<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A AMENDMENT NO. 1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-4877
FRONTIER AIRLINES, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1256945
(State of Incorporation) (IRS Employer ID No.)
12015 E. 46th Avenue
Denver, Colorado 80239
303-371-7400
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Common Stock, no par value per share: 5,420,640 shares outstanding as of 2/12/96
<PAGE>
FRONTIER AIRLINES, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE NO.
ITEM 1 FINANCIAL STATEMENTS 3
Condensed Balanced Sheets 3
Condensed Statements of Operations 4
Condensed Statements of Cash Flows 5
Notes to Financial Statements 6
ITEM 2 MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OR OPERATION 8
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 20
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
FRONTIER AIRLINES, INC.
Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1995
-------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,834,741 $ 4,024,656
Restricted investments 1,277,017 2,161,479
Trade receivables 3,582,975 5,037,718
Maintenance deposits - 3,167,483
Prepaid expenses and other assets 852,192 2,576,943
------------------------
Total current assets 9,546,925 16,968,279
Security and other deposits 2,504,037 4,554,241
Property and equipment, net 1,598,166 2,019,449
Restricted investments 97,000 55,000
------------------------
$13,746,128 $23,596,969
========================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,812,390 $ 3,662,586
Air traffic liability 3,816,446 7,693,712
Other accrued expenses 2,332,300 1,773,749
Accrued maintenance expense 533,316 4,586,177
Note payable - 41,374
Current portion of obligations under capital leases 34,357 37,368
------------------------
Total current liabilities 9,528,809 17,794,966
Accrued maintenance expense 2,428,160 2,374,923
Obligations under capital leases, excluding current
portion 146,667 118,253
------------------------
Total liabilities 12,103,636 20,288,142
------------------------
Stockholders' equity
Preferred stock, no par value, authorized
1,000,000 shares; none issued - -
Common stock, no par value, stated value of
$.001 per share, authorized 20,000,000 shares;
5,420,640 shares issued and outstanding 3,443 5,421
Additional paid-in capital 9,761,686 17,823,391
Unearned ESOP shares (note 3) - -
Accumulated deficit (8,122,637) (14,519,985)
------------------------
Total stockholders' equity 1,642,492 3,308,827
------------------------
$13,746,128 $23,596,969
========================
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
FRONTIER AIRLINES, INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31 December 31
1994 1995 1994 1995
------------------------ -------------------------
<S> <C> <C> <C> <C>
Revenues:
Passenger $9,672,135 $16,830,920 $12,729,844 $42,977,482
Cargo 219,953 250,944 245,215 821,529
Other 47,247 122,557 63,126 544,069
---------- ----------- ----------- ----------
Total revenues 9,939,335 17,204,421 13,038,185 44,343,080
---------- ----------- ----------- ----------
Operating expenses:
Flight operations 4,653,795 8,267,170 7,776,880 18,502,320
Aircraft and traffic servicing 1,871,596 4,482,184 2,718,609 12,126,679
Maintenance 2,431,239 3,006,613 3,769,371 8,039,622
Promotion and sales 1,927,615 4,224,498 2,875,540 9,611,396
General and administrative 634,010 785,541 2,110,308 2,450,063
Depreciation and amortization 86,565 125,559 121,598 379,094
---------- ----------- ----------- ----------
Total operating expenses 11,604,820 20,891,565 19,372,306 51,109,174
---------- ----------- ----------- ----------
Operating loss (1,665,485) (3,687,144) (6,334,121) (6,766,094)
---------- ----------- ----------- ----------
Nonoperating income:
Interest income 72,048 142,562 160,936 311,151
Other, net (7,836) (10,138) (14,817) 57,595
---------- ----------- ----------- ----------
Total nonoperating income, net 64,212 132,424 146,119 368,746
---------- ----------- ----------- ----------
Net loss $(1,601,273) $(3,554,720) $(6,188,002) $(6,397,348)
=========== =========== ============ ===========
Loss per common share (0.47) (0.66) (2.05) (1.51)
=========== =========== ============ ===========
Weighted average shares outstanding 3,443,300 5,418,031 3,025,373 4,247,695
=========== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
FRONTIER AIRLINES, INC.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31 December 31
1994 1995 1994 1995
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,601,273) $(3,554,720) $(6,188,002) $ (6,397,348)
Adjustments to reconcile net loss to net cash
used by operating activities:
Employee stock option plan compensation expense - 192,262 - 721,000
Issuance of common stock options - - - 60,500
Depreciation and amortization 86,565 125,559 121,598 379,094
Loss on sale of equipment - - - 20,000
Changes in operating assets and liabilities:
Trade receivables (2,257,141) (2,851,906) (3,886,379) (1,454,743)
Prepaid expenses and other assets (279,612) (1,114,769) (894,955) (1,724,751)
Security and other deposits (512,023) (2,804,509) (960,555) (5,217,687)
Restricted investments (55,088) (382,076) (625,354) (842,462)
Accounts payable 1,027,879 2,492,572 2,008,452 850,196
Air traffic liability 2,365,804 2,543,711 3,960,066 3,877,266
Other accrued expenses 1,025,006 248,997 2,218,822 (558,551)
Accrued maintenance expense 1,435,508 1,527,396 2,164,251 3,999,587
--------------- --------------- --------------- ---------------
Net cash used by operating activities 1,235,625 (3,577,483) (2,082,056) (6,287,899)
--------------- --------------- --------------- ---------------
Cash flows used by investing activities:
Acquisition of property and equipment (284,680) (579,935) (1,238,572) (840,047)
Sales of property and equipment - - - 19,745
--------------- --------------- --------------- ---------------
Net cash used by investing activities (284,680) (579,935) (1,238,572) (820,302)
--------------- --------------- --------------- ---------------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants - 972,798 9,249,480 7,282,183
Deferred public offering costs - - 35,000 -
Short-term borrowings - - - 101,496
Principal payments on short-term borrowings (9,494) (30,322) (14,705) (60,160)
Principal payments on obligations under capital leases (7,614) (8,705) (9,494) (25,403)
--------------- --------------- --------------- ---------------
Net cash provided by financing activities (17,108) 933,771 9,260,281 7,298,116
--------------- --------------- --------------- ---------------
Net increase in cash and cash equivalents 933,837 (3,223,647) 5,939,653 189,915
Cash and cash equivalents, beginning of period 5,421,163 7,248,303 415,347 3,834,741
--------------- --------------- --------------- ---------------
Cash and cash equivalents, end of period $ 6,355,000 $ 4,024,656 $ 6,355,000 $ 4,024,656
=============== =============== =============== ===============
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
FRONTIER AIRLINES, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB and Regulation
S-B. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for
a fair presentation have been included. The results of operations for the
nine months ended December 31, 1995 are not necessarily indicative of the
results that will be realized for the full year. For further information,
refer to the audited financial statements and notes thereto for the year
ended March 31, 1995 contained in the Form 10-KSB for the fiscal year
ended March 31, 1995.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. On June 22, 1995, the Company's
independent auditors had earlier stated an opinion that the Company's net
loss of $7,998,593 for its first fiscal year ended March 31, 1995, raises
substantial doubt about its ability to continue as a going concern. The
auditors also noted that management had plans in regards to this matter
including raising additional capital and actions designed to achieve long-
term profitability.
Among actions designed to achieve long-term profitability, the Company
undertook a major revision of its route system between September and
November 1995, at which time service was discontinued on a number of less-
traveled routes, two larger Boeing 737-300 jet aircraft were added to the
Company's fleet and service was introduced in six of Denver's most popular
air travel markets. Management's future plans include leasing additional
jets, expanding its route system into more high-density markets, making
periodic assessments of existing markets and pricing strategies, and cost
controls.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(2) STOCKHOLDERS' EQUITY
COMMON STOCK
In September 1995, the Company completed a secondary public offering of
1,600,000 shares of Common Stock for $6,309,385 net of offering expenses.
In October 1995, the Underwriters' over-allotment option associated with
this offering of 240,000 shares was exercised in full and the Company
received an additional $972,798 net of offering expenses.
(3) EMPLOYEE STOCK OWNERSHIP PLAN
6
<PAGE>
The Company has established an Employee Stock Ownership Plan ("ESOP")
which inures to the benefit of each permanent 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 vary from year to year. In order for an
employee to receive an allocation of Company Common Stock from the ESOP
that 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 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 this 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. At June 30, 1995,
27,468 of these contributed shares were committed to be released and the
remaining 109,872 shares were allocated to employees based upon
compensation for the nine months ended December 31, 1995. The Company
recognized compensation expense during the nine months ended December 31,
1995 of $721,000. Also, on June 22, 1995, the Company's Board of Directors
had originally authorized the sale of an additional 549,360 shares to the
plan on an installment basis. However, due to the Company's financial
results, the Board of Directors, with the concurrence of the plan trustee,
rescinded this installment sale in August 1995, determining that future
plan contributions should be made on the basis of then existing
circumstances.
(5) LEASE COMMITMENTS
AIRCRAFT LEASES
During the quarter ended December 31, 1995, the Company leased two Boeing
737-300 aircraft under operating leases which expire in the year 2000. The
Company is required to make security deposits and deposits for maintenance
of these leased aircraft. The Company has provided each of the lessors a
warrant to purchase 100,000 shares of the Company's Common Stock at a
purchase price of $500,000.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
The Company was incorporated in February 1994. Its operations during the
first fiscal period ended March 31, 1994 were limited to startup activities. The
Company's flight operations began at Stapleton International Airport
("Stapleton") on July 5, 1994 with two Boeing 737-200 aircraft operating eight
daily flights between Denver, Colorado and four North Dakota cities. Since that
time, the Company has increased the number of markets it serves and the number
of flights offered. The Company placed three additional aircraft in service--one
in August 1994, another in late September 1994 and a third in October 1994. The
Company operated a total of five aircraft from October 1994 through October
1995. In October 1995, the Company leased two Boeing 737-300 aircraft which were
placed in service during November 1995 in conjunction with adding four new, high
density routes linking Denver to Los Angeles and San Francisco, California,
Minneapolis-St. Paul, Minnesota, and Salt Lake City, Utah. The Company has
significantly rescheduled its flights in 1995 through the elimination of Minot
and Grand Forks, North Dakota and all four of its Montana destinations and added
Omaha, Nebraska, Las Vegas, Nevada, Chicago (Midway), Illinois and Phoenix,
Arizona, to its schedule. After adding these new cities, the Company's seven
aircraft serve 12 cities from its Denver base of operations. On February 28,
1995, Stapleton was closed and the Company's flight operations were moved to
Denver International Airport ("DIA").
The Company intends to further strengthen its Denver hub by expanding its
route system by adding two additional leased Boeing 737-300 or comparable jet
aircraft that will enable the Company to serve additional high density markets
on the west coast and selected eastern destinations. The Company's goal is to
have nine aircraft serving approximately 17 cities as soon as possible. See
"Liquidity and Capital Resources" below.
In February 1996, the Company retained Fieldstone Private Capital Group, a
New York based investment banking firm, to assist the Company in leasing
additional aircraft and to explore financing options for its future growth.
The Company's operations prior to July 5, 1994 were limited to startup
activities, including the establishment of its general office operation, initial
financing activities, completing the Department of Transportation and Federal
Aviation Administration application process, training crews and other activities
associated with a startup airline. These activities generated pre-operating
expenses of $1,179,000, which are included in the Company's results of
operations for the nine months ended December 31, 1994. In addition, the Company
modified its initial operating strategy during the nine months ended December
31, 1995 and plans to expand its operations. Therefore, the Company's results of
operations to date are not necessarily indicative of future operating results.
In June 1995, the Company contributed 137,340 shares of Common Stock to its
employee stock ownership plan ("ESOP"). The Company's Board of Directors had
originally authorized the sale of an additional 549,360 shares to the ESOP on an
installment basis. However, due to the Company's financial results, the Board of
Directors, with the concurrence of the plan trustee, rescinded this installment
sale in August 1995, determining that future ESOP contributions should be made
on the basis of then existing circumstances. The compensation expense of the
137,340 contributed shares totaled $721,000, which the Company fully recognized
during the nine months ended December 31, 1995. See Note 3 to the Financial
Statements.
8
<PAGE>
RESULTS OF OPERATIONS
General. The Company incurs substantial costs as it begins service to new
destinations. Commencement of service in new markets is characterized by
relatively high initial operating costs and lower introductory fares with a
gradual buildup of revenues over a 60 to 120 day period until the Company
achieves anticipated market penetration. As a result, the Company may incur
losses during at least the first few months of operation in new markets.
Operating results for fiscal 1995 and the nine months ended December 31, 1995
also were adversely affected by the Company's need to modify its initial
strategy. The Company's initial strategy in July 1994 was to enter regional
markets where a series of earlier route abandonments by Continental Airlines and
other major airlines had resulted in either only limited jet service to Denver,
service transfers to commuter carriers operating small turboprop aircraft, or no
nonstop or direct service to Denver at all. In its early planning, the Company
had expected to capture two types of traffic on its selected routes: "local"
passengers (those either beginning or ending their trips in Denver) and
"connecting" passengers (those transferring to other airlines for flights to
destinations beyond Denver).
After entering its first markets in July 1994, the Company encountered
difficulty in attracting connecting traffic because United Airlines, Denver's
dominant carrier, chose not to enter into interline agreements with the Company.
The Company's ability to attract connecting traffic was further inhibited by the
substantial reduction in service of Continental Airlines at Denver. As a
result, the Company modified its strategy and began to develop its own
connecting hub at Denver. The addition of new markets increased the Company's
startup costs, and the Company again experienced a gradual buildup of revenue in
each of the new markets as they were opened. In late 1994 and early 1995, the
Company implemented a low fare strategy and focused on building connecting
traffic in markets with greater potential volumes of local traffic.
The Company completed the integration of the two Boeing 737-300s leased
during the quarter ended December 31, 1995 and the restructuring of its
connecting hub and route system related to these aircraft during mid November
1995. In December 1995 the Company's cost per ASM dropped to 8.24c for the
month of December 1995. The Company expects its cost per ASM to continue to
decrease as additional aircraft are leased.
The following tables set forth certain operating data regarding the Company
for the last twelve months of flight operations and for each of the three months
during the quarter ended December 31, 1995.
SELECTED OPERATING DATA
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING
----------------------------------------------------------------------
MARCH 31, 1995 JUNE 30, 1995 SEPTEMBER 30, 1995 DECEMBER 31, 1995
-------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Passenger revenue $ 11,207,211 $ 12,421,151 $ 13,725,411 $ 16,830,920
Revenue passengers carried 123,718 129,637 158,835 201,688
Revenue passenger miles (RPMs)(1) 68,279,000 71,721,000 88,372,000 136,454,000
Available seat miles (ASMs)(2) 155,686,000 160,837,000 160,244,000 226,106,000
Passenger load factor (3) 43.8% 44.5% 55.2% 60.4%
Break-even load factor (4) 52.8% 51.8% 59.1% 73.3%
Block hours(5) 4,130 4,223 4,170 5,426
Average daily block hour
utilization(6) 9.18 9.28 9.18 10.33
Yield per RPM(7) 16.41c 17.32c 15.53c 12.33c
Yield per ASM(8) 7.20c 7.72c 8.57c 7.44c
Expense per ASM 8.55c 9.30c 9.53c 9.24C
Passenger revenue per block hour $ 2,713.85 $ 2,941.10 $ 3,291,47 $ 3,101.90
Average fare(9) $ 91 $ 96 $ 85 $ 80
Average aircraft in service 5.0 5.00 4.94 5.71
</TABLE>
9
<PAGE>
SELECTED OPERATING DATA (CONTINUED)
<TABLE>
<CAPTION>
MONTH ENDED
-------------------------------------------------------
OCTOBER 31, 1995 NOVEMBER 30, 1995 DECEMBER 31, 1995
---------------- ----------------- -----------------
<S> <C> <C> <C>
Passenger revenue $ 3,605,055 $ 5,943,810 $ 7,282,055
Revenue passengers carried 42,368 71,658 87,662
Revenue passenger miles (RPMs)(1) 27,043,000 48,759,000 60,652,000
Available seat miles (ASMs)(2) 46,344,000 79,805,000 99,957,000
Operating expenses 5,459,820 7,195,858 8,235,887
Passenger load factor (3) 58.4% 61.1% 60.7%
Break-even load factor (4) 86.4% 72.4% 67.2%
Block hours(5) 1,225 1,880 2,321
Average daily block hour
utilization(6) 9.88 10.23 10.70
Yield per RPM(7) 13.33c 12.19c 12.01c
Yield per ASM(8) 7.78c 7.45c 7.29c
Expense per ASM 11.78c 9.02c 8.24C
Passenger revenue per block hour $ 2,942.90 $ 3,161.60 $ 3,137.46
Average fare(9) $ 79 $ 81 $ 81
Average aircraft in service 4.00 6.13 7.00
- -------------------
</TABLE>
(1) "Revenue passenger miles," or RPMs, are determined by multiplying the
number of fare-paying passengers carried by the distance flown.
(2) "Available seat miles," or ASMs, are determined by multiplying the number
of seats available for passengers by the number of miles flown.
(3) "Passenger load factor" is determined by dividing revenue passenger miles
by available seat miles.
(4) "Break-even load factor" is the passenger load factor that will result in
operating revenues being equal to operating expenses, assuming
constant revenue per passenger mile and expenses
(5) "Block hours" represent the time between aircraft gate departure and
aircraft gate arrival.
(6) "Average daily block hour utilization" represents the total block hours
divided by the weighted average number of aircraft days in service.
(7) "Yield per RPM" is determined by dividing passenger revenues by revenue
passenger miles.
(8) "Yield per ASM" is determined by dividing passenger revenues by available
seat miles.
(9) "Average fare" excludes revenue included in passenger revenue for non-
revenue passengers, administrative fees, and revenue recognized for
unused tickets that are greater than 1 year from issuance date.
Nine Months Ended December 31, 1995. The Company did not recognize any
revenue or related direct costs of operations until July 5, 1994. Therefore, a
discussion regarding any comparisons between the nine months ended December 31,
1995 and the comparable period ended December 31, 1994 would not be meaningful.
The Company incurred a net loss of $6,397,348 or $1.51 per share, for the nine
months ending December 31, 1995. On September 25, 1995, the Company eliminated
all four of its Montana destinations, reduced frequency to Bismarck and Fargo,
North Dakota, and inaugurated routes to Chicago (Midway), Illinois and Phoenix,
Arizona. During November 1995 the Company began service between Denver and an
additional four markets -- Los Angeles and San Francisco, California,
Minneapolis-St. Paul, Minnesota, and Salt Lake City, Utah.
10
<PAGE>
The following table provides information regarding the Company's operating
revenues and expenses for the nine months ended December 31, 1995.
FLIGHT OPERATIONS REVENUES AND EXPENSES
<TABLE>
<CAPTION>
REVENUE/ YIELD/ YIELD/
REVENUE SEGMENTS AMOUNT PERCENT BLOCK HOUR ASM RPM
- -------------------------------- ----------- -------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
Passenger $42,977,482 96.9% $3,110.03 7.85c 14.49c
Cargo $ 821,529 1.9% $ 59.45 0.15c 0.28c
Other $ 544,069 1.2% $ 39.37 0.10c 0.18c
----------- ------ --------- ---------- ------
Total operating revenues $44,343,080 100.0% $3,208.85 8.10c 14.95c
=========== ====== ========= ========== ======
EXPENSE/ EXPENSE/
EXPENSE SEGMENTS AMOUNT PERCENT BLOCK HOUR ASM
- -------------------------------- ----------- -------- ---------- ----------
Flight operations $18,502,320 36.2% $1,338.91 3.38c
Aircraft and traffic servicing $12,126,679 23.7% $ 877.53 2.21c
Maintenance $ 8,039,622 15.7% $ 581.78 1.47c
Promotion and sales $ 9,611,396 18.9% $ 695.52 1.76c
General and administrative $ 2,450,063 4.8% $ 177.30 .45c
Depreciation and amortization $ 379,094 .7% $ 27.43 .07c
----------- ------ --------- ----------
Total operating expenses $51,109,174 100.00% $3,698.47 9.34c
=========== ====== ========= ==========
</TABLE>
Non-cash expenses of $721,000 and $61,000 were recorded in the nine months ended
December 31, 1995 as a result of the Company's contribution of shares to the
ESOP and the issuance of common stock options, respectively. ESOP compensation
expense is allocated to the various categories of operating expenses based on a
percentage of salaries and wages paid.
Quarters ended December 31, 1995 and 1994. The Company incurred a net loss
of $3,555,000 for the quarter ended December 31, 1995, compared to a net loss of
$1,601,000 for the quarter ended December 31, 1994. The Company materially
changed its operating strategy at the end of September 1995. This is the first
quarter in which these changes have been reflected. Although the overall results
of operations show a net loss for the three months ended December 31, 1995, the
Company experienced material improvements in results on a month by month basis.
This data is reflected by the decline in operating costs per ASM declining from
11.78c in October 1995 to 8.24c in December 1995. Management believes that
further improvements in ASM operating costs are possible in the March fourth
quarter and as the Company is able to add more aircraft to its present fleet.
The loss for the quarter ended December 31, 1995 resulted in part from
expenses associated with service introductions in six major markets and the
elimination of its four Montana routes, addition of two leased Boeing 737-300
jets to the Company's fleet, and a temporary decrease in the Company's Boeing
737-200 fleet in service. The Company performed back-to-back scheduled
maintenance on each of its five Boeing 737-200s which began on September 25,
1995 and ended on December 10, 1995. As a result, during the first seven weeks
of the quarter ended December 31, 1995, the Company operated only four aircraft.
The maintenance cycle, which is mandated by the FAA, required four weeks longer
than expected to accomplish and caused the Company to incur approximately
$571,000 in non-recurring expenses to lease a replacement Boeing 737-200
aircraft during the additional four week period from November 17, 1995 through
December 11, 1995 to accommodate passengers holding confirmed reservations. The
Company also lost revenue potential as a result of the related decrease in the
average aircraft in service during the maintenance cycle. Non-cash expenses of
$192,000 associated with the Company's ESOP were recorded in the quarter ended
December 31, 1995.
During December 1995, the Company benefited from the complete
utilization of 7 aircraft for the full month even though its scheduled
maintenance continued in effect for 10 days, adding substantially to total
operating costs for the month. Despite the additional cost, the Company's cost
per ASM declined to 8.24c, which is
11
<PAGE>
consistent with management's objectives for a 7 aircraft fleet. As a result of
the reduction in cost per ASM, the Company's operating losses for the month of
December declined from the prior two months of operations with the Company's new
route structure. The Company believes that its monthly operating data indicates
that it is making material progress toward its objective of achieving profitable
flight operations.
Since September, the Company's backlog of reservations has increased as
reflected in the table below.
<TABLE>
<CAPTION>
One Way Tickets
Sold for
Quarter Ended Future Travel
-------------------- ---------------
<S> <C>
September 30, 1994 40,087
December 31, 1994 33,771
March 31, 1995 44,957
June 30, 1995 57,446
September 30, 1995 81,081
December 31, 1995 113,112
</TABLE>
Management believes that this trend is in part a result of the
Company's changing its target markets to those with higher passenger demand and
that it is also consistent with management's view that the Denver market will
support a low fare airline.
The following table provides information regarding the Company's
operating revenues and expenses for the quarters ended December 31, 1995 and
1994.
FLIGHT OPERATIONS REVENUES AND EXPENSES
THREE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
REVENUE/ YIELD/ YIELD/
REVENUE SEGMENTS AMOUNT PERCENT BLOCK HOUR ASM RPM
- -------------------------------- ----------- -------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
Passenger $16,830,920 97.8% $3,101.90 7.44c 12.33c
Cargo $ 250,944 1.5% $ 46.25 0.11c 0.18c
Other $ 122,557 .7% $ 22.59 0.05c 0.09c
----------- ----- --------- ---------- ------
Total operating revenues $17,204,421 100.0% $3,170.74 7.61c 12.60c
=========== ===== ========= ========== ======
EXPENSE/ EXPENSE/
EXPENSE SEGMENTS AMOUNT PERCENT BLOCK HOUR ASM
- -------------------------------- ----------- -------- ----------- ----------
Flight operations $ 8,267,170 39.6% $1,523.62 3.66c
Aircraft and traffic servicing $ 4,482,184 21.4% $ 826.06 1.98c
Maintenance $ 3,006,613 14.4% $ 554.11 1.33c
Promotion and sales $ 4,224,498 20.2% $ 778.57 1.87c
General and administrative $ 785,541 3.8% $ 144.77 .35c
Depreciation and amortization $ 125,559 .6% $ 23.14 .05c
----------- ----- --------- ----------
Total operating expenses $20,891,565 100.0% $3,850.27 9.24c
=========== ===== ========= ==========
</TABLE>
12
<PAGE>
THREE MONTHS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
REVENUE/ YIELD/ YIELD/
REVENUE SEGMENTS AMOUNT PERCENT BLOCK HOUR ASM RPM
- -------------------------------- ----------- -------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
Passenger $ 9,672,135 97.3% $2,537.28 7.02c 15.75c
Cargo $ 219,953 2.2% $ 57.71 0.16c 0.36c
Other $ 47,247 .5% $ 12.39 0.03c 0.8c
----------- ----- --------- ---------- ------
Total operating revenues $ 9,939,335 100.0% $2,607,38 7.21c 16.19c
=========== ===== ========= ========== ======
EXPENSE/ EXPENSE/
EXPENSE SEGMENTS AMOUNT PERCENT BLOCK HOUR ASM
- -------------------------------- ----------- -------- ---------- ----------
Flight operations $ 4,653,795 40.1% $1,220.82 3.38c
Aircraft and traffic servicing $ 1,871,596 16.1% $ 490.97 1.36c
Maintenance $ 2,431,239 20.9% $ 637.79 1.76c
Promotion and sales $ 1,927,615 16.6% $ 505.67 1.40c
General and administrative $ 634,010 5.5% $ 166.32 .46c
Depreciation and amortization $ 86,565 .8% $ 22.71 .06c
----------- ----- --------- ----------
Total operating expenses $11,604,820 100.0% $3,044.28 8.42c
=========== ===== ========= ==========
</TABLE>
REVENUES
General. Airline revenues are primarily a function of the number of
passengers carried and fares charged by the airline. The Company believes that
revenues will gradually increase in a new market over a 60 to 120 day period as
anticipated market penetration is achieved. This occurred during the three
months ended September 30, 1994, which was the Company's first three months of
flight operations and, more recently, in January, September, and November 1995
when the Company commenced service to Omaha, Nebraska, Las Vegas, Nevada,
Chicago (Midway), Illinois, Phoenix, Arizona, Los Angeles and San Francisco,
California, Minneapolis-St. Paul, Minnesota, and Salt Lake City, Utah
Fare pricing policies have a significant impact on the Company's
revenues. Following is a table of the Company's average fares:
<TABLE>
<CAPTION>
Quarter Ended Average Fare
-------------------- ------------
<S> <C>
September 30, 1994 $104
December 31, 1994 $ 83
March 31, 1995 $ 91
June 30, 1995 $ 96
September 30, 1995 $ 85
December 31, 1995 $ 80
</TABLE>
On commencement of operations, the Company set its fares at prevailing
competitive fares within the markets entered. In connection with the
modification in the Company's strategy, the Company reduced fares to maximize
traffic and revenue. The initial stimulative effect on the markets involved was
positive when system-wide prices were reduced in September 1994. On March 1,
1995, in connection with the opening of DIA, the Company increased its local
Denver fares by up to $35 to offset the increased costs of DIA and other
expected cost increases and the Company's average fare peaked at $96 for the
quarter ended June 30, 1995. During the quarter ended September 30, 1995, the
Company reduced its fares system wide in order to "re-stimulate" markets and
match competitors' fares. During the quarter ended December 31, 1995, the
Company's average fare decreased to $80 as a result of introductory fares for
its two new markets added in late September, 1995 and the four new markets added
during the month of November 1995. The Company cannot completely predict future
fare levels, which depend to a substantial degree on actions of competitors.
When sale prices or other price changes are made by competitors in the Company's
markets, the Company believes that it must, in most cases, match these
competitive fares in order to maintain its market share.
13
<PAGE>
Revenues
Nine months ended December 31, 1995. Passenger revenues totaled
$42,977,000 for the nine months ended December 31, 1995 and represented 96.9% of
total revenues. Passenger revenues increased each quarter during the twelve
months ended December 31, 1995 principally as a result of the Company reaching
full market penetration on its earlier routes, increasing its aircraft
utilization through schedule adjustments, and the introduction of new high-
density markets. This is reflected in the aircraft block hour utilization
described in the table above. Passenger revenues are seasonal in each market.
The Company normally expects the March quarter to be its weakest with the
September quarter to be its strongest.
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 nine months ended
December 31, 1995, the Company's break-even load factor was 62.5% compared to a
passenger load factor of 54.2%. The Company believes that its load factors
were adversely affected by passenger uncertainty associated with the closing of
Stapleton and the opening of DIA and the increased fares charged by the Company
and other airlines at DIA to cover higher operating costs coupled with new
competition offering low fares at the Colorado Springs, Colorado airport which
is approximately 70 miles south of the Denver metro area.
Cargo revenues, consisting of revenues from freight and mail service,
totaled $822,000 for the nine months ended December 31, 1995 or 1.9% of total
revenue. 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 liquor sales, excess baggage
fees and ground handling services totaled $544,000 for the nine months ended
December 31, 1995 or 1.2% of revenue. Of the $544,000, $233,000 represented
revenues earned by providing ground handling services to other carriers in its
Montana cities. These ground handling services were discontinued in September
1995 when the Company terminated its Montana service.
Quarters ended December 31, 1995 and 1994. Passenger revenues totaled
$16,831,000 and $9,672,000 for the three months ended December 31, 1995 and
1994, respectively, or an increase of 74%. During the quarter ended December
31, 1994, the Company's second quarter of operations, the Company added service
from Denver to Albuquerque, New Mexico and El Paso, Texas and continued to build
its markets in which it commenced service in its first quarter of operations.
The Company had an average of 4.9 aircraft in service and 137,828,000 ASMs.
During the three months ended December 31, 1995, the Company had an average of
5.71 aircraft in service and 226,106,000 ASMs, or an increase of 64%. In
addition, the Company had reached maturity in only one half of the markets it
was serving the exceptions being Chicago (Midway), Illinois, and Phoenix,
Arizona, to which the Company began service in late September 1995, and Los
Angeles and San Francisco, California, Minneapolis-St. Paul, Minnesota, and Salt
Lake City, Utah, points to which service commenced in November 1995. Management
also believes that it lost potential passenger revenue as a result of scheduled
maintenance performed in the quarter ended December 31, 1995 which resulted in
the average number of aircraft in service of 5.71 to fall below the average
number of aircraft the Company leased during the quarter of 6.17. The Company's
revenue of $7,282,000 during the month of December 1995, a month in which the
Company's average aircraft in service was 7 and all 12 of its present markets
were served, was 102% more than the revenues of $3,605,000 for the month of
October 1995 when the Company had an average number of aircraft in service of 4
and 10 cities were served.
The Company experienced a significant increase of calls to its
reservation system which exceeded the system's capacity during the quarter ended
December 31, 1995. Management believes it lost passenger revenue as a result of
calls in which potential passengers either were unable to speak with a
reservation agent or did not want to remain on "hold". The Company added
additional reservationists in December 1995 and added additional telephone lines
to increase its capacity in January 1996.
Cargo revenue, consisting of revenues from freight and mail service,
totaled $251,000 and $220,000 for the quarters ended December 31, 1995 and 1994,
respectively. Cargo revenue represented 1.5% and 2.2% of total revenue for the
three months ended December 31, 1995 and 1994, respectively.
Other revenues, comprised principally of liquor sales and excess
baggage fees, totaled $123,000 and $47,000 for the three months ended September
30, 1995 and 1994, and represented .7% and .5% of total revenue,
14
<PAGE>
respectively. Other revenue increased over the prior comparable period primarily
due to the increase in the number of passengers.
OPERATING EXPENSES
General. Operating expenses include those related to flight
operations, aircraft and traffic service, maintenance, promotion and sales,
general and administrative and depreciation and amortization.
Nine months ended December 31, 1995. Flight operations expenses of
$18,502,000 were 36.2% of total operating expenses and 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 as well as
the cost of delivering fuel into the aircraft. Aircraft fuel costs of
$7,797,000 for 11,196,000 gallons used resulted in an average fuel cost per
gallon during the nine months ended December 31, 1995 of 69.6c. Fuel
consumption for the nine months averaged 810 gallons per block hour but varied
monthly as weather and flight planning changed. Fuel prices during the year
were generally stable. Fuel prices are subject to change weekly as the Company
purchases in advance for the following week's requirements. The Company will
reduce its exposure to fuel price changes as it leases additional Boeing 737-300
or comparable aircraft that are more fuel efficient than the older Boeing 737-
200 aircraft currently leased by it.
In August 1993, the United States increased taxes on domestic fuel,
including aviation fuel, by 4.3c per gallon. Airlines were exempt from this tax
increase until October 1, 1995. Effective October 1, 1995, the Company's
suppliers began to charge this tax. The aviation fuel tax included in the total
fuel cost of $7,797,000 was approximately $187,000 for the three months ended
December 31, 1995. The airline industry has proposed an extension of this
exemption. Prior to the United States government budget stalemate, the House of
Representatives had approved an additional two-year extension and the Senate
passed a seventeen month extension. Given the current status of the budget
impasse, management is unable to determine if an actual extension of the airline
industry's exemption will be approved. The fuel tax will increase the Company's
annual costs by approximately $984,000, assuming its current seven aircraft
fleet and an annual consumption of approximately 22,873,000 gallons of fuel.
Aircraft lease and insurance expenses, including passenger liability
insurance, totaled $5,572,000 for the nine months ended December 31, 1995 for
the Company's seven aircraft.
Pilot and flight attendant compensation totaled $2,760,000, excluding
compensation under the ESOP, for the nine months ended December 31, 1995. With
a scheduled passenger operation, and with salaried rather than hourly crew
compensation, the Company's expenses for flight operations are largely fixed,
with flight catering expenses a principal exception.
Aircraft and traffic servicing expenses were $12,127,000 and
represented 23.7% of total operating expenses. These include all expenses
incurred at the airports 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.
Maintenance expenses of $8,040,000 were 15.7% of total operating
expenses. 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.
Promotion and sales expenses totaled $9,611,000 for the nine months
ended December 31, 1995 and represented 18.9% of total operating expenses.
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.
15
<PAGE>
The promotion and sales expense per passenger was $19.61 which is higher than
would be normally expected for future Company operations because of the startup
nature of the airline and the introductory expense required to familiarize the
public with the Company's services.
Advertising costs are seasonal as heavier media utilization is planned
to coincide with heavy passenger booking periods. In addition, as new cities
are added to the Company's flight schedule, advertising and marketing promotions
are designed to increase awareness of the Company's new service to create name
and brand awareness. Advertising expenses of $1,122,000 were 2.6% of passenger
revenues for the nine months ended December 31, 1995, compared to approximately
$908,000 or 3.8% of passenger revenues for fiscal year ended March 31, 1995.
General and administrative expenses totaling $2,450,000 were 4.8% of
total operating expenses and include the wages and benefits for the Company's
executive officers and various other administrative personnel. Legal and
accounting expenses, supplies and other miscellaneous expenses are also included
in this category.
Depreciation and amortization expense of $379,000 was less than one
percent of total operating expenses and includes depreciation of office
equipment, ground station equipment, and other fixed assets of the Company.
Amortization of start up and route development costs are not included as these
expenses have been expensed as incurred.
Quarters ended December 31, 1995 and 1994. Flight operations expenses
were $8,267,000 and $4,654,000 or 39.6% and 40.1% of total operating expenses
for the three months ended December 31, 1995 and 1994, respectively. Aircraft
fuel costs were $3,213,000 for 4,342,000 gallons used resulting in an average
fuel cost per gallon during the quarter ended December 31, 1995 of 74.0c as
compared to $2,037,566 for 3,054,000 gallons used with an average fuel cost of
66.7c per gallon during the quarter ended December 31, 1994. The increase in
fuel cost of 57.7% is due to a 42.3% increase in block hours from 3,812 for the
three months ended December 31, 1994 to 5,426 for the three months ended
December 31, 1995 and a 10.9% increase in the average fuel cost which includes
increased fuel system use fees at DIA and the 4.3c per gallon aviation fuel tax.
Block hours increased as the Company had only 4.9 average aircraft in service
during the quarter ended December 31, 1994 as compared to 5.71 during the
quarter ended December 31, 1995.
Aircraft lease and insurance expenses, including passenger liability
insurance, totaled $2,834,000 for the three months ended December 31, 1995
compared to $1,399,000 for the three months ended December 31, 1994 or a 102.6%
increase. The increase is attributable to the two Boeing 737-300s leased during
the three months ended December 31, 1995 which carry higher lease and insurance
expenses than the five Boeing 737-200s because the Boeing 737-300s are newer
aircraft and have additional seating capacity. Pilot and flight attendant
compensation totaled $1,179,000, excluding compensation under the ESOP, and
$695,000 for the quarters ended December 31, 1995 and 1994, respectively -- an
increase of 69.7%. Pilot and flight attendant compensation increased as a
result of a 40% increase in the number of aircraft in the Company's fleet and an
increase of 42.3% in block hours. The Company pays pilot and flight attendant
salaries and wages for training approximately six and three weeks, respectively,
prior to scheduled increases in service causing the compensation expense at
December 31, 1994 to appear high in relationship to the average number of
aircraft in service. When the Company is not in the process of adding aircraft
to its system, it expects that pilot and flight attendant expense per aircraft
will normalize.
Aircraft and traffic servicing expenses were $4,482,000 and $1,872,000
or 21.4% and 16.1% of total operating expenses for the quarters ended December
31, 1995 and 1994, respectively. The Company served 12 cities with 45.5 average
daily flights during the three months ended December 31, 1995 as compared to an
average of 12 cities with 39.7 average daily flights for the three months ended
December 31, 1994. The dramatic cost increase of 139.5% is largely a result of
the increased costs at DIA versus Stapleton including charges for DIA's
automated baggage system, and changes in the size of markets served. Effective
November 15, 1995, DIA began charging its tenants on Concourse A for an
automated baggage system at approximately $4.00 per enplaned passenger. The
Company, which subleases its space at DIA from another airline through April
2000, was able to negotiate a rate which would be comparable to alternate gate
space within DIA. The Company has replaced approximately six of the cities
served during the three months ended September 30, 1994 with larger metropolitan
markets which have higher costs for station rentals and landing fees than the
cities they replaced.
16
<PAGE>
Maintenance expenses were $3,007,000 or 14.4% of total operating
expenses for the three months ended December 31, 1995. In the Company's fourth
fiscal quarter of the fiscal year ended March 31, 1995, the Company determined,
through competitive bidding, that its accruals for heavy maintenance were high
compared to the actual cost necessary to perform that maintenance, and a
$500,000 reduction in the accrual was made in the fourth fiscal quarter.
Approximately $257,000 of the excess accrual was attributable to the quarter
ended December 31, 1994. After accounting for this excess accrual, maintenance
expenses for the quarter ended December 31, 1994 would have been $2,174,000 or
19.2% of total operating expenses. The 38.3% increase compared to the 1994
period is a result of an increase in the average number of aircraft in service
and higher block hour utilization. During the three months ended December 31,
1995, the average number of aircraft in service was 4.9 as compared to 5.7 for
the three months ended December 31, 1994. As a result of scheduled maintenance
during the three months ended December 31, 1995, the Company expects maintenance
expense for its existing five Boeing 737-200 aircraft to decrease initially with
a slight increase toward the end of the next maintenance cycle in the fourth
quarter of calendar 1996.
Promotion and sales expenses totaled $4,225,000 and $1,928,000 for the
quarters ended December 31, 1995 and 1994 or 25.1% and 19.9% of passenger
revenues, respectively. Promotion and sales expenses include advertising,
reservations including computer reservation system fees, travel agency
commissions, and credit card discounts. The promotion and sales expense per
passenger for the quarter ended December 31, 1995 was $20.95 as compared to
$16.62 per passenger for the quarter ended December 31, 1994. Advertising
expenses were $698,000 and $322,000 or 4.1% and 3.3% of passenger revenues for
the three months ended December 31, 1995 and 1994, respectively. Promotion and
sales expenses have increased over the comparable periods as they pertain to
number of passengers and passenger revenue as a result of adding six new markets
in large metropolitan cities which command higher advertising rates.
Reservation expenses totaled $1,542,000 and $543,000 for the three
months ended December 31, 1995 and 1994, respectively. Reservation expenses
include salaries for reservationists, communications, and computer reservation
system (CRS) fees. The Company participates in all CRSs. Reservation expenses
as a percent of revenue for the quarters ended December 31, 1995 and 1994 were
9.2% and 5.6%, respectively. The increase in reservation expenses is
attributable to the increase in passenger revenues raised by the Company's
reservationists from 16.5% for the quarter ended December 31, 1994 to 22.6% for
the quarter ended December 31, 1995. Additionally, the Company began expanding
its internal reservation capabilities and incurred salary expenses while its new
reservationists were in training.
General and administrative expenses were $786,000 or 3.8% of total
operating expenses for the three months ended December 31, 1995 as compared to
$634,000 or 5.5% of total operating expenses for the three months ended December
31, 1994. General and administrative expenses increased 24.9% over the
comparable periods primarily due to increased revenue accounting fees as a
result of the increase in passengers, the addition of a health care program,
expense attributable to the Company's ESOP and other miscellaneous expenses.
Depreciation and amortization expense of $126,000 for the quarter
ended December 31, 1995 was less than 1% of total operating expenses.
The Company's expense per ASM increased from 8.43c for the three
months ended December 31, 1994 to 9.24c for the three months ended December 31,
1995. The net increase in the average expenses per ASM is primarily due to the
higher costs of operating at DIA versus Stapleton and the start-up costs
associated with the new aircraft and markets offset by a decrease in fixed costs
per ASM. Expense per ASM decreased each month during the quarter ended December
31, 1995 from 11.78c in October 1995, to 9.02c in November 1995, and to 8.24c in
December 1995 as the average number of aircraft increased and the start-up costs
decreased. Management believes that it will be able to further reduce its cost
per ASM as additional aircraft are added to its fleet.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet reflects cash and cash equivalents of
$4,025,000 at December 31, 1995, compared to $3,835,000 at March 31, 1995. At
March 31, 1995, total current assets, including cash, were $9,547,000 compared
to total current liabilities of $9,529,000, resulting in working capital of
$18,000. At December 31, 1995, total current assets, including cash, were
$16,968,000 compared to total current liabilities of $17,795,000, resulting in a
working capital deficit of $827,000.
Cash used by operating activities for the nine months ended December
31, 1995 was $6,288,000. This is attributed primarily to the Company's net loss
for the period, increases in trade receivables, prepaid expenses, deposits to
secure credit card transactions and deposits for aircraft leases, required
aircraft maintenance deposits, and decreases in accrued expenses, offset by
increases in accounts payable, air traffic liability, and accrued maintenance
expenses. Cash used by investing activities for the nine months ended December
31, 1995 was $840,000 which consisted of capital expenditures for the two Boeing
737-300s leased in October 1995, expansion of the Company's reservation system,
spare parts, ground equipment, computer equipment, leasehold improvements and
maintenance equipment and miscellaneous equipment sales as a result of the
closing of the Montana operations. Cash provided from financing activities was
$7,383,000 for the nine months ended December 31, 1995, primarily reflecting net
proceeds of $7,282,000 from the Company's sale of Common Stock and $101,000 to
finance insurance expenses. The Company currently has no lines of credit.
The Company's five Boeing 737-200 aircraft are leased under operating
leases which expire in the year 1997. The leases provide for up to two two-year
renewal terms with no increase in basic rent. Under these leases, the Company
is required to make security deposits for maintenance of these leased aircraft.
These deposits totaled $5,647,000 at December 31, 1995.
The Company leased two Boeing 737-300 aircraft under operating leases
in October 1995 which expire in the year 2000. The Company was required to make
security deposits and deposits for maintenance of these leased aircraft.
Security and maintenance deposits totaled $1,505,000 and $87,000 at December 31,
1995, respectively. These aircraft, which are compliant with Federal Aviation
Administration ("FAA") Stage 3 noise regulations, permit the Company to remain
in compliance with such regulations, assuming no change in its fleet, until
January 1997. The Company has issued to each of the two Boeing 737-300 aircraft
lessors a warrant to purchase 100,000 shares of the Company's Common Stock at a
purchase price of $500,000. These warrants, to the extent not earlier
exercised, expire upon the expiration dates of the aircraft leases.
On June 22, 1995, the Company's independent auditors had earlier stated an
opinion that the Company's net loss of $7,999,000 for its first fiscal year
ended March 31, 1995, raised substantial doubt about its ability to continue as
a going concern. As discussed below, the Company believes that it can meet its
cash requirements for the next 12 months and will not require additional
financing during that time. The auditors also noted that management had certain
plans including raising additional capital and actions designed to achieve long-
term profitability.
In September 1995, the Company completed a secondary public offering of
1,600,000 shares of Common Stock for $6,309,000 net of offering expenses. In
October 1995, the Underwriters' over-allotment option associated with this
offering of 240,000 shares was exercised in full and the Company received an
additional $973,000 net of offering expenses.
The Company's intent was to use approximately $4,870,000 of the net proceeds
to lease and place into service up to four additional Boeing 737-300 or
comparable jet aircraft (including the two 737-300 aircraft it leased in October
1995) that would enable the Company to serve additional high density markets on
the west coast and selected eastern destinations. Proceeds used for the two
Boeing 737-300s leased in October 1995 totaled $1,505,000 for aircraft deposits
and approximately $291,000 for aircraft reconfiguration and spare parts.
Additional proceeds used for expenditures associated with the expanded
operations from these two additional aircraft totaled $23,000 for airport
deposits and $382,000 for credit card deposits.
18
<PAGE>
In February 1996, the Company retained Fieldstone Private Capital Group, a New
York based investment banking firm, to assist the Company in leasing additional
aircraft beyond the two additional aircraft presently planned and to explore
financing options for its future growth.
Management is taking steps to improve the Company's operating performance.
The Company believes that expansion of service through its Denver hub is
essential for its long-term survival. The airport charges at DIA were increased
several times in the months preceding that airport's opening on February 28,
1995. They have also been increased since the airport opened as additional
changes have been made to the cost allocation formulas used by the airport.
Carriers that are able to utilize their gate positions at DIA with greater
frequency each day can reduce the impact of DIA's relatively high costs. In
September 1995, the Company redeployed some of its aircraft from the Company's
relatively lightly traveled routes in Montana and added service to new routes to
two of Denver's major destinations: Chicago (Midway), Illinois and Phoenix,
Arizona. In November 1995, the Company commenced service from Denver to Los
Angeles, California, Minneapolis-St. Paul, Minnesota, Salt Lake City, Utah, and
San Francisco, California in conjunction with the two Boeing 737-300 aircraft
delivered to it in October 1995. These high density markets have strong local
passenger volumes and represent destinations requested by customers within the
Company's current route cities. These increased flights will be accommodated
with the Company's present four gate operation at DIA.
As of December 1995 the Company serves 12 cities from Denver with seven
aircraft. The Company's goal is to have a route system of approximately 14
cities served by nine jet aircraft as soon as possible. The Company believes
that such a 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. There is no
assurance that the Company can complete the remaining expansion of its
operations.
In late October 1995, a competitive low fare carrier, headquartered in Denver,
discontinued its flight operations. This carrier handled approximately 2% of
the traffic at DIA as of the quarter ended June 30, 1995. With approximately
one half of the carrier's destination cities also served (or to be served) by
the Company, management believes that traffic on these routes improved in the
short-term as an outgrowth of that carrier's service termination.
The Company is exploring various means to reduce expenses. These include use
of a ticketless reservations system, a Company-based revenue accounting system,
and performance of "above wing" operations at DIA by company personnel. Above
wing operations include passenger check-in, baggage claim management, and
concourse gate operations.
Although the Company has a working capital deficit of $827,000, the Company
believes that it has sufficient cash on hand to support its operations during
the next 12 months. Included in the calculation of its working capital deficit
is the Company's air traffic liability of $7,694,000, a liability which is
satisfied by providing future services and not through the use of cash. The
Company's suppliers currently provide goods, services and operating equipment on
open credit terms. If such terms were modified to require immediate cash
payments, the Company's cash position would be materially and adversely
affected. The expansion of the Company's operations will entail the hiring of
additional employees to staff flight and ground operations in its new markets
and significant initial costs such as deposits for airport and aircraft leases.
Because of the expansion of the Company's business and the competitiveness of
the airline industry, which often requires quick reaction by management to
changes in market conditions, the Company may require additional capital to
maintain or further expand its business.
19
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE EXCHANGE ACT, THE ISSUER HAS DULY CAUSED
THIS AMENDMENT TO ITS REPORT ON FROM 10-QSB TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
FRONTIER AIRLINES, INC.
(ISSUER)
[SIGNATURE OF SAMUEL D. ADDOMS APPEARS HERE]
BY: SAMUEL D. ADDOMS MAY 3, 1996
----------------
SAMUEL D. ADDOMS
PRINCIPAL FINANCIAL OFFICER
[SIGNATURE OF ELISSA A. POTUCEK APPEARS HERE]
BY: ELISSA A. POTUCEK MAY 3, 1996
-----------------
ELISSA A. POTUCEK
PRINCIPAL ACCOUNTING OFFICER
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> DEC-31-1996
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0
0
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