FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended March 31, 1999
[ ] 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)
Registrant's telephone number including area code: (303) 371-7400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Title of Class
Indicate by check mark whether the Registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K or any amendment to this Form 10-K. [X]
Aggregate market value of Common Stock held by non-affiliates of the Company
computed by reference to the last quoted price at which such stock sold on such
date as reported by the Nasdaq National Market as of June 18, 1999:
$190,236,939.
The number of shares of the Company's Common Stock outstanding as of June 18,
1999 is 17,232,772.
Documents incorporated by reference - Part III is incorporated by reference to
the Company's 1999 Proxy Statement.
TABLE OF CONTENTS
Page
PART I
Item 1: Business...........................................................1
Item 2: Properties .......................................................12
Item 3: Legal Proceedings.................................................12
Item 4: Submission of Matters to a Vote of Security Holders...............12
PART II
Item 5: Market for Common Equity and Related Stockholder Matters..........13
Item 6: Selected Financial Data...........................................16
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................17
Item 7a: Quantitative and Qualitative Disclosures About Market Risk .......29
Item 8: Financial Statements..............................................29
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................29
PART III
Item 10: Directors and Executive Officers of the Registrant................29
Item 11: Executive Compensation............................................30
Item 12: Security Ownership of Certain Beneficial Owners and Management... 30
Item 13: Certain Relationships and Related Transactions....................30
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K...31
- 7 -
PART I
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. ("Frontier" or the "Company") and the
expectations of our Company and management. All statements, other than
statements of historical facts, included in this report that address activities,
events or developments that we expect, believe, intend or anticipate will or may
occur in the future, are forward-looking statements. When used in this document,
the words "estimate," "anticipate," "project" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties, many of which cannot be predicted
with accuracy and some of which might not even be anticipated. Future events and
actual results, financial and otherwise, could differ materially from those set
forth in or contemplated by the forward-looking statements herein. These risks
and uncertainties include, but are not limited to, those discussed in "Risk
Factors" below.
Item 1: Business
General
The Company is a scheduled airline based in Denver, Colorado. We
currently operate routes linking our Denver hub to 19 cities in 15 states
spanning the nation from coast to coast. We were organized in February 1994 and
we began flight operations in July 1994 with two leased Boeing 737-200 jets. We
have since expanded our fleet to 20 leased jets, including eight Boeing 737-200s
and 12 larger Boeing 737-300s. We currently use up to seven gates at our hub,
Denver International Airport ("DIA"), where we operate approximately 92 daily
system flight departures and arrivals.
Our current route system links our Denver hub to 19 cities. The following
table lists the cities we serve as of June 14, 1999, as well as the dates we
commenced service to those cities:
El Paso, Texas October 13, 1994
Albuquerque, New Mexico October 13, 1994
Omaha, Nebraska January 16, 1995
Chicago/Midway, Illinois September 25, 1995
Phoenix, Arizona September 25, 1995
Los Angeles, California November 3, 1995
Minneapolis/St. Paul, Minnesota November 13, 1995
Salt Lake City, Utah November 13. 1995
San Francisco, California November 17, 1995
Seattle, Washington May 1, 1996
Bloomington/Normal, Illinois January 6, 1997
Boston, Massachusetts September 16, 1997
Baltimore, Maryland November 16, 1997
New York/LaGuardia, New York December 3, 1997
San Diego, California July 23, 1998*
Atlanta, Georgia December 17, 1998
Dallas/Fort Worth, Texas December 17, 1998
Las Vegas, Nevada December 17, 1998*
Portland, Oregon June 14, 1999
*reintroduction of service
We initiated service to four additional markets during fiscal year 1999:
Atlanta, Georgia; Dallas/Ft. Worth, Texas; Las Vegas, Nevada and San Diego,
California. On November 1, 1998, we initiated complimentary shuttle service
between Boulder, Colorado and Denver International airport. We currently operate
six daily round trip bus routes between Boulder and DIA. We also began serving
Portland, Oregon on June 14, 1999.
Our senior management team includes executives with substantial
experience in the airline industry, including several executives who occupied
similar positions at a former airline called Frontier Airlines. The former
Frontier Airlines served regional routes to and from Denver from 1950 to 1986.
There were various occasions when the former Frontier Airlines served most of
the Company's current and intended markets with jet equipment from its Denver
hub.
Our corporate headquarters are located at 12015 East 46th Avenue, Denver,
Colorado 80239. Our administrative office telephone number is 303-371-7400; our
reservations telephone number is 800-432-1359; and our world wide Web site
address is www.frontierairlines.com.
Business Strategy and Markets
Our business strategy is to provide air service at low fares to high volume
markets from our Denver hub. Our strategy is based on the following factors:
o Stimulate demand by offering a combination of low fares, quality
service and frequent flyer credits in Continental Airlines' OnePass
program.
o Expand our Denver hub operation and increase connecting traffic by
adding additional high volume markets to our current route system.
o Continue filling gaps in flight frequencies to high volume markets from
our Denver hub.
In April 1999, we were named "Best Domestic Low Fare Carrier" by
Entrepreneur Magazine in the publication's sixth annual Business Travel Awards.
Route System History
Our route system strategy encompasses connecting our Denver hub to top
business and leisure destinations. We currently serve 15 of the top 25
destinations from Denver, as defined by the U.S. Department of Transportation's
Origin and Destination Market Survey. In addition, as we bring additional
aircraft into our fleet and add new markets to our route system, connection
opportunities increase. During fiscal year 1999, connection opportunities for
our passengers connecting through DIA increased from 3.2 flights to 5.3 flights.
Marketing and Sales
Our sales efforts are targeted to price-sensitive passengers in both
the leisure and corporate travel markets. In the leisure market, we offer
discounted fares marketed through newspaper, radio and television advertising
along with special promotions. We market these activities in both our Denver hub
and throughout our route system.
To balance the seasonal demand changes that occur in the leisure
market, we introduced several programs in late 1996 designed to capture a larger
share of the corporate market, which tends to be less seasonal than the leisure
market. These programs include negotiated fares for large companies that sign
contracts committing to a specified volume of travel, future travel credits for
small and medium size businesses contracting with us and special discounts for
members of various trade and nonprofit associations. As of June 10, 1999, we had
signed contracts with over 2,300 corporations.
We also pursue sales opportunities with meeting and convention
arrangers, government travel offices and vacation clubs. The primary tools we
use to attract this business include personal sales calls, direct mail and
telemarketing. In addition, we offer air/ground vacation packages to many
destinations on our route system under contracts with various tour operators.
An important marketing tool in today's airline environment is the
frequent flyer program. In 1995, we joined Continental Airlines' OnePass
program. We selected the OnePass program because there was an established
membership base in Denver and in other cities we served and planned to serve. In
addition, the OnePass program consistently receives high marks when compared
with other programs.
An important relationship for airlines is the relationship with travel
agencies. We currently pay travel agent commissions of eight percent. Unlike
some other airlines, we do not limit the earnings potential of travel agents
through a commission cap. We have implemented marketing strategies designed to
maintain and encourage relationships with travel agencies throughout our route
system. We communicate with travel agents through personal visits by company
executives and sales managers, sales literature mailings, telemarketing and
advertising in various travel agent trade publications.
We participate in the four major computer reservation systems used by
travel agents to make airline reservations. We maintain a reservations center in
Denver, operated by our employees. We also maintain an "overflow" center in
Miami, Florida, staffed by contract personnel, which assists our Denver
reservations center during peak booking periods.
In January 1999, we renewed an agreement with Electronic Data Systems
("EDS") for continued and enhanced airline customer information services,
including computerized reservations, passenger processing and telecommunications
services. Since early 1997, we have made greater use of electronic or
"paperless" ticketing, a lower cost alternative to ticketing passengers on
relatively expensive ticket stock. Currently, we do not offer electronic
ticketing through travel agents. Through our agreement with EDS, we are taking
steps to offer travel agents with this ticketing option. We anticipate that by
August 1999 we will be able to offer travel agents electronic ticketing
capabilities through two of the major computer reservations systems and that by
the end of our fiscal year 2000 we will be able to offer travel agents
electronic ticketing capabilities through the other two major computer
reservations systems.
Our agreement with EDS enhances our ability to provide Internet
bookings through the EDS SHARESWEB booking engine. In April 1999, we began
offering "Spirit of the Web" fares via our Web site, which permits customers to
make "close in" bookings beginning on Wednesdays for the following weekend. This
is intended to fill seats that might otherwise go unfilled.
In order to gain connecting traffic from other carriers, we have
negotiated various types of interline agreements with approximately 140 domestic
and international airlines serving cities on our route system. Generally, these
agreements include joint ticketing and baggage services and other conveniences
designed to expedite the connecting process.
Product Pricing
We generally offer our seats at discount fares. We believe by doing so,
we reduce the cost of travel in markets we serve by as much as 60 percent
compared to other carriers. Seat inventories on each flight are managed through
a yield management system and we generally offer discounts with three levels of
advance purchase requirements. In contrast to most carriers, our fares generally
do not require travelers to include a Saturday overnight stay in order to take
advantage of these discount rates. We also do not charge a premium for one-way
fares and, generally, our fares do not require a round-trip purchase.
Competition
The Airline Deregulation Act of 1978 (the "Deregulation Act") produced
a highly competitive airline industry, freed of certain government regulations
that for 40 years prior to the Deregulation Act had dictated where domestic
airlines could fly and how much they could charge for their services. Since
then, small carriers such as Frontier have entered markets long dominated by
large airlines with substantially greater resources, such as United Airlines,
American Airlines, Northwest Airlines and Delta Air Lines.
We compete principally with United Airlines, the dominant carrier at
DIA, and its commuter affiliates with a total market share of approximately 74%.
This gives United a significant competitive advantage compared to us and other
carriers serving DIA. We believe our current market share at DIA is
approximately 5.6%. We compete with United primarily on the basis of fares, fare
flexibility and the quality of our customer service.
Aircraft
As of June 1999, we operated 20 leased Boeing 737 twinjet aircraft in
all-coach seating configurations. We anticipate we will operate 19 aircraft
between August and mid-October 1999, at which time we expect to increase our
fleet size to 20 aircraft. Our intent is to add the 21st aircraft in
approximately April 2000. The age of our current aircraft, their passenger
capacities and their lease expirations are shown in the following table:
Approximate
Number of
Aircraft No. of Year of Passenger Lease
Model Aircraft Manufacture Seats Expiration
B-737-200 5 1968-1969 108 July-October
1999
B-737-200A 3 1978-1981 119 2001-2005
B-737-300 12 1985-1998 136 2000-2006
Stage 3 noise level requirements presently require that 75% of an
operator's fleet comply with Stage 3. Our aircraft fleet currently complies with
Stage 3 noise level requirements. See "Description of Business - Government
Regulation." By January 1, 2000, our entire fleet must comply with Stage 3
requirements. We plan to return our five smaller B-737-200 aircraft, which are
not Stage 3 compliant, to the lessor in the second half of 1999. We intend to
replace these aircraft with B-737-200A and B-737-300 aircraft that meet the
Stage 3 noise level requirements.
We regularly seek to lease additional aircraft in order to replace
aircraft with expiring lease terms and to expand our service and route system.
However, the aircraft lease market is cyclical, and we cannot be certain that
additional aircraft will be available when we need or want to procure them, or
that they will be available at acceptable lease rates and terms. By way of
example, we are returning five of our smaller B-737-200 aircraft to the lessor
in the second half of 1999. We have firm lease agreements to replace three of
these aircraft and have signed letters of intent to replace the other two.
However, delivery delays could cause us to temporarily reduce our fleet size and
our passenger revenues could therefore be adversely affected.
Maintenance and Repairs
All of our aircraft maintenance and repairs are accomplished in
accordance with the our maintenance program approved by the United States
Federal Aviation Administration ("FAA"). Spare or replacement parts are
maintained by us primarily in Denver. A major airline and a spare parts vendor
supply us with certain of these and we purchase or lease others from other
airline or vendor sources.
We terminated a contract with Continental Airlines for routine
maintenance at Denver in August 1996. Since that time, we have trained, staffed
and supervised our own maintenance work force at Denver. We lease a portion of
Continental Airlines' hangar at DIA where we presently perform our own
maintenance through the "C" check level. Other major maintenance such as
airframe overhauls and major engine repairs, continues to be performed by
outside FAA approved contractors. We also maintain a smaller maintenance
facility at El Paso, Texas.
Under our aircraft lease agreements, we pay all expenses relating to the
maintenance and operation of our aircraft, and we are required to pay monthly
maintenance reserve deposits to the lessors based on usage. Maintenance reserve
deposits are applied against the cost of scheduled major maintenance. Scheduled
major maintenance has occurred or will occur for three of our aircraft in the
fiscal year ending March 31, 2000. To the extent not used for major maintenance
during the lease terms, maintenance reserve deposits remain with the aircraft
lessors upon redelivery of the aircraft.
Our monthly completion factors for the years ending March 31, 1999, 1998
and 1997 ranged from 97.6% to 99.8%, from 92.8% to 99.9%, and from 94% to 99.8%,
respectively. The completion factor is the percentage of our scheduled flights
that were operated by us (i.e., not canceled). Flights not completed were
canceled principally as a result of mechanical problems, and to a lesser extent,
weather. There can be no assurance that our aircraft will continue to be
sufficiently reliable over longer periods of time.
Fuel
During the years ending March 31, 1999, 1998 and 1997, jet fuel accounted
for 11.6%, 14.1% and 16.6%, respectively, of our operating expenses. We have
arrangements with major fuel suppliers for substantial portions of our fuel
requirements, and we believe that such arrangements assure an adequate supply of
fuel for current and anticipated future operations. However, we have not entered
into any agreements that fix the price of fuel over any period of time. Jet fuel
costs are subject to wide fluctuations as a result of sudden disruptions in
supply beyond our control. Therefore, we cannot predict the future availability
and cost of jet fuel with any degree of certainty. Our average fuel price per
gallon including taxes and into-plane fees was 55.4(cent) for the year ended
March 31, 1999, with the monthly average price per gallon during the same period
ranging from a low of 48.3(cent) to a high of 62.3(cent). As of June 11, 1999,
the price per gallon was 60.2(cent).
Newer aircraft are more fuel efficient than our Boeing 737-200 aircraft
due to improved aircraft airframe design and engine technology. Significant
increases in the price of jet fuel would result in a higher increase in our
overall total costs than those of competitors whose fleets consist of more fuel
efficient aircraft such as our Boeing 737-300 aircraft. Increases in fuel prices
or a shortage of supply could have a material adverse affect on our operations
and financial results. Our ability to pass on increased fuel costs to passengers
through price increases or fuel surcharges may be limited, particularly given
our low fare strategy.
Insurance
We carry $700 million per aircraft per occurrence in property damage and
passenger and third-party liability insurance, and insurance for aircraft loss
or damage as required by our aircraft lease agreements, and customary coverage
for other business insurance. While we believe such insurance is adequate, there
can be no assurance that such coverage will adequately protect us against all
losses which we might sustain. Our property damage and passenger and third-party
liability insurance coverage exceeds the minimum amounts required by the DOT
regulations.
Employees
As of June 1, 1999, we had 1650 employees, including 1273 full-time and
377 part-time personnel. Our employees included 194 pilots, 271 flight
attendants, 646 customer service agents, 156 reservations agents, 256 mechanics
and related personnel, and 127 general management personnel. We consider our
relations with our employees to be good.
We believe we operate with lower personnel costs than many established
airlines, principally due to lower base salaries and greater flexibility in the
utilization of personnel. There can be no assurance that we can continue to
realize these advantages over established or other air carriers for any extended
period of time. In November 1998, our pilots voted to be represented by an
independent union, the Frontier Airlines Pilots Association. This is our only
employee group that currently is represented by a union. The impact of this
unionization on labor costs is unknown at this time since the first bargaining
agreement has not been negotiated.
We have enhanced our Retirement Savings Plan [401(k)] by announcing a
matching contribution by the Company for April 1999 through December 31, 1999.
Participants will receive a 25% Company match for contributions up to 15%. We
anticipate that the match and related vesting schedule of 20% per year will
reduce our turnover rates.
Training, both initial and recurring, is required for many employees. We
train our pilots, flight attendants, ground service personnel, reservationists
and mechanics. FAA regulations require pilots to be licensed as commercial
pilots, with specific ratings for aircraft to be flown and to be medically
certified as physically fit. Licenses and medical certification are subject to
periodic continuation requirements, including recurrent training and recent
flying experience. Mechanics, quality control inspectors and flight dispatchers
must be licensed and qualified for specific aircraft. Flight attendants must
have initial and periodic competency, fitness training and certification. The
FAA approves and monitors our training programs. Management personnel directly
involved in the supervision of flight operations, training, maintenance and
aircraft inspection must meet experience standards prescribed by FAA
regulations. Employees performing safety-sensitive functions are subject to
pre-employment and subsequent random drug and alcohol testing.
Government Regulation
All interstate air carriers are subject to regulation by the U.S.
Department of Transportation ("DOT") and the Federal Aviation Administration
("FAA") under the Federal Aviation Act. The DOT's jurisdiction extends primarily
to the economic aspects of air transportation, while the FAA's regulatory
authority relates primarily to air safety, including aircraft certification and
operations, crew licensing and training and maintenance standards. In general,
the amount of regulation over domestic air carriers in terms of market entry and
exit, pricing and inter-carrier agreements has been greatly reduced subsequent
to enactment of the Deregulation Act.
U.S. Department of Transportation. We hold a Certificate of Public
Convenience and Necessity issued by the DOT that allows us to engage in air
transportation. Pursuant to law and DOT regulation, each United States carrier
must qualify as a United States citizen, which requires that its President and
at least two-thirds of its Board of Directors and other managing officers be
comprised of United States citizens; that not more than 25% of its voting stock
may be owned by foreign nationals, and that the carrier not be otherwise subject
to foreign control.
U.S. Federal Aviation Administration. We also hold an operating
certificate issued by the FAA pursuant to Part 121 of the Federal Aviation
Regulations. The FAA has jurisdiction over the regulation of flight operations
generally, including the licensing of pilots and maintenance personnel, the
establishment of minimum standards for training and maintenance, and technical
standards for flight, communications and ground equipment. We must have and we
maintain FAA certificates of airworthiness for all of our aircraft. Our flight
personnel, flight and emergency procedures, aircraft and maintenance facilities
are subject to periodic inspections and tests by the FAA.
At the present time, four airports, including New York City (LaGuardia),
are regulated by means of "slot" allocations, which represent government
authorization to take off or land at a particular airport within a specified
time period. FAA regulations require the use of each slot at least 80% of the
time and provide for forfeiture of slots in certain circumstances. The Company
currently holds an exemption representing six take-off and landing slots to
serve the Denver-New York City (LaGuardia) market.
The DOT and FAA also have authority under the Aviation Safety and Noise
Abatement Act of 1979, the Airport Noise and Capacity Act of 1990 ("ANCA") and
Clean Air Act of 1963 to monitor and regulate aircraft engine noise and exhaust
emissions. We are required to comply with all applicable FAA noise control
regulations and with current exhaust emissions standards. According to FAA
rules, we must presently have at least 75% of our fleet in compliance with the
FAA's Stage 3 noise level requirements. The balance of our fleet must be brought
into full compliance by January 2000. Our aircraft fleet is currently in
compliance with Stage 3 noise level requirements. See "Description of
Business-Aircraft."
Railway Labor Act/National Mediation Board. Our pilots organized in 1998
under an independent union, the Frontier Airlines Pilots Association. Our labor
relations with respect to the pilots are now covered under Title II of the
Railway Labor Act and are subject to the jurisdiction of the National Mediation
Board.
Miscellaneous. All air carriers are also subject to certain provisions of
the Communications Act of 1934 because of their extensive use of radio and other
communication facilities, and are required to obtain an aeronautical radio
license from the Federal Communications Commission ("FCC"). To the extent that
we are subject to FCC requirements, we take all necessary steps to comply with
those requirements.
Risk Factors
In addition to the other information contained in this Form 10-K, the
following risk factors should be considered carefully in evaluating us and our
business.
We Have a History of Net Losses, Substantial Third-Party Credit and A Limited
Operating History
Although we had net income of $30,566,000 for the fiscal year ended
March 31, 1999, we had net losses of $17,746,000 and $12,186,000 for the years
ended March 31, 1998 and 1997, respectively. We had working capital of
$25,488,000 at March 31, 1999. Our suppliers currently provide goods, services
and operating equipment on open credit terms. If such terms were modified to
require immediate cash payments, we would be materially adversely affected. We
have a limited operating history in a highly competitive industry, and we face
all of the difficulties inherent in a relatively new entrant in the airline
industry.
The Airline Industry is Seasonal and Cyclical
Our operations primarily depend on passenger travel demand, and, as
such are subject to seasonal variations. Our weakest travel periods are
generally during the quarters ending in June and December. The airline industry
is also a highly cyclical business with substantial volatility. Airlines
frequently experience short-term cash requirements. This is caused by seasonal
fluctuations in traffic, which often put a drain on cash during off-peak
periods, and various other factors, including price competition from other
airlines, national and international events, fuel prices and general economic
conditions, including inflation. Because a substantial portion of airline travel
is discretionary, our operating and financial results may be negatively impacted
by any downturn in national or regional economic conditions in the United
States, particularly Colorado. Airlines require substantial liquidity to
continue operating under most conditions. The airline industry also has low
gross profit margins and revenues that vary to a substantially greater degree
than do the related costs. Therefore, a significant shortfall from expected
revenue levels could have a material adverse effect on our operations. Working
capital deficits are not uncommon in the airline industry since airlines
typically have no product inventories and ticket sales not yet flown are
reflected as current liabilities.
Increasing Number of Consolidations and Alliances Has Also Increased Competition
The U.S. airline industry has consolidated in recent years and may
further consolidate in the future. Consolidations have enabled certain carriers
to expand their international operations and increase their presence in the U.S.
domestic market. In addition, many major domestic carriers have formed alliances
with domestic regional carriers and foreign carriers. As a result, many of the
carriers with which we compete in our markets are larger and have substantially
greater resources than we have. Continuing developments in the industry will
affect our ability to compete in the various markets in which we operate.
We Are in a High Fixed Cost Business
The airline industry is characterized by fixed costs that are high in
relation to revenues. Accordingly, a shortfall from expected revenue levels can
have a material adverse effect on our profitability and liquidity.
Increases in Fuel Costs Affect Our Operating Costs
Fuel is a major component of operating expense for all airlines. Both
the cost and availability of fuel are subject to many economic and political
factors and events occurring throughout the world, and fuel costs fluctuate
widely. Fuel accounted for 11.6% of our total operating expenses for the year
ended March 31, 1999. We cannot predict our future cost and availability of
fuel, and substantial sustained price increases or the unavailability of
adequate fuel supplies could have a material adverse effect on our operations
and profitability. Because newer aircraft are more fuel efficient than our
Boeing 737-200 aircraft a significant increase in the price of jet fuel would
therefore result in a higher increase in our total costs than those of
competitors using more fuel-efficient aircraft. In addition, larger airlines may
have a competitive advantage because they pay lower prices for fuel. We intend
generally to follow industry trends by raising fares in response to significant
fuel price increases. However, our ability to pass on increased fuel costs
through fare increases may be limited by economic and competitive conditions.
We are Subject to Federal Regulatory Oversight
We have obtained the necessary authority to conduct flight operations,
including a Certificate of Public Convenience and Necessity from the Department
of Transportation and an operating certificate from the FAA. However, the
continuation of such authority is subject to continued compliance with
applicable statutes, rules and regulations pertaining to the airline industry,
including any new rules and regulations that may be adopted in the future. We
believe that small and start-up airlines are often subject to strict scrutiny by
FAA officials, making them susceptible to regulatory demands that can negatively
impact their operations. No assurance can be given that we will be able to
continue to comply with all present and future rules and regulations. In
addition, we can give no assurance about the costs of compliance with such
regulations and the effect of such compliance costs on our profitability. In May
1996 a relatively new domestic airline, as we are, sustained an accident in
which one of its aircraft was destroyed and all persons on board were fatally
injured. In June 1996, that airline agreed at the FAA's request to cease all of
its flight operations. Although the FAA, after an intensive and lengthy
investigation, allowed that airline to resume its operations, should we
experience a similar accident it is probable that there would be a material
adverse effect on our business and results of operations.
We Experience High Costs at Denver International Airport; the Future
Availability and Location of Our DIA Gates and Their Cost is Uncertain
DIA opened in March 1995, and Stapleton International Airport was
closed. Financed through revenue bonds, DIA depends on landing fees, gate
rentals and other income from airlines, the traveling public and others to pay
debt service and support operations. Generally, our cost of operations at DIA
will vary as traffic increases or diminishes at that airport. We believe that
our operating costs at DIA substantially exceed those we would have incurred at
Stapleton or that other airlines incur at most hub airports in other cities.
We currently sublease from Continental Airlines, on a preferential-use
basis, four departure gates on Concourse A at DIA. In addition, we use, on a
non-preferential use basis, another three gates under the direct control of the
City and County of Denver ("CCD"). Our sublease with Continental expires on
February 29, 2000, as does Continental's lease with CCD for these four gates and
an additional six gates it leases on Concourse A. Continental has an option to
renew its lease for five years and reduce its lease obligation to three gates
and related space. United Airlines, which occupies all of DIA's Concourse B
gates, has a right of first refusal on any of the ten Continental gates for
which Continental does not renew its lease. Continental's lease and lease
renewal option for gates on Concourse A, as well as United's right of first
refusal on Continental's Concourse A gates, are provided for in a 1995 agreement
between CCD, Continental and United (the "1995 Agreement"). We have requested of
CCD a lease, effective March 1, 2000, for the four gates we currently sublease
from Continental and an additional four gates contiguous to those we now use.
However, our request is contingent upon the implementation of a rate making
methodology for DIA terminal facilities that remedies what we consider to be
unfair and discriminatory aspects of the current methodology, as established by
the 1995 Agreement. Under the present methodology costs related to a
non-functioning Concourse A automated baggage system and associated equipment
and space ("AABS") are allocated exclusively to Concourse A, causing rental
rates on Concourse A to be higher than those on DIA's Concourse C. Our sublease
for Concourse A gates with Continental, which expires in February 2000, provides
that Continental pays, on our behalf, a significant portion of the AABS costs
that would otherwise be payable by us under the current rate-making methodology.
CCD has indicated that it is considering alternative means of treating
AABS costs upon expiration of the Continental lease in February 2000. CCD and
the signatory airlines at DIA, including us, are discussing possible changes to
the rate-making methodology to deal with the AABS costs, although CCD has stated
that absent an agreement with a majority-in-interest of the DIA signatory
airlines, CCD will unilaterally impose a solution to the issue. Unless the issue
is resolved by agreement of all or at least a majority in interest of the
affected parties, there is a significant possibility that the 1995 Agreement, or
any rate-making methodology unilaterally imposed by CCD, will be subject to
litigation. In these circumstances, there is uncertainty with respect to the
number and location of gate facilities at DIA that will be available to us, as
well as the rates and charges that we will be required to pay for such
facilities after February 2000. If we were required to operate at fewer gates
than we have requested or if the rate-making methodology is not amended, it
could have a material adverse effect on our business and results of operations.
We Have a Limited Number of Routes
Because of our relatively small fleet size and limited number of
routes, we are at a competitive disadvantage compared to other airlines, such as
United Airlines, that can spread their operating costs across more equipment and
routes and retain connecting traffic (and revenue) within their much more
extensive route networks.
We Face Intense Competition and Market Dominance by United Airlines
The airline industry is highly competitive, primarily due to the
effects of the Airline Deregulation Act of 1978 (the "Deregulation Act"), which
has substantially eliminated government authority to regulate domestic routes
and fares and has increased the ability of airlines to compete with respect to
flight frequencies and fares. We compete with United Airlines in the Denver
market, which is our hub, and we anticipate that we will compete principally
with United Airlines in our future market entries. United Airlines and its
commuter affiliates is the dominant carrier out of DIA, accounting for
approximately 74% of all passenger boardings and approximately 490 departures
per day. Effective in February 1997, United Airlines commenced service using its
low fare United "Shuttle" between Denver and Phoenix, Arizona, and on October
31, 1997 service to Salt Lake City was added, markets in which we provide
services, as well as additional United Airlines flights in certain of our other
markets. Additionally, from June 29, 1997 until February 4, 1998 when it ceased
flight operations entirely, Western Pacific Airlines, another low-fare carrier
provided hub service at DIA. This additional competition, as well as other
competitive activities by United Airlines and other carriers, have had in the
past and could continue to have a material adverse effect on our revenues and
results of operations. Most of our current and potential competitors have
significantly greater financial resources, larger route networks and superior
market identity than we have.
We are Dependent on Our Chief Executive Officer
We are dependent on the active participation of Samuel D. Addoms, our
President and Chief Executive Officer. The loss of his services could materially
and adversely affect our business and future prospects. We do not maintain key
person life insurance on any of our officers.
We Could Lose Airport and Gate Access
We have not initially encountered barriers to airport or airport gate
access other than cost. However, any condition that would deny or limit our
access to the airports that we intend to utilize in the future or that
diminishes the desire or ability of potential customers to travel between any of
those cities may have a materially adverse effect on our business. In addition,
gates may be limited at some airports, which could adversely affect our
operations.
There are Certain Risks Associated with Our Boeing 737 Aircraft
A. Maintenance. Under our aircraft lease agreements, we are required to
bear all routine and major maintenance expenses. Maintenance expenses comprise a
significant portion of our operating expenses. In addition, we are required
periodically to take aircraft out of service for heavy maintenance checks, which
can adversely affect revenues. We also may be required to comply with
regulations and airworthiness directives issued by the Federal Aviation
Administration, the cost of which may be partially assumed by our aircraft
lessors depending upon the magnitude of the expense. There can be no assurance
that we will not incur higher than anticipated maintenance expenses. Our leased
aircraft are in compliance with all FAA-issued Airworthiness Directives ("ADs").
However, other ADs are presently required to be performed in the future and
there is a high probability that additional ADs will be required.
B. Stage 3 Noise Regulations. FAA rules require each new entrant airline
such as Frontier to have at least 75% of its fleet in compliance with the FAA's
Stage 3 noise level requirements. We are currently in compliance. The balance of
each airline's fleet must be brought into full compliance by January 2000. Five
of our eight leased Boeing 737-200 aircraft do not presently meet Stage 3
requirements, and we plan to return them to the lessor in 1999. We believe that
we will be able to replace these aircraft with Stage 3 compliant aircraft but
there can be no assurance that we will not be required to temporarily reduce our
fleet size during this replacement process. The remaining 12 Boeing 737-300
aircraft we lease are Stage 3 compliant.
C. Local Noise Regulations. As a result of litigation and pressure from
airport area residents, airport operators have taken local actions over the
years to reduce aircraft noise. These actions have included regulations
requiring aircraft to meet prescribed decibel limits by designated dates,
curfews during night time hours, restrictions on frequency of aircraft
operations and various operational procedures for noise abatement. The Airport
Noise and Capacity Act of 1990 ("ANCA") recognized the right of airport
operators with special noise problems to implement local noise abatement
procedures as long as such procedures do not interfere unreasonably with the
interstate and foreign commerce of the national air transportation system. ANCA
generally requires FAA approval of local noise restrictions on Stage 3 aircraft
and establishes a regulatory notice and review process for local restrictions on
Stage 2 aircraft. An agreement between the City and County of Denver and another
city adjacent to DIA precludes the use of Stage 2 aircraft, such as certain of
our Boeing 737-200 aircraft, on one of DIA's runways. On occasion, this results
in longer taxi times for our aircraft than would otherwise be the case. This has
not had a material adverse effect on our operations to date, and we would not
expect it to have such an effect in the future due to the fact that our entire
aircraft fleet must be Stage 3 compliant by January 2000.
We Have a Limited Number of Aircraft, and the Market for Aircraft Fluctuates
We currently schedule all of our aircraft in regular passenger service
with limited spare aircraft capability in the event one or more aircraft is
removed from scheduled service for unplanned maintenance repairs or other
reasons. The unplanned loss of use of one or more of our aircraft for a
significant period of time could have a materially adverse effect on our
operations and operating results. The market for leased aircraft fluctuates
based on worldwide economic factors. There can be no assurance that we will be
able to lease additional aircraft on satisfactory terms or at the times needed.
By way of example, we are returning five of our smaller B-737-200 aircraft to
the lessor in the second half of 1999. We have firm lease agreements to replace
three of these aircraft and have signed letters of intent to replace the other
two. However, delivery delays could cause us to temporarily reduce our fleet
size and our passenger revenues could therefore be adversely affected.
Our Relations With Our Employees is Very Important
We believe we operate with lower personnel costs than many established
airlines, principally due to lower base salaries and greater flexibility in the
utilization of personnel. There can be no assurance that we will continue to
realize these advantages over established or other air carriers for an extended
period of time. Our pilots are represented by an independent labor union, the
Frontier Airlines Pilots Association. Our mechanics and stock clerks voted in
October 1997, and our flight attendants voted in 1998, not to be represented by
a union. Unionization of our employees could materially increase our labor
costs.
We Have Not Paid Dividends
We have never declared or paid cash dividends on our Common Stock. We
currently intend to retain any future earnings to fund operations and to
continue development of our business and do not expect to pay any cash dividends
on our Common Stock in the foreseeable future.
We Face the Year 2000 Issue
We began operations in July 1994, and our operations depend
predominantly on third party computer systems. Because of our limited resources
during our start-up, the most cost effective way to establish our computer
systems was to outsource or to use manual systems. Internal systems we developed
and any software we acquired were limited and designed or purchased with the
Year 2000 taken into consideration.
We have 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.
We rely on third party business and government agencies to provide goods
and services which are critical to our operations, including the FAA, the DOT,
local airport authorities, including DIA, utilities, communication providers,
financial institutions including credit card companies and fuel suppliers. We
are reviewing, and have initiated formal communications with, these third party
service providers to determine their Year 2000 readiness, the extent to which we
are vulnerable to any failure by such third parties to remediate their Year 2000
problems and to resolve such issues to the extent practicable.
All internal systems are in the testing and remediation phases. The
customer reservations and ticketing system and the credit card processing
system, for example, have already been tested and remediated. These systems are
outsourced and the costs of modifying and testing these systems are being
absorbed by the third party provider. Our general accounting and payroll systems
have been upgraded to new versions that are certified as being Year 2000
compliant at an insignificant cost to us. Our crew and dispatch training
records, aircraft maintenance records and inventory control are in the final
stages of being automated from manual systems to computer systems that are
certified as being Year 2000 compliant. The Boeing Company has verified that the
computer systems on the aircraft type operated by us are, or will be, Year 2000
compliant before the year 2000. We plan to complete the testing and remediation
phases by September 30, 1999, and the contingency planning phase by October 31,
1999.
We have utilized existing resources with the exception of four temporary
personnel and have incurred $60,000 of expenses to implement our Year 2000
project as of March 31, 1999. The total remaining costs of the Year 2000 project
are expected to be insignificant and will be funded through cash from
operations. The costs and the dates on which we anticipate completion of the
Year 2000 project are based on our best estimates. There can be no guarantee
that these estimates will be achieved and actual results could differ materially
from those anticipated.
Despite our efforts to address Year 2000 issues, we could potentially
experience disruptions to some of our operations, including those resulting from
non-compliant systems used by third party businesses and governmental entities.
Our business, financial condition or results of operations could be materially
adversely affected by the failure of our systems or those operated by third
parties upon which our business relies.
Item 2: Properties
We have leased approximately 42,000 square feet of office space in Denver
with terms ending August 2000 and January 2001 at a current annual rental of
approximately $543,000. This facility provides space for our reservations center
together with space for administrative activities, including senior management,
purchasing, accounting, sales, marketing, advertising, human resources,
maintenance and engineering and management information systems.
Each airport location requires leased space associated with gate
operations, ticketing and baggage operations. We either lease the ticket
counters, gates and airport office facilities at each of the airports we serve
from the appropriate airport authority or sublease them from other airlines.
We have entered into an airport lease and facilities agreement with the
City and County of Denver at DIA that expires in 2005. We sublease ticket
counter space and four gates at DIA from Continental Airlines until March 1,
2000 and a portion of Continental Airlines' hangar at DIA until January 1, 2004.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" and "Risk Factors."
Item 3: Legal Proceedings
In February 1997, we filed a complaint with the U.S. Department of
Justice ("DOJ") alleging that United Airlines has engaged in predatory,
anticompetitive and monopolistic practices at DIA. The complaint asks the agency
to investigate eight separate counts of potential antitrust violations. The
eight counts range from "capacity dumping" in markets served by competitors to
alleged abuses relating to United's pricing practices, "exclusive dealing" with
corporate customers and commuter carriers, and other tactics used by United to
allegedly drive competitors from its markets. In early 1998 we received and
answered a DOJ Civil Investigative Demand which requested information and
documents in our possession relating to possible violations of the federal
antitrust laws concerning monopolization or attempts to monopolize air
transportation in certain markets, including certain Denver city-pair markets.
To date, the DOJ has not acted on our complaint. Although the DOJ recently filed
a federal civil antitrust action against another major U.S. carrier with respect
to certain alleged anti-competitive practices against smaller carriers, we are
unable to predict what action, if any, the DOJ will take in response to our
complaint.
In a related matter, the DOT, in response to complaints by us and other
smaller airlines, in April 1998 published a number of proposed guidelines
designed to identify predatory practices in the airline industry, along with
enforcement policies. We are unable to predict what actions, if any, will be
taken either by the DOT or by Congress with respect to these issues.
From time to time, we are engaged in routine litigation incidental to our
business. Except as may be otherwise specifically discussed in this section, we
believe there are no legal proceedings pending in which we are a party or of
which any of our property is the subject that are not adequately covered by
insurance maintained by us, or which if adversely decided, would have a material
adverse effect upon our business or financial condition.
Item 4: Submission of Matters to a Vote of Security Holders
During the fourth quarter of the year covered by this report, we did not
submit any matters to a vote of our security holders through the solicitation of
proxies or otherwise.
PART II
Item 5: Market for Common Equity and Related Stockholder Matters
Price Range of Common Stock
Until May 26, 1999, our Common Stock was traded on the Nasdaq SmallCap
Market under the symbol "FRNT." Effective May 26, 1999, our Common Stock began
trading on the Nasdaq National Market. Our stock will continue to trade under
the symbol "FRNT." We were able to move from the SmallCap Market to the National
Market because of our ability to meet minimum requirements in areas such as net
tangible assets, market capitalization, public float, number of shareholders and
corporate governance.
The following table shows the range of high and low bid prices per share
for our Common Stock for the periods indicated and as reported by Nasdaq through
May 25, 1999, and thereafter the high and low sale prices as reported by Nasdaq.
Market quotations listed here represent prices between dealers and do not
reflect retail mark-ups, mark-downs or commissions. As of June 18, 1999 there
were 652 holders of record of our Common Stock.
Price Range of
Common Stock
Quarter Ended High Low
June 30, 1997 $ 4 7/16 $ 2 15/16
September 30, 1997 4 5/16 2 13/32
December 31, 1997 3 5/8 1 9/16
March 31, 1998 4 1 3/4
June 30, 1998 3 7/8 2 7/8
September 30, 1998 4 5/8 3
December 31, 1998 5 3/8 3
March 31, 1999 10 4 15/16
June 30, 1999 (through June 18, 1999) 17 3/16 9 1/2
Recent Sales of Securities
In April 1998, in connection with a private placement of 4,363,001 shares
of our Common Stock, we issued a warrant to an institutional investor to
purchase 716,929 shares of our Common Stock at a purchase price of $3.75 per
share, which warrant expires in April 2002. In May 1998, we issued a warrant to
a financial advisor in connection with debt and equity financings to purchase
548,000 shares of our Common Stock at a purchase price of $3.00 per share, which
warrant expires in May 2003. In September 1998 we issued to a financial
consultant a warrant to purchase 15,000 shares of our common stock at a purchase
price of $3.57 per share, which warrant expires in September 2003. Each of these
transactions was made under an exemption from registration under the Securities
Act of 1933 pursuant to Sections 4(2) or 4(6) thereof, although the shares
underlying the warrants issued to the institutional investor and financial
advisor were subsequently registered with the Securities and Exchange Commission
on Forms S-3.
During the period April 1, 1998 through June 16, 1999, various holders of
warrants to purchase our Common Stock exercised their warrants and we issued
Common Stock as described below:
Warrant
Number of Exercise Dates of
Warrant Holder Shares Issued Price Exercise
Initial Public Offering
Underwriter (and affiliates) 110,000 $5.525 3/29/99-
5/18/99
Aircraft Lessor 395,000 $5.00-$7.19 5/6/99 &
6/16/99
Lender 1,750,000 $3.00 7/30/98-
2/19/99
Financial Advisor 548,000 $3.00 6/14/99
Consultant 20,000 $3.00 12/23/98
As of June 18, 1999, we have granted stock options to our employees and
directors to purchase up to 2,658,750 shares of Common Stock, 927,396 of which
options have been previously exercised and 1,038,020 of which are currently
exercisable at exercise prices ranging from $1.00 to $3.86 per share.
Dividend Policy
We have not declared or paid cash dividends on our Common Stock. We
currently intend to retain any future earnings to fund operations and the
continued development of our business, and, thus, do not expect to pay any cash
dividends on our Common Stock in the foreseeable future. Future cash dividends,
if any, will be determined by our Board of Directors and will be based upon our
earnings, capital requirements, financial condition and other factors deemed
relevant by the Board of Directors.
Rights Dividend Distribution
In February 1997, our Board of Directors declared a dividend distribution
of one right (a "Right") for each outstanding share of our Common Stock to
shareholders of record at the close of business on March 15, 1997. Except as
described below, each Right, when exercisable, entitles the registered holder to
purchase from us one share of Common Stock at a purchase price of $17.50 per
share (the "Purchase Price"), subject to adjustment. The Rights expire at the
close of business on February 20, 2007, unless we redeem or exchange them
earlier as described below. The description and terms of the Rights are set
forth in a Rights Agreement, as amended by amendments dated June 30, 1997 and
December 5, 1997 (as so amended, the "Rights Agreement").
The Rights are exercisable upon the earlier of (i) 10 days following a
public announcement that a person or group of affiliated or associated persons
other than us, our subsidiaries or any person receiving newly-issued shares of
Common Stock directly from us or indirectly via an underwriter in connection
with a public offering by us (an "Acquiring Person") has acquired, or obtained
the right to acquire, beneficial ownership of 20% or more of the outstanding
shares of Common Stock (the "Stock Acquisition Date"), or (ii) 10 business days
following the commencement of a tender offer or exchange offer that would result
in a person or group beneficially owning 20% or more of such outstanding shares
of Common Stock.
If any person becomes an Acquiring Person other than pursuant to a
Qualifying Offer (as defined below), each holder of a Right has the right to
receive, upon exercise, Common Stock (or, in certain circumstances, cash,
property or other securities of the Company) having a value equal to two times
the exercise price of the Right. Notwithstanding any of the foregoing, all
Rights that are beneficially owned by any Acquiring Person will be null and
void. However, Rights are not exercisable in any event until such time as the
Rights are no longer redeemable by us as set forth below.
A "Qualifying Offer" means a tender offer or exchange offer for, or
merger proposal involving, all outstanding shares of Common Stock at a price and
on terms determined by at least a majority of the Board of Directors who are not
our officers or employees and who are not related to the Person making such
offer, to be fair to and in the best interests of the Company and our
shareholders.
If after the Stock Acquisition Date we are acquired in a merger or other
business combination transaction in which the Common Stock is changed or
exchanged or in which we are not the surviving corporation (other than a merger
that follows a Qualifying Offer) or 50% or more of the Company's assets or
earning power is sold or transferred, each holder of a Right shall have the
right to receive, upon exercise, common stock of the acquiring company having a
value equal to two times the exercise price of the Right.
The Purchase Price payable, and the number of shares of Common Stock or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Common
Stock, (ii) if holders of the Common Stock are granted certain rights or
warrants to subscribe for Common Stock or convertible securities at less than
the current market price of the Common Stock, or (iii) upon the distribution to
holders of the Common Stock of evidences of indebtedness or assets or of
subscription rights or warrants.
At any time until ten days following the Stock Acquisition Date, we may
redeem the Rights in whole at a price of $.01 per Right. Upon the action of the
Board of Directors ordering redemption of the Rights, the Rights will terminate
and the only right of the holders of Rights will be to receive the $.01
redemption price.
While the distribution, if any, of the Rights will not be taxable to
shareholders or to us, shareholders may, depending upon the circumstances,
recognize taxable income if the Rights become exercisable for Common Stock (or
other consideration) of the Company or for common stock of the acquiring
company.
Item 6: Selected Financial Data
The following selected financial data as of and for each of the years
ended March 31, 1999, 1998, 1997, 1996 and 1995 are derived from our audited
financial statements. This data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the financial statements and the related notes thereto included elsewhere in
this Report.
Year Ended March 31,
1999 1998 1997 1996 1995
------------------------------------------------------------------
Statement of Operations Data:
Total operating revenues (000s) $220,608 $147,142 $116,501 $70,393 $24,595
Total operating expenses (000s) 195,928 165,697 129,662 76,325 32,692
Operating income (loss) (000s) 24,680 (18,554) (13,161) (5,933) (8,122)
Net income (loss) (000s) 30,566 (17,746) (12,186) (5,582) (7,999)
Net income (loss) per share
basic 2.14 (1.95) (1.49) (1.23) (2.56)
diluted 1.98 (1.95) (1.49) (1.23) (2.56)
Balance Sheet Data:
Cash and cash equivalents (000s) $47,289 $3,641 $10,286 $6,359 $3,835
Current assets (000s) 94,209 33,999 31,470 25,797 8,270
Total assets (000s) 119,620 50,598 44,093 30,990 13,746
Current liabilities (000s) 68,721 50,324 32,745 25,844 9,529
Long-term debt (000s) 435 3,566 56 92 147
Total liabilities (000s) 75,230 56,272 34,210 26,289 12,104
Stockholders' equity (deficit) (000s) 44,391 (5,673) 9,883 4,701 1,642
Working capital (deficit) (000s) 25,488 (16,325) (1,275) (47) (1,259)
Selected Operating Data:
Passenger revenue (1) (000s) $214,311 $142,018 $113,758 $68,455 $23,883
Revenue passengers carried (000s) 1,664 1,356 1,180 758 269
Revenue passenger miles (RPMs) (2) (000s) 1,506,597 1,119,378 839,939 479,887 147,215
Available seat miles (ASMs) (3) (000s) 2,537,503 1,996,185 1,419,720 844,161 357,089
Passenger load factor (4) 59.4% 56.1% 59.2% 56.8% 41.2%
Break-even load factor (5) 52.4% 63.1% 65.5% 61.5% 55.0%
Block hours (6) 52,789 42,767 32,459 20,783 9,719
Departures 25,778 22,257 18,910 14,957 8,779
Average seats per departure 125 124 118 112 108
Average stage length 787 723 636 504 377
Average length of haul 905 826 712 633 547
Aircraft miles 20,300 16,098 12,032 7,537 3,306
Average daily block hour utilization (7) 9.6 9.5 10.3 9.9 8.7
Yield per RPM ( 8) (cents) 14.22 12.69 13.54 14.26 16.22
Total yield per RPM (9) (cents) 14.64 13.15 13.87 14.67 16.71
Total yield per ASM (10) (cents) 8.69 7.37 8.21 8.34 6.89
Expense per ASM (cents) 7.72 8.30 9.13 9.04 9.16
Expense per ASM excluding fuel (cents) 6.82 7.13 7.61 7.65 7.73
Passenger revenue per block hour $4,060 $3,321 $3,505 $3,294 $2,457
Average fare (11) $123 $100 $92 $88 $88
Average aircraft in service 15.0 12.3 9.6 5.7 4.1
EBITDAR (12) (000s) 58,848 7,437 4,576 942 (5,618)
EBITDAR as a % of revenue 26.7% 5.1% 3.9% 1.3% (22.8%)
Note: We did not begin flight operations until July 1994 (during the fiscal year ended March 31, 1995).
(1) "Passenger revenue" includes revenues for non-revenue passengers,
administrative fees, and revenue recognized for unused tickets that are
greater than one year from issuance date.
(2) "Revenue passenger miles," or RPMs, are determined by multiplying the
number of fare-paying passengers carried by the distance flown.
(3) "Available seat miles," or ASMs, are determined by multiplying the number
of seats available for passengers by the number of miles flown.
(4) "Passenger load factor" is determined by dividing revenue passenger miles
by available seat miles.
(5) "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
(6) "Block hours" represent the time between aircraft gate departure and
aircraft gate arrival.
(7) "Average daily block hour utilization" represents the total block hours
divided by the weighted average number of aircraft days in service.
(8) "Yield per RPM" is determined by dividing passenger revenues by revenue
passenger miles.
(9) "Total Yield per RPM" is determined by dividing total revenues by revenue
passenger miles.
(10) "Total Yield per ASM" is determined by dividing passenger revenues by
available seat miles.
(11) "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.
(12) "EBITDAR", or "earnings before interest, income taxes, depreciation,
amortization and aircraft rentals," is a supplemental financial measurement
we and many airline industry analysts use in the evaluation of our business
However, EBITDAR should only be read in conjunction with all of our
financial statements appearing elsewhere herein, and should not be
construed as an alternative either to operating income (as determined
in accordance with generally accepted accounting principles) as an
indicator of our operating performance or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) as a measure of liquidity.
Item 7: Management's Discussion and Analysis of Financial Condition and Result
of Operations
Selected Operating Statistics
The following table provides our operating revenues and expenses
expressed as cents per total available seat miles ("ASM") and as a percentage of
total operating revenues, as rounded, for the years ended March 31, 1999, 1998
and 1997.
1999 1998 1997
------------------------ ----------------------- -----------------------
Per % Per % Per %
total of total of total of
ASM Revenue ASM Revenue ASM Revenue
Revenues:
Passenger 8.44 97.2% 7.11 96.5% 8.01 97.6%
Cargo 0.19 2.2% 0.15 2.1% 0.14 1.7%
Other 0.06 0.6% 0.11 1.4% 0.06 0.7%
----------- ----------- ----------- ---------- ----------- ----------
Total revenues 8.69 100.0% 7.37 100.0% 8.21 100.0%
Operating expenses:
Flight operations 3.12 35.9% 3.32 45.1% 3.71 45.2%
Aircraft and traffic servicing 1.35 15.5% 1.54 20.9% 1.75 21.3%
Maintenance 1.42 16.4% 1.59 21.6% 1.76 21.4%
Promotion and sales 1.40 16.1% 1.47 19.9% 1.52 18.5%
General and administrative 0.36 4.2% 0.32 4.3% 0.33 4.0%
Depreciation and amortization 0.07 0.7% 0.06 0.9% 0.08 0.9%
=========== =========== =========== ========== =========== ==========
Total operating expenses 7.72 88.8% 8.30 112.6% 9.13 111.3%
=========== =========== =========== ========== =========== ==========
Total ASMs (000s) 2,537,503 1,996,185 1,419,720
Results of Operations - Year Ended March 31, 1999 Compared to Year Ended March
31, 1998
General
We are a scheduled airline based in Denver, Colorado. We currently
operate routes linking our Denver hub to 19 cities in 15 states spanning the
nation from coast to coast. At present, we use up to seven gates at Denver
International Airport ("DIA") for approximately 92 daily flight departures and
arrivals. During the year ended March 31, 1999, we added Atlanta, Georgia and
Dallas/Ft. Worth, Texas to our route system and re-entered the San Diego,
California and Las Vegas, Nevada markets. On June 14, 1999 we commenced service
in the Denver-Portland, Oregon market.
Organized in February 1994, we commenced flight operations as a regional
carrier in July 1994 with two leased Boeing 737-200 jet aircraft. We have since
expanded our fleet to 20 leased jets as of June 1999, including eight Boeing
737-200s and twelve larger Boeing 737-300s. During the year ended March 31,
1999, we added two additional leased Boeing 737-300 aircraft and one Boeing
737-200A to our fleet.
On June 30, 1997, we signed an Agreement and Plan of Merger ("the Merger
Agreement") providing for our merger (the "Merger") with Western Pacific
Airlines. Pursuant to the Merger Agreement, a "code share" marketing alliance
between us and Western Pacific went into effect on August 1, 1997, in effect
integrating the route networks of the two airlines. On September 29, 1997, we
both mutually agreed to terminate the Merger Agreement and the code-share
arrangement. The separation of the two carriers required us to implement a
costly restructuring of our 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. The Merger Agreement and our
competition with Western Pacific adversely affected our results of operations
for the year ended March 31, 1998.
As a result of the expansion of our operations and the cessation of
service by Western Pacific during the year ended March 31, 1999, our results of
operations are not necessarily indicative of future operating results or
comparable to the prior year ended March 31, 1998.
Small fluctuations in our yield per RPM or expense per ASM can
significantly affect operating results because we, like other airlines, have
high fixed costs 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 our liquidity, cash
flows and results of operations.
Results of Operations
We had net income of $30,566,000 or $1.98 per diluted share for the year
ended March 31, 1999 as compared to a net loss of $17,746,000 or $1.95 per share
for the year ended March 31, 1998. During the year ended March 31, 1999 as
compared to the prior comparable period, we 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. Our cost per ASM declined to 7.72(cent) during the year ended
March 31, 1999 from 8.30(cent) for the prior comparable period, principally as a
result of lower fuel prices and improved operating efficiencies and economies of
scale as our fixed costs were spread across a larger base 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 year ended March 31,
1999, our break-even load factor was 52.4% compared to the passenger load factor
achieved of 59.4%. For the year ended March 31, 1998, our break-even load factor
was 63.1% compared to the achieved passenger load factor of 56.1%. Our
break-even load factor decreased from the prior comparable period largely as a
result of an increase in our average fare to $123 during the year ended March
31, 1999 from $100 during the year ended March 31, 1998, an increase in our
total yield per RPM from 13.15(cent) for the year ended March 31, 1998 to
14.64(cent) for the year ended March 31, 1999, and a decrease in our expense per
ASM to 7.72(cent) for the year ended March 31, 1999 from 8.30(cent) for the year
ended March 31, 1998.
Revenues
Our revenues are highly sensitive to changes in fare levels. Fare pricing
policies have a significant impact on our revenues. Because of the elasticity of
passenger demand, we believe that increases in fares will result in a decrease
in passenger demand in many markets. We 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 our markets, we believe that
we must, in most cases, match those competitive fares in order to maintain our
market share. Passenger revenues are seasonal in leisure travel markets
depending on the markets' locations and when they are most frequently
patronized.
Our average fare for the years ended March 31, 1999 and 1998 was $123 and
$100, respectively. We believe that the increase in the average fare during the
year ended March 31, 1999 over the prior comparable period was largely a result
of our 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 825 miles for the year ended March 31, 1998 to 905 miles for the year ended
March 31, 1999. We also experienced higher average fares in certain of our
markets as a result of accommodating Northwest Airlines passengers during that
carrier's pilot strike in August and September 1998.
Passenger Revenues. Passenger revenues totaled $214,311,000 for the year
ended March 31, 1999 compared to $142,018,000 for the year ended March 31, 1998,
or an increase of 50.9%. We carried 1,664,000 revenue passengers for the year
ended March 31, 1999 compared to 1,356,000 for the year ended March 31, 1998 or
an increase of 22.7%. We had an average of 15 aircraft in our fleet during the
year ended March 31, 1999 compared to an average of 12.3 aircraft during the
year ended March 31, 1998, an increase of 22%, and ASMs increased 541,318,000 or
27.1%.
Cargo revenues, consisting of revenues from freight and mail service,
totaled $4,881,000 and $3,009,000 for the years ended March 31, 1999 and 1998,
respectively, representing 2.2% and 2.0% of total operating revenues,
respectively, or an increase of 62.2%. 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 $1,415,000 and $2,115,000 or .6% and 1.4%
of total operating revenues for each of the years ended March 31, 1999 and 1998,
respectively. Other revenues were higher during the year ended March 31, 1998 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
our code share partner. We recognized approximately $1,007,000 in ticket
handling fees associated with our code share agreement with Western Pacific
during the year ended March 31, 1998. The costs that 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
$195,928,000 and $165,697,000 for the years ended March 31, 1999 and 1998 and
represented 88.8% and 112.6% of total revenue, respectively. Operating expenses
decreased as a percentage of revenue during the year ended March 31, 1999 as we
experienced significantly lower fuel prices and improved operating efficiencies
and economies of scale as our fixed costs were spread across a larger base of
operations.
Flight Operations. Flight operations expenses of $79,247,000 and
$66,288,000 were 35.9% and 45.1% of total revenue for the years ended March 31,
1999 and 1998, 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 $22,758,000 for 41,082,000 gallons used and $23,332,000 for 33,098,000
gallons used resulted in an average fuel cost of 55.4(cent) and 70.5(cent) per
gallon and represented 28.7% and 35.2% of total flight operations expenses for
the years ended March 31, 1999 and 1998, respectively. The average fuel cost per
gallon decreased for the years ended March 31, 1999 and 1998 from the comparable
prior period due to an overall decrease in the market price of fuel. Fuel prices
are subject to change weekly as we do not purchase supplies in advance for
inventory. Fuel consumption for each of the years ended March 31, 1999 and 1998
averaged 778 and 774 gallons per block hour, respectively.
Aircraft lease expenses totaled $32,958,000 (14.9% of total revenue) and
$24,330,000 (16.5% of total revenue) for the years ended March 31, 1999 and
1998, respectively, or an increase of 35.5%. The increase is largely due to
higher lease expenses for larger and newer Boeing 737-300 aircraft added to the
fleet which resulted in the increase in the average number of aircraft to 15
from 12.3, or 22%, for the years ended March 31, 1999, respectively.
Aircraft insurance expenses totaled $2,425,000 (1.1% of total revenue)
for the years ended March 31, 1999 and 1998 offset by a profit commission of
$153,000 for the policy period ended June 6, 1998. The profit commission was
earned because we had no aircraft hull insurance claims during the 1997-1998
policy year. Aircraft insurance expenses for the year ended March 31, 1998 were
$2,989,000 (2% of total revenue). Aircraft insurance expenses decreased as a
percentage of revenue as a result of competitive pricing in the aircraft
insurance industry, our favorable experience rating since we began flight
operations in July 1994 and economies of scale due to the increase in fleet
size.
Pilot and flight attendant salaries before payroll taxes and benefits
totaled $10,653,000 and $8,708,000 or 5% and 6.1% of passenger revenue for each
of the years ended March 31, 1999 and 1998, or an increase of 22.3%. Pilot and
flight attendant compensation increased principally as a result of a 22%
increase in the average number of aircraft in service, general wage rate
increases, and an increase of 23.4% in block hours. We pay 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 we are not in the process of adding
aircraft to our system, pilot and flight attendant expense per aircraft
normalizes. With a scheduled passenger operation, and with salaried rather than
hourly crew compensation, our 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 $34,147,000 and $30,685,000 (an increase of 11.3%) for the years ended
March 31, 1999 and 1998, respectively, and represented 15.5% and 20.9% of total
revenue. These include all expenses incurred at airports served by us, 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 year ended March 31, 1999 over the year ended March 31,
1998 as a result of our rental costs (in particular, the gate rentals at DIA and
other cities where we added additional frequencies), which are largely fixed
costs, remaining relatively constant as compared to the increase in revenue.
Additionally, we began our own ground handling operations at DIA effective
September 1, 1998 which is more cost effective than using a third party
contractor. Aircraft and traffic servicing expenses will increase with the
addition of new cities to our route system.
Maintenance. Maintenance expenses of $36,090,000 and $31,791,000 were
16.4% and 21.6% of total revenue for the years ended March 31, 1999 and 1998,
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. Effective March 1999, we began to conduct certain
aircraft heavy maintenance checks in-house which we expect will reduce
maintenance expenses in future years. During the quarter ended March 31, 1999,
we reduced our accrued maintenance expenses for these heavy maintenance checks
by approximately $1,100,000 as a result of the reduced costs associated with
performing these heavy maintenance checks in-house. Maintenance cost per block
hour was $684 and $743 per block hour for the years ended March 31, 1999 and
1998, respectively. Maintenance costs per block hour decreased as a result of
six new aircraft we added to our fleet during the past two years, by bringing
certain aircraft heavy maintenance checks in-house, the fixed rental cost of the
hangar facility being spread over a larger aircraft fleet offset by FAA mandated
corrosion inspections on our 737-200s. 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. We believe that these costs will
continue to normalize as we add additional aircraft to our fleet.
Promotion and Sales. Promotion and sales expenses totaled $35,621,000 and
$29,329,000 and were 16.1% and 19.9% of total revenue for the years ended March
31, 1999 and 1998, 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. Our
promotion and sales expenses for the year ended March 31, 1998 included expenses
as a result of the code share agreement with Western Pacific, under which we
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. We did not have any code share agreements during the year ended March
31, 1999 that had as large of an impact on our expenses as the code share
agreement with Western Pacific. Promotion and sales expenses decreased as a
percentage of revenue for the year ended March 31, 1999 over the prior
comparable period largely as a result of the increase in revenue.
Promotion and sales expenses per passenger decreased to $21.41 from
$21.63 for year ended March 31, 1999, 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 our reservations
requirements. These increased costs were offset by a decrease in travel agency
commissions. During April 1998, we reduced travel agency commissions to 8% from
10%, matching an 8% commission instituted by our competitors in the fall of
1997. Additionally, our 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 5.6% for the year ended March 31,
1999 from 7.6% for the year ended March 31, 1998.
Advertising expenses of $3,900,000 were 1.8% of passenger revenue for the
year ended March 31, 1999, compared to $3,048,000 or 2.2% of passenger revenue
for the year ended March 31, 1998. As new cities are added to our flight
schedule, advertising and marketing promotions are designed and implemented to
increase awareness of our new service, name and brand awareness. Advertising
expenses decreased as a percentage of revenue largely as a result of the
increase in the average fare. Additionally, during the year ended March 31, 1998
we competed with Western Pacific for the low fare market which required a higher
volume of advertising.
General and Administrative. General and administrative expenses for the
years ended March 31, 1999 and 1998 totaled $9,163,000 and $6,353,000,
respectively, and were 4.2% and 4.3% of total revenue, respectively. These
expenses include the wages and benefits for our executive officers and various
other administrative personnel. Legal and accounting expenses, supplies and
other miscellaneous expenses are also included in this category. Included in
general and administrative expenses for the year ended March 31, 1999 were
accrued bonuses and related payroll taxes for our employees which totaled
approximately $1,830,000. This was the first time we paid bonuses to our
employees. Included in general and administrative expenses during the year ended
March 31, 1998 were unusual expenses of approximately $500,000 associated with
the terminated Merger Agreement with Western Pacific.
Depreciation and Amortization. Depreciation and amortization expenses of
$1,659,000 and $1,251,000 were approximately .8% and .9% of total revenue for
the years ended March 31, 1999 and 1998, respectively. These expenses include
depreciation of office equipment, ground station equipment, and other fixed
assets. 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 $406,000
for the year ended March 31, 1999 compared to $808,000 for the year ended March
31, 1998. Interest income increased from $722,000 to $1,556,000 during the year
ended March 31, 1999 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 expenses increased to $701,000 from
$324,000 during the year ended March 31, 1999 from the prior year. In December
1997, we sold $5,000,000 of 10% senior notes. In connection with this
transaction, we 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 associated with the senior secured notes totaled
$568,000 and $263,000 during the years ended March 31, 1999 and 1998,
respectively. See Note 4 to the Financial Statements. Other, net nonoperating
expense was $449,000 for the year ended March 31, 1999 compared to other, net
nonoperating income of $410,000 for the year ended March 31, 1998. Other, net
nonoperating expense for the year ended March 31, 1999 includes $486,000 of
unamortized deferred loan and warrant costs associated with the senior secured
notes that remained at the time we prepaid the debt.
Income Tax Benefit: We recognized an income tax benefit of $5,480,000
primarily attributable to the probable realization of our remaining income tax
loss carryforwards for which a valuation allowance had been previously recorded.
As a result of our profitability for the year ended March 31, 1999 and projected
taxable income for the year ending March 31, 2000, a valuation allowance was no
longer considered necessary.
Expenses per ASM. Our expenses per ASM for the years ended March 31, 1999
and 1998 were 7.72(cent) and 8.30(cent), respectively, or a decrease of 7%.
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 increase in average ASMs per
aircraft as we added aircraft with greater seating capacity compared to earlier
fleet additions. Expenses per ASM excluding fuel for the year ended were
6.82(cent) and 7.13(cent), respectively, or a decrease of 4.3%. Expenses per ASM
are influenced to a degree by the amount of aircraft utilization and by aircraft
seating configuration. For example, with the 108 seat all coach seating
configuration selected by us on five of our Boeing 737-200 aircraft, the
expenses per ASM for us are higher by 11% when compared with the 120 seat
alternative used by many carriers. Our average seats per aircraft for the year
ended March 31, 1999 were 125 as compared to 124 seats per aircraft for the year
ended March 31, 1998, with the increase in our Boeing 737-300 aircraft.
Results of Operations - Year Ended March 31, 1998 Compared to Year Ended March
31, 1997
General
During the year ended March 31, 1998, we added four new Boeing 737-300
aircraft to our fleet. As a result of these new aircraft fleet additions, we
added service to Boston, Massachusetts in September 1997, Baltimore, Maryland in
November 1997 and New York (LaGuardia), New York in December 1997. We terminated
service to Las Vegas, Nevada in August 1997 and San Diego, California and St.
Louis, Missouri in November 1997.
In June 1997, we signed the Merger Agreement with Western Pacific. In
September 1997, we mutually agreed to terminate the Merger Agreement. On October
5, 1997, Western Pacific filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. Western Pacific, which originally began service to and from
Colorado Springs, Colorado, commenced service from DIA on June 29, 1997. On
February 4, 1998, Western Pacific ceased flight operations and has since been
engaged in liquidating its business.
As a result of our expansion of operations during the year ended March
31, 1998, our results of operations are not necessarily indicative of future
operating results or comparable to the prior year ended March 31, 1997.
Results of Operations
We incurred a net loss of $17,746,000 or $1.95 per share for the year
ended March 31, 1998 as compared to a net loss of $12,186,000 or $1.49 per share
for the year ended March 31, 1997. We believe that our operating results were
adversely affected during the year ended March 31, 1998 by a code share
agreement with Western Pacific which, in connection with the proposed merger
with Western Pacific, was effective August 1, 1997. The code share was designed
to coordinate our schedule with Western Pacific's schedule at DIA. The code
share agreement was terminated effective November 15, 1997 as a part of the
mutual termination of the Merger Agreement. As a result of the schedule
implemented under the code share agreement, we had flights scheduled in certain
markets that were not at peak travel times. This arrangement did not benefit us
as an independent airline. As a result of the termination of the Merger
Agreement and code share agreement, we introduced a new, independent schedule,
terminated service to San Diego, California and St. Louis, Missouri, and added
routes to Baltimore, Maryland and to New York City's La Guardia Airport in
November and December 1997. Competition from Western Pacific on several of our
routes adversely affected our yields and load factors. Additionally, during the
year ended March 31, 1998 as compared to the prior comparable period, we
experienced higher average aircraft lease expenses on our newer aircraft, higher
maintenance expenses associated with our in-house maintenance operation which
began in September 1996, and unusual general and administrative expenses
associated with the Western Pacific merger.
Revenues
General. Airline revenues are primarily a function of the number of
passengers carried and fares charged by the airline. We believe that revenues
will gradually increase in a new market over a 60 to 120 day period as market
penetration is achieved. We added three new markets during the year ended March
31, 1998 and four new markets during the year ended March 31, 1997.
During the years ended March 31, 1998 and 1997, we faced significant
competitive actions by two airlines that maintained hubs at DIA. During the year
ended March 31, 1997, we competed with United Airlines with respect to fare and
other competitive actions. During the year ended March 31, 1998, we, as well as
competing with United Airlines for passenger traffic and on fares, also were
forced to compete with Western Pacific in six of our markets where Western
Pacific was offering extremely low fares in an effort we believe was targeted
toward increasing load factor and revenues. The effect upon us of this
competition during the year ended March 31, 1997 was a low average fare and, to
a lesser degree, fewer passengers carried, and during the year ended March 31,
1998 fewer passengers carried and with a slight downward effect on the average
fare. Western Pacific discontinued all flight operations on February 4, 1998 and
has since been engaged in liquidating its business.
Our average fares for the years ended March 31, 1998 and 1997 were $100
and $92, respectively. We believe that the increase in the average fare during
the year ended March 31, 1998 over the prior comparable period was largely a
result of our focus on increasing business travelers, an increase in the average
length of haul and stage length, and reduced fare competition from United
Airlines, offset by low pricing by Western Pacific. 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 decreases to 8%
October 1, 1998 and to 7.5% on October 1, 1999. The per-flight-segment fee
increased to $2 effective October 1, 1998, $2.25 effective October 1, 1999 and
thereafter increases in annual amounts of 25 cents until it reaches $3 effective
October 1, 2002.
Passenger Revenue. Passenger revenues totaled $142,018,000 for the year
ended March 31, 1998 compared to $113,758,000 for the year ended March 31, 1997,
or an increase of 24.8%. Competition increased dramatically during the months of
July through January 1998 when Western Pacific began operations at DIA and even
more significantly during the months of October 1997 through January 1998 once
our merger and code share agreements with Western Pacific were terminated. This
increased competition had a negative impact on the number of revenue passengers
we carried. The number of revenue passengers carried was 1,356,000 for the year
ended March 31, 1998 compared to 1,181,000 for the year ended March 31, 1997 or
an increase of 14.9%. We had an average of 12.3 aircraft in service during the
year ended March 31, 1998 compared to an average of 9.6 aircraft in service
during the year ended March 31, 1997 resulted in an increase in ASMs of
576,465,000 or 40.6%.
For the year ended March 31, 1998, our break-even load factor was 63.1%
compared to a passenger load factor of 56.1%. For the year ended March 31, 1997,
our break-even load factor was 65.5% compared to a passenger load factor of
59.2%. Our break-even load factor decreased from the prior comparable period
largely as a result of an increase in our average fare to $100 during the year
ended March 31, 1998 from $92 during the year ended March 31, 1997.
Our load factor decreased to 56.1% for the year ended March 31, 1998 from
59.2% the prior comparable period. We believe that our load factor for the year
ended March 31, 1998 was adversely affected by increased competition from
Western Pacific and the ramp-up effect from new routes we added during
September, November and December 1997.
Cargo revenues, consisting of revenues from freight and mail service,
totaled $3,009,000 and $1,956,000 for the years ended March 31, 1998 and 1997,
representing 2.1% and 1.7% of total operating revenues, respectively.
Other revenues, comprised principally of interline handling fees, liquor
sales and excess baggage fees, totaled $2,115,000 and $786,000 or 1.4% and .7%
of total operating revenues for the years ended March 31, 1998 and 1997,
respectively. The increase for the year ended March 31, 1998 over the prior
comparable period is due to the increase in 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 our code share partner. We recognized approximately
$1,007,000 in ticket handling fees associated with our code share agreement with
Western Pacific during the year ended March 31, 1998. The costs which offset
this revenue are included in sales and promotion expenses.
Operating Expenses
Total operating expenses increased to 112.6% of revenue for the year
ended March 31, 1998 compared to 111.3% of revenue for the year ended March 31,
1997. Operating expenses increased as a percentage of revenue as our revenue was
adversely effected by lower load factors caused by increased competition and we
also experienced higher average aircraft lease expenses on our newer larger
aircraft, higher maintenance expenses associated with our in-house maintenance
operation which began in September 1996, and unusual general and administrative
expenses associated with the Western Pacific merger.
Flight Operations. Flight operations expenses of $66,288,000 and
$52,650,000 were 45.1% and 45.2% of total revenue for years ended March 31, 1998
and 1997, respectively, or an increase of 25.9%.
Aircraft fuel costs of $23,332,000 for 33,098,000 gallons used and
$21,551,000 for 25,926,000 gallons used resulted in an average fuel cost of
70.5(cent) and 83.1(cent) per gallon and represented 35.2% and 40.9% of total
flight operations expenses for the years ended March 31, 1998 and 1997,
respectively. The average fuel cost per gallon decreased for the year ended
March 31, 1998 from the comparable prior period due to an overall decrease in
the cost of fuel. Fuel prices are subject to change weekly as we do not purchase
supplies in advance for inventory. Fuel consumption for the years ended March
31, 1998 and 1997 averaged 774 and 799 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 length of haul.
Aircraft lease expenses, excluding short-term aircraft lease expenses,
totaled $24,330,000 (16.5% of total revenue) and $16,704,000 (14.3% of total
revenue) for the years ended March 31, 1998 and 1997, respectively, or an
increase of 45.7%. The increase is partially attributable to the increase in the
average number of aircraft in service to 12.3 from 9.6, or 28.1%, for the years
ended March 31, 1998 and 1997, respectively, and largely due to higher lease
expenses for larger and newer Boeing 737-300 aircraft added to the fleet. In
August 1996, we entered into short-term lease agreements in order to add a
partial spare to our fleet to improve our on-time performance and completion
factors and to substitute for aircraft in our fleet that were out of service for
scheduled maintenance. Total expenses associated with the short-term lease
agreements totaled $3,359,000 for the months of August 1996 through March 1997
and none during the year ended March 31, 1998. Because of the increase in our
fleet size, we use at certain times up to one of our aircraft as a spare and
schedule most of our major maintenance cycles to coincide with lesser traveled
months.
Aircraft insurance expenses totaled $2,989,000 (2.0% of total revenue)
and $2,638,000 (2.3% of total revenue) for the years ended March 31, 1998 and
1997, respectively, or an increase of 13.3%. Aircraft insurance expenses
decreased as a percentage of revenue as a result of competitive pricing in the
aircraft insurance industry, our favorable experience rating since it began
flight operations in July 1994 and economies of scale due to the increase in
fleet size.
Pilot and flight attendant salaries totaled $8,708,000 and $6,671,000 or
6.1% and 5.9% of passenger revenue for the years ended March 31, 1998 and 1997,
respectively, or an increase of 30.5%. Pilot and flight attendant compensation
increased principally as a result of a 28.1% increase in the average number of
aircraft in service and an increase of 31.8% in block hours. During the years
ended March 31, 1998, we added four leased aircraft to our fleet and during the
year ended March 31, 1997, we added three leased aircraft to our fleet. We pay
pilot and flight attendant salaries for training, consisting of approximately
six and three weeks, respectively, prior to scheduled increases in service,
causing the compensation expense for the years ended March 31, 1998 and 1997 to
appear high in relationship to the average number of aircraft in service. When
we are not in the process of adding aircraft to our system, we expect that pilot
and flight attendant expense per aircraft will normalize. With a scheduled
passenger operation, and with salaried rather than hourly crew compensation, our
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 $30,685,000 and $24,849,000 for the years ended March 31, 1998 and 1997,
respectively, and represented 20.9% and 21.3% of total revenue. These include
all expenses incurred at airports served by us, 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 year ended March 31, 1998 over the year ended March 31, 1997 as a result of
our rental costs (in particular, gate rentals at DIA), which are largely fixed
costs, remaining relatively constant as compared to the increase in revenue and
more of our "above wing" (including passenger check-in at ticket counters,
concourse gate operations and cabin cleaning) operations being performed by our
personnel rather than by third party suppliers. We began our own "above wing"
operations at Los Angeles International Airport in June 1996, Chicago (Midway)
in July 1996, Seattle-Tacoma in August 1996, and El Paso, Texas effective
October 1996. Aircraft and traffic servicing expenses will increase with the
addition of new cities; however, the increased existing gate utilization at DIA
is expected to reduce per unit expenses.
Maintenance. Maintenance expenses of $31,791,000 and $24,946,000 were
21.6% and 21.4% of total revenue for the years ended March 31, 1998 and 1997,
respectively. These include all maintenance, labor, parts and supplies expenses
related to the upkeep of the aircraft. Routine maintenance is charged to
maintenance expense as incurred while major engine overhauls and heavy
maintenance checks are accrued each quarter. Maintenance cost per block hour was
$743 and $769 for the years ended March 31, 1998 and 1997, respectively.
Maintenance costs per block hour decreased as a result of lower maintenance
costs associated with the four new aircraft we added to our fleet this year.
Continental Airlines had been providing routine aircraft maintenance services
for us at Denver but discontinued this service in September 1996. As a result,
we hired our own aircraft mechanics to perform routine maintenance and subleased
a portion of a hangar from Continental at DIA in which to perform this work. The
performance of this work by us, together with the cost of leasing adequate
hangar space, initially increased our maintenance cost per block hour. We
believe that these costs will continue to normalize as we add additional
aircraft to our fleet.
During the years ended March 31, 1998 and 1997, we revised the timing of
our scheduled maintenance and related estimates for our engine maintenance
reserves. The revised estimate resulted in an additional reserve accrual of
approximately $1,034,000 and $765,000, respectively, which approximates $24.17
and $23.57 of the total maintenance cost per block hour of $743 and $769 for the
years ended March 31, 1998 and 1997, respectively.
Promotion and Sales. Promotion and sales expenses totaled $29,329,000 and
$21,526,000 and were 20.7% and 18.9% of passenger revenue for the years ended
March 31, 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 are
included in these costs. The promotion and sales expenses per passenger were
$21.63 and $18.24 for the years ended March 31, 1998 and 1997, respectively. Our
promotion and sales expenses per passenger increased largely as a result of the
code share agreement with Western Pacific, under which we incurred additional
communications, computer reservation, credit card and interline handling fees,
and increased advertising expenses. These expenses were offset, in part, by
interline handling fees earned which are included in other revenues. We offer
mileage credits on Continental Airlines OnePass mileage program. Our expense
associated with the OnePass program has increased from $317,000 or 27(cent) per
passenger for the year ended March 31, 1997 to $584,000 or 43(cent) per
passenger for the year ended March 31, 1998. Our OnePass expense has increased
as it has become more mature and more passengers have become aware of our
participation in the OnePass program. Additionally, the increase in business
travelers, who generally participate in mileage programs more than leisure
travelers, has also caused an increase in the OnePass expense.
Advertising expenses of $3,048,000 and $2,482,000 were 2.2% of passenger
revenue for the years ended March 31, 1998 and 1997, respectively.
General and Administrative. General and administrative expenses for the
years ended March 31, 1998 and 1997 totaling $6,353,000 and $4,618,000 were 4.3%
and 4.0% of total revenue, respectively. These expenses include the wages and
benefits for our executive officers and various other administrative personnel.
Legal and accounting expenses, supplies and other miscellaneous expenses are
also included in this category. Included in general and administrative expenses
during the year ended March 31, 1998 are unusual expenses of approximately
$513,000 associated with the terminated merger agreement with Western Pacific.
Depreciation and Amortization. Depreciation and amortization expense of
$1,251,000 and $1,072,000 were approximately .9% of total revenue for each of
the years ended March 31, 1998 and 1997, respectively. These expenses include
depreciation of office equipment, ground station equipment, and other fixed
assets. Amortization of start-up and route development costs are not included as
these expenses have been expensed as incurred.
Nonoperating Income (Expenses). Total net nonoperating income totaled
$808,000 for the year ended March 31, 1998 compared to $975,000 for the year
ended March 31, 1997, or a decrease of 17.1%. Interest income decreased from
$1,034,000 to $722,000 from the prior comparable period as a result of a
decrease in cash associated with the net loss incurred during the year ended
March 31, 1998. In December 1997, we sold $5,000,000 of 10% senior notes. In
connection with this transaction, we issued warrants to purchase 1,750,000
shares of our Common Stock. Total interest expense paid in cash and the
accretion of the warrants and deferred loan expenses totaled $263,000 during the
year ended March 31, 1998. We had $410,000 of other net income for the year
ended March 31, 1998 which was comprised principally of $484,000 in insurance
claims for our telephone switch which was subject to an electrical fire in
October 1997, offset by other miscellaneous expenses.
Expenses per ASM. Our expenses per ASM for the years ended March 31, 1998
and 1997 were 8.30(cent) and 9.13(cent), respectively, or a decrease of 9.1%.
Expenses per ASM decreased from the prior comparable period as a result of the
economies of scale as the fixed costs were spread across a larger base of
operations and the average ASMs per aircraft have increased as we add planes
with more seating capacity as compared to our earlier fleet additions. Our
average seats per aircraft for the year ended March 31, 1998 were 122 as
compared to 118 seats per aircraft for the year ended March 31, 1997.
Liquidity and Capital Resources
Our balance sheet reflected cash and cash equivalents of $47,289,000 and
$3,641,000 at March 31, 1999 and 1998, respectively. At March 31, 1999, total
current assets were $94,209,000 as compared to $68,721,000 of total current
liabilities, resulting in working capital of $25,488,000. 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. Our
present working capital is largely a result of the sale in April 1998 of
4,363,001 shares of our Common Stock with net proceeds to us totaling
approximately $13,650,000, combined with cash flows from operating activities
during the year ended March 31, 1999.
Cash provided by operating activities for the year ended March 31, 1999
was $35,956,000. This is attributable to our net income for the period,
increases in accounts payable, air traffic liability, other accrued expenses and
accrued maintenance expense, offset by increases in restricted investments,
trade receivables, security, maintenance and other deposits, prepaid expenses
and inventories. Cash used by operating activities for year ended March 31, 1998
was $8,158,000. This was largely attributable to our net loss for the period, an
increase in restricted investments, trade receivables, security, maintenance and
other deposits, and prepaid expenses and other assets, offset by increases in
accounts payable, air traffic liability, other accrued expenses and accrued
maintenance expenses.
Cash used by investing activities for year ended March 31, 1999 was
$6,801,000. We used $4,313,000 for capital expenditures for ground handling
equipment, rotable aircraft components, maintenance equipment and aircraft
leasehold costs and improvements. We used cash of $944,000 for initial lease
acquisition security deposits for one aircraft delivered during the year ended
March 31, 1999 and for three fiscal year 2000 deliveries. Additionally, we
secured two aircraft delivered in December 1998 with letters of credit and for
one aircraft delivered in April 1999 totaling $1,544,000. Our restricted
investments increased $1,544,000 to collateralize the letters of credit. Cash
used by investing activities for the year ended March 31, 1998 was $3,648,000,
largely a result of capital expenditures for rotable aircraft components and
aircraft leasehold costs and improvements for the aircraft delivered in May,
August and September 1997 and February 1998. Additionally, we secured lease
obligations for the aircraft delivered in August 1997 and February 1998 with
letters of credit totaling $1,500,000. In turn, we received $650,000 during the
year ended March 31, 1998 from the aircraft lessor that was previously on
deposit to secure lease obligations for these aircraft. Our restricted
investments increased $1,500,000 to collateralize the letter of credit.
Cash provided by financing activities for the years ended March 31, 1999
and 1998 was $14,493,000 and $5,161,000, respectively. During the year ended
March 31, 1999, we sold 4,363,001 shares of our Common Stock through a private
placement to an institutional investor. Gross proceeds to us from the
transaction were approximately $14,180,000, of which we received net proceeds of
approximately $13,650,000. We issued a warrant to this investor to purchase
716,929 shares of our Common Stock at a purchase price of $3.75 per share. This
warrant expires in April 2002. Additionally, during the year ended March 31,
1999, we received $1,900,000 from the exercise of Common Stock options and
warrants. During the year ended March 31, 1998, we received $435,000 from the
exercise of Common Stock options. In December 1997, we sold $5,000,000 of 10%
senior secured notes. In connection with this transaction, we issued warrants to
purchase 1,750,000 shares of Common Stock at $3.00 per share.
We lease 20 Boeing 737 type aircraft under operating leases with
expiration dates ranging from 1999 to 2006. Under these leases, we were required
to make cash security deposits or issue letters of credit to secure the lease
obligations. At March 31, 1999, we had made cash security deposits and
outstanding letters of credit totaling $5,549,000 and $3,644,000, respectively.
Accordingly, our restricted cash balance includes $5,549,000 which collateralize
the outstanding letters of credit. Additionally, we make deposits for
maintenance of these aircraft. At March 31, 1999 and 1998, we had made
maintenance deposits of $18,673,000 and $11,466,000, respectively.
We had issued to certain of our aircraft lessors warrants to purchase
395,000 shares of our Common Stock at an aggregate purchase price of $2,391,600.
During May 1999 and June 1999, aircraft lessors exercised all of these warrants
and we received $2,391,600. To the extent that the aircraft lessors were able to
realize certain profit margins on their subsequent sale of our Common Stock,
they were required to refund a portion of the cash security deposits they were
holding. As a result of their sale of our Common Stock, $486,000 in cash
security deposits were returned to us during the month of May 1999.
Five of our leased aircraft are not compliant with FAA Stage 3 noise
regulations. As their leases expire in 1999 we are replacing these aircraft with
Stage 3 compliant aircraft. We have entered into lease agreements to lease a
Boeing 737-300 aircraft and two Boeing 737-200 advanced aircraft to replace
three of the non-Stage 3 compliant aircraft and have signed letters of intent
for two Boeing 737-200 advanced aircraft to replace the remaining two non-Stage
3 compliant aircraft, however, delivery delays could cause us to temporarily
reduce our fleet size and therefore adversely affect our revenues.
We are exploring various means to increase revenues and reduce expenses.
We have performed ad hoc charters and will consider them in the future depending
on the availability of our fleet. We are considering revenue enhancement
initiatives with new marketing alliances. We began our 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 us
to perform these operations necessitated capital expenditures of approximately
$800,000. Effective March 1, 1999, we began to conduct certain aircraft heavy
maintenance checks in-house which we expect will reduce maintenance expenses.
Other potential expense reduction programs include the installation of an
upgraded flight operations, maintenance, and parts inventory management
information system which will be fully operational by the end of the fiscal year
ending March 31, 2000, and an in-house revenue accounting system.
We currently sublease from Continental Airlines, on a preferential-use
basis, four departure gates on Concourse A at DIA. In addition, we use, on a
non-preferential use basis, another three gates under the direct control of the
City and County of Denver ("CCD"). Our sublease with Continental expires on
February 29, 2000, as does Continental's lease with CCD for these four gates and
an additional six gates it leases on Concourse A. Continental has an option to
renew its lease for five years and reduce its lease obligation to three gates
and related space. United Airlines, which occupies all of DIA's Concourse B
gates, has a right of first refusal on any of the ten Continental gates for
which Continental does not renew its lease. Continental's lease and lease
renewal option for gates on Concourse A, as well as United's right of first
refusal on Continental's Concourse A gates, are provided for in a 1995 agreement
between CCD, Continental and United (the "1995 Agreement"). We have requested of
CCD a lease, effective March 1, 2000, for the four gates we currently sublease
from Continental and an additional four gates contiguous to those we now use.
However, our request is contingent upon the implementation of a rate making
methodology for DIA terminal facilities that remedies what we consider to be
unfair and discriminatory aspects of the current methodology, as established by
the 1995 Agreement. Under the present methodology costs related to a
non-functioning Concourse A automated baggage system and associated equipment
and space ("AABS") are allocated exclusively to Concourse A, causing rental
rates on Concourse A to be higher than those on DIA's Concourse C. Our sublease
for Concourse A gates with Continental, which expires in February 2000, provides
that Continental pays, on our behalf, a significant portion of the AABS costs
that would otherwise be payable by us under the current rate-making methodology.
CCD has indicated that it is considering alternative means of treating
AABS costs upon expiration of the Continental lease in February 2000. CCD and
the signatory airlines at DIA, including us, are discussing possible changes to
the rate-making methodology to deal with the AABS costs, although CCD has stated
that absent an agreement with a majority-in-interest of the DIA signatory
airlines, CCD will unilaterally impose a solution to the issue. Unless the issue
is resolved by agreement of all or at least a majority in interest of the
affected parties, there is a significant possibility that the 1995 Agreement, or
any rate-making methodology unilaterally imposed by CCD, will be subject to
litigation. In these circumstances, there is uncertainty with respect to the
number and location of gate facilities at DIA that will be available to us, as
well as the rates and charges that we will be required to pay for such
facilities after February 2000. If we were required to operate at fewer gates
than we have requested or if the rate-making methodology is not amended, it
could have a material adverse effect on our business and results of operations.
Our goal is to continue to lease additional aircraft to serve additional
cities and to add flights on existing routes from Denver. We added routes to San
Diego, California, Atlanta, Georgia, Dallas/Ft. Worth, Texas and Las Vegas,
Nevada during the year ended March 31, 1999 and Portland, Oregon effective June
14, 1999. We believe that expanding our 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. Expansion of our 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 our business, and competition within the airline
industry which often requires quick reaction by management to changes in market
conditions, we may require additional capital to further expand our 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 commenced service between Denver and Las Vegas in
December 1998, another market in which United provides service with United
"Shuttle". This competition, as well as other competitive activities by United
and other carriers, have had and could continue to have an adverse effect on the
Company's revenues and results of operations.
Except for the year ended March 31, 1999, we have incurred substantial
operating losses since our inception. In addition, we have substantial
contractual commitments for leasing and maintaining aircraft. We believe that
our existing cash balances coupled with improved operating results are and will
be adequate to fund our operations at least through March 31, 2000.
Year 2000 Compliance
We began operations in July 1994, and our operations depend predominantly
on third party computer systems. Because of our limited resources during our
start-up, the most cost effective way to establish our computer systems was to
outsource or to use manual systems. Internal systems we developed and any
software we acquired are limited and were designed or purchased with the Year
2000 taken into consideration.
We have 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.
We rely on third party business and government agencies to provide goods
and services which are critical to our operations, including the FAA, the DOT,
local airport authorities including DIA, utilities, communication providers,
financial institutions including credit card companies and fuel suppliers. We
are reviewing, and have initiated formal communications with, these third party
service providers to determine their Year 2000 readiness, the extent to which we
are vulnerable to any failure by such third parties to remediate their Year 2000
problems and to resolve such issues to the extent practicable.
All internal systems are in the testing and remediation phases. The
customer reservations and ticketing system and the credit card processing
system, for example, have already been tested and remediated. These systems are
outsourced and the costs of modifying and testing these systems are being
absorbed by the third party provider. Our general accounting and payroll systems
have been upgraded to new versions that are certified as being Year 2000
compliant at an insignificant cost to us. Our crew and dispatch training
records, aircraft maintenance records and inventory control are in the final
stages of being automated from manual systems to computer systems that are
certified as being Year 2000 compliant. The Boeing Company has verified that the
computer systems on the aircraft type operated by us are or will be Year 2000
compliant before the year 2000. We plan to complete the testing and remediation
phases by September 30, 1999, and the contingency planning phase by October 31,
1999.
We have utilized existing resources with the exception of four temporary
personnel and have incurred $60,000 of expenses to implement our Year 2000
project as of March 31, 1999. The total remaining costs of the Year 2000 project
are expected to be insignificant and will be funded through cash from
operations. The costs and the dates on which we anticipate completion of the
Year 2000 project are based on our best estimates. There can be no guarantee
that these estimates will be achieved and actual results could differ materially
from those anticipated.
Despite our efforts to address Year 2000 issues, we could potentially
experience disruptions to some of our operations, including those resulting from
non-compliant systems used by third party businesses and governmental entities.
Our business, financial condition or results of operations could be materially
adversely affected by the failure of our systems or those operated by third
parties upon which our business relies.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
The risk inherent in our market risk sensitive position is the potential
loss arising from an adverse change in the price of fuel as described below. The
sensitivity analysis presented does not consider either the effects that such an
adverse change may have on overall economic activity or additional actions
management may take to mitigate our exposure to such a change. Actual results
may differ from the amounts disclosed. At the present time, we do not utilize
fuel price hedging instruments to reduce our exposure to fluctuations in fuel
prices.
Our earnings are affected by changes in the price and availability of
aircraft fuel. Market risk is estimated as a hypothetical 10 percent increase in
the average cost per gallon of fuel for the fiscal year ended March 31, 1999.
Based on fiscal year 1999 actual fuel usage, such an increase would have
resulted in an increase to aircraft fuel expense of approximately $2,300,000 in
fiscal year 1999. Comparatively, based on projected fiscal year 2000 fuel usage,
such an increase would result in an increase to aircraft fuel expense of
approximately $3,100,000 in fiscal year 2000. The increase in exposure to fuel
price fluctuations in fiscal year 2000 is due to our plan to increase our
average aircraft fleet size and related gallons purchased.
Item 8: Financial Statements
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.
We have not, during the past three years and through the date of this
report, had a change in our independent certified public accountants or had a
disagreement with such accountants on any matter of accounting principles,
practices or financial statement disclosure.
PART III
Item 10: Directors and Executive Officers of the Registrant.
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
shareholders to be held on September 9, 1999. We will file the definitive Proxy
Statement with the Commission on or before July 29, 1999.
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
shareholders to be held on September 9, 1999. We will file the definitive Proxy
Statement with the Commission on or before July 29, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
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 shareholders to be held on September 9, 1999. We will
file the definitive Proxy Statement with the Commission on or before July 29,
1999.
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
shareholders to be held on September 9, 1999. We will file the definitive Proxy
Statement with the Commission on or before July 29, 1999.
PART IV
Item 14(a): Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Exhibit
Numbers Description of Exhibits
3.1 Amended and Restated Articles of Incorporation of the Company.(12)
3.2 Amended Bylaws of the Company (June 9, 1997). (5)
4.1 Specimen Common Stock certificate of the Company. (1)
4.2 The Amended and Restated Articles of Incorporation and Amended
Bylaws of the Company are included as Exhibits 3.1 and 3.2.
4.3 Form of Warrant. (1)
4.4 Rights Agreement, dated as of February 20, 1997, between Frontier
Airlines, Inc. and American Securities Transfer & Trust, Inc,
including the form of Rights Certificate and the Summary of Rights
attached thereto as Exhibits A and B, respectively, incorporated
by reference to Frontier Airlines, Inc. Registration Statement
on Form 8-A dated March 11, 1997. (6)
4.4(a) Amendment to Rights Agreement dated June 30, 1997. (5)
4.4(b) Amendment to Rights Agreement dated December 5, 1997. (13)
10.1 Office Lease. (1)
10.2 Office Lease Supplements and Amendments. (5)
10.2(a) Addendum to Office Lease (10)
10.2(b) Office Lease Supplements and Amendments (13)
10.3 1994 Stock Option Plan. (1)
10.4 Amendment No. 1 to 1994 Stock Option Plan. (2)
10.4(a) Amendment No. 2 to 1994 Stock Option Plan (5)
10.5 Registration Rights Agreement. (1)
10.6 Sales Agreement. (1)
10.7 Airport Use and Facilities Agreement, Denver International Airport
(2)
10.8 Aircraft Lease Agreement dated as of July 26, 1994. (2)
10.8(a) Assignment and Assumption Agreements dated as of March 28, 1997
and March 20, 1997 between USAirways, Inc. and First Security
Bank, National Association ("Trustee") and Frontier Airlines, Inc.
(5)
10.8(b) Amendment No. 1, dated June 5, 1997, to Lease Agreement dated
as of July 26, 1994 between Frontier Airlines, Inc. and First
Security Bank, National Association. (5)
10.9 Code Sharing Agreement. (5)
10.10 Aircraft Lease Agreement dated as of October 20, 1995 (MSN 23177).
(3)
10.11 Aircraft Lease Agreement dated as of October 20, 1995 (MSN 23257).
(3)
10.12 Aircraft Lease Agreement dated as of May 1, 1996. (3)
10.13 Aircraft Lease Agreement dated as of June 3, 1996. (3)
10.13(a) Amendment No.1 to Aircraft Lease Agreement dated as of June 3,
1996.(10)
10.14 Aircraft Lease Agreement dated as of June 12, 1996. 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. (3)
10.15 Operating Lease Agreement dated November 1, 1996 between the
Company and First Security Bank, National Association. 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. (4)
10.16 Aircraft Lease Agreement (MSN 28760) dated as of December 12, 1996
between the Company and Boullion Aircraft Holding Company, 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. (4)
10.16(a) Amendment No. 1 to Aircraft Lease Agreement (MSN 28760) dated
May 20, 1997. Portions of this Exhibit have been excluded from the
publicly available document and an application for an order
granting confidential treatment of the excluded material has been
made. (5)
10.17 Aircraft Lease Agreement (MSN 28662) dated as of December 12, 1996
between the Company and Boullion Aircraft Holding Company, 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. (4)
10.17(a) Amendment No. 1 to Aircraft Lease Agreement (MSN 28662) dated
May 20, 1997. Portions of this Exhibit have been excluded from the
publicly available document and an a pplication for an order
granting confidential treatment of the excluded material has been
made. (5)
10.18 Aircraft Lease Agreement (MSN 28563) dated as of March 25, 1997
between the Company and General Electric Capital Corporation.
Portions of this Exhibit have been excluded from the publicly
available document and an application for an order granting
confidential treatment of the excluded material has been made. (5)
10.19 Space and Use Agreement with Continental Airlines, as amended.
Portions of this Exhibit have been excluded from the publicly
available document and an application for an order granting
confidential treatment of the excluded material has been made. (5)
10.20 Letterof Understanding with Continental Airlines dated August 16,
1996. Portions of this Exhibit have been excluded from the
publicly available document and an application for an order
granting confidential treatment of the excluded material has been
made. (5)
10.21 Service Agreement between Frontier Airlines, Inc and Greenwich Air
Services, Inc. dated May 19, 1997. Portions of this Exhibit have
been excluded from the publicly available document and an
application for an order granting confidential treatment of the
excluded material has been made. (5)
10.22 Agreement between Frontier Airlines, Inc. and Dallas Aerospace,
Inc. dated April 17, 1997. Portions of this Exhibit have been
excluded from the publicly available document and an application
for an order granting confidential treatment of the excluded
material has been made. (5)
10.23 General Services Agreement between Frontier Airlines, Inc. and
Tramco, Inc. dated as of August 6, 1996. (5)
10.24 General Terms Engine Lease Agreement between Frontier Airlines,
Inc. and Terandon Leasing Corporation dated as of August 15, 1996,
as assigned to U.S. Bancorp Leasing and Financial on February 19,
1997. Portions of this Exhibit have been excluded from the
publicly available document and an application for an order
granting confidential treatment of the excluded material has
been made. (5)
10.25 Lease Agreement between Frontier Airlines, Inc. and Aircraft
Instrument and Radio Company, Inc, dated December 11, 1995.
Portions of this Exhibit have been excluded from the publicly
available document and an application for an order granting
confidential treatment of the excluded material has been made. (5)
10.26 Agreement and Plan of Merger between Western Pacific Airlines,
Inc. and Frontier Airlines, Inc. dated June 30, 1997. (5)
10.26(a) Agreement dated as of September 29, 1997 between Western Pacific
Airlines, Inc. and Frontier Airlines, Inc. (7)
10.27 Security Agreement with Wexford Management LLC dated December 2,
1997. (8)
10.28 Amended and Restated Warrant Agreement with Wexford Management LLC
dated as of February 27, 1998. (12)
10.29 Amended and Restated R egistration Rights Agreement with Wexford
Management LLC dated as of February 27, 1998. (12)
10.30 Securties Purchase Agreement with B III Capital Partners, L.P.
dated as of April 24, 1998. (9)
10.31 Registration Rights Agreement with B III Capital Partners, L.P.
dated as of April 24, 1998. (12)
10.32 Warrant Agreement with The Seabury Group, LLC dated as of May 26,
1998. (12)
10.33 Registration Rights Agreement with The Seabury Group, LLC dated as
of May 26, 1998. (12)
10.34 Aircraft Lease Agreement (MSN 21613) dated as of August 10, 1998
between the Company and Interlease Aviation Investors, L.L.C. (10)
10.35 Aircraft Lease Agreement (MSN 28738) dated as of November 23, 1998
among first Security Bank, National Association, Lessor, Heller
Financial Leasing, Inc., Owner participant, and the Company,
Lessee. (11).
10.36 Aircraft Sublease Agreement (MSN 28734) dated as of December 14,
1998 between Indigo pacific AB, Sublessor, and the Company,
Sublessee. (11)
10.37 Aircraft Lease Agreement (MSN 23004) dated as of February 26, 1999
between First Security Bank, N.A., Lessor, and Frontier Airlines,
Inc., Lessee. Portions of this exhibit have been excluded from
the publicly available document and an application for an order
granting confidential treatment of the excluded material has been
made. (13)
10.38 Aircraft Lease Agreement (MSN 23007) dated as of February 26, 1999
between First Security Bank, N.A. Lessor and Frontier Airlines,
Inc., Lessee. Portions of this exhibit have been excluded from
the publicly available document and an application for an order
granting confidential treatment of the excluded material has been
made. (13)
10.39 Aircraft Lease Agreement (MSN 26440) dated as of March 15, 1999
between Indigo Aviation AB (publ), Lessor, and Frontier Airlines,
Inc., Lessee. Portions of this exhibit have been excluded from
the publicly available document and an application for an order
granting confidential treatment of the excluded material has been
made. (13)
10.40 Aircraft Lease Agreement (MSN 24569) dated as of April 16, 1999
between C.I.T. Leasing Corporation, Lessor, and Frontier Airlines,
Inc., Lessee. Portions of this exhibit have been excluded from
the publicly available document and an application for an order
granting confidential treatment of the excluded material has been
made. (13)
10.41 Aircraft Lease Agreement (MSN 24856) dated as of June 2, 1999
between Indigo Aviation AB (publ), Lessor and Frontier Airlines,
Inc., Lessee. Portions of this exhibit have been excluded from
the publicly available document and an application for an order
granting confidential treatment of the excluded material has been
made. (13)
10.42 Severance Agreement dated March 10, 1999 between the Company and
Samuel D. Addoms. (13)
10.43 Space and Use Agreement between Continental Airlines, Inc. and the
Company. (13)
23.1 Consent of KPMG LLP (13)
27.1 Financial Data Schedule (13)
(1) Incorporated by reference from the Company's Registration Statement on
Form SB-2, Commission File No. 33-77790-D, declared effective May 20,
1994.
(2) Incorporated by reference from the Company's Annual Report on Form
10-KSB, Commission File No. 0-4877, filed on June 29, 1995.
(3) Incorporated by reference from the Company's Annual Report on Form
10-KSB, Commission File No. 0-4877, filed on June 24, 1996.
(4) Incorporated by reference from the Company's Quarterly Report on Form
10-QSB, Commission File No. 0-4877, filed on February 13, 1997.
(5) Incorporated by reference from the Company's Annual Report on Form
10-KSB, Commission File No. 0-24126, filed July 14, 1997.
(6) Incorporated by reference from the Company's Report on Form 8-K filed
on March 12, 1997.
(7) Incorporated by reference from the Company's Report on Form 8-K filed
on October 1, 1997.
(8) Incorporated by reference from the Company's Report on Form 8-K filed
on December 12, 1997.
(9) Incorporated by reference from the Company's Report on Form 8-K filed
on May 4, 1998.
(10) Incorporated by reference from the Company's Report on Form 10-Q,
Commission File No. 0-24126, filed on November 13, 1998.
(11) Incorporated by reference from the Company's Report on Form 10-Q,
Commission File No. 0-24126, filed on February 12, 1999.
(12) Incorporated by reference from the Company's Report on Form 10-K/A,
Commission file No. 0-24126, filed July 9, 1998.
(13) Filed herewith.
Item 14(b): Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended March 31,
1999.
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, INC.
Date: June 21, 1999 By: /s/ Samuel D. Addoms
------------------------------
Samuel D. Addoms, Principal
Executive Officer and Principal
Financial Officer
Date: June 21, 1999 By: /s/ Elissa A. Potucek
------------------------------
Elissa A. Potucek, Vice President,
Controller, Treasurer and
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: June 21, 1999 /s/ Samuel D. Addoms, Director
----------------------------------
Samuel D. Addoms, Director
Date: June 21, 1999 /s/ William B. McNamara, Director
----------------------------------
William B. McNamara, Director
Date: June 21, 1999 /s/ Paul Stephen Dempsey, Director
----------------------------------
Paul Stephen Dempsey, Director
Date: June 21, 1999 /s/ B. LaRae Orullian, Director
----------------------------------
B. LaRae Orullian, Director
Date: June 21, 1999 /s/ D. Dale Browning, Director
----------------------------------
D. Dale Browning, Director
Date: June 21, 1999 /s/ James B. Upchurch, Director
----------------------------------
James B. Upchurch, Director
Date: June 21, 1999 /s/ B. Ben Baldanza, Director
----------------------------------
B. Ben Baldanza, Director
Independent Auditors' Report
The Board of Directors and
Stockholders
Frontier Airlines, Inc.:
We have audited the accompanying balance sheets of Frontier Airlines, Inc. as of
March 31, 1999 and 1998, and the related statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
March 31, 1999. 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 generally accepted auditing
standards. 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, Inc., as of
March 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the years in the three-year period ended March 31, 1999, in
conformity with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
June 2, 1999, except as to
Note 11, which is as of June 16, 1999
FRONTIER AIRLINES, INC.
Balance Sheets
March 31, 1999 and 1998
March 31, March 31,
1999 1998
--------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 47,289,072 $ 3,641,395
Restricted investments 4,000,000 4,000,000
Trade receivables, net of allowance for doubtful accounts of $199,960
and $139,096 at March 31, 1999 and 1998, respectively 16,930,038 11,661,323
Maintenance deposits (note 3) 13,018,466 9,307,723
Prepaid expenses 5,439,834 3,843,694
Inventories 1,203,916 1,164,310
Deferred tax assets (note 5) 6,041,576 -
Deferred lease and other expenses 285,636 380,975
--------------- --------------
Total current assets 94,208,538 33,999,420
Security, maintenance and other deposits (note 3) 11,834,457 7,633,143
Property and equipment, net (note 2) 8,733,778 5,579,019
Deferred lease and other expenses 267,762 780,429
Restricted investments 4,575,760 2,606,459
--------------- --------------
$ 119,620,295 $ 50,598,470
=============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 14,011,238 $ 13,664,750
Air traffic liability 28,887,692 18,910,441
Other accrued expenses 10,781,509 5,157,640
Accrued maintenance expense (note 3) 14,933,568 12,537,228
Current portion of obligations under capital leases
(note 3) 106,833 54,346
--------------- --------------
Total current liabilities 68,720,840 50,324,405
Senior secured notes payable (note 4) - 3,468,138
Accrued maintenance expense (note 3) 6,042,958 2,381,354
Deferred tax liability (note 5) 30,928 -
Obligations under capital leases, excluding current
portion (note 3) 434,920 97,757
--------------- --------------
Total liabilities 75,229,646 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; 16,141,172 and 9,253,563 shares issued and
outstanding at March 31, 1999 and 1998, respectively 16,141 9,253
Additional paid-in capital 58,054,844 37,954,584
Unearned ESOP shares (note 8) (609,375) -
Accumulated deficit (13,070,961) (43,637,021)
--------------- --------------
44,390,649 (5,673,184)
--------------- --------------
Commitments and contingencies (notes 3, 6, 10 & 11)
$ 119,620,295 $ 50,598,470
=============== ==============
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Operations
Years Ended March 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Revenues:
Passenger $ 214,311,312 $ 142,018,392 $ 113,758,027
Cargo 4,881,066 3,008,919 1,956,150
Other 1,415,332 2,115,326 786,457
-------------- --------------- --------------
Total revenues 220,607,710 147,142,637 116,500,634
-------------- --------------- --------------
Operating expenses:
Flight operations 79,247,347 66,288,125 52,650,575
Aircraft and traffic servicing 34,146,888 30,684,992 24,849,388
Maintenance 36,090,052 31,790,600 24,945,636
Promotion and sales 35,620,954 29,328,970 21,526,345
General and administrative 9,163,045 6,352,977 4,617,982
Depreciation and amortization 1,659,429 1,251,364 1,072,160
-------------- --------------- --------------
Total operating expenses 195,927,715 165,697,028 129,662,086
-------------- --------------- --------------
Operating income (loss) 24,679,995 (18,554,391) (13,161,452)
-------------- --------------- --------------
Nonoperating income, net:
Interest income 1,556,047 722,380 1,033,508
Interest expense (700,635) (324,167) (20,435)
Other, net (448,917) 409,808 (37,953)
-------------- --------------- --------------
Total nonoperating income, net 406,495 808,021 975,120
-------------- --------------- --------------
Net income (loss) before income tax 25,086,490 (17,746,370) (12,186,332)
Income tax benefit (note 5) 5,479,570 - -
-------------- --------------- --------------
Net income (loss) $ 30,566,060 $ (17,746,370) $ (12,186,332)
============== =============== ==============
Earnings (loss) per share:
Basic $2.14 ($1.95) ($1.49)
============== =============== ==============
Diluted $1.98 ($1.95) ($1.49)
============== =============== ==============
Weighted average shares of
common stock outstanding
14,257,661 9,095,220 8,156,302
============== =============== ==============
Weighted average shares of common stock and
common stock equivalents outstanding
15,401,435 9,095,220 8,156,302
============== =============== ==============
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Stockholders' Equity
Years Ended March 31, 1999, 1998 and 1997
Common
Stock Additional Unearned Total
Stated paid-in ESOP Accumulated stockholders'
Shares value capital shares Deficit equity
--------------- ------------ ------------ ------------ -------------- --------------
Balances,
March 31, 1996 5,420,640 $ 5,421 $ 18,399,918 $ - $ (13,704,319) $ 4,701,020
Sale of common stock, net of
offering costs of $279,385 678,733 679 2,720,615 - - 2,721,294
Exercise of common stock
warrants, net of issuance
costs of $55,518 2,666,133 2,666 13,275,145 - - 13,277,811
Contribution of common stock to
employees stock ownership
plan 78,869 78 499,922 - - 500,000
Issuance of warrants - - 869,110 - - 869,110
Net loss - - - - (12,186,332) (12,186,332)
--------------- ------------ ------------ ------------ -------------- --------------
Balances,
March 31, 1997 8,844,375 8,844 35,764,710 - (25,890,651) 9,882,903
Exercise of common stock
options 409,188 409 434,948 - - 435,357
Warrants issued in conjunction
with debt - - 1,754,926 - - 1,754,926
Net loss - - - - (17,746,370) (17,746,370)
--------------- ------------ ------------ ------------ -------------- --------------
Balances,
March 31, 1998 9,253,563 9,253 37,954,584 - (43,637,021) (5,673,184)
Sale of common stock, net of
offering costs of $525,059 4,363,001 4,363 13,650,331 - - 13,654,694
Contribution of common stock to
employees stock ownership
plan 275,000 275 1,457,975 (609,375) - 848,875
Exercise of common stock
warrants 1,796,400 1,797 4,360,022 - - 4,361,819
Exercise of common stock
options 453,208 453 631,932 - - 632,385
Net income - - - -
30,566,060 30,566,060
--------------- ------------ ------------ ------------ -------------- --------------
Balances,
March 31, 1999 16,141,172 $ 16,141 $ 58,054,844 $ (609,375) $ (13,070,961) $ 44,390,649
=============== ============ ============ ============ ============== ==============
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Statements of Cash Flows
Years ended March 31, 1999, 1998, and 1997
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 30,566,060 $ (17,746,370) $ (12,186,332)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Employee stock ownership plan compensation
expense 848,600 - 500,000
Depreciation and amortization 2,705,255 1,749,097 1,322,916
Loss on sale of equipment 3,867 10,334 4,708
Changes in operating assets and liabilities:
Restricted investments (425,301) (2,372,326) 82,458
Trade receivables (5,268,715) (4,209,981) (1,579,184)
Security, maintenance and other deposits (6,968,057) (3,583,327) (1,608,524)
Prepaid expenses (1,596,140) (393,823) (562,954)
Inventories (39,606) (167,208) (427,926)
Note receivable - 11,740 10,950
Deferred tax benefit (6,010,648) - -
Accounts payable 346,488 5,619,217 3,643,071
Air traffic liability 9,977,251 5,851,809 1,858,072
Other accrued expenses 5,758,840 1,839,597 1,323,037
Accrued maintenance expense 6,057,944 5,233,104 1,151,443
-------------- --------------- --------------
Net cash provided (used) by
operating activities 35,955,838 (8,158,137) (6,468,265)
-------------- --------------- --------------
Cash flows used by investing activities:
Decrease in short-term investments - - 1,168,200
Aircraft lease deposits (944,000) 207,500 (2,682,250)
Increase in restricted investments (1,544,000) (1,500,000) (600,000)
Capital expenditures (4,313,065) (2,355,266) (3,434,789)
-------------- --------------- --------------
Net cash used in investing activities (6,801,065) (3,647,766) (5,548,839)
-------------- --------------- --------------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants 15,550,085 435,357 15,999,455
Proceeds from sale of senior secured notes - 5,000,000 -
Principal payments on senior secured notes (941,841) - -
Cash payments for debt issuance costs - (227,500) -
Proceeds from short-term borrowings 179,664 202,810 95,911
Principal payments on short-term borrowings (179,664) (212,622) (96,540)
Principal payments on obligations under capital leases (115,340) (37,200) (54,523)
-------------- --------------- --------------
Net cash provided by financing activities 14,492,904 5,160,845 15,944,303
-------------- --------------- --------------
Net increase (decrease) in cash and
cash equivalents 43,647,677 (6,645,058) 3,927,199
Cash and cash equivalents, beginning of period 3,641,395 10,286,453 6,359,254
-------------- --------------- --------------
Cash and cash equivalents, end of period $ 47,289,072 $ 3,641,395 $ 10,286,453
============== =============== ==============
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC.
Notes to Financial Statements
March 31, 1999
(1) Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Frontier Airlines, Inc. (the "Company") was incorporated in the State
of Colorado on February 8, 1994 and is a scheduled airline based in
Denver, Colorado which currently serves cities on the west and east
coasts, as well as intermediate cities in relatively close proximity to
Denver. The Company commenced airline operations on July 5, 1994.
Airline operations have high fixed costs and are highly sensitive to
various factors incuding the actions of competing airlines and general
economic factors.
Preparation of Financial Statements
The preparation of financial statements in conformity with 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.
Supplemental Disclosure of Cash Flow Information
Noncash Financing and Investment Activities:
During the year ended March 31, 1998, the Company issued warrants to its
lender in connection with its $5,000,000 senior secured notes with an
estimated fair market value totaling $1,645,434, and issued warrants to
its financial advisor in connection with debt and equity financing with
an estimated fair market value totaling $109,492. Also during the years
ended March 31, 1999 and 1998, the Company entered into capital lease
agreements totaling $504,900 and $97,000, respectively. During the year
ended March 31, 1998 the Company exchanged a note receivable for certain
property and equipment totaling $47,000. In the years ended March 31,
1997 and 1996, the Company issued warrants to aircraft lessors with an
estimated fair market value totaling $869,110 and $577,200,
respectively.
FRONTIER AIRLINES, INC.
Notes to Financial Statements, continued
- --------------------------------------------------------------------------------
(1) Nature of Business and Summary of Significant Accounting Policies
(continued)
Interest and Taxes Paid During the Year:
Cash paid for interest totaled $302,503, $184,999, and $20,435, for the
years ended March 31, 1999, 1998 and 1997, respectively. No income taxes
were paid during the years ended March 31, 1999, 1998, and 1997.
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 market value. Maturities are for one year or less
and the Company intends to hold restricted investments until maturity.
Valulation and Qualifying Accounts
The allowance for doubtful accounts was $199,960 and $139,096 at March
31, 1999 and 1998, respectively. Provisions for bad debts net of
recoveries totaled $386,000, $267,000, and $160,000 for the years ended
March 31, 1999, 1998 and 1997. Deductions from the reserve totaled
$330,000, $200,000, and $120,000 for the years ended March 31, 1999.
1998, and 1997, respectively.
Inventories
Inventories consist of expendable 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.
The Company has two aircraft parts agreements for its Boeing 737
aircraft as discussed in note 3, one with another air carrier and
another with an aircraft parts supplier. The Company is required to pay
a monthly consignment fee to each of these lessors, based on the value
of the consigned parts, and to replenish any such parts when used with a
like part. At March 31, 1999 and 1998, the Company held consigned parts
and supplies in the amount of approximately $8,902,000 and $8,161,000,
respectively, which are not included in the Company's balance sheet.
(1) Nature of Business and Summary of Significant Accounting Policies
(continued)
Property and Equipment
Property and equipment are carried at cost. Major additions, betterments
and renewals are capitalized. Depreciation and amortization is provided
for on a straight-line basis to estimated residual values over estimated
depreciable lives as follows:
Flight equipment 5-10 years
Improvements to leased aircraft Life of improvements or term
of lease, whichever is less
Ground property, equipment, and
leasehold improvements 3-5 years or term of lease
Assets utilized under capital leases are amortized over the lesser of
the lease term or the estimated useful life of the asset using the
straight-line method. Amortization of capital leases is included in
depreciation expense.
Maintenance
Routine maintenance and repairs are charged to operations as incurred.
Under the terms of its aircraft lease agreements, the Company is
required to make monthly maintenance deposits and a liability for
accrued maintenance is established based on usage; the deposits are
applied against the cost of major airframe maintenance checks, landing
gear and engine overhauls. Deposit balances remaining at lease
termination remain with the lessor and any remaining liability for
maintenance checks is reversed against the deposit balance.
Additionally, a provision is made for the estimated costs of scheduled
major overhauls required to be performed on leased aircraft and
components under the provisions of the aircraft lease agreements if the
required monthly deposit amounts are not adequate to cover the entire
cost of the scheduled maintenance. Accrued maintenance expense expected
to be incurred beyond one year is classified as long-term.
Revenue Recognition
Passenger, cargo, and other revenues are recognized when the
transportation is provided or after the tickets expire, and are net of
excise taxes. Revenues which have been deferred are included in the
accompanying balance sheet as air traffic liability.
(1) Nature of Business and Summary of Significant Accounting Policies
(continued)
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.
Frequent Flyer Awards
The Company allows its passengers to accumulate mileage on Continental
Airlines' OnePass frequent flyer program. The cost of providing mileage
on the OnePass program is based on an agreed upon rate per mileage
credit, which is paid to Continental Airlines on a monthly basis.
Income (Loss) Per Common Share
Basic EPS excludes dilution and is computed by dividing income (loss)
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in earnings. Common
stock equivalents are excluded from the computation of diluted loss per
share in 1998 and 1997 as their effect would have been anti-dilutive.
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 the existing
assets and liabilities. A valuation allowance for net 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.
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, 1999.
(1) Nature of Business and Summary of Significant Accounting Policies
(continued)
Stock Based Compensation
The Company follows 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 No. 123). Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized. The Company has included the pro forma disclosures required
by SFAS No. 123 in Note 7.
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 assets' carrying amount.
(2) Property and Equipment, Net
As of March 31, 1999 and 1998 property and equipment consisted of the
following:
1999 1998
---- ----
Flight equipment and improvements to leased aircraft $ 7,204,878 $ 4,932,024
Ground property, equipment and leasehold improvements 6,186,490 3,673,363
--------------- --------------
13,391,368 8,605,387
Less accumulated depreciation and amortization 4,657,590 3,026,368
--------------- --------------
Property and equipment, net $ 8,733,778 $ 5,579,019
=============== ==============
Property and equipment includes certain office equipment under capital
leases. At March 31, 1999 and 1998, office equipment recorded under capital
leases was $785,847 and $280,857 and accumulated amortization was $154,942
and $113,364, respectively.
(3) Lease Commitments
Aircraft Leases
At March 31, 1999, the Company operated 17 aircraft which are accounted
for under operating lease agreements with initial terms ranging from 2
to 8 years with certain leases that allow for renewal options. Security
deposits related to leased aircraft at March 31, 1999 and 1998 totaled
$5,548,750 and $4,604,750 and are included in security, maintenance and
other deposits on the balance sheet. Letters of credit issued to certain
aircraft lessors in lieu of cash deposits and related restricted
investments to secure these letters of credit at March 31, 1999 and 1998
totaled $3,644,000 and $2,100,000, respectively.
In addition to scheduled future minimum lease payments, the Company is
generally required to pay to each aircraft lessor monthly cash deposits
based on flight hours and cycles operated to provide funding for certain
scheduled maintenance costs of leased aircraft. The lease agreements
provide that the Company shall pay taxes, maintenance, insurance, and
other operating expenses applicable to the leased property. At March 31,
1999 and 1998, aircraft maintenance deposits totaled $18,672,825 and
$11,466,033, respectively, and are reported as a component of security,
maintenance and other deposits on the balance sheet.
Any cash deposits paid to aircraft lessors for future scheduled
maintenance costs to the extent not used during the lease term remain
with the lessors, and any remaining liability for maintenance checks is
reversed against the deposit balance. Maintenance deposits are unsecured
and may be subject to the risk of loss in the event the lessors are not
able to satisfy their obligations under the lease agreements.
Other Leases
The Company leases an office and hangar space, a spare engine and office
equipment for its headquarters, airport facilities, and certain ground
equipment. The Company also leases certain airport gate facilities on a
month-to-month basis.
(3) Lease Commitments (continued)
At March 31, 1999, commitments under capital and noncancelable operating
leases (excluding maintenance deposit requirements) with terms in excess
of one year were as follows:
Capital Operating
Leases Leases
Year ended March 31:
2000 $ 158,452 $ 45,978,116
2001 153,320 34,799,628
2002 153,320 30,256,397
2003 153,320 26,341,587
2004 44,322 25,856,040
Thereafter - 20,371,397
Total minimum lease payments $ 662,734 $183,603,165
Less amount representing interest (120,981)
Present value of obligations under
capital leases 541,753
Less current portion of obligations under
capital leases 106,833
Obligations under capital leases,
excluding current portion $ 434,920
The obligations under capital leases have been discounted at imputed
interest rates ranging from 10% to 13%.
Rental expense under operating leases, including month-to-month leases, for
the years ended March 31, 1999, 1998 and 1997 was $46,099,140, $36,573,509
and $25,336,749, respectively.
(4) Senior Secured Notes
In December 1997, the Company sold $5,000,000 of 10% senior secured
notes to Wexford Management LLC ("Wexford"). The notes were due and
payable in full on December 15, 2001 with interest payable quarterly in
arrears. The notes were secured by substantially all of the assets of
the Company. The Wexford agreement contained restrictions primarily
related to liens on assets and required 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 a discount on notes payable and as equity in additional paid-in
capital. The balance of the notes were to be accreted to its face value
over the term of the notes and included as interest expense. The
effective interest rate on the notes was approximately 18.2% including
the value of the warrants
During the year ended March 31, 1999, Wexford exercised all of the
warrants described above. As permitted 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. The total amount of $5,250,000 from the
exercise was comprised of the following: payment of accrued interest
totaling $134,971, then to the outstanding principal balance totaling
$4,058,159, and the remaining balance in cash to the Company totaling
$1,056,870. In January 1999, the Company paid the remaining balance of
the note in full which totaled $941,841, thereby terminating all of
Wexford's security interests in the Company's assets.
The value of the outstanding warrants amortized to interest expense
prior to the pay-off of the notes totaled $199,975 and $113,454 for the
years ended March 31, 1999 and 1998, respectively. Upon the exercise of
the warrants by Wexford, $1,094,042 of unamortized discount was charged
to additional paid-in capital. The deferred cost of the remaining
warrants and other deferred loan costs totaled $485,846 at the repayment
date and was charged to expense and is included in other, net
non-operating income (expense).
(5) Income Taxes
Income tax expense (benefit) for the years ended March 31, 1999 consists
of:
Current Deferred Total
Year ended March 31, 1999:
U.S. Federal $ 531,077 $ (5,244,134) $ (4,713,057)
State and local (766,513) (766,513)
----------------------------------------------
$ 531,077 $(6,010,647) $(5,479,570)
==============================================
There was no income tax expense or benefit in 1998 or 1997.
The differences between the Company's effective rate for income taxes
and the federal statutory rate are comprised of the items shown in the
following table:
1999 1998 1997
---- ---- ----
Income tax benefit (expense)
at the statutory rate (35%) 34% 34%
(Increase) decrease in valuation
allowance 60% (34%) (34%)
State and local income tax, net of
federal income tax benefit (3%) - -
===========================================
22% - -
===========================================
(5) Income Taxes, continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at March 31, 1999 and 1998 are
presented below:
1999 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards $4,548,000 $13,434,000
AMT credit carryforward 525,000 -
Start-up cost deferred for
tax purposes 55,000 108,000
Accrued maintenance not
deductible for tax purposes 212,000 899,000
Accrued vacation and health
insurance liability not
deductible for tax purposes 654,000 527,000
Other 103,000 110,000
------------------ -------------------
Total gross deferred tax assets 6,097,000 15,078,000
Less valuation allowance - (14,832,000)
------------------ -------------------
6,097,000 246,000
------------------ -------------------
Deferred tax liabilities:
Equipment depreciation and
amortization (86,000) (246,000)
================== ===================
Net deferred taxes $6,011,000 $ -
================== ===================
(5) Income Taxes, continued
The Company recognized an income tax benefit of $5,479,570 in 1999
attributable to the probable realization of its remaining income tax
loss carryforwards for which a valuation allowance had previously been
recorded. The valuation allowance for deferred tax assets as of March
31, 1998 and 1997 was $14,832,000 and $8,934,000, respectively. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of
deferred tax 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 Company's
profitibility in fiscal 1999 and projections for fiscal 2000 taxable
income, management believes it is more likely than not that the Company
will realize the benefits of these deductible differences; accordingly,
a valuation allowance is no longer considered necessary. As a result of
reversing its valuation allowance, the Company expects it will recognize
income tax expense on future income based on statutory rates. The
Company had net operating loss carryforwards of approximately
$11,891,000 which expire in the years 2010 to 2012, and alternative
minimum tax credits of approximately $525,000 which are available to
reduce future federal regular income taxes, if any, over an indefinite
period.
(6) Warrants and Rights Dividend
The Company issued 2,670,000 warrants to purchase common stock in
conjunction with a private placement and its initial public offering.
Each warrant entitled the warrant holder to purchase one share of common
stock for $5.00. These warrants were subject to redemption at $.05 per
warrant by the Company on 45 days written notice if certain conditions
were met. The Company met these conditions in May 1996 and on May 14,
1996, the Company notified the warrant holders of the Company's intent
to exercise its redemption rights with respect to the warrants not
exercised on or before June 28, 1996. 2,666,133 warrants were exercised
with net proceeds to the Company totaling $13,275,000.
At completion of the Company's initial public offering in 1994, an
underwriter acquired options to purchase up to 110,000 shares of common
stock exercisable at a price equal to $5.525 per share. At March 31,
1999, 26,400 options were exercised with net proceeds to the Company
totaling $145,860. (See note 11). The underwriters in a secondary public
offering by the Company in 1995 received a warrant to purchase 119,211
shares of common stock at $5.55 per share. The options and warrants
issued to underwriters in connection with the initial and secondary
public offerings expire, respectively, on May 20, 1999 and September 18,
2000.
(6) Warrants and Rights Dividend, continued
In October 1995, the Company issued to each of two of its Boeing 737-300
aircraft lessors a warrant to purchase 100,000 shares of common stock
for an aggregate purchase price of $500,000. In June 1996, the Company
issued two warrants to a Boeing 737-200 lessor, each warrant entitling
the lessor to purchase 70,000 shares of common stock at an aggregate
exercise price of $503,300 per warrant. In connection with a Boeing
737-300 aircraft delivered in August 1997, the Company issued to the
lessor a warrant to purchase 55,000 shares of Common Stock at an
aggregate purchase price of $385,000. Warrants issued to aircraft
lessors, to the extent not earlier exercised, expire upon expiration of
the aircraft leases in March 2000, May 2001 and June 2002. (See note
11).
In February 1998, in connection with the $5,000,000 senior notes as
discussed in note 4, the Company issued a warrant to the lender to
purchase 1,750,000 shares of the Company's common stock at a purchase
price of $3.00 per share, which warrant expires in December 2001. During
the year ended March 31, 1999, this warrant was exercised in its
entirety as discussed in note 4. In May 1998, the Company issued to its
financial advisor, in connection with debt and equity financings, a
warrant to purchase 548,000 shares of the Company's common stock at a
purchase price of $3.00 per share, which warrant expires in May 2003.
(See note 11). Of the 548,000 shares, 116,450 were recognized as of
March 31, 1998 as part of the sale of the senior secured notes discussed
in note 4. The Company recorded a value of $109,492 for these warrants
attributable to the debt and recorded the value as equity in additional
paid in capital and deferred loan expenses. The amount was fully
amortized during the year ended March 31, 1999 as discussed in note 4.
In April 1998, in connection with a private placement of 4,363,001
shares of its common stock, the Company issued a warrant to an
institutional investor to purchase 716,929 shares of its common stock at
a purchase price of $3.75 per share, which warrant expires in April
2002.
In February 1997, the Board of Directors declared a dividend
distribution of one common stock purchase right for each share of the
Company's common stock outstanding on March 15, 1997. Each right
entitles a shareholder to purchase one share of the Company's common
stock at a purchase price of $17.50 per full common share, subject to
adjustment. The rights are not currently exercisable, but would become
exercisable if certain events occurred relating to a person or group
acquiring or attempting to acquire 20 percent or more of the outstanding
shares of the Company's common stock. The rights expire on February 20,
2007, unless redeemed by the Company earlier. Once the rights become
exercisable, each holder of a right will have the right to receive, upon
exercise, common stock (or, in certain circumstances, cash, property or
other securities of the Company) having a value equal to two times the
exercise price of the right.
(7) Stock Option Plan
The Company has a stock option plan whereby the Board of Directors or
its Compensation Committee may issue options to purchase shares of the
Company's common stock to employees, officers, and directors of the
Company.
Under the plan, the Company has reserved an aggregate of 4,250,000
shares of common stock for issuance pursuant to the exercise of options.
With certain exceptions, options issued through March 31, 1999 generally
vest over a five year period from the date of grant and expire from
March 9, 2004 to March 28, 2009. At March 31, 1999, 1,591,250 options
are available for grant under the plan.
A summary of the Plan's stock option activity and related information
for the years ended March 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997
--------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------------------------------------------------------------------------
Outstanding-beginning of year 1,532,062 $1.56 1,911,250 $1.85 1,731,250 $1.27
Granted 717,500 $5.94 30,000 $2.77 180,000 $7.40
Exercised (453,208) $1.34 (409,188) $1.06 - -
Surrendered - - (180,000) $7.40 - -
Re-issued - - 180,000 $3.00 - -
--------------------------------------------------------------------------
1,796,354 $3.35 1,532,062 $1.56 1,911,250 $1.85
==========================================================================
Exercisable at end of year 1,103,020 $1.70 1,761,250 $1.39 1,671,250 $1.20
Exercise prices for options outstanding under the plan as of March 31,
1999 ranged from $1.00 to $9.00 per option share. The weighted-average
remaining contractual life of those options is 7.1 years. A summary of
the outstanding and exercisable options at March 31, 1999, segregated by
exercise price ranges, is as follows:
---------------------------------------------------------------------------------------------------
Weighted-
Average
Weighted- Remaining Weighted-
Exercise Price Options Average Contractual Exercisable Average
Range Outstanding Exercise Price Life (in years) Options Exercise Price
---------------------------------------------------------------------------------------------------
$ 1.00 - $ 2.50 800,937 $1.10 5.0 800,937 $1.10
$ 3.00 - $ 5.06 640,417 3.49 8.3 302,083 3.30
$ 8.13 - $ 9.00 355,000 8.20 10.0
-----------------------------------------------------------------------------------
1,796,354 $3.35 7.1 1,103,020 $1.48
===================================================================================
(6) Stock Option Plan, continued
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost is
recognized for options granted at a price equal to the fair market value
of the common stock. Pro forma information regarding net income and
earnings per share is required by SFAS No. 123, which also requires that
the information be determined as if the Company has accounted for its
employee stock options granted subsequent to March 31, 1995 under the
fair value method of that Statement. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1999, 1998 and
1997, respectively: risk-free interest rates of 5.36%, 6.42% and 6.55%,
dividend yields of 0%, 0% and 0%; volatility factors of the expected
market price of the Company's common stock of 69.25%, 64.33% and 58.78%,
and a weighted-average expected life of the options of 3.6 years for
each year. 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 is as follows:
1999 1998 1997
---- ---- ----
Net Income:
As reported $ 30,566,060 $(17,746,370) $(12,186,332)
Pro forma $ 30,263,570 $(17,842,594) $(12,366,532)
Earnings (loss) per share, basic:
As reported $ 2.14 $ (1.95) $ (1.49)
Proforma $ 2.12 $ (1.96) $ (1.52)
Earnings (loss) per share, diluted:
As reported $ 1.98 $ (1.95) $ (1.49)
Proforma $ 1.96 $ (1.96) $ (1.52)
(8) Benefit Plans
Employee Stock Ownership Plan
The Company has established an Employee Stock Ownership Plan (ESOP)
which inures to 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, will be 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 will 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
(8) Benefit Plans, continued
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.
The initial Company contribution to the ESOP was made on June 22, 1995
and consisted of 137,340 shares of Common Stock, of which 27,468 shares
relate to the plan year ended March 31, 1995 and 109,872 shares relate
to the period from April 1, 1995 to December 31, 1995. During the years
ended March 31, 1999 and 1997, the Company contributed 275,000 and
78,869 shares to the plan and none during the year ended March 31, 1998.
The Company recognized compensation expense during the year ended March
31, 1999 and 1997 of $848,600 and $500,000, respectively, related to its
contribution to the ESOP and none during the year ended March 31, 1998.
Retirement Savings Plan
The Company has established a Retirement Savings Plan (401(k)).
Participants may contribute from 1% to 15% of pre-tax annual
compensation. Individual pre-tax participant contributions are limited
annually (not to exceed $10,000 for calander year 1998 and $9,500 for
calander years 1997 and 1996) under the Internal Revenue Code.
Participants are immediately vested in their voluntary contributions,
adjusted by any actual earnings and/or losses there on from the specific
investments.
Effective April 1999, for the plan year ending December 31, 1999, the
Company's Board of Directors elected to match 25% of Participant
contributions from April 1999 through December 1999. The Company has not
matched any contributions made prior to this date. 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 will
vest in contributions made to the 401(k) upon their years of service
with the Company. A year of service is a 401(k) 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.
(9) Concentration of Credit Risk
The Company does not believe it is subject to any significant
concentration of credit risk relating to trade receivables. At March 31,
1999 and 1998, 70% and 60% of the Company's trade receivables relate 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, or the United States Postal Service. These receivables are
short-term, generally being settled shortly after sale or in the month
following ticket usage.
(10) Contingencies
The Company is party to legal proceedings and claims which arise during
the ordinary course of business. In the opinion of management, the
ultimate outcome of these matters will not have a material adverse
effect upon the Company's financial position or results of operations.
The Company uses information systems in managing and conducting certain
aspects of its business. The Company is taking measures to address Year
2000 compliance of its systems and processes. Failure by the company and
its key business partners (e.g., the FAA, DOT, airport authorities,
credit card companies, suppliers, and data providers) to achieve Year
2000 compliance on a timely basis could have a significant adverse
impact on the Company's business financial condition and operating
results.
(11) Subsequent Events
During April and June 1999, the Company entered into two aircraft leases
for two aircraft with lease terms of 6 and 7 years, respectively. Annual
rental expense for these two aircraft total $5,160,000.
During April and May 1999, the underwriter of the Company's initial
public offering in 1994, exercised the remaining 83,600 options with net
proceeds to the Company totaling $461,890.
During May and June 1999, aircraft lessors exercised 395,000 warrants
with net proceeds to the Company totaling $2,391,600. To the extent that
the aircraft lessors were able to realize certain profit margins on
their subsequent sale of the stock, they were required to refund a
portion of the cash security deposits they were holding. As a result of
their sale of the Company's common stock, $486,000 in cash security
deposits were returned to the Company during the month of May 1999.
During June 1999, a financial consultant exercised its warrant to
purchase 548,000 shares of the Company's common stock with net proceeds
to the Company totaling $1,644,000.
(11) Subsequent Events, continued
Between April 1, 1999 and June 16, 1999, 65,000 options issued under the
Company's Stock Option Plan were exercised with net proceeds to the
Company totaling $65,000.
As a result of these warrant and option exercises, the Company has
17,232,772 shares of its common stock outstanding as of June 16, 1999.