<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission file number: 0-4877
FRONTIER AIRLINES, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Colorado 84-1256945
- -------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)
12015 E. 46th Avenue, Denver, CO 80239
- ---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (303) 371-7400
Check whether the issuer (1) 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 registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No__
---
The number of shares of the Company's Common Stock outstanding as of
August 2, 1996 is 8,765,506.
Transitional Small Business Disclosure Format Yes:___; No: X
--
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRONTIER AIRLINES, INC.
CONDENSED BALANCE SHEETS
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,301,949
Short-term investments 3,763,544
Restricted investments 4,247,554
Trade receivables 4,968,325
Other receivables (note 2) 9,450,713
Maintenance deposits 8,148,833
Prepaid expenses and other assets 3,553,510
Inventories 416,198
Deferred lease expenses 133,200
Note receivable - current poriton 15,409
-------------
Total current assets 45,999,235
Security, maintenance and other deposits 4,214,875
Property and equipment, net 2,477,294
Note receivable - long-term portion 54,591
Deferred lease and other expenses 355,444
Restricted investments 107,795
-------------
$ 53,209,234
=============
</TABLE>
See accompanying notes to financial statements
2
<PAGE>
FRONTIER AIRLINES, INC.
CONDENSED BALANCE SHEETS
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,848,746
Air traffic liability 14,036,329
Other accrued expenses 2,240,279
Accrued maintenance expense 10,446,495
Current portion of obligations
under capital leases 32,786
-------------
Total current liabilities 30,604,635
Accrued maintenance expense 393,863
Other accrued expenses 76,880
Obligations under capital leases,
excluding current portion 83,595
-------------
Total liabilities 31,158,973
-------------
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;
7,669,223 shares
issued and outstanding 7,669
Additional paid-in capital 28,929,588
Common stock subscriptions (note 2) 5,480,913
Accumulated deficit (12,367,909)
-------------
Total stockholders' equity 22,050,261
-------------
$ 53,209,234
=============
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
FRONTIER AIRLINES, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------------------------
<S> <C> <C>
Revenues:
Passenger $ 27,569,884 $ 12,421,151
Cargo 415,203 299,447
Other 161,961 167,600
------------ ------------
Total revenues 28,147,048 12,888,198
------------ ------------
Operating expenses:
Flight operations 10,502,604 5,135,833
Aircraft and traffic servicing 5,853,791 3,852,234
Maintenance 4,288,575 2,623,817
Promotion and sales 5,055,123 2,395,612
General and administrative 1,108,921 813,009
Depreciation and amortization 200,254 126,768
------------ ------------
Total operating expenses 27,009,268 14,947,273
------------ ------------
Operating income (loss) 1,137,780 (2,059,075)
------------ ------------
Nonoperating income:
Interest income 218,608 108,494
Other, net (19,978) 94,253
------------ ------------
Total nonoperating income, net 198,630 202,747
------------ ------------
Net income (loss) $ 1,336,410 $ (1,856,328)
============ ============
Income (loss) per common share and share equivalent (note 1) $ 0.15 $ (0.52)
============ ============
Weighted average number of common shares
and common share equivalents outstanding (note 1) 8,865,968 3,580,640
============ ============
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
FRONTIER AIRLINES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,336,410 $ (1,856,328)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Employee stock ownership plan compensation expense 124,998 336,476
Depreciation and amortization 233,554 126,768
Changes in operating assets and liabilities:
Restricted investments (2,138,758) (265,902)
Trade receivables 903,833 516,777
Security, maintenance and other deposits (3,089,443) (448,608)
Prepaid expenses and other assets (607,723) (216,428)
Inventories 152,978 140,133
Accounts payable (553,716) 239,053
Air traffic liability 2,835,769 72,551
Other accrued expenses 197,155 (853,732)
Accrued maintenance expense 2,306,323 1,326,298
------------ ------------
Net cash provided (used) in operating activities 1,701,380 (882,942)
------------ ------------
Cash flows from investing activities:
Increase in short-term investments (2,595,344) -
Acquisition of property and equipment (694,488) (204,266)
------------ ------------
Net cash used in investing activities (3,289,832) (204,266)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants 6,562,118 -
Deferred offering costs 9,756 (51,020)
Proceeds from short-term borrowings - 101,496
Principal payments on short-term borrowings (10,441) -
Principal payments on obligations under capital leases (30,286) (8,233)
------------ ------------
Net cash provided by financing activities 6,531,147 42,243
------------ ------------
Net increase in cash and cash equivalents 4,942,695 (1,044,965)
Cash and cash equivalents, beginning of period 6,359,254 3,834,741
------------ ------------
Cash and cash equivalents, end of period $ 11,301,949 $ 2,789,776
============ ============
See accompanying notes to financial statements
</TABLE>
5
<PAGE>
FRONTIER AIRLINES, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(1) PER SHARE DATA
Primary earnings per share is based upon the weighted average number of
shares of common stock outstanding and dilutive common stock equivalents
(stock options and warrants). Common stock equivalents have been excluded
from the June 30, 1995 calculation as they are considered antidilutive. The
number of weighted average shares outstanding includes common stock
outstanding and dilutive common stock equivalents. Fully diluted earnings
per share is not materially different than primary earnings per share and
has not been presented.
(2) REDEMPTION OF WARRANTS
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 written days notice if certain conditions were met. The
Company met these conditions 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.
Substantially all of the warrants were exercised in connection with the
notice of intent to redeem summarized as follows:
<TABLE>
<CAPTION>
Number Proceeds
of Shares to Company
----------- ------------
<S> <C> <C>
Proceeds received prior to June 30, 1996 775,835 $3,878,000
Proceeds received by transfer agent as of
June 30, 1996, reflected as other receivables
at June 30, 1996 and received in July 1996 794,015 3,969,800
----------- ------------
Subtotal 1,569,850 7,847,800
Subscribed as of June 30, 1996, proceeds received
in July 1996 1,096,283 5,480,913
----------- ------------
Total 2,666,133 $13,328,713
=========== ============
</TABLE>
6
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company was incorporated in February 1994 and began flight
operations on July 5, 1994 with two leased Boeing 737-200 jet 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 Boeing 737-200
aircraft in service in 1994 and operated a total of five aircraft 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 volume routes linking Denver to Los Angeles and San Francisco,
California, Minneapolis-St. Paul, Minnesota, and Salt Lake City, Utah. The
Company significantly rescheduled its flights in 1995 through the elimination of
six lesser traveled regional markets and the addition of Omaha, Nebraska, Las
Vegas, Nevada, Chicago (Midway), Illinois and Phoenix, Arizona to its schedule.
Flights to Seattle/Tacoma commenced on May 1, 1996, and flights to San Diego,
California and St. Louis, Missouri commenced on June 1, 1996 in conjunction with
the addition of two more Boeing 737-200 jets to the Company's fleet. Effective
September 11, 1996, the Company is eliminating its Bismarck and Fargo, North
Dakota destinations. After September 11, 1996, the Company's nine leased jet
aircraft will serve 13 cities from its base of operations at Denver
International Airport ("DIA").
The Company has agreed to lease an additional Boeing 737-300 in April
1997, at which time it plans to add one or more new cities to its route system.
Pending future aircraft availability, the Company plans to lease additional jets
in the 737 series for possible deliveries in the second half of 1996 and in
1997, which would permit the Company to further expand its lines of service.
Commercial aviation demand for used Boeing 737 aircraft has increased
significantly in the past year and aircraft supplies are limited.
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 or from 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 to develop its own connecting hub at Denver.
The Company modified and expanded its route structure to routes that are more
dependent on local traffic and less dependent on connecting traffic.
The Company further modified and expanded its operations beginning in
September 1995 to emphasize higher volume markets, operated seven aircraft for
the first two months of the quarter ended June 30, 1996, and added two
additional aircraft in June 1996. The Company operated five aircraft during the
quarter ended June 30, 1995. Therefore, the Company's results of operations for
the quarters ended June 30, 1995 and 1996 are not necessarily comparable or
indicative of future operating results.
Small fluctuations in the Company's yield per RPM or expense per ASM
can significantly affect operating results because the Company, like other
airlines, has high fixed costs and low operating margins in relation to
revenues. Airline operations are highly sensitive to various factors, including
the actions of competing airlines and general economic factors, which can
adversely affect the Company's liquidity, cash flows and results of operations.
7
<PAGE>
RESULTS OF OPERATIONS
The Company had net income of $1,336,000 or $.15 per fully diluted
share for the quarter ended June 30, 1996 as compared to a net loss of
$1,856,000 or $.52 per share, for the quarter ended June 30, 1995. Management
believes that the profitability of the quarter ended June 30, 1996 is largely
due to the change in its business strategy to provide service to higher volume
markets, the increase in the number of aircraft in service and higher aircraft
utilization. During the quarter ended June 30, 1995, the Company was serving six
of its original regional markets. During the quarter ended June 30, 1996, the
Company was serving only two of its original regional markets.
The following table sets forth certain quarterly financial and
operating data regarding the Company for the last fifteen months of operations
ended June 30, 1996.
SELECTED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
JUNE 30, 1995 SEPTEMBER 30, 1995 DECEMBER 31,1995 MARCH 31, 1996 JUNE 30, 1996
------------- ------------------ ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Passenger revenue $12,421,000 $13,725,000 $16,831,000 $25,553,000 $27,570,000
Revenue passengers carried 130,000 159,000 202,000 267,000 271,000
Revenue passenger miles (RPMs)(1) 71,721,000 88,372,000 136,454,000 183,340,000 190,541,000
Available seat miles (ASMs)(2) 160,837,000 160,244,000 226,106,000 296,974,000 313,216,000
Passenger load factor(3) 44.5% 55.2% 60.4% 61.7% 60.8%
Break-even load factor(4) 52.0% 59.3% 73.6% 59.7% 58.3%
Block hours(5) 4,223 4,170 5,426 6,964 7,297
Average daily block hour
utilization(6) 9.28 9.18 10.33 10.93 11.46
Yield per RPM(7) 17.32(c) 15.53(c) 12.33(c) 13.94(c) 14.47(c)
Yield per ASM(8) 7.72(c) 8.57(c) 7.44(c) 8.60(c) 8.80(c)
Expense per ASM 9.29(c) 9.53(c) 9.24(c) 8.48(c) 8.62(c)
Passenger revenue per block hour $2,941.27 $3,291.47 $3,102.90 $3,669.30 $3,778.27
Average fare(9) $96 $85 $80 $93 $98
Average aircraft in service 5.0 4.9 5.7 7.0 7.3
Operating income (loss) ($2,059,000) ($1,020,000) ($3,687,000) $833,000 $1,138,000
Net income (loss) ($1,857,000) ($986,000) ($3,555,000) $816,000 $1,336,000
</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 one year from issuance date.
8
<PAGE>
The following table provides information regarding the Company's
operating revenues and expenses for the quarter ended June 30, 1995.
<TABLE>
<CAPTION>
REVENUE/ YIELD/ YIELD/
AMOUNT PERCENT BLOCK HOUR ASM RPM
------------- ----------- -------------- -------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES
Passenger $12,421,000 96.4% $2,941.27 7.72(c) 17.32(c)
Cargo $299,000 2.3% $70.80 0.19(c) 0.42(c)
Other $168,000 1.3% $39.79 0.10(c) 0.23(c)
------------- ----------- -------------- -------- -----------
Total operating revenues $12,888,000 100.0% $3,051.86 8.01(c) 17.97(c)
============= =========== ============== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
PERCENT
OF EXPENSE/ EXPENSE/
AMOUNT REVENUE BLOCK HOUR ASM
------------ ----------- -------------- -----------
<S> <C> <C> <C> <C>
EXPENSES
Flight operations $5,136,000 39.8% $1,216.20 3.19(c)
Aircraft and traffic servicing $3,852,000 29.9% $912.15 2.39(c)
Maintenance $2,624,000 20.4% $621.36 1.63(c)
Promotion and sales $2,395,000 18.6% $567.13 1.49(c)
General and administrative $813,000 6.3% $192.52 0.51(c)
Depreciation and amortization $127,000 1.0% $30.07 0.08(c)
------------- ---------- ------------- -----------
$14,947,000 116.0% $3,539.43 9.29(c)
============= ========== ============= ===========
</TABLE>
The following table provides information regarding the Company's
operating revenues and expenses for the quarter ended June 30, 1996.
<TABLE>
<CAPTION>
REVENUE/ YIELD/ YIELD/
AMOUNT PERCENT BLOCK HOUR ASM RPM
------------- ----------- -------------- -------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES
Passenger $27,570,000 98.0% $3,778.27 8.80(c) 14.47(c)
Cargo $415,000 1.5% $56.87 0.13(c) 0.22(c)
Other $162,000 0.6% $22.20 0.05(c) 0.09(c)
------------- ----------- -------------- --------- -----------
Total operating revenues $28,147,000 100.0% $3,857.34 8.98(c) 14.78(c)
============= =========== ============== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
PERCENT
OF EXPENSE/ EXPENSE/
AMOUNT REVENUE BLOCK HOUR ASM
------------ ----------- -------------- -----------
<S> <C> <C> <C> <C>
EXPENSES
Flight operations $10,503,000 37.3% $1,439.36 3.35(c)
Aircraft and traffic servicing $5,854,000 20.8% $802.25 1.87(c)
Maintenance $4,288,000 15.2% $587.63 1.38(c)
Promotion and sales $5,055,000 18.0% $692.75 1.61(c)
General and administrative $1,109,000 3.9% $151.98 0.35(c)
Depreciation and amortization $200,000 0.7% $27.41 0.06(c)
------------- ----------- ------------- ------------
$27,009,000 95.9% $3,701.38 8.62(c)
============= =========== ============= ============
</TABLE>
9
<PAGE>
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. During the quarter ended June 30,
1996, the Company commenced service to Seattle-Tacoma, Washington on May 1, 1996
and San Diego, California and St. Louis, Missouri on June 1, 1996.
The Company's results are highly sensitive to changes in fare levels. Fare
pricing policies have a significant impact on the Company's revenues. The
Company's average fare for the quarter ended June 30, 1996 of $98 was slightly
higher than the average fare of $96 for the quarter ended June 30, 1995 largely
as a result of the Company's new yield management system and the expiration of a
10% excise tax on air transportation which occurred effective December 31, 1995
offset slightly by lower introductory fares to its new markets. Management
believes that the excise tax or some other type of consumer paid tax will be
likely in the future and may be as high as 10% of the fare. Given the elasticity
of passenger demand, increases in fares may result in a decrease in passenger
demand. To maintain passenger traffic in the face of an excise tax increase may,
therefore, require some downward adjustment in net fares realized by the
Company. 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. Passenger revenues are seasonal in each market. The
Company expects the March quarter to be its weakest with the September quarter
to be its strongest.
Passenger Revenue. Passenger revenues totaled $27,570,000 for the quarter
ended June 30, 1996 compared to $12,421,000 for the quarter ended June 30, 1995,
or an increase of 122%. The number of revenue passengers carried was 271,000
for the quarter ended June 30, 1996 compared to 130,000 for the quarter ended
June 30, 1995 or an increase of 108.5%. The Company had 7.3 aircraft in service
during the quarter ended June 30, 1996 compared to 5.0 aircraft during the
quarter ended June 30, 1995 for an increase in ASMs of 152,379,000 or 94.7%.
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 quarter ended June
30, 1996, the Company's break-even load factor was 58.3% compared to a passenger
load factor of 60.8%. For the quarter ended June 30, 1995, the Company's break-
even load factor was 52.0% compared to a passenger load factor of 44.5%. The
Company's low load factors during the quarter ended June 30, 1995 reflect the
start-up nature of the airline, the difficulties the Company encountered in
entering the connecting traffic market at Denver, the modification to the
Company's initial strategy to create its own hub at Denver and to enter higher
volume markets, and public reaction to higher fares necessary to cover the
increased costs of the new Denver International Airport.
The Company's load factor in the quarter ended June 30, 1996 reflects the
result of the Company's change in business strategy to provide service to higher
volume markets. Management believes that its load factor for the quarter may
have been adversely affected by the public's initial reaction to an airline
accident which occurred on May 11, 1996 in which an Atlanta-based low fare
carrier's aircraft was destroyed and all passengers and crew were killed.
Cargo revenues, consisting of revenues from freight and mail service,
totaled $415,000 and $299,000 for the quarters ended June 30, 1996 and 1995,
representing 1.5% and 2.3% of total operating revenues, respectively. 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 and excess baggage
fees, totaled $162,000 and $168,000 for the quarters ended June 30, 1996 and
1995, respectively, and represented approximately one percent of total operating
revenues for both periods.
10
<PAGE>
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. In general, operating expenses declined as a
percentage of revenue during the quarter ended June 30, 1996 compared to the
quarter ended June 30, 1995 because of the 122% increase in revenue in the 1996
quarter.
Flight Operations. Flight operations expenses of $10,503,000 and $5,136,000
were 37.3% and 39.8% of total revenue for the quarters ended June 30, 1996 and
1995, 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 as well as the
cost of delivering fuel into the aircraft. Aircraft fuel costs of $4,586,000 for
5,803,000 gallons used and $2,277,000 for 3,413,000 gallons used resulted in an
average fuel cost of 79.03c and 66.72c per gallon for the quarters ended June
30, 1996 and 1995, respectively. The average fuel cost per gallon increased for
the quarter ended June 30, 1996 over the comparable prior period due to an
overall increase in the cost of fuel and loss of the fuel tax exemption. In
August 1993, the United States increased taxes on domestic fuel, including
aviation fuel, by 4.3 cents per gallon. Airlines were exempt from this tax
increase until October 1, 1995. Fuel prices are subject to change weekly as the
Company does not purchase supplies in advance for inventory. Fuel consumption
for the quarters ended June 30, 1996 and 1995 averaged 795 and 808 gallons per
block hour, respectively. Fuel consumption per block hour decreased as a result
of the addition of more fuel efficient aircraft and an increase in the average
length of haul.
Aircraft lease and insurance expenses, including passenger liability
insurance, totaled $3,060,000 and $1,379,000 for the quarters ended June 30,
1996 and 1995, respectively, or an increase of 122%. The increase is
attributable to the increase in the number of aircraft in service and generally
higher lease expenses on more recent aircraft fleet additions.
Pilot and flight attendant compensation totaled $1,530,000 and $734,000 for
the quarters ended June 30, 1996 and 1995, respectively, or an increase of 108%.
Pilot and flight attendant compensation increased as a result of a 46% increase
in the average number of aircraft in service and an increase of 73% in block
hours. The Company added two aircraft to its fleet on June 1, 1996. The Company
pays pilot and flight attendant salaries and wages for training consisting of
approximately six and three weeks, respectively, prior to scheduled increases in
service, causing the compensation expense for the quarter ended June 30, 1996 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. With a
scheduled passenger operation, and with salaried rather than hourly crew
compensation, the Company's expenses for flight operations are largely fixed,
with flight catering and fuel expenses the principal exception. Higher aircraft
utilization produces a more favorable cost per block hour or per ASM, and the
Company benefited from an increase in aircraft utilization during the quarter
ended June 30, 1996. Average utilization in the quarter ended June 30, 1996 was
11.5 block hours per day per aircraft, compared with the comparable prior period
of 9.28 block hours per day per aircraft.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses
were $5,854,000 and $3,852,000 for the quarters ended June 30, 1996 and 1995,
respectively, and represented 20.8% and 29.9% of total revenue. 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. Station expenses as a percentage of revenue decreased during
the quarter ended June 30, 1996 over the quarter ended June 30, 1995 as a result
of the Company's rental costs (in particular, the gate rentals at DIA) which are
largely fixed costs, remaining relatively constant as compared to the increase
in revenue. Additionally, the Company began its own "above wing" operations at
DIA (including passenger check-in at ticket counters, concourse gate operations,
cabin cleaning and baggage services) effective April 1, 1996 and at Los Angeles
International Airport in June 1996 rather than contracting these services
through a third party supplier. Aircraft and traffic servicing expenses will
increase with the addition of new
11
<PAGE>
cities; however, the increased existing gate utilization at DIA is expected to
reduce per unit expenses.
Maintenance. Maintenance expenses of $4,288,000 and $2,624,000 were 15.2%
and 20.4% of total revenue for the quarters ended June 30, 1996 and 1995,
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
$588 and $621 per block hour for the quarters ended June 30, 1996 and 1995,
respectively. The decrease in the expense per block hour is generally lower on
the more recent aircraft additions.
Promotion and Sales. Promotion and sales expenses totaled $5,055,000 and
$2,395,000 and were 18.3% and 19.3% of passenger revenue for the quarters ended
June 30, 1996 and 1995, 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 expense per passenger for the
year was $18.65 and $18.42 for the quarters ended June 30, 1996 and 1995,
respectively. Promotion and sales expenses increased over the prior comparable
period because of expenses required to familiarize the public with the Company's
three new markets entered during the quarter ended June 30, 1996. The Company
did not enter any new markets during the three months ended June 30, 1995.
Additionally, the Company operated in larger cities during the quarter ended
June 30, 1996 where advertising costs are higher than in the smaller regional
markets that dominated the Company's route system during the quarter ended June
30, 1995.
General and Administrative. General and administrative expenses for the
quarters ended June 30, 1996 and 1995 totaling $1,109,000 and $813,000 were 3.9%
and 6.3% of total revenue, respectively. These expenses include the wages and
benefits for the Company's executive officers and various other administrative
personnel. Legal and accounting expenses, supplies and other miscellaneous
expenses are also included in this category. The increase in general and
administrative expenses is largely a result of an increase in employee benefits
and office rent as a result of an increase in the number of full and part-time
employees from 389 in June 1995 to 621 in June 1996 and an increase in revenue
accounting fees.
Depreciation and Amortization. Depreciation and amortization expense of
$200,000 and $127,000 and were less than one percent of total revenue for the
quarters ended June 30, 1996 and 1995, respectively. These expenses include
depreciation of office equipment, ground station equipment, and other fixed
assets of the Company. Amortization of start-up and route development costs are
not included as these expenses have been expensed as incurred.
Expenses per ASM. The Company's expenses per ASM for the quarters ended
June 30, 1996 and 1995 were 8.62c and 9.29c, respectively, or a decrease of
7.2%. Increased service, as evidenced by a 94.7% increase in ASMs, and
additional aircraft contributed to economies of scale as the fixed costs
associated with the airline were spread across a larger base of operation.
Expenses per ASM are influenced to some degree by the utilization of
aircraft and by the seating configuration that each airline employs. For
example, with the 108 seat all coach seating configuration selected by the
Company on five of its 737-200 aircraft, the expenses per ASM of the Company are
higher by 11% when compared with the 120 seat alternative used by many carriers.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet reflected cash, cash equivalents and short-term
investments of $15,065,000 at June 30, 1996. At June 30, 1996, total current
assets were $45,999,000 as compared to $30,605,000 of total current liabilities,
resulting in working capital of $15,395,000. At March 31, 1996, total current
assets were $25,797,000 and total current liabilities were $25,844,000,
resulting in a working capital deficit of $47,000.
12
<PAGE>
Cash provided by operating activities for the quarter ended June 30, 1996
was $1,701,000. This is attributed primarily to the Company's net income for the
period, decreases in trade receivables, increases in air traffic liability,
other accrued expenses, and accrued maintenance expenses, offset by increases in
restricted investments to secure credit card transactions, deposits for
security, maintenance and other deposits and a decrease in accounts payable.
Cash used in investing activities for the quarter ended June 30, 1996 was
$3,290,000, which included additional capital expenditures for the Boeing 737-
300s and the two additional Boeing 737-200s leased during the quarter ended June
30, 1996, spare parts, ground equipment, computer equipment, and leasehold
improvements. The Company invested $2,595,000 in short-term investments
comprised of government backed agencies with maturities of one year or less.
Cash provided by financing activities for the three months ended June 30,
1996 was $6,531,000. In April 1996, the Company completed a private placement
of its Common Stock that resulted in net proceeds of approximately $2,723,000.
In May 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. As of June 30, 1996, the Company received net proceeds
from the exercise of these warrants of approximately $3,878,000 and
approximately $9,451,000 was received in July 1996. In total the Company
received net proceeds of approximately $13,290,000 from the exercise of these
warrants. The Company currently has no lines of credit.
Five of the Company's 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
was required to make security deposits and makes deposits for maintenance of
these leased aircraft. These deposits totaled $625,000 and $7,240,000
respectively, at June 30, 1996.
The Company leased two Boeing 737-300 aircraft under operating leases in
November 1995 which expire in the year 2000. The Company was required to make
security deposits and makes deposits for maintenance of these leased aircraft.
Security and maintenance deposits totaled $1,505,000 and $1,255,000,
respectively, at June 30, 1996. These aircraft are compliant with Federal
Aviation Administration ("FAA") Stage 3 noise regulations. 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.
In June 1996, the Company leased two additional Boeing 737-200 aircraft
under operating leases which expire in the year 2001. The Company was required
to make security deposits totaling $858,000. Commencing July 1996 the Company is
required to make deposits for maintenance for these leased aircraft. These
aircraft will be "hush-kitted" by the lessor at its expense during 1996 making
them compliant with FAA Stage 3 noise regulations. The Company has issued to the
aircraft lessor two warrants to purchase 70,000 shares each of the Company's
common stock at a purchase price of $503,300 per warrant.
In June 1996, the Company entered into a lease for a new Boeing 737-300
which is scheduled for delivery in April 1997. The lease term for this aircraft
is eight years from date of delivery with three additional one year renewal
terms at the Company's option. Between June 1996 and February 1997, the Company
is required to make security deposits with respect to this aircraft totaling
$726,250.
Management is continuing to take steps designed to improve the Company's
operating performance. Effective September 11, 1996, the Company is eliminating
its Bismarck and Fargo, North Dakota destinations due to the unprofitability of
these routes. The aircraft used to serve these destinations will be redeployed
to more heavily traveled routes elsewhere on Frontier's route system.
The Company is exploring various means to reduce expenses. These include
use of a ticketless reservations system, a reduction in credit card fees, and an
in-house revenue accounting system. The Company believes that it can
13
<PAGE>
reduce its airport operating expenses at certain cities by performing its own
"above wing" operations rather than continuing to contract out these services.
The Company commenced performing such operations at DIA in April 1996 and at Los
Angeles International Airport in June 1996. Effective in July 1996 and August
1996, a changeover to the Company's handling of these activities was completed
at Chicago/Midway and Seattle. In October 1996, the Company will begin its own
passenger service and ground handling operation in El Paso, Texas.
Continental Airlines currently provides aircraft maintenance services for
the Company at Denver. Continental has advised the Company that it will
discontinue this service effective approximately mid-September 1996. It is the
Company's intention to hire and utilize its own aircraft mechanics to perform
this work at Denver. The Company is reviewing various alternatives for aircraft
hangar space in which to perform this work, including the possibility of
subleasing a portion of Continental's hangar at DIA. The performance of this
work by the Company, together with the cost of leasing adequate hangar space, is
expected to cause the Company's maintenance costs to increase over the costs it
incurs under the current Continental maintenance agreement.
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 Company's goal is to lease a number of additional aircraft to serve
additional cities from Denver. 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. The proceeds from the private placement
completed in April 1996 and the exercise of the warrants in June 1996 have
provided additional working capital for the Company and, subject to aircraft
availability, will enable it to further expand its operations through the
leasing of additional aircraft. 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 notwithstanding the
significant improvement in its capital position during the quarter ended June
30, 1996.
14
<PAGE>
PART II. OTHER INFORMATION
Items 1 - 5: Not applicable
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit
Numbers Description of Exhibits
- ------- -----------------------
27.1 Financial Data Schedule. (4)
(b) Reports on Form 8-K
On April 16, 1996, the Company filed a Form 8-K reporting the closing
of a private placement of 678,733 shares of its common stock.
15
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<PERIOD-END> JUN-30-1996
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