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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to______________________.
Commission File Number 0-27238
Western Pacific Airlines, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 86-0758778
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
2864 South Circle Drive, Suite 1100
Colorado Springs, Colorado 80906
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (719) 579-7737
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of August 1, 1997 there were 13,550,665 shares of Common Stock of the
registrant issued and outstanding.
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1
<PAGE>
WESTERN PACIFIC AIRLINES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page Number
Item 1. Financial Information
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations
Three Months and Six Months ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
Six Months ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
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<TABLE>
WESTERN PACIFIC AIRLINES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
<CAPTION>
JUNE 30, 1997 DEC. 31, 1996
------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS :
Cash and cash equivalents $ 6,320,049 $ 12,076,034
Restricted cash and cash equivalents 7,888,144 8,314,887
Accounts receivable, net of allowance for uncollectible accounts
of $625,000 and $347,000 at June 30, 1997 and December 31, 1996, respectively 3,021,897 3,217,450
Prepaid expenses and other 9,018,368 6,104,414
Prepaid maintenance 8,757,326 6,819,841
Aircraft maintenance and engine reserves 10,173,085 5,204,698
------------- -------------
Total Current Assets 45,178,869 41,737,324
PROPERTY AND EQUIPMENT, NET 42,000,985 41,702,859
PREPAID MAINTENANCE, net of current portion 9,396,965 7,983,560
MAINTENANCE RESERVES, net of current 7,347,113 7,495,345
AIRCRAFT AND ENGINE 23,219,022 21,308,588
RESTRICTED CASH AND CASH EQUIVALENTS 1,507,495 2,638,158
OTHER 184,033 180,855
------------- -------------
$ 128,834,482 $ 123,046,689
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES :
Accounts payable $ 14,241,613 11,637,006
Accrued expenses 22,038,652 21,947,117
Air traffic liability 27,218,283 15,617,460
Short term debt 8,752,527 10,455,985
Current portion of long-term debt 1,111,589 1,007,757
Other 220,037 82,590
------------- -------------
Total Current Liabilities 73,582,701 60,747,915
LONG-TERM DEBT, net of current portion 14,902,286 15,214,819
OTHER LIABILITIES 1,371,543 1,396,735
MINORITY INTEREST - 2,239,033
COMMITMENTS AND CONTINGENCIES
PREFERRED STOCK (See note 2) 23,399,520 -
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, no shares outstanding at June 30, 1997 and
December 31, 1996 - -
Common stock, $.001 par value, 13,527,977 and 13,381,894 issued and outstanding
at June 30, 1997 and December 31, 1996, respectively 13,615 13,387
Common stock to be issued - 800,411
Deferred compensation (816,667) (1,016,667)
Additional paid-in capital 82,361,941 80,265,823
Treasury stock, at cost - (84,902)
Warrants 10,273,896 -
Accumulated deficit (76,254,353) (36,529,865)
------------- -------------
Total stockholders' equity 15,578,432 43,448,187
------------- -------------
$ 128,834,482 $ 123,046,689
============= =============
See accompanying notes.
</TABLE>
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<TABLE>
WESTERN PACIFIC AIRLINES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
OPERATING REVENUES :
Passenger $ 42,450,646 $ 38,265,095 $ 76,773,195 $ 71,052,167
Other 1,487,076 1,048,547 2,981,609 1,967,078
------------- ------------- ------------- -------------
Total Operating Revenues 43,937,722 39,313,642 79,754,804 73,019,245
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Salaries, wages and benefits 10,012,733 7,260,083 19,855,065 14,201,260
Aircraft lease 10,767,127 9,114,763 20,647,464 16,871,833
Aircraft fuel and oil 8,259,102 6,804,195 17,424,294 12,676,821
Other rentals, landing and ground handling fees 5,516,550 4,117,919 10,722,206 8,356,576
Advertising 3,050,703 2,291,179 6,277,692 4,438,699
Insurance 1,455,913 1,240,203 2,826,901 3,018,892
Maintenance materials and repairs 7,178,649 2,166,612 13,047,290 4,041,225
Agency commissions 2,642,916 1,354,798 4,076,318 2,419,615
Depreciation and amortization 1,447,208 1,076,759 2,905,652 1,851,652
Other operating 12,137,340 3,869,824 18,751,351 8,299,682
------------- ------------- ------------- -------------
62,468,241 39,296,335 116,534,233 76,176,255
Total Operating Expenses ------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) (18,530,519) 17,307 (36,779,429) (3,157,010)
------------- ------------- ------------- -------------
INTEREST INCOME., NET OF EXPENSE (705,076) 503,626 (1,059,109) 1,234,729
------------- ------------- ------------- -------------
NET INCOME (LOSS )BEFORE MINORITY INTEREST (19,235,595) 520,933 (37,838,538) (1,922,281)
MINORITY INTEREST 1,566,696 - 2,355,295 -
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ (17,668,899) $ 520,933 $ (35,483,243) $ (1,922,281)
============= ============= ============= =============
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK $ (20,924,463) $ 520,933 $ (38,960,697) $ (1,922,281)
============= ============= ============= =============
INCOME (LOSS ) PER COMMON SHARE AND COMMON $ (1.56) $ 0.04 $ (2.90) $ (0.15)
SHARE EQUIVALENT ============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON SHARE EQUIVALENTS
OUTSTANDING 13,437,629 13,248,129 13,437,629 13,248,129
============= ============= ============= =============
See accompanying notes.
</TABLE>
4
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<TABLE>
WESTERN PACIFIC AIRLINES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<CAPTION>
1997 1996
---------------------- ----------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (35,483,243) $ (1,922,281)
Adjustments to reconcile net loss to net cash used for operations -
Depreciation and amortization 2,905,652 1,851,652
Gain on sales leaseback 18,471 (36,942)
Amortization of deferred management fee 200,000 200,000
Minority interest in loss of subsidiary (2,239,033) -
Decrease (increase) in accounts receivables 195,553 (1,351,047)
Increase in prepaid expenses and deposits (2,913,954) (5,829,245)
Increase in prepaid maintenance (4,966,033) -
Increase in aircraft and engine reserves (3,205,012) (3,933,673)
Decrease (increase) in restricted cash and cash equivalents 1,557,406 (3,711,339)
Increase in aircraft deposits (1,910,434) (3,033,605)
Increase in other assets (3,178) (144,031)
Increase in accounts payable 2,604,607 1,335,937
Increase (decrease) in accrued expenses 91,535 (2,018,579)
Increase in air traffic liability 11,600,823 6,940,264
Increase (decrease) in other liabilities 112,255 (1,849)
---------------------- ----------------------
Net cash used in operating activities (31,434,585) (11,654,738)
---------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,978,440) (25,639,419)
---------------------- ----------------------
Net cash flows used in investing activities (3,978,440) (25,639,419)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of preferred stock, net of conversion of short-term debt 18,399,520 -
Issuance of warrants 6,032,651 -
Issuance of short term debt, net of principal payments 3,296,542 -
Increase in long term debt, net of principal paymen (208,701) 16,441,856
Issuance costs related to initial public offering - (287,390)
Issuance of Common Stock 2,181,248 806,672
---------------------- ----------------------
Net cash flows from financing activities
29,701,260 16,961,138
---------------------- ----------------------
DECREASE IN CASH AND CASH EQUIVALENTS (5,711,765) (20,333,019)
CASH AND CASH EQUIVALENTS, beginning of period 12,076,034 49,966,697
---------------------- ----------------------
CASH AND CASH EQUIVALENTS, end of period (1)
$ 6,364,269 $ 29,633,678
====================== ======================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes - 80
====================== ======================
See accompanying notes.
</TABLE>
5
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WESTERN PACIFIC AIRLINES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Preparation of Financial Statements
The accompanying financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The organization and business of
Western Pacific Airlines, Inc. ("Western Pacific"), accounting policies followed
by Western Pacific, and other information are contained in the notes to Western
Pacific's audited financial statements filed as part of Western Pacific's
December 31, 1996 Annual Report on Form 10-K. This quarterly report should be
read in conjunction with such annual report. The results of operations for the
six months ended June 30, 1997 may not necessarily be indicative of the results
for the entire fiscal year ending December 31, 1997.
2. Preferred Stock and Warrants
Western Pacific has authorized the issuance of 200,000 shares of Series B
Convertible Preferred Stock, with a par value of $100, of which all 200,000
shares are issued and outstanding at June 30, 1997. Western Pacific has also
authorized the issuance of 10,000 shares of Series C Convertible Preferred Stock
with a stated value of $1,000 per share, of which all 10,000 shares are issued
and outstanding at June 30, 1997.
On June 5, 1997,Western Pacific completed a private placement with a group of
institutional investors (the "Private Placement") whereby Western Pacific sold
(i) 10,000 shares of its Series C Convertible Preferred Stock, par value $.0.001
per share (the "Series C Preferred"), (ii) warrants to purchase an aggregate of
213,333 shares of Western Pacific's Common Stock at an exercise price of $11.25
per share (the "A-Warrants"), and (iii) warrants to purchase an aggregate of
111,110 shares of Western Pacific's Common Stock at an exercise price of
$6.80625 per share (the "B-Warrants," and together with the Series C Preferred
and the A-Warrants, the "Securities"), for an aggregate price of $10 million. In
connection with the Private Placement, the Company issued an additional 256,198
B-Warrants and paid cash in the amount of $350,000 to GEM Investment Management,
Ltd. as a placement fee.
The Series C Preferred has a stated value of $1,000 per share, with a premium
amount accruing on such stated value at a rate of 8.0% per annum (the "Premium
Accrual"). The Series C Preferred is nonvoting and ranks pari passu with Western
Pacific's Series B Preferred Stock (the "Series B Preferred"). The Series C
Preferred is subject to voluntary conversion at the option of the holders during
its three-year term, and will automatically convert into Western Pacific Common
Stock on June 5, 2000. The conversion price will be the lower of (i) a fixed
price (the "Fixed Price") of $6.1875 (110% of the closing bid price of West
Pac's Common Stock on June 4, 1997), or (ii) an amount which initially equaled a
10.0% discount (declining over ten months to 20.0%) of the average of the
closing bid prices of Western Pacific Common Stock for the 20 consecutive
trading days preceding a notice of conversion.
The conversion price of the Series C Preferred is subject to possible upward and
downward performance adjustments. If, at the time of conversion, the closing bid
price of Western Pacific Common Stock has increased by more than 45.0% over the
original Fixed Price (the "Upward Adjustment Threshold"), the Fixed Price shall
automatically increase so that the holders of the Series C Preferred being
converted gives up 60.0% of the increase in value of Western Pacific Common
Stock over the Upward Adjustment Threshold. Following September 3, 1997, if at
any date the closing bid price of West Pac Common Stock falls below 50.0% of the
Fixed Price for a period of 20 consecutive trading days, the holders of a
majority in interest of the Series C Preferred may request, within three days of
such date, that Western Pacific reset the Fixed Price of the Series C Preferred
to equal such 20 day average. If West Pac declines the request to reset the
Fixed Price, then the annual Premium Accrual on the Series C Preferred will
increase from 8.0% to 11.0%, to be applied on a retroactive basis.
The Series C Preferred is subject to optional redemptions by Western Pacific,
and, upon the occurrence of certain events, must be redeemed by Western Pacific
at the amounts set forth in the Certificate of Designations. In addition, upon
certain redemptions, Western Pacific is obligated to deliver warrants to the
holders of the shares being redeemed providing for the issuance upon exercise of
a number of shares of Western Pacific Common Stock which otherwise would have
6
<PAGE>
been issued upon conversion of the Series C Preferred being redeemed. The
warrants shall be substantially in the form of the A-Warrants described below,
shall expire on June 5, 2000 and shall be exercisable for a price equal to the
Fixed Price at the time of issuance of the warrants (as adjusted, if necessary,
pursuant to the performance adjustment provisions described above). In addition,
at the option of two-thirds of the holders of Series C Preferred, the Series C
Preferred must be redeemed by Western Pacific for an amount equal to its
Liquidation Preference (without the issuance of any additional warrants) if
Robert Peiser ceases to be employed as Western Pacific's Chief Executive Officer
at any time prior to May 31, 1998.
The parties mutually agreed that if Western Pacific redeems one series of
preferred stock due to certain mandatory or optional redemption provisions and a
similar provision does not apply to the other series of preferred stock, the
holders of the other series of preferred stock will, under certain
circumstances, be entitled to participate in such redemption.
The A-Warrants are convertible into shares of Western Pacific Common Stock at a
price of $11.25 per share (subject to certain adjustments), and expire on June
5, 2002. The B-Warrants are convertible into shares of Western Pacific Common
Stock at a price of $6.8025 per share (subject to certain adjustments), and
expire on June 5, 2000. The exercise price of the B-Warrants is subject to an
upward performance adjustment providing that if at the time of exercise the
closing bid price of Western Pacific Common Stock has increased by more than
45.0% over $6.8025 (the "Warrant Threshold Level"), the exercise price shall
automatically increase so that the holder of the B-Warrant being exercised gives
up 60.0% of the increase in value of Western Pacific Common Stock over the
Warrant Threshold Level.
The $10 million in gross proceeds received by Western Pacific has been allocated
between the Series C and the warrants based on the respective fair values of
each instrument, or approximately $7.4 million for the Series C Preferred Stock
and approximately $1.6 million for the warrants. In addition, $1.0 million was
allocated to paid in capital as a result of a minimum discount of 10% from the
market price of the Company's Common Stock available to the purchasers upon
conversion of the Series C Preferred into Common Stock. The initial carrying
amount of the Series C was increased by the accretion of $2.6 million ($1.6
million related to the warrants and $1.0 million related to the fixed discount
upon conversion) so that the carrying amount was equal to the redemption amount
($10.0 million) at the first possible conversion date which was the date of
issuance of the Series C Preferred.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN THIS DOCUMENT CONTAIN "FORWARD LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. SUCH FORWARD LOOKING STATEMENTS ARE SUBJECT TO KNOWN AND UNKNOWN RISKS
AND UNCERTAINTIES. WESTERN PACIFIC'S ACTUAL ACTIONS OR RESULTS MAY DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD LOOKING STATEMENTS. SPECIFIC
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
AVAILABILITY OF ADEQUATE WORKING CAPITAL, COMPETITIVE REACTION TO WESTERN
PACIFIC'S EXPANSION PLANS, RISE IN FUEL COSTS, REGULATORY ACTIONS BY THE
DEPARTMENT OF TRANSPORTATION OR THE FEDERAL AVIATION ADMINISTRATION, FUTURE
INCIDENTS SIMILAR TO THE GULF WAR, FUTURE AIRLINE ACCIDENTS (PARTICULARLY IF
INVOLVING A LOW COST CARRIER), ABILITY TO EFFECTIVELY INTEGRATE WESTERN PACIFIC
AND FRONTIER INTO A COMBINED CARRIER AND GENERAL ECONOMIC CONDITIONS IN THE
UNITED STATES. SEE ADDITIONAL DISCUSSION UNDER "RISK FACTORS."
OVERVIEW
Western Pacific commenced operations on April 12, 1994 as a development
stage enterprise organized to operate a low-fare, medium-haul, scheduled
passenger airline from its hub at the Colorado Springs Airport. From its
inception until it commenced flight operations on April 28, 1995, Western
Pacific's activities were limited to start-up activities including raising
capital, recruiting key operating personnel, developing computerized passenger
reservation and information systems, negotiating aircraft facilities and
aircraft leases, contracting ground handling and aircraft maintenance services,
conducting pilot and flight attendant training and obtaining FAA certification.
Western Pacific began flight operations on April 28, 1995 with two Boeing
737-300 aircraft and provided six daily round-trips between Colorado Springs and
five cities. Thereafter, Western Pacific continued to add aircraft and cities
and on June 29, 1997, moved a significant portion of its operation to Denver
International Airport ("DIA"). Western Pacific had 19 aircraft providing up to
48 round-trips between Denver or Colorado Springs and 18 cities across the
United States at August 1, 1997.
On June 30, 1997, Western Pacific entered into a definitive agreement and
plan of merger with Frontier Airlines, Inc. ("Frontier"), pursuant to which
Frontier will merge with and into the Company, with Western Pacific being the
surviving corporation in the merger. It is intended that the merger will
constitute a tax free reorganization for federal income tax purposes. Also, on
June 30, 1997, Western Pacific and Frontier entered into a Codeshare Agreement,
which became effective on August 1, 1997. Pursuant to the terms and conditions
of the merger agreement, at the effective time of the merger, subject to certain
adjustments and certain circumstances, Frontier shareholders will receive .75
shares of common stock of Western Pacific for each share of Frontier.
Consummation of the merger is subject to the satisfaction of certain conditions,
including, among others, approval by the shareholders of both Western Pacific
and Frontier of the merger and certain regulatory approvals. The merger is
anticipated to close in late October or November 1997.
The following chart indicates Western Pacific's changes in service since
December 31, 1996.
WESTERN PACIFIC AIRLINES, INC.
Total Number
Number of Round
As of Month End of Aircraft Trips Service Changes
--------------- ----------- ----- ---------------
February 1997............. 15 37 Added additional service to
all cities except Houston,
Miami, and Seattle, and
withdrew service from
Ontario(CA), San Antonio,
Nashville, and Las Vegas
April 1997................ 15 33 Withdrew service from Miami
May 1997.................. 16 33
June 1997................. 18 40 Moved the bulk of flight
operations from Colorado
Springs to Denver
International Airport
July 1997................. 19 40
August 1997............... 19 48 Began codesharing service
with Frontier
8
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Western Pacific anticipates delivery of one additional used 737-300 aircraft
in November 1997 and one new 737-300 aircraft in December 1997. On February 6,
1997 Western Pacific initiated a major schedule change whereby available seat
miles ("ASMs") were increased by 21% and average hours of daily aircraft
utilization were increased by 19% by scheduling overnight flights, and reducing
connection times. On June 29, 1997, the Company initiated another major schedule
change, increasing ASM's by 32.7% and moving the bulk of the Company's
operations to Denver International Airport.
During 1996, Western Pacific assisted in the start-up of an affiliated regional
carrier, Mountain Air Express ("MAX") to carry traffic into and out of Colorado
ski markets and other smaller travel markets that cannot support frequent jet
service. MAX, which commenced flight operations on December 15, 1996, is a
separate operating company with its own operating certificate and management.
Western Pacific's present ownership in MAX is approximately 57% of the voting
stock. MAX also moved the bulk of its operations to DIA, effective June 29,
1997, when MAX began offering up to 27 flights per day from DIA and one daily
flight from Colorado Springs.
The following chart indicates MAX's routes served since it commenced flight
operations on December 15, 1996.
MOUNTAIN AIR EXPRESS, INC.
Total Number
Number of Round
As of Month End of Aircraft Trips Service Changes
--------------- ----------- ----- ---------------
December 1996 4 up to 23 Initiated service to Steamboat
Springs/Hayden, Aspen/Snowmass,
Crested Butte/Gunnison, and
Telluride/Montrose, Colorado
January 1997 4 up to 23 Added service to Durango, Colorado
April 1997 4 19 Added service to Casper & Cheyenne,
Wyoming; Grand Junction and Fort
Collins, Colorado; Oklahoma City and
Tulsa, Oklahoma; Sante Fe,
New Mexico; and Kansas City,
Missouri; withdrew service from
Steamboat Springs/Hayden, Telluride/
Montrose, and Durango,Colorado.
June 1997 4 28 Initiated service to Albuquerque;
Discontinued service to Cheyenne and
Casper, Wyoming; and Ft. Collins,
Colorado and Sante Fe, New Mexico;
Added service to other existing
markets.
August 1997 5 28 Initiated service to Salt Lake City,
Utah.
In November 1996, Colorado Springs Car Rental, Inc., a Thrifty Rent-A-Car
franchisee and a 100% owned subsidiary of Western Pacific, commenced operations
from its base in Colorado Springs.
RESULTS OF OPERATIONS
Operating Revenues
WESTERN PACIFIC AIRLINES
Airline revenue is primarily a function of the number of passengers flown
and the fares charged by the airline. Passenger ticket sales are recognized as
revenue when the transportation is provided. Western Pacific's fares are
generally non-refundable. Prior to completing the total conversion of Western
Pacific's reservations to a computerized reservation system ("CRS") on April 25,
1997, changes in travel plans could be made only prior to scheduled departure
for a $50 change fee, plus any fare increase. After the change to the CRS,
tickets not used remain a liability of the airline, until used to pay for other
flights or until the ticket expires, generally after one year.
During the fourth quarter of 1996, Robert A. Peiser joined Western Pacific
as President and Chief Executive Officer, Mark J. Coleman as Senior
Vice-President of Marketing and Planning, and George E. Leonard as
Vice-President of Finance and Chief Financial Officer. Under this new management
team, Western Pacific began the first quarter of 1997 with a large increase in
9
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capacity and very low levels of advanced bookings. There were substantial
traffic improvements during the last two weeks of March, but the full impact of
the new marketing initiatives implemented by the new management team were not
felt until April. Western Pacific's load factor increased 8.2 percentage points,
when comparing the quarter ended June 30, 1997 to the quarter ended June 30,
1996, due to its entry into the CRS along with advertising initiatives put into
place by the new management team, including "Peak Paks", "Pack USA's", and a
promotion with King Soopers, a Colorado grocery store chain, and increased
frequencies to increase connecting opportunities.
The chart presented below compares Western Pacific's passenger load factor
to the incremental growth in capacity as measured by available seat miles (ASM)
for the quarters of 1997 and 1996, commencing from the quarter ended June 30,
1996. The airline industry is extremely seasonal, with the highest load factors
typically occurring in the summer months, and the lowest load factors occurring
during September through October and January, February, April and May. Western
Pacific's load factor increased 16.0 percentage points for the quarter ended
June 30, 1997 from the quarter ended March 31, 1997, primarily due to
seasonality, its entry into the CRS, and the advertising initiatives previously
noted.
Passenger Total Increase/
Load Available (Decrease)
Operating Period Factor Seat Miles In Capacity
- ---------------- ------ ---------- ----------
(000s)
Quarter ended June 30,1996 56.5% 622,519 ---%
Quarter ended September 30, 1996 57.5 745,821 19.8
Quarter ended December 31, 1996 60.1 673,607 (9.7)
Quarter ended March 31, 1997 48.7 758,592 12.6
Quarter ended June 30, 1997 64.7 763,118 .6
Passenger revenue per revenue passenger mile (RPM) or yield may increase in the
third quarter of 1997 due to a combination of factors, including increases in
average fares and decreases in discounted introductory fares as a percentage of
total fares. However, in periods when Western Pacific introduces promotional
fares to stimulate additional travel in existing markets, Western Pacific
generally experiences a decrease in passenger revenue per RPM as is reflected in
the decline in the passenger revenue per RPM during the second quarter of 1997
when Western Pacific introduced "Peak Pacs", "Pack USAs", travel agents' "Love A
Fares", and the promotion with King Soopers. As noted previously, new management
joined Western Pacific in the fourth quarter of 1996. At December 31, 1996,
there were very low levels of advance bookings for the first two quarters of
1997. The management of Western Pacific determined, therefore, that promotional
fares were needed to stimulate the market. Western Pacific believes that the
short-term negative impact on yields of entering new markets and the use of
discounted fares should decrease as Western Pacific increases its overall
revenue base, customer awareness and expands into the Denver market. For the
quarter ended June 30, 1997, Western Pacific produced a yield of 8.27(cent)
which is a 3.9% decrease from that experienced for the prior quarter. Western
Pacific's yield during the quarter ended June 30, 1997 was 22.0% below the yield
experienced during the second quarter of 1996 for the reasons described above.
10
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Revenue Average Passenger
Passenger Passenger Segment Revenue
Operating Period Revenue Miles Fare Per RPM
- ---------------- ------- ----- ---- -------
(000's) (000's) (cents)
Quarter ended June 30, 1996 38,265 351,547 $ 91.89 10.60
Quarter ended September 30, 1996 44,375 428,509 90.98 10.36
Quarter ended December 31, 1996 33,909 404,689 74.37 8.38
Quarter ended March 31, 1997 32,045 369,557 77.54 8.61
Quarter ended June 30, 1997 40,594 493,465 76.39 8.27
Western Pacific's operating break-even load factor during the twenty-six
months of its operations has ranged from a high of 104.8% in May 1995 to 56.4%
for the quarter ended June 30, 1996. For the quarter ended June 30, 1997, the
operating break-even load factor was 88.4%. Western Pacific's cost per ASM for
the second quarter of 1997 was 7.55(cent) including one time expenses primarily
related to the move to DIA. Without these one time charges, Western Pacific's
cost per ASM for the quarter ended June 30, 1997 was 7.09(cent). This cost,
without the one time charges, represents an increase of .97(cent) or 14.7% from
the prior quarter resulting from the fees associated with Western Pacific's
entry into the Sabre Computerized Reservation Systems ("CRS"), and the expense
associated with reaccomodations of passengers related to an unusually heavy
spring snowstorm which hit Colorado Springs on April 24, 1997. It is anticipated
that the higher costs associated with the CRS systems will be more than offset
by increased revenue, particularly when the full effect of Western Pacific's
move to DIA is considered. The cost per ASM for the quarter ended June 30, 1997
was a 12.4% increase, after one time charges, compared to the second quarter
ended June 30, 1996 for the reasons noted previously, as well as heavier
maintenance expense on Western Pacific's aircraft due to the shorter maintenance
cycles caused by Western Pacific's increased aircraft utilization and more
aircraft having been through "C" check. The operating break even load factor
increased by 14.6 percentage points from the prior quarter based on higher costs
as well as the reduction in yield quarter over quarter as explained above. There
can be no assurance that any incremental passenger revenue generated in the
future as Western Pacific expands its fleet will be sufficient to cover
incremental costs or that, ultimately, as a result of these or other factors,
Western Pacific's operating break-even load factor will decrease.
Operating
Operating Break-Even
Operating Period Cost Per ASM Load Factor
---------------- ------------ -----------
(cents)
Quarter ended June 30, 1996............. 6.31 56.4%
Quarter ended September 30, 1996........ 6.23 58.7
Quarter ended December 31, 1996......... 8.28 96.2
Quarter ended March 31, 1997............ 6.58 73.8
Quarter ended June 30, 1997............. 7.55 88.4
MOUNTAIN AIR EXPRESS
Mountain Air Express commenced flight operations on December 15, 1996. The
determination of MAX's revenues is currently governed by an Alliance Agreement
between MAX and Western Pacific and the number of passengers flown. Under the
Alliance Agreement, all of MAX's marketing, scheduling, and pricing decisions
are made by Western Pacific. In return, MAX receives an agreed amount from
Western Pacific, ranging from $86.54 to $126.17 for the quarter ended June 30,
1997, for each passenger segment flown. The agreed amount may be renegotiated by
MAX in the event of certain occurrences, such as decreases in load factors or
increases in fuel prices. MAX also expects its revenue to be seasonal, with
higher load factors in the winter and summer, and reduced load factors in the
spring and fall.
11
<PAGE>
<TABLE>
Total Passenger Operating
Passenger Available Revenue Break-Even
Operating Period Load Factor Seat Miles Per RPM Load Factor
- ---------------- ----------- ---------- ------- -----------
<S> <C> <C> <C> <C>
(000s) (cents)
Dec. 15 - Dec. 31, 1996................ 44.4% 1,250 43.39 674.0%
Quarter ended March 31, 1997........... 28.3 12,215 65.84 50.4
Quarter ended June 30, 1997............ 23.8 21,481 25.43 89.2
</TABLE>
The decrease in load factor for the quarter ended June 30, 1997 from the quarter
ended March 31, 1997 is due primarily to seasonality and additional new cities
which were added to the schedule and later dropped as the markets did not prove
to be successful. The decrease in the passenger revenue per RPM or yield for the
quarter ended June 30, 1997 from the prior quarter can be attributed to
adjustments made to the agreed amounts by Western Pacific in the first quarter
of 1997. The increase in the operating break-even load factor percentage is due
to the decrease in yield.
Operating Expenses
WESTERN PACIFIC AIRLINES
The following table shows the components of operating cost per available
seat mile (shown in cents):
<TABLE>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1997 June 30,1996 June 30, 1997 June 30,1996
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
(cents) (cents) (cents) (cents)
Salaries, wages and benefits 1.13 1.16 1.13 1.20
Aircraft lease expense 1.29 1.46 1.26 1.42
Aircraft fuel and oil 1.03 1.09 1.09 1.07
Other rentals, landing, and ground handling fees .68 .66 .65 .70
Advertising and public relations .16 .37 .29 .37
Insurance expense .16 .20 .15 .25
Maintenance materials and repairs .79 .35 .77 .34
Agency and cargo commissions .35 .22 .27 .20
Depreciation and amortization .18 .17 .18 .16
Other operating expenses 1.32 .62 1.05 .70
---- --- ---- ---
Total 7.09 6.31 6.84 6.41
==== ==== ==== ====
</TABLE>
All costs shown above for the second quarter of 1997 and six months ended
June 30, 1997 have been adjusted for the $3.4 million in non-recurring charges
and start-up costs related to DIA.
Salaries, wages and benefits decreased by .03 cents per ASM or 3% when
comparing the quarter ended June 30, 1997 to the quarter ended June 30, 1996.
This decrease can be attributed to a 23% increase in ASMs, with only a 16.8%
increase in full-time equivalent (FTE) personnel. Salary, wages, and benefits
decreased by .07 cents or 6% when comparing the six months ended June 30, 1997
to the six months ended June 30, 1996 due to 28% increase in ASMs, with only a
21.0% increase in FTE personnel.
Aircraft lease expense decreased .17 cents per ASM, or 12% for the quarter
ended June 30, 1997 from the quarter ended June 30, 1996. Aircraft lease expense
decreased .16 cents or 11% for the six months ended June 30, 1997 from the six
months ended June 30, 1996. At June 30, 1996, the Company leased two 727-200's
for the summer travel period only. The lease rates for these aircraft were
inclusive of crew, insurance and fuel. At June 30, 1996, Western Pacific had 16
leased aircraft (including the two mentioned above), while at June 30, 1997,
Western Pacific had 17 leased aircraft, and one owned aircraft whose costs are
accounted for in depreciation expense. However, three of the eighteen aircraft
were added in the second quarter of 1997 with two delivered in late June 1997.
The increase in the number of ASMs for the quarter ended June 30, 1997 from the
quarter ended June 30, 1996 is due primarily to the increased utilization of the
existing aircraft.
Aircraft fuel and oil expense decreased by .06 cents per ASM or 6% when
comparing the quarter ended June 30, 1997 to the quarter ended June 30, 1996.
This decrease reflects the effect of a 4.2 cent per gallon or 6% fuel price
12
<PAGE>
increase over the period. Aircraft fuel and oil expense increased by .02 cents
per ASM or 2% when comparing the six months ended June 30, 1997 to the six
months ended June 30, 1996. This increase in expense is due to an average fuel
price 3.0 cents per gallon higher over the period. Western Pacific has entered
into a fuel hedging agreement with Mercury Aviation Services, whereby the first
10,000 barrels of fuel used in each of the months of October 1997 to March 1998
will be at a fixed price of 62.64(cent)per gallon before taxes and into plane
fees, or 79.96(cent) after taxes and fees.
Other rentals, landing, airport and ground handling fees increased by .02
cents per ASM or 3% when comparing the quarter ended June 30, 1997 to the
quarter ended June 30, 1996. This increase was because of increased flight
simulator time rental due to increased hiring of pilots required by the higher
utilization schedule and planned aircraft deliveries, and increased ground
handling rates at certain airports. Other rentals, landing, airport, and ground
handling fees decreased by .05 cents per ASM or 7% when comparing the six months
ended June 30, 1997 to the six months ended June 30, 1996 due to fixed costs
such as station rents which do not increase proportionately with ASMs as
additional flights are added.
Advertising expense decreased by .21 cents per ASM or 57% when comparing
the quarter ended June 30, 1997 to the quarter ended June 30, 1996, after
deduction of $1.8 million in launch advertising expense related to the
commencement of Western Pacific's operations at DIA. Without the elimination of
the DIA launch advertising, advertising expense increased .04 cents or 10%. This
increase is due to the high number of promotional fares advertised in the second
quarter of 1997 such as "Pack USA", as well as the roll-out of the advertising
for the Denver market. Advertising expense decreased by .08 cents per ASM or 22%
when comparing the six months ended June 30, 1997 to the six months ended June
30, 1996 due to promotions offered in conjunction with the introduction of four
new cities to Western Pacific's route system in 1996.
Insurance expense decreased by .04 cents per ASM or 25% when comparing the
quarter ended June 30, 1997 to the quarter ended June 30, 1996, and .10 cents
per ASM or 40% when comparing the six months ended June 30, 1997 to the six
months ended June 30, 1996. These decreases reflect a premium reduction obtained
by Western Pacific due to fewer aircraft in service than originally projected
for the policy year.
Maintenance materials and repairs expense increased by .44 cents per ASM or
126% when comparing the quarter ended June 30, 1997 to the quarter ended June
30, 1996 and .43 cents per ASM or 126% when comparing the six months ended June
30, 1997 to the six months ended June 30, 1996. These increases reflect the
amortization of airframe "C" maintenance checks and engine overhauls performed
on Western Pacific's fleet, as well as a shorter maintenance cycle due to
Western Pacific's increased aircraft utilization. Western Pacific uses the
deferral method of accounting for "C" check maintenance and engine overhaul
costs.
Agency and cargo commissions increased .13 cents per ASM or 59% when
comparing the quarter ended June 30, 1997 to the quarter ended June 30, 1996 and
.07 cents per ASM or 35% when comparing the six months ended June 30, 1997 to
the six months ended June 30, 1996. As anticipated, agency and cargo commissions
increased as a percentage of total expenses, as Western Pacific entered into
agreements with several of the industry's CRS systems in March of 1997 so that
seats on Western Pacific's flights could be booked directly by a travel agent
without the need to telephone Western Pacific's reservation office. These
agreements have given Western Pacific's flights increased exposure to travel
agents, who now account for 60% of Western Pacific's flight booking activity.
Depreciation and amortization increased by .01 cents per ASM or 6% when
comparing the quarter ended June 30, 1997 to the quarter ended June 30, 1996 and
.02 cents per ASM or 13% when comparing the six months ended June 30, 1997 to
the six months ended June 30, 1996. The increase can be attributed to Western
Pacific's maintenance hangar and new concourse at Colorado Springs Airport.
Other operating expenses increased by .70 cents per ASM or 113% when
comparing the quarter ended June 30, 1997 to the quarter ended June 30, 1996 and
.35 cents per ASM or 50% when comparing the six months ended June 30, 1997 to
the six months ended June 30, 1996. Excluded from this calculation were one time
charges related to the commencement of operations at DIA, new uniforms, and the
write-off of deposits made on trams originally intended to be used at the new
concourse at Colorado Springs of $803,000. Other operating expenses include
property taxes, telecommunication and utilities charges, professional and
consulting services, supplies and minor equipment (excluding aircraft
maintenance supplies), credit card processing fees, bad debt expense, travel and
incidental expense, and passenger reaccommodation and baggage delivery charges.
13
<PAGE>
While some of these types of costs, such as credit card processing fees and bad
debt expense will vary with the increase in ASM's, others such as supplies will
not. Significant increases or new charges in this category for the quarter ended
June 30, 1997 from the quarter ended June 30, 1996 include $1.1 million for CRS
fees; $1.2 million for reservation overflow capacity, temporary reservation
agents, and reservation consultants; $1.1 million in fees for the outsourced
Information Technology functions; $.7 million in reaccommodation charges related
to Western Pacific's schedule changes and operational performance; and $.2
million in payments to an outside revenue accounting (ticket) processor. The CRS
fees and the expenses of processing revenue are additional distribution costs
related to Western Pacific's move into the SABRE multi-host reservation system,
which are offset by the additional revenue generated as a result of a wider
distribution system. The fees paid for temporary reservation agents, overflow
capacity and consultants are expected to decrease as Western Pacific increases
its reservation capacity. The fees paid to reaccommodate passengers may increase
in the third quarter as Western Pacific adjusts to its August 1 code sharing
schedule, but are expected to decrease for the fourth quarter as Western Pacific
adjusts to its new flight schedule.
MOUNTAIN AIR EXPRESS
The following table shows the components of operating cost per available
seat mile (shown in cents):
Three months Three months
ended ended
June 30, 1997 Mar. 31, 1997
------------- -------------
(cents) (cents)
Salaries, wages and benefits 6.62 10.03
Aircraft lease expense 4.21 4.87
Aircraft fuel and oil 1.97 3.45
Other rentals, landing, and ground handling 1.55 4.09
fees
Advertising and public relations .00 .01
Insurance expense 1.19 1.82
Maintenance materials and repairs 2.93 1.42
Depreciation and amortization .27 .30
Other operating expenses 3.94 7.19
Total 22.68 33.18
The decrease in the cost per ASM for the quarter ended June 30, 1997 can be
attributed to the 76% increase in ASM's from the prior quarter.
BALANCE SHEET FLUCTUATION ANALYSIS (CONSOLIDATED)
Western Pacific's prepaid expenses and other current assets account
increased by $2.9 million or 48% during the six months ended June 30, 1997.
Approximately $1.0 million of this increase is prepaid travel agency
commissions, $.7 million in deferred loan fees, $.4 million in additional
prepaid insurance, $.4 million is prepaid CRS fees, and $.2 million related to
costs relating to the merger with Frontier.
Western Pacific's current and long-term prepaid maintenance accounts
increased by $3.4 million or 23% during the six months ended June 30, 1997,
while maintenance reserves increased by $4.8 million or 38% during the same time
period. Western Pacific follows the deferral method of accounting for
maintenance events, whereby costs for "C" checks on Western Pacific's fleet of
aircraft are capitalized when the event occurs and amortized over the period
until the next scheduled maintenance event.
Western Pacific's air traffic liability account increased by $11.6 million
or 74% during the six months ended June 30, 1997. This increase resulted
primarily from an increase in the number of bookings due to seasonality, the
move into DIA at June 29, 1997, and various special promotions offered by
Western Pacific.
LIQUIDITY AND CAPITAL RESOURCES
WESTERN PACIFIC
From Western Pacific's inception on April 12, 1994 through June 30, 1997,
its preoperating and development costs, as well as its operating costs since it
commenced flight operations, have been funded primarily with the proceeds from
14
<PAGE>
private sales of its equity securities, the proceeds from its initial public
offering, and the issuance of debt, as well as from operating revenues. Western
Pacific has received net proceeds from the sale of its equity securities
aggregating approximately $76.8 million. During the six months ended June 30,
1997, Western Pacific's operating activities resulted in a cash flow deficit of
$31.6 million. These cash flow deficits have been funded primarily with the
proceeds from the issuance of Western Pacific's equity securities as discussed
in Notes to Consolidated Financial Statements. At June 30, 1997, Western Pacific
had cash and cash equivalents of $14.2 million, including restricted cash and
cash equivalents of $7.9 million. Western Pacific had a working capital deficit
at June 30, 1997 of $28.4 million.
Cash flow used in investing activities totaled $4.0 million during the six
months ended June 30, 1997 and $25.6 million for the six months ended June 30,
1996. Capital expenditures in the first six months of 1997 consisted of aircraft
improvements and miscellaneous equipment. Capital expenditures in the first six
months of 1996 consisted primarily of the purchase of a used Boeing 737-300
aircraft.
Western Pacific expects to incur approximately $1.6 million for capital
expenditures during 1997 and 1998 for aircraft modifications, including Heads Up
Display and Wind Shear avoidance systems, aircraft fleet induction costs,
reservation and information system improvements and facility leasehold
improvements. An additional $.5 million in payments will be made to The Boeing
Company for interest payments on deferred pre-delivery payments on new aircraft
that have not yet been delivered. In addition, Western Pacific is required to
post a cash deposit or other type of financial bond of up to $3.0 million to
secure gates, ramp, and office space at DIA at the rate of $.25 million every
other month beginning in July 1997.
The State of Colorado General Assembly recently amended certain portions of
the state economic development law. The amendments concern the circumstances
under which proceeds of the aviation tax levied at airports in Colorado may be
used for economic development purposes. The amendments were designed to assist
airlines in expanding their intrastate and regional service. In connection with
those amendments, the General Assembly also appropriated up to $5.5 million in
aviation fuel tax dollars for economic development purposes during the fiscal
year beginning July 1, 1997. Such amounts are available to the to Colorado
Economic Development Commission to promote economic development associated with
aviation in Colorado. The Colorado Economic Development Commission solicited
proposals from airports across the state for the use of such funds for economic
development purposes. The City and County of Denver, Colorado, applied to the
Colorado Economic Development Commission to use up to $5.5 million of aviation
fuel tax dollars, to the extent collected at DIA, for the purpose of providing a
loan guarantee fund for the benefit of Western Pacific. No other city submitted
an application to the Colorado Economic Development Commission for participation
in the program. This application has been approved in its current form, and will
allocate up to $5.5 million in fuel tax proceeds (or such lesser amount as shall
be actually collected at DIA during the fiscal year beginning July 1, 1997) into
a fund to be used for the purpose of providing a loan guarantee for the benefit
of Western Pacific. Western Pacific has had preliminary discussions with
potential lenders, but no definitive commitment has been issued by any lender
for the benefit of Western Pacific. No assurance exists that any loan will be
made to Western Pacific.
At August 1, 1997, Western Pacific operated nineteen aircraft, with eighteen
under operating leases with original terms of either five or ten years. Rent
expense under these leases is recognized on a straight-line basis over their
respective lease terms. The amount charged to aircraft lease expense was
approximately $20.6 million and $16.9 million for the six months ended June 30,
1997 and 1996, respectively. Future minimum rental payments under these eighteen
operating leases over their respective remaining terms, are approximately $399.6
million, of which $25.0 million will be paid during the remainder of 1997.
During 1997, Western Pacific expects to incur approximately $33.5 million for
aircraft maintenance reserve deposits, aircraft lease security deposits and
aircraft heavy maintenance (net of reserves and lessor contributions).
Additionally, Western Pacific owns one aircraft, with minimum principal and
interest payments of $2.6 million due during 1997.
Cash flow provided by financing activities totaled $29.7 million and $17.0
million during the six months ended June 30, 1997 and 1996, respectively. On
June 5, 1997,Western Pacific completed a private placement with a group of
institutional investors (the "Private Placement") whereby Western Pacific sold
(i) 10,000 shares of its Series C Convertible Preferred Stock, par value $.0.001
per share (the "Series C Preferred"), (ii) warrants to purchase an aggregate of
213,333 shares of Western Pacific's Common Stock at an exercise price of $11.25
per share (the "A-Warrants"), and (iii) warrants to purchase an aggregate of
111,110 shares of Western Pacific's Common Stock at an exercise price of
$6.80625 per share (the "B-Warrants," and together with the Series C Preferred
15
<PAGE>
and the A-Warrants, the "Securities"), for an aggregate purchase price of $10
million. In addition, in connection with the Private Placement Western Pacific
issued an additional 256,198 B-Warrants and paid cash in the amount of $350,000
to GEM Investment Management, Ltd. as a placement fee. See additional discussion
under notes to Consolidated Financial Statements.
On April 25, 1997, Western Pacific entered into a revised Aviation Fuel
Management Agreement (the "Fuel Management Agreement") with Mercury Air Group,
Inc. ("Mercury"), whereby Mercury has agreed to provide certain fuel supply
services to Western Pacific. Western Pacific also executed a promissory note in
favor of Compass Bank in the principal sum of $6.0 million (the "Compass Note").
The Compass Note provides that Western Pacific may borrow funds from Compass
Bank in order to pay amounts due and owing under the Fuel Management Agreement.
Payment of all amounts due and owing from Western Pacific to Compass Bank under
the Compass note is guaranteed by Mercury. In consideration of Mercury's
entering into the Fuel Management Agreement and its agreement to guarantee the
obligations of Western Pacific arising pursuant to the Compass Note, on April
25, 1997 Western Pacific issued warrants to Mercury to purchase 200,000 shares
of Western Pacific's Common Stock (the "Mercury Warrants") at an exercise price
of $6.875 per share. The Mercury Warrants become exercisable upon issuance and
expire on April 25, 2000. With respect to Mercury Warrants that remain
unexercised on July 28, 1998, Western Pacific may become obligated to issue
additional shares of Common Stock to Mercury (or to make cash payments to
Mercury) to the extent that the highest average trading price of Western
Pacific's Common Stock (as reported on Nasdaq during any 20 consecutive trading
days during the three month period ending July 28, 1998) does not meet at least
a 20% target return level, as set forth in the Mercury Warrants. Western Pacific
drew down $3.7 million on this credit line on April 28, 1997, and the remaining
$2.3 million available during the month of May 1997.
Western Pacific is actively seeking arrangements that will allow it to
increase its liquidity. Western Pacific has taken certain short term measures to
conserve its cash resources. Western Pacific has contracted to outsource its
Information Technology function to Perot Systems Corporation. This transaction
allows Western Pacific to issue common stock in lieu of cash for certain of the
required monthly service fees. Western Pacific is also working with the City of
Colorado Springs to issue Special Facility Bonds to repay Western Pacific for
the costs of construction of the new concourse at Colorado Springs Airport.
There can be no assurance that these bonds will actually be sold, nor at what
price. Western Pacific continues to seek other methods of raising additional
capital, including the sale and leaseback of its one owned aircraft and
additional equity or debt offerings. Although management believes that Western
Pacific will be able to secure such additional capital, if Western Pacific is
unable to do so, cash flow from operations might not be sufficient to cover
Western Pacific's financial obligations during the next twelve months.
MOUNTAIN AIR EXPRESS
At June 30, 1997, MAX was in a cash overdraft position totaling $.1 million
and had a working capital deficit of $2.4 million. MAX raised $4.2 million from
the private sale of its preferred stock during 1996, including $.1 million from
Western Pacific. MAX's loss from operations for the six months ended June 30,
1997 totaled $5.4 million, and $3.3 million for the period from inception
through December 31, 1996. This loss was funded by MAX's sale of equity
securities and a loan from Western Pacific of $2.1 million. Western Pacific
provided MAX with a $1.5 million letter of credit prior to MAX's commencement of
flight operations, which MAX has drawn down completely.
MAX incurred $1.1 million in investing activities, primarily for the
purchase of property and equipment, and aircraft acquisition since inception.
These activities were financed by the proceeds of the sale of equity securities
and a loan from Western Pacific. MAX expects to incur approximately $4.0 million
for investing activities in 1997: $3.3 million for aircraft acquisition and
lease payments on current aircraft, and $0.7 million for capital expenditures.
MAX expects to finance these payments through cash flow from operations, third
party financings, and the sale of equity securities. Western Pacific has no
further commitment to MAX to provide any future financing or capital. MAX may
renegotiate the agreed amount it is receiving per segment from Western Pacific
on a quarterly basis if certain events occur, such as increases in the price of
fuel or shortfalls in MAX's load factor from its plan. Western Pacific is
currently using MAX to supplement service on some of its shorter haul routes
such as Tulsa, Oklahoma City, and Kansas City, bringing additional revenue to
MAX, and freeing Western Pacific's aircraft to add service in higher yield
markets.
16
<PAGE>
RISK FACTORS
The following issues and uncertainties, among others, should be considered in
evaluating Western Pacific's future performance.
History of Operating Losses, Availability of Working Capital and Future
Financing Sources. Neither Western Pacific nor Mountain Air Express have
generated positive cash flow consistently since their respective inceptions.
Western Pacific had net losses of $1.4 million, $10.5 million and $23.7 million
for the years ended December 31, 1994, 1995, and 1996, respectively and
experienced a net loss of $35.5 million for the six month period ended June 30,
1997. At June 30, 1997, Western Pacific had a consolidated working capital
deficit of $28.4 million and an available cash position of $6.4 million. Such
available cash may vary significantly from month to month, as well as during the
course of a month. The airline industry is extremely capital intensive,
especially for a growing carrier, with purchase or lease payments for new
aircraft and extensive maintenance requirements for the existing fleet of
aircraft. Since inception, Western Pacific has actively searched for additional
sources of capital. Western Pacific is continuing to evaluate additional sources
of working capital and financing sources, but there is no assurance that
additional sources of capital will be available at acceptable rates and
conditions. If Western Pacific is unable to raise additional capital, current
cash balances plus cash flow from operations may be insufficient to cover its
financial obligations as they come due during the next twelve months.
Low Margin Business and High Operating Leverage. The airline industry is
characterized by low gross profit margins and high fixed costs. The expenses of
each flight do not vary significantly with the number of passengers carried and,
therefore, a relatively small change in the number of passengers or in the
pricing or traffic mix could have a disproportionate effect on operating and
financial results. Accordingly, a minor shortfall in expected revenue levels
could have a material adverse effect on Western Pacific's growth or financial
performance.
Entry into the Denver Market. Although Western Pacific's operations were
originally based in Colorado Springs, in late June 1997 Western Pacific moved a
substantial portion of its flight operations to DIA. The move to DIA was
prompted by a number of factors including, pricing competition at DIA from
Frontier and United Airlines, which Western Pacific's management believed
reduced the incentive for passengers to travel from Denver to Colorado Springs
in order to use Western Pacific as an alternative carrier. Western Pacific
incurred significant one time costs to effectuate the move to DIA. Management
believes that the move to DIA will make Western Pacific a more viable
competitive entity, allowing it to offer low fare alternatives at DIA.
Nevertheless, there can be now assurance that anticipated benefits resulting
from Western Pacific's move to DIA will allow management to operate Western
Pacific on a profitable basis.
Integration of the Businesses. The proposed merger of Western Pacific and
Frontier involves the integration of two companies that have previously operated
independently. There can be no assurance that Western Pacific and Frontier will
not encounter difficulties in integrating their operations and work forces. Any
delays or unexpected costs incurred in connection with such integration could
have a material adverse effect on the business, operating results or financial
condition of Western Pacific, as the surviving corporation of the merger.
Furthermore, there can be no assurance that the operations, managements, and
personnel of the two companies will be compatible or that the surviving
corporation will not experience the loss of key personnel.
Government Regulations; Consumer concern about operating safety. All commercial
airlines are subject to extensive regulation by the United States Department of
Transportation ("DOT") and the Federal Aviation Administration ("FAA"). The
continuation of Western Pacific's ability to operate its business will be
subject to continued compliance with applicable statutes, rules and regulations
pertaining to the airline industry, including any new rules and regulations
relating to protection of the environment, radio communications, labor
relations, equal employment opportunity, taxation, and other matters. Western
Pacific believes that the highly publicized safety issues that led to the
Federal Aviation Administration grounding of ValuJet in June 1996, have caused
some consumers to question the operating safety of all low cost airlines.
Western Pacific has passed rigorous National Aeronautical Safety Inspection
Program ("NASIP") audits conducted by the FAA and an independently commissioned
comprehensive safety audit conducted by the Flight Safety Foundation. However,
there is no assurance that the DOT or FAA will not take more restrictive actions
against Western Pacific because of its low cost status. Any changes enacted by
Congress, the DOT or the FAA could reduce revenues, or increase operating costs
which could have a material adverse effect on Western Pacific or cause Western
Pacific to temporarily or permanently cease operations.
17
<PAGE>
Impact of new excise tax legislation. Presently, domestic air transportation is
subject to a 10% excise tax. The U.S. Congress has recently passed legislation
that changes this tax beginning October 1, 1997 to 9% plus $1.00 per flight
segment through September 30, 1998 when the tax becomes 8% plus $2.00 per flight
segment. Further changes will be made until January 1, 2002 when the tax becomes
7.5% plus $3.00 per flight segment. It is anticipated that this tax will be
borne disproportionately by the low fare carriers, and less by the major
carriers. It is uncertain if these increases in taxes can be passed along to the
passengers, or if some portion of them will be borne by the Company.
Unionization of Employee Groups. Western Pacific's mechanics voted to join the
International Brotherhood of Teamsters union in May 1996. No other work groups
are currently represented by, or have voted to be represented by, a labor union.
While the mechanics' action has not altered Western Pacific's work rules or
increased Western Pacific's costs, there can be no assurance that such action
will not result in future changes or that other employee groups will not vote
for union representation, nor that labor costs for those groups represented by a
union will not increase.
Competition. The airline industry is highly competitive. Other airlines that
presently serve Western Pacific's routes in competition with Western Pacific are
larger and have greater name recognition and resources than Western Pacific.
Western Pacific may also face competition from other airlines which may begin
serving the markets that Western Pacific currently serves (such as DIA or the
Colorado Springs airport) or may serve in the future, and competition from new
low-cost airlines that may be formed to compete in the low-fare market
(including those formed by other major airlines) and from ground transportation
alternatives.
General State of United States Economy. The airline industry is highly
susceptible to general changes in the economic climate, particularly in the
leisure travel segment of the market. Any downturn in the economy of the United
States could have an adverse effect on Western Pacific's business.
PART II. OTHER INFORMATION
EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed herewith. Exhibit numbers refer to item 601
of Regulation S-K.
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
27 -- Financial Data Schedule
- -----------------------------
(b) Form 8-K's filed during the quarter:
18
<PAGE>
(i) The Company filed a report on Form 8-K for an event dated June 6,
1997, reporting under Item 5 the creation and private placement of the
Company's Series C Preferred Stock and warrants to purchase common
stock.
(ii) The Company filed a report on Form 8-K for an event dated June 30,
1997, reporting under Item 5 the Agreement and Plan of Merger between
the Company and Frontier Airlines Inc.
19
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SIGNATURES
Pursuant to the requirements 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.
WESTERN PACIFIC AIRLINES, INC.
By: /s/ ROBERT A. PEISER
Robert A. Peiser
President and Chief Executive Officer
Date: August 14, 1997
By: /s/ GEORGE E. LEONARD
George E. Leonard
Vice President Finance and Chief Financial Officer
Date: August 14, 1997
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE JUNE 30, 1997 YEAR-TO-DATE FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000930239
<NAME> Western Pacific Airlines, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1.00
<CASH> 14,208
<SECURITIES> 0
<RECEIVABLES> 3,647
<ALLOWANCES> 625
<INVENTORY> 0
<CURRENT-ASSETS> 45,179
<PP&E> 49,547
<DEPRECIATION> 7,546
<TOTAL-ASSETS> 128,834
<CURRENT-LIABILITIES> 73,583
<BONDS> 0
0
23,400
<COMMON> 14
<OTHER-SE> 15,564
<TOTAL-LIABILITY-AND-EQUITY> 128,834
<SALES> 76,773
<TOTAL-REVENUES> 79,755
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 115,916
<LOSS-PROVISION> 618
<INTEREST-EXPENSE> 1,141
<INCOME-PRETAX> (38,483)
<INCOME-TAX> 0
<INCOME-CONTINUING> (38,483)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (38,483)
<EPS-PRIMARY> (2.90)
<EPS-DILUTED> (2.90)
</TABLE>
