FORM 10-K
SECURITIESAND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 0-24126
FRONTIER AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1256945
(State or other jurisdiction
of incorporated or organization) (I.R.S. Employer Identification No.)
12015 E. 46th Avenue, Denver, CO 80239
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (303) 371-7400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Title of Class
Indicate by check mark whether the Registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of Common Stock held by non-affiliates of the Company
computed by reference to the last quoted price at which such stock sold on such
date as reported by the Nasdaq National Market as of June 15,2000: $181,263,088.
The number of shares of the Company's Common Stock outstanding as of June 15,
2000 is 17,747,056.
Documents incorporated by reference - Information required by Part III is
incorporated by reference to the Company's 2000 Proxy Statement.
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TABLE OF CONTENTS
Page
PART I
Item 1: Business.....................................................3
Item 2: Properties .................................................12
Item 3: Legal Proceedings...........................................12
Item 4: Submission of Matters to a Vote of Security Holders.........13
PART II
Item 5: Market for Common Equity and Related Stockholder Matters....13
Item 6: Selected Financial Data.....................................16
Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations...............18
Item 7A: Quantitative and Qualitative Disclosures About
Market Risk ................................................30
Item 8: Financial Statements........................................30
PART III
Item 10: Directors and Executive Officers of the Registrant..........30
Item 11: Executive Compensation......................................30
Item 12: Security Ownership of Certain Beneficial Owners
and Management..............................................31
Item 13: Certain Relationships and Related Transactions..............31
PART IV
Item 14: Exhibits, Financial Statement Schedules and
Reports on Form 8-K.........................................31
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PART I
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 that describe the business and
prospects of Frontier Airlines, Inc. ("Frontier" or the "Company") and the
expectations of our Company and management. All statements, other than
statements of historical facts, included in this report that address activities,
events or developments that we expect, believe, intend or anticipate will or may
occur in the future, are forward-looking statements. When used in this document,
the words "estimate," "anticipate," "project" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties, many of which cannot be predicted
with accuracy and some of which might not even be anticipated. Future events and
actual results, financial and otherwise, could differ materially from those set
forth in or contemplated by the forward- looking statements herein. These risks
and uncertainties include, but are not limited to, those discussed in "Risk
Factors" below.
Item 1: Business
General
We are a scheduled airline based in Denver, Colorado. As of June 15,
2000, we operate routes linking our Denver hub to 21 cities in 17 states
spanning the nation from coast to coast. We were organized in February 1994 and
we began flight operations in July 1994 with two leased Boeing 737-200 jets. We
have since expanded our fleet to 24 leased jets, including seven Boeing 737-200s
and 17 larger Boeing 737-300s. We currently use up to nine gates at our hub,
Denver International Airport ("DIA"), where we operate approximately 112 daily
system flight departures and arrivals.
The following table lists the cities we serve as of June 15, 2000, as
well as the dates we commenced service to those cities:
El Paso, Texas October 13, 1994
Albuquerque, New Mexico October 13, 1994
Omaha, Nebraska January 16, 1995
Chicago/Midway, Illinois September 25, 1995
Phoenix, Arizona September 25, 1995
Los Angeles, California November 3, 1995
Minneapolis/St. Paul, Minnesota November 13, 1995
Salt Lake City, Utah November 13. 1995
San Francisco, California November 17, 1995
Seattle, Washington May 1, 1996
Bloomington/Normal, Illinois January 6, 1997
Boston, Massachusetts September 16, 1997
Baltimore, Maryland November 16, 1997
New York/LaGuardia, New York December 3, 1997
San Diego, California July 23, 1998
Atlanta, Georgia December 17, 1998
Dallas/Fort Worth, Texas December 17, 1998
Las Vegas, Nevada December 17, 1998
Portland, Oregon June 14, 1999
Orlando, Florida September 9, 1999
Kansas City, Missouri June 15, 2000
On November 1, 1998, we initiated complimentary shuttle service between
Boulder, Colorado and DIA. We currently operate six daily round trip bus routes
between Boulder and DIA.
In addition to implementing service to 3 new cities between April 1, 1999
and June 15, 2000, we also added additional flight frequencies in the following
markets: Baltimore, Dallas/Fort Worth, San Francisco and Seattle.
Our senior management team includes executives with substantial
experience in the airline industry, including several executives who occupied
similar positions at a former airline called Frontier Airlines. The former
Frontier Airlines served regional routes to and from Denver from 1950 to 1986.
There were various occasions when the former Frontier Airlines served most of
the Company's current and intended markets with jet equipment from its Denver
hub.
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Our corporate headquarters are located at 12015 East 46th Avenue,
Denver, Colorado 80239. Our administrative office telephone number is
303-371-7400; our reservations telephone number is 800-432-1359; and our world
wide Web site address is www.frontierairlines.com.
Business Strategy and Markets
Our business strategy is to provide air service at affordable fares to
high volume markets from our Denver hub. Our strategy is based on the following
factors:
o Stimulate demand by offering a combination of low fares, quality
service and frequent flyer credits in Continental Airlines' OnePass
program.
o Expand our Denver hub operation and increase connecting traffic by
adding additional high volume markets to our current route system.
o Continue filling gaps in flight frequencies to high volume markets from
our Denver hub.
In April 1999, we were named "Best Domestic Low Fare Carrier" by
Entrepreneur Magazine in the publication's sixth annual Business Travel Awards.
During our fiscal year 2000, we were also named Entrepreneur of the Year for the
services sector at Ernst & Young's 1999 Rocky Mountain Entrepreneur of the Year
awards.
Route System History
Our route system strategy encompasses connecting our Denver hub to top
business and leisure destinations. We currently serve 17 of the top 25
destinations from Denver, as defined by the U.S. Department of Transportation's
Origin and Destination Market Survey. In addition, as we bring additional
aircraft into our fleet and add new markets to our route system, connection
opportunities increase. During fiscal year 2000, connection opportunities for
our passengers connecting through DIA increased from an average of 5.3 flights
to 5.9 flights.
Marketing and Sales
Our sales efforts are targeted to price-sensitive passengers in both
the leisure and corporate travel markets. In the leisure market, we offer
discounted fares marketed through the Internet, newspaper, radio and television
advertising along with special promotions. We market these activities in both
our Denver hub and throughout our route system.
To balance the seasonal demand changes that occur in the leisure
market, we introduced several programs in late 1996 designed to capture a larger
share of the corporate market, which tends to be less seasonal than the leisure
market. These programs include negotiated fares for large companies that sign
contracts committing to a specified volume of travel, future travel credits for
small and medium size businesses contracting with us, and special discounts for
members of various trade and nonprofit associations. As of June 15, 2000, we had
signed contracts with over 4,600 companies.
We also pursue sales opportunities with meeting and convention
arrangers and government travel offices. The primary tools we use to attract
this business include personal sales calls, direct mail and telemarketing. In
addition, we offer air/ground vacation packages to many destinations on our
route system under contracts with various tour operators. During fiscal year
2000, Renaissance Travel Solutions, which operated a private label "Frontier
Airlines Vacation" brand, ceased operations. In April 2000, we entered into an
agreement with travelbyus.com ltd., a Canadian travel company, to market and
sell private label Frontier Airlines Vacation products effective June 2000.
These products include air/land inclusive packages to vacation markets within
our route system, such as Las Vegas and Orlando, as well as ski destinations and
other destinations we serve.
In 1995, we joined Continental Airlines' OnePass program. We selected
the OnePass program because there was an established membership base in Denver
and in other cities we served and planned to serve.
Our relationship with travel agencies is important to us and other
airlines. In November 1999, we matched an industry initiative and lowered travel
agent commissions from eight to five %. However, unlike some other airlines, we
do not limit the earnings potential of travel agents through a commission cap.
We have implemented marketing strategies designed to maintain and encourage
relationships with travel agencies throughout our route system. We communicate
with travel agents through personal visits by company executives and sales
managers, sales literature mailings, trade shows, telemarketing and advertising
in various travel agent trade publications.
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We participate in the four major computer reservation systems used by
travel agents to make airline reservations: Amadeus, Galileo, Worldspan and
Sabre. We maintain a reservations center in Denver, operated by our employees.
We also maintain an "overflow" center in Miami, Florida, staffed by contract
personnel, which assists our Denver reservations center during peak booking
periods. In March 2000, we announced our plans to open a new call center in Las
Cruces, New Mexico. The center, scheduled to open in August 2000, will employ
approximately 100 full-time Frontier employees by the end of calendar year 2000,
and will be located in a 12,000 square foot building we are leasing and
renovating. This new call center will replace our current Miami outsource
company.
In January 1999, we renewed an agreement with Electronic Data Systems
("EDS") for continued and enhanced airline customer information services,
including computerized reservations, passenger processing and telecommunications
services. Since early 1997, we have made greater use of electronic or
"paperless" ticketing, a lower cost alternative to ticketing passengers on
relatively expensive ticket stock. During fiscal year 2000, we enabled all four
computer reservation systems utilized by travel agents to offer e-ticketing
capabilities on our flights.
Our agreement with EDS enhances our ability to provide Internet
bookings through the EDS SHARESweb booking engine. In April 1999, we began
offering "Spirit of the Web" fares via our Web site, which permits customers to
make "close in" bookings beginning on Wednesdays for the following weekend. This
is intended to fill seats that might otherwise go unfilled. During fiscal year
2000, our percentage of Internet-related revenue, which includes our own Web
site and other Internet travel distributors, increased from 3.5% to 12.2%.
In May 2000, we unveiled a newly designed and enhanced Web site that
incorporates booking capabilities on each page of the site, an expanded "About
Frontier" section, exclusive partner offers, a new "Frequently Answered
Questions" section and new real time flight information. We also announced in
May that we had signed a letter of intent to purchase EDS' VIBE, Versatile
Internet Booking Engine, which will permit us to perform more advanced online
booking capabilities, such as online discounts, and explore a business to
business corporate strategy. We anticipate that VIBE will be operational by the
end of calendar 2000.
In order to gain connecting traffic from other carriers, we have
negotiated various types of interline agreements with approximately 130 domestic
and international airlines serving cities on our route system. Generally, these
agreements include joint ticketing and baggage services and other conveniences
designed to expedite the connecting process.
Product Pricing
We generally offer our seats at discount fares, and consider our
service an affordable alternative to the higher fare, larger carriers. Seat
inventories on each flight are managed through a yield management system. We
generally offer discounts with five levels of advance purchase requirements. In
contrast to most carriers, our fares usually do not require travelers to include
a Saturday overnight stay in order to take advantage of these discount rates. We
also do not charge a premium for one-way fares and, generally, our fares do not
require a round-trip purchase.
Competition
The Airline Deregulation Act of 1978 (the "Deregulation Act") produced
a highly competitive airline industry, freed of certain government regulations
that for 40 years prior to the Deregulation Act had dictated where domestic
airlines could fly and how much they could charge for their services. Since
then, smaller carriers such as we have entered markets long dominated by large
airlines with substantially greater resources, such as United Airlines, American
Airlines, Northwest Airlines and Delta Air Lines.
We compete principally with United Airlines, the dominant carrier at
DIA, and its commuter affiliates with a total market share of approximately 72%.
This gives United a significant competitive advantage compared to us and other
carriers serving DIA. We believe our current market share at DIA approximates
7%. We compete with United primarily on the basis of fares, fare flexibility and
the quality of our customer service.
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At the present time, four airports, including New York's LaGuardia
Airport, are regulated by means of "slot" allocations, which represent
government authorization to take off or land at a particular airport within a
specified time period. FAA regulations require the use of each slot at least 80%
of the time and provide for forfeiture of slots in certain circumstances. We
were originally awarded six slots at LaGuardia. At the present time, we utilize
four of those slots to operate two daily round-trip flights between Denver and
LaGuardia.
Another airport that is regulated by slots is Ronald Reagan Washington
National Airport (DCA). In addition to slot restrictions, DCA is limited by a
perimeter rule, which limits flights to and from DCA to 1,250 miles. In April
2000, the Wendell H. Ford Aviation Investment and Reform Act for the 21st
Century ("FAIR 21") was enacted. FAIR 21 which authorizes the Department of
Transportation ("DOT") to grant up to 12 slot exemptions beyond the 1,250 mile
DCA perimeter, provided certain specifications are met. These include that the
new service will provide air transportation with domestic network benefits in
areas beyond the perimeter; increase competition by new entrant air carriers or
in multiple markets; not reduce travel options for communities served by small
hub airports and medium hub airports within the perimeter; and not result in
meaningfully increased travel delays. We have filed an application requesting
four slots to operate two daily non-stop flights between our Denver hub and DCA.
Eight other carriers also have filed applications seeking "beyond perimeter"
slots, and the DOT has indicated a decision on the award of the 12 slot
exemptions will be made in early July 2000. If our application is successful, we
plan to implement service between Denver and DCA later this summer or in the
early fall.
Aircraft
As of June 2000, we operate 24 leased Boeing 737 twinjet aircraft in
all-coach seating configurations. The age of these aircraft, their passenger
capacities and their lease expirations are shown in the following table:
<TABLE>
<S> <C> <C> <C> <C>
Approximate
Number of
Aircraft No. of Year of Passenger Lease
Model Aircraft Manufacture Seats Expiration
B-737-200A 7 1978-1983 119 2001-2005
B-737-300 17 1985-1998 136 2002-2006
</TABLE>
Stage 3 noise level requirements mandated that 100% of an operator's
fleet comply with Stage 3 by January 1, 2000. Each of our aircraft has been in
compliance with Stage 3 on and after that date.
In March 2000, we entered into an agreement to purchase 11 new Airbus
aircraft, with options to purchase an additional nine new Airbus aircraft. To
the extent we exercise our options to purchase the nine aircraft, they are
replaced on a one-for-one basis with additional options to purchase new Airbus
aircraft, up to a total of nine additional option aircraft. This order
contemplates a fleet replacement plan by which we will phase out our Boeing 737
aircraft and replace them with a combination of Airbus A319 and A318 aircraft.
As a complement to this purchase, in April and May 2000, we signed two aircraft
lease agreements to lease 16 new Airbus aircraft. When combined with the
purchase agreement, and upon completion of our fleet transition, we expect our
fleet to be comprised of approximately two-thirds A319 aircraft and one-third
A318 aircraft. We expect to take delivery of our first leased Airbus aircraft
during the middle part of 2001 and plan to complete our fleet transition by the
end of 2004. The A319 and A318 aircraft will be configured with 132 and 114
passenger seats, respectively, with a 32-inch seat pitch. We believe that
operating new Airbus aircraft will result in significant operating cost savings
and an improved product for our customers.
We seek to lease additional aircraft from time-to-time in order to
replace aircraft with expiring lease terms and to expand our service and route
system. However, the aircraft lease market is cyclical, and we cannot be certain
that additional aircraft will be available when we need or want to procure them,
or that they will be available at acceptable lease rates and terms.
Maintenance and Repairs
All of our aircraft maintenance and repairs are accomplished in
accordance with the our maintenance program approved by the United States
Federal Aviation Administration ("FAA"). Spare or replacement parts are
maintained by us primarily in Denver. Spare parts vendors supply us with certain
of these parts, and we purchase or lease others from other airline or vendor
sources.
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Since August 1996, we have trained, staffed and supervised our own
maintenance work force at Denver. We sublease a portion of Continental Airlines'
hangar at DIA where we presently perform our own maintenance through the "D"
check level. Other major maintenance, such as major engine repairs, continue to
be performed by outside FAA approved contractors. We also maintain a smaller
maintenance facility at El Paso, Texas.
Under our aircraft lease agreements, we pay all expenses relating to the
maintenance and operation of our aircraft, and we are required to pay monthly
maintenance reserve deposits to the lessors based on usage. Maintenance reserve
deposits are applied against the cost of scheduled major maintenance. Scheduled
major maintenance has occurred or will occur for four of our aircraft in the
fiscal year ending March 31, 2001. To the extent not used for major maintenance
during the lease terms, maintenance reserve deposits remain with the aircraft
lessors upon redelivery of the aircraft.
Our monthly completion factors for the years ending March 31, 2000, 1999
and 1998 ranged from 96.7% to 99.7%, from 97.6% to 99.8%, and from 92.8% to
99.9%, respectively. The completion factor is the percentage of our scheduled
flights that were operated by us (i.e., not canceled). Flights not completed
were canceled principally as a result of mechanical problems, and, to a lesser
extent, weather. There can be no assurance that our aircraft will continue to be
sufficiently reliable over longer periods of time.
Fuel
During the years ending March 31, 2000, 1999 and 1998, jet fuel accounted
for 15.3%, 11.6% and 14.1%, respectively, of our operating expenses. We have
arrangements with major fuel suppliers for substantial portions of our fuel
requirements, and we believe that such arrangements assure an adequate supply of
fuel for current and anticipated future operations. However, we have not entered
into any agreements that fix the price of fuel over any period of time. Jet fuel
costs are subject to wide fluctuations as a result of sudden disruptions in
supply beyond our control. Therefore, we cannot predict the future availability
and cost of jet fuel with any degree of certainty. Fuel prices increased
significantly in fiscal 2000. Our average fuel price per gallon including taxes
and into-plane fees was 79.9(cent) for the year ended March 31, 2000, with the
monthly average price per gallon during the same period ranging from a low of
57.9(cent) to a high of $1.02. As of June 15, 2000, the price per gallon was
94.1(cent). Our average fuel price per gallon including taxes and into-plane
fees was 55.4(cent) for the year ended March 31, 1999, with the monthly average
price per gallon during the same period ranging from a low of 48.3(cent) to a
high of 62.3(cent).
Newer aircraft are more fuel efficient than our Boeing 737-200 aircraft
due to improved aircraft airframe design and engine technology. Significant
increases in the price of jet fuel such as those that occurred in fiscal 2000
result in a higher increase in our overall total costs than those of competitors
whose fleets have a larger proportion of fuel efficient aircraft such as our
Boeing 737-300 aircraft. Increases in fuel prices or a shortage of supply could
have a material adverse effect on our operations and financial results. Our
ability to pass on increased fuel costs to passengers through price increases or
fuel surcharges may be limited, particularly given our affordable fare strategy.
Insurance
We carry $800 million per aircraft per occurrence in property damage and
passenger and third-party liability insurance, and insurance for aircraft loss
or damage as required by our aircraft lease agreements, and customary coverage
for other business insurance. While we believe such insurance is adequate, there
can be no assurance that such coverage will adequately protect us against all
losses which we might sustain. Our property damage and passenger and third-party
liability insurance coverage exceeds the minimum amounts required by the DOT
regulations.
Employees
As of June 1, 2000 we had 2,126 employees, including 1,643 full-time and
483 part-time personnel. Our employees included 233 pilots, 371 flight
attendants, 493 customer service agents, 295 ramp service agents, 188
reservations agents, 334 mechanics and related personnel, and 212 general
management personnel. We consider our relations with our employees to be good.
We have established a compensation philosophy that we will pay
competitive wages compared to other airlines of similar size and other employers
with whom we compete for our labor supply. Employees have the opportunity to
earn above our established market rates through the payment of bonuses.
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Two of our employee groups have voted for union representation: our
pilots voted in November 1998 to be represented by an independent union, the
Frontier Airline Pilots Association, and our dispatchers voted in September 1999
to be represented by the Transport Workers Union. The first bargaining agreement
for the pilots, which has a 5-year term, was ratified and became effective in
May 2000. Negotiations are presently being conducted with the Transport Workers
Union, representing our dispatchers. In addition since 1997 we have had union
organizing attempts that were defeated by our flight attendants, ramp service
agents, mechanics, and stock clerks.
We have enhanced our Retirement Savings Plan [401(k)] by announcing an
increased matching contribution by the Company. Effective May 2000, participants
will receive a 50% Company match for contributions up to 10%. This match is
discretionary and appoved on an annual basis by our Board of Dircetors. We
anticipate that the match and related vesting schedule of 20% per year will
reduce our turnover rates.
All new employees are subject to pre-employment drug and alcohol testing.
Those employees who perform safety sensitive functions are also subject to
random drug testing.
Training, both initial and recurring, is required for many employees. We
train our pilots, flight attendants, ground service personnel, reservations
personnel and mechanics. FAA regulations require pilots to be licensed as
commercial pilots, with specific ratings for aircraft to be flown, to be
medically certified or physically fit, and have recent flying experience.
Mechanics, quality control inspectors and flight dispatchers must be licensed
and qualified for specific aircraft. Flight attendants must have initial and
periodic competency, fitness training and certification. The FAA approves and
monitors our training programs. Management personnel directly involved in the
supervision of flight operations, training, maintenance and aircraft inspection
must meet experience standards prescribed by FAA regulations.
Government Regulation
All interstate air carriers are subject to regulation by the DOT and the
FAA under the Federal Aviation Act. The DOT's jurisdiction extends primarily to
the economic aspects of air transportation, while the FAA's regulatory authority
relates primarily to air safety, including aircraft certification and
operations, crew licensing and training, maintenance standards, and aircraft
standards. In general, the amount of regulation over domestic air carriers in
terms of market entry and exit, pricing and inter-carrier agreements has been
greatly reduced subsequent to enactment of the Deregulation Act.
U.S. Department of Transportation. We hold a Certificate of Public
Convenience and Necessity issued by the DOT that allows us to engage in air
transportation. Pursuant to law and DOT regulation, each United States carrier
must qualify as a United States citizen, which requires that its President and
at least two-thirds of its Board of Directors and other managing officers be
comprised of United States citizens; that not more than 25% of its voting stock
may be owned by foreign nationals, and that the carrier not be otherwise subject
to foreign control.
U.S. Federal Aviation Administration. We also hold an operating
certificate issued by the FAA pursuant to Part 121 of the Federal Aviation
Regulations. The FAA has jurisdiction over the regulation of flight operations
including the licensing of pilots and maintenance personnel, the establishment
of minimum standards for training and maintenance, and technical standards for
flight, communications and ground equipment. We must have and we maintain FAA
certificates of airworthiness for all of our aircraft. Our flight personnel,
flight and emergency procedures, aircraft and maintenance facilities and station
operations are subject to periodic inspections and tests by the FAA.
At the present time, four airports, including New York's LaGuardia
Airport, are regulated by means of "slot" allocations, which represent
government authorization to take off or land at a particular airport within a
specified time period. FAA regulations require the use of each slot at least 80%
of the time and provide for forfeiture of slots in certain circumstances. The
Company currently holds slots to serve the Denver-LaGuardia market and provides
two daily round trip flights in that market. FAIR 21 begins a phase out of slot
controls at three of the four slot controlled airports, including LaGuardia
where slot restrictions are to be eliminated by January 1, 2007.
The DOT and FAA also have authority under the Aviation Safety and Noise
Abatement Act of 1979, the Airport Noise and Capacity Act of 1990 ("ANCA") and
Clean Air Act of 1963 to monitor and regulate aircraft engine noise and exhaust
emissions. We are required to comply with all applicable FAA noise control
regulations and with current exhaust emissions standards. All of our fleet is in
compliance with the FAA's Stage 3 noise level requirements.
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Railway Labor Act/National Mediation Board. Our pilots organized in 1998
under an independent union, the Frontier Airlines Pilots Association, and our
dispatchers organized in 1999 and are represented by the Transport Workers
Union. Our labor relations with respect to the pilots and dispatchers are now
covered under Title II of the Railway Labor Act and are subject to the
jurisdiction of the National Mediation Board.
Miscellaneous. All air carriers are subject to certain provisions of the
Communications Act of 1934 because of their extensive use of radio and other
communication facilities, and are required to obtain an aeronautical radio
license from the Federal Communications Commission ("FCC"). To the extent that
we are subject to FCC requirements, we take all necessary steps to comply with
those requirements.
Risk Factors
In addition to the other information contained in this Form 10-K, the
following risk factors should be considered carefully in evaluating us and our
business.
We Will be Required to Secure New Aircraft Financing
We have agreed to purchase certain new Airbus A319 and A318 aircraft See
"Description of Business - Aircraft". In order to complete the purchase of these
aircraft we must secure acceptable aircraft financing. The amount of financing
required will depend on the number of aircraft purchase options we exercise and
the amount of cash generated by operations prior to delivery of the aircraft. We
are exploring various financing alternatives, including, but not limited to,
domestic and foreign bank financing, public debt financing such as enhanced
equipment trust certificates, and leveraged lease arrangements. We expect to
develop a financing plan and implement that plan coincident with the delivery of
the first purchased aircraft in calendar year 2002. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources". While we believe that such financing will be available to
us, there can be no assurance that financing will be available when required, or
on acceptable terms. The inability to secure such financing could have a
material adverse effect on us and result in delays in or our inability to take
delivery of Airbus aircraft we have agreed to purchase.
The Airline Industry is Seasonal and Cyclical
Our operations primarily depend on passenger travel demand, and, as
such are subject to seasonal variations. Our weakest travel periods are
generally during the quarters ending in June and December. The airline industry
is also a highly cyclical business with substantial volatility. Airlines
frequently experience short-term cash requirements. This is caused by seasonal
fluctuations in traffic, which often put a drain on cash during off-peak
periods, and various other factors, including price competition from other
airlines, national and international events, fuel prices and general economic
conditions, including inflation. Because a substantial portion of airline travel
is discretionary, our operating and financial results may be negatively impacted
by any downturn in national or regional economic conditions in the United
States, and particularly in Colorado. Airlines require substantial liquidity to
continue operating under most conditions. The airline industry also has low
operating profit margins and revenues that vary to a substantially greater
degree than do the related costs. Therefore, a significant shortfall from
expected revenue levels could have a material adverse effect on our operations.
Working capital deficits are not uncommon in the airline industry since airlines
typically have no product inventories and ticket sales not yet flown are
reflected as current liabilities.
Increasing Number of Consolidations and Alliances Has Also Increased Competition
The U.S. airline industry has consolidated in recent years, and there
are additional consolidations presently proposed. Consolidations have enabled
certain carriers to expand their international operations and increase their
presence in the U.S. domestic market. In addition, many major domestic carriers
have formed alliances with domestic regional carriers and foreign carriers. As a
result, many of the carriers with which we compete in our markets are larger and
have substantially greater resources than we have. Continuing developments in
the industry will affect our ability to compete in the various markets in which
we operate.
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We Are in a High Fixed Cost Business
The airline industry is characterized by fixed costs that are high in
relation to revenues. Accordingly, a shortfall from expected revenue levels can
have a material adverse effect on our profitability and liquidity.
Increases in Fuel Costs Affect Our Operating Costs
Fuel is a major component of operating expense for all airlines. Both
the cost and availability of fuel are subject to many economic and political
factors and events occurring throughout the world, and fuel costs fluctuate
widely. Fuel accounted for 15.3% of our total operating expenses for the year
ended March 31, 2000. We cannot predict our future cost and availability of
fuel, and substantial sustained price increases as have prevailed during our
fiscal year ended March 31, 2000, or the unavailability of adequate fuel
supplies, could have a material adverse effect on our operations and
profitability. Because newer aircraft are more fuel efficient than our Boeing
737-200 aircraft a significant increase in the price of jet fuel would result in
a higher increase in our total costs than those of competitors using more
fuel-efficient aircraft. In addition, larger airlines may have a competitive
advantage because they pay lower prices for fuel. We intend generally to follow
industry trends by raising fares in response to significant fuel price
increases. However, our ability to pass on increased fuel costs through fare
increases may be limited by economic and competitive conditions.
We are Subject to Federal Regulatory Oversight
We have obtained the necessary authority from the DOT and the FAA to
conduct flight operations. However, the continuation of such authority is
subject to continued compliance with applicable statutes, rules and regulations
pertaining to the airline industry, including any new rules and regulations that
may be adopted in the future. We believe that small and start-up airlines are
often subject to strict scrutiny by FAA officials, making them susceptible to
regulatory demands that can negatively impact their operations. No assurance can
be given that we will be able to continue to comply with all present and future
rules and regulations. In addition, we can give no assurance about the costs of
compliance with such regulations and the effect of such compliance costs on our
profitability. We also expect substantial FAA scrutiny as we transition from our
all Boeing to an all Airbus fleet.
In May 1996 a relatively new domestic airline sustained an accident in
which one of its aircraft was destroyed and all persons on board were fatally
injured. In June 1996, that airline agreed at the FAA's request to cease all of
its flight operations. Although the FAA, after an intensive and lengthy
investigation, allowed that airline to resume its operations, should we
experience a similar accident it is probable that there would be a material
adverse effect on our business and results of operations.
We Experience High Costs at Denver International Airport
DIA opened in March 1995, and Denver's-Stapleton International Airport
was closed. Financed through revenue bonds, DIA depends on landing fees, gate
rentals and other income from airlines, the traveling public and others to pay
debt service and support operations. Our cost of operations at DIA will vary as
traffic increases or diminishes at that airport. However, we believe that our
operating costs at DIA substantially exceed those that other airlines incur at
most hub airports in other cities.
We Have a Limited Number of Routes
Because of our relatively small fleet size and limited number of
routes, we are at a competitive disadvantage compared to other airlines, such as
United Airlines, that can spread their operating costs across more equipment and
routes and retain connecting traffic (and revenue) within their much more
extensive route networks.
We Face Intense Competition and Market Dominance by United Airlines
The airline industry is highly competitive, primarily due to the
effects of the Airline Deregulation Act of 1978 (the "Deregulation Act"), which
has substantially eliminated government authority to regulate domestic routes
and fares and has increased the ability of airlines to compete with respect to
flight frequencies and fares. We compete with United Airlines in our Denver hub,
and we anticipate that we will compete principally with United Airlines in our
future market entries. United Airlines and its commuter affiliates are the
dominant carriers out of DIA, accounting for approximately 72% of all passenger
boardings. Additionally, from July 1997 until February 1998, when it ceased
flight operations, Western Pacific Airlines, a low-fare carrier, provided hub
service at DIA. This additional competition, as well as other competitive
activities by United Airlines and other carriers, have had in the past and could
continue to have a material adverse effect on our revenues and results of
operations. Most of our current and potential competitors have significantly
greater financial resources, larger route networks and superior market identity
than we have.
10
<PAGE>
We are Dependent on Our Chief Executive Officer
We are dependent on the active participation of Samuel D. Addoms, our
President and Chief Executive Officer. The loss of his services could materially
and adversely affect our business and future prospects. We do not maintain key
person life insurance on any of our officers.
We Could Lose Airport and Gate Access
We have not initially encountered barriers to airport or airport gate
access other than cost. However, any condition that would deny or limit our
access to the airports that we intend to utilize in the future or that
diminishes the desire or ability of potential customers to travel between any of
those cities may have a materially adverse effect on our business. In addition,
gates may be limited at some airports, which could adversely affect our
operations.
There are Certain Risks Associated with Our Boeing 737 Aircraft
A. Maintenance. Under our aircraft lease agreements, we are required to
bear all routine and major maintenance expenses. Maintenance expenses comprise a
significant portion of our operating expenses. In addition, we are required
periodically to take aircraft out of service for heavy maintenance checks, which
can adversely affect revenues. We also may be required to comply with
regulations and airworthiness directives issued by the FAA, the cost of which
may be partially assumed by our aircraft lessors depending upon the magnitude of
the expense. There can be no assurance that we will not incur higher than
anticipated maintenance expenses. We believe that our leased aircraft are in
compliance with all FAA-issued Airworthiness Directives ("ADs"). However, other
ADs are presently required to be performed in the future and there is a high
probability that additional ADs will be required.
B. Local Noise Regulations. As a result of litigation and pressure from
airport area residents, airport operators have taken local actions over the
years to reduce aircraft noise. These actions have included regulations
requiring aircraft to meet prescribed decibel limits by designated dates,
curfews during night time hours, restrictions on frequency of aircraft
operations and various operational procedures for noise abatement. The Airport
Noise and Capacity Act of 1990 ("ANCA") recognized the right of airport
operators with special noise problems to implement local noise abatement
procedures as long as such procedures do not interfere unreasonably with the
interstate and foreign commerce of the national air transportation system. ANCA
generally requires FAA approval of local noise restrictions on Stage 3 aircraft.
An agreement between the City and County of Denver and another county adjacent
to Denver specifies certain maximum aircraft noise levels at designated
monitoring points in the vicinity of DIA with significant payments payable by
Denver to the other county for each substantiated noise violation under the
agreement. Violation of these noise standards could result in increased landing
fees at DIA for us, as well as other carriers operating at DIA. Noise
regulations have not had a material adverse effect on our operations to date,
but regulations could be enacted in the future that would have such an effect.
We Have a Limited Number of Aircraft, and the Market for Aircraft Fluctuates
We currently schedule all of our aircraft in regular passenger service
with limited spare aircraft capability in the event one or more aircraft is
removed from scheduled service for unplanned maintenance repairs or other
reasons. The unplanned loss of use of one or more of our aircraft for a
significant period of time could have a materially adverse effect on our
operations and operating results. The market for leased aircraft fluctuates
based on worldwide economic factors. There can be no assurance that we will be
able to lease additional aircraft on satisfactory terms or when needed.
Our Relations With Our Employees is Very Important
We believe we operate with lower personnel costs than many established
airlines, principally due to lower base salaries and greater flexibility in the
utilization of personnel. There can be no assurance that we will continue to
realize these advantages over other air carriers for an extended period of time.
Our pilots are represented by an independent labor union, the Frontier Airline
Pilots Association and our dispatchers are represented by the Transport Workers
Union. In addition since 1997 we have had union organizing attempts that were
defeated by our flight attendants, ramp service agents, mechanics, and stock
clerks. The collective bargaining agreement we have entered into with our pilots
has increased our labor and benefit costs effective in May 2000, and additional
unionization of our employees could increase our overall costs as well.
11
<PAGE>
We Have Not Paid Dividends
We have never declared or paid cash dividends on our Common Stock. We
currently intend to retain any future earnings to fund operations and to
continue development of our business and do not expect to pay any cash dividends
on our Common Stock in the foreseeable future.
Item 2: Properties
We have leased approximately 47,000 square feet of office space in
Denver with terms ending February 2001 and May 2001 at a current annual rental
of approximately $720,000. This facility provides space for our reservations
center together with space for administrative activities, including senior
management, purchasing, accounting, sales, marketing, advertising, human
resources, maintenance and engineering and information technology systems.
Beginning February 2001, we will move our general and administrative
functions to a new headquarters facility near DIA. The new lease for
approximately 51,000 square feet has a term of 12 years at an average annual
rental of approximately $686,000 plus operating and maintenance expenses. The
Denver reservations center will occupy a facility separate from the headquarters
at a location yet to be determined. Beginning August 2000, a second reservations
center facility will commence operations in Las Cruces, New Mexico. This
facility is approximately 12,000 square feet and is leased for a term of 122
months at an average annual rental of approximately $132,000 plus operating and
maintenance expenses.
Each of our airport locations requires leased space associated with
gate operations, ticketing and baggage operations. We either lease the ticket
counters, gates and airport office facilities at each of the airports we serve
from the appropriate airport authority or sublease them from other airlines.
We have agreed to enter into an airport lease and facilities agreement
with the City and County of Denver (CCD) at DIA for ticket counter space, nine
gates and associated operations. This lease will expire in 2010. We also
sublease a portion of Continental Airlines' hangar at DIA until January 1, 2004.
Item 3: Legal Proceedings
In 1997, we filed a complaint with the U.S. Department of Justice ("DOJ")
alleging that United Airlines has engaged in predatory, anticompetitive and
monopolistic practices at DIA. The complaint asks the agency to investigate
eight separate counts of potential antitrust violations. The eight counts range
from "capacity dumping" in markets served by competitors to alleged abuses
relating to United's pricing practices, "exclusive dealing" with corporate
customers and commuter carriers, and other tactics used by United to allegedly
drive competitors from its markets. In early 1998 we received and answered a DOJ
Civil Investigative Demand, which requested information and documents in our
possession relating to possible violations of the federal antitrust laws
concerning monopolization or attempts to monopolize air transportation in
certain markets, including certain Denver city-pair markets. To date, the DOJ
has not acted on our complaint, although the DOJ has filed a federal civil
antitrust action against another major U.S. carrier with respect to certain
alleged anti-competitive practices against smaller carriers, not including us.
In a related matter, the DOT, in response to complaints by us and other
smaller airlines, in April 1998 published a number of proposed guidelines
designed to identify predatory practices in the airline industry, along with
enforcement policies. We are unable to predict what actions, if any, will be
taken either by the DOT or by Congress with respect to these issues.
From time to time, we are engaged in routine litigation incidental to our
business. Except as may be otherwise specifically discussed in this section, we
believe there are no legal proceedings pending in which we are a party or of
which any of our property is the subject that are not adequately covered by
insurance maintained by us, or which if adversely decided, would have a material
adverse effect upon our business or financial condition.
12
<PAGE>
Item 4: Submission of Matters to a Vote of Security Holders
During the fourth quarter of the year covered by this report, we did not
submit any matters to a vote of our security holders through the solicitation of
proxies or otherwise.
PART II
Item 5: Market for Common Equity and Related Stockholder Matters
Price Range of Common Stock
Until May 26, 1999, our Common Stock was traded on the Nasdaq SmallCap
Market under the symbol "FRNT." Effective May 26, 1999, our Common Stock began
trading on the Nasdaq National Market, also under the symbol "FRNT." We were
able to move from the SmallCap Market to the National Market because of our
ability to meet minimum requirements in areas such as net tangible assets,
market capitalization, public float, number of shareholders and corporate
governance.
The following table shows the range of high and low bid prices per share
for our Common Stock for the periods indicated and as reported by Nasdaq through
June 15, 2000. Market quotations listed here represent prices between dealers
and do not reflect retail mark-ups, mark-downs or commissions. As of June 15,
2000 there were 657 holders of record of our Common Stock.
Price Range of
Common Stock
Quarter Ended High Low
June 30, 1998 $ 3 7/8 $ 2 7/8
September 30, 1998 4 5/8 3
December 31, 1998 5 3/8 3
March 31, 1999 10 4 15/16
June 30, 1999 17 3/16 9 1/2
September 30, 1999 18 5/8 8 1/4
December 31, 1999 13 1/2 8 29/32
March 31, 2000 11 5/16 9 3/8
June 30, 2000 (through June 15, 2000) 15 15/32 11 1/2
13
<PAGE>
Recent Sales of Securities
During the period April 1, 1999 through June 15, 2000, various holders of
warrants to purchase our Common Stock exercised their warrants and we issued
Common Stock as described below:
<TABLE>
<S> <C> <C> <C> <C>
Number of Exercise Warrant
Warrant Holder Shares Issued Price Dates of Exercise
-------------- ------------- ----- -----------------
Initial Public Offering Underwriter
(and affiliates) 83,600 $5.525 4/1/99-5/18/99
Secondary Offering Underwriters
(and affiliates) 147,764 $5.55 7/12/99-5/31/00
Aircraft Lessor 395,000 $5.00-$7.19 5/6/99 & 6/16/99
Financial Advisor 548,000 $3.00 6/14/99
</TABLE>
As of June 15, 2000, we have granted stock options to our employees and
directors to purchase up to 3,008,750 shares of Common Stock, 1,237,271 of which
options have been previously exercised and 975,979 of which are currently
exercisable at exercise prices ranging from $1.00 to $13.82 per share.
Dividend Policy
We have not declared or paid cash dividends on our Common Stock. We
currently intend to retain any future earnings to fund operations and the
continued development of our business, and, thus, do not expect to pay any cash
dividends on our Common Stock in the foreseeable future. Future cash dividends,
if any, will be determined by our Board of Directors and will be based upon our
earnings, capital requirements, financial condition and other factors deemed
relevant by the Board of Directors.
Rights Dividend Distribution
In February 1997, our Board of Directors declared a dividend distribution
of one right (a "Right") for each outstanding share of our Common Stock to
shareholders of record at the close of business on March 15, 1997. Except as
described below, each Right, when exercisable, entitles the registered holder to
purchase from us one share of Common Stock at a purchase price of $65.00 per
share (the "Purchase Price"), subject to adjustment. The Rights expire at the
close of business on February 20, 2007, unless we redeem or exchange them
earlier as described below. The description and terms of the Rights are set
forth in a Rights Agreement, as amended by amendments dated June 30, 1997,
December 5, 1997, and September 9, 1999 (as so amended, the "Rights Agreement").
The Rights are exercisable upon the earlier of (i) 10 days following a
public announcement that a person or group of affiliated or associated persons
other than us, our subsidiaries or any person receiving newly-issued shares of
Common Stock directly from us or indirectly via an underwriter in connection
with a public offering by us (an "Acquiring Person") has acquired, or obtained
the right to acquire, beneficial ownership of 20% or more of the outstanding
shares of Common Stock (the "Stock Acquisition Date"), or (ii) 10 business days
following the commencement of a tender offer or exchange offer that would result
in a person or group beneficially owning 20% or more of such outstanding shares
of Common Stock.
If any person becomes an Acquiring Person other than pursuant to a
Qualifying Offer (as defined below), each holder of a Right has the right to
receive, upon exercise, Common Stock (or, in certain circumstances, cash,
property or other securities of the Company) having a value equal to two times
the exercise price of the Right. Notwithstanding any of the foregoing, all
Rights that are beneficially owned by any Acquiring Person will be null and
void. However, Rights are not exercisable in any event until such time as the
Rights are no longer redeemable by us as set forth below.
A "Qualifying Offer" means a tender offer or exchange offer for, or
merger proposal involving, all outstanding shares of Common Stock at a price and
on terms determined by at least a majority of the Board of Directors who are not
our officers or employees and who are not related to the Person making such
offer, to be fair to and in the best interests of the Company and our
shareholders.
14
<PAGE>
If after the Stock Acquisition Date we are acquired in a merger or other
business combination transaction in which the Common Stock is changed or
exchanged or in which we are not the surviving corporation (other than a merger
that follows a Qualifying Offer) or 50% or more of the Company's assets or
earning power is sold or transferred, each holder of a Right shall have the
right to receive, upon exercise, common stock of the acquiring company having a
value equal to two times the exercise price of the Right.
The Purchase Price payable, and the number of shares of Common Stock or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Common
Stock, (ii) if holders of the Common Stock are granted certain rights or
warrants to subscribe for Common Stock or convertible securities at less than
the current market price of the Common Stock, or (iii) upon the distribution to
holders of the Common Stock of evidences of indebtedness or assets or of
subscription rights or warrants.
At any time until ten days following the Stock Acquisition Date, we may
redeem the Rights in whole at a price of $.01 per Right. Upon the action of the
Board of Directors ordering redemption of the Rights, the Rights will terminate
and the only right of the holders of Rights will be to receive the $.01
redemption price.
While the distribution, if any, of the Rights will not be taxable to
shareholders or to us, shareholders may, depending upon the circumstances,
recognize taxable income if the Rights become exercisable for Common Stock (or
other consideration) of the Company or for common stock of the acquiring
company.
15
<PAGE>
Item 6: Selected Financial Data
The following selected financial and operating data as of and for each of
the years ended March 31, 2000, 1999, 1998, 1997 and 1996 are derived from our
audited financial statements. This data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the financial statements and the related notes thereto included
elsewhere in this Report.
<TABLE>
<S> <C> <C> <C> <C> <C>
Year Ended March 31,
2000 1999 1998 1997 1996
-----------------------------------------------------------------
(Amounts in thousands except per share amounts)
Statement of Operations Data:
Total operating revenues $329,820 $220,608 $147,142 $116,501 $70,393
Total operating expenses 290,511 195,928 165,697 129,662 76,325
Operating income (loss) 39,309 24,680 (18,554) (13,161) (5,933)
Income (loss) before income tax expense
(benefit) and cumulative effect of change of
accounting for maintenance checks 43,415 25,086 (17,746) (12,186)
Income tax expense (benefit) 16,954 (5,480) - - -
Income (loss) before cumulative effect of
change in accounting for maintenance checks 26,460 30,566 (17,746) (12,186) -
Cumulative effect of change of method of
accounting for maintenance checks 549 - - - -
Net income (loss) 27,010 30,566 (17,746) (12,186) (5,582)
Income (loss) per share before cumulative
effect of a change in accounting principle:
Basic 1.53 2.14 (1.95) (1.49) (1.23)
Diluted 1.40 1.98 (1.95) (1.49) (1.23)
Net income (loss) per share:
Basic 1.56 2.14 (1.95) (1.49) (1.23)
Diluted 1.43 1.98 (1.95) (1.49) (1.23)
Balance Sheet Data:
Cash, cash equivalents and
short-term investments $83,611 $47,289 $3,641 $10,286 $7,527
Current assets 140,361 94,209 33,999 31,470 25,797
Total assets 187,546 119,620 50,598 44,093 30,990
Current liabilities 98,475 68,721 50,324 32,745 25,844
Long-term debt 329 435 3,566 56 92
Total liabilities 106,501 75,230 56,272 34,210 26,289
Stockholders' equity (deficit) 81,045 44,391 (5,673) 9,883 4,701
Working capital (deficit) 41,886 25,488 (16,325) (1,275) (47)
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Year Ended March 31,
2000 1999 1998 1997 1996
-------------------------------------------------------------------
Selected Operating Data:
Passenger revenue (000s) (2) $320,850 $214,311 $142,018 $113,758 $68,455
Revenue passengers carried (000s) 2,284 1,664 1,356 1,180 758
Revenue passenger miles (RPMs) (000s) (3) 2,104,460 1,506,597 1,119,378 839,939 479,887
Available seat miles (ASMs) (000s) (4) 3,559,595 2,537,503 1,996,185 1,419,720 844,161
Passenger load factor (5) 59.1% 59.4% 56.1% 59.2% 56.8%
Break-even load factor (6) 51.1% 52.4% 63.1% 65.5% 61.5%
Block hours (7) 71,276 52,789 42,767 32,459 20,783
Departures 33,284 25,778 22,257 18,910 14,957
Average seats per departure 129 125 124 118 112
Average stage length 829 787 723 636 504
Average length of haul 921 905 826 712 633
Aircraft miles (000s) 27,594 20,300 16,098 12,032 7,537
Average daily block hour utilization (8) 9.9 9.6 9.5 10.3 9.9
Yield per RPM (cents) (9) 15.25 14.22 12.69 13.54 14.26
Total yield per RPM (cents) (10) 15.67 14.64 13.14 13.87 14.67
Total yield per ASM (cents) (11) 9.27 8.69 7.37 8.21 8.34
Expense per ASM (cents) 8.16 7.72 8.30 9.13 9.04
Expense per ASM excluding fuel (cents) 6.91 6.82 7.13 7.61 7.65
Passenger revenue per block hour $4,502 $4,060 $3,321 $3,505 $3,294
Average fare (12) $134 $123 $100 $92 $88
Average aircraft in service 19.7 15.0 12.3 9.6 5.7
Aircraft in service at end of year 23.0 17.0 14.0 10.0 7.0
Average age of aircraft at end of year 10.5 14.7 16.2 22.0 25.3
EBITDAR (000s) (13) $90,583 $58,848 $7,437 $4,576 $942
EBITDAR as a % of revenue 27.5% 26.7% 5.1% 3.9% 1.3%
</TABLE>
(1) Fiscal 2000 includes income of $549,000 ($.03 per share) from the
cumulative effect of the change in the method of accounting for maintenance
checks.
(2) "Passenger revenue" includes revenues for non-revenue passengers,
administrative fees, and revenue recognized for unused tickets that are
greater than one year from issuance date.
(3) "Revenue passenger miles," or RPMs, are determined by multiplying the
number of fare-paying passengers carried by the distance flown. (4)
"Available seat miles," or ASMs, are determined by multiplying the number
of seats available for passengers by the number of miles flown.
(5) "Passenger load factor" is determined by dividing revenue passenger miles
by available seat miles.
(6) "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
(7) "Block hours" represent the time between aircraft gate departure and
aircraft gate arrival.
(8) "Average daily block hour utilization" represents the total block hours
divided by the weighted average number of aircraft days in service.
(9) "Yield per RPM" is determined by dividing passenger revenues by revenue
passenger miles.
(10) "Total Yield per RPM" is determined by dividing total revenues by revenue
passenger miles.
(11) "Total Yield per ASM" is determined by dividing passenger revenues by
available seat miles.
(12) "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.
(13) "EBITDAR", or "earnings before interest, income taxes, depreciation,
amortization and aircraft rentals," is a supplemental financial measurement
we and many airline industry analysts use in the evaluation of our
business. However, EBITDAR should only be read in conjunction with all of
our financial statements appearing elsewhere herein, and should not be
construed as an alternative either to operating income (as determined in
accordance with generally accepted accounting principles) as an indicator
of our operating performance or to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles) as
a measure of liquidity.
17
<PAGE>
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations Selected Operating Statistics
The following table provides our operating revenues and expenses
expressed as cents per total available seat miles ("ASM") and as a percentage of
total operating revenues, as rounded, for the years ended March 31, 2000, 1999
and 1998. Pro forma amounts have been provided for the years ended March 31,
1999 and 1998 assuming the new method of accounting for maintenance checks is
applied retroactively.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
2000 1999 1998
---------------------- -------------------------- --------------------------
Per % Per % Per %
total of total of total of
ASM Revenue ASM Revenue ASM Revenue
--- ------- --- ------- --- -------
Revenues:
Passenger 9.02 97.3% 8.44 97.1% 7.11 96.5%
Cargo 0.19 2.1% 0.19 2.2% 0.15 2.1%
Other 0.06 0.6% 0.06 0.7% 0.11 1.4%
----------- ---------- ------------ ------------ ------------- ------------
Total revenues 9.27 100.0% 8.69 100.0% 7.37 100.0%
Operating expenses:
Flight operations 3.53 38.1% 3.12 35.9% 3.32 45.1%
Aircraft and traffic servicing 1.38 14.8% 1.36 15.6% 1.56 21.1%
Maintenance 1.41 15.2% 1.42 16.3% 1.59 21.6%
Promotion and sales 1.29 14.0% 1.39 16.0% 1.45 19.7%
General and administrative 0.46 5.0% 0.36 4.2% 0.32 4.3%
Depreciation and amortization 0.10 1.0% 0.07 0.8% 0.06 0.9%
----------- ---------- ------------ ------------ ------------- ------------
Total operating expenses 8.16 88.1% 7.72 8.8% 8.30 112.6%
=========== ========== ============ ============ ============= ============
Total ASMs (000s) 3,559,595 2,537,503 1,996,185
Pro forma amounts:
Maintenance 1.49 17.1% 1.54 20.9%
Total operating expenses 7.79 89.6% 8.25 111.9%
</TABLE>
18
<PAGE>
The following selected financial and operating data for the years ended
March 31, 2000, 1999, and 1998 have been adjusted on a pro forma basis assuming
the new method of accounting for maintenance checks is applied retroactively.
Year Ended March 31,
1999 1998
--------------------------
Statement of Operations Data:
Maintenance expenses (000s) 37,821 30,692
Total operating expenses (000s) 197,659 164,598
Net income (loss) (000s) 29,510 (16,647)
Net income (loss) per share:
Basic 2.07 (1.83)
Diluted 1.92 (1.83)
Selected Operating Data:
Break-even load factor 52.9% 62.2%
Expense per ASM (cents) 7.79 8.25
Expense per ASM excluding fuel (cents) 6.89 7.02
Results of Operations - Year Ended March 31, 2000 Compared to Year Ended March
31, 1999
General
We are a scheduled airline based in Denver, Colorado. We currently
operate routes linking our Denver hub to 21 cities in 17 states spanning the
nation from coast to coast. At present, we use up to 9 gates at Denver
International Airport ("DIA") for approximately 112 daily flight departures and
arrivals. During the year ended March 31, 2000, we added Portland, Oregon and
Orlando, Florida to our route system. On June 15, 2000 we commenced service in
the Kansas City, Missouri market.
Organized in February 1994, we commenced flight operations as a regional
carrier in July 1994 with two leased Boeing 737-200 jet aircraft. We have since
expanded our fleet to 24 leased jets as of June 2000, including seven Boeing
737-200s and seventeen larger Boeing 737-300s. During the year ended March 31,
2000, we added seven additional leased Boeing 737-300 aircraft and four Boeing
737-200A to our fleet and retired 5 Boeing 737-200 aircraft.
Small fluctuations in our yield per RPM or expense per ASM can
significantly affect operating results because we, like other airlines, have
high fixed costs in relation to revenues. Airline operations are highly
sensitive to various factors, including the actions of competing airlines and
general economic factors, which can adversely affect our liquidity, cash flows
and results of operations.
During the fourth quarter ended March 31, 2000, we changed our method of
accounting for maintenance checks from the accrue in advance method to the
direct expensing method. The Company believes that the newly adopted accounting
principle is preferable in the circumstances because there has not been an
obligating event prior to the maintenance checks actually being performed and
the new method is the predominant method used in the airline industry.
Fluctuations in these maintenance costs from period to period are not expected
to be significant given the maturity and current size of the Company's fleet.
For purposes of comparability, the amounts for the year ended March 31, 1999
used in our discussion and analysis of financial condition and results of
operations use the pro forma data included in the Selected Operating Statistics
tables.
As a result of the expansion of our operations during the year ended
March 31, 2000, our results of operations are not necessarily indicative of
future operating results or comparable to the prior year ended March 31, 1999.
19
<PAGE>
Results of Operations
We had net income of $27,009,000 or $1.40 per diluted share for the year
ended March 31, 2000 as compared to pro forma net income of $29,510,000 or $1.92
per diluted share for the year ended March 31, 1999. During the year ended March
31, 2000, we reported a provision for income taxes, which totaled $16,954,000,
or 90(cent) per diluted share. During the year ended March 31, 1999, we
eliminated the valuation allowance that offset tax loss carryforwards and
recognized an income tax benefit. The income tax benefit totaled $5,480,000 or
36(cent) per share. During the year ended March 31, 2000, as compared to the
prior comparable periods, we experienced higher fares as a result of increases
in the number of business travelers, and a general increase in fare levels. We
also increased fares to partially offset increased fuel costs.
Our cost per ASM for the year ended March 31, 2000 and pro forma cost per
ASM for the year ended March 31, 1999 were 8.16(cent) and 7.79(cent),
respectively, or an increase of .37(cent) or 4.8%. Costs per ASM excluding fuel
for the years ended March 31, 2000 and pro forma costs per ASM for the year
ended March 31, 1999 were 6.91(cent) and 6.89(cent), respectively, or an
increase of .3%. Our cost per ASM increased during the year ended March 31, 2000
from 7.79(cent) principally because of overall increases in the cost of fuel
which accounted for .35(cent) per ASM, aircraft rentals because of newer and
larger aircraft of .05(cent) per ASM, general and administrative expenses to
support increased levels of operations and the number of personnel of .09(cent)
per ASM, offset by a .08(cent) reduction in cost per ASM in maintenance as a
result of conducting certain heavy maintenance checks in-house and a .10(cent)
decrease in cost per ASM in promotion and sales expense as a result of a
decrease in the travel agency commission rate from 8% to 5% in November 1999,
decreased advertising and communication expenses offset by an increase in credit
card fees associated with the increase in our average fare.
An airline's break-even load factor is the passenger load factor that
will result in operating revenues being equal to operating expenses, assuming
constant revenue per passenger mile and expenses. For the year ended March 31,
2000, our break-even load factor was 51.1% compared to the passenger load factor
achieved of 59.1%. For the year ended March 31, 1999, our pro forma break-even
load factor was 52.9% compared to the achieved passenger load factor of 59.4%.
Our break-even load factor decreased from the prior comparable period largely as
a result of an increase in our average fare to $134 during the year ended March
31, 2000 from $123 during the year ended March 31, 1999, an increase in our
total yield per RPM from 14.64(cent) for the year ended March 31, 1999 to
15.67(cent) for the year ended March 31, 2000 offset by an increase in our
expense per ASM to 8.16(cent) for the year ended March 31, 2000 from 7.79(cent)
for the year ended March 31, 1999.
Revenues
Our revenues are highly sensitive to changes in fare levels. Fare pricing
policies have a significant impact on our revenues. Because of the elasticity of
passenger demand, we believe that increases in fares will result in a decrease
in passenger demand in many markets. We cannot predict future fare levels, which
depend to a substantial degree on actions of competitors. When sale prices or
other price changes are initiated by competitors in our markets, we believe that
we must, in most cases, match those competitive fares in order to maintain our
market share. Passenger revenues are seasonal in leisure travel markets
depending on the markets' locations and when they are most frequently
patronized.
Our average fare for the years ended March 31, 2000 and 1999 was $134 and
$123, respectively. We believe that the increase in the average fare during the
year ended March 31, 2000 over the prior comparable periods was largely a result
of our focus on increasing the number of business travelers, an increase in
fares to offset increased fuel costs, and a general increase in fare levels.
Passenger Revenues. Passenger revenues totaled $320,850,000 for the year
ended March 31, 2000 compared to $214,311,000 for the year ended March 31, 1999,
or an increase of 49.7%. We carried 2,284,000 revenue passengers for the year
ended March 31, 2000 compared to 1,664,000 for the year ended March 31, 1999 or
an increase of 37.3%. We had an average of 19.7 aircraft in our fleet during the
year ended March 31, 2000 compared to an average of 15 aircraft during the year
ended March 31, 1999, an increase of 31.3%, and ASMs increased by 1,022,092,000
or 40.3%. We believe that our passenger traffic and related revenues during the
year ended March 31, 2000 were adversely affected by late deliveries of aircraft
and consumer concerns over the Year 2000 issue.
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Cargo revenues, consisting of revenues from freight and mail service,
totaled $6,856,000 and $4,881,000 for the years ended March 31, 2000 and 1999,
respectively, representing 2.1% and 2.2% of total operating revenues,
respectively, an increase of 40.5%. This adjunct to the passenger business is
highly competitive and depends heavily on aircraft scheduling, alternate
competitive means of same day delivery service and schedule reliability.
Other revenues, comprised principally of interline handling fees, liquor
sales and excess baggage fees, totaled $2,114,000 and $1,415,000 or .6% of total
operating revenues for each of the years ended March 31, 2000 and 1999,
respectively.
Operating Expenses
Operating expenses include those related to flight operations, aircraft
and traffic servicing, maintenance, promotion and sales, general and
administrative and depreciation and amortization. Total operating expenses and
pro forma total operating expenses were $290,511,000 and $197,659,000,
respectively, for the years ended March 31, 2000 and 1999, and represented 88.1%
and 89.6% of total revenue, respectively. Operating expenses decreased as a
percentage of revenue during the year ended March 31, 2000 as a result of the
49.7% increase in passenger revenues attributable to a 37.3% increase in
passengers and a 8.9% increase in the average fare offset by a 44.2% increase in
the average cost per gallon of fuel and a general wage rate increase which went
into effect in January 2000.
Flight Operations. Flight operations expenses of $125,536,000 and
$79,247,000 were 38.1% and 35.9% of total revenue for the years ended March 31,
2000 and 1999, respectively. Flight operations expenses include all expenses
related directly to the operation of the aircraft, including fuel, lease and
insurance expenses, pilot and flight attendant compensation, in-flight catering,
crew overnight expenses, flight dispatch and flight operations administrative
expenses.
Aircraft fuel expenses include both the direct cost of fuel including
taxes as well as the cost of delivering fuel into the aircraft. Aircraft fuel
costs of $44,402,000 for 55,568,000 gallons used and $22,758,000 for 41,082,000
gallons used resulted in an average fuel cost of 79.9(cent) and 55.4(cent) per
gallon and represented 35.4% and 28.7% of total flight operations expenses for
the years ended March 31, 2000 and 1999, respectively. The average fuel cost per
gallon increased for the year ended March 31, 2000 from the comparable prior
period due to an overall increase in the market price of fuel. Fuel prices are
subject to change weekly as we do not purchase supplies in advance for
inventory. Fuel consumption for each of the years ended March 31, 2000 and 1999
averaged 780 and 778 gallons per block hour, respectively. Fuel consumption
increased over the prior comparable period because of increased flap speed
settings mandated by the FAA, which required more fuel to maintain air speed at
normal operating levels. The requirement for increased flap speed settings will
be lifted when a fleet modification is completed, which is required to be
completed by August 1, 2000. Approximately 65% of our fleet have had the
modification completed as of March 31, 2000. Additionally, 5 aircraft were
returned to their lessor during the year ended March 31, 2000 and replaced with
4 aircraft with higher thrust engines that have a higher fuel burn rate.
Aircraft lease expenses totaled $47,945,000 (14.5% of total revenue) and
$32,958,000 (14.9% of total revenue) for the years ended March 31, 2000 and
1999, respectively, or an increase of 45.5%. The increase is largely due to
higher lease expenses for larger and newer Boeing 737-300 aircraft added to the
fleet which resulted in the increase in the average number of aircraft to 19.7
from 15, or 31.3%, for the year ended March 31, 2000. The average age of our
fleet decreased from 14.7 years as of March 31, 1999 to 10.5 years as of March
31, 2000.
Aircraft insurance expenses totaled $2,689,000 (.8% of total revenue) for
the year ended March 31, 2000. Aircraft insurance expenses for the year ended
March 31, 1999 were $2,425,000 (1.1% of total revenue). Aircraft insurance
expenses were .13(cent) and .16(cent) per RPM for the years ended March 31, 2000
and 1999, respectively. Aircraft insurance expenses decreased per RPM as a
result of competitive pricing in the aircraft insurance industry and our
favorable experience rating since we began flight operations in July 1994.
Pilot and flight attendant salaries before payroll taxes and benefits
totaled $15,392,000 and $10,653,00 or 4.8% and 5% of passenger revenue for each
of the years ended March 31, 2000 and 1999, or an increase of 44.5%. Pilot and
flight attendant compensation increased principally as a result of a 31.3%
increase in the average number of aircraft in service, general wage rate
increases, and a 35% increase in block hours. We pay pilot and flight attendant
salaries for training consisting of approximately six and three weeks,
respectively, prior to scheduled increases in service which can cause the
compensation expense during such periods to appear high in relationship to the
average number of aircraft in service. When we are not in the process of adding
aircraft to our system, pilot and flight attendant expense per aircraft
normalizes. With a scheduled passenger operation, and with salaried rather than
hourly crew compensation, our expenses for flight operations are largely fixed,
with flight catering and fuel expenses the principal exception.
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Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses
were $48,955,000 and $34,451,000 (an increase of 42.1%) for the years ended
March 31, 2000 and 1999, respectively, and represented 14.8% and 15.6% of total
revenue. Aircraft and traffic servicing expenses include all expenses incurred
at airports including landing fees, facilities rental, station labor, ground
handling expenses, and interrupted trip expenses associated with delayed or
cancelled flights. Interrupted trip expenses are amounts paid to other airlines
to protect passengers as well as hotel, meal and other incidental expenses.
Aircraft and traffic servicing expenses will increase with the addition of new
cities to our route system. During the year ended March 31, 2000 we served 21
cities compared to 19 cities during the year ended March 31, 1999, or an
increase of 10.5%. Three of the four cities added during the year ended March
31, 1999 were not added until mid-December 1998. Aircraft and traffic servicing
expenses were $1,471 for the year ended March 31, 2000 as compared to $1,336 per
departure for the year ended March 31, 1999, or an increase of $135. An
additional DIA revenue credit above amounts previously estimated and accrued,
for its fiscal year ended December 31, 1997 totaled $371,000 (or $11 per
departure) and was included as an offset to aircraft and traffic servicing
expenses during the year ended March 31, 1999. After adjusting the cost per
departure for these credits for the year ended March 31, 1999, the cost per
departure would have been $1,347 and the cost per departure for the year ended
March 31, 2000 would have been a $124 increase over the prior comparable period.
Aircraft and traffic servicing expenses increased as a result of a drop in the
completion factor for the year ended March 31, 2000 to 98.6% from 99% for the
year ended March 31, 1999 and late deliveries of aircraft which increased
interrupted trip expenses. We also had expenses associated with the Boulder,
Colorado-DIA shuttle bus service, which is complimentary to our passengers, and
a general wage rate increase which was effective in January 2000.
Maintenance. Maintenance expenses for the year ended March 31, 2000 and
pro forma maintenance expenses for the year ended March 31, 1999 of $50,239,000
and $37,821,000, respectively, were 15.2% and 17.1% of total revenue. These
include all labor, parts and supplies expenses related to the maintenance of the
aircraft. Routine maintenance is charged to maintenance expense as incurred
while major engine overhauls and heavy maintenance check expense are accrued
monthly. Maintenance cost per block hour for the year ended March 31, 2000 and
pro forma maintenance cost per block hour for the year ended March 31, 1999 was
$704 and $717 per block hour, respectively. Maintenance cost per block hour
decreased during the year ended March 31, 2000 as a result of a decrease in the
average age of our aircraft and as a result of conducting certain heavy
maintenance checks in-house, which, prior to March 1999, had been outsourced.
Additionally, maintenance costs per block hour have decreased as certain fixed
costs are spread over a larger fleet. These cost savings were offset by higher
than usual borrowed parts fees during the year ended March 31, 2000. During the
years ended March 31, 2000 these fees were approximately $1,439,000 compared to
$349,000 during the years ended March 31, 1999 or $20 and $7 per block hour,
respectively. During the year ended March 31, 2000, we increased our spare parts
inventory in an effort to mitigate this expense in the future.
Promotion and Sales. Promotion and sales expenses totaled $46,014,000 and
$35,217,000 and were 14% and 16% of total revenue for the years ended March 31,
2000 and 1999, 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.
Promotion and sales expenses decreased as a percentage of revenue for the year
ended March 31, 2000 over the prior comparable period largely as a result of the
increase in revenue and a decrease in travel agency commissions.
During the year ended March 31, 2000, promotion and sales expenses per
passenger decreased to $20.15 from $21.16 for the year ended March 31, 1999.
Promotion and sales expenses decreased largely as a result of a decrease in
travel agency commissions from 8% to 5% effective in November 1999 matching the
decrease instituted by our competitors. Travel agency commissions and interline
service charges and handling fees, as a percentage of passenger revenue, before
non-revenue passengers, administrative fees and breakage (revenue from expired
tickets), decreased to 4.4% for the year ended March 31, 2000 from 5.6% for the
year ended March 31, 1999. The decrease in travel agency commissions was offset
by increased commission expense associated with the increase in our average
fare. During the years ended March 31, 1999 and 2000, we added four and two new
markets, respectively, thereby experiencing a decrease in advertising expenses
per passenger which are generally higher when opening new markets. During the
year ended March 31, 2000 we had an increase in computer reservations costs
associated with the expansion of our travel agency electronic ticketing
capabilities. With increased activity on our web site, our calls per passenger
have decreased. Because of this web site activity as well as a decrease in long
distance rates, we experienced a decrease in communications expense. These cost
savings were offset by an increase in credit card fees associated with the
increase in our average fare from $123 for the year ended March 31, 1999 to $134
for the year ended March 31, 2000. We believe that promotion and sales expenses
per passenger will continue to decrease but there can be no assurance that this
will occur.
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General and Administrative. General and administrative expenses for the
years ended March 31, 2000 and 1999 totaled $16,327,000 and $9,264,000,
respectively, and were 5.0% and 4.2% of total revenue, respectively. General and
administrative expenses include the wages and benefits for several of our
executive officers and various other administrative personnel including legal,
accounting, IT (including costs associated with Y2K), aircraft procurement,
corporate communications, training and human resources and other expenses
associated with these departments. Employee health benefits, accrued vacation
and bonus expenses, general insurance expenses including worker's compensation,
and write-offs associated with credit card and check fraud are also included in
general and administrative expenses. We experienced increases in our human
resources, training and IT expenses as a result of an increase in employees from
approximately 1,502 in March 1999 to approximately 2,067 in March 2000, or an
increase of 37.6%. In addition to the usual increases in crew and station
personnel associated with additional aircraft and cities, we had significant
increases in maintenance personnel as a result of bringing certain heavy
maintenance checks in-house which began in March 1999. We increased general and
administrative personnel in general because many of these areas were considered
to be under staffed in prior years as we strived for profitability. We also
experienced personnel increases in the area of aircraft procurement as a result
of the purchase and lease agreements for Airbus aircraft and the number of
aircraft we brought into our fleet during the year ended March 31, 2000. Because
of the increase in personnel, our health insurance benefit expenses and accrued
vacation expense increased accordingly. During the years ended March 31, 2000
and 1999, we accrued for employee performance bonuses totaling $2,605,000 and
$1,829,000, respectively, or .8% of total revenue for each of these years.
Depreciation and Amortization. Depreciation and amortization expenses of
$3,440,000 and $1,659,000, an increase of 107.4% were approximately 1.0% and .9%
of total revenue for the years ended March 31, 2000 and 1999, respectively.
These expenses include depreciation of office equipment, ground station
equipment, and other fixed assets. Amortization of start-up and route
development costs are not included as these expenses have been expensed as
incurred. Depreciation expense increased over the prior year as a result of an
increase in our spare parts inventory including a spare engine, leasehold
improvements associated with 11 (6 additional and 5 replacement) aircraft
brought into our fleet during the year, ground handling equipment, and computers
to support new employees as well as replacement computers for those with
outdated technology.
Nonoperating Income (Expense). Net nonoperating income totaled $4,105,000
for the year ended March 31, 2000 compared to $406,000 for the year ended March
31, 1999. Interest income increased from $1,556,000 to $4,335,000 during the
year ended March 31, 2000 from the prior period due to an increase in cash
balances as a result of an increase in cash provided by operating activities and
proceeds from stock option and warrant exercises. Interest expense decreased to
$119,000 during the year ended March 31, 2000 from $701,000 in the prior period.
In December 1997, we sold $5,000,000 of 10% senior notes. In connection with
this transaction, we issued warrants to purchase 1,750,000 shares of Common
Stock to the lender. Interest expense paid in cash and the accretion of the
warrants and deferred loan expenses associated with the senior secured notes
totaled $568,000 during the year ended March 31, 1999. In January 1999, we paid
the note in full. Other, net nonoperating expense was $110,000 for the year
ended March 31, 2000 compared to other, net nonoperating income of $449,000 for
the year ended March 31, 1999. Other, net nonoperating expense for the year
ended March 31, 1999 includes $486,000 of unamortized deferred loan costs
associated with the senior secured notes that remained at the time we prepaid
the debt.
Income Tax Expense (benefit): During the year ended March 31, 2000, we
had income tax expense totaling $16,954,000, or 39% of income before income tax
expense and cumulative effect of change in method of accounting for maintenance
checks. During the year ended March 31, 1999 we recognized an income tax benefit
of $5,480,000 primarily attributable to the probable realization of our
remaining income tax loss carryforwards for which a valuation allowance had been
previously recorded. As a result of our profitability for the year ended March
31, 1999 a valuation allowance was no longer considered necessary.
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Cumulative Effect of Change in Method of Accounting for Overhaul Costs:
During the year ended March 31, 2000, we changed our method of accounting for
maintenance checks from the accrual to the direct expense method which resulted
in a credit of $549,000 net of income taxes of $351,000. Assuming this method
was used during the year ended March 31, 1999, we would have had $1,731,000 of
additional maintenance expense, and net income would have decreased by
$1,056,000, or 6(cent) per share.
Results of Operations - Year Ended March 31, 1999 Compared to Year Ended March
31, 1998
General
During the year ended March 31, 1999 we operated routes linking our
Denver hub to 19 cities in 15 states. We used up to seven gates at Denver
International Airport ("DIA") for approximately 92 daily flight departures and
arrivals. During the year ended March 31, 1999, we added Atlanta, Georgia and
Dallas/Ft. Worth, Texas to our route system and re-entered the San Diego,
California and Las Vegas, Nevada markets. On June 14, 1999 we commenced service
in the Denver-Portland, Oregon market. During the year ended March 31, 1999, we
added two additional leased Boeing 737-300 aircraft and one Boeing 737-200A to
our fleet.
On June 30, 1997, we signed an Agreement and Plan of Merger ("the Merger
Agreement") providing for our merger (the "Merger") with Western Pacific
Airlines. Pursuant to the Merger Agreement, a "code share" marketing alliance
between us and Western Pacific went into effect on August 1, 1997, in effect
integrating the route networks of the two airlines. On September 29, 1997, we
both mutually agreed to terminate the Merger Agreement and the code-share
arrangement. The separation of the two carriers required us to implement a
costly restructuring of our flight schedule and route system to support a
stand-alone operation competing against both Western Pacific and United
Airlines, the dominant air carrier at DIA. On October 5, 1997, Western Pacific
filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Western
Pacific ceased operations on February 4, 1998. The Merger Agreement and our
competition with Western Pacific adversely affected our results of operations
for the year ended March 31, 1998.
As a result of the expansion of our operations and the cessation of
service by Western Pacific during the year ended March 31, 1999, our results of
operations are not necessarily indicative of future operating results or
comparable to the prior year ended March 31, 1998.
Results of Operations
We had net income of $30,566,000 or $1.98 per diluted share for the year
ended March 31, 1999 as compared to a net loss of $17,746,000 or $1.95 per share
for the year ended March 31, 1998. During the year ended March 31, 1999 as
compared to the prior comparable period, we experienced higher fares as a result
of increases in business travelers, decreased competition as a result of the
demise of Western Pacific, and an increase in the average length of haul and
stage length. Our cost per ASM declined to 7.72(cent) during the year ended
March 31, 1999 from 8.30(cent) for the prior comparable period, principally as a
result of lower fuel prices and improved operating efficiencies and economies of
scale as our fixed costs were spread across a larger base of operations.
An airline's break-even load factor is the passenger load factor that
will result in operating revenues being equal to operating expenses, assuming
constant revenue per passenger mile and expenses. For the year ended March 31,
1999, our break-even load factor was 52.4% compared to the passenger load factor
achieved of 59.4%. For the year ended March 31, 1998, our break-even load factor
was 63.1% compared to the achieved passenger load factor of 56.1%. Our
break-even load factor decreased from the prior comparable period largely as a
result of an increase in our average fare to $123 during the year ended March
31, 1999 from $100 during the year ended March 31, 1998, an increase in our
total yield per RPM from 13.15(cent) for the year ended March 31, 1998 to
14.64(cent) for the year ended March 31, 1999, and a decrease in our expense per
ASM to 7.72(cent) for the year ended March 31, 1999 from 8.30(cent) for the year
ended March 31, 1998.
Revenues
Our revenues are highly sensitive to changes in fare levels. Fare pricing
policies have a significant impact on our revenues. Because of the elasticity of
passenger demand, we believe that increases in fares will result in a decrease
in passenger demand in many markets. We cannot predict future fare levels, which
depend to a substantial degree on actions of competitors. When sale prices or
other price changes are initiated by competitors in our markets, we believe that
we must, in most cases, match those competitive fares in order to maintain our
market share. Passenger revenues are seasonal in leisure travel markets
depending on the markets' locations and when they are most frequently
patronized.
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Our average fare for the years ended March 31, 1999 and 1998 was $123 and
$100, respectively. We believe that the increase in the average fare during the
year ended March 31, 1999 over the prior comparable period was largely a result
of our focus on increasing the number of business travelers, decreased
competition as a result of the demise of Western Pacific, and an increase in the
average length of haul and stage length. The average length of haul increased
from 825 miles for the year ended March 31, 1998 to 905 miles for the year ended
March 31, 1999. We also experienced higher average fares in certain of our
markets as a result of accommodating Northwest Airlines passengers during that
carrier's pilot strike in August and September 1998.
Passenger Revenues. Passenger revenues totaled $214,311,000 for the year
ended March 31, 1999 compared to $142,018,000 for the year ended March 31, 1998,
or an increase of 50.9%. We carried 1,664,000 revenue passengers for the year
ended March 31, 1999 compared to 1,356,000 for the year ended March 31, 1998 or
an increase of 22.7%. We had an average of 15 aircraft in our fleet during the
year ended March 31, 1999 compared to an average of 12.3 aircraft during the
year ended March 31, 1998, an increase of 22%, and ASMs increased 541,318,000 or
27.1%.
Cargo revenues, consisting of revenues from freight and mail service,
totaled $4,881,000 and $3,009,000 for the years ended March 31, 1999 and 1998,
respectively, representing 2.2% and 2.0% of total operating revenues,
respectively, or an increase of 62.2%. This adjunct to the passenger business is
highly competitive and depends heavily on aircraft scheduling, alternate
competitive means of same day delivery service and schedule reliability.
Other revenues, comprised principally of interline handling fees, liquor
sales and excess baggage fees, totaled $1,415,000 and $2,115,000 or .6% and 1.4%
of total operating revenues for each of the years ended March 31, 1999 and 1998,
respectively. Other revenues were higher during the year ended March 31, 1998 as
a result of ticket handling fees associated with the code share agreement with
Western Pacific. Ticket handling fees are earned by the ticketing airline to
offset ticketing costs incurred on segments ticketed on the flight operated by
our code share partner. We recognized approximately $1,007,000 in ticket
handling fees associated with our code share agreement with Western Pacific
during the year ended March 31, 1998. The costs that offset this revenue are
included in sales and promotion expenses.
Operating Expenses
Operating expenses include those related to flight operations, aircraft
and traffic servicing, maintenance, promotion and sales, general and
administrative and depreciation and amortization. Total operating expenses were
$195,928,000 and $165,697,000 for the years ended March 31, 1999 and 1998 and
represented 88.8% and 112.6% of total revenue, respectively. Operating expenses
decreased as a percentage of revenue during the year ended March 31, 1999 as we
experienced significantly lower fuel prices and improved operating efficiencies
and economies of scale as our fixed costs were spread across a larger base of
operations.
Flight Operations. Flight operations expenses of $79,247,000 and
$66,288,000 were 35.9% and 45.1% of total revenue for the years ended March 31,
1999 and 1998, respectively. Flight operations expenses include all expenses
related directly to the operation of the aircraft including fuel, lease and
insurance expenses, pilot and flight attendant compensation, in-flight catering,
crew overnight expenses, flight dispatch and flight operations administrative
expenses.
Aircraft fuel expenses include both the direct cost of fuel including
taxes as well as the cost of delivering fuel into the aircraft. Aircraft fuel
costs of $22,758,000 for 41,082,000 gallons used and $23,332,000 for 33,098,000
gallons used resulted in an average fuel cost of 55.4(cent) and 70.5(cent) per
gallon and represented 28.7% and 35.2% of total flight operations expenses for
the years ended March 31, 1999 and 1998, respectively. The average fuel cost per
gallon decreased for the years ended March 31, 1999 and 1998 from the comparable
prior period due to an overall decrease in the market price of fuel. Fuel prices
are subject to change weekly as we do not purchase supplies in advance for
inventory. Fuel consumption for each of the years ended March 31, 1999 and 1998
averaged 778 and 774 gallons per block hour, respectively.
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Aircraft lease expenses totaled $32,958,000 (14.9% of total revenue) and
$24,330,000 (16.5% of total revenue) for the years ended March 31, 1999 and
1998, respectively, or an increase of 35.5%. The increase is largely due to
higher lease expenses for larger and newer Boeing 737-300 aircraft added to the
fleet which resulted in the increase in the average number of aircraft to 15
from 12.3, or 22%, for the years ended March 31, 1999, respectively.
Aircraft insurance expenses totaled $2,425,000 (1.1% of total revenue) for the
years ended March 31, 1999 and 1998 offset by a profit commission of $153,000
for the policy period ended June 6, 1998. The profit commission was earned
because we had no aircraft hull insurance claims during the 1997-1998 policy
year. Aircraft insurance expenses for the year ended March 31, 1998 were
$2,989,000 (2% of total revenue). Aircraft insurance expenses decreased as a
percentage of revenue as a result of competitive pricing in the aircraft
insurance industry, our favorable experience rating since we began flight
operations in July 1994 and economies of scale due to the increase in fleet
size.
Pilot and flight attendant salaries before payroll taxes and benefits
totaled $10,653,000 and $8,708,000 or 5% and 6.1% of passenger revenue for each
of the years ended March 31, 1999 and 1998, or an increase of 22.3%. Pilot and
flight attendant compensation increased principally as a result of a 22%
increase in the average number of aircraft in service, general wage rate
increases, and an increase of 23.4% in block hours. We pay pilot and flight
attendant salaries for training consisting of approximately six and three weeks,
respectively, prior to scheduled increases in service which can cause the
compensation expense during that period to appear high in relationship to the
average number of aircraft in service. When we are not in the process of adding
aircraft to our system, pilot and flight attendant expense per aircraft
normalizes. With a scheduled passenger operation, and with salaried rather than
hourly crew compensation, our expenses for flight operations are largely fixed,
with flight catering and fuel expenses the principal exception.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses
were $34,147,000 and $30,685,000 (an increase of 11.3%) for the years ended
March 31, 1999 and 1998, respectively, and represented 15.5% and 20.9% of total
revenue. These include all expenses incurred at airports served by us, as well
as station operations administration and flight operations ground equipment
maintenance. Station expenses include landing fees, facilities rental, station
labor and ground handling expenses. Station expenses as a percentage of revenue
decreased during the year ended March 31, 1999 over the year ended March 31,
1998 as a result of our rental costs (in particular, the gate rentals at DIA and
other cities where we added additional frequencies), which are largely fixed
costs, remaining relatively constant as compared to the increase in revenue.
Additionally, we began our own ground handling operations at DIA effective
September 1, 1998 which is more cost effective than using a third party
contractor. Aircraft and traffic servicing expenses will increase with the
addition of new cities to our route system.
Maintenance. Maintenance expenses of $36,090,000 and $31,791,000 were
16.4% and 21.6% of total revenue for the years ended March 31, 1999 and 1998,
respectively. These include all labor, parts and supplies expenses related to
the maintenance of the aircraft. Routine maintenance is charged to maintenance
expense as incurred while major engine overhauls and heavy maintenance check
expense is accrued monthly. Effective March 1999, we began to conduct certain
aircraft heavy maintenance checks in-house which we expect will reduce
maintenance expenses in future years. During the quarter ended March 31, 1999,
we reduced our accrued maintenance expenses for these heavy maintenance checks
by approximately $1,100,000 as a result of the reduced costs associated with
performing these heavy maintenance checks in-house. Maintenance cost per block
hour was $684 and $743 per block hour for the years ended March 31, 1999 and
1998, respectively. Maintenance costs per block hour decreased as a result of
six new aircraft we added to our fleet during the past two years, by bringing
certain aircraft heavy maintenance checks in-house, the fixed rental cost of the
hangar facility being spread over a larger aircraft fleet offset by FAA mandated
corrosion inspections on our 737-200s. The newer aircraft require fewer routine
repairs and are generally covered by a warranty period of approximately up to
three years on standard Boeing components. We believe that these costs will
continue to normalize as we add additional aircraft to our fleet.
Promotion and Sales. Promotion and sales expenses totaled $35,621,000 and
$29,329,000 and were 16.1% and 19.9% of total revenue for the years ended March
31, 1999 and 1998, respectively. These include advertising expenses,
telecommunications expenses, wages and benefits for reservationists and
reservations supervision as well as marketing management and sales personnel,
credit card fees, travel agency commissions and computer reservations costs. Our
promotion and sales expenses for the year ended March 31, 1998 included expenses
as a result of the code share agreement with Western Pacific, under which we
incurred additional communications, computer reservation, and interline service
charges and handling fees for the code share agreement. These expenses were
offset, in part, by interline handling fees earned which are included in other
revenues. We did not have any code share agreements during the year ended March
31, 1999 that had as large of an impact on our expenses as the code share
agreement with Western Pacific. Promotion and sales expenses decreased as a
percentage of revenue for the year ended March 31, 1999 over the prior
comparable period largely as a result of the increase in revenue.
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Promotion and sales expenses per passenger decreased to $21.41 from
$21.63 for year ended March 31, 1999, as a result of the elimination of expenses
related to the code share agreement with Western Pacific offset by increased
reservation costs and an increase in credit card fees. The costs of reservation
expenses increased as a result of outsourcing part of our reservations
requirements. These increased costs were offset by a decrease in travel agency
commissions. During April 1998, we reduced travel agency commissions to 8% from
10%, matching an 8% commission instituted by our competitors in the fall of
1997. Additionally, our direct sales, which are not subject to commissions,
increased as a percentage of passenger revenue. Travel agency commissions and
interline service charges and handling fees, as a percentage of passenger
revenue, before non-revenue passengers, administrative fees and breakage
(revenue from expired tickets), decreased to 5.6% for the year ended March 31,
1999 from 7.6% for the year ended March 31, 1998.
Advertising expenses of $3,900,000 were 1.8% of passenger revenue for the
year ended March 31, 1999, compared to $3,048,000 or 2.2% of passenger revenue
for the year ended March 31, 1998. As new cities are added to our flight
schedule, advertising and marketing promotions are designed and implemented to
increase awareness of our new service, name and brand awareness. Advertising
expenses decreased as a percentage of revenue largely as a result of the
increase in the average fare. Additionally, during the year ended March 31, 1998
we competed with Western Pacific for the low fare market which required a higher
volume of advertising.
General and Administrative. General and administrative expenses for the
years ended March 31, 1999 and 1998 totaled $9,163,000 and $6,353,000,
respectively, and were 4.2% and 4.3% of total revenue, respectively. These
expenses include the wages and benefits for our executive officers and various
other administrative personnel. Legal and accounting expenses, supplies and
other miscellaneous expenses are also included in this category. Included in
general and administrative expenses for the year ended March 31, 1999 were
accrued bonuses and related payroll taxes for our employees which totaled
approximately $1,830,000. This was the first time we paid bonuses to our
employees. Included in general and administrative expenses during the year ended
March 31, 1998 were unusual expenses of approximately $500,000 associated with
the terminated Merger Agreement with Western Pacific.
Depreciation and Amortization. Depreciation and amortization expenses of
$1,659,000 and $1,251,000 were approximately .8% and .9% of total revenue for
the years ended March 31, 1999 and 1998, respectively. These expenses include
depreciation of office equipment, ground station equipment, and other fixed
assets. Amortization of start-up and route development costs are not included as
these expenses have been expensed as incurred.
Nonoperating Income (Expense). Net nonoperating income totaled $406,000
for the year ended March 31, 1999 compared to $808,000 for the year ended March
31, 1998. Interest income increased from $722,000 to $1,556,000 during the year
ended March 31, 1999 from the prior comparable period due to an increase in cash
balances as a result of the sale of Common Stock in April 1998 and an increase
in cash from operating activities. Interest expenses increased to $701,000 from
$324,000 during the year ended March 31, 1999 from the prior year. In December
1997, we sold $5,000,000 of 10% senior notes. In connection with this
transaction, we issued the lender warrants to purchase 1,750,000 shares of
Common Stock. Interest expense paid in cash and the accretion of the warrants
and deferred loan expenses associated with the senior secured notes totaled
$568,000 and $263,000 during the years ended March 31, 1999 and 1998,
respectively. See Note 4 to the Financial Statements. Other, net nonoperating
expense was $449,000 for the year ended March 31, 1999 compared to other, net
nonoperating income of $410,000 for the year ended March 31, 1998. Other, net
nonoperating expense for the year ended March 31, 1999 includes $486,000 of
unamortized deferred loan and warrant costs associated with the senior secured
notes that remained at the time we prepaid the debt.
Income Tax Benefit: We recognized an income tax benefit of $5,480,000
primarily attributable to the probable realization of our remaining income tax
loss carryforwards for which a valuation allowance had been previously recorded.
As a result of our profitability for the year ended March 31, 1999 and projected
taxable income for the year ending March 31, 2000, a valuation allowance was no
longer considered necessary.
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Expenses per ASM. Our expenses per ASM for the years ended March 31, 1999
and 1998 were 7.72(cent) and 8.30(cent), respectively, or a decrease of 7%.
Expenses per ASM decreased from the prior comparable period as a result of
economies of scale as fixed costs were spread across a larger base of
operations, a decrease in fuel prices, and the increase in average ASMs per
aircraft as we added aircraft with greater seating capacity compared to earlier
fleet additions. Expenses per ASM excluding fuel for the year ended were
6.82(cent) and 7.13(cent), respectively, or a decrease of 4.3%. Expenses per ASM
are influenced to a degree by the amount of aircraft utilization and by aircraft
seating configuration. For example, with the 108 seat all coach seating
configuration selected by us on five of our Boeing 737-200 aircraft, the
expenses per ASM for us are higher by 11% when compared with the 120 seat
alternative used by many carriers. Our average seats per aircraft for the year
ended March 31, 1999 were 125 as compared to 124 seats per aircraft for the year
ended March 31, 1998, with the increase in our Boeing 737-300 aircraft.
Liquidity and Capital Resources
Our balance sheet reflected cash and cash equivalents and short-term
investments of $83,611,000 and $47,289,000 at March 31, 2000 and 1999,
respectively. At March 31, 2000, total current assets were $140,361,000 as
compared to $98,475,000 of total current liabilities, resulting in working
capital of $41,886,000. At March 31, 1999, total current assets were $94,209,000
as compared to $68,721,000 of total current liabilities, resulting in working
capital of $25,488,000. The increase in our working capital is largely a result
of cash flows provided by operating activities and proceeds from exercises of
common stock options and warrants during the year ended March 31, 2000.
Cash provided by operating activities for the year ended March 31, 2000
was $54,707,000. This was primarily attributable to our net income for the
period adjusted for non-cash charges, the utilization of deferred tax assets,
increases in air traffic liability, other accrued expenses and accrued
maintenance expenses, offset by increases in trade receivables, security,
maintenance and other deposits, prepaid expenses and inventories. Cash provided
by operating activities for the year ended March 31, 1999 was $35,956,000. This
was primarily attributable to our net income for the period adjusted for
non-cash charges, increases in accounts payable, air traffic liability, other
accrued expenses and accrued maintenance expense, offset by increases in
restricted investments, trade receivables, security, maintenance and other
deposits, prepaid expenses and inventories.
Cash used by investing activities for year ended March 31, 2000 was
$39,370,000. We invested $15,760,000 in short-term investments, net of
maturities, comprised of government-backed agencies and commercial paper with
maturities of one year or less. During the year ended March 31, 2000, cash
security deposits for aircraft totaling $2,491,000 were returned to us or
replaced with letters of credit. During the year ended March 31, 2000, we made
cash security deposits totaling $200,000 in connection with an Airbus aircraft
lease and $6,400,000 in down payments associated with a purchase agreement to
purchase Airbus aircraft. We had issued to certain of our aircraft lessors
warrants to purchase 395,000 shares of our Common Stock at an aggregate purchase
price of $2,391,600. During May 1999 and June 1999, aircraft lessors exercised
all of these warrants and we received $2,391,600. To the extent that the
aircraft lessors were able to realize certain profit margins on their subsequent
sale of our Common Stock, they were required to refund a portion of the cash
security deposits they were holding. As a result of their sales of our Common
Stock, $1,206,000 in cash security deposits were returned to us during the year
ended March 31, 2000. Other cash security deposits were replaced with letters of
credit and these deposits were returned to us. We also received $625,000 in cash
security deposits for aircraft returned to the lessor during the year ended
March 31, 2000. Additionally, we secured 10 aircraft delivered during the year
ended March 31, 2000 with letters of credit totaling $3,640,000 and restricted
investments increased by this amount to collateralize the letters of credit. We
used $16,361,000 for capital expenditures for rotable aircraft components
including a spare CFM engine, maintenance equipment and tools, aircraft
leasehold improvements, and computer equipment during the year ended March 31,
2000. Cash used by investing activities for the year ended March 31, 1999 was
$6,801,000. We used $4,313,000 for capital expenditures for ground handling
equipment, rotable aircraft components, maintenance equipment and aircraft
leasehold costs and improvements. We used cash of $944,000 for initial lease
acquisition security deposits for one aircraft delivered during the year ended
March 31, 1999 and for three fiscal year 2000 deliveries. Additionally, we
secured two aircraft delivered in December 1998 with letters of credit and for
one aircraft delivered in April 1999 totaling $1,544,000. Our restricted
investments increased $1,544,000 to collateralize the letters of credit.
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Cash provided by financing activities for the years ended March 31, 2000
and 1999 was $5,224,000 and $14,493,000, respectively. During the year ended
March 31, 2000, we received $5,324,000 from the exercise of common stock options
and warrants. During the year ended March 31, 1999, we sold 4,363,001 shares of
our common stock through a private placement to an institutional investor. Gross
proceeds to us from the transaction were approximately $14,180,000, of which we
received net proceeds of approximately $13,650,000. We issued a warrant to this
investor to purchase 716,929 shares of our Common Stock at a purchase price of
$3.75 per share. This warrant expires in April 2002. Additionally, during the
year ended March 31, 1999, we received $1,900,000 from the exercise of common
stock options and warrants.
As of June 15, 2000 we lease 24 Boeing 737 type aircraft under operating
leases with expiration dates ranging from 2001 to 2006. Under these leases, we
were required to make cash security deposits or issue letters of credit to
secure the lease obligations. At March 31, 2000, we had made cash security
deposits and had arranged for issuance of letters of credit totaling $3,258,000
and $7,284,000, respectively. Accordingly, our restricted cash balance includes
$7,284,000 that collateralize the outstanding letters of credit. Additionally,
we make deposits for maintenance of these aircraft. At March 31, 2000 and 1999,
we had made maintenance deposits of $26,912,000 and $18,673,000, respectively.
In March 2000, we entered into an agreement to purchase 11 new Airbus
aircraft, with options to purchase an additional nine new Airbus aircraft. To
the extent we exercise our options to purchase the nine aircraft, they are
replaced on a one-for-one basis with additional options to purchase new Airbus
aircraft, up to a total of nine additional option aircraft. This order
contemplates a fleet replacement plan by which we will phase out our Boeing 737
aircraft and replace them with a combination of Airbus A319 and A318 aircraft.
The aggregate additional amounts due under this purchase commitment and
estimated amounts for buyer-furnished equipment and spare parts for both the
purchased and leased aircraft was approximately $347,000,000 at March 31,2000.
Under the terms of the purchase agreement, we are required to make scheduled
pre-delivery payments. These payments are non-refundable with certain
exceptions. As of March 31, 2000, the Company has made pre-delivery payments
totaling $6,400,000 to secure these aircraft and option aircraft. As a
complement to this purchase, in April and May 2000 we signed two aircraft lease
agreements to lease 16 new Airbus aircraft. As of March 31, 2000, we have made
deposits totaling $200,000 to secure these aircraft. Upon completion of our
fleet transition, we expect our owned and leased fleet to be comprised of
approximately two-thirds A319 aircraft and one-third A318 aircraft. We expect to
take delivery of our first leased Airbus aircraft during the middle part of
calendar 2001 and plan to complete our fleet transition by the end of 2004. The
A319 and A318 aircraft will be configured with 132 and 114 passenger seats,
respectively, with a 32-inch seat pitch. We believe that operating new Airbus
aircraft will result in significant operating cost savings and an improved
product for our customers. In order to complete the purchase of these aircraft
we must secure acceptable aircraft financing. The amount of financing required
will depend on the number of aircraft purchase options we exercise and the
amount of cash generated by operations prior to delivery of the aircraft. We
continue to explore various financing alternatives, including but not limited
to, domestic and foreign bank financing, public debt financing such as enhanced
equipment trust certificates, and leveraged lease arrangements. We expect to
develop a financing plan and implement that plan coincident with the delivery of
the first purchased aircraft in 2002. While we believe that such financing will
be available to us, there can be no assurance that financing will be available
when required, or on acceptable terms. The inability to secure such financing
could have a material adverse effect on us and result in delays in or our
inability to take delivery of Airbus aircraft we have agreed to purchase.
We are exploring various means to increase revenues and reduce expenses.
We have performed ad hoc charters and will consider them in the future depending
on the availability of our fleet. We are considering revenue enhancement
initiatives with new marketing alliances. We began our own ground handling
operations at DIA effective September 1, 1998, a function which had been
provided by an independent contractor. Ground handling equipment required by us
to perform these operations necessitated capital expenditures of approximately
$800,000. Effective March 1, 1999, we began to conduct certain aircraft heavy
maintenance checks in-house which we believe has reduced our maintenance
expenses. Effective November 5, 1999 we reduced travel agency commissions from
8% to 5% in response to our competitors. Effective in August 2000, our new
reservations center located in Las Cruces, New Mexico will open. We believe the
cost of operating this facility will be lower than that charged by the contract
provider we currently use for these services. We are in the process of adding
additional procedures when making reservations to reduce credit card fraud.
In November 1998, our pilots voted to be represented by an independent
union, the Frontier Airline Pilots Association. In September 1999, our
dispatchers elected to be represented by the Transport Workers Union. The first
bargaining agreement for the pilots, which has a 5-year term, was ratified and
made effective in May 2000. Negotiations are underway with the Transport Workers
Union for a contract with the dispatchers. In addition since 1997 we have had
union organizing attempts that were defeated by our employees: our flight
attendants, ramp service agents, mechanics, and stock clerks.
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We believe that our existing cash balances coupled with improved
operating results are and will be adequate to fund our operations for the
foreseeable future. However, as discussed above, we will require financing in
order to fund our intended purchase of Airbus A319 and A318 aircraft.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
The risk inherent in our market risk sensitive position is the potential
loss arising from an adverse change in the price of fuel as described below. The
sensitivity analysis presented does not consider either the effect that such an
adverse change may have an overall economic activity or additional action
management may take to mitigate our exposure to such a change. Actual results
may differ from the amounts disclosed. At the present time, we do not utilize
fuel price hedging instruments to reduce our exposure to fluctuations in fuel
prices.
Our earnings are affected by changes in the price and availability of
aircraft fuel. Market risk is estimated as a hypothetical 10 percent increase in
the average cost per gallon of fuel for the fiscal year ended March 31, 2000.
Based on fiscal year 200 actual fuel usage, such an increase would have resulted
in an increase to aircraft fuel expense of approximately $4,442,000 in fiscal
year 2000. Comparatively, based on projected fiscal year 2001 fuel usage, such
an increase would result in an increase to aircraft fuel expense of
approximately $5,343,000 in fiscal year 2001. The increase in exposure to fuel
price fluctuations in fiscal year 2001 is due to the increase of our average
aircraft fleet size during the year ended March 31, 2000, projected increases to
our fleet during the year ended March 31, 2001 and related gallons purchased.
Our average cost per gallon of fuel for the period ended March 31, 2000
increased 44.4% over the average cost for the year ended March 31, 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Operating Expenses".
Item 8: Financial Statements
Our financial statements are filed as a part of this report immediately
following the signature page.
PART III
Item 10: Directors and Executive Officers of the Registrant.
The information required by this Item is incorporated herein by reference
to the data under the heading "Election of Directors" in the Proxy Statement to
be used in connection with the solicitation of proxies for our annual meeting of
shareholders to be held on September 7, 2000. We will file the definitive Proxy
Statement with the Commission on or before July 31, 2000.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by reference
to the data under the heading "Executive Compensation" in the Proxy Statement to
be used in connection with the solicitation of proxies for our annual meeting of
shareholders to be held on September 7, 2000. We will file the definitive Proxy
Statement with the Commission on or before July 31, 2000.
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Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated herein by reference
to the data under the heading "Voting Securities and Principal Holders Thereof"
in the Proxy Statement to be used in connection with the solicitation of proxies
for our annual meeting of shareholders to be held on September 7, 2000. We will
file the definitive Proxy Statement with the Commission on or before July 31,
2000.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated herein by reference
to the data under the heading "Related Transactions" in the Proxy Statement to
be used in connection with the solicitation of proxies for our annual meeting of
shareholders to be held on September 7, 2000. We will file the definitive Proxy
Statement with the Commission on or before July 31, 2000.
PART IV
Item 14(a): Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Exhibit
Numbers Description of Exhibits
3.1 Amended and Restated Articles of Incorporation of the Company.(12)
3.2 Amended Bylaws of the Company (June 9, 1997). (5)
4.1 Specimen Common Stock certificate of the Company. (1)
4.2 The Amended and Restated Articles of Incorporation and Amended By
laws of the Company are included as Exhibits 3.1 and 3.2.
4.3 Form of Warrant. (1)
4.3 Rights Agreement, dated as of February 20, 1997, between Frontier
Airlines, Inc. and American Securities Transfer & Trust, Inc,
including the form of Rights Certificate and the Summary of Rights
attached thereto as Exhibits A and B, respectively, incorporated
by reference to Frontier Airlines, Inc. Registration Statement on
Form 8-A dated March 11, 1997. (6)
4.4(a) Amendment to Rights Agreement dated June 30, 1997. (5)
4.4(b) Amendment to Rights Agreement dated December 5, 1997. (13)
4.4(c) Third Amendment to Rights Agreement dated September 9, 1999. (15)
10.1 Office Lease. (1)
10.2 Office Lease Supplements and Amendments. (5)
10.2(a) Addendum to Office Lease (10)
10.2(b) Office Lease Supplements and Amendments (13)
10.2(c) Lease Amendment dated as of January 12, 2000 between Highline
Group, LLC,landlord, and Frontier Airlines, Inc., tenant. Portions
of this exhibit have been excluded from the publicly available
document and an application for an order granting confidential
treatment of the excluded material has been made. (16)
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10.2(d) Lease Amendment dated as of April 1, 2000 between Highline Group,
LLC, landlord, and Frontier Airlines, Inc., tenant. Portions of
this exhibit have been excluded from the publicly available
document and an application for an order granting confidential
treatment of the excluded material has been made. (16)
10.3 1994 Stock Option Plan. (1)
10.4 Amendment No. 1 to 1994 Stock Option Plan. (2)
10.4(a) Amendment No. 2 to 1994 Stock Option Plan (5)
10.5 Registration Rights Agreement. (1)
10.6 Sales Agreement. (1)
10.7 Airport Use and Facilities Agreement, Denver International
Airport. (2)
10.8 Aircraft Lease Agreement dated as of July 26, 1994. (2)
10.8(a) Assignment and Assumption Agreements dated as of March 28,1997 and
March 20, 1997 between USAirways, Inc. and First Security Bank,
National Association ("Trustee") and Frontier Airlines, Inc. (5)
10.8(b) Amendment No. 1, dated June 5, 1997, to Lease Agreement dated as
of July 26,1994 between Frontier Airlines, Inc. and First Security
Bank, National Association. (5)
10.9 Code Sharing Agreement. (5)
10.10 Aircraft Lease Agreement dated as of October 20, 1995 (MSN 23177).
(3)
10.10(a) Aircraft Lease Extension and Amendment Agreement dated as of
October 1, 1999. Portions of this Exhibit have been excluded
from the publicly available document and an order granting
confidential treatment of the excluded material has been received.
(15)
10.11 Aircraft Lease Agreement dated as of October 20, 1995 (MSN 23257).
(3)
10.11(a) Aircraft Lease Extension and Amendment Agreement dated as of
October 1, 1999. (15)
10.12 Aircraft Lease Agreement dated as of May 1, 1996. (3)
10.13 Aircraft Lease Agreement dated as of June 3, 1996. (3)
10.13(a) Amendment No.1 to Aircraft Lease Agreement dated as of June 3,
1996.(10)
10.14 Aircraft Lease Agreement dated as of June 12, 1996. Portions of
this Exhibit have been excluded from the publicly available
document and an order granting confidential treatment of the
excluded material has been received. (3)
10.15 Operating Lease Agreement dated November 1, 1996 between the
Company and First Security Bank, National Association. Portions
of this Exhibit have been excluded from the publicly available
document and an order granting confidential treatment of the
excluded material has been received. (4)
10.16 Aircraft Lease Agreement (MSN 28760) dated as of December 12, 1996
between the Company and Boullion Aircraft Holding Company, Inc.
Portions of this Exhibit have been excluded from the publicly
available document and an order granting confidential treatment of
the excluded material has been received. (4)
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10.16(a) Amendment No. 1 to Aircraft Lease Agreement (MSN 28760) dated
May 20, 1997. Portions of this Exhibit have been excluded from the
publicly available document and an application for an order
granting confidential treatment of the excluded material has been
made. (5)
10.17 Aircraft Lease Agreement (MSN 28662) dated as of December 12, 1996
between the Company and Boullion Aircraft Holding Company, Inc.
Portions of this Exhibit have been excluded from the publicly
available document and an order granting confidential treatment of
the excluded material has been received. (4)
10.17(a) Amendment No. 1 to Aircraft Lease Agreement (MSN 28662) dated
May 20, 1997. Portions of this Exhibit have been excluded from the
publicly available document and an application for an order
granting confidential treatment of the excluded material has been
made. (5)
10.18 Aircraft Lease Agreement (MSN 28563) dated as of March 25, 1997
between the Company and General Electric Capital Corporation.
Portions of this Exhibit have been excluded from the publicly
available document and an application for an order granting
confidential treatment of the excluded material has been made. (5)
10.19 Space and Use Agreement with Continental Airlines, as amended.
Portions of this Exhibit have been excluded from the publicly
available document and an application for an order granting
confidential treatment of the excluded material has been made. (5)
10.19(a) Space and Use Agreement with Continental Airlines. Portions of
this exhibit have been excluded from the publicly available
document and an application for an order granting confidential
treatment of the excluded material has been made. (16)
10.20 Letter of Understanding with Continental Airlines dated August 16
1996. Portions of this Exhibit have been excluded from the
publicly available document and an application for an order
granting confidential treatment of the excluded material has been
made. (5)
10.21 Service Agreement between Frontier Airlines, Inc and Greenwich Air
Services, Inc. dated May 19, 1997. Portions of this Exhibit have
been excluded from the publicly available document and an
application for an order granting confidential treatment of the
excluded material has been made. (5)
10.22 Agreement between Frontier Airlines, Inc. and Dallas Aerospace,
Inc. dated April 17, 1997. Portions of this Exhibit have been
excluded from the publicly available document and an application
for an order granting confidential treatment of the excluded
material has been made. (5)
10.23 General Services Agreement between Frontier Airlines, Inc. and
Tramco, Inc. dated as of August 6, 1996. (5)
10.24 General Terms Engine Lease Agreement between Frontier Airlines,
Inc. and Terandon Leasing Corporation dated as of August 15, 1996,
as assigned to U.S. Bancorp Leasing and Financial on February 19,
1997. Portions of this Exhibit have been excluded from the
publicly available document and an application for an order
granting confidential treatment of the excluded material has
been made. (5)
10.25 Lease Agreement between Frontier Airlines, Inc. and Aircraft
Instrument and Radio Company, Inc, dated December 11, 1995.
Portions of this Exhibit have been excluded from the publicly
available document and an application for an order granting
confidential treatment of the excluded material has been made. (5)
10.26 Agreement and Plan of Merger between Western Pacific Airlines,
Inc. and Frontier Airlines, Inc. dated June 30, 1997. (5)
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<PAGE>
10.26(a) Agreement dated as of September 29, 1997 between Western Pacifi
Airlines, Inc. and Frontier Airlines, Inc. (7)
10.27 Security Agreement with Wexford Management LLC dated December 2,
1997. (8)
10.28 Amended and Restated Warrant Agreement with Wexford Management LLC
dated as of February 27, 1998. (12)
10.29 Amended and Restated R egistration Rights Agreement with Wexford
Management LLC dated as of February 27, 1998. (12)
10.30 Securities Purchase Agreement with B III Capital Partners, L.P.
dated as of April 24, 1998. (9)
10.31 Registration Rights Agreement with B III Capital Partners, L.P.
dated as of April 24, 1998. (12)
10.32 Warrant Agreement with The Seabury Group, LLC dated as of May 26,
1998. (12)
10.33 Registration Rights Agreement with The Seabury Group, LLC dated as
of May 26, 1998. (12)
10.34 Aircraft Lease Agreement (MSN 21613) dated as of August 10, 1998
between the Company and nterlease Aviation Investors, L.L.C. (10)
10.35 Aircraft Lease Agreement (MSN 28738) dated as of November 23, 1998
among first Security Bank, National Association, Lessor, Heller
Financial Leasing, Inc., Owner participant, and the Company,
Lessee. (11).
10.36 Aircraft Sublease Agreement (MSN 28734) dated as of December 14,
1998 between Indigo Pacific AB, Sublessor, and the Company,
Sublessee. (11)
10.37 Aircraft Lease Agreement (MSN 23004) dated as of February 26, 1999
between First Security Bank, N.A., Lessor, and Frontier Airlines,
Inc., Lessee. Portions of this exhibit have been excluded from
the publicly available document and an application for an order
granting confidential treatment of the excluded material has been
made. (13)
10.38 Aircraft Lease Agreement (MSN 23007) dated as of February 26, 1999
between First Security Bank, N.A. Lessor and Frontier Airlines,
Inc., Lessee. Portions of this exhibit have been excluded from
the publicly available document and an application for an order
granting confidential treatment of the excluded material has been
made. (13)
10.39 Aircraft Lease Agreement (MSN 26440) dated as of March 15, 1999
between Indigo Aviation AB (publ), Lessor, and Frontier Airlines,
Inc., Lessee. Portions of this exhibit have been excluded from
the publicly available document and an application for an order
granting confidential treatment of the excluded material has been
made. (13)
10.40 Aircraft Lease Agreement (MSN 24569) dated as of April 16, 1999
between C.I.T. Leasing Corporation, Lessor, and Frontier Airlines,
Inc., Lessee. Portions of this exhibit have been excluded from
the publicly available document and an application for an order
granting confidential treatment of the excluded material has been
made. (13)
10.41 Aircraft Lease Agreement (MSN 24856) dated as of June 2, 1999
between Indigo Aviation AB (publ), Lessor and Frontier Airlines,
Inc., Lessee. Portions of this exhibit have been excluded from
the publicly available document and an application for an order
granting confidential treatment of the excluded material has been
made. (13)
10.42 Severance Agreement dated March 10, 1999 between the Company and
Samuel D. Addoms. (13)
10.43 Space and Use Agreement between Continental Airlines, Inc. and the
Company. (13)
34
<PAGE>
10.44 Aircraft Sublease Agreement (MSN 23039) dated as of July 21, 1999
between Kommanditbolaget Flygplant XIV, Sublessor, and Frontier
Airlines, Inc., Sublessee. Portions of this exhibit have been
excluded from the publicly available document and an application
for an order granting confidential treatment of the excluded
material has been made. (14)
10.45 Aircraft Sublease Agreement (MSN 23040) dated as of July 21, 1999
between Kommanditbolaget Flygplant XIV, Sublessor, and Frontier
Airlines, Inc., Sublessee. Portions of this exhibit have been
excluded from the publicly available document and an application
for an order granting confidential treatment of the excluded
material has been made. (14)
10.46 Aircraft Sublease Agreement (MSN 26442) dated as of October 11,
1999 between Indigo Aviation AB (publ), Lessor, and Frontier
Airlines, Inc., Lessee. Portions of this exhibit have been
excluded from the publicly available document and an application
for an order granting confidential treatment of the excluded
material has been made. (15)
10.47 Aircraft Lease Agreement (MSN 25256) dated as of January 7, 2000
between Aviation Financial Services, Inc. Lessor, and
Frontier Airlines, Inc., Lessee. Portions of this exhibit have
been excluded from the publicly available document and an
application for an order granting confidential treatment of the
excluded material has been made. (16)
10.48 Aircraft Lease Agreement (MSN 25159) dated as of January 7, 2000
between Aviation Financial Services, Inc. Lessor, and
Frontier Airlines, Inc., Lessee. Portions of this exhibit have
been excluded from the publicly available document and an
application for an order granting confidential treatment of the
excluded material has been made. (16)
10.49 Aircraft Lease Agreement (MSN 25264) dated as of January 7, 2000
between Aviation Financial Services, Inc. Lessor, and
Frontier Airlines, Inc., Lessee. Portions of this exhibit have
been excluded from the publicly available document and an
application for an order granting confidential treatment of the
excluded material has been made. (16)
10.50 Aircraft Lease Agreement (MSN 25263) dated as of January 7, 2000
between Aviation Financial Services, Inc. Lessor, and
Frontier Airlines, Inc., Lessee. Portions of this exhibit have
been excluded from the publicly available document and an
application for an order granting confidential treatment of the
excluded material has been made. (16)
10.51 Airbus A318/A319 Purchase Agreement dated as of March 10, 2000
between AVSA, S.A.R.L., Seller, and Frontier Airlines, Inc.,
Buyer. Portions of this exhibit have been excluded from the
publicly available document and an application for an order
granting confidential treatment of the excluded material has been
made. (16)
10.52 Aircraft Lease Common Terms Agreement dated as of April 20,
2000 between General Electric Capital Corporation and Frontier
Airlines, Inc. Portions of this exhibit have been excluded from
the publicly available document and an application for an
order granting confidential treatment of the excluded material has
been made. (16)
10.53 Aircraft Lease Agreement dated as of April 20, 2000 between
Aviation Financial Services, Inc., Lessor, and Frontier Airlines,
Inc., Lessee, in respect of Fifteen Airbus A319 Aircraft. Portions
of this exhibit have been excluded from the publicly available
document and an application for an order granting confidential
treatment of the excluded material has been made. (16)
10.54 Aircraft Lease Agreement dated as of May 25, 2000 between Frontier
Airlines, Inc., Lessee, and International Lease Finance
Corporation, Lessor, in respect to one Airbus A318 aircraft.
Portions of this exhibit have been excluded from the publicly
available document and an application for an order granting
confidential treatment of theexcluded material has been made. (16)
35
<PAGE>
10.55 Lease dated as of May 5, 2000 for Frontier Center One, LLC, as
landlord, and Frontier Airlines, Inc., as tenant. Portions of this
exhibit have been excluded from the publicly available document
and an application for an order granting confidential treatment of
the excluded material has been made. (16)
10.56 Operating Agreement of Frontier Center One, LLC, dated as of May
10, 2000 between Shea Frontier Center, LLC, and 7001 Tower,
LLC, and Frontier Airlines, Inc. Portions of this exhibit have
been excluded from the publicly available document and an
application for an order granting confidential treatment of the
excluded material has been made. (16)
10.57 Standard Industrial Lease dated April 27, 2000, between Mesilla
Valley Business Park, LLC, landlord, and Frontier Airlines, Inc.,
tenant. Portions of this exhibit have been excluded from the
publicly available document and an application for an order
granting confidential treatment of the excluded material has been
made. (16)
10.58 Aircraft Lease Agreement dated as of May 25, 2000 between Frontier
Airlines,Inc.,Lessee, and International Lease Finance Corporation,
Lessor, in respect to one Boeing 737-300 aircraft. Portions of
this exhibit have been excluded from the publicly available
document and an application for an order granting confidential
treatment of the excluded material has been made. (16)
18.1 Letter re: change in accounting principle. (16)
23.1 Consent of KPMG LLP (16)
27.1 Financial Data Schedule (16)
(1) Incorporated by reference from the Company's Registration Statement on
Form SB-2, Commission File No. 33-77790-D, declared effective May 20,
1994.
(2) Incorporated by reference from the Company's Annual Report on Form
10-KSB, Commission File No. 0-4877, filed on June 29, 1995.
(3) Incorporated by reference from the Company's Annual Report on Form
10-KSB, Commission File No. 0-4877, filed on June 24, 1996.
(4) Incorporated by reference from the Company's Quarterly Report on Form
10-QSB, Commission File No. 0-4877, filed on February 13, 1997.
(5) Incorporated by reference from the Company's Annual Report on Form
10-KSB, Commission File No. 0-24126, filed July 14, 1997.
(6) Incorporated by reference from the Company's Report on Form 8-K filed
on March 12, 1997.
(7) Incorporated by reference from the Company's Report on Form 8-K filed
on October 1, 1997.
(8) Incorporated by reference from the Company's Report on Form 8-K filed
on December 12, 1997.
(9) Incorporated by reference from the Company's Report on Form 8-K filed
on May 4, 1998.
(10) Incorporated by reference from the Company's Report on Form 10-Q,
Commission File No. 0-24126, filed on November 13, 1998.
(11) Incorporated by reference from the Company's Report on Form 10-Q,
Commission File No. 0-24126, filed on February 12, 1999.
(12) Incorporated by reference from the Company's Report on Form 10-K/A,
Commission file No. 0-24126, filed July 9, 1998.
(13) Incorporated by reference from the Company's Report on Form 10-KSB,
Commission File No. 0-24126, filed [DATE].
(14) Incorporated by reference from the Company's Report on Form 10-Q,
Commission File No. 0-24126, filed on August 10, 1999.
(15) Incorporated by reference from the Company's Report on Form 10-Q,
Commission File No. 0-24126, filed on November 10, 1999.
(16) Filed Herewith.
36
<PAGE>
Item 14(b): Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended March 31,
2000.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FRONTIER AIRLINES, INC.
Date: June 26, 2000 By: /s/ Steve B. Warnecke
--------------------------------------
Steve B. Warnecke, Vice President and
Chief Financial Officer
Date: June 26, 2000 By: /s/ Elissa A. Potucek
--------------------------------------
Elissa A. Potucek, Vice President,
Controller, Treasurer and Principal
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: June 26, 2000 /s/ Samuel D. Addoms, Director
--------------------------------------
Samuel D. Addoms, Director
Date: June 26, 2000 /s/ William B. McNamara, Director
--------------------------------------
William B. McNamara, Director
Date: June 26, 2000 --------------------------------------
Paul Stephen Dempsey, Director
Date: June 26, 2000 /s/ B. LaRae Orullian, Director
--------------------------------------
B. LaRae Orullian, Director
Date: June 26, 2000 /s/ D. Dale Browning, Director
--------------------------------------
D. Dale Browning, Director
Date: June 26, 2000 /s/ James B. Upchurch, Director
--------------------------------------
James B. Upchurch, Director
<PAGE>
Independent Auditors' Report
The Board of Directors and
Stockholders
Frontier Airlines, Inc.:
We have audited the accompanying balance sheets of Frontier Airlines, Inc. as of
March 31, 2000 and 1999, and the related statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
March 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Frontier Airlines, Inc., as of
March 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the years in the three-year period ended March 31, 2000, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for maintenance checks in 2000.
KPMG LLP
Denver, Colorado
May 31, 2000
F-1
<PAGE>
FRONTIER AIRLINES, INC.
Balance Sheets
March 31, 2000 and 1999
<TABLE>
<S> <C> <C>
March 31, March 31,
2000 1999
---------------- ----------------
Assets
Current assets:
Cash and cash equivalents 67,850,933 47,289,072
Short-term investments 15,760,000 -
Restricted investments 4,000,000 4,000,000
Trade receivables, net of allowance for doubtful
accounts of $170,819 and $199,960 at March 31, 2000 and 1999 22,190,835 16,930,038
Maintenance deposits (note 5) 19,637,128 13,018,466
Prepaid expenses (note 2) 7,386,851 5,439,834
Inventories 2,235,183 1,203,916
Deferred tax assets (note 7) 1,136,194 6,041,576
Deferred lease and other expenses 163,527 285,636
---------------- ----------------
Total current assets 140,360,651 94,208,538
Security, maintenance and other deposits (note 5) 17,613,122 11,834,457
Property and equipment, net (note 3) 21,654,262 8,733,778
Deferred lease and other expenses 104,243 267,762
Restricted investments 7,813,760 4,575,760
---------------- ----------------
$ 187,546,038 $ 119,620,295
================ ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 14,407,913 14,011,238
Air traffic liability 44,518,837 28,887,692
Other accrued expenses (note 4) 17,542,019 10,781,509
Accrued maintenance expense (note 5) 21,893,316 14,933,568
Current portion of obligations under capital leases (note 5) 113,029 106,833
---------------- ----------------
Total current liabilities 98,475,114 68,720,840
Accrued maintenance expense (note 5) 7,214,167 6,042,958
Deferred tax liability (note 7) 483,514 30,928
Obligations under capital leases, excluding current portion 328,702 434,920
(note 5)
---------------- ----------------
Total liabilities 106,501,497 75,229,646
---------------- ----------------
Stockholders' equity
Preferred stock, no par value, authorized 1,000,000
shares; none issued and outstanding - -
Common stock, no par value, stated value of $.001 per
share, authorized 40,000,000 shares; 17,732,273 and
16,141,172 shares issued and outstanding at March 31, 2000 and 17,732 16,141
1999
Additional paid-in capital 67,946,230 58,054,844
Unearned ESOP shares (note 10) (857,713) (609,375)
Retained earnings (accumulated deficit) 13,938,292 (13,070,961)
---------------- ----------------
81,044,541 44,390,649
---------------- ----------------
Commitments and contingencies (notes 5, 12 and 13) $ 187,546,038 $ 119,620,295
================ ================
See accompanying notes to financial statements.
</TABLE>
F-2
<PAGE>
FRONTIER AIRLINES, INC.
Statements of Operations
Years Ended March 31, 2000, 1999 and 1998
<TABLE>
<S> <C> <C> <C>
2000 1999 1998
Revenues:
Passenger $ 320,850,271 $ 214,311,312 $ 142,018,392
Cargo 6,855,882 4,881,066 3,008,919
Other 2,113,802 1,415,332 2,115,326
---------------- ---------------- ----------------
Total revenues 329,819,955 220,607,710 147,142,637
---------------- ---------------- ----------------
Operating expenses:
Flight operations 125,536,174 79,247,347 66,288,125
Aircraft and traffic servicing 48,954,728 34,450,562 31,042,855
Maintenance 50,238,538 36,090,052 31,790,600
Promotion and sales 46,013,812 35,216,787 28,971,107
General and administrative 16,327,410 9,263,538 6,352,977
Depreciation and amortization 3,440,069 1,659,429 1,251,364
---------------- ---------------- ----------------
Total operating expenses 290,510,731 195,927,715 165,697,028
---------------- ---------------- ----------------
Operating income (loss) 39,309,224 24,679,995 (18,554,391)
---------------- ---------------- ----------------
Nonoperating income (expense):
Interest income 4,334,688 1,556,047 722,380
Interest expense (119,496) (700,635) (324,167)
Other, net (109,798) (448,917) 409,808
---------------- ---------------- ----------------
Total nonoperating income, net 4,105,394 406,495 808,021
---------------- ---------------- ----------------
Income (loss) before ncome tax expense (benefit)
and cumulative effect of change in method of
accounting for maintenance checks 43,414,618 25,086,490 (17,746,370)
Income tax expense (benefit)
16,954,374 (5,479,570) -
---------------- ---------------- ----------------
Income (loss) before cumulative effect of
change in accounting principle 26,460,244 30,566,060 (17,746,370)
Cumulative effect of change in method of
accounting for maintenance checks 549,009 - -
---------------- ---------------- ----------------
Net income (loss) 27,009,253 30,566,060 (17,746,370)
================ ================ ================
(continued)
F-3
<PAGE>
FRONTIER AIRLINES, INC.
Statements of Operations, continued
Years Ended March 31, 2000, 1999 and 1998
2000 1999 1998
------ ------ ------
Earnings (loss) per share:
Basic:
Income (loss) before cumulative effect of a
change in accounting principle $1.53 $2.14 ($1.95)
Cumulative effect of change in method of
accounting for maintenance checks 0.03 - -
---------------- ---------------- ----------------
Net income (loss) $1.56 $2.14 ($1.95)
================ ================ ================
Diluted:
Income (loss) before cumulative effect of a
change in accounting principle $1.40 $1.98 ($1.95)
Cumulative effect of change in method of
accounting for maintenance checks 0.03 - -
---------------- ---------------- ----------------
Net income (loss) $1.43 $1.98 ($1.95)
================ ================ ================
Pro forma amounts assuming the new method of accounting for maintenance checks
is applied retroactively:
Net income (loss) $ 29,510,374 $(16,647,306)
Earnings (loss) per share:
Basic $2.07 ($1.83)
================ ================
Diluted $1.92 ($1.83)
================ ================
Weighted average shares of
common stock outstanding
Basic 17,329,400 14,257,661 9,095,220
================ ================ ================
Diluted 18,856,688 15,401,435 9,095,220
================ ================ ================
See accompanying notes to financial statements.
</TABLE>
F-4
<PAGE>
FRONTIER AIRLINES, INC.
Statements of Stockholders' Equity
Years Ended March 31, 2000, 1999 and 1998
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Common Stock Retained
----------------------------- Additional Unearned earnings Total
Stated paid-in ESOP (accumulated stockholders'
Shares value capital shares deficit) equity
-------------- ------------ ------------- ------------ -------------- -------------
Balances,
March 31, 1997 8,844,375 $ 8,844 $ 35,764,710 - $ (25,890,651) $ 9,882,903
Exercise of common stock
options 409,188 409 434,948 - - 435,357
Warrants issued in conjunction
with debt - - 1,754,926 - - 1,754,926
Net loss - - - - (17,746,370) (17,746,370)
-------------- ------------ ------------- ------------ -------------- -------------
Balances,
March 31, 1998 9,253,563 9,253 37,954,584 - (43,637,021) (5,673,184)
Sale of common stock, net of
offering costs of $525,059 4,363,001 4,363 13,650,331 - - 13,654,694
Contribution of common stock to
employees stock ownership
plan 275,000 275 1,457,975 (1,458,250) - -
Amortization of employee stock
compensation - - - 848,875 - 848,875
Exercise of common stock
warrants 1,796,400 1,797 4,360,022 - - 4,361,819
Exercise of common stock
options 453,208 453 631,932 - - 632,385
Net income - - - - 30,566,060 30,566,060
-------------- ------------ ------------- ------------ -------------- -------------
Balances,
March 31, 1999
16,141,172 16,141 58,054,844 (609,375) (13,070,961) 44,390,649
Exercise of common stock
warrants 1,147,726 1,148 4,758,969 - - 4,760,117
Exercise of common stock
options 343,375 343 563,712 - - 564,055
Tax benefit from exercises of
common stock options and
warrants - - 3,425,055 - - 3,425,055
Contribution of common stock to
employees stock ownership
plan 100,000 100 1,143,650 (1,143,750) - -
Amortization of employee stock
compensation - - - 895,412 - 895,412
Net income - - - - 27,009,253 27,009,253
-------------- ------------ ------------- ------------ -------------- -------------
Balances,
March 31, 2000 17,732,273 $ 17,732 $67,946,230 (857,713) $13,938,292 81,044,541
============== ============ ============= ============ ============== =============
See accompanying notes to financial statements.
</TABLE>
F-5
<PAGE>
FRONTIER AIRLINES, INC.
Statements of Cash Flows
Years ended March 31, 2000, 1999, and 1998
<TABLE>
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------
2000 1999 1998
Cash flows from operating activities: ------ ------ ------
Net income (loss) $ 27,009,253 $ 30,566,060 $ (17,746,370)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Employee stock ownership plan compensation expense 895,412 848,875 -
Depreciation and amortization 3,725,697 2,705,255 1,749,097
Loss on sale of equipment - 3,867 10,334
Deferred tax expense (benefit) 5,459,468 (6,010,648) -
Changes in operating assets and liabilities:
Restricted investments 402,000 (425,301) (2,372,326)
Trade receivables 5,260,797) (5,268,715) (4,209,981)
Security, maintenance and other deposits (8,288,288) (6,968,057) (3,583,327)
Prepaid expenses (1,947,017) (1,596,140) (393,823)
Inventories (1,031,267) (39,606) (167,208)
Note receivable - - 11,740
Accounts payable 396,675 346,488 5,619,217
Air traffic liability 15,631,145 9,977,251 5,851,809
Other accrued expenses 10,084,065 5,758,840 1,839,597
Accrued maintenance expense 8,130,957 6,057,944 5,233,104
---------------- ---------------- ----------------
Net cash provided (used) by operating activities 55,207,303 35,956,113 (8,158,137)
---------------- ---------------- ----------------
Cash flows from investing activities:
Increase in short-term investments, net (15,760,000) - -
Aircraft lease and purchase deposits, net (4,109,039) (944,000) 207,500
Increase in restricted investments (3,640,000) (1,544,000) (1,500,000)
Capital expenditures (16,360,553) (4,313,065) (2,355,266)
---------------- ---------------- ----------------
Net cash used in investing activities (39,869,592) (6,801,065) (3,647,766)
---------------- ---------------- ----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants 5,324,172 15,549,810 435,357
Proceeds from issuance of senior secured notes - - 5,000,000
Principal payments on senior secured notes - (941,841) -
Cash payments for debt issuance costs - - (227,500)
Proceeds from short-term borrowings - 179,664 202,810
Principal payments on short-term borrowings - (179,664) (212,622)
Principal payments on obligations under capital leases (100,022) (115,340) (37,200)
---------------- ---------------- ----------------
Net cash provided by financing activities 5,224,150 14,492,629 5,160,845
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents 20,561,861 43,647,677 (6,645,058)
Cash and cash equivalents, beginning of year 47,289,072 3,641,395 10,286,453
---------------- ---------------- ----------------
Cash and cash equivalents, end of year $ 67,850,933 $ 47,289,072 $ 3,641,395
================ ================ ================
See accompanying notes to financial statements.
</TABLE>
F-6
<PAGE>
FRONTIER AIRLINES, INC.
Notes to Financial Statements
March 31, 2000
(1) Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Frontier Airlines, Inc. (the "Company") was incorporated in the State of
Colorado on February 8, 1994. Denver-based Frontier Airlines serves 20
cities coast to coast with a fleet of 23 Boeing 737 jets and employs
approximately 2,000 aviation professionals. The Company commenced
airline operations on July 5, 1994.
Airline operations have high fixed costs and are highly sensitive to
various factors including the actions of competing airlines and general
economic factors.
Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
For financial statement purposes, the Company considers cash and
short-term investments with an original maturity of three months or less
to be cash equivalents.
Short-term investments
Short-term investments consist of government-backed agencies with
maturities of one year or less. These investments are classified as
held-to-maturity and are carried at amortized cost which approximates
fair value. Held-to-maturity securities are those securities in which
the Company has the ability and intent to hold the security until
maturity. Interest income is recognized when earned.
Supplemental Disclosure of Cash Flow Information
Noncash Financing and Investment Activities:
During the year ended March 31, 1998, the Company issued warrants to its
lender in connection with its $5,000,000 senior secured notes with an
estimated fair market value totaling $1,645,434, and issued warrants to
its financial advisor in connection with debt and equity financing with
an estimated fair market value totaling $109,492. Also during the years
ended March 31, 1999 and 1998, the Company entered into capital lease
F-7
<PAGE>
FRONTIER AIRLINES, INC.
Notes to Financial Statements, continued
(1) Nature of Business and Summary of Significant Accounting Policies
(continued)
agreements totaling $504,900 and $97,000, respectively. During the year
ended March 31, 1998, the Company exchanged a note receivable for
certain property and equipment totaling $47,000.
Interest and Taxes Paid During the Year:
Cash paid for interest totaled $119,496, $302,503, and $184,999, for the
years ended March 31, 2000, 1999 and 1998, respectively. During the year
ending March 31, 2000, the Company paid approximately $3,005,000 for
income taxes. No income taxes were paid during the years ended March 31,
1999 and 1998.
Restricted Investments
Restricted investments include certificates of deposit which secure
certain letters of credit issued primarily to companies which process
credit card sale transactions, certain airport authorities and aircraft
lessors. Restricted investments are carried at cost, which management
believes approximates market value. Maturities are for one year or less
and the Company intends to hold restricted investments until maturity.
Valulation and Qualifying Accounts
The allowance for doubtful accounts was approximately $171,000 and
$200,000 at March 31, 2000 and 1999, respectively. Provisions for bad
debts net of recoveries totaled $873,000, $386,000, and $267,000 for the
years ended March 31, 2000, 1999 and 1998. Deductions from the reserve
totaled $902,000, $330,000, and $200,000 for the years ended March 31,
2000, 1999, and 1998, respectively.
Inventories
Inventories consist of expendable parts, supplies and aircraft fuel and
are stated at the lower of cost or market. Inventories are accounted for
on a first-in, first-out basis and are charged to expense as they are
used.
At March 31, 2000, the Company has an aircraft parts agreement for its
Boeing 737 aircraft with an aircraft parts supplier. The Company is
required to pay a monthly consignment fee to the lessor, based on the
value of the consigned parts, and to replenish any such parts when used
with a like part. At March 31, 2000 and 1999, the Company held consigned
parts and supplies in the amount of approximately $5,788,000 and
$8,902,000, respectively, which are not included in the Company's
balance sheet.
F-8
<PAGE>
(1) Nature of Business and Summary of Significant Accounting Policies
(continued)
Property and Equipment
Property and equipment are carried at cost. Major additions, betterments
and renewals are capitalized. Depreciation and amortization is provided
for on a straight-line basis to estimated residual values over estimated
depreciable lives as follows:
Flight equipment 5-10 years
Improvements to leased aircraft Life of improvements or term of
Ground property, equipment, and
leasehold improvements 3-5 years or term of lease
Assets utilized under capital leases are amortized over the lesser of
the lease term or the estimated useful life of the asset using the
straight-line method. Amortization of capital leases is included in
depreciation expense.
Maintenance
Routine maintenance and repairs are charged to operations as incurred.
Under the terms of its aircraft lease agreements, the Company is
required to make monthly maintenance deposits and a liability for
accrued maintenance is established based on usage. The deposits are
applied against the cost of major airframe maintenance checks, landing
gear and engine overhauls. Deposit balances remaining at lease
termination remain with the lessor and any remaining liability for
maintenance checks is reversed against the deposit balance.
Additionally, a provision is made for the estimated costs of scheduled
major overhauls required to be performed on leased aircraft and
components under the provisions of the aircraft lease agreements if the
required monthly deposit amounts are not adequate to cover the entire
cost of the scheduled maintenance. Accrued maintenance expense expected
to be incurred beyond one year is classified as long-term.
Effective April 1, 1999, the Company changed its method of accounting
for required periodic maintenance checks from the accrue-in-advance
method to the direct expensing method. The Company believes that the
newly adopted accounting principle is preferable in the circumstances
because there has not been an obligating event prior to the maintenance
checks actually being performed, and the new method is the predominant
method used in the airline industry. Fluctuations in these maintenance
costs from period to period are not expected to be significant given the
maturity and current size of the Company's fleet. Previously, the
Company accrued-in-advance for maintenance checks and major overhauls,
including the costs for scheduled major airframe, landing gear, and
engine overhauls. The Company continues to utilize the accrue-in-advance
method for
F-9
<PAGE>
(1) Nature of Business and Summary of Significant Accounting Policies
(continued)
scheduled major airframe, landing gear and engine overhauls because the
Company's aircraft lease agreements require the Company to make
non-refundable monthly deposits with the lessors for such costs.
The cumulative effect of the change, calculated as of April 1, 1999, was
to increase net income by $549,009 or $.03 per diluted share. The effect
of the change was to decrease net income for the year ended March 31,
2000 by $247,713 or $.01 per diluted share. Had the new method of
accounting been used, net income (loss) for the years ended March 31,
1999 and 1998 would have been $29,510,374 and $(16,647,306) or $1.92 and
($1.83) per diluted share, respectively.
Revenue Recognition
Passenger, cargo, and other revenues are recognized when the
transportation is provided or after the tickets expire, and are net of
excise taxes. Revenues which have been deferred are included in the
accompanying balance sheet as air traffic liability.
Passenger Traffic Commissions and Related Expenses
Passenger traffic commissions and related expenses are expensed when the
transportation is provided and the related revenue is recognized.
Passenger traffic commissions and related expenses not yet recognized
are included as a prepaid expense.
Frequent Flyer Awards
The Company allows its passengers to accumulate mileage on Continental
Airlines' OnePass frequent flyer program. The cost of providing mileage
on the OnePass program is based on an agreed upon rate per mileage
credit, which is paid to Continental Airlines on a monthly basis.
Income (Loss) Per Common Share
Basic EPS excludes the effect of potentially dilutive securities and is
computed by dividing income (loss) available to common stockholders by
the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could
share in earnings. Common options and warrants were excluded from the
computation of diluted loss per share in 1998 as their effect would have
been anti-dilutive.
F-10
<PAGE>
(1) Nature of Business and Summary of Significant Accounting Policies
(continued)
Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under that method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and tax bases of existing
assets and liabilities. A valuation allowance for net deferred tax
assets is provided unless realizability is judged by management to be
more likely than not. The effect on deferred taxes from a change in tax
rates is recognized in income in the period that includes the enactment
date.
Fair Value of Financial Instruments
The Company estimates the fair value of its monetary assets and
liabilities based upon existing interest rates related to such assets
and liabilities compared to current rates of interest for instruments
with a similar nature and degree of risk. The Company estimates that the
carrying value of all of its monetary assets and liabilities
approximates fair value as of March 31, 2000.
Stock Based Compensation
The Company follows Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to Employees ("APB 25") and related
Interpretations in accounting for its employee stock options and follows
the disclosure provisions of Statement of Financial Accounting Standards
No. 123 (SFAS No. 123). Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the
underlying Common Stock on the date of grant, no compensation expense is
recognized. The Company has included the pro forma disclosures required
by SFAS No. 123 in Note 9.
Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount.
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for
hedging a ctivities. SFAS No. 133 is effective for periods beginning
after June 15, 2000. The adoption of SFAS No. 133 would have no effect
on the Company's financial statements based on present activity.
F-11
<PAGE>
(1) Nature of Business and Summary of Significant Accounting Policies
(continued)
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
(2) Prepaid Expenses and Other Assets
The March 31, 2000 and 1999 prepaid expenses and other assets is
comprised of the following:
2000 1999
------ ------
Prepaid aircraft rentals $ 2,652,672 $1,509,917
Prepaid passenger traffic commissions 1,529,129 1,575,320
Prepaid fuel 929,940 337,062
Other prepaid expenses and other assets 2,275,110 2,017,535
-------------------------------
$ 7,386,851 $ 5,439,834
===============================
(3) Property and Equipment, Net
As of March 31, 2000 and 1999 property and equipment consisted of the
following:
2000 1999
------ ------
Flight equipment and
improvements to leased aircraft $ 20,891,239 $ 7,204,878
Ground property, equipment
and leasehold improvements 6,571,776 6,186,490
--------------- --------------
27,463,015 13,391,368
Less accumulated depreciation
and amortization 5,808,753 4,657,590
--------------- --------------
Property and equipment, net $ 21,654,262 $ 8,733,778
=============== ==============
Property and equipment includes certain office equipment under capital
leases. At March 31, 2000 and 1999, office equipment recorded under
capital leases was $602,149 and $785,847 and accumulated amortization
was $163,428 and $154,942, respectively.
F-12
<PAGE>
(4) Other Accrued Expenses
The March 31, 2000 and 1999 other accrued expenses is comprised of the
following:
2000 1999
------ ------
Income taxes payable $ 5,483,264 $ 524,591
Accrued salaries and benefits 5,505,449 4,802,772
Federal excise taxes payable 3,664,429 3,372,907
Other 2,888,877 2,081,239
-------------------------------------
$17,542,019 $10,781,509
=====================================
(5) Lease Commitments
Aircraft Leases
At March 31, 2000, the Company operated 23 aircraft which are accounted
for under operating lease agreements with initial terms ranging from
16.5 months to 8 years. Certain leases allow for renewal options.
Security deposits related to leased aircraft at March 31, 2000 and 1999
totaled $3,257,789 and $5,548,750 and are included in security,
maintenance and other deposits on the balance sheet. Letters of credit
issued to certain aircraft lessors in lieu of cash deposits and related
restricted investments to secure these letters of credit at March 31,
2000 and 1999 totaled $7,284,000 and $3,644,000, respectively.
In addition to scheduled future minimum lease payments, the Company is
required to make monthly maintenance deposits and a liability for
accrued maintenance is established based on usage. The lease agreements
require the Company to pay taxes, maintenance, insurance, and other
operating expenses applicable to the leased property. At March 31, 2000
and 1999, aircraft maintenance deposits totaled $26,911,635 and
$18,672,825, respectively, and are reported as a component of security,
maintenance and other deposits on the balance sheet.
Any cash deposits paid to aircraft lessors for future scheduled
maintenance costs to the extent not used during the lease term remain
with the lessors, and any remaining liability for maintenance checks is
reversed against the deposit balance. Maintenance deposits are unsecured
and may be subject to the risk of loss in the event the lessors are not
able to satisfy their obligations under the lease agreements.
F-13
<PAGE>
(5) Lease Commitments (continued)
Other Leases
The Company leases an office and hangar space, spare engines and office
equipment for its headquarters, airport facilities, and certain
equipment. The Company also leases certain airport gate facilities on a
month-to-month basis.
At March 31, 2000, commitments under capital and noncancelable operating
leases (excluding maintenance deposit requirements) with terms in excess
of one year were as follows:
Capital Operating
Leases Leases
--------- ------------
Year ended March 31:
2001 $153,320 $ 66,657,710
2002 153,320 61,411,677
2003 153,320 56,172,369
2004 44,322 47,005,434
2005 - 28,323,323
Thereafter - 4,668,121
------------- ------------------
Total minimum lease payments 504,282 $ 264,238,634
==================
Less amount representing interest 62,551
-------------
Present value of obligations
under capital leases 441,731
Less current portion of obligations
under capital leases 113,029
-------------
Obligations under capital leases,
excluding current portion $ 328,702
=============
The obligations under capital leases have been discounted at imputed
interest rates ranging from 10% to 13%.
Rental expense under operating leases, including month-to-month leases,
for the years ended March 31, 2000, 1999 and 1998 was $65,201,876,
$46,099,140 and $36,573,509, respectively.
F-14
<PAGE>
(6) Senior Secured Notes
In December 1997, the Company sold $5,000,000 of 10% senior secured
notes to Wexford Management LLC ("Wexford"). The notes were due and
payable in full on December 15, 2001 with interest payable quarterly in
arrears. The notes were secured by substantially all of the assets of
the Company. The Wexford agreement contained restrictions primarily
related to liens on assets and required prior written consent for
expenditures outside the ordinary course of business. In connection with
this transaction, the Company issued Wexford warrants to purchase
1,750,000 shares of Common Stock at $3.00 per share. The Company
determined the value of the warrants to be $1,645,434 and recorded the
value as a discount on notes payable and as equity in additional paid-in
capital. The balance of the notes were to be accreted to its face value
over the term of the notes and included as interest expense. The
effective interest rate on the notes was approximately 18.2% considering
the value of the warrants
During the year ended March 31, 1999, Wexford exercised all of the
warrants described above. As permitted under the terms of the agreement,
Wexford elected to tender debt for the warrant exercise price first by
application of accrued unpaid interest and the remainder by reducing the
principal balance of the notes. The total amount of $5,250,000 from the
exercise was comprised of the following: payment of accrued interest
totaling $134,971, then to the outstanding principal balance totaling
$4,058,159, and the remaining balance in cash to the Company totaling
$1,056,870. In January 1999, the Company paid the remaining balance of
the note in full which totaled $941,841, thereby terminating all of
Wexford's security interests in the Company's assets.
The discount amortized to interest expense prior to the pay-off of the
notes totaled $199,975 and $113,454 for the years ended March 31, 1999
and 1998, respectively. Upon the exercise of the warrants by Wexford,
$1,094,042 of unamortized discount was charged to additional paid-in
capital. The remaining unamortized discount and other deferred loan
costs totaled $485,846 at the repayment date and were charged to other
nonoperationg expense.
F-15
<PAGE>
(7) Income Taxes
Income tax expense (benefit) for the years ended March 31, 2000 and 1999
consists of:
<TABLE>
<S> <C> <C> <C>
Current Deferred Total
--------- ---------- ------
Year ended March 31, 2000:
U.S. Federal $9,785,064 $ 4,726,153 $ 14,511,217
State and local 1,811,343 631,814 2,443,157
----------------- ------------------ ------------------
$11,596,407 $ 5,357,967 $ 16,954,374
================= ================== ==================
Year ended March 31, 1999:
U.S. Federal $531,077 $ (5,244,134) $ (4,713,057)
State and local - (766,513) (766,513)
----------------- ------------------ ------------------
$531,077 $ (6,010,647) $ (5,479,570)
================= ================== ==================
</TABLE>
There was no income tax expense or benefit in 1998.
The differences between the Company's effective rate for income taxes
and the federal statutory rate are shown in the following table:
2000 1999 1998
------ ------ ------
Income tax benefit (expense)
at the statutory rate (35%) (35%) 34%
(Increase) decrease in valuation
allowance - 60% (34%)
State and local income tax, net of
federal income tax benefit (3%) (3%) -
Nondeductible expenses (1%) - -
---------- ----------- ----------
(39%) 22% -
========== =========== ==========
F-16
<PAGE>
(7) Income Taxes, continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at March 31, 2000 and 1999 are
presented below:
<TABLE>
<S> <C> <C>
2000 1999
Deferred tax assets: ------ ------
Accrued vacation and health
insurance liability not
deductible for tax purposes $1,041,000 $ 654,000
Accrued maintenance not
deductible for tax purposes - 212,000
Net operating loss carryforwards 4,548,000
AMT credit carryforward - 525,000
Start-up cost deferred for
tax purposes - 55,000
Inventory reserves 134,000 -
Other 136,000 103,000
------------------- ------------------
Total gross deferred tax assets 1,311,000 6,097,000
Deferred tax liabilities:
Equipment depreciation and
amortization (556,000) (86,000)
Book/tax difference on warrant
treatment (102,000) -
------------------- ------------------
Total gross deferred tax liabilities (658,000) (86,000)
------------------- ------------------
Net deferred tax assets $ 653,000 $6,011,000
=================== ==================
The net deferred tax assets are reflected in accompanying balance sheet
as follows:
2000 1999
------ ------
Current deferred tax assets $1,136,194 $6,041,576
Non-current deferred tax liabilities (483,514) (30,928)
------------------- ------------------
Net deferred tax assets $652,680 $6,010,648
=================== ==================
</TABLE>
F-17
<PAGE>
(7) Income Taxes, continued
The Company recognized an income tax benefit of $5,479,570 in 1999
attributable to the probable realization of its remaining income tax
loss carryforwards for which a valuation allowance had previously been
recorded. As of March 31, 1999 the Company had net operating loss
carryforwards of approximately $11,891,000 and alternative minimum tax
credits of approximately $525,000 which were fully utilized to reduce
federal regular income taxes during the year ended March 31, 2000.
(8) Warrants and Stock Purchase Rights
At completion of the Company's initial public offering in 1994, an
underwriter acquired options to purchase up to 110,000 shares of Common
Stock exercisable at a price equal to $5.525 per share. As of March 31,
2000, all 110,000 options have been exercised with net proceeds to the
Company totaling $607,750.
The underwriters in a secondary public offering by the Company in 1995
received a warrant to purchase 168,500 shares of Common Stock at $5.55
per share. The underwriters had an option to exercise the warrants as a
cashless exercise, which has the effect of reducing the total number of
warrants issued to them. As of March 31, 2000, 142,697 warrants were
exercised with net proceeds to the Company totaling $209,069 and 36,571
warrants were retired pursuant to the cashless exercise option. The
remaining warrants issued to the underwriters in the secondary public
offerings expire on September 18, 2000.
In October 1995, the Company issued to each of two Boeing 737-300
aircraft lessors a warrant to purchase 100,000 shares of Common Stock
for an aggregate purchase price of $500,000. In June 1996, the Company
issued two warrants to a Boeing 737-200 lessor, each warrant entitling
the lessor to purchase 70,000 shares of Common Stock at an aggregate
exercise price of $503,300 per warrant. In connection with a Boeing
737-300 aircraft delivered in August 1997, the Company issued to the
lessor a warrant to purchase 55,000 shares of Common Stock at an
aggregate purchase price of $385,000. During May and June 1999, aircraft
lessors exercised all 395,000 warrants with net proceeds to the Company
totaling $2,391,600. To the extent that the aircraft lessors were able
to realize certain profit margins on their subsequent sale of the stock,
they were required to refund a portion of the cash security deposits
they were holding. As a result of their sale of the Company's Common
Stock, $1,024,000 in cash security deposits were returned to the Company
during the year ended March 31, 2000.
In February 1998, in connection with the $5,000,000 senior notes as
discussed in Note 6, the Company issued a warrant to the lender to
purchase 1,750,000 shares of the Company's Common Stock at a purchase
price of $3.00 per share. During the year ended March 31, 1999, this
warrant was exercised in its entirety.
F-18
<PAGE>
(8) Warrants and Rights Dividend, continued
In May 1998, the Company issued to its financial advisor, in connection
with debt and equity financings, a warrant to purchase 548,000 shares of
the Company's Common Stock at a purchase price of $3.00 per share, which
warrant expires in May 2003. Of the 548,000 warrants issued, 116,450
were attributable to the issuance of the senior secured notes discussed
in Note 6. The Company recorded a value of $109,492 for these warrants
and recorded the value as equity in additional paid in capital and
deferred loan costs. During the year ended March 31, 2000, the financial
advisor exercised the warrant with net proceeds to the Company totaling
$1,644,000.
In April 1998, in connection with a private placement of 4,363,001
shares of its Common Stock, the Company issued a warrant to an
institutional investor to purchase 716,929 shares of its Common Stock at
a purchase price of $3.75 per share, which warrant expires in April
2002.
In February 1997, the Board of Directors declared a dividend
distribution of one Common Stock purchase right for each share of the
Company's Common Stock outstanding on March 15, 1997. Each right
entitles a shareholder to purchase one share of the Company's Common
Stock at a purchase price of $65.00 per full common share, subject to
adjustment. The rights are not currently exercisable, but would become
exercisable if certain events occurred relating to a person or group
acquiring or attempting to acquire 20 percent or more of the outstanding
shares of the Company's Common Stock. The rights expire on February 20,
2007, unless redeemed by the Company earlier. Once the rights become
exercisable, each holder of a right will have the right to receive, upon
exercise, Common Stock (or, in certain circumstances, cash, property or
other securities of the Company) having a value equal to two times the
exercise price of the right.
(9) Stock Option Plan
The Company has a stock option plan whereby the Board of Directors or
its Compensation Committee may grant options to purchase shares of the
Company's Common Stock to employees, officers, and directors of the
Company.
Under the plan, the Company has reserved an aggregate of 4,250,000
shares of Common Stock for issuance pursuant to the exercise of options.
With certain exceptions, options issued through March 31, 2000 generally
vest over a five-year period from the date of grant and expire from
March 9, 2004 to March 7, 2010. At March 31, 2000, 1,291,250 options are
available for grant under the plan.
F-19
<PAGE>
(9) Stock Option Plan, continued
A summary of the Plan's stock option activity and related information
for the years ended March 31, 2000, 1999 and 1998 is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
2000 1999 1998
--------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------------------------------------------------------------------------
Outstanding-beginning of year 1,796,354 $1.58 1,532,062 $1.56 1,911,250 $1.85
Granted 300,000 $13.41 717,500 $5.94 30,000 $2.77
Exercised (343,375) $1.64 (453,208) $1.34 (409,188) $1.06
Surrendered - - - - (180,000) $7.40
Re-issued - - - - 180,000 $3.00
--------------------------------------------------------------------------
1,752,979 $5.41 1,796,354 $3.35 1,532,062 $1.56
==========================================================================
Exercisable at end of year 972,979 $2.78 1,103,020 $1.70 1,761,250 $1.39
</TABLE>
Exercise prices for options outstanding under the plan as of March 31,
2000 ranged from $1.00 to $16.57 per option share. The weighted-average
remaining contractual life of those options is 7 years. A summary of the
outstanding and exercisable options at March 31, 2000, segregated by
exercise price ranges, is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------
Weighted-
Average
Weighted- Remaining Weighted-
Exercise Price Options Average Contractual Exercisable Average
Range Outstanding Exercise Price Life (in years) Options Exercise Price
---------------------------------------------------------------------------------------------------
$ 1.00 - $ 2.50 555,562 $1.14 3.9 555,562 $1.14
$ 3.00 - $ 5.06 542,417 3.53 7.5 306,417 3.36
$ 8.13 - $13.82 540,000 9.32 9.2 111,000 9.39
$16.07 - $16.57 115,000 16.50 9.2 - -
-----------------------------------------------------------------------------------
1,752,979 $5.41 7.0 972,979 $2.78
===================================================================================
</TABLE>
F-20
<PAGE>
(9) Stock Option Plan, continued
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost is
recognized for options granted at a price equal to the fair market value
of the Common Stock. Pro forma information regarding net income and
earnings per share is required by SFAS No. 123, which also requires that
the information be determined as if the Company has accounted for its
employee stock options granted subsequent to March 31, 1995 under the
fair value method of that Statement. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 2000, 1999 and
1998, respectively: risk-free interest rates of 5.98%, 5.36% and 6.42%,
dividend yields of 0%, 0% and 0%; volatility factors of the expected
market price of the Company's Common Stock of 61.38%, 69.25% and 64.33%,
and a weighted-average expected life of the options of 3.5 years for the
year ended March 31, 2000 and 3.7 years for the year ended March 31,
1999 and 1998. Had compensation cost for the Company's stock-based
compensation plan been determined using the fair value of the options at
the grant date, the Company's pro forma net income (loss) and earnings
(loss) per share would be as follows:
<TABLE>
<S> <C> <C> <C> <C>
1999 1998 1997
Net Income: ------ ------ ------
As reported $ 27,009,253 $ 30,566,060 $(17,746,370)
Pro forma $ 26,230,907 $ 30,263,570 $(17,842,594)
Earnings (loss) per share, basic:
As reported $ 1.56 $ 2.14 $ (1.95)
Proforma $ 1.51 $ 2.12 $ (1.96)
Earnings (loss) per share, diluted:
As reported $ 1.43 $ 1.98 $ (1.95)
Proforma $ 1.39 $ 1.96 $ (1.96)
</TABLE>
(10) Benefit Plans
Employee Stock Ownership Plan
The Company has established an Employee Stock Ownership Plan (ESOP)
which inures to the benefit of each employee of the Company, except
those employees covered by a collective bargaining agreement that does
not provide for participation in the ESOP. Company contributions to the
ESOP are discretionary and may vary from year to year. In order for an
employee to receive an allocation of Company Common Stock from the ESOP,
the employee must be employed on the last day of the ESOP's plan year,
with certain exceptions. The Company's annual contribution to the ESOP,
if any, will be allocated among the eligible employees of the Company as
of the end of each plan year in proportion to the relative compensation
(as defined in the ESOP) earned that plan year by each of the eligible
employees. The ESOP does not provide for contributions by participating
employees. Employees will vest in contributions made to the ESOP based
F-21
<PAGE>
(10) Benefit Plans, continued
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.
Total Company contributions to the ESOP from inception through March 31,
1998 totaled 216,209 shares. During the years ended March 31, 2000 and
1999, the Company contributed 100,000 and 275,000 shares to the plan
and none during the year ended March 31, 1998. The Company recognized
compensation expense during the year ended March 31, 2000 and 1999 of
$895,412 and $848,875, respectively, related to its contribution to the
ESOP and none during the year ended March 31, 1998.
Retirement Savings Plan
The Company has established a Retirement Savings Plan (401(k)).
Participants may contribute from 1% to 15% of pre-tax annual
compensation. Annual individual pre-tax participant contributions are
limited to $10,500 for calendar year 2000, $10,000 for calendar years
1999 and 1998 and $9,500 for calendar year 1997 under the Internal
Revenue Code. Participants are immediately vested in their voluntary
contributions.
Effective April 1999, for the plan year ending December 31, 1999, the
Company's Board of Directors elected to match 25% of participant
contributions from April 1999 through April 2000. Effective May 2000,
for the plan year ending December 31, 2000, the Company's Board of
Directors elected to match 50% of participant contributions up to 10% of
salaries from May 2000 through December 2000. The Company had not
matched any contributions made prior to April 1999. Future matching
contributions, if any, will be determined annually by the Board of
Directors. In order to receive the matching contribution, Participants
must be employed on the last day of the plan year. Participants will
vest in contributions made to the 401(k) upon their years of service
with the Company. A year of service is a 401(k) plan year during which a
participant has at least 1,000 hours of service. Vesting generally
occurs at the rate of 20% per year, beginning after the first year of
service, so that a Participant will be fully vested after five years of
service. Upon termination of employment with the Company, each
participant will be entitled to receive the vested portion of his or her
account balance.
F-22
<PAGE>
(11) Concentration of Credit Risk
The Company does not believe it is subject to any significant
concentration of credit risk relating to trade receivables. At March 31,
2000 and 1999, 69.7% and 70% of the Company's trade receivables relate
to tickets sold to individual passengers through the use of major credit
cards, travel agencies approved by the Airlines Reporting Corporation,
tickets sold by other airlines and used by passengers on Company
flights, or the United States Postal Service. These receivables are
short-term, generally being settled shortly after sale or in the month
following ticket usage.
(12) Commitments and Contingencies
The Company is party to legal proceedings and claims which arise during
the ordinary course of business. In the opinion of management, the
ultimate outcome of these matters will not have a material adverse
effect upon the Company's financial position or results of operations.
In March 2000, the Company entered into an agreement with AVSA, S.A.R.L.
to purchase 11 new Airbus aircraft, with options to purchase an
additional nine new Airbus aircraft. To the extent that the Company
exercises options to purchase the nine aircraft, they are replaced on a
one-for-one basis with additional options to purchase new Airbus
aircraft, up to a total of nine additional option aircraft. The 11 firm
aircraft are scheduled to be delivered in calendar years 2002 through
2004. The aggregate additional amounts due under this purchase
commitment and estimated amounts for buyer-furnished equipment and spare
parts for both the purchased and leased aircraft (see Note 13) was
approximately $347,000,000 at March 31, 2000. Under the terms of the
purchase agreement, the Company is required to make scheduled
pre-delivery payments. These payments are non-refundable with certain
exceptions. As of March 31, 2000, the Company has made pre-delivery
payments totaling $6,400,000 to secure these aircraft and option
aircraft. Pre-delivery payments due in fiscal year 2001 approximate
$5,000,000. After pre-delivery payments, the balance of the total
purchase price must be paid upon delivery of each aircraft. In order to
complete the purchase of these aircraft, it will be necessary for the
Company to secure financing. The amount of financing required will
depend on the number of aircraft purchase options exercised and the
amount of cash generated by operations prior to delivery of the
aircraft. At this time, the type of financing has not been determined.
F-23
<PAGE>
(13) Subsequent Events
During May 2000, the Company entered into an aircraft lease for a Boeing
737 aircraft with a lease term of approximately three years beginning in
June 2000.
During April 2000 and May 2000, the Company entered into aircraft leases
for 16 Airbus aircraft with lease terms of approximately 12 years.
Delivery dates begin in June 2001 and end in October 2004.
During April and May 2000, the Company entered into two leases for its
new general office and call center facilities, with lease terms of
approximately 10 and 12 years, respectively.
Total commitments under these noncancelable operating leases (excluding
maintenance deposit requirements) are approximately as follows:
Year ended March 31,
2001 $ 2,221,000
2002 8,434,000
2003 18,651,000
2004 31,064,000
2005 44,204,000
thereafter 479,891,000
------------------
$ 584,465,000
==================
F-24
<PAGE>
(14) Selected Quarterly Financial Data (Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
First Second Third Fourth
quarter (1) quarter (1) quarter (1) quarter
2000
Revenues $ 77,886,197 $ 85,453,265 $ 73,973,909 $ 92,506,584
================= ================= ================= =================
Operating expenses $ 66,120,957 $ 72,350,177 $ 69,964,227 $ 82,075,370
================= ================= ================= =================
Net income, before cumulative effect of
change in accounting principle $ 7,728,564 $ 8,752,522 $ 3,095,381 $ 6,883,777
Cumulative effect of change in method of
accounting for maintenance checks 549,009 - - -
----------------- ----------------- ----------------- -----------------
Net income $ 8,277,573 $ 8,752,522 $ 3,095,381 $ 6,883,777
================= ================= ================= =================
Earnings per share:
Basic:
Income before cumulative effect
of a change in accounting principle $ 0.47 $ 0.50 $ 0.18 $ 0.39
Cumulative effect of change in method
of accounting for maintenance checks 0.03 - - -
----------------- ----------------- ----------------- -----------------
Net income $ 0.50 $ 0.50 $ 0.18 $ 0.39
================= ================= ================= =================
Diluted:
Income before cumulative effect
of change in accounting principle $ 0.42 $ 0.46 $ 0.16 $ 0.36
Cumulative effect of change in method
of accounting for maintenance checks 0.03 - - -
----------------- ----------------- ----------------- -----------------
Net income $ 0.45 $ 0.46 $ 0.16 $ 0.36
================= ================= ================= =================
1999
Revenues $ 42,887,553 $ 56,852,913 $ 50,693,588 $ 70,173,656
================= ================= ================= =================
Operating expenses $ 42,462,864 $ 47,075,097 $ 48,450,574 $ 57,939,180
================= ================= ================= =================
Net Income $ 433,709 $ 9,869,558 $ 2,459,531 $ 17,803,262
================= ================= ================= =================
Earnings per share:
Basic $ 0.03 $ 0.71 $ 0.17 $ 1.01
================= ================= ================= =================
Diluted $ 0.03 $ 0.64 $ 0.15 $ 0.93
================= ================= ================= =================
</TABLE>
(1) Income before the cumulative effect of the change in the method of
accounting for maintenance checks for the first, second, and third
quarters of the year ended March 31, 2000 differs from the amount
previously reported on Form 10-Q by $112,161, ($261,358), and ($84,640),
respectively, because the change in method of accounting for maintenance
checks was applied retroactively to April 1, 1999 (Note 1).
F-25
