<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997 or
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission file number 000-21715
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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 Number)
1800 St. Julian Place - 4th Floor, Columbia, SC 29204
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(Address of Principle Executive Offices) (Zip Code)
Registrant's Telephone Number: (803) 822-0502 EXT. 3207
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N/A
- - - --------------------------------------------------------------------------------
(Former Name, Former Address or former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
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APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, par value, $0.001 per share - 6,967,182 shares were
outstanding as of August 12, 1997.
<PAGE> 2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
AIR SOUTH AIRLINES, INC.
BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------
ASSETS 1996 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,070,063 $ 464,654
Investments 1,211,000 1,061,000
Receivables (principally air traffic) 671,825 1,980,387
Prepaid expenses and other current assets 1,522,176 2,082,298
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Total current assets 4,475,064 5,588,339
DEPOSITS 1,170,000 1,170,000
PROPERTY AND EQUIPMENT, NET 3,469,287 3,955,319
DEBT ISSUE COSTS 312,976 306,024
OTHER 426,469 527,490
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Total assets $ 9,853,796 $11,547,172
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LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Short-term borrowings $ 5,277,359 $22,127,359
Accounts payable 10,572,801 11,063,056
Accrued expenses 10,178,518 7,570,726
Air traffic liability 4,500,157 6,587,817
Current portion of long-term debt 1,266,752 15,634,775
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Total current liabilities 31,795,587 62,983,733
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LONG-TERM DEBT 18,291,122 4,437,961
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Convertible preferred stock, $.001 par value, 2,000,000 shares authorized,
1,995,000 shares outstanding at December 31, 1996 and June 30,
1997, respectively; aggregate liquidation preference of $6,500,000 1,995 1,995
Common stock, $.001 par value, 18,000,000 shares authorized; shares
issued and outstanding: 6,967,182 at December 31, 1996 and June 30,
1997 6,967 6,967
Additional capital 11,453,645 11,476,445
Accumulated deficit (51,695,520) (67,359,929)
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Total stockholders' deficiency (40,232,913) (55,874,522)
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Total liabilities and stockholders' deficiency $ 9,853,796 $11,547,172
=========== ===========
</TABLE>
See notes to unaudited financial statements.
<PAGE> 3
AIR SOUTH AIRLINES, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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1996 1997 1996 1997
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Passenger $13,281,828 $16,643,374 $ 27,076,985 $ 29,440,206
Other 500,583 1,119,654 905,125 2,068,166
----------- ----------- ------------ ------------
Total operating revenues 13,782,411 17,763,028 27,982,110 31,508,372
----------- ----------- ------------ ------------
OPERATING EXPENSES:
Salaries, wages and benefits 4,007,785 4,390,947 7,912,780 8,259,606
Aircraft fuel and oil 3,378,465 3,281,754 6,320,852 6,286,713
Aircraft leases 1,935,955 2,261,110 3,575,984 4,535,623
Maintenance materials and repairs 2,055,781 3,135,893 4,075,361 5,106,671
Agency commissions 919,972 828,124 1,713,862 1,331,631
Other rentals, landing and ground handling fees 1,621,424 1,723,099 3,108,583 3,185,149
Advertising 1,015,349 1,153,894 1,838,724 2,612,186
Depreciation and amortization 153,009 235,770 304,965 450,298
Other operating expenses 4,635,570 8,062,439 9,301,978 14,462,829
----------- ----------- ------------ ------------
Total operating expenses 19,723,310 25,073,030 38,153,089 46,230,706
----------- ----------- ------------ ------------
OPERATING LOSS (5,940,899) (7,310,002) (10,170,979) (14,722,334)
----------- ----------- ------------ ------------
NONOPERATING (EXPENSE) AND INCOME:
Grants 65,675 46,875 112,550 93,750
Interest expense (212,010) (650,820) (360,694) (1,107,403)
Interest income 42,076 31,733 72,968 57,941
Other income (expense) 174,199 12,637 185,799 13,637
----------- ----------- ------------ ------------
Total nonoperating income (expense), net 69,940 (559,575) 10,623 (942,075)
----------- ----------- ------------ ------------
NET LOSS $(5,870,959) $(7,869,577) $(10,160,356) $(15,664,409)
=========== =========== ============ ===========
NET LOSS PER SHARE $ (.86) $ (1.13) $ (1.49) $ (2.25)
=========== =========== ============ ============
WEIGHTED AVERAGE COMMON SHARES (000's) 6,823 6,967 6,826 6,967
=========== =========== ============ ============
</TABLE>
See notes to unaudited financial statements.
<PAGE> 4
AIR SOUTH AIRLINES, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE THREE MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
NUMBER OF NUMBER OF STOCKHOLDERS'
PREFERRED PREFERRED COMMON COMMON ADDITIONAL ACCUMULATED EQUITY
SHARES STOCK SHARES STOCK CAPITAL DEFICIT (DEFICIENCY)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1997 1,995,000 1,995 6,967,182 6,967 11,476,445 (59,490,352) (48,004,945)
Net loss (7,869,577) (7,869,577)
--------- ------ --------- ------ ----------- ------------ ------------
BALANCE, JUNE 30, 1997 1,995,000 $1,995 6,967,182 $6,967 $11,476,445 $(67,359,929) $(55,874,522)
========= ====== ========= ====== =========== ============ ============
</TABLE>
AIR SOUTH AIRLINES, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
NUMBER OF NUMBER OF STOCKHOLDERS'
PREFERRED PREFERRED COMMON COMMON ADDITIONAL ACCUMULATED EQUITY
SHARES STOCK SHARES STOCK CAPITAL DEFICIT (DEFICIENCY)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 1,995,000 1,995 6,967,182 6,967 11,453,645 (51,695,520) (40,232,913)
Issuance of warrants 22,800 22,800
Net loss (15,664,409) (15,664,409)
--------- ------ --------- ------ ----------- ------------ ------------
BALANCE, JUNE 30, 1997 1,995,000 $1,995 6,967,182 $6,967 $11,476,445 $(67,359,929) $(55,874,522)
========= ====== ========= ====== =========== ============ ============
</TABLE>
See notes to unaudited financial statements.
<PAGE> 5
AIR SOUTH AIRLINES, INC.
STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1996 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,160,356) $(15,664,409)
Adjustments to reconcile net loss to net cash used by operating activities:
Grants (112,550) (93,750)
Stock compensation 370,565
Depreciation and amortization 356,317 464,556
Changes in assets and liabilities:
(Increase) decrease in receivables (1,772,823) (1,308,562)
(Increase) decrease in prepaid expenses (88,796) (560,122)
(Increase) decrease in other assets (388,840) (78,220)
Increase in accounts payable 3,187,481 490,255
Increase (decrease) in accrued liabilities (769,048) (2,607,792)
Increase (decrease) in air traffic liability 2,065,532 2,087,660
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Net cash used by operating activities (7,312,518) (17,270,384)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment (303,427) (927,962)
(Increase) decrease in investments (671,043) 150,000
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Net cash used by investing activities (974,470) (777,962)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from grants 112,550 93,750
Proceeds from short-term borrowings 2,500,000 16,850,000
Payments of long-term debt (54,167) (209,584)
Proceeds from issuance of long-term debt 724,446
Proceeds from issuance of common stock 18,333
Proceeds from issuance of preferred stock 4,000,000
Common stock redemption (500,000)
Debt issue costs (37,143) (15,675)
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Net cash provided by financing activities 6,039,573 17,442,937
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,247,415) (605,409)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,369,614 1,070,063
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 122,199 $ 464,654
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the period for interest $ 68,226 $ 298,821
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Stock and warrants issued to vendors and investors $ 52,000 $ 22,800
</TABLE>
See notes to unaudited financial statements.
<PAGE> 6
AIR SOUTH AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
1. INTERIM FINANCIAL STATEMENTS - These notes should be read in
conjunction with the Notes to Financial Statements appearing in Air
South Airlines, Inc.'s (the Company) Amendment No. 1 to its Registration
Statement on Form 10 for the year ended December 31, 1996. These are
interim financial statements and, because of seasonal variations in air
travel, the amounts reported in the statements of operations are not
necessarily indicative of amounts expected for the year. The unaudited
financial statements for the three months and six months ended June 30,
1997 and June 30, 1996, reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results
for the interim periods presented. All such adjustments are of a normal
recurring nature. These financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
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 financial
position or results of operations.
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.
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.
CONTINUITY OF OPERATIONS - The Company has incurred significant
operating losses since inception, and at June 30, 1997, has a deficiency
in working capital of $57,395,000 and a stockholders' deficiency of
$67,360,000. The Company continues to experience negative cash flows
and payments to certain trade creditors are past due. Operating
revenues have not yet exceeded a break-even threshold. In addition,
loan covenant violations on $12,000,000 of indebtedness with Lexington
County, South Carolina (the "State Loan") 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. Subsequent
to June 30, 1997, the Company was unable to make a required interest
payment on this debt in the amount of approximately $624,000. As such,
the entire principal balance of the loan can be declared due and payable
by the holder of the debt.
The cash flow deficits 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
<PAGE> 7
Company's ongoing operation. It is also highly unlikely that
the 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.
As of June 30, 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 $4,536,000 for the six months ending June 30, 1997.
The Company's working capital deficit and accumulated deficit are
likely to hinder its ability to obtain additional aircraft. On August
14, 1997, the Company received a default notice from its major
aircraft lessor from whom it leases fire aircraft. The Company has
until August 28, 1997 to cure this default or the lessor will be able
to exercise various remedies provided for by the lease terms,
including repossession of the aircraft.
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 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. The Company began operating all seven of
its aircraft on June 15, 1997. No new cities will be served.
Management has installed a new reservations system with improved
revenue management and accounting capabilities. Additionally, the
Company installed an automated scheduling system which should reduce
flight crew expenses by producing better crew utilization.
During 1996 and through June 30, 1997, the Company raised
approximately $35 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. 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.
2. Financing Arrangements - During the six months ended June 30, 1997,
the Company issued $16,900,000 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. In April 1997, the Company issued $697,000 of
Convertible Debentures. These securities are convertible into
6,970,000 shares of Series F Preferred Stock (to be authorized), which
in turn are convertible at $.25 per share into shares of Common Stock.
In addition, the Company was unable to make a required interest
payment of approximately $630,000 which was due on August 1, 1997 on
the State Loan. As a result, the entire principal balance of the
loan can be declared due and payable and has therefore been reflected
as a current liability in the accompanying balance sheet.
3. 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 financial position or
future results of the operations of the Company.
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
Three months ended June 30, 1997 compared to three months ended June 30, 1996.
Operating Revenues
Operating revenue increased 28.9% from $13,782,000, for the three months ended
June 30, 1996 to $17,763,000, for the three months ended June 30, 1997. The
increase was a result of operating more flights ( up 15.0%) and more passengers
flying on those flights. Total Available Seat Miles ("ASMs") increased 21.0%,
from 159.4 million, for the three months ended June 30, 1996 to 192.9 million,
for the three months ended June 30, 1997.
Passenger revenue increased 25.0% from $13,282,000, for the three months ended
June 30, 1996 to $16,643,000, for the three months ended June 30, 1997. Revenue
Passenger Miles ("RPMs") increased 34.3% from 82.8 million, for the three months
ended June 30, 1996 to 111.1 million, for the three months ended June 30, 1997.
The increase was a result of flying more miles (up 21.1%) and greater acceptance
of the Company's route structure. Load factors increased from 51.9% for the
three months ended June 30, 1996 to 57.6%, for the three months ended June 30,
1997. The increase was a result of greater awareness and acceptance of the
Company's new schedules. Passenger yield per RPM decreased 6.9% from 16.1 cents,
for the three months ended June 30, 1996 to 15.0 cents, for the three months
ended June 30, 1997. The decrease was a result of fare sales which occurred
which allowed certain passengers to fly free when accompanied by a full fare
paying passenger and passengers flying longer distances. These sales commenced
in late February and allowed passengers to purchase tickets and travel from late
February 1997 through the end of 1997. The average distance per flight increased
5.3% from 352 miles to 371 miles.
Other revenue increased 123.6% from $501,000, for the three months ended June
30, 1996
<PAGE> 9
to $1,120,000, for the three months ended June 30, 1997. The increase was a
result of an increase in the amount of mail carried and commissions on
passengers given to other carriers when the Company was unable to carry the
passenger because of flight cancellations.
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 increased 9.6%, from $4,008,000, for the three
months ended June 30, 1996 to $4,391,000 for the three months ended June 30,
1997. The increase was a result of additional staffing required for increased
levels of flying (hours were up 15.9%) and Company personnel replacing
contractors at some airport locations served by the Company. Salaries, wages,
and benefits accounted for 20.3% of operating expense and 29.1% of operating
revenue for the three months ended June 30, 1996. By contrast, salaries, wages,
and benefits accounted for 17.5% of operating expenses and 24.7% of operating
revenue for the three months ended June 30, 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 decreased 2.9%, from $3,378,000, for the three months ended June 30,
1996 to $3,282,000 for the three months ended June 30, 1997. The decrease was
attributable to lower fuel prices (down from $.89 per gallon from $.73 per
gallon), partially offset by increased consumption per block hour as a result of
heavier loads. Aircraft fuel and oil expenses accounted for 17.1% of operating
expense and 24.5% of operating revenue for the three months ended June 30, 1996.
By contrast, aircraft fuel and oil expenses accounted for 13.1% of operating
expenses and 18.5% of operating revenue for the three months ended June 30,
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 two and one half years.
Aircraft lease expenses increased 16.8%, from $1,936,000 for the three months
ended June 30, 1996, to $2,261,000 for the three months ended June 30, 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 re-negotiated leases and
increased from $38,900 to $105,000 per month on February 1, 1997 in exchange for
payment of heavy maintenance expenses cost being paid for by the owner on 1
aircraft. Aircraft lease expense accounted for 9.8% of operating expenses and
14.0% of operating revenue for the three months ended June 30, 1996. By
contrast, aircraft lease expense accounted for 9.0% of operating expenses and
12.7% of operating revenue for the three months ended June 30, 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
<PAGE> 10
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. In
general, the costs to maintain older aircraft exceeds the cost to maintain newer
aircraft. Modifications or additions 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 overhauls, primarily of engines.
Major engine repairs are capitalized and amortized over the period to the next
scheduled overhaul.
Maintenance, materials, and repairs expense increased 52.5%, from $2,056,000
for the three months ended June 30, 1996 to $3,136,000 for the three months
ended June 30, 1997. The increase was due to an increase in the number of hours
flown (15.9%), extensive use of loaner parts and 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 10.4% of operating expenses and 14.9% of operating revenue
for the three months ended June 30, 1996. By contrast, maintenance, materials
and repairs expense accounted for 12.5% of operating expenses and 17.7% of
operating revenue for the three months ended June 30, 1997. Over time the
Company expects that maintenance expenses will more closely follow industry
norms, however there can be no assurance that this will occur because of the
average age of the fleet.
Agency commissions expense reflects fees paid to travel agents. For the three
months ended June 30, 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 40% of the Company's
bookings are made through travel agents.
Agency commissions expense decreased 10% from $920,000 for the three months
ended June 30, 1996 to $828,000 for the three months ended June 30, 1997. The
decrease was a result of a decline in the number of tickets sold by travel
agents compared to last year. Agency commissions expense accounted for 4.7% of
operating expenses and 6.7% of operating revenue for the three months ended June
30, 1996. Agency commissions expense accounted for 3.3% of operating expenses
but 4.7% of operating revenue for the three months ended June 30, 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 and passengers at certain locations.
Other rental, landing, and ground handling fees expenses increased 6.3%, from
$1,621,000 for the three months ended June 30, 1996 to $1,723,000 for the three
months ended June 30, 1997. The increase was primarily attributable to flying
more segments (up 15.0%) partially offset by increased flights to airports
already being served by the Company where no additional fixed facility rents
were incurred and the use of Company personnel to perform tasks previously done
by contractors. Other rental, landing, and ground handling fees represented
8.2% of operating expenses and 11.8% of operating revenues for the three months
ended June 30, 1996. By contrast, these expenses represented 6.9% of operating
expenses and 9.7% of operating revenues for the three months ended June 30,
1997.
Advertising expense includes all external costs associated with the production
and distribution of advertisements and promotional materials and sponsorship of
various promotional events.
<PAGE> 11
Advertising costs increased 13.7% from $1,015,000 for the three months ended
June 30, 1996, to $1,154,000 for the three months ended June 30, 1997. The
increase was primarily attributable to increased advertising associated with
fare sales. Advertising represented 5.1% of operating expenses and 7.4% of
operating revenues for the three months ended June 30, 1996. By contrast, these
expenses represented 4.6% of operating expenses and 6.5% of operating revenues
for the three months ended June 30, 1997.
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 54.2% from $153,000 for the
three months ended June 30, 1996, to $236,000 for the three months ended June
30, 1997. The increase was due to the increased level of property and equipment
owned by the Company.
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 73.9%, from
$4,636,000 for the three months ended June 30, 1996, to $8,062,000 for the three
months ended June 30, 1997. The increase in other expenses is primarily
attributable to the increase in canceled flights resulting in passenger
re-accommodation costs ($1,246,000) and increased communications costs incurred
in an effort to assure that travel agents were able to sell the Company's
services using the new reservations system ($300,000). Other Operating Expenses
represented 23.5% of operating expenses and 33.6% of operating revenues for the
three months ended June 30, 1996. By contrast, these expenses represented 32.2%
of operating expenses and 45.4% of operating revenues for the three months ended
June 30, 1997.
Net interest expense increased from $170,000 for the three months ended June 30,
1996, to $619,000 for the three months ended June 30, 1997. The increase was a
result of interest on increased short term borrowings and long-term debt.
Six months ended June 30, 1997 compared to six months ended June 30, 1996.
Operating Revenues
Operating revenue increased 12.6% from $27,982,000, for the six months ended
June 30, 1996 to $31,508,000, for the six months ended June 30, 1997. The
increase was a result of flying more flights and more passengers. Total
Available Seat Miles ("ASMs") increased 14.4%, from 306.3 million, for the six
months ended June 30, 1996 to 350.4 million, for the six months ended June 30,
1997.
Passenger revenue increased 8.7% from $27,077,000 for the six months ended June
30, 1996 to $29,440,000, for the six months ended June 30, 1997. Revenue
Passenger Miles ("RPMs") increased 25.8% from 154.8 million, for the six months
ended June 30, 1996 to 194.7 million, for the six months ended June 30, 1997.
The increase was a result of more flying and greater acceptance of the Company's
route structure. Load factors increased from 50.5% for the six months ended June
30, 1996 to 55.6%, for the six months ended June 30, 1997. The increase was a
result of greater awareness and acceptance of the Company's new schedules.
Passenger yield per RPM decreased 13.6% from 17.50 cents, for the six months
ended June 30, 1996 to 15.12 cents, for the six months ended June 30, 1997. The
decrease was a result of fare sales which occurred which allowed certain
passengers to fly free when accompanied by a
<PAGE> 12
full fare paying passenger and passengers flying longer distances. These sales
commenced in late February and allowed passengers to purchase tickets and travel
from late February 1997 through the end of 1997. The average distance per flight
increased 5.3% for 352 miles to 371 miles.
Other revenue increased 128.5% from $905,000 for the six months ended June 30,
1996 to $2,068,000, for the six months ended June 30, 1997. The increase was a
result of an increase in the amount of mail carried and commissions on
passengers given to other carriers when the Company was unable to carry the
passenger because of flight cancellations.
Operating Expenses
Salaries, wages, and benefits increased 4.4%, from $7,913,000, for the six
months ended June 30, 1996 to $8,260,000 for the six months ended June 30, 1997.
The increase was a result of additional staffing required for increased levels
of flying (hours were up 3.5%) and Company personnel replacing contractors at
some airport locations served by the Company. Salaries, wages, and benefits
accounted for 20.7% of operating expense and 28.3% of operating revenue for the
six months ended June 30, 1996. By contrast, salaries, wages, and benefits
accounted for 17.9% of operating expenses and 26.2% of operating revenue for the
six months ended June 30, 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 decreased 0.5%, from $6,321,000, for the six months ended June 30, 1996
to $6,287,000 for the six months ended June 30, 1997. The decrease was
attributable to lower fuel prices (down from $.83 per gallon from $.77 per
gallon), partially offset by increased consumption per block hour as a result of
heavier loads. Aircraft fuel and oil expenses accounted for 16.6% of operating
expense and 22.6% of operating revenue for the six months ended June 30, 1996.
By contrast, aircraft fuel and oil expenses accounted for 13.6% of operating
expenses and 20.0% of operating revenue for the six months ended June 30, 1997.
Aircraft lease expenses increased 26.8%, from $3,576,000 for the six months
ended June 30, 1996, to $4,536,000 for the six months ended June 30, 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 re-negotiated leases and
increased from $38,900 to $105,000 per month on February 1, 1997 in exchange for
payment of heavy maintenance expenses cost being paid for by the owner on 1
aircraft. Aircraft lease expense accounted for 9.4% of operating expenses and
12.8% of operating revenue for the six months ended June 30, 1996. By contrast,
aircraft lease expense accounted for 9.8% of operating expenses and 14.4% of
operating revenue for the six months ended June 30, 1997.
Maintenance, materials, and repairs expense increased 25.3%, from $4,075,000 for
the six months ended June 30, 1996 to $5,106,671 for the six months ended June
30, 1997. The increase was due to a slight increase in the number of hours flown
(up 3.5%) extensive use of very costly loaner parts and 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 10.7% of operating expenses and 14.6% of operating
revenue for the six months ended June 30, 1996. By contrast, maintenance,
materials and repairs expense accounted for 11.0% of operating expenses and
16.2% of operating revenue for the six months ended June 30, 1997. The Company
expects the use of loaner parts to decrease and the costs related thereto to
decrease, but there can be no assurance that this will occur.
Agency commissions expense decreased 22.3% from $1,714,000 for the six months
ended June 30, 1996 to $1,332,000 for the six months ended June 30, 1997. The
decrease was a result of a decline in the number of tickets sold by travel
agents compared to last year. Agency commissions expense accounted for 4.5% of
operating expenses and 6.1% of operating revenue for the six months ended June
30, 1996. Agency commissions expense accounted for 2.9% of operating expenses
but 4.2% of operating revenue for the six months ended June 30, 1997.
<PAGE> 13
Other rental, landing, and ground handling fees expenses increased 2.5%, from
$3,109,000 for the six months ended June 30, 1996 to $3,185,000 for to the six
months ended June 30, 1997. The increase was primarily attributable to flying
more segments (up 15.0%) partially offset by increased flights to airports
already being served by the Company where no additional fixed facility rents
were incurred and the use of Company personnel to perform tasks previously done
by contractors. Other rental, landing, and ground handling fees represented 8.1
% of operating expenses and 11.1% of operating revenues for the six months ended
June 30, 1996. By contrast, these expenses represented 6.9% of operating
expenses and 10.1% of operating revenues for the six months ended June 30, 1997.
Advertising costs increased 42.1% from $1,839,000 for the six months ended June
30, 1996, to $2,612,000 for the six months ended June 30, 1997. The increase was
primarily attributable to increased advertising associated with fare sales.
Advertising represented 4.8 % of operating expenses and 6.6% of operating
revenues for the six months ended June 30, 1996. By contrast, these expenses
represented 5.7% of operating expenses and 8.3% of operating revenues for the
six months ended June 30, 1997.
Depreciation and amortization expenses increased 47.7% from $305,000 for the six
months ended June 30, 1996, to $450,000 for the six months ended June 30, 1997.
The increase was due to the increased level of property and equipment owned by
the Company.
Other expenses increased 55.5%, from $9,302,000 for the six months ended June
30, 1996, to $14,463,000 for the six months ended June 30, 1997. The increase in
other expenses is primarily attributable to the increase in canceled flights
resulting in passenger re-accommodation costs ($3,201,000) and increased
communications costs incurred in an effort to assure that travel agents were
able to sell the Company's services using the new reservations system
($300,000). Other Operating Expenses represented 24.4% of operating expenses
and 33.2% of operating revenues for the six months ended June 30, 1996. By
contrast, these expenses represented 31.3% of operating expenses and 45.9% of
operating revenues for the six months ended June 30, 1997.
Net interest expense increased from $288,000 for the six months ended June 30,
1996, to $1,050,000 for the six months ended June 30, 1997. The increase was a
result of interest on increased short term borrowings and 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.
Liquidity and Capital Resources
From its inception, the Company has experienced serious liquidity problems.
During the period from inception through June 30, 1997, the Company's
pre-operating and operating activities resulted in a significant deficit in
cash flow. This cash flow deficit has been funded primarily with the proceeds
from private securities sales, bank loans, private loans and certain vendors.
At June 30, 1997, the Company had cash and cash equivalents of $465,000 and the
working capital deficit was approximately $57,395,000 compared to cash and cash
equivalents of $1,100,000 and a working capital deficit of approximately
$27,000,000 at December 31, 1996.
Through June 30, 1997, H&Q has advanced $21,400,000 to the Company in the form
of promissory notes. There can be no assurance that given continuing cash flow
deficits the Company can continue to use this source or find sources to fund
its cash needs.
In addition to the H&Q advances, the Company has been partially funded by a $12
million loan guaranteed by the Department of Housing and Urban Development (the
State Loan). In September 1996, the terms of the State Loan were modified such
that, among other things, the interest due for September 1, 1996 through August
1, 1997 was deferred until August 1, 1997. On August 1, 1997 the Company was
unable to make the required interest payment of approximately $624,000. As
such, the entire principal balance of the State Loan can be considered due and
payable by the debtholder. Negotiations are continuing with the debtholder to
resolve and reschedule this payment, but there can be no assurances that an
agreement will be reached.
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. Aproximately 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 May 21, 1997, the Company suspended service to Savannah in order to improve
deployment of aircraft.
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. The outstanding principal of $450,000 was payable on March 29, 1997
but the bank agreed to an extension until July 2, 1997. The loan was repaid in
full on July 2, 1997.
<PAGE> 14
As of June 30, 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 $4,536,000 for
the six months ending June 30, 1997. The Company's working capital deficit and
accumulated deficit are likely to hinder its ability to obtain additional
aircraft. On August 14, 1997, the Company received a default notice from its
major aircraft lessor from whom it leases five aircraft. The Company has
until August 28, 1997 to cure this default or the lessor will be able to
exercise various remedies provided for by the lease terms, including
repossession of the aircraft.
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 in the near
future, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
<PAGE> 15
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None; but see Item 6, (b) of this Form 10-Q.
Item 2. Changes in Securities.
(a) Not applicable
(b) Not applicable
(c) (A) On April 16, 1997 the Registrant sold $697,000 of
Convertible Debentures due April 16, 2000 (the
"Securities").
(B) No underwriter was used in the sale of the Securities. The
Securities were sold to a single institutional Accredited
Investor as such term is defined in Regulation D
promulgated under the Securities Act of 1933 as amended
(an "Accredited Investor").
(C) The Securities were sold for $697,000 in cash.
(D) The Securities were sold to a single Accredited Investor
in reliance on Rule 506 of Regulation D. Such Accredited
Investor was a venture capital firm with assets in excess
of $5,000,000.
(E) The Securities are convertible into shares of the
Registrant's common stock at ten cents ($0.10) per share.
Item 3. Defaults Upon Senior Securities
On August 1, 1997 the Registrant defaulted on the payment of
interest for the periods June 1, 1996 through August 1, 1997 which had accrued
and was payable in the amount of $624,000 with regard to the Registrant's
Promissory Note dated August 8, 1994 payable to the order of Lexington County,
South Carolina.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
* Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K.
- - - -----------
* To be filed by amendment.
On June 27, 1997 the Registrant filed a Report on Form 8-K. Such
report described: (1) a lawsuit against two directors of the Registrant and two
security holders of the Registrant; the Registrant is not a party to the
lawsuit; (ii) a lawsuit against the Registrant and a director of the
Registrant; (iii) the resignation of the Chairman of the Board, President and
Chief executive Officer of the Registrant; and (iv) the termination of a
consulting agreement pursuant to which such Chairman of the Board, President
and Chief Executive Officer and two other persons were employed by the
Registrant; and (v) the election of a new President and Director.
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AIR SOUTH AIRLINES, INC.
----------------------------
(Registrant)
Date August 19, 1997 /s/ John Affeltranger
---------------------- ----------------------------
John Affeltranger
President
Date August 19, 1997 /s/ George McConnaughey
---------------------- ----------------------------
George McConnaughey
Vice President and
Acting Chief Financial Officer
