We had a net loss of $23,430,000, or $0.66 per diluted share, for the year ended March 31, 2005 as compared to net income of $12,635,000, or $0.36 per diluted share, for the year ended March 31, 2004. Included in our net loss for the year ended March 31, 2005 were the following items before the effect of income taxes: a write down of $5,123,000 of the carrying value of Boeing rotable spare parts which was partially offset by an unrealized gain on fuel hedges of $2,837,000. These items, net of income taxes, increased our net loss by 4¢ per diluted share. Included in our net income for the year ended March 31, 2004 were the following items before the effect of profit sharing and income taxes: $15,024,000 of compensation received under the Appropriations Act offset by the write-off of deferred loan costs of $9,816,000 associated with the prepayment of all of a $70,000,000 government guaranteed loan; a charge for Boeing aircraft and facility lease exit costs of $5,372,000; a loss of $1,838,000 on the sale of one Airbus aircraft in a sale-leaseback transaction and from the sale of a spare engine and other assets; a write down of $3,560,000 of the carrying value of spare engines and rotable parts that support the Boeing 737-300 aircraft; and $1,152,000 of flight crew training expenses related to the start-up of our new Frontier JetExpress regional jet relationship with Horizon. These items, net of income taxes and profit sharing, reduced net income by 12¢ per diluted share.
Our mainline passenger yield per RPM was 11.03¢ and 11.96¢ for the years ended March 31, 2005 and March 31, 2004, respectively, a decrease of 7.8%. Our length of haul was 990 and 919 miles for the years ended March 31, 2005 and March 31, 2004, respectively, an increase of 7.7%. Our mainline average fare was $102 for the year ended March 31, 2005 as compared to $104 for the year ended March 31, 2004, a decrease of 1.9%. Our mainline yield per ASM (“RASM”) for the years ended March 31, 2005 and March 31, 2004 was 7.97¢ and 8.56¢, respectively, a decrease of 6.9%. The decreases in the mainline average fare and mainline RASM were offset by an increase in our mainline load factor to 72.3% for the year ended March 31, 2005 as compared to 71.6% for the year ended March 31, 2004, an increase of .07 points. In February 2004, we capped all fares to and from Denver at $314 one-way, excluding passenger facility, security or segment fees, with the exception of flights to Mexico and Anchorage, Alaska. The fare cap was a 25 to 50 percent reduction from the February 2003 caps of $399 and $499. Although this created downward pressure on our mainline passenger yield per RPM and average fare, we believe the effect on our revenues was offset by an increase in passenger traffic. Pricing caps on airfare, as a policy, were eliminated shortly after fiscal year 2005 began. Additionally, we believe that our average fare during the year ended March 31, 2005 was negatively impacted as a result of aggressive pricing actions by our competitors in all of the markets we serve and is systemic across the entire industry.
Our mainline CASM, for the year ended March 31, 2005 and 2004 was 8.42¢ and 8.41¢, respectively. Mainline CASM, excluding fuel for the years ended March 31, 2005 and 2004 were 6.38¢ and 6.89¢, respectively, a decrease of .51¢ or 7.4%. Our mainline CASM excluding fuel decreased during the year ended March 31, 2005 primarily as a result of the realized benefits of efficiencies of scale associated with increasing capacity while controlling costs which resulted in a decrease in traffic and servicing costs of .12¢ and promotion and sales of ..07¢. In addition, maintenance cost per ASM decreased by .15¢ as a result of the reduction in our Boeing fleet that was replaced with new Airbus A319 aircraft. Included in mainline CASM for the year ended March 31, 2004 was .09¢ per ASM for profit sharing bonuses and 0.07¢ for aircraft lease and facility exit costs. As a result of our net loss for the year ended March 31, 2005, we did not accrue for bonuses. Mainline CASM also decreased as a result of an increase in our daily block hour utilization as discussed below and economies of scale associated with lower increases in indirect costs as compared to the 27.4% increase in mainline ASMs over the prior comparable period.
During the year ended March 31, 2005, our average daily block hour utilization increased to 11.1 from 10.4 for the year ended March 31, 2004, or 6.7%.
For the years ended March 31, 2005 and 2004, our mainline break-even load factors were 75.0% and 68.8%, respectively, compared to our achieved passenger load factors of 72.3% and 71.6%, respectively. Our mainline break-even load factor increased from the prior comparable period largely as a result of a decrease in our average fare to $102 during the year ended March 31, 2005 from $104 during the year ended March 31, 2004. At the passenger levels in effect during the fiscal year ending March 31, 2005, the $2 decrease in average fare equaled a revenue decrease of approximately $13,306,000 million.
Mainline Revenues
Passenger Revenues - Mainline. Passenger revenues from our mainline operations totaled $731,822,000 for the year ended March 31, 2005 compared to $615,390,000 for the year ended March 31, 2004, or an increase of 18.9%.
Revenues from tickets sales generated 93.0% of our mainline passenger revenues and increased $103,200,000 or 17.9% over prior year. The increase in ticket sales resulted from a 27.4% increase in ASM’s, or $158,391,000 and a 1.0% increase in load factor, or $7,052,000 and was offset by a 7.5% decrease in our yields from ticket sales, or a decrease of $62,242,000. Revenues generated from other sources and the percentage of mainline passenger revenues are as follows: Administrative fees were 2.6%; revenue recognized for tickets that are not used within one year from issuance were 2.8%, charter revenues were 0.7% and earnings from our co-branded credit card were 0.6%. These sources of revenue increased mainline passenger revenue by $12,224,000 as compared to prior year, or 33.1%, due to our 19.5% increase in passengers and the increased usage of our co-branded credit card.
Cargo Revenues.Cargo revenues, consisting of revenues from freight and mail service, totaled $4,958,000 and $8,077,000 for the years ended March 31, 2005 and 2004, respectively, representing 0.7% and 1.3%, respectively, of total mainline revenues, a decrease of 0.6%. During the year ended March 31, 2005, we determined that carrying mail for the United States Postal Service was not profitable and we terminated our contract effective July 1, 2004. This adjunct to the passenger business is highly competitive and depends heavily on aircraft scheduling, alternate competitive means of same day delivery service and schedule reliability.
Other Revenues. Other revenues, comprised principally of LiveTV sales, net revenue from the Mesa codeshare agreement of $1,717,000 (in 2004 only), liquor sales, ground handling fees, and excess baggage fees, totaled $12,591,000 and $9,021,000 or 1.7% and 1.4% of total operating revenues for the years ended March 31, 2005 and 2004, respectively. Other revenue increased over the prior comparable period primarily as a result of an increase in LiveTV sales.
Mainline Operating Expenses
Mainline operating expenses totaled $767,606,000 for the year ended March 31, 2005, or 102.4% of total mainline revenues. Mainline operating expenses totaled $601,563,000 for the year ended March 31, 2004, or 95.1% of total mainline revenues. Mainline operating expenses increased as a percentage of revenues during the year ended March 31, 2005 largely a result of a 35.6% increase in our aircraft fuel cost per gallon for the year ended March 31, 2005 as compared to the year ended March 31, 2004.
Salaries, Wages and Benefits. Salaries, wages and benefits totaled $203,398,000 and $160,260,000 and were 27.1% and 25.3% of total mainline revenues for the years ended March 31, 2005 and 2004, respectively, an increase of 26.9%. Salaries, wages and benefits increased over the prior period largely as a result of overall wage increases and an increase in the number of employees to support our ASM growth of 27.4% during the year ended March 31, 2005. Our employees increased from approximately 4,100 in March 2004 to approximately 4,500 in March 2005, or 9.8%.
Flight Operations. Flight operations expenses of $132,023,000 and $105,255,000 were 17.6% and 16.6% of total mainline revenues for the years ended March 31, 2005 and 2004, respectively, an increase of 25.4%.
Pilot and flight attendant salaries before payroll taxes and benefits totaled $72,487,000 and $53,358,000 or 9.7% and 8.7% of mainline passenger revenue, for each of the years ended March 31, 2005 and 2004, or an increase of 35.9%. Pilot and flight attendant compensation for the year ended March 31, 2005 increased as a result of a 20.4% increase in the average number of mainline aircraft in service combined with an increase of 28.2% in mainline block hours, a general wage increase in flight attendant and pilot salaries and additional crew required to replace those who were attending training on the Airbus equipment.
Aircraft insurance expenses totaled $10,219,000 (1.4% of total mainline revenues) for the year ended March 31, 2005. Aircraft insurance expenses for the year ended March 31, 2004 were $9,950,000 (1.6% of total mainline revenues). Aircraft insurance expenses decreased per RPM as a result of less expensive war risk coverage that is presently provided by the FAA compared to the coverage that was previously provided by commercial underwriters combined with a 25% decrease in our basic hull and liability insurance rates effective June 7, 2004.
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Aircraft Fuel Expense.Aircraft fuel expenses include both the direct cost of fuel including taxes as well as the cost of delivering fuel into the aircraft. Aircraft fuel costs of $185,821,000 for 131,906,000 gallons used and $108,863,000 for 104,799,000 gallons used resulted in an average fuel cost of $1.41 and $1.04 per gallon for the years ended March 31, 2005 and 2004, respectively. Aircraft fuel expenses represented 24.8% and 17.2% of total mainline revenues, for the years ended March 31, 2005 and 2004, respectively. We initiated a fuel-hedging program in late November 2002, which decreased fuel expense by $7,605,000 for the year ended March 31, 2005 and decreased fuel expense by $1,387,000 for the year ended March 31, 2004. Fuel hedging gains include unrealized fuel gains of $3,139,000 and $302,000 in 2005 and 2004, respectively. Fuel consumption for the years ended March 31, 2005 and 2004 averaged 722 and 736 gallons per block hour, respectively, or a decrease of 1.9%. Fuel consumption per block hour decreased during the year ended March 31, 2005 from the prior year because of the more fuel-efficient Airbus aircraft added to our fleet coupled with the reduction in our Boeing fleet, which had higher fuel burn rates, partially offset by the increase in our load factors.
Aircraft Lease Expenses. Aircraft lease expenses totaled $87,096,000 (11.6% of total mainline revenues) and $70,061,000 (11.1% of total mainline revenues) for the years ended March 31, 2005 and 2004, respectively, or an increase of 24.3%. The increase is a result of an increase in the average number of leased aircraft to 30.9 from 26.0, or 18.8%, during the year ended March 31, 2005 compared to the same period in 2004.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses were $129,470,000 and $110,378,000 (an increase of 17.3%) for the years ended March 31, 2005 and 2004, respectively, and represented 17.3% and 17.5% of total mainline revenues. Aircraft and traffic servicing expenses increase with the addition of new cities and departures to our route system. As of March 31, 2005, we served 39 cities with mainline service compared to 38 as of March 31, 2004, an increase of 2.6%. During the year ended March 31, 2005, our mainline departures increased to 72,888 from 61,812 during the year ended March 31, 2004, or 17.9%. Aircraft and traffic servicing expenses were $1,776 per mainline departure for the year ended March 31, 2005 as compared to $1,786 per mainline departure for the year ended March 31, 2004, a decrease of $10 per mainline departure. Aircraft and traffic servicing expenses decreased per mainline departure principally as a result of better on-time performance and fewer expenses paid for delayed or misconnected flights. In addition, commencing in July 2004 we no longer carried U.S. mail and our ground handling expenses decreased accordingly.
Maintenance. Maintenance expenses for the years ended March 31, 2005 and 2004 of $76,679,000 and $70,444,000, respectively, were 10.2% and 11.1% of total mainline revenues, an increase of 8.9%. Maintenance costs per block hour for the years ended March 31, 2005 and 2004 were $420 and $494 per block hour, respectively, a decrease of 15.0%. Maintenance cost per block hour decreased as a result of the addition of new Airbus aircraft that are less costly to maintain than our older Boeing aircraft, offset by return condition expenses related to the seven Boeing aircraft we returned and/or retired in fiscal year 2005.
Promotion and Sales.Promotion and sales expenses totaled $76,462,000 and $65,322,000 and were 10.2% and 10.3% of total mainline revenues, for the years ended March 31, 2005 and 2004, respectively. During the year ended March 31, 2005, promotion and sales expenses per mainline passenger decreased to $11.49 compared to $11.73 for the year ended March 31, 2004, a decrease of 2.0%. Promotion and sales expenses per mainline passenger decreased as a result of variable expenses that are based on lower average fares and economies of scale associated with our growth.
General and Administrative. General and administrative expenses for the years ended March 31, 2005 and 2004 totaled $48,351,000 and $36,750,000, and were 6.5% and 5.8% of total mainline revenues, respectively, an increase of 31.6%. Our employees increased from approximately 4,100 in March 2004 to approximately 4,500 in March 2005, or 9.8%. Accordingly, we experienced increases in our human resources, training, information technology, and health insurance benefit expenses. As a result of our pre-tax loss for the year ended March 31, 2005, we did not accrue bonuses which are solely based on profitability. General and administrative expenses also include $2,960,000 of expenses related to the conversion to our new reservation system and $603,000 of out-of-pocket costs to comply with the Sarbanes-Oxley Act of 2002. During the year ended March 31, 2004, we accrued $2,436,000 for employee performance bonuses, or 0.4% of total revenues. General and administrative expenses also increased with a general increase in the cost of providing health insurance.
Impairment and Other Related Charges. During the year ended March 31, 2005, we recorded additional impairments and other related charges totaling $5,123,000 on the carrying value of our Boeing 737 expendable inventory, rotable parts and a spare engine as a result of further market declines and the results of actual sales. Included in this amount
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are estimated selling costs that we expect to pay on the sale of our assets held for sale totaling $541,000. We believe the decline in resale values of parts for the less fuel-efficient Boeing 737 aircraft was due in part to increasing fuel prices during the past fiscal year. The impairment on spare and rotables is a result of further market declines for Boeing parts coupled with the results of actual sales history. In August 2004, we began selling our Boeing spare parts. Our analysis of these sales compared to the impaired value of these parts as of March 31, 2005 indicated that we were selling these rotable parts at approximately 90% of the carrying value. The impairment recorded for the year ended March 31, 2004 was $3,560,000, which also related to the impairment of Boeing spare engines and rotable parts that supported the Boeing 737 aircraft.
Depreciation. Depreciation expenses of $26,498,000 and $23,720,000, an increase of 11.7%, were approximately 3.5% and 3.8% of total mainline revenues, for the years ended March 31, 2005 and 2004, respectively. Depreciation expense increased over the prior year largely as a result of an increase in the average number of Airbus A318 and A319 aircraft owned from an average of 11.4 during the year ended March 31, 2004 to an average of 14.0 for the year ended March 31, 2005, an increase of 22.8%.
Nonoperating Income (Expense).Net nonoperating expenses totaled $9,391,000 for the year ended March 31, 2005 compared to net nonoperating expense of $7,025,000 for the year ended March 31, 2004. Interest income increased to $3,758,000 during the year ended March 31, 2005 from $2,074,000 for the prior period due to an increase in investment rates earned on investments. Interest expense was $13,184,000 for the year ended March 31, 2005 as compared to $13,961,000 for the prior period. Interest expense for the year ended March 31, 2004 included interest expense associated with a $70,000,000 government guaranteed loan we obtained in February 2002 and subsequently repaid in December 2003. The decrease in interest expense in fiscal 2005 was due to the repayment of this loan, which was offset by an increase in interest expense associated with the financing of additional aircraft purchased after March 31, 2004.
Income Tax Expense (Benefit).We recorded an income tax benefit of $12,408,000 during the year ended March 31, 2005 at a 34.6% rate compared to income tax expense of $7,822,000 during the year ended March 31, 2004 at a 38.2% effective tax rate. During the year ended March 31, 2005, the our tax benefit was at a federal rate of 35.0% plus the blended state rate of 3.0% (net of federal benefit) and was decreased by the tax effect of permanent differences of 2.0%. During the year ended March 31, 2005, we recorded a valuation allowance of $262,000 against certain state net operating loss carryforwards since it was more likely than not that the tax benefit was not going to be realized due to the lack of taxable income in these jurisdictions, which approximated 1.0%. During the year ended March 31, 2004, we recorded a $558,000 reduction to income tax expense as a result of an adjustment to deferred income taxes provided for in prior years, which approximated 3%.
Regional Partner
Passenger Revenues – Regional Partner. Regional partner revenues, consisting of revenues from Frontier JetExpress operated by Horizon, totaled $84,269,000 for the year ended March 31, 2005 and totaled $11,191,000 for the year ended March 31, 2004. Revenues of $25,155,000 from the Frontier JetExpress service, formerly provided by Mesa, were netted against related expenses and included in “Other revenues” for the year ended March 31, 2005. As such, the fiscal year 2004 amounts only represent three months of service with a limited number of aircraft. Horizon began service January 1, 2004 and replaced the Frontier JetExpress service formerly provided by Mesa. See footnote (2) in Item 6. “Selected Financial Data”, which explains the different accounting methods for our Frontier JetExpress operations.
Regional Partner Expense. Regional partner expenses for the year ended March 31, 2005 totaled $92,481,000, and were 109.7% of total regional partner revenues compared to expenses of $14,634,000, or 130.8%, of total regional partner revenues for the year ended March 31, 2004. Horizon began service January 1, 2004 and replaced the JetExpress service formerly provided by Mesa. During the year ended March 31, 2004, $23,438,000 in Mesa expenses were netted against related revenues and included in “Other revenues”. See footnote (2) in “Selected Financial Data”, which explains the different accounting methods for our Frontier JetExpress operations for Horizon and Mesa. During the year ended March 31, 2004, we incurred $1,152,000 for flight crew training costs and other related costs associated with the start-up of our regional partnership with Horizon.
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Liquidity and Capital Resources
Our liquidity depends to a large extent on the number of passengers who fly with us, the fares we charge, our operating and capital expenditures, our financing activities, and the cost of fuel. We depend on lease or mortgage-style financing to acquire all of our aircraft, including 20 additional Airbus aircraft that as of March 31, 2006 are scheduled for delivery through August 2010.
We had cash, cash equivalents and short-term investments of $272,839,000 and $174,795,000 at March 31, 2006 and March 31, 2005, respectively. At March 31, 2006, total current assets were $390,957,000 as compared to $301,012,000 of total current liabilities, resulting in working capital of $89,946,000. At March 31, 2005, total current assets were $275,550,000 as compared to $233,850,000 of total current liabilities, resulting in working capital of $41,700,000. The increase in our working capital from March 31, 2005 to March 31, 2006 is largely a result of the convertible debt offering in December 2005, offset by increases in our air traffic liability and deferred revenue accounts as our business grows.
Operating Activities. Cash provided by operating activities for the year ended March 31, 2006 was $79,642,000 as compared to $19,240,000 for the year ended March 31, 2005. The increase in operating cash flows was primarily due to an increase of $44,152,000 in cash generated through working capital which, was primarily related to the increases in our air traffic liability and deferred revenue accounts, and better operating results during the year ended March 31, 2006 as compared to the prior year.
Investing Activities.Cash used in investing activities for the year ended March 31, 2006 was $95,502,000. Capital expenditures were $93,775,000 for the year ended March 31, 2006 and included the purchase of two Airbus A319 aircraft, the purchase of LiveTV equipment, the purchase of one spare engine that was delivered to us and that we sold in a sale-leaseback transaction, rotable aircraft components, aircraft improvements and ground equipment. We received $9,843,000 from the sale of the spare engine that we sold in a sale-leaseback transaction, the sale of Boeing spare parts held for sale and other assets. Aircraft lease and purchase deposits made during the period were $36,117,000, which was offset by pre-delivery payments totaling $19,513,000 applied against the purchase of two Airbus A319 aircraft and LiveTV equipment.
Cash provided by investing activities for the year ended March 31, 2005 was $14,841,000. Aircraft lease and purchase deposits made during the period were $21,436,000, which was offset by deposits returned of $23,008,000. Capital expenditures were $128,776,000 for the year ended March 31, 2005 and included the purchase of one Airbus A318 aircraft and two Airbus A319 aircraft and one spare engine that were delivered to us and that we sold in sale-leaseback transactions. Additionally, capital expenditures included the purchase of LiveTV equipment, rotable aircraft components, aircraft improvements, ground equipment, and equipment related to our new reservation system. We applied pre-delivery payments totaling $6,412,000 for the purchase of an Airbus A318 aircraft to the purchase of that aircraft, and the pre-delivery deposits totaling $14,716,000 for the two Airbus A319 aircraft were returned to us upon sale of the aircraft. We received $80,963,000 from the sale of the two new A319 aircraft and two spare engines in sale-leaseback transactions, two spare engines for our Boeing fleet and other Boeing spare parts. We also sold $57,600,000 of short-term securities.
Financing Activities. Cash provided by financing activities for the year ended March 31, 2006 was $116,905,000. On December 7, 2005, we completed the issuance of $92,000,000 principal amount of 5% convertible notes due 2025, raising net proceeds of approximately $88,759,000. The net proceeds from our convertible debt offering are being used for general working capital purposes and capital expenditures related to the purchase of financing of aircraft and expansion of our operations. During the year ended March 31, 2006, we borrowed $54,700,000 for the purchase of two Airbus A319 aircraft, paid $19,959,000 of debt principal payments on 16 owned aircraft and repaid short-term borrowings of $5,000,000 under a revolving line of credit. During the year ended March 31, 2006, we also received $1,551,000 from the exercise of common stock options and paid $1,146,000 of fees for aircraft debt financing.
Cash provided by financing activities for the year ended March 31, 2005 was $7,705,000. During the year ended March 31, 2005, we borrowed $22,000,000 for the purchase of one Airbus A318 aircraft and paid $18,373,000 of debt principal payments on 14 owned aircraft. During the year ended March 31, 2005, we also had short-term borrowings of $5,000,000 under a revolving line of credit, received $349,000 from the exercise of common stock options and paid 1,271,000 of fees for aircraft debt financing.
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Other Items That Impact Our Liquidity
In August 2004, we entered into an agreement with two vendors to market and sell all of our remaining Boeing 737 spare parts inventories and rotables. As of September 30, 2005, we had transferred the remaining Boeing inventories to these vendors. As of March 31, 2006, the carrying value of our Boeing rotables and expendable spare parts classified as assets held for sale totaled $3,543,000. This amount represents the estimated market value of the remaining Boeing spare parts based on estimates obtained from our vendors, less selling costs. If the actual net proceeds received for these Boeing parts are less than the amounts we have estimated, we may recognize additional impairments on these parts. During the year ended March 31, 2006, we have received $4,025,000 in gross proceeds resulting in a net gain on our expendable and rotable inventory parts held for sale totaling approximately $1,333,000.
We continue to assess our liquidity position in light of our aircraft purchase commitments and other capital requirements, the economy, our competition, and other uncertainties surrounding the airline industry. In September 2005, we filed a registration statement with the SEC, which will enable us to periodically sell up to $250,000,000 in preferred and common stock and debt and other securities. In December 2005, in the first offering under this shelf registration, we issued $92,000,000 of 5% Convertible Notes due 2025. We intend to continue to examine domestic or foreign bank aircraft financing, bank lines of credit and aircraft sale-leasebacks, and other transactions as necessary to support our capital and operating needs. For further information on our financing plans and activities and commitments, see “Contractual Obligations” and “Commercial Commitments” below.
We expect to continue generating positive cash flow from our operations for the foreseeable future. We have obtained financing for all of our aircraft deliveries scheduled through June 2007 and expect to have adequate liquidity to cover our contractual obligations. However, we cannot predict future trends or predict whether current trends and conditions will continue. Our future liquidity and capital resources may be impacted by many factors, including “Risk Factors” in Item 1A of this report.
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Contractual Obligations
The following table summarizes our contractual obligations as of March 31, 2006:
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Long-term debt - principal payments (1) | | $ | 22,274,000 | | $ | 48,455,000 | | $ | 54,195,000 | | $ | 302,832,000 | | $ | 427,756,000 | |
Long-term debt - interest payments (1) | | | 26,020,000 | | | 47,402,000 | | | 40,860,000 | | | 105,895,000 | | | 220,177,000 | |
Operating leases (2) | | | 138,945,000 | | | 277,691,000 | | | 263,341,000 | | | 617,427,000 | | | 1,297,404,000 | |
Unconditional purchase obligations (3) (4) (5) | | | 152,638,000 | | | 249,226,000 | | | 268,896,000 | | | — | | | 670,760,000 | |
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Total contractual cash obligations | | $ | 339,877,000 | | $ | 622,774,000 | | $ | 627,292,000 | | $ | 1,026,154,000 | | $ | 2,616,097,000 | |
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(1) | At March 31, 2006, we had 16 loan agreements for 11 Airbus A319 aircraft and five Airbus A318 aircraft. Two of the loans have a term of 10 years and are payable in equal monthly installments, including interest, payable in arrears. These loans require monthly principal and interest payments of $218,000 and $215,000, bear interest with rates of 6.71% and 6.54%, and mature in May and August 2011, at which time a balloon payment totaling $10,200,000 is due with respect to each loan. The remaining 14 loans have interest rates based on LIBOR plus margins that adjust quarterly or semi-annually. At March 31, 2006, interest rates for these loans ranged from 5.63% to 7.14%. Each of these loans has a term of 12 years, and each loan has balloon payments ranging from $2,640,000 to $7,770,000 at the end of the term. All of the loans are secured by the aircraft. Actual interest payments will change based on changes in LIBOR. In July 2005, we also entered into a junior loan in the amount of $4,900,000 on an A319 aircraft. This loan has a seven-year term with quarterly installments of $244,000. The loan bears interest at a floating rate adjusted quarterly based on LIBOR, which was 8.38% on March 31, 2006. |
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| In December 2005, we issued $92,000,000 of 5% convertible notes due 2025. At any time on or after December 20, 2010, we may redeem any of the convertible notes for the principal amount plus accrued interest. Note holders may require us to repurchase the notes for cash for the principal amount plus accrued interest only on December 15, 2010, 2015 and 2020 or at any time prior to their maturity following a designated event as defined in the indenture for the convertible notes. In the obligation table above, the convertible notes are reflected based on their stated maturity of December 2025 with the corresponding interest payments. However, these notes may be called prior to the stated maturity dates which would impact the timing of the principal payments and the amount of interest paid. |
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(2) | As of March 31, 2006, we have leased 32 Airbus A319 type aircraft and two Airbus A318 aircraft under operating leases with expiration dates ranging from 2013 to 2018. Under all of our leases, we have made cash security deposits or arranged for letters of credit representing approximately two months of lease payments per aircraft. At March 31, 2006, these deposits totaled of $16,483,000. Additionally, we are required to make additional rent payments to cover the cost of major scheduled maintenance overhauls of these aircraft. These additional rent payments are based on the number of flight hours flown and/or flight departures and are not included as an obligation in the table above. |
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| During the year ended March 31, 2004, we entered into additional aircraft lease agreements for two Airbus A318 aircraft and 18 Airbus A319 aircraft. Three of the aircraft leases were a result of sale-leaseback transactions of three new Airbus aircraft. As of March 31, 2006, we have taken delivery of 17 of these aircraft. The remaining three aircraft are scheduled for delivery beginning in April 2006 through February 2007. As of March 31, 2006, we have made $501,000 in security deposit payments for future leased aircraft deliveries. Total operating lease obligations include the three aircraft not yet received. |
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| We also lease office and hangar space, spare engines and office equipment for our headquarters and airport facilities, and certain other equipment with expiration dates ranging from 2006 to 2015. In addition, we lease certain airport gate facilities on a month-to-month basis. Amounts for leases that are on a month-to-month basis are not included as an obligation in the table above. |
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(3) | As of March 31, 2006, we have remaining firm purchase commitments for 17 additional aircraft that have scheduled delivery dates beginning in June 2006 and continuing through August 2010. We also have remaining firm purchase |
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| commitments for two spare engines scheduled for delivery in September 2006 and December 2009. Included in the purchase commitments are the remaining amounts due Airbus and amounts for spare aircraft components to support the additional purchase and leased aircraft. We are not under any contractual obligations with respect to spare parts. Under the terms of the purchase agreement, we are required to make scheduled pre-delivery payments for these aircraft. These payments are non-refundable with certain exceptions. As of March 31, 2006, we had made pre-delivery payments on future deliveries totaling $40,449,000 to secure these aircraft. |
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(4) | In October 2002, we entered into a purchase and 12-year services agreement with LiveTV to bring DIRECTV AIRBORNE™ satellite programming to every seatback in our Airbus fleet. We intend to install LiveTV in every new aircraft we place in service. The table above includes amounts for the installation of DirectTV for the remaining 17 aircraft we currently expect to be purchased and the remaining three aircraft we currently expect to be leased, less deposits made of $1,383,000. |
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(5) | In March 2004, we entered into a services agreement with Sabre, Inc. for its SabreSonic™ passenger solution to power our reservations and check-in capabilities along with a broad scope of technology for streamlining our operations and improving revenues. The table above includes minimum annual fees for system usage fees. Usage fees are based on passengers booked and actual amounts paid may be in excess of the minimum per the contract terms. |
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Commercial Commitments
Letters of Credit and Cash Deposits
As we enter new markets, increase the amount of space we lease, or add leased aircraft, we are often required to provide the airport authorities and lessors with a letter of credit, bond or cash security deposits. These generally approximate up to three months of rent and fees. We also provide letters of credit for our workers’ compensation insurance. As of March 31, 2006, we had outstanding letters of credit, bonds, and cash security deposits totaling $12,471,000, $1,867,000, and $19,597,000, respectively.
We have a letter of credit agreement with a financial institution, which expired on December 1, 2005, that has been extended for existing letters of credit. This facility can be used only for the issuance of standby letters of credit, and no new letters of credit can be issued. Any amounts drawn under this facility are fully collateralized by certificates of deposit, which are carried as restricted investments on our balance sheet. As of March 31, 2006, we have utilized $481,000 under this credit agreement for standby letters of credit that provide credit support for certain leases. We are in the process of moving the letters of credit that are collateralized by restricted cash to letters of credit with another financial institution that are collateralized by inventories and receivables. In the event that the surety companies determined that issuing bonds on our behalf were a risk they were no longer willing to underwrite, we would be required to collateralize certain of these lease obligations with either cash security deposits or standby letters of credit, which would decrease our liquidity.
We also have an agreement with another financial institution where we can issue letters of credit of up to 50% of certain spare parts inventories less amounts borrowed under the credit facility. As of March 31, 2006, we had $11,299,000 available under this facility, which is reduced by letters of credit issued of $9,500,000.
In July 2005, we entered into an additional agreement with another financial institution for a $5,000,000 revolving letter of credit that permits us to issue letters of credit up to $3,500,000. As of March 31, 2006, we have utilized $2,491,000 under this agreement for standby letters of credit that provide credit support for certain facility leases.
We have a contract with a bankcard processor that requires us to pledge a certificate of deposit equal to a certain percentage of our air traffic liability associated with bankcard customers. As of March 31, 2006, that amount totaled $32,762,000 and is classified a restricted investment on our balance sheet. The amount is adjusted quarterly in arrears based on our air traffic liability associated with bankcard transactions. As of May 1, 2006, based on our air traffic liability as of March 31, 2006, this resulted in an increase of approximately $14,053,000 in the required amount of certificate of deposits pledged.
We use the Airline Reporting Corporation (“ARC”) to provide reporting and settlement services for travel agency sales and other related transactions. In order to maintain the minimum bond (or irrevocable letter of credit) coverage of $100,000, ARC requires participating carriers to meet, on a quarterly basis, certain financial tests such as, but not limited to, working capital ratio, and percent of debt to debt plus equity. As of March 31, 2006, we met these financial tests and presently are only obligated to provide the minimum amount of $100,000 in coverage to ARC. If we were to fail the minimum testing requirements, we would be required to increase our bonding coverage to four times the weekly agency net cash sales (sales net of refunds and agency commissions). Based on net cash sales remitted to us for the week ended May 21, 2006, the coverage would be increased by approximately $6,687,000 if we failed the tests. If we were unable to increase the bond amount as a result of our then financial condition, we could be required to issue a letter of credit that would restrict cash in an amount equal to the letter of credit.
Hedging Transactions
In November 2002, we initiated a fuel hedging program comprised of swap and collar agreements. Under a swap agreement, the cash settlements are calculated based on the difference between a fixed swap price and a price based on an agreed upon published spot price for the underlying commodity. If the index price is higher than the fixed price, we receive the difference between the fixed price and the spot price. If the index price is lower, we pay the difference. A collar agreement has a cap price, a primary floor price, and, in the case of a three-way collar, a secondary floor price. When the hedged product’s index price is above the cap, we receive the difference between the index and the cap. When the hedged product’s index price is below the primary floor but above the secondary floor, we pay the difference between the index and the primary floor. However, when the price is below the secondary floor, we are only obligated to pay the difference
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between the primary and secondary floor prices. When the price is between the cap price and the primary floor, no payments are required. Unrealized net gains recorded on fuel derivative contracts for the years ended March 31, 2006 and 2005 were $976,000 and $3,139,000, respectively, and realized gains for hedge cash settlements during the years ended March 31, 2006 and 2005 were $2,199,000 and $4,465,000, respectively. We have entered into the following swap and collar agreements that cover periods during fiscal year 2006:
| | | | | | | | | | |
Date | | Product * | | Notional volume
** (barrels per
month) | | Period covered | | Price (per gallon or barrel) | | Percentage
of estimated
fuel
purchases |
|
|
|
|
|
|
|
|
|
|
|
November 2004 | | Jet A | | 75,000 | | April 1, 2005 - June 30, 2005 | | $1.34 per gallon, with a floor of $1.20 per gallon | | 28% |
| | | | | | | | | | |
May 2005 | | Crude Oil | | 60,000 | | July 1, 2005 - March 31, 2006 | | $53.00 per barrel cap, with a floor of $50.73 | | 20% |
| | | | | | | | | | |
November 2005 | | Jet A | | 60,000 | | January 1, 2006 - March 31, 2006 | | $1.83 per gallon, with a floor of $1.685 per gallon | | 21% |
| | | | | | | | | | |
November 2005 | | Jet A | | 50,000 | | April 1, 2006 - June 30, 2006 | | $1.83 per gallon, with a floor of $1.6925 per gallon | | 16% |
| |
* | Jet A is Gulf Coast Jet A fuel. Crude oil is West Texas Intermediate crude oil. |
| |
** | One barrel is equal to 42 gallons. |
In March 2003, we entered into an interest rate swap agreement with a notional amount of $27,000,000 to hedge a portion of our LIBOR based borrowings through June 30, 2007. Under the interest rate swap agreement, we pay a fixed rate of 2.45% and receive a variable rate based on the three month LIBOR over the term of the swap that expires in March 2007. During the years ended March 31, 2006 and 2005, interest expense was decreased by $216,000 and increased by $177,000, respectively, for this agreement. Approximately $238,000 of unrealized gains are included in accumulated other comprehensive income, net of income taxes of $87,000, as of March 31, 2006.
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Maintenance Contracts
Effective January 1, 2003, we entered into an engine maintenance agreement with GE Engine Services, Inc. (“GE”) covering the scheduled and unscheduled repair of our aircraft engines used on most of our Airbus aircraft. The agreement was subsequently modified and extended in September 2004. The agreement is for a 12-year period from the effective date for our owned aircraft or May 1, 2019, whichever comes first. For each leased aircraft, the term coincides with the initial lease term of 12 years. This agreement precludes us from using another third party for such services during the term. This agreement requires monthly payments at a specified rate multiplied by the number of flight hours the engines were operated during that month. The amounts due based on flight hours are not included in table above. The costs under this agreement for our purchased aircraft for the year ended March 31, 2006, 2005 and 2004 were approximately $3,545,000, $2,603,000 and $1,833,000, respectively. For our leased aircraft, we do not make the flight hour payments to GE under the agreement; instead we make engine maintenance reserve payments as required under the applicable lease agreements. At the time a leased engine makes a scheduled shop visit, the lessors pay GE directly for the repair of aircraft engines from reserve accounts established under the applicable lease documents.
Critical Accounting Policies
The preparation of financial statements in conformity with U.S generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Critical accounting policies are defined as those that are both important to the portrayal of our financial condition and results, and require management to exercise significant judgments. Our most critical accounting policies are described briefly below.
Revenue Recognition
Passenger, cargo, and other revenues are recognized when the transportation is provided or after the tickets expire, one year after date of issuance, and are net of excise taxes, passenger facility charges and security fees. Revenues that have been deferred are included in the accompanying balance sheets as air traffic liability. We do not recognize as revenue the amount of credits estimated to be granted after the date a ticket expires.
Impairments
During the years ended March 31, 2005 and 2004, we recorded impairment charges of $3,860,000 and $3,047,000, respectively, related to Boeing rotable parts. During the year ended March 31, 2006, we have determined that no additional impairment is required based on current resale values and our recent sales history. We monitor resale values for Boeing rotables quarterly using estimates obtained from our vendors and record impairment charges based on this analysis and current sales prices. During the year ended March 31, 2005, we recorded impairment charges as a result of further market declines of the carrying values of Boeing 733 expendable inventory, rotable parts and a spare engine. During the year ended March 31, 2004, we recorded an impairment charge for rotables and for two Boeing 737-300 spare engines. The impairment charge totaling $901,000 was principally the result of declining resale values for Boeing rotables. The impairment for the spare engines totaled $2,146,000 and was recorded as a result of our decision to sell these remaining spare engines. The impairment was based on three separate quotes from third parties for a sale-leaseback transaction on these engines. As of March 31, 2006, the carrying value of our Boeing spare parts totaled $3,543,000 and have been classified as assets held for sale.
We use the criteria in SFAS No. 144 to determine when an asset is classified as held for sale. Upon classification as held for sale, the long-lived asset or asset group is measured at the lower of its carrying amount or fair value less cost to sell, depreciation is ceased and the asset or asset group is separately presented on the balance sheet.
Aircraft Maintenance
We operate under an FAA-approved continuous inspection and maintenance program. We account for maintenance activities on the direct expense method. Under this method, major overhaul maintenance costs are recognized as expense as
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maintenance services are performed, as flight hours are flown for nonrefundable maintenance payments required by lease agreements, and as the obligation is incurred for payments made under service agreements. Routine maintenance and repairs are charged to operations as incurred.
Effective January 1, 2003, we executed a 12-year engine services agreement with GE covering the scheduled and unscheduled repair of Airbus engines. This agreement was extended to May 1, 2019 in September 2004. Under the terms of the services agreement, we agreed to pay GE an annual rate per-engine-hour, payable monthly, and GE assumed the responsibility to overhaul our engines on Airbus aircraft as required during the term of the services agreement, subject to certain exclusions. We believe the rate per-engine hour approximates the periodic cost we would have incurred to service those engines. Accordingly, these payments are expensed as the obligation is incurred.
Derivative Instruments
We account for derivative financial instruments in accordance with the provisions of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 133 requires us to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability. For derivatives designated as cash flow hedges, changes in fair value of the derivative are generally reported in other comprehensive income and are subsequently reclassified into earnings when the hedged item affects earnings. Changes in fair value of derivative instruments not designated as hedging instruments and ineffective portions of hedges are recognized in earnings in the current period.
We enter into derivative instruments to hedge the interest payments associated with a portion of our LIBOR-based borrowings and fuel purchases. We designate certain interest rate swaps as qualifying cash flow hedges. We also enter into derivative instruments to reduce exposure to the effect of fluctuations in fuel prices. These transactions are accounted for as trading instruments under SFAS 133. As a result, we record these instruments at fair market value and recognize realized and unrealized gains and losses in aircraft fuel expense.
Customer Loyalty Program
In February 2001, we established EarlyReturns, a frequent flyer program to encourage travel on our airline and foster customer loyalty. We account for the EarlyReturns program under the incremental cost method whereby travel awards are valued at the incremental cost of carrying one passenger based on expected redemptions. Those incremental costs are based on expectations of expenses to be incurred on a per passenger basis and include food and beverages, fuel, liability insurance, and ticketing costs. The incremental costs do not include allocations of overhead expenses, salaries, aircraft cost or flight profit or losses. We do not record a liability for mileage earned by participants who have not reached the level to become eligible for a free travel award. We believe this is appropriate because the large majority of these participants are not expected to earn a free flight award. We do not record a liability for the expected redemption of miles for non-travel awards since the cost to us of these awards is negligible.
As of March 31, 2006 and 2005, we estimated that approximately 193,000 and 102,000 round-trip flight awards, respectively, were eligible for redemption by EarlyReturns members who have mileage credits exceeding the 15,000-mile free round-trip domestic ticket award threshold. As of March 31, 2006 and 2005, we had recorded a liability of approximately $2,776,000 and $1,275,000, respectively, for these rewards.
We sell points in EarlyReturns to third parties. The portion of the sale that is for travel is deferred and recognized as passenger revenue when we estimate transportation is provided. The remaining portion, referred to as the marketing component, is recognized as revenue as a reduction of sales and promotion expense in the month received.
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Co-Branded Credit Card Arrangement
We entered into a co-branded credit card arrangement with a MasterCard issuing bank in March 2003. The terms of this affinity agreement provide that we will receive a fixed fee for each new account, which varies based on the type of account, and a percentage of the annual renewal fees that the bank receives. We receive an increased fee for new accounts solicited by us. We also receive fees for the purchase of frequent flier miles awarded to the credit card customers.
We account for all fees received under the co-branded credit card program by allocating the fees between the portion that represents the estimated value of the subsequent travel award to be provided, and the portion which represents a marketing fee to cover marketing and other related costs to administer the program. This latter portion (referred to as the marketing component) represents the residual after determining the value of the travel component. The component representing travel is determined by reference to an equivalent restricted fare, which is used as a proxy for the value of travel of a frequent flyer mileage award. The travel component is deferred and recognized as revenue over the estimated usage period of the frequent flyer mileage awards of 20 months. We have estimated the period over which the frequent flier mileage awards will be used based on the history of usage of the frequent flier mileage awards. We record the marketing component of the revenue earned under this agreement as a reduction of sales and promotion expenses in the month received.
For the year ended March 31, 2006, we earned total fees of $24,986,000. Of that amount, $19,686,000 was deferred as the travel award component, with the remaining marketing component of $5,300,000 recognized as a reduction to sales and promotions expense. For the year ended March 31, 2005, we earned total fees of $12,227,000. Of that amount, $8,455,000 was deferred as the travel award component, and the remaining marketing component of $3,772,000 was recognized as a reduction to sales and promotions expense. For the year ended March 31, 2004, we earned total fees of $4,245,000. Of that amount, $3,286,000 was deferred as the travel award component, with the remaining marketing component of $959,000 recognized as a reduction to sales and promotions expense. Amortization of deferred revenue recognized in earnings during the years ended March 31, 2006, 2005 and 2004 was $11,059,000, $4,396,000 and $786,000, respectively.
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Self-Insurance
We are self insured for the majority of our group health insurance costs, subject to specific retention levels. We rely on claims experience and the advice of consulting actuaries and administrators in determining an adequate liability for self-insurance claims. Our self-insurance healthcare liability represents our estimate of claims that have been incurred but not reported as of March 31, 2006. This liability, which totaled $2,567,000 at March 31, 2006, was estimated based on our claims experience. We determine the actual average claims cost per employee and the number of days between the incurrence of a claim and the date it is paid. The estimate of our liability for employee healthcare represents approximately 1.5 months of unreported claims with an increase in claims based on a trend factor of 6.5%
We are also self-insured for the majority of our workers’ compensation cost. Our liability for workers’ compensation claims is the estimated total cost of the claims on a fully-developed basis, up to a maximum amount, based on reserves for these claims that are established by a third-party administrator. The liability at March 31, 2006 totaled $5,125,000.
While we believe that the estimate of our self-insurance liabilities are reasonable, significant differences in our experience or a significant change in any of our assumptions could materially affect the amount of healthcare and workers compensation expenses we have recorded.
New Accounting Standards
In December 2004, the FASB issued SFAS No. 123(R), which revised FASB Statement No. 123,Accounting for Stock-Based Compensation and superseded APB Opinion No. 25. SFAS No. 123(R) focuses primarily on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123(R) requires companies to recognize in the statement of operations the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). It will also require the benefits associated with tax deductions in excess of recognized compensation cost to be reported as a financing cash flow rather than as an operating cash flow as currently required. In April 2005, the effective date for SFAS 123(R) was changed to the first reporting period that begins after June 15, 2005. Accordingly, we plan to adopt SFAS 123(R) as of April 1, 2006 and use the modified-prospective transition method. Under the modified-prospective method, the Company will recognize compensation expense in the financial statements issued subsequent to the date of adoption for all share-based payments granted, modified or settled after April 1, 2006 as well as for any awards that were granted prior to April 1, 2006 for which requisite service has not been provided as of April 1, 2006. We will recognize compensation expense on awards granted subsequent to April 1, 2006 using the fair values determined by a valuation model prescribed by SFAS 123(R). The compensation expense on awards granted prior to April 1, 2006 will be recognized using the fair values determined for the pro forma disclosures on stock-based compensation, which is determined using the Black-Scholes option pricing model. The amount of compensation expense that will be recognized on awards that have not fully vested will exclude the compensation expense cumulatively recognized in the pro forma disclosures on stock-based compensation and will include adjustments for estimated forfeitures. Unrecognized non-cash stock compensation expense related to unvested options and awards outstanding as of March 31, 2006 was approximately $2,727,000, and will be recorded over the remaining vesting periods of one to five years. The incremental expense related to future equity based grants is difficult to predict because the expense will depend on the number of shares granted, the grant date stock price and other factors.
In May 2005, the FASB issued FASB Statement No. 154,Accounting Changes and Error Correction,replacing APB Opinion No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements (“SFAS 154”). Among other changes, SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS 154 also provides that a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and that the correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of SFAS 154 to have a material impact on our financial position or results of operations.
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Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Fuel
Our earnings are affected by changes in the price and availability of aircraft fuel. Market risk is estimated as a hypothetical 10 percent change in the average cost per gallon of fuel for the year ended March 31, 2006. Based on actual fuel usage for the year ended March 31, 2006, such a change would have had the effect of increasing or decreasing our mainline and regional partner aircraft fuel expense by approximately $31,679,000, excluding the impact of our fuel hedging. Comparatively, based on projected fiscal year 2007 fuel usage for our mainline operations and regional partner operators, this would have the effect of increasing or decreasing our aircraft fuel expense in fiscal year 2007, by approximately $36,202,000, excluding the effects of our fuel hedging arrangements.
On November 28, 2005, we entered into a zero cost collar agreement that hedges approximately 16% of our expected fuel requirements for the period from April 1, 2006 through June 30, 2006. The collar uses Gulf Coast Jet A as its basis. The cap price is set at $1.83 per gallon and the floor is set at $1.6925. When the U.S. Gulf Coast Pipeline Jet index price is above the cap, we receive the difference between the index and the cap. When the U.S. Gulf Coast Pipeline Jet index price is below the floor, we pay the difference between the index and the floor. When the price is between the cap price and the floor, no payments are required.
Our results of operations for the year ended March 31, 2006 include realized and unrealized derivative gains of $3,175,000 recorded as a decrease in fuel expense with respect to fuel hedging agreements. As of March 31, 2006, the fair value of the November 2005 hedge agreement recorded on the balance sheet as an asset was $976,000.
Interest
We are susceptible to market risk associated with changes in variable interest rates on long-term debt obligations we incurred and will incur to finance the purchases of our Airbus aircraft. Interest expense on 69.8% of our debt is subject to interest rate adjustments every three to nine months based upon changes in the applicable LIBOR rate. A change in the base LIBOR rate of 100 basis points (1.0%) would have the effect of increasing or decreasing our annual interest expense by $2,987,000 assuming the loans outstanding that are subject to interest rate adjustments at March 31, 2006 totaling $298,656,000 are outstanding for the entire period.
In March 2003, we entered into an interest rate swap agreement with a notional amount of $27,000,000 to hedge a portion of our LIBOR based borrowings. Under the interest rate swap agreement, we pay a fixed rate of 2.45% and receive a variable rate based on the three month LIBOR over the term of the swap that expires in March 2007. As of March 31, 2006, we had hedged approximately 3.5% of our variable interest rate loans that are based on three-month LIBOR rates. As of March 31, 2006, the fair value of the swap agreement is recorded in the balance sheet as an asset of $105,000.
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Item 8: Financial Statements and Supplementary Data
Our financial statements are filed as a part of this report immediately following the signature page.
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A: Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2006. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were sufficiently effective to ensure that the information required to be disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions for Form 10-K.
Management’s Report on Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended), occurred during the fourth quarter of fiscal year 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm thereon are set forth in Part II, Item 8 of this Annual Report on Form 10-K.
Item 9B. Other Information
None.
PART III
Item 10: Directors and Executive Officers of the Registrant.
Code of Ethics
The information required by this Item is incorporated herein by reference to the data under the heading “Election of Directors” in the Proxy Statement to be used in connection with the solicitation of proxies for our annual meeting of stockholders to be held on September 7, 2006. We will file the definitive Proxy Statement with the SEC on or before July 28, 2006.
Audit Committee Financial Expert
The information required by this Item is incorporated herein by reference to the data under the heading “Election of Directors” in the Proxy Statement to be used in connection with the solicitation of proxies for our annual meeting of stockholders to be held on September 7, 2006. We will file the definitive Proxy Statement with the SEC on or before July 28, 2006.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by reference to the data under the heading “Executive Compensation” in the Proxy Statement to be used in connection with the solicitation of proxies for our annual meeting of stockholders to be held on September 7, 2006. We will file the definitive Proxy Statement with the SEC on or before July 28, 2006.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated herein by reference to the data under the heading “Voting Securities and Principal Holders Thereof” in the Proxy Statement to be used in connection with the solicitation of proxies for our annual meeting of stockholders to be held on September 7, 2006. We will file the definitive Proxy Statement with the SEC on or before July 28, 2006.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated herein by reference to the data under the heading “Related Transactions” in the Proxy Statement to be used in connection with the solicitation of proxies for our annual meeting of stockholders to be held on September 7, 2006. We will file the definitive Proxy Statement with the SEC on or before July 28, 2006.
Item 14. Principal Accountant Fees and Services.
The information required by this Item is incorporated herein by reference to the data under the heading “Principal Accountant Fees and Services” in the Proxy Statement to be used in connection with the solicitation of proxies for our annual meeting of stockholders to be held on September 7, 2006. We will file the definitive Proxy Statement with the SEC on or before July 28, 2006.
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PART IV
Item 15(a): Exhibits and Financial Statement Schedules
| | | | |
Exhibit | |
Numbers | | Description of Exhibits | |
| |
| | |
|
Exhibit 2 – Plan of acquisition, reorganization, arrangement, liquidation or succession: |
| |
2.1 | Agreement and Plan of Merger, dated as of January 31, 2006, by and among Frontier Airlines, Inc., Frontier Airlines Holdings, Inc., and FA Sub, Inc. (Annex I to Amendment No. 1 to the Registration Statement on Form S-4 filed by Frontier Airlines Holdings, Inc. on February 14, 2006, File No. 333-131407). |
|
Exhibit 3 – Articles of Incorporation and Bylaws: |
| |
3.1 | Amended and Restated Certificate of Incorporation of Frontier Airlines Holdings, Inc. (Annex II to Amendment No. 1 to the Registration Statement on Form S-4 filed by Frontier Airlines Holdings, Inc. on February 14, 2006, File No. 333-131407). |
| |
3.2 | Bylaws of Frontier Airlines Holdings, Inc. (Annex III to Amendment No. 1 to the Registration Statement on Form S-4 filed by Frontier Airlines Holdings, Inc. on February 14, 2006, File No. 333-131407). |
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Exhibit 4 – Instruments defining the rights of security holders: |
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4.1* | Specimen common stock certificate of Frontier Airlines Holdings, Inc. |
| |
4.2 | Frontier Airlines, Inc. Warrant to Purchase Common Stock, No. 1 – Air Transportation Stabilization Board. Two Warrants, dated as of February 14, 2003, substantially identical in all material respects to this Exhibit, have been entered into with each of the Supplemental Guarantors granting each Supplemental Guarantor a warrant to purchase 191,697 shares under the same terms and conditions described in this Exhibit. Portions of this Exhibit have been excluded from the publicly available document and an order granting confidential treatment of the excluded material has been received. (Exhibit 4.6 to the Company’s Current Report on Form 8-K dated March 25, 2003). |
| |
4.2(a)* | Warrant Supplement to Frontier Airlines, Inc. Warrant to Purchase Common Stock, No. 1 – Air Transportation Stabilization Board. Two Warrant Supplements dated March 17, 2006, substantially identical in all material respects to this Exhibit have been entered into with each of the Supplemental Guarantors. |
| |
4.3 | Registration Rights Agreement dated as of February 14, 2003 by and between and Frontier Airlines, Inc. as the Issuer, and the Holders of Warrants to Purchase Common Stock. Portions of this Exhibit have been omitted excluded from the publicly available document and an order granting confidential treatment of the excluded material has been received. (Exhibit 4.5 to the Company’s Current Report on Form 8-K dated March 25, 2003). |
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Exhibit 10 – Material Contracts: |
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10.1 | Airport Use and Facilities Agreement, Denver International Airport (Exhibit 10.7 to the Company’s Annual Report on Form 10-KSB for the year ended March 31, 1995; Commission File No. 0-4877). |
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| | | | |
10.2 | Space and Use Agreement between Continental Airlines, Inc. and the Company. (Exhibit 10.43 to the Company’s Annual Report on Form 10-K for the year ended March 31, 1999). |
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10.2(a) | Second Amendment to Space and Use Agreement between Continental Airlines, Inc. and the Company. Portions of this Exhibit have been omitted and filed separately with the Securities and Exchange Commission in a confidential treatment request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. |
| |
10.3 | Airbus A318/A319 Purchase Agreement dated as of March 10, 2000 between AVSA, S.A.R.L., Seller, and Frontier Airlines, Inc., Buyer. Portions of this exhibit have been excluded from the publicly available document and an order granting confidential treatment of the excluded material has been received. (Exhibit 10.51 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2000). |
| |
10.3(a)* | Amendment No. 9 to the A318/A319 Purchase Agreement dated as of March 10, 2000 between AVSA, S.A.R.L. and Frontier Airlines, Inc. Portions of this exhibit have been excluded from the publicly available document and filed separately with the SEC in a confidential treatment request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. |
| |
10.4 | Aircraft Lease Common Terms Agreement dated as of April 20, 2000 between General Electric Capital Corporation and Frontier Airlines, Inc. Portions of this exhibit have been excluded from the publicly available document and an order granting confidential treatment of the excluded material has been received. (Exhibit 10.52 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2000). |
| |
10.5 | Aircraft Lease Agreement dated as of April 20, 2000 between Aviation Financial Services, Inc., Lessor, and Frontier Airlines, Inc., Lessee, in respect of 15 Airbus A319 Aircraft. After 3 aircraft were leased under this Exhibit with Aviation Financial Services, Inc. as Lessor, related entities of Aviation Financial Services, Inc. replaced it as the Lessor, but each lease with these related entities is substantially identical in all material respects to this Exhibit. Portions of this exhibit have been excluded from the publicly available document and an order granting confidential treatment of the excluded material has been received. (Exhibit 10.53 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2000). |
| |
10.6 | Lease dated as of May 5, 2000 for Frontier Center One, LLC, as landlord, and Frontier Airlines, Inc., as tenant. Portions of this exhibit have been excluded from the publicly available document and an order granting confidential treatment of the excluded material has been received. (Exhibit 10.55 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2000). |
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10.6(a) | Amendment Number Two to Lease Agreement. Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission in a confidential treatment request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. |
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10.7 | Operating Agreement of Frontier Center One, LLC, dated as of May 10, 2000 between Shea Frontier Center, LLC, and 7001 Tower, LLC, and Frontier Airlines, Inc. Portions of this exhibit have been excluded from the publicly available document and an order granting confidential treatment of the excluded material has been received. (Exhibit 10.56 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2000). |
| |
10.8 | Standard Industrial Lease dated April 27, 2000, between Mesilla Valley Business Park, LLC, landlord, and Frontier Airlines, Inc., tenant. Portions of this exhibit have been excluded from the publicly available document and an order granting confidential treatment of the excluded material has been received. (Exhibit 10.57 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2000). |
| |
10.9 | General Terms Agreement No. 6-13616 between CFM International and Frontier Airlines, Inc. Portions of this exhibit have been excluded from the publicly available document and an order granting confidential |
- 58 -
| | | | |
| treatment of the excluded material has been received. (Exhibit 10.60 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). |
| |
10.10 | Lease Agreement dated as of December 15, 2000 between Gateway Office Four, LLC, Lessor, and Frontier Airlines, Inc., Lessee. (Exhibit 10.61 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2000). |
| |
10.11 | Code Share Agreement dated as of May 3, 2001 between Frontier Airlines, Inc. and Great Lakes Aviation, Ltd. Portions of this exhibit have been excluded from the publicly available document and an order granting confidential treatment of the excluded material has been received. (Exhibit 10.62 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2001). |
| |
10.11(a) | Amendment No. 1 to the Codeshare Agreement dated as of May 3, 2001 between Frontier Airlines, Inc. and Great Lakes Aviation, Ltd. Portions of the exhibit have been excluded from the publicly available document and an order granting confidential treatment of the excluded material has been received. (Exhibit 10.62(a) to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2001). |
| |
+10.12 | Employee Stock Ownership Plan of Frontier Airlines, Inc. as amended and restated, effective January 1, 1997 and executed February 5, 2002. (Exhibit 10.66 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2001). |
| |
+10.12(a) | Amendment of the Employee Stock Ownership Plan of Frontier Airlines, Inc. as amended and restated, effective January 1, 1997 and executed February 5, 2002 for EGTRRA. (Exhibit 10.66(a) to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2001). |
| |
10.12(b)* | Second Amendment to the Employee Stock Ownership Plan of Frontier Airlines, Inc. executed March 30, 2006 and effective April 3, 2006. |
| |
+10.13 | Director Compensation Agreement between Frontier Airlines, Inc. and Samuel D. Addoms dated effective April 1, 2002. This agreement was modified on April 1, 2003, to expressly describe the second installment exercise period as on or after December 31, 2003, and the third installment exercise period as on or after April 1, 2004. (Exhibit 10.67 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2002). |
| |
10.14 | Secured Credit Agreement dated as of October 10, 2002 between Frontier Airlines, Inc. and Credit Agricole Indosuez in respect to 3 Airbus 319 aircraft. Portions of this exhibit have been excluded form the publicly available document and an order granting confidential treatment of the excluded material has been received. (Exhibit 10.75 to the Company’s Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2002). |
| |
10.15 | Aircraft Mortgage and Security Agreement dated as of October 10, 2002 between Frontier Airlines, Inc. and Credit Agricole Indosuez in respect to 3 Airbus 319 aircraft. Portions of this exhibit have been excluded form the publicly available document and an order granting confidential treatment of the excluded material has been received. (Exhibit 10.76 to the Company’s Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2002). |
| |
10.16 | Codeshare Agreement dated as of September 18, 2003 between Horizon Air Industries, Inc. and Frontier Airlines, Inc. Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission in a confidential treatment request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. (Exhibit 10.23 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003). |
| |
10.17 | Aircraft Lease Agreement dated as of December 5, 2003 between International Lease Finance Corporation, Inc., and Frontier Airlines, Inc., Lessee, in respect of 1 Airbus A319 Aircraft. Frontier has signed leases for |
- 59 -
| | | | |
| 4 additional Airbus 319 aircraft with this Lessor under Aircraft Lease Agreements that are substantially identical in all material respects to this Exhibit. Portions of this Exhibit have been omitted and filed separately with the Securities and Exchange Commission in a confidential treatment request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. (Exhibit 10.24 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2003). |
| |
+10.18 | Frontier Airlines 2004 Equity Incentive Plan. (Exhibit B to the Company’s 2004 Annual Meeting of Shareholders; filed July 26, 2004). |
| |
10.18 (a)* | Amendment to Frontier Airlines 2004 Equity Incentive Plan executed March 30, 2006 and effective April 3, 2006. |
| |
+10.19 | Executive Bonus Plan for the Company’s fiscal year ending March 31, 2006 (Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2005). |
| |
+10.20 | Long Term Incentive Plan for the Company’s fiscal year ending March 31, 2006 (Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2005). |
| |
+10.21 | Form of Stock Appreciation Rights Agreement for issuance of stock appreciation rights pursuant to the Frontier Airlines 2004 Equity Incentive Plan to plan participants, including named executive officers (Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2005). |
| |
+10.22 | Form of Incentive Stock Option Agreement for issuance on incentive stock options pursuant to the Frontier Airlines 2004 Equity Incentive Plan to plan participants, including named executive officers (Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2005). |
| |
+10.23 | Form of Stock Unit Agreement for issuance of restricted stock units pursuant to the Frontier Airlines 2004 Equity Incentive Plan to plan participants, including named executive officers (Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2005). |
| |
+10.24 | Form of Non-Qualified Stock Option Agreement for issuance of non-qualified stock options pursuant to the Frontier Airlines 2004 Equity Incentive Plan to qualifying members of the Company’s Board of Directors (Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2005). |
| |
+10.25 | Summary of Base Salary Compensation Arrangements with Named Executive Officers (Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2005). |
| |
10.26 | Underwriting Agreement dated December 1, 2005, by and among Frontier Airlines, Inc., Morgan Stanley & Co. Incorporated, and Citigroup Global Markets, Inc. (Exhibit 1.1 to a Form 8-K filed on December 7, 2005). |
| |
10.27 | Indenture dated December 7, 2005, by and between Frontier Airlines, Inc. and U.S. Bank National Association, as Trustee (Exhibit 4.1 to Amendment No. 1 to Frontier’s Registration Statement on Form S-3, File No. 333-128407, filed on November 23, 2005). |
| |
10.28 | First Supplemental Indenture dated December 7, 2005, by and between Frontier Airlines, Inc. and U.S. Bank National Association, as Trustee (Exhibit 4.2 to a Form 8-K filed on December 7, 2005). |
| |
10.29* | Second Supplemental Indenture dated April 3, 2006, by and among Frontier Airlines, Inc., Frontier Airlines Holdings, Inc., and U.S. Bank National Association, as Trustee. |
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| | | | |
Exhibit 23 – Consents of Experts: |
| |
23.1* | Consent of KPMG LLP. |
|
Exhibit 31 - Certifications |
| |
31.1* | Section 302 certification of President and Chief Executive Officer, Jeffery S. Potter. |
| |
31.2* | Section 302 certification of Chief Financial Officer, Paul H. Tate. |
|
Exhibit 32 - Certifications |
| |
32.1** | Section 906 certifications of President and Chief Executive Officer, Jeffery S. Potter |
| |
32.2** | Section 906 certifications of Chief Financial Officer, Paul H. Tate |
| |
|
|
| |
* | Filed herewith. |
| |
** | Furnished herewith. |
| |
+ | Management contract or compensatory plan or arrangement. |
- 61 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| |
| FRONTIER AIRLINES HOLDINGS, INC. |
| |
Date: May 26, 2006 | By: /s/ Jeffery S. Potter |
|
|
| Jeffery S. Potter, Chief Executive Officer and Director |
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 and on the dates indicated.
| |
| FRONTIER AIRLINES HOLDINGS, INC. |
| |
Date: May 26, 2006 | By: /s/ Paul H. Tate |
|
|
| Paul H. Tate, Vice President and |
| Chief Financial Officer |
| |
Date: May 26, 2006 | By: /s/ Elissa A. Potucek |
|
|
| Elissa A. Potucek, Vice President, Controller, |
| Treasurer and Principal Accounting Officer |
| |
Date: May 26, 2006 | By: /s/ Samuel D. Addoms |
|
|
| Samuel D. Addoms, Director |
| |
Date: May 26, 2006 | By: /s/ William B. McNamara |
|
|
| William B. McNamara, Director |
| |
Date: May 26, 2006 | By: /s/ Paul Stephen Dempsey |
|
|
| Paul Stephen Dempsey, Director |
| |
Date: May 26, 2006 | By: /s/ LaRae Orullian |
|
|
| B. LaRae Orullian, Director |
| |
Date: May 26, 2006 | By: /s/ D. Dale Browning |
|
|
| D. Dale Browning, Director |
| |
Date: May 26, 2006 | By: /s/ Jim Upchurch |
|
|
| James B. Upchurch, Director |
| |
Date: May 26, 2006 | By: /s/ Patricia A. Engels |
|
|
| Patricia A. Engels, Director |
| |
Frontier Airlines, Inc.
TABLE OF CONTENTS
| |
|
|
Independent Registered Public Accounting Firm’s Reports | F-1 |
| |
Management’s Report on Internal Control over Financial Reporting | F-3 |
| |
Financial Statements | |
| |
BALANCE SHEETS, | |
March 31, 2006 and 2005 | F-4 |
| |
STATEMENTS OF OPERATIONS, | |
Years Ended March 31, 2006, 2005, and 2004 | F-5 |
| |
STATEMENTS OF STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS), | |
Years Ended March 31, 2006, 2005, and 2004 | F-6 |
| |
STATEMENTS OF CASH FLOWS, | |
Years Ended March 31, 2006, 2005, and 2004 | F-7 |
| |
NOTES TO FINANCIAL STATEMENTS, | |
March 31, 2006 | F-8 |
| |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Frontier Airlines Holdings, Inc.:
We have audited the accompanying balance sheets of Frontier Airlines Holdings, Inc. (formerly Frontier Airlines, Inc.) as of March 31, 2006 and 2005, and the related statements of operations, stockholders’ equity and other comprehensive income (loss), and cash flows for each of the years in the three-year period ended March 31, 2006. 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 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 financial position of Frontier Airlines Holdings, Inc. as of March 31, 2006 and 2005, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2006, 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 Frontier Airlines Holdings, Inc.’s internal control over financial reporting as of March 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 26, 2006, expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Denver, Colorado
May 26, 2006
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Frontier Airlines Holdings, Inc.:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Frontier Airlines Holdings, Inc. (formerly Frontier Airlines, Inc.) maintained effective internal control over financial reporting as of March 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Frontier Airlines Holdings, Inc.’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 Frontier Airlines Holdings, Inc. maintained effective internal control over financial reporting as of March 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Frontier Airlines Holdings, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Frontier Airlines Holdings, Inc., as of March 31, 2006 and 2005, and the related statements of operations, stockholders’ equity and other comprehensive income (loss), and cash flows for each of the years in the three-year period ended March 31, 2006, and our report dated May 26, 2006 expressed an unqualified opinion on those financial statements.
/s/ KPMG LLP
Denver, Colorado
May 26, 2006
F-2
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Frontier Airlines, Inc. (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
As of March 31, 2006, management assessed the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of March 31, 2006 is effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and 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.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2006 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report appearing on page F-2.
F-3
|
FRONTIER AIRLINES, INC. |
|
Balance Sheets |
March 31, 2006 and 2005
|
|
| | | | | | | |
| | 2006 | | 2005 | |
| |
| |
| |
Assets | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents (note 3) | | $ | 272,839,478 | | $ | 171,794,772 | |
Short-term investments (note 3) | | | — | | | 3,000,000 | |
Restricted investments | | | 35,297,275 | | | 28,011,395 | |
Receivables, net of allowance for doubtful accounts of $1,261,000 and $927,000 at March 31, 2006 and 2005, respectively (note 1) | | | 41,691,321 | | | 37,748,785 | |
Security and other deposits (note 8) | | | — | | | 1,900,250 | |
Prepaid expenses and other assets | | | 23,182,351 | | | 18,740,220 | |
Inventories, net of allowance of $378,000 and $3,973,000 and March 31, 2006 and 2005, respectively (note 1) | | | 6,623,721 | | | 7,564,342 | |
Assets held for sale (note 4) | | | 3,543,035 | | | 1,317,334 | |
Deferred tax asset (note 11) | | | 7,780,161 | | | 5,472,643 | |
| |
|
| |
|
| |
Total current assets | | | 390,957,342 | | | 275,549,741 | |
Property and equipment, net (note 5) | | | 510,428,061 | | | 455,813,682 | |
Security and other deposits (note 8) | | | 19,597,270 | | | 18,662,421 | |
Aircraft pre-delivery payments | | | 40,449,142 | | | 22,976,090 | |
Restricted investments | | | 480,726 | | | 11,126,307 | |
Deferred loan fees and other assets | | | 8,519,397 | | | 7,882,430 | |
| |
|
| |
|
| |
Total Assets | | $ | 970,431,938 | | $ | 792,010,671 | |
| |
|
| |
|
| |
| | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | | $ | 44,954,842 | | $ | 37,240,376 | |
Air traffic liability | | | 153,662,726 | | | 112,688,811 | |
Other accrued expenses (note 7) | | | 67,683,431 | | | 55,337,203 | |
Current portion of long-term debt (note 10) | | | 22,273,893 | | | 18,222,539 | |
Short-term borrowings | | | — | | | 5,000,000 | |
Deferred revenue and other liabilities (note 6) | | | 12,436,615 | | | 5,361,422 | |
| |
|
| |
|
| |
Total current liabilities | | | 301,011,507 | | | 233,850,351 | |
Long-term debt related to aircraft notes (note 10) | | | 313,481,757 | | | 282,792,222 | |
Convertible notes (note 10) | | | 92,000,000 | | | — | |
Deferred tax liability (note 11) | | | 12,732,807 | | | 17,331,125 | |
Deferred revenue and other liabilities (note 6) | | | 22,430,276 | | | 20,116,667 | |
| |
|
| |
|
| |
Total liabilities | | | 741,656,347 | | | 554,090,365 | |
| |
|
| |
|
| |
| | | | | | | |
Stockholders’ equity: | | | | | | | |
Preferred stock, no par value, authorized 1,000,000 shares; none issued | | | — | | | — | |
Common stock, no par value, stated value of $.001 per share, authorized 100,000,000 shares; 36,589,705 and 35,995,342 shares issued and outstanding at March 31, 2006 and March 31, 2005, respectively | | | 36,590 | | | 35,995 | |
Additional paid-in capital | | | 192,935,951 | | | 188,165,820 | |
Unearned ESOP shares (note 14) | | | (2,094,000 | ) | | (2,270,652 | ) |
Accumulated other comprehensive loss, net of tax | | | 150,620 | | | 271,267 | |
Retained earnings | | | 37,746,430 | | | 51,717,876 | |
| |
|
| |
|
| |
Total stockholders’ equity | | | 228,775,591 | | | 237,920,306 | |
| |
|
| |
|
| |
Commitments and contingencies (notes 2, 8, 10, 13, 14 and 17) | | | | | | | |
Total Liabilities and Stockholders’ Equity | | $ | 970,431,938 | | $ | 792,010,671 | |
| |
|
| |
|
| |
See accompanying notes to the financial statements.
F-4
|
FRONTIER AIRLINES, INC.
Statements of Operations
Years Ended March 31, 2006, 2005 and 2004
|
| | | | | | | | | | |
|
|
| | 2006 | | 2005 | | 2004 | |
| |
| |
| |
| |
Revenues: | | | | | | | | | | |
Passenger - mainline | | $ | 878,680,878 | | $ | 731,821,890 | | $ | 615,389,565 | |
Passenger- regional partner | | | 92,826,244 | | | 84,268,560 | | | 11,191,338 | |
Cargo | | | 5,676,883 | | | 4,957,731 | | | 8,077,106 | |
Other | | | 17,088,741 | | | 12,591,260 | | | 9,021,133 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Total revenues | | | 994,272,746 | | | 833,639,441 | | | 643,679,142 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Operating expenses: | | | | | | | | | | |
Flight operations | | | 141,315,684 | | | 132,022,593 | | | 105,255,438 | |
Aircraft fuel | | | 281,906,430 | | | 185,821,202 | | | 108,862,582 | |
Aircraft lease | | | 94,228,608 | | | 87,095,717 | | | 70,061,270 | |
Aircraft and traffic servicing | | | 138,491,985 | | | 129,469,952 | | | 110,377,894 | |
Maintenance | | | 77,238,247 | | | 76,678,749 | | | 70,443,627 | |
Promotion and sales | | | 82,501,933 | | | 76,461,549 | | | 65,322,259 | |
General and administrative | | | 48,978,978 | | | 48,350,563 | | | 36,750,152 | |
Operating expenses - regional partner | | | 106,865,952 | | | 92,480,847 | | | 14,634,258 | |
Aircraft lease and facility exit costs (note 9) | | | 3,413,932 | | | — | | | 5,371,799 | |
(Gains) losses on sales of assets, net | | | (1,144,041 | ) | | 84,610 | | | 1,837,550 | |
Impairments | | | — | | | 5,123,224 | | | 3,560,151 | |
Depreciation | | | 28,372,292 | | | 26,497,930 | | | 23,719,743 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Total operating expenses | | | 1,002,170,000 | | | 860,086,936 | | | 616,196,723 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Operating income (loss) | | | (7,897,254 | ) | | (26,447,495 | ) | | 27,482,419 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Nonoperating income (expense): | | | | | | | | | | |
Interest income | | | 9,365,958 | | | 3,757,596 | | | 2,074,050 | |
Interest expense | | | (21,758,135 | ) | | (13,184,345 | ) | | (13,961,074 | ) |
Emergency Wartime Supplemental Appropriations Act (note 18) | | | — | | | — | | | 15,024,052 | |
Loss on early extinguishment of debt | | | — | | | — | | | (9,815,517 | ) |
Other, net | | | (179,340 | ) | | 36,148 | | | (346,434 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Total nonoperating expense, net | | | (12,571,517 | ) | | (9,390,601 | ) | | (7,024,923 | ) |
| |
|
|
|
|
|
|
|
| |
| | | | | | | | | | |
Income (loss) before income tax expense (benefit) | | | (20,468,771 | ) | | (35,838,096 | ) | | 20,457,496 | |
| | | | | | | | | | |
Income tax expense (benefit) | | | (6,497,325 | ) | | (12,407,910 | ) | | 7,822,361 | |
| |
|
| |
|
| |
|
| |
Net income (loss) | | $ | (13,971,446 | ) | $ | (23,430,186 | ) | $ | 12,635,135 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Earnings (loss) per share: | | | | | | | | | | |
Basic | | $ | (0.39 | ) | $ | (0.66 | ) | $ | 0.39 | |
| |
|
| |
|
| |
|
| |
Diluted | | $ | (0.39 | ) | $ | (0.66 | ) | $ | 0.36 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Weighted average shares of common stock outstanding: | | | | | | | | | | |
Basic | | | 36,166,972 | | | 35,641,370 | | | 32,732,567 | |
Diluted | | | 36,166,972 | | | 35,641,370 | | | 35,276,416 | |
See accompanying notes to the financial statements.
F-5
FRONTIER AIRLINES, INC.
|
Statements of Stockholders’ Equity and Other Comprehensive Income (Loss)
Years Ended March 31, 2006, 2005 and 2004 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Common
Stock | | Additional
paid-in
capital | | Unearned
ESOP
shares | | Accumulated
other
comprehensive
income (loss) | | Retained
earnings | | Total
stockholders’
equity | |
|
|
|
|
|
|
|
|
|
|
|
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|
|
Balances, March 31, 2003 | | | 29,674 | | | 96,424,525 | | | — | | | — | | | 62,512,927 | | | 158,967,126 | |
Net income | | | — | | | — | | | — | | | — | | | 12,635,135 | | | 12,635,135 | |
Other comprehensive loss - unrealized loss on derivative instruments, net of tax of $85,000 | | | — | | | — | | | — | | | (137,785 | ) | | — | | | (137,785 | ) |
| | | | | | | | | | | | | | | | |
|
| |
Total comprehensive income | | | | | | | | | | | | | | | | | | 12,497,350 | |
| | | | | | | | | | | | | | | | |
|
| |
Sale of common stock, net of offering costs of $257,000 | | | 5,050 | | | 81,072,096 | | | — | | | — | | | — | | | 81,077,146 | |
Exercise of common stock options | | | 227 | | | 1,000,487 | | | — | | | — | | | — | | | 1,000,714 | |
Tax benefit from exercises of stock options | | | — | | | 1,261,937 | | | — | | | — | | | — | | | 1,261,937 | |
Equity adjustment for the repricing of warrants issued in conjunction with a debt agreement | | | — | | | 116,701 | | | — | | | — | | | — | | | 116,701 | |
Contribution of common stock to employees stock ownership plan | | | 646 | | | 5,202,640 | | | (5,203,286 | ) | | — | | | — | | | — | |
Amortization of employee stock compensation | | | — | | | — | | | 3,020,652 | | | — | | | — | | | 3,020,652 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Balances, March 31, 2004 | | $ | 35,597 | | $ | 185,078,386 | | $ | (2,182,634 | ) | $ | (137,785 | ) | $ | 75,148,062 | | $ | 257,941,626 | |
Net loss | | | — | | | — | | | — | | | — | | | (23,430,186 | ) | | (23,430,186 | ) |
Other comprehensive income - unrealized gain on derivative instruments, net of tax of $246,000 | | | — | | | — | | | — | | | 409,052 | | | — | | | 409,052 | |
| | | | | | | | | | | | | | | | |
|
| |
Total comprehensive loss | | | | | | | | | | | | | | | | | | (23,021,134 | ) |
| | | | | | | | | | | | | | | | |
|
| |
Exercise of common stock options | | | 52 | | | 336,775 | | | — | | | — | | | — | | | 336,827 | |
Tax benefit from exercises of stock options | | | — | | | (288,503 | ) | | — | | | — | | | — | | | (288,503 | ) |
Contribution of common stock to employees stock ownership plan | | | 346 | | | 3,027,190 | | | (3,027,536 | ) | | — | | | — | | | — | |
Amortization of employee stock compensation | | | — | | | — | | | 2,939,518 | | | — | | | — | | | 2,939,518 | |
Capital contribution | | | | | | 11,972 | | | | | | | | | | | | 11,972 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, March 31, 2005 | | $ | 35,995 | | $ | 188,165,820 | | $ | (2,270,652 | ) | $ | 271,267 | | $ | 51,717,876 | | $ | 237,920,306 | |
Net loss | | | — | | | — | | | — | | | — | | | (13,971,446 | ) | | (13,971,446 | ) |
Other comprehensive loss - unrealized loss on derivative instruments, net of tax of $74,000 | | | — | | | — | | | — | | | (120,647 | ) | | — | | | (120,647 | ) |
| | | | | | | | | | | | | | | | |
|
| |
Total comprehensive loss | | | | | | | | | | | | | | | | | | (14,092,093 | ) |
| | | | | | | | | | | | | | | | |
|
| |
Exercise of common stock options | | | 195 | | | 1,550,993 | | | — | | | — | | | — | | | 1,551,188 | |
Tax benefit from exercises of stock options | | | — | | | 280,966 | | | — | | | — | | | — | | | 280,966 | |
Contribution of common stock to employees stock ownership plan | | | 400 | | | 2,791,600 | | | (2,792,000 | ) | | — | | | — | | | — | |
Amortization of employee stock compensation | | | — | | | 146,572 | | | 2,968,652 | | | — | | | — | | | 3,115,224 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, March 31, 2006 | | | 36,590 | | | 192,935,951 | | | (2,094,000 | ) | | 150,620 | | | 37,746,430 | | | 228,775,591 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the financial statements.
F-6
FRONTIER AIRLINES, INC.
|
Statements of Cash Flows |
Years ended March 31, 2006, 2005, and 2004
|
|
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| |
| |
| |
| |
Cash flows from operating activities: | | | | | | | | | | |
Net income (loss) | | $ | (13,971,446 | ) | $ | (23,430,186 | ) | $ | 12,635,135 | |
Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by operating activities: | | | | | | | | | | |
Compensation expense under long-term incentive plans and employee ownership plans | | | 3,115,224 | | | 2,939,518 | | | 2,498,700 | |
Depreciation and amortization | | | 29,438,984 | | | 27,123,642 | | | 25,411,877 | |
Impairment recorded on property and equipment | | | — | | | 3,860,342 | | | 3,047,482 | |
Provisions recorded on inventories | | | — | | | 1,262,882 | | | 617,749 | |
Write off of deferred loan costs | | | — | | | — | | | 9,815,517 | |
(Gains) losses on disposal of equipment and other, net | | | (1,058,290 | ) | | 482,669 | | | 1,501,465 | |
Unrealized derivative losses (gains), net | | | 2,163,486 | | | (2,837,000 | ) | | (469,394 | ) |
Deferred tax expense | | | (6,551,333 | ) | | (12,514,853 | ) | | 9,957,271 | |
Changes in operating assets and liabilities: | | | | | | | | | | |
Restricted investments | | | 3,325,701 | | | (7,916,066 | ) | | (13,057,670 | ) |
Receivables | | | (3,942,536 | ) | | (11,409,993 | ) | | (451,660 | ) |
Income taxes receivable | | | — | | | 231,651 | | | 24,363,525 | |
Security and other deposits | | | 96,150 | | | (304,925 | ) | | (328,127 | ) |
Prepaid expenses and other assets | | | (4,442,131 | ) | | (5,646,721 | ) | | (3,590,110 | ) |
Inventories | | | 404,762 | | | (2,700,651 | ) | | (785,486 | ) |
Other assets | | | 639,537 | | | 1,150,746 | | | 1,352,536 | |
Accounts payable | | | 7,714,466 | | | 6,073,208 | | | 4,512,197 | |
Air traffic liability | | | 40,973,915 | | | 29,349,251 | | | 24,463,937 | |
Other accrued expenses | | | 12,346,228 | | | 11,031,932 | | | 22,007,937 | |
Deferred revenue and other liabilities | | | 9,388,802 | | | 2,494,153 | | | 4,514,925 | |
| |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities | | | 79,641,519 | | | 19,239,599 | | | 128,017,806 | |
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | |
Aircraft lease and purchase deposits made | | | (36,116,717 | ) | | (21,436,210 | ) | | (39,986,696 | ) |
Aircraft lease and purchase deposits returned or applied to aircraft | | | 19,512,916 | | | 23,008,434 | | | 33,541,079 | |
Decrease in restricted investments | | | 2,034,000 | | | 3,481,600 | | | 2,443,500 | |
Decrease (increase) in short-term investments | | | 3,000,000 | | | 57,600,000 | | | (55,265,000 | ) |
Proceeds from the sale of property and equipment and assets held for sale | | | 9,842,873 | | | 80,962,695 | | | 341,435 | |
Capital expenditures | | | (93,775,079 | ) | | (128,775,506 | ) | | (134,650,799 | ) |
| |
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities | | | (95,502,007 | ) | | 14,841,013 | | | (193,576,481 | ) |
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | |
Net proceeds from issuance of common stock and warrants | | | 1,551,188 | | | 348,799 | | | 82,077,860 | |
Payment to bank for compensating balance | | | (2,000,000 | ) | | — | | | — | |
(Payments) proceeds from short-term borrowings | | | (5,000,000 | ) | | 5,000,000 | | | — | |
Proceeds from long-term borrowings | | | 146,700,000 | | | 22,000,000 | | | 98,500,000 | |
Payment of financing fees | | | (4,386,883 | ) | | (1,270,839 | ) | | (1,231,201 | ) |
Principal payments on long-term borrowings | | | (19,959,111 | ) | | (18,372,529 | ) | | (83,324,659 | ) |
| |
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities | | | 116,905,194 | | | 7,705,431 | | | 96,022,000 | |
|
| | | | | | | | | | |
Net increase in cash and cash equivalents | | | 101,044,706 | | | 41,786,043 | | | 30,463,325 | |
| |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year | | | 171,794,772 | | | 130,008,729 | | | 99,545,404 | |
| |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year | | $ | 272,839,478 | | $ | 171,794,772 | | $ | 130,008,729 | |
| |
|
|
|
|
|
|
|
|
|
See accompanying notes to the financial statements.
F-7
FRONTIER AIRLINES, INC.
|
Notes to Financial Statements
March 31, 2006 |
|
|
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Frontier Airlines, Inc. (“Frontier” or the “Company”) provides air transportation for passengers and freight. Frontier was incorporated in the State of Colorado on February 8, 1994 and commenced operations on July 5, 1994. The Company, in conjunction with its regional jet partner Frontier JetExpress, currently operates routes linking from its Denver hub to 47 cities coast to coast and seven cities in Mexico. The Company also provides service to Cancun, Mexico from five non-hub cities and service to Puerto Vallarta, Mexico from Kansas City, Missouri. The Company operates a fleet of 43 Airbus A319 aircraft and seven Airbus A318 aircraft, and nine CRJ 700 aircraft (operated by Horizon Air Industries, Inc.) from its base in Denver, and has approximately 4,800 employees as of March 31, 2006.
Airline operations have high fixed costs relative to revenues and are highly sensitive to various factors, including the actions of competing airlines and general economic factors. Small fluctuations in yield per revenue passenger mile or expense per available seat mile can significantly affect operating results.
The Company operates in one business segment that provides transportation to passengers and cargo and includes mainline operations and a regional partner.
Preparation of Financial Statements and Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For financial statement purposes, the Company considers cash and short-term investments with an original maturity of three months or less to be cash equivalents.
Investment Securities
Investment securities consist of the following: (a) Bond money market funds and commercial paper with maturities of less than three months, classified as held-to-maturity and are carried at amortized cost which approximates fair value; (b) Money market funds and auction rate securities, classified as available for sale securities and stated at fair value. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the security until maturity. Interest income is recognized when earned
FRONTIER AIRLINES, INC.
|
Notes to Financial Statements, continued |
|
Restricted Investments
Restricted investments include certificates of deposit which secure certain letters of credit issued primarily to companies which process credit card sale transactions, certain airport authorities and aircraft lessors. Restricted investments are carried at cost, which management believes approximates fair value. Maturities are for one year or less and the Company intends to hold restricted investments until maturity.
Valuation and Qualifying Accounts
The following table summarizes our valuation and qualifying accounts as of March 31, 2006, 2005, and 2004, and the associated activity for the years then ended.
| | | | | | | | |
| | | | | | |
| | | Allowance for
Doubtful
Accounts | | Allowance
for
Inventory | |
| | |
| |
| |
| Balance at March 31, 2003 | | | 237,000 | | | 2,478,000 | |
| | | | | | | | |
| Additional expenses | | | 593,000 | | | 618,000 | |
| Deductions | | | (605,000 | ) | | (105,000 | ) |
| | |
|
| |
|
| |
| Balance at March 31, 2004 | | | 225,000 | | | 2,991,000 | |
| | | | | | | | |
| Additional expenses | | | 1,012,000 | | | 1,263,000 | |
| Deductions | | | (310,000 | ) | | (281,000 | ) |
| | |
|
| |
|
| |
| Balance at March 31, 2005 | | $ | 927,000 | | $ | 3,973,000 | |
| | | | | | | | |
| Additional expenses | | | 579,000 | | | 169,000 | |
| Deductions | | | (245,000 | ) | | (165,000 | ) |
| Transfer to assets held for sale | | | — | | | (3,599,000 | ) |
| | |
|
| |
|
| |
| Balance at March 31, 2006 | | $ | 1,261,000 | | $ | 378,000 | |
| | |
|
| |
|
| |
The allowance for doubtful accounts is primarily based on the specific identification method.
Inventories
Inventories consist of expendable aircraft spare parts, supplies and aircraft fuel and are stated at the lower of cost or market. Inventories are accounted for on a first-in, first-out basis and are charged to expense as they are used. An allowance for obsolescence on aircraft spare parts is provided over the remaining useful life of the related aircraft plus allowances for spare parts currently identified as excess to reduce the carrying costs to lower of cost or market.
FRONTIER AIRLINES, INC.
|
Notes to Financial Statements, continued |
|
Assets held for sale
Assets held for sale are valued at the lower of the carrying amount or the estimated market value less selling costs. The Company monitors resale values for Boeing spare parts and rotables quarterly using an analysis of current sales and estimates obtained from outside vendors.
Property and Equipment
Property and equipment are carried at cost. Major additions, betterments and renewals are capitalized. Depreciation is provided for on a straight-line basis to estimated residual values over estimated depreciable lives as follows:
| | |
| | |
Description | | Lives |
| |
|
Aircraft, spare aircraft parts and flight equipment | | 7 - 25 years |
Improvements to leased aircraft | | Life of improvements or term of lease,
whichever is less. |
Capitalized software | | 3 years |
Ground property; equipment and leasehold improvements | | 3 - 5 years or term of lease, which ever is less |
Residual values for aircraft are at 25% of the aircraft cost.
Manufacturers’ and Lessor Credits
The Company receives credits in connection with its purchase and lease of aircraft for engines, auxiliary power units and other rotable parts. These credits are deferred until the aircraft, engines, auxiliary power units and other rotable parts are delivered and then applied as a reduction of the cost of the related equipment. The Company also receives credits in connection with certain aircraft lease agreements. These credits are recognized as a credit to lease expense over the lease term.
Deferred Loan Fees
Deferred loan fees, including the estimated fair value of warrants issued to the lenders, are deferred and amortized over the term of the related debt obligation. During the year ended March 31, 2004, the Company wrote off $9,816,000 in deferred loan costs associated with the prepayment of the government guaranteed loan.
Fair Value of Financial Instruments
The Company estimates the fair value of its monetary assets and liabilities based upon existing interest rates related to such assets and liabilities compared to current rates of interest for instruments with a similar nature and degree of risk. The Company estimates that the carrying value of all of its monetary assets and liabilities approximates fair value as of March 31, 2006 and 2005 with exception of its fixed rate loans. The estimated fair value of the Company’s fixed rate loans based on current rates available to the Company for debt of the same remaining maturity was approximately $125,981,000 as compared to the carrying amount of $129,100,000 at March 31, 2006. The estimated fair value of the Company’s fixed rate loans based on current rates available to the Company for debt of the same remaining maturity was approximately $36,732,000 as compared to the carrying amount of $39,711,000 at March 31, 2005.
FRONTIER AIRLINES, INC.
|
Notes to Financial Statements, continued |
|
Revenue Recognition
Passenger, cargo, and other revenues are recognized when the transportation is provided or after the tickets expire, one year after date of issuance, and are net of excise taxes, passenger facility charges and security fees. Revenues for tickets sold but not yet recognized are included in the accompanying balance sheets as air traffic liability. We do not recognize as revenue the amount of credits estimated to be granted after the date a ticket expires.
Frontier Jet Express
In September 2003, the Company signed a 12-year agreement with Horizon Air Industries, Inc. (“Horizon”), under which Horizon operates up to nine 70-seat CRJ 700 aircraft under our Frontier JetExpress brand. The service began on January 1, 2004 and replaced the Company’s codeshare with Mesa Airlines, which terminated in December 2003. In accordance with Emerging Issues Task Force No. 01-08,“Determining Whether an Arrangement Contains a Lease” (“EITF 01-08”), the Company has concluded that the Horizon agreement contains leases as the agreement conveys the right to use a specific number and specific type of aircraft over a stated period of time. Frontier establishes the scheduling, routes and pricing of the flights operated as “Frontier JetExpress” under the agreement. EITF 01-08 was effective for new arrangements or arrangements modified after the beginning of an entity’s next reporting period after May 28, 2003. The assessment of whether an arrangement contains a lease is made at the inception of or upon modification of an arrangement. Therefore, we began recording revenues and expenses related to the Horizon Agreement gross, as opposed to net, upon inception of service. Prior to the implementation of EITF 01-08, JetExpress revenues were reduced by related expenses and reported net as other revenues. Revenues are pro-rated to the segment operated by the regional partner based on miles flown and are included in passenger revenues – regional partner. Expenses directly related to the flights flown by the regional partner are included in operating expenses – regional partner. The Company allocates indirect expenses between mainline and JetExpress operations by using regional partner departures, available seat miles, or passengers as a percentage of system combined departures, available seat miles or passengers.
Amounts included in other revenues for the years ended March 31, 2006, 2005, and 2004 were approximately as follows:
| | | | | | | | | | |
| | | |
| | Year Ended March 31 | |
| | 2006 | | 2005 | | 2004 | |
| |
| |
Mesa revenues | | $ | — | | $ | — | | $ | 25,155,000 | |
Mesa expenses | | | — | | | — | | | (23,438,000 | ) |
| |
|
| |
|
| |
|
| |
Net amount in other revenues | | $ | — | | $ | — | | $ | 1,717,000 | |
| |
|
| |
|
| |
|
| |
Passenger Traffic Commissions and Related Expenses
Passenger traffic commissions and related expenses are expensed when the transportation is provided and the related revenue is recognized. Passenger traffic commissions and related expenses not yet recognized are included as a prepaid expense.
FRONTIER AIRLINES, INC.
|
Notes to Financial Statements, continued |
|
Aircraft Maintenance
The Company operates under an FAA-approved continuous inspection and maintenance program. The Company accounts for maintenance activities on the direct expense method. Under this method, major overhaul maintenance costs are recognized as expense as maintenance services are performed, as flight hours are flown for nonrefundable maintenance payments required by lease agreements, and as the obligation is incurred for payments made under service agreements. Routine maintenance and repairs are charged to operations as incurred.
Effective January 1, 2003, the Company and GE Engine Services, Inc. (“GE”) executed an engine services agreement (the “Services Agreement”) covering the scheduled and unscheduled repair of Airbus engines, which was subsequently modified in September 2004. The agreement is for a 12-year period from the effective date for our owned aircraft or May 1, 2019, whichever comes first. For each leased aircraft, the agreement term coincides with the initial lease term of 12 years. Under the terms of the Services Agreement, the Company agreed to pay GE an annual rate per-engine-hour, payable monthly, and GE assumed the responsibility to overhaul the Company’s engines on Airbus aircraft as required during the term of the Services Agreement, subject to certain exclusions. The Company believes the rate per-engine hour approximates the periodic cost the Company would have incurred to service those engines. Accordingly, these payments are expensed as the obligation is incurred.
Advertising Costs
The Company expenses the costs of advertising as promotion and sales expense in the year incurred. Advertising expense was $9,588,000, $10,803,000 and $7,897,000 for the years ended March 31, 2006, 2005 and 2004, and the amount of expense recognized related to advertising barter transactions were $2,104,000, $2,051,000, and $1,635,000, respectively. During the years ended March 31, 2006, 2005 and 2004, the amount of revenue recognized related to advertising barter transactions were $1,511,000, $2,324,000, and $611,000, respectively. Prepaid barter expenses as of March 31, 2006 and 2005 were $799,000 and $474,000, respectively.
Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted future cash flows estimated to be generated by those assets are less than the carrying amount of the assets. If an impairment occurs, the loss is measured by comparing the fair value of the asset to its carrying amount.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under that method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and tax bases of existing assets and liabilities and net operating losses and tax credit carryforwards. A valuation allowance for deferred tax assets is provided unless realizability is judged by management to be more likely than not. The effect on deferred taxes from a change in tax rates is recognized in income in the period that includes the enactment date.
FRONTIER AIRLINES, INC.
|
Notes to Financial Statements, continued |
|
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share excludes the effect of potentially dilutive securities and is computed by dividing income by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution of all securities that could share in earnings. Shares outstanding include shares contributed to the Employee Stock Option Plan.
Customer Loyalty Program
The Company offers EarlyReturns, a frequent flyer program to encourage travel on its airline and customer loyalty. The Company accounts for the EarlyReturns program under the incremental cost method whereby travel awards are valued at the incremental cost of carrying one passenger based on expected redemptions. Those incremental costs are based on expectations of expenses to be incurred on a per passenger basis and include food and beverages, fuel, liability insurance, and ticketing costs. The incremental costs do not include allocations of overhead expenses, salaries, aircraft cost or flight profit or losses. The Company does not record a liability for mileage earned by participants who have not reached the level to become eligible for a free travel award. The Company believes this is appropriate because the large majority of these participants are not expected to earn a free flight award. The Company does not record a liability for the expected redemption of miles for non-travel awards since the cost of these awards to us is negligible.
As of March 31, 2006 and 2005, the Company estimated that approximately 193,000 and 102,000 round-trip flight awards, respectively, were eligible for redemption by EarlyReturns members who have mileage credits exceeding the 15,000-mile free round-trip domestic ticket award threshold. As of March 31, 2006 and 2005, the Company had recorded a liability of approximately $2,776,000 and $1,275,000, respectively, for these rewards.
The Company also sells points in EarlyReturns to third parties. The portion of the sale that is for travel is deferred and recognized as passenger revenue when the Company estimates the transportation is provided. The remaining portion, referred to as the marketing component, is recognized as a reduction of sales and promotion expense in the month received.
Co-branded Credit Card Arrangement
The Company entered into a co-branded credit card arrangement with a MasterCard issuing bank in March 2003. The terms of this affinity agreement provide that we will receive a fixed fee for each new account, which varies based on the type of account, and a percentage of the annual renewal fees that the bank receives. The Company receives an increased fee for new accounts solicited by us. The Company also receives fees for the purchase of frequent flier miles awarded to the credit card customers.
The Company accounts for all fees received under the co-branded credit card program by allocating the fees between the portion that represents the estimated value of the subsequent travel award to be provided, and the portion which represents a marketing fee to cover marketing and other related costs to administer the program. This latter portion (referred to as the marketing component) represents the residual after determination of the value of the travel component. The component representing travel is determined by reference to an equivalent restricted fare, which is used as a proxy for the value of travel of a frequent flyer mileage award. The travel component is deferred and recognized as revenue over the estimated usage period of the frequent flyer mileage awards of 20 months. The Company has estimated the period over which the frequent flier mileage awards will be used based on the history of usage of the frequent flier
FRONTIER AIRLINES, INC.
|
Notes to Financial Statements, continued |
|
mileage awards. The Company records the marketing component of the revenue earned under this agreement as a reduction of sales and promotion expenses in the month received.
For the year ended March 31, 2006, the Company earned total fees of $24,986,000 under the credit card agreement. Of that amount, $19,686,000 was deferred as the travel award component, and the remaining marketing component of $5,300,000 was recognized as a reduction to sales and promotions expense. For the year ended March 31, 2005, the Company earned total fees of $12,227,000. Of that amount, $8,455,000 was deferred as the travel award component, and the remaining marketing component of $3,772,000 was recognized as a reduction to sales and promotions expense. For the year ended March 31, 2004, the Company earned total fees of $4,245,000. Of that amount, $3,286,000 was deferred as the travel award component, and the remaining marketing component of $959,000 was recognized as a reduction to sales and promotions expense. Amortization of deferred revenue recognized in earnings during the years ended March 31, 2006, 2005 and 2004 was $11,059,000, $4,396,000 and $786,000, respectively.
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Year for:
| | | | | | | | | | |
| | | | | | | |
| | 2006 | | 2005 | | 2004 | |
| |
| |
|
Interest | | $ | 18,911,401 | | $ | 12,345,237 | | $ | 9,836,737 | |
Taxes | | $ | 7,128 | | $ | 160,598 | | $ | 312,484 | |
Derivative Instruments
The Company accounts for derivative financial instruments in accordance with the provisions of Statement of Financial Accounting Standards No. 133,“Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 133 requires the Company to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability. For derivatives designated as cash flow hedges, changes in fair value of the derivative are generally reported in other comprehensive income (“OCI”) and are subsequently reclassified into earnings when the hedged item affects earnings. Changes in fair value of derivative instruments not designated as hedging instruments and ineffective portions of hedges are recognized in earnings in the current period.
The Company enters into derivative transactions to hedge the interest payments associated with a portion of its LIBOR-based borrowings and fuel purchases. The Company has designated an interest rate swap as a qualifying cash flow hedge. This transaction is accounted for as a cash flow hedge under SFAS 133. As a result, the Company records these instruments at fair market value and recognizes changes in the unrealized gain or loss in OCI, net of taxes. The Company also enters into derivative transactions to reduce exposure to the effect of fluctuations in fuel prices. These transactions are accounted for as trading instruments under SFAS 133. As a result, the Company records these instruments at fair market value and recognizes realized and unrealized gains and losses in aircraft fuel expense.
Self-Insurance
The Company is self-insured for the majority of the group health insurance costs, subject to specific retention levels. The Company records its liability for health insurance claims based on our estimate of claims that have been incurred but not reported.
FRONTIER AIRLINES, INC.
|
Notes to Financial Statements, continued |
|
The Company is also self-insured for the majority of our workers’ compensation cost. The liability for workers’ compensation claims is the estimated total cost of the claims on a fully-developed basis, up to a maximum amount, based on reserves for these claims that are established by a third-party administrator.
Stock-Based Compensation
Stock options and other stock-based compensation awards are accounted for using the intrinsic value method prescribed under Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees”(“APB 25”) and related Interpretations in accounting for its employee stock options and follows the disclosure provisions of Statement of Financial Accounting Standards No. 123 (“SFAS 123”). Accordingly, no compensation cost is recognized for options granted at a price equal to the fair market value of the Common Stock on the date of grant. Pro forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options under the fair value method of that Statement. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option valuation model. Had compensation cost for the Company’s stock-based compensation plan been determined using the fair value of the options at the grant date, the Company’s pro forma net income (loss) and earnings (loss) per share would be as follows:
| | | | | | | | | | |
| | | | | | | |
| | 2006 | | 2005 (1) | | 2004 | |
| |
| |
| |
| |
| | | | | | | | | | |
Net income (loss) as reported | | $ | (13,971,446 | ) | $ | (23,430,186 | ) | $ | 12,635,135 | |
Add: stock-based compensation expense included in reported net loss, net of tax | | | 91,168 | | | — | | | — | |
Less: total compensation expense determined under fair value method, net of tax | | | (532,507 | ) | | (4,201,805 | ) | | (1,862,553 | ) |
| |
|
| |
|
| |
|
| |
Pro forma net income (loss) | | $ | (14,412,785 | ) | $ | (27,631,991 | ) | $ | 10,772,582 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Earnings (loss) per share, basic: | | | | | | | | | | |
As Reported | | $ | (0.39 | ) | $ | (0.66 | ) | $ | 0.39 | |
| |
|
| |
|
| |
|
| |
Pro Forma | | $ | (0.40 | ) | $ | (0.78 | ) | $ | 0.33 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Earnings (loss) per share, diluted: | | | | | | | | | | |
As Reported | | $ | (0.39 | ) | $ | (0.66 | ) | $ | 0.36 | |
| |
|
| |
|
| |
|
| |
Pro Forma | | $ | (0.40 | ) | $ | (0.78 | ) | $ | 0.31 | |
| |
|
| |
|
| |
|
| |
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R),Share-Based Payment. SFAS No. 123(R), revised SFAS 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) focuses primarily on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires companies to recognize in the statement of operations the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). In April 2005, the effective date for SFAS 123(R) was changed to the first reporting period that begins after June 15, 2005. Accordingly, the Company will adopt SFAS No. 123(R) on April 1, 2006 and use the modified-prospective transition method. Under the modified-prospective method, the Company will recognize compensation expense in the financial statements issued subsequent to the date of adoption for all stock-based payments granted,
|
FRONTIER AIRLINES, INC. |
|
Notes to Financial Statements, continued |
|
| |
| modified or settled after April 1, 2006 as well as for any awards that were granted prior to April 1, 2006 for which requisite service has not been provided as of April 1, 2006. The Company will recognize stock-based compensation expense on awards granted subsequent to April 1, 2006 using the fair values determined by a valuation model prescribed by SFAS(R). The stock-based compensation expense on awards granted prior to April 1, 2006 will be recognized using the fair values determined for the pro forma disclosures on stock-based compensation. The amount of stock-based compensation expense that will be recognized on awards that have not fully vested will exclude the compensation expense cumulatively recognized in the pro forma disclosures on stock-based compensation and will include adjustments for estimated forfeitures. Unrecognized non-cash stock-based compensation expense related to unvested options and awards outstanding as of March 31, 2006 was approximately $2,727,000, and will be recorded over the remaining vesting periods of one to five years. This estimate is based on the number of unvested options and awards currently outstanding and could change based on the number of options granted or forfeited in fiscal year 2007. |
| |
(1) | In September and October of 2004, when the stock price was $8.21 and $7.63, respectively, the Company’s Board of Directors approved that certain of the Company’s stock options with exercise prices in excess of the stock’s current market price be modified to accelerate vesting. The purpose of the accelerated vesting was to enable the Company to avoid recognizing stock-based compensation expense in its statement of operations associated with these options in future periods upon adoption of SFAS No. 123(R). As a result, a total of 671,500 options became immediately vested. These options originally vested between October 2004 and March 2009. Exercise prices for these options ranged from $8.00 to $24.17 per share. There were 35 employees affected by the modification. The total accelerated expense as a result of the modification is approximately $2,997,000, net of taxes, and is included in the fiscal year 2005 pro forma numbers presented in the table above. |
| |
| New Accounting Standards |
| |
| In May 2005, the FASB issued FASB Statement No. 154,Accounting Changes and Error Correction, replacing APB Opinion No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that a change in method of depreciating or amortizing a long-lived nonfinancial assets to be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and that the correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of Statement 154 to have a material impact on its financial position or results of operations. |
| |
F-16
|
FRONTIER AIRLINES, INC. |
|
Notes to Financial Statements, continued |
|
2. Derivative Instruments
| |
| Fuel Hedging |
| |
| We are exposed to the effects of changes in the price and availability of aircraft fuel. To manage this risk, the Company initiated a fuel hedging program comprised of swap and collar agreements. Under a swap agreement, the Company receives the difference between a fixed swap price and a price based on an agreed upon published spot price for jet fuel. If the index price is higher than the fixed price, the Company receives the difference between the fixed price and the index price. If the index price is lower, the Company pays the difference. A collar agreement has a cap price, a primary floor price, and, in the case of a three-way collar, a secondary floor price. When the U.S. Gulf Coast Pipeline Jet index price or WTI price is above the cap, the Company receives the difference between the index and the cap. When the index price is below the primary floor but above the secondary floor, the Company pays the difference between the index and the primary floor. However, when the price is below the secondary floor, the Company is only obligated to pay the difference between the primary and secondary floor prices. When the price is between the cap price and the primary floor, no payments are required. |
| |
| The Company had the following swap and collar agreements outstanding at March 31, 2006 and 2005, which had fair values of $976,000 and $3,319,000, respectively: |
| |
| March 31, 2006: |
| | | | | | | | | | | | | | | | | |
| Contract date | | | Product * | | | Notional
volume **
(barrels per
month) | | | Period covered | | | Price (per gallon or
barrel) | | | Percentage of
estimated fuel
purchases | |
|
| November 2005 | | | Jet A | | | 50,000 | | | April 1, 2006 – June 30, 2006 | | | $1.83 per gallon, with a floor of $1.6925 per gallon | | | 16% | |
| | | | | | | | | | | | | | | | | |
| Contract date | | | Product * | | | Notional
volume **
(barrels per
month) | | | Period covered | | | Price (per gallon or
barrel) | | | Percentage of
estimated fuel
purchases | |
|
| November 2004 | | | Jet A | | | 75,000 | | | April 1, 2005 –
June 30, 2005 | | | $1.34 per gallon, with a floor of $1.20 per gallon | | | 28% | |
| |
* | Jet A is Gulf Coast Jet A fuel. Crude oil is West Texas Intermediate crude oil. |
|
** | One barrel is equal to 42 gallons. |
| |
| These fuel hedges have been designated as trading instruments, as such realized and unrealized gains are included in aircraft fuel expense. The results of operations for the year ended March 31, 2006, 2005 and 2004 include unrealized derivative gains of $976,000, $3,139,000 and $302,000, respectively. Additionally, realized gains of $2,199,000, $4,465,000 and $1,085,000 were recorded as reductions of fuel expense for the years ended March 31, 2006, 2005 and 2004, respectively. |
| |
F-17
|
FRONTIER AIRLINES, INC. |
|
Notes to Financial Statements, continued |
|
| |
| Interest Rate Hedging Program |
| |
| In March 2003, the Company entered into an interest rate swap agreement with a notional amount of $27,000,000 to hedge the interest payments associated with a portion of its LIBOR-based borrowings through June 30, 2007. Under the interest rate swap agreement, the Company is paying a fixed rate of 2.45% and receiving a variable rate based on the three month LIBOR, which is reset quarterly. Interest expense for the year ended March 31, 2006 was reduced by $216,000 for settlement payments received from the counter party for the period. Interest expense for the years ended March 31, 2005 and 2004 includes $177,000 and $351,000, respectively, of settlement amounts paid or payable to the counter party for the period. At March 31, 2006 and 2005, the Company’s interest rate swap agreement had estimated values of $105,000 and $300,000, respectively, and were included in deferred loan fees and other assets. |
| |
| Changes in the fair value of interest rate swaps designated as hedging instruments are reported in accumulated other comprehensive income included in stockholders’ equity. Approximately $194,000 of unrealized gains are included in accumulated other comprehensive income included in stockholders’ equity, net of income taxes of $74,000, for the year ended March 31, 2006. Approximately $655,000 of unrealized losses are included in accumulated other comprehensive income included in stockholders’ equity, net of income taxes of $246,000, for the year ended March 31, 2005. The unrealized gains and losses are expected to be reclassified into interest expense as a yield adjustment in the same period in which the related interest payments on the LIBOR-based borrowings effects earnings. |
3. Investment securities
| |
| Investment securities at March 31, 2006 and 2005 consisted of the following: |
| | | | | | | | | |
| | | 2006 | | | 2005 | |
| | |
| | |
| |
| | | | | | | | | |
| Available-for-sale securities: | | | | | | | | |
| | | | | | | | | |
| Money market funds (1) | | $ | 118,236,857 | | | | — | |
| Auction rate securities collateralized by student loan bonds and corporate debt (2) | | | — | | | | 3,000,000 | |
| | |
|
| | |
|
| |
| | | | 118,236,857 | | | | 3,000,000 | |
| | |
|
| | |
|
| |
| | | | | | | | | |
| Held-to-maturity securities: | | | | | | | | |
| Bond money market funds (1) | | | — | | | | 33,699,968 | |
| Commercial paper (1) | | | 121,673,447 | | | | 23,977,360 | |
| | |
|
| | |
|
| |
| | | | 121,673,447 | | | | 57,677,328 | |
| | |
|
| | |
|
| |
| | | | | | | | | |
| Total | | $ | 239,910,304 | | | $ | 60,677,328 | |
| | |
|
| | |
|
| |
| |
(1) | Reported in cash and cash equivalents |
| |
(2) | Reported in short-term investments |
F-18
|
FRONTIER AIRLINES, INC. |
|
Notes to Financial Statements, continued |
|
| |
| There were no unrealized gains or losses on these investments for the years ended March 31, 2006, 2005 and 2004. Contractual maturities of all held-to-maturity securities mature in three months or less. |
4. Assets Held For Sale
| |
| In April 2005, the Company retired the remaining Boeing aircraft and has classified all remaining Boeing aircraft rotable spare parts and expendable inventories as “assets held for sale.” As such, these assets have been valued at the lower of the carrying amount or the estimated market value less selling costs. |
| |
| In August 2004, the Company began selling Boeing spare parts and entered into agreements with two vendors to sell these parts on a consignment basis. The Company monitors resale values for Boeing parts quarterly using estimates obtained from outside vendors. Based on the current market prices and recent sales history, the Company has determined that there is currently no additional impairment required for the Boeing rotable spare parts and expendable inventories for the year ending March 31, 2006. During the years ending March 31, 2005 and 2004, the Company recorded total impairments on Boeing rotable spare parts and expendable inventories of $5,123,000 and $3,560,000, respectively, due to declines in the resale values of these parts. |
| |
| Gains and losses that resulted from the sale of these assets are recognized as they are sold and reported in income from operations as a component of (gains) losses on sales of assets, net. During the years ended March 31, 2006 and 2005, the Company realized net gains of $1,333,000 and $66,000, respectively, on the sale of these assets. |
5. Property and Equipment, Net
| |
| At March 31, 2006 and 2005, property and equipment consisted of the following: |
| | | | | | | | | |
| | | 2006 | | | 2005 | |
| | |
| | |
| |
| | | | | | | | | |
| Aircraft, spare aircraft parts, and improvements to leased aircraft | | $ | 555,573,781 | | | $ | 489,324,022 | |
| Ground property, equipment and leasehold improvements | | | 35,937,251 | | | | 33,405,140 | |
| Computer software | | | 6,584,568 | | | | 5,118,956 | |
| Construction in progress * | | | 1,597,477 | | | | 231,397 | |
| | |
|
| | |
|
| |
| | | | 599,693,077 | | | | 528,079,515 | |
| Less accumulated depreciation | | | (89,265,016 | ) | | | (72,265,833 | ) |
| | |
|
| | |
|
| |
|
| Property and equipment, net | | $ | 510,428,061 | | | $ | 455,813,682 | |
| | |
|
| | |
|
| |
| |
* | Airbus flight equipment and manufacturers’ credits received or earned but not yet placed in service totaled approximately $4,106,000 and $62,000, at March 31, 2006 and 2005, respectively. |
| |
| In October 2004 and December 2005, the Company completed sale-leaseback transactions for three Airbus 319 engines on the same day the transaction for the purchase closed. As such, no gain or loss was recorded on these transactions in fiscal years 2006 and 2005. The Company agreed to lease these engines over 10-year terms. During the year ended March 31, 2004, the Company completed a sale-leaseback transaction of |
| |
F-19
|
FRONTIER AIRLINES, INC. |
|
Notes to Financial Statements, continued |
|
| |
| an Airbus A319 aircraft resulting in a loss of $1,323,000. This charge is included in the losses on sales of assets in the statement of operations. The Company agreed to lease this aircraft over a 12-year term. |
6. Deferred Revenue and Other Liabilities
| |
| At March 31, 2006 and 2005, deferred revenue and other liabilities is comprised of the following: |
| | | | | | | | |
| | | 2006 | | 2005 | |
| | |
|
|
| |
| | | | | | | | |
| Deferred revenue related to co-branded credit card | | $ | 15,184,792 | | $ | 6,557,945 | |
| Deferred rent | | | 19,092,803 | | | 18,271,668 | |
| Other | | | 589,296 | | | 648,476 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Total deferred revenue and other liabilities | | | 34,866,891 | | | 25,478,089 | |
| Less: current portion | | | (12,436,615 | ) | | (5,361,422 | ) |
| | |
|
| |
|
| |
| | | $ | 22,430,276 | | $ | 20,116,667 | |
| | |
|
| |
|
| |
7. Other Accrued Expenses
| |
| The March 31, 2006 and 2005 other accrued expenses is comprised of the following: |
| | | | | | | | |
| | | 2006 | | 2005 | |
| | |
|
|
|
|
| | | | | | | | |
| Accrued salaries and benefits | | $ | 35,202,825 | | $ | 30,340,973 | |
| Federal excise and other passenger taxes payable | | | 23,715,483 | | | 15,829,706 | |
| Property and income taxes payable | | | 2,529,165 | | | 2,279,718 | |
| Remaining lease payments for aircraft and facilities abandoned before lease termination date | | | 174,559 | | | 1,063,022 | |
| Other | | | 6,061,399 | | | 5,823,784 | |
| | |
|
| |
|
| |
| | | | | | | | |
| | | $ | 67,683,431 | | $ | 55,337,203 | |
| | |
|
| |
|
| |
8. Lease Commitments
| |
| Aircraft Leases |
| |
| At March 31, 2006 and 2005, the Company operated 34 and 33 leased aircraft, respectively, which are accounted for under operating lease agreements with initial terms of 12-years. Security deposits related to leased aircraft and future leased aircraft deliveries at March 31, 2006 and 2005 totaled $16,984,000 and $17,853,000, respectively, and are reported in the balance sheets in security and other deposits. Letters of credit issued to certain aircraft lessors in lieu of cash deposits and the related restricted investments to secure these letters of credit at March 31, 2005 totaled $2,034,000 and none at March 31, 2006. |
| |
F-20
|
FRONTIER AIRLINES, INC. |
|
Notes to Financial Statements, continued |
|
| |
| In addition to scheduled future minimum lease payments, the Company is required to make supplemental rent payments to cover the cost of major scheduled maintenance overhauls of these aircraft. These supplemental rentals are based on the number of flight hours flown and/or flight departures and are included in maintenance expense. The lease agreements require the Company to pay taxes, maintenance, insurance, and other operating expenses applicable to the leased property. |
| |
| Other Leases |
| |
| The Company leases office and hangar space, spare engines and office equipment for its headquarters, reservation facilities, airport facilities, and certain other equipment. The Company also leases certain airport gate facilities on a month-to-month basis. |
| |
| For leases that contain escalations, the Company records the total rent payable during the lease term on a straight-line basis over the term of the lease and records the difference between the rent paid and the straight-line rent as a deferred rent liability. |
| |
| At March 31, 2006, commitments under non-cancelable operating leases (excluding aircraft supplemental rent requirements) with terms in excess of one year were as follows: |
| | | | | | | | | | | |
| | | Aircraft | | Other | | Total | |
| | |
|
|
|
|
| |
|
| 2007 | | $ | 116,929,201 | | $ | 22,016,171 | | $ | 138,945,372 | |
| 2008 | | | 121,210,707 | | | 17,857,208 | | | 139,067,915 | |
| 2009 | | | 121,210,707 | | | 17,411,989 | | | 138,622,696 | |
| 2010 | | | 121,210,707 | | | 16,020,500 | | | 137,231,207 | |
| 2011 | | | 121,210,707 | | | 4,899,824 | | | 126,110,531 | |
| Thereafter | | | 602,748,745 | | | 14,678,856 | | | 617,427,601 | |
| | |
|
| |
|
| |
|
| |
|
| Total minimum lease payments | | $ | 1,204,520,774 | | $ | 92,884,548 | | $ | 1,297,405,322 | |
| | |
|
| |
|
| |
|
| |
| |
| Rental expense under operating leases, including month-to-month leases, for the years ended March 31, 2006, 2005 and 2004 was $138,911,000, $130,205,000, and $98,473,000, respectively. |
9. Aircraft Lease and Facility Exit Costs
| |
| During the year ended March 31, 2006, the Company ceased using three of its Boeing 737-300 leased aircraft with original lease termination dates in June 2005, August 2005 and May 2006. The Company negotiated an early return and one-time payment for the one aircraft with an original lease termination date of May 2006. This resulted in a charge of $3,311,888, representing the estimated fair value of the remaining lease payments and a negotiated one-time termination payment. During the year ended March 31, 2006, the Company also recorded $102,044 of facility lease exit costs related to a property in which a sublease was not obtained in a period originally estimated for an airport exited in fiscal year 2005. This reflects the Company’s revised estimated future payments on this lease. These charges are reported in the Statement of Operations as aircraft and facility lease exit costs. |
| |
F-21
|
FRONTIER AIRLINES, INC. |
|
Notes to Financial Statements, continued |
|
| |
| During the year ended March 31, 2005, the Company ceased providing air service to a city with an airport facility lease. This resulted in a charge of $50,292. |
| |
| During the year ended March 31, 2004, the Company ceased using three of its Boeing 737-200 leased aircraft, two of which had lease terminations in October 2003 and one with a lease termination date in October 2005. This resulted in a charge of $5,054,232, representing the estimated fair value of the remaining lease payments and the write-off of the unamortized leasehold improvements on the aircraft. During the year ended March 31, 2004, the Company also closed its El Paso, Texas maintenance facility which had a lease termination date of August 2007 resulting in a charge of $317,567, representing the estimated fair value of the remaining lease payments. These charges are reported in the Statement of Operations as aircraft lease and facility exit costs. |
| |
| A summary of the activity charged to the aircraft and property lease termination liabilities are as follows: |
| | | | | | | | | | | | |
| | | Aircraft | | Facility | | Total | |
| | |
|
|
|
|
| |
| | | | | | | | | | | |
| Initial accrual | | $ | 3,591,739 | | $ | 317,567 | | $ | 3,909,306 | |
| Lease payments | | | (1,042,338 | ) | | (42,459 | ) | | (1,084,797 | ) |
| | |
|
|
|
|
|
|
|
|
|
| Balance, March 31, 2004 | | | 2,549,401 | | | 275,108 | | | 2,824,509 | |
| Additions | | | — | | | 50,292 | | | 50,292 | |
| Lease payments | | | (1,616,601 | ) | | (75,832 | ) | | (1,692,433 | ) |
| | |
|
|
|
|
|
|
|
|
|
| Balance, March 31, 2005 | | $ | 932,800 | | $ | 249,568 | | $ | 1,182,368 | |
| Additions | | | 3,311,888 | | | 102,044 | | | 3,413,932 | |
| Lease payments | | | (4,244,688 | ) | | (141,726 | ) | | (4,386,414 | ) |
| | |
|
|
|
|
|
|
|
|
|
| Balance, March 31, 2006 | | $ | — | | $ | 209,886 | | $ | 209,886 | |
| | |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | |
F-22
|
FRONTIER AIRLINES, INC. |
|
Notes to Financial Statement, Continued |
|
10. Long-term Debt and Short-term Borrowings
Long-term debt and short-term borrowings at March 31, 2006 and 2005 consisted of the following:
| | | | | | | |
| | 2006 | | 2005 | |
| |
| |
| |
| | | | | | | |
Unsecured Debt | | | | | | | |
Convertible Notes, fixed interest rate of 5.0% (1) | | $ | 92,000,000 | | $ | — | |
Credit Facility (2) | | | — | | | 5,000,000 | |
| | | | | | | |
Debt Secured by Aircraft | | | | | | | |
Aircraft notes payable, fixed interest rates with a 6.62% weighted average interest rate (3) | | | 37,099,863 | | | 39,711,187 | |
Aircraft notes payable, variable interest rates based on LIBOR plus a margin, for an overall weighted average rate of 6.51% at
March 31, 2006 (4) | | | 294,042,129 | | | 261,303,574 | |
Aircraft junior note payable, variable interest rate based on LIBOR plus a margin, with a rate of 8.38% at March 31, 2006 (5) | | | 4,613,658 | | | — | |
| |
|
| |
|
| |
| | | | | | | |
Total Debt | | | 427,755,650 | | | 306,014,761 | |
| | | | | | | |
Less: current maturities | | | (22,273,893 | ) | | (23,222,539 | ) |
| | | | | | | |
| |
|
| |
|
| |
Long-term debt | | $ | 405,481,757 | | $ | 282,792,222 | |
| |
|
| |
|
| |
| |
(1) | Convertible Notes due 2025 |
| |
| On December 7, 2005, the Company completed the sale of $92,000,000 aggregate principal amount of 5.0% Convertible Notes due 2025 (“Convertible Notes”) in a public offering pursuant to the Company’s shelf registration statement. Interest is payable semi-annually, beginning on June 15, 2006. The Convertible Notes are unsecured and rank effectively junior in right of payment to existing and future secured debt, including the Company’s Credit Facility and aircraft notes. At any time on or after December 20, 2010, the Company may redeem any of the Convertible Notes for cash at a redemption price of 100% of the principal amount plus accrued interest. Holders may require the Company to repurchase the Convertible Notes for cash at a repurchase price of 100% of the principal amount plus accrued interest on December 15, 2010, 2015 and 2020. |
| |
| The Convertible Notes are convertible, at the option of the holders, into shares of the Company’s common stock at a conversion rate of 96.7352 shares per principal amount of notes (representing a conversion price of approximately $10.34 per share), subject to certain adjustments, at any time prior to maturity. Upon conversion, the Company will have the right to deliver a combination of cash and shares of common stock. In addition, holders of the Convertible Notes have the right to require the Company to repurchase the notes upon the occurrence of a specified designated event at a price of 100% of the principal amount plus accrued interest. Upon the occurrence of a specified designated event prior to |
F-23
|
FRONTIER AIRLINES, INC. |
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Notes to Financial Statement, Continued |
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| December 15, 2010, the conversion rate will be increased by a specified number of shares for a maximum of 2,224,910 additional shares issued. |
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| The Company incurred and capitalized $3,241,000 in fees which are included in deferred loan fees and other assets. The debt issuance costs will be amortized using the effective interest rate method over the shortest period in which the note holders may require the Company to repurchase the notes, which is five-years. |
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(2) | Credit Facility |
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| In March 2005, the Company entered into a two-year revolving credit facility (“Credit Facility”) to be used in support of letters of credit and for general corporate purposes. Under this facility, the Company may borrow the lesser of $13,000,000 (“maximum commitment amount”) or 50% of the current market value of pledged eligible spare parts. Letters of credit available is the maximum commitment amount under the facility less current borrowings. Interest under the Credit Facility is based on the Eurodollar rate plus a margin of 3.75% or prime plus a margin of 2.0%, for Eurodollar borrowings and alternative base rate borrowings, respectively. In addition, there is a quarterly commitment fee of 0.50% per annum of the unused portion of the facility based on the maximum commitment amount. The agreement contains a covenant that will not permit the Company to maintain an unrestricted cash and cash equivalent position of less than $120,000,000, with a 30-day cure period. The amount available for borrowings under the Credit Facility based on the current market value of the pledged eligible spare parts at March 31, 2006 was $11,299,000, which was reduced by letters of credit issued of $9,500,000. Amounts borrowed under this facility were $0 and $5,000,000 at March 31, 2006 and 2005, respectively. |
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(3) | Secured Aircraft Notes payable – fixed interest rates |
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| During the year ended March 31, 2002, the Company entered into a credit agreement to borrow up to $72,000,000 for the purchase of three Airbus aircraft with a maximum borrowing of $24,000,000 per aircraft. During the year ended March 31, 2003, the Company entered into a sale-leaseback transaction for one of these purchased aircraft and repaid the loan with the proceeds of the sale. The two remaining aircraft loans have a term of 10 years and are payable in equal monthly installments, including interest, payable in arrears. The remaining loans require monthly principal and interest payments of $218,110 and $215,000, respectively, bear interest with rates of 6.71% and 6.54%, with maturities in May and August 2011, at which time a balloon payment totaling $10,200,000 is due with respect to each loan. |
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(4) | Secured Aircraft Notes payable – variable interest rates |
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| During the years ended March 31, 2003 through March 31, 2006, the Company borrowed $341,400,000 for the purchase of 14 Airbus aircraft. These loans have terms of 12 years with floating interest rates adjusted based on three and six month LIBOR rates plus a margins of 1.25% to 2.25%. These loans bear interest at rates of 5.63% to 7.14%, respectively, at March 31, 2006 with maturities in May 2014 to July 2017. At the end of the term, there are balloon payments ranging from $2,640,000 to $7,770,000, respectively. |
F-24
|
FRONTIER AIRLINES, INC. |
|
Notes to Financial Statement, Continued |
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(5) | Junior Secured Aircraft Notes payable – variable interest rates |
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| During the year ended March 31, 2006, the Company borrowed $4,900,000 for the purchase of an Airbus aircraft. This junior loan has a seven-year term with quarterly installments currently of $244,000. The loan bears interest at a floating interest rate adjusted quarterly based on LIBOR plus a margin of 3.75%, which was 8.38% at March 31, 2006. |
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Maturities of long-term debt, including balloon payments, are as follows: |
| | | | |
2007 | | $ | 22,273,893 | |
2008 | | | 23,544,214 | |
2009 | | | 24,910,424 | |
2010 | | | 26,339,372 | |
2011 | | | 27,855,974 | |
Thereafter | | | 302,831,773 | |
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| | $ | 427,755,650 | |
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| In July 2005, the Company entered into an agreement with a financial institution for a $5,000,000 revolving line of credit that allows the Company to issue letters of credit up to $3,500,000. As of March 31, 2006, the Company has utilized $2,491,000 under this agreement for standby letters of credit that provide credit support for certain facility leases, which reduced the amount available for borrowings to $2,509,000. A cash compensating balance of $2,000,000 is required to be maintained and to secure the letters of credit, which has been classified as a restricted investment on the balance sheet. |
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| At March 31, 2006, the Company was in compliance with the covenants for all debt and lease agreements. |
F-25
|
FRONTIER AIRLINES, INC. |
|
Notes to Financial Statement, Continued |
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11. Income Taxes
Income tax expense (benefit) for the years ended March 31, 2006, 2005, and 2004 is presented below:
| | | | | | | | | | |
| | Current | | Deferred | | Total | |
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Year ended March 31, 2006: | | | | | | | | | | |
U.S. Federal | | $ | — | | $ | (6,410,261 | ) | $ | (6,410,261 | ) |
State and local | | $ | 54,008 | | | (141,072 | ) | | (87,064 | ) |
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| | $ | 54,008 | | $ | (6,551,333 | ) | $ | (6,497,325 | ) |
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Year ended March 31, 2005: | | | | | | | | | | |
U.S. Federal | | $ | — | | $ | (11,822,849 | ) | $ | (11,822,849 | ) |
State and local | | | 106,943 | | | (692,004 | ) | | (585,061 | ) |
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| | $ | 106,943 | | $ | (12,514,853 | ) | $ | (12,407,910 | ) |
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Year ended March 31, 2004: | | | | | | | | | | |
U.S. Federal | | $ | (1,891,662 | ) | $ | 10,851,098 | | $ | 8,959,436 | |
State and local | | | (243,248 | ) | | (893,827 | ) | | (1,137,075 | ) |
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| | $ | (2,134,910 | ) | $ | 9,957,271 | | $ | 7,822,361 | |
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| The differences between the Company’s effective rate for income taxes and the federal statutory rate of 35% are shown in the following table: |
| | | | | | | | | | |
| | 2006 | | 2005 | | 2004 | |
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Income tax expense (benefit) at the statutory rate | | $ | (7,164,070 | ) | $ | (12,543,334 | ) | $ | 7,160,123 | |
State and local income tax, net of federal income tax benefit | | | (579,266 | ) | | (931,791 | ) | | 646,449 | |
Valuation allowance recorded against certain state net operating loss carryforwards | | | 273,151 | | | 262,160 | | | — | |
Nondeductible expenses | | | 731,427 | | | 649,700 | | | 573,643 | |
Adjustment to deferred taxes previously provided | | | 76,350 | | | — | | | (557,854 | ) |
Other | | | 165,083 | | | 155,355 | | | — | |
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| | $ | (6,497,325 | ) | $ | (12,407,910 | ) | $ | 7,822,361 | |
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Effective tax rate | | | 31.7 | % | | 34.6 | % | | 38.2 | % |
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| The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at March 31, 2006 and 2005 are presented below: |
F-26
|
FRONTIER AIRLINES, INC. |
|
Notes to Financial Statement, Continued |
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| | | | | | | |
| | 2006 | | 2005 | |
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Deferred tax assets: | | | | | | | |
Accrued vacation | | $ | 3,495,087 | | $ | 3,221,523 | |
Accrued workers compensation liability | | | 1,972,821 | | | 1,337,932 | |
Deferred rent | | | 7,222,807 | | | 6,870,147 | |
Impairments recorded on inventory and fixed assets | | | 2,187,923 | | | 3,067,165 | |
Net operating loss carryforwards | | | 95,011,866 | | | 75,357,782 | |
Alternative minimum tax credit carryforward | | | 1,757,517 | | | 1,757,517 | |
Accruals | | | 2,339,801 | | | 788,868 | |
Deferred loan fees and other assets | | | 48,180 | | | — | |
Other | | | 225,678 | | | 1,536,672 | |
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Deferred tax assets | | | 114,261,680 | | | 93,937,606 | |
Valuation allowance | | | (535,311 | ) | | (262,160 | ) |
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Net deferred tax assets | | | 113,726,369 | | | 93,675,446 | |
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Deferred tax liabilities: | | | | | | | |
Property and Equipment | | | (117,235,484 | ) | | (103,627,616 | ) |
Deferred loan fees and other assets | | | — | | | (1,180,368 | ) |
Prepaid commissions | | | (805,128 | ) | | (363,615 | ) |
Other | | | (638,403 | ) | | (362,329 | ) |
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Total gross deferred tax liabilities | | | (118,679,015 | ) | | (105,533,928 | ) |
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Net deferred tax liabilities | | $ | (4,952,646 | ) | $ | (11,858,482 | ) |
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The net deferred tax assets (liabilities) are reflected in the accompanying balance sheet as follows: |
| | | | | | | |
| | 2006 | | 2005 | |
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Current deferred tax assets | | $ | 7,780,161 | | $ | 5,472,643 | |
Non-current deferred tax liabilities | | | (12,732,807 | ) | | (17,331,125 | ) |
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Net deferred tax liability | | $ | (4,952,646 | ) | $ | (11,858,482 | ) |
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| During the years ended March 31, 2006 and 2005, the Company recorded valuation allowances against certain state net operating loss carryforwards. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of all of the deferred tax assets will not be realized. The ultimate realization of deferred assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at March 31, 2006. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. |
F-27
|
FRONTIER AIRLINES, INC. Notes to Financial Statements, continued |
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As of March 31, 2005, the Company had federal net operating loss carryforwards totaling $196,859,000, comprised of $45,638,000 that expires in 2023, $58,960,000 that expires in 2024 and $92,261,000 that expires in 2025. During the year ended March 31, 2006, the Company generated an estimated $51,888,000 in additional federal net operating loss carryforwards which expires in 2026. As of March 31, 2006, the Company had an estimated total federal net operating loss carryforwards of $248,747,000 and total state net operating loss carryforwards of $216,225,000 which expire between 2008 and 2026.
12. Stockholders’ Equity
Common Stock
The Company recorded an approximate $12,000 capital contribution paid to the Company in August 2004 as a result of recovering short-swing profits from a shareholder in accordance with Section 16(b) of the Securities Exchange Act of 1934. Section 16(b) provides that any profit realized by an insider (defined as an officer, director or principal shareholder of an issuer) from a purchase and sale, or any sale and purchase, of an equity security of the issuer within any period of less than six months are recoverable by the issuer, irrespective of the intention of the insider in entering into such transaction.
The Company completed a secondary public offering of 5,050,000 shares of common stock in September 2003. The Company received $81,077,000, net of offering expenses, from the sale of these shares.
Warrants and Stock Purchase Rights
In February 2003, the Company issued warrants to purchase 3,833,946 shares of common stock at $6.00 per share to the Air Transportation Stabilization Board, (“ATSB”) and to two other guarantors which were exercisable immediately. The warrants had an estimated fair value of $9,282,538 when issued and expire seven years after issuance. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model. These warrants were subsequently repriced in September 2003 as a result of the Company’s secondary public offering and again in December 2005 as a result of the Company’s convertible debt offering to $5.87 per share.
F-28
|
FRONTIER AIRLINES, INC. Notes to Financial Statements, continued |
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13. Equity Based Compensation Plans
Stock Options
On September 9, 2004, the shareholders of the Company approved the Frontier Airlines, Inc. 2004 Equity Incentive Plan (the “2004 Plan”). The 2004 Plan, which includes stock options issued since 1994 under a previous plan, allows the Compensation Committee to grant stock options, stock appreciation rights, restricted stock or stock units, any or all of which may be made contingent upon the achievement of performance criteria. Eligible participants include all full-time director and officer level employees of the Company, and such other employees as may be identified by the Compensation Committee from time to time where legally eligible to participate, and non-employee directors. Subject to plan limits, the Compensation Committee has the discretionary authority to determine the size and timing of an award and the vesting requirements related to the award. The plan expires September 12, 2009. The 2004 Plan allows up to a maximum 2,500,000 shares for option grants and 500,000 shares for restricted stock or restricted stock units, subject to adjustment only to reflect stock splits and similar events. With certain exceptions, stock options issued under this plan generally vest over a five-year period from the date of grant and expire in ten years from the grant date.
A summary of the stock option activity and related information for the years ended March 31, 2006, 2005 and 2004 is as follows:
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| | 2006 | | 2005 | | 2004 | |
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| | Options | | Weighted-
Average
Exercise
Price | | Options | | Weighted-
Average
Exercise
Price | | Options | | Weighted-
Average
Exercise
Price | |
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Outstanding-beginning of year | | | 2,695,550 | | $ | 10.82 | | | 2,578,565 | | $ | 11.06 | | | 2,430,815 | | $ | 10.28 | |
Granted | | | 60,000 | | $ | 12.23 | | | 210,000 | | $ | 7.91 | | | 522,500 | | $ | 11.41 | |
Exercised | | | (194,308 | ) | $ | 7.98 | | | (51,500 | ) | $ | 6.54 | | | (227,250 | ) | $ | 4.40 | |
Surrendered | | | (164,692 | ) | $ | 10.30 | | | (41,515 | ) | $ | 16.21 | | | (147,500 | ) | $ | 9.67 | |
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Outstanding-end of year | | | 2,396,550 | | $ | 11.13 | | | 2,695,550 | | $ | 10.82 | | | 2,578,565 | | $ | 11.06 | |
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Exercisable at end of year | | | 2,122,550 | | $ | 11.54 | | | 2,279,050 | | $ | 11.50 | | | 1,407,899 | | $ | 10.43 | |
The grant date fair value of the options granted during the years ended March 31, 2006, 2005 and 2004 were $7.71, $5.47 and $6.48, respectively.
F-29
|
FRONTIER AIRLINES, INC. Notes to Financial Statements, continued |
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Exercise prices for options outstanding under the 2004 Plan as of March 31, 2006 ranged from $2.13 per share to $24.17 per share. The weighted-average remaining contractual life of those options is 5.5 years. A summary of the outstanding and exercisable options at March 31, 2006, segregated by exercise price ranges, is as follows:
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Exercise Price
Range | | Options
Outstanding | | Weighted-
Average
Exercise Price | | Weighted-
Average
Remaining
Contractual
Life (in years) | | Exercisable
Options | | Weighted-
Average
Exercise Price | |
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$2.13 - $5.42 | | 506,250 | | | $ | 4.90 | | 3.4 | | | 468,250 | | | $ | 4.89 | |
$5.80 - $8.55 | | 496,000 | | | $ | 7.47 | | 6.4 | | | 320,000 | | | $ | 7.67 | |
$8.83 - $12.23 | | 520,000 | | | $ | 10.75 | | 6.0 | | | 460,000 | | | $ | 10.55 | |
$12.68 - $17.00 | | 622,500 | | | $ | 15.88 | | 5.9 | | | 622,500 | | | $ | 15.88 | |
$17.02 - $24.17 | | 251,800 | | | $ | 19.91 | | 6.2 | | | 251,800 | | | $ | 19.91 | |
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| | 2,396,550 | | | $ | 11.13 | | 5.5 | | | 2,122,550 | | | $ | 11.54 | |
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Restricted Stock Units and Stock Appreciation Rights
To better optimize the cost of the Company’s equity incentives under SFAS 123(R), the Company began to issue awards under the 2004 Plan that consisted of restricted stock units (“RSUs”) and stock appreciation rights (“SARs”) rather than stock options. During the year ended March 31, 2006, the Company granted RSUs to acquire 85,221 shares of common stock and SARs with respect to 197,964 shares of common stock.
The restricted stock awards issued to employees vest, if the employee is still employed by the Company at the time, five years from the grant date. Restricted stock issued to members of the Board of Directors vest after three years. The fair value of the RSUs on the date of the grant is recorded as compensation expense over the vesting period. The SARs are payable only in stock and vest 20% a year over five years. The SARs entitle the employee, once vested and exercised, to receive shares of the Company’s common stock having a value on the date of exercise equal to the excess of the fair market value of the shares on the date of exercise over the fair market value of the shares on the date of grant. Compensation expense for the SARs is based on the difference between the market price of the award on the date of grant and the current market price of the award. During the year ended March 31, 2006, compensation expense of $147,000 was recognized for these awards.
F-30
|
FRONTIER AIRLINES, INC. Notes to Financial Statements, continued |
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A summary of the activity for RSUs and SARs are as follows:
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| | RSUs | | SARs | |
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| | Number of
Restricted
Units | | Weighted-
Average
Grant Date
Market Value | | Number of
Shares | | Weighted-
Average
Grant Date
Fair Value | |
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Outstanding-beginning of year | | | — | | $ | — | | | — | | $ | — | |
Granted | | | 85,221 | | $ | 10.20 | | | 197,964 | | $ | 10.25 | |
Released | | | (55 | ) | $ | 11.28 | | | — | | $ | — | |
Surrendered | | | (9,562 | ) | $ | 10.59 | | | (29,727 | ) | $ | 10.12 | |
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Outstanding-end of year | | | 75,604 | | $ | 10.15 | | | 168,237 | | $ | 10.28 | |
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SFAS No. 123
SFAS No. 123 establishes a fair value based method of accounting for stock options. As discussed in Note 1, “Nature of Business and Summary of Significant Accounting Policies – Stock Based Compensation,” the Company has elected to continue using the intrinsic value method of accounting prescribed in Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees,” as permitted by SFAS No. 123.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option valuation model with the following assumptions:
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| | 2006 | | 2005 | | 2004 | |
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Assumptions: | | | | | | | | | | |
Risk-free interest rate | | 4.06 | % | | 3.35 | % | | 2.97 | % | |
Dividend yield | | 0 | % | | 0 | % | | 0 | % | |
Volatility | | 74.41 | % | | 73.88 | % | | 77.48 | % | |
Expected life (years) | | 5 | | | 7 | | | 5 | | |
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility. Because our stock options have characteristics significantly different from those of traded options and because changes in the input assumptions can materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our stock options.
F-31
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FRONTIER AIRLINES, INC. Notes to Financial Statements, continued |
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14. Retirement Plans
Employee Stock Ownership Plan
The Company has established an Employee Stock Ownership Plan (“ESOP”) which is for the benefit of each employee of the Company, except those employees covered by a collective bargaining agreement that does not provide for participation in the ESOP. Company contributions to the ESOP are discretionary and may vary from year to year. In order for an employee to receive an allocation of Company common stock from the ESOP, the employee must be employed on the last day of the ESOP’s plan year, with certain exceptions. The Company’s annual contribution to the ESOP, if any, is allocated among the eligible employees of the Company as of the end of each plan year in proportion to the relative compensation (as defined in the ESOP) earned that plan year by each of the eligible employees. The ESOP does not provide for contributions by participating employees. Employees vest in contributions made to the ESOP based upon their years of service with the Company. A year of service is an ESOP plan year during which an employee has at least 1,000 hours of service. Vesting generally occurs at the rate of 20% per year, beginning after the first year of service, so that a participating employee will be fully vested after five years of service. Distributions from the ESOP will not be made to employees during employment. However, upon termination of employment with the Company, each employee will be entitled to receive the vested portion of his or her account balance. In November 2005, the Company negotiated a new union contract in which employees covered by a union contract became immediately vested in their accounts and received stock certificates for the balance in their account.
During the year ended March 31, 2006, 2005 and 2004, the Company contributed 400,000, 346,400 and 646,142 shares, respectively, to the plan. Total Company contributions to the ESOP from inception through March 31, 2006 totaled 2,588,000 shares. The Company recognized compensation expense during the years ended March 31, 2006, 2005 and 2004 of $2,969,000, $2,940,000, and $2,499,000, respectively, related to its contributions to the ESOP. Compensation expense under the ESOP plan is determined by multiplying the number of the shares contributed by the fair market value of the shares on the date contributed. The fair value of the unearned ESOP shares on March 9, 2006, the date of grant, was $2,792,000. The fair value of the unearned ESOP shares on March 31, 2006 was $3,080,000.
Retirement Savings Plan
The Company has established a Retirement Savings Plan under section 401(k) of the Internal Revenue Code (“401(k) Plan”). Participants may contribute from 1% to 60% of their pre-tax annual compensation up the maximum amount allowed under the Internal Revenue Code. Participants are immediately vested in their voluntary contributions.
The Company’s Board of Directors has elected to match 50% of participant contributions up to 10% of salaries from May 2000 through December 2006. During the years ended March 31, 2006, 2005, and 2004, the Company recognized compensation expense associated with the matching contributions totaling $4,201,000, $3,924,000, and $2,599,000, respectively. Future matching contributions, if any, will be determined annually by the Board of Directors. In order to receive the matching contribution, participants must be employed on the last day of the plan year. Participants vest in contributions made to the 401(k) Plan based upon their years of service with the Company. A year of service is a plan year during which a participant has at least 1,000 hours of service. Vesting generally occurs at the rate of 20% per year, beginning after the first year of service, so that a participant will be fully vested after five years of service. Upon termination of employment with the Company, each participant will be entitled to receive the vested portion of his or her account balance.
F-32
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FRONTIER AIRLINES, INC. Notes to Financial Statements, continued |
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Retirement Health Plans
In conjunction with the Company’s collective bargaining agreement with its pilots, retired pilots and their dependents, they may retain medical benefits under the terms and conditions of the Health and Welfare Plan for Employees of Frontier Airlines, Inc. (“the Retirement Health Plan”) until age 65. The cost of retiree medical benefits are continued under the same contribution schedule as active employees.
We regularly evaluate ways to better manage employee benefits and control costs. Any changes to the plan or assumptions used to estimate future benefits could have a significant effect on the amount of the reported obligation and future annual expense.
The following table provides a reconciliation of the changes in the benefit obligations under the Retirement Health Plan for the years ended March 31, 2006 and 2005.
Reconciliation of benefit obligation:
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| | 2006 | | 2005 | |
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Obligation at beginning of period | | $ | 4,574,772 | | $ | 3,680,511 | |
Service cost | | | 953,916 | | | 932,527 | |
Interest cost | | | 271,285 | | | 218,390 | |
Benefits paid | | | (116,621 | ) | | (16,756 | ) |
Net actuarial loss (gain) | | | (553,398 | ) | | (239,900 | ) |
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Obligation at end of period | | $ | 5,129,954 | | $ | 4,574,772 | |
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The following is a statement of the funded status as of March 31, 2006 and 2005:
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| | 2006 | | 2005 | |
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Funded status | | $ | (5,129,954 | ) | $ | (4,574,772 | ) |
Unrecognized net actuarial (gain) loss | | | 680,235 | | | 1,294,318 | |
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Accrued benefit liability | | $ | (4,449,719 | ) | $ | (3,280,454 | ) |
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Net periodic benefit cost of the Retirement Health Plan for the years ended March 31, 2006, 2005, and 2004 include the following components.
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| | 2006 | | 2005 | | 2004 | |
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Service cost | | $ | 953,916 | | $ | 932,527 | | $ | 640,082 | |
Interest cost | | | 271,285 | | | 218,390 | | | 146,494 | |
Recognized net actuarial loss | | | 60,685 | | | 89,430 | | | 61,410 | |
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Net periodic benefit cost | | $ | 1,285,886 | | $ | 1,240,347 | | $ | 847,986 | |
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Assumed healthcare cost trend rates have a significant effect on the amounts reported for the other post-retirement benefit plans. A 1% change in the healthcare cost trend rate used in measuring the accumulated post-retirement benefit obligation (“APBO”) at March 31, 2006, would have the following effects:
F-33
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FRONTIER AIRLINES, INC. Notes to Financial Statements, continued |
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| | | 1% increase | | | 1% decrease | |
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Increase (decrease) in total service and interest cost | | $ | 158,629 | | $ | (136,749 | ) |
Increase (decrease) in the APBO | | $ | 604,874 | | $ | (524,339 | ) |
The measurement dates used to determine the benefit measurements for the plan are March 31, 2006, 2005 and 2004. The Company used the following actuarial assumptions, which were based upon information available as of the beginning of the fiscal year, to account for this post-retirement benefit plan:
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| | 2006 | | 2005 | | 2004 | |
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Weighted average discount rate | | 6.25 | % | | 6.00 | % | | 6.00 | % | |
Assumed healthcare cost trend (1) | | 9.50 | % | | 9.50 | % | | 10.00 | % | |
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(1) | Trend rates were assumed to reduce until 2015 when an ultimate rate of 5.00% is reached. |
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(2) | |
The estimated benefit payments expected to be paid by the Retirement Health Plan, and funded by the Company, for the next ten years are as follows:
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Fiscal year 2007 | | $ | 100,165 | |
Fiscal year 2008 | | $ | 212,994 | |
Fiscal year 2009 | | $ | 341,620 | |
Fiscal year 2010 | | $ | 411,985 | |
Fiscal year 2011 | | $ | 475,073 | |
Fiscal year 2012 - 2016 | | $ | 3,192,664 | |
Certain other union employees are included in a multi-employer pension plan to which the Company makes contributions in accordance with the union contract. Such contributions are made on a monthly basis in accordance with the requirements of the union contract. Contributions to multi-employer pension plans were $537,000, $471,000 and $424,000 for the years ended March 31, 2006, 2005 and 2004, respectively.
F-34
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FRONTIER AIRLINES, INC. Notes to Financial Statements, continued |
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15. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings (loss) per share:
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| | 2006 | | 2005 | | 2004 | |
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Numerator: | | | | | | | | | | |
Numerator for basic earnings (loss) per share - | | | | | | | | | | |
Net income (loss) | | $ | (13,971,446 | ) | $ | (23,430,186 | ) | $ | 12,635,135 | |
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Denominator: | | | | | | | | | | |
Weighted average shares outstanding, basic | | | 36,166,972 | | | 35,641,370 | | | 32,732,567 | |
Effects of dilutive securities: | | | | | | | | | | |
Dilutive effect of employee stock options | | | — | | | — | | | 582,150 | |
Dilutive effect of warrants | | | — | | | — | | | 1,961,699 | |
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Denominator for diluted earnings (loss) per share | | | 36,166,972 | | | 35,641,370 | | | 35,276,416 | |
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Earnings (loss) per share: | | | | | | | | | | |
Basic | | $ | (0.39 | ) | $ | (0.66 | ) | $ | 0.39 | |
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Diluted | | $ | (0.39 | ) | $ | (0.66 | ) | $ | 0.36 | |
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For the year ended March 31, 2006, interest, net of tax, on the Convertible Notes in the amount of $1,027,000 and shares of 2,804,000 that would be issued upon assumed conversion of the Convertible Notes, were excluded from the calculation of diluted loss per share due to the antidilutive effect on loss per share. For the years ending March 31, 2006, 2005 and 2004, the weighted average options and warrants outstanding of 6,557,000, 6,529,000, and 1,556,000, respectively, were excluded from the calculation of diluted earnings per share since the effect would have been anti-dilutive. For the years ending March 31, 2004, the Company has excluded from the calculations of diluted earnings per share 1,022,300 options, with exercise prices ranging from $12.68 to $24.17, because the exercise price of the options was greater than the average market price of the common stock for the respective year.
16. Concentration of Credit Risk
The Company does not believe it is subject to any significant concentration of credit risk relating to receivables. At March 31, 2006 and 2005, 53.4% and 60.8% of the Company’s receivables related to tickets sold to individual passengers through the use of major credit cards, travel agencies approved by the Airlines Reporting Corporation, tickets sold by other airlines and used by passengers on Company flights, manufactures’ credits and the Internal Revenue Service. Receivables related to tickets sold are short-term, generally being settled shortly after sale or in the month following ticket usage.
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Notes to Financial Statements, continued |
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17. Commitments and Contingencies
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| Legal Proceedings and Insurance |
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| From time to time, the Company is engaged in routine litigation incidental to our business. The Company believes there are no legal proceedings pending in which the Company is a party or of which any of our property may be subject to that are not adequately covered by insurance maintained by us, or which, if adversely decided, would have a material adverse affect upon its business or financial condition. |
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| Recently, the Company’s services to Cancun, Mexico and New Orleans, Louisiana were disrupted by hurricanes and other extreme weather that impacted the Company’s service levels to these destinations, revenues and operating costs. The Company maintains business interruption insurance to cover lost profits and has made claims to recover loss profits related to these events. The Company has not recorded any anticipated recoveries as a final settlement of the claims has not been reached. |
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| Purchase Commitments |
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| As of March 31, 2006, the Company has remaining firm purchase commitments for 17 additional aircraft, which have scheduled delivery dates beginning in June 2006 and continuing through August 2010. The Company has also committed to lease as many as three additional A319 aircraft from third party lessors over the next year. The Company is not under any contractual obligations with respect to spare parts. Under the terms of the purchase agreement, the Company is required to make scheduled pre-delivery payments for these aircraft. These payments are non-refundable with certain exceptions. As of March 31, 2006, pre-delivery payments on future deliveries were made totaling $40,449,000 to secure these aircraft. |
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| The Company has aggregate additional amounts due under these purchase commitments and estimated amounts for buyer-furnished equipment, spare parts for both the purchased and leased aircraft and to equip the aircraft with LiveTV. In addition, the Company has commercial commitments under an agreement with SabreSonic™ for its SabreSonic passenger solution to power the reservations and check-in capabilities along. The estimated aggregate amount for these purchase commitments is $670,759,000; $152,638,000 which is due in fiscal year 2007. We have obtained financing for all of our aircraft deliveries through June 2007 and expect to have adequate liquidity to cover our contractual obligations. |
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| Employees |
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| As of March 31, 2006, the Company had approximately 4,800 employees, of which approximately 21% are represented by unions. Of those employees covered by collective bargaining agreements, approximately 62% presently have contracts under negotiation or becoming amendable in fiscal year 2007. The Company believes that mutually acceptable agreements can be reached with such employees, although the ultimate outcome of the negotiations is unknown at this time. |
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Notes to Financial Statements, continued |
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18.Government Assistance
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| Emergency Wartime Supplemental Appropriations Act |
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| The Emergency Wartime Supplemental Appropriations Act (“the Appropriations Act”) enacted on April 16, 2003, which made available approximately $2.3 billion to U.S. flag air carriers for expenses and revenue foregone related to aviation security. In order to have been eligible to receive a portion of this fund, air carriers must have paid one or both of the TSA security fees, the September 11th Security Fee and/or the Aviation Security Infrastructure Fee as of the date of enactment of the Appropriations Act. According to the Appropriations Act, an air carrier may use the amount received as the air carrier determines. The Appropriations Act requires air carriers who accept these funds to limit the compensation paid during the 12 month period beginning April 1, 2003 to each executive officer to an amount equal to no more than the annual salary paid to that officer with respect to the air carrier’s fiscal year 2002. Pursuant to the Appropriations Act, the Company received $15,573,000 in May 2003, of which $549,000 was paid to Mesa Air Group for the revenue passengers Mesa carried as Frontier JetExpress. |
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| The Appropriations Act provides for additional reimbursements to be made to U.S. flag air carriers for costs incurred related to the FAA requirements for enhanced flight deck door security measures that were mandated as a result of the September 11 terrorist attacks. Pursuant to the Appropriations Act, the Company received $889,000 in September 2003 for expenses related to the installation of enhanced flight deck doors on its aircraft. Upon receipt of the $889,000 reimbursement, the Company credited maintenance expense and charged fixed assets for the labor component of the flight deck door installation, and correspondingly credited property, plant, and equipment to reflect the reimbursement. |
19.Selected Quarterly Financial Data (Unaudited)
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| | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | |
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2006 | | | | | | | | | | | | | |
Revenues | | $ | 236,410,061 | | $ | 258,423,479 | | $ | 246,962,560 | | $ | 252,476,646 | |
Operating Expenses | | $ | 237,632,907 | | $ | 244,788,895 | | $ | 258,626,176 | | $ | 261,122,022 | |
Net loss | | $ | (2,733,748 | ) | $ | 6,905,352 | | $ | (10,290,220 | ) | $ | (7,852,830 | ) |
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Loss per share: | | | | | | | | | | | | | |
Basic | | $ | (0.08 | ) | $ | 0.19 | | $ | (0.28 | ) | $ | (0.22 | ) |
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Diluted | | $ | (0.08 | ) | $ | 0.18 | | $ | (0.28 | ) | $ | (0.22 | ) |
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2005 | | | | | | | | | | | | | |
Revenues | | $ | 192,423,070 | | $ | 214,434,774 | | $ | 208,237,471 | | $ | 218,544,126 | |
Operating Expenses | | $ | 200,232,227 | | $ | 215,031,732 | | $ | 223,520,909 | | $ | 221,302,068 | |
Net loss | | $ | (6,573,718 | ) | $ | (2,081,970 | ) | $ | (11,058,044 | ) | $ | (3,716,454 | ) |
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Loss per share: | | | | | | | | | | | | | |
Basic | | $ | (0.18 | ) | $ | (0.06 | ) | $ | (0.31 | ) | $ | (0.10 | ) |
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Diluted | | $ | (0.18 | ) | $ | (0.06 | ) | $ | (0.31 | ) | $ | (0.10 | ) |
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F-37
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Notes to Financial Statements, continued |
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20. Subsequent Events
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| Reorganization |
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| On April 3, 2006, Frontier Airlines, Inc. (“Frontier”) completed its reorganization (the “Reorganization”) into a Delaware holding company structure, whereby Frontier became a wholly owned subsidiary of Frontier Airlines Holdings, Inc., a Delaware corporation (“Frontier Holdings”). In connection with the Reorganization, each share of common stock of Frontier (“Frontier Common Stock”) was exchanged for one share of common stock of Frontier Holdings (“Frontier Holdings Common Stock”), resulting in each shareholder of Frontier as of the close of business on March 31, 2006 becoming a stockholder of Frontier Holdings as of the opening of business on April 3, 2006. |
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| Frontier Holdings assumed all of the outstanding options and awards under Frontier’s 2004 Equity Incentive Plan effective upon the closing of the Reorganization. Each outstanding option and other award assumed by Frontier Holdings is exercisable or issuable upon the same terms and conditions as were in effect immediately prior to the completion of the Reorganization, except that all such options and awards now entitle the holder thereof to purchase Frontier Holdings Common Stock in accordance with the terms of such plan or agreement as in effect on the date of issuance. The number of shares of Frontier Holdings Common Stock issuable upon the exercise or issuance of such an option or award after the completion of the Reorganization equals the number of shares of Frontier Common Stock subject to the option or award prior to the completion of the Reorganization. |
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| Also in connection with the Reorganization, Frontier’s Employee Stock Ownership Plan was amended to provide that future awards under the plan will be made in shares of Frontier Holdings Common Stock. |
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| ATSB Warrants |
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| In May 2006, the ATSB transferred ownership all of their outstanding warrants to seven institutional investors (see Note 12). |
F-38
