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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
AIR SOUTH AIRLINES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-3889681
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 St. Julian Place, 4th Floor, Columbia, South Carolina 29204
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (803) 822-0502
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Securities to be registered pursuant to Section 12(b) of the Act:
None
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(Title of Class)
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock par value $0.001 per share
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(Title of class)
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ITEM 1. BUSINESS.
A glossary of certain terms used in this Form 10 appears following Item
14.
ORGANIZATION AND OPERATIONS- Air South Airlines, Inc. (the "Company" or
"Air South") was incorporated in Illinois in 1993 as Travel Management Industry
Services, Inc. for the purposes of providing consulting services regarding
travel industry marketing. On January 26, 1994, an amendment to the Articles
of Incorporation was filed which changed the name of the Company to Air South,
Inc. and the stated purpose to operation of an airline and related services.
The Company commenced airline operations on August 22, 1994. Prior to
commencement of airline operations, the Company was essentially a development
stage enterprise with activities consisting of organizational and pre-operating
activities. The Company's management primarily spent the pre-operating period
and the initial phase of operations recruiting key personnel, developing
strategies, obtaining Federal Aviation Administration and Department of
Transportation certification and negotiating aircraft leases, debt agreements
and grant agreements. During the period ended August 31, 1993, the Company
produced no revenues and incurred development stage losses of approximately
$300,000. On December 29, 1995, the Company: was reincorporated in Delaware;
changed its name from Air South, Inc. to Air South Airlines, Inc.; changed its
common shares authorized from 10,000,000 to 18,000,000 and from no par value
shares to $0.001 par value shares; and authorized 2,000,000 shares of preferred
stock with a $0.001 par value. The Company also changed its year end for
financial reporting purposes from August 31 to December 31.
Air South seeks to provide low-cost, low-fare scheduled airline service
to passengers in the Southeastern, Eastern seaboard and Midwestern regions of
the United States. The Company began flight operations within the Southeast on
August 22, 1994 with two and currently has seven Boeing 737-200 aircraft. All
aircraft used by the Company are leased. In the first quarter of 1996 the
Company began implementing a linear, point-to-point route strategy. The
Company provides passengers with non-stop and other direct flights from
cities in the Southeast to the high-density, high-volume markets in the
Northeast, Midwest and Florida, presently New York, Chicago and Miami. Cities
currently served are Jacksonville and Miami, Florida; Atlanta, Georgia;
Chicago, Illinois; New York, New York; Charleston, Columbia, Greenville/
Spartanburg and Myrtle Beach, South Carolina; and Norfolk, Virginia.
Although all cities served by the Company can be reached from any other city
served, the Company does not schedule flights between certain cities.
BUSINESS STRATEGY
The Company's business strategy is focused on providing low-cost,
low-fare, profitable jet air service from the Southeastern and Eastern seaboard
regions to high population areas of the Northeast, Midwest and Florida, and is
based on the following key elements.
The Company believes its route structure provides air travelers to and
from the Southeast with an attractive alternative to the inconvenient, time
consuming hub-and-spoke system of air travel offered by the national full-fare
airlines. According to the latest data available from the Department of
Transportation (the "DOT"), the Southeast currently is the largest and fastest
growing air travel market in the United States. There are a large number of
cities in the Southeast and along the Eastern seaboard that have little or no
direct airline service to the high-density, high-volume markets of the
Northeast, the Midwest, and Florida. Historically, the Southeastern and
Eastern seaboard regions were served by airlines such as Piedmont Airlines and
National Airlines which successfully provided direct air service within these
markets. In 1979, National was acquired by Pan American and in 1987 Piedmont
was acquired by USAir. Subsequently, direct air service was terminated in
favor of adopting the hub-and-spoke strategies of these acquirors. When
People Express Airlines initiated service to these markets in the mid-1980's,
there was a significant increase in traffic as more air travelers took
advantage of its low fares and direct jet service. With the acquisition of
People Express by Continental Air Lines and the further expansion of
hub-and-spoke systems, convenient and frequent direct jet service to these
markets was once again significantly reduced and for many cities eliminated.
The Company believes the resulting market environment is one of
consumer frustration because many Southeastern air travelers are forced to
endure added time and inconvenient connections at the busy Atlanta, Georgia and
Charlotte, North Carolina hubs instead of being able to fly directly to their
destinations. The Company views the markets that form the spokes of the
hub-and-spoke route system designed by the national full-fare carriers as key
cities for its strategy. Based on historical passenger traffic data, past
successes of other direct and low-fare airlines, and the dissatisfaction of air
travelers in the region, the Company believes the opportunity exists to provide
profitable air service which bypasses the hub-and-spoke system of the national
full-fare carriers.
The Company's policy is to offer fares which are at or below those of
other low-fare airlines in the region. These low fares are intended to attract
both value-conscious business travelers and leisure travelers from competing
airlines, to increase the efficiency of travel and to stimulate demand by those
who might otherwise have used ground transportation or not traveled at all.
For example, the Company's 14-day advance, and walk-up one-way fares on its
Columbia to New York route are $79 and $199, respectively.
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The Company believes it can achieve and sustain a low operating cost
structure through lower labor costs, a highly productive work force, quick
turnaround times, efficient facilities utilization, and high utilization of its
aircraft. Additionally, through growth and greater market concentration, the
Company hopes to experience significant economies in costs. Moreover, the
Company believes that by operating a single aircraft type, reductions in costs
can be achieved through commonality of training, maintenance and inventory.
This low operating cost structure is expected to be one of the Company's
principal competitive advantages. For the immediate future, the Company intends
to utilize only Boeing 737-200 aircraft. The Company is determined to maintain
the highest level of safety, productivity, and utilization with a low unit
cost.
The Company believes its highly trained and motivated non-union work
force is one of its competitive advantages. The Company seeks to select and
train only the most enthusiastic, polite, pleasant and professional employees
in order to provide its passengers with friendly southern hospitality in the
air. Management believes its employees generally have enthusiastically
embraced the lean, flat, friendly, entrepreneurial culture at the Company. In
addition, approximately 50% of its employees are stockholders in the Company.
Management believes the Company's payroll costs are considerably less per
comparable employee than the national full-fare carriers. The Company's flat
organization structure allows rapid decision making at all levels.
SOUTHEAST MARKET
Air travel in the Southeast primarily flows through two major hubs:
Atlanta, Georgia and Charlotte, North Carolina. Airline service to spoke
cities in this region has deteriorated as airlines have either merged with
larger carriers or have gone out of business. In addition, in order to have
the economic advantages provided by use of the hub and spoke system, many of
the major carriers have reduced or eliminated non-stop and direct service to
other than the hubs, or offered high-priced propeller-only service through
affiliated commuter airlines. The resulting market environment is one of
frustrated passengers without alternatives to the time-consuming, inconvenient
hub connections and high fares of the national full-fare carriers.
The Southeast region experienced the fastest economic growth among
major regions in the United States in 1995, and published accounts of
economists have forecasted that economic growth in the region can be expected
to continue during their forecast periods. According to statistics provided by
the DOT, the Southeast currently is the largest and fastest growing air
travel market in the nation. The aggressive economic development activities
undertaken by many Southeastern states have resulted in a significant number of
foreign and domestic companies relocating to and establishing new plants and
businesses within the region. Management believes this economic growth will
produce increased demand for the Company's service.
FARE STRUCTURE
The Company's low-fare service is designed to meet the needs of, and
stimulate increased demand among, leisure travelers and value-conscious
business travelers.
The Company also offers a tiered fare structure with discounts for
14-day and 7-day advance purchase as well as a peak/off peak structure. All
advance purchase fares are non-refundable and have a change fee. The Company
does not require a Saturday night stay or any other timing restrictions on any
of its tickets. All of the Company's published fares are sold and paid for by
the customer within 24 hours of the time when the reservation is made.
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ROUTE SYSTEM AND SCHEDULING
The Company's schedule presently provides for in most cases two or
three and up to four round-trip flights per day in markets that the Company
serves. The Company's objective is to provide sufficient capacity in each
market to satisfy demand for the Company's low-fare service, while maintaining
above break-even load factors.
The relatively small size of the Company's aircraft fleet (see
"AIRCRAFT," below) and the Company's objective of maintaining high utilization
of its aircraft, present challenges in scheduling convenient service on its
routes. The Company schedules its flights to facilitate non-stop and direct
service between city pairs to take advantage of connecting and segment
traveling passengers. It may be necessary in some cases to schedule departures
in certain markets at times that may not be considered optimal from the
perspective of travelers. The Company's operating experience to date
indicates, however, that travelers are often willing to forego a more desirable
departure time in exchange for low fares and the convenience of the Company's
air service.
The Company operated with only six of its seven aircraft for substantially all
of the period from September 1995, until June 1996. During that period one of
the seven aircraft was unavailable at all times as each aircraft in the fleet
rotated through a Federal Aviation Administration ("FAA") mandatory heavy
"C-Check" inspection and maintenance. The result has been an infrastructure
and a route structure designed for high utilization of seven or more aircraft
while the Company has been able to operate only six. Beginning in August
1996, the Company began operating only five of its seven aircraft to improve
schedule reliability and on-time performance. By doing so the Company was
better able to manage its fleet for timely performance. By not utilizing two
aircraft in scheduled service, schedule reliability was increased by the
Company applying its maintenance and operational resources to only five
aircraft. Because of improved operational capabilities and results, the
Company now operates six and expects to operate seven aircraft in June
1997, and continues to explore the possibility of acquiring one or more
additional aircraft (see "AIRCRAFT," below).
Typically, airlines experience reduced demand for services at various
times during the fall and winter. During these periods, an airline may
experience variations in passenger demand based on its particular routes and
passenger demographics. Due to the Company's limited history and the
implementation of the Company's linear, point-to-point strategy, the Company is
unable to predict whether, or to what extent, seasonal variations in its
operations will differ from those of the airline industry generally. If the
Company's demand patterns are similar to those of the airline industry
generally, the Company would experience reduced demand during the fall and
winter with adverse effects on revenues, operating results, and cash flow.
RESERVATIONS AND OTHER SYSTEMS
The Company operates local and wide area networks supporting a
computerized reservations system, a financial accounting system, and an airline
dispatch and crew scheduling/tracking system. The reservations system ("Open
Res") is in use at several airlines around the world, and provides the ability
to communicate with and accept reservations from other major airlines'
computerized reservations systems ("CRS"). Approximately 50% of the Company's
reservations are booked by travel agents through these CRS's. The system also
allows the Company to provide "ticketless" travel for passengers booking their
reservations directly with Air South. Open Res is a relational database which
provides manangement with real time information on a wide range of financial
and traffic indices.
The Company has a reservations center in Columbia, South Carolina
where it accepts nationwide calls from travel agents and passengers over its
toll free number (1-800-AIR SOUTH).
SALES AND MARKETING
Objectives. The primary objectives of the Company's marketing
activities are to create product awareness and brand recognition, and to
develop first time customers and customer loyalty. Marketing is targeted at
the general traveling public, both leisure and value-conscious business
travelers, and the travel industry intermediaries, including travel agents,
corporate travel arrangers, and meeting planners in the Southeastern region,
where the Company is portrayed as an aggressive, innovative provider of high
quality air transportation services. The Company has applied to the Department
of Defense to become an approved carrier for official government travel.
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The Company markets its services through CRSs, mass media,
advertising, public relations, direct sales, and regional and local promotions.
In addition, the Company believes it has benefitted from generally favorable
regional and local media coverage of its growth and operations.
Computer Reservations Systems. The Company participates in the
airline industry's CRSs. The Company's flight schedules and inventory of seats
and fares are displayed prominently in every CRS. Passengers and travel agents
have instant and complete access to the Company's flight schedules,
availability and fares, including any special promotions. The Company has
installed a ticketless reservation system which reduces the cost of revenue
accounting functions and the direct and indirect costs of handling tickets.
Management believes its participation in the CRSs, the travel industry and
travel agent norm for making reservations, gives it a competitive advantage
over low-fare or charter airlines which do not participate in such systems.
Travel Agents. The Company markets its services to travel agents, who
account for approximately 50% of its passenger bookings, through direct sales
and promotion, and through CRSs. In addition to providing easy access to the
selling of the Company's flights through the industry CRSs, the Company
maintains a special toll-free number for travel agent use. The Company pays
travel agents a commission of 10% of the fare booked.
Advertising. Management is aware of the critical importance to a
start-up airline of the need to advertise and promote its service and create
brand awareness. Unfortunately, because of capital limitations, all elements
of marketing -- sales, advertising and promotion -- frequently have been scaled
back to barely a whisper. The Company believes that recent infusions of
capital will permit it to promote more aggressively its new routes and
attractive fares. The Company's advertising typically emphasizes the Company's
low fares, destinations served on a non-stop or one-stop basis, simplified fare
structure, and product features that distinguish the Company as a smart
low-fare choice. The Company's advertising consists of radio, newspaper,
magazine, billboards, and television.
Promotions. The Company augments its advertising and public relations
effort with innovative promotions that are fun, high profile, and newsworthy.
Radio promotions throughout the system are conducted on an ongoing basis, and
the Company reaches out to the communities it serves by participating in local,
civic, special interest, educational, and other non-profit events to gain
identity and support.
Frequent Flyer Program. The Company offers its customers the
opportunity to participate in a segment-based Frequent Flyer Program which is
simple to administer. A free trip is awarded to travelers who fly eight round
trips or the equivalent on Air South. Frequent Flyers receive additional
inducement to use the Company's service, including pre-boarding and special
fare promotions.
AIRCRAFT
The Company's fleet currently consists of seven Boeing 737-200 jet
aircraft. The Company's Boeing 737-200 aircraft are all twin-engine, two-pilot
crew, jet aircraft equipped with Pratt & Whitney JT8D engines. The Boeing 737-
200 aircraft is widely used throughout the world on medium-haul flights similar
to those flown by the Company. The Company's aircraft were first placed in
service between 1968 and 1979 and have an average age of 23 years. Modern
aircraft are such that they can be used until the cost to maintain them in
airworthy condition exceeds the cost of scrapping them. The Company does not
contemplate that within the next five to ten years it will be required to
change the constitution of its aircraft fleet to include a newer generation of
aircraft. The Company intends for the immediate future to use only Boeing
737-200 aircraft. All of the Company's aircraft provide 122 passenger seats
configured for all-coach service. The Company believes that the use of a
single type of aircraft reduces the cost of personnel training and maintenance
services, and contributes to its low-cost operating structure. The Company
leases all of its aircraft under operating leases with remaining terms from
approximately one and one-half to three years. Five of the Company's aircraft
are leased from various owners through their agent, GE Capital Aviation
Services, Inc. and two are leased from Mimi Leasing Corp.
The Company's additional growth is dependent upon its ability to
purchase or lease additional aircraft and spare engines. See "ITEM 2 --
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS". Depending on market conditions, the Company intends to continue
seeking aircraft to meet its additional capacity needs. The demand for, and
lease prices of, used aircraft has increased over the past 18 months, and may
increase further in the future. The Company cannot predict how long suitable
aircraft will continue to be available, whether it can lease such aircraft on
satisfactory terms, or whether such aircraft can be delivered on a timely
basis. Furthermore, because the precise timing of the acquisition and delivery
of
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additional aircraft in the future is uncertain, the Company may take delivery
of additional planes but be unable to put them into service until it hires and
trains additional personnel, acquires gate facilities, and completes the other
matters necessary to begin operating new routes. The Company also believes
that, as it expands its fleet of aircraft, it will require additional aircraft
engines, which are becoming increasingly difficult to obtain on favorable
economic terms. The Company currently has no spare engines, and there can be
no assurance that the Company will be able to obtain a sufficient number of
aircraft engines in the future on satisfactory terms.
AIRPORT OPERATIONS
The Company provides its own passenger service personnel at all
airports served other than Chicago Midway where it contracts such services to
another airline. Ramp service operations, including marshaling aircraft into
the gate, baggage and cargo loading and unloading, aircraft cleaning, and
lavatory and water servicing, are handled by Company employees at Jacksonville,
Florida, Atlanta, Georgia, and Columbia and Myrtle Beach, South Carolina. At
other airports served, certain of these services are provided by fixed-base
operators under contract with the Company. Required de-icing services are
contracted to fixed-base operators or other air carriers at all locations
except Columbia, South Carolina, where de-icing is accomplished by Company
personnel. Such ground handling, de-icing and other contracts are terminable
by either party; however, other providers of such services are available at
each location.
Ticket counters, gates, and airport office facilities at each of the
airports the Company serves are leased from the airport authority or subleased
from other airlines. In all cases, airport use fee agreements for landing fees
and other airport use related charges exist with airports the Company
serves. The Company has signatory agreements with the airport authorities
located in Columbia and Charleston, South Carolina. Signatory agreements offer
the Company various financial advantages in exchange for a long-term commitment
to maintain airport leaseholds. These leaseholds may be sublet to another
airline with the consent of the airport if the Company should reduce or
eliminate service at those locations in the future; however, there is no
assurance that a suitable subtenant can be found.
MAINTENANCE AND REPAIR
In general, the cost to maintain older aircraft exceeds the cost to
maintain newer aircraft. The FAA has promulgated Airworthiness Directives
("ADs") with respect to aging aircraft, and there are pending regulations that
would require certain additional maintenance checks and other maintenance
requirements for aircraft operating beyond certain operational limits. From
time to time, the FAA also develops new requirements which apply to all
aircraft and which may require significant and costly modifications or
additions to the aircraft. It is likely that the ADs, pending regulations,
and required aircraft modifications will apply to all of the Company's
aircraft. The Company anticipates that it, along with all other operators of
Boeing 737-200 aircraft, will be required by the FAA to modify the tail
section flight controls of its Boeing 737-200 aircraft. These modifications are
being required as a result of investigations by the FAA of accidents involving
Boeing 737-200 aircraft operated by other airlines. The Company does not
now know the exact cost of such modifications; however, the Company believes
that its parts and installation cost is not likely to exceed $75,000 per
aircraft; the Company does not believe that the modifications will cause the
aircraft to be out of service for a material amount of time.
The Company provides its own routine and daily aircraft maintenance,
repair and checks at its Columbia, South Carolina airport facility, or in other
cities, as needed, by an FAA-approved independent contractor, often another
airline. Major scheduled maintenance, including C-checks, component
overhaul/repair services and engine overhaul services are performed under
contract at maintenance bases of other airlines or at various independent
maintenance or overhaul providers.
The Company does not currently own or lease a spare engine. The
Company has an agreement with an independent spare parts inventory supplier to
provide spare parts inventory purchasing and financing services for a fee.
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EMPLOYEES
At March 31, 1997, the Company had 589 full-time equivalent employees.
Training, both initial and recurrent, is required for all flight
operations, maintenance, reservations and customer service personnel. The
average training period for all new employees is approximately four weeks,
although the Company's cockpit crews undergo approximately eight weeks of
training. Both pilot training on 737-200 aircraft simulators and mechanic
training for the 737-200 is provided by contractors, which include other
airlines. The Company entered into an agreement with the State of South
Carolina providing for payment by the State for the initial training for all
South Carolina based flight crews, mechanics, reservations agents, and airport
service agents up to a total of 1,004 employees. Recurrent training of pilots
and flight attendants is done by qualified in-house instructors. Recurrent
737-200 simulator time for pilots is paid for by the Company.
FAA regulations require pilots to be licensed as commercial pilots
with specific ratings for each aircraft to be flown and to be medically
certified as physically fit. Licenses and medical certification are subject to
periodic re-evaluation requirements, including recurrent training and recent
flying experience. Mechanics, quality-control inspectors, and flight
dispatchers must be licensed and qualified for specific aircraft. Flight
attendants must have initial and periodic competency fitness training and FAA
certification, and must be qualified for specific aircraft. Training programs
are subject to approval and monitoring by the FAA. Management personnel
directly involved in the supervision of flight operations, training,
maintenance and aircraft inspection must meet experience standards prescribed
by FAA regulations. All of these employees are subject to background checks
and pre-employment and subsequent drug testing.
Management believes that the current conditions in the airline
industry have created a sufficient pool of qualified pilots, dispatchers, and
mechanics to satisfy the Company's current and foreseeable future needs in the
flight operations, maintenance, and quality control areas and that the Company
should have no difficulty hiring and continuing to employ the required
personnel. The Company is presently considering what changes are appropriate
in its overall employee benefits and compensation programs.
While the Company believes that its per employee labor cost is lower
than those of its competitors, this cost may increase in the future. None of
the Company's employees are represented by a labor union. The Company is
unable to predict whether any of its employees will elect to be represented by
a labor union or other collective bargaining unit in the future. The Company
considers its relationship with its employees to be very good.
FUEL
The cost of jet fuel is one of the Company's largest operating
expenses. Fuel costs represent approximately 21.9% of revenue and 14.2% of
operating costs for the three-month period ended March 31, 1997. Any
significant increase in fuel costs would materially affect the Company's
operating results. A significant increase in fuel costs would also result in a
disproportionately higher increase in the Company's fuel expense compared to
many of its competitors whose average aircraft is newer and thus more fuel
efficient. Both the cost and availability of fuel are subject to many economic
and political factors and events occurring throughout the world which the
Company can neither control nor accurately predict. In the event of a fuel
shortage resulting from a disruption of oil imports or otherwise, higher fuel
prices or curtailment of scheduled service could result. The Company has no
agreement assuring the availability and price stability of fuel over any period
of time because such agreements are generally not available, and to date has
not used forward purchases as a hedging technique to minimize fuel price
fluctuations. Therefore, an increase in the cost of jet fuel will be
immediately passed through to the Company by suppliers. The Company has not in
the past been able to pass along increases in fuel costs to its customers.
The Company cannot predict the future cost and availability of fuel.
Substantial price increases or the unavailability of adequate suppliers could
have a material adverse effect on the Company's business, financial condition,
or results of operations. Airlines that are larger and better capitalized than
the Company, or which have successfully applied hedging techniques, may be able
to better absorb increases in fuel prices than the Company.
The Company uses an outside fuel management organization to assist it
in the management of its fuel purchases and related airport fuel storage
arrangements.
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COMPETITION
Under the Deregulation Act, domestic certificated airlines are free to
enter and exit domestic routes and to set fares without regulatory approval,
and all city-pair domestic airline markets are generally open to any domestic
certificated airline. As a consequence, the airline industry is intensely
competitive.
Airlines compete primarily with respect to fares, scheduling
(frequency and flight time), destinations, frequent flyer programs, and type
(jet or propeller) and size of aircraft. The Company competes with other
airlines on its routes and expects to compete with other airlines on any future
routes. Many of these airlines are larger and have greater name recognition
and greater financial resources than the Company.
In the Southeast market, two major carriers, Delta Air Lines (and its
commuter affiliate Comair) and US Airways, and one low-fare carrier, ValuJet
Airlines, are the principal competition for the Company. In addition,
Continental Airlines introduced service between Newark and Charleston, Columbia
and Myrtle Beach, South Carolina in May and June, 1996. The Delta commuter
affiliate, Comair, recently introduced 50-seat jet service between New York
LaGuardia and Charleston and Columbia, South Carolina. Delta's and Comair's
average fares are generally more than twice the Company's average fares on the
same routes. US Airways provides only connecting service through its hub in
Charlotte at fares generally more than double the Company's fares on the same
routes. Although the major carriers sometimes offer low competing fares, such
fares usually are subject to restrictions and are available only on a limited
number of seats. All of the major carriers (including Delta's commuter
affiliate, Comair) have far greater resources than the Company and have
established reputations and name recognition. As a result, all provide
formidable competition.
Delta has established a low-fare subsidiary, Delta Express, to compete
with low-fare carriers such as the Company, but does not now compete in the
Company's markets. Delta Express is based in Orlando, Florida,
Southwest Airlines introduced service in the Southeast, mainly in
Florida, beginning in January, 1996. Southwest does not now serve any of the
same markets as the Company; Southwest does, however, fly between Jacksonville
and Fort Lauderdale, Florida which could be considered competitive with the
Company's Jacksonville and Miami, Florida service.
Airtran Airways, Inc. recently began service from three of the
Company's cities to Orlando, Florida, a city not served by the Company.
There can be no assurance that Delta Express, Southwest or Airtran
will not directly compete with the Company in the future. If such competition
does occur, the Company would need to rely on greater stimulation of traffic
and its low-fare structure to be successful.
In the future, competing airlines may set their prices at or below the
Company's fares or introduce new non-stop service between cities served by the
Company in attempts to prevent the Company from achieving or maintaining
profitable operations. The Company may face competition not only from existing
airlines which may begin servicing markets the Company serves, but also from new
low-cost airlines that may be formed to compete in the low-fare market
(including any airlines that may be formed by major airlines) and from ground
transportation alternatives. For example, Jet Express, a public-charter
airline, has provided seasonal scheduled jet airline service with discounted air
fares from Myrtle Beach, South Carolina to Chicago, Illinois, Boston,
Massachusetts, Detroit, Michigan, Newark, New Jersey, Long Island, New York,
and Philadelphia, Pennsylvania. In addition to traditional competition among
the scheduled domestic carriers, the industry may be subject to new forms of
competition in the future, such as video teleconferencing and other methods of
electronic communication, that may add a new dimension of competition to the
industry as businesses seek lower cost substitutes for air travel. The Company
recognizes that recurrent travelers have developed loyalties to existing
airlines or may desire benefits (such as numerous destinations and a choice in
class of service) that only major airlines currently provide. Many business
travelers are able to obtain reimbursement for their travel expenses and
therefore may be unwilling to give up the perceived benefits of national
full-fare airlines simply to obtain the Company's lower fares. In addition,
the Company anticipates that attracting customers from established airlines to
the Company's new routes will be even more difficult than attracting customers
to the Company's existing routes. The Company has previously experienced a
poor record of on time performance and passenger service, and has had an above
average number of cancelled flights. The Company has taken steps which have
alleviated much of this problem; however, this may continue to hamper
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passenger acceptance in the future. The Company believes that these problems
have been greatly alleviated as a result of reductions in its schedule, better
training and better management of personnel, facilities and equipment. The
Company's decision to discontinue service to certain cities may also have
created dissatisfaction among passengers expecting to fly these routes and may
also negatively affect passenger acceptance. In addition, all low-fare
start-up airlines experienced a decline in the acceptance level of the flying
public as a result of the publicity and criticism of ValuJet Airlines following
the May 11, 1996 aircraft crash and the June 18, 1996 grounding of all ValuJet
aircraft.
GOVERNMENT REGULATION
All interstate air carriers are subject to regulation by the
DOT and the FAA under the Aviation Act. The DOT's jurisdiction extends
primarily to the economic aspects of air transportation, while the FAA's
regulatory authority relates primarily to air safety, including aircraft
certification and operations, crew licensing and training, and maintenance
standards. The Company has obtained a Certificate of Public Convenience and
Necessity issued by the DOT and a Part 121 Operating Certificate issued by the
FAA. The Certificates remain in effect until revoked by administrative action.
In general, the amount of economic regulation over interstate air carriers in
terms of market entry, exit, pricing, and inter-carrier acquisitions and
agreements has been greatly reduced subsequent to enactment of the Deregulation
Act.
The FAA has jurisdiction over, and imposes requirements concerning,
flight operations generally, including the licensing of pilots, maintenance and
flight dispatch personnel, the establishment of standards and requirements with
respect to training, maintenance and flight operations, including standards
applicable to cabin crews, communications and air and ground equipment, among
other things. The Company must obtain and maintain FAA certificates of
airworthiness for all of its aircraft. The Company's flight personnel, flight
and emergency procedures, aircraft and maintenance facilities are subject to
periodic inspections and tests by the FAA.
Air South began flight operations in August 1994. Since then Air South
has had one reportable incident in October, 1994 in which no one was injured
and no material damage was done to the aircraft.
Presently, four airports, Chicago O'Hare, New York LaGuardia,
New York Kennedy and Washington National, are regulated by means of "slot"
allocations, which represent governmental authorizations to take off or land at
a particular airport within a specified time period. The DOT regulations
currently permit the buying, selling, trading or leasing of slots. Slot values
depend on several factors, including the airport, time of day covered, the
availability of slots, and the class of aircraft. FAA regulations require the
use of each slot at least 80% of the time and provide for forfeiture of slots
in certain circumstances without compensation. The DOT may require forfeiture
of slots without compensation if it determines slots are needed to meet
operational needs of international or essential air transportation.
The DOT has previously determined that the present structure of the
slot system should not be changed at this time; however reports in the press
have indicated that the DOT may reconsider its position. The Company's ability
to gain access to these four airports is affected by the number of slots
available to it for takeoffs and landings.
The Company currently leases six slots at New York Kennedy for use
during the slot controlled hours of 3:00 pm to 8:00 pm daily. Such leases
expire on October 26, 1997; the Company is in negotiations for their renewal
and has no reason to believe that satisfactory new leases will not be obtained.
All air carriers are also subject to certain provisions of the
Communications Act of 1934, as amended, 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 the
9
<PAGE> 10
Company is subject to FCC requirements, it has taken, and will continue to
take, all necessary steps to comply with those requirements.
The Company's operations may become subject to additional federal
regulatory requirements in the future under certain circumstances. For
example, the Company's labor relations are covered under Title 11 of the
Railway Labor Act of 1926, as amended, and are subject to the jurisdiction of
the National Mediation Board. During a period of past fuel scarcity, air
carrier access to jet fuel was subject to allocation regulations promulgated by
the Department of Energy. The Company is also subject to state and local laws
and regulations at locations where it operates and the regulations of various
local authorities that operate the airports it serves.
Recently, the FAA escalated air carrier inspections involving carriers
of all sizes. Recent inspections have resulted in the suspension of service by
certain airlines. The Company was recently inspected as part of that program;
only immaterial penalties have been issued against the Company resulting from
FAA inspections; there can be no assurance as to future inspections that
material penalties will not be assessed. The Company believes that low-fare
and start-up airlines may be being subjected to regulation at a level of
scrutiny greater than that applicable to larger, more established airlines.
INSURANCE
The Company carries the types and amounts of insurance that are
required by the DOT and that the Company believes are customary for airlines
similar to the Company. These coverages include: Aircraft Third Party
Liability Insurance; and All Risk Aircraft Hull Insurance and War Risk and
Allied Perils Insurance; these coverages have a $500,000,000 Combined Single
Limit limit of liability and include within them Baggage Liability and Cargo
Legal Liability coverages. The Company also carries $3,000,000 of All Risk
Spare Parts Insurance, as well as workers' compensation insurance. While the
Company believes such insurance will be adequate as to amounts and risks
covered, there can be no assurance that such coverage will continue to be
available or that it will fully protect the Company against all material losses
which it might sustain.
ENVIRONMENTAL MATTERS
The DOT and FAA have authority under the Aviation Safety and Noise
Abatement Act of 1979, as amended, under the Airport Noise and Capacity Act of
1990 and, along with the Environmental Protection Agency, under the Clean Air
Act, as amended, to monitor and regulate aircraft engine noise and exhaust
emissions. The Company believes it is operating its aircraft in compliance
with all applicable FAA noise control regulations and with current emissions
standards.
The Company does not believe that compliance with federal, state and
local provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to protection of the
environment will have any material adverse effect upon the capital
expenditures, earnings or competitive position of the Company. The Company
does not expect to make any material environmentally related capital
expenditures in the forseeable future. However, if the Company increases its
fleet from the current seven aircraft, the Company may have to comply with
federal noise control regulations for such additional aircraft which could
cause it to incur material capital expenses.
BUSINESS COMMUNITY, STATE, COUNTY AND CITY SUPPORT
The Company was initially financed with a combination of equity
capital from its founding shareholders, local businesses and business leaders,
and loans and grants from state and municipal governments, totaling more than
$17,000,000. Business and government leaders in South Carolina arranged this
financing to attract a jet airline to the State in order to stimulate tourism
and aid the State's future economic growth and development. The business
community throughout the State as well as state and local government officials
have been very cooperative and supportive of the Company's efforts to provide
low-fare jet service to South Carolina cities, and other cities in the
Southeast.
In late 1993 and early 1994, Patrick J. O'Shea, Clifton E. Haley and
other founders of the Company met frequently with South Carolina development
officials about locating the headquarters of the proposed, low-cost, low-fare
regional airline in Columbia, South Carolina, and establishing flight service
from Columbia and other South Carolina cities.
Early cooperative efforts between the State of South Carolina,
Richland and Lexington Counties, South Carolina and the City of Columbia, South
Carolina resulted in an innovative package of financing and benefits as an
inducement for the Company to bring a low-fare jet airline to South Carolina
and to locate its corporate headquarters in the South Carolina midlands. This
financing and benefits package included:
- a $12,000,000 State arranged loan guaranteed by the Department of
Housing and Urban Development (the "State Loan").
- $3,000,000 of non-reimbursable grants from the City of Columbia
and Richland and Lexington Counties to be used for personnel
relocation, advertising, the cost of the Company's headquarters,
reservation center and other facilities in the Columbia area, and
working capital.
10
<PAGE> 11
- $1,137,000 of training grants for pre-employment training for
pilots, mechanics, flight attendants, reservations personnel and
others.
The State Loan provides for a deferred, low-interest rate (4%, with
interest payments beginning in August 1997); deferred principal repayment
(principal payments beginning in September 1997); and an interest rate
adjustment at September 1, 2004. The State Loan also limits the ability of the
Company to move its headquarters or its principal operational base from
Columbia without the written consent of the City of Columbia.
As part of the cooperative effort of the business community and
government authorities to provide capital, in May 1994, the Company raised
approximately $1,000,000 through the sale of Common Stock in a private
offering to South Carolina accredited investors (the "South Carolina
Offering"). In connection with the final draw on the State Loan, the Company
raised an additional approximately $1,500,000 in a rights offering of Common
Stock to certain of its stockholders, including those who purchased stock in
the South Carolina Offering and an offering to employees pursuant to a stock
purchase plan.
As of March 31, 1997 the Compamy was not (and is not now) in
compliance with certain covenants of the State Loan Agreement; however,
compliance with such covenants has been waived through December 31, 1997.
The Company believes that the support, cooperation, and confidence
shown by the various individuals and governmental entities has been a
significant factor in its progress. However, there can be no assurance that
the Company will continue to experience a supportive and cooperative
environment in its governmental relations and with the communities in which it
is located.
ITEM 2. FINANCIAL INFORMATION.
(a) SELECTED FINANCIAL AND OPERATING DATA
The selected Statement of Operations and Balance Sheet data as of and
for each of the years ended August 31, 1994 and 1995 and December 31, 1996, and
the four month period ended December 31, 1995, have been derived from
the audited financial statements of the Company. The selected data as of and
for the year ended December 31, 1995 and the three month periods ended March
31, 1996 and 1997 have been derived from financial statements of the Company
which are unaudited but which, in the opinion of management, have been prepared
on the same basis as the audited financial statements and include all
adjustments necessary (consisting of normal recurring adjustments) for a fair
presentation of the results for the unaudited period. The selected financial
data is qualified by, and should be read in conjunction with, "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
elsewhere in this ITEM 2 and with the Company's financial statements and the
related notes thereto included elsewhere in this Form 10.
11
<PAGE> 12
<TABLE>
<CAPTION>
Four Months
Ended
Twelve Months Ended August 31,(1) December 31, Twelve Month Ended December 31,
--------------------------------- ------------- -------------------------------
1994(2) 1995 1995 1995 1996
------------ ----------- ------------- ----------- ------------
($000) ($000) ($000) ($000) ($000)
Statement of Selected
Financial Data
- - - ----------------------
<S> <C> <C> <C> <C> <C>
TOTAL OPERATING REVENUES $ 132 $ 45,130 $ 19,858 $ 58,368 $ 53,960
OPERATING EXPENSES
- - - ------------------
Salaries, Wages & Benefits 1,083 13,254 5,166 15,154 15,872
Aircraft Fuel & Oil 100 10,172 4,120 12,309 13,134
Aircraft Leases 156 4,924 2,088 6,036 7,920
Maintenance Materials and Repairs 146 7,573 3,671 9,625 8,330
Agency Commissions 6 2,512 1,379 3,544 3,031
Other rentals, landing and ground
handling fees 105 4,619 1,990 5,690 5,900
Advertising 324 2,393 595 1,978 4,501
Depreciation & Amortization 29 350 175 442 668
Other Operating Expenses(3) 1,037 16,120 5,482 17,241 22,723
-------- -------- -------- -------- --------
Total Operating Expenses 2,986 61,917 24,666 72,019 82,079
-------- -------- -------- -------- --------
Net Operating Loss (2,854) (16,787) (4,808) (13,651) (28,119)
Interest Expense (net) 6 332 76 393 857
Grants/Other 1,045 1,256 58 407 447
-------- -------- -------- -------- --------
Net Loss $ (1,815) $(15,863) $ (4,826) $(13,637) $(28,529)
======== ======== ======== ======== ========
Net Loss Per Share $ (0.72) $ (3.18) $ (0.69) $ (1.95) $ (4.14)
Weighted average common shares
outstanding 2,523 4,987 6,981 6,981 6,888
SELECTED OPERATING AND OTHER DATA:(4)
Revenue Passenger Enplaned (000) 3 788 330 996 730
Revenue Passenger Miles (RPMs) (000) 1,104 273,965 119,059 351,239 361,230
Available Seat Miles (ASMs) (000) 6,149 583,126 226,997 712,017 648,390
Load Factor 18.0% 47.0% 52.4% 49.3% 55.7%
Operating Break-even Load Factor 406.1% 64.5% 65.1% 60.9% 84.3%
Average Fare $ 44.00 $ 57.27 $ 60.18 $ 58.60 $ 73.92
Passenger Yield Per RPM (cents) 11.96 16.47 16.68 16.62 14.94
Total Revenue Per ASM (cents) 2.15 7.74 8.75 8.20 8.32
Operating Cost Per ASM (cents)(5) 48.56 10.62 10.87 10.11 12.59
Block Hours Flown 197 18,434 7,049 22,307 15,639
Average Flight Segment (miles) 255 255 272 261 340
Operating Cost Per Block Hour $ 15,157 $ 3,359 $ 3,499 $ 3,229 $ 5,219
BALANCE SHEET DATA:
Cash and Cash Equivalents $ 3,552 $ 1,054 $ 2,370 $ 2,370 $ 1,070
Working Capital (Deficiency) 2,833 (6,934) (8,546) (8,546) (27,321)
Property and Equipment, Net 1,061 2,238 2,595 2,595 3,469
Total Assets 6,359 10,676 11,617 11,617 9,984
Total Long Term Debt 5,000 12,000 12,000 12,000 18,291
Total Stockholders' Equity
(Deficiency) $ 2 $(13,996) $(16,347) $(15,847) $(40,233)
<CAPTION>
Three Months Ended March 31,
---------------------------------
1996 1997
------------ -----------
($000) ($000)
Statement of Selected
Financial Data
- - - ----------------------
<S> <C> <C>
TOTAL OPERATING REVENUES $ 14,200 $ 13,745
OPERATING EXPENSES
- - - ------------------
Salaries, Wages & Benefits 3,905 3,869
Aircraft Fuel & Oil 2,942 3,005
Aircraft Leases 1,640 2,275
Maintenance Materials and Repairs 2,020 1,971
Agency Commissions 794 503
Other rentals, landing and ground
handling fees 1,487 1,462
Advertising 824 1,458
Depreciation & Amortization 152 215
Other Operating Expenses(3) 4,666 6,400
-------- --------
Total Operating Expenses 18,430 21,158
-------- --------
Net Operating Loss (4,230) (7,413)
Interest Expense (net) 118 430
Grants/Other 59 48
-------- --------
Net Loss $ (4,289) $( 7,795)
======== ========
Net Loss Per Share $ (0.63) $ (1.12)
Weighted average common shares
outstanding 6,829 6,967
SELECTED OPERATING AND OTHER DATA:(4)
Revenue Passenger Enplaned (000) 197 149
Revenue Passenger Miles (RPMs) (000) 71,996 83,585
Available Seat Miles (ASMs) (000) 146,944 157,406
Load Factor 49.0% 53.1%
Operating Break-even Load Factor 63.6% 81.7%
Average Fare $ 72.22 $ 92.25
Passenger Yield Per RPM (cents) 19.72 16.44
Total Revenue Per ASM (cents) 9.66 8.73
Operating Cost Per ASM (cents)(5) 12.54 13.44
Block Hours Flown 4,687 4,290
Average Flight Segment (miles) 274 357
Operating Cost Per Block Hour $ 3,932 $ 4,932
BALANCE SHEET DATA:
Cash and Cash Equivalents $ 379 $ 494
Working Capital (Deficiency) (14,071) (35,746)
Property and Equipment, Net 2,977 3,680
Total Assets 13,590 11,778
Total Long Term Debt 12,000 17,994
Total Stockholders' Equity
(Deficiency) $(20,532) $(48,005)
</TABLE>
(1) The Company's fiscal year was changed from August 31, to December 31
effective for the year ended December 31, 1995
(2) The Company conducted flight operations for only ten days during the twelve
months ended August 31, 1994.
(3) Other Operating Expenses include communications, utilities, professional and
technical fees, postage, freight, supplies, all insurance (except workers'
compensation coverage), credit card processing fees, computerized
reservation system fees, flight crew hotel and per diem costs, other outside
services, equipment rental, passenger food and interrupted trip expense and
substitute aircraft service costs.
(4) See 'GLOSSARY' following item 14 for definitions of certain terms.
(5) From September 1995 through March 1997, the number of aircraft in service
was reduced by at least one aircraft due to scheduled heavy maintenance
inspections on the fleet as required by FAA regulations. During such
periods operating cost per ASM was adversely affected because the Company's
cost infrastructure and overhead remained unchanged while the number of ASMs
were reduced.
12
<PAGE> 13
(b) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company was incorporated on January 14, 1993. Until commencement of
flight operations on August 22, 1994, the Company raised capital, obtained
certification from the FAA and the DOT, recruited key personnel, negotiated
facility and aircraft leases, contracted ground handling and maintenance
services, trained flight personnel, and selected and installed a reservation
system.
The Company began flight operations with two Boeing 737-200 aircraft and
initially provided service to Columbia, South Carolina, Atlanta, Georgia, St.
Petersburg, Florida, and Miami, Florida. Service was later expanded to other
Southern cities, some of which have since been dropped. Beginning in the first
calendar quarter of 1996, following a change in management, the Company began a
linear, point-to-point strategy designed to provide passengers with non-stop
and direct jet air service from cities in the Southeast to selected
high-density, high-volume markets in the Northeast, Midwest, and Florida.
The Company's revenues are derived principally from the sale of airline
services to passengers and are recognized when transportation is provided.
Revenues are primarily a function of fare levels and the number of seats sold
per flight. The Company's business is characterized, as is true for the
airline industry generally, by high fixed costs relative to revenues, and low
profit margins. Management's principal business strategy is to expand airline
service where there is sufficient customer demand and the Company's operating
costs permit profitable operations.
The Company expects its future revenues to be affected by its ability to
offer and maintain competitive fares, the reaction of existing competitors to
the Company's service, the possible entry of national and other low-fare
airlines into the Company's current or future markets, the effectiveness of the
Company's marketing efforts, and general economic conditions. The Company's
costs may be affected by increases in the price of jet fuel, scheduled and
unscheduled aircraft maintenance expenses, labor costs, fees charged by
independent contractors for various services, and rent for gates and other
facilities.
The Company expects to compete with new or existing competitors on future
routes. Competing airlines may set prices at or below the Company's fares or
introduce new, competing service. Competitors have responded to the Company's
addition of routes to New York by providing new service and reduced fares.
Typically, airlines experience reduced demand for services at various
times during the fall and winter. During these periods, an airline may
experience variations in passenger demand based on its particular routes and
passenger demographics. Due to the Company's limited history and the
implementation of the Company's linear, point-to-point strategy, the Company is
unable to predict whether, or to what extent, seasonal variations in its
operations will differ from those of the airline industry generally. If the
Company's demand patterns are similar to those of the airline industry
generally, the Company would experience reduced demand during the fall and
winter with adverse effects on revenues, operating results, and cash flow.
The Company has a limited history of operations, and since its inception
has experienced significant losses. As of December 31, 1995, the Company had
an accumulated deficit of $23,166,000 and negative stockholders' equity of
$16,347,000; as of December 31, 1996 such accumulated deficit and negative
stockholders' equity were $51,696,000 and $40,233,000 respectively. As of
March 31, 1997 such accumulated deficit and negative stockholders' equity were
$59,490,000 and $48,005,000, respectively.
13
<PAGE> 14
RESULTS OF OPERATIONS
The Company began flight operations on August 22, 1994, operating only ten days
for the fiscal year ended August 31, 1994. In 1995, the Company changed from a
fiscal year ending August 31, to a calendar year ending December 31. The
following tables set forth selected financial data of the Company for the
twelve months ended August 31, 1994 and 1995, December 31, 1995 and 1996 and
for the three months ended March 31, 1996 and 1997.
<TABLE>
<CAPTION>
Twelve Months Ended August 31,
---------------------------------------------------------------
1994 1995
----------------------------- -----------------------------
Percent of Percent of
Amount Operating Amount Operating
(000) Revenues (000) Revenues
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Passenger Revenue $ 132 $ 44,466
Other Operating Revenue 0 664
----------------------------- -----------------------------
TOTAL OPERATING REVENUES $ 132 100.0% $ 45,130 100.0%
----------------------------- -----------------------------
OPERATING EXPENSES
Salaries, Wages & Benefits 1,083 820.5% 13,254 29.4%
Aircraft Fuel & Oil 100 75.8% 10,172 22.5%
Aircraft Leases 156 118.2% 4,924 10.9%
Maintenance Materials and Repairs 146 110.6% 7,573 16.8%
Agency Commissions 6 4.5% 2,512 5.6%
Other Rentals, Landing & Ground Handling Fees 105 79.5% 4,619 10.2%
Advertising 324 245.5% 2,393 5.3%
Depreciation & Amortization 29 22.0% 351 0.8%
Other Operating Expenses 1,037 785.6% 16,120 35.7%
----------------------------- -----------------------------
Total Operating Expenses 2,986 2262.1% 61,918 137.2%
----------------------------- -----------------------------
Net Operating Income\(Loss) (2,854) (16,788)
NON OPERATING ITEMS:
Interest Expense 6 332
Grants/Other 1,045 1,257
------------- -------------
Net Nonoperating 1,039 925
------------- -------------
Net Loss $(1,815) $(15,863)
============= =============
</TABLE>
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
---------------------------------------------------------------
1995 1996
----------------------------- ------------------------------
Percent of Percent of
Amount Operating Amount Operating
(000) Revenues (000) Revenues
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Passenger Revenue $ 57,326 $ 51,780
Other Operating Revenue 1,042 2,180
----------------------------- ------------------------------
TOTAL OPERATING REVENUES $ 58,368 100.0% $ 53,960 100.0%
----------------------------- ------------------------------
OPERATING EXPENSES
Salaries, Wages & Benefits 15,154 26.0% 15,872 29.4%
Aircraft Fuel & Oil 12,309 21.1% 13,134 24.3%
Aircraft Leases 6,036 10.3% 7,920 14.7%
Maintenance Materials and Repairs 9,625 16.5% 8,330 15.4%
Agency Commissions 3,544 6.1% 3,301 5.6%
Other Rentals, Landing & Ground Handling Fees 5,690 9.7% 5,900 10.9%
Advertising 1,978 3.4% 4,501 8.3%
Depreciation & Amortization 442 0.8% 668 1.2%
Other Operating Expenses 17,241 29.5% 22,723 42.1%
----------------------------- ------------------------------
Total Operating Expenses 72,019 123.4% 82,079 152.1%
----------------------------- ------------------------------
Net Operating Income\(Loss) (13,651) (28,119)
NON OPERATING ITEMS:
Interest Expense 393 857
Grants/Other 407 447
------------- -------------
Net Nonoperating 14 (410)
------------- -------------
Net Loss $ (13,637) $(28,529)
============= =============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, Three Months Ended March 31,
----------------------------- ----------------------------------
1996 1997
----------------------------- ----------------------------------
Percent of Percent of
Amount Operating Amount Operating
(000) Revenue (000) Revenue
----------------------------- ----------------------------------
<S> <C> <C> <C> <C>
TOTAL OPERATING REVENUES
Passenger $ 13,795 $ 12,797
Other 405 948
----------------------------- ----------------------------------
14,200 100.0% 13,745 100.0%
OPERATING EXPENSES
Salaries, Wages & Benefits 3,905 27.5% 3,869 28.1%
Aircraft Fuel & Oil 2,942 20.7% 3,005 21.9%
Aircraft Leases 1,640 11.5% 2,275 16.6%
Maintenance Materials and Repairs 2,020 14.2% 1,971 14.3%
Agency Commissions 794 5.6% 503 3.7%
Other rentals, landing and ground handling fee 1,487 10.5% 1,462 10.6%
Advertising 824 5.8% 1,458 10.6%
Depreciation & Amortization 152 1.1% 215 1.6%
Other Operating Expenses 1/ 4,666 32.9% 6,400 46.6%
----------------------------- ----------------------------------
Total Operating Expenses 18,430 129.8% 21,158 153.9%
----------------------------- ----------------------------------
Net Operating Loss (4,230) (7,413)
Interest Expense (net) 118 430
Grants/Others 59 48
----------------------------- ----------------------------------
Net Loss $ (4,289) $ (7,795)
============================= ==================================
</TABLE>
<PAGE> 15
Comparison of the three months ended March 31, 1997 and 1996
Operating Revenues
Total operating revenues of $13,745,000 were 3.2% lower for the three
months ended March 31, 1997 compared to the three months ended March 31, 1996.
At March 31, 1997 the Company provided service to 11 cities compared to 8
cities at March 31, 1996. The Company operated 5 of its 7 aircraft for all of
the quarter ended March 31, 1997 and 6 (of the 7 available) for the quarter
ended March 31, 1996. A new schedule has been operated since April 5 using 6
aircraft (of the available 7 aircraft) and the Company expects to be operating
all 7 aircraft early in June.
Total available seat miles ("ASM's") increased 7.1% from approximately
146,944,000 during the three months ended March 31, 1996 to approximately
157,406,000 during the three months ended March 31, 1997. Revenue passenger
miles also increased from 71,996,000 during the three months ended March 31,
1996 to approximately 83,585,000 during the three months ended March 31, 1997.
The increase in available seat miles was primarily attributable to an increase
in the average stage length, which increased from 274 miles for the three
months ended March 31, 1996 to 357 miles for the three months ended March 31,
1997. The increase in RPMs was primarily attributable to increased acceptance
by the traveling public of the new routes being operated. The Company's load
factor increased from 49.0% for the three months ended March 31, 1996, to 53.1%
for the three months ended March 31, 1997. This increase was also the result
of increased acceptance by the traveling public of the new routes being
operated and additional advertising expenditures made to increase public
awareness of the Company's new services.
Passenger yield decreased 16.6%, from 19.72 cents per RPM for the three
months ended March 31, 1996, to 16.44 cents per RPM for the three months ended
March 31, 1997. The decrease in passenger yield was the result of increases in
fares from initial promotional levels offset by the introduction of advanced
reservation requirements, which produces the lower fares, and increases in the
distance flown by travelers.
The Company's operating break-even load factor increased from 63.6%
during the three months ended March 31, 1996, to 81.7% during the three-month
period ended March 31, 1997. The Company's high operating break-even load factor
during the 1997 period was the result of (i) certain non-recurring maintenance
and repair expenses, (ii) the impact of spreading the cost of the Company's
corporate infrastructure (sufficient to support 7 aircraft) over a small number
of total available seat miles flown using 5 of the 7 leased aircraft and (iii)
higher than normal flight cancellations caused by both extraordinary delays in
the release of aircraft from scheduled maintenance and unscheduled maintenance
requirements for operational aircraft. Approximately 11%, 18%, 15%, 6% and 10%
of scheduled flights were canceled from January through May 1997, respectively.
The Company does not anticipate that such extraordinary scheduled maintenance
delays will occur in the future. While the Company cannot predict unscheduled
maintenance, it has taken certain actions and improved certain procedures
which it believes will reduce the incidence of unscheduled maintenance and
reduce its adverse affect on the schedule; these include hiring additional
maintenance personnel and opening a second maintenance base. Since all seven
aircraft have recently undergone scheduled maintenance, no scheduled
maintenance checks are due until late 1997. The Company's break-even load
factor should decrease as it generates incremental passenger revenue with the
expansion of its new routes and the addition of aircraft to the Company's fleet.
There can be no assurance, however, that any such incremental passenger revenue
will be sufficient to cover the incremental costs of expansion or that,
ultimately, as a result of these or other factors, the Company's operating
break-even load factor will decrease.
15
<PAGE> 16
Operating Expenses
Operating expenses reflect costs for salaries, wages and benefits,
aircraft fuel and oil, aircraft leases, maintenance materials and repairs,
agency commissions, other rental, landing, and ground handling fees,
advertising, depreciation and amortization, and other operating expenses.
Salaries, wages and benefits reflect compensation earned by all
employees of the Company. Fees paid to independent contractors are included in
other operating expenses. The Company's employees are not unionized and when
practicable, part-time employees are used.
Salaries, wages and benefits decreased .9% for the three months ended March 31,
1997 compared to the same three month period in 1996. Salaries, wages, and
benefits accounted for 21.2% of operating expense 27.6% of operating revenue
for the three months ended March 31, 1996. By contrast, salaries, wages, and
benefits accounted for 18.3% of operating expenses and 28.1% of operating
revenue for the three months ended March 31, 1997.
Aircraft fuel and oil expenses include the cost of fuel, oil, and taxes,
as well as the cost of pumping the fuel into the aircraft. Aircraft fuel and
oil expenses increased 2.1% for the three months ended March 31, 1997.
The increase was attributable to higher fuel prices (up to $.81 per gallon from
$.76 per gallon), plus increased consumption per block hour as a result of
heavier loads. Aircraft fuel and oil expenses accounted for 16.0% of operating
expense and 20.7% of operating revenue for the three months ended March 31,
1996. By contrast, aircraft fuel and oil expenses accounted for 14.2% of
operating expenses and 21.9% of operating revenue for the three months ended
March 31, 1997. The Company will likely absorb moderate increases in fuel
costs, which would reduce profits or increase losses for the period affected.
The Company would seek to offset significant longer term increases in fuel
costs with increases in ticket prices. However, because of the Company's
low-fare policy, its ability to pass on the additional costs may be limited. The
Company's aircraft are relatively fuel inefficient compared to newer aircraft.
An increase in the price of fuel could, therefore, result in a
disproportionately higher increase in the Company's expense as compared with
many of its competitors.
The Company leases seven Boeing 737-200 aircraft on operating leases
with terms between approximately one and one-half and three years.
Aircraft lease expenses increased 38.7%, from $1,640,000 for the three
months ended March 31, 1996, to $2,275,000 for the three months March 31, 1997.
The increase was primarily attributable to an increase in the average monthly
lease cost on 6 of the 7 aircraft leased by the Company. The lease rate
increased by $25,000 per month on each of 5 aircraft as a result of
renegotiated leases and increased from $38,900 to $105,000 per month on
February 1, 1997 in exchange for payment of heavy maintenance expenses being
paid for by the owner of 1 aircraft. Aircraft lease expense accounted for 8.9%
of operating expenses and 11.5% of operating revenue for the three months ended
March 31, 1996. By contrast, aircraft lease expense accounted for 10.8% of
operating expenses and 16.6% of operating revenue for the three months ended
March 31, 1997.
Maintenance, materials, and repairs expense includes all the costs
incurred by the Company for maintenance services and related parts and
supplies, but excludes wages paid to the Company's maintenance
employees. Currently, the Company uses its employees to perform minor
maintenance at several of the airports it serves. At some locations, and
whenever required, the Company uses qualified contractors to perform
maintenance on a contract basis. Heavy maintenance, such as major engine
repairs and major airframe checks, are performed by third parties at their
locations. The Company accrues for scheduled C-check inspections at $125 per
block hour, or $375,000 per aircraft.
The Company's fleet consists of aircraft manufactured between 1968 and
1979 and have an average age of 23 years. In general, the costs to maintain
older aircraft exceeds the cost to maintain newer aircraft. Modifications or
additions
16
<PAGE> 17
may also be required to these older aircraft to meet regulations which may be
issued from time to time by the FAA. Included in maintenance, materials, and
repair expense are reserves paid to the lessors, based on hours flown and for
scheduled overhaul, primarily of engines. Major engine repairs are capitalized
and amortized over the period to the next scheduled overhaul.
Maintenance, materials, and repairs expense decreased 2.4% for the
three months ended March 31, 1997. The decrease was due to a reduction in the
number of hours flown (9% lower) offset by both extraordinary delays in the
release of aircraft from scheduled maintenance and unscheduled maintenance
requirements for operational aircraft. Maintenance, materials and repairs
expense accounted for 11.0% of operating expenses and 14.2% of operating
revenue for the three months ended March 31, 1996. By contrast, maintenance,
materials and repairs expense accounted for 9.3% of operating expenses and
14.3% of operating revenue for the three months ended March 31, 1997.
Agency commissions expense reflects fees paid to travel agents. For
the three months ended March 31, 1997, these commissions were paid at 10.0% on
the net fare paid at the time of the sale. Agency commissions expense is
recognized in the same period as the revenue is recognized. Approximately 50% of
the Company's bookings are made through travel agents.
Agency commissions expense decreased 36.6% from the three months ended
March 31, 1996 to the three months ended March 31, 1997. Agency commissions
expense accounted for 4.3% of operating expenses and 5.6% of operating revenue
for the three months ended March 31, 1996. Agency commissions expense accounted
for 2.4% of operating expenses but 3.7% of operating revenue for the three
months ended March 31, 1997.
Other rental, landing, and ground handling fees include costs incurred
by the Company for rental of airport facilities, reservations, and
administrative offices. Landing fees are fees assessed by each airport for
each landing. Ground handling fees reflect the costs incurred by the Company
for use of airport facilities for baggage claim and security and passenger
holding areas, as well as fees under contracts with a third party for handling
and cleaning the aircraft at certain locations.
Other rental, landing, and ground handling fees expense decreased 1.7%,
from the three months ended March 31, 1996, to the three months ended
March 31, 1997. The decrease was primarily attributable to flying fewer
segments (17.8% less) offset by higher fees at New York and Chicago. Other
rental, landing, and ground handling fees represented 8.1% of operating expenses
and 10.5% of operating revenues for the three months ended March 31, 1996. By
contrast, these expenses represented 6.9% of operating expenses and 10.6% of
operating revenues for the three months ended March 31, 1997.
Advertising expense includes all external costs associated with the
production and distribution of advertisements and promotional materials and
sponsorship of various promotional events.
Advertising costs increased 76.9% from $824,000 for the three months
ended March 31, 1996, to $1,458,000 for the three months ended March 31, 1997.
The increase was primarily attributable to increased advertising associated with
implementing the new route structure and the higher costs in New York and
Chicago.
Depreciation and amortization expense includes leasehold improvements
on facilities and equipment, spare parts, and ground equipment. The Company
recognizes such expenses on a straight line basis over the estimated useful
lives of the Company's assets.
Depreciation and amortization expenses increased 41.4% from $152,000
for the three months ended March 31, 1996, to $215,000 for the three months
ended March 31, 1997. The increase was due to the increased level of property
and equipment owned by the Company.
17
<PAGE> 18
Other operating expenses include communications and utilities,
professional and technical fees, postage, freight and supplies, all insurance
(except workers compensation coverage), credit card processing and
computerized reservation systems fees, flight crew hotel and per diem costs,
other outside services, equipment rental, passenger food, passenger
re-accommodation expense, and substitute aircraft service costs. Other
expenses increased 37.2% from $4,666,000 for the three months ended March 31,
1996, to $6,400,000 for the three months ended March 31, 1997. The increase in
other expenses is primarily attributable to the increase in canceled flights
resulting in passenger re-accommodation costs ($1,400,000).
Interest expense increased from $118,000 for the three months ended
March 31, 1996, to $430,000 for the three months ended March 31, 1997. The
increase was a result of interest on increased short term borrowings
and long-term debt.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." The provisions of the
Statement, which will be implemented by the Company for the year ending
December 31, 1997, requires specific computation, presentation and disclosure
requirements for earnings per share. If earnings per share for all periods
presented had been calculated using the requirements of the Statement, the
earnings per share would not have been materially different from the earnings
per share presented.
Comparison of the twelve months ended December 31, 1996 and 1995
Operating Revenues
Total operating revenues were 7.6% lower for the twelve months ended
December 31, 1996 compared to the twelve months ended December 31, 1995
primarily as a result of the Company flying fewer aircraft in 1996 than 1995.
The Company operated 5.6 equivalent aircraft of its 7 aircraft for all of 1996
and 6.4 (of 6.6 available) for 1995. At December 31, 1996 the Company provided
service to 11 cities compared to 8 cities at December 31, 1995.
Total available seat miles ("ASM's") decreased from approximately
712,017,000 during the twelve months ended December 31, 1995 to approximately
648,390,000 during the twelve months ended December 31, 1996. Revenue
passenger miles increased from approximately 351,239,000 during the twelve
months ended December 31, 1995 to approximately 361,230,000 during the twelve
months ended December 31, 1996. The decrease in available seat miles was
primarily attributable to the decrease in the average number of aircraft being
flown, and the increase in RPM's was primarily attributable to increased
acceptance by the traveling public of the new routes being operated.
The Company's load factor increased from 49.3% for the twelve months
ended December 31, 1995, to 55.7% for the twelve months ended December 31,
1996. This increase was primarily the result of increased awareness of the
Company's service.
Passenger yield decreased 10.1% from 16.62 cents per revenue passenger
mile for the twelve months ended December 31, 1995, to 14.94 cents per RPM for
the twelve months ended December 31, 1996. The decrease in passenger yield was
the result of increases in fares from initial promotional levels offset by the
introduction of advanced reservation requirements, which produces the lower
fares, and increases in the distance flown by travelers.
The Company's operating break-even load factor increased from 60.9%
during the twelve months ended December 31, 1995, to 84.3% during the
twelve-month period ended December 31, 1996. The Company's high operating
break-even load factor during the 1996 period was the result of (i) certain
non-recurring maintenance and repair expenses and (ii) the impact of spreading
the cost of the Company's
18
<PAGE> 19
corporate infrastructure over a small number of total available seat miles
resulting from the Company's operating less the six of the seven leased
aircraft. The Company's break-even load factor should decrease as it generates
incremental passenger revenue with the expansion of its new routes and addition
of aircraft to the Company's fleet. There can be no assurance, however, that
any such incremental passenger revenue will be sufficient to cover the
incremental costs of expansion or that, ultimately, as a result of these or
other factors, the Company's operating break-even load factor will decrease.
Operating Expenses
Salaries, wages, and benefits increased 4.7% for the twelve months ended
December 31, 1996 compared to the same twelve month period in 1995. The
increase was primarily the result of a charge made in the twelve month period
ended December 31, 1996 for the amortization of increased compensation in the
amount of $370,565 related to evaluations for stock options granted to certain
employees and severance pay for several executives who left during the year.
There was no similar charge in the twelve month period ended December 31, 1995.
Salaries, wages and benefits accounted for 21.0% of operating expenses and
26.0% of operating revenue for the twelve months ended December 31, 1995. By
contrast, salaries, wages, and benefits accounted for 19.3% of operating
expenses and 29.4% of operating revenue for the twelve months ended December
31, 1996.
Aircraft fuel and oil expenses increased 6.7% for the twelve months
ended December 31, 1996. The increase was attributable to exceptionally high
fuel prices (up to $.84 per gallon from $.67 per gallon), plus increased
consumption per block hour as a result of heavier loads. Aircraft fuel and oil
expenses accounted for 17.1% of operating expense and 21.1% of operating
revenue for the twelve months ended December 31, 1995. By contract, aircraft
fuel and oil expenses accounted for 16.1% of operating expenses and 24.3% of
operating revenue for the twelve months ended December 31, 1996. The Company
will likely absorb moderate increases in fuel costs, which would reduce profits
or increase losses for the period affected. The Company would seek to offset
significant longer term increases in fuel costs with increases in ticket
prices. However, because of the Company's low-fare policy, its ability to pass
on the additional costs may be limited. The Company's aircraft are relatively
fuel inefficient compared to newer aircraft. An increase in the price of fuel
could, therefore, result in a disproportionately higher increase in the
Company's expense as compared with many of its competitors.
Aircraft lease expenses increased 31.2%, from $6,036,000 for the twelve
months ended December 31, 1995, to $7,920,000 for the twelve months ended
December 31, 1996. The increase was primarily attributable to an increase in
the number of aircraft in the fleet to seven in March 1995. In addition the
average monthly lease cost increased for all but two aircraft starting in
April 1996 as a result of renegotiated leases. The lease rate on one of the
remaining two aircraft increased from $38,900 to $105,000 per month on February
1, 1997 in exchange for payment of heavy maintenance expenses being paid
for by the owner. This change in the lease rate also resulted in a one time
charge of $261,000 in prepaid rent expense for the twelve months ended December
31, 1996. Aircraft lease expense accounted for 8.4% of operating expenses and
10.3% of operating revenue for the twelve months ended December 31, 1995. By
contrast, aircraft lease expense accounted for 9.7% of operating expenses and
14.7% of operating revenue for the twelve months ended December 31, 1996.
Maintenance, materials, and repairs expense decreased 13.5% for the
twelve months ended December 31, 1996. The decrease was partially due to
operating fewer aircraft and flying fewer hours (down 16.1%). Maintenance,
materials and repairs expense accounted for 13.4% of operating expenses and
16.5% of operating revenue for the twelve months ended December 31, 1995. By
contrast, maintenance, materials and repairs expense accounted for 10.2% of
operating expenses and 15.4% of operating revenue for the twelve months ended
December 31, 1996.
Agency commissions expense reflects fees paid to travel agents. For
the twelve months ended December 31, 1996, these commission were paid at 10.0%
on the net fare paid at the time of the sale.
19
<PAGE> 20
Agency commissions expense is recognized in the same period as the revenue is
recognized. Approximately 50% of the Company's bookings are made through travel
agents.
Agency commissions expense decreased 14.5% from $3,544,000 for the
twelve months ended December 31, 1995, to $3,031,000 for the twelve months
ended December 31, 1996. The decrease was primarily attributable to a
reduction in travel agents' commission rates from 11% in 1995 to 10% in 1996.
Agency commissions expense accounted for 4.9% of operating expenses and 6.1%
operating revenue for the twelve months ended December 31, 1995. Agency
commissions expense accounted for 3.7% of operating expenses but 5.6% of
operating revenue for the twelve months ended December 31, 1996.
Other rental, landing, and ground handling fees expenses increased
3.0%, from $5,690,000 for the twelve months ended December 31, 1995, to
$5,900,00 for the twelve months ended December 31, 1996. The increase was
primarily attributable to higher fees at New York and Chicago. Other rental,
landing, and ground handling fees represented 7.9% of operating expenses and
9.7% of operating revenues for the twelve months ended December 31, 1995. By
contrast, these expenses represented 7.2% of operating expenses and 10.9% of
operating revenues for the twelve months ended December 31, 1996.
Advertising costs increased 127.6% from $1,978,000 for the twelve
months ended December 31, 1995, to $4,501,000 for the twelve months ended
December 31, 1996. The increase was primarily attributable to increased
advertising associated with implementing the new route structure and the higher
costs in New York and Chicago.
Depreciation and amortization expenses increased to $226,000 or by
51.1% for the twelve months ended December 31, 1996. The increase was due to
an increase in ground handling equipment.
Other operating expenses include communications and utilities,
professional and technical fees, postage, freight and supplies, all insurance
(except workers compensation coverage), credit card processing and computerized
reservation systems fees, flight crew hotel and per diem costs, other outside
services, equipment rental, passenger food, passenger re-accommodation expense,
and substitute aircraft service costs. Other expenses increased 31.8%, from
$17,241,000 for the twelve months ended December 31, 1995, to $22,723,000
for the twelve months ended December 31, 1996. The increase in other
expenses is primarily attributable to the increase in canceled flights
resulting in passenger re-accommodation costs ($2,000,000), the write-off
required as a result of changing reservations systems ($500,000) and higher
than normal legal and audit fees resulting from the preparation of certain
regulatory reports and filings ($700,000).
Interest expense increased from $393,000 for the twelve months ended
December 31, 1995, to $857,000 for the twelve months ended December 31, 1996.
The increase was related to new debt incurred in 1996.
20
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
Almost from its inception, the Company has experienced serious
liquidity problems. These problems continue. From the Company's inception on
January 14, 1993, through March 1995, the Company's pre-operating and
development costs, as well as its operating costs since it commenced flight
operations, were funded with operational revenues and capital comprised of (A)
the initial investment of the Company's founders; (B) the debt and equity
investments described below, and (C) a series of loans, grants, and
reimbursements of expenses provided by the State of South Carolina, the County
of Lexington, and the City of Columbia, South Carolina, including: (i) a $12
million State Loan guaranteed by the Department of Housing and Urban
Development, (ii) $3 million of grants from the City of Columbia and Richland
and Lexington Counties, to be used for personnel relocation, advertising, cost
of Company headquarters, the reservation center, and working capital, and (iii)
$1,100,000 of training grants for pre-employment training for pilots,
mechanics, flight attendants, reservation personnel, and others. As of
March 31, 1997, the Company had $230,890 of unused grants available for rent
subsidy for the Company's reservations facility. In September 1996, the terms
of the State Loan were modified to provide (a) for a four percent (4%) fixed
interest rate through August 31, 2004; beginning September 1, 2004 the interest
rate may be increased, not to exceed prevailing commercial loan rates, based on
the Company's net operating income, (b) that interest due for September 1, 1996
through August 1, 1997 is deferred until August 1, 1997, (c) that the loan is
to be repaid in 143 equal installments based on 204 months amortization with a
balloon payment one month after the last (final) installment; and (d) that the
outstanding principal balance is based on the size of an initial public
offering with principal repayment not to exceed $6,000,000 of the net proceeds
of an initial public offering greater than $20,000,000. The Company does not
now have any plans for an initial public offering.
In the Spring of 1995 the Company sold approximately 3,000,000 shares of
Common Stock to certain employees and shareholders for proceeds of
approximately $1,500,000. Subsequently, the Company from December 1995
through the date hereof: (a) entered into $2,500,000 of bank loans; (b) issued
shares of preferred stock convertible into, in the aggregate 9,250,000 shares
of Common Stock, for an aggregate consideration of $6,500,000; (c) sold
convertible debentures convertible into an aggregate of 27,850,000 shares of
preferred stock which are, in turn, convertible into an aggregate of 27,850,000
shares of Common Stock, for an aggregate consideration of $5,917,000; (d)
issued warrants to purchase 24,400,000 shares of preferred stock which in turn
are convertible into 24,400,000 shares of Common Stock; (e) agreed to the sale
to The Pointe Group L.L.C. at $0.02 per share of Common Stock equal, on a fully
diluted basis, to six percent of the Company's Common Stock assuming issuance
and conversion of the convertible debentures referred to in "(g)" below; upon
the consumation of this sale 14,038,185 shares will be issued for an aggregate
consideration of $280,763; (f) has issued $19,200,000 of demand promissory
notes to Hambrecht & Quist and affiliates, $2,300,000 of which have been
repaid; and (g) has authorized the sale of up to $12,500,000 of convertible
debentures and expects that an additional $7,700,000 of convertible debentures
will be authorized; such convertible debentures would be convertible into
202,000,000 shares of Series F Preferred Stock which in turn would be
convertible into 202,000,000 shares of Common Stock on the basis of $0.10 per
share; such Series F Preferred Stock would be issued on substantially the same
terms as the Series A, Series B, Series C, Series D and Series E Preferred
Stock. As is the case with the Series D and Series E Preferred Stock, the
Company does not have sufficient authorized but unissued preferred stock and
common stock to allow conversion of such convertible debentures and Series F
Preferred Stock. It is anticipated that the shareholders of the Company will
authorize sufficient additional preferred and common stock for such
conversions. The transactions referred to in "(b)", "(c)", "(d)" and "(g)",
above all have the broad weighted-average anti-dilution provisions usual in the
terms of such securities.
It is anticipated that $16,900,000 of the proceeds of such sale
of convertible debentures will be used to retire certain demand promissory
notes of the Company.
In addition, there are outstanding options and warrants to purchase
shares of Common Stock which have been issued to directors, officers, employees
and certain suppliers and customers of the company.
Early in 1996 the Company commenced new routes; thereafter, its load
factors and yields were below prior levels, and the Company's advertising and
other promotional costs were higher, which resulted in significant start-up
losses on the new routes. In addition, significant cash was required to fund
increases in accounts receivable and prepaid expenses. The effects of the
expansion described above has caused the Company to have substantial cash
requirements.
When passengers purchase tickets using a credit card, the credit card
company generally requires that the payment be held in reserve until the
passenger actually flies. Approximately 85% of the Company's ticket sales are
credit card sales made for future travel. These payments are unavailable for
the immediate cash needs of the Company. The Company has entered into an
agreement by which a letter of credit provided by Hambrecht & Quist California
allows cash to be obtained more promptly from credit card receivables.
In January 1996 a 10% federal excise tax on air fares expired. It was
reinstated in August 1996. The Company reflected such reinstatement in its
fare structure, thereby avoiding any adverse effect on the Company. On
January 1, 1997 that excise tax again expired but was reinstated on March 7,
1997; the same methods have been used upon its reinstatement.
On April 8, 1996 the Company ceased scheduled service to the Tampa
International Airport in order to improve the deployment of its aircraft.
Hillsborough County Aviation Authority, which operates the Tampa airport, has
sued the Company for breach of contract. See Item 8 LEGAL PROCEEDINGS.
On May 21, 1997, the Company suspended service to Savannah in order
to improve deployment of aircraft.
During the period from inception through March 31, 1997, the Company's
pre-operating and operating activities resulted in a significant deficit in
cash flow. This cash flow deficit was funded primarily with the proceeds from
private securities sales, bank loans, the State Loan, and certain vendors. At
December 31, 1996, the Company had cash and cash equivalents of $1,100,000 and
the working capital deficit was approximately $27,000,000. At March 31, 1997,
the Company had cash and cash equivalents of $494,000; the working capital
deficit at March 31, 1997 was approximately $35,746,000.
21
<PAGE> 22
The Company expects to incur approximately $1,000,000 for capital
expenditures over the next twelve months to lease additional aircraft, engines
and related spare parts.
In March 1996, the Company entered into an agreement with a bank for a
revolving line of credit which provided the Company with additional working
capital; $500,000 has been advanced under this agreement and no further
advances are expected; $50,000 has been repaid and is not able to be
reborrowed. The principal of this Loan was payable on March 29, 1997; the Bank
has agreed to an extension until July 2, 1997. Interest is payable monthly at
one percent above the prime rate.
In April 1996, the Company obtained a $2,000,000 bank loan all of which has
been funded. Hambrecht & Quist Group, L.L.C. ("H&Q Group") was granted a
warrant to purchase 400,000 shares of Air South Common Stock at a price of
$2.00 per share as consideration for guaranteeing such loan; in May 1996, the
purchase price per share was changed to $0.50 per share as additional
consideration for H&Q Air South Investors, L.P. ("H&Q"), purchasing $2.5
million of Series B Preferred Stock. The principal of this loan was payable on
December 1, 1996 with interest at one percent above the bank's prime rate,
payable monthly. The maturity date of this loan has been extended to June 1,
1998. A letter of credit provided by an affiliate of H&Q Group has been
substituted for the guarantee by H&Q Group of such loan; such affiliate has
been granted a warrant to purchase 8,000,000 shares of Air South Common Stock
at a price of $0.25 per share, subject to adjustment if shares of Common Stock
or equivalents are later sold at a lower price. The Company may from
time-to-time enter into other short-term borrowing arrangements for additional
working capital. However, there can be no assurance that additional loans or
lines of credit will be available in the future.
As of March 31, 1997, the Company had seven aircraft under operating
leases with terms from approximately one and one-half to three years. Rent
expense under these leases is recognized on a straight-line basis over the
lease terms. The amount charged to aircraft lease expense was approximately
$6,900,000 for the year ended December 31, 1996. The Company's working
capital deficit and accumulated deficit are likely to hinder its ability to
obtain additional aircraft.
The Company's over 60-day payables as of December 31, 1996 and March 31,
1997 were and as of the date hereof are approximately $5,100,000. The
Company currently has agreements with certain of its creditors to make payments
in excess of $4,000,000 of payables over periods ranging up to one year.
The Company's operations have not generated positive cash flow since
August 1995. The cash flow deficits have been funded primarily by loans from
and equity securities purchased by affiliates of Hambrecht & Quist Group. If
the Company cannot achieve profitable operations and positive cash flow during
the busy summer months of 1997, the Company believes it is highly unlikely that
such investors will continue to fund the Company's ongoing operation. It is
also highly unlikely that other present investors in the Company, or new
investors, will be willing to make additional investments. If that is the
case, it is highly likely that the Company will be required to discontinue
operations. If positive cash flow and profits are attained, the Company
believes it will be able to fund any deficits in cash flow during the slow fall
and winter months by additional debt and equity financing; however, there can
be no assurance of this.
Cash flows for the three months ended March 31, 1997 necessary to fund
the net loss of $7,795,000 came from short term borrowings of $6,9000,000 and a
combination of an increase in ticket sales for future flights ($3,519,00) and
delaying the payment of certain trade payables ($2,371,000). The combination of
the above sources of cash also was used to pay down certain accrued liabilities
($3,010,000), fund an increae in accounts receivable ($1,491,000), fund an
increase in commissions and fees related to the increase in ticket sales for
future flights ($653,000) and to purchase property and equipment ($425,000).
Cash flows for the twelve months ended December 31, 1997 necessary to fund
the net loss of $28,529,000 came from short term borrowings of $5,277,000,
issuance of preferred stock of $4,000,000, issuance of long term debt of
$7,445,000, and a combination of an increase in ticket sales for future flights
($1,567,000), delaying the payment of certain trade payables and accured
liablilities ($5,140,000 and $3,821,000 respectively) and a decrease in
accounts receivable of $1,747,000. The combination of the above sources of
cash also was used to purchase property and equipment ($1,942,000), make
deposits necessary to commence service to new cities ($517,000) and redeem
common stock ($500,000).
The Financial Accounting Standards Board has issued Statement of Financial
Accounting No. 128, "Earnings Per Share." The provisions of the Statement,
which will be implemented by the Company for the year ending December 31, 1997,
require specific computation, presentation and disclosure for earnings per
share. If earnings per share for all periods presented had been calculated
using the requirements of the Statement, the earnings per share would not have
been materially different from earnings per share presented.
ITEM 3. PROPERTIES.
The Company's operations in Columbia, South Carolina include a downtown
office which houses reservations and executive offices, an office near the
airport which houses accounting and customer relations, and a facility at the
airport that houses executive offices and other administrative and operations
functions. The downtown facility comprises approximately 16,200 square feet.
The offices near the airport comprise 4,000 square feet. The airport facility
comprises approximately 8,400 square feet of office space surrounding a 13,400
square foot hangar. The downtown facility is under a four year lease, entered
into on May 9, 1994. The offices near the airport are leased on a
month-to-month basis. The office/hangar complex at the airport is under lease
for a five-year period from February 1996.
The Company also maintains leased ticketing and boarding facilities, and
office and storage space at airports in the cities it serves. Such facilities
are leased from the airport owner or subleased from other carriers at such
airports.
The Company believes its properties are suitable for their intended
purposes and are adequate for the Company's needs at present. Although the
properties of the Company are essentially fully utilized, the Company believes
that there is room for any anticipated expansion in the near term. If further
expansion is required, the Company believes that adequate properties suitable
for its needs will be available in the locations concerned which can be
obtained on an economically feasible basis.
22
<PAGE> 23
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth beneficial ownership of the shares of
Common Stock as of May 31, 1997 by (i) each stockholder known by the Company
to be the beneficial owner of more than 5% of Common Stock, (ii) each director
of the Company, (iii) each Named Executive Officer, and (iv) all directors and
Executive Officers of the Company as a group. Unless otherwise indicated, all
shares are owned directly and the indicated owner has sole voting and
dispositive power with respect thereto.
<TABLE>
<CAPTION>
Shares Beneficially Owned(1)
----------------------------
Amount and
----------
Nature of
---------
Beneficial
----------
Name of Beneficial Owner Ownership(2) Percent of Class(2)
------------------------ ------------ -------------------
<S> <C> <C>
H&Q Air South Investors, L.P.(3). . . . . 251,673,992* 83.0
William R. Hambrecht(3) . . . . . . . . . 251,673,992** 83.0
Fil-Fibers Manufacturing, Inc. Ltd.(4). . 9,743,590* 3.2
Donald P. Duncan(4) . . . . . . . . . . . 9,743,590** 3.2
W.J. Flynn & Associates, Inc.(5). . . . . 4,871,795* 1.6
The Pointe Group L.L.C.(6). . . . . . . . 14,038,185** 4.6
Clifton E. Haley(7) . . . . . . . . . . . 942,500* ** ***
Patrick J. O'Shea(8) . . . . . . . . . . 628,450* ** ***
Donald Baker(9) . . . . . . . . . . . . 320,500* ** ***
William K. Flynn(5) . . . . . . . . . . . 4,871,795** 1.6
Paul T. Gillcrist(10) . . . . . . . . . . 1,406,977* ***
Harold Stowe(11) . . . . . . . . . . . . 102,800** ***
John P. Tague(6) . . . . . . . . . . . . 14,038,185** 4.6
John Affeltranger(6) . . . . . . . . . . 14,038,185** 4.6
All Directors and Executive
Officers as a group (14 persons) . . . . 283,981,727
</TABLE>
----------------------------
* Direct Ownership
** Indirect Ownership
*** Less than 1%
(1) Pursuant to the regulations of the Securities and Exchange
Commission, shares are deemed to be "beneficially owned" by
a person if such person directly or indirectly has or shares the
power to vote or dispose of such shares, whether or not such person
has any pecuniary interest in such shares, or the right to acquire
the power to vote or dispose of such shares within 60 days,
including any right to acquire shares through the exercise of any
option, warrant or right.
(2) The Company has sold $5,917,000 of convertible debentures which
are convertible into shares of preferred stock which, in turn, are
convertible into Common Stock. By August 15, 1997 the Company
expects to have sold and issued an additional $16,900,000 of such
debentures. At the time of each such sale, the Company did not,
and does not now, have sufficient authorized shares of preferred
stock or Common Stock to effect the conversion of such debentures,
which fact is recognized in the debentures and related debenture
purchase agreement. The Company expects that by July 31, 1997
sufficient preferred stock and Common Stock will have been
authorized to allow the conversion of such debentures to shares of
preferred stock and that such debentures will be converted.
Accordingly, all calculations with respect to beneficial ownership
of the Company have assumed the authorization of such preferred
stock and Common Stock and the issuance and conversion to Common
Stock of such debentures.
23
<PAGE> 24
(3) Includes: (a) 1,250,000 shares of Series A Preferred Stock
("Series A Preferred") held by H&Q AirSouth Investors L.P. ("H&Q")
originally convertible at $2.00 per share into 1,250,000 shares
of Common Stock; (b) 625,000 shares of Series B Preferred Stock
("Series B Preferred") held by H&Q convertible at $0.50 per share
into 5,000,000 shares of Common Stock; (c) $4,000,000 of
Convertible Debentures held by H&Q originally convertible into
16,000,000 shares of Series D Preferred Stock ("Series D
Preferred") when Series D Preferred shares are authorized which,
in turn, are convertible at $0.25 per share into 16,000,000 shares
of Common Stock; and (d) warrants to purchase 400,000 shares of
Common Stock at $0.50 per share issued to H&Q Group, an affiliate
of H&Q; (e) warrants to purchase 16,000,000 shares of Common Stock
at $0.25 per share issued to an affiliate of H&Q and H & Q Group;
(f) warrants to purchase 8,000,000 shares of Common Stock at $0.25
per share issued to an affiliate of H&Q Group and H & Q Group
(such warrants and the warrants described at "(d)," and "(e)"
herein being collectively called the "H & Q Warrrants"); and (g)
$16,900,000 of Convertible Debentures to be purchased by H&Q which
will be convertible into 169,000,000 shares of Series F Preferred
Stock when Series F Preferred Stock shares are authorized which,
in turn, are convertible into 169,000,000 shares of Common Stock.
The shares of Series A Preferred, Series B Preferred, Series D
Preferred and the H&Q Warrants all have broad anti-dilution
provisions which, upon the issuance of certain other equity
securities, would act to increase the conversion ratios. The
application of such anti-dilution provisions and the conversion of
such preferred stock and the exercise of the H&Q Warrants have
been assumed in all calculations with respect to beneficial
ownership of the Company. H&Q and H&Q Group currently hold on a
fully diluted basis almost 50% of the issued and outstanding
voting shares of the Company. On a fully diluted basis (assuming
the issuance and conversion of the Convertible Debentures referred
to in "(c)" and "(g)", above) H&Q and H&Q Group would hold in
excess of 80% of the issued and outstanding voting shares.
William R. Hambrecht, a director of the Company, is Chairman of
H&Q Group. Mr. Hambrecht disclaims beneficial ownership of the
shares held by H&Q Group and H&Q except to the extent of his
proportionate beneficial interest therein. The address of H&Q, H&Q
Group and Mr. Hambrecht is One Bush Street, San Francisco,
California 94104.
(4) Includes: (a) 80,000 shares of Series C Preferred Stock
("Series C Preferred") which are convertible at $0.50 per share
into 2,000,000 shares of Common Stock; and (b) $400,000 of
Convertible Debentures which are convertible into 1,600,000 shares
of Series D Preferred when Series D Preferred shares are
authorized which, in turn, are convertible at $0.25 per share into
1,600,000 shares of Common Stock. The shares of Series C
Preferred and Series D Preferred have broad anti-dilution
provisions which, upon the issuance of certain other equity
securities, would act to increase the conversion ratios. The
application of such anti-dilution provisions and the conversion of
the Series C and D Preferred have been assumed in all calculations
with respect to beneficial ownership of the Company. Donald P.
Duncan was elected a director of the Company pursuant to a
contractual right of Fil-Fibers Manufacturing, Inc. Ltd. ("Fil
Fibers") to nominate one director of the Company. Mr. Duncan
disclaims beneficial ownership of the shares held by Fil-Fibers.
The address of Fil-Fibers Manufacturing, Inc. Ltd. and Mr.
Duncan is Murray Hill Plaza, 2H, 244 Madison Avenue, New York, New
York 10016.
(5) Includes: (a) 40,000 shares of Series C Preferred which are
convertible at $0.50 per share into 1,000,000 shares of Common
Stock; and (b) $200,000 of Convertible Debentures which are
convertible into 800,000 shares of Series D Preferred when Series
D Preferred shares are authorized which, in turn, are convertible
at $0.25 per share into 800,000 shares of Common Stock. The shares
of Series C Preferred and Series D Preferred have broad
anti-dilution provisions which, upon the issuance of certain other
equity securities, would act to increase the conversion ratios.
The application of such anti-dilution provisions and the
conversion of the Series C and D Preferred have been assumed in
all calculations with respect to beneficial ownership of the
Company. William K. Flynn, a director of the Company, is
President of W.J. Flynn & Associates, Inc. Mr. Flynn disclaims
beneficial ownership of the shares held by W.J. Flynn &
Associates, Inc. except to the extent of his proportionate
beneficial interest therein. The address of W.J. Flynn &
Associates, Inc. and Mr. Flynn is 320 Park Avenue, New York, NY
10022.
(6) Includes approximately 14,038,185 shares of Common Stock which are
to be issued to The Point Group, L.L.C. ("TPG"), an
aviation and transportation consulting firm, pursuant to a
consulting agreement between TPG and the Company. Issuance of
these shares has been assumed in all calculations with respect to
beneficial ownership of the Company. John P. Tague, Chairman of
the Board, President and Chief Executive Officer of the Company
and John Affeltranger, Senior Vice President and Chief Operating
Officer of the Company, are each a principal of TPG. Mr. Tague and
Mr. Affeltranger disclaim beneficial ownership of such shares
except to the extent of their proportionate beneficial interests
in TPG. The address of TPG is 866 United Nations Plaza, Suite
451, New York, New York, 10017.
24
<PAGE> 25
(7) Includes 725,000 shares subject to options exercisable
immediately, at $0.50 per share and 217,500 shares held of record
by the Clifton E. Haley Trust dated September 27, 1988. Exercise
of options has been assumed in all calculations with respect to
beneficial ownership.
(8) Includes 522,650 shares held of record jointly by Mr. O'Shea and
his spouse, 75,000 shares subject to options to be exercised at the
time of a public offering of Common Stock by the Company,
20,000 shares which Mr. O'Shea holds the right to vote pursuant to
irrevocable proxies and 10,800 shares held by Mr. O'Shea's
daughter; Mr. O'Shea disclaims beneficial ownership of the shares
owned by his daughter. Exercise of options has been assumed in all
calculations with respect to beneficial ownership.
(9) Includes 270,500 shares held of record by Mr. Baker, 10,000 shares
held by Mr. Baker as Trustee for Andrew C. Baker, and 40,000
shares subject to options immediately exercisable. Exercise of
options has been assumed in all calculations with respect to
beneficial ownership.
(10) Includes 447,900 shares of Common Stock, options to purchase 36,000
shares of Common Stock exercisable at $0.50 per share and
$120,000 of Convertible Debentures which are convertible into
480,000 shares of Series E Preferred Stock ("Series E Preferred")
when Series E Preferred shares are authorized which, in turn, are
convertible at $0.25 per share into 480,000 shares of Common
Stock. The shares of Series E Preferred have broad anti-dilution
provisions which, upon the issuance of certain other equity
securities, would act to increase the conversion ratios. The
application of such anti-dilution provisions and the conversion of
the Series E Preferred and exercise of options has been assumed
in all calculations with respect to beneficial ownership of the
Company. Mr. Gillcrist's address is 210 Upper East Coast Road,
Eastern Lagoon II, Singapore 1541.
(11) Includes 102,800 shares of Common Stock held by CSI Group, Inc., of
which Mr. Stowe is an affiliate, and options to purchase 36,000
shares of Common Stock exercisable at $0.50 per share.
25
<PAGE> 26
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
On August 16, 1996, H&Q purchased $4 million of Convertible Debentures
due August 16, 1999 from the Company. In connection with the purchase of such
debentures: (1) all directors except Messrs. Clifton E. Haley, William R.
Hambrecht and Robert B. Spane were asked to submit their resignations as
directors; all of such directors except Messrs. Donald Baker and Patrick J.
O'Shea have resigned; and (2) Mr. John P. Tague was elected Chairman of the
Board, President and Chief Executive Officer replacing Mr. Roden A. Brandt, and
Mr. John Affeltranger was elected Senior Vice President. Subsequent to the
foregoing changes there have been numerous changes in management at all levels.
The Company's Executive Officers and Directors are now as follows:
<TABLE>
<CAPTION>
Name Age Position
- - - ---- --- --------
<S> <C> <C>
John P. Tague 35 Chairman of the Board, President, and Chief Executive Officer
John Affeltranger 41 Senior Vice President and Chief Operating Officer
Dennis B. Crosby 51 Vice President
Thomas J. Volz 54 Vice President
David Y. Monteith 62 General Counsel and Secretary
Donald Baker(1) 67 Director
Donald P. Duncan 49 Director
William K. Flynn 40 Director
Paul Gillcrist 42 Director
Clifton E. Haley 65 Director
William R. Hambrecht 60 Director
Patrick J. O'Shea(1) 56 Director
Robert B. Spane 56 Director
Harold Stowe 49 Director
</TABLE>
Mssrs. Hambrecht and Spane are directors pursuant to agreements entered
into in connection with the purchase by H & Q of shares of Series A and Series B
Preferred. Messrs. Duncan and Flynn are directors pursuant to agreements
entered into in connection with the purchase, respectively, by Fil-Fibers
Manufacturing, Inc. Ltd. and W.J. Flynn & Associates, of Series C Preferred.
John P. Tague joined the Company in July 1996 as President and Chief
Executive Officer, and as a director; in September 1996 he became Chairman of
the Board. Mr. Tague has also served since November 1996 as Chairman of the
Board, President and Chief Executive Officer of Vanguard Airlines, Inc.
Previously, since 1995, he was and remains a principal of The Pointe Group,
L.L.C. ("TPG") and its Co-Chairman and Chief Executive Officer. TPG is an
aviation and transportation consulting firm. Prior to that, for more than
five years, he was with American Trans Air, Inc., the United States' 10th
largest airline, most recently as President and Chief Operating Officer.
John Affeltranger joined the Company in July 1996, became a Senior Vice
President in August 1996 and became Chief Operating Officer in March 1997.
Since 1995 he has been and remains a principal of and an Executive Vice
President of TPG. Prior to that, for more than five years he was with American
Trans Air, Inc., most recently as a Vice President and Assistant to the Chief
Executive Officer with responsibilities for, among other things, corporate and
fleet development.
Dennis B. Crosby has been a Vice President of the Company since
December 1994. A thirty-year veteran of the airline industry, including
President of an American Airlines subsidiary and Senior Vice President at World
Airways, he was most recently Executive Vice President and Chief Operating
Officer of The California Kamchatka Companies from 1992 to 1994 and Executive
Vice President and Chief Operating Officer of Monevest Holdings b.v. from 1990
- - - - 1992.
____________________________
(1) Messrs. Baker and O'Shea have entered into agreements with the Company that
they will not stand for election as directors at the next meeting of
stockholders. See Item 6. EXECUTIVE COMPENSATION - Employment Agreements
and Other Arrangements.
26
<PAGE> 27
Thomas J. Volz has been a Vice President of the Company since May 1993.
Mr. Volz was a director of the Company until July 1996. Previously, for more
than five years, he was a self-employed marketing consultant. Mr. Volz was
Vice President - Marketing for Southwest Airlines from 1978 to 1984. Mr. Volz
also worked as a marketing executive for Continental Airlines and Braniff, Inc.
David Y. Monteith has been General Counsel and Secretary of the Company
since October 1995. Since 1964 until 1990 Mr. Monteith was engaged in the
practice of corporate, securities, and commercial law in New York City. For
more than five years he has practiced corporate, securities and commercial law
in Columbia, South Carolina, most recently in his own office and previously as
a partner in Nelson Mullins Riley & Scarborough, L.L.P.
Donald P. Duncan became a director of the Company in January 1997. Mr.
Duncan is a Vice President of AT&T Data Network Services and has for more than
20 years served in various capacities with various units of American Telephone
& Telegraph Company.
Donald Baker served as General Counsel and Secretary of the Company
from early 1994 until October 1995 and has been a director of the Company since
early 1994. Previously, for more than five years he practiced law in Chicago
as a partner in Baker & McKenzie.
William K. Flynn became a director of the Company in October 1996. For
more than five years he has been President of W. J. Flynn & Associates, Inc.,
an investment and venture capital firm. Previously he was a certified public
accountant with Arthur Andersen & Company.
Paul Gillcrist became a director of the Company in 1993 and has been a
Boeing 747-400 Senior Captain for Singapore Airlines for more than the past
five years. He formerly was Vice President - Flight Operations at Southern Air
Transport, Inc. and Airborne Freight Corporation, which owns and operates
Airborne Express.
Clifton E. Haley has been a director of the Company since April 1993 and
served as a Chairman of the Board from January 1994 to September 1996. In May
1995 the Board ratified Mr. Haley's role in the management of the Company since
the resignation of the Chief Executive Officer in February 1995 and granted him
the authority of an acting chief executive officer until the election of a new
Chief Executive Officer. In October 1995 Mr. Haley became Chief Executive
Officer pending the election of Roden M. Brandt, the Company's new President,
to that position; Mr. Brandt became Chief Executive Officer in April 1996.
Previously, for more than five years prior to his retirement in January 1993,
Mr. Haley was the Chairman, President, and Chief Executive Officer of Budget
Rent-a-Car Corporation.
William R. Hambrecht has served as a director of the Company since
December 1995. For more than five years he has been with Hambrecht & Quist
Group, L.L.C., an investment banking firm specializing in emerging growth
companies, of which Mr. Hambrecht is a co-founder and Chairman. Mr. Hambrecht
is also a director of Adobe Systems, Inc., a software development company.
Patrick J. O'Shea is the founder of the Company and was Chief Executive
Officer of the Company from its inception until February 1995. As such he was
instrumental in the conception, planning, and implementation of the Company and
the successful beginning of its operations. Prior to that he was a Senior Vice
President of AMADEUS Group, an airline CRS and Chief Executive Officer of
Amadeus Marketing, S.A. Mr. O'Shea is currently Chairman of the Board,
President and Chief Executive Officer of Jet America, Inc.
Robert B. Spane was elected a director in July 1996. Admiral Spane is
retired from the United States Navy and for more than five years has been
engaged as a consultant in various aspects of military and civil aviation.
Admiral Spane is also a director of Vanguard Airlines, Inc.
Harold C. Stowe became a director of the Company in 1995 and has been
Co-President of Canal Industries, Inc., of Conway, South Carolina, for more
than the past five years. Mr. Stowe is also a director of Home State Holdings,
Inc., the holding company for Home State Insurance Company, Inc.
ITEM 6. EXECUTIVE COMPENSATION
Summary Compensation of Executive Officers. The following table sets
forth a summary of the compensation paid by the Company during the fiscal year
ended December 31, 1996 to (a) its Chairman of the Board, President and Chief
Executive Officer, (b) its former President and Chief Executive Officer, (c)
its former Chairman of the Board and former Chief Executive Officer, and
(d) its Senior Vice President and Chief Operating Officer (the "Named Executive
Officers"). No other executive officer of the Company received total annual
compensation for services rendered to the Company during the fiscal year ended
December 31, 1996, in excess of $100,000.
27
<PAGE> 28
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1996
------------------------------------
Name and Principal Position Annual Compensation All Other
- - - --------------------------- ------------------- ---------
Position Salary Bonus Compensation
- - - -------- ------ ----- ------------
<S> <C> <C> <C>
(a) John P. Tague . . . . . . . . . . . . . . . $ 160,470 $ -0- $ -0-
Chairman of the Board,
President and Chief
Executive Officer (1)
(b) Roden A. Brandt . . . . . . . . . . . . . . . $ 99,604 $50,000 $ -0-
President and Chief
Executive Officer (2)
(c) Clifton E. Haley . . . . . . . . . . . . . . $ -0- $ -0- $ -0-
Chairman of the Board
and Chief
Executive Officer (3)
(d) John Affeltranger . . . . . . . . . . . . . . $ 160,470 $ -0- $ -0-
Senior Vice President
and Chief Operating
Officer (4)
</TABLE>
____________________________
(1) Mr. Tague was elected as President and Chief Executive Officer on
July 25, 1996; he became Chairman of the Board upon the resignation of
Mr. Haley on September 15, 1996. Mr. Tague is compensated pursuant to
a contract (the "TPG Contract") between the Company and The Pointe
Group L.L.C. ("TPG") a consulting firm in which Mr. Tague is a
principal. The compensation shown for Mr. Tague is the aggregate
compensation paid to TPG during the year ended December 31, 1996 for
the services of Mr. Tague, Mr. Affeltranger and an assistant to Mr.
Tague pursuant to the contract with TPG.
(2) Mr. Brandt was elected President and Chief Operating Officer of the
Company on October 25, 1995 and became Chief Executive Officer on
April 23, 1996. Mr. Brandt was replaced as President and Chief
Executive Officer by Mr. Tague on July 25, 1996.
(3) Mr. Haley received no salary or other cash payments for his services.
Mr. Haley was appointed Chief Executive Officer of the Company
on October 25, 1995 (formerly, as Chairman of the Board, at the request
of the Board of Directors, he had performed the function of Chief
Executive Officer), and on that date Mr. Haley was awarded options to
purchase 750,000 shares at an exercise price of $1.00 per share; the
exercise price was later reduced to $0.50 per share. The options
were to vest: (a) with respect to 250,000 shares; on October 25,
1995; (b) with respect to 250,000 shares on January 1, 1997; and (c)
with respect to 250,000 on January 1, 1998. Under the options,
250,000 shares vested earlier upon the Board of Directors'
determination that an orderly management succession plan had been
implemented; and an additional 250,000 vested earlier upon the closing
of sales by the Company of equity securities aggregating $4,000,000.
All options have vested. Mr. Haley resigned as Chief Executive
Officer on April 23, 1996 and as Chairman of the Board on September 15,
1996.
(4) Mr. Affeltranger joined the Company on July 25, 1996, became a Senior
Vice President on August 28, 1996, acting Chief Operating Officer on
October 30, 1996 and Chief Operating Officer on March 4, 1997. Mr.
Affeltranger is compensated pursuant to the contract between the
Company and TPG. The compensation shown for Mr. Affeltranger is the
aggregate compensation paid to TPG during the year ended December 31,
1996 for the services of Mr. Tague, Mr. Affeltranger and assistant to
Mr. Tague pursuant to the TPG Contract.
Aggregated Option Exercises and Year End Option Values. During the
year ended December 31, 1996 no options held by the Named Executive Officers
were exercised. At December 31, 1996 Mr. Haley held exercisable options to
purchase 725,000 shares of Common Stock at an exercise price of $0.50 per
share; none of Mr. Haley's options are unexercisable. At December 31, 1996 Mr.
Brandt held exercisable options to purchase 250,000 shares of Common Stock at
an exercise price of $1.00 per share; none of Mr. Brandt's options are
unexercisable. Pursuant to the TPG Contract, under certain circumstances Mr.
Tague may be granted options to purchase up to five percent of the Company's
Common Stock at its fair market value on the date of grant. Based upon the
grant of a warrant as consideration for the provision of collateral security
for certain debts of the Company on December 3, 1996 in an arm's length
transaction, the fair market value of the Common Stock is estimated to have
been $0.25 per share. No other Named Executive Officer held any options to
purchase shares of Common Stock. The Company does not have any plan allowing
the issuance of stock appreciation rights.
28
<PAGE> 29
Employment Agreements and Other Arrangements. Mr. John P. Tague became
President and Chief Executive Officer and a director of the Company on July 25,
1996; on September 15, 1996 he became Chairman of the Board. Mr. Tague serves
pursuant to the TPG Contract. The TPG Contract provides, among other things,
that: TPG will cause Messrs. Tague and John Affeltranger, and one other person
to perform consulting services including serving as officers of the Company for
$425,000 annually for two years. The TPG Agreement also provides for the sale
to TPG of 6% of the Common Stock of the Company, approximately 14,038,185
shares, for a purchase price of $0.02 per share. Upon termination of the
contract with TPG, it is anticipated that the Company will either renew the
contract or enter into an employment contract with Mr. Tague for continued
service. Under such contract, Mr. Tague will be granted an option to purchase
Common Stock on a fully-diluted basis equal to 5% of the Company's Common Stock
at a price per share equal to the then fair market value of the Company's
Common Stock.
On October 31, 1996, with the endorsement of the Company's Board,
of Directors, Mr. Tague became Chairman of the Board, President and Chief
Executive Officer of Vanguard Airlines, Inc., an airline serving the Midwest
and West Coast. The Company's agreement with TPG provides that if Mr. Tague
devotes less than his full time to rendering services to the Company, the cash
compensation of TPG will be reduced to $325,000. Mr. Tague currently spends
approximately one-half his time rendering services to Vanguard.
On November 9, 1995, the Company employed Mr. Roden A. Brandt as
President and Chief Operating Officer. Mr. Brandt was to receive a minimum
gross annual salary of $135,000 per year. His minimum gross annual salary was
increased to $160,000 per year on June 1, 1996. He received performance bonuses
equal to 50% of base salary based on achievement of specific agreed objectives,
paid one-half on February 1, 1996, and one-half on June 1, 1996. He was to
receive an additional bonus following the year-end audit in early 1997 equal to
50% of base salary based on specific objectives with primary emphasis on the
Company's profit plan. Mr. Brandt became eligible to purchase, and purchased,
100,000 shares of Common Stock at $0.50 per share immediately upon acceptance
of employment; 50% of the purchase price was paid immediately and the balance
was paid in July 1996. He was awarded options to purchase 250,000 shares of
Common Stock at $1.00 per share, with 50,000 shares vesting immediately upon
employment, 100,000 shares vesting on June 1, 1996, and 100,000 shares vesting
on January 1, 1997. Upon the change in control, mentioned above, non-vested
shares became vested immediately. The terms of Mr. Brandt's employment
included a term of three years and a $250,000 severance payment if terminated
for reasons other than cause. Mr. Brandt's employment with the Company was
terminated on July 25, 1996. The Company has entered into an agreement with Mr.
Brandt which provides for settlement of claims by Mr. Brandt, including claims
for severance and moving expenses, for $290,000 plus interest at 8.5% payable
over 15 months.
Pursuant to employment agreements with each of its Vice Presidents
(other than Mr. Affeltranger), the Company has agreed to pay six months'
severance to any Vice President whose employment with the Company terminates;
three Vice Presidents have been terminated and received an aggregate of
$146,250; Mr. Haley is not and has not been a salaried employee of the Company
and has no contract with the Company regarding his service as a director or his
prior service as Chairman of the Board and interim Chief Executive Officer.
On March 16, 1995, the Company entered into a termination agreement
(the "O'Shea Agreement") with Patrick J. O'Shea, a director and the former
Vice Chairman of the Board, President, and Chief Executive Officer of the
Company, providing for severance payments totaling $130,000 payable in 15
equal monthly installments with the first installment on April 10, 1995 (the
"Termination Payments"). The O'Shea Agreement also provides that Mr. O'Shea's
option to purchase 75,000 shares of Common Stock at $1.00 per share awarded to
him on August 23, 1994, became fully vested and becomes exercisable on the
earlier of 30 days prior to the date the Company announces its initial public
offering or March 16, 2000. On December 22, 1995, the Company and Mr. O'Shea
amended the O'Shea Agreement (the "O'Shea Amendment") to, among other things,
provide for the payment of the Termination Payments as a lump sum rather than
periodically and for the
29
<PAGE> 30
redemption by the Company for $2.00 per share of up to 250,000 shares of Common
Stock owned by Mr. O'Shea and specified persons designated by him. The Company
redeemed 150,000 shares of Common Stock held by Mr. O'Shea and 100,000 shares
of Common Stock held by persons designated by him. Pursuant to the O'Shea
Amendment, Mr. O'Shea agreed not to stand for re-election as a director of the
Company.
On December 22, 1995, the Company entered into a termination agreement
with Donald Baker, a former director and former Vice President, General
Counsel, and Secretary of the Company. This agreement provides for, among
other things, the payment in a lump sum of the remainder of the $48,750 in the
aggregate of periodic severance payments provided for by Mr. Baker's employment
agreement and termination agreement, and immediate vesting of stock options
previously granted to him. The Company redeemed 20,000 shares of Mr. Baker's
Common Stock at $2.00 per share as a designee of Mr. O'Shea under the O'Shea
Amendment. Pursuant to such termination agreement, Mr. Baker agreed not to
stand for re-election as a director of the Company.
Stock Option Plans. In January 1994, the Board of Directors adopted
and the Company's stockholders approved the 1993 Incentive Stock Option Plan
(the "1993 Stock Option Plan") under which 500,000 shares of Common Stock were
available to be granted to officers and key employees of the Company. Options
for 350,000 of such shares have been granted. Options granted under the 1993
Stock Option Plan are intended to be incentive stock options as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), which
permits the deferral of taxable income related to the exercise of such options.
Options granted under the 1993 Stock Option Plan have an exercise price equal
to the fair market value at the date of the option grant. Generally, the
options are nontransferable and become void unless the optionee remains
continuously employed by the Company for at least six months following the date
of grant. In addition, the 1993 Stock Option Plan requires each optionee to
agree in writing not to sell or otherwise transfer any shares acquired by
exercise of an option under the plan until two years after the date of grant
and one year after the date of exercise thereof. It is not contemplated that
any additional options will be granted under the 1993 Stock Option Plan.
In August 1994, the Board of Directors adopted the 1994-1995 Stock
Option Plan (the "1994-1995 Stock Option Plan") under which 750,000 shares of
Common Stock were available to be granted to officers and employees of the
Company, as well as nonemployee directors, consultants, and others who have a
relationship with the Company. The 1994-1995 Stock Option Plan was approved by
the Company's stockholders in January 1995. In March 1996 the Board of
Directors adopted the Amended 1994-1995 Stock Option Plan (the "Amended Plan")
which, among other things, increased the number of shares available for grant
to 2,500,000. In the discretion of the Board of Directors, the Amended Plan
may be submitted to the stockholders for approval. The Company may award
either incentive stock options or non-qualified stock options under the Amended
Plan. However, until stockholder approval is obtained, options granted will
not qualify as incentive options under applicable state and federal tax laws.
However, because of major changes and proposed changes to the capitalization of
the Company, the Company does not (a) plan to submit the Amended Plan to its
shareholders for approval or (b) anticipate that any additional options will be
granted under the Amended Plan.
Options under the Amended Plan may become exercisable with respect to
not more than one-third of the total number of shares granted thereby during
each twelve-month period during which the optionee remains continually an
employee, director, or consultant of the Company, commencing twelve months from
the date of grant.
Organization and Compensation Committee. The Company's organization
and Compensation Committee considers and makes recommendations as to the
structure of the management organization and the compensation provided to its
directors, officers and executives. Until July 25, 1996, the Company's
Organization and Compensation Committee (the "Committee") consisted of Clifton
E. Haley, Paul Gillcrist, Harold Stowe and Suzy Van Huss. Other than Mr.
Haley, none of the members of the committee was employed by or served as an
officer of the Company; from October 25, 1995 until April 23, 1996 Mr. Haley
served without salary as Chief Executive Officer of the Company. From
January 1994 until September 15, 1996, Mr. Haley was Chairman of the Board of
the Company. On July 25, 1996 Mssrs. Gillcrist and Stowe, and Dr. Van Huss
resigned as Directors; the Committee has not been reconstituted. The Committee
has not adopted any policies relating to the Company's executive officers.
actions on executive compensation since July 25, 1996 have been made
on the recommendation of the President.
On July 25, 1996 John P. Tague was elected President and Chief
Executive Officer of the Company. The principal factor considered by the Board
in electing Mr. Tague and establishing his compensation was his successful
experience in operating an airline and causing its significant growth.
Directors' Compensation. The Company's Directors receive no pay for
service as such; they are, however, reimbursed for their out-of-pocket expenses
of traveling to and attending meetings of the Board of Directors. No such
reimbursements have been paid from January 1, 1996 to the date hereof. On June
23, 1995 certain directors of the Company including Mssrs. Gillcrist and Stowe,
and Dr. VanHuss were each granted an option to purchase 36,000 shares of
Common Stock at an exercise price of $0.50 per share.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On March 16, 1995, the Company entered into the O'Shea Agreement. On
December 22, 1995, the Company entered into an agreement supplemental to the
O'Shea Agreement. See ITEM 6. EXECUTIVE COMPENSATION.
On December 22, 1995 the Company entered into an agreement with Donald
Baker, a director. See ITEM 6. EXECUTIVE COMPENSATION - Employment Agreements
and Other Arrangements.
The Company has entered into an agreement with The Pointe Group,
L.L.C. regarding the services of Mssrs. Tague and Affeltranger and one other
person. See ITEM 6. EXECUTIVE COMPENSATION - Employment Agreements and Other
Arrangements.
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<PAGE> 31
The Company has had the following transactions with H&Q and certain of
its affiliates of which William R. Hambrecht, a director of the Company, is
also an affiliate: (a) the sale to H&Q on December 29, 1995 of $2,500,000 of
Series A Preferred; (b) the sale to H&Q on May 24, 1996 of $2,5000,000 of
Series B Preferred; (c) the sale to H&Q on August 16, 1996 of $4,000,000 of
convertible debentures; (d) the delivery to H&Q and certain of its affiliates
from September 1996 through the date hereof of Promissory Notes reflecting
loans to the Company aggregating $19,200,000 of which $2,300,000 has been
repaid; (e) an affiliate of H&Q has provided a letter of credit as security for
the early payment of credit card receivables of the Company; the Company has
issued to such affiliate a warrant to purchase 16,000,000 shares of the
Company's common stock for $0.25 per share, subject to adjustment if Common
Stock or equivalents are later sold at a lower price; and (f) an affiliate of
H&Q has provided a letter of credit in exchange for the guaranty by another
affiliate of H&Q of a $2,000,000 bank loan to the Company; as consideration for
providing such letter of credit, such subsidiary has been granted a warrant to
purchase 8,000,000 shares of the Company's Common Stock for $0.25 per share,
subject to adjustment if Common Stock or equivalents are later sold at a lower
price. The Company has issued to H&Q Group a warrant to purchase 400,000
shares of Common Stock for $0.50 per share as consideration for its guarantee
of a $2 million bank loan. See ITEM 4. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
During the years ended December 31, 1995 and 1996 the Company paid CEH
Inc. $96,270 and $31,650, respectively for air travel on Company business by
its Director and former Chairman of the Board, Clifton E. Haley, and certain
other directors, officers, management executives and consultants between
Columbia, S.C. and various places. As of the date hereof, $121,596 is owed to
CEH, Inc. for such air travel by Mr. Haley; the invoices representing such
amount are all more than 120 days past due. CEH Inc. is owned by Mr. Haley.
On July 12, 1996, Mr. Haley paid $277,359 of insurance premiums
directly to the broker for the Company's insurance carrier to avoid
cancellation of its policies of insurance. As of December 31, 1996, this
amount was, and is now, payable to Mr. Haley
Phillip R. Coleman has acted as lease negotiating agent with the
Company for the lessor of two aircraft leased by the Company including the
material renegotiation of one lease effective February 1, 1997. From March
1993 until the present Clifton E. Haley, a former Chairman of the Board and
Chief Executive Officer of the Company was the Chairman of the Board
and a 50% stockholder in a company in which Mr. Coleman was an officer and a
50% stockholder.
In connection with the renegotiation in early 1995 of the terms of the
lease for one of such aircraft, the lessor was given the right to recieve
certain options to purchase shares of Common Stock of the Company, some of
which were transferred to Mr. Coleman, presumably as part of his compenstion
for acting as negotiating agent. These options contained broad antidilution
provisions.
ITEM 8. LEGAL PROCEEDINGS.
The Company is a party to a lawsuit which if decided adversely to
the Company might be considered a material lawsuit. In Hillsborough County
Aviation Authority v. Air South Airlines, Inc., the Hillsborough County
Aviation Authority seeks damages from the Company arising out of the Company's
alleged breach of four contracts relating to the use by the Company of Tampa
International Airport. This suit was instituted in April, 1996 in the Circuit
Court of the Thirteenth Judicial Circuit in and for Hillsborough County, State
of Florida, Civil Division. The suit seeks approximately $472,000 in damages
plus interest, costs and attorneys' fees. An accrual of $680,000 reflecting
management's estimate of the amount required to settle this suit has been
recorded as of March 31, 1997.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
(a) Market Information.
There is no established trading market for any securities of the
Company. The Company takes the position that all its issued and outstanding
securites issued by it to date are "restricted securities" as defined in Rule
144(a)(3) promulgated under the Securities Act and cannot be sold or otherwise
transferred unless registered or sold or transferred pursuant to an applicable
exemption. On the date hereof: (i) there are outstanding options or warrants to
purchase 34,384,833 shares of Common Stock, and certain of such options are
subjects to broad anti-dilutive provisions; (ii) there are outstanding shares
of preferred stock and convertible debentures which are convertible into
50,829,838 shares of Common Stock and there are no shares of common equity
which could be sold pursuant to Rule 144. The Company has agreed under certain
circumstances to register under the Securities Act of 1933, as amended (the
"Securities Act"), for sale by certain security holders up to 62,382,598 shares
of Common Stock; and (iii) the Company is not presently proposing to publicly
offer any of its common equity.
(b) Holders.
On the date hereof there were 899 holders of record of shares of Common
Stock.
(c) Dividends.
The Company has never declared or paid dividends on its capital stock.
The Company currently intends to retain any available earnings for use in the
operation and expansion of its business. Therefore, the Company does not
expect to pay any cash dividends on the Common Stock in the foreseeable future.
Any payments of dividends by the Company in the future will be at the
discretion of the Board of Directors and will depend upon the Company's
earnings, capital requirements, financial condition, and any other factors
deemed relevant by the Board of Directors. In addition, the Company is
prohibited from making any cash distribution in respect of its Common Stock
pursuant to restrictive covenants in various agreements with banks and others,
including the State Loan agreement.
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<PAGE> 32
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Since the Company's inception, the registrant has sold and issued or
otherwise issued the following unregistered securities; all transactions
described below have been adjusted to reflect a two-for-one split of the shares
of Common Stock effective in September, 1993:
(1) Between April 1993 and September 1993, the Company sold
2,097,334 shares of Common Stock to the founding stockholders and original
directors and officers of the Company for cash, services rendered, or a
combination of cash and services rendered, at $0.23 to $0.83 per share.
(2) (a) In September 1993 the Company sold 30,000 shares of Common
Stock to a consultant to the Company in exchange for consulting services on the
basis of $0.50 per share; (b) in January, 1994 the Company issued 56,000 shares
in the aggregate to four directors of the Company in exchange for services as
directors and consulting services on the basis of $0.50 per share; (c) in April
1994 the Company sold 35,000 shares to its chief pilot and 80,000 shares to its
chief financial officer, in each case for $0.50 per share.
(3) In May 1994, the Company sold 1,022,000 shares of Common Stock
to South Carolina accredited investors for $1.00 and 235,000 shares of Common
Stock to certain of its founding stockholders for $0.50 per share.
(4) In July 1994, the Company sold 436,200 shares of Common Stock to
certain of its founding stockholders, officers, directors and certain
executive employees for $0.50 per share.
(5) In January 1995, the Company issued an aggregate of 32,775
shares of Common Stock to substantially all employees of the Company as holiday
gifts. The number of shares issued to each employee was based upon months of
service. Half of such shares were donated by Patrick J. O'Shea, the then
President and Chief Executive Officer, and founder of the Company.
(6) In April 1995, the Company sold 1,836,560 shares of Common Stock
pursuant to the Company's Employee Stock Purchase Plan for $0.50 per share.
(7) In April 1995, the Company sold 1,181,040 shares of Common Stock
pursuant to a rights offering to existing stockholders (other than employee
stockholders who had received shares as 1994 holiday gifts or who had purchased
shares pursuant to the Employees Stock Purchase Plan) for $0.50 per share.
(8) In May 1995 the Company sold 122,400 shares of Common Stock to a
consultant for consulting services on the basis of $0.50 per share.
(9) In August 1995, the Company issued an aggregate of 129,590 shares
of Common Stock to substantially all employees of the Company as gifts on the
occasion of the Company's first anniversary of flight operations. The number
of shares issued to each employee was based upon months of service.
(10) In November 1995, the Company sold 100,000 shares of Common Stock
to an officer and director for $0.50 per share in connection with his
employment by the Company.
(11) In December 1995, the Company sold 1,250,000 shares of Series A
Preferred to H&Q Group for $2.00 per share.
(12) In March 1996, the Company issued 7,500 shares of Common Stock to
a bank in connection with a loan.
(13) In April 1996, the Company borrowed $2,000,000 from a bank. H&Q
Group guaranteed the loan in exchange for a warrant to purchase 400,000 shares
of Series A Preferred at $2.00 per share; that price has subsequently been
reduced to $.50 per share.
(14) On May 24, 1996, the Company sold 5,000,000 shares of Series B
Preferred to H&Q for $2,500,000.
(15) In June 1996, the Company sold 120,000 shares of Series C
Preferred for $1,500,000. $1,000,000 was sold to a corporation of British
Virgin Islands registry and $500,000 to a New York corporation.
(16) On August 16, 1996, the Company sold $4 million of Convertible
Debentures to H&Q.
(17) On September 4, 1996 the Company sold $500,000 of Convertible
Debentures to a North Carolina corporation.
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<PAGE> 33
(18) On September 30, 1996, the Company sold $400,000 and $200,000,
respectively, of Convertible Debentures to the two investors referred to in
"(15)", above.
(19) In October 1996, the Company sold $120,000 of Convertible
Debentures to a present stockholder and director of the Company resident in
Singapore.
(20) As of March 31, 1997, the Company had granted stock options and
warrants (in addition to those described elsewhere in this Item 10) to
employees, officers and directors and certain suppliers covering an aggregate
of 34,384,833 shares of Common Stock exercisable at between $0.25 and $0.50
per share. None of these options and warrants have been exercised except for
3,333 shares by one person leaving the employment of the Company.
(21) From September 20, 1996 through the date hereof the Company has
borrowed 19,200,000 from Accredited Investors pursuant to demand promissory
notes; $2,300,000 has been repaid. It is anticipated that such Accredited
Investors will cause such demand promissory notes to be satisfied in
consideration of the issuance of a similar amount of the Company's Convertible
Debentures to them.
(22) On December 3, 1996 the Company issued a Warrant to H&Q to
purchase 16,000,000 shares of Common Stock at an exercise price of $0.25 per
share subject to adjustment if Common Stock or equivalents are later sold at a
lower price. Such Warrant was issued as consideration for H&Q providing a
$4,000,000 letter of credit to secure the early payment certain of credit card
receivables of the Company.
(23) On January 29, 1997 the Company issued a warrant to H&Q to
purchase 8,000,000 shares of Common Stock at an exercise price of $0.25 per
share subject to adjustment if Common Stock or equivalents are later sold at a
lower price. Such warrant was issued as consideration for H&Q providing a
$2,000,000 letter of credit to secure a bank loan to the Company.
(24) On April 16, 1997 the Company sold $697,000 of Convertible
Debentures to a venture capital company.
The sales and issuance of securities in the transactions described in
paragraph "(6)", above, were deemed to be exempt from registration under the
Securities Act by virtue of Rule 701 promulgated thereunder in that they were
offered and sold pursuant to a written contract relating to compensation. With
respect to (a) the grant of stock options described in paragraphs "(20)"
"(22)"; and "(23)", (b) the issuances referred to in paragraphs "(5)" and
"(9)", above, an exemption from registration under the Securities Act was
unnecessary in that the issuance of the securities did not involve a sale of
securities as such term is used in Section 2(3) of the Securities Act. The
sales and issuances of securities in the transactions described in all other
paragraphs above were deemed to be exempt from registration under the
Securities Act by virtue of Section 4(2) and Regulation D promulgated
thereunder.
Except for certain shares issued prior to May 1994, appropriate legends
are affixed to the stock certificates for all shares issued by the Company and
investment representations were obtained from the purchasers. All purchasers
of securities either received adequate written information about the Company or
had access, through employment or other relationships, to such information
necessary to make a proper evaluation of the securities being acquired. The
Company considers all securities issued by it to date to be "restricted
securities" as defined in Rule 144(a)(3) promulgated under the Securities Act.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The authorized capital stock of the Company consists of 18,000,000
shares of Common Stock, par value $0.001 per share, and 2,000,000 shares of
Preferred Stock, par value $0.001 par value per share (the "Preferred Stock").
COMMON STOCK
As of the date hereof, there are 6,967,182 shares of Common Stock
outstanding, held of record by 899 stockholders. Options and warrants to
purchase 34,384,833 shares of Common Stock have been issued. If all
outstanding convertible securities were converted and all options and warrants
were exercised, after applying broad anti-dilution provisions where applicable,
there would be 73,386,070 shares of Common Stock outstanding, held of
record by approximately 925 stockholders.
Holders of Common Stock are entitled to one vote for each share held
and have no preemptive or other subscription rights, and there are no
conversion rights or redemption or sinking fund provisions with respect to
Common Stock. There is cumulative voting for the election of directors.
Holders of Common Stock are entitled to such dividends as may be declared by
the Board of Directors out of funds legally available therefor, subject to
preferential dividend rights of any outstanding series of Preferred Stock, if
any. Upon the liquidation, dissolution, or winding up of the Company, the
holders of Common Stock are entitled to receive pro rata the net assets of the
Company remaining after the payment of all creditors and any Preferred Stock or
other liquidation preferences. The outstanding shares of Common Stock are
fully paid and nonassessable.
PREFERRED STOCK
As of the date hereof, there was an aggregate of 1,995,000 shares of
Preferred Stock outstanding, which shares were issued in series, to the
number of holders of record indicated, and with rights of conversion (before
application of anti-dilution provisions) into the number of shares of Common
Stock as follows:
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<PAGE> 34
<TABLE>
<CAPTION>
Name of Series and Number of Shares
Number of Shares Number of of Common Stock Issuable
Outstanding Holders Upon Conversion
---------------------- ----------- ---------------------------
<S> <C> <C>
Series A 1
1,250,000 shares 1,250,000 shares
Series B 1
625,000 shares 5,000,000 shares
Series C 2
120,000 shares 3,000,000 shares
</TABLE>
Series A
The Series A Preferred Stock (the "Series A") shall be entitled to
receive non-cumulative dividends at the rate of $0.16 per share per annum. No
cash dividend shall be paid on the Common Stock in any year unless an equal
dividend is paid on each outstanding share of Series A on an as-if-converted
basis. In the event of liquidation, the holders of the Series A shall be
entitled to receive, pari passu with the shares of Series B Preferred Stock
("Series B") and Series C Preferred Stock ("Series C") in preference to the
Common Stock, $2.00 per share. After payment of such preferential amount, the
remaining assets shall be distributed ratably among the holders of Series A,
Series B, Series C and Common Stock in proportion to the shares held. Each
share of Series A is convertible at any time into one share of Common Stock.
The holders of Series A have the right to vote with the holders of Common Stock
as a single class upon the election of directors and, subject to any applicable
limitations in the Delaware General Corporation Law, upon any other matter
submitted to the stockholders. Each share of Preferred Stock has the same
number of votes as the shares of Common Stock into which it is convertible. In
addition, the vote of a majority of the Series A shares shall be necessary to
adopt certain fundamental changes in the Company, including any change to the
Certificate of Incorporation or Bylaws of the Company, liquidation of the
Company, change in the principal business of the Company or certain securities
repurchases by the Company. So long as at least 50% of the Series A remains
outstanding, the holders of Series A voting as a class shall be entitled to
elect one member to the Board of Directors. The Series A holders' rights with
respect to preferences upon liquidation, conversion into Common Stock, and
voting with the holders of Common Stock as a class on certain matters are
protected by broad anti-dilution provisions.
Series B
The Series B Preferred Stock (the "Series B") shall be entitled to
receive non-cumulative dividends at the rate of $0.32 per share per annum. No
cash dividend shall be paid on the Common Stock in any year unless an equal
dividend is paid on each outstanding share of Series B on an as-if-converted
basis. In the event of liquidation, the holders of the Series B shall be
entitled to receive, pari passu with Series A and Series C, in preference to the
Common Stock, $4.00 per share. After payment of such preferential amount, the
remaining assets shall be distributed ratably among the holders of Series A,
Series B, Series C and Common Stock in proportion to the shares held. Each
share of Series B is convertible at any time into eight shares of Common Stock.
The holders of Series B have the right to vote with the holders of Common Stock
as a single class upon the election of directors and, subject to any applicable
limitations in the Delaware General Corporation Law, upon any other matter
submitted to the stockholders. Each share of Preferred Stock has the same
number of votes as the shares of Common Stock into which it is convertible. In
addition, the vote of a majority of the Series B shares shall be necessary to
adopt certain fundamental changes in the Company, including any change to the
Certificate of Incorporation or Bylaws of the Company, liquidation of the
Company, change in the principal business of the Company or certain securities
repurchases by the Company. So long as at least 50% of the Series B remains
outstanding, the holders of Series B voting as a class shall be entitled to
elect one member to the Board of Directors. The Series B holders' rights with
respect to preferences upon liquidation, conversion into Common Stock, and
voting with the holders of Common Stock as a class on certain matters are
protected by broad anti-dilution provisions.
Series C
The Series C Preferred Stock (the "Series C") shall be entitled to
receive non-cumulative dividends at the rate of $1.00 per share per annum. No
cash dividend shall be paid on the Common Stock in any year
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<PAGE> 35
unless an equal dividend is paid on each outstanding share of Series C on an
as-if-converted basis. In the event of liquidation, the holders of the Series
C shall be entitled to receive, pari passu with Series A and Series B, in
preference to the Common Stock, $12.50 per share. After payment of such
preferential amount, the remaining assets shall be distributed ratably among
the holders of Series A, Series B, Series C and Common Stock in proportion to
the shares held. Each share of Series C is convertible at any time into 25
shares of Common Stock. The holders of Series C have the right to vote with
the holders of Common Stock as a single class upon the election of directors
and, subject to any applicable limitations in the Delaware General Corporation
law, upon any other matter submitted to the stockholders. Each share of
Preferred Stock has the same number of votes as the shares of Common Stock
into which it is convertible. In addition, the vote of a majority of the
Series C shares shall be necessary to adopt certain fundamental changes in the
Company, including any change to the Certificate of Incorporation or Bylaws of
the Company, liquidation of the Company, change in the principal business of
the Company or certain securities repurchases by the Company. So long as at
least 50% of the Series C remains outstanding, the holders of Series C voting
as a class shall be entitled to elect one member to the Board of Directors.
The Series C holders' rights with respect to preferences upon liquidation,
conversion into Common Stock, and voting with the holders of Common Stock as a
class on certain matters are protected by broad anti-dilution provisions.
SERIES D AND E
The Company has sold $4,600,000 of Convertible Debentures which are
convertible to Series D Preferred Stock which is, in turn, convertible into
Common Stock; and $620,000 of Convertible Debentures which are convertible into
Series E Preferred Stock which is, in turn, convertible into Common Stock. The
Company does not now have sufficient authorized preferred or common stock for
the conversion of such debentures and preferred stock. It is anticipated that
the shareholders of the Company will approve such additional authorized capital
stock at the next annual meeting of stockholders. It is also anticipated that
the terms of such Series D and Series E Preferred Stock will be substantially
similar to those of the Series A, Series B and Series C Preferred Stock except
that Series D and Series E Preferred will be convertible at $0.25 per share.
SERIES F
The Company anticipates that within 90 days after the date hereof it
will have sold $16,900,000 of Convertible Debentures which are convertible to
Series F Preferred Stock which is, in turn, convertible into Common Stock. The
Company does not now have sufficient authorized preferred or common stock for
the conversion when issued of such debentures and preferred stock. It is
anticipated that the shareholders of the Company will approve such additional
authorized capital stock at the next annual meeting of stockholders. It is
also anticipated that the terms of such Series F Preferred Stock will be
substantially similar to those of the Series A, Series B and Series C Preferred
Stock except that Series F Preferred will be convertible at $0.10 per share.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) Section 145 of the Delaware General Corporation Law ("DGCL") (i)
gives Delaware corporations broad powers to indemnify their present and former
directors, officers, employees or agents and those directors, officers,
employees or agents of certain other entities who serve in such capacities for
those entities at the request of a Delaware corporation against expenses
incurred in the defense of any lawsuit to which they are made parties by reason
of being or having been such directors, officers, employees or agents, subject
to specified conditions and exclusions, (ii) gives a director or officer who
successfully defends an action the right to be so indemnified, and (iii)
authorizes the Company to buy directors' and officers' liability insurance.
Such indemnification is not exclusive of any other rights to which those
indemnified may be entitled under any bylaws, agreement, vote of stockholders
or otherwise.
(b) The Company's Certificate of Incorporation provides that the
Company shall indemnify officers, directors, employees and agents of the
Company to the fullest extent permitted by the DGCL.
(c) In accordance with Section 102(b)(7) of the DGCL, the Company's
Certificate of Incorporation provides that directors shall not be personally
liable for monetary damages for breaches of their fiduciary duty as directors
except for (i) breaches of their duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or knowing violations of law, (iii) breaches of Section
174 of the DGCL (unlawful payment of dividends), or (iv) transactions from which
a director derives an improper personal benefit.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements required by this ITEM 13 are set forth in pages
F-1 through F-19 of this Registration Statement. No supplementary financial
information is required by Item 302 of Regulation S-K.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the registrant's two most recent fiscal years or any subsequent
interim period, no independent accountant who was previously engaged as the
principal accountant to audit the registrant's financial statements, or an
independent accountant who was previously engaged to audit a significant
subsidiary and on whom the
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<PAGE> 36
principal accountant expressed reliance in its report, has resigned (or
indicated it has declined to stand for re-election after the completion of the
current audit) or was dismissed.
GLOSSARY
"Available seat miles" or "ASMs" represents the number of seats available for
passengers on scheduled service flights multiplied by the number of miles those
seats are flown.
"Aviation Act" means the Federal Aviation Act of 1958.
"Average fare" means operating revenues divided by enplaned passengers.
"Average flight length" represents total aircraft miles flown divided by the
number of departures.
"Average segment fare" means operating revenue divided by onboard passengers.
"Block hours flown" represents the time between aircraft gate departure and
aircraft gate arrival.
"Break-even load factor" represents the percentage of RPMs that must be flown
for the airline to break even after operating expenses. Break-even load factor
is calculated by taking total expenses, minus non-passenger revenue, divided by
ASMs, divided by passenger yields per RPM.
"CRS" means Computer Reservation Systems used extensively by travel agents in
the airline industry to book reservations.
"C-check" means scheduled heavy maintenance required by FAA regulations to be
performed on aircraft every 3,000 hours of flight time.
"Deregulation Act" means the Airline Deregulation Act of 1978.
"DOT" means the United States Department of Transportation.
"FAA" means the Federal Aviation Administration.
"Grants" means the approximately $4.0 million of grants to the Company by South
Carolina State and local governments for relocation, training, facility, and
advertising reimbursement.
"Load" means the percentage of available seats occupied.
"Load Factor" represents Revenue Passenger Miles divided by available seat
miles.
"Operating Cost per total ASM" for any period represents the amount determined
by dividing total operating expenses for each period by total ASMs for each
such period.
"Passenger yield per RPM" represents the total passenger revenue divided by
RPMs.
"Revenue Passenger Miles" or "RPMs" represents the total number of miles flown
by passengers on scheduled service flights.
"State Loan" means a $12 million loan to the Company arranged by the State of
South Carolina from Lexington County, South Carolina guaranteed and sold by the
United States Department of Housing and Urban Development.
"Total Revenue per ASM" represents total revenues divided by total Available
seat miles.
"Working Capital" means the excess of current assets over current liabilities.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
FINANCIAL STATEMENTS
(a) Independent Auditors' Report;
Audited Balance Sheets at December 31, 1995 and 1996,
Statements of Operations, Stockholders' Deficiency, and Statement
of Cash Flows for the years ended August 31, 1994 and 1995, the
four months ended December 31, 1995 and the year ended
December 31, 1996.
(b) Unaudited Balance Sheet at March 31, 1997, Statement of
Operations, Stockholders' Deficiency and Statement of Cash Flows
for the three months ended March 31, 1996 and 1997.
EXHIBIT INDEX
The exhibits listed below are, unless marked with an asterisk,
incorporated by reference to the Company's Registration Statement on Form 10
filed on February 7, 1997 (withdrawn pursuant to request letter dated
March 21, 1997); those exhibits marked with an asterisk are incorporated by
reference to the Company's Registration Statement on Form 10 filed April 17,
1997.
<TABLE>
<CAPTION>
Sequential
Exhibit Page
Number Description Number
- - - ------- ----------- ----------
<S> <C> <C> <C>
2.1 -- Agreement of Merger dated December 29, 1995
between Air South Airlines, Inc. and Air South,
Inc.
3.1 -- Certificate of Incorporation of Registrant and
Certificates of Designation as to Series B and C
Preferred Stock.
3.2 -- Bylaws of Registrant.
4.1 -- Article 4 of Registrant's Articles of Incorporation
(included in Exhibit 3.1).
4.2 -- Articles VI and VII of Registrant's Bylaws
(included in Exhibit 3.2).
4.3 -- HUD Section 108 Program Loan Agreement between
Lexington County, South Carolina and the Registrant,
and the related Grant Agreement between the City
of Columbia and the Regisrtant, in each case dated
July 15, 1994.
4.4 -- Specimen Common Stock Certificate.
4.5 -- Series A Preferred Stock Purchase Agreement and
the related Investors' Rights Agreement dated
December 29, 1995 between the Company and
Hambrecht and Quist Group, L.L.C.
4.6 -- Loan Agreement and certain related documents
dated March 29, 1996 between NationsBank, N.A.
and the Company.
4.7 -- Loan Agreement and certain related documents
dated April 26, 1996 between The National Bank of
South Carolina and the Company.
4.7(a)* -- Note Revision Agreement between the National Bank
of South Carolina and the Company, and related
agreements.
4.8 -- Option Purchase Agreement and certain related
documents dated April 26, 1996 between the
Company and Hambrecht & Quist Group, L.L.C.
4.9 -- Series B Preferred Stock Purchase Agreement and
the related Investors' Rights Agreement dated May
24, 1996 between the Company and H&Q Air South
Investors, L.P. ("H&Q").
4.10 -- Series C Preferred Stock Purchase Agreement and
the related Investors' Rights Agreement dated June
14, 1996 between the Company and W.J. Flynn &
Associates, Inc. ("Flynn").
</TABLE>
36
<PAGE> 37
<TABLE>
<S> <C> <C> <C>
4.11 -- Series C Preferred Stock Purchase Agreement and
the related Investors' Rights Agreement dated June
24, 1996 between the Company and Fil-Fiber
Manufacturing, Inc., Ltd. ("Fil-Fiber").
4.12 -- Convertible Debenture Purchase Agreement and the
related Investors' Rights Agreement dated August
16, 1996 between the Company and H&Q.
4.13 -- Convertible Debenture Purchase Agreement and the
related Investors' Rights Agreement dated
September 4, 1996 between the Company and
Godley Group Ltd.
4.14 -- Convertible Debenture Purchase Agreement and the
related Investors' Rights Agreement dated
September 30, 1996 between the Company and Flynn.
4.15 -- Convertible Debenture Purchase Agreement and the
related Investors' Rights Agreement dated
September 30, 1996 between the Company and
Fil-Fiber.
4.16* -- Convertible Debenture Purchase Agreement
and the related Investor's Rights Agreement dated October 16,
1996 between the Company and Paul Gillcrist.
10.1 -- 1993 Incentive Stock Option Plan.
10.2 -- 1994-1995 Incentive and Non-Qualified Stock
Option Plan.
10.3 -- 1994-1995 Amended Incentive and Non-Qualified
Stock Option Plan.
10.4 -- Employee Stock Purchase Plan.
10.5 -- (Intentionally omitted.)
10.6 -- Common stock purchase warrant for 725,000 shares
issued January 11, 1996 to Clifton E. Haley by Air
South Airlines, Inc.
10.7 -- Common stock purchase warrant for 10,000 shares
issued October 25, 1995 to David Y. Monteith by
Air South Airlines, Inc.
10.8 -- Common stock purchase warrant for 250,000 shares
issued November 8, 1995 to Roden A. Brandt by
Air South, Inc.
10.9 -- Incentive Stock Option Agreement dated November
12, 1994 between Air South, Inc. and Dennis
Crosby for the purchase of up to 80,000 shares of
common stock.
</TABLE>
37
<PAGE> 38
<TABLE>
<S> <C> <C> <C>
10.10 -- Incentive Stock Option Agreement dated August 23,
1994 between Air South, Inc. and Donald Baker for
the purchase of up to 40,000 shares of common
stock.
10.11 -- Incentive Stock Option Agreement dated August 23,
1994 between Air South, Inc. and Thomas Volz for
the purchase of up to 50,000 shares of common
stock.
10.12 -- Incentive Stock Option Agreement dated June 23,
1995 between Company and Paul Gillcrist for the
purchase of up to 36,000 shares of common stock.
10.13 -- Incentive Stock Option Agreement dated June 23,
1995 between Company and Harold Stowe for the
purchase of up to 36,000 shares of common stock.
10.14 -- Letter from Air South, Inc. to Roden A. Brandt,
dated October 20, 1995.
10.15 -- Employment agreement between Air South, Inc.
and Tom Volz, dated December 8, 1993.
10.16 -- Employment agreement between Air South, Inc.
and Dennis Crosby dated November 12, 1994.
10.17 -- Lease dated ____________, 199_ between
Jacksonville Port Authority and Air South, Inc.
10.18 -- Lease between Dade County, Florida and Air
South, Inc. dated ____________, 199_.
10.19 -- Lease between Air South, Inc. and Horry County
dated February 20, 1995
10.20 -- Lease between Air South, Inc. and the City of
Atlanta dated ____________, 199_.
10.21 -- Aircraft Use and Lease Agreement between Air
South, Inc. and Richland-Lexington Airport
District dated August 15, 1994.
10.22 -- Airline Operating Agreement between Savannah
Airport Commission and Air South dated April 10,
1996.
10.23 -- Non-Signatory Airlines Tenant Agreement between
Greenville-Spartanburg Airport District dated
June 20, 1996.
10.24 -- Airport Use Agreement between Norfolk Airport
Authority and Air South, Inc. dated May 2, 1996.
</TABLE>
38
<PAGE> 39
<TABLE>
<S> <C> <C>
10.25(a)* -- Scheduled Airline Operating Agreement and Terminal Building
Lease dated October 1, 1996 between the Company and
Charleston County Aviation Authority
10.26 -- Airport License and Agreement between the City of
Chicago and Air South Airlines, Inc.
10.27 -- (Intentionally omitted.)
10.28 -- (Intentionally omitted.)
10.29 -- Airport Use and Lease Agreement between
Richland-Lexington Airport District and Air South, Inc.
dated August 1, 1994
10.30 -- Lease Agreement between Richland-Lexington
Airport District and Air South, Inc. dated
December 12, 1995.
10.31 -- Lease between Polaris Aircraft Leasing K.B. and
Air South Airlines, Inc. dated April 29, 1996 for
Boeing 737 Advanced Aircraft Serial Number 21612.
10.32 -- Lease between Polaris Aircraft Leasing K.B. and
Air South Airlines, Inc. dated April 29, 1996
for Boeing 737 Advanced Aircraft Serial Number 21356.
10.33 -- Lease between Polaris Holding Co. and Air South
Airlines, Inc. dated April 29, 1996 for Boeing 737
Advanced Aircraft Serial Number 21186.
10.34 -- Lease between Polaris Aircraft Leasing K.B. and
Air South Airlines, Inc. dated April 29, 1996 for
Boeing 737 Advanced Aircraft Serial Number 21677.
10.35 -- Lease between Polaris Aircraft Leasing K.B. and
Air South Airlines, Inc. dated April 29, 1996 for
Boeing 737 Advanced Aircraft Serial Number 21733.
10.36 -- Lease between Air South, Inc. and MIMI Leasing
Corp. dated October 31, 1994 for the lease of
Boeing 737 Serial Number 19612.
10.37(A)* -- Lease between Air South Airlines, Inc. and MIMI Leasing
Corp. dated as of February 1, 1997 for the lease of
Boeing 737 Serial Number 19607.
10.38* -- Consulting Agreement between Air South Airlines, Inc. and
The Pointe Group, L.L.C. effective as of August 16, 1996,
and a related Indemnity Agreement.
10.39* -- Reimbursement Agreement between Air South Airlines, Inc.
and Hambrecht & Quist California relating to a $4,000,000
Letter of Credit dated December 3, 1996, and related
agreements.
10.40* -- Reimbursement Agreement between Air South Airlines, Inc.
and Hambrecht & Quist California relating to a $2,000,000
Letter of Credit dated January 29, 1997, and related
agreements.
</TABLE>
39
<PAGE> 40
<TABLE>
<S> <C> <C> <C>
27.1* -- Financial Data Schedule for the twelve months ended December
31, 1996 - (for SEC use only)
</TABLE>
40
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
AIR SOUTH AIRLINES, INC.
June 3, 1997
By: /s/ John P. Tague
---------------------------------------
John P. Tague, Chairman of the Board,
President and Chief Executive Officer
41
<PAGE> 42
AIR SOUTH AIRLINES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
BALANCE SHEETS F-3
STATEMENTS OF OPERATIONS F-4
STATEMENTS OF STOCKHOLDERS' DEFICIENCY F-5
STATEMENTS OF CASH FLOWS F-6
NOTES TO FINANCIAL STATEMENTS F-8
</TABLE>
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
Board of Directors
Air South Airlines, Inc.:
We have audited the accompanying balance sheets of Air South Airlines, Inc. (the
"Company") as of December 31, 1995 and 1996, and the related statements of
operations, stockholders' deficiency, and cash flows for each of the two years
in the period ended August 31, 1995, the four-month period ended December 31,
1995 and the year ended December 31, 1996. 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, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1995 and 1996,
and the results of its operations and its cash flows for each of the two years
in the period ended August 31, 1995, the four-month period ended December 31,
1995 and the year ended December 31, 1996 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company's recurring losses from operations and stockholders'
deficiency raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Deloitte & Touche LLP
Columbia, South Carolina
March 31, 1997
F-2
<PAGE> 44
AIR SOUTH AIRLINES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
ASSETS (NOTE 3) 1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 2,369,614 $ 1,070,063 $ 494,119
Investments (Notes 1 and 3) 694,430 1,211,000 1,211,000
Receivables, principally air traffic (no allowance considered necessary) 2,419,171 671,825 2,163,110
Prepaid expenses and other current assets 1,435,438 1,522,176 2,175,517
------------ ------------ ------------
Total current assets 6,918,653 4,475,064 6,043,746
DEPOSITS (Note 5) 1,170,000 1,170,000 1,170,000
PROPERTY AND EQUIPMENT, NET (Notes 1 and 2) 2,594,600 3,469,287 3,679,688
DEBT ISSUE COSTS (net of accumulated amortization of $30,723 and
$37,873, respectively) (Note 1) 262,424 312,976 327,599
OTHER 671,786 426,469 557,359
------------ ------------ ------------
Total assets $ 11,617,463 $ 9,853,796 $ 11,778,392
============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Short-term borrowings (Note 3) $ - $ 5,277,359 $ 12,177,359
Accounts payable 6,077,084 10,572,801 12,943,791
Accrued expenses (Note 1) 6,357,336 10,178,518 7,168,204
Air traffic liability (Note 1) 2,933,101 4,500,157 8,018,794
Current portion of long-term debt (Note 3) 96,789 1,266,752 1,481,647
------------ ------------ ------------
Total current liabilities 15,464,310 31,795,587 41,789,795
------------ ------------ ------------
LONG-TERM DEBT (Note 3) 12,000,000 18,291,122 17,993,542
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 5 and 6)
REDEEMABLE COMMON STOCK (Note 10) - $.001 par value, 250,000
shares issued and outstanding at December 31, 1995 (redeemed in 1996) 500,000 - -
STOCKHOLDERS' DEFICIENCY (Notes 1, 3 ,4 and 11):
Convertible preferred stock, $.001 par value, 2,000,000 shares authorized,
1,250,000 and 1,995,000 shares outstanding at December 31, 1995 and
1996, respectively; aggregate liquidation preference of $6,500,000 1,250 1,995 1,995
Common stock, $.001 par value, 18,000,000 shares authorized; shares
issued and outstanding: December 31, 1995 - 6,818,019 and
December 31, 1996 - 6,967,182 6,818 6,967 6,967
Additional capital 7,263,606 11,453,645 11,476,445
Accumulated deficit (23,166,328) (51,695,520) (59,490,352)
Unearned compensation (452,193)
------------ ------------ ------------
Total stockholders' deficiency (16,346,847) (40,232,913) (48,004,945)
------------ ------------ ------------
Total liabilities and stockholders' deficiency $ 11,617,463 $ 9,853,796 $ 11,778,392
============ ============ ============
</TABLE>
See notes to financial statements.
F-3
<PAGE> 45
AIR SOUTH AIRLINES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOUR
YEARS ENDED MONTHS ENDED
AUGUST 31, DECEMBER 31,
----------------------------
1994 1995 1995
<S> <C> <C> <C>
OPERATING REVENUES:
Passenger (Note 1) $ 132,181 $ 44,465,530 $ 19,463,505
Other - 664,170 394,626
------------ ------------ ------------
Total operating revenues 132,181 45,129,700 19,858,131
------------ ------------ ------------
OPERATING EXPENSES:
Salaries, wages and benefits 1,083,381 13,253,773 5,165,701
Aircraft fuel and oil 100,000 10,172,353 4,120,382
Aircraft leases 155,820 4,924,358 2,088,116
Maintenance materials and repairs (Note 1) 146,477 7,572,728 3,670,797
Agency commissions 6,000 2,511,632 1,379,132
Other rentals, landing and ground handling fees 104,911 4,619,166 1,990,312
Advertising (Note 1) 323,518 2,392,574 595,516
Depreciation and amortization 28,694 350,447 174,864
Other operating expenses (Note 8) 1,037,543 16,120,423 5,481,611
------------ ------------ ------------
Total operating expenses 2,986,344 61,917,454 24,666,431
------------ ------------ ------------
OPERATING LOSS (2,854,163) (16,787,754) (4,808,300)
------------ ------------ ------------
NONOPERATING (EXPENSE) AND INCOME:
Grants (Notes 1 and 6) 1,261,198 1,316,811 88,493
Interest expense (21,375) (514,171) (164,764)
Interest income 14,950 182,476 65,152
Other income (expense) (215,873) (60,543) (6,876)
------------ ------------ ------------
Total nonoperating income (expense), net 1,038,900 924,573 (17,995)
------------ ------------ ------------
NET LOSS $ (1,815,263) $(15,863,181) $ (4,826,295)
============ ============ ============
NET LOSS PER SHARE (Note 1) $ (.72) $ (3.18) $ (.69)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES (000's) 2,523 4,987 6,981
============ ============ ============
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------------
1996 1996 1997
(Unaudited)
<S> <C> <C> <C>
OPERATING REVENUES:
Passenger (Note 1) $ 51,780,268 $ 13,795,157 $ 12,796,832
Other 2,179,389 404,542 948,512
------------ ------------ ------------
Total operating revenues 53,959,657 14,199,699 13,745,344
------------ ------------ ------------
OPERATING EXPENSES:
Salaries, wages and benefits 15,872,183 3,904,995 3,868,659
Aircraft fuel and oil 13,133,798 2,942,387 3,004,959
Aircraft leases 7,920,265 1,640,029 2,274,513
Maintenance materials and repairs (Note 1) 8,329,850 2,019,580 1,970,778
Agency commissions 3,030,434 793,890 503,507
Other rentals, landing and ground handling fees 5,900,070 1,487,159 1,462,050
Advertising (Note 1) 4,500,960 823,375 1,458,292
Depreciation and amortization 667,753 151,956 214,528
Other operating expenses (Note 8) 22,723,333 4,666,408 6,400,390
------------ ------------ ------------
Total operating expenses 82,078,646 18,429,779 21,157,676
------------ ------------ ------------
OPERATING LOSS (28,118,989) (4,230,080) (7,412,332)
------------ ------------ ------------
NONOPERATING (EXPENSE) AND INCOME:
Grants (Notes 1 and 6) 215,800 46,875 46,875
Interest expense (1,045,557) (148,684) (456,583)
Interest income 188,534 30,892 26,208
Other income (expense) 231,020 11,600 1,000
------------ ------------ ------------
Total nonoperating income (expense), net (410,203) (59,317) (382,500)
------------ ------------ ------------
NET LOSS $(28,529,192) $ (4,289,397) $ (7,794,832)
============ ============ ============
NET LOSS PER SHARE (Note 1) $ (4.14) $ (.63) $ (1.12)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES (000's) 6,888 6,823 6,987
============ ============ ============
</TABLE>
See notes to financial statements.
F-4
<PAGE> 46
AIR SOUTH AIRLINES, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
PREFERRED PREFERRED COMMON COMMON
SHARES STOCK SHARES STOCK
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 1, 1993 - $ - 2,097,334 $ 2,098
Issuance of shares of common stock - - 1,571,200 1,571
Net loss - - - -
------------ ------------ ------------ ------------
BALANCE, AUGUST 31, 1994 - - 3,668,534 3,669
Issuance of shares of common stock - - 3,187,055 3,187
Issuance of stock options, warrants and stock award - - 162,530 162
Amortization of unearned compensation - - - -
Net loss - - - -
------------ ------------ ------------ ------------
BALANCE, AUGUST 31, 1995 - - 7,018,119 7,018
Issuance of shares of common stock - - 49,900 50
Issuance of stock options - - - -
Amortization of unearned compensation - - - -
Issuance of preferred stock - Series A 1,250,000 1,250 - -
Transfer of redeemable common stock - - (250,000) (250)
Net loss - - - -
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1995 1,250,000 1,250 6,818,019 6,818
Issuance of shares of common stock - - 149,163 149
Issuance of shares of preferred stock - Series B 625,000 625 - -
Issuance of shares of preferred stock - Series C 120,000 120 - -
Amortization of unearned compensation - - - -
Issuance of warrants - - - -
Net loss - - - -
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 1,995,000 1,995 6,967,182 6,967
Issuance of warrants - - - -
Net loss - - - -
------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1997 (UNAUDITED) 1,995,000 $ 1,995 6,967,182 $ 6,967
============ ============ ============ ============
<CAPTION>
TOTAL
STOCKHOLDERS'
ADDITIONAL ACCUMULATED UNEARNED EQUITY
CAPITAL DEFICIT COMPENSATION (DEFICIENCY)
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 1, 1993 $ 709,877 $ (336,839) $ - $ 375,136
Issuance of shares of common stock 1,440,812 - - 1,442,383
Net loss - (1,815,263) - (1,815,263)
------------ ------------ ------------ ------------
BALANCE, AUGUST 31, 1994 2,150,689 (2,152,102) - 2,256
Issuance of shares of common stock 1,598,025 - - 1,601,212
Issuance of stock options, warrants and stock award 312,558 - (66,240) 246,480
Amortization of unearned compensation - - 26,791 26,791
Net loss - (15,863,181) - (15,863,181)
------------ ------------ ------------ ------------
BALANCE, AUGUST 31, 1995 4,061,272 (18,015,283) (39,449) (13,986,442)
Issuance of shares of common stock 82,784 - - 82,834
Issuance of stock options 795,800 - (795,800) -
Amortization of unearned compensation - - 383,056 383,056
Issuance of preferred stock - Series A 2,498,750 - - 2,500,000
Transfer of redeemable common stock (175,000) (324,750) - (500,000)
Net loss - (4,826,295) - (4,826,295)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1995 7,263,606 (23,166,328) (452,193) (16,346,847)
Issuance of shares of common stock 93,184 - - 93,333
Issuance of shares of preferred stock - Series B 2,499,375 - - 2,500,000
Issuance of shares of preferred stock - Series C 1,499,880 - - 1,500,000
Amortization of unearned compensation - - 452,193 452,193
Issuance of warrants 97,600 - - 97,600
Net loss - (28,529,192) - (28,529,192)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 11,453,645 (51,695,520) - (40,232,913)
Issuance of warrants 22,800 - - 22,800
Net loss - (7,794,832) - (7,794,832)
------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1997 (UNAUDITED) $ 11,476,445 $(59,490,352) $ - $(48,004,945)
============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-5
<PAGE> 47
AIR SOUTH AIRLINES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
AUGUST 31,
----------------------------
1994 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,815,263) $(15,863,181)
Adjustments to reconcile net loss to net cash used by operating activities:
Grants (1,261,198) (1,316,811)
Stock compensation -- 295,866
Loss (gain) on disposal of equipment -- --
Depreciation and amortization 28,694 350,447
Changes in assets and liabilities: -- --
(Increase) decrease in receivables (490,385) (3,181,173)
Increase in prepaid expenses and other current assets (148,306) (749,858)
Increase in deposits (853,387) (316,613)
(Increase) decrease in other assets -- (513,697)
Increase in accounts payable 972,530 2,912,454
Increase in accrued liabilities 357,671 5,014,562
Increase (decrease) in air traffic liability 27,000 3,218,276
----------- ------------
Net cash used by operating activities (3,182,644) (10,149,728)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment (1,089,237) (1,509,028)
Proceeds on sale of property -- --
(Increase) decrease in investments (100,000) (759,972)
----------- ------------
Net cash used by investing activities (1,189,237) (2,269,000)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from grants 1,261,198 1,316,811
Proceeds from short-term borrowings -- --
Payments of long-term debt (500,000) (1,038,877)
Proceeds from issuance of long-term debt 5,500,000 8,198,819
Proceeds from issuance of common stock 1,442,383 1,578,617
Proceeds from issuance of preferred stock -- --
Common stock redemption -- --
Debt issue costs (154,862) (134,968)
----------- ------------
Net cash provided by financing activities 7,548,719 9,920,402
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,176,838 (2,498,326)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 375,136 3,551,974
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,551,974 $ 1,053,648
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the period for interest $ 9,040 $ 217,988
=========== ============
</TABLE>
<TABLE>
FOUR THREE MONTHS ENDED
MONTHS ENDED YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, --------------------
1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,826,295) $(28,529,192) $(4,289,394) $(7,794,832)
Adjustments to reconcile net loss to net cash used by operating activities:
Grants (88,493) (215,800) (46,875) (46,875)
Stock compensation 465,890 452,193 86,280 --
Loss (gain) on disposal of equipment 6,876 (231,020) -- --
Depreciation and amortization 174,864 724,389 151,956 219,855
Changes in assets and liabilities: -- -- -- --
(Increase) decrease in receivables 1,252,387 1,747,346 (2,135,451) (1,491,285)
Increase in prepaid expenses and other current assets (537,274) (86,738) (290,447) (653,341)
Increase in deposits -- -- -- --
(Increase) decrease in other assets (158,089) 342,917 (408,628) (108,090)
Increase in accounts payable 2,192,100 5,140,375 2,791,204 2,370,990
Increase (decrease) in accrued liabilities 985,102 3,821,182 798,524 (3,010,314)
Increase (decrease) in air traffic liability (312,175) 1,567,056 2,588,105 3,518,637
----------- ------------ ----------- -----------
Net cash used by operating activities (845,107) (15,267,292) (754,726) (6,995,255)
----------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment (549,809) (1,941,778) (534,799) (424,929)
Proceeds on sale of property 20,000 -- -- --
(Increase) decrease in investments 165,542 (516,570) (697,178) --
----------- ------------ ----------- -----------
Net cash used by investing activities (364,267) (2,458,348) (1,231,977) (424,929)
----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from grants 88,493 215,800 46,875 46,875
Proceeds from short-term borrowings -- 5,277,359 500,000 6,900,000
Payments of long-term debt (63,153) (24,311) (20,556) (82,685)
Proceeds from issuance of long-term debt -- 7,445,000 -- --
Proceeds from issuance of common stock -- 93,333 18,333 --
Proceeds from issuance of preferred stock 2,500,000 4,000,000 --
Common stock redemption -- (500,000) (500,000) --
Debt issue costs -- (81,092) (48,910) (19,950)
----------- ------------ ----------- -----------
Net cash provided by financing activities 2,525,340 16,426,089 (4,258) 6,844,240
----------- ------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,315,966 (1,299,551) (1,990,961) (575,944)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,053,648 2,369,614 2,369,614 1,070,063
----------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,369,614 $ 1,070,063 $ 378,653 $ 494,119
=========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the period for interest $ 415 $ 494,564 $ 43,669 99,645
=========== ============ =========== ===========
</TABLE>
F-6
<PAGE> 48
AIR SOUTH AIRLINES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOUR
YEARS ENDED MONTHS ENDED THREE MONTHS ENDED
AUGUST 31, DECEMBER 31, MARCH 31,
------------------ ----------------
1994 1995 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Stock bonus $ - $183,831 $ - $ 50,000 $ --
Unearned compensation - 66,240 795,000 - --
Stock and warrants issued to vendors and investors - 135,544 82,834 137,600 $22,800
Equipment exchanged with vendors for reduction of trade payables - - - 875,678 --
</TABLE>
See notes to financial statements.
F-7
<PAGE> 49
AIR SOUTH AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1994 AND 1995, THE FOUR-MONTH PERIOD
ENDED DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Air South Airlines, Inc. (the "Company") was incorporated in
Illinois in 1993 as Travel Management Industry Services, Inc. for the
purposes of providing consulting services regarding travel industry
marketing. On January 26, 1994, an amendment to the Articles of
Incorporation was filed which changed the name of the Company to Air South,
Inc. and the stated purpose to operation of an airline and related services.
The Company commenced airline operations on August 22, 1994. Prior to
commencement of airline operations, the Company was essentially a
development stage enterprise with activities consisting of organizational
and pre-operating activities. The Company's management primarily spent the
pre-operating period and the initial phase of operations recruiting key
personnel, developing strategies, obtaining Federal Aviation Administration
and Department of Transportation certification and negotiating aircraft
leases, debt agreements and grant agreements. During the period ended
August 31, 1993, the Company produced no revenues and incurred development
stage losses of approximately $300,000. The Company is a passenger airline
providing all jet service primarily in the Southeastern and Eastern seaboard
regions of the United States. Services are provided with a fleet of seven
leased Boeing 737-200 aircraft.
On December 29, 1995, the Company:
- was reincorporated in Delaware;
- changed its name from Air South, Inc. to Air South Airlines, Inc.;
- changed its common shares authorized from 10 million to 18 million
and from no par value shares to $.001 par value shares; and
- authorized 2 million shares of preferred stock with a $.001 par
value.
The Company also changed its year end for financial reporting purposes from
August 31 to December 31.
INTERIM FINANCIAL STATEMENTS - The unaudited financial statements as of
March 31, 1997 and for the three months ended March 31, 1997 and 1996
reflect all adjustments which are, in the opinion of management, necessary
for a fair statement of the results for the periods. All such adjustments
are of a normal recurring nature. Operating results for the three months
ended March 31, 1997 are not necessarily indicative of results to be
expected for the year ended December 31, 1997.
INDUSTRY RISKS -The airline industry is intensely competitive. Domestic
certified airlines are free to enter and exit domestic markets and to set
fares without regulatory approval. Any significant fare reductions or
introduction of directly competing routes by other airlines could have a
material adverse effect on the Company's results of operations and financial
condition.
The Company cannot predict the future cost and availability of fuel for
flight operations. Substantial price increases or the unavailability of
adequate suppliers could have a material adverse effect on the Company's
financial position or results of operations.
F-8
<PAGE> 50
CONTINUITY OF OPERATIONS - The Company has incurred significant operating
losses since inception, and at March 31, 1996, has a deficiency in
working capital of $35,746,000 and a stockholders' deficiency of
$48,005,000. The Company continues to experience negative cash flows and
payments to certain trade creditors are past due. Operating revenues have
not yet exceeded a breakeven threshold. In addition, loan covenant
violations on $12,000,000 of indebtedness have been waived through December
31, 1997, but there is no assurance that waivers can be obtained for any
future violations subsequent to that date.
The cash flow defects have been funded primarily by loans from equity
securities purchased by affiliates of Hambrecht & Quist Group. If the Company
cannot achieve profitable operations and positive cash flow during the busy
summer months of 1997, the Company believes it is highly unlikely that such
investors will continue to fund the Company's ongoing operation. It is also
highly unlikely that other present investors in the Company, or new
investors, will be willing to make additional investments. If that is the
case, it is highly likely that the Company will be required to discontinue
operations.
The financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the liquidation of liabilities in
the ordinary course of business. The continuance of the Company as a going
concern is dependent, among other things, upon obtaining sufficient
additional financing to fulfill cash flow requirements, growth in the
Company's revenue base and, ultimately, the attainment of profitable
operations. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Management's plans to mitigate the uncertainty as to continuity of
operations include the following:
The Company has employed new management personnel in key positions,
including a chief executive officer with significant experience in
airline management.
Under the new management team, the Company has realigned its flight
schedules in order to improve on-time performance and reduce flight
cancellations. Since mid-year 1996 the Company has been operating five of
its seven aircraft. The Company has a new schedule which went into effect
in April 1997 which uses an additional aircraft and has plans to add the
seventh aircraft to the schedule by mid-year, in time for the peak travel
season. No new cities will be served. Management has installed a new
reservations system with improved revenue management and accounting
capabilities. Additionally, the Company is in the process of installing
an automated scheduling system which should reduce flight crew expenses by
producing better crew utilization.
The Company hopes to add additional B737-200 aircraft in 1997 if the
financial performance shows that reliability and traffic can be
sustained at levels which can produce profits.
During 1996, the Company raised approximately $17 million of additional
funds through debt and equity transactions. A substantial portion of
these funds have been received from H&Q Air South Investors, L.P. ("H&Q"),
an affiliate of Hambrecht & Quist, L.L.C., an investment banking firm. As
of March 31, 1997, the Company has raised approximately $8 million of
additional funds through debt and equity transactions with H&Q and
affiliates of H&Q (Note 11). H&Q has also guaranteed a $2 million bank
loan for the Company and now has in excess of 50% voting control of the
Company.
Management is seeking additional sources of financing from H&Q and
other investors. However, the Company's ability to raise additional funds
is dependent upon the Company's ability to meet its operational plans over
the peak travel season.
CASH EQUIVALENTS - For purposes of the statement of cash flows, the Company
considers certificates of deposit with an original maturity of three months
or less to be cash equivalents.
INVESTMENTS - Investments consist of certificates of deposit which are
stated at cost.
F-9
<PAGE> 51
PROPERTY AND EQUIPMENT - Property and equipment are carried at cost. Major
additions, betterments and renewals are capitalized. Depreciation is
computed on the straight-line basis over the estimated useful lives of the
related assets, which are seven years for all flight equipment and five
years for other property and equipment. Leasehold improvements are
amortized on a straight-line basis over the five year term of the leases.
DEBT ISSUE COSTS - Debt issuance costs are amortized over the term of the
related debt.
ACCRUED EXPENSES - Included in accrued expenses are federal excise taxes
payable of $795,140 and $1,722,976, accrued maintenance reserves of $790,170
and $1,543,463 and accrued aircraft rent of $1,035,025 and $1,139,185 at
December 31, 1995 and 1996, respectively.
FREQUENT FLYER AWARDS - The Company accrues the estimated incremental cost
of providing free travel awards earned under its frequent flyer program at
the time of travel by participating passengers.
AIRCRAFT AND ENGINE MAINTENANCE - The Company accounts for airframe overhaul
costs using the accrual method. The accrual method provides for accruing
the estimated cost of the next overhaul based on cycles or flight hours.
For airframe overhauls, the actual cost of an overhaul is charged to the
accrual, with any deficiency or excess charged or credited to expense. For
engine overhauls, the Company accounts for overhaul costs using the deferral
method. Costs of engine overhauls are capitalized and amortized to the next
overhaul. The cost of routine maintenance is charged to expense as
incurred.
PASSENGER REVENUES - Passenger ticket sales are recognized as earned revenue
when the transportation is provided. Customer flight deposits and unused
passenger tickets sold are included in air traffic liability. As is
customary within the industry, the Company performs periodic evaluations of
this estimated liability and any adjustments resulting therefrom, which can
be significant, are included in the results of operations for the periods in
which the evaluations are completed.
GRANTS - Grants from governmental entities are restricted for specified
purposes and are recognized when an expenditure for which the grant provides
reimbursement is incurred. Grants related to expenses are recognized as
nonoperating income, while grants relating to property and equipment or to
intangible assets reduce their recorded cost.
INCOME TAXES - The Company accounts for income taxes under Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes. Accordingly, deferred tax assets and liabilities are recorded for
temporary differences in the book and tax basis of assets and liabilities
and for tax loss and credit carryforwards. Deferred tax assets, which are
not considered more likely than not to be realized, are offset by a
valuation allowance.
PREOPERATING COSTS - All preoperating costs incurred during the development
stage were charged to expense as incurred.
RETIREMENT PLAN - The Company has a contributory 401(k) plan covering
substantially all employees. The Company may make matching and
discretionary contributions to the plan at the determination of the
Company's Board of Directors. The Company has made no contributions to the
plan.
PASSENGER TRAFFIC COMMISSIONS - Passenger traffic commissions are recognized
as expense when the transportation is provided and the related revenue is
recognized. The amount of passenger traffic commissions paid but not yet
recognized as expense is included in prepaid expenses and other current
assets in the accompanying balance sheet.
F-10
<PAGE> 52
ADVERTISING - The cost of advertising is expensed as incurred.
USE OF ESTIMATES - Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the recorded 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
these estimates.
IMPAIRMENT OF LONG-LIVED ASSETS - Effective September 1, 1995, the Company
adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of. This Statement requires assessment of
impairment of long-lived assets whenever factors, events or changes in
circumstances indicate the carrying amount of certain long-lived assets to
be held and used may not be recoverable. Assessment of impairment is based
on the expected undiscounted cash flows of the assets. If an asset is
determined to be impaired, an impairment loss is recognized to the extent
the carrying amount of the impaired asset exceeds fair value. Adoption of
this Statement did not materially affect the Company's financial position or
results of operations.
LOSS PER COMMON SHARE - The net loss per common share is calculated by
dividing the net loss by the weighted average common shares and common share
equivalents outstanding. Fully diluted earnings per share are equal to
primary earnings in all periods presented. The effect of common stock
equivalents is antidilutive in all periods presented.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." The provisions of the
Statement, which will be implemented by the Company for the year ending
December 31, 1997, requires specific computation, presentation and
disclosure requirements for earnings per share. If earnings per share for
all periods presented had been calculated using the requirements of the
Statement, the earnings per share would not have been materially different
from earnings per share presented.
RECLASSIFICATIONS - Certain amounts for prior years have been reclassified
to conform with the 1996 presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1995 and 1996 consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1995 1996
<S> <C> <C>
Flight equipment $1,545,825 $ 2,382,820
Computer equipment 844,240 1,392,305
Ground property and equipment 474,877 481,874
Office furniture, fixtures and
equipment 221,889 271,487
Leasehold improvements 33,395 34,724
---------- -----------
Total 3,120,226 4,563,210
Less accumulated depreciation (525,626) (1,093,923)
---------- -----------
Property and equipment, net $2,594,600 $ 3,469,287
========== ===========
</TABLE>
F-11
<PAGE> 53
3. DEBT
LINE OF CREDIT - On March 12, 1996, the Company entered into an agreement to
obtain a one year, $500,000 line of credit from a bank. Subject to the
bank's discretion, and subject to such additional terms, conditions and
provisions as the bank considers necessary, an additional $500,000 may be
provided under the agreement. The line of credit is collateralized by a
first lien on substantially all the Company's assets and bears interest at
the rate of prime plus 1%. This line of credit is past its maturity date as
of March 31, 1997, and the Company is in default on the payment of principal
and related accrued interest.
As consideration for this line of credit, the Company issued 7,500 shares of
common stock in 1996 to the bank. Subject to funding of the additional
$500,000, the Company will issue an additional 15,000 shares of common stock
to the bank. Such shares are required to be registered in any subsequent
equity offering.
DEMAND NOTES - In September through December 1996, the Company issued
$6,800,000 of demand notes to H&Q and H&Q affiliates bearing an interest
rate of 8%; $2,300,000 of such notes was repaid prior to December 31, 1996.
NOTE PAYABLE - See Note 9 for a description of the $277,359 short-term note
payable to a related party.
LONG-TERM DEBT - Long-term debt outstanding as of December 31, 1995 and 1996
consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1995 1996
<S> <C> <C>
Loan from Lexington County, South Carolina (the "State
Loan"), see below $12,000,000 $12,000,000
Bank loan at prime plus 2.0% (10.25% at December 31, 1996) - 2,000,000
Convertible debentures - 5,220,000
Other 96,789 337,874
----------- -----------
Total 12,096,789 19,557,874
Less current portion 96,789 1,266,752
----------- -----------
Long term portion $12,000,000 $18,291,122
=========== ===========
</TABLE>
The terms of the State Loan provide (i) for 4% fixed interest rate through
August 31, 2004; beginning September 1, 2004 the interest rate may be
increased, not to exceed prevailing commercial loan rates, based on the
Company's net operating income, (ii) that interest due for June 1, 1996
through August 1, 1997 is deferred until August 1, 1997, (iii) that the loan
is to be repaid in 143 equal installments based on 204 months amortization
with a balloon payment one month after the last (final) installment and (iv)
that the outstanding principal balance is based on the size of an initial
public offering with principal repayment not to exceed $6 million of the net
proceeds of a public offering greater than $20 million. Substantially all
of the Company's assets serve as collateral for this loan, subordinate to
the interests of the line of credit described above. The Company has also
agreed to use the proceeds of any initial public stock offering to repay up
to one half of the loan's outstanding balance. The loan was funded through
the issuance of Lexington County, South Carolina general revenue bonds and
was guaranteed by the United States Department of Housing and Urban
Development ("HUD").
F-12
<PAGE> 54
The loan agreement relating to the State Loan contains, among other things,
provisions which limit payment of dividends, salary increases and other
financial restrictions and requires the Company to maintain certain
financial ratios (working capital, tangible net worth, and other financial
ratios). Dividend payments are prohibited until one-half of the loan is
paid. As of December 31, 1996, the Company was not in compliance with the
above described financial covenants as well as certain other provisions of
the loan agreement; however, on February 6, 1997, the South Carolina Jobs -
Economic Development Authority, the Servicing Agent, waived compliance with
those provisions through December 31, 1997.
The $2,000,000 bank loan requires payment of interest only monthly with a
final payment of principal and accrued interest on June 1, 1998. This note
is secured by an irrevocable letter of credit issued on behalf of H&Q.
In August and September of 1996, the Company issued $4,600,000 of
convertible debentures to H&Q and two existing investors in the Company.
These securities are convertible into 18,400,000 shares of Series D
Preferred Stock (to be authorized), which in turn are convertible at $.25
per share into shares of common stock.
In September and October of 1996, the Company issued $620,000 of Convertible
Debentures. These securities are convertible into 2,480,000 shares of
Series E Preferred Stock (to be authorized), which in turn are convertible
at $.25 per share into shares of common stock.
The provisions of Series D and E preferred stock (other than conversion
provisions) will be substantially the same as the previously issued Series
A, B and C Preferred Stock. The Convertible Debentures bear interest at 6%
per annum. Interest is deferred and added to the principal balance.
Principal is due on August 16, 1999.
Additionally, the Company has standby letters of credit totaling $1,211,000
at December 31, 1996, with two banks, for which $1,211,000 of investments
was pledged as collateral.
Principal payments on debt are due as follows:
<TABLE>
<CAPTION>
Fiscal year:
<S> <C>
1997 $ 1,266,752
1998 3,055,321
1999 6,230,321
2000 1,010,321
2001 1,010,321
Thereafter 6,984,838
-----------
Total $19,557,874
===========
</TABLE>
F-13
<PAGE> 55
4. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK - Convertible preferred stock at December 31,
1996 consists of 1,250,000 shares designated as Series A Preferred Stock,
625,000 shares designated as Series B Preferred Stock and 120,000 shares
designated as Series C Preferred Stock.
Significant terms of these Convertible Preferred Stocks are as follows:
Each share is convertible at the option of the holder into one
share of common stock for Series A, eight shares of common stock for
Series B and 25 shares of common stock of Series C, subject to
adjustment for events of dilution. Shares will automatically be
converted upon an initial public offering of common stock meeting
specified criteria or upon written consent of the holder of a specified
percentage of the outstanding shares of each respective series of
preferred stock.
Each share has the same voting rights and number of votes as shares
of common stock into which it is convertible.
Dividends are at the discretion of the Board of Directors and are
noncumulative. Each share is entitled to a per share dividend of $.16
per share of Series A, $.32 of Series B and $1.00 for Series C per
annum before any dividend is paid to common shareholders. All series
participate with the Company common stock on an as-if-converted basis
with respect to any other dividends that may be paid on the Company's
common stock.
In the event of liquidation, the preferred shareholders are
entitled to receive $2.00 per share for Series A, $4.00 per share for
Series B and $12.50 per share for Series C, plus any declared but
unpaid dividends, prior to any distribution to the common shareholders.
The holders of the preferred shares have certain piggyback and
demand registration rights with respect to the underlying shares of
common stock into which the preferred shares are convertible.
WARRANTS - Warrants to purchase 25,000 shares of the Company's common stock
were issued to an aircraft lessor in November 1994. Warrants to purchase
200,000 shares of common stock were issued to a leasing agent in April 1995.
The value of these warrants has been treated as deferred lease expense and
is being amortized over the life of the related leases. The warrants have
an exercise price of $1.00 and expire October 31, 2005. In April 1996
warrants to purchase 400,000 shares of Series A preferred stock were issued
to Hambrecht & Quist Group L.L.C. as consideration for guaranteeing the
$2,000,000 line of credit. These warrants have an exercise price of $.50
and expire in April 2006. In December 1996, the Company issued to H&Q
warrants to purchase 16,000,000 shares (of which 6,400,000 were fully vested
at December 31, 1996) of common stock at an exercise price of $.25 per
share. The warrants were issued as consideration for a $4,000,000 letter of
credit provided by H&Q which allows the Company to obtain cash more promptly
from certain credit card receivables.
STOCK OPTION PLANS - The Company has adopted the 1993 Stock Option Plan and
the 1994-1995 Stock Option Plan. These plans (the "Plans") provide for
grants of both incentive stock options ("ISO's") and non-qualified options.
Under the Plans, ISO's may be granted to employees and non-qualified options
may be granted to employees, directors, consultants and other advisors.
Shares subject to incentive stock options generally vest over a three year
period. Although vesting may vary, no options have vesting periods in
excess of three years. Certain options provide for acceleration of vesting
upon occurrence of specified events. Options expire over varying periods
from five to ten years after the date of grant.
F-14
<PAGE> 56
ISO's shall be granted at a price at least equal to the fair market value at
the time of issuance as determined by the Board of Directors. Non-qualified
options may have an exercise price of less than fair market value. At the
March 18, 1996 board meeting, directors voted to increase the number of
authorized shares under the 1994-1995 Stock Option Plan to 2,500,000. On
May 18, 1996, the board voted to reduce the exercise price for outstanding
options to purchase common stock by current employees, officers, and
directors to $.50 per share. No future grants will be made under the 1993
Stock Option Plan.
The Company will continue to follow the accounting provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
The effect of applying the disclosure provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, on a proforma basis is not material to the
financial statements.
The fair value of options granted under the Company's stock option plans
was estimated on the date of grant using the Black-Scholes options-pricing
model assuming no dividend yield, no volatility, a risk free interest rate
of 6.4% and expected lives of 1.5 years.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
OPTIONS PER SHARE
------- ---------
<S> <C> <C>
Activity under the Plans is summarized as follows:
Outstanding at September 1, 1993 -
Granted 350,000 $ 0.50
---------
Outstanding at August 31, 1994 350,000 $ 0.50
Granted 939,100 $ 0.50
Forfeited (62,000) $ 0.50
---------
Outstanding at August 31, 1995 1,227,100 $ 0.50
Granted 1,030,000 $ 0.50
---------
Outstanding at December 31, 1995 2,257,100 $ 0.50
Forfeited (61,000) $ 0.50
Exercised (3,333) $ 0.50
---------
Outstanding at December 31, 1996 2,192,767 $ 0.50
=========
Options exercisable at December 31, 1996 1,921,858 $ 0.50
=========
The weighted average remaining contractual life of the options outstanding at December 31, 1996
was 1.5 years.
</TABLE>
UNEARNED STOCK COMPENSATION - In connection with the grant of certain stock
options to employees, the Company recorded unearned stock compensation for
the difference between the deemed fair value for accounting purposes based
on independent appraisals and the option price as determined by the Board of
Directors at the date of grant. Deferred compensation was recorded as a
reduction in stockholders' equity at December 31, 1995. Such amounts were
recognized as compensation expense over the vesting period of the related
stock options, and were fully amortized at December 31, 1996.
STOCK AWARDS - On January 24, 1995 and August 22, 1995 the Company awarded
stock to all employees. The fair value of the stock issued to employees of
$183,831 has been treated as compensation expense for the year ended August
31, 1995. In addition, stock was awarded to a Company executive during
1996. The fair value of that issuance of $50,000 has been treated as
compensation expense for the year ended December 31, 1996.
F-15
<PAGE> 57
5. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company leases aircraft, its principal facilities,
including airport and terminal facilities, sales offices and general
offices. These operating leases are generally on a long-term net rent basis
whereby the Company pays taxes, maintenance, insurance and certain other
operating expenses applicable to the leased premises. Management expects
that, in the normal course of business, leases that expire will be renewed
or replaced by other leases.
At December 31, 1996, approximate minimum lease payments under leases
expiring after December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Calendar year:
<S> <C>
1997 $ 8,687,000
1998 5,028,000
1999 5,028,000
2000 3,831,000
2001 3,291,000
Thereafter 3,045,000
-----------
Total minimum lease payments $28,910,000
===========
</TABLE>
Total rental expense for all operating leases was approximately $11,825,000
and $16,940,000 for the years ended August 31, 1995 and December 31, 1996,
respectively, of which approximately $4,342,000 and $5,943,000 represented
contingent rentals. Comparable amounts for the four months ended December
31, 1995 were $4,882,000 and $1,742,000 for contingent rentals. Contingent
rentals are based on number of flights, enplaned passengers (as defined) or
usage (as defined) for terminal space. Rent expense was not significant for
the year ended August 31, 1994.
In April 1996, the Company renegotiated certain of its aircraft lease
agreements. Under these agreements, the Company would be required to make
an additional payment of up to $3 million to the lessor upon completion of a
successful initial public offering meeting specified criteria.
Noncurrent deposits include $1,170,000 at December 31, 1995 and 1996 for
leased aircraft.
STOCK REGISTRATION - The Company sold shares in the year ended August 31,
1995 and the period ended December 31, 1995 (the "Rescission Shares") which
may have violated the Securities Act of 1933 or other applicable state
securities laws. The shares were not registered under the securities laws,
and exemptions from registration provided by such securities laws may not
have been available or may not have been perfected, and, in some cases,
sales of the shares may have been made by unregistered persons with the
result that the Company may be deemed to have violated the registration
requirements of the securities laws. The Company does not believe the
possible violations of securities laws will have a material impact on the
Company's financial position or future results of operations.
F-16
<PAGE> 58
LITIGATION - The Hillsborough County Aviation Authority is seeking damages
arising out of the Company's alleged breach of four contracts relating to
the use by the Company of Tampa International Airport. An accrual of
approximately $680,000 reflecting management's estimate of the potential
exposure on this litigation has been recorded. The Company does not believe
the ultimate settlement of this litigation will have a material impact on
the Company's financial position or future results of operations.
The Company is a defendant in certain other legal proceedings arising out of
the ordinary conduct of the Company's business. In the opinion of
management, the ultimate outcome of these legal proceedings will not have a
material adverse effect on the final position or future results of the
operations of the Company.
6. GRANTS
Certain governmental entities committed to provide the Company reimbursement
for certain types of expenditures or to provide services free of charge. At
December 31, 1996, grant commitments of $184,015 are available to the
Company for free training services to be provided by the South Carolina
State Board for Technical and Comprehensive Education, and $277,765 is
available for rent subsidy for the Company's reservation facility.
Grants totaling $3,000,000 are repayable on a pro-rata basis, with interest
at 4% per annum, to the governmental entities should the Company, within
five years of commencement of operations, relocate its operations and
headquarters away from the Columbia, South Carolina metropolitan area.
7. INCOME TAXES
The components of deferred income taxes are:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1995 1996
<S> <C> <C>
Depreciation 11,839 $ 156,284
Vacation and other reserves 462,168 862,576
Accrued maintenance reserves 285,884 575,712
Net operating loss carryforwards 7,420,764 17,030,530
----------- ------------
Gross deferred tax assets 8,180,655 18,625,102
Valuation allowance (8,180,655) (18,625,102)
----------- ------------
Net deferred tax assets $ - $ -
=========== ============
</TABLE>
As of December 31, 1996, the Company had available net operating loss
carryforwards of approximately $48,000,000. These carryforwards expire
beginning in 2008. The Company has experienced a change in ownership. The
ownership change may limit the utilization of these carryforwards in the
future.
F-17
<PAGE> 59
The Company has recorded a valuation allowance for the total amount of the
gross deferred tax asset in all years presented as recoverability of such
assets is not considered likely.
8. OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS
AUGUST 31, ENDED YEAR ENDED
----------------------------------- DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
<S> <C> <C> <C> <C>
Travel, lodging and meals $ 118,333 $ 1,042,240 $ 253,506 $ 963,978
Communications 74,632 1,638,396 549,862 2,404,489
Useage fees - reservations 26,104 1,502,235 619,009 1,457,587
Purchased services 185,100 1,546,173 836,301 4,974,939
Equipment rentals - 648,991 230,382 685,357
Aircraft charters - 1,290,373 - 298,808
Insurance 115,872 2,861,286 1,174,539 3,405,818
Taxes and licenses 13,304 465,682 57,818 226,110
Passenger food and drink 31,219 324,343 137,892 410,935
Credit card fees - 1,100,276 587,485 1,357,534
Interrupted trip expense - 209,519 53,458 2,343,821
Corporate and fiscal 140,516 169,231 71,611 245,589
Other 332,463 3,321,678 909,748 3,948,368
---------- ----------- ---------- -----------
Total $1,037,543 $16,120,423 $5,481,611 $22,723,333
========== =========== ========== ===========
</TABLE>
9. RELATED PARTY TRANSACTION
On July 12, 1996, the then Chairman of the Board of Directors of the
Company paid $277,359 directly to a vendor for payment of certain payables
of the Company. As of December 31, 1996, this amount is payable to the
former Chairman of the Board.
10. REDEEMABLE COMMON STOCK
On December 22, 1995 the Company entered into an agreement with a former
officer of the Company to repurchase for $2.00 a share, 250,000 shares of
the Company's common stock from the former officer or designated
individuals. On January 3, 1996, the Company repurchased the shares of
common stock under the terms of this agreement.
F-18
<PAGE> 60
11.FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------------------- ------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 2,369,614 $2,369,614 $ 1,070,063 $ 1,070,063
Investments 668,622 653,334 1,211,000 1,184,665
Liabilities:
Loan from Lexington County,
South Carolina 12,000,000 9,970,542 12,000,000 10,312,322
Convertible debentures - - 5,220,000 2,088,000
</TABLE>
The information presented herein is based on information available to the
Company as of December 31, 1996. Although the Company is not aware of any
factors that would significantly affect the estimated fair value amounts,
such financial instruments have not been comprehensively revalued since
December 31, 1996, and the current estimated fair value may differ
significantly from the estimated fair value at that date.
The following methods and assumptions were used to estimate the fair value
of the above classes of financial instruments:
Cash and cash equivalents are valued at their carrying amount.
Fair values of investments and certain non-convertible long-term debt are
based on net present value calculations as quoted market prices for the
instruments or similar instruments are not available. Settlement of
long-term debt may not be possible or may not be a prudent management
decision. Potential taxes and other expenses that would be incurred in an
actual sale or settlement have not been taken into consideration.
The fair value of convertible debentures are based upon the estimated
current fair value of common stock and the conversion provisions of these
debentures.
12.SUBSEQUENT EVENTS
Subsequent to December 31, 1996, the Company has received new financing as
follows:
In January and March 1997, the Company issued $6,900,000 of demand notes
to H&Q and H&Q affiliates bearing interest at 8%.
In January 1997, the Company issued warrants to purchase 8,000,000
shares of Common Stock at an exercise price of $.25 per share to H&Q. The
warrants were issued as consideration for a $2 million letter of credit
provided by H&Q which allowed the Company to obtain an extension on the
maturity of the $2 million bank loan.
The Company has executed an agreement to sell approximately 6% (14,038,185
shares) of the outstanding shares of the Company (on a fully diluted
basis) to management at $.02 per share.
*********
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