- 14 -
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 0-24126
FRONTIER AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1256945
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporated or organization)
12015 E. 46th Avenue, Denver, CO 80239
(Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code: (303) 371-7400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares of the Company's Common Stock outstanding as of November
10, 1998 was 14,507,364.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Information
Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Item 3: Quantitative and Qualitative Disclosures
About Market Risk 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER AIRLINES, INC.
Condensed Balance Sheets
September 30, March 31,
1998 1998
--------------- --------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 23,823,598 $ 3,641,395
Restricted investments 4,000,000 4,000,000
Trade receivables, net of allowance for doubtful accounts of $172,295
and $139,096 at September 30, 1998 and March 31, 1998 9,586,154 11,661,323
Maintenance deposits 12,132,909 9,307,723
Prepaid expenses and other assets 5,483,419 3,843,694
Inventories 1,086,300 1,164,310
Deferred lease expenses 380,975 380,975
--------------- --------------
Total current assets 56,493,355 33,999,420
Security, maintenance and other deposits 9,320,149 7,633,143
Property and equipment, net 6,156,158 5,579,019
Deferred lease and other expenses 589,941 780,429
Restricted investments 3,425,813 2,606,459
=============== ==============
$ 75,985,416 $ 50,598,470
=============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 10,768,778 $ 13,664,750
Air traffic liability 18,302,114 18,910,441
Other accrued expenses 5,862,216 5,157,640
Accrued maintenance expense 14,575,022 12,537,228
Note payable 121,003 -
Current portion of obligations under capital leases 60,495 54,346
--------------- --------------
Total current liabilities 49,689,628 50,324,405
Senior secured notes payable 2,701,173 3,468,138
Accrued maintenance expense 3,839,292 2,381,354
Obligations under capital leases, excluding current portion 108,254 97,757
--------------- --------------
Total liabilities 56,338,347 56,271,654
--------------- --------------
Stockholders' equity
Preferred stock, no par value, authorized 1,000,000 shares;
none issued and outstanding - -
Common stock, no par value, stated value of $.001 per share,
authorized 40,000,000 shares; 14,280,564 and 9,253,563 shares
issued and outstanding at September 30, 1998 and March 31, 1998 14,280 9,253
Additional paid-in capital 53,289,418 37,954,584
Unearned ESOP shares (322,875) -
Accumulated deficit (33,333,754) (43,637,021)
--------------- --------------
Total stockholders' equity 19,647,069 (5,673,184)
--------------- --------------
$ 75,985,416 $ 50,598,470
=============== ==============
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
--------------- -------------- --------------- --------------
Revenues:
Passenger $ 55,502,301 $ 36,021,428 $ 97,062,888 $ 69,642,878
Cargo 967,071 783,609 1,971,819 1,411,418
Other 383,541 808,085 705,759 1,115,496
--------------- -------------- --------------- --------------
Total revenues 56,852,913 37,613,122 99,740,466 72,169,792
--------------- -------------- --------------- --------------
Operating expenses:
Flight operations 18,778,648 15,887,077 36,632,354 30,131,179
Aircraft and traffic servicing 8,453,991 7,659,465 15,591,813 14,447,958
Maintenance 9,410,480 6,819,415 18,138,348 14,554,106
Promotion and sales 8,296,433 7,256,755 15,422,893 13,556,277
General and administrative 1,758,020 1,871,991 3,036,579 3,250,757
Depreciation and amortization 377,525 371,531 715,974 721,119
--------------- -------------- --------------- --------------
Total operating expenses 47,075,097 39,866,234 89,537,961 76,661,396
--------------- -------------- --------------- --------------
Operating income (loss) 9,777,816 (2,253,112) 10,202,505 (4,491,604)
--------------- -------------- --------------- --------------
Nonoperating income (expense):
Interest income 344,403 219,525 619,972 380,331
Interest expense (217,842) (5,679) (458,081) (10,216)
Other, net (34,819) (8,993) (61,129) (13,427)
--------------- -------------- --------------- --------------
Total nonoperating income, net 91,742 204,853 100,762 356,688
--------------- -------------- --------------- --------------
Net income (loss) $ 9,869,558 $ (2,048,259) $ 10,303,267 $ (4,134,916)
=============== ============== =============== ==============
Earnings (loss) per share:
Basic $ 0.71 $ (0.23) $ 0.78 $ (0.46)
=============== ============== =============== ==============
Diluted $ 0.64 $ (0.23) $ 0.71 $ (0.46)
=============== ============== =============== ==============
Weighted average shares of
common stock outstanding 13,955,031 9,071,866 13,238,367 8,958,742
=============== ============== =============== ==============
Weighted average shares of common stock and
common stock equivalents outstanding 15,354,381 9,071,866 14,483,683 8,958,742
=============== ============== =============== ==============
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Condensed Statements of Cash Flows
For the Six Months Ended September 30, 1998 and 1997
(Unaudited)
1998 1997
--------------- --------------
Cash flows from operating activities:
Net income (loss) $ 10,303,267 $ (4,134,916)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Employee stock option plan compensation expense 322,875 -
Depreciation and amortization 1,438,249 862,334
Loss on sale of equipment 6,793 -
Changes in operating assets and liabilities:
Restricted investments (819,354) (266)
Trade receivables 2,075,169 (8,126,346)
Security, maintenance and other deposits (4,228,192) (3,061,901)
Prepaid expenses and other assets (1,639,725) (4,205,127)
Inventories 78,010 (2,120)
Note receivable - 11,740
Accounts payable (2,895,972) (265,918)
Air traffic liability (608,327) 17,982,369
Other accrued expenses 704,576 4,280,185
Accrued maintenance expense 3,495,732 4,487,544
--------------- --------------
Net cash provided by operating activities 8,233,101 7,827,578
--------------- --------------
Cash flows used by investing activities:
Aircraft lease deposits (284,000) (117,500)
Increase in restricted investments - (750,000)
Capital expenditures (1,259,468) (1,077,977)
--------------- --------------
Net cash used by investing activities (1,543,468) (1,945,477)
--------------- --------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 13,395,477 396,106
Proceeds from short-term borrowings 179,664 170,318
Principal payments on short-term borrowings (58,778) (65,526)
Principal payments on obligations under capital leases (23,793) (17,342)
--------------- --------------
Net cash provided by financing activities 13,492,570 483,556
--------------- --------------
Net increase in cash and cash equivalents 20,182,203 6,365,657
Cash and cash equivalents, beginning of period 3,641,395 10,286,453
--------------- --------------
Cash and cash equivalents, end of period $ 23,823,598 $ 16,652,110
=============== ==============
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Notes to Condensed Financial Statements
September 30, 1998
(1) Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the 1998 Annual
Report on Form 10-K. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for
a fair presentation have been included. The results of operations for the
three and six months ended September 30, 1998 and 1997 are not necessarily
indicative of the results that will be realized for the full year.
(2) Senior Secured Notes Payable
In December 1997, the Company sold $5,000,000 of 10% senior secured notes
to Wexford Management LLC ("Wexford"). The notes are due and payable in
full on December 15, 2001 with interest payable quarterly in arrears. The
notes are secured by substantially all of the assets of the Company. The
Wexford agreement contains restrictions primarily related to liens on
assets and requires prior written consent for expenditures outside the
ordinary course of business. In connection with this transaction, the
Company issued Wexford warrants to purchase 1,750,000 shares of Common
Stock at $3.00 per share. The Company determined the value of the warrants
to be $1,645,434 and recorded the value as equity in additional paid-in
capital. The balance of the notes will be accreted to its face value over
the term of the notes and included as interest expense. The effective
interest rate on the notes is approximately 18.2% including the value of
the warrants.
During the six months ended September 30, 1998, Wexford exercised 459,000
warrants with proceeds to the Company totaling $1,377,000. Under the terms
of the agreement, Wexford elected to tender debt for the warrant exercise
price first by application of accrued unpaid interest and the remainder by
reducing the principal balance of the notes. As a result, $1,298,634 of the
principal balance of the notes was tendered during the six months ended
September 30, 1998.
(3) Common Stock
In April 1998, the Company sold 4,363,001 shares of its common stock, no
par value, through a private placement to an institutional investor. Gross
proceeds to the Company from the transaction were $14,179,753, of which the
Company received net proceeds of $13,654,694. The Company issued a warrant
to this investor to purchase 716,929 shares of common stock of the Company
at a purchase price of $3.75 per share, which warrant expires in April
2002.
(4) Income Tax Expense
The Company's income tax expense was zero for the three and six months
ended September 30, 1998. The current income tax expense for these periods
was offset by a reduction in the Company's valuation allowance for deferred
tax assets, a result of the Company's ability to utilize previously
reserved for net operating loss carryforwards.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 that describe the business and
prospects of Frontier Airlines, Inc. (the "Company") and the expectations of the
Company and management. When used in this document, the words "estimate,"
"anticipate," "intend," "project," "management believes" and similar words and
phrases are intended to identify forward-looking statements. These statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those set forth. These risks and uncertainties
include, but are not limited to: the timing of, and expense associated with,
expansion and modification of the Company's operations in accordance with its
business strategy or in response to competitive pressures or other factors such
as the Company's commencement of passenger service and ground handling
operations at several airports and assumption of maintenance and ground handling
operations at DIA with its own employees; general economic factors and behavior
of the fare-paying public and the federal government, such as the crash in May
1996 of another low-fare carrier's aircraft that resulted in a federal
investigation of the carrier, suspension of the carrier's operations and
increased federal scrutiny of low-fare carriers generally that may increase the
Company's operating costs or otherwise adversely affect the Company; actions of
competing airlines, such as increasing capacity and pricing actions of United
Airlines and other competitors; the availability of Boeing 737 aircraft, which
may inhibit the Company's ability to achieve operating economies and implement
its business strategy; recent changes to the former air transportation excise
tax of 10% to a combination of a percentage tax and flight segment fee; and
uncertainties regarding aviation fuel prices. Because the Company's business,
like that of the airline industry generally, is characterized by high fixed
costs relative to revenues, small fluctuations in the Company's yield per RPM or
expense per ASM can significantly affect operating results.
General
The Company is a low-fare, full-service commercial airline based in
Denver, Colorado. The Company currently operates routes linking its Denver hub
to 15 cities in 12 states spanning the nation from coast to coast. The Company's
current route system extends from Denver to Los Angeles, San Francisco and San
Diego, California; Chicago and Bloomington/Normal, Illinois; Boston,
Massachusetts; Baltimore, Maryland; Seattle/Tacoma, Washington; Phoenix,
Arizona; Minneapolis/St. Paul, Minnesota; Salt Lake City, Utah; Omaha, Nebraska;
Albuquerque, New Mexico, New York (LaGuardia), New York; and El Paso, Texas. At
present, the Company utilizes approximately five gates at Denver International
Airport ("DIA") for approximately 66 daily flight departures and arrivals.
Organized in February 1994, the Company commenced flight operations in
July 1994 with two leased Boeing 737-200 jet aircraft. It has since expanded its
fleet to 15 leased jets as of October 1998, including eight Boeing 737-200s and
seven larger Boeing 737-300s. The Company has executed letters of intent for two
new Boeing 737-300s with scheduled deliveries in November and December 1998. The
Company plans to add service to Atlanta, Georgia, Dallas/Fort Worth, Texas and
Las Vegas, Nevada in mid-December 1998 with the addition of these two aircraft.
The Company's senior management team includes executives with substantial
experience in the airline industry, including persons who occupied similar
positions at a former airline called Frontier Airlines that served regional
routes to and from Denver from 1950 to 1986. From time to time, the former
Frontier Airlines served most of the Company's current and intended markets with
jet equipment from its Denver hub.
Terminated Merger with Western Pacific Airlines
On June 30, 1997, the Company signed an Agreement and Plan of Merger
("the Merger Agreement") providing for the merger (the "Merger") of the Company
with Western Pacific Airlines ("Western Pacific"), a low-fare airline that had
previously used Colorado Springs, Colorado as its base of flight operations. The
Merger Agreement was signed following Western Pacific's shift of a portion of
its flight operations to DIA, and its announced intent to further expand its
operations at DIA. Pursuant to the Merger Agreement, a "code share" marketing
alliance between the Company and Western Pacific went into effect on August 1,
1997, in effect integrating the route networks of the two airlines.
On September 29, 1997, both companies mutually agreed to terminate the
Merger Agreement and the code-share arrangement. The separation of the two
carriers required the Company to implement a costly restructuring of its flight
schedule and route system to support a stand-alone operation competing against
both Western Pacific and United Airlines, the dominant air carrier at DIA. On
October 5, 1997, Western Pacific filed for protection under Chapter 11 of the
U.S. Bankruptcy Code. Western Pacific ceased operations on February 4, 1998 and
is in the process of liquidating its business.
Results of Operations
The Company had net income of $10,303,000 or $0.71 per diluted share for
the six months ended September 30, 1998 as compared to a net loss of $4,135,000
or $0.46 per share for the six months ended September 30, 1997. The Company had
net income of $9,869,000 or $0.64 per diluted share for the three months ended
September 30, 1998 as compared to a net loss of $2,048,000 or $0.23 per share
for the three months ended September 30, 1997. During the three and six months
ended September 30, 1998 as compared to the prior comparable period, the Company
experienced higher fares as a result of increases in business travelers,
decreased competition as a result of the demise of Western Pacific, and an
increase in the average length of haul and stage length. During the three months
ended September 30, 1998 the Company also experienced higher average fares in
certain of its markets as a result of accommodating Northwest Airlines
passengers while that carrier experienced a pilot strike during a portion of
August and September 1998. The Company's cost per ASM declined to 7.76(cents)
during the six months ended September 30, 1998 from 8.55(cents) for the prior
comparable period, principally as a result of a reduction in fuel prices and
improved operating efficiencies and economies of scale as the Company's fixed
costs were spread across a larger base of operations.
Small fluctuations in the Company's yield per RPM or expense per ASM can
significantly affect operating results because the Company, like other airlines,
has high fixed costs and low operating margins in relation to revenues. Airline
operations are highly sensitive to various factors, including the actions of
competing airlines and general economic factors, which can adversely affect the
Company's liquidity, cash flows and results of operations.
An airline's break-even load factor is the passenger load factor that
will result in operating revenues being equal to operating expenses, assuming
constant revenue per passenger mile and expenses. For the six months ended
September 30, 1998, the Company's break-even load factor was 56.2% compared to
the passenger load factor achieved of 62.9%. For the six months ended September
30, 1997, the Company's break-even load factor was 62.8% compared to the
achieved passenger load factor of 59.3%. The Company's break-even load factor
decreased from the prior comparable period largely as a result of an increase in
its average fare to $117 during the six months ended September 30, 1998 from $96
during the six months ended September 30, 1997 and a decrease in its expense per
ASM to 7.76(cents) for the six months ended September 30, 1998 from 8.55(cents)
for the six months ended September 30, 1997.
The following table sets forth certain quarterly financial and operating
data regarding the Company for the fifteen months of operations ended September
30, 1998.
Selected Financial and Operating Data
Quarter Ended
----------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30,
1997 1997 1998 1998 1998
Passenger revenue $36,021,000 $31,922,000 $40,454,000 $41,561,000 $55,502,000
Revenue passengers carried 347,000 301,000 370,000 368,000 420,000
Revenue passenger
miles (RPMs)(1) 282,190,000 259,443,000 328,309,000 337,555,000 387,810,000
Available seat miles
(ASMs)(2) 490,810,000 524,686,000 575,294,000 544,557,000 609,111,000
Passenger load factor(3) 57.5% 49.4% 57.1% 62.0% 63.7%
Break-even load factor(4) 60.8% 67.3% 60.0% 61.3% 52.3%
Block hours(5) 10,507 11,059 12,114 11,255 12,543
Average daily block hour
utilization(6) 9.89 10.52 10.30 10.27 10.27
Yield per RPM (cents)(7) 12.76 12.30 12.32 12.31 14.31
Total yield per RPM
(cents)(8) 13.33 12.75 12.76 12.71 14.66
Total yield per ASM
(cents)(9) 7.66 6.31 7.28 7.88 9.33
Expense per ASM (cents) 8.12 8.52 7.70 7.80 7.73
Passenger revenue per
block hour $3,428.29 $2,886.52 $3,339.44 $3,692.67 $4,424.94
Average fare(10) $99 $101 $105 $108 $125
Average aircraft in fleet 11.8 13.0 13.6 14.0 14.0
Operating income (loss) ($2,253,000) ($11,626,000) ($2,437,000) $425,000 $9,778,000
Net income (loss) ($2,048,000) ($11,519,000) ($2,092,000) $434,000 $9,869,000
(1) "Revenue passenger miles," or RPMs, are determined by multiplying the
number of fare-paying passengers carried by the distance flown.
(2) "Available seat miles," or ASMs, are determined by multiplying the number
of seats available for passengers by the number of miles flown.
(3) "Passenger load factor" is determined by dividing revenue passenger miles
by available seat miles.
(4) "Break-even load factor" is the passenger load factor that will result in
operating revenues being equal to operating expenses, assuming constant
revenue per passenger mile and expenses.
(5) "Block hours" represent the time between aircraft gate departure and
aircraft gate arrival.
(6) "Average daily block hour utilization" represents the total block hours
divided by the weighted average number of aircraft days in service.
(7) "Yield per RPM" is determined by dividing passenger revenues by revenue
passenger miles.
(8) "Total yield per RPM" is determined by dividing total revenues by revenue
passenger miles.
(9) "Total yield per ASM" is determined by dividing total revenues by available
seat miles.
(10) "Average fare" excludes revenue included in passenger revenue for non-
revenue passengers, administrative fees, and revenue recognized for unused
tickets that are greater than one year from issuance date.
The following table provides operating revenues and expenses for the Company
expressed as cents per total available seat miles ("ASM") and as a percentage of
total operating revenues, as rounded, for the three and six months ended
September 30, 1998 and 1997.
Three Months Ended September 30, Six Months Ended September 30,
------------------------------------------ -----------------------------------------
1998 1997 1998 1997
-------------------- -------------------- -------------------- -------------------
Per % Per % Per % Per %
total of total of total of total of
ASM Revenue ASM Revenue ASM Revenue ASM Revenue
Revenues:
Passenger 9.11 97.6% 7.34 95.8% 8.41 97.3% 7.77 96.5%
Cargo 0.16 1.7% 0.16 2.1% 0.17 2.0% 0.16 2.0%
Other 0.06 0.7% 0.16 2.1% 0.06 0.7% 0.12 1.5%
--------- --------- ---------- --------- ---------- --------- --------- --------
Total revenues 9.33 100.0% 7.66 100.0% 8.64 100.0% 8.05 100.0%
Operating expenses:
Flight operations 3.08 33.0% 3.24 42.2% 3.18 36.7% 3.36 41.7%
Aircraft and traffic
servicing 1.39 14.9% 1.56 20.4% 1.35 15.6% 1.61 20.0%
Maintenance 1.55 16.5% 1.39 18.1% 1.57 18.2% 1.63 20.2%
Promotion and sales 1.36 14.6% 1.48 19.3% 1.34 15.5% 1.51 18.8%
General and
administrative 0.29 3.1% 0.38 5.0% 0.26 3.0% 0.36 4.5%
Depreciation and
amortization 0.06 0.7% 0.07 1.0% 0.06 0.7% 0.08 1.0%
========= ========= ========== ========= ========== ========= ========= ========
Total operating expenses 7.73 82.8% 8.12 106.0% 7.76 89.7% 8.55 106.2%
========= ========= ========== ========= ========== ========= ========= ========
Total ASMs (000s) 609,111 490,810 1,153,668 896,205
Revenues
The Company's revenues are highly sensitive to changes in fare levels.
Fare pricing policies have a significant impact on the Company's revenues.
Because of the elasticity of passenger demand, the Company believes that
increases in fares will result in a decrease in passenger demand in many
markets. The Company cannot predict future fare levels, which depend to a
substantial degree on actions of competitors. When sale prices or other price
changes are initiated by competitors in the Company's markets, the Company
believes that it must, in most cases, match those competitive fares in order to
maintain its market share. Passenger revenues are seasonal in leisure travel
markets depending on the markets' locations and when they are most frequently
patronized.
The Company's average fare for the six months ended September 30, 1998
and 1997 was $117 and $96, respectively. Management believes that the increase
in the average fare during the six months ended September 30, 1998 over the
prior comparable period was largely a result of the Company's focus on
increasing the number of business travelers, decreased competition as a result
of the demise of Western Pacific, and an increase in the average length of haul
and stage length. The average length of haul increased from 775 miles for the
six months ended September 30, 1997 to 920 miles for the six months ended
September 30, 1998. The Company also experienced higher average fares in certain
of its markets as a result of accommodating Northwest Airlines passengers during
that carrier's pilot strike during a portion of August and September 1998.
Effective October 1, 1997, the U.S. Congress reduced the 10% excise tax to 9%,
but added a per-flight-segment fee of $1 on domestic flights. The tax decreased
to 8% October 1, 1998 and decreases to 7.5% on October 1, 1999. The
per-flight-segment fee increased to $2 effective October 1, 1998, increases to
$2.25 effective October 1, 1999 and thereafter increases in annual amounts of 25
cents until it reaches $3 effective October 1, 2002.
Passenger Revenues. Passenger revenues totaled $97,063,000 for the six
months ended September 30, 1998 compared to $69,643,000 for the six months ended
September 30, 1997, or an increase of 39.4%. The number of revenue passengers
carried was 788,000 for the six months ended September 30, 1998 compared to
686,000 for the six months ended September 30, 1997 or an increase of 14.9%. The
Company had an average of 14 aircraft in its fleet during the six months ended
June 30, 1998 compared to an average of 11.4 aircraft during the six months
ended September 30, 1997, an increase of 22.8%, and an increase in ASMs of
257,463,000 or 28.7%.
Cargo revenues, consisting of revenues from freight and mail service,
totaled $1,972,000 and $1,411,000 for the six months ended September 30, 1998
and 1997, respectively, representing 2% of total operating revenues and an
increase of 39.8%. 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, comprised principally of interline handling fees, liquor
sales and excess baggage fees, totaled $706,000 and $1,116,000 or .7% and 1.5%
of total operating revenues for each of the six months ended September 30, 1998
and 1997, respectively. Other revenues were higher during the six months ended
September 30, 1997 as a result of ticket handling fees associated with the code
share agreement with Western Pacific. Ticket handling fees are earned by the
ticketing airline to offset ticketing costs incurred on segments ticketed on the
flight operated by the Company's code share partner. The Company recognized
approximately $539,000 in ticket handling fees associated with its code share
agreement with Western Pacific during the months of August and September 1997.
The costs which offset this revenue are included in sales and promotion
expenses.
Operating Expenses
Operating expenses include those related to flight operations, aircraft
and traffic servicing, maintenance, promotion and sales, general and
administrative and depreciation and amortization. Total operating expenses were
$89,538,000 and $76,661,000 for the six months ended September 30, 1998 and 1997
and represented 89.7% of and 106.2% of revenue, respectively. Operating expenses
decreased as a percentage of revenue during the six months ended September 30,
1998 as the Company experienced a significant reduction in fuel prices and
improved operating efficiencies and economies of scale as the Company's fixed
costs were spread across a larger base of operations.
Flight Operations. Flight operations expenses of $36,632,000 and
$30,131,000 were 36.7% and 41.7% of total revenue for the six months ended
September 30, 1998 and 1997, respectively. Flight operations expenses include
all expenses related directly to the operation of the aircraft including fuel,
lease and insurance expenses, pilot and flight attendant compensation, in flight
catering, crew overnight expenses, flight dispatch and flight operations
administrative expenses.
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 $10,807,000 for 18,621,000 gallons used and $11,425,000 for 15,486,000
gallons used resulted in an average fuel cost of 58(cents) and 74(cents) per
gallon and represented 29.5% and 37.9% of total flight operations expenses for
the six months ended September 30, 1998 and 1997, respectively. The average fuel
cost per gallon decreased for the six months ended September 30, 1998 from the
comparable prior period due to an overall decrease in the cost of fuel. Fuel
prices are subject to change weekly as the Company does not purchase supplies in
advance for inventory. Fuel consumption for the six months ended September 30,
1998 and 1997 averaged 782 and 790 gallons per block hour, respectively. Fuel
consumption per block hour decreased as a result of more fuel efficient aircraft
and an increase in the average stage length.
Aircraft lease expenses totaled $15,181,000 (15.2% of total revenue) and
$10,329,000 (14.3% of total revenue) for the six months ended September 30, 1998
and 1997, respectively, or an increase of 47%. The increase is largely due to
higher lease expenses for larger and newer Boeing 737-300 aircraft added to the
fleet and partially attributable to the increase in the average number of
aircraft to 14 from 11.4, or 22.8%, for the six months ended September 30, 1998
and 1997, respectively.
Aircraft insurance expenses totaled $1,235,000 (1.2% of total revenue) for the
six months ended September 30, 1998 offset by a profit commission of $153,000
for the policy period ended June 6, 1998. The profit commission was earned
because the Company had no aircraft hull insurance claims during the 1997-1998
policy year. Aircraft insurance expenses for the six months ended September 30,
1997 were $1,300,000 (1.8% of total revenue). Aircraft insurance expenses
decreased as a percentage of revenue as a result of competitive pricing in the
aircraft insurance industry, the Company's favorable experience rating since it
began flight operations in July 1994 and economies of scale due to the increase
in fleet size. For the policy period June 7, 1998 to June 6, 1999, the Company
has reduced its aircraft insurance rates by approximately 44.8% or an estimated
annual savings of $1,787,000 at its present fleet levels.
Pilot and flight attendant salaries before payroll taxes and benefits
totaled $4,787,000 and $4,132,000 or 4.9% and 5.9% of passenger revenue for each
of the six months ended September 30, 1998 and 1997, or an increase of 13.7%.
Pilot and flight attendant compensation increased principally as a result of a
22.8% increase in the average number of aircraft in service and an increase of
21.5% in block hours. Pilot and flight attendant salaries decreased as a
percentage of passenger revenue because the Company did not add additional
aircraft during the six months ended September 30, 1998. The Company pays pilot
and flight attendant salaries for training consisting of approximately six and
three weeks, respectively, prior to scheduled increases in service which can
cause the compensation expense during that period to appear high in relationship
to the average number of aircraft in service. When the Company is not in the
process of adding aircraft to its system, pilot and flight attendant expense per
aircraft normalizes. With a scheduled passenger operation, and with salaried
rather than hourly crew compensation, the Company's expenses for flight
operations are largely fixed, with flight catering and fuel expenses the
principal exception.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses
were $15,292,000 and $14,448,000 (an increase of 5.8%) for the six months ended
September 30, 1998 and 1997, respectively, and represented 15.6% and 20.0% of
total revenue. These include all expenses incurred at airports served by the
Company, as well as station operations administration and flight operations
ground equipment maintenance. Station expenses include landing fees, facilities
rental, station labor and ground handling expenses. Station expenses as a
percentage of revenue decreased during the six months ended September 30, 1998
over the six months ended September 30, 1997 as a result of the Company's rental
costs (in particular, the gate rentals at DIA and other cities where the Company
added additional frequencies), which are largely fixed costs, remaining
relatively constant as compared to the increase in revenue. Aircraft and traffic
servicing expenses will increase with the addition of new cities to the
Company's route system; however, the increased existing gate utilization at DIA
is expected to reduce per unit expenses.
Maintenance. Maintenance expenses of $18,138,000 and $14,554,000 were
18.2% and 20.2% of total revenue for the six months ended September 30, 1998 and
1997, respectively. These include all labor, parts and supplies expenses related
to the maintenance of the aircraft. Routine maintenance is charged to
maintenance expense as incurred while major engine overhauls and heavy
maintenance check expense is accrued monthly. Maintenance cost per block hour
was $762 and $743 per block hour for the six months ended September 30, 1998 and
1997, respectively. Maintenance costs per block hour increased as a result of
corrosion inspections on the Company's Boeing 737-200s and revisions in airframe
and engine overhaul estimates offset by lower maintenance costs on the four new
aircraft added to the Company's fleet during the past year and the fixed rental
cost of the hangar facility being spread over a larger aircraft fleet. The newer
aircraft require fewer routine repairs and are generally covered by a warranty
period of approximately up to three years on standard Boeing components.
Management believes that these costs will continue to normalize as additional
aircraft are added to the fleet.
Promotion and Sales. Promotion and sales expenses totaled $15,423,000 and
$13,556,000 and were 15.5% and 18.8% of total revenue for the six months ended
September 30, 1998 and 1997, respectively. These include advertising expenses,
telecommunications expenses, wages and benefits for reservationists and
reservations supervision as well as marketing management and sales personnel,
credit card fees, travel agency commissions and computer reservations costs. The
Company's promotion and sales expenses for the six months ended September 30,
1997 included expenses as a result of the code share agreement with Western
Pacific, under which the Company incurred additional communications, computer
reservation, and interline service charges and handling fees for the code share
agreement. These expenses were offset, in part, by interline handling fees
earned which are included in other revenues. The Company did not have any code
share agreements during the six months ended September 30, 1998 that had as
large of an impact on its expenses as the code share agreement with Western
Pacific. Promotion and sales expenses decreased as a percentage of revenue for
the six months ended September 30, 1998 over the prior comparable period largely
as a result of the increase in revenue.
Promotion and sales expenses per passenger decreased to $19.56 from
$19.76 for the six months ended September 30, 1997, as a result of the
elimination of expenses related to the code share agreement with Western Pacific
offset by increased reservation costs and an increase in credit card fees. The
costs of reservation expenses increased as a result of outsourcing part of the
Company's reservations requirements. These increased costs were offset by a
decrease in travel agency commissions. During the month of April 1998, the
Company reduced travel agency commissions to 8% from 10% matching an 8%
commission instituted by the Company's competitors in the fall of 1997.
Additionally, the Company's direct sales, which are not subject to commissions,
increased as a percentage of passenger revenue. Travel agency commissions and
interline service charges and handling fees, as a percentage of passenger
revenue, before non-revenue passengers, administrative fees and breakage
(revenue from expired tickets), decreased to 5.5% for the six months ended
September 30, 1998 from 7.4% for the six months ended September 30, 1997.
Advertising expenses of $1,836,000 were 1.9% of passenger revenue for the
six months ended September 30, 1998, compared to $1,237,000 or 1.8% of passenger
revenue for the six months ended September 30, 1997. During the six months ended
September 30, 1997, the Company's advertising expenses were less than the six
months ended September 30, 1998 because of the code share agreement with Western
Pacific that was in effect during the six months ended September 30, 1997. The
Company received benefits from the advertising that Western Pacific did, that it
was able to reduce its level of advertising and related expenses.
General and Administrative. General and administrative expenses for the
six months ended September 30, 1998 and 1997 totaling $3,037,000 and $3,251,000
were 3.0% and 4.5% of total revenue, respectively. These expenses include the
wages and benefits for the Company's executive officers and various other
administrative personnel. Legal and accounting expenses, supplies and other
miscellaneous expenses are also included in this category. During the six months
ended September 30, 1998, the Company relieved approximately $240,000 of its
employee health insurance liability which was determined to be overfunded with a
corresponding credit to general and administrative expenses. Without this
adjustment, general and administrative expenses would have been approximately
$3,277,000 or 3.3% of revenue. Included in general and administrative expenses
during the six months ended September 30, 1997 were unusual expenses of
approximately $500,000 associated with the terminated Merger Agreement with
Western Pacific.
Depreciation and Amortization. Depreciation and amortization expenses of
$716,000 and $721,000 were approximately .7% and 1% of total revenue for the six
months ended September 30, 1998 and 1997, respectively. These expenses include
depreciation of office equipment, ground station equipment, and other fixed
assets of the Company. Amortization of start-up and route development costs are
not included as these expenses have been expensed as incurred.
Nonoperating Income (Expense). Net nonoperating income totaled $101,000
for the six months ended September 30, 1998 compared to $357,000 for the six
months ended September 30, 1997. Interest income increased from $380,000 to
$620,000 during the six months ended September 30, 1998 from the prior
comparable period due to an increase in cash balances as a result of the sale of
common stock in April 1998 and an increase in cash from operating activities.
Interest income was offset by interest expense of $458,000 during the six months
ended September 30, 1998. In December 1997, the Company sold $5,000,000 of 10%
senior notes. In connection with this transaction, the Company issued the lender
warrants to purchase 1,750,000 shares of common stock. Interest expense paid in
cash and the accretion of the warrants and deferred loan expenses totaled
$380,000 during the six months ended September 30, 1998.
Income Tax Expense: The Company has substantial net operating loss
carryforwards (NOL's) available to offset future taxable income, however a
portion of these NOL's could be subject to Internal Revenue Code Section 382
annual limitations. Additionally, alternative minimum tax rules could limit the
Company's ability to utilize a portion of the NOL's each year and could result
in alternative minimum tax expense.
Expenses per ASM. The Company's expenses per ASM for the six months ended
September 30, 1998 and 1997 were 7.76(cents) and 8.55(cents), respectively, or a
decrease of 9.2%. Expenses per ASM decreased from the prior comparable period as
a result of economies of scale as fixed costs were spread across a larger base
of operations, a decrease in fuel prices, and the average ASMs per aircraft
having increased as the Company added aircraft with greater seating capacity as
compared to earlier fleet additions. Expenses per ASM are influenced to a degree
by the amount of aircraft utilization and by the seating configuration. For
example, with the 108 seat all coach seating configuration selected by the
Company on five of its Boeing 737-200 aircraft, the expenses per ASM of the
Company are higher by 11% when compared with the 120 seat alternative used by
many carriers. The Company's average seats per aircraft for the six months ended
September 30, 1998 were 124 as compared to 121 seats per aircraft for the six
months ended September 30, 1997.
Liquidity and Capital Resources
The Company's balance sheet reflected cash and cash equivalents of
$23,824,000 at September 30, 1998 and $3,641,000 at March 31, 1998. At September
30, 1998, total current assets were $56,493,000 as compared to $49,690,000 of
total current liabilities, resulting in working capital of $6,803,000. At March
31, 1998, total current assets were $33,999,000 as compared to $50,324,000 of
total current liabilities, resulting in a working capital deficit of
$16,325,000. The Company had a working capital deficit of $6,063,000 at
September 30, 1997. The Company's present working capital is largely a result of
the sale in April 1998 of 4,363,001 shares of the Company's common stock with
net proceeds to the Company totaling approximately $13,677,000 combined with
cash flows from operating activities during the six months ended September 30,
1998.
Cash provided by operating activities for the six months ended September
30, 1998 was $8,233,000. This is attributable to the Company's net income for
the period, a decrease in receivables and increases in other accrued expenses
and accrued maintenance expenses, offset by increases in security, maintenance
and other deposits and prepaid expenses and other assets, and decreases in
accounts payable and air traffic liability. Cash provided by operating
activities for the six months ended September 30, 1997 was $7,828,000. This was
largely attributable to an increase in air traffic liability, accrued expenses
and accrued maintenance expenses, offset by increases in trade receivables,
security, maintenance and other deposits, prepaid expenses, and the Company's
net loss for the period.
The large increase in cash and cash equivalents and corresponding large
increase in air traffic liability during the six months ended September 30, 1997
was a result of the code share agreement with Western Pacific. If a ticket for
travel on another airline is ticketed on the Company's ticket stock designated
by the other airline's code, the Company receives the cash for the sale and
records a corresponding liability until the passenger has traveled. Upon
providing the service, the airline that carries the passenger can invoice the
ticketing carrier. The payment on the invoice is made the following month.
During the month of October 1997, Western Pacific and the Company invoiced and
paid one another for travel services provided during the month of September 1997
totaling $6,949,000 and $1,970,000, respectively, or a net amount of $4,979,000.
The air traffic liability was decreased by the corresponding amount paid to
Western Pacific.
Cash used in investing activities for the six months ended September 30,
1998 was $1,543,000. The Company used $1,259,000 for capital expenditures for
ground handling equipment, rotable aircraft components and aircraft leasehold
costs and improvements. The Company used cash of $284,000 for initial lease
acquisition security deposits for the Boeing 737-200 aircraft to be delivered in
October 1998. Cash used in investing activities for the six months ended
September 30, 1997 was $1,945,000, largely a result of capital expenditures for
rotable aircraft components and aircraft leasehold costs and improvements for
aircraft delivered in May 1997, August and September 1997. Additionally, the
Company secured the aircraft delivered in August 1997 with a letter of credit
totaling $750,000. In turn the Company received $325,000 from the aircraft
lessor that was previously on deposit to secure this aircraft. The Company's
restricted investments increased $750,000 to collateralize the letter of credit.
Cash provided by financing activities for the six months ended September
30, 1998 and 1997 was $13,493,000 and $484,000, respectively. During the six
months ended September 30, 1998, the Company sold 4,363,001 shares of its common
stock through a private placement to an institutional investor. Gross proceeds
to the Company from the transaction were approximately $14,180,000, of which the
Company received net proceeds of approximately $13,677,000. The Company issued a
warrant to this investor to purchase 716,929 shares of common stock of the
Company at a purchase price of $3.75 per share. This warrant expires in April
2002. During the six months ended September 30, 1997, the Company received
$396,000 from the exercise of common stock options.
Five of the Company's Boeing 737-200 aircraft are leased under operating
leases that originally expired in 1997. The leases provide for up to two renewal
terms of two years each with no increase in basic rent. The Company renewed the
leases for the first two-year renewal period and these leases now expire in
1999. Under these leases, the Company was required to make security deposits and
makes deposits for maintenance of these leased aircraft. These deposits totaled
$625,000 and $3,521,000, respectively, at September 30, 1998. These aircraft are
not compliant with FAA Stage 3 noise regulations. As their leases expire in 1999
the Company plans to replace these aircraft with Stage 3 compliant aircraft.
There can be no assurances that the Company will be successful in replacing any
or all of these aircraft. Management believes that the replacement aircraft, if
any, will be newer, larger aircraft with higher monthly rental costs.
The Company in November 1995 leased two Boeing 737-300 aircraft under
operating leases that expire in the year 2000. The Company was required to make
security deposits and makes deposits for maintenance of these leased aircraft.
Security and maintenance deposits for these aircraft totaled $1,505,000 and
$3,235,000, respectively, at September 30, 1998. The Company has issued to each
of the two Boeing 737-300 aircraft lessors a warrant to purchase 100,000 shares
of the Company's common stock at an aggregate purchase price of $500,000. These
warrants, to the extent not earlier exercised, expire upon the expiration dates
of the aircraft leases.
In June 1996, the Company leased two additional Boeing 737-200 aircraft
under operating leases that expire in the year 2001. In November 1997, the
Company renegotiated one of these leases extending the lease term by one year to
2002 in return for a slight reduction in the monthly rental payment. The Company
was required to make security deposits for these aircraft totaling $858,000.
Commencing July 1996, the Company was required to make monthly deposits for
maintenance of these leased aircraft. At September 30, 1998, these deposits
totaled $2,156,000. These aircraft were "hush-kitted" by the lessor at its
expense during 1996 making them compliant with FAA Stage 3 noise regulations.
The Company has issued to the aircraft lessor two warrants, each of which
entitles the lessor to purchase 70,000 shares of the Company's common stock at
an aggregate purchase price of $503,300 per warrant.
In November 1996, the Company took delivery of a leased Boeing 737-300
aircraft which it placed in scheduled service in December 1996. The lease term
for this aircraft is eight years from date of delivery. The Company was required
to secure the aircraft lease with a letter of credit totaling $600,000. The
Company is also required to make monthly cash deposits for maintenance of this
aircraft. As of September 30, 1998, the Company had made maintenance deposits
associated with this leased aircraft totaling $1,878,000.
During the year ended March 31, 1997, the Company entered into four
operating lease agreements for four additional new Boeing 737-300 aircraft. The
Company took delivery of these aircraft in May, August and September 1997 and in
February 1998. In connection with the Boeing 737-300 aircraft delivered in
September 1997, the Company has issued to the lessor a warrant to purchase
55,000 shares of common stock at an aggregate purchase price of $385,000. As of
September 30, 1998, the Company had made cash security deposits totaling
$1,616,000 with respect to these aircraft. During the year ended March 31, 1998,
the Company secured lease obligations for two of these aircraft with letters of
credit totaling $1,500,000 and, in turn, $650,000 of cash security deposits was
returned to the Company. The Company's restricted cash increased by $1,500,000
to collateralize the letters of credit. Two of the four leases have seven year
terms, and two have eight year terms, in each case from date of delivery. Two of
the four leases have up to two one year renewal terms and a third may be renewed
for up to three one year terms. The Company is required to pay monthly cash
deposits to each aircraft lessor based on flight hours and cycles operated to
provide funding of future scheduled maintenance costs. As of September 30, 1998,
the Company had maintenance deposits associated with these aircraft totaling
$4,583,000.
In October 1998, the Company took delivery of a leased Boeing 737-200
advanced aircraft. The lease term for this aircraft is seven years from date of
delivery. The Company has made cash security deposits totaling $284,000 to
secure the aircraft lease. The Company is also required to make monthly cash
deposits for maintenance of this aircraft commencing in November 1998.
During October 1998, the Company executed two letters of intent with two
different lessors for two additional new Boeing 737-300 aircraft with scheduled
deliveries in November 1998 and December 1998. The first aircraft has a 40 month
lease term from date of delivery with an option to extend the lease term for an
additional 12 months. The second aircraft lease term expires on April 15, 2000,
and may be extended to October 31, 2000 at the lessor's option. The Company is
required to secure these aircraft with cash or letters of credit totaling
$1,120,000. The Company is also required to make monthly cash deposits for
maintenance of these aircraft commencing in January 1999. The addition of these
two aircraft in 1998 will permit the Company's then 17 aircraft fleet to be in
compliance with Stage 3 noise level requirements until January 1, 2000.
Management is continuing to take steps designed to improve the Company's
operating performance. Effective in January 1997, the Company introduced
electronic ticketing. Passengers who call the Company directly are provided the
option of receiving a paper ticket or a confirmation number in lieu of a paper
ticket. Electronic ticketing decreases certain costs including postage and
handling costs, ticket stock, and reduced revenue accounting fees. The Company
also has implemented and maintains a booking capability on its Internet site.
The Company is exploring various means to increase revenues and reduce
expenses. The Company has performed ad hoc charters and will consider them in
the future depending on the availability of its fleet. The Company is
considering revenue enhancement initiatives with new marketing alliances.
Expense reduction programs include the installation of an upgraded flight
operations, maintenance, and parts inventory management information system which
will be installed by the end of the fiscal year ending March 31, 1999. Other
potential cost savings programs include an in-house revenue accounting system
and conducting certain heavy maintenance checks in-house.
The Company began its own ground handling operations at DIA effective
September 1, 1998, a function which had been provided by an independent
contractor. Ground handling equipment required by the Company to perform these
operations internally necessitated capital expenditures of approximately
$850,000.
The Company's sublease with Continental Airlines for terminal gates and
other related space at DIA expires in March 2000. If DIA is unsuccessful in
reallocating the cost of the inoperative automated baggage system on Concourse
A, which is presently subsidized by Continental Airlines, the Company's
operating costs to cover the additional cost associated with this system would
increase materially. The Company's present fixed monthly rate under the terms of
the sublease with Continental would change to a per passenger fee.
The Company has a contract with a credit card processor that requires the
Company to provide a letter of credit to match the total amount of air traffic
liability associated with credit card customers if the Company does not meet
certain financial covenants and if the credit card processor requests that the
collateral be increased. As of September 30, 1998, the Company did not meet the
financial covenant requirements. In November 1997, the credit card processor
required an increase in the collateral amount from its present level of
$2,000,000 to $4,000,000, which increased the Company's current restricted
investment balance accordingly. As of November 9, 1998, the Company could be
required to increase the collateral amount to $6,183,000. Given the Company's
improved financial results, management is negotiating with the credit card
processor to reduce the collateral amount although there can be no assurance
that the Company will be able to reduce the collateral amount required.
The Company's goal is to continue to lease additional aircraft to serve
additional cities from Denver. The Company is adding routes to Atlanta, Georgia,
Dallas/Ft. Worth, Texas and Las Vegas, Nevada effective December 17, 1998. The
Company believes that expanding its route system would facilitate a greater
volume of connecting traffic as well as a stable base of local traffic and
offset the impact of higher DIA-related operating costs through more efficient
gate utilization. The expansion of the Company's operations will entail the
hiring of additional employees to staff flight and ground operations in new
markets, and significant initial costs such as deposits for airport and aircraft
leases. Because of the expansion of the Company's business, and competition
within the airline industry which often requires quick reaction by management to
changes in market conditions, the Company may require additional capital to
further expand its business.
In February 1997, United Airlines commenced service using its low fare
United "Shuttle" between Denver and Phoenix, Arizona, and in October 1997 such
service to Salt Lake City was added by United. These are both markets in which
the Company provides service, in addition to other markets where United Airlines
provides flights. The Company also plans to commence service between Denver and
Las Vegas in December 1998, another market in which United provides service with
United "Shuttle". This additional competition, as well as other competitive
activities by United and other carriers, have had and could continue to have a
material adverse effect on the Company's revenues and results of operations.
The Company has incurred substantial operating losses since its
inception. In addition, the Company has substantial contractual commitments for
leasing and maintaining aircraft. The Company believes that its existing cash
balances coupled with improved operating results will be adequate to fund the
Company's operations at least through March 31, 1999. There can be no assurances
however, that the Company will be successful in achieving profitable operating
results in fiscal 1999, and the Company could be required to obtain additional
capital or other financing to fund its operations.
Year 2000 Compliance
Background. Older computers were programmed to use a two-digit code for
the date entry rather than a four-digit code. For example, the date November 17,
1970 would be entered as "11/17/70" rather than "11/17/1970." The decision to
use two digits instead of four was based largely on cost-reduction
considerations and the belief that the code would no longer be used at the
millennium. Nevertheless, coding conventions have not changed, and on January 1,
2000, computers may read the digits "00" as denoting the year 1900 rather than
2000. At the least, this could result in massive quantities of incorrect data.
At worst, it could result in the total or partial failure of time sensitive
computer systems and software.
The Company's Year 2000 Issues. The Company began operations in July
1994, and its operations depend predominantly on third party computer systems.
Because of the Company's limited resources during its start-up, the most cost
effective way to establish its computer systems was to outsource or to use
manual systems. Internal systems developed and any software acquired are limited
and were designed or purchased with the Year 2000 taken into consideration.
The Company has designated an employee committee that is responsible for
(1) identifying and assessing Year 2000 issues, (2) modifying, upgrading or
replacing computer systems, (3) testing internal and third party systems and,
(4) developing contingency plans in the event that a system or systems fail.
This committee periodically reports to management regarding progress being made
in addressing the Year 2000 issue. Management, in turn, periodically reports to
the Board of Directors on the issue.
The Company relies on third parties which provide goods and services
which are imperative to the Company's operations including, but not limited to,
the U.S. Federal Aviation Administration, the U.S. Department of Transportation,
local airport authorities including DIA, utilities, communication providers, and
fuel suppliers. The Company is reviewing, and has initiated formal
communications with, these third party service providers to determine their Year
2000 readiness, the extent to which the Company is vulnerable to any failure by
such third parties to remediate their Year 2000 problems and to resolve such
issues to the extent practicable.
Although the Company is primarily in the identification and assessment
phase of its Year 2000 project, some systems are in the modification and testing
phases. These include the customer reservations and ticketing system and the
credit card processing system that is interfaced with the reservations and
ticketing system. These systems are outsourced and the costs of modifying and
testing these systems are being absorbed by the third party provider. The
Company's general accounting and payroll systems are being upgraded to new
versions that are Year 2000 compliant at an insignificant cost to the Company.
The Company's crew and dispatch training records, aircraft maintenance records
and inventory control are in the process of automating from manual systems to
computer systems that are Year 2000 compliant. The Boeing Company has verified
that the computer systems on the aircraft type operated by the Company are or
will be Year 2000 compliant before the year 2000. The Company plans to complete
its identification and assessment phase by December 31, 1998, its modification
and testing phases by June 30, 1999, and its contingency plans by October 31,
1999.
The Company has utilized existing resources and has not incurred any
significant costs to implement its Year 2000 project to date. The total
remaining cost of the Year 2000 project are expected to be immaterial and will
be funded through cash from operations. The costs and the dates on which the
Company anticipates it will complete the Year 2000 project are based on
management's best estimates. There can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Despite its efforts to address Year 2000 issues, the Company could
potentially experience disruptions to some of its operations, including those
resulting from non-compliant systems used by third party business and
governmental entities. The Company's business, financial condition or results of
operations could be materially adversely affected by the failure of its systems
or those operated by third parties upon which the Company's business relies.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II. OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds
Notes 2 and 3 to the Condensed Financial Statements are
incorporated by reference herein. The transactions referenced in
those notes were exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act") pursuant
to Section 4(2) thereof as sales to institutional investors not
involving a public offering. No underwriters were involved in such
offerings.
Item 4: Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on
September 10, 1998, at which a quorum for the transaction of
business was present. Three matters were voted upon, as described
below.
(a) Members of the Company's Board of Directors elected at the
meeting were Samuel D. Addoms, B LaRae Orullian, Paul S.
Dempsey, William B. McNamara, D. Dale Browning, Arthur H.
Amron and B. Ben Baldanza. The votes cast with respect to each
nominee were as follows:
12,679,084 "For" Mr. Addoms; 55,590 "Withheld"
12,668,683 "For" Ms. Orullian; 65,991 "Withheld"
12,680,006 "For" Mr. Dempsey; 54,668 "Withheld"
12,657,857 "For" Mr. McNamara; 76,817 "Withheld"
12,662,603 "For" Mr. Browning; 72,071 "Withheld"
12,665,986 "For" Mr. Amron 78,688 "Withheld"
12,635,442 "For" Mr. Baldanza 99,232 "Withheld"
(b) Shareholders voted to ratify an increase in the number of
shares available for grant under the Company's 1994 Stock
Option Plan from 2,250,000 to 4,250,000. There were 6,660,843
votes "for" this proposal, 564,073 "against", and 63,507
abstentions.
(c) Shareholders ratified the appointment of KPMG Peat Marwick LLP
as the Company's independent public accountants for the year
ending March 31, 1999. There were 12,631,988 votes "for" this
proposal, 35,717"against", and 66,969 abstentions.
Item 5: Other Information
On October 19, 1998, James B. Upchurch was appointed as a member
of the Company's board of directors.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
10.34 Aircraft Lease Agreement (MSN 21613) dated as of
August 10,1998 between the Company and Interlease
Aviation Investors, L.L.C.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the 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, INC.
Date: November 12, 1998 By: /s/ Samuel D. Addoms
---------------------------------------
Samuel D. Addoms, Principal Executive
Officer and Principal Financial Officer
Date: November 12, 1998 By: /s/ Elissa A. Potucek
---------------------------------------
Elissa A. Potucek, Vice President,
Controller, Treasurer and Principal
Accounting Officer