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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
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Commission File Number 001-31898
PINNACLE AIRLINES CORP.
(Exact name of registrant as specified in its charter)
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Delaware
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03-0376558 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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1689 Nonconnah Blvd, Suite 111
Memphis, Tennessee
(Address of principal executive offices) |
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38132
(Zip Code) |
Registrant’s telephone number, including area code:
901-348-4100
Securities registered pursuant to Section 12(b) of the
Act:
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Name of each exchange on which registered: |
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Common Stock, $.01 par value
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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 þ No o
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. þ
Indicate
by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the
Act). Yes þ No o
The
aggregate market value of the voting and non-voting common
equity stock held by non-affiliates of the registrant was
$219 million as of June 30, 2004.
As
of March 1, 2005, 21,950,260 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 2005 Annual Meeting of Stockholders to be
filed with the Commission within 120 days after
December 31, 2004.
TABLE OF CONTENTS
i
PART I
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 in 2004 and we were 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, 2004, we had a 54% increase in block
hours over the same period in 2003. We provide Northwest with
regional airline capacity as a Northwest Airlink carrier at its
domestic hub airports in Detroit, Minneapolis/ St. Paul and
Memphis, and in the focus cities of Milwaukee and Indianapolis.
At December 31, 2004, we operated a jet fleet of 117
Canadair Regional Jet (“CRJ”) aircraft and offered
regional airline services with approximately 660 daily
departures to 103 cities in 35 states and four
Canadian provinces. We offered service with 76 CRJ aircraft with
approximately 490 daily departures to 81 cities in
29 states and two Canadian provinces as of
December 31, 2003.
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
sole 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 Plans”). 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 our fleet to 95
regional jets by December 31, 2004. During 2003, we entered
into certain amendments to the ASA with Northwest that, among
other things, extended the term of the agreement through
December 31, 2017, increased the number of CRJ aircraft
under the ASA to 129, eliminated incentive payments based on
certain performance criteria and lowered our target operating
margin from 14% to 10% effective December 1, 2003. During
2004, we amended our ASA with Northwest to, among other things,
increase from 129 to 139 the number of CRJ aircraft that will be
operated by Pinnacle Airlines, Inc. under the ASA. As
consideration for these contractual rights, we agreed to pay
$15.1 million to Northwest. Concurrently with this
amendment to the ASA, we amended the revolving credit agreement
(“Revolver”) between Pinnacle Airlines, Inc. and
Northwest. Among other things, the amendment to the Revolver
provided that in our role as guarantor, we may obtain up to
$5 million in advances from Pinnacle Airlines, Inc. to
secure, or do business utilizing, a second airline operating
certificate. Additionally, the amendment decreased borrowings
available to Pinnacle Airlines, Inc. under the Revolver from
$50 million to $25 million.
1
Our Airline Services Agreement with Northwest (continued)
At the end of its term in 2017, the ASA automatically extends
for additional five-year periods unless Northwest provides
notice to us two years prior to the termination date that it
does not plan to extend the term.
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 and engine 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. We have no financial risk associated
with cost fluctuations because we are reimbursed by Northwest
for the actual expenses incurred for these items.
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 to the
Company or by the Company to Northwest will be made to adjust
our operating margin to the floor or ceiling. Specified items
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. For the years
ended December 31, 2004, 2003, and 2002 no margin
adjustment payments were required pursuant to the terms of the
ASA.
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
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Our Airline Services Agreement with Northwest (continued)
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. Note 4,
“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.
The ASA covers all of our existing fleet, as well as the 22
additional regional jets currently scheduled to become part of
our fleet during 2005. Northwest is entitled to change the
timing of the deliveries of the remaining 22 aircraft by either
delaying or accelerating the delivery of any aircraft but has
agreed to deliver a total of 139 CRJs by December 31, 2005,
subject to Northwest receiving the aircraft from Bombardier, the
manufacturer of the CRJ, by that time. Of the 22 planned
deliveries of CRJ aircraft in 2005, we are planning to accept
delivery of six aircraft in the first quarter (three received as
of March 1, 2005), thirteen aircraft in the second quarter
and three aircraft in the third quarter. In addition to those 22
regional jets, at its option Northwest may also add up to 165
additional regional jets to our fleet to be operated by us under
the terms of the ASA. If Northwest chooses to expand our CRJ
fleet to more than 139 aircraft, Northwest retains the option
under the ASA to subsequently reduce the number of jets covered
by the ASA to a minimum of 139 aircraft. Northwest also has
certain rights to terminate the ASA or reduce the number of
aircraft covered by the ASA to fewer than 139 aircraft. A more
detailed discussion of these rights can be found below under
“Term and Termination of Agreement; Remedies for
Breach.” Northwest is also responsible for scheduling all
aircraft covered by the ASA.
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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.
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.
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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 third parties, primarily Northwest
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Our Airline Services Agreement with Northwest (continued)
and Mesaba Airlines. 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.
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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.
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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.
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Our Airline Services Agreement with Northwest (continued)
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) a 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:
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terminate the ASA, which would immediately terminate the leases
and subleases for all of our CRJs; and |
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prior to electing to terminate the ASA, immediately terminate
the subleases for 89 of our CRJs, and if the strike continues
for more than 45 days, terminate the subleases for all but
50 of our CRJs. |
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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:
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our failure to make any payment under any aircraft lease or
sublease; |
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an event of default by us of any term of any aircraft lease or
sublease; |
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an event of default under any of our other agreements with
Northwest; |
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our failure to make payments under our promissory note to
Northwest (which was subsequently retired in February 2005); |
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our failure to make payments under our revolving credit facility
with Northwest; |
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our failure to maintain required insurance coverages; |
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our failure to comply with Northwest’s inspection
requirements; |
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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: |
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an FAA order grounding all commercial flights or all air
carriers or grounding a specific aircraft type of all carriers, |
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a scheduling action by Northwest or |
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Northwest’s inability to perform its obligations under the
airline services agreement as a result of a strike by Northwest
employees; |
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suspension or revocation of our authority to operate as an
airline by the FAA or the Department of Transportation
(“DOT”); |
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a change of control of our company or our affiliates; |
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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 |
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Our Airline Services Agreement with Northwest (continued)
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any replacement of the chief executive officer of either
Pinnacle Airlines Corp. or Pinnacle Airlines, Inc. that is not
approved by Northwest. |
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.
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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. We currently lease all of our
turboprops from third parties and sublease them to Mesaba
Airlines. Note 4, “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.
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 March 1, 2005, we had approximately 3,260 active
employees, including 1,000 pilots, 625 flight attendants (of
whom 270 are part-time), 890 customer service personnel (of whom
735 are part-time), 320 mechanics and other maintenance
personnel, 90 dispatchers/crew resource personnel and 335
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 77% of our employees are represented by unions.
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Our Employees (continued)
The following table reflects our principal collective bargaining
agreements and their respective amendable dates as of
March 1, 2005:
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Representing Union |
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Contract Amendable Date |
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Pilots
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1,000 |
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Airline Pilots Association |
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April 30, 2005 |
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Flight Attendants
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625 |
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Paper, Allied-Industrial, Chemical and Energy Workers
International Union |
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July 31, 2006 |
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Customer Service
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890 |
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Paper, Allied-Industrial, Chemical and Energy Workers
International Union |
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March 19, 2010 |
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
our CRJs. 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 1.9 years. In general, the CRJ aircraft do
not require their first heavy maintenance checks until they have
flown approximately 8,000 hours, (3.5 to 3.75 years).
Northwest is required to reimburse us for and pay a margin on
these maintenance expenses for our CRJs under the ASA. The
profit we derive from maintenance has been minimal, but we
expect that it will grow as the aircraft age.
Training
We perform the majority of training of our flight personnel in
Memphis, Tennessee at our Corporate Education Center and the
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 three
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.
We provide in-house and outside training for our maintenance
personnel and take advantage of manufacturers’ training
programs offered, particularly when leasing new aircraft.
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Training (continued)
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. Some of the security enhancements
implemented include 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; directors’ and
officers’ insurance; 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 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 or 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. 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.
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
8
Item 1. Business
Regulations (continued)
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, 2004, we operated 117 CRJs serving
103 cities in 35 states and four Canadian provinces
out of Northwest’s three hubs and two focus cities, and our
route network spanned the entire eastern half of the United
States. We fly as far west as Casper, Wyoming, as far east as
Halifax, Nova Scotia, as far north as Winnipeg, Manitoba and as
far south as San Antonio, Texas.
Recent Developments
In February 2005, we completed the sale of $121 million
principal amount of our 3.25% senior convertible notes due
February 15, 2025 (the “Notes”). Our sale of the
Notes was made to qualified institutional investors under
Rule 144A of the Securities Act of 1933. As part of the
terms of the sale, we agreed to file a registration statement
with the Securities and Exchange Commission for the resale of
the Notes and the shares of common stock issuable upon
conversion of the Notes within 90 days after the closing of
the sale.
We used the net proceeds from the Notes, together with cash on
hand, to purchase the outstanding $120 million note payable
to Northwest at a discounted price of $101.6 million, to
repay $5 million of borrowings outstanding under the
Revolver with Northwest, in each case with accrued and unpaid
interest, and for general corporate purposes. As a result, we
recorded a pre-tax gain of $18.4 million related to the
extinguishment of debt during the first quarter of 2005. A more
detailed discussion of our borrowings from Northwest is provided
in Note 6 “Note Payable and Dividends to
Northwest” and Note 7 “Lines of Credit” in
the notes to our consolidated financial statements under
Item 8 of this Form 10-K.
The Notes pay interest semiannually in arrears in cash on
February 15 and August 15 of each year, beginning
August 15, 2005. The holders of the Notes may require us to
purchase all or a portion of their Notes for cash on
February 15, 2010, February 15, 2015, and
February 15, 2020 at a purchase price equal to 100% of the
principal amount of the Notes to be repurchased plus accrued and
unpaid interest, if any, to the purchase date. The Notes are
structured such that, upon the occurrence of certain events,
holders may convert the Notes into the equivalent value of our
common stock at an initial conversion rate of
75.6475 shares per $1,000 principal amount of Notes,
representing an initial conversion price of $13.22 per
share. Upon conversion, we will pay the holder the portion of
the conversion value in cash up to the $1,000 principal amount.
To the extent that the conversion value exceeds the $1,000
principal amount, the excess will be settled in cash, common
stock or a combination of both, at our option.
Holders may convert their Notes only during the following
periods:
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• |
during a quarter (and only during such quarter) if the closing
price of our common stock exceeds 120% of the conversion price
of the Notes (initially $15.86 per share) for at least 20
of the last 30 trading days of the preceding quarter; |
| |
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• |
during a five day period after the Notes have traded for a five
day period at a price that is less than 98% of the equivalent
value that could be realized upon conversion of the Notes; |
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• |
if we call the convertible Notes for redemption; |
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• |
if a change of control or other specified corporate transactions
or distributions to holders of our common stock occurs (and in
some instances, we may also owe an additional premium upon a
change in control); and |
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• |
during the 10 trading days prior to the maturity date of
February 15, 2025. |
9
Recent Developments (continued)
Because the $1,000 principal amount of the Notes will be settled
in cash upon conversion, the number of shares used in our
calculation of fully diluted earnings per share will only be
increased by the number of shares of our common stock with a
market value equal to the excess of the Notes’ conversion
value over their $1,000 principal amount.
The following table summarizes the number of shares that would
be used in our calculation of fully diluted earnings per share
as a result of our issuance of the Notes:
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Increase in Fully Diluted Shares with |
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|
$121 Million Principal Amount |
| Average Stock Price during Period |
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Outstanding (thousands) |
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$11.00
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— |
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$12.00
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|
|
— |
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$13.00
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— |
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$14.00
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510 |
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$15.00
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1,087 |
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$16.00
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1,591 |
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$17.00
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2,036 |
|
10
Risk Factors Affecting Our Business
Risks Relating to our ASA with Northwest
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We are dependent on the services that Northwest provides
to us. 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. 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. As a result, we will
have no significant source of revenue or earnings unless we are
able to enter into satisfactory substitute arrangements. We
currently sublease all of our regional jets from Northwest. The
current term of the ASA expires on December 31, 2017. A
further discussion of our ASA is included in
“Business — Our Airline Services Agreement.”
We currently use Northwest’s systems, airport facilities
(including maintenance facilities) and services to support a
significant portion of our operations, including our information
technology support, dispatching, fuel purchasing, 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.
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Northwest may decide not to grow our fleet beyond 139 CRJs
or to use other regional airlines, and any future growth from
Northwest may be on less than favorable terms. |
The ASA does not guarantee the growth of our fleet beyond 139
CRJs. Northwest is permitted under the ASA to add an additional
165 CRJs to our fleet on the same economic terms as the first
139 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.
Additionally, even if Northwest chooses to expand our CRJ fleet
to more than 139 aircraft, it will be allowed at any time to
subsequently reduce the number of regional jets covered by the
ASA so long as our fleet is not reduced below 139 regional jets.
Additionally, 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
currently has airline services agreements with Mesaba Airlines,
under which Mesaba, operating as a Northwest Airlink carrier,
provides Northwest with regional airline capacity at its hub
airports in Detroit, Minneapolis/St. Paul and Memphis.
Northwest currently owns approximately 28% of the outstanding
common stock of Mesaba, which operates Avro RJ85 regional jets
and Saab turboprops. 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 165
CRJs on which it has option.
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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 certain reimbursable expenses, primarily fuel, that we incur
only when we fly. Approximately 37% of our 2004 revenue from
regional airline services was from block hour and cycle payments
and the reimbursement of fuel costs. 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. For example, after
September 11, 2001, Northwest reduced our scheduled
capacity by approximately 20% on an available seat mile basis.
Northwest could decide to significantly reduce the utilization
levels of our fleet in the future.
11
Risks Relating to our ASA with Northwest (continued)
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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
established to cover all of our expenses in respect of the ASA
that are not directly reimbursed by Northwest. The substantial
majority of expenses intended to be covered by the payments for
block hours, cycles and fixed costs relate to labor costs,
passenger handling costs, landing fees, overhead and
depreciation. 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. Our
operating margin for those periods could also be less than the
applicable floor if we incur specified excluded costs, such as
employee bonuses and incentives to the extent they exceed
amounts used in calculating our pre-set rates, employee salary
expenses in excess of standard industry wages, depreciation
expense relating to capital expenditures in excess of $250,000
and deemed by Northwest to be inconsistent with the provision of
regional airline services and penalties based on our failure to
satisfy specified performance measures. These excluded costs may
be substantial, and, as a result, we could suffer losses under
the agreement, and we may be unable to generate sufficient cash
flow to pay our debts on time.
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 that we provide.
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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).
12
Risks Related to Our Business and Operations
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Northwest Airlines is our largest source of operating
revenue, and financial or operational difficulties at Northwest
could have a negative impact on our financial condition. |
We derive 99.4% of our operating revenue from Northwest
Airlines. Northwest has incurred significant losses since 2001,
including a net loss of $862 million in 2004. Should
Northwest continue to experience operating losses, it may have
difficulty fulfilling its financial obligations, including the
payment of revenues owed to us under the ASA. In addition,
Northwest may be forced to seek protection under Chapter 11
of the United States bankruptcy code. Such an action could
adversely affect our financial condition.
Northwest also provides us with a number of services that we
need in order to operate, including ground handling services and
access to its leased airport facilities. If Northwest were to
experience operational difficulties, including a strike, it may
not be able to provide these services to us. Since our revenues
and profits are dependent on our level of flight operations, a
strike at Northwest could adversely affect our financial
condition. Northwest has experienced strikes by its employees in
the past. Northwest could experience strikes or other
operational difficulties that require it and us to cease
operations again in the future.
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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 22
aircraft to our fleet in 2005, will require us to locate, hire,
train and retain a significant number of new employees. 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.
The airline industry has in the past experienced, and may again
in the future experience, a shortage of qualified personnel,
specifically pilots and mechanics. In addition, as is common
with most of our competitors, we face considerable turnover of
our employees. Our pilots often leave to work for major
airlines, which generally offer salaries higher than those
regional airlines are able to offer. We may not be able to
locate, hire, train and retain the qualified employees that we
need to carry out our expansion plans or replace departing
employees.
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Strikes or labor disputes with our employees may adversely
affect our ability to conduct our business and could result in
the termination of the ASA 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. Our bargaining agreement with our pilots becomes
amendable on April 30, 2005, and we are already engaged in
discussions with pilot’s union representatives. 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.
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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. For example, during the year ended
December 31, 2004, our labor costs constituted
approximately 19% of our total operating costs. Under our ASA
with Northwest, our block hour, cycle and fixed cost rates
contemplate labor costs that increase at a market rate, which is
based on increases in the producer price index (“PPI”)
as defined in the ASA, through 2007. Although the ASA generally
provides for adjustments to the payments we receive under the
agreement to maintain our operating margin between 9% and 11%
for 2005 and between 8% and 12% for 2006 and 2007, adjustments
will not be made with respect to labor cost increases exceeding
standard industry
13
Item 1. Business
Risks Related to Our Business and Operations (continued)
wages. As a result, 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 have entered into
collective bargaining agreements with our pilots, flight
attendants and fleet and passenger service employees, which are
amendable in 2005, 2006 and 2010, respectively.
Our other employees are not covered by collective bargaining
agreements. Future agreements with our employees’ unions
may be on terms that are not economically as attractive as our
current agreements or comparable to agreements entered into by
our competitors. Any future agreements may increase our labor
costs or otherwise adversely affect us. Additionally, we cannot
assure you that the compensation rates that we have assumed will
correctly reflect the market for our non-union employees, or
that there will not be future unionization of our currently
non-unionized groups which could adversely affect our costs.
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We are highly leveraged, which could hurt our ability to
meet our strategic goals. |
As of December 31, 2004, we had a stockholders’
deficiency of $7.5 million and our debt accounted for
106.4% of our total capitalization. In February 2005, as
discussed in “Recent Developments” in Item 1 of
this Form 10-K, we issued $121 million of our
3.25% senior convertible notes due 2025. We used the
proceeds to repurchase all of our long-term debt payable to
Northwest and to repay the outstanding balance of
$5 million under our revolving credit facility with
Northwest. After giving effect to these transactions, as of
December 31, 2004 our stockholders’ equity would have
been $4.0 million and our total debt would have accounted
for 96.8% of our total capitalization on a pro forma basis. Our
high degree of leverage could:
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• |
limit our ability to obtain additional financing to support
capital expansion plans and for working capital and other
purposes; |
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• |
divert substantial cash flow from our operations and expansion
plans in order to service our debt; |
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• |
limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we compete; and |
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• |
place us at a possible competitive disadvantage compared to less
leveraged competitors and competitors that have better access to
capital resources. |
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Our reputation and financial results could be harmed in
the event of an accident or incident involving our
aircraft. |
On October 14, 2004, one of our aircraft, which was not
being operated in commercial service, was involved in an
accident with no passengers or flight attendants on board. The
two pilots did not survive the accident. The National
Transportation Safety Board investigation following the accident
and the subsequent FAA inspection, although still ongoing, have
not revealed any regulatory violation or negligence on the part
of the Company to date. While this accident has not had a
material adverse effect on our business, we cannot assure you
that we would not be adversely affected by any accident in the
future.
An accident or incident involving one of our aircraft could
involve repair or replacement of a damaged aircraft, and its
consequential temporary or permanent loss from service, and
significant potential claims of injured passengers and others.
We are required by the DOT to carry liability insurance.
Although we believe we currently maintain liability insurance in
amounts and of the type generally consistent with industry
practice, the amount of such coverage may not be adequate, and
we may be forced to bear substantial losses from an accident.
Substantial claims resulting from an accident in excess of our
related insurance coverage would harm our business and financial
results. Moreover, any aircraft accident or incident, even if
fully insured, could cause a public perception that we are less
safe or reliable than other airlines, which would harm our
business.
14
Risks Related to Our Business and Operations (continued)
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We are increasingly dependent on technology in our
operations, and if our technology fails, our business may be
adversely affected. |
We have made, and continue to make, significant investments in
technology hardware and software to manage our operations. In
particular, our systems operations control center, which
oversees daily flight operations, is dependent on a number of
technology systems to operate effectively. Like all companies,
our technology systems may be vulnerable to a variety of sources
of interruption due to events beyond our control, including
natural disasters, terrorist attacks, computer viruses, and
hackers. In addition, large scale interruption in technology
infrastructure that we depend on, such as power,
telecommunications or the internet, could cause a substantial
disruption in our operations.
For example, in December 2004, our operations were
significantly affected when adverse weather conditions closed or
reduced operations at over 60% of the airports we serve. The
severe weather strained our operational systems, and our ability
to recover quickly to normal reliability levels was impaired.
The December operational incident was a factor in our failure to
meet certain operational performance levels under the ASA for
the second half of 2004, and we were required to pay performance
penalties totaling $1.4 million to Northwest.
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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. In that event, the price of our
common stock could decline, perhaps substantially.
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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.
Bombardier aerospace workers represented by the International
Association of Machinists and Aerospace Workers of the Quebec
Workers Federation engaged in a strike affecting three plants,
including a plant where Bombardier assembles CRJs. The strike
lasted from April 15, 2002 through May 5, 2002, at
which time the union entered into a new contract which is
effective through November 30, 2005. The strike delayed by
approximately one month the delivery of each of the remaining 18
CRJs we were scheduled to receive in 2002, after which
deliveries have been made as previously scheduled. Any future
prolonged strike at Bombardier or delay in Bombardier’s
production schedule as a result of labor matters could further
disrupt the delivery of CRJs to us, which could adversely affect
the planned growth of our fleet.
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.
15
Risks Related to Our Business and Operations (continued)
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.
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Under certain circumstances, we may be required to pay
cash or a combination of cash and our common stock to holders of
our 3.25% senior convertible notes due 2025 at their option
prior to the maturity date. |
As noted in “Recent Developments,” holders of our
$121 million principal amount senior convertible notes may
require us to purchase all or a portion of their Notes for cash
on February 15, 2010, February 15, 2015, and
February 15, 2020 at a purchase price equal to 100% of the
principal amount of the Notes to be repurchased plus accrued and
unpaid interest, if any, to the purchase date. In addition,
under certain circumstances, holders of the Notes may convert
the Notes into the equivalent value of our common stock. Upon
conversion, we will pay the portion of the conversion value up
to the principal amount of each note in cash, and any excess
conversion value in cash or our common stock at our election.
Holders may convert their notes only during the following
periods:
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• |
during a quarter (and only during such quarter) if the closing
price of our common stock exceeds 120% of the conversion price
of the Notes (initially $15.86 per share) for at least 20
of the last 30 trading days of the preceding quarter; |
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• |
during a five day period after the notes have traded for a five
day period at a price that is less than 98% of the equivalent
value that could be realized upon conversion of the Notes; |
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• |
if we call the Notes for redemption; |
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• |
if a change of control or other specified corporate transactions
or distributions to holders of our common stock occurs (and in
some instances, we may also owe an additional premium upon a
change in control); and |
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• |
during the 10 trading days prior to the maturity date of
February 15, 2025. |
We may not have sufficient financial resources at the time that
a holder of the Notes presents their notes to us for conversion
or for repurchase. In addition, we will classify the Notes as a
current liability during any period for which they may be freely
converted, regardless of whether any holders have actually
converted the Notes.
Risks Associated with the Airline Industry
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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.
In addition to traditional competition among airlines, the
industry faces competition from ground transportation
alternatives. Video teleconferencing and other methods of
electronic communication have also added a new dimension of
competition to the industry as businesses and leisure travelers
seek substitutes for air travel.
16
Risks Associated with the Airline Industry (continued)
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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.
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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
involve significant compliance costs. In the last several years,
Congress has passed laws, and the DOT, the FAA and the TSA have
issued regulations relating to the operation of airlines that
have required significant expenditures. For example, on
November 19, 2001, the President signed into law the
Aviation and Transportation Security Act, or the Aviation
Security Act. This law federalizes substantially all aspects of
civil aviation security and requires, among other things, the
implementation of security measures, such as the requirement
that all passenger checked bags be screened for explosives.
Funding for airline and airport security under the law is
provided in part by a passenger security fee of $2.50 per
U.S. enplanement (up to $10.00 per round trip);
however, airlines are responsible for costs in excess of this
fee, and on February 18, 2002, the TSA imposed an air
carrier security fee directly on airlines. Through the end of
fiscal year 2004, this direct cost to us is set by reference to
the amount we spent in 2000 for security screening. Continued
implementation of the requirements of the Aviation Security Act
and related regulations will result in increased costs for our
passengers and us.
In addition to increased costs, the security measures that the
TSA has implemented have resulted in a longer check-in process
for passengers and have caused delays and disruptions in airline
service, which have 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.
17
Risks Associated with the Airline 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 ours and other carriers’, 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.
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 reasonably practicable
after we file them with, or furnish them to, the SEC. Printed
copies of our annual Form 10-K, quarterly reports on
Form 10-Q, and current reports on Form 8-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.
Item 2. Properties
Flight Equipment
As shown in the following table, our operating aircraft fleet
consisted of 117 regional jets at December 31, 2004:
| |
|
|
|
|
|
|
|
|
| |
|
Number | |
|
Standard Seating | |
| Aircraft Type |
|
of Aircraft | |
|
Configuration | |
| |
|
| |
|
| |
|
Canadair Regional Jet 200
|
|
|
42 |
|
|
|
50 |
|
|
Canadair Regional Jet 440
|
|
|
75 |
|
|
|
44 |
|
| |
|
|
|
|
|
|
| |
|
|
117 |
|
|
|
|
|
| |
|
|
|
|
|
|
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
1.9 years. The 117 CRJ aircraft are, and the additional 22
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.
18
Item 2. Properties
(continued)
Facilities
We have the following significant dedicated facilities:
| |
|
|
|
|
|
|
| Location |
|
Description |
|
Square Footage |
|
Lease Expiration Date |
| |
|
|
|
|
|
|
|
Memphis, TN
|
|
Corporate Headquarters and Corporate Education Center |
|
47,000 |
|
August 2011 |
|
Memphis, TN
|
|
Hangar and Maintenance Facility |
|
51,250 |
|
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 2006 |
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.
We consider that our properties are generally in good condition,
are well-maintained, and are generally suitable and adequate to
carry on our business.
|
|
| 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 statements
as a whole.
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 but not limited to, the FAA, TSA 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 statements
as a whole.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
None.
19
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
The shares of Pinnacle Airlines Corp.’s common stock are
quoted and traded on the Nasdaq National Market under the symbol
“PNCL.” Our common stock began trading on
November 25, 2003, following our initial public offering.
Set forth below, for the applicable periods indicated, are the
high and low closing sale prices per share of our common stock
as reported by the Nasdaq National Market.
| |
|
|
|
|
|
|
|
|
| |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
2003
|
|
|
|
|
|
|
|
|
|
Fourth Quarter (beginning November 25, 2003)
|
|
$ |
13.91 |
|
|
$ |
12.80 |
|
|
2004
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
15.99 |
|
|
$ |
12.55 |
|
|
Second Quarter
|
|
$ |
14.63 |
|
|
$ |
11.30 |
|
|
Third Quarter
|
|
$ |
11.01 |
|
|
$ |
8.55 |
|
|
Fourth Quarter
|
|
$ |
13.94 |
|
|
$ |
9.17 |
|
As of March 1, 2005, there were approximately
22 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 our
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 the Company (or any other
U.S. airline) of persons who are not citizens of the United
States.
As described in Note 7, “Lines of Credit,” in
Item 8 of this Form 10-K, our Revolver with Northwest
contains certain terms that restrict our ability to pay
dividends. As discussed in Note 7, we repaid the
$5 million of outstanding borrowings under the Revolver at
December 31, 2004. The term of the Revolver expires on
June 30, 2005.
20
|
|
| Item 6. |
Selected Financial Data |
You should read this selected 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.
The financial information for the years ended December 31,
2003, 2002, 2001 and 2000 do 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 sole 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.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$ |
635,448 |
|
|
$ |
456,770 |
|
|
$ |
331,568 |
|
|
$ |
202,050 |
|
|
$ |
131,923 |
|
|
Total operating expenses
|
|
|
568,145 |
|
|
|
392,601 |
|
|
|
283,912 |
|
|
|
185,077 |
|
|
|
117,362 |
|
|
Operating income
|
|
|
67,303 |
|
|
|
64,169 |
|
|
|
47,656 |
|
|
|
16,973 |
|
|
|
14,561 |
|
|
Operating income as a percentage of operating revenues(1)
|
|
|
10.6 |
% |
|
|
14.0 |
% |
|
|
14.4 |
% |
|
|
8.4 |
% |
|
|
11.0 |
% |
|
Nonoperating (expense) income
|
|
|
(4,178 |
) |
|
|
(6,770 |
) |
|
|
2,672 |
|
|
|
6,094 |
|
|
|
67 |
|
|
Net income
|
|
|
40,725 |
|
|
|
35,067 |
|
|
|
30,785 |
|
|
|
14,246 |
|
|
|
9,262 |
|
|
Basic and diluted net income per share
|
|
$ |
1.86 |
|
|
$ |
1.60 |
|
|
$ |
1.41 |
|
|
$ |
0.65 |
|
|
$ |
0.42 |
|
|
Shares used in computing basic net income per share
|
|
|
21,892 |
|
|
|
21,892 |
|
|
|
21,892 |
|
|
|
21,892 |
|
|
|
21,892 |
|
|
Shares used in computing diluted net income per share
|
|
|
21,911 |
|
|
|
21,892 |
|
|
|
21,892 |
|
|
|
21,892 |
|
|
|
21,892 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
34,912 |
|
|
$ |
31,523 |
|
|
$ |
4,580 |
|
|
$ |
1,891 |
|
|
$ |
8,232 |
|
|
Property and equipment
|
|
|
39,416 |
|
|
|
34,286 |
|
|
|
26,631 |
|
|
|
32,785 |
|
|
|
24,072 |
|
|
Total assets
|
|
|
165,960 |
|
|
|
128,906 |
|
|
|
143,284 |
|
|
|
92,250 |
|
|
|
64,156 |
|
|
Lines of credit
|
|
|
— |
|
|
|
— |
|
|
|
4,245 |
|
|
|
4,245 |
|
|
|
— |
|
|
Borrowings from Northwest (refinanced in 2005)
|
|
|
125,000 |
|
|
|
142,000 |
|
|
|
— |
|
|
|
— |
|
|
|
122 |
|
|
Stockholders’ (deficiency) equity
|
|
|
(7,548 |
) |
|
|
(48,382 |
) |
|
|
82,051 |
|
|
|
55,651 |
|
|
|
41,405 |
|
21
|
|
| Item 6. |
Selected Financial Data (continued) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passengers (in thousands)
|
|
|
6,340 |
|
|
|
4,540 |
|
|
|
2,938 |
|
|
|
2,031 |
|
|
|
1,378 |
|
|
Revenue passenger miles (in thousands)(2)
|
|
|
2,894,776 |
|
|
|
1,797,631 |
|
|
|
1,091,181 |
|
|
|
673,395 |
|
|
|
404,404 |
|
|
Available seat miles (in thousands)(3)
|
|
|
4,219,078 |
|
|
|
2,678,000 |
|
|
|
1,714,151 |
|
|
|
1,153,620 |
|
|
|
687,059 |
|
|
Passenger load factor(4)
|
|
|
68.6 |
% |
|
|
67.1 |
% |
|
|
63.7 |
% |
|
|
58.4 |
% |
|
|
58.9 |
% |
|
Operating revenue per available seat mile (in cents)
|
|
|
15.06 |
|
|
|
17.06 |
|
|
|
19.34 |
|
|
|
17.51 |
|
|
|
19.20 |
|
|
Operating costs per available seat mile (in cents)
|
|
|
13.47 |
|
|
|
14.66 |
|
|
|
16.56 |
|
|
|
16.04 |
|
|
|
17.08 |
|
|
Block hours
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
CRJs
|
|
|
323,810 |
|
|
|
210,646 |
|
|
|
124,889 |
|
|
|
58,584 |
|
|
|
10,889 |
|
| |
Turboprops(5)
|
|
|
— |
|
|
|
— |
|
|
|
26,509 |
|
|
|
66,145 |
|
|
|
87,913 |
|
|
Cycles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
CRJs
|
|
|
201,816 |
|
|
|
146,898 |
|
|
|
85,478 |
|
|
|
41,238 |
|
|
|
8,321 |
|
| |
Turboprops(5)
|
|
|
— |
|
|
|
— |
|
|
|
20,262 |
|
|
|
47,570 |
|
|
|
66,881 |
|
|
Average daily utilization (block hours)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
CRJs
|
|
|
8.98 |
|
|
|
8.83 |
|
|
|
8.47 |
|
|
|
8.22 |
|
|
|
9.31 |
|
| |
Turboprops(5)
|
|
|
— |
|
|
|
— |
|
|
|
4.81 |
|
|
|
7.54 |
|
|
|
8.29 |
|
|
Average stage length (miles)
|
|
|
450 |
|
|
|
384 |
|
|
|
353 |
|
|
|
318 |
|
|
|
262 |
|
|
Number of operating aircraft (end of period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
CRJs
|
|
|
117 |
|
|
|
76 |
|
|
|
51 |
|
|
|
30 |
|
|
|
9 |
|
| |
Turboprops(5)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
24 |
|
|
|
28 |
|
|
Employees
|
|
|
3,056 |
|
|
|
2,253 |
|
|
|
2,403 |
|
|
|
1,738 |
|
|
|
1,750 |
|
|
|
| (1) |
As discussed in Item 1, “Our Airline Services
Agreement with Northwest,” our target operating margin
under the ASA was 14% from March 1, 2002 to
November 30, 2003. Effective December 1, 2003, the
target operating margin is 10%. Prior to March 1, 2002,
there was no target operating margin as we did not operate under
an airline services agreement. |
| |
| (2) |
Revenue passenger miles represents the number of miles flown by
revenue passengers. |
| |
| (3) |
Available seat miles represents the number of seats available
for passengers multiplied by the number of miles the seats are
flown. |
| |
| (4) |
Passenger load factor equals revenue passenger miles divided by
available seat miles. |
| |
| (5) |
As of December 31, 2002, all Saab turboprop aircraft were
removed from our operating fleet. |
22
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Review of 2004
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 continue to be
the only operator of 44-seat and 50-seat CRJs as a code-share
partner of Northwest. As of December 31, 2004, we operated
a jet fleet of 117 CRJ aircraft and offered regional airline
services with approximately 660 daily departures to
103 cities in 35 states and four Canadian provinces.
For the year ended December 31, 2004, we reported annual
net income of $40.7 million, or $1.86 a share. Net income
increased $5.7 million, or 16%, over 2003 net income
of $35.1 million, or $1.60 a share. Annual operating
revenue in 2004 reached $635.4 million, up 39% from the
prior year, yielding operating income of $67.3 million, up
5% from the prior year. In 2004, our block hours and cycles
increased by 54% and 37%, respectively, over 2003. We operate in
one business segment consisting of regional airline services.
We operate for Northwest according to the terms of the ASA,
which we entered into effective March 1, 2002. Our revenue
from regional airline services 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. A more detailed discussion of our ASA
can be found in this Form 10-K under Item 1
“Business — Our Airline Services Agreement with
Northwest.”
We believe our operations are integral to Northwest’s
future growth and complement Northwest’s operations by
allowing more frequent service to selected markets than could be
provided economically with conventional large jet aircraft. Our
regional jets’ operational capabilities allow us to service
markets profitably that do not have enough passenger traffic to
support Northwest’s mainline jet service. Northwest has
indicated its commitment to regional jets as part of its core
strategy by placing firm orders on 139 CRJs, all of which have
been committed to us and 120 of which have been delivered as of
March 1, 2005, and acquiring options on an additional 165
CRJs.
The following is a list of certain significant developments in
our business during 2004:
|
|
|
| |
• |
Successful Completion of 2004 Expansion Plans: The
addition of 41 CRJs to our fleet during 2004, representing
an increase of 54%, required us to hire and train a significant
number of new employees, specifically 304 pilots and 212 flight
attendants. Our Corporate Education Center has been and will be
instrumental in training and developing our People to allow for
such growth. In addition, we successfully opened seven new
stations as part of Northwest’s network. |
| |
| |
• |
Increase in Committed Aircraft: In December 2004, we
amended our ASA with Northwest to increase from 129 to 139 the
number of CRJs that will be operated by Pinnacle Airlines, Inc. |
| |
| |
• |
Increased Employee Productivity: For the year ended
December 31, 2004, we decreased our labor costs per block
hour by approximately 18% compared to 2003. Our headcount per
aircraft decreased from 30 at December 31, 2003 to 26 at
December 31, 2004. Our pilot utilization increased 18% from
57 hours per month for the year ended December 31,
2003 to 67 hours per month for the year ended
December 31, 2004. As of December 31, 2004, 40% of our
flight attendants were part time versus 25% as of
December 31, 2003. |
| |
| |
• |
Decrease in Unit Costs: For the year ended
December 31, 2004, we decreased our operating costs per
block hour and ASM by approximately 6% and 8% over 2003,
respectively. |
Outlook for 2005
Our rapid growth is scheduled to continue in 2005 with the
addition of 22 aircraft, representing an increase of 19%
over the size of our fleet as of December 31, 2004. Of the
22 planned deliveries of CRJ aircraft in 2005, we are
planning to accept delivery of six aircraft in the first quarter
(three received as of March 1, 2005), thirteen aircraft in
the second quarter and three aircraft in the third quarter. We
believe that operating a fleet of all-regional jet aircraft with
strong operational performance and cost efficiency,
23
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Outlook for 2005 (continued)
particularly high employee utilization, is crucial to our
growth. We believe this will position us well to compete for the
additional 165 CRJ aircraft that Northwest has on option, which
have not yet been exercised or committed to any regional airline.
As another element of our growth strategy, we intend 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. Although we are not in current discussions
with any other 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 currently building the foundation for our second air
carrier certificate, and expect to have the groundwork completed
by the end of 2005. We believe opportunities exist to provide
regional airline services to other carriers using equipment
types with capacities ranging from 70 to 90 seats. We are
currently restricted by the terms of our ASA from operating
aircraft with more than 59 seats, even through the use of a
separate operating subsidiary and separate air carrier
certificate. We have requested that Northwest review this scope
limitation.
In early 2005, we issued $121 million of our
3.25% senior convertible notes due 2025 (the
“Notes”). We used the proceeds to repurchase our
$120 million note payable to Northwest at a discounted
purchase price of $101.6 million, and to repay the then
current outstanding balance of $5 million under our
revolving credit agreement with Northwest
(“Revolver”). In addition, we shortened the term of
the Revolver from December 31, 2005 to June 30, 2005.
The Northwest note contained a provision that required us to
make principal prepayments when our month-end balance of cash
and cash equivalents exceeded $50 million. The Revolver
contains restrictions on the declaration and payment of
dividends and the issuance of debt. In addition, our ASA with
Northwest contains cross-default provisions to any indebtedness
that we may owe to Northwest. The Notes do not contain mandatory
prepayments tied to our cash balance, restrictions on our
ability to declare and pay dividends, or default provisions tied
directly to our ASA with Northwest. Eliminating these
restrictions gives us more flexibility to determine the best
uses of our free cash flow and to manage our balance sheet in
the best interests of our shareholders. For a more detailed
discussion of the Notes, refer to “Recent
Developments” in Item 1 of this Form 10-K.
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
has been and will be instrumental in training and developing our
People to meet these objectives.
24
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Outlook for 2005 (continued)
Certain Statistical Information
Information with respect to our operating expenses per block
hour is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Operating expenses per block hour:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Salaries, wages and benefits
|
|
$ |
325 |
|
|
$ |
395 |
|
|
$ |
456 |
|
|
$ |
456 |
|
|
$ |
395 |
|
| |
Aircraft fuel
|
|
|
258 |
|
|
|
261 |
|
|
|
224 |
|
|
|
181 |
|
|
|
128 |
|
| |
Aircraft maintenance, materials and repairs
|
|
|
73 |
|
|
|
67 |
|
|
|
88 |
|
|
|
166 |
|
|
|
186 |
|
| |
Aircraft rentals
|
|
|
645 |
|
|
|
647 |
|
|
|
575 |
|
|
|
326 |
|
|
|
222 |
|
| |
Other rentals and landing fees
|
|
|
114 |
|
|
|
139 |
|
|
|
151 |
|
|
|
69 |
|
|
|
57 |
|
| |
Ground handling services
|
|
|
203 |
|
|
|
212 |
|
|
|
155 |
|
|
|
43 |
|
|
|
11 |
|
| |
Depreciation
|
|
|
10 |
|
|
|
14 |
|
|
|
40 |
|
|
|
36 |
|
|
|
33 |
|
| |
Government reimbursement
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other
|
|
|
126 |
|
|
|
134 |
|
|
|
186 |
|
|
|
207 |
|
|
|
156 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
$ |
1,754 |
|
|
$ |
1,864 |
|
|
$ |
1,875 |
|
|
$ |
1,484 |
|
|
$ |
1,188 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information with respect to our operating expenses per available
seat mile is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Operating expenses per available seat mile (in cents):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Salaries, wages and benefits
|
|
|
2.49 |
|
|
|
3.11 |
|
|
|
4.03 |
|
|
|
4.93 |
|
|
|
5.67 |
|
| |
Aircraft fuel
|
|
|
1.98 |
|
|
|
2.05 |
|
|
|
1.98 |
|
|
|
1.96 |
|
|
|
1.83 |
|
| |
Aircraft maintenance, materials and repairs
|
|
|
0.56 |
|
|
|
0.53 |
|
|
|
0.77 |
|
|
|
1.79 |
|
|
|
2.68 |
|
| |
Aircraft rentals
|
|
|
4.95 |
|
|
|
5.09 |
|
|
|
5.08 |
|
|
|
3.52 |
|
|
|
3.19 |
|
| |
Other rentals and landing fees
|
|
|
0.88 |
|
|
|
1.09 |
|
|
|
1.33 |
|
|
|
0.74 |
|
|
|
0.82 |
|
| |
Ground handling services
|
|
|
1.56 |
|
|
|
1.67 |
|
|
|
1.37 |
|
|
|
0.47 |
|
|
|
0.16 |
|
| |
Depreciation
|
|
|
0.08 |
|
|
|
0.11 |
|
|
|
0.36 |
|
|
|
0.39 |
|
|
|
0.48 |
|
| |
Government reimbursement
|
|
|
— |
|
|
|
(0.04 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other
|
|
|
0.97 |
|
|
|
1.05 |
|
|
|
1.64 |
|
|
|
2.24 |
|
|
|
2.25 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
|
13.47 |
|
|
|
14.66 |
|
|
|
16.56 |
|
|
|
16.04 |
|
|
|
17.08 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of Presentation
The financial information for the years ended December 31,
2003 and 2002 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. Prior to
September 2003, Northwest was our majority owner and designed
our operations 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.
25
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Basis of Presentation (continued)
Our statements of income for the years ending December 31,
2004, 2003 and 2002 can be compared as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Increase/ | |
|
|
|
Increase/ | |
|
|
| |
|
|
|
(Decrease) | |
|
|
|
(Decrease) | |
|
|
| |
|
2004 | |
|
2003–2004 | |
|
2003 | |
|
2002–2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Regional airline services
|
|
$ |
631,504 |
|
|
|
|
|
|
$ |
450,611 |
|
|
|
|
|
|
$ |
325,386 |
|
| |
Other
|
|
|
3,944 |
|
|
|
|
|
|
|
6,159 |
|
|
|
|
|
|
|
6,182 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
635,448 |
|
|
|
39 |
% |
|
|
456,770 |
|
|
|
38 |
% |
|
|
331,568 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Salaries, wages and benefits
|
|
|
105,143 |
|
|
|
26 |
% |
|
|
83,316 |
|
|
|
21 |
% |
|
|
69,086 |
|
| |
Aircraft fuel
|
|
|
83,572 |
|
|
|
52 |
% |
|
|
55,007 |
|
|
|
62 |
% |
|
|
33,932 |
|
| |
Aircraft maintenance, materials and repairs
|
|
|
23,545 |
|
|
|
67 |
% |
|
|
14,116 |
|
|
|
6 |
% |
|
|
13,276 |
|
| |
Aircraft rentals
|
|
|
209,047 |
|
|
|
53 |
% |
|
|
136,273 |
|
|
|
57 |
% |
|
|
87,016 |
|
| |
Other rentals and landing fees
|
|
|
37,101 |
|
|
|
27 |
% |
|
|
29,255 |
|
|
|
28 |
% |
|
|
22,818 |
|
| |
Ground handling services
|
|
|
65,877 |
|
|
|
48 |
% |
|
|
44,622 |
|
|
|
91 |
% |
|
|
23,422 |
|
| |
Depreciation
|
|
|
3,153 |
|
|
|
8 |
% |
|
|
2,912 |
|
|
|
(53 |
)% |
|
|
6,141 |
|
| |
Government reimbursements
|
|
|
— |
|
|
|
(100 |
)% |
|
|
(1,114 |
) |
|
|
100 |
% |
|
|
— |
|
| |
Other
|
|
|
40,707 |
|
|
|
44 |
% |
|
|
28,214 |
|
|
|
0 |
% |
|
|
28,221 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
568,145 |
|
|
|
45 |
% |
|
|
392,601 |
|
|
|
38 |
% |
|
|
283,912 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
67,303 |
|
|
|
5 |
% |
|
|
64,169 |
|
|
|
35 |
% |
|
|
47,656 |
|
|
Nonoperating (expense) income
|
|
|
(4,178 |
) |
|
|
(38 |
%) |
|
|
(6,770 |
) |
|
|
(353 |
)% |
|
|
2,672 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
63,125 |
|
|
|
10 |
% |
|
|
57,399 |
|
|
|
14 |
% |
|
|
50,328 |
|
|
Income tax expense
|
|
|
22,400 |
|
|
|
0 |
% |
|
|
22,332 |
|
|
|
14 |
% |
|
|
19,543 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
40,725 |
|
|
|
16 |
% |
|
$ |
35,067 |
|
|
|
14 |
% |
|
$ |
30,785 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In our historical statements of income, revenue from regional
airline services has been derived from our capacity purchase
arrangements with Northwest and since March 1, 2002 has
been derived under our ASA. Other revenues have primarily
consisted of ground handling services that we provide to
Northwest, Mesaba Airlines, and other carriers at certain
airports. Revenue from ground handling services accounted for
less than 1% of our total revenues in 2004. We will continue to
account for our ground handling services in other revenues.
Operating income for 2004 was $67.3 million, a 5% increase
over 2003 operating income of $64.2 million. During 2004,
we achieved an operating margin of 10.6%, 0.6 points above the
target operating margin contained in our ASA with Northwest. In
connection with our initial public offering of stock in November
2003, the ASA was amended to lower our target operating margin
from 14.0% to 10.0%. If the reduced target margin of 10.0% had
been in effect throughout the twelve months of 2003, increases
during 2004 in both revenue from regional airline services and
operating income would have been approximately 46% compared to
2003.
The following reconciles our revenue from regional airline
services and operating income as reported in accordance with
generally accepted accounting principles (“GAAP”) for
2004 and 2003 to revenue from regional airline services and
operating income as if our target operating margin had been 10%
throughout those periods. We believe that this information is
useful as it indicates more clearly our comparative year-to-
26
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Basis of Presentation (continued)
year operating results. None of this information should be
considered a substitute for any measures prepared in accordance
with GAAP. We have included this reconciliation of non-GAAP
financial measures to our most comparable GAAP financial
measures included herein.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
% Increase | |
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
Regional Airline Services Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional airline services revenue in accordance with GAAP
|
|
$ |
631,504 |
|
|
$ |
450,611 |
|
|
|
40 |
% |
| |
Adjustment to reduce target operating margin to 10% from 14%
|
|
|
— |
|
|
|
(18,183 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Adjusted regional airline services revenue with 10% target
operating margin
|
|
$ |
631,504 |
|
|
$ |
432,428 |
|
|
|
46 |
% |
| |
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income in accordance with GAAP
|
|
$ |
67,303 |
|
|
$ |
64,169 |
|
|
|
5 |
% |
| |
Adjustment to reduce target operating margin to 10% from 14%
|
|
|
— |
|
|
|
(18,183 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Adjusted operating income with 10% target operating margin
|
|
$ |
67,303 |
|
|
$ |
45,986 |
|
|
|
46 |
% |
| |
|
|
|
|
|
|
|
|
|
The number of aircraft we operate will continue to have the
largest effect on the growth in our 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 significantly impacted by any
seasonality trends historically associated with the airline
industry.
27
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Results of Operations
The following schedule summarizes operating revenue, operating
expenses, and operating income by type for the years ended
December 31, 2004 and 2003, respectively. 2003 was our
first full year of operations under an ASA. As the terms of the
ASA are materially different from the terms of our historical
arrangement with Northwest, comparable information for the year
ended December 31, 2002 is not available.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
Reimbursed | |
|
Unreimbursed | |
|
Total | |
|
Reimbursed | |
|
Unreimbursed | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional airline services
|
|
$ |
423,911 |
|
|
$ |
207,593 |
|
|
$ |
631,504 |
|
|
$ |
296,257 |
|
|
$ |
154,354 |
|
|
$ |
450,611 |
|
|
Other revenue
|
|
|
— |
|
|
|
3,944 |
|
|
|
3,944 |
|
|
|
— |
|
|
|
6,159 |
|
|
|
6,159 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
423,911 |
|
|
|
211,537 |
|
|
|
635,448 |
|
|
|
296,257 |
|
|
|
160,513 |
|
|
|
456,770 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Salaries, wages and benefits
|
|
|
— |
|
|
|
105,143 |
|
|
|
105,143 |
|
|
|
— |
|
|
|
83,316 |
|
|
|
83,316 |
|
| |
Aircraft fuel
|
|
|
83,061 |
|
|
|
511 |
|
|
|
83,572 |
|
|
|
54,731 |
|
|
|
276 |
|
|
|
55,007 |
|
| |
Aircraft maintenance, materials and repairs
|
|
|
11,842 |
|
|
|
11,703 |
|
|
|
23,545 |
|
|
|
6,548 |
|
|
|
7,568 |
|
|
|
14,116 |
|
| |
Aircraft rentals
|
|
|
209,047 |
|
|
|
— |
|
|
|
209,047 |
|
|
|
136,273 |
|
|
|
— |
|
|
|
136,273 |
|
| |
Other rentals and landing fees
|
|
|
18,651 |
|
|
|
18,450 |
|
|
|
37,101 |
|
|
|
16,512 |
|
|
|
12,743 |
|
|
|
29,255 |
|
| |
Government reimbursements
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,000 |
) |
|
|
(114 |
) |
|
|
(1,114 |
) |
| |
Ground handling services
|
|
|
47,533 |
|
|
|
18,344 |
|
|
|
65,877 |
|
|
|
33,223 |
|
|
|
11,399 |
|
|
|
44,622 |
|
| |
Depreciation
|
|
|
— |
|
|
|
3,153 |
|
|
|
3,153 |
|
|
|
— |
|
|
|
2,912 |
|
|
|
2,912 |
|
| |
Other
|
|
|
11,386 |
|
|
|
29,321 |
|
|
|
40,707 |
|
|
|
9,600 |
|
|
|
18,614 |
|
|
|
28,214 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
381,520 |
|
|
|
186,625 |
|
|
|
568,145 |
|
|
|
255,887 |
|
|
|
136,714 |
|
|
|
392,601 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$ |
42,391 |
|
|
$ |
24,912 |
|
|
$ |
67,303 |
|
|
$ |
40,370 |
|
|
$ |
23,799 |
|
|
$ |
64,169 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income as a percent of operating revenues
|
|
|
10.0 |
% |
|
|
11.8 |
% |
|
|
10.6 |
% |
|
|
13.6 |
% |
|
|
14.8 |
% |
|
|
14.0 |
% |
2004 operating revenue of $635.4 million increased
$178.7 million, or 39%, over 2003 operating revenue of
$456.8 million. The increase in operating revenue of
$178.7 million was primarily caused by the addition of
41 CRJ aircraft during 2004. CRJ block hours and cycles
increased by 54% and 37%, respectively, causing increases in
revenue, excluding margin, of $29.8 million and
$12.6 million, respectively. Revenue associated with
expense reimbursements, excluding margin, increased by
$125.6 million, or 49%.
Regional airline services revenue per CRJ block hour for the
years ended December 31, 2004 and 2003 were $1,950 and
$2,139 respectively, which represents a decrease of
approximately 9%. Revenue per cycle increased by 2% from $3,068
to $3,129. The variances in revenue per block hour and cycle are
due primarily to an increase in the average length of our
flights of 17% over the same periods.
Revenue from regional airline services for 2004 was negatively
impacted by severe weather. During the last week of December,
adverse weather closed or reduced operations at over 60% of the
airports we serve. These difficulties were in part responsible
for a drop in our average performance statistics for the six
months ended December 31, 2004 falling below the standards
contained in the ASA. As a result, during the first quarter of
2005, we paid Northwest $1.4 million in settlement of
performance related penalties, an amount which was treated as a
reduction in revenue in the fourth quarter. We have begun to
implement certain upgrades to those operational and
communication systems that were overburdened as a result of the
adverse
28
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
2004 Compared to 2003 (continued) |
weather and have also developed interim policies should
additional severe weather impact a large portion of the network
prior to the completion of the systems upgrades.
Operating Expenses. The increase in operating expenses of
45% during 2004 was primarily due to the 54% increase in the
size of our aircraft fleet. Operating expenses for the year
ended December 31, 2004 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. Operating expense per block
hour decreased by 6%.
Salaries, wages and benefits increased by $21.8 million, or
26%, primarily due to the increase in the number of pilots and
flight attendants of 47% and 57%, respectively, as well as wage
rate and benefit increases. An increase in other employee
benefits, primarily the cost of employee insurance, accounted
for the remaining increase in salaries, wages and benefits.
Aircraft fuel expense increased $28.6 million, or 52%, due
to the 54% increase in block hours, which was partially offset
by decreased fuel burn resulting primarily from a 17% increase
in the average length of our flights. In accordance with the
ASA, passenger fuel costs are reimbursed in full by Northwest
and capped at $0.78 per gallon.
Aircraft maintenance, materials and repairs expenses that are
reimbursed by Northwest increased principally due to required
heavy airframe maintenance checks performed on our CRJ aircraft
during 2004. Heavy airframe maintenance checks were performed on
28 aircraft during 2004 versus five aircraft in 2003. This
accounted for approximately $1.9 million of the increase in
reimbursed maintenance expenses. The remaining increases in
maintenance expense, both reimbursed and unreimbursed, were due
mainly to the increase in our level of operations and the
expiration of warranty on a portion of our fleet.
Aircraft rental expense increased $72.8 million, or 53%,
due to the addition of 41 aircraft to our fleet. As
previously noted, we sublease our CRJ aircraft from Northwest
under operating leases that expire December 31, 2017. 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 aircraft
rental expense in full under the ASA.
Other rentals and landing fees increased due to an increase in
landing fees of approximately $7.0 million, or
approximately 54%, which is largely due to our increased level
of operations and a change in the mix of cities where we provide
passenger service.
Ground handling services increased by $21.3 million, or
48%, due primarily to the 37% increase in the number of
departures performed. The increase in ground handling expense
per departure was caused by a change in the mix of cities where
we provide passenger service.
Other expenses that are reimbursed by Northwest increased
primarily due to increases in property taxes of
$1.0 million, incremental passenger screening costs of
$0.3 million, and passenger liability insurance of
$0.3 million. The increase in unreimbursed other expenses
was driven by our increased level of operations, most notably an
increase of $2.7 million of expenses associated with
overnight travel for our pilots and flight attendants,
$2.6 million associated with new pilot training and
$0.8 million in Canadian air traffic control costs.
Additionally, $2.3 million of the increase is attributable
to increases in certain insurance premiums and due to
professional service expenses associated with state tax planning
and the compliance with Section 404 of the Sarbanes-Oxley
Act of 2002.
Income tax expense was unchanged from 2003 to 2004. During the
third quarter of 2004, we lowered our 2004 income tax expense by
approximately $1.1 million following a reduction in a
previous estimate of our tax obligations for 2003. The reduction
in our estimate occurred following the filing of our
2003 state and federal income tax returns and was primarily
due to changes in the apportionment of taxable income to those
states
29
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
2004 Compared to 2003 (continued) |
where we operate. This change in estimate increased our
basic and diluted earnings per share by approximately $0.05 for
the year ended December 31, 2004.
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 69% and 72%, 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 revenue from
regional airline services and operating income by
$2.0 million.
Revenue associated with expense reimbursements increased by
$112.7 million, or 61%. 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 regional airline services revenue during
2002. Regional airline services revenue per CRJ block hour for
the years ended December 31, 2003 and 2002 were
$2.1 million and $2.3 million respectively, which
represents a decrease of approximately 6%. This decrease was due
to the 9% increase in the average length of our flights over the
same periods.
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
1.90 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 expense increased primarily due to increased block
hours and the higher burn rate associated with jet equipment. In
accordance with the ASA, passenger fuel costs are reimbursed in
full by Northwest and capped at $0.78 per gallon.
Aircraft maintenance, materials and repairs increased primarily
due to the increase in the size of our fleet and reflects the
fact that our CRJs were largely covered by the
manufacturers’ warranties.
Aircraft rental expense increased primarily due to
25 additional leased CRJ aircraft and higher CRJ rental
rates under the ASA. 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 |
|
|
|
2003 Compared to 2002 (continued) |
Depreciation 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 and other taxes of $1.0 million, which was more
than offset by a decrease in other expenses, primarily passenger
liability insurance.
Liquidity and Capital Resources
As of December 31, 2004, we had $34.9 million in cash
and cash equivalents. Net cash provided by operating activities
was $38.0 million in 2004. Cash used for investing and
financing activities was $17.6 million and
$17.0 million, respectively.
Contractual obligations. The following chart details our
debt and lease obligations on a pro forma basis at
December 31, 2004. The chart reflects our future
obligations following the February 2005 issuance of the senior
convertible notes discussed below. 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 | |
| |
|
| |
| |
|
|
|
Less than | |
|
|
|
After | |
| |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
4-5 Years | |
|
5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
Contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior convertible notes
|
|
$ |
121,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
121,000 |
|
|
Interest payments on long-term debt
|
|
|
78,738 |
|
|
|
2,054 |
|
|
|
7,865 |
|
|
|
7,865 |
|
|
|
60,954 |
|
|
Payment due Northwest for contractual rights
|
|
|
5,115 |
|
|
|
5,115 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Operating leases(1)
|
|
|
3,837,790 |
|
|
|
286,965 |
|
|
|
594,774 |
|
|
|
593,040 |
|
|
|
2,363,011 |
|
|
Purchase obligations(2)
|
|
|
5,971 |
|
|
|
1,322 |
|
|
|
1,967 |
|
|
|
1,832 |
|
|
|
850 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total contractual cash obligations
|
|
$ |
4,048,614 |
|
|
$ |
295,456 |
|
|
$ |
604,606 |
|
|
$ |
602,737 |
|
|
$ |
2,545,815 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
As of December 31, 2004, our obligations relating to
operating leases, excluding future scheduled deliveries of
aircraft under the ASA, were as follows (in thousands): |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Less than | |
|
|
|
|
|
After | |
| |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
4-5 Years | |
|
5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
$ |
3,247,690 |
|
|
$ |
251,265 |
|
|
$ |
502,374 |
|
|
$ |
500,640 |
|
|
$ |
1,993,411 |
|
|
|
| (2) |
Amounts represent noncancelable commitments to purchase goods
and services, including certain aircraft parts and information
technology. |
The amounts noted above for operating leases include
$3.2 billion of obligations for leased CRJ aircraft from
Northwest. Under the terms of the ASA, we are reimbursed by
Northwest in full for aircraft rental expense. For a more
detailed discussion of operating leases, refer to Note 10
“Leases,” under Item 8 of this Form 10-K.
In February 2005, we repaid the outstanding amount of
$5 million on the Revolver and purchased the outstanding
$120 million note payable at a discounted purchase price of
$101.6 million. The payments were made in connection with
the private sale of $121 million principal amount of our
3.25% senior convertible
31
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Liquidity and Capital Resources (continued)
notes due 2025 (the “Notes”). Holders of the
Notes may require us to purchase all or a portion of their notes
for cash on February 15, 2010, February 15, 2015 and
February 15, 2020 at a purchase price equal to 100% of the
principal amount of the Notes to be repurchased plus accrued and
unpaid interest, if any, to the purchase date. In addition,
under certain circumstances, holders of the Notes may convert
them into the equivalent value of our common stock at an initial
conversion rate of 75.6475 shares per $1,000 principal
amount, representing an initial conversion price of $13.22. Upon
conversion, we will pay the portion of the conversion value up
to the principal amount of each note in cash, and any excess
conversion value in cash or our common stock at our election.
For a more detailed discussion of note conversion features,
refer to “Recent Developments” and “Risks Related
to Our Business and Operations” in Item 1 of this
Form 10-K.
The Notes generally trade in secondary markets at a premium to
the value that they could be converted into. For instance, at
the time the Notes were issued, if any of the conditions for
conversion had been met, holders of the Notes could have
converted each $1,000 principal amount of Notes into cash and
stock totaling only $823. Because of this premium associated
with the option value imbedded in the Notes, we do not believe
that a significant number of holders of the Notes would choose
to convert the Notes prior to their maturity if any of the
conditions allowing for conversion are met. In the event that a
significant number of the Notes were converted prior to their
maturity, we would use internally generated cash flow and, to
the extent necessary, issue other debt or equity securities to
raise additional capital to satisfy the cash requirements of
such conversions.
The Notes will bear interest at the rate of 3.25% per year,
payable in cash semiannually in arrears on February 15 and
August 15 of each year, beginning August 15, 2005.
The Revolver with Northwest allows for borrowings up to
$25 million and accrues interest at the rate of 1.0% plus a
margin equal to the higher of the most recent prime rate offered
by JPMorganChase Bank, or the most recent overnight funds rate
offered by JPMorganChase plus 0.5%. At December 31, 2004,
the interest rate was 6.25%. The Revolver contains a number of
restrictive covenants applicable to the Company, including
limitations on the incurrence of debt and liens, the making of
distributions and other transactions. The term of our Revolver
extends through June 2005. As previously noted, the outstanding
balance under the Revolver at December 31, 2004 was paid in
connection with our issuance of the Notes.
Operating activities. Net cash provided by operating
activities was $38.0 million during the year ended
December 31, 2004, due primarily to cash provided by net
income of $40.7 million, depreciation of $3.2 million
and deferred income taxes of $2.4 million, offset by
decreases in operating assets and liabilities of
$7.9 million (including a total of $7.4 million in
aircraft deposits paid to Northwest). In 2005, we will pay
deposits of $3.7 million on the future 22 aircraft planned
for delivery. Of the 22 planned deliveries of CRJ aircraft in
2005, we are planning to accept delivery of six aircraft in the
first quarter (three received as of March 1, 2005),
thirteen aircraft in the second quarter and three aircraft in
the third quarter. 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 (including a total of $4.4 million in
aircraft deposits paid to Northwest). 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.
Investing activities. Investing activities consisted of
rotable (renewable) parts purchases of $5.3 million and
$9.1 million for the years ended December 31, 2004 and
2003, respectively. Our 2004 results include a payment of
$10.0 million to acquire contractual rights from Northwest
to operate an additional 10 CRJs during the remaining term of
the ASA. Pursuant to this agreement, we will pay Northwest an
additional $5.1 million in 2005. The remaining balance of
investing activities consisted primarily of ground equipment
purchases related to the new CRJ aircraft. We expect next
year’s investing activities to be funded from 2005 cash
flows from operations.
32
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Liquidity and Capital Resources (continued)
Financing activities. Cash used in financing activities
for the year ended December 31, 2004 totaled
$17.0 million. We made principal payments to Northwest on
our note payable in the amount of $12.0 million and a
payment on the line of credit with Northwest for
$5.0 million. 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. As of
December 31, 2004, we had $20.0 million of available
borrowings under our Revolver with Northwest and
$0.7 million of standby letters of credit outstanding.
We expect capital expenditures for 2005 to be approximately
$8.0 million (excluding the $5.1 million for the
contractual rights from Northwest discussed above), 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.
We have no significant capital commitments as of
December 31, 2004.
Guarantees and indemnifications. We are the guarantor of
approximately $2.5 million aggregate principal amount of
tax-exempt special facilities revenue bonds and interest
thereon. These bonds were issued by the Memphis-Shelby County
Airport Authority (the “Authority”) and are payable
solely from our rentals paid under a long-term lease agreement
with the Authority. The leasing arrangement is accounted for as
an operating lease in the consolidated financial statements.
We are party to numerous contracts and real estate leases in
which it is common for us to agree to indemnify third parties
for tort liabilities that arise out of or relate to the subject
matter of the contract or occupancy of the leased premises. In
some cases, this indemnity extends to related liabilities
arising from the negligence of the indemnified parties, but
usually excludes any liabilities caused by their gross
negligence or willful misconduct. Additionally, we typically
indemnify the lessors and related third parties for any
environmental liability that arises out of or relates to our use
of the leased premises.
In our aircraft lease agreements with Northwest, we typically
indemnify the prime lessor, financing parties, trustees acting
on their behalf and other related parties against liabilities
that arise from the manufacture, design, ownership, financing,
use, operation and maintenance of the aircraft and for tort
liability, whether or not these liabilities arise out of or
relate to the negligence of these indemnified parties, except
for their gross negligence or willful misconduct.
We expect that we would be covered by insurance (subject to
deductibles) for most tort liabilities and related indemnities
described above with respect to real estate we lease and
aircraft we operate.
We do not expect the potential amount of future payments under
the foregoing indemnities and agreements to be material.
Off-balance sheet arrangements. None of our operating
lease obligations are reflected on our consolidated balance
sheets. We are responsible for all maintenance, insurance and
other costs associated with these leased assets; however, the
lease agreements do not include a residual value guarantee,
fixed price purchase option or other similar guarantees. We have
no other off-balance sheet arrangements.
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
33
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Critical Accounting Policies (continued)
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. As discussed in Item 1
“Business — Our Airline Services Agreement with
Northwest,” our ASA provides a monthly margin payment
calculated to achieve a target operating margin, based on
reimbursement payments and payments based on pre-set rates. We
recognize revenue when services are provided. The monthly margin
payment plus total reimbursement payments and payments based on
pre-set rates are recognized as revenue at the gross amount
billed.
As the payments based on pre-set rates are not based on the
actual expenses incurred, our actual annual unadjusted operating
margin may fall outside the then applicable floor or ceiling
stipulated in the ASA. The ASA provides for a year-end
adjustment to bring our operating margin to the applicable floor
or ceiling. For the years ended December 31, 2004, 2003 and
2002, no margin adjustment payments were required.
Any penalties we incur in providing regional airline services to
Northwest are treated as reductions in revenue. For the years
ended December 31, 2004 and 2003, we recorded penalties of
$1.9 million and $0.7 million, respectively. In 2002,
there were no provisions in the ASA for performance penalties.
Maintenance. We record maintenance and repair costs for
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 maintenance cost per
hour contracts. The cost per 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, cost
per hour arrangements have represented 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
34
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Critical Accounting Policies (continued)
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.
Long-lived assets. We evaluate whether there has been an
impairment of our long-lived assets on an annual basis or if
certain circumstances indicate that a possible impairment may
exist. Impairment exists when the carrying amount of a
long-lived asset is not recoverable (undiscounted cash flows are
less than the asset’s carrying value) and exceeds its fair
value. If it is determined that an impairment has occurred, the
carrying value of the long-lived asset is reduced to its fair
value. Goodwill is tested for impairment under
SFAS No. 142, “Goodwill and other Intangible
Assets.” All other long-lived assets, including intangibles
subject to amortization, are evaluated for impairment under
SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.”
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 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.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”),
which replaces SFAS No. 123, “Accounting for
Stock-Based Compensation,” (“SFAS 123”) and
supersedes APB Opinion No. 25, “Accounting for Stock
Issued to Employees.” Our planned adoption of
SFAS 123R is discussed in more detail in Note 2
“Significant Accounting Policies” in the notes to our
consolidated financial statements under Item 8 of this
Form 10-K. We have not yet determined which of the
acceptable adoption methods will be used. We have also not
determined the financial statement impact of adopting
SFAS No. 123R or whether the adoption will result in
amounts that are similar to our current pro forma disclosures
under SFAS No. 123.
In September 2004, the Emerging Issues Task Force
(“EITF”) reached a consensus on EITF No. 04-08,
“Accounting Issues Related to Certain Features of
Contingently Convertible Debt and the Effect on Diluted Earnings
per Share.” Our planned adoption of this consensus and our
issuance of the Notes in February 2005 is discussed in more
detail in Note 18 “Subsequent Events” in the
notes to our consolidated financial statements under Item 8
of this Form 10-K.
Forward Looking Statements
Statements in this Form 10-K report (or otherwise made by
Pinnacle Airlines Corp. or on Pinnacle Airlines Corp.’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 progresses, and
therefore, it should be clearly
35
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Forward Looking Statements (continued)
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 “Review of
2004” and “Outlook for 2005.” 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.
36
|
|
| 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
and the 3.25% senior convertible notes discussed below also
bear interest at a fixed rate, but loans under our Revolver 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.
Senior convertible notes. As discussed in “Recent
Developments” under Item 1 of this Form 10-K, we
completed the sale in February 2005 of $121 million
principal amount of our 3.25% senior convertible notes due
February 2025 (the “Notes”). While we pay interest on
the Notes at a fixed rate of 3.25%, the fair value of the Notes
is sensitive to changes in interest rates and to changes in the
market price of our common stock. Interest rate changes may
result in increases or decreases in the fair value of the Notes
due to differences between market interest rates and rates in
effect at the inception of the obligation. The fair value of the
Notes may also increase or decrease with differences between the
current market price of our common stock and the market price on
the original issuance date of the Notes. Unless we elect to
repurchase our Notes in the open market, changes in their fair
value have no impact on our consolidated financial statements as
a whole. The estimated fair value of the Notes on March 4,
2005 was approximately $121.1 million, based on quoted
market prices.
37
|
|
| Item 8. |
Financial Statements and Supplementary Data |
| |
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
39 |
|
|
Consolidated Statements of Income for the Years Ended
December 31, 2004, 2003 and 2002
|
|
|
40 |
|
|
Consolidated Balance Sheets as of December 31, 2004 and 2003
|
|
|
41 |
|
|
Consolidated Statements of Stockholders’ Equity
(Deficiency) for the Years Ended December 31, 2004, 2003
and 2002
|
|
|
42 |
|
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002
|
|
|
43 |
|
|
Notes to Consolidated Financial Statements
|
|
|
44 |
|
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Pinnacle Airlines Corp.
We have audited the accompanying consolidated balance sheets of
Pinnacle Airlines Corp. as of December 31, 2004 and 2003,
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, 2004.
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 the auditing
standards of the Public Company Accounting Oversight Board
(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 Pinnacle Airlines Corp. at
December 31, 2004 and 2003, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Pinnacle Airlines Corp.’s internal control
over financial reporting as of December 31, 2004, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 9, 2005
expressed an unqualified opinion thereon.
Memphis, Tennessee
March 9, 2005
39
PINNACLE AIRLINES CORP.
CONSOLIDATED STATEMENTS OF INCOME
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Regional airline services
|
|
$ |
631,504 |
|
|
$ |
450,611 |
|
|
$ |
325,386 |
|
| |
Other
|
|
|
3,944 |
|
|
|
6,159 |
|
|
|
6,182 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
635,448 |
|
|
|
456,770 |
|
|
|
331,568 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Salaries, wages and benefits
|
|
|
105,143 |
|
|
|
83,316 |
|
|
|
69,086 |
|
| |
Aircraft fuel
|
|
|
83,572 |
|
|
|
55,007 |
|
|
|
33,932 |
|
| |
Aircraft maintenance, materials and repairs
|
|
|
23,545 |
|
|
|
14,116 |
|
|
|
13,276 |
|
| |
Aircraft rentals
|
|
|
209,047 |
|
|
|
136,273 |
|
|
|
87,016 |
|
| |
Other rentals and landing fees
|
|
|
37,101 |
|
|
|
29,255 |
|
|
|
22,818 |
|
| |
Ground handling services
|
|
|
65,877 |
|
|
|
44,622 |
|
|
|
23,422 |
|
| |
Depreciation
|
|
|
3,153 |
|
|
|
2,912 |
|
|
|
6,141 |
|
| |
Government reimbursements
|
|
|
— |
|
|
|
(1,114 |
) |
|
|
— |
|
| |
Other
|
|
|
40,707 |
|
|
|
28,214 |
|
|
|
28,221 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
568,145 |
|
|
|
392,601 |
|
|
|
283,912 |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
67,303 |
|
|
|
64,169 |
|
|
|
47,656 |
|
|
Operating income as a percentage of operating revenues
|
|
|
10.6% |
|
|
|
14.0% |
|
|
|
14.4% |
|
|
Nonoperating (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest income
|
|
|
301 |
|
|
|
230 |
|
|
|
3,001 |
|
| |
Interest expense
|
|
|
(4,907 |
) |
|
|
(7,387 |
) |
|
|
(409 |
) |
| |
Miscellaneous income, net
|
|
|
428 |
|
|
|
387 |
|
|
|
80 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total nonoperating (expense) income
|
|
|
(4,178 |
) |
|
|
(6,770 |
) |
|
|
2,672 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
63,125 |
|
|
|
57,399 |
|
|
|
50,328 |
|
|
Income tax expense
|
|
|
22,400 |
|
|
|
22,332 |
|
|
|
19,543 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
40,725 |
|
|
$ |
35,067 |
|
|
$ |
30,785 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
1.86 |
|
|
$ |
1.60 |
|
|
$ |
1.41 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$ |
1.86 |
|
|
$ |
1.60 |
|
|
$ |
1.41 |
|
| |
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic earnings per share
|
|
|
21,892 |
|
|
|
21,892 |
|
|
|
21,892 |
|
| |
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted earnings per share
|
|
|
21,911 |
|
|
|
21,892 |
|
|
|
21,892 |
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
40
PINNACLE AIRLINES CORP.
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands, except share | |
| |
|
data) | |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
34,912 |
|
|
$ |
31,523 |
|
| |
Receivables, principally from Northwest, net of allowances of
$34 in 2004 and $146
in 2003
|
|
|
25,139 |
|
|
|
17,524 |
|
| |
Spare parts and supplies, net of allowances of $352 in 2004 and
$2,606 in 2003
|
|
|
5,341 |
|
|
|
3,773 |
|
| |
Prepaid expenses and other assets
|
|
|
5,644 |
|
|
|
6,810 |
|
| |
Deferred income taxes
|
|
|
860 |
|
|
|
2,549 |
|
| |
|
|
|
|
|
|
| |
|
Total current assets
|
|
|
71,896 |
|
|
|
62,179 |
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
| |
Aircraft and rotable spares
|
|
|
35,837 |
|
|
|
32,779 |
|
| |
Other property and equipment
|
|
|
16,161 |
|
|
|
14,081 |
|
| |
Office furniture and fixtures
|
|
|
1,863 |
|
|
|
1,258 |
|
| |
|
|
|
|
|
|
| |
|
|
53,861 |
|
|
|
48,118 |
|
| |
Less accumulated depreciation
|
|
|
(14,445 |
) |
|
|
(13,832 |
) |
| |
|
|
|
|
|
|
| |
Net property and equipment
|
|
|
39,416 |
|
|
|
34,286 |
|
| |
Other assets, primarily aircraft deposits with Northwest
|
|
|
21,111 |
|
|
|
14,019 |
|
| |
Goodwill, net of amortization of $4,027
|
|
|
18,422 |
|
|
|
18,422 |
|
| |
Contractual rights acquired from Northwest
|
|
|
15,115 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
Total assets
|
|
$ |
165,960 |
|
|
$ |
128,906 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
16,983 |
|
|
$ |
9,716 |
|
| |
Accrued expenses
|
|
|
15,083 |
|
|
|
11,332 |
|
| |
Line of credit with Northwest
|
|
|
— |
|
|
|
10,000 |
|
| |
Income taxes payable
|
|
|
1,633 |
|
|
|
5,596 |
|
| |
Other current liabilities, including $5,115 due Northwest for
contractual rights
at December 31, 2004
|
|
|
6,756 |
|
|
|
806 |
|
| |
Current portion of note payable to Northwest
|
|
|
— |
|
|
|
12,000 |
|
| |
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
40,455 |
|
|
|
49,450 |
|
|
Deferred income taxes
|
|
|
7,105 |
|
|
|
6,400 |
|
|
Note payable and line of credit from Northwest refinanced
subsequent
to December 31, 2004
|
|
|
125,000 |
|
|
|
120,000 |
|
|
Other liabilities
|
|
|
948 |
|
|
|
1,438 |
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ 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 and issued
|
|
|
— |
|
|
|
— |
|
| |
Series common stock, par value $0.01 per share;
5,000,000 shares authorized; no shares issued
|
|
|
— |
|
|
|
— |
|
| |
Common stock, $0.01 par value; 40,000,000 shares
authorized, 21,950,260 and 21,892,060 shares issued in 2004
and 2003, respectively
|
|
|
220 |
|
|
|
219 |
|
| |
Additional paid-in capital
|
|
|
85,603 |
|
|
|
84,973 |
|
| |
Accumulated deficit
|
|
|
(92,849 |
) |
|
|
(133,574 |
) |
| |
Unearned compensation on restricted stock
|
|
|
(522 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
|
Total stockholders’ deficiency
|
|
|
(7,548 |
) |
|
|
(48,382 |
) |
| |
|
|
|
|
|
|
| |
|
|
Total liabilities and stockholders’ deficiency
|
|
$ |
165,960 |
|
|
$ |
128,906 |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
41
PINNACLE AIRLINES CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(DEFICIENCY)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Unearned | |
|
|
| |
|
|
|
Additional | |
|
Retained | |
|
Compensation | |
|
|
| |
|
Common | |
|
Paid-In | |
|
Earnings | |
|
on Restricted | |
|
|
| |
|
Stock | |
|
Capital | |
|
(Deficiency) | |
|
Stock | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except share and per share data) | |
|
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 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Restricted stock issuance — 58,200 shares
|
|
|
1 |
|
|
|
630 |
|
|
|
— |
|
|
|
(631 |
) |
|
|
— |
|
| |
Amortization of unearned compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
109 |
|
|
|
109 |
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
40,725 |
|
|
|
— |
|
|
|
40,725 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
$ |
220 |
|
|
$ |
85,603 |
|
|
$ |
(92,849 |
) |
|
$ |
(522 |
) |
|
$ |
(7,548 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
42
PINNACLE AIRLINES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
40,725 |
|
|
$ |
35,067 |
|
|
$ |
30,785 |
|
| |
Adjustments to reconcile net income to cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation
|
|
|
3,153 |
|
|
|
2,912 |
|
|
|
6,141 |
|
| |
|
(Gain) loss on disposal of equipment and rotable spares
|
|
|
(445 |
) |
|
|
225 |
|
|
|
43 |
|
| |
|
Deferred income taxes
|
|
|
2,394 |
|
|
|
1,885 |
|
|
|
1,019 |
|
| |
|
Provision for spare parts and supplies obsolescence
|
|
|
177 |
|
|
|
106 |
|
|
|
623 |
|
| |
|
Other
|
|
|
(217 |
) |
|
|
(180 |
) |
|
|
(145 |
) |
| |
|
Amortization of unearned compensation
|
|
|
109 |
|
|
|
— |
|
|
|
— |
|
| |
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Receivables, principally from Northwest
|
|
|
(7,575 |
) |
|
|
5,168 |
|
|
|
(40,622 |
) |
| |
|
|
Spare parts and supplies
|
|
|
(1,905 |
) |
|
|
(954 |
) |
|
|
(172 |
) |
| |
|
|
Prepaid expenses and other current assets
|
|
|
1,166 |
|
|
|
7,782 |
|
|
|
(9,469 |
) |
| |
|
|
Aircraft deposits paid to Northwest
|
|
|
(7,350 |
) |
|
|
(4,375 |
) |
|
|
(8,925 |
) |
| |
|
|
Accounts payable and accrued expenses
|
|
|
10,975 |
|
|
|
(2,213 |
) |
|
|
3,676 |
|
| |
|
|
Other current liabilities
|
|
|
753 |
|
|
|
(121 |
) |
|
|
(398 |
) |
| |
|
|
Income taxes payable
|
|
|
(3,963 |
) |
|
|
4,780 |
|
|
|
17,398 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Cash provided by (used in) operating activities
|
|
|
37,997 |
|
|
|
50,082 |
|
|
|
(46 |
) |
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Purchases of property and equipment
|
|
|
(8,647 |
) |
|
|
(10,894 |
) |
|
|
(4,415 |
) |
| |
Proceeds from the sale of property and equipment
|
|
|
1,057 |
|
|
|
— |
|
|
|
— |
|
| |
Purchase of contractual rights from Northwest
|
|
|
(10,000 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Cash used in investing activities
|
|
|
(17,590 |
) |
|
|
(10,894 |
) |
|
|
(4,415 |
) |
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Payments on long-term debt
|
|
|
(12,000 |
) |
|
|
(18,000 |
) |
|
|
— |
|
| |
Repayments on line of credit with bank
|
|
|
— |
|
|
|
(4,245 |
) |
|
|
— |
|
| |
(Repayments) borrowings under line of credit with Northwest
|
|
|
(5,000 |
) |
|
|
10,000 |
|
|
|
— |
|
| |
Advances from Northwest for manufacturer credits
|
|
|
— |
|
|
|
— |
|
|
|
7,150 |
|
| |
Other financing activities
|
|
|
(18 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Cash (used in) provided by financing activities
|
|
|
(17,018 |
) |
|
|
(12,245 |
) |
|
|
7,150 |
|
|
Net increase in cash and cash equivalents
|
|
|
3,389 |
|
|
|
26,943 |
|
|
|
2,689 |
|
|
Cash and cash equivalents at beginning of period
|
|
|
31,523 |
|
|
|
4,580 |
|
|
|
1,891 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
34,912 |
|
|
$ |
31,523 |
|
|
$ |
4,580 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest paid
|
|
$ |
5,920 |
|
|
$ |
6,345 |
|
|
$ |
357 |
|
| |
Income tax payments
|
|
$ |
23,970 |
|
|
$ |
15,553 |
|
|
$ |
1,024 |
|
|
Other non-cash transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Dividends issued to Northwest
|
|
$ |
— |
|
|
$ |
215,500 |
|
|
$ |
4,385 |
|
| |
Capital contribution from Northwest applied to note payable
|
|
$ |
— |
|
|
$ |
50,000 |
|
|
$ |
— |
|
| |
Payment owed to Northwest for contractual rights
|
|
$ |
5,115 |
|
|
$ |
— |
|
|
$ |
— |
|
| |
Property acquired through a capital lease obligation
|
|
$ |
87 |
|
|
$ |
— |
|
|
$ |
— |
|
The accompanying notes are an integral part of these
consolidated financial statements.
43
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 providing 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, and the regional focus cities of Indianapolis and
Milwaukee. As of December 31, 2004, the Company operated an
all-regional jet fleet of 117 Canadair Regional Jet
(“CRJ”) aircraft and offered regional airline services
with approximately 660 daily departures to 103 cities in
35 states and four Canadian provinces. The Company offered
service with 76 CRJ aircraft with approximately 490 daily
departures to 81 cities in 29 states and two Canadian
provinces as of December 31, 2003.
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 services exclusively to Northwest. Prior to September
2003, Northwest was the majority owner of the Company and
designed the Company’s operations to increase overall
system revenues of Northwest rather than to maximize the
Company’s stand-alone profitability. The historical
financial information does not reflect what the financial
position, results of operations and cash flows of the Company
would have been as a stand-alone entity for all 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.
As discussed in Note 3, the Company’s Airline Services
Agreement (“ASA”) provides a monthly margin payment
calculated to achieve a target operating margin, based on
reimbursement payments and payments based on pre-set rates. The
Company recognizes revenue when services are provided. The
monthly margin payment plus total reimbursement payments and
payments based on pre-set rates are recognized as revenue at the
gross amount billed.
As the payments based on pre-set rates are not based on the
actual expenses incurred, the Company’s actual annual
unadjusted operating margin may fall outside the then applicable
floor or ceiling stipulated in the ASA. The ASA provides for a
year-end adjustment to bring the Company’s operating margin
to the applicable floor or ceiling. For the years ended
December 31, 2004, 2003 and 2002, no margin adjustment
payments were required.
Any penalties incurred by the Company in providing regional
airline services to Northwest are treated as reductions in
revenue. For the years ended December 31, 2004 and 2003,
the Company recorded penalties of $1,878 and $664, respectively.
In 2002, there were no provisions in the ASA for performance
penalties.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant Accounting
Policies — (Continued)
|
|
|
Allowance for Doubtful Accounts |
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.
|
|
|
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.
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 shorter of the asset’s useful life
or the remaining lease terms of related aircraft.
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 for spare parts expected to be on
hand at the date the aircraft are retired from service is
provided over the remaining estimated useful life of the related
aircraft equipment. In addition, an allowance for spare parts
currently identified as obsolete or excess is provided. These
allowances are based on management estimates and are subject to
change.
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 agreements that
are expensed based on specific operational events.
The Company files claims for vendor refunds on warrantable spare
parts and flight equipment that require repair or replacement.
The Company reduces its aircraft maintenance costs when claims
are filed by the amount it expects to recover from vendors. The
balance of outstanding warranty claims, net of allowance, at
December 31, 2004 and 2003 was $834 and $0, respectively.
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
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant Accounting
Policies — (Continued)
180 days. Available manufacturer credits of $2,206 and
$3,645 at December 31, 2004 and 2003, respectively, are
included in prepaid expenses and other assets in the
Company’s consolidate balance sheets.
For the years ended December 31, 2004, 2003 and 2002, the
Company obtained manufacturer credits from Northwest in the
amount of $4,386, $8,935 and $7,150, respectively.
The Company pays to Northwest a deposit of $175 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.
Aircraft deposits are shown as other assets in the
Company’s consolidated balance sheet.
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.
Goodwill represents the excess of the purchase price over the
fair value of acquired net assets. Goodwill in the amount of
$22,449 was recorded in connection with the Northwest
acquisition of the Company in 1997.
Effective January 1, 2002, the Company adopted the
provisions of Financial Accounting Standards Board
(“FASB”) Statement of Financial Accounting Standard
(“SFAS”) 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. For
purposes of this standard, the Company considers it to have one
reporting unit consisting of regional airline services. Each
October, the Company performs the annual impairment test. In
conducting the test for 2004, the Company concluded that its
goodwill is not impaired.
|
|
|
Contractual Rights Acquired from Northwest |
Contractual rights were acquired from Northwest under Amendment
No. 4 to the ASA. Among other things, Amendment No. 4
granted the Company the right to operate an additional ten CRJs
during the remaining term of the ASA. The delivery of the ten
additional aircraft, which will begin in the second quarter of
2005, will increase the Company’s fleet to 139 by September
2005. In consideration of these contractual rights, the Company
agreed to pay $15,115 to Northwest, $10,000 of which was paid in
the fourth quarter of 2004. The remaining $5,115 is included in
other current liabilities on the Company’s consolidated
balance sheet and will be paid during the second quarter of 2005.
The Company expects these contractual rights to contribute
directly to its cash flows, beginning with aircraft deliveries
in the second quarter of 2005 and continuing over the remaining
term of the ASA. The acquired contractual rights will be
amortized on a straight-line basis over the expected period of
increased cash flows. The Company expects future amortization
associated with this intangible asset to be $796 in 2005 and
$1,193 in years 2006 through 2017.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant Accounting
Policies — (Continued)
The Company accounts for earnings per share in accordance with
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. The following
table sets forth the computation of basic and diluted earnings
per share:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
40,725 |
|
|
$ |
35,067 |
|
|
$ |
30,785 |
|
|
Weighted average number of shares outstanding
|
|
|
21,892 |
|
|
|
21,892 |
|
|
|
21,892 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
1.86 |
|
|
$ |
1.60 |
|
|
$ |
1.41 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
40,725 |
|
|
$ |
35,067 |
|
|
$ |
30,785 |
|
|
Share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Weighted average number of shares outstanding
|
|
|
21,892 |
|
|
|
21,892 |
|
|
|
21,892 |
|
| |
Assumed exercises of stock options
|
|
|
19 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Weighted average number of shares outstanding for diluted
earnings per share
|
|
|
21,911 |
|
|
|
21,892 |
|
|
|
21,892 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$ |
1.86 |
|
|
$ |
1.60 |
|
|
$ |
1.41 |
|
| |
|
|
|
|
|
|
|
|
|
Options to purchase 727 shares of common stock were
excluded from the diluted EPS calculation because the effect
would be anti-dilutive.
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”) to measure compensation expense for
stock-based compensation plans. 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 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,
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant Accounting
Policies — (Continued)
prorated over the vesting periods, at the grant dates as
required under SFAS No. 123, “Accounting for
Stock-Based Compensation,” (“SFAS 123”):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net income
|
|
$ |
40,725 |
|
|
$ |
35,067 |
|
|
$ |
30,785 |
|
|
Add: Stock-based compensation expense included in reported net
income, net of tax
|
|
|
68 |
|
|
|
— |
|
|
|
— |
|
|
Deduct: Stock-based compensation expense determined under the
fair value method, net of tax
|
|
|
991 |
|
|
|
121 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
39,802 |
|
|
$ |
34,946 |
|
|
$ |
30,785 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income per common share — basic and diluted, as
reported
|
|
$ |
1.86 |
|
|
$ |
1.60 |
|
|
$ |
1.41 |
|
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net income per common share — basic and
diluted
|
|
$ |
1.82 |
|
|
$ |
1.60 |
|
|
$ |
1.41 |
|
| |
|
|
|
|
|
|
|
|
|
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 effect in future years.
In December 2004, the FASB issued SFAS No. 123R,
“Share-Based Payment.” SFAS No. 123R is a
revision of SFAS No. 123 and supersedes APB 25.
Among other items, SFAS No. 123R eliminates the use of
APB 25 and the intrinsic value method of accounting, and
requires companies to recognize the cost of employee services
received in exchange for awards of equity instruments based on
the grant date fair value of those awards in the financial
statements. Pro forma disclosure is no longer an alternative.
The effective date of SFAS No. 123R is the first
reporting period beginning after June 15, 2005, which is
third quarter 2005 for calendar year companies, although early
adoption is allowed. SFAS No. 123R permits companies
to adopt its requirements using either a “modified
prospective” method, or a “modified
retrospective” method. Under the “modified
prospective” method, compensation cost is recognized in the
financial statements beginning with the effective date, based on
the requirements of SFAS No. 123R for all share-based
payments granted after that date, and based on the requirements
of SFAS No. 123 for all unvested awards granted prior
to the effective date of SFAS No. 123R. Under the
“modified retrospective” method, the requirements are
the same as under the “modified prospective” method,
but also permits entities to restate financial statements of
previous periods based on pro forma disclosures made in
accordance with SFAS No. 123. In the above pro forma
table, the Company utilizes the Black-Scholes standard option
pricing model to measure the fair value of stock options granted
to employees. While SFAS No. 123R permits entities to
continue to use such a model, the standard also permits the use
of a “lattice” model. The Company currently expects to
adopt SFAS No. 123R effective July 1, 2005. The
Company has also not yet determined the financial statement
impact of adopting SFAS No. 123R or whether the
adoption will result in amounts that are similar to the current
pro forma disclosures under SFAS No. 123.
|
|
|
Impairment of Long-Lived Assets |
The Company evaluates whether there has been an impairment of
any of its long-lived assets on an annual basis or if certain
circumstances indicate that a possible impairment may exist.
Impairment exists when the carrying amount of a long-lived asset
is not recoverable (undiscounted cash flows are less than the
assets carrying value) and exceeds its fair value. If it is
determined that an impairment has occurred, the carrying value
of the long-lived asset is reduced to its fair value. Goodwill
is tested for impairment under SFAS No. 142. All other
long-lived assets, including intangibles subject to
amortization, are evaluated for impairment under
SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.”
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Significant Accounting
Policies — (Continued)
Fair values of cash equivalents, receivables, other assets,
accounts payable and line of credit 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 $22,806 and $403
at December 31, 2004 and 2003, respectively.
The Company’s note payable with Northwest had a face value
of $120,000 as of December 31, 2004. The Company
repurchased the note payable from Northwest in February 2005 for
$101,600, which approximates its fair value. The repurchase was
done after the Company’s private sale of $121,000 principal
amount of its 3.25% senior convertible notes (the
“Notes”). See Note 18 for a detailed discussion
of the Notes.
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 regional airline services.
The Company has no adjustments to net income to arrive at
comprehensive income.
|
|
|
Significant Concentration |
One supplier manufactures the Company’s leased 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.
Certain prior year amounts, primarily amounts for other assets
and other liabilities on the Company’s consolidated balance
sheet, have been reclassified to conform with the current year
presentation. Such reclassifications have no impact on amounts
previously reported in the Company’s consolidated
statements of income, consolidated statements of
stockholders’ equity (deficiency) or consolidated cash
flows for operating, investing or financing activities.
Use of Estimates
The preparation of the Company’s 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.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
| 3. |
Airline Services Agreement |
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. Upon expiration, the ASA is automatically renewed for
successive five-year periods unless terminated by the Company or
Northwest. In 2004, the Company entered into Amendment
No. 4 to the ASA with Northwest that, among other things,
increased from 129 to 139 the number of CRJs that the Company
may operate under the ASA. Also, this Amendment provided that
the Company would pay $15,115 to Northwest in consideration for
the agreements and covenants therein.
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
Company’s initial public offering, as discussed in
Note 5, 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 to the Company or by the Company to
Northwest will be made to adjust the Company’s operating
margin to the floor or ceiling. Certain 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. If the
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
| 3. |
Airline Services Agreement — (Continued) |
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. For the years ended
December 31, 2004, 2003 and 2002, no margin adjustment
payments were required pursuant to the terms of the ASA.
|
|
| 4. |
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, 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.
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.
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 ended December 31,
2004, 2003 and 2002, the Company recorded revenue of
approximately $950, $2,020
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
| 4. |
Other Agreements with Northwest — (Continued) |
and $3,087, respectively, for providing these services, which is
included in other operating revenue in the accompanying
statements of income.
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.
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.
|
|
| 5. |
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 constituted 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 Plans.”)
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 ASA 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.
6. 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.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Note Payable and
Dividends to Northwest — (Continued)
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 |
|
| |
|
|
|
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 exceeded $40,000. The note
accrued interest at the rate of 3.4%, which was payable
quarterly.
Immediately following the Offering, Northwest made a capital
contribution to the Company in the amount of $50,000. The
Company used the contribution of capital 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
exceeded $50,000. No other significant changes were made to the
terms of the note payable.
As discussed in Note 18, in February 2005, the Company
purchased from Northwest the note payable in its entirety at a
discounted purchase price of $101,600, together with accrued and
unpaid interest. The Company’s purchase of the note payable
was done in conjunction with its sale of $121,000 principal
amount of its 3.25% senior convertible notes due 2025. Due
to this event, the note payable of $120,000 is classified as a
non-current liability on the consolidated balance sheet as of
December 31, 2004.
7. 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, Pinnacle Airlines, Inc. obtained a Revolving
Credit Facility (“Revolver”) from Northwest, which
allowed for borrowings up to $50,000. Based on the original
agreement, the term of the Revolver extended through
December 31, 2005. The Revolver accrued interest at the
rate of 1% plus a margin that was equal to the higher of the
most recent prime rate offered by JPMorganChase Bank, or the
most recent overnight federal funds rate offered to
JPMorganChase Bank plus 0.5%. Under the terms of the Revolver,
the Company was prevented from issuing or declaring dividends or
incurring any additional debt without the approval of Northwest.
The interest rate at December 31, 2004 was 6.25%.
In December 2004, Pinnacle Airlines, Inc. and Northwest entered
into Amendment No. 3 to the Revolver. Among other things,
Amendment No. 3 provided that the Company in its role as
guarantor, may obtain up to $5,000 in advances from Pinnacle
Airlines, Inc. to secure, or do business utilizing, a second
airline operating certificate. Additionally, Amendment
No. 3 decreased borrowings available to Pinnacle Airlines,
Inc. under the Revolver from $50,000 to $25,000. As of
December 31, 2004, there was $20,000 of available
borrowings under the Revolver and $700 of standby letters of
credit outstanding.
As discussed in Note 18, in February 2005, the Company
completed the sale of $121,000 principal amount of its
3.25% senior convertible notes due 2025, (the
“Notes”). In conjunction with the sale, the Company
repaid the $5,000 of borrowings outstanding as of
December 31, 2004 under the Revolver, together with accrued
and unpaid interest, and decreased the term of the Revolver from
December 31, 2005 to
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Lines of
Credit — (Continued)
June 30, 2005. Due to this event, the $5,000 in borrowings
outstanding under the Revolver is classified as a non-current
liability on the consolidated balance sheet as of
December 31, 2004.
8. Summary of Revenue from
Regional Airline Services
As discussed in Note 3, the Company’s revenue from
regional airline services 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 following schedule summarizes operating revenue, operating
expenses and operating income by type for the years ended
December 31, 2004 and 2003, respectively. As discussed in
Note 3, 2003 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 year
ended December 31, 2002 is not available.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
Reimbursed | |
|
Unreimbursed | |
|
Total | |
|
Reimbursed | |
|
Unreimbursed | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional airline services
|
|
$ |
423,911 |
|
|
$ |
207,593 |
|
|
$ |
631,504 |
|
|
$ |
296,257 |
|
|
$ |
154,354 |
|
|
$ |
450,611 |
|
|
Other revenue
|
|
|
— |
|
|
|
3,944 |
|
|
|
3,944 |
|
|
|
— |
|
|
|
6,159 |
|
|
|
6,159 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
423,911 |
|
|
|
211,537 |
|
|
|
635,448 |
|
|
|
296,257 |
|
|
|
160,513 |
|
|
|
456,770 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Salaries, wages and benefits
|
|
|
— |
|
|
|
105,143 |
|
|
|
105,143 |
|
|
|
— |
|
|
|
83,316 |
|
|
|
83,316 |
|
| |
Aircraft fuel
|
|
|
83,061 |
|
|
|
511 |
|
|
|
83,572 |
|
|
|
54,731 |
|
|
|
276 |
|
|
|
55,007 |
|
| |
Aircraft maintenance, materials and repairs
|
|
|
11,842 |
|
|
|
11,703 |
|
|
|
23,545 |
|
|
|
6,548 |
|
|
|
7,568 |
|
|
|
14,116 |
|
| |
Aircraft rentals
|
|
|
209,047 |
|
|
|
— |
|
|
|
209,047 |
|
|
|
136,273 |
|
|
|
— |
|
|
|
136,273 |
|
| |
Other rentals and landing fees
|
|
|
18,651 |
|
|
|
18,450 |
|
|
|
37,101 |
|
|
|
16,512 |
|
|
|
12,743 |
|
|
|
29,255 |
|
| |
Government reimbursements
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,000 |
) |
|
|
(114 |
) |
|
|
(1,114 |
) |
| |
Ground handling services
|
|
|
47,533 |
|
|
|
18,344 |
|
|
|
65,877 |
|
|
|
33,223 |
|
|
|
11,399 |
|
|
|
44,622 |
|
| |
Depreciation
|
|
|
— |
|
|
|
3,153 |
|
|
|
3,153 |
|
|
|
— |
|
|
|
2,912 |
|
|
|
2,912 |
|
| |
Other
|
|
|
11,386 |
|
|
|
29,321 |
|
|
|
40,707 |
|
|
|
9,600 |
|
|
|
18,614 |
|
|
|
28,214 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
381,520 |
|
|
|
186,625 |
|
|
|
568,145 |
|
|
|
255,887 |
|
|
|
136,714 |
|
|
|
392,601 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$ |
42,391 |
|
|
$ |
24,912 |
|
|
$ |
67,303 |
|
|
$ |
40,370 |
|
|
$ |
23,799 |
|
|
$ |
64,169 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income as a percent of operating revenues
|
|
|
10.0 |
% |
|
|
11.8 |
% |
|
|
10.6 |
% |
|
|
13.6 |
% |
|
|
14.8 |
% |
|
|
14.0 |
% |
The Company’s airline services revenues by aircraft type
are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Regional jets (CRJs)
|
|
$ |
631,504 |
|
|
$ |
450,611 |
|
|
$ |
285,505 |
|
|
Turboprops
|
|
|
— |
|
|
|
— |
|
|
|
39,881 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total regional airline services
|
|
$ |
631,504 |
|
|
$ |
450,611 |
|
|
$ |
325,386 |
|
| |
|
|
|
|
|
|
|
|
|
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. 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 the Company’s regional jets and
is the owner of 2,492 shares of the Company’s common
stock and the Company’s Series A preferred stock. The
Company also had certain borrowings from Northwest, as discussed
in Notes 6 and 7.
Amounts recorded in the Company’s consolidated statements
of income for transactions with Northwest are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional airline services
|
|
$ |
631,504 |
|
|
$ |
450,611 |
|
|
$ |
325,386 |
|
|
Other revenue
|
|
|
950 |
|
|
|
2,020 |
|
|
|
3,087 |
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
|
83,061 |
|
|
|
53,909 |
|
|
|
27,247 |
|
|
Aircraft rentals
|
|
|
209,047 |
|
|
|
136,283 |
|
|
|
79,260 |
|
|
Other rentals and landing fees
|
|
|
11,250 |
|
|
|
11,250 |
|
|
|
9,063 |
|
|
Ground handling services
|
|
|
46,112 |
|
|
|
32,069 |
|
|
|
14,584 |
|
|
Other
|
|
|
394 |
|
|
|
275 |
|
|
|
344 |
|
|
Interest expense (income)
|
|
|
4,765 |
|
|
|
7,176 |
|
|
|
(2,937 |
) |
Net amounts due from Northwest as of December 31, 2004 and
2003 were $22,894 and $16,187, respectively, and are included in
accounts receivable in the Company’s consolidated balance
sheets. Net amounts due to Northwest as of December 31,
2004 and 2003 were $1,061 and $1,039, respectively, and are
included in accounts payable in the Company’s consolidated
balance sheets.
Other current liabilities include $5,115 payable to Northwest
for contractual rights, as discussed in Note 2.
In accordance with the ASA, passenger fuel costs are reimbursed
in full by Northwest and capped at $0.78 per gallon.
As discussed in Note 4, the Company subleases certain Saab
aircraft to Mesaba and obtains ground handling and landing fee
services at certain cities where Mesaba has existing operations.
Additionally, as provided in the ASA with Northwest, the Company
provides certain ground handling services at selected cities to
Mesaba. Ground handling services obtained from Mesaba for the
years ended December 31, 2004, 2003 and 2002 totaled
$15,621, $13,196 and $5,727 respectively. Ground handling
services provided to Mesaba for the years ended
December 31, 2004, 2003 and 2002 totaled $1,161, $3,990 and
$2,831, respectively. As discussed in Note 4, these amounts
are included in other operating revenue in the Company’s
consolidated statements of income.
10. Leases
The Company leases its CRJ aircraft and certain aircraft
equipment, buildings and office equipment under capital and
noncancelable operating leases that expire in various years
through 2017. As previously noted, the Company subleases its CRJ
aircraft and engines 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
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Leases — (Continued)
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 4, 11 Saab 340 aircraft are being
subleased to another regional airline carrier that provides
airline capacity to Northwest.
The following is a summary of the Company’s fleet of active
aircraft providing regional airline services:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Fleet Size as of | |
| |
|
Standard | |
|
December 31, | |
| |
|
Seating | |
|
| |
| Aircraft |
|
Configuration | |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
CRJ 200
|
|
|
50 |
|
|
|
42 |
|
|
|
35 |
|
|
|
33 |
|
|
CRJ 440
|
|
|
44 |
|
|
|
75 |
|
|
|
41 |
|
|
|
18 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
117 |
|
|
|
76 |
|
|
|
51 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes approximate minimum future rental
payments, by year and in the aggregate, required under capital
leases and noncancelable operating leases with initial or
remaining lease terms in excess of one year as of
December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Capital Leases | |
|
Operating Leases | |
| |
|
| |
|
| |
| |
|
Non-aircraft | |
|
Aircraft | |
|
Non-aircraft | |
| |
|
| |
|
| |
|
| |
|
2005
|
|
$ |
46 |
|
|
$ |
253,356 |
|
|
$ |
5,720 |
|
|
2006
|
|
|
27 |
|
|
|
253,165 |
|
|
|
5,715 |
|
|
2007
|
|
|
— |
|
|
|
248,095 |
|
|
|
5,426 |
|
|
2008
|
|
|
— |
|
|
|
247,092 |
|
|
|
4,744 |
|
|
2009
|
|
|
— |
|
|
|
245,758 |
|
|
|
4,496 |
|
|
Thereafter
|
|
|
— |
|
|
|
1,965,600 |
|
|
|
27,811 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
73 |
|
|
|
3,213,066 |
|
|
|
53,912 |
|
|
Sublease rental income
|
|
|
— |
|
|
|
(18,966 |
) |
|
|
(322 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Total minimum operating lease payments
|
|
|
73 |
|
|
$ |
3,194,100 |
|
|
$ |
53,590 |
|
| |
|
|
|
|
|
|
|
|
|
|
Less amount representing interest
|
|
|
4 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
$ |
69 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Rental expense for operating leases for the years ended
December 31 consisted of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Gross rental expense
|
|
$ |
233,947 |
|
|
$ |
160,723 |
|
|
$ |
106,548 |
|
|
Sublease rental income
|
|
|
(7,811 |
) |
|
|
(8,181 |
) |
|
|
(5,831 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net rental expense
|
|
$ |
226,136 |
|
|
$ |
152,542 |
|
|
$ |
100,717 |
|
| |
|
|
|
|
|
|
|
|
|
The above minimum future rentals and total rental expense do not
include landing fees which amounted to approximately $20,012,
$12,986 and $9,117 for the years ended December 31, 2004,
2003 and 2002, respectively.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Accrued Expenses
Accrued expenses consisted of the following as of
December 31:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Compensation
|
|
$ |
6,016 |
|
|
$ |
4,397 |
|
|
Taxes other than income
|
|
|
6,605 |
|
|
|
4,678 |
|
|
Insurance costs
|
|
|
1,795 |
|
|
|
1,848 |
|
|
Other
|
|
|
667 |
|
|
|
409 |
|
| |
|
|
|
|
|
|
| |
|
$ |
15,083 |
|
|
$ |
11,332 |
|
| |
|
|
|
|
|
|
Other expenses consisted of the following for the years ended
December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Passenger liability insurance
|
|
$ |
2,682 |
|
|
$ |
2,427 |
|
|
$ |
4,317 |
|
|
Hull and other insurance
|
|
|
2,785 |
|
|
|
1,664 |
|
|
|
1,479 |
|
|
Property and other taxes
|
|
|
6,884 |
|
|
|
5,635 |
|
|
|
4,657 |
|
|
Crew training expense
|
|
|
5,124 |
|
|
|
2,515 |
|
|
|
4,243 |
|
|
Crew overnight accommodations
|
|
|
6,250 |
|
|
|
3,517 |
|
|
|
3,567 |
|
|
Other
|
|
|
16,982 |
|
|
|
12,456 |
|
|
|
9,958 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
40,707 |
|
|
$ |
28,214 |
|
|
$ |
28,221 |
|
| |
|
|
|
|
|
|
|
|
|
13. Income Taxes
During the third quarter of 2004, the Company lowered its 2004
income tax expense by $1,063 following reduction in the
Company’s previous estimate of its tax obligations for
2003. The reduction in the Company’s estimate occurred
following the filing of its 2003 state and federal income
tax returns and was primarily due to changes in the
apportionment of taxable income to those states where the
Company has operations. This change in estimate increased the
Company’s basic and diluted EPS by approximately $0.05 for
the year ended December 31, 2004.
As discussed in Note 5, Northwest’s majority ownership
of the Company ceased with its contribution of stock to the
Northwest Airlines Pension Plans 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.
The Company has assessed its risk regarding various potential
tax matters in a number of jurisdictions and provided estimated
accruals of approximately $1,481. The ultimate amount of the
liabilities, if any, may vary; however, the Company believes it
has adequate reserves for its assessed risk.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Income
Taxes — (Continued)
The significant components of the Company’s deferred tax
assets and liabilities are as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
Asset valuation reserves
|
|
$ |
292 |
|
|
$ |
1,136 |
|
| |
Vacation pay
|
|
|
983 |
|
|
|
692 |
|
| |
Other accruals
|
|
|
133 |
|
|
|
721 |
|
| |
|
|
|
|
|
|
| |
Total deferred tax assets
|
|
|
1,408 |
|
|
|
2,549 |
|
| |
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Prepaid insurance
|
|
|
(408 |
) |
|
|
— |
|
| |
Tax over book depreciation
|
|
|
(7,245 |
) |
|
|
(6,400 |
) |
| |
|
|
|
|
|
|
| |
Total deferred tax liabilities
|
|
|
(7,653 |
) |
|
|
(6,400 |
) |
| |
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$ |
(6,245 |
) |
|
$ |
(3,851 |
) |
| |
|
|
|
|
|
|
The provision for income tax expense includes the following
components for the years ended December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
19,179 |
|
|
$ |
17,293 |
|
|
$ |
16,107 |
|
| |
State
|
|
|
827 |
|
|
|
3,154 |
|
|
|
2,417 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
20,006 |
|
|
|
20,447 |
|
|
|
18,524 |
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
|
2,511 |
|
|
|
1,454 |
|
|
|
909 |
|
| |
State
|
|
|
(117 |
) |
|
|
431 |
|
|
|
110 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
2,394 |
|
|
|
1,885 |
|
|
|
1,019 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
22,400 |
|
|
$ |
22,332 |
|
|
$ |
19,543 |
|
| |
|
|
|
|
|
|
|
|
|
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:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
$ | |
|
% | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Income tax expense at statutory rate
|
|
$ |
22,094 |
|
|
|
35.0 |
% |
|
$ |
20,090 |
|
|
|
35.0 |
% |
|
$ |
17,615 |
|
|
|
35.0 |
% |
|
State income taxes, net of federal taxes
|
|
|
1,279 |
|
|
|
2.0 |
% |
|
|
2,239 |
|
|
|
3.9 |
% |
|
|
1,817 |
|
|
|
3.6 |
% |
|
Decrease in estimate of 2003 taxes
|
|
|
(1,063 |
) |
|
|
(1.6 |
)% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Other
|
|
|
90 |
|
|
|
0.1 |
% |
|
|
3 |
|
|
|
0.0 |
% |
|
|
111 |
|
|
|
0.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$ |
22,400 |
|
|
|
35.5 |
% |
|
$ |
22,332 |
|
|
|
38.9 |
% |
|
$ |
19,543 |
|
|
|
38.8 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 14. |
Stock-Based Compensation |
In connection with the Offering discussed in Note 5, the
Company adopted the 2003 Stock Incentive Plan (the
“Plan”). The Plan permits the granting of
non-qualified stock options, incentive stock options, stock
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
| 14. |
Stock-Based Compensation — (Continued) |
appreciation rights, restricted stock and other stock-based
awards to employees or directors of the Company. The Company has
reserved 2,152 shares of common stock for issuance 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. In September 2004, an additional 32
stock options to purchase the Company’s common stock were
granted to non-employee members of the Board of Directors under
the Plan at an exercise price of $10.23. These options vest one
year after the grant date and will expire ten years after the
grant date. The following table provides certain information
with respect to the Company’s stock options:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
|
|
Weighted Average | |
|
|
|
Weighted Average | |
| |
|
Stock Options | |
|
Exercise Price | |
|
Stock Options | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
Outstanding at beginning of year
|
|
|
858 |
|
|
$ |
14.00 |
|
|
|
— |
|
|
$ |
— |
|
|
Granted
|
|
|
32 |
|
|
|
10.23 |
|
|
|
858 |
|
|
|
14.00 |
|
|
Exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Forfeited
|
|
|
131 |
|
|
|
14.00 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
759 |
|
|
$ |
13.84 |
|
|
|
858 |
|
|
$ |
14.00 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
182 |
|
|
$ |
14.00 |
|
|
|
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Exercise prices for options outstanding as of December 31,
2004 ranged from $10.23 to $14.00. The weighted-average
remaining contractual life of those options at December 31,
2004 and 2003 was 8.9 years and 9.9 years,
respectively.
Pro forma information regarding net income and income per share,
as disclosed in Note 2, 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 2004 and 2003 was estimated at the date of grant using
the Black-Scholes options pricing model with the following
assumptions for 2004 and 2003, respectively: risk-free interest
rate of 4.2% and 3.5%, dividend yield of 0.0% and 0.0%, expected
volatility of the Company’s stock of 55.0% and 65.0% and
expected life of the option of 6.0 and 6.0 years. The grant
date fair value of the stock options granted in 2004 and 2003
was $5.75 and $8.65 per option, respectively.
In October 2004, the Company awarded 58 shares of
restricted stock to certain officers and members of the Board of
Directors under the Plan. With the stock grant, the Company
recorded unearned compensation of $631, the market value of the
shares on the date of grant. Using the straight-line method,
this amount is being amortized ratably over the vesting periods,
none of which exceed one year. During 2004, the Company
recognized $109 of compensation expense from this grant of
restricted stock. The unamortized balance of $522 is shown on
the Company’s consolidated balance sheet as unearned
compensation in stockholders’ equity.
During the vesting periods, grantees have voting rights, but the
shares may not be sold, assigned, transferred, pledged,
hypothecated or otherwise disposed of, alienated or encumbered.
Additionally, granted but unvested shares are forfeited upon a
grantee’s separation from service. During 2003 and 2002,
the Company made no grants of restricted stock.
|
|
| 15. |
Employee Benefit Plan |
The Pinnacle Airlines, Inc. Savings Plan (the “Savings
Plan”), is a defined contribution plan covering
substantially all employees of the Company. Effective
March 1, 2002, participants who are classified as flight
attendants, customer service or ground agents, or who are not
represented for purposes of collective bargaining are eligible
to participate in the Savings Plan on the first day of the
month following employment,
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
| 15. |
Employee Benefit Plan — (Continued) |
while pilots are eligible to participate in the Savings Plan
after six months of service, as defined in the Savings Plan
agreement. Prior to March 1, 2002, eligible employees were
required to complete six months of service to be eligible for
the Savings Plan. The Savings Plan is subject to the provisions
of the Employee Retirement Income Security Act of 1974, as
amended (ERISA).
Each year, participants may contribute a portion of their pretax
annual compensation, as defined in the Savings Plan, subject to
Internal Revenue Code limitations. Participants may also
contribute amounts representing distributions from other
qualified plans. Participants who have attained age 50
before the end of the plan year are eligible to make catch-up
contributions.
The Company’s match for pilot contributions is based on
years of service, as indicated in the following table:
| |
|
|
|
|
| Years of Service |
|
Company Match | |
| |
|
| |
|
6 months – 5 years
|
|
|
25% of first 5% |
|
|
6 – 9 years
|
|
|
40% of first 6% |
|
|
10 – 12 years
|
|
|
60% of first 7% |
|
|
13 or more years
|
|
|
70% of first 7% |
|
Effective March 1, 2002, the Company’s match for
participants who are classified as flight attendants, customer
service or ground agents, or who are not represented for
purposes of collective bargaining is based on the following
table:
| |
|
|
|
|
| Employee Contribution |
|
Company Match | |
| |
|
| |
|
First 3%
|
|
|
Dollar for dollar, or 100% |
|
|
Next 3%
|
|
|
Matched at 67% |
|
The total employer contributions will be no more than 4.9% of
total employee contributions for pilots and 5% for participants
who are classified as flight attendants, customer service or
ground agents, or who are not represented for purposes of
collective bargaining. The Company made matching contributions
of approximately $1,675, $1,253 and $710 for the years ended
December 31, 2004, 2003 and 2002. The Savings Plan also
contains a profit sharing provision allowing the Company to make
discretionary contributions to the Savings Plan for the benefit
of all plan participants. For the three years ended
December 31, 2004, the Company made no discretionary
contributions to the Savings Plan.
|
|
| 16. |
Commitments and Contingencies |
Employees. As of December 31, 2004, approximately
77% of the Company’s workforce were members of unions
representing pilots (32%), flight attendants (19%) and customer
service agents (26%). The collective bargaining agreements for
the pilots, flight attendants and customer service agents become
amendable on April 30, 2005, July 31, 2006 and
March 19, 2010, respectively. 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.
Legal Proceedings. 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 statements as a whole.
Purchase Commitments. The Company has a contractual
obligation to purchase cost per hour services with an avionics
service provider. The contract has approximately 6 years
remaining under the original 10-year term and covers repair and
support services for our avionics equipment on a per flight hour
basis,
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
| 16. |
Commitments and Contingencies — (Continued) |
subject to a minimum purchase obligation of approximately
$600 per year through the remainder of the term of the
contract.
The Company has contractual obligations of approximately $2,558
under certain software license agreements with various service
providers. The contracts vary in term and extend through 2012.
Contractual obligations to these service providers are
approximately $400 per year in 2005 through 2008 and
$310 per year in 2009 through May 2012.
Self-Insurance. The Company self-insures a portion of its
losses from claims related to medical insurance for employees.
Losses are accrued based on an estimate of the ultimate
aggregate liability for claims incurred, using standard industry
practices and actual experience.
Financings and Guarantees. The Company is the guarantor
of approximately $2,500 aggregate principal amount of tax-exempt
special facilities revenue bonds and interest thereon. These
bonds were issued by the Memphis-Shelby County Airport Authority
(the “Authority”) and are payable solely from the
Company’s rentals paid under a long-term lease agreement
with the Authority. The leasing arrangement is accounted for as
an operating lease in the Company’s consolidated financial
statements.
Regulatory Matters. The Company is subject to regulation
under various laws and regulation, which are administered by
numerous state and federal agencies, including the Federal
Aviation Administration, Transportation Security Administration
and the Department of Transportation. The Company is involved in
various matters with these agencies during the ordinary course
of its business. While the outcome of these matters cannot be
predicted with certainty, the Company does not expect, based on
current information and past experience, that the ultimate
disposition of these matters will not have a material adverse
effect on its financial statements as a whole.
General Guarantees and Indemnifications. The Company is
party to numerous contracts and real estate leases in which it
is common for the Company to agree to indemnify third parties
for tort liabilities that arise out of or relate to the subject
matter of the contract or occupancy of the leased premises. In
some cases, this indemnity extends to related liabilities
arising from the negligence of the indemnified parties, but
usually excludes any liabilities caused by their gross
negligence or willful misconduct. Additionally, the Company will
typically indemnify the lessors and related third parties for
any environmental liability that arise out of or relates to the
Company’s use of the leased premises.
In the Company’s aircraft lease agreements with Northwest,
the Company typically indemnifies the prime lessor, financing
parties, trustees acting on their behalf and other related
parties against liabilities that arise from the manufacture,
design, ownership, financing, use, operation and maintenance of
the aircraft and for tort liability, whether or not these
liabilities arise out of or relate to the negligence of these
indemnified parties, except for their gross negligence or
willful misconduct.
The Company expects that it would be covered by insurance
(subject to deductibles) for most tort liabilities and related
indemnities described above with respect to real estate it
leases and aircraft it operates.
The Company does not expect the potential amount of future
payments under the foregoing indemnities and agreements to be
material.
Other contingencies. On October 14, 2004, a
repositioning flight operated by the Company, which was not
carrying any passengers or flight attendants, was involved in an
accident. The National Transportation Safety Board is currently
investigating the accident and the Company is fully cooperating
with the investigation. The Company is currently assessing the
costs that may be associated with the event. Due primarily to
adequate levels of insurance, the Company does not expect that
these costs will have a material impact on its financial
statements as a whole.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
| 17. |
Quarterly Financial Data (Unaudited) |
Unaudited summarized financial data by quarter for 2004 and 2003
is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended, | |
| |
|
| |
| |
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
| |
|
| |
|
| |
|
| |
|
| |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$ |
133,879 |
|
|
$ |
152,173 |
|
|
$ |
168,086 |
|
|
$ |
181,310 |
|
|
Operating income
|
|
|
14,344 |
|
|
|
16,910 |
|
|
|
18,525 |
|
|
|
17,524 |
|
|
Net income
|
|
|
8,054 |
|
|
|
9,698 |
|
|
|
12,649 |
|
|
|
10,324 |
|
|
Basic and diluted income per share
|
|
$ |
0.37 |
|
|
$ |
0.44 |
|
|
$ |
0.58 |
|
|
$ |
0.47 |
|
|
Operating income as a percentage of operating revenues
|
|
|
10.7 |
% |
|
|
11.1 |
% |
|
|
11.0 |
% |
|
|
9.7 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended, | |
| |
|
| |
| |
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
| |
|
| |
|
| |
|
| |
|
| |
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$ |
100,562 |
|
|
$ |
109,449 |
|
|
$ |
119,665 |
|
|
$ |
127,094 |
|
|
Operating income
|
|
|
14,339 |
|
|
|
15,697 |
|
|
|
16,571 |
|
|
|
17,562 |
|
|
Net income
|
|
|
8,024 |
|
|
|
8,499 |
|
|
|
8,738 |
|
|
|
9,806 |
|
|
Basic and diluted income per share
|
|
$ |
0.37 |
|
|
$ |
0.39 |
|
|
$ |
0.40 |
|
|
$ |
0.45 |
|
|
Operating income as a percentage of operating revenues
|
|
|
14.3 |
% |
|
|
14.3 |
% |
|
|
13.8 |
% |
|
|
13.8 |
% |
The Company’s basic and diluted EPS were increased by $0.08
for the three months ended September 30, 2004 following a
reduction in the Company’s previous estimate of its tax
obligations for 2004 and 2003. Approximately $0.03 of this
change related to the Company’s estimate of amounts owed
for 2004. See Note 13 for a more detailed discussion.
As discussed in Note 3, the ASA was amended in connection
with the Offering in November 2003 to lower the Company’s
target operating margin from 14.0% to 10.0%.
The sum of the quarterly earnings per share amounts may not
equal the annual amount reported since per share amounts are
computed independently for each quarter, and for the full year
are based on respective weighted-average common shares
outstanding and other dilutive potential common shares.
In February 2005, the Company completed the sale of $121,000
principal amount of its 3.25% senior convertible notes due
February 15, 2025 (the “Notes”). The
Company’s sale of the Notes was made to qualified
institutional investors under Rule 144A of the Securities
Act of 1933. As part of the terms of the sale, the Company
agreed to file a registration statement with the Securities and
Exchange Commission for the resale of the Notes and the shares
of common stock issuable upon conversion of the Notes within
90 days after the closing of the sale.
The Company used the net proceeds from the Notes, together with
cash on hand, to purchase the outstanding $120,000 note payable
to Northwest at a discounted price of $101,600, to repay $5,000
of borrowings outstanding under the Revolver with Northwest, in
each case with accrued and unpaid interest, and for general
corporate purposes. As a result, the Company recorded a pre-tax
gain of $18,400 related to the extinguishment of debt during the
first quarter of 2005. A more detailed discussion of the
Company’s borrowings from Northwest is provided in
Note 6 and Note 7.
The Notes pay interest semiannually in arrears in cash on
February 15 and August 15 of each year, beginning
August 15, 2005. The holders of the Notes may require the
Company to purchase all or a portion of
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Subsequent
Event — (Continued)
their Notes for cash on February 15, 2010,
February 15, 2015 and February 15, 2020 at a purchase
price equal to 100% of the principal amount of the Notes to be
repurchased plus accrued and unpaid interest, if any, to the
purchase date. The Notes are structured such that, upon the
occurrence of certain events, holders may convert the Notes into
the equivalent value of the Company’s common stock at an
initial conversion rate of 75.6475 shares per $1,000
principal amount of Notes, representing an initial conversion
price of $13.22 per share. Upon conversion, the Company
will pay the holder the portion of the conversion value in cash
up to the $1,000 principal amount. To the extent that the
conversion value exceeds the $1,000 principal amount, the excess
will be settled in cash, common stock or a combination of both,
at the Company’s option.
Holders may convert their Notes only during the following
periods:
|
|
|
| |
• |
during a quarter (and only during such quarter) if the closing
price of the Company’s common stock exceeds 120% of the
conversion price of the Notes (initially $15.86 per share)
for at least 20 of the last 30 trading days of the preceding
quarter; |
| |
| |
• |
during a five day period after the Notes have traded for a five
day period at a price that is less than 98% of the equivalent
value that could be realized upon conversion of the Notes; |
| |
| |
• |
if the Company calls the Notes for redemption; |
| |
| |
• |
if a change of control or other specified corporate transactions
or distributions to holders of the Company’s common stock
occurs (and in some instances, the Company may also owe an
additional premium upon a change in control); and |
| |
| |
• |
during the 10 trading days prior to the maturity date of
February 15, 2025. |
In determining the impact of the Notes on its diluted earnings
per share, the Company will follow the consensus reached by the
Emerging Issues Task Force (“EITF”) Issue
No. 04-08, “The Effect of Contingently Convertible
Debt on Diluted Earnings per Share” issued during September
2004. In accordance with EITF 04-08, the number of shares used
in the Company’s calculation of fully diluted earnings per
share will only be increased by the number of shares of its
common stock with a market value equal to the excess of the
Notes’ conversion value over their $1,000 principal amount.
No dilution will result from the Notes during a reporting period
unless the Company’s average price of its common stock
during such reporting period exceeds the initial conversion
price of $13.22, and then only to the extent of that excess.
63
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Pinnacle Airlines
Corp.
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal Control over
Financial Reporting, that Pinnacle Airlines Corp. maintained
effective internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Pinnacle Airlines Corp.’s management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an
opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Pinnacle
Airlines Corp. maintained effective internal control over
financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Pinnacle Airlines Corp. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2004, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Pinnacle Airlines Corp. as of
December 31, 2004 and 2003, 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, 2004, and our report dated March 9, 2005
expressed an unqualified opinion thereon.
Memphis, Tennessee
March 9, 2005
64
|
|
| 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 |
Disclosure Controls and Procedures. An evaluation was
performed under the supervision and with the participation of
our management, including our Chief Executive Officer, or CEO,
and Chief Financial Officer, or CFO, of the effectiveness of our
disclosure controls and procedures as of December 31, 2004.
Based on that evaluation, our management, including our CEO and
CFO, concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported as specified in the
SEC’s rules and forms.
Management’s Report on Internal Control over Financial
Reporting. The management of Pinnacle Airlines Corp. is
responsible for the fair presentation of the information
contained in the financial statements in this Annual Report. The
financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America (GAAP) and reflect management’s best judgment as to
the Company’s financial position, results of operations,
cash flows and related disclosures. The management of Pinnacle
Airlines Corp. is also responsible for establishing and
maintaining adequate internal control over financial reporting
to provide reasonable assurance that (a) the Company’s
financial records accurately and fairly reflect transactions in
and dispositions of assets, (b) the records of transactions
are sufficient to prepare financial statements in accordance
with GAAP, (c) receipts and expenditures are made only as
authorized by management, and (d) steps are in place to
prevent or detect theft, unauthorized use or disposition of
Company assets of a value that could have a material effect on
the financial statements.
Management has assessed the effectiveness of the Company’s
internal control over financial reporting as of
December 31, 2004 using the Internal Control —
Integrated Framework published by the Committee of
Sponsoring Organizations (COSO) of the Treadway Commission.
In the opinion of management, Pinnacle Airlines Corp. maintained
effective internal control over financial reporting as of
December 31, 2004.
The Company’s independent auditor, Ernst & Young
LLP, has audited the financial statements included in this
Annual Report and has issued their report thereon.
Ernst & Young LLP has also issued an attestation report
on management’s assessment of the Company’s internal
control over financial reporting. Please see pages 39 and
64 of this Annual Report for the reports of Ernst &
Young LLP.
|
|
| |
/s/ Philip H. Trenary
|
| |
|
| |
Philip H. Trenary |
| |
President and Chief Executive Officer |
| |
| |
/s/ Peter D. Hunt
|
| |
|
| |
Peter D. Hunt |
| |
Vice-President and Chief Financial Officer |
65
|
|
| Item 9B. |
Other Information |
None.
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 2005 annual meeting of stockholders to be filed within
120 days of December 31, 2004.
PART IV
|
|
| Item 15. |
Exhibits, Financial Statement Schedules |
|
|
| 1. |
The following financial statements are included in Part II,
Item 8. Financial Statements and Supplementary Data: |
Report of Independent Registered Public Accounting Firm:
| |
|
|
|
i)
|
|
Consolidated Statements of Income for the Years Ended
December 31, 2004, 2003, and 2002 |
| |
|
ii)
|
|
Consolidated Balance Sheets as of December 31, 2004 and 2003 |
| |
|
iii)
|
|
Consolidated Statements of Stockholders’ Equity
(Deficiency) for the Years Ended December 31, 2004, 2003
and 2002 |
| |
|
iv)
|
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002 |
| |
|
v)
|
|
Notes to Consolidated Financial Statements |
2. Financial
Statement Schedule:
| |
|
|
|
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule |
|
S-1 |
| |
|
Schedule II — Valuation and Qualifying Accounts |
|
S-2 |
|
All schedules have been omitted because they are inapplicable,
not required, or the information is included elsewhere in the
consolidated financial statements or notes thereto. |
|
|
| 3. |
Exhibits: See accompanying Exhibit Index included after the
signature page of this report for a list of the exhibits filed
or furnished with or incorporated by reference in this report. |
66
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) |
|
|
|
| |
By: |
/s/ Philip H. Trenary
|
|
|
| |
|
| |
Name: Philip H. Trenary |
| |
Title: President and Chief Executive Officer |
Date: March 14, 2005
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 14, 2005.
| |
|
|
|
|
| Signature |
|
Title |
| |
|
|
| |
/s/ Philip H. Trenary
Philip
H. Trenary |
|
President, Chief Executive Officer and Director
(Principal Executive Officer) |
| |
/s/ Peter D. Hunt
Peter
D. Hunt |
|
Vice President and Chief Financial Officer
(Principal Accounting Officer) |
| |
/s/ Stephen E. Gorman
Stephen
E. Gorman |
|
Chairman, Director |
| |
/s/ Donald J. Breeding
Donald
J. Breeding |
|
Director |
| |
/s/ J. Timothy Griffin
J.
Timothy Griffin |
|
Director |
| |
/s/ Robert D.
Isom, Jr.
Robert
D. Isom, Jr. |
|
Director |
| |
/s/ James E.
McGehee, Jr.
James
E. McGehee, Jr. |
|
Director |
| |
/s/ Robert A. Peiser
Robert
A. Peiser |
|
Director |
67
| |
|
|
|
|
| Signature |
|
Title |
| |
|
|
| |
/s/ Thomas S.
Schreier, Jr.
Thomas
S. Schreier, Jr. |
|
Director |
| |
/s/ R. Philip Shannon
R.
Philip Shannon |
|
Director |
| |
/s/ Nicholas R.
Tomassetti
Nicholas
R. Tomassetti |
|
Director |
68
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 |
| |
4 |
.3(a) |
|
Indenture, 3.25% Senior Convertible Notes due 2025, dated
as of February 8, 2005, by and between Pinnacle Airlines
Corp. and Deutsche Bank Trust Company |
| |
4 |
.4(a) |
|
Registration Rights Agreement made pursuant to the Purchase
Agreement dated February 3, dated as of February 8,
2005, by and among Pinnacle Airlines Corp., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Raymond
James & Associates, Inc. |
| |
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 dated as of November 28, 2003 to Revolving
Credit Facility dated as of January 14, 2003 between
Pinnacle Airlines, Inc. and Northwest Airlines, Inc. |
| |
10 |
.6.3(b) |
|
Third Amendment dated as of December 13, 2004 to Revolving
Credit Facility dated as of January 14, 2003 between
Pinnacle Airlines, Inc. and Northwest Airlines, Inc. |
| |
10 |
.6.4(a) |
|
Fourth Amendment dated as of February 8, 2005 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) |
69
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
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 |
|
Intentionally omitted |
| |
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. |
| |
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 dated as of November 26, 2003 to the
Airline Services Agreement dated as of January 14, 2003
among the registrant, Pinnacle Airlines, Inc. and Northwest
Airlines, Inc. |
| |
10 |
.21.3(b) |
|
Amendment No. 3 dated as of August 20, 2004 to the
Airline Services Agreement dated as of January 14, 2003
among the registrant, Pinnacle Airlines, Inc. and Northwest
Airlines, Inc. |
| |
10 |
.21.4(b) |
|
Amendment No. 4 dated as of December 13, 2004 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. |
| |
10 |
.27(a) |
|
Purchase Agreement, Senior Convertible Notes due 2025, dated as
of February 3, 2005, by and among, Pinnacle Airlines Corp.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Raymond James & Associates, Inc. |
| |
21 |
.1* |
|
List of Subsidiaries |
| |
23 |
.1 |
|
Consent of Independent Registered Public Accounting Firm |
| |
31 |
.1 |
|
Rule 13a-14(a) Certification of Chief Executive Officer |
| |
31 |
.2 |
|
Rule 13a-14(a) Certification of Chief Financial Officer |
| |
32 |
|
|
Section 1350 Certifications of Chief Executive Officer and
Chief Financial Officer |
|
|
|
| |
* |
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 |
|
|
|
|
(a) |
|
Incorporated by reference to the Company’s Current Report
on Form 8-K, filed on February 8, 2004. |
| |
|
(b) |
|
Incorporated by reference to the Company’s Current Report
on Form 8-K/A filed on December 16, 2004. |
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Pinnacle Airlines Corp.
We have audited the consolidated financial statements of
Pinnacle Airlines Corp. (the “Company”) as of
December 31, 2004 and 2003, and for each of the three years
in the period ended December 31, 2004, and have issued our
report thereon dated March 9, 2005 (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.
Memphis, Tennessee
March 9, 2005
S-1
Schedule II — Valuation and Qualifying Accounts
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Additions |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
Charged to |
|
Charged to |
|
|
|
|
| |
|
Beginning of |
|
Costs and |
|
Other |
|
|
|
Balance at End |
| Description |
|
Period |
|
Expenses |
|
Accounts |
|
Deductions |
|
of Period |
| |
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts
|
|
$ |
146 |
|
|
$ |
422 |
|
|
$ |
— |
|
|
$ |
(534 |
) |
|
$ |
34 |
|
| |
Allowance for obsolete inventory parts
|
|
|
2,606 |
|
|
|
177 |
|
|
|
— |
|
|
|
(2,431 |
)(1) |
|
|
352 |
|
|
Year Ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts
|
|
|
536 |
|
|
|
— |
|
|
|
— |
|
|
|
(390 |
) |
|
|
146 |
|
| |
Allowance for obsolete inventory parts
|
|
|
2,603 |
|
|
|
106 |
|
|
|
— |
|
|
|
(103 |
)(1) |
|
|
2,606 |
|
|
Year Ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts
|
|
|
310 |
|
|
|
226 |
|
|
|
— |
|
|
|
— |
|
|
|
536 |
|
| |
Allowance for obsolete inventory parts
|
|
|
1,980 |
|
|
|
686 |
|
|
|
|
|
|
|
(63 |
)(1) |
|
|
2,603 |
|
|
|
| (1) |
Dispositions and write-offs |
S-2