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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 Form 10-Q þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended March 31, 2005oro
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from___to___
 Commission File Number 001-31898 PINNACLE AIRLINES CORP. (Exact name of registrant as specified in its charter)
 Delaware
    
    03-0376558(State or other jurisdiction
of incorporation or organization)
    
    (I.R.S. Employer
Identification No.)1689 Nonconnah Blvd, Suite 111
Memphis, Tennessee(Address of principal executive offices)
    
    38132(Zip Code)
 901-348-4100(Registrants telephone number, including area code) 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes þ
    
    
    
    No o
 As of May 3, 2005, [21,945,260] shares of common stock were outstanding.




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Table of Contents  
 PART I. FINANCIAL INFORMATION
    
    
    1Item 1.Financial Statements
    
    
    1Condensed Consolidated Statements of Income (Unaudited)
    
    
    1Condensed Consolidated Balance Sheets (Unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows (Unaudited)
    
    
    4Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    5item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
    
    
    14Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    22PART II. OTHER INFORMATION
    
    
    23Item 1. Legal Proceedings
    
    
    23Item 2. Changes in Securities and Use of Proceeds
    
    
    23Item 3. Defaults Upon Senior Securities
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 5. Other Information
    
    
    23Item 6. Exhibits
    
    
    24EX-31.1  SECTION 302 CERTIFICATION OF THE CEOEX-31.2  SECTION 302 CERTIFICATION OF THE CFOEX-32  SECTION 1350 CERTIFICATIONS OF THE CEO AND CFO




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Part I. Financial Information 
 Item 1. Financial Statements Pinnacle Airlines Corp. 
 Condensed Consolidated Statements of Income (Unaudited)
 (in thousands, except per share data)
 Three Months Ended March 31,2005
    
    
    2004Operating revenuesRegional airline services
    
    $
    192,751
    
    
    $
    133,387Other
    
    
    1,981
    
    
    
    492Total operating revenues
    
    
    194,732
    
    
    
    133,879Operating expensesSalaries, wages and benefits
    
    
    31,482
    
    
    
    23,219Aircraft fuel
    
    
    25,462
    
    
    
    16,540Aircraft maintenance, materials and repairs
    
    
    7,238
    
    
    
    5,646Aircraft rentals
    
    
    63,306
    
    
    
    43,620Other rentals and landing fees
    
    
    10,142
    
    
    
    8,077Ground handling services
    
    
    22,664
    
    
    
    13,503Depreciation
    
    
    962
    
    
    
    721Other
    
    
    13,405
    
    
    
    8,209Total operating expenses
    
    
    174,661
    
    
    
    119,535Operating income
    
    
    20,071
    
    
    
    14,344Operating income as a percentage of operating revenues
    
    
    10.3
    %
    
    
    10.7
    %Nonoperating income (expense)Interest expense, net
    
    
    (932
    )
    
    
    (1,235
    )Miscellaneous income, net
    
    
    
    
    
    
    85Gain on extinguishment of debt
    
    
    18,000
    
    
    
    Total nonoperating income (expense)
    
    
    17,068
    
    
    
    (1,150
    )Income before income taxes
    
    
    37,139
    
    
    
    13,194Income tax expense
    
    
    13,807
    
    
    
    5,140Net income
    
    $
    23,332
    
    
    $
    8,054Basic and diluted earnings per share
    
    $
    1.06
    
    
    $
    0.37Shares used in computing basic earnings per share
    
    
    21,908
    
    
    
    21,892Shares used in computing diluted earnings per share
    
    
    21,928
    
    
    
    21,905
 The accompanying notes are an integral part of these condensed consolidated financial statements. 1




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Pinnacle Airlines Corp. 
 Condensed Consolidated Balance Sheets
 (in thousands, except share data)
 March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    49,642
    
    
    $
    34,912Receivables, principally from Northwest, net
    
    
    27,670
    
    
    
    25,139Spare parts and supplies, net
    
    
    5,504
    
    
    
    5,341Prepaid expenses and other assets
    
    
    6,223
    
    
    
    5,644Deferred income taxes
    
    
    704
    
    
    
    860Total current assets
    
    
    89,743
    
    
    
    71,896Property and equipmentAircraft and rotable spares
    
    
    36,741
    
    
    
    35,837Other property and equipment
    
    
    17,240
    
    
    
    16,161Office furniture and fixtures
    
    
    1,868
    
    
    
    1,86355,849
    
    
    
    53,861Less accumulated depreciation
    
    
    (15,383
    )
    
    
    (14,445
    )Net property and equipment
    
    
    40,466
    
    
    
    39,416Other assets, primarily aircraft deposits with Northwest
    
    
    22,135
    
    
    
    21,111Debt issuance costs, net
    
    
    4,306
    
    
    
    Contractual rights acquired from Northwest, net
    
    
    15,115
    
    
    
    15,115Costs in excess of net assets acquired, net
    
    
    18,422
    
    
    
    18,422Total assets
    
    $
    190,187
    
    
    $
    165,960
 The accompanying notes are an integral part of these condensed consolidated financial statements. 2




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Pinnacle Airlines Corp.
Condensed Consolidated Balance Sheets
(in thousands, except share data) March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)Liabilities and stockholders equity (deficiency)Current liabilitiesAccounts payable
    
    $
    15,634
    
    
    $
    16,983Accrued expenses
    
    
    15,179
    
    
    
    15,083Income taxes payable
    
    
    7,059
    
    
    
    1,633Other current liabilities, including $5,115 due Northwest for
contractual rights
    
    
    6,948
    
    
    
    6,756Total current liabilities
    
    
    44,820
    
    
    
    40,455Deferred income taxes
    
    
    7,601
    
    
    
    7,105Other liabilities
    
    
    740
    
    
    
    948Senior convertible notes
    
    
    121,000
    
    
    
    Note payable and line of credit with Northwest
    
    
    
    
    
    
    125,000Commitments and contingenciesStockholders equity (deficiency)Preferred stock, par value $0.01 per share; 1,000,000 shares authorized,
no shares issued
    
    
    
    
    
    
    Series A preferred stock, stated value $100 per share; one share
authorized 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, 21,945,260
and 21,950,260 shares issued, respectively
    
    
    219
    
    
    
    220Additional paid-in capital
    
    
    85,549
    
    
    
    85,603Accumulated deficit
    
    
    (69,516
    )
    
    
    (92,849
    )Unearned compensation on restricted stock
    
    
    (226
    )
    
    
    (522
    )Total stockholders equity (deficiency)
    
    
    16,026
    
    
    
    (7,548
    )Total liabilities and stockholders equity (deficiency)
    
    $
    190,187
    
    
    $
    165,960
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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Pinnacle Airlines Corp. 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 (in thousands)
 Three Months Ended March 31,2005
    
    
    2004Operating activitiesNet income
    
    $
    23,332
    
    
    $
    8,054Adjustments to reconcile net income to cash provided by
operating activities:Depreciation
    
    
    962
    
    
    
    721Loss on disposal of rotable spares
    
    
    141
    
    
    
    24Deferred income taxes
    
    
    652
    
    
    
    562Provision for spare parts and supplies obsolescence
    
    
    57
    
    
    
    35Gain on extinguishment of debt
    
    
    (18,000
    )
    
    
    Amortization of unearned compensation, net of forfeitures
    
    
    241
    
    
    
    Amortization of debt issuance costs
    
    
    31
    
    
    
    Changes in operating assets and liabilities:Receivables, principally from Northwest
    
    
    (2,531
    )
    
    
    (1,342
    )Spare parts and supplies
    
    
    (220
    )
    
    
    117Prepaid expenses and other current assets
    
    
    (579
    )
    
    
    (553
    )Aircraft and engine deposits paid to Northwest
    
    
    (1,024
    )
    
    
    (1,858
    )Accounts payable and accrued expenses
    
    
    (1,253
    )
    
    
    3,913Other current liabilities
    
    
    (16
    )
    
    
    (105
    )Income taxes payable
    
    
    5,426
    
    
    
    (1,137
    )Cash provided by operating activities
    
    
    7,219
    
    
    
    8,431Investing activitiesPurchases of property and equipment
    
    
    (2,152
    )
    
    
    (709
    )Proceeds from the sale of property and equipment
    
    
    
    
    
    
    355Cash used in investing activities
    
    
    (2,152
    )
    
    
    (354
    )Financing activitiesPayment to extinguish note payable to Northwest
    
    
    (101,600
    )
    
    
    Payments on note payable to Northwest
    
    
    
    
    
    
    (3,000
    )Repayment under line of credit with Northwest
    
    
    (5,000
    )
    
    
    Gross proceeds from issuance of senior convertible notes
    
    
    121,000
    
    
    
    Debt issuance costs
    
    
    (4,337
    )
    
    
    Other costs to retire note payable to Northwest
    
    
    (400
    )
    
    
    Cash provided by (used in) financing activities
    
    
    9,663
    
    
    
    (3,000
    )Net increase in cash and cash equivalents
    
    
    14,730
    
    
    
    5,077Cash and cash equivalents at beginning of period
    
    
    34,912
    
    
    
    31,523Cash and cash equivalents at end of period
    
    $
    49,642
    
    
    $
    36,600Supplemental disclosure of cash flow informationInterest paid
    
    $
    493
    
    
    $
    2,297Income tax payments
    
    $
    7,729
    
    
    $
    5,716
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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Pinnacle Airlines Corp. 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 (all amounts in thousands, except per share data)
 Pinnacle Airlines Corp. (the Company) operates through its wholly owned subsidiary,
Pinnacle Airlines, Inc., as a regional airline that provides airline capacity to Northwest
Airlines, Inc. (Northwest), a wholly owned indirect subsidiary of Northwest Airlines
Corporation. The Company operates as a Northwest Airlink carrier at Northwests domestic hub
airports in Detroit, Minneapolis/St. Paul and Memphis, and the regional focus cities of
Indianapolis and Milwaukee. As of March 31, 2005, the Company operated an all-regional jet fleet
of 123 Canadair Regional Jet (CRJ) aircraft and offered regional airline services with
approximately 682 daily departures to 111 cities in 36 states and four Canadian provinces. 1. Basis of Presentation These interim financial statements of the Company have been prepared in accordance with

accounting principles generally accepted in the United States for interim financial information,
the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X and should be
read in conjunction with our Annual Report on Form 10-K, as amended, for the year ended December
31, 2004. Accordingly, significant accounting policies and other disclosures normally provided have
been omitted since such items are disclosed therein. In the opinion of management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments (including normal recurring adjustments) necessary to present
fairly the Companys financial position, the results of its operations and its cash flows for the
periods indicated. Operating results for the periods presented are not necessarily indicative of
the results that may be expected for the year ended December 31, 2005. The term block hours refers to the elapsed time between an aircraft leaving a gate and
arriving at a gate, and the term cycle refers to an aircrafts departure and corresponding
arrival. Available seat miles represents the number of seats available for passengers,
multiplied by the number of miles those seats are flown. Certain prior year amounts have been reclassified to conform to current year classifications. 2. Airline Services Agreement The Company operates its all-CRJ fleet under an Airline Services Agreement (ASA) with
Northwest that became effective March 1, 2002. The term of the ASA extends through December 31,
2017 and provides for a target operating margin of 10%. Upon expiration, the ASA is automatically
renewed for successive five-year periods unless terminated by the Company or Northwest. In
December 2004, the Company entered into Amendment No. 4 to the ASA with Northwest that, among
other things, increased the number of CRJs that the Company may operate under the ASA to 139.
Also, this Amendment provided that the Company would pay $15,115 to Northwest in consideration for
the agreements and covenants therein, $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
sheets as of March 31, 2005 and December 31, 2004, and is due during the third quarter of 2005. Under the ASA, the Company receives the following payments from Northwest: Reimbursement payments. The Company receives monthly reimbursements for all expenses relating
to: passenger aircraft fuel; basic aircraft rentals; aviation liability, war risk and hull
insurance; third-party deicing services; CRJ third-party engine and airframe maintenance; hub and
maintenance facility rentals; passenger security costs; Detroit landing fees and property taxes. The Company has no
financial risk associated with cost fluctuations for these items because the Company is
reimbursed by Northwest for the actual expenses incurred. 5




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Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 2. Airline Services Agreement (continued) 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, 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. Following the Companys initial
public offering, the Company and Northwest amended the ASA to lower the Companys target operating
margin to 10%, effective December 1, 2003. Under the amended ASA, the Companys target operating
margin will be reset to a market-based percentage in 2008, but the reset target operating margin
will be no lower than 8% and no higher than 12%. The portion of any margin payments attributable to the reimbursement payments will always be
equal to the target 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. Under the ASA, the Companys operating income as a percentage of operating revenue is subject
to a floor and ceiling (between 9% and 11% for 2005, and 8% and 12% for 2006 and 2007). 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 floor or above the ceiling, 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 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 target operating margin by more than five percentage
points, the Company will pay Northwest all of the excess above five percent. 3. Note Payable to Northwest 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. On November 25, 2003, the Company completed an initial public offering (the Offering).
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. 6




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Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 3. Note Payable to Northwest (continued) As discussed in Note 5, in February 2005, the Company purchased from Northwest the note
payable with a balance of $120,000 in its entirety at a discounted purchase price of $101,600,
together with accrued and unpaid interest. As a result of the retirement, the Company recorded a
pre-tax gain of $18,000, net of advisory fees of $400. 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 was classified as a non-current
liability on the consolidated balance sheet as of December 31, 2004. 4. Line of Credit In January 2003, the Company 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. In December 2004, the Company and Northwest
entered into Amendment No. 3 to the Revolver that, among other things, decreased borrowings
available to Pinnacle Airlines, Inc. under the Revolver from $50,000 to $25,000 and restricted
draws under the facility to periods when the Companys cash and cash equivalents (cash) balance
was less than $20,000. Additionally, the Company was required to repay borrowings under the
facility when its balance of cash exceeded $30,000 for two consecutive business days. 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 is prevented from
issuing or declaring dividends or incurring any additional debt without the approval of Northwest.
There are no financial covenants associated with the Revolver. As discussed in Note 5, in February 2005, the Company completed the sale of $121,000
principal amount of its 3.25% senior convertible notes due 2025. 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 reduced the term of the Revolver from
December 31, 2005 to June 30, 2005. As of March 31, 2005, $25,000 of borrowings were available
under the Revolver. 5. Senior Convertible Notes In February 2005, the Company completed the private placement of $121,000 principal amount of
its 3.25% senior convertible notes due February 15, 2025, (the Notes). The Notes pay cash
interest semiannually in arrears on February 15 and August 15 of each year, beginning August 15,
2005. The Companys sale of the Notes was made to qualified institutional investors under Rule 144A
of the Securities Act of 1933. The Notes are senior unsecured obligations and rank equally with
other future senior unsecured debt, and are junior to any of the Companys secured debt, to the
extent of the collateral pledged, and to any debt and all other liabilities of Pinnacle Airlines,
Inc. Proceeds from the sale of the Notes were used to purchase the outstanding $120,000 note
payable to Northwest at a discounted price of $101,600, to repay the $5,000 of borrowings
outstanding under the Revolver, in each case with accrued and unpaid interest, and for general
corporate purposes. As a result, the Company recorded a pre-tax gain of $18,000, net of advisory
fees of $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 3 and Note 4. 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 (Redemption Dates) at a purchase
price equal to 100% of their principal amount 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 7




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Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 5. Senior Convertible Notes (continued) 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 follows
the consensus reached by the Emerging Issues Task Force Issue No. 04-08, The Effect of
Contingently Convertible Debt on Diluted Earnings per Share (EITF 04-08) issued during September
2004. In accordance with EITF 04-08, the Companys calculation of fully diluted earnings per share
will only be impacted 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. 6. Earnings Per Share The Company accounts for earnings per share in accordance with Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 128, Earnings per Share.
Basic earnings per common share (Basic EPS) excludes dilution and is computed by dividing net
income available to common stockholders by the weighted average number of common shares
outstanding during the periods presented. Diluted earnings per share (Diluted EPS) reflects the
potential dilution that could occur if securities or other obligations to issue common stock were
exercised or converted into common stock or resulted in the issuance of common stock that then
shared in the earnings of the Company. 8




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Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 6. Earnings Per Share (continued) The following table sets forth the computation of basic and diluted earnings per share (in
thousands, except per share data): Three Months EndedMarch 31,2005
    
    
    2004Net income
    
    $
    23,332
    
    
    $
    8,054Basic and diluted earnings per share
    
    $
    1.06
    
    
    $
    0.37Share computation:Weighted average number of shares outstanding for basic
earnings per share
    
    
    21,908
    
    
    
    21,892Assumed exercise of stock options
    
    
    20
    
    
    
    13Weighted average number of shares outstanding for diluted
earnings per share
    
    
    21,928
    
    
    
    21,905
 Options to purchase 699 shares of common stock were excluded from the diluted EPS calculation
because the effect would be anti-dilutive. 7. Stock-Based Compensation The Company accounts for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and
related interpretations (APB 25). Under APB 25, if the exercise price of the Companys employee
stock options equals the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. Since the Companys stock options have all been granted with
exercise prices at the market price of the underlying stock on the date of grant, no compensation
expense has been recognized under APB 25. Stock Options An initial grant of 858 stock options to purchase the Companys common stock occurred in
November 2003 at an exercise price of $14.00. These options vest over four years in annual
increments of 25% and will expire ten years after the grant date. For the three months ended March
31, 2005, 27 of previously granted options were forfeited. 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 2003 Stock Incentive 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. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, (SFAS
No. 123R). The Company expects to adopt SFAS No. 123R effective January 1, 2006. In the below 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 has not
yet determined which of the adoption methods provided by SFAS 123R will be used, 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. 9




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Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 7. Stock-Based Compensation (continued) 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 as required under SFAS No. 123: Three Months Ended March 31,2005
    
    
    2004Net income, as reported
    
    $
    23,332
    
    
    $
    8,054Add: Stock-based compensation expense
included in reported net income, net of tax
    
    
    153
    
    
    
    Deduct: Total pro forma stock-based
compensation expense, net of tax
    
    
    (379
    )
    
    
    (306
    )Pro forma net income
    
    $
    23,106
    
    
    $
    7,748Earnings per common share:Basic and diluted  as reported
    
    $
    1.06
    
    
    $
    0.37Basic and diluted  pro forma
    
    $
    1.05
    
    
    $
    0.35
 The pro forma effect on net income per share is not necessarily representative of the effect
in future years. Restricted Stock In October 2004, the Company awarded 58 shares of restricted stock to certain officers and
members of the Board of Directors under the Companys 2003 Stock Incentive 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 the three months ended March 31, 2005, the
Company recognized $242 of compensation expense related to this grant of restricted stock. The
unamortized balance of $226 is shown on the Companys consolidated balance sheet as of March 31,
2005 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 the three months ended March 31, 2005, 5 unvested shares were forfeited. 8. Related Party Transactions Northwest is a related party of the Company. As previously noted, the Company generates
substantially all of its revenue from its ASA with Northwest under which the Company uses the NW
two-letter designator code in displaying its schedules on all flights in the automated airline
reservation systems used throughout the industry. Under this agreement, the Company uses the name
Northwest Airlink. Northwest leases the Company all of its regional jets 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 Note 3 and Note 4. 10




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Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 8. Related Party Transactions (continued) Amounts recorded in the Companys consolidated statements of income for transactions with
Northwest for the periods indicated are as follows: Three Months EndedMarch 31,2005
    
    
    2004Revenue:Regional airline services
    
    $
    192,751
    
    
    $
    133,387Other revenue
    
    
    577
    
    
    
    39Expenses:Aircraft fuel
    
    
    25,349
    
    
    
    16,411Aircraft rentals
    
    
    63,306
    
    
    
    43,620Other rentals and landing fees
    
    
    2,813
    
    
    
    2,813Ground handling services
    
    
    15,405
    
    
    
    8,915Other
    
    
    185
    
    
    
    57Interest
    
    
    463
    
    
    
    1,251
 Net amounts due from Northwest as of March 31, 2005 and December 31, 2004 were $25,982 and
$22,894, respectively, and are included in accounts receivable in the Companys consolidated
balance sheets. Net amounts due to Northwest as of March 31, 2005 and December 31, 2004 were $2,615 and
$1,061, respectively, and are included in accounts payable in the Companys consolidated balance
sheets. Other current liabilities at March 31, 2005 and December 31, 2004 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. The Company subleases certain Saab aircraft to Mesaba Airlines (Mesaba), another Northwest
regional carrier, and obtains ground handling 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 three months ended March 31, 2005
and 2004 totaled $3,904 and $3,860,
respectively. Ground handling services provided to Mesaba for the three months ended March 31,
2005 and 2004 totaled $471 and $391, respectively. These amounts are included in other operating
revenue in the Companys consolidated statements of income. 9. Income Taxes The
following summarizes the significant components of the Companys income tax expense for the periods
indicated: Three Months Ended March 31,2005
    
    
    2004$
    
    
    %
    
    
    $
    
    
    %Income tax expense at statutory rate
    
    $
    12,999
    
    
    
    35.0
    %
    
    $
    4,618
    
    
    
    35.0
    %State income taxes, net of federal taxes
    
    
    787
    
    
    
    2.1
    %
    
    
    522
    
    
    
    4.0
    %Other
    
    
    21
    
    
    
    0.1
    %
    
    
    
    
    
    
    0.0
    %Income tax expense
    
    
    13,807
    
    
    
    37.2
    %
    
    $
    5,140
    
    
    
    39.0
    %
 11




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##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 9. Income Taxes (continued) The Company has provided estimated accruals of approximately $13,000 for certain income tax
contingencies related to the repurchase of debt. 10. Warranty 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 March 31, 2005 and December 31, 2004 was $225 and $834, respectively. 11. Manufacturer Credits The Company purchases from Northwest certain manufacturer credits to acquire flight equipment,
spare parts and supplies and maintenance services. Under the ASA, the Company may decline to
purchase credits that it does not plan to utilize within 180 days. The Company had available
manufacturer credits of $2,335 and $2,206 at March 31, 2005 and December 31, 2004, respectively,
which are included in prepaid expenses and other assets in the
Companys consolidated balance sheets. The Company purchased manufacturer credits from Northwest in the amount of $1,687 and $728,
for the three months ended March 31, 2005 and 2004, respectively. 12. Leases The Company leases all of its aircraft and certain aircraft equipment, buildings and office
equipment under capital and noncancelable operating leases that expire in various years through
2017. The Company subleases its CRJ aircraft from Northwest under operating leases that expire
December 31, 2017. The operating lease agreements contain certain requirements of the Company
regarding the payment of taxes on the aircraft, acceptable use of the aircraft, the level of
insurance to be maintained, the maintenance procedures to be performed and the condition of the
aircraft upon its return to Northwest. The monthly operating 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. The Company transferred 11 Saab turboprops to Mesaba 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 subleases with the third-party sublessors, subject to its right to terminate the
sublease in the event of default by Mesaba. Amounts received from Northwest and Mesaba are
consistent with amounts paid by the Company to third party lessors of the Saab aircraft. The following summarizes approximate minimum future rental payments, by year and in the
aggregate, required under capital leases and noncancelable operating leases, excluding future CRJ
aircraft deliveries, with initial or remaining lease terms in excess of one year as of March 31,
2005: Operating LeasesAircraft
    
    
    Non-aircraftRemainder of 2005
    
    $
    199,467
    
    
    $
    4,7012006
    
    
    265,765
    
    
    
    6,0722007
    
    
    260,695
    
    
    
    5,7972008
    
    
    259,692
    
    
    
    5,1182009
    
    
    258,358
    
    
    
    4,873Thereafter
    
    
    2,066,400
    
    
    
    31,4183,310,377
    
    
    
    57,979Sublease rental income
    
    
    (17,052
    )
    
    
    (283
    )Total minimum operating lease payments
    
    $
    3,293,325
    
    
    $
    57,696
 12




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##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 13. Commitments and Contingencies Employees.As of March 31, 2005, approximately 77% of the Companys workforce were members of
unions representing pilots (30%), flight attendants (20%) and customer service agents (27%). 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. The Company and its pilots union are currently in the
early stages of negotiations to amend its collective bargaining agreement. The Company has set a
goal to complete negotiations during 2005. 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 six years remaining
under the original 10-year term and covers repair and support services for our avionics equipment
on a per flight hour basis, 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 $2,452 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 $350 per year in 2005
through 2009 and $310 per year in 2009 through May of 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, it is the opinion of the Companys management, 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 involving negligence
of the indemnified parties on common 13




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##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 13. Commitments and Contingencies (continued) commercial terms. 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. In March 2005, an aircraft operated by the Company was involved in an event at the General
Mitchell International Airport in Milwaukee, Wisconsin. Although there were no injuries, the
aircraft was damaged and has been removed from service while being repaired. The National
Transportation Safety Board is currently investigating the event and the Company is fully
cooperating with the investigation. The Company has recorded a liability equal to its insurance
deductible and does not expect any further material costs to result from this event in the future. 
 Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition General The following managements discussion and analysis describes the principal factors affecting
the results of operations, liquidity, capital resources and contractual cash obligations, as well
as the critical accounting policies, of the Company. This discussion should be read in conjunction
with the accompanying unaudited financial statements and our Annual Report on Form 10-K, as
amended, for the year ended December 31, 2004 (Annual Report), which include additional
information about our significant accounting policies, practices and the transactions that underlie
our financial results. Our website address is www.nwairlink.com. All of our filings with the SEC are available free
of charge through our website as soon as reasonably practicable after we file them with, or furnish
them to, the SEC. Overview Our available seat miles (ASMs), block hours and cycles increased by approximately 57%, 55%
and 35%, respectively, during the three months ended March 31, 2005, compared to the same period in
2004. The increases were driven primarily by the growth in our fleet of Canadair Regional Jets
(CRJs), 14




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued) six of which were added during the three months ended March 31, 2005. By adding 36 aircraft
since March 31, 2004, we have grown our fleet by 41% to include 123 CRJs at March 31, 2005. Total operating and regional airline services revenue for the three months ended March 31,
2005 were $194.7 million and $192.8 million, respectively, which represented increases of 45%, over
the same period in 2004. Operating income for the three months ended March 31, 2005 and 2004 was
$20.1 million and $14.3 million, respectively. Since December 31, 2004, our balance of cash and cash equivalents has increased by $14.7
million to $49.6 million. Net income for the three month periods ended March 31, 2005 and 2004 was $23.3 million and
$8.1 million, respectively. 2005 results included a nonrecurring pre-tax gain of $18.0 million
($11.3 million net of related income taxes) from the retirement of the note payable to Northwest.
Excluding the gain, net income and diluted earnings per share for the three months ended March 31,
2005 was $12.0 million and $0.55, respectively, representing
increases of 49% over the same period in 2004. The following reconciles our net income as reported in accordance with generally accepted
accounting principles (GAAP) for the three months ended March 31, 2005 to net income excluding
the nonrecurring gain described above. We believe that this information is useful as it indicates
more clearly our comparative year-to-year 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. Three Months Ended March 31,2005
    
    
    2004
    
    
    % Increase(in
thousands)Net IncomeNet income in accordance with GAAP
    
    $
    23,332
    
    
    $
    8,054
    
    
    
    190
    %Deduct: Gain on extinguishment of debt, net of
related tax
    
    
    (11,302
    )
    
    
    Net income excluding gain on extinguishment of debt
    
    $
    12,030
    
    
    $
    8,054
    
    
    
    49
    %Basic and Diluted EPSBasic and diluted EPS in accordance with GAAP
    
    $
    1.06
    
    
    $
    0.37
    
    
    
    186
    %Deduct: Gain on extinguishment of debt, net of
related tax
    
    
    (0.51
    )
    
    
    Basic and diluted EPS excluding gain on extinguishment
of debt
    
    $
    0.55
    
    
    $
    0.37
    
    
    
    49
    %
 Outlook Our growth is scheduled to continue through the third quarter of 2005 with the addition of 16
additional aircraft committed from Northwest, seven of which have been delivered to us as of
May 2, 2005. Upon completion of these deliveries, our fleet will total 139 CRJ aircraft. On
April 22, 2005, Northwest announced that it had exercised options to accept delivery of 15
additional CRJ aircraft from Bombardier Aerospace, beginning in September of this year. In
addition, after requesting that several regional airlines, including ourselves, provide proposals
to operate these additional aircraft, Northwest announced that it had selected Mesaba Airlines, and
also granted Mesaba exclusive rights to operate an additional 20 CRJ aircraft in the Northwest
network should Northwest elect to exercise additional options with Bombardier. We believe that strong operational performance and rigorous cost control are key to
maintaining our successful relationship with Northwest, and we will continue to focus on these
areas. We also believe that we would be a competitive candidate to operate any additional regional
aircraft that Northwest might choose to add to its network beyond the 139 firm aircraft awarded to
us and the 15 firm and 20 option aircraft awarded to Mesaba. As a result of Northwests recent
announcement, however, we expect to have little near-term opportunity to grow our existing
operations under the ASA with Northwest beyond the current 139 aircraft that are committed to us. 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. We used
the proceeds to repurchase our $120 million note payable to Northwest and to repay the then current
outstanding balance of $5 million under our revolving credit agreement with Northwest (Revolver).
See further discussion of these events in Liquidity and Capital Resources. 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 15




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued) 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 (including under the Revolver). The
3.25% senior convertible notes do not contain such restrictions, providing us with 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. Results of Operations The following discussion provides an analysis of our results of operations and reasons for
material changes therein for the three months ended March 31, 2005 compared to the same period in
2004. Comparison of Three Months Ended March 31, 2005 to Three Months Ended March 31, 2004 Revenues 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 in Item 1 of this Form 10-Q, 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. The following schedule summarizes operating revenue, operating expenses, and operating income
by type for the periods indicated: Three Months Ended March 31,(in thousands)2005
    
    
    2004Reimbursed
    
    
    Pre-set Rates
    
    
    Total
    
    
    Reimbursed
    
    
    Pre-set Rates
    
    
    TotalOperating revenues:Regional airline services
    
    $
    130,917
    
    
    $
    61,834
    
    
    $
    192,751
    
    
    $
    89,351
    
    
    $
    44,036
    
    
    $
    133,387Other
    
    
    
    
    
    
    1,981
    
    
    
    1,981
    
    
    
    
    
    
    
    492
    
    
    
    492Total operating revenues
    
    
    130,917
    
    
    
    63,815
    
    
    
    194,732
    
    
    
    89,351
    
    
    
    44,528
    
    
    
    133,879Operating expenses:Salaries, wages and benefits
    
    
    
    
    
    
    31,482
    
    
    
    31,482
    
    
    
    
    
    
    
    23,219
    
    
    
    23,219Aircraft fuel
    
    
    25,349
    
    
    
    113
    
    
    
    25,462
    
    
    
    16,411
    
    
    
    129
    
    
    
    16,540Aircraft maintenance, materials and repairs
    
    
    3,871
    
    
    
    3,367
    
    
    
    7,238
    
    
    
    3,005
    
    
    
    2,641
    
    
    
    5,646Aircraft rentals
    
    
    63,306
    
    
    
    
    
    
    
    63,306
    
    
    
    43,620
    
    
    
    
    
    
    
    43,620Other rentals and landing fees
    
    
    4,632
    
    
    
    5,510
    
    
    
    10,142
    
    
    
    4,569
    
    
    
    3,508
    
    
    
    8,077Ground handling services
    
    
    17,121
    
    
    
    5,543
    
    
    
    22,664
    
    
    
    9,938
    
    
    
    3,565
    
    
    
    13,503Depreciation
    
    
    
    
    
    
    962
    
    
    
    962
    
    
    
    
    
    
    
    721
    
    
    
    721Other
    
    
    3,546
    
    
    
    9,859
    
    
    
    13,405
    
    
    
    2,874
    
    
    
    5,335
    
    
    
    8,209Total operating expenses
    
    
    117,825
    
    
    
    56,836
    
    
    
    174,661
    
    
    
    80,417
    
    
    
    39,118
    
    
    
    119,535Operating income:
    
    $
    13,092
    
    
    $
    6,979
    
    
    $
    20,071
    
    
    $
    8,934
    
    
    $
    5,410
    
    
    $
    14,344Operating income as a percent of operating revenues
    
    
    10.0
    %
    
    
    10.9
    %
    
    
    10.3
    %
    
    
    10.0
    %
    
    
    12.1
    %
    
    
    10.7
    %
 Operating revenue of $194.7 million for the three months ended March 31, 2005 increased
$60.9 million, or 45%, over operating revenue of $133.9 million for the same period in 2004. The
increase in operating revenue was primarily caused by the addition of 36 CRJ aircraft to our fleet.
CRJ block hours and cycles increased by 55% and 35%, respectively, causing increases in revenue,
excluding margin, of $3.6 million and $10.4 million, respectively. Revenue associated with expense
reimbursements, excluding margin, increased by $37.4 million, or 47%. 16




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued) Regional airline services revenue per CRJ block hour for the three months ended March 31, 2005
and 2004 were $1,925 and $2,059, respectively, which represents a decrease of approximately 7%.
Regional airline services revenue per cycle increased by 7% to $3,376 from $3,162. The variances in
revenue per block hour and cycle are due primarily to an increase in the average length of our
flights of 20% over the same periods. Under the ASA, we are required to maintain average performance levels related to the
percentage of completed flights, the percentage of on-time departures and arrivals, the percentage
of mishandled baggage, and the number of customer complaints. Our performance in several of these
operational metrics was well below the ASA targets during January and February, primarily due to
unusually severe winter weather across our network. Our operating performance significantly
improved in March to levels above the ASA targets, and in April to levels well in excess of our
average monthly performance in 2004. As a result of our operational performance in January and
February, however, we believe that we will owe a performance-related payment to Northwest under the
ASA for the six months ended June 30, 2005. The payment is calculated based on the number of
Pinnacle passengers enplaned during a six-month period. Accordingly, results for the first quarter
of 2005 include a reduction in regional airline services revenue of $1.0 million based on the
passengers enplaned during the quarter. Operating Expenses The increase in operating expenses during the three months ended March 31, 2005 was
predominately due to the growth in our level of operations. Total operating expenses increased by
$55.1 million, or 46%, which is comprised of increases in reimbursed expenses and expenses based on
pre-set rates of approximately 47% and 45%, respectively. Salaries, wages and benefits increased by $8.3 million, or 36%, primarily due to the increase
in the number of employees 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 $8.9 million, or 54%, due to the 55% increase in block hours,
which was partially offset by decreased fuel burn resulting primarily from an 18% 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 increased utilization of certain maintenance cost per hour services.
This accounted for approximately $0.9 million of the increase in reimbursed 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 $19.7 million, or 45%, due to the addition of 36 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
$1.7 million, or 43%, 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 $9.2 million, or 68%, due primarily to the 35% increase
in the number of departures performed. The increase in ground handling expense per departure was
primarily due to the addition of new cities where we provide passenger service with higher average
handling costs. Additionally, $1.0 million of the increase was caused by the additional deicing
services required due to the severe weather events in January 2005. 17




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued) The increase in other expenses was driven by our increased level of operations, most notably
an increase of $1.0 million of expenses associated with overnight travel for our pilots and flight
attendants and Canadian air traffic control costs of $0.3 million. Additionally, $1.4 million of
the increase is attributable to certain professional service expenses. Nonoperating Income and Expenses The decrease in interest expense was due to the extinguishment of our debt with Northwest and
the $5.0 million repayment under our Revolver, offset by the interest expense related to the 3.25%
senior convertible notes issued in February 2005. Nonoperating income for the three months ended March 31, 2005 includes a pre-tax gain of $18.0
million, net of advisory fees of $0.4 million, related to the extinguishment of our debt with
Northwest. Income tax expense increased by $6.7 million over the same period in 2004 as a result of
this gain. See Note 3 in Item 1 of this Form 10-Q for further discussion. Certain Statistical Information Information with respect to our operating expense components as a percentage of revenue, as
cents per available seat miles (ASMs) and as dollars per block hour is as follows: Three Months Ended March 31,2005
    
    
    2004Amount (in
    
    
    Percent of
    
    
    Cents per
    
    
    Cost per Block
    
    
    Amount
    
    
    Percent of
    
    
    Cents per
    
    
    Cost per Blockthousands)
    
    
    Revenue
    
    
    ASM
    
    
    Hour (dollars)
    
    
    (in thousands)
    
    
    Revenue
    
    
    ASM
    
    
    Hour (dollars)Operating expenses:Salaries, wages and benefits
    
    
    31,482
    
    
    
    16
    %
    
    
    2.44
    
    
    $
    315
    
    
    $
    23,219
    
    
    
    17
    %
    
    
    2.83
    
    
    $
    359Aircraft fuel
    
    
    25,462
    
    
    
    13
    %
    
    
    1.98
    
    
    
    254
    
    
    
    16,540
    
    
    
    12
    %
    
    
    2.02
    
    
    
    255Aircraft maintenance, materials and repairs
    
    
    7,238
    
    
    
    4
    %
    
    
    0.56
    
    
    
    72
    
    
    
    5,646
    
    
    
    4
    %
    
    
    0.69
    
    
    
    87Aircraft rentals
    
    
    63,306
    
    
    
    33
    %
    
    
    4.91
    
    
    
    632
    
    
    
    43,620
    
    
    
    33
    %
    
    
    5.33
    
    
    
    673Other rentals and landing fees
    
    
    10,142
    
    
    
    5
    %
    
    
    0.79
    
    
    
    101
    
    
    
    8,077
    
    
    
    6
    %
    
    
    0.99
    
    
    
    125Ground handling services
    
    
    22,664
    
    
    
    11
    %
    
    
    1.76
    
    
    
    226
    
    
    
    13,503
    
    
    
    10
    %
    
    
    1.65
    
    
    
    208Depreciation
    
    
    962
    
    
    
    1
    %
    
    
    0.08
    
    
    
    10
    
    
    
    721
    
    
    
    1
    %
    
    
    0.09
    
    
    
    11Other
    
    
    13,405
    
    
    
    7
    %
    
    
    1.04
    
    
    
    134
    
    
    
    8,209
    
    
    
    6
    %
    
    
    1.00
    
    
    
    127Total operating expenses
    
    $
    174,661
    
    
    
    90
    %
    
    
    13.56
    
    
    $
    1,744
    
    
    $
    119,535
    
    
    
    89
    %
    
    
    14.60
    
    
    $
    1,846
 The
following table summarizes certain operational statistics for the
periods indicated: Three Months Ended March 31,2005
    
    
    2004
    
    
    ChangeOther Data:Revenue passengers (in thousands)
    
    
    1,669
    
    
    
    1,229
    
    
    
    36
    %Revenue passenger miles (in thousands) (1)
    
    
    817,662
    
    
    
    513,097
    
    
    
    59
    %Available seat miles (in thousands)
    
    
    1,288,500
    
    
    
    818,689
    
    
    
    57
    %Passenger load factor (2)
    
    
    63.5
    %
    
    
    62.7
    %
    
    0.8 ptsOperating revenue per available seat mile (in cents)
    
    
    15.11
    
    
    
    16.35
    
    
    
    (8
    %)Operating costs per available seat mile (in cents)
    
    
    13.56
    
    
    
    14.60
    
    
    
    (7
    %)Operating revenue per block hour
    
    $
    1,945
    
    
    $
    2,067
    
    
    
    (6
    %)Operating costs per block hour
    
    $
    1,744
    
    
    $
    1,846
    
    
    
    (6
    %)Block hours
    
    
    100,143
    
    
    
    64,769
    
    
    
    55
    %Cycles
    
    
    57,096
    
    
    
    42,185
    
    
    
    35
    %Average daily utilization (block hours)
    
    
    9.34
    
    
    
    8.44
    
    
    0.90 hrsAverage stage length (miles)
    
    
    492
    
    
    
    416
    
    
    
    18
    %Number of operating aircraft (end of period)
    
    
    123
    
    
    
    87
    
    
    
    41
    %Employees (end of period)
    
    
    3,350
    
    
    
    2,228
    
    
    
    50
    %
   (1)
    
    Revenue passenger miles represents the number of miles flown by revenue passengers.(2)
    
    Passenger load factor equals revenue passenger miles divided by available seat miles. 18




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued) Liquidity and Capital Resources As of March 31, 2005, we had $49.6 million in cash and cash equivalents. Net cash provided by
operating activities for the three months ended March 31, 2005 was $7.2 million. Cash used for
investing activities was $2.2 million and cash provided by financing activities was $9.7 million. Contractual obligations. The following chart details our debt and lease obligations on a pro
forma basis at March 31, 2005. Operating lease information includes scheduled deliveries of the 16
additional aircraft we will receive through the third quarter of 2005 at the basic aircraft rental
rate provided in the ASA. Under our ASA, amounts relating to operating leases will be directly
reimbursed by Northwest. Payments Due by Period(in thousands)Total
    
    
    2005(1)
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterContractual Obligations:Senior convertible notes
    
    $
    121,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    121,000Interest payments on long-term debt
    
    
    78,738
    
    
    
    2,054
    
    
    
    3,933
    
    
    
    3,933
    
    
    
    3,933
    
    
    
    3,933
    
    
    
    60,952Capital lease
    
    
    59
    
    
    
    33
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating leases (2)
    
    
    3,774,889
    
    
    
    218,978
    
    
    
    297,821
    
    
    
    297,681
    
    
    
    297,018
    
    
    
    296,773
    
    
    
    2,366,618Purchase obligations (3)
    
    
    5,610
    
    
    
    972
    
    
    
    1,010
    
    
    
    953
    
    
    
    916
    
    
    
    916
    
    
    
    843Total contractual cash obligations
    
    $
    3,980,296
    
    
    $
    222,037
    
    
    $
    302,790
    
    
    $
    302,567
    
    
    $
    301,867
    
    
    $
    301,622
    
    
    $
    2,549,413
   (1)
    
    Contractual obligations for the remainder of 2005(2)
    
    As of March 31, 2005, our obligations relating to operating leases, excluding future scheduled deliveries of
aircraft under the ASA, were as follows (in thousands): Total
    
    2005(1)
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter$3,351,021
    
    $
    198,310
    
    
    $
    264,221
    
    
    $
    264,081
    
    
    $
    263,418
    
    
    $
    263,173
    
    
    $
    2,097,818
  (3)
    
    Amounts represent noncancelable commitments to purchase goods and services, including certain
aircraft parts and information technology. The amounts noted above for operating leases, including scheduled deliveries, include
$3.7 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. In February 2005, we repaid the outstanding amount of $5.0 million on the revolving credit
facility with Northwest (the Revolver) and purchased the outstanding $120.0 million note payable
at a discounted purchase price of $101.6 million. The payments were made in connection with the
private sale of $121.0 million principal amount of our 3.25% senior convertible 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 Note 5 in Item 1 of this Form 10-Q. 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. 19




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued) The Notes 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 allows for borrowings up to $25.0 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%. As of March 31,
2005, there were no amounts outstanding thereunder. The Revolver contains a number of restrictive
covenants applicable to Pinnacle, including limitations on the incurrence of debt and liens, the
making of distributions and other transactions. Additionally, drawing under the facility is
restricted to periods when our cash and cash equivalents (cash) balance is less than $20.0
million. Further, we are required to repay borrowings under the facility when our cash balance
exceeds $30.0 million for two consecutive days. There are no financial covenants associated with
the Revolver. The term of the Revolver extends through June of 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 $7.2 million during the
three months ended March 31, 2005. This was due primarily to cash provided by net income of $23.3
million, depreciation of $1.0 million and changes in operating assets and liabilities of $0.2
million (including an increase in taxes payable of $5.4 million and $1.2 million in aircraft and
engine deposits paid to Northwest), offset by the pre-tax gain on extinguishment of debt of $18.0
million, net of advisory fees of $0.4 million. In the remaining three quarters of 2005, we will
pay deposits of $2.8 million on the future 16 aircraft planned for delivery. Net cash provided by
operating activities was $8.4 million during the three months ended March 31, 2004, due primarily
to cash provided by net income of $8.1 million and depreciation of $0.7 million, and changes in
operating assets and liabilities of $1.0 million (including a total of $1.9 million in aircraft
deposits paid to Northwest). Investing activities.Cash used for investing activities for the three months ended March 31,
2005 and 2004 was $2.2 million and $0.4 million, respectively. The increase is due to the timing of
purchases of rotable parts. We
expect capital expenditures for 2005 to be approximately $8 million (excluding the $5.1
million for the contractual rights due to Northwest which will be paid during the third quarter of
2005), 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. Our only
significant capital commitment as of March 31, 2005 was $5.1 million for the contractual rights
purchased from Northwest. Financing activities. Cash provided by financing activities for the three months ended March
31, 2005 totaled $9.7 million. We paid a total of $106.6 million to Northwest to retire our
long-term debt and repay our borrowings under the Revolver. Additionally, we paid $4.3 million to
various third parties in debt issuance costs related to the issuance of the Notes, and $0.4 million
in fees in connection with the retirement of our long-term debt. The debt issuance costs of $4.3
million will be amortized ratably over the 20-year life of the Notes. Critical Accounting Policies The preparation of financial statements in accordance with accounting principles generally
accepted in the United States requires management to adopt accounting policies and make significant
judgments and estimates to develop amounts reflected and disclosed in the financial statements. In
many cases, there are alternative policies or estimation techniques that could be used. We maintain
a thorough
process to review the application of our accounting policies and to evaluate the
appropriateness of the many estimates that are required to prepare the financial statements of a
corporation. However, even under optimal circumstances, estimates routinely require adjustment
based on changing circumstances and the receipt of new or better information. 20




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued) Information regarding our Critical Accounting Policies can be found in our Annual Report on
page 33. In addition, Note 2 to the consolidated financial statements in our Annual Report contains
a summary of our significant accounting policies. Forward Looking Statements Statements in this Form 10-Q report contain various forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the Securities Act of 1934, as amended, or the Exchange Act, which represent our
managements beliefs and assumptions concerning future events. When used in this document and in
documents incorporated by reference, forward-looking statements include, without limitation,
statements regarding financial forecasts or projections, our expectations, beliefs, intentions or
future strategies that are signified by the words expects, anticipates, intends, believes
or similar language. These forward-looking statements are subject to risks, uncertainties and
assumptions that could cause our actual results and the timing of certain events to differ
materially from those expressed in the forward-looking statements. All forward-looking statements
included in this report are based on information available to us on the date of this report. It is
routine for our internal projections and expectations to change as the year or each quarter in the
year progress, and therefore it should be clearly understood that the internal projections, beliefs
and assumptions upon which we base our expectations may change prior to the end of each quarter or
the year. Although these expectations may change, we may not inform you if they do. Our policy is
generally to provide our expectations not more than once per quarter, and not to update that
information until we deem it appropriate. 
 Item 3. 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
revolving credit facility bear interest at a floating rate. We do not purchase or hold any
derivative financial instruments to protect against the effects of changes in interest rates. Senior Convertible 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 31, 2005 was approximately $118.7 million, based on
quoted market prices. 21




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##### Table of Contents



Item 4. Controls and Procedures As of the end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures are
effective. Disclosure controls and procedures are controls and procedures that are designed to
ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded,
processed, summarized and completely and accurately reported within the time periods specified in
the Securities and Exchange Commissions rules and forms. There have been no changes in our internal controls or in other factors that have materially
affected, or are reasonably likely to materially affect, our internal controls subsequent to the
date we carried out this evaluation. 22




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##### Table of Contents



Part II. Other Information 
 Item 1. Legal Proceedings We are a defendant in various lawsuits and other proceedings 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 management, based on current information and legal advice, that the
ultimate disposition of these actions will not have a material adverse effect on our financial
position, results of operations or cash flows. 
 Item 2. Changes in Securities and Use of Proceeds None 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 
 Item 5. Other Information None. 23




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##### Table of Contents



Item 6. Exhibits (a) Exhibits  31.1
    Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer.31.2
    Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer.32
    Section 1350 Certification by Chief Executive Officer
and Chief Financial Officer. 24




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. By:
    
    /s/ PHILIP H. TRENARYDate: May 3, 2005
    
    
    
    Philip H. Trenary
President and Chief Executive OfficerBy:
    
    /s/ PETER D. HUNTDate: May 3, 2005
    
    
    
    Peter D. Hunt
Vice President and Chief Financial Officer
 25