------------ ------------------
1,885 1,019 1,649
------------------ ------------------ ------------------
$ 22,332 19,543 8,821
================== ================== ==================
56
Item 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
13. Income Taxes (continued)
The following is a reconciliation of the provision for income taxes at the
applicable federal statutory income tax rate to the reported income tax expense
for the years ended December 31:
2003 2002 2001
------------ ------------- ------------
Income tax expense at statutory rate $ 20,090 $ 17,615 $ 8,073
State income taxes, net of federal taxes 2,239 1,817 310
Goodwill amortization - - 255
Other 3 111 183
------------ ------------- ------------
Income tax expense $ 22,332 $ 19,543 $ 8,821
============ ============= ============
14. Stock-Based Compensation
In connection with the Offering discussed in Note 3, the Company adopted
the 2003 Stock Incentive Plan (the "Plan"). The plan permits the granting of
non-qualified stock options, incentive stock options, stock appreciation rights,
restricted stock and other stock-based awards to employees or directors of the
Company. A maximum of 1,152 shares of common stock may be subject to awards
under the plan.
At the time of the Offering, the Company awarded options for 858 shares at
the Offering price of $14. These options vest over four years in annual
increments of 25% and will expire ten years after the grant date. The following
table provides certain information with respect to the Company's stock options:
Weighted Average
Stock Options Exercise Price
------------------- -------------------
Outstanding at December 31, 2002 - -
Granted 858 $ 14.00
Exercised - -
Forfeited - -
------------------- -------------------
Outstanding at December 31, 2003 858 $ 14.00
=================== ===================
As of December 31, 2003, the remaining contractual life of outstanding
options was 9.9 years.
Pro forma information regarding net income and income per share has been
determined as if the Company had accounted for its employee stock options and
purchase rights under the fair value method of SFAS No. 123. The fair value of
the options granted during 2003 was estimated at the date of grant using the
Black-Scholes options pricing model with the following assumptions for 2003:
risk-free interest rate of 3.5% dividend yield of 0.0%, expected volatility of
Pinnacle stock of 65.0% and expected life of the option of 6.0 years. The grant
date fair value of the stock options granted in 2003 was $8.65 per option.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and purchase rights
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, the existing models do not necessarily provide a reliable
single measure of the fair value of our employee stock options and purchase
rights.
57
Item 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
15. Related Party Transactions
Northwest is a related party of the Company. As previously noted, the
Company generates substantially all of its revenue from its ASA with Northwest
under which the Company uses the "NW" two-letter designator code in displaying
its schedules on all flights in the automated airline reservation systems used
throughout the industry. Under this agreement, the Company uses the name
"Northwest Airlink." Northwest leases the Company all of its regional jets,
provides certain borrowings to the Company and is the owner of 2,492 shares of
the Company's common stock and the Company's Series A preferred stock.
Years Ending December 31,
------------------------------------------------------
2003 2002 2001
----------------- ----------------- ------------------
Revenue:
Passenger revenue $ 450,611 $ 325,386 $ 198,271
Expenses:
Aircraft fuel and taxes 53,909 27,247 14,186
Aircraft rentals 136,283 79,260 25,601
Other rentals and landing fees 11,250 9,063 15
Ground handling services 32,069 14,584 925
Other 275 344 1,135
Interest expense 7,176 - -
Interest income - (2,937) (105)
Net amounts due from Northwest as of December 31, 2003 and 2002 were
$16,187 and $59,632, respectively, and are included in accounts receivable in
the Company's consolidated balance sheets.
16. Contingencies
Approximately 76% of the Company's workforce are members of unions
representing pilots, flight attendants and customer service agents. The
collective bargaining agreements for the pilots and flight attendants become
amendable on April 30, 2005, and July 31, 2006, respectively. The initial
contract for customer service agents is currently in negotiation. The Railway
Labor Act, which governs labor relations for unions representing airline
employees, contains detailed provisions that must be exhausted before work
stoppage can occur once a collective bargaining agreement becomes amendable.
The Company is a defendant in various lawsuits arising in the ordinary
course of business. While the outcome of these lawsuits and proceedings cannot
be predicted with certainty, it is the opinion of the Company's management based
on current information and legal advice that the ultimate disposition of these
suits will not have a material adverse effect on the financial position, results
of operations or cash flows.
58
Item 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
17. Quarterly Financial Data (Unaudited)
Unaudited summarized financial data by quarter for 2003 and 2002 is as
follows:
March 31 June 30 September 30 December 31
----------------- ----------------- ----------------- -----------------
2003
----
Operating Revenue $ 100,562 $ 109,449 $ 119,665 $ 127,095
Operating Income 14,339 15,697 16,571 17,562
Net Income 8,024 8,499 8,738 9,807
Basic and Diluted Income per Share 0.37 0.39 0.40 0.45
2002 March 31 June 30 September 30 December 31
---- ----------------- ----------------- ----------------- -----------------
Operating Revenue $ 66,343 $ 82,552 $ 87,385 $ 95,288
Operating Income 6,556 12,374 12,142 16,584
Net Income 4,258 8,004 7,829 10,694
Basic and Diluted Income per Share 0.19 0.37 0.36 0.49
Basic and diluted income per share for all periods presented was computed
using the total number of common stock shares outstanding, which was 21,892
shares.
18. Recently Issued Accounting Standards
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, effective for fiscal years beginning after June 15, 2002. This
statement addresses the accounting for obligations associated with the
retirement of long-lived assets and the associated asset retirement costs. The
Company adopted this statement effective January 1, 2003 and it did not have a
material effect on our financial position or results of operations.
FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, ("FIN 45"), significantly changed current practice in the accounting
for, and disclosure of, guarantees. FIN 45 required a guarantor to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 also expanded the disclosures
required to be made by a guarantor about its obligations under certain
guarantees that it has issued. FIN 45 disclosure requirements were effective for
financial statements of interim or annual periods ending after December 15,
2002, while the initial recognition and initial measurement provisions were
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company adopted FIN 45 effective January 1, 2003, which
did not have a material impact on our results of operations or financial
position.
In December 2002, the FASB issued No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. This statement amended SFAS No. 123,
Accounting for Stock-Based Compensation to provide alternate methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amended the
disclosure requirements of Statement 123 to require prominent disclosures about
the method of accounting for stock-based employee compensation and the effect of
the method used on reported results. The Company adopted this statement in 2003,
which did not have a material impact on our results of operations or financial
position.
59
Item 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
18. Recently Issued Accounting Standards (continued)
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, ("FIN 46"). FIN 46 was issued to improve financial
reporting by companies involved with variable interest entities. Until now, one
company generally has included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. FIN 46
changed that by requiring a variable interest entity to be consolidated by a
company if that company was subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN 46
applied immediately to variable interest entities created after January 31,
2003. The consolidation requirements applied to older entities in the first
fiscal year or interim period beginning after March 15, 2004. Certain of the
disclosure requirements applied to all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established. The
adoption of this statement did not have a material impact on our results of
operations or financial position as we do not have activities with any entities
that would fall under this interpretation.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have
a material impact on the Company's consolidated results of operations, financial
position, or cash flows.
19. Significant Event
On September 11, 2001, terrorists hijacked and intentionally crashed four
commercial aircraft operated by two U.S. air carriers, causing substantial loss
of life and property. While these aircraft were neither owned nor operated by
the Company, these events had an immediate and severe impact on the U.S. airline
industry's passenger traffic and yields. As a result of these events, the
Company reduced its scheduled capacity by approximately 20% on an available seat
mile basis and recorded a pre-tax charge of $118 for employee severance costs
related to the reduction in capacity. In addition, the downturn in revenue
required the Company to review its long-lived assets for possible impairment.
Based on the current operations, the Company determined that its long-lived
assets and goodwill were not impaired. The Company recorded other income of
$5,591 in December 31, 2001, related to expected financial assistance from the
U.S. Government under the Airline Stabilization Act. As of December 31, 2002,
the Company had received $4,785 of the expected financial assistance. The
remaining $806 was received during 2003.
60
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There were no changes in or disagreements on any matters of accounting
principles or financial statement disclosure between us and our independent
auditors.
Item 9A. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of our disclosure controls and procedures as of a date within
90 days of the filing of this report, the Chief Executive Officer and
Chief Financial Officer of Pinnacle Airlines Corp. have concluded that
the disclosure controls and procedures are effective.
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
61
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
The information required by Items 10 through 14 is incorporated by reference
from the definitive proxy statement for our 2004 annual meeting of stockholders
to be filed within 120 days of December 31, 2003.
62
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements
1. The following financial statements are included in Part II, Item 8.
Financial Statements and Supplementary Data:
Report of Independent Auditors on:
i) Consolidated Statements of Income for the Years Ending December
31, 2003, 2002 and 2001
ii) Consolidated Balance Sheets as of December 31, 2003 and 2002
iii) Consolidated Statements of Cash Flows for the Years Ending
December 31, 2003, 2002 and 2001
iv) Consolidated Statements of Stockholders' Equity (Deficiency) for
the Years Ending December 31, 2003, 2002 and 2001
v) Notes to Consolidated Financial Statements
2. Schedule II--Valuation and Qualifying Accounts. Report of independent
auditors included in Item 15(d).
All other financial statement schedules are not required under the related
instructions or are inapplicable and therefore have been omitted.
63
3. Index of Exhibits
The following exhibits are filed as part of this Form 10-K.
Exhibit
Number Description
- ------- -----------
3.1* Amended and Restated Certificate of Incorporation of the registrant
3.1.1* Second Amended and Restated Certificate of Incorporation of the
registrant
3.2* Certificate of Designations for Series A preferred stock of the
registrant
3.3* Bylaws of the registrant
3.3.1* Amended and Restated Bylaws, dated January 14, 2003, of the
registrant
4.1* Specimen Stock Certificate
4.2* Rights Agreement between the registrant and EquiServe Trust Company,
N.A., as Rights Agent
10.2* Sublease Agreement between Pinnacle Airlines, Inc. and Northwest
Airlines, Inc.
10.2.1* First Amendment to Sublease Agreement between Pinnacle Airlines,
Inc. and Northwest Airlines, Inc.
10.3* Engine Lease Agreement between Pinnacle Airlines, Inc. and Northwest
Airlines, Inc.
10.3.1* First Amendment to Engine Lease Agreement between Pinnacle Airlines,
Inc. and Northwest Airlines, Inc.
10.4* Promissory Note issued by Pinnacle Airlines, Inc. to Northwest
Airlines, Inc.
10.5* Guarantee of Promissory Note issued by registrant to Northwest
Airlines, Inc.
10.6* Revolving Credit Facility dated as of January 14, 2003 between
Pinnacle Airlines, Inc. and Northwest Airlines, Inc.
10.6.1* First Amendment dated as of February 5, 2003 to Revolving Credit
Facility dated as of January 14, 2003 between Pinnacle Airlines,
Inc. and Northwest Airlines, Inc.
10.6.2* Second Amendment to Revolving Credit Facility dated as of
January 14, 2003 between Pinnacle Airlines, Inc. and Northwest
Airlines, Inc.
10.7* Guaranty dated as of January 14, 2003 issued by registrant to
Northwest Airlines, Inc.
10.8* Pinnacle Airlines Corp. 2003 Stock Incentive Plan
10.9* Non-Qualified Stock Option Agreement for options granted under the
Pinnacle Airlines Corp. 2003 Stock Incentive Plan
10.10* Pinnacle Airlines, Inc. Annual Management Bonus Plan
10.11* Amended and Restated Sublease Agreement dated as of January 14,
2003 between Pinnacle Airlines, Inc. and Northwest Airlines, Inc.
(SBN Facilities)
10.12* Sublease Agreement dated as of August 1, 2002 between Pinnacle
Airlines, Inc. and Northwest Airlines, Inc. (TYS Facilities)
10.13* Amended and Restated Facilities Use Agreement between Pinnacle
Airlines, Inc. and Northwest Airlines, Inc. (DTW Facilities)
10.14* Amended and Restated Facilities Use Agreement between Pinnacle
Airlines, Inc. and Northwest Airlines, Inc. (MEM Facilities)
10.15* Amended and Restated Facilities Use Agreement between Pinnacle
Airlines, Inc. and Northwest Airlines, Inc. (MSP Facilities)
10.16+ Management Compensation Agreement dated as of January 14, 2003
between Pinnacle Airlines, Inc. and Philip H. Trenary
10.17* Management Compensation Agreement dated as of January 14, 2003
between Pinnacle Airlines, Inc. and Curtis E. Sawyer
10.18* Lease Guaranty issued by the registrant to Northwest Airlines, Inc.
10.19* Sublease Guaranty issued by the registrant to Northwest Airlines,
Inc.
10.20* Airline Services Agreement dated as of March 1, 2002 among the
registrant, Pinnacle Airlines, Inc. and Northwest Airlines, Inc.
10.21* Airline Services Agreement dated as of January 14, 2003 among the
registrant, Pinnacle Airlines, Inc. and Northwest Airlines, Inc.
64
Exhibit
Number Description
- ------- -----------
10.21.1* Amendment No. 1 dated as of September 11, 2003 to the Airline
Services Agreement dated as of January 14, 2003 among the
registrant, Pinnacle Airlines, Inc. and Northwest Airlines, Inc.
10.21.2* Amendment No. 2 to the Airline Services Agreement dated as of
January 14, 2003 among the registrant, Pinnacle Airlines, Inc.
and Northwest Airlines, Inc.
10.22* Amended and Restated Ground Handling Agreement between Pinnacle
Airlines, Inc. and Northwest Airlines, Inc.
10.23* Amended and Restated Information Technology Services Agreement
between Pinnacle Airlines, Inc. and Northwest Airlines, Inc.
10.24* Amended and Restated Family Assistance Services Agreement between
Pinnacle Airlines, Inc. and Northwest Airlines, Inc.
10.25* Amended and Restated Manufacturer Benefits Agreement between
Pinnacle Airlines, Inc. and Northwest Airlines, Inc.
10.26* Form of Amended and Restated Preferential Hiring Agreement between
Pinnacle Airlines, Inc. and Northwest Airlines, Inc.
21.1* List of Subsidiaries
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32 Certifications of CEO and CFO
* Incorporated by reference to the Company's Registration Statement
Form S-1 (Registration No. 333-83359), as amended
+ Management contract or compensatory plan or arrangement
65
(b) Reports on Form 8-k during the fourth quarter of 2003
None.
66
(d) Schedule II--Valuation and Qualifying Accounts
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Pinnacle Airlines
Corp. (the "Company") as of December 31, 2003 and 2002, and for each of the
three years in the period ended December 31, 2003, and have issued our report
thereon dated January 21, 2004 (included elsewhere in this Form 10-K). Our
audits also included the financial statement schedule listed in Item 15(a) of
this Form 10-K. This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Memphis, Tennessee
January 21, 2004
67
(d) Schedule II--Valuation and Qualifying Accounts (in thousands)
Allowance For
Obsolescence of Spare Parts
---------------------------
Balance, December 31, 2000 $ 1,527
Additions charged to expense 453
Deductions from reserve -
---------------------------
Balance, December 31, 2001 1,980
Additions charged to expense 686
Deductions from reserve (63)
---------------------------
Balance, December 31, 2002 2,603
Additions charged to expense 106
Deductions from reserve (103)
---------------------------
Balance, December 31, 2003 $ 2,606
===========================
Allowance for
Doubtful Receivables
---------------------------
Balance, December 31, 2000 $ 216
Additions charged to expense 94
Deductions from reserve -
---------------------------
Balance, December 31, 2001 310
Additions charged to expense 226
Deductions from reserve -
---------------------------
Balance, December 31, 2002 536
Additions charged to expense -
Deductions from reserve (390)
---------------------------
Balance, December 31, 2003 $ 146
===========================
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Pinnacle Airlines Corp. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Pinnacle Airlines Corp.
-----------------------
(Registrant)
Date: March 9, 2004 By: /s/ Philip H. Trenary
-------------------------------------
Name: Philip H. Trenary
Title: President, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 9, 2004.
Signature Title
/s/ Philip H. Trenary
- ----------------------- President, Chief Executive Officer and Director
Philip H. Trenary (Principal Executive Officer)
/s/ Curtis E. Sawyer
- ----------------------- Vice President and Chief Financial Officer
Curtis E. Sawyer (Principal Accounting Officer)
/s/ Stephen E. Gorman
- ----------------------- Chairman, Director
Stephen E. Gorman
/s/ Donald J. Breeding
- ----------------------- Director
Donald J. Breeding
/s/ J. Timothy Griffin
- ----------------------- Director
J. Timothy Griffin
/s/ Robert A. Peiser
- ----------------------- Director
Robert A. Peiser
/s/ Thomas S. Schreier, Jr.
- --------------------------- Director
Thomas S. Schreier, Jr.
/s/ R. Philip Shannon
- ----------------------- Director
R. Philip Shannon
/s/ Nicholas R. Tomassetti
- -------------------------- Director
Nicholas R. Tomassetti
69
Exhibit 31.1 Certification of Chief Executive Officer
I, Philip H. Trenary, certify that:
1. I have reviewed this annual report on Form 10-K of Pinnacle Airlines
Corp.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f), for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected or is reasonably likely to materially affect the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
Date: March 9, 2004 /s/ Philip. H. Trenary
------------------------
Philip H. Trenary
President and Chief Executive Officer
70
Exhibit 31.2 Certification of Chief Financial Officer
I, Curtis E. Sawyer, certify that:
1. I have reviewed this annual report on Form 10-K of Pinnacle Airlines Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f), for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected or is
reasonably likely to materially affect the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
Date: March 9, 2004 /s/ Curtis E. Sawyer
----------------------
Curtis E. Sawyer
Vice President and Chief Financial Officer
71
Exhibit 32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. 1350
Each of the undersigned, Philip H. Trenary and Curtis E. Sawyer, certifies,
pursuant to 18 U.S.C. Section 1350, that (1) this annual report on Form 10-K for
the year ended December 31, 2003 of Pinnacle Airlines Corp. (the "Company")
fully complies with the requirements of section 13(a) of the Securities Exchange
Act of 1934 and (2) the information contained in the report fairly presents, in
all material respects, the financial condition and result of operations of the
Company.
March 9, 2004
/s/ Philip H. Trenary
----------------------------------
Philip H. Trenary
President and Chief Executive Officer
/s/ Curtis E. Sawyer
----------------------------------
Curtis E. Sawyer
Vice President and Chief Financial Officer
72