UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1996.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the transition
period from _____________ to
Commission File Number 33-96884
VANGUARD AIRLINES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 48-1149290
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
30 N.W. Rome Circle
Mezzanine Level
Kansas City International Airport
Kansas City, Missouri 64153
(816) 243-2100
(Address of principal executive offices, including zip code;
Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 1, 1997, there were 9,984,952 shares of Common
Stock outstanding, of which 5,288,208 shares were owned by
affiliates. The aggregate market value of the outstanding Common
Stock of the Registrant held by non-affiliates, based on the
average of bid and asked prices of such stock on March 1, 1997,
was $11,726,601.24.
Documents incorporated by reference: Portions of the
Registrant's Proxy Statement for the 1996 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Vanguard Airlines, Inc. ("Vanguard" or the "Company") was
incorporated in Delaware on April 25, 1994. The Company's
principal offices are located at 30 N.W. Rome Circle, Mezzanine
Level, Kansas City International Airport, Kansas City, Missouri
64153, and its telephone number is (816) 243-2100.
Vanguard is a low-fare airline offering convenient, non-stop
and connecting scheduled jet service to attractive destinations
in established markets for both leisure and business travelers.
The Company currently operates six leased Boeing 737-200 jet
aircraft and two leased Boeing 737-300 jet aircraft, which
provide 63 daily weekday flights serving Kansas City, Atlanta,
Chicago/Midway, Dallas/Fort Worth, Denver, Des Moines, Fort
Meyers, Las Vegas, Los Angeles, Miami, Minneapolis/Saint Paul,
Orlando, San Francisco, Tampa/Saint Petersburg and Wichita. In
addition, the Company provides limited charter services. The
Company has experienced significant growth since the commencement
of operations in December 1994, achieving operating revenues of
approximately $36.2 million for the year ended December 31, 1995
and $68.6 million for the year ended December 31, 1996. However,
despite this significant growth in revenue levels, the Company to
date has yet to operate profitably.
THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS AND
INFORMATION THAT ARE BASED ON MANAGEMENT'S BELIEFS AS WELL AS
ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO
MANAGEMENT. WHEN USED IN THIS DOCUMENT, THE WORDS "ESTIMATE,"
"ANTICIPATE," "PROJECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. THE ACTUAL RESULTS MAY
DIFFER SIGNIFICANTLY FROM THOSE CURRENTLY ANTICIPATED. FACTORS
THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
GENERAL ECONOMIC CONDITIONS, THE COST OF JET FUEL, THE OCCURRENCE
OF EVENTS INVOLVING OTHER LOW COST CARRIERS, THE CURRENT LIMITED
SUPPLY OF BOEING 737 JET AIRCRAFT AND THE HIGHER LEASE COSTS
ASSOCIATED WITH SUCH AIRCRAFT, POTENTIAL CHANGES IN GOVERNMENT
REGULATION OF AIRLINES OR AIRCRAFT AND ACTIONS TAKEN BY OTHER
AIRLINES PARTICULARLY WITH RESPECT TO SCHEDULING AND PRICE IN THE
COMPANY'S CURRENT OR FUTURE ROUTES. FOR ADDITIONAL DISCUSSION OF
SUCH RISKS, SEE "BUSINESS-- FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS."
COMPANY'S LOW-FARE SERVICE
The Company's low-fare service is designed to meet the needs
of, and stimulate increased demand among, leisure travelers and
price-sensitive business travelers. The Company believes that in
its markets opportunities exist for airlines such as the Company
that offer low fares with a level of service that meets or
exceeds consumer expectations of low-fare airlines.
To compete favorably, low-fare airlines must offer services
that are price competitive with other airlines in its markets
and, particularly with respect to short-haul travelers, are
competitive with ground transportation alternatives. The Company
typically offers its airline services at fares that are generally
substantially lower than fares offered prior to its entry into
its markets. The Company believes its offering low fares will
continue in light of the Company's cost structure; however, the
Company has marginally increased fares in markets that it has
been operating for more than one year or where it has strong load
factors. The following table sets forth a range of the Company's
fares for one-way, non-stop service in selected markets as of
February 2, 1997:
<PAGE>
Between And One Way Fares
From To
Chicago-Midway ........ Minneapolis/Saint Paul $69 $169
Denver ................ Kansas City $79 $179
Des Moines ............ Kansas City $29 $69
Kansas City ........... Atlanta $69 $159
Kansas City ........... Chicago $99 $159
Kansas City ........... San Francisco $79 $179
Kansas City ........... Los Angeles $89 $149
Kansas City ........... Orlando $99 $169
Kansas City ........... Tampa $99 $169
In the first quarter of 1996, the Company revised its
pricing system to complete more effectively against airlines that
offered a limited number of seats at fares at or below the
Company's then existing fares. This change provided the Company
with flexible fare pricing options. The Company transitioned
from a peak/off-peak single-price per flight fare system to a
revenue/yield management fare system utilizing a range of price
categories in all markets. The primary price categories are: (i)
14-day advance, (ii) seven-day advance, (iii) three day advance
and (iv) walk-up. Within each primary category, there are
smaller fare price increments that are triggered by time
remaining to the flight and existing number of reservations on
such flight and are tailored to competitive conditions in the
local market and historical operating data. The purpose of the
yield management system is to achieve and maintain acceptable
yield and load factor levels in each market, thereby maximizing
revenue per available seat mile.
None of the Company's fares require a round-trip purchase or
minimum stay. All of the Company's published fares are sold on a
non-refundable basis. A customer who wishes to change, or who
fails to use a purchased flight reservation may apply the funds
toward the purchase of another Vanguard flight for use within 90
days (180 days as of March 24, 1997) of the scheduled flight date
subject to a $50 service charge. As a result of its
non-refundable fare structure, the Company's passengers typically
take their designated flights, and the Company believes its "no
- -show" rate is approximately 4%. Because of its non-refundable
fare structure and low "no-show" rate, it is unnecessary for the
Company to over book flights.
The Company's low-fare service is intended to satisfy most
of the basic air transportation needs of the Company's targeted
customers while establishing the Company's reputation as a small
yet reliable airline where customers receive more than they
expect from typical low-fare airlines. The Company believes that
the basic air transportation needs of its targeted customers can
be satisfied by providing a limited number of flights per day on
each route (generally two or three), low-fares, a frequent flyer
program, in-flight beverages and the ability to make advance
reservations. The Company does not offer advance seat
assignments, airport clubs, city ticket offices or certain other
amenities offered by many of its competitors. In addition, the
Company does not interline with other domestic jet airlines.
While many business travelers select traditional airlines based
on the availability of these amenities, the Company believes that
there is substantial demand for its low-fare service both from
leisure travelers and price-sensitive business travelers.
ROUTE SYSTEM AND SCHEDULING
The Company currently serves primarily short- to medium-haul
markets (200 to 1,500 miles) with a limited number of flights
(generally two or three round trips per route per day). In
addition, the Company currently offers "night hawk" flights on
its Las Vegas, Los Angeles and San Francisco routes. By flying
these routes at night when the aircraft would otherwise be idle,
the Company has increased its capacity by approximately 20%.
During the fourth quarter of 1996, the Company launched its new
route system by establishing a hub operation in Kansas City. The
Company currently has twenty-three flights per day in Kansas City
and provides service to the most non-stop destinations from
Kansas City. Prior to its current hub strategy, the Company's
utilized a point-to-point route strategy focusing primarily on
short-to medium-haul markets in the Midwest and Rocky Mountain
regions of the United States.
<PAGE>
The Company's hub system will allow the Company to pursue
measured growth by expanding in existing markets as well as
entering new markets where its low cost structure, current
operating efficiencies and quality of operations can be
preserved. This hub system allows Vanguard to add service to a
new destination from a larger number of cities using only one or
a limited number of aircraft. The Company's flights are timed to
promote good local service in each non-stop market and to provide
connecting opportunities to and from other destinations. For
example, flights originating in Des Moines, Denver, Chicago-
Midway, Minneapolis/Saint Paul, Las Vegas, San Francisco and Los
Angeles arrive in Kansas City in time to connect to non-stop
flights to either Tampa or Orlando.
The Company's aircraft scheduling strategy is directly
related to the perceived needs of its target customers. The
Company believes that its target customers are more sensitive to
price than to schedule or flight frequency. As a result, the
Company's schedule generally provides only two or three flights
per day in any given market. The Company may add or reduce
flights to existing markets to satisfy increased or decreased
demand.
RESERVATION AND INFORMATION SYSTEMS
Automation is a key component of the Company's strategy. The
Company's software, which operates on a Hewlett-Packard 3000
computer system, has been specifically designed to implement the
Company's simplified, ticketless service and is an important
component of the Company's attempt to maintain its low-cost
structure. The Company's integrated reservation, marketing and
revenue accounting system is designed to capture information at
its source, eliminating paper records when possible. The
Company's system provides immediate access to detailed market,
customer and financial information obtained through the
reservation process. The system also collects, organizes and
stores data on customers in support of the Company's frequent
flyer program and can be used for other direct marketing efforts.
The reservation system is operated under a perpetual license
from a subsidiary of Southwest Airlines. Management believes
that the ease of immediate access to timely, detailed information
through its automation system in a cost-effective manner enhances
management functions.
While a number of traditional airlines now offer ticketless
service in certain circumstances, these airlines continue to
maintain their ticketed service and the expenses associated with
the supporting accounting functions. The Company's reservation
system and processes are entirely ticketless. At the time a
reservation or sale is made, the Company provides its customers
with a confirmation number. At the airport, this information is
available to the gate agent facilitating customer check-in,
effectively eliminating slow moving customer check-in lines. The
Company's ticketless service also eliminates traditional revenue
accounting functions and the direct and indirect costs of
handling tickets. The reservation system allows the Company to
sell directly to customers and travel agencies, eliminating the
charges imposed by the computerized reservation systems owned by
the major airlines.
The Company currently does not allow reservations to be
booked directly through the airline industry's Computer
Reservation Systems (CRSs), which are used extensively by travel
agents. The Company currently displays its flight schedules in
the WORLDSPAN and GALILEO CRSs. The Company, however, does not
display its flight schedule in the larger SABRE CRS. The Company
anticipates negotiating an agreement to have its schedules and
fares available for display and booking by travel agents through
all major CRS vendors during the second or third quarter of 1997.
The Company currently does not participate in the Airline
Reporting Corporation ("ARC"), the airline industry collection
agent for travel agency sales. Consequently, at the time a
reservation or sale is made with a travel agent, the Company
identifies the travel agency making the booking, either taking
credit card information or charging the travel agency's account
for future payment. Each travel agency then receives an invoice
summarizing these transactions. In connection with the
anticipated CRS conversion, the Company is evaluating ARC
participation. The Company anticipates converting to ARC
participation during 1997.
In the future, the Company may encounter problems with
features added to its computer system, with new computer hardware
provided by third parties or with a greater volume of
reservations. If the Company experiences a system failure,
revenues may be lost or significant expenses incurred in
repairing, modifying or replacing the system. With its
ticketless service, the Company is dependent on its computerized
reservation system for information regarding confirmed passengers
and flight schedules.
<PAGE>
MARKETING AND PROMOTION
A majority of the Company's customers call its reservation
center directly to make their reservations. As a result, the
Company advertises directly to potential customers using
newspapers, television, radio and billboards. In November 1996,
with the launch of its new cities and hub in Kansas City and the
hiring of a new advertising agency, the Company has significantly
increased its advertising expenditures. These advertisements
feature the Company's destinations, every-seat, every-flight low
fares and the Company's reservations toll free phone number,
(1-800-VANGUARD).
Approximately 40% of the Company's customers use travel
agents to make their reservations. The Company's sales through
travel agents include payments of customary sales commissions,
however, sales are not made through a CRS and do not include fees
associated with such participation. As described above, the
Company anticipates having its schedules and fares available for
display and booking by travel agents during the second or third
quarter of 1997. See "--Reservation and Information Systems."
The Company currently offers a frequent-flyer program,
which awards free round-trip tickets on Vanguard to customers who
complete 16 Vanguard flights within 12 months. In addition to
its standard frequent flyer program, the Company on occasion
accelerates rewards on its frequent flyer program. For example,
in January 1997, the Company launched a Threequent Flyer Program
that entitles customers to a free round trip ticket, valid for
one year, for anyone who completes three round-trip flights on
Vanguard between January 26, 1997 and June 1, 1997.
MOTIVATED AND TRAINED WORKFORCE
The Company believes that the success of an airline is
dependent in large part on the attitudes of its people. The
Company has sought to establish and develop a corporate culture
that provides an environment of relaxed, casual professionalism
for its employees. The Company attempts to provide a working
environment conducive to personal responsibility, creativity,
accountability and commitment. The Company has created an
informal atmosphere and employed a horizontal management
structure to facilitate communication throughout the
organization. To keep all employees informed about the Company's
status and developments, the Company hosts a monthly question and
answer session with the Company's Chairman of the Board, Chief
Executive Officer and President, John P. Tague, and other
executive officers of the Company.
The Company seeks to select, train and maintain a highly
productive workforce of skilled, enthusiastic and energetic
employees and reward them for performance by allowing them to
share in the Company's success and develop professionally.
Management believes that its base wage and benefit levels are
generally at market rates of other similar airlines. The Company
expects to maintain a motivated workforce through its selection
process and a casual and friendly working environment. In
addition, the Company has implemented a 401(k) plan, employee
stock purchase plan and adopted a profit sharing plan, which the
Company expects will further align the interests of its
employees, the Company and its customers.
Training, both initial and recurring, is required for almost
all employees. The average training period for all new
employees, other than pilots, is approximately two weeks. Both
pilot training and mechanic training for the Boeing 737-200 and
737-300 jet aircraft are generally provided by independent
contractors, including other airlines.
Regulations promulgated by the Federal Aviation
Administration ("FAA") require pilots to be licensed as
commercial pilots, with specific ratings for aircraft to be flown
and to be medically certified as physically fit. Licenses and
medical certification are subject to periodic continuation
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 training and
certification. All of these employees are subject to
pre-employment and subsequent random drug and alcohol testing.
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 the FAA
regulations.
<PAGE>
Many airlines are unionized. Management has attempted to
create an environment that is informal and that facilitates the
free flow of communication, which may reduce employees' desires
to be represented by unions. If the employees eventually seek
representation, the impact on the Company may be material and
adverse, although the Company believes that its low-cost
structure derives from its simplified procedures and not simply
from its employee compensation structure. The Company is unable
to predict whether any of its employees will elect to be
represented by a labor union.
AIRPORT OPERATIONS
Ground handling services typically involve (i) public
contact services, such as meeting, greeting and serving the
Company's customers at the check-in counter, gate and baggage
claim area and (ii) underwing ground handling services such as
marshaling the aircraft into and out of the gate, baggage loading
and unloading, as well as lavatory and water servicing, deicing
and certain services provided to the aircraft overnight. Public
contact services at the Company's various airports are conducted
by the Company's full- and part-time employees. Underwing ground
handling services are contracted to other air carriers or
independent contractors. The Company currently is evaluating the
acquisition of certain ground handling equipment and hiring of
its own employees to provide underwing ground handling services
at selected airports.
The Company currently serves 15 airports. The Company has
leases with the appropriate airport authority at certain airports
and sublease or handling arrangements directly with other
airlines at various airports it serves. Most of these sublease
or handling arrangements can be terminated by the other airlines
upon 30 to 60 days' notice. If such a termination were to occur,
the Company would have to make alternative arrangements or cease
operations at the affected airport. There can be no assurance
that alternative arrangements would be available at all or at a
reasonable cost. The Company anticipates being able to gain
access to any airports but currently has no immediate plans to
serve any slot-controlled airports (Washington's National, New
York's LaGuardia and Kennedy and Chicago's O'Hare). The Company
considers the cost of airport operations in determining whether
to commence service to a city.
AIRCRAFT
The Company has leased three of its six Boeing 737-200 jet
aircraft for terms extendable by the Company through 2001; two of
its Boeing 737-200 jet aircraft have been leased for a term
extendable through 2002; and its remaining Boeing 737-200 has
been leased for a term expiring in 2002. The Company has options
to purchase five of the Boeing 737-200 jet aircraft during the
terms of their respective leases. The Company has leased its two
Boeing 737-300 jet aircraft for terms expiring in mid-1997. The
first Boeing 737-300 jet aircraft will be returned in May 1997
and the second Boeing 737-300 jet aircraft will be returned in
July 1997. The Company currently is evaluating lease terms with
respect to one to three Boeing 737-200 jet aircraft to replace
the Boeing 737-300 jet aircraft. However, there can be no
assurance that additional aircraft will be available at all or at
reasonable costs or that the Company will have sufficient
resources to lease such aircraft. The scheduled return of the
737-300 jet aircraft in May should not have a material adverse
effect on the Company's business, financial condition and results
of operations. However, if the Company is unable to lease one to
two jet aircraft by July 1997, the scheduled return of its second
Boeing 737-300 jet aircraft, could have a material adverse effect
on the Company's business, financial condition and results of
operations. See "--Factors That May Affect Future Results of
Operations--Limited Number of Aircraft."
All expenses relating to the maintenance and operation of
the aircraft are the Company's responsibility. While the Company
anticipates a higher maintenance cost for older aircraft,
including costs to comply with FAA Airworthiness Directives
("AD"s) and regulations for aging aircraft, the Company believes
that the total costs of operating the Boeing 737-200 jet aircraft
will be competitive with newer aircraft types because the
Company's aircraft have significantly lower acquisition or lease
costs. Lower acquisition or lease costs result in lower fixed
costs, which the Company believes will allow greater flexibility
to adjust capacity to demand.
The Company's aircraft must be brought into compliance with
federal Stage 3 noise level requirements in phases: 25% by
December 31, 1994; 50% by December 31, 1996; 75% by December 31,
1998; and 100% by December 31, 1999. Currently, the Company's
fleet meets the current Stage 3 noise compliance requirements.
Any jet <PAGE> aircraft acquired to replace the two 737-300 jet aircraft,
which are scheduled to be returned in mid-1997, will need to meet the Stage
3 noise compliance requirements. Alternatively, the Company
would be required to modify aircraft in its existing fleet to
meet the Stage 3 requirements if the acquired aircraft were non-
Stage 3 compliant. The Company believes that through the
modification of current lease terms, the acquisition of an FAA
certified hush kit would be available to allow the Company's
aircraft to meet Stage 3 requirements. Although there can be no
assurance that the hush kit addition will not adversely affect
the cost and operating performance of the Company's Boeing
737-200 jet aircraft, the Company does not believe the hush kits
installed on two of the Company's aircraft have significantly
affected the economics or reliability of such aircraft.
Because the Company's aircraft fleet consists of only eight
aircraft, if one or more of its aircraft were not in service the
Company would experience a proportionally greater loss of
capacity than would be the case with a larger airline. Any
interruption of aircraft service as a result of scheduled or
unscheduled maintenance, however, could materially and adversely
affect the Company's service, reputation and profitability.
MAINTENANCE AND REPAIRS
The Company's Boeing 737-200 jet aircraft were manufactured
between 1968 and 1970 and its Boeing 737-300 aircraft were
manufactured in 1986. Older aircraft, in general, are likely to
incur greater maintenance expense than newer aircraft. The
Company believes that its aircraft are mechanically reliable and
that the ongoing cost of maintenance on such aircraft is, and
will continue to be, within industry norms. The Company must
comply with existing ADs and regulations of the FAA. In
addition, the Company may be required to comply with future ADs
or regulations regarding maintenance and repairs, including aging
aircraft. For example, the FAA has ordered a number of ADs for
rudder modifications on Boeing 737-200 jet aircraft. Though
Boeing is willing to pay for the cost of the replacement parts,
the Company is responsible for the labor costs that are estimated
to be $50,000 to $75,000 per aircraft. There can be no assurance
that the Company's costs of maintenance in the future (including
costs to comply with ADs and regulations) will fall within
industry norms or that the Company's aircraft will be reliable
over time.
Aircraft maintenance consists of routine or daily
maintenance and major overhauls. Routine or daily maintenance is
generally performed in Kansas City, Chicago-Midway or Minneapolis
by the Company's employees or in various other cities, as needed,
by independent contractors. The Company has contracted with
Tramco (BF Goodrich) to perform major scheduled maintenance.
Through the end of 1997, the Company's aircraft will require
major scheduled maintenance in accordance with the Company's
maintenance program at an estimated aggregate cost of $4.3
million of which $2.1 million will be funded from existing
supplemental rent payments recoverable from aircraft lessors.
The major scheduled maintenance costs exclude any costs
associated with the acquisition and installation of hush kits or
additional aircraft.
The Company does not own a large inventory of spare parts,
but has contracted with an independent contractor to make spare
parts available and to manage the Company's stockroom in Kansas
City. For this service, the Company pays a monthly lease fee
based on the value of the parts in stock, in addition to the
repair costs on "off" units when, and if, the inventoried parts
are installed on the Company's aircraft.
FUEL
The cost of jet fuel is one of the Company's largest
operating expenses (approximately 17.3% of operating expenses
when including taxes and the cost of delivering fuel into the
aircraft for the year ended December 31, 1996). Significant
changes in jet fuel prices have materially affected the Company's
operating results. Jet fuel prices are susceptible to
international events. The Company cannot predict the effect of
events on the future availability and cost of jet fuel. The
Company's 737-200 jet aircraft are relatively fuel inefficient
compared to newer aircraft. Accordingly, a significant increase
in the price of jet fuel has resulted in a disproportionately
higher increase in the Company's fuel expenses as compared with
many of its competitors whose average aircraft is newer and thus
more fuel efficient. The Company has not entered into any
agreements that fix the price of jet fuel over any period of
time. Therefore, an increase in the cost of jet fuel is
immediately passed through to the Company by suppliers. As a
result, the Company has experienced reduced margins due to its
inability to increase fares sufficiently to compensate for higher
fuel costs and <PAGE> taxes. Even if it is able to raise selected fares, the
Company will experience reduced margins on sales prior to such fare
increases. In addition to increases in fuel prices, a shortage
of supply could also have a material adverse effect on the
Company's business, financial condition and results of
operations. See "--Factors That May Affect Future Results of
Operations--Rising Fuel Costs."
COMPETITION
Under the Airline Deregulation Act of 1978 (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 and
susceptible to price discounting. Airlines compete primarily
with respect to fares, scheduling (frequency and flight time),
destinations, frequent-flyer programs and types (jet or
propeller) and size of aircraft. The Company competes with
numerous 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 response to the Company's
commencement of service to a particular market, competing
airlines have, at times, added flights and capacity in the market
and lowered their fares, making it more difficult for the Company
to achieve or maintain profitable operations or even maintain
operations in that market. In the future, other airlines may set
their prices at or below the Company's fares, introduce new
non-stop service between cities served by the Company or add
additional capacity in markets served by the Company in attempts
to prevent the Company from achieving profitable operations.
The Company may also face competition from existing airlines that
may begin serving markets the Company serves, 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. See "-Factors That May
Affect Future Results of Operations--Competition and Competitive
Reaction."
GOVERNMENT REGULATION
All interstate air carriers are subject to regulation by the
United States Department of Transportation ("DOT") and the FAA
under the 49 U.S.C., Subtitle VII (formerly the Federal Aviation
Act of 1958, as amended) (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. 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 Company's flight personnel, flight and emergency
procedures, aircraft and maintenance facilities are subject to
periodic inspections and tests by the FAA. The Company believes
that the FAA often applies strict scrutiny to the operations of
small or start-up airlines to ensure proper compliance with FAA
regulations. FAA examiners have flown on numerous Company
flights and have subjected its flight and ground personnel to
periodic announced and unannounced reviews and inspections.
The DOT and FAA also have authority under the Aviation
Safety and Noise Abatement Act of 1979, as amended, under the
Airport Noise and Capacity Act of 1990 ("ANCA") 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 its aircraft comply with
all applicable FAA noise control regulations and with current
emissions standards. See "--Aircraft" and "--Maintenance and
Repairs."
Recently, the FAA began a nationwide series of air carrier
inspections involving carriers of all sizes. Several recent
inspections have resulted in the air carrier under inspection
suspending service or specific aircraft being grounded. The
Company was the subject of an intensive inspection and was
notified that it had successfully completed this inspection with
no significant airworthiness findings. The Company expects these
nationwide inspections to continue in 1997. See "--Factors That
May Affect Future Results of Operations--Government Regulation."
<PAGE>
INSURANCE
The Company carries the types and amounts of insurance
required by the DOT, and that the Company believes are customary
for airlines similar to the Company, including coverage for
public liability, property damage, aircraft loss or damage,
baggage and cargo liability and workers' compensation. 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 losses that it might sustain.
EMPLOYEES
As of February 28, 1997, the Company employed approximately
484 full- and part-time employees consisting of 83 pilots, 109
flight attendants, 63 mechanics, 148 station agents and 81
management and staff personnel. In addition, the Company's
reservation center, operated by a third party, employed
approximately 500 full- and part-time people as of February 28,
1997.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Vanguard's business operations and financial results are
subject to various uncertainties and future developments that
cannot be predicted. Certain of the principal risks and
uncertainties that may affect Vanguard's operations and financial
results are identified below.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; FUTURE
OPERATING RESULTS UNCERTAIN; WORKING CAPITAL DEFICIT. The
Company has a limited history of operations, beginning flight
operations on December 4, 1994. Since the Company's inception on
April 25, 1994, the Company has incurred significant losses and
as of December 31, 1996 had an accumulated deficit of
approximately $41.4 million, a stockholders' deficit of
approximately $13.2 and a working capital deficit of
approximately $21.3 million. The Company's limited operating
history makes the prediction of future operating results
difficult. The Company's future operating results will depend on
many factors, including general economic conditions, the cost of
jet fuel, the occurrence of events involving other low-cost
carriers, potential changes in government regulation of airlines
or aircraft and actions taken by other airlines particularly with
respect to scheduling and pricing in the Company's current or
future routes. A negative change in any one or more of these
factors could have a material adverse effect on the Company's
business, financial condition and results of operations. There
can be no assurance that the Company will achieve profitability
at any time in the future. The Company has been dependent upon
equity and debt financings primarily with its principal
stockholders during 1996 and 1997. See "Item 7 Management's
Discussion and Analysis of Finance Condition and Results of
Operations--Liquidity and Capital Resources."
CONSUMER CONCERN ABOUT OPERATING SAFETY AT START-UP CARRIERS
OR TYPE OF AIRCRAFT. Aircraft accidents or other safety related
issues involving any carrier, such as the recent plane crashes
involving ValuJet and Trans World Airlines, have had an adverse
effect on airline passengers' perceptions regarding the safety of
low cost carriers, particularly with respect to the use of aging
aircraft such as the Company's 737-200 jet aircraft. As a
result, any such future event could have a material adverse
effect on the Company's business, financial condition and results
of operations, even if such events do not include the Company's
operations or personnel. Similarly, publicized accounts of
mechanical problems or accidents involving Boeing 737s or other
aircraft that are of the same age as the Company's aircraft could
have a material adverse effect on the Company's business,
financial condition and results of operations, even though the
Company itself may not experience any such problems with its jet
aircraft.
SEASONALITY AND CYCLICALITY. The Company's operations are
dependent upon passenger travel demand. Airlines typically
experience reduced demand at various times during the fall and
winter and increased demand for service during the spring and
summer. Within these periods, an airline may experience
variations in passenger demand based on its particular routes and
passenger demographics. Due to the Company's limited operating
history, the Company is unable to predict whether, and 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 <PAGE> with adverse effects on revenues, operating results and cash
flow. During 1995 and 1996, the Company did experience reduced
demand during the fall and winter with adverse effects on
revenues operating results and cash flows. In addition,
passenger travel in the airline industry, particularly leisure
travel, is highly sensitive to adverse changes in general
economic conditions. A worsening of current economic conditions,
or an extended period of recession nationally or in the regions
served by the Company, could have a material adverse effect of
the Company's business, financial condition or results of
operations.
COMPETITION AND COMPETITIVE REACTION. Under the
Deregulation Act, domestic certificated airlines are free to
enter and exit domestic markets 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 times), destinations, frequent flyer
programs and type (jet or propeller ) and size of aircraft. The
Company competes with numerous 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
response to the Company's commencement of service to a particular
market, competing airlines have, at times, added flights and
capacity in the market and lowered their fares, making it more
difficult for the Company to achieve or maintain profitable
operations in such markets. In the future, other 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 or even maintaining operations in that market. The
Company may also face competition from existing airlines that may
begin serving markets the Company serves, from new low-cost
airlines that may be formed to compete in the low-fare market
(including any airlines that may be formed by traditional
airlines) and from ground transportation alternatives.
RISING FUEL COSTS. The cost of jet fuel is one of the
largest operating expenses for an airline and particularly for
the Company due to the relative fuel inefficiency of its
aircraft. Jet fuel costs, including taxes and the cost of
delivering fuel into the aircraft, accounted for approximately
17.3% of the Company's operating expenses. The Company's average
cost per gallon increased from $0.61 per gallon in the year ended
December 31, 1995, to $0.79 per gallon in the year ended December
31, 1996. The Company's average cost per gallon during the
fourth quarter 1996 of $0.84 declined to $0.79 during the first
quarter 1997. Jet fuel costs are subject to wide fluctuations as
a result of sudden disruptions in supply. The Company cannot
predict the effect on the future availability and cost of jet
fuel. The Boeing 737-200 jet aircraft are relatively fuel
inefficient compared to newer aircraft (such as the Company's
Boeing 737-300 jet aircraft). Accordingly, the significant
increases in the price of jet fuel has resulted in a
disproportionately higher increase in the Company's fuel expenses
as compared with many of its competitors who have, on average,
newer and thus more fuel efficient aircraft. The Company has not
entered into any agreements that fix the price of jet fuel over
any period of time. Therefore, the increase in the cost of jet
fuel has immediately passed through to the Company by suppliers
and the Company has experienced reduced margins at times when the
Company has been unable to increase fares to compensate for such
higher fuel costs. Even at times when the Company has been able
to raise selected fares, the Company has experienced reduced
margins on sales prior to such fare increases. In addition to
increases in fuel prices, a shortage of supply has also had a
material adverse effect on the Company's business, financial
condition and results of operations.
LIMITED NUMBER OF AIRCRAFT; AIRCRAFT ACQUISITIONS. The
Company's fleet consists of eight aircraft and if one or more of
its aircraft were not in service, the Company would experience a
proportionally greater loss of capacity than would be the case
for an airline utilizing a larger fleet. Any interruption of
aircraft service as a result of scheduled or unscheduled
maintenance could materially and adversely affect the Company's
service, reputation and profitability. The leases relating to
the Company's Boeing 737-300 jet aircraft have terms expiring in
May and July, 1997. The market for leased aircraft has become
more competitive than it was at the time of the Company's
inception, and there can be no assurance that the Company would
be able to lease additional aircraft on satisfactory terms or at
the time needed. In addition, if the Company is unable to lease
737-200 jet aircraft with additional fuel tank capacity to
replace its existing 737-300 jet aircraft, it may have to
substantially curtail the frequency of its flight schedule to San
Francisco, Los Angeles, and Florida destinations, which flights
currently account for a substantial portion of the Company's
revenues. Further, if the Company is unable to lease additional
aircraft that are in compliance with the Stage-3 noise compliance
requirements, it will have to make significant capital
expenditures to make its aircraft fleet meet such requirements.
While the Company currently has plans to purchase or lease one to
three additional jet aircraft, two of which would replace the
737-300 jet aircraft, its ability to further expand its
operations could be limited by the availability of additional jet
aircraft on terms satisfactory to the Company. See "--
Aircraft."
<PAGE>
GOVERNMENT REGULATION. The Company is subject to the
Aviation Act, under which the DOT and the FAA exercise regulatory
authority over airlines. This regulatory authority includes, but
is not limited to: (i) the initial determination and continuing
review of the fitness of air carriers (including financial,
managerial, compliance-disposition and citizenship fitness); (ii)
the certification and regulation of aircraft and other flight
equipment; (iii) the certification and approval of personnel who
engage in flight, maintenance and operations activities; and (iv)
the establishment and enforcement of safety standards and
requirements with respect to the operation and maintenance of
aircraft, all as set forth in the Aviation Act and the Federal
Aviation Regulations. The FAA has promulgated a number of
maintenance regulations and directives relating to, among other
things, retirement of aging aircraft, increased inspections and
maintenance procedures to be conducted on aging aircraft,
collision avoidance systems, aircraft corrosion, airborne
windshear avoidance systems and noise abatement. As a result of
recent incidents involving airlines, the FAA has increased its
review of commercial airlines generally and particularly with
respect to small and start-up airlines, such as the Company.
During 1996, after extensive FAA investigations, ValuJet
suspended operations and Kiwi Airlines substantially reduced its
operations before filing for bankruptcy protection, and Mesa
Airlines and Western Pacific Airlines were subject to extensive
investigations by the FAA. Because of the Company's start-up
status, along with other start-up carriers, the Company's
operations recently have been subject to increased review by the
FAA.
Additional rules and regulations have been proposed from
time to time in the last several years and might be enacted that
could significantly increase the cost of airline operations by
imposing substantial additional requirements or restrictions on
airline operations. For example, the National Transportation
Safety Board has proposed new regulations to require carriers to
upgrade the flight data recorders on their Boeing 737-200 jet
aircraft. The estimated cost of such equipment would be
approximately $90,000 for each of the Company's six 737-200 jet
aircraft. There can be no assurances that any of these rules or
regulations would not have material adverse effect on the
Company's business, financial condition and results of
operations.
The DOT and FAA also enforce federal law with respect to
aircraft noise compliance requirements. The Company's current
fleet exceeds the current Stage-3 noise compliance requirements
(50% of its fleet Stage-3 compliance), with two of its Boeing
737-200 jet aircraft being equipped with hush kits and its two
Boeing 737-300 jet aircraft satisfying the Stage-3 requirements.
In the event the Company is unable to lease hush kitted 737-200
jet aircraft to replace the 737-300 jet aircraft or finance a
hush kit on one of its existing 737-200 jet aircraft, it could
have a material adverse effect on the Company's business,
financial condition and results of operations. In the future,
the Company's aircraft fleet is required to meet the following
federal Stage-3 noise compliance deadlines: 75% of its fleet
must be Stage-3 compliant by December 31, 1998; and 100% of its
fleet must be Stage-3 compliant by December 31, 1999.
The Company has obtained the necessary authority to perform
airline operations, including a Certificate of Public Convenience
and Necessity issued by the DOT pursuant to 49 U.S.C. Section 41102
and an air carrier operating certificate issued by the FAA under
Part 121 of the Federal Aviation Regulations. The continuation
of such authority is subject to continued compliance with
applicable rules, regulations and laws pertaining to or affecting
the airline industry, including any rules and regulations that
may be adopted by the DOT and FAA in the future. No assurance
can be given that the Company will be able to continue to comply
with all present or future rules, regulations and laws or that
such rules, regulations and laws would not materially and
adversely affect the Company's business, financial condition and
results of operations.
TICKET TAX. Despite the recent reinstatement of the ten
percent ticket tax (the "ticket tax"), proposed FAA "funding
reform" continues to present uncertainty as to how or if any
changes would impact Vanguard in the future. Congress reinstated
the ticket tax in August 1996, the ticket tax lapsed as of
December 31, 1996; Congress reinstated the ticket tax as of
March 7, 1997 with the tax scheduled to lapse on September 30,
1997. The Company is unable to predict how the FAA funding issue
will be resolved, and what impact, if any resolution of this
uncertainty in the future will have on the Company's business,
financial condition and results of operations.
<PAGE>
ITEM 2. PROPERTIES
The Company leases approximately 6,000 square feet of office
space at Kansas City International Airport for its headquarters
at a current monthly rent of approximately $7,500 under a lease
that expires in 1998. In addition, the Company leases
approximately 17,000 square feet of office space in Mission,
Kansas and approximately 7,250 square feet in Lawrence, Kansas,
which are used primarily for its reservations facilities.
The check-in counters, gates and airport office facilities
at each of the airports the Company serves are leased from the
appropriate airport authority or provided by other airlines
pursuant to subleases or other arrangements. Such arrangements
may include baggage handling, station operations, cleaning and
other services. If such facilities at any additional cities to
be served by the Company are not available to the Company at
acceptable rates, or if such facilities become no longer
available to the Company at acceptable rates, the Company may
choose not to service such markets.
ITEM 3. LEGAL PROCEEDINGS
In December 1996, the Company had a dispute regarding past
fees and termination fees associated with the Company's
termination of its contract with Valentine-Radford, Inc. ("VRI"),
the Company's former advertising agency. On March 24, 1997, the
Company entered into a Settlement Agreement with VRI. Under the
terms of Settlement Agreement, the Company has agreed to pay all
outstanding trade payables previously due for advertising
services performed and media placed by VRI. In addition, the
Company agreed to pay an aggregate of $ 75,000 in late 1997 and
early 1998 in connection with the termination of its contract
with VRI.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of
the Company during the fourth quarter of the fiscal year ended
December 31, 1996. On March 3, 1997, the Company held a Special
Meeting of Stockholders where a majority of the holders of common
stock approved an amendment to the Company's Restated
Certificate of Incorporation to increase the number of authorized
shares of the Company's common stock, par value $.001 per share
from 15,000,000 to 50,000,000 shares.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names, ages and positions
of the Company's executive officers and directors as of March 1,
1997:
NAME AGE POSITION
John P. Tague 34 Chairman of the Board,
Chief Executive
Officer and President
William A. Garrett 31 Vice President - Finance and
Chief Financial Officer
Brian S. Gillman 27 Vice President, General
Counsel and Secretary
Ronald L. McClellan 47 Vice President - Maintenance
William F. McKinney 57 Vice President - Flight Operations
Robert J. McAdoo 51 Director
Richard D. Pearson 61 Director
Edmund H. Shea, Jr. 67 Director
Robert J. Spane 55 Director
Set forth below is a description of the business experience
of each executive officer and director of the Company.
JOHN P. TAGUE joined the Company on November 1, 1996 as
Chairman of the Board, Chief Executive Officer and President.
Mr. Tague has also served, since July 1996, as Chief Executive
Officer and President of Air South Airlines. Since 1995, he was
and remains a principal of The Pointe Group, L.L.C ("TPG") and
its Co-Chairman and
<PAGE>
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.
WILLIAM A. GARRETT joined the Company in June 1996 as
Corporate Controller and was appointed Vice President - Finance
and Chief Financial Officer in July 1996. From December 1993 to
June 1996, he served as a Senior Manager with Ernst & Young LLP.
From 1987 to 1993, he served on the staff of and as manager for
Coopers and Lybrand LLP.
BRIAN S. GILLMAN joined the Company in July 1996 as Vice
President, General Counsel and Secretary. From September 1994 to
July 1996, Mr. Gillman was an associate in the law firm of
Stinson, Mag & Fizzell, P.C., Kansas City, Missouri.
RONALD L. MCCLELLAN joined the Company in May 1994 as Vice
President - Maintenance. Prior to joining the Company, Mr.
McClellan served as Director of Aircraft Reliability Engineering
from 1987 to 1994. From 1981 to 1986, he was employed by People
Express as Director of Quality Control and advanced to Managing
Officer of Technical Services.
WILLIAM MCKINNEY joined the Company in March 1996 as Chief
Pilot and was appointed Vice President-Flight Operations in April
1996. Prior to joining the Company, Captain McKinney retired
from Trans World Airlines after 29 years of service as a pilot,
where he served mostly as General Manager of Flying for the
western region.
ROBERT J. MCADOO has been a director of the Company since
the Company's inception in April 1994. From April 1994 to
November 1996, Mr. McAdoo was Chairman of Board, Chief Executive
Officer and President of the Company. Mr. McAdoo was an airline
analyst with Prudential Securities from 1991 to 1994 and with
Oppenheimer and Company, Inc., from 1986 to 1991. In 1980, he
was one of the original officers of People Express, where he
served from 1980 to 1986 as the Chief Financial Officer and from
1981 to 1983 as the Chief Marketing Officer.
RICHARD D. PEARSON was elected a director of the Company in
June 1995. From 1994 until his retirement in April 1995, he was
Chairman of the Board and Chief Executive Officer of Buffalo
Airways, Inc., a cargo airline. From 1992 to 1994, Mr. Pearson
was retired. From 1987 to 1992, Mr. Pearson was Senior Vice
President Field Services and Vice President of Operations
Administration for American Airlines, Inc. From 1984 to 1986, he
was President of TWA.
EDMUND H. SHEA, JR. was elected a director of the Company in
May 1994. He has been Vice President of J.F. Shea & Co., Inc., a
privately held construction company since 1954. Mr. Shea is also
a director of Hambrecht & Quist Group.
VICE ADMIRAL ROBERT J. SPANE USN (RET.) was elected as a
director of the Company in May 1996. Vice Admiral Spane served
in the U.S. Navy for 35 years where his last position was
Commander, Naval Air Force Pacific, which he held from October
1993 to February 1996. Vice Admiral Spane, as Commander, Naval
Air Force Pacific, was responsible for all finances, training,
logistics and the material condition of all aircraft carriers,
aircraft and naval air stations in the Pacific. Vice Admiral
Spane retired from the U.S. Navy in February 1996 and is a 1962
graduate of the U.S. Naval Academy.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
The Common Stock began trading publicly on the Nasdaq
SmallCap Market under the symbol "VNGD" on November 3, 1995.
Prior to that date, there was no public market for the Common
Stock. The following table sets forth, for the periods
indicated, the high and low sales prices of the Common Stock as
reported on the Nasdaq SmallCap <PAGE> Market. The Common Stock
was delisted from the Nasdaq SmallCap Market on December 16, 1996.
The Common Stock currently trades on the OTC Bulletin Board.
High Low
1995
Fourth Quarter (from November 3, 1995). . . . . . $6 3/4 $5 15/16
1996
First Quarter . . . . . . . . . . . . . . . . . . 9 5/8 6
Second Quarter. . . . . . . . . . . . . . . . . . 12 1/4 8
Third Quarter . . . . . . . . . . . . . . . . . . 9 1/2 3 7/16
Fourth Quarter. . . . . . . . . . . . . . . . . . 5 1/4 1 3/4
1997
January . . . . . . . . . . . . . . . . . . . . . 2 7/8 1 3/4
February. . . . . . . . . . . . . . . . . . . . . 2 1 13/16
RECENT SALE OF UNREGISTERED SECURITIES
On January 17, 1996, one of the Company's principal
stockholders agreed to establish a two year $4.0 million letter
of credit in favor of the Company's credit card processor on
behalf of the Company. In consideration for the establishment of
this letter of credit, the Company issued up to 4,000,000
warrants to purchase shares of common stock with an exercise
price of $1.00 per share. Upon execution of the letter of
credit, 1,600,000 warrants immediately vested. The remaining
2,400,000 warrants vest quarterly according to the amount of
exposure under such letter of credit. Each warrant expires 10
years from the date of issuance.
On January 30, 1997, the Company established a $2.275
million six-month line of credit, guaranteed by certain
stockholders of the Company. In consideration for the guaranty,
the Company issued up to 2,275,000 warrants to purchase shares of
common stock with an exercise price of $1.00 per share. Upon
execution of the line of credit, 910,000 warrants immediately
vested. The remaining 1,365,000 warrants vest quarterly
according to the amount outstanding under the line of credit.
Each warrant expires 10 years from the date of issuance.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the period ended
December 31, 1994, and the years ended December 31, 1995 and
1996, have been derived from the audited financial statements of
the Company, which are included elsewhere herein. The data
should be read in conjunction with the Financial Statements of
the Company and the related Notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
Period from Inception
(April 25, 1994 Year Ended Year Ended
to December 31, December 31, December 31,
1994/1/ 1995 1996
STATEMENT OF OPERATIONS DATA:
Total operating revenues $760,985 $ 36,159,018 $68,589,101
Total operating expenses 4,274,275 48,225,313 92,503,417
Operating Loss (3,513,290) (12,066,295) (23,914,316)
Total other income (expense), net 70,833 (129,235) (1,893,754)
Net loss $(3,442,457) $ (12,195,530) $ (25,808,070)
Net loss per share (2) $ (0.70) $ (1.65) $ (2.85)
Weighted average common and
common equivalent shares
outstanding (2) 4,907,377 7,395,921 9,056,888
OPERATING DATA: (3)
Revenue passenger miles (RPMs) 6,515,183 290,030,187 667,845,140
Available seat miles (ASMs) 15,251,200 562,340,660 1,090,058,358
Load factor 42.75% 51.58% 61.27%
Break-even load factor (4) (5) 100.02% 69.90% 83.83%
Passenger yield per RPM $0.1139 $0.1172 $0.0973
Total revenue per ASM $0.0499 $0.0643 $0.0629
Operating cost per ASM (4) $0.1139 $0.0855 $0.0848
Block hours flown 441 14,781 24,721
Average flight length (miles) 464 372 530
Operating cost per block hour (4) $3,948 $3,260 $3,740
Aircraft in service (end of period) 2 7 8
Airports served (end of period) 3 9 15
BALANCE SHEET DATA:
Cash and cash equivalents $1,126,809 $3,491,640 $402,083
Working capital (deficiency) $(1,297,439) $(4,172,305) $(21,296,881)
Property and equipment, net $2,588,892 $4,550,818 $5,049,658
Total assets $6,191,439 $16,425,698 $20,318,247
Total stockholders' equity
(deficit) $2,576,023 $3,544,633 $(13,238,017)
_____________
/1/ The Company's flight operations commenced December 4, 1994.
Prior to that time, the Company was in the development
stage.
/2/ See Note 1 of Notes to Financial Statements.
/3/ "REVENUE PASSENGER MILES" or "RPMS" represents the aggregate
amount of miles flown by revenue passengers. "AVAILABLE
SEAT MILES" or "ASMS" represents the number of seats
available for passengers multiplied by the number of miles
those seats are flown. "BREAK-EVEN LOAD FACTOR" represents
the percentage of RPMs that must be flown for the airline to
break-even after operating and interest expenses assuming
non-passenger operations, primarily mail, operate at break-even.
Break-even load factor is calculated by taking total
expenses, minus non-passenger revenue, divided by ASMs,
divided by passenger yield per RPM. "PASSENGER YIELD RPM"
represents the total passenger revenue divided by RPMs.
"TOTAL REVENUE PER ASM" represents total revenues divided by
total available seat miles. "OPERATING COST PER ASM"
represents operating expenses divided by total available
seat miles. "BLOCK HOURS FLOWN" represents the time between
aircraft gate departure and aircraft gate arrival. "AVERAGE
FLIGHT LENGTH" represents aircraft miles flown divided by
the number of departures.
/4/ Excludes $122,159 and $41,903 for the years ended December
31, 1995 and 1996, respectively, of nonrecurring, noncash
compensation expense relating to stock options granted to
certain directors and key employees of the Company.
/5/ Excludes $1,833,335 of noncash deferred debt issuance cost
amortization for the year ended December 31, 1996.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated on April 25, 1994 and operates
as a low-fare, short- to medium-haul passenger airline that
provides convenient, scheduled jet service to attractive
destinations in established markets in the United States. The
Company's flight operations began on December 4, 1994 with two
Boeing 737-200 jet aircraft operating two daily flights each way
between Kansas City and Denver and two daily flights each way
between Denver and Salt Lake City. As of December 31, 1996, the
Company operates a total of six leased Boeing 737-200 jet
aircraft and two leased Boeing 737-300 jet aircraft, which
provide 63 daily weekday flights serving Kansas City, Atlanta,
Dallas/Fort Worth, Denver, Des Moines, Fort Meyers, Las Vegas,
Los Angeles, Miami, Minneapolis/Saint Paul, Orlando, San
Francisco, Tampa/Saint Petersburg and Wichita. The following
chart indicates the expansion of service from December 4, 1994
through February 28, 1997.
Number
Total Number of Daily
of Aircraft Weekday As of Month End
in Service Flights New Cities Added
1994
December. . . . . 2 8 Kansas City, Denver,
Salt Lake City (2)
1995
January . . . . . . . .4 28 Dallas/Fort Worth,
Milwaukee /1/
February. . . . . . . .4 24 --
March . . . . . . . . 5 26 --
April . . . . . . . . .5 32 Wichita
May . . . . . . . . . .5 34 Des Moines, Minneapolis/Saint Paul
June. . . . . . . . . .5 34 --
July. . . . . . . . . .5 34 --
August. . . . . . . . .5 40 Chicago-Midway
September . . . . . . .5 40 --
October . . . . . . . .5 40 --
November. . . . . . . .5 40 --
December. . . . . . . .7 44 San Francisco
1996
January . . . . . . . 7 46 --
February. . . . . . . .8 46 --
March . . . . . . . . .8 48 Los Angeles
April . . . . . . . . .8 50 --
May . . . . . . . . . 8 50 --
June. . . . . . . . . .8 58 --
July. . . . . . . . . .8 58 --
August. . . . . . . . 8 55 --
September . . . . . . .8 49 --
October . . . . . . . .8 44 Cincinnati /3/, Seattle /4/,
Phoenix /5/
November. . . . . . . .8 50 --
December. . . . . . . .8 63 Atlanta, Fort Meyers,
Las Vegas, Miami,
Orlando, Tampa
1997 (6)
January . . . . . . .8 63 --
February. . . . . . .8 63 --
/1/ Milwaukee service terminated effective March 26, 1995. /2/
Salt Lake City service terminated effective December 2, 1996.
/3/ Cincinnati service terminated effective November 19, 1996.
/4/ Seattle service terminated November 19, 1996. /5/ Phoenix
service terminated effective December 20, 1996. /6/ On March 11,
1997, the Company issued a press release announcing a schedule
change which among other things, involved the seasonal
termination of service to Miami and Fort Meyers, Florida.
<PAGE>
The Company's operating revenues are derived principally
from the sale of airline transportation services to passengers
and are recognized when transportation is provided. Total
operating 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 operating revenues, and low profit
margins. The Company's principal business strategy is to provide
airline services where its low operating costs permit profitable
operations.
The primary factors expected to affect the Company's future
operating revenues are the Company's ability to offer and
maintain competitive fares, the reaction of existing competitors
to the continuation or commencement of operations by the Company
in a particular market (including changes in their fare structure
and schedule), the possible entry of other low-fare airlines into
the Company's current and future markets, the effectiveness of
the Company's marketing efforts, the occurrence of events
involving other low-cost carriers, passengers' perceptions
regarding the safety of low-cost carriers and general economic
conditions. The Company's costs are affected by fluctuations in
the price of jet fuel, scheduled and unscheduled aircraft
maintenance expenses, labor costs, the level of government
regulation, fees charged by independent contractors for services
provided and rent for gates and other facilities. The Company
has a limited history of operations and since its inception on
April 25, 1994 has experienced significant losses. As of December
31, 1996, the Company had an accumulated deficit of $41.4 million
and stockholders' deficit of $13.2 million. As disclosed in the
audited financial statements, the Company had a net loss of
approximately $25.8 million and net cash flows used in operating
activities amounting to approximately $14.6 million for the year
ended December 31, 1996. Additionally, at December 31, 1996,
current liabilities exceeded current assets by $21.3 million.
As a result of its limited operating history, together with the
uncertainty in the airline industry generally, management is
unable to predict the future operating results of the Company.
The Company is dependent upon equity and debt financings
from third parties or from its principal stockholders. The
Company anticipates completing a $10.0 million private placement
in April 1997. There can be no assurance as to the availability
of further financings. Management's plans include raising
additional capital and securing additional bank financings to
fund ongoing operations and the possible expansion of operations,
there can be no assurance the Company will be successful in this
regard.
In January 1997, the Company entered into a $2.275 million
line of credit guaranteed by certain stockholders. In addition,
one of the Company's principal stockholders established a $4.0
letter of credit facility in favor of the Company's credit card
processor. In connection with these agreements, the Company
issued up to 2,275,000 warrants to the stockholders who
guaranteed the line of credit and up to 4,000,000 warrants to the
stockholder who established the letter of credit to purchase
shares of the Company's common stock at an exercise price of
$1.00. Upon execution of the line of credit and letter of credit
agreements, the Company issued 910,000 and 1,600,000 warrants,
respectively, that vested immediately. The fair value related to
each warrant issuance, totaling $1,100,000 related to the line of
credit and $1,900,000 related to the letter of credit, was
recorded in other assets and is being amortized over the term of
each agreement. As a result of these agreements, the Company
will record deferred debt issuance cost amortization of
approximately $329,000 in the first quarter of 1997, $375,000 per
quarter through the fourth quarter of 1998, and $46,000 in the
first quarter of 1999. The remaining warrants related to each
agreement vest quarterly and the number is determined based on
certain formulas, as defined in each agreement. The estimated
fair value of the warrants that will vest each quarter will be
determined based on the then current stock prices. The fair
value determined will be recorded in other assets and will be
amortized to expense over the remaining term of the agreements.
Typically, airlines experience reduced demand for service at
various times during the fall and winter. Within 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 it is unable to predict if, and to what
extent, seasonal variations in its operations will differ from
those of the airline industry generally. During its first two
full years of operations, however, the Company experienced
reduced demand during the fall and winter with adverse effects on
operating revenues, operating expenses, operating results and
cash flow.
Certain amounts and percentages disclosed in management's
discussion and analysis of financial condition and results of
operations for the year ended December 31, 1995 have been changed
to conform to the 1996 presentation.
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1995
OPERATING REVENUES
Total operating revenues increased approximately 89.7% from
approximately $36.2 million for the year ended December 31, 1995
to approximately $68.6 million for the year ended December 31,
1996. This increase was primarily attributable to an increase in
the number of daily flights and the number of passengers on those
flights off-set by the drop in passenger yield per revenue
passenger mile. At December 31, 1995, the Company operated 44
daily weekday flights with seven aircraft and during the year
then ended added service to Dallas/Fort Worth, Milwaukee,
Wichita, Des Moines, Minneapolis/Saint Paul, Chicago-Midway and
San Francisco. Service to Milwaukee terminated in March 1995.
At December 31, 1996, the Company operated 63 daily flights with
eight aircraft, having added service to Los Angeles, Cincinnati,
Seattle, Phoenix, Atlanta, Fort Meyers, Las Vegas, Miami, Orlando
and Tampa during the year. Service to Salt Lake City,
Cincinnati, Seattle and Phoenix terminated in November and
December of 1996. Total available seat miles ("ASMs") increased
approximately 93.8%, from approximately 562.3 million during the
year ended December 31, 1995 to approximately 1,090.1 million
during the year ended December 31, 1996. Revenue passenger miles
("RPMs") increased approximately 130.3% from approximately 290.0
million during the year ended December 31, 1995 to approximately
667.8 million during the year ended December 31, 1996. The
increase in ASMs was primarily attributable to an increase in the
number of jet aircraft in service throughout the year, the number
of daily flights and the addition of destinations with greater
flight lengths. The increase in RPMs was primarily attributable
to an increase in the number of daily flights, an increase in the
number of passengers on those flights and the addition of
destinations with greater flight lengths. Load factor increased
from approximately 51.6% for the year ended December 31, 1995 to
approximately 61.3% for the year ended December 31, 1996. This
increase was primarily the result of adjustments in capacity to
meet market demand, increases and changes in the number of city
pairs served, reduced fares, and an increase in market awareness
of the Company's service.
Passenger yield per RPM decreased approximately 17.0% from
approximately 11.7 cents for the year ended December 31, 1995 to
approximately 9.7 cents for the year ended December 31, 1996. The
Company believes this decrease was partially attributable to the
Valujet and Trans World Airlines accidents in May 1996 and July
1996, respectively. During the four week period after each
accident, call volume at the Company's reservation center
declined substantially. As a result, the Company's revenue/yield
management fare system offered customers seats at reduced fares.
In other words, the Company had to discount fares to stimulate
travel in existing markets during a seasonally strong sales
period. The Company's favorable load factors remained unchanged,
but at the cost of reduced passenger yields. The expansion of
service to new markets also contributed to the decrease in yield
experienced by the Company in 1996. The Company also offered
promotional fares on its new city pairs throughout the year ended
December 31, 1996, and these new routes accounted for
approximately 48% of the system-wide RPMs during 1996. The
Company terminated service in late 1996 to three cities in which
the Company had offered promotional fares. During 1996, the
Company attempted to increase fares in mature markets in order to
improve passenger yield. The Company can not predict future fare
levels, which depend to a substantial extent on actions of
competitors. When the sale prices or other price changes have
been made by competitors in the Company's markets, the Company
believes that it must, in most cases, match these competitive
fares in order to maintain its market share. The Company
believes that the negative impact of entering new markets and the
use of discounted fares should decrease as the Company increases
its overall revenue base and customer awareness. The factors
which decreased yield were offset by the increase yield in the
first half of 1996 as a result of the absence of the ticket tax.
The benefit received by the Company from the expiration of the
ticket tax cannot precisely be determined. The ticket tax was
reinstated in August 1996, the tax lapsed as of December 31,
1996, and Congress reinstated the ticket tax as of March 7, 1997
with the tax scheduled to lapse again on September 30, 1997.
The Company also generates operating revenues as a result of
service charges from passengers who change flight reservations.
For a period of 90 days (180 days as of March 24, 1997) after the
flight date, the customer may use the value of the unused
reservation for transportation, less a $50 ($25 through October
1996) service charge. These operating revenues were
approximately $697,000 (approximately 1.9% of total operating
revenue) and approximately $2.1 million (approximately 3.1% of
total operating revenues) in the year ended December 31, 1995 and
the year ended <PAGE> December 31, 1996, respectively. The increase in
cancellation and change fee revenue as a percent of passenger
revenue was primarily attributable to the increase in the number
of daily flights and the number of passengers. The Company began
carrying mail for the United States Postal Service during the
first quarter of 1995. Mail revenue increased approximately
93.0% from approximately $484,000 in the year ended December 31,
1995 to approximately $933,000 in the year ended December 31,
1996.
OPERATING EXPENSES
Expenses are generally categorized as related to flying
operations, aircraft fuel, maintenance, passenger service,
aircraft and traffic servicing, promotion and sales, general and
administrative, depreciation and amortization and other expense,
including interest expense and amortization of deferred debt
issuance costs, net. The following table sets forth the
percentage of total operating revenues represented by these
expense categories as well as certain other selected financial
data.
<TABLE>
Year Ended December 31,
1995 1996
Percent Cents Percent Cents
of Per of Per
Revenues ASM Revenues ASM
<CAPTION>
<S> <C> <C> <C> <C>
Total operating revenues 100.0% 6.43 100.0% 6.29
Operating Expenses:
Flying operations 23.8% 1.53 25.2% 1.59
Aircraft fuel 20.0 1.29 23.3 1.47
Maintenance 17.8 1.15 23.5 1.48
Passenger service 8.0 .52 9.1 .57
Aircraft and traffic
servicing 27.5 1.77 22.2 1.39
Promotion and sales 25.6 .49 6.4 .40
Depreciation and
amortization 3.0 .20 2.3 .15
Total operating expenses 133.3 8.60 134.9 8.49
Total other income
(expense), net (.4) .00 (2.7) (.17)
Net loss (33.7%) (2.17) (37.6%) (2.37)
</TABLE>
Flying operations expenses include aircraft lease and
subservice expense, compensation of pilots, expenses related to
flight dispatch and flight operations administration, hull
insurance and all other expenses related directly to the
operation of the aircraft other than aircraft fuel and
maintenance expenses. Flying operations expenses increased
approximately 100.9% from approximately $8.6 million
(approximately 23.8% of operating revenues) for the year ended
December 31, 1995 to approximately $17.3 million (approximately
25.2% of operating revenues) for the year ended December 31,
1996. The number of departures increased approximately 38.7%
from 11,809 for the year ended December 31, 1995 to 16,383 for
the year ended December 31, 1996. In addition, the Company
leased three additional jet aircraft in late 1995 and early 1996,
two of which were newer, more advanced Boeing 737-300 jet
aircraft which have a larger capacity and substantially higher
lease and insurance costs. In connection with the acquisition of
the three planes, the Company hired 30 additional pilots and
incurred additional pilot training costs for existing and new
pilots.
Aircraft fuel expenses include the direct cost of fuel,
taxes and the costs of delivering fuel into the aircraft.
Aircraft fuel cost increased approximately 121.6% from
approximately $7.2 million (approximately 20.0% of operating
revenues) for the year ended December 31, 1995 to approximately
$16.0 million (approximately 23.3% of operating revenues) for the
year ended December 31, 1996. These fuel expenses represent an
increase in the fuel cost per ASM of 0.18 cents or 14.0% from 1.29 cents in
the year ended December 31, 1995 to 1.47 cents in the year ended
December 31, 1996 primarily due to an increase in fuel price.
Specifically, the average price increased from $0.61 per gallon
in the year ended December 31, 1995 to $0.79 per gallon in the
year ended December 31, 1996. The Company's average cost per
gallon during the fourth quarter 1996 of $0.84 declined to $0.79
during the first quarter 1997. Approximately one fourth of the
fuel price increase was due to a 4.30 cents federal excise tax on
domestic fuel consumption that began October <PAGE> 1, 1995.
The Company will continue to seek to pass on
significant fuel cost increases to the Company's customers
through fare increases as permitted by the then current market
conditions, however, there can be no assurance that the Company
will be successful in passing on these increased costs.
Maintenance expenses include all maintenance-related labor,
parts, supplies and other expenses related to the upkeep of
aircraft. Maintenance expenses increased approximately 149.6%
from approximately $6.4 million (approximately 17.8% of operating
revenues) for the year ended December 31, 1995 to approximately
$16.1 million (23.5% of operating revenues) for the year ended
December 31, 1996. This increase was primarily due to the
increase in the fleet size and block hours and cycles flown. For
the year ended December 31, 1995, the average fleet size was
approximately 5.0 aircraft compared to an average fleet size for
the year ended December 31, 1996 of approximately 7.9 aircraft.
In late 1995 and early 1996, the Company leased two Boeing 737-
300 jet aircraft, which generally are more costly with respect to
major scheduled maintenance. In addition, the Company incurred
greater lease pool charges for the significant amount of Boeing
737-300 jet aircraft parts held in stock. During 1996, the
Company incurred charges related to certain Boeing 737-200 jet
aircraft that were in excess of what traditionally had been
accrued by the Company for three scheduled maintenance checks.
The Company also charged approximately $300,000 to maintenance
expense in the fourth quarter for the early induction of three
aircraft for scheduled maintenance checks in November and
December 1996. These scheduled maintenance checks were
originally scheduled during the first and second quarters of
1997. This change in the Company's major maintenance schedule
corresponded to the major route restructuring completed by the
Company in December 1996. The costs of routine aircraft and
engine maintenance are charged to maintenance expense as
incurred. In addition, the Company accrues the cost of future
major scheduled maintenance on a monthly basis. The Company
deposits funds with its aircraft lessors to cover a portion of
the cost of its future major scheduled maintenance. Finally, the
Company significantly increased the capacity of its in-house
maintenance department during 1996. The Company's maintenance
administration function expanded by eight employees to insure
compliance with all FAA and DOT regulations and requirements.
The Company also increased line maintenance personnel by twelve
employees including the introduction of maintenance operations at
Chicago-Midway and Minneapolis/Saint Paul airports.
Passenger service expenses include flight attendant wages
and benefits, in-flight service, flight attendant training,
uniforms and overnight expenses and passenger liability
insurance. Passenger service expenses increased approximately
115.8% from approximately $2.9 million (approximately 8.0% of
operating revenues) for the year ended December 31, 1995 to
approximately $6.2 million (approximately 9.1% of operating
revenues) for the year ended December 31, 1996. This increase
was primarily due to the 38.7% increase in the number of
departures and the 61.9% increase in number of passengers
carried. Passenger service expenses per ASM increased
approximately 11.3% from approximately 0.51 cents for the year ended
December 31, 1995 to 0.57 cents for the year ended December 31, 1996.
This increase per ASM is primarily due to passenger
reaccomodation charges necessitated by frequent schedule changes
and restructurings in 1996 and operational inefficiencies.
Aircraft and traffic servicing expenses include all expenses
incurred at the airports for handling aircraft, passengers and
mail, landing fees, facilities rent, station labor and ground
handling expenses. Aircraft and traffic servicing expenses
increased approximately 52.7% from approximately $10.0 million
(approximately 27.5% of operating revenues) in the year ended
December 31, 1995 to approximately $15.2 million (approximately
22.2% of operating revenues) in the year ended December 31, 1996.
This increase was primarily due to an increase in the number of
cities served and an increase in the number of departures.
Departures increased approximately 38.7% from 11,809 during the
year ended December 31, 1995 to 16,383 during the year ended
December 31, 1996, and the average cost per departure increased
approximately 10.1% from approximately $843 to approximately $927
in the same periods. The increase in cost per departure was
primarily attributable to the additional cost associated with
providing service to airports with higher operating costs. The
decrease in aircraft and traffic servicing as a percentage of
operating revenues was primarily attributable to station
personnel cost, landing fees and other traffic servicing costs
not rising in proportion to the increases in the number of
passengers and RPMs between 1995 and 1996. The decrease of 0.38 cents
per ASM was primarily due to a 42% increase in average stage
length from 372 miles to 530 miles in 1995 and 1996,
respectively.
Promotion and sales expenses include the costs of the
reservations function, including all wages and benefits for
reservationists, rent, electricity, communication charges, credit
card fees, travel agency commissions, advertising
<PAGE>
expenses and wages and benefits for the marketing department.
Promotion and sales expenses increased approximately 69.9% from
approximately $9.3 million (approximately 25.6% of operating
revenues) in the year ended December 31, 1995 to approximately
$15.7 million (approximately 22.9% of operating revenues) in the
year ended December 31, 1996. This increase was primarily the
result of an increase in cities served, reflecting the Company's
practice to increase advertising when new cities are introduced
in order to create brand awareness while maintaining stable
advertising programs in existing cities. In addition, the
Company's reservation operations expanded in May 1996 with the
opening of a new reservation center in Lawrence, Kansas. The
average promotion and sales cost per passenger increased from
$11.88 in the year ended December 31, 1995 to $12.47 in the year
ended December 31, 1996. The Company anticipates increased
advertising expenses to establish and reinforce its hub operation
in Kansas City and to improve brand awareness in its key
destination cities in 1997.
General and administrative expenses include the wages and
benefits for the Company's executive and various other
administrative personnel, the costs for office supplies, office
rent, legal, accounting and other miscellaneous expenses.
General and administrative expenses increased approximately 58.1%
from $2.8 million (approximately 7.6% of operating revenues) in
the year ended December 31, 1995 to $4.4 million (approximately
6.4% of operating revenues) in the year ended December 31, 1996.
The decrease in general and administrative expenses as a
percentage of operating revenues and on a per ASM basis was
primarily attributable to increased productivity and economies of
scale.
Depreciation and amortization expenses include depreciation
and amortization of aircraft modifications, ground equipment and
leasehold improvements, but does not include any amortization of
start-up and route development costs as all of these costs are
expensed as incurred. Depreciation and amortization expense
increased approximately 46.1% from approximately $1.1 million
(approximately 3.0% of operating revenues) in the year ended
December 31, 1995 to approximately $1.6 million (approximately
2.3% of operating revenues) in the year ended December 31, 1996.
This increase was primarily a result of improvements to new and
existing aircraft and costs associated with modifications of the
Company's reservation system as well a full year of depreciation
and amortization charged in 1996 on 1995 additions.
Other income (expense), net consists primarily of debt
issuance cost amortization, interest income and interest expense.
In connection with a guarantee of a bank line of credit executed
in July 1996, the Company issued certain stockholders (the
guarantors) warrants to purchase an aggregate of up to 656,250
shares of common stock at a weighted-average exercise price of
$6.65 per share. Accordingly, the estimated fair value of the
warrants issued of $1,850,000 was recorded in other current
assets as deferred debt issuance costs and was amortized to
expense over the term of the line which expired January 1997.
Interest income increased during the year ended December 31,
1996, as a result of greater average interest bearing cash
balances compared to 1995. Interest expense decreased during the
year ended December 31, 1996, as a result of lower average
borrowings during the year as compared to 1995.
YEARS ENDED DECEMBER 31, 1996 AND 1995 COMPARED TO PERIOD ENDED
DECEMBER 31, 1994
The Company began flight operations on December 4, 1994,
operating a total of 28 days during the fourth quarter of 1994.
As a result, any comparison of the years 1996 and 1995 with the
1994 period would not be meaningful.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and
met its capital expenditure requirements primarily with proceeds
from (i) the initial private sale of equity securities, which
raised an aggregate of approximately $6.0 million, (ii) the
initial public offering of its Common Stock, which raised
approximately $13.0 million in November 1995, and (iii) the
private sale of units of securities, each unit consisting of one
share of common stock and one redeemable common stock purchase
warrant, which raised aggregate net proceeds of approximately
$7.1 million in August and September 1996. During December 1996
and the first quarter of 1997, the Company received interim
borrowings of $10.0 million from its principal stockholders. The
Company utilized $3.375 million of these borrowings to repay an
outstanding line of credit as described below. In April 1997,
the Company expects to complete a $10.0 million private placement
of units of securities, each unit consisting of one share of
common stock and two redeemable <PAGE> common stock purchase warrants.
The Company anticipates the net proceeds from this private placement
will be utilized to pay down all outstanding interim borrowings with
the principal stockholders of the Company. In addition, the Company has
utilized and continues to utilize current liabilities as an
additional source of cash by delaying payments to certain of its
creditors. Most of the Company's suppliers currently provide
goods, services and operating equipment on open credit terms. If
such terms were modified to require immediate cash payments, the
Company's cash position and possibly its ability to continue to
operate would be materially and adversely affected.
In August 1996, the Company established a $5.0 million six-
month line of credit. The line of credit was guaranteed by
certain principal stockholders of the Company. The Company used
the proceeds of the line of credit primarily to reduce past due
accounts payable balances, provide for scheduled engine
maintenance repairs and increase its restricted cash account
balance held by its credit card processor. Borrowings accrued
interest at the prime rate as published in The Wall Street
Journal. On January 30, 1997, the Company repaid the remaining
$3.375 million of the $5.0 million credit facility with interim
borrowings as described above from principal stockholders of the
Company who guaranteed the credit facility. On January 30, 1997,
the Company replaced $1.625 million of the $5.0 million credit
facility with a $2.275 million six-month line of credit,
guaranteed by certain of the Company's stockholders. Upon
execution of the line of credit, the Company issued 910,000
warrants at an exercise price of $1.00 per share that vested
immediately. The remaining 1,365,000 warrants vest quarterly
according to the amount of borrowings against the line, as
defined in the agreement. Each warrant expires 10 years from the
date of issuance. There can be no assurance that a replacement
line of credit will be available on acceptable terms, if at all
prior to its maturity. In the event that the Company is unable
to replace the line of credit prior to July 30, 1997, the Company
would be required to utilize available cash balances which would
materially adversely affect the Company's then current cash
position.
On January 17, 1997, one of the Company's principal
stockholders agreed to established a two year $4.0 million letter
of credit on behalf of the Company in favor of the Company's
credit card processor in order to reduce required restricted cash
balances with the Company's credit card processor. Upon
execution of the letter of credit, the Company issued 1,600,000
warrants at an exercise price of $1.00 per share that vest
immediately. The remaining 2,400,000 warrants vest quarterly
according to the amount of exposure under such letter of credit,
as defined in the agreement. Each warrant expires 10 years from
the date of issuance. The Company anticipates it will need to
place additional restricted cash deposits of approximately $2.5
million during the next six months with the Company's credit card
processor to secure its increased exposure due to increased
advance ticket sales. The Company is in discussions with its
principal stockholder with respect to increasing the letter of
credit in order to secure its increased exposure. In the event
the letter of credit in not increased the Company will need to
utilize cash from operations to secure its credit card processor.
There can be no assurance that the Company's principal
stockholders will increase the letter of credit or that the
Company's use of cash from operations to secure the credit card
processor will not have a material adverse effect on the
Company's liquidity.
During 1996, and through March 10, 1997, the Company has not
generated sufficient passenger revenue to provide for its
operational cash needs. As a result, in December 1996, the
Company completed a significant route restructuring including the
introduction of non-stop service to six new cities as well as
one-stop service to two additional cities. This route
restructuring refocused the Company's strategy by creating a
Kansas City hub. The Company anticipates generating sufficient
cash flow from operations through the third quarter of 1997. The
Company's ability to raise additional capital through equity or
debt financings that may be required for operations or expansion
during 1997 will likely be dependent upon the Company's ability
to operate at profitable levels during the second and third
quarters of 1997. There can be no assurance that management's
restructuring efforts or its ability to provide for the necessary
cash requirements of the Company will be successful. Even if the
Company is successful in restructuring operations and completing
the anticipated $10.0 million private placement, there can be no
assurance that management can provide for the Company's capital
requirements that may be necessary during the remainder of 1997.
The Company estimates that major scheduled maintenance of
its existing aircraft fleet through December 1997 will cost
approximately $4.3 million of which $2.1 million will be funded
from existing supplemental rent payments recoverable from
aircraft lessors. The Company expects to expend approximately
$2.8 million on various capital expenditures, the majority of
which relate to improvements to existing aircraft, consolidating
the Company's Kansas City <PAGE> operations in a new terminal and
leasing 737-200 jet aircraft to replace the 737-300 jet aircraft
scheduled to be returned in May and July 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the financial statements and schedules
and Report of Independent Auditors included later in this report
under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 29,
1997, contains under the caption "Election of Directors" certain
information required by Item 10 of Form 10-K and such information
is incorporated herein by this reference. The information
required by Item 10 of Form 10-K as to executive officers is set
forth in Item 4A of Part I hereof.
The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 29,
1997, contains under the caption "Compliance with Section 16(a)
of the Securities Exchange Act of 1934" certain information
required by Item 10 of Form 10-K and such information is
incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 29,
1997, contains under the caption "Executive Compensation" the
information required by Item 11 of Form 10-K and such information
is incorporated herein by this reference (except that the
information set forth under the following subcaptions is
expressly excluded from such incorporation: "Executive
Compensation and Stock Option Committee Report" and "Company
Performance").
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 29,
1997, contains under the caption "Voting Securities and Principal
Holders Thereof" the information required by Item 12 of Form 10-K
and such information is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 29,
1997, contains under the caption "Certain Transactions" the
information required by Item 13 of Form 10-K and such information
is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND
REPORTS ON FORM 8-K
(a) Financial Statements.
(1) Audited Financial Statements:
<PAGE>
Independent Auditors' Report . . . . . . . . . . . 27
Balance Sheets -
December 31, 1996 and December 31, 1995. . . . . . 28
Statements of Operations for the years
ended December 31, 1996 and 1995, and
for the period from April 25, 1994 (date
of inception) to December 31,1994. . . . . . . . . 30
Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996 and 1995,
and for the period from April 25, 1994 (date of
inception) to December 31, 1994. . . . . . . . . . 31
Statements of Cash Flows for the years ended
December 31, 1996 and 1995, and for the period
from April 25, 1994 (date of inception) to
December 31, 1994. . . . . . . . . . . . . . . . . 32
Notes to Financial Statements . . . . . . . . . . 34
(2) The following financial statement schedule
is included herein:
Schedule II - Valuation and Qualifying Accounts . . 50
All other schedules are omitted, as the required
information is inapplicable or the information is
presented in the financial statements or related notes.
(3) The exhibits required to be filed by this item are
set forth in paragraph (c) below:
(b) Reports on Form 8-K.
On October 22, 1996, the Company filed a report on Form
8-K under Item 5 - Other Events regarding a press
release issued by the Company on October 14, 1996
announcing the resignation of Russell W. Meyer, Jr.
from the Company's Board of Directors. This item was
reported under Item 5 of Form 8-K rather than Item 6
because Mr. Meyer's resignation was not the result of a
disagreement with the Registrant on any matter relating
to the Registrant's operations, policies or practices.
On November 4, 1996, the Company filed a report on Form
8-K under Item 5-Other Events regarding a press release
issued by the Company on November 1, 1996 announcing
that Robert J. McAdoo, Chief Executive Officer
and President of the Company and Chairman of the Board
resigned effective November 1, 1996. Mr. McAdoo will
continue as a director of the Company. The Board of
Directors has named John P. Tague as Chief Executive
Officer and President and Chairman of the Board of
Directors. Mr. Tague currently is Chief Executive
Officer and President and Chairman of the Board of Air
South Airlines, Inc. Mr. Tague will continue in his
positions as Chief Executive Officer and President and
Chairman of the Board of Directors of Air South.
On December 11, 1996, the Company filed a report on
Form 8-K under Item 5-Other Events regarding a press
release issued by the Company on December 9, 1996
announcing that the Company was informed by the Nasdaq
Stock Market that it did not meet the minimum net worth
requirements for continued listing on the Nasdaq
SmallCap Market, and that effective with the close of
business on Friday December 13, 1996 the Company's
common stock will no longer be eligible for continued
listing on the Nasdaq SmallCap Market. When the
Company's common stock is delisted, trading of
<PAGE>
the Company's common stock will be conducted on the OTC
Bulletin Board or in the over-the-counter market in
what is commonly referred to as the "pink sheets."
On February 6, 1997, the Company filed a report on Form
8-K under Item 5- Other Events regarding a press
release issued by the Company on February 5, 1997
announcing the resignation of Kenneth J. Wagnon and
Sharol Raspberry from the Company's Board of Directors.
This item was reported under Item 5 of Form 8-K rather
than Item 6 because Mr. Wagnon and Ms. Raspberry's
resignations were not the result of a disagreement with
the Registrant on any matter relating to the
Registrant's operations, policies or practices.
On March 6, 1997, the Company filed a report on Form 8-K
under Item 5 - Other Events regarding the Special
Meeting of Stockholders of the Company held on March 3,
1997, where a majority of the holders of common stock
approved an amendment to the Company's Restated
Certificate of Incorporation to increase the number of
authorized shares of the Company's capital stock from
16,000,000 to 51,000,000 shares and to increase the
number of authorized shares of the Company's common
stock, par value $.001 per share, from 15,000,000 to
50,000,000 shares.
(c) Exhibits.
3.1 Restated Certificate of Incorporation, as
amended of Registrant.
3.2 By laws of Registrant, as amended to date
(filed as Exhibit 3.2 with Amendment No. 2 to
the Registrant's Registration Statement No.
33-96884 and incorporated herein by reference).
10.1 Registrant's 1994 Stock Option Plan, as amended
to date (filed as Exhibit 10.1 to the
Registrant's Registration Statement No.
33-96884 and incorporated herein by reference).
10.2 Form of Incentive Stock Option Agreement (filed
as Exhibit 10.2 to the Registrant's
Registration Statement No. 33-96884 and
incorporated herein by reference).
10.3 Form of Nonstatutory Stock Option Agreement
(filed as Exhibit 10.3 to the Registrant's
Registration Statement No. 33-96884 and
incorporated herein by reference).
10.4 Form of Employee Stock Purchase Plan (filed as
Exhibit 10.4 to the Registrant's Registration
Statement No. 33-96884 and incorporated herein
by reference).
10.5 Registrant's 401(k) Plan (filed as Exhibit 10.4
to the Registrant's Registration Statement No.
33-96884 and incorporated herein by reference).
10.6 Form of Registrant's Profit Sharing Plan (filed
as Exhibit 10.6 to the Registrant's
Registration Statement No. 33-96884 and
incorporated herein by reference).
10.7 Aircraft Lease Agreement, dated as of December
8, 1994, between US Air, Inc. and Registrant,
along with Lease Supplements Nos. 1, 2, 3 and 4
(filed as Exhibit 10.7 to the Registrant's
Registration Statement No. 33-96884
and incorporated herein by reference).
<PAGE>
10.8 Supplementary Lease Agreement, dated as of
October 28, 1997, between US Air, Inc. and
Registrant (filed as Exhibit 10.8 to the
Registrant's Registration Statement No.
33-96884 and incorporated herein by reference).
10.9 Modification to Aircraft Lease Agreement, dated
September 1, 1995, between US Air, Inc. and
Registrant (filed as Exhibit 10.9 to the
Registrant's Registration Statement No.
33-96884 and incorporated herein by reference).
10.10 Acknowledgment and Consent of the Registrant
regarding assignment of Aircraft Lease
Agreement between US Air, Inc. and Registrant.
10.11 Aircraft Lease Agreement, dated as of December
6, 1994, between EA 727, Inc. and Registrant
(filed as Exhibit 10.10 to the Registrant's
Registration Statement No. 33-96884 and
incorporated herein by reference).
10.12 Computer Software Nonexclusive License
Agreement, dated as of September 14, 1994,
between Morris Air Corporation and the
Registrant (filed as Exhibit 10.11 to the
Registrant's Registration Statement No.
33-96884 and incorporated herein by reference).
10.13 Lease, dated September 27, 1994, between the
Gerson Company and Registrant, as amended to
date (filed as Exhibit 10.13 to the
Registrant's Registration Statement No.
33-96884 and incorporated herein by reference).
10.14 Shopping Center Lease, dated February 28, 1996,
between the Registrant and Southern Hills
Center, L.L.C. (filed as Exhibit 10.31 to the
Registrant's Form 10-K for the year ended
December 31, 1995).
10.15 Form of Second Amended and Restated Investors'
Rights Amendment (filed as Exhibit 10.16 to the
Registrant's Registration Statement No. 33-96884
and incorporated herein by reference).
10.16 Second Amendment and Restated Warrant Purchase
Agreement among Registrant and certain of its
stockholders (filed as Exhibit 10.18 to the
Registrant's Registration Statement No. 33-96884 and
incorporated herein by reference).
10.17 Form of Amended and Restated Warrant for the
Purchase of Shares of Series B Preferred Stock
(Amended Warrant) (filed as Exhibit 10.19 to
the Registrant's Registration Statement No.
33-96884 and incorporated herein by reference).
10.18 Aircraft Sublease Agreement B, dated December
31, 1995, between the Registrant and Aloha
Airlines, Inc. (filed as Exhibit 10.28 to the
Registrant's Form 10-K for the year ended
December 31, 1995).
10.19 Aircraft Sublease Agreement D, dated January
18, 1996, between the Registrant and Aloha
Airlines, Inc. (filed as Exhibit 10.29 to the
Registrant's Form 10-K for the year ended
December 31, 1995).
10.20 Aircraft Lease Agreement, dated December 11,
1995, between the Registrant and Mimi Leasing
Corporation (filed as Exhibit 10.30 to the
Registrant's Form 10-K for the year ended
December 31, 1995).
<PAGE>
10.21 Reimbursement Agreement, dated as of December
31, 1996, by and among Registrant and Hambrecht
& Quist California, a wholly owned subsidiary
of Hambrecht & Quist Group.
10.22 Security Agreement, dated as of December 31,
1996, by Registrant in favor of Hambrecht &
Quist California.
10.23 Amended and Restated Reimbursement Loan Note in
the amount of $4,000,000.
10.24 Warrant for the purchase of shares of Common
Stock issued to Hambrecht & Quist California.
10.25 Merchant Agreement, dated as of February 27,
1997, by and between Registrant and Michigan
National Bank.
10.26 Amendment to Merchant Agreement, dated as of
February 6, 1997, by and between Registrant.
10.27 Agreement, dated as of January 30, 1997, by and
between Registrant and Commerce Bank, N.A.
(Wichita, KS) and certain stockholders of the
Registrant.
10.28 Line of Credit Note in the amount of
$2,275,000.
10.29 Warrant Purchase Agreement, dated as of January
30, 1997.
10.30 Form of Warrant to purchase shares of Common
Stock in connection with the Commerce Bank Line
of Credit.
11.1 Statement regarding computation of net income
(loss) per common share.
21.1 List of Subsidiaries of Registrant (filed as
Exhibit 21.1 to the Registrant's Registration
Statement No. 33-96884 and incorporated herein
by reference).
23.1 Consent of Ernst & Young, LLP.
24.1 Power of Attorney (included on the signature
page of this Form 10-K) .
27 Financial Data Schedule.
(d) Financial Statement Schedules.
The response to this portion of Item 14 is submitted as a
separate section of this report.
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Vanguard Airlines, Inc.
We have audited the accompanying balance sheets of Vanguard
Airlines, Inc. (the Company) as of December 31, 1996 and 1995,
and the related statements of operations, stockholders' equity
(deficit), and cash flows for the years ended December 31, 1996
and 1995 and for the period from April 25, 1994 (date of
inception) to December 31, 1994. Our audits also included the
financial statement schedule listed on the Index at Item 14 (a).
These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Vanguard Airlines, Inc. as of December 31, 1996 and 1995, and
the results of its operations and its cash flows for the years
ended December 31, 1996 and 1995 and for the period from April
25, 1994 (date of inception) to December 31, 1994, in conformity
with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information
set forth therein.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed
in Note 2 to the financial statements, the Company had a net loss
of $25,808,070 and net cash flows used in operating activities
amounted to $14,559,507 for the year ended December 31, 1996 and,
at December 31, 1996, current liabilities exceed current assets
by $21,296,881. As a result, the Company has been dependent upon
financing from its principal stockholders, which during the
period from January 1, 1996 through March 10, 1997, included
$7,115,508 in equity and $11,400,000 in short-term loans. There
is no assurance as to the availability of further financing.
These factors raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to
this matter are described in Note 2. The financial statements
do not include any adjustments that might result from the outcome
of this uncertainty.
Kansas City, Missouri ERNST & YOUNG
LLP
March 10, 1997
<PAGE>
Vanguard Airlines, Inc.
Balance Sheets
December 31
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $402,083 $3,491,640
Restricted cash 1,822,998 -
Accounts receivable, less allowance
for doubtful accounts of $230,000
in 1996 ($197,000 in 1995) 3,454,418 1,271,245
Inventory 673,338 338,119
Prepaid expenses and other
current assets 3,356,374 2,215,579
Total current assets 9,709,211 7,316,583
Property and equipment, at cost:
Aircraft improvements and
leasehold costs 3,731,046 3,409,633
Reservation system and
communication equipment 1,516,440 884,939
Other property and equipment 2,404,121 1,420,610
7,651,607 5,715,182
Less accumulated depreciation
and amortization (2,601,949) (1,164,364)
5,049,658 4,550,818
Other assets:
Supplemental maintenance deposits 2,233,988 2,216,571
Leased aircraft deposits 1,506,000 1,506,000
Fuel and security deposits 1,093,185 820,213
Other 726,205 15,513
5,559,378 4,558,297
Total assets $20,318,247 $16,425,698
<PAGE>
December 31
1996 1995
Liabilities and stockholders'
equity (deficit)
Current liabilities:
Line of credit $5,000,000 $-
Notes payable to related parties 2,500,000 -
Accounts payable 8,404,196 3,400,288
Accrued expenses 3,652,162 2,303,377
Accrued maintenance 4,684,550 3,422,513
Air traffic liability 6,609,609 2,260,721
Current portion of capital
lease obligations 155,575 101,989
Total current liabilities 31,006,092 11,488,888
Accrued maintenance, less
current portion 2,547,088 1,306,044
Capital lease obligations,
less current portion 3,084 86,133
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.001 par value:
Authorized shares - 1,000,000 in
1996 and 1995 None issued and
outstanding - -
Common stock, $.001 par value:
Authorized shares - 15,000,000
in 1996 and 1995 Issued and
outstanding shares - 9,982,452
in 1996 (8,524,376 in 1995) 9,982 8,524
Additional paid-in capital 28,283,996 19,301,937
Accumulated deficit (41,446,057) (15,637,987)
(13,152,079) 3,672,474
Deferred stock compensation (85,938) (127,841)
Total stockholders' equity
(deficit) (13,238,017) 3,544,633
Total liabilities and
stockholders' equity (deficit) $20,318,247 $16,425,698
See accompanying notes.
<PAGE>
Vanguard Airlines, Inc.
Statements of Operations
<TABLE>
Period from
April 25,
Year Ended December 31, 1994 to
December 31,
1996 1995 1994
<CAPTION>
<S> <C> <C> <C>
Operating revenues:
Passenger revenue $64,977,645 $33,980,209 $741,898
Other 3,611,456 2,178,809 19,087
Total operating revenues 68,589,101 36,159,018 760,985
Operating expenses:
Flying operations 17,306,500 8,615,286 1,215,454
Aircraft fuel 16,005,041 7,223,040 287,455
Maintenance 16,074,921 6,440,702 383,965
Passenger service 6,245,678 2,894,113 275,656
Aircraft and traffic
servicing 15,193,426 9,950,014 332,469
Promotion and sales 15,722,822 9,253,974 545,404
General and administrative 4,371,150 2,764,313 1,153,379
Depreciation and amortization 1,583,879 1,083,871 80,493
Total operating expenses 92,503,417 48,225,313 4,274,275
Operating loss (23,914,316) (12,066,295) (3,513,290)
Other income (expense):
Deferred debt issuance cost
amortization (1,833,335) - -
Interest income 135,309 88,368 73,189
Interest expense (195,728) (217,603) (2,356)
Total other income
(expense), net (1,893,754) (129,235) 70,833
Net loss $(25,808,070)$(12,195,530) $(3,442,457)
Net loss per share $(2.85) $(1.65) $(.70)
Weighted average common and
common equivalent shares
outstanding 9,056,888 7,395,921 4,907,377
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
Statements of Stockholders' Equity
Vanguard Airlines, Inc.
Statements of Stockholders' Equity (Deficit)
Convertible Preferred Stock Common Stock
Series A Series B
Shares Amount Shares Amount Shares Amount
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Balance at April 25, 1994
(date of inception) -- $ -- -- $ -- -- $ --
Issuance of common
stock for cash -- -- -- -- 433,333 433
Issuance of preferred
stock for cash 2,000,000 2,000 -- -- -- --
Issuance of preferred
stock for cash -- -- 3,641,043 3,641 -- --
Net loss -- -- -- -- -- --
Balance at
December 31, 1994 2,000,000 2,000 3,641,043 3,641 433,333 433
Issuance of warrants -- -- -- -- -- --
Issuance of compensatory
options -- -- -- -- -- --
Amortization of
deferred stock
compensation -- -- -- -- -- --
Conversion of preferred
stock to common
stock (2,000,000) (2,000) (3,641,043) (3,641) 5,641,043 5,641
Issuance of common
stock in
public offering -- -- -- -- 2,400,000 2,400
Exercise of stock
options -- -- -- -- 50,000 50
Net loss -- -- -- -- -- --
Balance at
December 31, 1995 -- -- -- -- 8,524,376 8,524
Issuance of warrants -- -- -- -- -- --
Amortization of
deferred stock
compensation -- -- -- -- -- --
Issuance of common stock
and warrants in
private placement -- -- -- -- 1,319,774 1,320
Exercise of stock
option -- -- -- -- 138,302 138
Net loss -- -- -- -- -- --
Balance at
December 31, 1996 -- $ -- -- $-- 9,982,452 $9,982
</TABLE>
<TABLE>
Total
Additional Deferred Stockholder's
Paid Accumulated Stock Equity
Capital Deficit Compensation (Deficit)
<CAPTION>
<S> <C> <C> <C> <C>
Balance at April 25, 1994
(date of inception) $ -- $ -- $ -- $ ---
Issuance of common
stock for cash 12,900 -- -- 13,333
Issuance of preferred
stock for cash 1,998,000 -- -- 2,000,000
Issuance of preferred
stock for cash 4,001,506 -- -- 4,005,147
Net loss -- (3,442,457) -- (3,442,457)
Balance at
December 31, 1994 6,012,406 (3,442,457) -- 2,576,023
Issuance of warants 71,000 -- -- 71,000
Issuance of compensatory
options 250,000 -- (250,000) --
Amortization of
deferred stock
compensation -- -- 122,159 122,159
Conversion of preferred
stock to common stock -- -- --
Issuance of common
stock in public offering 12,953,581 -- -- 12,955,981
Exercise of stock options 14,950 -- -- 15,000
Net loss -- (12,195,530) --
Balance at
December 31, 1995 19,301,937 (15,637,987) (127,841) 3,544,633
Issuance of warrants 1,850,000 -- -- 1,850,000
Amortization of
deferred stock
compensation -- -- 41,903 41,903
Issuance of common stock
and warrants in a
private placement 7,114,188 -- -- 7,115,508
Exercise of stock
options 17,871 -- -- 18,009
Net loss -- (25,808,070) -- (25,808,070)
Balance at
December 31, 1996 $28,283,996 $(41,446,057) $(85,938) $(13,238,017)
</TABLE>
See accompanying notes.
<PAGE>
Vanguard Airlines, Inc.
Statements of Cash Flows
Period from
April 25,
Year Ended December 31, 1994 to
December 31,
1996 1995 1994
Operating activities
Net loss $(25,808,070) $(12,195,530) $(3,442,457)
Adjustments to
reconcile net loss
to net cash used in
operating activities:
Depreciation and
amortization 1,583,879 1,083,871 80,493
Loss on sale and
disposal of property
and equipment 117,954 - -
Deferred debt issuance
cost amortization 1,833,335 71,000 -
Compensation related to
stock options 41,903 122,159 -
Provision for
uncollectible accounts 32,719 197,000 -
Changes in operating
assets and liabilities:
Restricted cash (1,822,998) - -
Accounts receivable (2,215,892)(1,128,214) (340,031)
Inventory (335,219) (331,110) (7,009)
Prepaid expenses and
other current assets (1,124,130)(1,493,600) (721,979)
Accounts payable 5,937,339 3,395,860 4,428
Accrued expenses and
accrued maintenance 3,851,866 3,777,801 1,601,739
Air traffic liability 4,348,888 1,482,684 607,192
Deposits and other (1,001,081)(3,151,578)(1,406,719)
Net cash used in operating
activities (14,559,507)(8,169,657)(3,624,343)
Investing activities
Purchase of property and
equipment (2,958,406)(2,341,478)(1,248,359)
Net cash used in investing
activities (2,958,406)(2,341,478)(1,248,359)
Financing activities
Proceeds from line of
credit 9,700,000 2,000,000 -
Payments on line of
credit (4,700,000)(2,000,000) -
Proceeds from issuance
of notes payable
to related parties 3,900,000 - -
Principal payments on
notes payable
to related parties (1,400,000) - -
Proceeds from sale of
common stock and
exercise of options,
net of offering costs 7,133,517 12,970,981 13,333
Proceeds from sale of
preferred stock - - 6,005,147
Principal payments on
notes payable and
capital lease obligations (205,161) (95,015) (18,969)
Net cash provided by
financing activities 14,428,356 12,875,966 5,999,511
<PAGE>
Vanguard Airlines, Inc.
Statements of Cash Flows (continued)
Period from
April 25,
Year Ended December 31, 1994 to
December 31,
1996 1995 1994
Net increase (decrease)
in cash and cash
equivalents $(3,089,557) $2,364,831 $1,126,809
Cash and cash
equivalents, beginning
of period 3,491,640 1,126,809 -
Cash and cash
equivalents,
end of period $402,083 $3,491,640 $1,126,809
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION
Cash paid during the
period for interest $159,541 $146,603 $2,356
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Capital leases entered
into for property
and equipment $134,031 $84,267 $223,887
Aircraft improvements
financed through the
issuance of notes
payable $1,000,000 $- $-
Retirement of notes
payable through sale of
property and equipment $958,333 $- $-
Reduction of accounts
payable through sale
of property and equipment $933,431 $- $-
Deferred debt issuance
costs recorded in
conjunction with
warrants issued $1,850,000 $71,000 $-
Conversion of preferred
stock to common stock $- $6,005,147 $-
Aircraft leasehold costs
associated with
accrued maintenance $- $620,052 $1,203,187
Deferred compensation
costs associated with
compensatory stock options $- $250,000 $-
See accompanying notes.
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Vanguard Airlines, Inc. (the Company) was incorporated in
Delaware in April 1994. The Company offers low-fare, convenient,
short- to medium-haul passenger air transportation service
primarily in the Midwestern, Rocky Mountain, western and
southeastern regions of the United States, and commenced flight
operations on December 4, 1994. During the period from April 25,
1994 (date of inception) to December 3, 1994, the Company was in
the development stage and was engaged in raising capital and
establishing its business and planned principal operations.
The airline industry is highly competitive primarily due to the
effects of the Airline Deregulation Act of 1978, which has
substantially eliminated government authority to regulate
domestic routes and fares and has increased the ability of
airlines to compete with respect to flight frequencies and fares.
The airline industry is significantly affected by general
economic conditions. Because a substantial portion of business
and personal airline travel is discretionary, the industry
has experienced adverse financial results during general economic
downturns. The Company's business is also seasonal, which can
affect the Company's results of operations from quarter to
quarter.
Fuel is a major component of operating expenses for all airlines.
Both the cost and availability of fuel are subject to many
economic and political factors and events occurring throughout
the world. The future cost and availability of fuel to the
Company cannot be predicted, and substantial sustained price
increases or the inability to obtain adequate fuel supplies could
have a material adverse effect on the Company's operations and
profitability.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
1. SIGNIFICANT ACCOUNTING POLICIES (...CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
RESTRICTED CASH
Restricted cash includes cash equivalents that secure the risk of
loss exposure estimated by the Company's credit card processor.
<PAGE>
ACCOUNTS RECEIVABLE
Accounts receivable are primarily due from major credit card
processors and travel agents. These receivables are unsecured.
The Company provides an allowance for doubtful accounts equal to
the estimated losses expected to be incurred in the collection of
accounts receivable.
CONCENTRATION OF CREDIT RISK
Although the Company does not expect losses associated with
supplemental payments recoverable from aircraft lessors, which
are described in Notes 3 and 10, recoverability of these payments
is dependent upon the continued financial stability of its four
lessors.
INVENTORIES
Inventories of flight equipment, expendable parts, materials,
tools, food, beverages and promotional items are carried at cost.
These items are charged to expense when issued for use.
The Company has entered into an agreement with a supplier for
consigned parts and supplies for its six Boeing 737-200 and two
Boeing 737-300 aircraft. The Company is required to pay a
monthly consignment fee, based on the value of the consigned
parts, and to replenish any such parts when used with a like
part. At December 31, 1996, the Company held consigned parts and
supplies of approximately $3,943,000, which are not included in
the Company's balance sheet.
PROPERTY AND EQUIPMENT
Depreciation and amortization of aircraft improvements and
leasehold costs are provided by the straight-line method over
their estimated useful lives or anticipated lease terms of the
related aircraft, whichever is shorter, ranging from 17 months to
five years. Reservation system and communication equipment and
other property and equipment are depreciated on a straight-line
1. SIGNIFICANT ACCOUNTING POLICIES (...CONTINUED)
basis over the shorter of their estimated useful lives or
remaining lease terms ranging from five to seven years.
Amortization of capital leases is included in depreciation and
amortization expense.
AIRCRAFT AND ENGINE MAINTENANCE
The Company accounts for aircraft overhaul and major engine
maintenance costs using the accrual method. The Company accrues
the estimated cost of the next aircraft overhaul based on
aircraft utilization. The actual cost of an aircraft overhaul is
charged to the accrual, with any deficiency or excess charged or
credited to expense. The Company accrues major engine maintenance
based on the greater of engine cycles or flight hours times the
estimated long-term cost per flight hour or cycle. The actual
cost of engine maintenance is charged to the accrual. The cost of
routine maintenance is charged to expense as incurred.
ADVERTISING COSTS
Advertising costs are charged to expense in the period the costs
are incurred. Advertising expense was approximately $4,316,000,
$2,372,000 and $167,000 for the years ended December 31, 1996 and
1995 and for the period ended December 31, 1994, respectively.
PASSENGER REVENUE RECOGNITION
Passenger ticket sales are initially recorded as a component of
air traffic liability. Revenue derived from ticket sales is
recognized at the time transportation is provided. However, due
to various factors, including a multi-tier ticket pricing
structure, certain amounts are recognized in revenue using
estimates regarding both the timing of the revenue recognition
and the amount of revenue to be recognized. Actual results could
differ from those estimates.
<PAGE>
PREOPERATING COSTS
All preoperating costs incurred during the development stage were
charged to expense as incurred.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principals Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for its employee stock
options, because, as discussed in Note 5, the alternative fair
value accounting provided for under the Financial Accounting
Standards Board's Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation,"
requires the use of option valuation models that were not
developed for use in valuing employee stock
1. SIGNIFICANT ACCOUNTING POLICIES (...CONTINUED)
options. Under APB No. 25, compensation expense is recorded over
the related vesting period when the exercise price is less than
the estimated fair value of the stock at the date of grant. For
the years ended December 31, 1996 and 1995, the Company recorded
compensation expense of approximately $42,000 and $122,000,
respectively, in general and administrative expenses. The
Company recorded no compensation expense related to options in
1994.
Pro forma information regarding net loss and loss per share is
required by SFAS No. 123 and has been determined as if the
Company had accounted for its stock options under the fair value
method of that statement. This pro forma information is included
in Note 5.
LOSS PER SHARE
In 1996, the computation of net loss per share is based on the
weighted average number of common shares outstanding.
Outstanding stock options and warrants were not included in the
calculation, as their effect was antidilutive.
In 1995 and 1994, net loss per share is based on the weighted
average number of common and preferred shares outstanding and
dilutive common stock equivalents during the periods. Pursuant
to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common stock and preferred stock issued for consideration
below the offering price of $6.00 per share (the Offering Price)
and stock options and preferred stock warrants issued with
exercise prices below the Offering Price during the 12-month
period preceding the initial filing of the Registration Statement
have been included in the calculation of common shares, using the
Treasury stock method, as if they were outstanding for all
periods presented.
INCOME TAXES
The Company utilizes the liability method in accounting for
income taxes, whereby deferred tax assets and liabilities are
determined based on differences between financial reporting and
tax bases of assets and liabilities utilizing enacted rates and
laws that will be in effect when the differences are expected to
reverse.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, restricted
cash and supplemental maintenance deposits reported in the
balance sheet approximate fair value. Based on the guarantee of
the line of credit by certain stockholders of the Company,
management believes the carrying amount reported in the balance
sheet approximates fair value. As a result of the uncertainties
described in Note 2, management is unable to estimate the fair
value of the notes payable to related parties at
1. SIGNIFICANT ACCOUNTING POLICIES (...CONTINUED)
December 31, 1996. The fair values of warrants issued in 1996
and 1997, as described in Notes 7 and 12, were estimated using a
discounted Black-Scholes pricing model.
<PAGE>
FOURTH QUARTER ADJUSTMENT
During the quarter ended December 31, 1996, the Company adjusted
its estimate of the fair value of warrants issued in conjunction
with obtaining a bank line of credit in July 1996 (see Note 7).
The effect was to increase net loss for the fourth quarter of the
year ended December 31, 1996 by approximately $583,000, which
relates to the third quarter period.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1995 financial statements have
been reclassified to conform to the 1996 presentation.
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. The Company
had a net loss of $25,808,070 and net cash flows used in
operations amount to $14,559,507 for the year ended December 31,
1996 and, at December 31, 1996, current liabilities exceed
current assets by $21,296,881. As a result, the Company has been
dependent upon financing from its principal stockholders, which
during the period from January 1, 1996 through March 10, 1997,
included $7,115,508 in equity and $11,400,000 in short-term
loans. There is no assurance as to the availability of further
financing. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
Management's plans include raising additional capital and
securing additional bank financing to fund ongoing operations and
the possible expansion of operations. Management's plans also
include actions designed to achieve long-term profitability,
including the reassessment of existing markets, possible
expansion into new markets, pricing strategies to maximize
operating income and cost controls. During 1996 and through
March 10, 1997, the Company did not generate sufficient passenger
revenue to provide for its operational cash needs. As a result,
in December 1996, the Company completed a significant route
restructuring, including the introduction of service to six new
cities as well as nonstop service to two additional cities. This
route restructuring refocused the Company's strategy by creating
a Kansas City hub. As discussed in Notes 7 and 8, the Company
has received interim cash advances from its majority stockholder
in the form of demand notes payable in connection with the
Company's anticipated placement of a $10.0 million private
offering of equity securities in April 1997. In January 1997,
the Company
2. BASIS OF PRESENTATION (...CONTINUED)
also completed a $2,275,000, six-month credit facility with a
bank. Management believes these sources of cash will provide for
its cash requirements through the first quarter of 1997. The
Company anticipates generating sufficient cash flow from
operations through the third quarter of 1997. The Company's
ability to raise additional cash through equity or debt
financings that may be required for expansion during 1997 or
operations in the fourth quarter, or earlier, if sufficient cash
flows are not generated in the second and third quarters, will be
greatly dependent on the Company's ability to operate at
profitable levels during the second and third quarters of 1997,
as to which there can be no assurance.
There can be no assurance that management's restructuring efforts
or its efforts to provide for the necessary cash requirements of
the Company will be successful. Even if the Company is
successful in restructuring operations and completing the
anticipated $10 million private placement, there can be no
assurance that management can provide for the Company's cash
requirements which may be necessary during the remainder of 1997.
Inability to obtain necessary financing would have a material
adverse effect on the Company, including possibly requiring the
Company to cease operations.
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets are as follows as of
December 31:
<PAGE>
1996 1995
Supplemental payments recoverable
from aircraft lessors (Note 10) $2,489,270 $713,467
Prepaid insurance 255,560 811,005
Other prepaid expenses 611,544 691,107
$3,356,374 $2,215,579
4. STOCKHOLDERS' EQUITY
In September 1996, the Company completed a private sale of units
of securities, each consisting of one share of common stock and
one redeemable common stock purchase warrant. In connection with
the sale, the Company issued 1,319,774 shares of common stock for
aggregate proceeds of approximately $7,116,000, net of offering
costs of approximately $184,000. Each redeemable warrant
entitles the holder to purchase, at any time over a five-year
period commencing after the sale closing, one share of common
stock at an exercise price of $6.64. The redeemable warrant
exercise price is subject to adjustment under certain
circumstances as defined in the warrant agreement. The Company
has the right to redeem the warrants at a redemption
4. STOCKHOLDERS' EQUITY (...CONTINUED)
price of $0.05 per warrant on 45 days' prior notice if the
average closing bid price of the Company's common stock equals or
exceeds $13.28 for any 20 days within a period of 30 consecutive
trading days, as defined by the warrant agreement. Proceeds from
the sale were utilized for major scheduled maintenance costs,
capital expenditures, working capital requirements and the
repayment of notes payable to related parties.
On November 3, 1995, the Company completed the issuance of
2,400,000 shares of common stock at a price of $6.00 per share
through an initial public offering, resulting in net proceeds,
after underwriting commissions and expenses, of approximately
$12,956,000. The net proceeds of this offering were used
principally for working capital needs, including reduction of
indebtedness, reduction of accounts payable, and expenditures
related to the maintenance and expansion of the Company's
aircraft fleet. In connection with the offering, the Company
issued the underwriter warrants to purchase 240,000 shares of
common stock at an exercise price of $7.20. The warrants are
exercisable at any time from November 1, 1996 to November 1,
2000.
In May 1994, the Company authorized 5,000,000 shares of preferred
stock and subsequently issued and sold 2,000,000 shares of
convertible Series A preferred stock (Series A preferred stock).
In August 1994, the Company amended and restated its Certificate
of Incorporation to increase the number of authorized shares of
preferred stock from 5,000,000 to 6,000,000, of which 4,000,000
were designated convertible Series B preferred stock (Series B
preferred stock). The Company then sold 3,641,043 shares of
Series B preferred stock. In March 1995, the Company filed a
Certificate of Amendment to increase the number of authorized
shares of preferred stock from 6,000,000 to 7,000,000, of which
5,000,000 were designated as Series B preferred stock. The
Series A preferred stock and Series B preferred stock were
entitled to the same privileges, the only difference being the
issuance price of $1.00 and $1.10, respectively. Upon the
closing of the Company's initial public offering described above,
the Series A preferred stock and Series B preferred stock were
automatically converted into an equal number of shares of common
stock. At the time of the conversion, there were no declared but
unpaid dividends. In addition, pursuant to the Company's Restated
Certificate of Incorporation, the number of shares of the
Company's authorized preferred stock were reduced from 7,000,000
to 1,000,000 shares.
In March 1997, the Company held a special meeting of stockholders
and approved an amendment to the Company's Restated Certificate
of Incorporation to increase the number of authorized shares of
the Company's common stock from 15,000,000 to 50,000,000 shares.
As of March 10, 1997, the Company has reserved shares of common
stock for issuances related to the exercise of outstanding or
available stock options and outstanding stock purchase warrants
and for shares available under the employee stock purchase plan
as follows:
<PAGE>
4. STOCKHOLDERS' EQUITY (...CONTINUED)
Number
of Shares
Reserved
Stock options (Note 5) 3,759,198
Stock purchase warrants (Notes 4, 7 and 12) 9,025,115
Employee stock purchase plan (Note 6) 1,000,000
5. STOCK OPTIONS
The Company established the Vanguard Airlines, Inc. 1994 Stock
Option Plan (the Stock Plan) whereby options for up to 1,700,000
shares may be granted to officers, directors, key employees and
consultants to purchase shares of common stock. Vesting and term
of these options are determined by the Board of Directors and may
vary by optionee; however, the term may be no longer than 10
years from the date of issuance. A summary of stock option
activity related to the Stock Plan is as follows:
<TABLE>
1996 1995 1994
Weighted- Weighted- Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning
of year 587,000 $0.17 489,500 $0.11 - $-
Granted 133,500 8.66 147,500 0.35 589,500 0.11
Exercised (138,302) 0.13 (50,000) 0.30 (100,000) 0.10
Forfeited (108,971) 0.93 - - - -
Outstanding at
end of year 473,227 2.40 587,000 0.17 489,500 0.11
Exercisable at
end of year 202,821 2.55 152,719 0.12 17,219 0.11
Weighted-average
fair value of
options granted
during the year 4.08 0.84 -
</TABLE>
Exercise prices for options outstanding under the Stock Plan as
of December 31, 1996 for options granted prior to November 3,
1995, the date the Company completed an initial public offering,
range from $.11 to $.30. Exercise prices for options granted
subsequent to November 3, 1995, range from $7.00 to $9.25. The
weighted-average remaining contractual life at December 31, 1996
of all outstanding options under the Stock Plan is 8.23 years.
The fair values of options granted after November 3, 1995, were
estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for
5. STOCK OPTIONS (...CONTINUED)
1996, including a risk free interest rate of 6.32%, a volatility
factor of the expected market price of the Company's common stock
of .61, and a weighted-average expected life of the option of
3.21 years.
The fair values of options granted prior to November 3, 1995,
were estimated using the Minimum Value option pricing model with
the following weighted-average assumptions for 1995, including a
risk free interest rate of 6.19% and a weighted-average expected
life of four <PAGE> years. Under the Minimum Value model, the
volatility factor is excluded. There were no options granted
during the period from November 3, 1995 to December 31, 1995.
Under both the Black-Scholes and the Minimum Value models, the
Company assumed a 0% dividend yield over the expected life of the
options.
These models were developed for use in estimating the fair value
of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require
the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's stock
options have characteristics significantly different from those
of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting
period. The effects of applying SFAS No. 123 for pro forma
disclosures are not likely to be representative of the effects on
reported net income or losses for future years. The Company's
pro forma information follows:
1996 1995
Pro forma net loss $(25,948,409) $(12,089,631)
Pro forma net loss per share $(2.87) $(1.63)
Subsequent to December 31, 1996, in connection with an employment
agreement entered into with the president of the Company on
November 1, 1996, the president will receive options to purchase
up to 200,000 shares of common stock. Each option will have an exercise
price of $1.81 and an estimated fair value of $.67. The options
will vest over a two-year period from the date employment commenced
and have a contractual term of 10 years.
6. EMPLOYEE STOCK PURCHASE PLAN
Effective January 1, 1996, the Company adopted the Vanguard
Airlines, Inc. Employee Stock Purchase Plan (the Purchase Plan).
Under the Purchase Plan, the Company registered 1,000,000 shares
of common stock for issuances to participating eligible
employees, and withholds a specified amount (at least $20.00 per
month and not to exceed 15% of compensation for that particular
month) from the paychecks of participating eligible employees.
The custodian of the Purchase Plan purchases common stock within
five business days of the allocation of the participating
employee's contribution. Any employee who has completed ninety
(90) days of employment with the Company is eligible to
participate in the Purchase Plan. Common stock is purchased from
the Company at 85% of the fair market value of the common stock
as determined on the last market trading day prior to the
purchase date. Common stock purchased on the open market is paid
85% by the participating employee and 15% by the Company. During
1996, the Company expensed approximately $19,000 for purchases of
common stock under the Purchase Plan.
7. LINES OF CREDIT
On July 30, 1996, the Company entered into a new bank line of
credit (the Agreement) that permitted borrowings up to $4,000,000
with interest payable monthly at the prime rate published in The
Wall Street Journal. On August 12, 1996, the amount available
under the Agreement was increased to $5,000,000. As of December
31, 1996, the Company had borrowed $5,000,000 under the
Agreement. The Agreement matured on January 30, 1997 and was
subsequently paid off. The Agreement was guaranteed by certain
stockholders of the Company (the Guarantors). In connection with
the execution of the Agreement and related guarantee, the Company
issued the Guarantors warrants to purchase an aggregate of up to
656,250 shares of common stock at a weighted-average exercise
price of $6.65 per share. The warrants vested immediately and
expire on July 30, 2006. Accordingly, effective July 31, 1996,
the estimated fair value of the warrants issued <PAGE> under the
Agreement of $1,850,000 was recorded in other current assets as
deferred debt issuance costs and is being charged to expense over
the term of the Agreement.
In January 1997, the Company entered into another bank line of
credit agreement (the New Agreement) that permits borrowings up
to $2,275,000 with interest payable monthly at the prime rate
published in The Wall Street Journal. The New Agreement matures
on June 30, 1997. On January 31, 1997, the Company borrowed
$2,275,000 under the terms of the New Agreement, of which
$1,625,000 was used to repay amounts outstanding under the
Agreement. The New Agreement is guaranteed by certain
stockholders of the Company (the New Guarantors). In connection
with the execution of the New Agreement and related guarantee,
the Company agreed to issue the New Guarantors warrants to
purchase an aggregate of up to 2,275,000 shares of common stock.
Upon execution of the New Agreement, the Company issued 910,000
warrants at an exercise price of $1.00 per share that vested
immediately. Accordingly, effective January 31, 1997, the
estimated fair value of the warrants issued of $1,100,000 was
recorded in other assets
7. LINES OF CREDIT (...CONTINUED)
and is being charged to expense over the term of the New
Agreement. The remaining warrants vest quarterly and the number
is dependent on the amount of borrowings against the line, as
defined in the agreement. Each warrant expires 10 years from the
date of issuance.
On March 24, 1995, the Company entered into a bank line-of-credit
agreement (the Original Credit Agreement) that permitted
borrowings up to $1,500,000 with interest payable monthly at the
prime rate as published in The Wall Street Journal plus 1%. In
September 1995, the Company amended the Original Credit Agreement
to increase the amount available thereunder to $3,000,000 and to
extend the maturity to September 30, 1996. In November 1995, the
Company elected to terminate the Original Credit Agreement with
the bank.
The Original Credit Agreement was secured by the Guarantors. In
connection with the execution of the Original Credit Agreement
and related guarantee, the Company issued to the Guarantors
warrants to purchase an aggregate of up to 545,454 shares of
Series B preferred stock at an exercise price of $1.10 per share,
which warrants expire on March 19, 2005. In connection with the
amendment of the Original Credit Agreement, the Company issued to
the Guarantors warrants to purchase an additional 784,086 shares
of Series B preferred stock at an exercise price of $3.50 per
share, which warrants expire on September 12, 2005. A portion of
the warrants were immediately vested as of the date of grant, and
the remaining warrants vest proportionately each month based on
the amount of borrowings outstanding under the Original Credit
Agreement. Upon the closing of the Company's initial public
offering, the holders of the warrants agreed to amend and restate
the warrants so that each warrant will be exercisable for shares
of common stock. At December 31, 1995, warrants for 534,091
shares of the common stock were exercisable and warrants for
795,449 shares of common stock expired unvested upon termination
of the Credit Agreement. In connection with the warrant
issuances, $71,000 was recorded in other assets as deferred debt
issuance costs and was charged to expense upon the termination of
the Original Credit Agreement in 1995.
8. NOTES PAYABLE TO RELATED PARTIES
In December 1996, the Company entered into unsecured demand
notes payable totaling $3,000,000 with the majority stockholder
of the Company with interest payable on demand at a rate of 8.0%.
As of December 31, 1996, unsecured demand notes payable of
$2,500,000 were outstanding. Subsequent to December 31, 1996,
the Company entered into additional unsecured demand notes
payable totaling $7,500,000 with the majority stockholder of the
Company with interest payable on demand at a rate of 8.0%.
Proceeds totaling $3,375,000 were used by the Company to repay
amounts outstanding under the Agreement described in Note 7.
Proceeds received from the Company's anticipated placement of a
$10.0 million private offering of equity securities in April 1997
is expected to be utilized to repay these outstanding demand
notes payable.
8. NOTES PAYABLE TO RELATED PARTIES (...CONTINUED)
In July 1996, the Company entered into promissory note agreements
totaling $900,000 with two stockholders at an interest rate of
8.25%. In August 1996, the Company repaid the principal and
interest balance of the notes.
<PAGE>
The weighted average stated interest rate on short-term
borrowings outstanding, including the notes payable to related
parties and the line of credit discussed in Note 7 (excluding
deferred debt issuance cost amortization), as of December 31,
1996 equaled 8.17%. The Company recorded related-party interest
expense during 1996 of approximately $11,000 (excluding deferred
debt issuance cost amortization).
9. INCOME TAXES
A reconciliation of the provision (benefit) for income taxes to
the federal statutory rate of 34% is as follows:
Period from
April 25,
1994 to
Year ended December 31, December 31,
1996 1995 1994
Tax at statutory
rate $(8,774,744) $(4,146,480) $(1,170,435)
State taxes,
net of federal
benefit (1,192,333) (563,433) (113,601)
Amortization of
deferred debt
issuance costs 715,001 -- --
Other 12,444 (80,137) 721
Change in
valuation allowance 9,239,632 4,790,050 1,283,315
$- $- $-
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities as of December 31 are as follows:
1996 1995
Deferred tax assets:
Net operating loss
carryforwards $13,928,498 $5,507,568
Accrued overhaul maintenance 2,820,339 1,710,032
Accrued vacation 142,308 90,725
9. INCOME TAXES (...CONTINUED)
Amortization of aircraft
leasehold costs 293,243 155,634
Other 132,963 125,779
Total deferred tax assets 17,317,351 7,589,738
Valuation allowance (15,312,997) (6,073,365)
2,004,354 1,516,373
Deferred tax liabilities:
Prepaid overhaul maintenance 1,842,071 1,142,715
Prepaid insurance 99,668 316,292
<PAGE>
Other 62,615 57,366
Total deferred tax liabilities 2,004,354 1,516,373
$- $-
The Company has provided a valuation reserve of $15,312,997 and
$6,073,365 as of December 31, 1996 and 1995, respectively, to
fully reserve for net deferred tax assets in the same amounts due
to the uncertainty of their future realization.
As of December 31, 1996, net operating loss carryforwards of
approximately $35,714,000 are available to reduce income taxes of
future years and will begin to expire in 2009, if unused. The
Company made no income tax payments during the years ended
December 31, 1996 and 1995, or the period from April 25, 1994
(date of inception) to December 31, 1994.
10. LEASES
AIRCRAFT
In January 1996 and during 1995 and 1994, the Company entered
into operating lease agreements (collectively, the Lease
Agreements) for six Boeing 737-200 and two Boeing 737-300 Series
aircraft requiring fixed monthly rental payments. The Company
recorded rent expense of approximately $10,404,000, $4,613,000
and $312,000 for the years ended December 31, 1996 and 1995, and
for the period ended December 31, 1994, respectively.
In addition, the Company is required to make supplemental
payments to the aircraft lessors based on the number of
cycles/flight hours, as defined by the Lease Agreements. Certain
supplemental payments are recoverable from the lessor upon the
performance of required engine, airframe, landing gear and
auxiliary power unit overhauls. At December 31, 1996 and 1995,
the Company
10. LEASES (...CONTINUED)
has recorded approximately $4,723,000 and $2,930,000,
respectively, in current assets as supplemental payments
recoverable from aircraft lessors, reflecting amounts paid to
lessors (Note 3).
The Lease Agreements require the Company to pay the entire cost
of the initial overhauls, even though a portion of the cycles or
flight hours were incurred prior to initiation of the Lease
Agreements. Accordingly, at the inception of the lease, the
Company accrued (as accrued maintenance) the portion of the
estimated cost of the initial overhaul pertaining to cycles or
flight hours incurred prior to inception of the lease. There was
no overhaul component capitalized for the year ended December 31,
1996. The amounts capitalized as aircraft leasehold costs
totaled approximately $620,000 and $1,203,000 for the year ended
December 31, 1995 and the period ended December 31, 1994,
respectively. The capitalized component is being amortized on
the straight-line method over 17 months to five years, the
estimated lease terms. Amortization totaled approximately
$422,000 and $399,000 for the years ended December 31, 1996 and
1995, respectively.
The Lease Agreements have lease terms ranging from 17 months to
five years with the option to extend the lease term for certain
aircraft from two to four additional years. The Boeing 737-200
Lease Agreements each have an option to purchase the aircraft at
a value defined by the respective agreement.
SALE AND LEASEBACK OF AIRCRAFT ENGINES
In March 1996, the Company made cash down payments of $260,000
and signed promissory notes totaling $1,000,000 to finance the
purchase of two aircraft engines. In July 1996, the Company
restructured these note agreements, whereby the two aircraft
engines were sold back to the vendor and the vendor subsequently
leased the aircraft engines back to the Company. This
transaction was completed in conjunction with the sale and
leaseback of two additional engines. In total, the Company
completed the sale and leaseback of four aircraft <PAGE> engines under
operating leases with terms ranging from one month to four years.
The Company has purchase and lease renewal options at the
projected fair market values under such agreements. As of the
date of these transactions in July 1996, the book values and
related long-term debt of the aircraft engines totaling
approximately $1,525,000 and $959,000, respectively, were removed
from the Company's balance sheet. In addition, the Company
reduced accounts payable due to the lessor, a vendor of the
Company, by approximately $567,000. Gains and losses recorded by
the Company in conjunction with these transactions were
immaterial. Fixed rental payments of approximately $13,000 per
engine are due monthly. In addition, the Company is required to
make supplemental payments to the lessor based on the number of
cycles/flight hours the engines are utilized, as defined by the
Lease Agreements.
10. LEASES (...CONTINUED)
OTHER
The Company leases facilities as well as office space for its
corporate headquarters from local airport authorities. These
operating leases have terms ranging from one month to five years.
In addition, the Company leases certain equipment and other
office space. These operating leases have terms ranging from one
to three years. Total rental expense for operating leases other
than aircraft charged to operations for the years ended
December 31, 1996 and 1995, and for the period ended December 31,
1994 were approximately $1,574,000, $634,000 and $67,000,
respectively.
The Company has capital leases in connection with various
property and equipment. Property and equipment at December 31
included the following amounts for the capital leases:
1996 1995
Other property and equipment $442,185 $308,154
Less accumulated depreciation 184,913 119,301
$257,272 $188,853
Future minimum lease payments under capital leases and
noncancelable operating leases (excluding supplemental payments)
at December 31, 1996 were as follows:
CAPITAL OPERATING
LEASES LEASES
1997 $165,453 $10,339,076
1998 2,699 7,444,409
1999 674 6,514,620
2000 - 2,040,253
2001 - 220,303
Total minimum lease payments 168,826 $26,558,661
Less amounts representing
interest 10,166
Present value of minimum
lease payments 158,660
Less current portion 155,576
$3,084
<PAGE>
11. CONTINGENCIES
The Company is party to various legal proceedings and claims
which arise during the ordinary course of business. In the
opinion of management, the ultimate outcome of these matters will
not have a material adverse effect on the Company's financial
position or results of operations.
12. SUBSEQUENT EVENTS
In January 1997, the Company completed a $4,000,000 letter of
credit facility in favor of the Company's credit card processor.
The letter of credit facility expires in January 1998 and was
established by the Company's majority stockholder. As
consideration for establishing the letter of credit, the Company
agreed to issue up to 4,000,000 warrants to the majority
stockholder to purchase shares of the Company's common stock.
Upon execution of the letter of credit, the Company issued
1,600,000 warrants at an exercise price of $1.00. Accordingly,
in January 1997, the estimated fair value of the warrants issued
of $1,900,000 was recorded in other assets and is being charged
to expense over the term of the facility. The remaining
2,400,000 warrants vest quarterly according to the amount of
exposure under such letter of credit, as defined in the
agreement. Each warrant expires 10 years from the date of
issuance. In addition, the Company granted the majority
stockholder a security interest in all credit card receivables
processed by the Company's credit card processor.
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
VANGUARD AIRLINES, INC.
Balance at Charged to
Beginning Charged to Other Deductions Balance at End
of Costs and Accounts-- -- of
Description Period Expenses Describe Describe Period
YEAR ENDED DECEMBER 31, 1996:
Reserves and allowances deducted from
asset accounts:
Allowance for
uncollectible
accounts: $197,000 $89,336 $32,719 $56,617 /1/ $229,719
Valuation reserve
for deferred tax
assets: $6,073,365 $9,239,632 $15,312,997
PERIOD ENDED DECEMBER 31, 1995:
Reserves and allowances deducted from
asset accounts:
Allowance for
uncollectible
accounts: $ -- $197,000 $197,000
Valuation reserve
for deferred tax
assets: $1,283,315 $4,790,050 $6,073,365
YEAR ENDED DECEMBER 31, 1994:
Reserves and allowances deducted from
asset accounts:
Valuation for deferred
tax assets: $ -- $1,283,315 $1,283,315
/1/ amounts charged against the allowance for accounts
determined uncollectible during the year.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VANGUARD AIRLINES, INC.
Dated: March 30, 1997 By:/s/ John P. Tague
John P. Tague
Chairman of the Board, Chief
Executive Officer
and President
We, the undersigned, directors and officers of Vanguard
Airlines, Inc. (the "Company"), do hereby severally constitute
and appoint John P. Tague and William A. Garrett and each or any
of them, our true and lawful attorneys and agents, with full
power of substitution and resubstitution, for him or her and in
his or her name, place and stead, in any and all capacities, to
sign any and all amendments to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, and to
file the same with all exhibits thereto, and all other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys and agents, and each or
any of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully
to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys
and agents, and each of them, or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed by the following persons
on behalf of the Registrant and in the capacities indicated and
on the dates indicated.
Signature and Title Date
/s/ John P. Tague March 30, 1997
John P. Tague, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
/s/ William A. Garrett March 30, 1997
William A. Garrett, Vice President-Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Robert J. McAdoo March 30, 1997
Robert J. McAdoo, Director
/s/ Robert J. Spane March 30, 1997
Robert J. Spane, Director
/s/ Richard D. Pearson March 30, 1997
Richard D. Pearson, Director
/s/ Edmund H. Shea, Jr. March 30, 1997
Edmund H. Shea, Jr., Director
<PAGE>
3.1 Restated Certificate of Incorporation,
as amended of Registrant *
3.2 By laws of Registrant, as amended to date
(filed as Exhibit 3.2 with Amendment No. 2
to the Registrant's Registration Statement
No. 33-96884 and incorporated herein by
reference). *
10.1 Registrant's 1994 Stock Option Plan, as
amended to date (filed as Exhibit 10.1 to the
Registrant's Registration Statement No. 33-96884
and incorporated herein by reference). *
10.2 Form of Incentive Stock Option Agreement
(filed as Exhibit 10.2 to the Registrant's
Registration Statement No. 33-96884 and
incorporated herein by reference). *
10.3 Form of Nonstatutory Stock Option Agreement
(filed as Exhibit 10.3 to the Registrant's
Registration Statement No. 33-96884 and
incorporated herein by reference). *
10.4 Form of Employee Stock Purchase Plan
(filed as Exhibit 10.4 to the Registrant's
Registration Statement No. 33-96884 and
incorporated herein by reference). *
10.5 Registrant's 401(k) Plan (filed as Exhibit
10.4 to the Registrant's Registration
Statement No. 33-96884 and incorporated herein
by reference). *
10.6 Form of Registrant's Profit Sharing Plan
(filed as Exhibit 10.6 to the Registrant's
Registration Statement No. 33-96884 and
incorporated herein by reference). *
10.7 Aircraft Lease Agreement, dated as of
December 8, 1994, between US Air, Inc. and
Registrant, along with Lease Supplements Nos.
1, 2, 3 and 4 (filed as Exhibit 10.7 to the
Registrant's Registration Statement No.
33-96884 and incorporated herein by reference). *
10.8 Supplementary Lease Agreement, dated as of
October 28, 1997, between US Air, Inc. and
Registrant (filed as Exhibit 10.8 to the
Registrant's Registration Statement No.
33-96884 and incorporated herein by reference). *
10.9 Modification to Aircraft Lease Agreement, dated
September 1, 1995, between US Air, Inc. and
Registrant (filed as Exhibit 10.9 to the
Registrant's Registration Statement No.
33-96884 and incorporated herein by reference). *
10.10 Acknowledgment and Consent of the Registrant
regarding assignment of Aircraft Lease Agreement
between US Air, Inc. and Registrant
10.11 Aircraft Lease Agreement, dated as of
December 6, 1994, between EA 727, Inc. and
Registrant (filed as Exhibit 10.10 to the
Registrant's Registration Statement No.
33-96884 and incorporated herein by reference). *
<PAGE>
10.12 Computer Software Nonexclusive License
Agreement, dated as of September 14, 1994,
between Morris Air Corporation and the
Registrant (filed as Exhibit 10.11 to the
Registrant's Registration Statement No.
33-96884 and incorporated herein by reference). *
10.13 Lease, dated September 27, 1994, between the
Gerson Company and Registrant, as amended to
date (filed as Exhibit 10.13 to the Registrant's
Registration Statement No. 33-96884 and
incorporated herein by reference). *
10.14 Shopping Center Lease, dated February 28, 1996,
between the Registrant and Southern Hills Center,
L.L.C. (filed as Exhibit 10.31 to the Registrant's
Form 10-K for the year ended December 31, 1995). *
10.15 Form of Second Amended and Restated Investors'
Rights Amendment (filed as Exhibit 10.16 to the
Registrant's Registration Statement No. 33-96884
and incorporated herein by reference). *
10.16 Second Amendment and Restated Warrant Purchase
Agreement among Registrant and certain of its
stockholders (filed as Exhibit 10.18 to the
Registrant's Registration Statement No. 33-96884
and incorporated herein by reference). *
10.17 Form of Amended and Restated Warrant for the
Purchase of Shares of Series B Preferred Stock
(Amended Warrant) (filed as Exhibit 10.19 to the
Registrant's Registration Statement No. 33-96884
and incorporated herein by reference). *
10.18 Aircraft Sublease Agreement B, dated December 31,
1995, between the Registrant and Aloha Airlines,
Inc. (filed as Exhibit 10.28 to the Registrant's
Form 10-K for the year ended December 31, 1995). *
10.19 Aircraft Sublease Agreement D, dated January 18,
1996, between the Registrant and Aloha Airlines,
Inc. (filed as Exhibit 10.29 to the Registrant's
Form 10-K for the year ended December 31, 1995). *
10.20 Aircraft Lease Agreement, dated December 11,
1995, between the Registrant and Mimi Leasing
Corporation (filed as Exhibit 10.30 to the
Registrant's Form 10-K for the year ended
December 31, 1995). *
10.21 Reimbursement Agreement, dated as of
December 31, 1996, by and among Registrant and
Hambrecht & Quist California, a wholly owned
subsidiary of Hambrecht & Quist Group
10.22 Security Agreement, dated as of December 31,
1996, by Registrant in favor of Hambrecht &
Quist California
10.23 Amended and Restated Reimbursement Loan Note
in the amount of $4,000,000
10.24 Warrant for the purchase of shares of Common
Stock issued to Hambrecht & Quist California
10.25 Merchant Agreement, dated as of February 27,
1997, by and between Registrant and Michigan
National Bank
<PAGE>
10.26 Amendment to Merchant Agreement, dated as of
February 6, 1997, by and between Registrant
10.27 Agreement, dated as of January 30, 1997, by
and between Registrant and Commerce Bank, N.A.
(Wichita, KS) and certain stockholders of the
Registrant
10.28 Line of Credit Note in the amount of $2,275,000
10.29 Warrant Purchase Agreement, dated as of January
30, 1997
10.30 Form of Warrant to purchase shares of Common
Stock in connection with the Commerce Bank
Line of Credit
11.1 Statement regarding computation of net income
(loss) per common share
21.1 List of Subsidiaries of Registrant (filed as
Exhibit 21.1 to the Registrant's Registration
Statement No. 33-96884 and incorporated herein by
reference)
23.1 Consent of Ernst & Young, LLP
24.1 Power of Attorney (included on the signature
page of this Form 10-K)
27 Financial Data Schedule
* Incorporated by reference
RESTATED CERTIFICATE OF INCORPORATION
OF
VANGUARD AIRLINES, INC.
The undersigned, Vanguard Airlines, Inc., a Delaware
corporation (the "Corporation"), for the purpose of restating the
Certificate of Incorporation of the Corporation, in accordance
with the General Corporation Law of Delaware, does hereby make
and execute this Restated Certificate of Incorporation and does
hereby certify that:
I. The name of the Corporation is Vanguard Airlines,
Inc., and the name under which it was originally incorporated was
TSP, Inc. Its original Certificate of Incorporation was filed
with the Secretary of State of Delaware on April 25, 1994.
II. Resolutions setting forth the Restated Certificate
of Incorporation of the Corporation were duly adopted at a
special meeting of the Board of Directors of the Corporation duly
called and held on August 30, 1995, at which a quorum of the
directors was at all times present.
III. The Restated Certificate of Incorporation of the
Corporation approved by a resolution of the Board of Directors
read as follows:
FIRST. The name of the Corporation is:
Vanguard Airlines, Inc.
SECOND. The address of its registered office in the
State of Delaware is 32 Loockerman Square, Suite L-100, City of
Dover, County of Kent, Delaware. The name of its registered
agent at such address is The Prentice-Hall Corporation System,
Inc.
THIRD. The nature of the business or purposes to be
conducted or promoted by the Corporation is to engage in any
lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
In addition to the powers and privileges conferred upon
the
<PAGE>
Corporation by law and those incidental thereto, the Corporation
shall possess and may exercise all the powers and privileges
which are necessary or convenient to the conduct, promotion or
attainment of the business or purposes of the Corporation.
FOURTH.
(a) The total number of shares of all classes of
stock which the Corporation shall have the authority to issue is
fifty one million (51,000,000), of which (i) fifty million
(50,000,000) shares, of the par value of $.001 per share, shall
be denominated "Common Stock," and (ii) one million (1,000,000)
shares of the par value of $.001 per share shall be denominated
"Preferred Stock."
(b) The Board of Directors is authorized to
provide by resolution or resolutions for the issuance of shares
of stock of any class or of any series of any class at any time
and from time to time and, by filing a Certificate of
Designations in the manner prescribed under the laws of the State
of Delaware, to fix and amend the voting powers, full or limited,
or no voting powers, and the designations, preferences and
relative, participating, optional or other special rights, if
any, and qualifications, limitations or restrictions thereof.
Unless otherwise provided in any such resolution or resolutions,
the number of shares of stock of any such series to which such
resolution or resolutions apply may be increased (but not above
the total number of authorized shares of the class) or decreased
(but not below the number of shares thereof then outstanding) by
filing a Certificate of Designations in the manner prescribed
under the laws of the State of Delaware.
(c) Shares of Common Stock and Preferred Stock
may be issued from time to time as the Board of Directors of the
Corporation shall determine and on such terms and for such
consideration as shall be fixed by the Board of Directors.
(d) No holder of any shares of stock of the
Corporation of any class shall be entitled as such, as a matter
of right, to subscribe for or purchase any shares of stock of the
Corporation of any class, whether now or hereafter authorized or
whether issued for cash, property or services or as a dividend or
otherwise, or to subscribe for or purchase any obligations,
bonds, notes, debentures, other securities or stock convertible
into shares of stock of the Corporation of any class or carrying
or evidencing any right to purchase shares of stock of any class.
<PAGE>
(e) Except as may be required by law, each holder
of Common Stock shall have one vote in respect of each share of
Common Stock held by such person on all matters voted upon by the
stockholders.
FIFTH.
(a) Except as may be otherwise specifically
provided by statute, as from time to time amended, all powers of
management, direction and control of the Corporation shall be,
and hereby are, vested in the Board of Directors.
(b) A majority of the whole Board of Directors
shall constitute a quorum for the transaction of business, and,
except as otherwise provided in this Restated Certificate of
Incorporation or the Bylaws, the vote of a majority of the
directors present at a meeting at which a quorum is then present
shall be the act of the Board. As used in this Restated
Certificate of Incorporation, the terms "whole Board" and "whole
Board of Directors" are hereby exclusively defined and limited to
mean the total number of directors which the Corporation would
have if the Board had no vacancies.
(c) The number of directors shall be fixed by, or
in the manner provided in, the Bylaws.
(d) The directors of the Corporation other than
those who may be elected by the holders of any Preferred Stock or
series thereof, shall be divided into three classes (to be
designated as Class I, Class II and Class III), as nearly equal
in number as the then total number of Directors constituting the
whole Board of Directors permits, with the terms of office of one
class expiring each year. Messrs. Hambrecht and Shea are hereby
named as Class I Directors to hold office for a term expiring at
the annual meeting of stockholders in 1996 and until their
respective successors are duly elected and qualified or until
their respective earlier resignation or removal; Messrs. Golden
and Meyer are hereby named as Class II Directors to hold office
for a term expiring at the annual meeting of stockholders in 1997
and until their respective successors are duly elected and
qualified or until their respective earlier resignation or
removal; and Messrs. McAdoo, Wagnon and Pearson are hereby named
as Class III Directors to hold office for a term expiring at the
annual meeting of stockholders in 1998 and until their respective
successors are duly elected and qualified or until their
respective earlier resignation or removal. Notwithstanding the
foregoing,
<PAGE>
and except as otherwise required by law, whenever the holders of
any one or more series of Preferred Stock shall have the right,
voting separately as a class, to elect one or more Directors of
the Corporation, the terms of the Director or Directors elected
by such holders shall expire at the next succeeding annual
meeting of stockholders. Subject to the foregoing, at each
annual meeting of stockholders the successors to the class of
directors whose term shall then expire shall be elected to hold
office for a term expiring at the third succeeding annual
meeting. The foregoing notwithstanding, each director shall
serve until his successor shall have been duly elected and
qualified, unless he or she shall resign, become disqualified,
disabled or shall otherwise be removed.
(e) Except for directorships created pursuant to
Article FOURTH of this Restated Certificate of Incorporation
relating to the rights of holders of Preferred Stock, or any
series thereof, and except for vacancies in such directorships,
any vacancies in the Board of Directors for any reason, and any
newly created directorships resulting from any increase in the
number of directors, may be filled only by the Board of
Directors, acting by a majority of the directors then in office,
although less than a quorum, and any directors so chosen shall
hold office until the next election and until their successors
shall be elected and qualified or until their respective earlier
resignation, removal or death. No decrease in the number of
directors shall shorten the term of any incumbent director.
(f) Notwithstanding any other provision of this
Restated Certificate of Incorporation or the Bylaws, and
notwithstanding the fact that some lesser percentage may be
specified by law, this Restated Certificate of Incorporation or
the Bylaws, any director or the whole Board of Directors of the
Corporation may be removed at any time, but only for cause and
only upon the affirmative vote of the holders of seventy-five
percent (75%) or more of the Total Voting Power of the then
outstanding shares of Voting Stock, considered for this purpose
as one class (for the purposes of this Article FIFTH, section
(f), each share of the Voting Stock shall have the number of
votes granted to it pursuant to Article FOURTH of this Restated
Certificate of Incorporation). For the purposes of this Article
FIFTH, section (f): (i) the term "Total Voting Power" shall mean
the aggregate of all votes of all outstanding shares of Voting
Stock; and (ii) the term "Voting Stock" shall mean the shares of
all classes of capital stock of the Corporation entitled to vote
on removal of any director or the entire Board of Directors in
the manner provided in this Article FIFTH, section (f) (except
that if the next succeeding sentence is operative, then the
outstanding
<PAGE>
shares of Preferred Stock shall not be considered "Voting Stock"
for purposes of this Article FIFTH, section (f)).
Notwithstanding the foregoing, and except as otherwise required
by law, whenever the holders of any one or more series of
Preferred Stock shall have the right, voting separately as a
class, to elect one or more directors of the Corporation, the
provisions of this Section (f) shall not apply with respect to
the directors elected by such holders of Preferred Stock.
(g) As used in this Restated Certificate of
Incorporation, the term "for cause" is hereby exclusively defined
and limited to mean commission of a felony or a finding by a
court of competent jurisdiction of liability for negligence, or
misconduct, in the performance of the director's duty to the
Corporation in a matter of substantial importance to the
Corporation, where such adjudication is no longer subject to
direct appeal.
(h) There shall be no qualifications for election
as directors of the Corporation, except that no person shall be
eligible to stand for election as a director if such person has
been convicted of a felony by a court of competent jurisdiction
where such conviction is no longer subject to direct appeal.
(i) Except as provided in this Article FIFTH, no
director of the Corporation shall be removed from his office as a
director by vote or other action of stockholders or otherwise
except for cause.
(j) Advance notice of nominations for the
election of directors other than nominations by the Board of
Directors or a committee thereof shall be given to the
Corporation in the manner provided in the Bylaws.
(k) Except as may be otherwise specifically
provided in this Article FIFTH, the term of office and voting
power of each director of the Corporation shall be neither
greater than nor less than that of any other director or class of
directors of the Corporation.
(l) Elections of directors need not be by ballot
unless the Bylaws of the Corporation shall so provide.
SIXTH. The original Bylaws of the Corporation shall be
adopted in any manner provided by law. In furtherance, and not in
<PAGE>
limitation of, the powers conferred by statute, the Board of
Directors is expressly authorized to make, adopt, alter, amend or
repeal the Bylaws of the Corporation. Notwithstanding any other
provisions in this Restated Certificate of Incorporation or the
Bylaws of the Corporation, and notwithstanding the fact that some
lesser percentage may be specified by law, the stockholders of
the Corporation shall have the power to make, adopt, alter, amend
or repeal the Bylaws of the Corporation only upon the affirmative
vote of seventy-five percent (75%) or more of the Total Voting
Power of the then outstanding shares of Voting Stock, considered
for this purpose as one class (for purposes of this Article
SIXTH, each share of the Voting Stock shall have the number of
votes granted to it pursuant to Article FOURTH of this Restated
Certificate of Incorporation). For purposes of this Article
SIXTH: (i) the term "Total Voting Power" shall mean the aggregate
of all votes of all outstanding shares of Voting Stock; and (ii)
the term "Voting Stock" shall mean the shares of all classes of
capital stock of the Corporation entitled to vote on making,
adopting, altering, amending or repealing the Bylaws of the
Corporation.
SEVENTH. The Corporation may agree to the terms and
conditions upon which any director, officer, employee or agent
accepts his office or position and in its Bylaws, by contract or
in any other manner may agree to indemnify and protect any
director, officer, employee or agent of the Corporation, or any
person who serves at the request of the Corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other
enterprise, to the fullest extent permitted by the laws
(including, without limitation, the statutes, case law and
principles of equity) of the State of Delaware. If the laws
(including, without limitation, the statutes, case law or
principles of equity, as the case may be) of the State of
Delaware are amended or changed to permit or authorize broader
rights of indemnification to any of the persons referred to in
the immediately preceding sentence, then the Corporation shall be
automatically authorized to agree to indemnify such respective
persons to the fullest extent permitted or authorized by such
law, as so amended or changed, without the need for amendment or
modification of this Article SEVENTH and without further action
by the directors or stockholders of the Corporation.
Without limiting the generality of the foregoing
provisions of this Article SEVENTH, to the fullest extent
permitted or authorized by the laws of Delaware as now in effect
and as the same may from time to time hereafter be amended,
including without limitation the provisions of
<PAGE>
subsection (b)(7) of Section 102 of the General Corporation Law
of Delaware, no director of the Corporation shall be personally
liable to the Corporation or to its stockholders for monetary
damages for breach of fiduciary duty as a director. Any repeal
or modification of the immediately preceding sentence shall not
adversely affect any right or protection of a director of the
Corporation existing hereunder with respect to any act or
omission occurring prior to or at the time of such repeal or
modification.
EIGHTH. Whenever a compromise or arrangement is
proposed between this Corporation and its creditors or any class
of them and/or between this Corporation and its stockholders or
any class of them, any court of equitable jurisdiction within the
State of Delaware may, on the application in a summary way of
this Corporation or of any creditor or stockholder thereof or on
the application of any receiver or receivers appointed for this
Corporation under the provisions of Section 291 of Title 8 of the
Delaware Code or on the application of trustees in dissolution or
of any receiver or receivers appointed for this Corporation under
the provisions of Section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as
the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in
value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the
case may be, agree to any compromise or arrangement and to any
reorganization of this Corporation as consequence of such
compromise or arrangement, the said compromise or arrangement and
the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the
creditors or class of creditors, or on all the stockholders or
class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
NINTH. Except as may be otherwise provided by statute,
the Corporation shall be entitled to treat the registered holder
of any shares of the Corporation as the owner of such shares and
of all rights derived from such shares for all purposes, and the
Corporation shall not be obligated to recognize any equitable or
other claim to or interest in such shares or rights on the part
of any other person, including, but without limiting the
generality of the term "person" to, a purchaser, pledgee,
assignee or transferee of such shares or rights, unless and until
such person becomes the registered holder of such shares. The
foregoing shall apply whether or not the Corporation shall have
either actual or constructive notice of the claim by or the
interest of such person.
<PAGE>
TENTH. The books of the Corporation may be kept
(subject to any provisions contained in the statutes of the State
of Delaware) outside the State of Delaware at such place or
places as may be designated from time to time by the Board of
Directors or in the Bylaws of the Corporation.
ELEVENTH. Any action required or permitted to be taken
by the stockholders of the Corporation must be effected at a duly
called annual or special meeting of such holders and may not be
effected by any consent in writing by such holders; provided,
however, that the foregoing shall not derogate from the authority
of all the directors and all of the stockholders of the
Corporation eligible to vote, to adopt an amendment to the
Certificate of Incorporation by signing a written statement
manifesting their intention that an amendment to the Certificate
of Incorporation be adopted pursuant to Section 242 of the
General Corporation Law of Delaware.
TWELFTH. Except as otherwise required by law and
subject to the rights, if any, of the holders of Preferred Stock
or any series thereof, special meetings of the stockholders of
the Corporation may be called only by the Chairman of the Board
of Directors, the President of the Corporation or the Board
pursuant to a resolution adopted by the a majority of the whole
Board.
THIRTEENTH. The Corporation reserves the right to
amend, alter, change or repeal any provision contained in this
Restated Certificate of Incorporation in the manner now or
hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
FOURTEENTH. The duration of the Corporation is
perpetual.
FIFTEENTH. None of the provisions of Articles FIFTH,
SIXTH or this Article FIFTEENTH may be amended, altered, changed
or repealed except upon the affirmative vote at any annual or
special meeting of the stockholders, of the holders of at least
seventy-five percent (75%) or more of the Total Voting Power of
the then outstanding shares of Voting Stock, considered for this
purpose as one class (for the purpose of this Article FIFTEENTH,
each share of Voting Stock shall have the number of votes granted
to it pursuant to Article FOURTH of this Restated Certificate of
Incorporation), nor shall new provisions to this Restated
Certificate of
<PAGE>
Incorporation be adopted or existing provisions to this Restated
Certificate of Incorporation be amended, altered or repealed
which in either instance are in conflict or inconsistent with
Articles FIFTH, SIXTH or this Article FIFTEENTH except upon the
affirmative vote at any annual or special meeting of the
stockholders of the holders of at least seventy-five percent
(75%) or more of the Total Voting Power of the then outstanding
shares of Voting Stock, considered for this purpose as one class.
Any inconsistency between the provisions of a Bylaw and any
provisions of this Restated Certificate of Incorporation shall be
controlled by this Restated Certificate of Incorporation. For
the purposes of this Article FIFTEENTH: (i) the term "Total
Voting Power" shall mean the aggregate of all votes of all
outstanding shares of Voting Stock; and (ii) the term "Voting
Stock" shall mean the shares of all classes of capital stock of
the Corporation entitled to vote on the issue in question.
IV. The Restated Certificate of Incorporation restates
and integrates and does not further amend the provisions of the
Corporation's Certificate of Incorporation as theretofore amended
or supplemented, and there is no discrepancy between those
provisions and the provisions of the restated certificate of
incorporation.
V. This Restated Certificate of Incorporation has
been duly adopted in accordance with the provisions of Sections
242 and 245 of the Delaware Corporation Law, as amended.
<PAGE>
IN WITNESS WHEREOF, this Restated Certificate of
Incorporation has been executed on behalf of the Corporation by
its President and attested by its Secretary as of March 6, 1997,
and each of them does hereby affirm and acknowledge that this
Restated Certificate of Incorporation is the act and deed of the
Corporation and that the facts stated herein are true.
VANGUARD AIRLINES, INC.
By: ___________________________
John P. Tague
President
(CORPORATE SEAL)
ATTEST:
______________________________
Brian S. Gillman
Secretary
<PAGE>
ACKNOWLEDGEMENT AND CONSENT
Acknowledgement and Consent (this "Consent") of
Vanguard Airlines, Inc. dated as of March _____,
1997.
RECITALS: US Airways, Inc. ("US Airways"), as lessor
and Vanguard Airlines, Inc. (the "Lessee"), as
lessee, entered into that certain Lease Agreement
dated as of December 8, 1994 (the "Lease") whereby
US Airways agreed to lease to Lessee and Lessee
agreed to lease from US Airways the four Boeing
737-200 series Airframe(s) and Engines identified in the
Assignment (defined below). US Airways and First
Security Bank, National Association ("Trustee"), as
trustee for the S-C Parties, have entered into an
Assignment and Assumption Agreement (the
"Assignment") dated as of March __, 1997, whereby US
Airways has assigned to the Trustee all of the
right, title and interest of US Airways in and to
the Assigned Documents and the Aircraft. The
Trustee desires that Lessee acknowledge and consent
to the Assignment and reaffirm its obligations to
the Trustee.
Accordingly, the Trustee and Lessee agree as
follows:
1. DEFINED TERMS. Unless otherwise defined herein
or the context requires otherwise, all
capitalized terms used herein shall have the
meanings assigned to them in the Assignment.
2. ACKNOWLEDGEMENT AND CONSENT. Lessee hereby
acknowledges and consents to the Assignment (a
copy of which is attached hereto as Exhibit
"A"), and all of the terms and conditions
contained therein.
3. REPRESENTATIONS, WARRANTIES AND OBLIGATIONS.
All representations and warranties of Lessee in
the Assigned Documents were true and correct
when made. Lessee further affirms its
liability to the Trustee for all of its
obligations and duties under the Assigned
Documents. Lessee acknowledges and agrees that
Trustee shall not be bound by or subject to any
of the duties obligating or responsibilities
described in Section 4 of the Assignment.
4. NOTICES. Pursuant to Section 19.2 of the Lease
and Section 7.5 of the Supplementary Agreement,
all requests, notices and other communications
to the "Lessor" shall, from the date of this
Consent, be addressed to the Trustee, as
follows (or to such other address as the
<PAGE>
Trustee shall specify from time to time):
First Security Bank, National
Association
Corporate Trust Department
79 South Main Street - 3rd Floor
Salt Lake City, Utah 84111
Attention: Corporate Trust
Administration
with copies to:
S-C Domestic Holdings VIII
c/o S-C Aviation Financing LDC
c/o Curacao Corporation Company
N.V.
Kaya Flamboyan 9
Willemstad, Curacao N.A.
Facsimile: 599-9-322008/322009
and
C-S Aviation
888 Seventh Avenue, Suite 2901
New York, New York 10106
Attention: Thomas Seery
Facsimile: 212-246-0102
5. PAYMENTS. All payments to be made to "Lessor"
under the Assigned Documents shall, from the date of
this Consent, be made to the following bank account
(or to such other account as the Trustee shall
specify from time to time):
Citibank New York
ABA No. 021000089
Account No. 10990765
For further credit to Citibank London
Account number 8228825
Account name: S-C Domestic Holdings II LLC
6. INSURANCE. Lessee will cooperate in having the
Trustee, the S-C Parties and US Airways named
as additional insureds under the liability
insurance, and the Trustee named as sole loss
payee under the hull insurance procured by
Lessee under the Lease.
<PAGE>
7. MISCELLANEOUS. This Consent may be executed by
the parties hereto in separate counterparts, each
fully executed set of which when so executed and
delivered shall be an original, but all such
counterparts shall together constitute but one and
the same instrument. This Consent shall be governed
by the laws of the State of New York. The
respective rights and obligations set forth in this
Consent shall be binding on and inure to the benefit
of the parties hereto and their respective
successors and assigns.
<PAGE>
The undersigned has executed this
Acknowledgement and Consent.
Vanguard Airlines, Inc.
By:__________________________
Title:_______________________
Agreed:
First Security Bank, National
Association, as Trustee
By: ___________________________
Title: ________________________
PAGE
<PAGE>
Exhibit "A" to Acknowledgement and Consent
ASSIGNMENT AND ASSUMPTION AGREEMENT
ASSIGNMENT AND ASSUMPTION AGREEMENT (this
"Assignment"), dated as of March __, 1997, by and
between US Airways, Inc. ("US Airways"), a Delaware
corporation formerly known as USAir, Inc., and FIRST
SECURITY BANK, NATIONAL ASSOCIATION, a national
banking association, not in its individual capacity
but solely as Owner Trustee ("Trustee").
RECITALS:
US Airways and Trustee desire to effect
(a) the transfer by US Airways to Trustee of all of
the right, title and interest of US Airways (except
as excluded in Section 4 below) in, under and with
respect to, among other things, (i) the Aircraft
Lease Agreement (as supplemented by the Lease
Supplement defined below and to the extent relating
to the Aircraft, the "Lease"), dated December 8,
1994, between US Airways and Vanguard Airlines, Inc.
(the, "Lessee"), as supplemented by Lease Supplement
No. 3, dated as of December 8, 1994 (the "Lease
Supplement"), (ii) Supplementary Agreement, dated as
of October 28, 1994 between US Airways and Lessee,
as it relates to the Aircraft (defined below)(iii)
all certificates, opinions, and other documents
relating to the Operative Document as they relate to
the Boeing 737-247 airframe with manufacturer's
serial number 19603 and United States Registration
Number N204AU and the Pratt & Whitney model JT8D-9A
aircraft engines (which engines have 750 or more
rated takeoff horsepower or the equivalent) with
manufacturer's serial numbers 667224 and 707332
(such airframe and the engines (as further defined
in the Lease), the "Aircraft") (all of the foregoing
collectively, the "Assigned Documents"), (iv) the
Aircraft, (v) the Hourly Rent Balances and the
security deposits of Lessee as they relate to the
Aircraft (collectively, the "Assigned Accounts"),
and (vi) the proceeds from all of the foregoing; and
(b) the assumption by Trustee of the obligations of
US Airways (except as excluded in Section 4 below)
to the extent arising after the Effective Date under
the Assigned Documents. The Lease was recorded by
the Federal Aviation Administration on January 6,
1995 and assigned Conveyance No. Y40259. The Lease
Supplement was recorded by the Federal Aviation
Administration on January 6, 1995 and assigned
Conveyance No. Y40259.
PAGE
<PAGE>
NOW, THEREFORE, in consideration of the
mutual agreements contained herein, it is hereby
agreed as follows:
1.DEFINITIONS. Capitalized terms used
herein without definition shall have meaning
ascribed thereto in the Lease unless the context in
which such term is used requires another meaning.
2. ASSIGNMENT. US Airways does hereby
sell, convey, assign, transfer and set over to
Trustee, effective as of the date first above
written (the "Effective Date"), all of its right,
title and interest in, under and to the Assigned
Documents, the Assigned Accounts and all other
contracts, agreements, documents or instruments in
respect of the Aircraft to which US Airways is a
party and relating to the Operative Agreements or
the Aircraft and any proceeds therefrom, together
with all other documents and instruments evidencing
any of such right, title and interest.
3. ASSUMPTION. Trustee hereby
undertakes and assumes all of the duties and
obligations of US Airways relating to the period
after the Effective Date pursuant to the Assigned
Documents and any other contracts, agreements,
documents or instruments relating thereto to which
US Airways is a party or by which it is bound, and
hereby confirms that it shall be deemed a party to
and be bound by the Assigned Documents and each
other contract, agreement, document or instrument in
respect of the Aircraft relating thereto to which US
Airways is a party or by which it is bound as if
named therein as "Lessor". Without limiting the
foregoing, Trustee acknowledges and agrees that
payments of "Basic Rent" under the Lease (whether
received by US Airways or by Trustee) shall be
credited towards the purchase price for the Aircraft
to the extent provided in (and subject to the terms
and conditions of) Section 18.2 of the Lease.
4. EXCLUDED OBLIGATIONS.
Notwithstanding anything to the contrary set forth
in this Assignment, US Airways is not assigning to
Trustee and US Airways shall remain responsible for,
and Trustee is not assuming from US Airways: (a)
the duties and obligations described on Schedule A,
(b) the duties and obligations of US Airways that
relate to any period on or prior to the Effective
Date, (c) any other duties and obligations of US
Airways relating to parts or engine consignments,
spare parts or spare engines, and (d) without
limiting the foregoing, the right of US Airways to
receive any Rent due or accrued to US Airways prior
to the Effective Date and any indemnity relating to
events occurring prior to the Effective Date.
PAGE
<PAGE>
5.RELEASE OF US AIRWAYS. Except for
liabilities not assumed as provided in Section 4
hereof and for which US Airways shall remain
responsible, US Airways shall have no further duty
or obligation to Lessee under the Assigned
Documents, the Assigned Accounts or under any other
contract, agreement, document or other instrument
relating thereto to which US Airways is a party or
by which it is bound (other than this Agreement).
6. FURTHER ASSIGNMENT. In furtherance of
the within assignments, US Airways assigns and
grants to Trustee all right to collect for the
account of Trustee all items sold, transferred or
assigned to Trustee pursuant hereto; to institute
and prosecute all proceedings that Trustee may deem
proper in order to collect, assert or enforce any
claim, right or title of any kind in or to the items
sold, transferred or assigned; to defend and
compromise any and all actions, suits or proceedings
as to title to or interest in the Aircraft or any of
the property acquired by Trustee; and to do all such
acts and things in relating thereto as Trustee shall
deem advisable.
7. PAYMENTS. US Airways hereby
covenants and agrees to pay over to Trustee, if and
when received following the Effective Date, any
amounts (including any sums payable as interest in
respect thereof) paid to or for the benefit of US
Airways that, under Section 2 hereof, belong to
Trustee, and Trustee hereby covenants and agrees to
pay over to US Airways, if and when received
following the Effective Date, any amounts (including
any sums payable as interest in respect thereof)
paid to or for the benefit of Trustee that, under
Section 2 hereof, belong to US Airways.
8.FURTHER ASSURANCES. Each party to this
Assignment and Assumption Agreement agrees to
execute, acknowledge, deliver, file, record and
publish such further certificates, amendments,
instruments or documents, and to do all such further
acts and things, as may be required by law, or as
may reasonably be necessary or advisable to carry
out the intents and purposes of this Assignment and
Assumption Agreement.
9. EXPENSES. Each party hereto shall
bear its own legal fees incurred in connection with
the transactions described herein.
10. GOVERNING LAW. This Assignment and
Assumption Agreement shall be governed by and
construed in accordance with the laws of the State
of New York.
11. HEADINGS. Section headings used in
this Assignment are for convenience only and shall
not be used in interpreting or construing this
Assignment and Assumption Agreement and shall not
affect the meaning or
<PAGE>
construction of this Assignment and Assumption
Agreement.
12. NOTICES. All notices and other
communications hereunder shall be in writing and
shall be deemed given if delivered to the parties at
the following addresses (or at such other address
for a party as shall be specified by like notice):
i. IF TO US AIRWAYS:
US Airways, Inc.
2345 Crystal Drive
Arlington, Virginia 22227
Attention: Director - Aircraft Sales
Facsimile: 703-418-7515
with a copy at the same address to
the attention of US Airways' General
Counsel, facsimile number (703) 418-5252
ii. IF TO TRUSTEE:
First Security Bank, National
Association
79 South Main Street, 3rd Floor
Salt Lake City, Utah 84111
Attention: Corporate Trust
Administration
Facsimile: 801-246-5053
13. ENTIRE AGREEMENT. This Assignment
constitutes the entire agreement among the parties
hereto and supersedes all prior agreements and
understandings, both written and oral, with respect
to the subject matter hereof. There are no
representations and warranties of any party hereto
except as expressly set forth herein.
14. SURVIVAL OF REPRESENTATIONS AND
WARRANTIES. All representations and warranties
contained in this Assignment shall survive the
Effective Date.
15. COUNTERPARTS. This Assignment may be
executed by the parties hereto in separate
counterparts, each of which when so executed and
delivered shall be an original, but all such
counterparts shall together constitute but one and
the same instrument.
16. SUCCESSORS AND ASSIGNS. The
respective rights and obligations set forth in this
Assignment shall be binding on and inure to the
benefit of the parties hereto and their respective
successors and assigns.
[remainder of page left blank intentionally]
<PAGE>
IN WITNESS WHEREOF, the parties hereto
have duly executed this Assignment and Assumption
Agreement as of the day and year set forth above.
US AIRWAYS, INC.
By: ____________________________
Name: __________________________
Title: _________________________
Dated: _________________________
FIRST SECURITY BANK, National
Association, as Owner Trustee
By: ____________________________
Name: __________________________
Title: _________________________
Dated: _________________________
PAGE
<PAGE>
SCHEDULE A
Excluded Obligations
- - Section 4.2 of the Supplementary Agreement (US
Airways' representations)
- - Section 5.3 of the Supplementary Agreement
(license of maintenance program)
- - Section 5.4 of the Supplementary Agreement (US
Airways-provided maintenance work)
- - Section 5.5 of the Supplementary Agreement
(provisioning assistance)
<PAGE>
REIMBURSEMENT AGREEMENT
This REIMBURSEMENT AGREEMENT dated as of December 31,
1996, is made by and between VANGUARD AIRLINES, INC.,
a Delaware corporation having its principal place of
business at 30 N.W. Rome Circle, Mezzanine Level,
Kansas City International Airport, Kansas City, Mo.,
64153 ("Corporation"), in favor of HAMBRECHT & QUIST
CALIFORNIA, a wholly owned subsidiary of Hambrecht &
Quist Group ("Lender").
RECITALS
(A)Corporation has requested that Lender arrange for
the initial issuance of a letter of credit to be
issued in favor of Boatmen's POS Merchant Services
Co., L.L.C. for the account of the Corporation in
the aggregate amount of Four Million Dollars
($4,000,000) ( the "Letter of Credit").
(B)Corporation intends to switch credit card
processors from Boatmen's POS, as hereinafter
defined, to Michigan National Bank. Corporation
intends to request Lender to arrange for the
issuance of a letter of credit in favor Michigan
National Bank up to the aggregate amount of Four
Million Dollars ($4,000,000) (collectively with the
"Letter of Credit" referred to in Rectal A above,
the "Letters of Credit") upon the reduction and/or
cancellation of the initial Letter of Credit,
referred to in Recital A above, to be issued in
favor of Boatmen's POS.
(C)Lender is willing to arrange for the issuance of
the Letters of Credit, but only upon the condition,
among others, that Corporation shall have executed
and delivered to Lender this Reimbursement
Agreement.
AGREEMENT
NOW, THEREFORE, in order to induce Lender to cause
the issuance of the Letters of Credit and for other
good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, and
intending to be legally bound, the parties hereto
represent, warrant, covenant and agree as follows:
<PAGE>
ARTICLE I
DEFINITIONS
SECTION 0.1 DEFINITIONS. Unless otherwise defined
herein the following terms shall have the following
meanings (such meanings being equally applicable to
both the singular and plural forms of the terms
defined):
"ACT OF BANKRUPCY" shall mean the Corporation shall
commence a voluntary case or other proceeding in
seeking liquidation, reorganization, arrangement,
readjustment of its debts or for any other relief
under the federal bankruptcy laws, including the
Federal Bankruptcy Code, as amended, or under any
other insolvency act or law, state or federal, now
or hereafter existing, or shall take any other
action indicating its consent to, approval of, or
acquiescence in, any such petition or proceedings;
the Corporation shall apply for, or consent to or
acquiesce in, the appointment of a receiver,
liquidator, custodian, sequestrator, or a trustee
for all or a substantial part of its property; the
Corporation shall make an assignment for the benefit
of its creditors; the Corporation shall be unable,
or shall admit in writing its inability, to pay its
debts when due; or a petition in bankruptcy shall be
filed against the Corporation, as a debtor, under
any applicable bankruptcy, insolvency or similar law
as now or hereafter in effect which shall not be
discharged by a court of competent jurisdiction
within sixty (60) days of the date of such filing.
"AGREEMENT" shall mean this Reimbursement Agreement
together with all duly authorized and executed
amendments thereto.
"APPLICATIONS" shall mean that certain Applications
and Agreements for the Standby Letters of Credit
dated as of January 2, 1997 by and between Issuing
Bank and Lender in connection with the Letters of
Credit to be issued to Boatmen's POS and MNB.
"BOATMEN'S MERCHANT AGREEMENT" means that certain
Merchant Agreement between KBC Card Services (a
division of Bank IV, Kansas) and Vanguard as amended
by the Addendum to KBC Card Services Merchant
Agreement between KBC Card Services and Vanguard
effective as of November 18, 1994 and the
Modification and Pledge Agreement by and between
Vanguard, Boatmen's National Bank, successor by
merger as of October 18, 1996, to Bank IV Kansas,
N.A., and Boatmen's POS Merchant Services Co.,
L.L.C. effective as of January 1, 1997 and attached
as EXHIBIT E hereto, as the same may from time to
time be amended, modified, supplemented or restated.
<PAGE>
"BOATMEN'S POS" shall mean Boatmen's POS Merchant
Services Co., L.L.C., a limited liability company,
whose address is 100 N. Broadway, St. Louis,
Missouri, 63166.
"BRIDGE LOANS" shall mean those certain demand notes
executed and delivered by Corporation to Lender as
of December 5, 1996 and December 6, 1996.
"BUSINESS DAY" shall mean any day other than (i) a
Saturday or Sunday, (ii) a day on which banking
institutions in the States of California, Michigan
or Missouri are authorized or required by law or
executive order not to be open for the conduct of
their commercial banking business, or (iii) a day on
which the federal reserve bank for the federal
reserve district in which Boatmen's POS or MNB is
located is closed.
"COLLATERAL" shall have the meaning assigned to such
term in SECTION 2 of the Security Agreement.
"DATE OF DELIVERY" shall mean January 2, 1997 or any
other date agreed upon by the Corporation and Lender
as the date upon which a Letter of Credit shall be
issued to Boatmen's POS and MNB.
"DEFAULT RATE" shall mean a rate per annum equal to
five (5) percentage points above the interest rate
applicable immediately prior to the occurrence of
the Event of Default.
"DRAWING" shall mean a drawing under the Letters of
Credit in accordance with their terms.
"EVENT OF DEFAULT" shall have the meaning set forth
inSECTION 7.1 hereof.
"INTEREST RATE" shall mean ten percent (10%) per
annum.
"ISSUING BANK" shall mean Bank of America National
Trust and Savings Association acting through its
Chicago branch, or any surviving, resulting or
transferee entity.
"LETTERS OF CREDIT" shall mean the Letters of Credit
arranged by Lender and issued by Issuing Bank
pursuant to the Applications on the Date of
Delivery, as the same may from time to time be
amended, modified, supplemented or restated, and
shall include any substitute Letter of Credit
<PAGE>
issued pursuant to Lender's obligations hereunder
including without limitations any replacement
Letters of Credit in connection with the switch of
credit card processors.
"MAXIMUM CREDIT" initially shall mean, as of any
date of calculation, the aggregate maximum amount
available to be drawn under the Letters of Credit.
Initially, the Maximum Credit shall be $4,000,000.
"MNB" shall mean Michigan National Bank, a national
banking association with its principal office
located at or any surviving, resulting or transferee
entity.
"MNB MERCHANT AGREEMENT" shall mean any Merchant
Agreement between Vanguard and MNB that may be
entered into with respect to credit card processing,
as the same may from time to time be amended,
modified, supplemented or restated.
"PERSON" shall mean any individual, sole
proprietorship, partnership, limited liability
company, joint venture, trust, unincorporated
organization, association, corporation, institution,
public benefit corporation, firm, joint stock
corporation, estate, entity or governmental agency.
"REIMBURSEMENT LOAN NOTE" shall mean the note
evidencing the Reimbursement Loans, substantially in
the form attached hereto as EXHIBIT A.
"REIMBURSEMENT LOANS" shall mean the reimbursement
loans described in SECTION 2.8 hereof.
"SECURITY AGREEMENT" shall mean that certain
Security Agreement dated as of December 31, 1996
made by Corporation in favor of Lender.
"TERMINATION DATE" shall mean the date determined in
the manner provided in SECTION 2.7 hereof.
"TRANSACTION DOCUMENTS" means, collectively, this
Agreement, the Security Agreement, the Reimbursement
Loan Note, and any other agreement entered into
between Corporation and Lender, and any certificate
or instrument executed by Lender, in connection with
said agreements and note, as the same may from time
to time be amended, modified, supplemented or
restated.
"VANGUARD" means Vanguard Airlines, Inc.
<PAGE>
SECTION 1.2 CONSTRUCTION. In this Agreement,
unless the context otherwise requires:
(a) Articles and Sections referred to by number
shall mean the corresponding Articles and Sections
of this Agreement.
(b) The terms "hereby," "hereof," "hereto,"
"herein," "hereunder," and any similar terms, as
used in this Agreement refer to this Agreement, and
the term "hereafter" shall mean after, and the term
"heretofore" shall mean before the date of execution
of this Agreement.
(c) Words of the masculine gender shall be deemed
and construed to include correlative words of the
feminine and neuter genders. Words importing the
singular number shall include the plural number and
vice versa, and words importing persons shall
include corporations and associations, including
public bodies, as well as natural persons.
ARTICLE II
LETTER OF CREDIT
SECTION 2.1 Amount and Terms of Letter of Credit. At the
request of Corporation, Lender agrees, on the terms
and subject to the conditions set forth in this
Agreement, including without limitation the
conditions set forth in ARTICLE III hereof, to on or
before the applicable Date of Delivery cause the (i)
issuance of a Letter of Credit by Issuing Bank, in
favor of Boatmen's POS and/or (ii) issuance of a
Letter of Credit by Issuing Bank, in favor of MNB,
for the account of Corporation, to secure, and to
provide a source of payment of the obligations of
the Company under the Boatmen's Merchant Agreement
and MNB Merchant Agreement, respectively. The
Letters of Credit will be issued in an initial
aggregate amount equal to the Maximum Credit. The
Letters of Credit shall be issued in favor of
Boatmen's POS and MNB for the account of the
Corporation substantially in the form of EXHIBIT B
and EXHIBIT C attached hereto.
SECTION 2.2
DRAWINGS AND REINSTATEMENT.
(a) Drawings under the Letters of Credit are
intended to be made by Boatmen's POS and MNB for the
account of the Corporation and to be honored by
Issuing Bank, all pursuant to the provisions, on the
terms and
<PAGE>
subject to the conditions set forth in the
applicable Letter of Credit. The honoring of any
Drawing shall automatically reduce by like amount
the Maximum Credit. No Drawing under the Letters of
Credit shall be honored in an amount exceeding the
Maximum Credit.
(b) The Maximum Credit, or any lesser amount, may be
reinstated by Lender at its sole option, provided
Lender has been reimbursed by Corporation any such
amounts to be reinstated.
SECTION 2.3
FEES AND OTHER PAYMENT.
(a) The Corporation hereby agrees to pay to or
reimburse Lender:
(i) On or before a Date of Delivery, the origination
fees paid to Issuing Bank
(ii) On or before a Date of Delivery, an amount
equal to all costs and expenses (including
attorneys' fees and expenses) incurred by Lender in
connection with the preparation and negotiation of
this Agreement, the Reimbursement Loan Note, the
other Transaction Documents and the closing of the
transactions contemplated hereby.
(iii) On demand from time to time from Lender, any
fees or other amounts (not otherwise reimbursed by
Corporation to Lender pursuant toSECTION 2.4 hereof)
required to be paid by Lender to the Issuing Bank in
connection with the Letters of Credit, including,
without limitation, a one percent (1%) per annum
fee, payable quarterly by Lender to Issuing Bank;
(iv) On demand from time to time by Lender, an
amount equal to all costs and expenses (including
attorneys' fees and expenses) (not otherwise
reimbursed by Corporation to Lender pursuant to
SECTION 2.4 hereof) incurred by Lender relative to a
Drawing under a Letter of Credit.
(v) On demand from time to time by Lender, an amount
equal to all costs and expenses (including
attorneys' fees and expenses) incurred by Lender
relative to the Letters of Credit (not otherwise
reimbursed by Corporation to Lender pursuant to this
SECTION 2.3 or SECTION 2.4) or each Reimbursement
Loan or the enforcement or preservation of any
rights of Lender under this Agreement, the other
Transaction Documents, each Reimbursement Loan or
the Reimbursement Loan Note, or in connection with
the exercise or waiver of any of Lender's
discretionary rights under this Agreement, the
Reimbursement Loan Note or under the other
Transaction Documents;
<PAGE>
(vi) On demand from time to time by Lender,
interest, at the Default Rate, on any and all
amounts unpaid by the Corporation when due under
this Agreement or the Reimbursement Loan Note, but
in no event shall such rates exceed the maximum rate
of nonusurious interest allowed from time to time by
law, as is now or, to the extent allowable by law,
as hereinafter may be in effect, to be paid by the
Corporation;
Each such payment or reimbursement shall be deemed
to be earned in full the date on which such amount
is due and payable by the Corporation.
(b) The Corporation agrees to pay, on demand from
time to time by the Lender, all reasonable costs and
expenses incurred by the Lender, in connection with
(i) any transfer or amendment of the Letter of
Credit or amendment of this Agreement, (ii) any
review by the Lender of the documents necessary for
Lender to honor a Drawing under the Letter of
Credit, or relative to the Lender's curing of any
event of default by Borrower under any of the
Transaction Documents, (iii) the exercise,
enforcement or preservation of any rights of Lender
under this Agreement, (iv) any action or proceeding
relating to a court order, injunction, or other
process or decree restraining or seeking to restrain
Lender from paying any amount under the Letter of
Credit, and (v) the waiver or amendment of any of
the Lender's rights under any of the Transaction
Documents; PROVIDED, HOWEVER, that no payment shall
be required under this SECTION 2.3(B) in respect of
any cost or expense Lender has incurred because of
its gross negligence or willful misconduct if so
determined by a court of competent jurisdiction.
Section 2.4 REIMBURSEMENT. The Corporation agrees
to pay to or reimburse Lender in full for any and
all Drawings made under the Letter of Credit on the date
any Drawing is made. Any amount drawn under a Letter of
Credit shall be, to the extent permitted by and in
accordance with SECTION 2.8 HEREOF, automatically
converted into a Reimbursement Loan. A Reimbursement
Loan, when made, will satisfy the reimbursement
obligation of the Corporation to Lender in the
principal amount of such Reimbursement Loan.
SECTION 2.5 SECURITY. The obligations of the
Corporation under this Agreement, including, without
limitation, the Corporation's obligations to make
payments under Sections 2.3 and 2.4 hereof, are
secured by the Collateral identified and described
as security therefore in the Security Agreement.
<PAGE>
SECTION 2.6 PLACE OF PAYMENT. All payments to be made
by the Corporation to the Lender hereunder shall be made
in lawful currency of the United States of America and
in immediately available funds by wire to the following
account:
Hambrecht and Quist Group
c/o Citibank, F.S.B.
260 California Street
San Francisco, CA 94111
ABA: 321171184
Account #: 601022205
Account Name: H&Q Management Corporation
or at such other address as Lender may specify from
time to time by notice to the Corporation.
SECTION 2.7
TERMINATION OF AGREEMENT. This Agreement (except
for the obligations of the Corporation set forth in
SECTION 2.3(B) and 9.4) shall terminate at such time
as the Letters of Credit shall have expired and when
all amounts due and payable to Lender hereunder
shall be paid in full (the "Termination Date").
SECTION 2.8
REIMBURSEMENT LOANS.
(a) Lender agrees, upon the terms, subject to the
conditions and relying upon the representations and
warranties set forth in this Agreement and the other
Transaction Documents, that, unless an Event of
Default shall have occurred and be continuing a
Drawing under a Letter of Credit that is not repaid
in full by the Corporation on the date thereof shall
automatically be converted into a Reimbursement
Loan. On and as of the date of the making of each
Reimbursement Loan: the Corporation shall be deemed
to have (A) remade, ratified and confirmed all
representations and warranties of the Corporation
contained in SECTION 5.1 of this Agreement, and (B)
certified compliance with all covenants contained in
ARTICLE VI hereof.
(b) The principal amount of the Reimbursement Loans
shall not exceed the Maximum Credit available under
the Letters of Credit on such date. All the
Reimbursement Loans shall be evidenced by a single
Reimbursement Loan Note substantially in the form of
EXHIBIT A hereto with appropriate insertions, duly
executed and delivered by the Corporation to Lender,
dated by
<PAGE>
Lender on the attached schedule the date of each
Drawing under a Letter of Credit that gives rise to
a Reimbursement Loan, and payable to Lender or its
assigns in an amount equal to the amount drawn on
the Letter of Credit that is not reimbursed as
provided in the first sentence of SECTION 2.4 of
this Agreement.
The principal amount of each Reimbursement Loan,
together with any unpaid and accrued interest
thereon, shall be due and payable on the later of
(a) the first anniversary of such Reimbursement Loan
or (b) such time as the Letter of Credit shall have
expired.
(c) The Reimbursement Loans shall bear interest at
the Interest Rate. Such interest shall be
calculated on the basis of a 365 or 366 day year and
actual number of days elapsed. Lender shall, and is
hereby authorized by the Corporation to, date the
schedule attached to the Reimbursement Loan Note the
date of any Drawing under a Letter of Credit that is
not reimbursed as provided in the first sentence of
SECTION 2.4 of this Agreement and insert the amount
(or the portion thereof not so reimbursed, as the
case may be), and endorse on such schedule an
appropriate notation evidencing the date and amount
of each repayment and any other information provided
for on such schedule;PROVIDED, HOWEVER, that the
failure of Lender to insert any such date or amount
or set forth such repayments and other information
on such schedule shall not in any manner affect the
obligation of the Corporation to repay the related
Reimbursement Loans in accordance with the terms of
this Agreement.
(d) Lender agrees that the Corporation may prepay a
Reimbursement Loan in whole or in part without
premium or penalty at any time.
ARTICLE III
CONDITIONS PRECEDENT TO ISSUANCE
OF LETTER OF CREDIT
SECTION 3.1
Documents To Be Received. Lender's obligations to
cause the issuance of the Letters of Credit as set
forth in SECTION 2.1 hereof are subject to the
conditions precedent that, on or prior to the Date
of Delivery, Lender shall receive the following
documents, all in form and substance satisfactory to
Lender:
(a) executed counterparts of the this Agreement, the
Security Agreement and the Reimbursement Loan Note,
which shall be duly executed and dated by the
<PAGE>
Corporation (except for the schedule attached
thereto, which shall be undated and blank as to
amount);
(b) a certificate of the appropriate officer(s) of
the Corporation certifying (i) that the statements
contained in SECTIONS 3.2(A) and 5.1 are true and
correct, (ii) the name and true signatures of the
officers of the Corporation authorized to sign this
Agreement and the other documents to be delivered by
the Corporation hereunder and (iii) as to such other
matters as Lender shall determine, in substantially
the form attached hereto as EXHIBIT D;
(c) all filings, notices and recordings necessary to
perfect the security interest granted Lender
pursuant to the Security Agreement shall have been
delivered to Lender;
(d) the Warrant duly executed and delivered by
Corporation in the form attached hereto as EXHIBIT
E;
(e) the Notification of Assignment duly executed and
delivered by Corporation and acknowledged, consented
and agreed to by Boatmen's POS in the form attached
as Exhibit A to the Security Agreement;
(f) a copy of a fairness opinion delivered to the
Corporation from an established provider of
financial services (unaffiliated with Lender) that
the terms of the provision of such letter of credit
are fair tot he Corporation from a financial point
of view;
(g) such other documents, certificates, instruments,
approvals or filings as Lender may reasonably deem
necessary or appropriate.
SECTION 3.2 OTHER CONDITIONS PRECEDENT. The Lender's
obligation to cause the issuance of the Letters of
Credit as set forth in Section 2.1 hereof shall be
subject to the additional conditions precedent that:
(a) the following statements shall be true and
correct on a Date of Delivery and Lender shall have
received a certificate signed by a duly authorized
officer of the Corporation, dated the Date of
Delivery to the following effect and to such other
effects as the Lender may request, substantially in
the form attached hereto as EXHIBIT D:
(i) the representations and warranties of the
Corporation set forth in SECTION
<PAGE>
5.1 hereof and in the other Transaction Documents
are true and correct as of the Date of Delivery as
though made on and as of such date;
(ii) no event has occurred and is continuing, or
would result directly or indirectly from the
issuance of the Letters of Credit, which constitutes
an Event of Default hereunder or which would
constitute such an Event of Default, but for the
requirement that notice be given or time elapse, or
both; and
(ii) no "event of default" (however defined or
designated) has occurred under any of the
Transaction Documents, and no event has occurred and
is continuing which would constitute such an event
of default, but for the requirement that notice be
given or time elapse, or both.
(b) On or before the Date of Delivery, the
Corporation shall have duly adopted a resolution
authorizing the execution, delivery and performance
by the Corporation of the Transaction Documents to
which it is a party, and on and after the Date of
Delivery such resolution shall continue to be in
full force and effect.
ARTICLE IV
OBLIGATIONS OF THE CORPORATION
SECTION 4.1
OBLIGATIONS OF THE CORPOATION.
(a) The obligations of the Corporation under this
Agreement shall be absolute, unconditional and
irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement, under
all circumstances whatsoever, including without
limitation the following circumstances:
(i) any lack of validity or enforceability of any of
the Transaction Documents (other than this
Agreement) or any other agreement or instrument
contemplated thereby or related thereto;
(ii) any amendment or waiver of or any consent to
departure from all or any of the documents
contemplated hereby;
(iii) the existence of any claim, setoff, defense or
other rights which the Corporation may have at any
time against any beneficiary or any transferee of a
Letter of Credit (or any persons or entities for
whom such beneficiary may
<PAGE>
be acting), the Lender or any other Person, whether
in connection with the Transaction or any unrelated
transaction;
(iv) any breach of contract or other dispute between
the Corporation and any beneficiary of the Letters
of Credit (or any persons or entities for whom any
such beneficiary may be acting), Lender, Issuing
Bank, Bank or any other Person;
(v) any statement or any other document presented
under the Transaction Documents proving to be
forged, fraudulent, invalid or insufficient in any
respect or any statement therein being untrue or
inaccurate in any respect whatsoever;
(vi) payment by the Issuing Bank under the Letters
of Credit against presentation of a sight draft or
certificate which does not comply with the terms of
the Letter of Credit, provided that such payment
shall not have constituted an act of gross
negligence or willful misconduct by Lender as
determined by a court of competent jurisdiction; or
(vii) any delay, extension of time, renewal,
compromise or other indulgence or modification
granted or agreed to by Lender, with or without
notice to or approval by the Corporation, as the
case may be, in respect of any of the Corporation's
indebtedness to Lender under this Agreement.
(b) Lender shall not be deemed to have waived or
released any of its rights or remedies (whether
specified in or arising under this Agreement or
otherwise available to it by law or agreement)
unless it signs a written waiver or release. Delay
or failure to act on the Lender's part shall not
constitute a waiver of or otherwise preclude
enforcement of any of its rights and remedies. All
of Lender's rights and remedies shall be cumulative
and may be exercised singularly or concurrently.
Lender need not resort to any particular right or
remedy before exercising or enforcing any other, and
Lender's resort to any right or remedy shall not
preclude the exercise or enforcement of each other
right and remedy.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
SECTION 5.1
Representations and Warranties of the Corporation.
The Corporation
<PAGE>
represents and warrants as follows:
(a) ORGANIZATION AND POWERS. The Corporation is a
corporation, duly organized and validly existing
under the laws of the State of Delaware and is
authorized to transact business and exercise its
power under the applicable laws of any state in
which the conduct of its business or its ownership
of property requires that it be so qualified except
where failure to do so would not have a material
adverse effect on the ability of the Corporation to
conduct its business as currently conducted or as
proposed or contemplated to be conducted.
(b) AUTHORIZATION AND ABSENCE OF CONFLICTS. The
execution, delivery and performance of the
Transaction Documents (i) have been duly authorized
by all necessary action on the part of the
Corporation, (ii) do not and will not conflict with,
or result in a violation of, any provision of law,
or any order, writ, rule or regulation of any court
or governmental agency or instrumentality binding
upon or applicable to the Corporation and (iii) do
not and will not conflict with, result in a
violation of, or constitute a default under, any
resolution, material agreement or instrument to
which the Corporation is a party or by which the
Corporation or any of its property is bound.
(c) BINDING OBLIGATION. Each of the Transaction
Documents will be a valid and binding obligation of
the Corporation enforceable in accordance with its
terms.
(d) GOVERNMENTAL APPROVAL AND CONSENT. No consent,
approval, permit, authorization or order of, or
registration or filing with, any court or
governmental agency, authority or other
instrumentality not already obtained, given or made
is required on the part of the Corporation for the
execution, delivery and performance by the
Corporation of any of the Transaction Documents.
(e) ABSENCE OF LITIGATION. There is no action, suit,
proceeding, inquiry or investigation, at law or in
equity, before or by any court, arbitrator,
governmental or other board, body or official,
pending or, to the best knowledge of the
Corporation, threatened against or affecting the
Corporation, questioning the validity of any
proceeding taken or to be taken by the Corporation
in connection with the execution, delivery and
performance by the Corporation of the Transaction
Documents or seeking to prohibit, restrain or enjoin
the execution, delivery or performance by the
Corporation of any of the foregoing, nor, to the
best knowledge of the Corporation, is there any
basis therefor, wherein an unfavorable decision,
ruling or finding would (i) adversely affect the
validity or enforceability of, or the authority or
ability of
<PAGE>
the Corporation to perform its obligations under the
Transaction Documents or (ii) have a material
adverse effect on the ability of the Corporation to
conduct its business as currently conducted or as
proposed or contemplated to be conducted.
(f) NO DEFAULTS BY THE CORPORATION. Other than as
set forth on the Schedule of Exceptions attached
hereto (the "Schedule"), the Corporation is not in
default in the performance, observance or
fulfillment of any of the obligations, covenants or
conditions contained in any agreement or instrument
to which the Corporation is a party or by which the
Corporation or any of its property is bound, except
for such defaults as would not have a material
adverse effect on the ability of the Corporation to
conduct its business as currently conducted or as
proposed or contemplated to be conducted.
(g) INCORPORATION OF REPRESENTATIONS. The
Corporation hereby makes to the Lender the same
representations and warranties as are made by the
Corporation and set forth in any other Transaction
Documents, which representations and warranties, as
well as the defined terms contained therein (or in
such defined terms), are hereby incorporated by
reference with the same effect as if each and every
such representation and warranty and defined term
were set forth herein in its entirety. No amendment
to such representations and warranties or defined
terms made pursuant thereto shall be effective to
amend such representations and warranties and
defined terms as incorporated by reference herein
without the consent of Lender.
(h) COMPLIANCE WITH LAWS. The Corporation is in
material compliance with all provisions of
applicable law.
ARTICLE VI
Covenants Of The CORPORATION
SECTION 6.1
AFFIRMITIVE COVENANTS. So long as the Termination
Date has not occurred or so long as any amount is
due and owing to Lender hereunder, the Corporation
will, unless Lender otherwise shall consent in
writing:
(a) DELIVERY OF INFORMATION, REPORTS AND OPINIONS.
Furnish to Lender the following: (i) as soon as
possible and in any event within two (2) Business
Days after the occurrence of (A) each Event of
Default or any event or condition that, with the
passage of time or the giving of notice or both,
would constitute an Event of Default, under this
Agreement, and (B)
<PAGE>
each "event of default" (however defined or
designated) or any event or condition that, with the
passage of time or the giving of notice or both,
would constitute an "event of default" under any
Transaction Document, a statement of an officer of
the Corporation setting forth details thereof and
the action which the Corporation proposes to take
with respect thereto; (ii) audited financial
statements, if any, of the Corporation within ten
(10) days after the Corporation's receipt of the
same from the respective accountants; (iii) a copy
of the annual budget, if any, for the Corporation
within ten (10) days after the adoption of such
budget; and (iv) as promptly as practicable, written
notice to the Lender of all proceedings before any
court or governmental authority which, if adversely
determined, would materially and adversely affect
the ability of the Corporation to pay when due the
principal of or any interest on the Reimbursement
Loan Note.
(b) PAYMENT OF INDEBTNESS. Other than as set forth
on the Schedule, duly and punctually pay or cause to
be paid all principal and interest on the
indebtedness of the Corporation legally due and
owing to third parties, comply with and perform all
conditions, terms and obligations of the notes or
bonds evidencing such indebtedness and the security
agreements, deeds of trust and mortgages securing
such indebtedness, and upon being notified of a
default or having made a determination not to pay an
indebtedness when due, promptly inform Lender of any
such default, or anticipated default, under any such
note, bond, security agreement, deed of trust or
mortgage, and forward to the Lender a copy of any
notice of default or notice of an event that might
result in default under any such note, bond,
security agreement, deed of trust or mortgage;
(c) ACCESS TO RECORDS AND AUDITS. Upon reasonable
notice to Corporation (unless an Event of Default
has occurred and is continuing, in which case no
notice is necessary) Corporation shall permit Lender
to at all times have full and free access during
normal business hours to all the books and records
and correspondence of Corporation, and Lender or any
agents or representatives of Lender may examine the
same, take extracts therefrom and make photocopies
thereof, and Corporation agrees to render to Lender,
at Corporation's cost and expense, such clerical and
other assistance as may be reasonably requested with
regard thereto; and cause MNB or Boatmen's POS to
permit Lender to have all rights of the Corporation
to audit, copy or make extracts of the records of
MNB or Boatmen's POS as are specified under the
Boatmen's Merchant Agreement and the MNB Merchant
Agreement, respectively.
(d) RELATED COVENANTS. Fully and faithfully perform
each of the covenants and agreements required of it
pursuant to the provisions of the Transaction
Documents;
<PAGE>
(e) FURTHER ACTION. At any and all times, insofar as
it may be authorized to do so by law, pass, make,
do, execute, acknowledge and deliver all and every
such further resolutions, acts, deeds, conveyances,
assignments, recordings, filings, transfers and
assurances as may be necessary or reasonably
desirable for the better assuring, conveying,
granting, assigning and confirming the amounts due
hereunder and under the Reimbursement Loan Note, or
intended so to be, or which the Corporation may
hereafter become bound to pledge or assign thereto;
(f) COMPLIANCE WITH LAWS. Comply in all material
respects with all applicable (A) laws (including,
rules, regulations, writs, decrees and orders of all
Federal, state, local or foreign courts or
governmental agencies, authorities,
instrumentalities or regulatory bodies and (B)
rules, regulations and requirements necessary to
maintain its operating and business licenses,
authorizations and permits; and
(g) INCORPORATION OF COVENANTS. The Corporation
hereby makes to Lender the same covenants as are
made by the Corporation and set forth in any other
Transaction Document, which covenants, as well as
the defined terms contained therein (or in such
defined terms), are hereby incorporated by reference
with the same effect as if each and every such
covenant and defined term were set forth herein in
its entirety. No amendment to such covenants or
defined terms made pursuant thereto shall be
effective to amend such covenants and defined terms
as incorporated by reference herein without the
consent of the Lender.
(h) In event that Vanguard transfers any of its
credit card processing functions from Boatmen's POS
to MNB and obtains a Letter of Credit for the
benefit of MNB, Vanguard hereby agrees to obtain
from MNB a Notification of Assignment duly executed
and delivered by Vanguard and acknowledged,
consented and agreed to by MNB in substantially the
form attached as Exhibit A to the Security
Agreement.
SECTION 6.2 NEGATIVE COVENANTS. So long as the Termination
Date has not occurred or any amount remains due and owing
to Lender hereunder, unless the Lender otherwise
shall consent in writing, the Corporation agrees not
to issue any indebtedness which would be secured
(whether on a senior, parity or junior lien basis)
by any pledge of or security interest in the
Collateral.
<PAGE>
ARTICLE VII
EVENTS OF DEFAULT
SECTION 7.2
EVENTS OF DEFAULT. The occurrence of any of the
following events shall be an "Event of Default"
hereunder unless waived by Lender pursuant to
SECTION 9.1 hereof:
(a) the Corporation shall fail to pay when due any
amount specified under the terms of this Agreement,
including, without limitation, amounts due under the
Reimbursement Loan Note;
(b) any representation or warranty made by the
Corporation pursuant to SECTION 5.1 hereof or under
the Security Agreement or any certification made by
the Corporation hereunder shall prove to have been
incorrect in any material respect when made;
(c) the Corporation shall fail to perform or observe
any other term, covenant or agreement contained in
this Agreement (other than those specifically
referenced in SECTION 7.1(A) and (B) above) and such
failure shall remain unremedied for thirty (30) days
after written notice thereof shall have been given
to the Corporation, by Lender;
(d) an "event of default" (however defined or
designated) under any Transaction Document shall
have occurred and be continuing;
(e) an event of default under any indebtedness of
the Corporation from time to time outstanding or
under any agreement to which Borrower is a party
with a third party or parties resulting in a right
by such third party or parties, whether or not
exercised, to accelerate the maturity of any
indebtedness in an amount in excess of Five Hundred
Thousand Dollars ($500,000) or that could materially
and adversely affect the ability of the Corporation
to pay when due the principal of or any interest on
the Reimbursement Loan Note.
(f) any material provision of this Agreement or the
other Transaction Documents shall at any time for
any reason cease to be valid and binding on the
Corporation, or shall be declared to be null and
void, or the validity or enforceability thereof
shall be contested by the Corporation or any
governmental agency or authority, and the happening
of the events heretofore set forth in this
SUBSECTION (F)shall materially and adversely affect
Lender's rights under this Agreement or under any
other Transaction Document, or the Corporation shall
deny that it has any or further liability or
obligation under this Agreement or any other
Transaction Document;
<PAGE>
(g) Lender shall fail to have a valid and
enforceable perfected first priority security
interest under the Security Agreement, subject only
to the Permitted Liens;
(h) The occurrence of (or with the giving of notice,
lapse of time, determination of materiality or the
fulfillment of any other applicable condition or any
combination of the foregoing, might constitute) a
default by Borrower under, or the termination of,
the Credit Card Agreement; or
(i) an Act of Bankruptcy.
ARTICLE VIII
RIGHTS AND REMEDIES
SECTION 8.1
RIGHTS AND REMEDIES.
(a) DEFAULTS UNDER THIS AGREEMENT. Upon the
occurrence of an Event of Default hereunder, or at
any time thereafter while such default continues,
Lender, in its sole discretion, may do any one or
more of the following:
(i) send notice of such Event of Default to the
Corporation;
(ii) declare the Reimbursement Loan Note, if
outstanding, and any and all amounts due and owing
under this Agreement or under the other Transaction
Documents, to be immediately due and payable;
(iii) terminate the Letter of Credit; and
(iv) exercise any rights and remedies available to
it by law or under this Agreement, the Security
Agreement, any other Transaction Document or any
other agreement, document or instrument contemplated
hereby.
(b) DEFAULTS UNDER THE MERCHANT AGREEMENT. Lender
may cure an event of default under the Boatmen's
Merchant Agreement or the MNB Merchant Agreement;
provided, however, that nothing contained herein
shall obligate Lender to cure any such event of
default.
<PAGE>
ARTICLE IX
MISCELLANEOUS
SECTION 9.1
MODIFICATION OF AGREEMENT. No modification or waiver
of any provision of this Agreement, and no consent
to any departure by the Corporation therefrom, shall
be effective unless the same shall be in writing and
signed by Lender and the Corporation and no
modification or waiver of any provision of the
Letter of Credit, and no consent to any departure by
the Corporation, Boatmen's POS or MNB therefrom,
shall in any event be effective unless the same
shall be in writing and signed by Lender. Any such
waiver or consent shall be effective only in the
specific instance and for the purpose for which
given. No notice to or demand on the Corporation in
any case shall entitle the Corporation to or any
other or further notice or demand in the same,
similar or other circumstances.
SECTION 9.2
WAIVER OF RIGHTS BY LENDER; REMEDIES. No course of
dealing or failure or delay on the part of Lender in
exercising any right, power or privilege hereunder
or under the Letters of Credit shall operate as a
waiver hereof or thereof, nor shall a single or
partial exercise thereof preclude any other or
further exercise or the exercise of any other right,
power or privilege. The rights of Lender under this
Agreement are cumulative and not exclusive of any
rights or remedies which Lender would otherwise
have.
SECTION 9.3
NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and
shall be deemed effectively given: (i) upon
personal delivery to the party to be notified; (ii)
upon receipt at the address specified below after
having been sent by certified or registered mail,
return receipt requested, postage prepaid; or (iii)
one (1) day after deposit with a nationally
recognized overnight courier, specifying next day
delivery, with written verification of receipt. All
communications shall be sent to the party to be
notified at the address set forth below:
<PAGE>
If to the Corporation:
Vanguard Airlines, Inc.
30 N.W. Rome Circle-Mezzanine Level
Kansas City International Airport
Kansas City, MO 64153
Attention: Brian Gillman, Vice President
and General Counsel
Fax: (816) 243-2118
If to Lender:
Hambrecht & Quist California
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Attention: David Golden
Fax:(415) 339-4325
or, in any such case, at such other address or
addresses as shall have been furnished in writing by
such party to the others.
SECTION 9.4
INDEMNIFICATION. In addition to other amounts
payable by the Corporation under this Agreement, the
Corporation hereby agrees to the fullest extent
permitted by applicable law, to protect, defend,
indemnify and hold harmless Lender, its assignees,
the Issuing Bank, and their respective directors,
officers, employees, agents, counsel, successors and
assigns from and against any and all claims,
demands, judgments, damages, actions, injuries,
losses, liabilities, penalties, costs, charges and
expenses whatsoever which such Person may (or which
may be claimed against such Person whatsoever),
including, without limitation, the fees and expenses
of counsel for such Person by reason of or in
connection with: (a) the issuance of the Letters of
Credit; (b) any breach by Corporation of any
representation, warranty, covenant, term or
condition in, or the occurrence of any default under
this Agreement, the Reimbursement Loan Note or the
other Transaction Documents, including all
reasonable fees or expenses resulting from the
settlement or defense of any claims or liabilities
arising as a result of any such breach or
default;PROVIDED, HOWEVER, that the Corporation
shall not be required to indemnify any such Person
for any claims, demands, damages, losses,
liabilities, costs, charges and expenses to the
extent, but only to the
<PAGE>
extent, caused by (i) the gross negligence of
Lender, as determined by a court of competent
jurisdiction, in determining whether a sight draft
or certificate presented under the Letters of Credit
complied with the terms of the Letters of Credit;
(ii) Lender's willful failure, as determined by a
court of competent jurisdiction, to cause payment
under the Letters of Credit after the presentation
to it by Lender of a sight draft and all required
certificates strictly complying with the terms and
conditions of the Letter of Credit. The
indemnification obligations in this SECTION 9.4
shall survive the expiration of this Agreement or
the Letters of Credit.
SECTION 9.5
LIABILITY OF LENDER. The Corporation assumes all
risks of the acts or omissions of Boatmen's POS or
MNB and any transferee of the Letters of Credit with
respect to its use of the Letters of Credit or the
proceeds thereof; PROVIDED, HOWEVER, this assumption
is not intended to, and shall not, preclude the
Corporation from pursuing such rights and remedies
as it may have against Boatmen's POS or MNB at law
or under the Boatmen's Merchant Agreement or MNB
Merchant Agreement or any other agreement. Neither
the Lender nor any Person participating in the
Letters of Credit or the Reimbursement Loan Note
shall be liable or responsible for: (a) the use
which may be made of the Letters of Credit or the
proceeds thereof or for any acts or omissions of
Boatmen's or MNB and any transferee of the Letters
of Credit in connection therewith; (b) the validity,
sufficiency or genuineness of documents presented
under the Letters of Credit, or of any
endorsement(s) thereon, even if such documents
should in fact prove to be in any or all respects
invalid, insufficient, fraudulent or forged;
PROVIDED, HOWEVER, (a) and (b) to the contrary
notwithstanding, the Corporation shall have a claim
against the Lender, and the Lender shall be liable
to the Corporation, to the extent, but only to the
extent, of any direct, as opposed to consequential,
damages suffered by the Corporation which the
Corporation proves, as determined by a court of
competent jurisdiction, were caused by (i) Lender's
gross negligence or (ii) Lender's willful act that
prevents payment under the Letters of Credit after
the presentation to Issuing Bank by Boatmen's POS or
MNB (or a successor under the Boatmen's Merchant
Agreement or MNB Merchant Agreement to whom the
Letters of Credit has been transferred in accordance
with its terms) of a sight draft and all required
certificates strictly complying with the terms and
conditions of the Letters of Credit. In furtherance
and not in limitation of the foregoing, the Lender
may accept documents that appear on their face to be
in order, without responsibility for further
investigation, regardless of any notice or
information to the contrary; PROVIDED, HOWEVER, that
if Lender shall receive timely written notification
from each of Boatmen's POS or MNB or the Corporation
and that sufficiently identifies (in the reasonable
opinion of Lender) documents that
<PAGE>
thereafter may be presented to Issuing Bank or
Lender which are not to be honored, Lender agrees to
use its best efforts to avoid honoring such
documents thereafter. Lender assumes no
responsibility for any failure or delay in the
transmission to Boatmen's POS or MNB of funds drawn
under the Letters of Credit through the federal
funds wire system.
SECTION 9.6
PARTICIPATIONS. Lender may participate to other
Persons and institutions of the Lender's choosing
all or any portion of its obligations under the
Letter of Credit and the obligations of the
Corporation under the Reimbursement Loan Note. No
such participation shall relieve the Lender of its
obligations hereunder nor shall it cause an increase
in Corporation's obligations under this Agreement,
including under SECTION 2.3(B) above.
SECTION 9.7 SATISFACTION REQUIREMENT. If any agreement,
certificate or other writing, or any action taken or
to be taken, is by the terms of this Agreement
required to be satisfactory to the Lender, the
determination of such satisfaction shall be made by
Lender in its sole and exclusive judgment exercised
in good faith.
SECTION 9.8
GOVERNING LAW. In all respects, including all
matters of construction, validity and performance,
this Agreement, the Reimbursement Loan Note and the
other Transaction Documents, and any obligations
arising hereunder or thereunder, shall be governed
by, and construed and enforced in accordance with,
the laws of the State of California applicable to
contracts made and performed in such state, without
regard to the principles thereof regarding conflict
of laws.
SECTION 9.9
WAIVER OF JURY TRIAL. The Corporation hereby waives
trial by jury in any litigation in any court with
respect to, in connection with, or arising out of
this Agreement, the Reimbursement Loan Note, the
other Transaction Documents or any instrument or
document delivered pursuant to this Agreement, the
Reimbursement Loan Note or the other Transaction
Documents, or the validity, protection,
interpretation, collection or enforcement thereof,
or any other claim or dispute howsoever arising,
between the Corporation, on the one hand, and
Lender, on the other hand.
SECTION 9.10
JURISDICTION: SERVICE OF PROCESS. The Corporation
hereby irrevocably consents to the jurisdiction of
the Courts of the State of California,
<PAGE>
County of San Francisco and of any Federal Court
located in the county of San Francisco California,
and agree that venue in each of such Courts is proper
in connection with any action or proceeding arising
out of or relating to this Agreement, the other
Transaction Documents, or any document or instrument
delivered pursuant to this Agreement or the other
Transaction Documents. Nothing herein shall affect
the right of Lender to serve process in any other
manner permitted by law or to commence legal
proceedings or otherwise proceed against the
Corporation in any other jurisdiction.
SECTION 9.11
SURVIVAL OF AGREEMENT. All covenants, agreements,
representations and warranties made in this
Agreement shall survive the issuance of the Letters
of Credit by Issuing Bank and shall continue in full
force and effect so long as the Letters of Credit
shall be unexpired or any sums drawn or due
hereunder or under the Reimbursement Loan Note shall
be outstanding and unpaid, regardless of any
investigation made by any Person and so long as any
amount payable hereunder remains unpaid. Whenever
in this Agreement Lender is referred to, such
reference shall be deemed to include the successors
and assigns of Lender, and all covenants, promises
and agreements by or on behalf of the Corporation
which are contained in this Agreement shall inure to
the benefit of the successors and assigns of Lender
and such other Persons as are indemnified herein,
subject to such limitations as are set forth in
SECTION 9.6 above regarding participations. The
rights and duties of the Corporation, however, may
not be assigned or transferred, except as
specifically provided in this Agreement or with the
prior written consent of the Lender, and all
obligations of the Corporation shall continue in
full force and effect notwithstanding any assignment
by the Corporation of any of their respective rights
or obligations under any of the Transaction
Documents or the Reimbursement Loan Note or any
entering into, or consent by the Corporation
supplement or amendment to any of the Transaction
Documents.
SECTION 9.12
SEVERABILITY. Any provision of this Security
Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in
any other jurisdiction.
SECTION 9.13
HEADINGS. The various headings in this Agreement
are inserted for convenience only and shall not
affect the meaning or interpretation of this
agreement or any provisions hereof.
<PAGE>
SECTION 9.14 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which when so
delivered shall be deemed an original, but all such
counterparts shall constitute but one and the same
instrument. Each such agreement shall become
effective upon the execution of a counterpart hereof
or thereof by each of the parties hereto and
telephonic notification thereof has been received by
Corporation and Lender.
IN WITNESS WHEREOF, each of the parties hereto has
caused this Agreement to be executed and delivered
by its duly authorized officer on the date first set
forth above.
CORPORATION: VANGUARD AIRLINES,
INC.
By:
Printed Name:
Title:
ATTEST:
Name: Brian Gillman
Title: Vice President, General
Counsel and Secretary
HAMBRECHT & QUIST
CALIFORNIA, a wholly
owned subsidiary of
Hambrecht & Quist
Group
By:
Printed Name:
Title:
PAGE
<PAGE>
SCHEDULE OF EXCEPTIONS
1. Contract and Agreement between Advertising
Agency and National Client, between Vanguard
Airlines, Inc. and Valentine Radford, Inc.
2. Aircraft Parts and Engine Lease Agreements
between Aviation Sales Company and Vanguard
Airlines, Inc.
3. Aircraft Lease Agreements between Aloha Airlines
and Vanguard Airlines, Inc.
4. Service Agreement between Greenwich Air
Services, Inc. and Vanguard Airlines, Inc. for JT8D
Engines
5. The Company has utilized current liabilities as
an additional source of cash by delaying payments to
certain of its creditors and attached hereto as
Annex A is a list of Vanguard's vendors with
balances in excess of $25,000 as of January 9, 1997.
<PAGE>
EXHIBIT A
FORM OF
REIMBURSEMENT LOAN NOTE
$4,000,000 SAN FRANCISCO,
CALIFORNIA
DECEMBER 31, 1996
FOR VALUE RECEIVED, VANGUARD AIRLINES, INC., a
Delaware corporation (the "Corporation") hereby
unconditionally promises to pay to the order of
HAMBRECHT & QUIST CALIFORNIA, a wholly owned
subsidiary of Hambrecht & Quist Group, or their
assigns, in lawful money of the United States of
America and in immediately available funds, the sum
of Four Million Dollars ($4,000,000) or so much
thereof as from time to time may be advanced
hereunder pursuant to Section 2.8 of that certain
Reimbursement Agreement, dated as of December 31,
1996, by and among the Corporation and Lender, as
amended from time to time (the "Agreement"), in
connection with drawings under either the (i)
certain Letter of Credit No. 3002741 dated January
2, 1997, issued by the BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION in favor of BOATMEN'S
MERCHANT PROCESSING CO., L.L.C., (including any
amendment thereof or substitute therefor or
replacement thereof) or (ii) that certain Letter of
Credit No. 3002835 dated January 2, 1997 issued by
the BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION in favor of MICHIGAN NATIONAL BANK
(including any amendment thereof or substitute
therefor or replacement thereof) (collectively, the
"Letters of Credit") in accordance with the terms
and conditions set forth in the Agreement. Borrower
shall also pay interest (calculated on the basis of
a 365 or 366 day year and actual number of days
elapsed) on such sum or the portion thereof from
time to time outstanding hereunder, monthly, at the
rates and in accordance with the terms and
conditions set forth in the Agreement.
This Reimbursement Loan Note is issued under and is
subject to the terms and conditions of the
Agreement. All definitions, terms, conditions,
rights and provisions set forth in the Agreement,
are hereby incorporated herein in their entirety.
Annexed hereto and made a part hereof is a schedule
(the "Loan and Repayment Schedule") on which shall
be shown all advances by Lender pursuant to the
Agreement (each such advance, a "Reimbursement
Loan") and all repayments of principal made to
Lender hereunder. The Corporation hereby appoints
Lender as its agent to endorse the date and the
amount of each
<PAGE>
such Reimbursement Loan or principal repayment made
hereunder. Such endorsement shall constitute prima
facie evidence of the accuracy of the information
endorsed; provided, however, that failure to make
any such endorsement (or any errors in notation)
shall not affect in any manner the obligations of
Corporation with respect to the amounts payment
hereunder.
This Reimbursement Loan Note is subject to
acceleration upon the occurrence of certain events
as provided in the Agreement. The Corporation shall
have the right to prepay this Reimbursement Loan
Note in whole or in part, without penalty or
premium, at any time.
All payments or prepayments of principal of and
interest on this Reimbursement Loan Note shall be
payable to the Account of Lender as specified in
Section 2.6 of the Agreement.
All payments and prepayments hereon shall be applied
FIRST, to costs and expenses and other amounts due
and owing to Lender under the Agreement; SECOND, to
accrued interest then payable; and THIRD to
principal of the Reimbursement Loans in
chronological order of funding of the Reimbursement
Loans and within each Reimbursement Loan in inverse
chronological order of principal amortization.
The full amount of this Reimbursement Loan Note is
secured by the Collateral identified and described
as security therefor in that certain Security
Agreement executed and delivered by Corporation as
of December 31, 1996. Corporation shall not,
directly or indirectly, suffer or permit to be
created or to remain, and shall promptly discharge,
any lien on or in the Collateral, or in any portion
thereof, except as permitted pursuant to the
Security Agreement. In addition, Corporation shall
not suffer any other matter whereby an interest of
Lender under the Security Agreement in the
collateral or in any lien pursuant to the Security
Agreement or any part of the foregoing might by
impaired, except as permitted pursuant to such
Security Agreement.
The Corporation hereby waives presentment, demand,
protest, notice of protest or other notice of
dishonor of any kind or of non-payment of this
Reimbursement Loan Note, and promises to pay all
reasonable costs of collection when incurred,
including, without limitation, reasonable attorneys'
fees, costs and other expenses.
The right to plead any and all statutes of
limitations as a defense to any demands hereunder is
hereby waived to the full extent permitted by law.
<PAGE>
No extension of the time for the payment of this
Reimbursement Loan Note
or any installment hereof made by agreement with any
Person now or hereafter liable for the payment of
this Reimbursement Loan Note shall operate to
release or discharge the original liability under
this Reimbursement Loan Note, either in whole or in
part, of the Corporation.
This Reimbursement Loan Note is to be construed
according to the laws of the State of California,
without regard to principles of conflict of laws.
The provisions of this Note shall inure to the
benefit of and be binding on any successor to Lender
and shall extend to any holder hereof.
CORPORATION: VANGUARD AIRLINES, INC.
By:
Printed Name:
Title:
PAGE
<PAGE>
EXHIBIT D
FORM OF
CERTIFICATE RELATING TO ACCURACY OF CERTAIN
CORPORATION REPRESENTATIONS CONTAINED IN, AND THE
AUTHORIZATION TO EXECUTE, CERTAIN DOCUMENTS
We, the undersigned, Do Hereby Certify to
Hambrecht & Quist California, a wholly owned
subsidiary of Hambrecht & Quist Group (the "Lender")
that:
1. We are the duly qualified and acting Vice
President, and Secretary, respectively, of Vanguard
Airlines, Inc. (the "Corporation").
2. The statements contained in Sections 3.2 and 5.1
of the Reimbursement Agreement (the "Agreement"),
dated as of December 31, 1996 by and among the
Corporation and the Lender are true and correct as of
the date hereof.
3. The names and true signatures of the officers of
the Corporation authorized to sign the Agreement, and
the other documents to be delivered by the Corporation
under the Agreement, are as follows:
Name Signature Title
John Tague
Chairman of the Board, President and CEO
William A. Garrett
Vice President
Brian S. Gillman
Vice President and Secretary
4. All conditions precedent to the issuance of the
Letter of Credit have been satisfied by the
Corporation.
5. No Event of Default has occurred and is
continuing, or no event which would result directly or
indirectly from the execution and delivery of the
Agreement by the Corporation or the issuance of the
Letter of Credit which constitutes an Event of Default
or which would constitute such an Event of Default but
for the requirement that notice be given or time
elapse, or both.
6. All capitalized terms not otherwise defined shall
have the meaning ascribed thereto in the Agreement.
<PAGE>
IN WITNESS WHEREOF, we have hereunto set our hands and
the seal of the Corporation on December 31, 1996.
VANGUARD AIRLINES, INC.
By:
Printed Name: William A.Garrett
Title: Vice President
By:
Printed Name: Brian S. Gillman
Title: Secretary
<PAGE>
SECURITY AGREEMENT
This SECURITY AGREEMENT dated as of December 31,
1996, is made by VANGUARD AIRLINES, INC., a Delaware
corporation having its principal place of business
at 30 N.W. Rome Circle, Mezzanine Level, Kansas City
International Airport, Kansas City, Missouri, 64153
("Grantor"), in favor of HAMBRECHT & QUIST,
CALIFORNIA, a wholly owned subsidiary of Hambrecht &
Quist Group ("Lender").
RECITALS
A. Corporation has requested that Lender arrange
for the initial issuance of (i) a letter of credit
to be issued in favor of Boatmen's POS Merchant
Services Co., L.L.C. for the account of the
Corporation in the aggregate amount of Four Million
Dollars ($4,000,000) (the "Letter of Credit.")
B. Corporation intends to switch credit card
processors from Boatmen's POS to Michigan National
Bank. Corporation intends to request Lender to
arrange for the issuance of a letter of credit in
favor Michigan National Bank up to the aggregate
amount of Four Million Dollars ($4,000,000)
(collectively with the "Letter of Credit" referred
to in Recital A above, the "Letters of Credit") upon
the reduction and/or cancellation of the letter of
credit, referred to in Recital A above, to be issued
in favor of Boatmen's POS.
C. Substantially concurrently herewith Grantor and
Lender have entered into that certain Reimbursement
Agreement dated as of December 31, 1996 (as the same
may from time to time be amended, modified,
supplemented or restated, the "Reimbursement
Agreement") whereby Grantor has agreed to reimburse
Lender in full for any an all drawings made under
the Letter of Credit.
D. Lender is willing to arrange for the issuance
of the Letters of Credit, but only upon the
condition, among others, that Grantor shall have
executed and delivered to Lender this Security
Agreement in order to secure Grantor's obligations
to Lender under and in connection with the
Transaction Documents (as defined herein).
<PAGE>
AGREEMENT
NOW, THEREFORE, in order to induce Lender to arrange
the Letters
of Credit, enter into the Reimbursement Agreement
and for other good and valuable consideration, the
receipt and adequacy of which are hereby
acknowledged, and intending to be legally bound,
Grantor hereby represents, warrants, covenants and
agrees as follows:
1. DEFINED TERMS. Unless otherwise defined herein
the following terms shall have the following
meanings (such meanings being equally applicable to
both the singular and plural forms of the terms
defined):
"ACCOUNTS" means (i) any and all accounts or other
distributions acquired by, owned by, owed to or
payable to Grantor in any manner, whether now
existing or hereafter acquired, in connection with
the Boatmen's Merchant Agreement or the MNB Merchant
Agreement and (ii) all rights to payments
(including, without limitation actual collections
held by MNB Bank and Boatmen's POS, in connection
with any Credit Card transactions), from Cardholders
or card issuers, whether now existing or hereafter
acquired, in the AMOUNT OF AND AS A RESULT of such
CHANGES, and, which with respect to each case (i)
and (ii) above, shall include, without limitation,
accounts receivable, book debts and other forms of
obligations now owned or hereafter received or
acquired by or belonging or owing to Grantor
(including, without limitation, under any trade
name, style or division thereof) WHETHER ARISING OUT
OF GOODS SOLD or services rendered by Grantor or
from any other transaction, whether or not the same
involves the sale of goods or services by Grantor
(including, without limitation, any such obligation
which may be characterized as an account or contract
right under the UCC) and all of GRANTOR'S RIGHTS IN,
TO AND UNDER ALL PURCHASE orders or receipts now
owned or hereafter acquired by it for goods or
services, and all of Grantor's rights to any goods
represented by any of the foregoing (including,
without limitation, unpaid seller's rights of
rescission, replevin, reclamation and stoppage in
transit and rights to returned, reclaimed or
repossessed goods), and all monies due or to become
due to Grantor under all purchase orders and
contracts or other agreements for the sale of goods
or the performance of services or both by Grantor
(whether or not yet earned by performance on the
part of Grantor or in connection with any other
transaction), now in existence or hereafter
occurring, including, without limitation, the right
to receive the proceeds of said purchase orders and
contracts, and all collateral security and
guarantees of any kind given by any Person with
respect to any of the foregoing;
"ACCOUNT DEBTOR" means any "account debtor," as such
term is defined in Section 9-105(1)(a) of the UCC,
including, without limitation, all Cardholders.
<PAGE>
"ACT OF BANKRUPCY" shall have the meaning assigned
to such term in Section 1.1 of the Reimbursement
Agreement.
"BOATMEN'S MERCHANT AGREEMENT" means that certain
Merchant Agreement between KBC Card Services (a
division of Bank IV, Kansas) and Vanguard as amended
by the Addendum to KBC Card Services Merchant
Agreement between KBC Card Services and Vanguard
effective as of November 18, 1996 and the
Modification and Pledge Agreement by and between
Vanguard, Boatmen's National Bank, successor by
merger as of October 18, 1996, to Bank IV Kansas,
N.A., and Boatmen's POS Merchant Services Co.,
L.L.C. effective as of January 1, 1997 and attached
as EXHIBIT F to the Reimbursement Agreement, as the
same may from time to time be amended, modified,
supplemented or restated.
"BOATMEN'S POS" shall mean Boatmen's POS Services
Merchant Co., L.L.C., a limited liability company.
"CREDIT CARD" shall have the meaning assigned to
such term in Section 1 of the MNB Merchant Agreement
or the meaning assigned to the term "Purchase Card"
in the Boatmen's Merchant Agreement, whichever is
applicable.
"CARDHOLDERS" shall have the meaning assigned to
such term in Section 1 of the Boatmen's Merchant
Agreement or Section A of the MNB Merchant
Agreement, whichever is applicable.
"CHATTEL PAPER" means any "chattel paper," as such
term is defined in Section 9-105(1)(b) of the UCC,
now owned or hereafter acquired by Grantor.
"COLLATERAL" shall have the meaning assigned to
such term in SECTION 2 of this Agreement.
"CONTRACTS" shall mean all contracts, undertakings,
franchise agreements or other agreements in or under
which Grantor may now or hereafter have any right,
title or interest with respect to an Account, any
agreement relating to the terms of payment or the
terms of performance with respect to an Account,
including, without limitation, the MNB Merchant
Agreement and the Boatmen's Merchant Agreement.
"DEPOSITS" shall mean cash, Instruments, Documents
or Chattel Paper or any other securities, including,
without limitation, the Letters of Credit, now
existing or hereafter received, acquired or arising,
deposited by or on behalf
<PAGE>
of Grantor with MNB Bank and Boatmen's POS, all
additions thereto from time to time and all monies,
securities investments and instruments purchase
therewith and all interest, profits and/or dividends
accruing thereon and proceeds thereof, all of the
foregoing held by MNB Bank and Boatmen's POS in an
account or otherwise, whether or not within MNB Bank
or Boatmen's POS sole dominion or control, relating
to the payment and/or performance by Grantor of its
obligations to Bank under or in connection with the
MNB Merchant Agreement and Boatmen's Merchant
Agreement.
"DOCUMENTS" shall mean any "documents," as such term
is defined in Section 9-105(1)(f) of the UCC, now
owned or hereafter acquired by Grantor.
"EVENT OF DEFAULT" means any of the following:
(A) Failure by Grantor to pay, distribute or
otherwise perform the Secured Obligations;
(B) Grantor's failure in any material respect to
perform or observe any term, covenant or agreement
contained herein or in any of the Transaction
Documents;
(C) Any warranty, representation or statement made
or furnished to Lender by or on behalf of Grantor
under this Security Agreement or any Transaction
Document is or proves false or misleading in any
material respect either now or at the time made;
(D) An Act of Bankruptcy; or
(E) The occurrence of (or with the giving of
notice, lapse of time, determination of materiality
or the fulfillment of any other applicable condition
or any combination of the foregoing, might
constitute) a default under, or the termination of,
the MNB Merchant Agreement.
"GROSS EXPOSURE" shall mean the sum of (i) Gross
Exposure, as such term is defined in Section C of
Amendment to the MNB Merchant Agreement by and
between Vanguard and MNB, dated as of December 31,
1996, and also (ii) the amount sufficient to secure
all obligations of Vanguard to Boatmen's POS under
the Boatmen's Merchant Agreement.
"INSTRUMENTS" means any "instrument," as such term
is defined in Section 9-105(1)(i) of the UCC now
owned or hereafter acquired by Grantor, including,
without limitation, all notes, certificated
securities, and other evidences of indebtedness,
other than instruments that constitute, or are a
part of a group of writings that constitute, Chattel
Paper.
<PAGE>
"LIEN" means any mortgage, deed of trust, pledge,
hypothecation, assignment for security, security
interest, encumbrance, levy, lien or charge of any
kind, whether voluntarily incurred or arising by
operation of law or otherwise, against any property
of Grantor, including any agreement to grant any of
the foregoing, any conditional sale or other title
retention agreement, any lease in the nature of a
security interest, and the filing of or agreement to
file or deliver any financing statement (other than
a precautionary financing statement with respect to
a lease that is not in the nature of a security
interest) under the UCC or comparable law of any
jurisdiction.
"MNB BANK" means Michigan National Bank, a national
banking association, with its principal office
located at 77 Monroe Center, Grand Rapids, MI 49503.
"MNB MERCHANT AGREEMENT" means an Agreement between
Michigan National Bank and Vanguard Airlines, Inc.,
that may be entered into with respect to credit card
processing services, as the same may from time to
time be amended, modified or restated.
"PERMITTED LIEN" means (a) any lien in favor of
Lender granted hereunder or arising under any of the
Transaction Agreements to secure the Secured
obligations and (b) any interest in the Pledged
Collateral securing a credit to Grantor which is
listed on SCHEDULE III attached hereto and
incorporated herein by this reference.
"PERSON" means any individual, sole proprietorship,
partnership, limited liability company, joint
venture, trust, unincorporated organization,
association, corporation, institution, public
benefit corporation, firm, joint stock corporation,
estate, entity or governmental agency.
"PROCEEDS" means "proceeds," as such term is defined
in Section 9-306(1) of the UCC and, in any event,
shall include, without limitation, (a) any and all
accounts, Chattel Paper, Instruments, cash or other
proceeds payable to Grantor from time to time in
respect of the Collateral, (b) any and all proceeds
of any insurance, indemnity, warranty or guaranty
payable to Grantor from time to time with respect to
any of the Collateral, (c) any and all payments (in
any form whatsoever) made or due and payable to
Grantor from time to time in connection with any
requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral
above by any governmental body, authority, bureau or
agency (or any person acting under color of
governmental authority), and (d) any and all other
amounts from time to time paid or payable under or
in connection with any of the Collateral.
<PAGE>
"REIMBURSEMENT LOANS" shall have the meaning
assigned to such term in Section 1.1 of the
Reimbursement Agreement.
"REIMBURSEMENT LOAN NOTE" shall have the meaning
assigned to such term in Section 1.1 of the
Reimbursement Agreement.
"SECURED OBLIGATIONS" means all loans, advances,
debts, liabilities and obligations, for monetary
amounts owed by Grantor to Lender whether due or to
become due, matured or unmatured, liquidated or
unliquidated, contingent or non-contingent, and all
covenants and duties regarding such amounts, of any
kind or nature, present or future, whether or not
evidenced by any note, agreement or other
instrument, arising under the Transaction Documents.
This term includes, without limitation, all
principal, interest (including interest that accrues
after the commencement of a case against Grantor or
any affiliate of Grantor under the Bankruptcy Code),
fees, including, without limitation, any and all
closing fees, prepayment fees, commitment fees,
advisory fees, agent fees and attorneys' fees and
any and all other fees, expenses, costs or other
sums chargeable to Guarantor under any of the
Transaction Documents.
"SECURITY AGREEMENT" means this Security Agreement
and all Schedules hereto, as the same may from time
to time be amended, modified or supplemented.
"TRANSACTION DOCUMENTS" means, collectively, this
Security Agreement, the Reimbursement Agreement, the
Reimbursement Loan Note, and any other agreement
entered into between Grantor and Lender, and any
certificate or instrument executed by Lender, in
connection with said agreements and note, as the
same may from time to time be amended, modified,
supplemented or restated.
"UCC" means the Uniform Commercial Code as the same
may, from time to time, be in effect in the State of
California; PROVIDED, HOWEVER, in the event that, by
reason of mandatory provisions of law, any or all of
the attachment, perfection or priority of Lender's
security interest in any collateral is governed by
the Uniform Commercial Code as in effect in a
jurisdiction other than the State of California, the
term "UCC" shall mean the Uniform Commercial Code as
in effect in such other jurisdiction for purposes of
the provisions hereof relating to such attachment,
perfection of priority and for purposes of
definitions related to such provisions.
"VANGUARD" means Vanguard Airlines, Inc.
2. GRANT OF SECURITY INTEREST. As collateral
security for the
<PAGE>
prompt and complete payment and performance when due
(whether at stated
maturity, by acceleration or otherwise) of all the
Secured Obligations and in order to induce Lender to
arrange the Letter of Credit, to enter into the
Transaction Documents and to make the Reimbursement
Loans, each in accordance with the terms and
conditions thereof, Grantor hereby assigns, conveys,
mortgages, pledges, hypothecates and transfers to
Lender, and hereby grants to Lender, a security
interest in and to all of Grantor's right, title and
interest in, to and under the following (all of
which being hereinafter collectively called the
"COLLATERAL"):
(A) All Accounts;
(B) All Contracts;
(C) The Deposit;
(D) To the extent not otherwise included, all
Proceeds of each of the foregoing and all accessions
to, substitutions and replacements for, and rents,
profits and products of each of the foregoing.
3. RIGHTS OF LENDER; COLLECTION OF ACCOUNTS.
(A) Notwithstanding anything contained in this
Security Agreement to the contrary, Grantor
expressly agrees that it shall remain liable under
each of its Contracts to observe and perform all the
conditions and obligations to be observed and
performed by it thereunder and that it shall perform
all of its duties and obligations thereunder, all in
accordance with and pursuant to the terms and
provisions of each such Contract. Lender shall not
have any obligation or liability under any Contract
by reason of or arising out of this Security
Agreement or the granting to Lender of a Lien
therein or the receipt by Lender of any payment
relating to any Contract pursuant hereto, nor shall
Lender be required or obligated in any manner to
perform or fulfill any of the obligations of Grantor
under or pursuant to any Contract, or to make any
payment, or to make any inquiry as to the nature or
the sufficiency of any payment received by it or the
sufficiency of any performance by any party under
any Contract, or to present or file any claim, or to
take any action to collect or enforce any
performance or the payment of any amounts which may
have been assigned to it or to which it may be
entitled at any time or times.
(B) Lender authorizes Grantor to collect its
Accounts, provided that such collection is performed
in a prudent and businesslike manner, and Lender
may,
<PAGE>
upon the occurrence and during the continuation of
any Event of Default and without notice, limit or
terminate said authority at any time. If required
by Lender at any time during the continuation of any
Event of Default, any Proceeds, when first collected
by Grantor, received in payment of any such Account
or on account of any of its Contracts shall, subject
to the rights of MNB Bank under the MNB Merchant
Agreement and Boatmen's POS under the Boatmen's
Merchant Agreement, be promptly deposited by Grantor
in precisely the form received (with all necessary
endorsements) in a special bank account maintained
by Lender subject to withdrawal by Lender only, as
hereinafter provided, and until so turned over shall
be deemed to be held in trust by Grantor for and as
Lender's property and shall not be commingled with
Grantor's other funds or properties. Such Proceeds,
when deposited, shall continue to be collateral
security for all of the Secured Obligations and
shall not constitute payment thereof until applied
as hereinafter provided. Lender may, in its sole
discretion, apply all or a part of the funds on
deposit in said special account to the principal of
or interest on or both in respect of any of the
Secured Obligations in accordance with the
provisions of SECTION 7(D) hereof, and any part of
such funds which Lender elects not so to apply and
deem not required as collateral security for the
Secured Obligations shall be paid over from time to
time by Lender to Grantor. If an Event of Default
has occurred and is continuing, at the request of
Lender, subject to the rights of MNB Bank under the
MNB Merchant Agreement, and Boatmen's POS under the
Boatmen's Merchant Agreement, Grantor shall deliver
all original and other documents evidencing and
relating to, the performance of service which
created such Accounts, including, without
limitation, all original orders, invoices, and
shipping receipts.
(C) Lender may at any time, upon the occurrence and
during the continuation of any Event of Default
after first notifying Grantor of its intention to do
so, notify Account Debtors of Grantor, parties to
the Contracts of Grantor and obligors in respect of
Instruments and Chattel Paper of Grantor
constituting or relating to the Collateral, that the
Accounts and the right, title and interest of
Grantor in and under such Contracts, Instruments and
Chattel Paper have been assigned to Lender and that
payments shall be made directly to Lender. Upon the
request of Lender, Grantor shall so notify such
Account Debtors, parties to such Contracts, obligors
in respect of such Instruments and such Chattel
Paper. Upon the occurrence and during the
continuation of an Event of Default, Lender may, in
its name, or in the name of others communicate with
such Account Debtors, parties to such Contracts,
such Instruments and such Chattel Paper to verify
with such parties, to Lender's satisfaction, the
existence, amount and terms of any such Accounts,
Contracts, Instruments or Chattel Paper.
<PAGE>
(D) Notwithstanding anything to the contrary set
forth in paragraphs (A) or (B) above or elsewhere
herein, Grantor shall, by execution and delivery of
the Notification of Assignment attached hereto as
Exhibit A, immediately notify Boatmen's POS of the
security interest granted hereby and (C) authorize
and direct Boatmen's POS, at such time as Lender
shall notify Boatmen's POS as to the occurrence of
an Event of Default hereunder, to pay and or
distribute to Lender all Collateral owned by, owed
to, payable to or otherwise distributable to Grantor
pursuant to the Boatmen's Merchant Agreement. In
the event that the Company's credit card processing
function is transferred to MNB Bank, Grantor shall
cause to be executed a Notification of Assignment in
substantially the form attached hereto as Exhibit A
from MNB Bank.
4. REPRESENTATIONS AND WARRANTIES. Grantor hereby
represents and warrants to Lender that:
(A) Except for the security interest granted to
Lender under this Security Agreement and other
Permitted Liens, Grantor is the sole legal and
equitable owner of each item of the Collateral in
which it purports to grant a security interest
hereunder, having good, marketable and insurable
title thereto free and clear of any and all Liens
other than Permitted Liens.
(B) No effective security agreement, financing
statement, equivalent security or lien instrument or
continuation statement covering all or any part of
the Collateral exists, except such as may have been
filed by Grantor in favor of Lender pursuant to this
Security Agreement or such as relate to other
Permitted Liens.
(C) This Security Agreement creates a legal and
valid security interest on and in all of the
Collateral in which Grantor now has rights, and all
filings and other actions necessary or desirable to
perfect and protect such security interest have been
duly taken. Accordingly, Lender has a fully
perfected first priority security interest in all of
the Collateral in which Grantor now has rights,
subject only to the Permitted Liens. This Security
Agreement will create a legal and valid and fully
perfected first priority security interest in the
Collateral in which Grantor later acquires rights,
when Grantor acquires those rights, subject only to
the Permitted Liens.
(D) Grantor's chief executive office, principal
place of business, and the place where Grantor
maintains its records concerning the Collateral are
presently located at the addresses set forth on
SCHEDULE I attached hereto and incorporated herein
by this reference. Grantor shall not, during the
<PAGE>
continuance of this Security Agreement, change such
chief executive office or principal place of
business or remove or cause to be removed, except in
the ordinary course of Grantor's business, the
records relating to the Collateral from those
premises without prior written notice to Lender.
(E) All Collateral of Grantor with respect to which
a security interest may be perfected by the secured
party's taking possession thereof, including,
without limitation, all Chattel Paper and
Instruments, except for any such Collateral which is
in the possession of Bank, are set forth on SCHEDULE
II attached hereto and incorporated herein by this
reference. All action necessary or desirable to
protect and perfect such security interest in each
item set forth on SCHEDULE II , including, without
limitation, the delivery of all originals thereof to
Lender, has been duly taken, except with respect to
those Chattel Paper, Instruments or other documents
constituting or relating to the Collateral
evidencing obligations of non-material amounts
payable to Grantor. The security interest of Lender
in the Collateral listed on SCHEDULE II is prior in
right and interest to all other Liens and is
enforceable as such against creditors of and
purchasers from Grantor.
(F) The amount represented by Grantor to Lender
from time to time as owing by each Account Debtor or
by all Account Debtors in respect of the Accounts of
Grantor shall at such time be the correct amount
actually and unconditionally owing by such Account
Debtors thereunder.
(G) The current value of the Deposit is
approximately $1,750,000 and the estimated Gross
Exposure as of December 31, 1996 is $2,997,045.
(H) The amount represented by Grantor to Lender
from time to time as the Deposits and as the Gross
Exposure shall at such time be the correct total of
such Amounts.
5. COVENANTS. Grantor covenants and agrees with
Lender that from and after the date of this Security
Agreement and until the Secured Obligations have
been performed and paid in full:
5.1 FURTHER ASSURANCES; PLEDGE OF INSTRUMENTS. At
any time and from time to time, upon the written
request of Lender, and at the sole expense of
Grantor, Grantor shall promptly and duly execute and
deliver any and all such further instruments and
documents and take such further action as Lender may
reasonably deem desirable to obtain the full
benefits of this Security Agreement and of the
rights and powers herein granted, including,
<PAGE>
without limitation, (a) using its best efforts to
secure all consents and approvals necessary or
appropriate for the assignment to Lender of any
Contract held by Grantor or in which Grantor has any
rights not heretofore assigned, (b) filing any
financing or continuation statements under the UCC
with respect to the security interests granted
hereby, and (c) transferring Collateral to Lender's
possession (if a security interest in such
Collateral can be perfected by possession). Grantor
also hereby authorizes Lender to file any such
financing or continuation statement without the
signature of Grantor. If any amount payable under
or in connection with any of the Collateral is or
shall become evidenced by any Instrument, such
Instrument, other than checks and notes received in
the ordinary course of business, shall be duly
endorsed in a manner satisfactory to Lender and,
subject to the rights of Boatmen's POS under the
Boatmen's Merchant Agreement and MNB under the MNB
Merchant Agreement, be delivered to Lender
immediately upon Grantor's receipt thereof.
5.2 MAINTENANCE OF RECORDS. Grantor shall keep and
maintain at its own cost and expense satisfactory
and complete records of the Collateral, including,
without limitation, a record of all payments
received and all credits granted with respect to the
Collateral and all other dealings with the
Collateral. Grantor shall mark its books and
records pertaining to the Collateral to evidence
this Security Agreement and the security interests
granted hereby. All Chattel Paper shall be marked
with the following legend: "This writing and
the obligations evidenced or secured hereby are
subject to the security interest of Hambrecht &
Quist California."
5.3 INDEMNIFICATION. In any suit, proceeding or
action brought by or against Lender relating to any
Account or Contract, or any Chattel Paper,
Instrument or Document constituting or relating to
the Collateral, for any sum owing thereunder, or to
enforce any provision of any Account or Contract, or
any Chattel Paper, Instrument or Document
constituting or relating to the Collateral, Grantor
shall save, indemnify and keep Lender harmless from
and against all expense, loss or damage suffered by
reason of any defense, setoff, counterclaim,
recoupment or reduction of liability whatsoever of
the obligor thereunder arising out of a breach by
Grantor of any obligation thereunder or arising out
of any other agreement, indebtedness or liability at
any time owing to, or in favor of, such obligor or
its successors from Grantor, and all such
obligations of Grantor shall be and remain
enforceable against and only against Grantor and
shall not be enforceable against Lender.
5.4 COMPLIANCE WITH TERMS OF ACCOUNTS, ETC. In all
material respects, Grantor shall perform and comply
with all obligations in respect of the Accounts and
Contracts and in respect to any Chattel Paper,
<PAGE>
Documents and Instruments constituting or relating
to the Collateral.
5.5 LIMITATION ON LIENS ON COLLATERAL. Grantor
shall not create, permit or suffer to exist, and
shall defend the Collateral against and take such
other action as is necessary to remove, any Lien on
the Collateral, except (a) Permitted Liens and
(b) the Lien granted to Lender under this Security
Agreement. Grantor shall further defend the right,
title and interest of Lender in and to any of
Grantor's rights under the Contracts and Accounts or
in the Deposit or under Chattel Paper, Documents,
and Instruments constituting or relating to the
Collateral, and in and to the Proceeds thereof
against the claims and demands of all Persons
whomsoever.
5.6 LIMITATIONS ON MODIFICATIONS OF ACCOUNTS, ETC.
Upon the occurrence and during the continuation of
any Event of Default, Grantor shall not, without
Lender's prior written consent, (a) grant any
extension of the time of payment of any of the
Accounts or amounts due under any Contract
(including, without limitation, amounts due from the
Deposit) or under any Chattel Paper, Instruments or
Document constituting or relating to the Collateral,
(b) compromise, compound or settle the same for less
than the full amount thereof, (c) release, wholly or
partly, any Person liable for the payment thereof,
or (d) allow any credit or discount whatsoever
thereon other than trade discounts granted in the
ordinary course of business of Grantor.
5.7 TAXES, ASSESSMENTS, ETC. Grantor shall pay
promptly when due all property and other taxes,
assessments and government charges or levies imposed
upon, and all claims (including claims for labor,
materials and supplies) against, the Collateral
except to the extent the validity thereof is being
contested in good faith and adequate reserves are
being maintained in connection therewith.
5.8 LIMITATIONS ON DISPOSITIONS. Grantor shall
keep the records regarding the Collateral and any
Collateral in possession of Grantor separate and
identifiable from other property located on the same
premises as the Collateral and Grantor shall not
sell, lease, transfer or otherwise dispose of any of
the Collateral, or attempt or contract to do so.
5.9 FURTHER IDENTIFICATION OF COLLATERAL. Grantor
shall, if so requested by Lender, furnish to Lender,
as often as Lender shall reasonably request,
statements and schedules further identifying and
describing the Collateral and such other reports in
connection with the Collateral as Lender may
reasonably request, all in reasonable detail.
5.10 NOTICES. Grantor shall advise Lender promptly,
in reasonable detail, of (a) any material Lien,
other than Permitted Liens, attaching to or asserted
against any of the Collateral, (b) any material
change in the composition of the Collateral and
(c) the occurrence of any other event which would
have a material adverse effect on the aggregate
value of the Collateral or on the Lien created
hereunder.
5.11 RIGHT OF INSPECTION AND AUDIT.
(A) Upon reasonable notice to Grantor (unless an
Event of Default has occurred and is continuing, in
which case no notice is necessary), Lender shall at
all times have full and free access during normal
business hours to all the books and records and
correspondence of Grantor, and Lender or any agents
or representatives of Lender may examine the same,
take extracts therefrom and make photocopies
thereof, and Grantor agrees to render to Lender, at
Grantor's cost and expense, such clerical and other
assistance as may be reasonably requested with
regard thereto. Upon reasonable notice to Grantor
(unless an Event of Default has occurred and is
continuing, in which case no notice is necessary),
Lender and its agents and representatives shall
also have the right to enter into and upon any
premises where any of records regarding the
Collateral are located for the purpose of conducting
audits and making test verifications of the Accounts
in any manner and through any medium that it
considers advisable, and Grantor agrees to furnish
all such assistance and information as Lender may
reasonably require in connection therewith.
Grantor, at its own expense, shall cause certified
independent public accountants, reasonably
satisfactory to Lender, to prepare and deliver to
Lender the results of and any test verification of
Grantor's Accounts made or observed by such
accountants when and if such verification is
conducted.
(B) Lender shall have all rights of Grantor to
audit, copy or make extracts of the records of
Boatmen's POS or MNB Bank as are specified under the
respective agreements.
5.12 CONTINOUS PERFECTION. Grantor shall not change
its name, identity or corporate structure in any
manner which might make any financing or
continuation statement filed in connection herewith
seriously misleading within the meaning of Section
9-402(7) of the UCC (or any other then applicable
provision of the UCC) unless Grantor shall have
given Lender at least thirty (30) days' prior
written notice thereof and shall have taken all
action (or made arrangements to take such action
substantially simultaneously with such change if it
is impossible to take such action in advance)
necessary or reasonably requested by Lender to amend
such financing statement or
<PAGE>
continuation statement so that it is not seriously
misleading.
5.13 Grantor shall provide, or shall cause Boatmen's
POS or MNB Bank to provide, to Lender such reports
and notices as are required to be sent, or may be
sent, by Boatmen's POS or MNB to Grantor with
respect to the Accounts, the Deposit, the Gross
Exposure, or as otherwise are required to be sent or
may be made available to Grantor pursuant to the
Boatmen's Merchant Agreement or MNB Merchant
Agreement.
5.14 Grantor may not enter into any amendment to the
Boatmen's Merchant Agreement or the MNB Merchant
Agreement, without the written consent of Lender,
except where such amendment only relates to the fees
and charges to be paid to Boatmen's POS or MNB by
Vanguard.
6. LENDER'S APPOINTMENT AS ATTORNEY-IN-FACT.
(A) Grantor hereby irrevocably constitutes and
appoints Lender, and any officer or agent thereof,
with full power of substitution, as its true and
lawful attorney-in-fact with full irrevocable power
and authority in the place and stead of Grantor and
in the name of Grantor or in its own name, from time
to time at Lender's discretion, for the purpose of
carrying out the terms of this Security Agreement,
to take any and all appropriate action and to
execute and deliver any and all documents and
instruments which may be necessary or desirable to
accomplish the purposes of this Security Agreement
and, without limiting the generality of the
foregoing, hereby gives Lender the power and right,
on behalf of Grantor, without notice to or assent by
Grantor, to do the following:
(I) to ask, demand, collect, receive and give
acquittances and receipts for any and all monies due
or to become due under any Collateral and, in the
name of Grantor in its own name or otherwise to take
possession of, endorse and collect any checks,
drafts, notes, acceptances or other Instruments for
the payment of monies due under any Collateral and
to file any claim or to take or commence any other
action or proceeding in any court of law or equity
or otherwise deemed appropriate by Lender for the
purpose of collecting any and all such monies due
under any Collateral whenever payable;
(II) to pay or discharge any Liens, including,
without limitation, any tax lien, levied or placed
on or threatened against the Collateral, to effect
any repairs or any insurance called for by the terms
of this Security Agreement and to pay all or any
part of the premiums therefor and the costs thereof;
and
<PAGE>
(III) (1) direct any person liable for any
payment under or in respect of any of the Collateral
to make payment of any and all monies due or to
become due thereunder directly to Lender or as
Lender shall direct, (2) receive payment of any and
all monies, claims and other amounts due or to
become due at any time arising out of or in respect
of any Collateral, (3) sign and endorse any
invoices, freight or express bills, bills of lading,
storage or warehouse receipts, drafts against
debtors, assignments, verifications and notices in
connection with Accounts and other Instruments and
Documents constituting or relating to the
Collateral, (4) commence and prosecute any suits,
actions or proceedings at law or in equity in any
court of competent jurisdiction to collect the
Collateral or any part thereof and to enforce any
other right in respect of any Collateral, (5) defend
any suit, action or proceeding brought against
Grantor with respect to any Collateral, (6) settle,
compromise or adjust any suit, action or proceeding
described above and, in connection therewith, give
such discharges or releases as Lender may deem
appropriate, and (7) sell, transfer, pledge, make
any agreement with respect to or otherwise deal with
any of the Collateral as fully and completely as
though Lender were the absolute owner thereof for
all purposes, and to do, at Lender's option and
Grantor's expense, at any time, or from time to
time, all acts and things which Lender may
reasonably deem necessary to protect, preserve or
realize upon the Collateral and Lender's Lien
therein in order to effect the intent of this
Security Agreement, all as fully and effectively as
Grantor might do.
(B) Lender agrees that, except upon the occurrence
and during the continuation of an Event of Default,
it shall not exercise the power of attorney or any
rights granted to Lender pursuant to this SECTION 6.
Grantor hereby ratifies, to the extent permitted by
law, all that said attorney shall lawfully do or
cause to be done by virtue hereof. The power of
attorney granted pursuant to this SECTION 6 is a
power coupled with an interest and shall be
irrevocable until the Secured Obligations are paid
and performed in full.
(C) The powers conferred on Lender hereunder are
solely to protect Lender's interests in the
Collateral and shall not impose any duty upon it to
exercise any such powers. Lender shall be
accountable only for amounts that it actually
receives as a result of the exercise of such powers
and neither it nor any of its officers, directors,
employees, agents or representatives shall be
responsible to Grantor for any act or failure to
act, except for its own gross negligence or willful
misconduct.
(D) Grantor also authorizes Lender, at any time and
from time to time upon the occurrence and during the
continuation of any Event of Default, to
<PAGE>
(i) communicate in its own name with any party to
any Contract with regard
to the assignment of the right, title and interest
of Grantor in and under the Contracts hereunder and
other matters relating thereto and (ii) execute, in
connection with the sale of Collateral provided for
in SECTION 7 hereof, any endorsements, assignments
or other instruments of conveyance or transfer with
respect to the Collateral.
(E) If Grantor fails to perform or comply with any
of its agreements contained herein and Lender, as
provided for by the terms of this Security
Agreement, shall perform or comply, or otherwise
cause performance or compliance, with such
agreement, the reasonable expenses, including
attorneys' fees, of Lender incurred in connection
with such performance or compliance, together with
interest thereon at the rate then in effect in
respect of the Reimbursement Loans, shall be payable
by Grantor to Lender on demand and shall constitute
Secured Obligations secured hereby.
7. RIGHTS AND REMEDIES UPON DEFAULT.
(A) If any Event of Default shall occur and be
continuing, Lender may exercise in addition to all
other rights and remedies granted to it under this
Security Agreement, the Boatmen's Merchant
Agreement, MNB Merchant Agreement, the other Loan
Documents and under any other instrument or
agreement securing, evidencing or relating to the
Secured Obligations, all rights and remedies of a
secured party under the UCC. Without limiting the
generality of the foregoing, Grantor expressly
agrees that in any such event Lender, without demand
of performance or other demand, advertisement or
notice of any kind (except the notice specified
below of time and place of public or private sale)
to or upon Grantor or any other person (all and each
of which demands, advertisements and notices are
hereby expressly waived to the maximum extent
permitted by the UCC and other applicable law), may
forthwith collect, receive, appropriate and realize
upon the Collateral, or any part thereof, and may
forthwith sell, lease, assign, give an option or
options to purchase or sell or otherwise dispose of
and deliver said Collateral (or contract to do so),
or any part thereof, in one or more parcels at
public or private sale or sales, at any exchange or
broker's board or at any of Lender's offices or
elsewhere at such prices as it may deem best, for
cash or on credit or for future delivery without
assumption of any credit risk. Lender shall have
the right upon any such public sale or sales, and,
to the extent permitted by law, upon any such
private sale or sales, to purchase the whole or any
part of said Collateral so sold, free of any right
or equity of redemption, which equity of
<PAGE>
redemption Grantor hereby releases. Grantor further
agrees, at Lender's request, to assemble the
Collateral and make it available to Lender at places
which Lender shall reasonably select, whether at
Grantor's premises or elsewhere. Lender shall apply
the net proceeds of any such collection, recovery,
receipt, appropriation, realization or sale as
provided in SECTION 7(D) hereof, Grantor remaining
liable for any deficiency remaining unpaid after
such application, and only after so paying over such
net proceeds and after the payment by Lender of any
other amount required by any provision of law,
including Section 9-504(1)(c) of the UCC, need
Lender account for the surplus, if any, to Grantor.
To the maximum extent permitted by applicable law,
Grantor waives all claims, damages, and demands
against Lender arising out of the repossession,
retention or sale of the Collateral except such as
arise out of the gross negligence or willful
misconduct of Lender. Grantor agrees that Lender
need not give more than ten (10) days' notice (which
notification shall be deemed given if given in
accordance with SECTION 9.3 of the Reimbursement
Agreement) of the time and place of any public sale
or of the time after which a private sale may take
place and that such notice is reasonable
notification of such matters. Grantor shall remain
liable for any deficiency if the proceeds of any
sale or disposition of the Collateral are
insufficient to pay all amounts to which Lender is
entitled, Grantor also being liable for the
reasonable fees of any attorneys employed by Lender
to collect such deficiency.
(A) Grantor also agrees to pay all fees, costs and
expenses of Lender, including, without limitation,
reasonable attorneys' fees, incurred in connection
with the enforcement of any of its rights and
remedies hereunder.
(B) Grantor hereby waives presentment, demand,
protest or any notice (to the maximum extent
permitted by applicable law) of any kind in
connection with this Security Agreement or any
Collateral.
(C) The Proceeds of any sale, disposition or other
realization upon all or any part of the Collateral
shall be distributed by Lender in the following
order of priorities:
FIRST,to Lender in an amount
sufficient to pay in full the
reasonable costs of Lender in
connection with such sale,
disposition or other realization,
including all fees, costs, expenses,
liabilities and advances incurred or
made by Lender in connection
therewith, including, without
limitation, reasonable attorneys'
fees;
<PAGE>
SECOND, to Lender in an amount
equal to the then unpaid principal of
and accrued interest and prepayment
premiums, if any, on the Secured
Obligations;
THIRD, to Lender in an amount
equal to any other Secured
Obligations which are then unpaid;
and
FINALLY, upon payment in full of
all of the Secured Obligations, to
Grantor or its representatives or as
a court of competent jurisdiction may
direct.
8. LIMITATION ON LENDER'S DUTY IN RESPECT OF
COLLATERAL. Lender shall be deemed to have acted
reasonably in the custody, preservation and
disposition of any of the Collateral if it takes
such action as Grantor requests in writing, but
failure of Lender to comply with any such request
shall not in itself be deemed a failure to act
reasonably, and no failure of Lender to do any act
not so requested shall be deemed a failure to act
reasonably.
9. REINSTATEMENT. This Security Agreement shall
remain in full force and effect and continue to be
effective should any petition be filed by or against
Grantor for liquidation or reorganization, should
Grantor become insolvent or make an assignment for
the benefit of creditors or should a receiver or
trustee be appointed for all or any significant part
of Grantor's property and assets, and shall continue
to be effective or be reinstated, as the case may
be, if at any time payment and performance of the
Secured Obligations, or any part thereof, is,
pursuant to applicable law, rescinded or reduced in
amount, or must otherwise be restored or returned by
any obligee of the Secured Obligations, whether as a
"voidable preference," "fraudulent conveyance," or
otherwise, all as though such payment or performance
had not been made. In the event that any payment,
or any part thereof, is rescinded, reduced, restored
or returned, the Secured Obligations shall be
reinstated and deemed reduced only by such amount
paid and not so rescinded, reduced, restored or
returned.
10. MISCELLANEOUS.
10.1 NOTICES. Any notice or other communication
hereunder to any party shall be addressed and
delivered (and shall be deemed given) in accordance
with Section 9.3 of the Reimbursement Agreement.
10.2 SEVERABILITY. Any provision of this Security
Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in
any other jurisdiction.
10.3 HEADINGS. The various headings in this
Security Agreement are inserted for convenience only
and shall not affect the meaning or interpretation
of this agreement or any provisions hereof.
10.4 NO WAIVER; CUMALITIVE REMEDIES.
(A) Lender shall not by any act, delay, omission or
otherwise be deemed to have waived any of its
respective rights or remedies hereunder, nor shall
any single or partial exercise of any right or
remedy hereunder on any one occasion preclude the
further exercise thereof or the exercise of any
other right or remedy.
(B) The rights and remedies hereunder provided are
cumulative and may be exercised singly or
concurrently, and are not exclusive of any rights
and remedies provided by law.
(C) None of the terms or provisions of this
Security Agreement may be waived, altered, modified
or amended except by an instrument in writing, duly
executed by Grantor and Lender.
10.5 TERMINATION OF THIS SECURITY AGREEMENT.
Subject to SECTION 9 hereof, this Security Agreement
shall terminate upon the payment and performance in
full of the Secured Obligations.
10.6 SUCCESSORS AND ASSIGNS. This Security
Agreement and all obligations of Grantor hereunder
shall be binding upon the successors and assigns of
Grantor, and shall, together with the rights and
remedies of Lender hereunder, inure to the benefit
of Lender, any future holder of any Reimbursement
Loan Note executed by Grantor in connection with the
Reimbursement Agreement and their respective
successors and assigns. No sales of participations,
other sales, assignments, transfers or other
dispositions of any agreement governing or
instrument evidencing the Secured Obligations or any
portion thereof or interest therein shall in any
manner affect the Lien granted to Lender hereunder.
<PAGE>
10.7 FURTHER IDEMNIFICATION. Grantor agrees to pay,
and to save Lender harmless from, any and all
liabilities with respect to, or resulting from any
delay in paying, any and all excise, sales or other
similar taxes which may be payable or determined to
be payable with respect to any of the Collateral or
in connection with any of the transactions
contemplated by this Security Agreement.
10.8 GOVERNING LAW. In all respects, including all
matters of construction, validity and performance,
this Security Agreement and the Secured Obligations
arising hereunder shall be governed by, and
construed and enforced in accordance with, the laws
of the State of California applicable to contracts
made and performed in such state, without regard to
the principles thereof regarding conflict of laws.
10.9 COUNTERPARTS. This Security Agreement may be
executed in any number of counterparts, each of
which when so delivered shall be deemed an original,
but all such counterparts shall constitute but one
and the same instrument. Each such agreement shall
become effective upon the execution of a counterpart
hereof or thereof by each of the parties hereto and
telephonic notification thereof has been received by
Grantor and Lender.
[Intentionally Left Blank]
PAGE
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has
caused this Security Agreement to be executed and
delivered by its duly authorized officer on the date
first set forth above.
GRANTOR VANGUARD AIRLINES, INC.
By:
Printed Name:
Title:
Accepted and acknowledged by:
HAMBRECHT & QUIST, CALIFORNIA,
a wholly owned subsidiary of
Hambrecht & Quist Group
By:
Printed Name:
Title:
PAGE
<PAGE>
SCHEDULE I
LOCATION OF GRANTOR'S CHIEF EXECUTIVE OFFICE
PRINCIPAL PLACE OF BUSINESS
AND RECORDS PERTAINING TO COLLATERAL
CHIEF EXECUTIVE OFFICE:
30 N.W. Rome Circle- Mezzanine Level
Kansas City International Airport
Kansas City, MO 64153
RECORDS PERTAINING TO COLLATERAL
30 N.W. Rome Circle- Mezzanine Level
Kansas City International Airport
Kansas City, MO 64153
PRINCIPAL PLACE OF BUSINESS:
30 N.W. Rome Circle- Mezzanine Level
Kansas City International Airport
Kansas City, MO 64153
PAGE
<PAGE>
SCHEDULE II
LIST OF COLLATERAL DELIVERED TO LENDER
NONE
PAGE
<PAGE>
SCHEDULE III
PERMITTED LIENS
NONE
<PAGE>
AMENDED AND RESTATED
REIMBURSEMENT LOAN NOTE
$4,000,000 San Francisco, California
January 17, 1997
WHEREAS, Hambrecht & Quist California, a wholly owned subsidiary of
Hambrecht & Quist Group (the "Lender"), pursuant to the terms of that certain
Reimbursement Agreement, dated as of December 31, 1996, by and among
Vanguard Airlines, Inc., a Delaware corporation (the "Corporation" or
"Borrower") and Lender, as amended from time to time (the "Agreement"),
has caused a Letter of Credit to be established for the benefit of Michigan
National Bank; and
WHEREAS, Corporation and Lender hereby amend and restate the
Reimbursement Loan Note dated as of January 17, 1997 to read in its entirety
as follows:
FOR VALUE RECEIVED,VANGUARD AIRLINES, INC., a Delaware
corporation (the "Corporation") hereby unconditionally promises to pay to the
order of HAMBRECHT & QUIST CALIFORNIA, a wholly owned subsidiary
of Hambrecht & Quist Group, or their assigns, in lawful money of the United
States of America and in immediately available funds, the sum of Four Million
Dollars ($4,000,000) or so much thereof as from time to time may be advanced
hereunder pursuant to Section 2.8 of that certain Reimbursement Agreement,
dated as of December 31, 1996, by and among the Corporation and Lender, as
amended from time to time (the "Agreement"), in connection with drawings
under either the (i) certain Letter of Credit No. 3002741 dated January 17,
1997, issued by the BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION in favor of BOATMEN'S MERCHANT PROCESSING CO, L.L.C.
(including any amendment thereof or substitute
therefor or replacement (the "Letter of Credit") in accordance with the terms
and conditions set forth in the Agreement. Borrower shall also pay interest
(calculated on the basis of a 365 or 366 day year and actual number of days
elapsed) on such sum or the portion thereof from time to time outstanding
hereunder, monthly, at the rates and in accordance with the terms and
conditions set forth in the Agreement.
This Reimbursement Loan Note is issued under and is subject to the terms and
conditions of the Agreement. All definitions, terms, conditions, rights and
provisions set forth in the Agreement, are hereby incorporated herein in their
entirety.
<PAGE>
Annexed hereto and made a part hereof is a schedule (the "Loan and
Repayment Schedule") on which shall be shown all advances by Lender
pursuant to the Agreement (each such advance, a "Reimbursement Loan") and
all repayments of principal made to Lender hereunder. The Corporation
hereby appoints Lender as its agent to endorse the date and the amount of each
such Reimbursement Loan or principal repayment made hereunder. Such
endorsement shall constitute prima facie evidence of the accuracy of the
information endorsed; provided, however, that failure to make any such
endorsement (or any errors in notation) shall not affect in any manner the
obligations of Corporation with respect to the amounts payment hereunder.
This Reimbursement Loan Note is subject to acceleration upon the occurrence
of certain events as provided in the Agreement. The Corporation shall have
the right to prepay this Reimbursement Loan Note in whole or in part, without
penalty or premium, at any time.
All payments or prepayments of principal of and interest on this
Reimbursement Loan Note shall be payable to the Account of Lender as
specified in Section 2.6 of the Agreement.
All payments and prepayments hereon shall be applied FIRST, to costs and
expenses and other amounts due and owing to Lender under the Agreement;
SECOND, to accrued interest then payable; and THIRD to principal of the
Reimbursement Loans in chronological order of funding of the Reimbursement
Loans and within each Reimbursement Loan in inverse chronological order of
principal amortization.
The full amount of this Reimbursement Loan Note is secured by the Collateral
identified and described as security therefor in that certain Security Agreement
executed and delivered by Corporation as of December 31, 1996. Corporation
shall not, directly or indirectly, suffer or permit to be created or to remain,
and shall promptly discharge, any lien on or in the Collateral, or in any
portion thereof, except as permitted pursuant to the Security Agreement.
In addition, Corporation shall not suffer any other matter whereby an interest
of Lender under the Security Agreement in the collateral or in any lien pursuant
to the Security Agreement or any part of the foregoing might by impaired,
except as permitted pursuant to such Security Agreement.
The Corporation hereby waives presentment, demand, protest, notice of
protest or other notice of dishonor of any kind or of non-payment of this
Reimbursement Loan Note, and promises to pay all reasonable costs of
collection when incurred, including, without limitation, reasonable attorneys'
fees, costs and other expenses.
<PAGE>
The right to plead any and all statutes of limitations as a defense to any
demands hereunder is hereby waived to the full extent permitted by law.
No extension of the time for the payment of this Reimbursement Loan Note or
any installment hereof made by agreement with any Person now or hereafter
liable for the payment of this Reimbursement Loan Note shall operate to
release or discharge the original liability under this Reimbursement Loan Note,
either in whole or in part, of the Corporation.
This Reimbursement Loan Note is to be construed according to the laws of the
State of California, without regard to principles of conflict of laws.
The provisions of this Note shall inure to the benefit of and be binding on any
successor to Lender and shall extend to any holder hereof.
<PAGE>
CORPORATION: VANGUARD AIRLINES, INC.
By:
Printed Name:
Title:
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR
UNDER THE SECURITIES LAWS OF ANY STATE. ANY TRANSFER OF SUCH
SECURITIES WILL BE INVALID UNLESS A REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND AS REQUIRED BY BLUE SKY LAWS IS IN EFFECT
AS TO SUCH TRANSFER OR IN THE OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY SUCH REGISTRATION IS UNNECESSARY IN ORDER FOR SUCH
TRANSFER TO COMPLY WITH THE SECURITIES ACT AND BLUE SKY LAWS.
VANGUARD AIRLINES, INC.
WARRANT FOR THE PURCHASE
OF SHARES OF COMMON STOCK
No. PB-50
January 30, 1997
VANGUARD AIRLINES, INC., a Delaware corporation (the
"COMPANY"), hereby certifies that, for value received, HAMBRECHT
& QUIST CALIFORNIA the transferee who has received this warrant (the
"WARRANT") in compliance with applicable law and the terms hereof
(the "HOLDER"), is entitled, on the terms set forth below, to
purchase from the Company, on or before the Expiration Time (as
defined in Section 18 below) four million (4,000,000) shares of Common
Stock, par value $0.001 per share, of the Company at a price of one
dollar ($1.00) per share, subject to adjustment as provided
below (the "EXERCISE PRICE").
1. REIMBURSEMENT AGREEMENT. This Warrant is the "Warrant"
referred to in Section 3.1(d) of that Reimbursement Agreement
dated as of December 31, 1996, by and between the Company and
Hambrecht & Quist California (the "REIMBURSEMENT AGREEMENT").
Any capitalized term used but not defined herein shall have the
meaning ascribed to it in the Reimbursement Agreement.
2. EXERCISE OF WARRANT.
(A) INITIAL VESTING. The Holder may exercise this Warrant, in
whole or in part, at any time or from time to time on any
business day prior to the Expiration Date (as defined herein),
for one million six hundred thousand (1,600,000) shares
<PAGE> of Common Stock.
(B) SUBSEQUENT VESTING. On any business day beginning 30 days
after the end of each Measurement Period (as defined below) and
prior to the Expiration Date, the Holder may exercise this
Warrant, in whole or in part, at any time or from time to time,
as to an additional number of shares of Common Stock equal to (i)
the product of (A) the average daily Gross Exposure (as defined
in the Security Agreement (or the schedules or exhibits thereto),
subject to Section 9(b) hereof) during the Measurement Period and
(B) one-tenth (0.1), divided by (ii) one dollar ($1.00).
Notwithstanding the preceding sentence, in no event shall this
Warrant be exercisable for more than four million (4,000,000)
shares of Common Stock. For the purposes of this Warrant,
"MEASUREMENT PERIOD" shall mean the 90 day period commencing on
the date of this Warrant and each succeeding 90 day period
thereafter prior to the Termination Date.
(C) The Holder may exercise any shares then exercisable by
surrendering this Warrant to the Company at its principal office,
with a duly executed Subscription Form (in substantially the form
attached hereto), together with payment of the sum obtained by
multiplying the number of shares of Common Stock to be purchased
by the Exercise Price then in effect. Promptly after such
exercise, the Company shall issue and deliver to or upon the
order of the Holder a certificate or certificates for the number
of shares of Common Stock issuable upon such exercise, and the
Company will pay all issue or transfer taxes in connection with
the issue thereof. To the extent permitted by law, this Warrant
shall be deemed to have been exercised immediately prior to the
close of business on the date of its surrender for exercise as
provided herein, even if the Company's stock transfer books are
at that time closed, and the Holder shall be treated for all
purposes as the holder of record of the Common Stock to be issued
upon such exercise as of the close of business on such date.
Upon any partial exercise, the Company will issue to or upon the
order of the Holder a new Warrant for the number of shares of
Common Stock as to which this Warrant has not been exercised.
(D) NET ISSUE EXERCISE. Notwithstanding any provisions herein
to the contrary, if the fair market value of one share of the
Common Stock subject to this Warrant is greater than the Exercise
Price (at the Date of Determination, as defined below), in lieu
of exercising this Warrant for cash, the Holder may elect to
receive shares equal to the value (as determined below) of this
Warrant (or the portion thereof being canceled) by surrender of
this Warrant at the principal office of the Company together with
the properly endorsed Form of Subscription and notice of such
election (the date of such delivery being referred to herein as
the "DATE OF DETERMINATION") in which event the Company shall
issue to the Holder a number of shares of Common Stock
<PAGE>
computed using the following formula:
X = Y (A-B)
A
Where X = the number of shares of Common Stock to be
issued to the Holder
Y = the number of shares of Common Stock
purchasable under the Warrant or, if only a
portion of the Warrant is being exercised,
the portion of the Warrant being canceled (at
the Date of Determination)
A = the fair market value of one share of the
Common Stock (at the Date of Determination)
B = Exercise Price (as adjusted to the Date of
Determination)
For purposes of the above calculation, fair market value of one
share of Common Stock shall be determined by the Company's Board
of Directors in good faith as of the Date of Determination;
PROVIDED, HOWEVER, when there is a public market for the
Company's Common Stock, the fair market value per share shall be
the average of the closing prices of the Company's Common Stock
quoted on the Nasdaq National Market or on the primary securities
exchange on which the Common Stock is then listed, whichever is
applicable, as published in the Wall Street Journal for the ten
(10) trading days prior to the Date of Determination.
3. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES.
The Exercise Price and the number of shares of Common Stock
subject to this Warrant (and all other adjustment to exercise
price and shares herein as appropriate) shall be subject to
adjustment from time to time as follows:
(A) ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. If at any time the
Company:
i. pays a dividend or makes a distribution on
its Common Stock in shares of its Common
Stock;
ii. subdivides its outstanding shares of Common
Stock into a greater number of shares;
<PAGE>
iii. combines its outstanding shares of Common
Stock into a smaller number of shares;
iv. makes a distribution on its Common Stock in
shares of its capital stock other than Common
Stock; or
v. issues by reclassification of its Common
Stock any shares of its capital stock;
then the Exercise Price in effect immediately prior to such
action shall be adjusted so that the Holder may receive upon
exercise of the Warrant and payment of the same aggregate
consideration the number of shares of capital stock of the
Company which the Holder would have owned immediately following
such action if the Holder had exercised the Warrant immediately
prior to such action.
The adjustment shall become effective immediately after the
record date in the case of a dividend or distribution and
immediately after the effective date in the case of a
subdivision, combination or reclassification.
(a) REORGANIZATION, CONSOLIDATION OR MERGER. In the event of
any consolidation or merger of the Company with or into another
corporation (other than a merger in which merger the Company is
the continuing corporation and that does not result in any
reclassification, capital reorganization or other change of
outstanding shares of Common Stock issuable upon exercise of this
Warrant) or in the event of any sale, lease, transfer or
conveyance to another corporation of the property and assets of
the Company as an entirety or substantially as an entirety, the
Company shall cause effective provisions to be made so that the
Holder shall have the right thereafter, by exercising this
Warrant, to purchase the kind and amount of shares of stock and
other securities and property (including cash) receivable upon
such capital reorganization and other change, consolidation,
merger, sale, lease, transfer or conveyance by a holder of the
number of shares of Common Stock that might have been received
upon exercise of this Warrant immediately prior to such capital
reorganization, change, consolidation, merger, sale, lease,
transfer or conveyance. Any such provision shall include
provisions for adjustments in respect of such shares of stock and
other securities and property that shall be as nearly equivalent
as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Section 3(b) shall
similarly apply to successive capital reorganizations and changes
of shares of Common Stock and to successive consolidations,
mergers, sales, leases, transfers or conveyances. In the event
that in connection with any such capital reorganization, or
change, consolidation, merger, sale, lease, transfer or
<PAGE>
conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in
part, for, or of, a security of the Company other than Common
Stock, any such issue shall be treated as an issue of Common
Stock covered by the provisions of Section 3(a) hereof.
(b) PRICE ADJUSTMENTS. If on any Price Adjustment Date (as
defined below) the number of shares of Common Stock of the
Company authorized for issuance pursuant to the Company's
Restated Certificate of Incorporation as in effect on such date
is insufficient to permit the valid issuance on such date of the
total number of shares of Common Stock issuable upon the direct
or indirect exercise and/or conversion of any and all securities
of the Company then outstanding into Common Stock, then the
Exercise Price in effect on such date shall be reduced by five
cents ($0.05) per share, provided, that, in no event shall the
Exercise Price be reduced to less than the par value of the
Common Stock per share. As used in this Warrant, "PRICE
ADJUSTMENT DATE" shall mean May 31, 1997 and the last day of each
succeeding month thereafter.
(c) MINIMAL ADJUSTMENT. No adjustment in the Exercise Price
and/or the number of shares of Common Stock subject to this
Warrant need be made if such adjustment would result in a change
in the Exercise Price of less than one percent (1%) or the
Exercise Price (the "ADJUSTMENT THRESHOLD AMOUNT") or a change in
the number of subject shares of less than one (1) share. Any
adjustment which is less than the Adjustment Threshold Amount and
not made shall be carried forward and shall be made, together
with any subsequent adjustments, at the time when (a) the
aggregate amount of all such adjustments is equal to at least the
Adjustment Threshold Amount or (b) the Warrant is exercised.
(d) DEFERRAL OF ISSUANCE OR PAYMENT. In any case in which an
event covered by this Section 3 shall require that an adjustment
in the Exercise Price be made effective as of a record date, the
Company may elect to defer until the occurrence of such event (i)
issuing to the Holder, if this Warrant is exercised after such
record date, the shares of Common Stock and other capital stock
of the Company, if any, issuable upon such exercise over and
above the shares of Common Stock or other capital stock of the
Company, if any, issuable upon such exercise on the basis of the
Exercise Price in effect prior to such adjustment, and (ii)
paying to the Holder by check any amount in lieu of the issuance
of fractional shares pursuant to Section 7 hereof.
(e) WHEN NO ADJUSTMENT REQUIRED. No adjustment need be made for
a change in the par value or no par value of the Common Stock.
To the extent the Warrants become exercisable into cash, no
adjustment need be made thereafter as to the cash, and interest
will not accrue on the cash.
<PAGE>
(f) CERTIFICATE AS TO ADJUSTMENT. Upon the occurrence of each
adjustment or readjustment of the Exercise Price pursuant to this
Section 3, the Company, at its expense, shall promptly compute
such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to the Holder a certificate
setting forth such adjustment or readjustment and showing the
facts upon which such adjustment or readjustment is based. The
Company shall, upon written request at any time of the Holder,
furnish or cause to be furnished to the Holder a like certificate
setting forth (a) such adjustments and readjustments, (b) the
then effective Exercise Price and number of shares of Common
Stock subject to the Warrant, and (c) the then effective amount
of securities (other than Common Stock) and other property, if
any, which would be received upon exercise of the Warrant.
4. REGISTRATION RIGHTS. Shares of the Company's Common Stock
issued or issuable pursuant to the exercise of this Warrant shall
be deemed to be "Registrable Securities" for purposes of that
certain Amended and Restated Investor Rights Agreement, dated as
of August 24, 1994, among the Company and the persons named
therein (the "Investors Rights Agreement"), as such agreement
may be subsequently amended or restated or consolidated with
other similar agreements granting registration rights in the
securities of the Company, and the holder of such shares shall
have all the rights, subject to the obligations, of a holder of
Registrable Securities pursuant to the Investors Rights
Agreement, and shall be treated for all purposes as a holder of
Registrable Securities under and subject to the terms of the
Investor Rights Agreement.
5. RIGHTS OF THE HOLDER The Holder shall not, solely by virtue
of this Warrant, be entitled to any rights of a stockholder in
the Company, either at law or equity, and the rights of the
Holder are limited to those expressed in this Warrant. Nothing
contained in this Warrant shall be construed as conferring upon
the Holder hereof the right to vote or to consent or to receive
notice as a stockholder of the Company on any matters or with
respect to any rights whatsoever as a stockholder of the Company.
No dividends or interest shall be payable or accrued in respect
of this Warrant or the interest represented hereby or the shares
of Common Stock purchasable hereunder until, and only to the
extent that, this Warrant shall have been exercised in accordance
with its terms.
6. NO IMPAIRMENT. The Company will not, by any voluntary
action, avoid or seek to avoid the observance or performance of
any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in
order to protect the rights of the Holder against dilution or
other impairment.
<PAGE>
7. NO FRACTIONAL SHARES. No fractional share shall be issued
upon exercise of this Warrant. The Company shall, in lieu of
issuing any fractional share, pay the Holder entitled to such
fraction a sum in cash equal to the fair market value of such
fraction on the date of exercise (as determined in good faith by
the Board of Directors of the Company). The fair market value of
a fraction of a share is determined by multiplying the fair
market price of a full share by the fraction of a share, rounded
to the nearest cent.
8. RESERVATION OF STOCK ISSUABLE ON EXERCISE OF WARRANT. The
Company will at all times reserve and keep available, solely for
issuance and delivery upon the exercise of this Warrant, all such
shares of Common Stock or other shares of capital stock, from
time to time issuable upon the exercise of this Warrant. If at
any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the exercise of this
Warrant, the Company will use its best efforts to take such
corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for
such purposes. All shares that may be issued upon exercise of
the rights represented by this Warrant and payment of the
Exercise Price, all as set forth herein, will be free from all
taxes, liens and charges in respect of the issue of such shares
(other than taxes in respect of any transfer occurring
contemporaneously with such exercise and payment or otherwise
specified herein). All such shares shall be duly authorized and
when issued, sold and delivered in accordance with the terms of
the Warrant for the consideration expressed herein, will be duly
and validly issued, fully paid and nonassessable, and will be
free of restrictions on transfer other than restrictions on
transfer set forth in this Warrant and applicable state and
federal securities laws.
9. COVENANTS OF THE COMPANY.
(a) The Company shall use its best efforts to amend
the RestatedCertificate of Incorporation of the Company in such a
manner so that no reduction of the Exercise Price pursuant to
Section 3 (c) hereof shall occur at any time.
(b) The Company shall cause a report of the daily
Gross Exposure in each Measurement Period (each, an "EXPOSURE
REPORT") to be delivered by Boatmen's POS and MNB to the Holder
at the address specified in Section 14 hereof within 30 days of
the end of such Measurement Period so long as this Warrant
remains subject to additional vesting. In the event that the
Holder has not received an Exposure Report within 30 days after
the end or any Measuring Period, then, notwithstanding anything
else contained herein, for the purposes of this Warrant, the
daily Gross Exposure throughout such period shall be deemed to be
four million dollars ($4,000,000).
<PAGE>
10. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to and for the
benefit of the Purchaser as follows:
(c) AUTHORIZATION. All corporate action on the part of the
Company and its directors necessary for the authorization,
execution, issuance and delivery by the Company of this Warrant
and the performance of the Company's obligations hereunder. This
Warrant, when executed and delivered by the Company, shall
constitute a valid and binding obligation of the Company
enforceable in accordance with its terms. Assuming an amendment
of the Restated Certificate of Incorporation of the Company to
increase the number of authorized shares of Common Stock (as so
amended, the "Amended RestatedCertificate of Incorporation"), the
shares of Common Stock issuable upon exercise of this Warrant,
when issued in compliance with the provisions of this Warrant and
the Amended Restated Certificate of Incorporation, will be
validly issued, fully paid and nonassessable and free of any
liens or encumbrances.
(d) COMPLIANCE WITH OTHER INSTRUMENTS. Assuming an amendment of
the Restated Certificate of Incorporation, the Company is not in
violation of any term of its Restated Certificate of
Incorporation, By-Laws or any statute, rule or regulation
applicable to the Company. The execution, delivery and
performance of this Agreement, the creation and issuance of this
Warrant and the issuance of the shares of Common Stock pursuant
to an exercise of the Warrant in accordance with the Amended
Certificate of Incorporation will not result in any such
violation, or be in conflict with or constitute a default under
any such term, or result in the creation of any mortgage, pledge,
lien, encumbrance, or charge upon any of the properties or assets
of the Company or contravene any provision of, or constitute a
default under, any indenture, mortgage, contract or other
instrument to which it is a party or by which it is bound.
(e) GOVERNMENTAL CONSENTS. All consents, approvals, orders, or
authorizations of, or registrations, qualifications,
designations, declarations, or filings with, any governmental
authority, required on the part of the Company in accordance with
the valid execution, delivery, offer, sale or issuance of this
Warrant and the capital stock issuable upon exercise of the
Warrant, have been obtained, except for the filing of notices
pursuant to Regulation D under the Securities Act, and any filing
required under applicable state securities laws which will be
effective by the time required thereby.
(f) OFFERING. Assuming the accuracy of the representations and
warranties of the Purchaser contained in Section 19 hereof, the
offer, issue, and sale of the Warrant are and will be exempt from
the registration and prospectus
<PAGE>
delivery requirements of the Securities Act, and have been
registered or qualified (or are exempt from registration and
qualification) under the registration, permit, or qualification
requirements of all applicable state securities laws.
11. NOTICES OF RECORD DATE. Upon (a) any taking by the Company
of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to
receive any dividend or other distribution or (b) any capital
reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, any merger
or consolidation of the Company with or into any other
corporation, or any transfer of all or substantially all the
assets of the Company to any other person, or any voluntary or
involuntary dissolution, liquidation or winding up of the
Company, the Company shall mail to the Holder at least twenty
(20) days, or such longer period as is required by law, prior to
the record date, a notice specifying (i) the date on which any
such record is to be taken for the purpose of such dividend or
distribution and a description of such dividend or distribution,
(ii) the date on which any such reorganization, reclassification,
transfer, consolidation, merger, dissolution, liquidation or
winding up is expected to become effective, and (iii) the date,
if any, that is to be fixed as to when the holders of record of
Common Stock (or other capital stock at that time receivable upon
exercise of the Warrant) shall be entitled to exchange their
shares of Common Stock (or such other stock or securities) for
securities or other property deliverable upon such
reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up.
12. EXCHANGES OF WARRANTS. Upon surrender for exchange of this
Warrant (in negotiable form, if not surrendered by the Holder
named on the face hereof) to the Company at its principal office,
the Company, at its expense, will issue and deliver a new Warrant
or Warrants calling in the aggregate for the same number of
shares of Common Stock, in the denomination or denominations
requested, to or on the order of such Holder upon payment by such
Holder of any applicable transfer taxes; PROVIDED that any
transfer of the Warrant shall be subject to the conditions on
transfer set forth herein.
13. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or
destruction) upon delivery of an indemnity agreement in such
reasonable amount as the Company may determine, or (in the case
of mutilation) upon surrender and cancellation hereof, the
Company, at its expense, shall issue a replacement.
14. NOTICES. Any notice required or permitted under this
Agreement
<PAGE>
shall be given in writing and shall be deemed effectively given
upon personal delivery or upon deposit with the United States
Post Office, postage prepaid, addressed to the Company at 30 NW
Rome Circle, Mezzanine Level, Kansas City International Airport,
Kansas City, MO 64153, or to the Holder at One Bush Street, San
Francisco, California 94104, Attention: David Golden, or at such
other address as the Company or any Holder may designate by ten
(10) days advance written notice to the other party.
14. MODIFICATION OF WAIVER. Except as provided in this Warrant,
no modification or waiver of any provision of this Warrant or
consent to departure therefrom shall be effective unless in
writing and approved by the Company and the Holder.
15. TITLES AND SUBTITLES. The titles and subtitles used in this
Warrant are used for convenience only and are not to be
considered in construing or interpreting this Warrant.
16. GOVERNING LAW. This Warrant shall be construed in
accordance with and governed by and under the laws of the State
of California as applied to contracts made and to be performed
entirely within the State of California.
17. EXPIRATION TIME. This Warrant will be wholly void and of no
effect after 5:00 p.m. (San Francisco time) January 17, 2007 (the
"EXPIRATION TIME").
18. TRANSFER RESTRICTIONS. The Company is relying upon an
exemption from registration of this Warrant and the shares of
Common Stock issuable upon exercise hereof under the Securities
Act and applicable state securities laws. The Holder by
acceptance hereof represents that the Holder understands that
neither this Warrant nor the Common Stock issuable upon exercise
hereof has been registered with the Securities and Exchange
Commission nor under any state securities law. By acceptance
hereof, the Holder represents and warrants that (a) it is
acquiring the Warrant (and the shares of Common Stock or other
securities issuable upon exercise hereof) for its own account for
investment purposes and not with a view to distribution, (b) has
received all such information as the Holder deems necessary and
appropriate to enable the Holder to evaluate the financial risk
inherent in making an investment in the Company, and satisfactory
and complete information concerning the business and financial
condition of the Company in response to all inquiries in respect
thereof, (c) the Holder's acquisition of shares upon exercise
hereof will be a highly speculative investment, (d) the Holder is
able, without impairing its financial condition, to hold such
shares for an indefinite period of time and to suffer a complete
loss of the Holder's
<PAGE>
investment, and (e) the Holder has such knowledge and experience
in financial and business matters that it is capable of
evaluating the merits and risks of acquisition of this Warrant
and the shares issuable upon exercise hereof and of making an
informed investment decision with respect thereto.
This Warrant may not be exercised and neither this Warrant
nor any of the shares issuable upon exercise of the Warrant, nor
any interest in either, may be sold, assigned, pledged,
hypothecated, encumbered or in any other manner transferred or
disposed of, in whole or in part, except in compliance with
applicable United States federal and state securities or Blue Sky
laws and the terms and conditions hereof. Each Warrant or each
certificate representing shares of Common Stock or other
securities issued upon exercise of this Warrant shall have
conspicuously endorsed on its face, at the time of its issuance,
such legends as counsel to the Company deems necessary or
appropriate, including without limitation the legend set forth on
the top of the first page of this Warrant. Any certificate for
any securities issued at any time in exchange or substitution for
any certificate for any shares of Common Stock bearing such
legend shall also bear such legend unless, in the opinion of
counsel for the Company, the securities represented thereby need
no longer be subject to the restriction contained herein.
Without in any way limiting the foregoing, the Holder agrees
not to make any disposition of all or any portion of the
Securities unless and until:
a. There is then in effect a Registration Statement
under the Securities Act covering such proposed disposition and
such disposition is made in accordance with such Registration
Statement; or
b. (i) The Holder shall have notified the Company of
the proposed disposition and shall have furnished the Company
with a detailed statement of the circumstances surrounding the
proposed disposition, and (ii) if reasonably requested by the
Company, the Holder shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration under the
Securities Act.
c. Notwithstanding the provisions of paragraphs (i)
and (ii) above, no such registration statement or opinion of
counsel shall be necessary for a transfer by the Holder to (i) an
underwriter acceptable to the Company for immediate exercise by
such underwriter in connection with a fully underwritten public
offering of the Company's Common Stock underlying this Warrant
(ii) a partner (or retired partner) or "affiliate" (as defined
under the Securities Exchange Act of 1934) of Hambrecht & Quist
Group or (iii) transfers by gift, will or intestate succession to
any spouse or lineal descendants or ancestors of any such
partner, retired partner or affiliate, if all transferees agree
in writing to be subject to the terms hereof to the same extent
as if they
<PAGE>
were a purchaser hereunder.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to
be duly executed and delivered on the date first set forth above.
VANGUARD AIRLINES, INC.
By:___________________________
Name:_________________________
Title:________________________
<PAGE>
SUBSCRIPTION FORM
[To be executed if holder desires to exercise the Warrant]
The undersigned, holder of this Warrant, (1) hereby
irrevocably elects to exercise the right of purchase represented
by this Warrant for, and to purchase thereunder, ______________
full shares of the Common Stock of Vanguard Airlines, Inc.
provided for therein, (2) makes payment in full (as permitted in
Section 2 of the Warrant) of the purchase price of such shares,
(3) requests that certificates for such shares be issued in the
name of
_______________________________________________________________
(Please print name and address)
_______________________________________________________________
(Please insert social security or other identifying number)
and (4) if said number of shares shall not be all the shares
purchasable thereunder, requests that a new Warrant for the
unexercised portion of this Warrant be issued in the name of and
delivered to:
_______________________________________________________________
_______________________________________________________________
(Please print name and address)
Dated:__________________________ _________________________
By: __________________________
__________________________
Title
<PAGE>
MERCHANT AGREEMENT
MICHIGAN
BANKARD [TRADEMARK]
SERVICES
<PAGE>
Merchant Agreement
This MERCHANT AGREEMENT
(The "Agreement") is entered into between Michigan National Bank
("MNB", "us" or "we") and the company identified as the
("Merchant" or "you") as of the date this Agreement is accepted
by us in the attached Schedule of Fees and Charges. You agree to
honor Credit and/or Debit Cards in connection with the sale of
merchandise and/or services, and we agree to perform sales
authorizations, accept Sales Drafts and pay you for the Sales
Drafts in accordance with the following terms and conditions:
1. DEFINITIONS. (a) "ANNUAL SALES VOLUME" means the dollar
amount of Visa and MasterCard Sales Drafts minus Credit Vouchers
which: (i) are received from Merchant and processed by MNB during
a calendar year, or (ii) will be received from Merchant according
to a projection approved by MNB.
(b) "AUTHORUZATION" means the approval by the Participating
Institution holding the Cardholder Account, or its agent, to
complete a Transaction.
(c) "AVERAGE TICKET" means the average dollar amount of Sales
Drafts submitted y Merchant. The Average Ticket is computed by
dividing the total dollar amount of Sales Drafts received from a
Location during a calendar month by the total number of Sales
Drafts received from the Location during that same calendar
month.
(d) "CARDHOLDER" means an individual with a validly issued and
currently effective, unrevoked, unvoided, and unexpired Credit or
Debit Card.
(e) "CHARGEBACK" means a Sales Draft that has been presented to
either the Cardholder or the issuer of the Credit or Debit Card
and for which payment to us has subsequently either been refused
or reversed in accordance with applicable law and/or operating
regulations promulgated by the licensor of the Credit or Debit
Card, as provided in Section 15.
(f) "CREDIT CARD" means a valid and unexpired: (1) Visa(R) credit
or debit card bearing the service marks owned and licensed by
Visa, U.S.A., Inc., (2) MasterCard(R) credit or debit card in the
form issued under license from MasterCard International, Inc.;
(3) Diners Club(R) and Carte Blanche(R) credit cards that bear
the service marks or names licensed by Citicorp Diners Club, Inc.
and (4) any other credit card which, by agreement between us and
the issuer or licensor of such credit cards, we permit you to
honor in connection with the sale of merchandise or services.
(g) "CREDIT VOUCHER" means the written form or Electronic Format
approved by us for use in consummating credit transactions
applied to the account of a Purchaser on the basis of a Credit or
Debit Card properly honored by you under the terms of this
Agreement.
(h) "DEBIT CARD" means an access device for a Debit Cardholder
Account, which is issued by any institution that is a member of,
or participant in, a Participating Switch, and which can be used
to initiate a Transaction.
(i) "DEBIT CARD PROGRAM" means the on-line debit card point of
sale
<PAGE>
program by which the Merchant processes Transactions initiated by
Debit Cards to us and we transfer funds to the Merchant for
Transactions, all in accordance with the terms of this Agreement.
(j) "DEBIT CARD PROGRAM COSTS" means the fees and costs related
to the Debit Card Program as set forth in the attached Schedule
of Fees and Charges.
(k) "DEBIT CARDHOLDER ACCOUNT" means the Debit Cardholder's
deposit account that is accessed by a Debit Card when it is used
to initiate a Transaction.
(l) "ELECTRONIC FROMAT" means the electronic form approved by us
for use in transmitting data required by this Agreement.
(m) "LOCATION" means each geographic site or, by agreement
between MNB and you, one or more subdivisions of a geographic
site, at which you: (i) transact business and (ii) accept Credit
and/or Debit Cards as payment for goods and services.
(n) "MERCHANT APPLICATION" means the written application required
by us to be submitted by you as a precondition to the execution
of this Agreement.
(o) "MERCHANT GUIDE" means the written procedures and
requirements we provide to you, as they may be changed
periodically by us, regarding the operation of MNB's Merchant
Credit Card program or any other written instructions from us to
you. The Merchant Guide may be changed from time to time by us
upon fifteen (15) days written notice to you.
(p) "OPERATING RULES" means the Debit Point of Sale Operating
Rules for Debit Card acceptance promulgated by MNB for the Debit
Card Program.
(q) "PARTICIPATING INSTITUTION" means an institution that (i) is
identified as such in the Operating Rules and (ii) issues Debit
or Credit Cards.
(r) "PARTICIPATING SWITCH" means an institution or network that
(i) is identified as such in the Operating Rules and (ii) is
identified with and interfaces for, Debit Cards.
(s) "PERFORMANCE GOAL FEE" means the additional fee we charge you
when a Sales Draft does not meet our transmission format or the
Visa/MasterCard interchange criteria as indicated on the Schedule
of Fees and Charges. Such fee represents the additional amount
we incur or that is charged to us by Visa and MasterCard for each
Sales Draft that does not meet all of the applicable
requirements.
(t) "PURCHASER" means the person whose name is embossed on a
Credit or Debit Card or who is an authorized user of that card.
(u) "RETRIEVAL" means your production of the original or an
acceptable facsimile of a Sales Draft, Credit Voucher, or other
supporting documentation at our request.
(v) "RETURN RATE" means the percentage (rounded up to the nearest
whole percent) determined for each Location each month by adding
together the number of processed Chargebacks and Credit Vouchers,
divided by the total number of Sales Drafts received.
(w) "SALES DRAFT" means the written form or Electronic Format
approved by us for use in consummating sales Transactions charged
to the account of a Purchaser on the basis of a Credit Card
properly honored by you under this Agreement.
(x) "SALES DRAFT TRANSMITTAL" means the written form or
Electronic
<PAGE>
Format approved by us for use in transmitting Sales Drafts and
Credit Vouchers for deposit.
(y) "SCHEDULE OF FEES AND CHARGES" is the document so named which
is attached to and a part of this agreement.
(z) "SECURITY DEPOSIT" means an interest-bearing account
maintained by you to provide sufficient funds to cover any
Chargebacks or other amounts due to us.
(aa) "SETTLEMENT ACCOUNT" means the demand deposit account or
other account approved by us which has been or will be maintained
by you with us for the purpose of debiting and crediting you for
Credit or Debit Card transactions and fees.
(ab) "TERMINAL" means an electronic device which is capable of
transmitting, to us or our agents, transactions initiated with a
Credit or Debit Card.
(ac) "TRANSACTION" means an attempt by a Cardholder to purchase
goods or services from the Merchant which (i) is initiated with a
Credit or Debit Card at a Terminal owned, operated, rented or
leased by the Merchant and (ii) is processed through MNB or its
agents.
2. HONOR ALL CREDIT CARDS. (a) You shall honor, without
discrimination, all valid Credit Cards when properly presented as
payment from Purchasers for authorized Transactions. If you do
not deal with the public at large (for example, a private club),
you will be deemed to have complied with this subsection if you
honor valid Credit Cards of Purchasers who have purchasing
privileges with you.
(b) You shall not establish minimum or maximum Transaction
amounts as a condition of honoring a Credit Card.
(c) You shall not impose a surcharge on Credit Card Transactions
or require any Purchaser to pay any part of any merchant
processing fee, whether through increased price, finance charge,
or any other means.
(d) You shall not require Purchasers to provide any personal
information such as a telephone number, an address, or driver's
license number as a condition for honoring the Credit Card unless
such information is required to complete the Transaction.
(e) Any tax you collect must be included in the total Transaction
amount and not collected separately in cash.
3. ADVERTISING AND PROMOTION. (a) Upon execution of this
Agreement, you shall remove outdated Credit Card signage and
display the current Credit Card emblems and promotional materials
provided by us. If you accept Debit Cards, we may require you to
display the logos and marks identified and in the manner set
forth in the Operating Rules.
(b) You may use the Credit Card emblems in your advertising and
promotional activities. You shall make no other use of the
Credit Card emblems or service marks without our prior written
consent. If you accept Debit Cards, you shall only use the
Michigan Money(TM) logo and marks or those of Participating
Switches or Institutions as set forth in the Operating Rules, and
shall not use such logos or marks in any other manner without our
prior written consent. In your
<PAGE>
advertising and promotional activities, you shall not indicate,
directly or indirectly, that MNB, Visa U.S.A. Inc., MasterCard
International, Inc., Citicorp Diners Club, Inc., any other Credit
Card licensor, or any Participating Switch or Institution,
endorses any of your merchandise or services.
(c) If you accept Debit Cards, you agree to execute such license
agreements as we may require to govern the display of the logos
and marks set forth in the Operating Rules.
4. SETTLEMENT ACCOUNT. (a) You agree to establish and maintain
a Settlement Account with us and agree to maintain a balance
sufficient to accommodate all Merchant/MNB Transactions. You may
transfer your Settlement Account to, or establish a new
Settlement Account with, another financial institution only with
our prior written approval.
(b) You hereby authorize us to make deposits to and withdrawals
from the Settlement Account whether held by MNB or another
financial institution, or any other accounts you hold at any bank
or institution, as provided in this Agreement. You also
authorize us to make withdrawals from the Settlement Account
whether held by MNB or another financial institution for any
amounts you owe us for any reason. Such deposits and withdrawals
may be in paper form or Electronic Format and may be made through
and in accordance with the rules of the Michigan or National
Automated Clearing House Association. You hereby agree that all
such financial institutions may rely on the authorizations
contained in this Agreement without additional or separate
written documents providing such authorizations. At our request,
however, you shall provide a separate written authorization to
the financial institution holding the Settlement Account in the
event such account is not held by MNB, or to any other financial
institution, authorizing such deposits and withdrawals by us.
(c) You hereby direct all financial institutions holding your
Settlement Account in the event such account is not held by MNB
or any of your other accounts to provide us with all requested
account information with respect to those accounts.
(d) You agree that we may take any action against the Settlement
Account whether held by MNB or another financial institution or
any other accounts of yours, including, but not limited to,
suspending credits, reversing credits, and withdrawing funds when
such action is deemed necessary by us to protect us against any
loss or liability that we reasonably believe we may incur as a
result of your breach of the Agreement. Our action against the
Settlement Account whether held by MNB or another financial
institution or other accounts shall be limited to the amount of
any loss or liability that we reasonably believe we may incur as
a result of the breach and for the time period in which we
reasonably believe such loss or liability may be incurred. You
hereby authorize the financial institutions at which you maintain
your Settlement Account in the event such account is not held by
MNB or any other accounts to act in accordance with instructions
from us regarding funds in those accounts, including, but not
limited to, the transfer of the funds to us. You agree to
indemnify and hold all such financial institutions harmless from
any claim or loss incurred for acting in accordance with any
instruction from us with respect to the Settlement Account in the
event such account is not held by MNB or your other accounts held
by
<PAGE>
them. Neither the termination of this Agreement nor any action
taken pursuant to Section 5 herein shall affect our right to take
any action in accordance with this subsection.
(e) You shall not pledge or assign the Settlement Account, any
proceeds of it, or any other amounts due to you under this
Agreement to any person or entity and you shall continually
maintain the Settlement Account whether held by MNB or another
financial institution free from all liens and encumbrances.
(f) In the event a Security Deposit is established pursuant to
Section 5 of this Agreement, you authorize us to make withdrawals
from the Settlement Account whether held by MNB or another
financial institution in order to replenish the Security Deposit.
5. SECURITY DEPOSIT. (a) You agree to provide us with an
interest-bearing Security Deposit in the amount set forth in the
Schedule of Fees and Charges upon the occurrence of one or more
of the following:
(1) We require the establishment of a Security Deposit at the
time this Agreement is executed.
(2) The Return Rate at any single Location during any calendar
month exceeds 10%, unless otherwise specified in the Schedule of
Fees and Charges. Upon this occurrence, a deduction equalling
that Location's actual Return Rate will be withheld from each
deposit for a period of 90 days and placed in the Security
Deposit account. Once the Security Deposit has been established,
the amount required to be maintained is subject to review and may
be changed by us every 90 days.
(3) The number of Merchant's Chargebacks as described in Section
15 of this Agreement compared to the total number of Sales Drafts
received at any single Location during any calendar month exceeds
1%.
(b) In the event that the Settlement Account whether held by MNB
or another financial institution is insufficient to cover any
amounts due to us under this Agreement, you agree that we may
withdraw funds from the Security Deposit to cover such amounts
when due.
(c) If any funds are withdrawn from the Security Deposit by us,
you shall immediately restore it to the amount set forth in the
Schedule of Fees and Charges. We may terminate this Agreement if
you fail to do so.
(d) We shall have continual access to the Security Deposit for
the purposes described above for a period of 180 days following
the expiration or termination of this Agreement. After that, we
shall return the remaining balance of the Security Deposit to
you. However, we may, in good faith, retain any funds contained
in the Security Deposit if MNB and you are parties to any dispute
involving the funds until the dispute is resolved.
6. EQUIPMENT AND FORMS. (a) You shall pay a monthly fee for all
imprinters, terminals, electronic printers, and other equipment
rented from us in accordance with the Schedule of Fees and
Charges. All equipment rented from us including parts and
accessories, shall remain our property and shall be returned to
us at the end of this Agreement in the same condition as when
<PAGE>
received, reasonable wear and tear excepted. If you fail to
return any equipment as required under this Agreement within
fifteen days, you shall pay us the then current purchase price
for such item(s).
(b) All information embossed on your imprinter plate shall be in
a form approved by us. Changes to such information may be made
only by us or with our consent after notice from you. Upon the
expiration or termination of this Agreement, you shall return the
imprinter plate and any merchant identification cards to us.
(c) Unless otherwise agreed by you and MNB, upon reasonable
request, we shall supply you with printed Sales Drafts, Sales
Draft Transmittals, Credit Vouchers, and other forms to be used
by you pursuant to this Agreement at the price(s) established by
us. You shall be responsible for obtaining, at your own expense,
all supplies necessary for performing Transactions via electronic
printer or other electronic equipment.
(d) If you rent or lease equipment from a third party, MNB, upon
your request, will provide terminal and printer repair and
download services at the price(s) established by us. You agree
that MNB will not be obligated to provide these services if this
Agreement is terminated or cancelled, regardless of the length of
your rental or lease agreement with the third party. If an
equipment management fee for these services is charged by the
third party leasing company and paid to us, that fee and the
associated services will be discontinued if this Agreement is
terminated or cancelled.
(e) If you elect to pay a fee for Equipment Management Services
as indicated on the Schedule of Fees and Charges, MNB will
provide equipment repair and download services (exclusive of
shipping charges) under the following terms and conditions:
(1) The equipment, consisting of electronic Terminals and related
parts and accessories (the "Equipment"), to be maintained by us
is set forth on the Schedule of Fees and Charges.
(2) No Equipment shall be eligible for maintenance service unless
it is in good operating condition, as determined by us at the
commencement of this Agreement. In order to make any Equipment
eligible for maintenance service, we may make such repairs as we
determine to be necessary. You agree to pay us for these repairs
at our service rates then in effect.
(3) We will provide maintenance services on the Equipment within
a reasonable time or on a "best efforts" basis following
notification of Equipment malfunction.
(4) We will repair, or, at our option, replace all defective
Equipment eligible for maintenance services under this Agreement.
Any replacement Equipment or part shall be of comparable
operating capability to the replaced Equipment.
(5) In the event that we provide replacement Equipment, you agree
to deliver the defective Equipment to us within fifteen days of
receipt of the replacement Equipment. If you fail to do so, you
authorize us to charge your Settlement Account whether held by
MNB or another financial institution for the full cost of the
Equipment at our then current purchase price.
(6) In no event shall we be obligated to perform maintenance or
repair services at your Location.
(7) The following maintenance services are not included under
this Agreement
<PAGE>
and, if performed by us, will be subject to additional charges in
accordance with our service fee schedule then in effect:
(i) Services which, in our opinion, are required due to improper
treatment or use of the Equipment.
(ii) Services which, in our opinion, are required due to the
attempted repair of the Equipment by persons not authorized by
us.
(iii) Services required when Equipment functions are interrupted
due to your negligence or willful misconduct, computer or
telephone breakdowns, fire, flood, earthquake, strike, lock-out,
war, riot, civil disobedience, governmental action or inaction,
acts of God or other causes beyond our control.
(8) You will immediately notify us of any malfunctions or damage
to or error in transmissions through the Equipment and shall
provide to us full and unrestricted access to the Equipment and
to the related communications facilities at all reasonable times
to install, replace, inspect, relocate, disconnect, remove,
repair and maintain the Equipment.
(9) You agree to maintain the site conditions within the common
environmental range of the Equipment in such manner and condition
as we may specify.
(10) You agree not to remove any Equipment from the place of
installation, nor permit any modification, attachment or
additions to the Equipment without our prior written approval.
(11) The fees for Equipment Management Services are set forth in
the Schedule of Fees and Charges and may be changed by us upon
fifteen days written notice to you. You authorize us to make
necessary withdrawals from your Settlement Account whether held
by MNB or another financial institution for payment thereof.
These fees are non-refundable except for any unused portion of
any annual Equipment Management Services fee upon our termination
of this Agreement. Monthly Equipment Management Services fees
will not be refunded.
(12) We make no warranties whatsoever, express or implied, with
respect to any of the Equipment or the condition of the
Equipment. We disclaim all such warranties including all implied
warranties of merchantability and fitness for a particular
purpose. We do not warrant that the Equipment is error free or
that its use will be uninterrupted. Our sole obligation will be
to provide maintenance and repair services as described in this
section.
7. CREDIT CARD SALES TRANSACTION. (a) In affecting Credit Card
sales Transactions, you shall fully comply with all of the
procedures set forth in the Merchant Guide.
(b) Except in the case of mail order, telephone order, and
preauthorized orders or Transactions, no Credit Card sales
Transaction may be completed if the Purchaser fails to present
his or her Credit Card to you. In affecting a Mail Order,
Telephone Order, or Preauthorized Order Credit Card transaction,
you shall fully comply with all of the procedures set forth in
the Merchant Guide.
(c) You shall include all items of merchandise and services
purchased in a single sales Transaction in one total amount on a
single Sales Draft, except as otherwise specifically authorized
in Merchant Guide.
(d) Your compliance with this Section does not preclude
Chargebacks under Section 15.
<PAGE>
8. DEBIT CARD SALES TRANSACTION. In addition to any other terms
and conditions relating to Debit Cards stated in this Agreement,
if you accept Debit Card Transactions you agree to the
following:
(a) You agree to comply with the Operating Rules and with any
rules and regulations promulgated by any Participating Switch,
together with any changes, amendments or supplements thereto as
may be made by MNB or any Participating Switch from time to time.
(b) We have the discretion to process a Transaction through any
Participating Switch, switch or network, that we deem
appropriate.
(c) You must provide us with information (including the
Cardholder PIN) for each Transaction in the format prescribed in
the Operating Rules.
(d) You must issue the Cardholder a receipt for each Transaction.
The receipt must comply with the requirements of Regulation E, 12
C.F.R. (SECTION) 205.1 ET. SEQ, as amended from time to time,
and all other federal and state regulations. If we ask for proof
of issuance of a receipt, you must provide us this proof within
two days.
(e) If a Debit Card Transaction does not receive Authorization,
we have no obligation to credit the Settlement Account whether
held by MNB or another financial institution for the amount of
the Transaction. The Debit Card Program costs do, however, apply
to any such Transaction. If a Debit Transaction does not receive
Authorization or if your Terminal becomes inoperative, and if the
Operating Rules so provide, you may initiate a paper based
Transaction. You shall, however, assume the risk that any such
paper based Transaction will not receive Authorization. Such
Transaction shall comply with the requirements for paper based
Transactions set forth in the Operating Rules.
(f) MNB may change or amend the Operating Rules at any time upon
at least 15 days prior written notice to you.
(g) To the extent that MNB has the ability to interface with a
particular network or institution, you agree that all point of
sale Debit Card Transactions involving that network or
institution initiated at any of your Location(s) will be
processed through MNB and will be governed by either this
Agreement or another agreement with MNB.
9. AMERICAN EXPRESS TRANSACTIONS. MNB shall allow you to accept
American Express and Novus (e.g., Discover) Credit Cards as
payment for the sale of goods or services pursuant to an
agreement between you, American Express Travel Related Services
Company, Inc. ("Amexco") and/or Novus Services, Inc. ("Novus")
and to obtain American Express and/or Novus Authorizations in the
manner set forth in this section.
(a) MNB agrees that you may use our processing system via
electronic terminal to obtain American Express and/or Novus
Authorizations and/or utilize American Express or Novus Data
Capture Services.
(b) You agree that if your authority to process American Express
or Novus Transactions via electronic terminal is terminated by
Amexco, Novus or our designated processor, then your authority to
process American Express or Novus Transactions pursuant to this
Agreement is also terminated; provided, however, that such
termination shall not affect any of your existing or accrued
obligations
<PAGE>
to MNB under this Agreement.
(c) All Amexco or Novus Sales Drafts shall be transmitted by
MNB's designated processor to Amexco or Novus pursuant to the
terms and conditions of your agreement with our designated
processor, Amexco and/or Novus. We make no warranties to you as
to the time or manner in which Amexco or Novus will pay you for
Sales Drafts transmitted by you to them through our designated
processor.
(d) You authorize us to furnish your name to Amexco or Novus and
to MNB's designated processor identifying you as a recipient of
American Express and/or Novus Authorization and Processing
Services through the MNB's processing system.
(e) In addition to the indemnities in section 17 of this
Agreement, you agree to indemnify and hold MNB harmless from any
loss, damage or expense in the event that Amexco, Novus and/or
MNB's designated processor terminate MNB's authority to process
American Express or Novus Credit Card Transactions.
(f) We make no representations or warranties as to any floor
limits or processing rates chargeable to you by Amexco or Novus.
10. SCAN(TM) ACCESS. If you indicate on the Schedule of Fees
and Charges that you want MNB to provide you with access to
Electronic Transaction Corporation's (ETC) Shared Check
Authorization Network (SCAN), MNB will provide this access
subject to the following terms and conditions and to the SCAN
rules and regulations established from time to time by ETC.
(a) SCAN is a check verification software program developed by
ETC and licensed to MNB. We make no representations or
warranties whatsoever, express or implied, with respect to SCAN.
We have been authorized by ETC to provide SCAN access to you.
(b) You represent to us that you will access SCAN for the purpose
of assisting you to determine whether to accept or reject
consumer checks tendered at points of sale (POS) in payment for
goods and/or services. You agree to use SCAN solely for the
purpose of authorizing checks offered as payment for bona fide
purchases completed in your ordinary course of business. You
agree not to use SCAN for check guarantee purposes, not to make
SCAN available to any other person or entity, and you agree to
instruct your employees and representatives to take all
reasonable measures to ensure compliance with this provision.
You agree to abide by the terms and conditions set forth herein,
as well as ETC's existing and future rules and regulations
regarding the use and operation of SCAN.
(c) You agree that in order for check data provided by your
customer to be accurately compared with SCAN, you must enter the
check MICR number. You further agree that if you decline to
accept a check as a result of information obtained through SCAN,
you shall immediately advise your customer via a SCAN Referral
Card, that inquiries concerning the reasons for denial and
requests for assistance must be directed to: SCAN(TM), 19803
North Creek Parkway, Bothell, WA 98011, 1(800)262-7771.
(d) SCAN is a check authorization service intended to reduce your
risk associated with accepting checks. SCAN does not guarantee
payment. You agree that ETC
<PAGE>
and MNB are not guaranteeing any consumer sales transactions
which are paid by check and authorized through SCAN. You assume
full risk and liability for your use of SCAN and for any losses
incurred as the result of consumer sales transactions authorized
through SCAN.
(e) You agree to indemnify MNB from any and all claims,
liabilities, lawsuits, losses, or damages (hereinafter referred
to as "Claims") asserted or brought by customers whose checks are
declined through SCAN, as well as from Claims by you or any other
person resulting from your use of SCAN, including without
limitation, Claims resulting from any check authorized through
SCAN which is subsequently returned to you unpaid. You further
agree to indemnify MNB from all Claims by ETC against MNB arising
out of or resulting from the use or misuse of SCAN by you, your
employees and agents. Finally, you agree to indemnify MNB and
ETC against any and all Claims which arise as a result of the
negligent use or the misuse of SCAN by you, your employees and
agents.
11. CASH DISBURSEMENTS AND PAYMENTS. You shall not give cash to
a Purchaser and subsequently prepare and deposit a Sales Draft to
represent such cash disbursement. You shall not receive or
accept any payments from a Purchaser with respect to charges for
merchandise or services which are included in a Sales Draft
resulting from the use of a Credit Card. You shall not accept
money from a Purchaser and subsequently prepare and deposit a
Credit Voucher for the purpose of affecting a credit to the
Purchaser's Credit Card account.
12. AUTHORIZATIONS. When prior Credit Card Authorization is
required by the provisions of the Merchant Guide, you shall
request Authorization from MNB or its designated processor. You
shall type, print legibly, or electronically record the
Authorization number or code on the Credit Card Sales Draft
evidencing the Authorization. If you use an Authorization
service other than one designated and approved in writing by us,
we are not responsible for any Authorizations from that service.
Your compliance with this Section does not preclude Chargebacks
under Section 15.
13. RECOVERY OF CREDIT CARDS. You shall use your best efforts
to retrieve Credit or Debit Cards under the circumstances and in
the manner set forth in the Merchant Guide. You shall indemnify
us from and against any claims, expenses or losses claimed
against or incurred by us in connection with your actions, or
those of any of your agents or employees, in the recovery of any
Credit or Debit Card.
14. PRESENTMENT OF SALES DRAFTS. (a) You shall transmit all
Sales Drafts to us in accordance with the specifications
established by us and within the time frames set forth in the
Schedule of Fees and Charges. In no event, however, shall you
present a Sales Draft until the merchandise has been shipped or
the services have been performed and you have otherwise performed
all of your obligations to the Purchaser. You shall not permit
any Sales Drafts to be transmitted or presented which you know or
should know to be fraudulent or not
<PAGE>
authorized by the Purchaser.
(b) All Sales Drafts shall be presented for deposit with a Sales
Draft Transmittal drawn on us in the total amount of all of the
Sales Drafts presented, less any enclosed Credit Vouchers
presented. Any deduction of the applicable processing fee by you
is prohibited.
(c) After the proper transmission or delivery of the Sales Drafts
to us for deposit, and subject to your warranties under this
Agreement and our Chargeback and other rights, we will process
the credit for the full amount of the deposit within one (1)
business day (which will normally reach your Settlement Account
one day later), unless you have agreed to a different period of
time for us to process the credit, and such different period of
time is set forth in the Schedule of Fees and Charges. The
availability of funds in the Settlement Account shall be governed
by your account agreement with the financial institution holding
the Settlement Account in the event such account is not held by
MNB. In the event of any inaccuracies in the Sales Draft
Transmittal, we shall have the right, without prior notice to
you, to make an adjustment to your Settlement Account whether
held by MNB or another financial institution.
(d) You hereby waive notice of default or nonpayment, protest,
demand for payment and any other demands or notices in connection
with this Agreement or any of the Sales Drafts. You hereby
consent to any extension of time granted and to any compromise
made by us with any Purchaser identified in a Sales Draft without
affecting your obligations under this Agreement.
(e) We shall not be obligated to pay you or to credit the
Settlement Account whether held by MNB or another financial
institution for any Sales Drafts transmitted or delivered to us
after you become insolvent, cease to do business, or dissolve.
(f) You shall not present to us for deposit any Sales Draft or
Credit Voucher which was not originated as a result of a bona
fide Transaction consummated between the Purchaser and you in the
ordinary course of your business. Transmittal or presentation of
Sales Drafts or Credit Vouchers for goods or services provided or
performed by any person other than you ("Factoring") is strictly
prohibited. Factoring may result in the immediate termination of
this Agreement and action by us against the Settlement Account
whether held by MNB or another financial institution as provided
in Section 4.
15. CHARGEBACKS. (a) We shall have the right at any time to
process Chargebacks to the Settlement Account whether held by MNB
or another financial institution and to make withdrawals from it
for the full amount of any Sales Draft in any of the following
cases:
(1) The Sales Draft or any material information on the Sales
Draft such as the account number, expiration date of the Credit
Card, Merchant description, transaction amount or date is
illegible or incomplete;
(2) The Sales Draft is not presented to us in a timely manner.
(3) The Transaction was under your floor limit and the Credit
Card account number was listed on the then-current MasterCard and
Visa Electronic Warning Bulletin (Exception File) or the Diners
Club/Carte Blanche Warning Bulletin, or on any other written or
electronic notice accessible to you via an electronic
<PAGE>
terminal or telephone voice authorization service listing Credit
Cards which may not be honored on the Transaction date, and you
did not reject the Transaction or receive prior Authorization
from us or our designated processor for the transaction;
(4) The written Sales Draft does not contain the imprint of a
Credit Card that was unexpired on the Transaction date;
(5) The Transaction was one for which prior Authorization from us
is required, and prior Authorization was not obtained, or a valid
authorization number or code was not correctly or legibly printed
on the Sales Draft;
(6) The Sales Draft is a duplicate of a Sales Draft previously
paid or is one of two or more Sales Drafts generated in a single
Transaction in violation of Section 7(c);
(7) The Purchaser disputed the execution or Authorization of the
Sales Draft, the sales, delivery, quality, or performance of the
merchandise or services purchased, or alleges that a credit
adjustment was requested and refused or that a credit adjustment
was issued by you but was not posted to the Purchaser's account;
(8) The price of the merchandise or services shown on the Sales
Draft differs from the amount shown on the copy of the Sales
Draft delivered to the Purchaser at the time of the transaction;
(9) We reasonably determine that you violated any provision of
this Agreement in connection with the execution, transmission,
Authorization, presentment or processing of the Sales Draft;
(10) We reasonably determine that the Sales Draft is fraudulent
or that the related Transaction is not a bona fide Transaction in
your ordinary course of business, or is subject to any claim of
illegality, cancellation, rescission, avoidance, or offset for
any reason including, without limitation, negligence, breach of
warranty, fraud, or dishonesty on the part of you or any of your
agents or employees;
(11) The merchandise was not delivered to the Purchaser or was
refused or rejected by the Purchaser (or was returned to you), or
acceptance of the merchandise was revoked by the Purchaser, or
the services were not performed by you or were refused or
rejected by the Purchaser for any reason;
(12) The Purchaser or other person executing or authorizing the
Sales Draft lacked the legal capacity to contract at the time of
the Transaction;
(13) A Debit Card Transaction is reversed for any reason;
(14) A Debit Card Transaction was not authorized by a person
authorized to make withdrawals from the Cardholder Account;
(15) We are required to pay any of our customers, any
Participating Switch, or any Participating Institution for the
entire amount, or any portion, of a Debit Card Transaction; or
(16) We receive a Chargeback for any reason not listed in this
Section.
(b) Without our consent, you may not deposit any Sales Draft
which has previously been presented and was subsequently subject
to a Chargeback.
(c) The return of merchandise to you shall not be a condition
precedent to the exercise of our right of Chargeback under this
Agreement.
<PAGE>
16. RETURNED MERCHANDISE, CREDITS, AND ADJUSTMENTS.
(a) Unless otherwise restricted by applicable law, you shall
maintain a fair policy of permitting refunds, exchanges, returns,
and adjustments for persons making purchases through the use of a
Credit or Debit Card.
(b) When you accept any merchandise for return, when any services
are terminated or cancelled, or when you allow any price
adjustment, you shall not make any cash refund, but shall
promptly complete and present (within the time periods specified
in the Schedule of Fees and Charges) to us a Credit Voucher
evidencing the refund or adjustment, and shall deliver to the
Purchaser a true and complete copy or facsimile of the Credit
Voucher at the time the refund or adjustment is made.
(c) You shall issue and present to us Credit Vouchers only in
connection with previous bona fide Credit or Debit Card sales
transactions between you and the Purchaser and only as permitted
under this Agreement and in the manner set forth in the Merchant
Guide or Debit Operating Rules. You shall not permit any Credit
Vouchers to be presented to us which you know or should know to
be fraudulent or not authorized by the Purchaser.
(d) If returned merchandise was purchased using a Debit Card, you
have the option of providing the Cardholder with cash or an in-store
credit. Alternatively, if the Operating Rules so provide,
you may credit the amount that was debited for the Transaction in
accordance with the requirements for credit Transactions set
forth in the Operating Rules.
(e) Your compliance with this Section does not preclude
Chargebacks under Section 15.
17. MERCHANT INDEMNITY. (a) In addition to any other
indemnities provided under this Agreement, you shall indemnify us
from any and all liabilities, claims, demands, losses, damages,
costs, expenses, including court costs and attorney's fees,
incurred by us in connection with or arising as the result of any
of the following:
(1) A Sales Draft that does not conform to the requirements of
this Agreement, the Merchant Guide or the Debit Operating Rules;
(2) A breach or alleged breach of any warranty or agreement by
you to any Purchaser or to us.
(3) The rescission or cancellation of a Sales Draft or Credit
Voucher by operation of law, adjudication, or otherwise;
(4) A claim, counterclaim, dispute or defense, whether or not
well-founded, that (i) any Sales Draft or Credit Voucher is
unenforceable, or (ii) there has been a violation of any
applicable law or regulation; or (iii) there has been a
rescission or cancellation of any Sales Draft or Credit Voucher
occurring as a result any of your actions or inactions or those
of any of your agents or employees;
(5) Any action by us against your Settlement Account whether held
by MNB or another financial institution or other accounts taken
pursuant to this Agreement; or
(6) Any act or failure by you or your agents or employees, which
is claimed against us in connection with the use of a Credit or
Debit Card or of any Sales Draft or Credit Voucher.
<PAGE>
(b) The indemnities contained in this Section and elsewhere in
this Agreement shall survive the termination of this Agreement.
(c) We shall not be liable to you or to any other party for any
loss, damage or Performance Goal Fees resulting from the failure
of any Terminal, switch, processor, interfacer, software or
hardware provider or their products, or any other entity, device
or software to operate properly, unless such failure is due to
our gross negligence or willful misconduct.
18. MERCHANT WARRANTIES. In addition to any other warranty,
covenant, or representation made in this Agreement, you represent
and warrant the following:
(a) You will preserve all records pertaining to all Transactions,
Sales Drafts, and Credit Vouchers, including all paper or
microfilm evidence of electronically transmitted information or
data, as may be required by law, and in no event less than seven
years for Credit Card Transactions and one year for Debit Card
Transactions from the date of the applicable Transaction and
shall permit us or our agents or designees to examine, verify,
and copy any such records at any reasonable time.
(b) You will comply with all requirements of the federal Consumer
Credit Protection Act and all other applicable state and federal
consumer protection, consumer credit and debit card laws and
regulations, and will obtain and maintain such licenses and
permits as may be required by them. You will provide us with all
information necessary for us to comply with all such laws and
regulations. In addition, you will comply with all of the
obligations on your part to be performed in connection with the
sales of merchandise or the performance of services to
Purchasers.
(c) If you accept Debit Card Transactions, you will also comply
in all respects with the Electronic Fund Transfer Act, 15 U.S.C.
(SECTION) 1693, as amended from time to time and Regulation E, 12
C.F.R. (SECTION) 205.1 ET. SEQ, as amended from time to time.
(d) You will provide adequate services in connection with each
Credit or Debit Card Transaction in accordance with standard
practices and manufacturers' warranties, and will provide such
repairs, services, and replacements in such manner and will take
such corrective action as may be required by law or by contract
with a Purchaser. You also agree to make a good faith attempt to
resolve all Purchaser disputes with respect to any such
Transactions.
(e) You will execute, deliver, file, or record such documents as
we may reasonably request to protect our interests under this
Agreement.
(f) If you accept Debit Card Transactions, you will assist us in
resolving Debit Card errors by complying with error resolution
provisions of the Debit Operating Rules and by providing any
reasonable assistance to us as we may request.
(g) You will not sell, purchase, provide, disclose or exchange
Credit or Debit Card account number information, in the form of
imprinted Sales Drafts, mailing lists, electronic tapes, or any
other medium to any third person other than (1) to your agents or
employees for use in assisting you in processing Transactions,
(2) to us (3) to Visa U.S.A., Inc., MasterCard International,
Inc., Citicorp Diners Club, Inc. or to any other Credit Card
licensor, as applicable, or (4) as may be
<PAGE>
required by law.
(h) We may, at any time, investigate and obtain credit
information with respect to your credit and financial
responsibility and that of any owner, officer, partner,
shareholder or principal of Merchant or of any guarantor of your
obligations under this Agreement. You shall provide all
information reasonably requested by us to complete such credit
investigation. Upon our request, you will provide us with an
accurate and current signed financial statement with respect to
your business and financial affairs.
(i) You will comply in all respects with the Merchant Guide and
any other rules governing Credit Card Transactions.
(j) You will pay any sales tax, where applicable, directly to the
state to which the tax is due.
(k) The Merchant Application and this Agreement have been duly
and validly authorized by all appropriate corporate or
partnership action, as applicable. The person(s) designated as
"Authorized Signer" on the Merchant Application are authorized to
take all action for you under the terms of this Agreement. This
authorization shall remain in force until written notice to the
contrary is received by us, but receipt of such notice shall not
affect any action taken by us in reliance upon authorizations in
effect prior to such notice. The person(s) signing the Merchant
Application and this Agreement on your behalf has been duly
authorized to do so, and the Merchant Application and this
Agreement, when accepted by us, will be valid and binding on you
in accordance with its terms. Additionally, the person(s)
signing the Merchant Application and this Agreement are
authorized to deliver such other agreements, guarantees, pledges,
security deposit agreements, financial statements,
authorizations, and other documents as we may request in
connection with your participation in our Credit Card and/or
Debit Card Program(s), as well as any amendment, renewal,
restatement or extension thereof.
(l) The information and representations contained in any Merchant
Application or related documents are true and accurate as of the
date made and shall continue to be true and accurate throughout
the term of this Agreement. You shall promptly advise us of any
changes in the information contained in any such documents
including but not limited to the nature or description of the
goods or services you offer, authorized signers, and your correct
legal name.
(m) We shall have the right, at any reasonable time, to inspect
any of your places of business and to observe implementation of
and compliance with this Agreement.
(n) The warranties and representations contained in this
Agreement shall survive the termination of this Agreement.
19. GENERAL PROVISIONS. (a) Any notice required or permitted to
be given under this Agreement shall be given in writing and
deposited in the United States mail, first class postage prepaid,
and, if to us, addressed to us at the address set forth on the
Schedule of Fees and Charges and, if to you, addressed as
indicated on our records, or to such other places as either party
shall designate by written notice to the other party. Notices
shall be deemed given when mailed in accordance with this
subsection.
<PAGE>
(b) This Agreement may be amended by us at any time upon 15 days
prior written notice to you. In addition to termination rights
granted elsewhere in this Agreement, you may terminate this
Agreement if you object to an amendment (other than an amendment
permitted by Section 20(a)) and we may immediately terminate this
Agreement and all services in the event you fail to comply with
any amendment.
(c) This Agreement shall not be effective until accepted in
writing by an authorized officer from the Michigan Bankard
department of MNB by the dating and signing of the Schedule of
Fees and Charges. This Agreement shall remain in effect for 12
months from the date of our acceptance unless otherwise specified
in the Schedule of Fees and Charges ("Initial Term").
Thereafter, this Agreement shall be automatically extended for
successive one year periods (each of which shall be referred to
as a "Renewal Term") on the same terms and conditions expressed
herein, unless: i) You give us 60 days advance written notice
of termination to be effective no earlier than the expiration of
the Initial Term or any Renewal Term, or ii) We give you written
notice of termination at any time during the Initial Term or any
Renewal Term. Notwithstanding such termination, this Agreement
shall remain in effect with respect to your obligations to us
that existed, were incurred, or accrued as of the date of
termination. Your right to make Credit Card Transactions and to
use advertising displays, Sales Drafts, Credit Vouchers,
equipment that is owned by us, and other materials developed for
your use under this Agreement shall cease upon termination of
this Agreement, and you shall immediately surrender all such
advertising displays, Sales Drafts, Credit Vouchers, equipment,
forms, items, and materials to us.
(d) This Agreement shall be binding upon the parties hereto and
upon their respective successors and assigns. This Agreement
shall not be assigned by you without our express prior written
consent. We shall have the exclusive right in our sole
discretion to assign this Agreement at any time.
(e) This Agreement, including any Schedule or Addenda hereto, the
Merchant Guide and the Operating Rules, sets forth the entire
understanding of the parties relating to the use, processing,
honoring, payments and Chargebacks of Credit or Debit Card Sales
Drafts and of the related Transactions. This Agreement may not
be amended, waived, or terminated except in writing and in
accordance with the terms of this Agreement.
(f) If any provision of this Agreement is void or unenforceable
in any jurisdiction, this shall not affect the validity or
enforceability of such provision in any other jurisdiction or
that of any other provision of this Agreement in that or any
other jurisdiction.
(g) No failure or delay by us in exercising any right or remedy
under this Agreement shall operate as a waiver thereof, nor shall
any single or partial exercise of any such right or remedy
preclude any other exercise thereof or of the exercise of any
other right or remedy.
(h) This Agreement is a contract made under and governed by the
laws of the State of Michigan. You agree that the courts of the
State of Michigan shall have jurisdiction over you for purposes
of any suits brought in connection with your or our rights or
duties under this Agreement. Venue for all such suits shall be
Oakland or Eaton County, Michigan.
<PAGE>
(i) The captions and section headings in this Agreement are for
convenience only and in no way describe the scope or intent of
any provision and shall not be used in construing this Agreement.
(j) You understand and agree that telephone conversations with us
may be monitored or recorded for purposes of security and
enhancing merchant services.
(k) During the term of this Agreement, you shall not enter into
any agreement with another party for services such as those
contemplated by this Agreement.
(l) We will not be liable for any error unless you notify us
within ninety (90) days of the occurrence of the error. You
agree that if you bring legal action against us for any reason,
you will commerce that action within one year of the date the
error occurred.
20. FEES AND CHARGES. (a) You agree to pay us the fees and
charges set forth in the Schedule of Fees and Charges. We may
amend the Schedule of Fees and Charges not more frequently than
once during any Renewal Term by giving written notice of such
amendment to Merchant at least fifteen days prior to the
effective date of such amendment. Notwithstanding the
foregoing, we may amend the Schedule of Fees and Charges at any
time during the term of this Agreement: (i) if Sales Drafts are
not transmitted in accordance with the Electronic Format
specified by us or, (ii) if your Annual Sales Volume or Average
Ticket during any three consecutive months is less than that
specified in the Schedule of Fees and Charges, or (iii) in order
to pass through increased fees and charges incurred by us and
imposed by Visa, MasterCard, a Participating Switch or
Institution, or telecommunication vendors, or (iv) if your
membership in the association or trade group specified in the
Schedule of Fees and Charges is terminated.
(b) If the Schedule of Fees and Charges indicates that you will
be charged a variable rate, the processing fee rate and per item
fee will be determined by your Average Ticket. The Average
Ticket will then be compared to the variable rate table set forth
in the Schedule of Fees and Charges to determine the processing
fee rate and per item fee for the Location for that month.
(c) Whether you are charged a fixed or variable rate processing
fee, at the end of each calendar month, we will compute the
applicable processing fee by first applying your processing rate
for each Location to the dollar amount of all Sales Drafts from
that Location presented to us for deposit, and then multiplying
the per item fee by the number of Sales Drafts received, and,
lastly, adding together the resulting sums for the total amount
of the processing fee due. Thereafter, without prior notice to
you, we may make sufficient withdrawals from the Settlement
Account whether held by MNB or another financial institution to
pay for the computed processing fee, together with all other
fees, charges and adjustments then due under this Agreement.
(d) Upon notice to you, we shall be entitled to deduct the
applicable processing fee and other fees and charges then due
from each Sales Draft Transmittal when presented to us.
(e) You agree to reimburse us for any fines imposed on us by
Visa, MasterCard, Diners Club, and/or a Participating Switch or
Institution, if such fines have been imposed because of your
failure to adhere to the written procedures and
<PAGE>
requirements of this Agreement or those provided to you in the
Merchant Guide or Operating Rules. You may contact us for a list
of potential fines because changes in such fines may be frequent
and beyond our control. You will not receive notice of such
changes.
(f) If the Schedule of Fees and Charges indicates a minimum
monthly processing charge, you agree to pay us that charge each
month when your total fixed or variable rate processing fees for
that month are less than the minimum monthly processing charge.
21. CREDIT CARD LICENSOR REQUIREMENTS. You agree to be bound by
the requirements for Merchant Agreements set forth in the Visa
U.S.A. Operating Regulations, the MasterCard International Rules,
the Citicorp Diners Club/Carte Blanche Operating Manual, and the
rules of any other Credit Card licensor whose card is honored by
you, as any of such rules may be changed from time to time.
Within a reasonable time after your request, we shall make
available such requirements for your review.
22. CONFIDENTIALITY. You shall not copy, publish, disclose to
others, or use any information, documents, products, or data,
including this Agreement, which is provided or disclosed to you
by us for any purpose other than the fulfillment of your
obligations under this Agreement without our prior written
consent.
23. ACCEPTANCE BY MNB. We are authorized to make whatever
inquiries as may be appropriate for purposes of evaluating your
request to become a Credit or Debit Card merchant. You warrant
that all information given to us in connection with the Merchant
Application is true, accurate, and complete. This Agreement is
subject to acceptance and execution by us in the Schedule of Fees
and Charges.
VANGUARD AIRLINES, INC.
By:_____________________________________
Bill Garrett, Vice President of Finance
MICHIGAN NATIONAL BANK
By:_____________________________________
<PAGE>
AMENDMENT TO MERCHANT AGREEMENT
This AMENDMENT TO MERCHANT AGREEMENT (the "Agreement") is entered
into as of February 6, 1997, by and between Vanguard Airlines,
Inc., a Delaware corporation whose address is 30 NW Rome Circle
(Terminal B), Kansas City International Airport, Kansas City,
Missouri 64153 (the "Merchant") and Michigan National Bank, a
national banking association whose address is c/o Michigan
Bankard Services, Lansing, Michigan ("MNB").
RECITALS
A. Merchant and MNB are parties to a certain Merchant Agreement
dated as of even date herewith (as amended, the "Agreement")
pursuant to which Merchant and MNB agreed to the terms and
conditions whereby Merchant could honor Credit and/or Debit Cards
and receive payment from MNB upon MNB's acceptance of related Sales
Drafts.
B. Merchant and MNB desire to amend the Agreement to set forth
certain non-standard provisions relating to the specific
transaction contemplated by the parties.
NOW, THEREFORE, for good and valuable consideration the parties
hereto agree as follows:
1. ADDITIONAL DEFINITIONS. The defined terms set forth below shall
be deemed a part of the Agreement. Capitalized terms used in this
Amendment but not otherwise defined shall have the meanings
assigned thereto in the Agreement.
(A)"BUSINESS DAY" means a day (other than a Saturday or Sunday) on
which banks generally are open for the conduct of substantially all
of their business activities.
(B)"DAILY OUTSTANDING BALANCE" means, for any particular day,
Merchant's unearned revenue relating to tickets sold by Merchant on
or before such day in connection with Merchant's honor of Visa and
Mastercard Credit Cards and relating to flights occurring on or
after such day as shown on Merchant's most-recent Travel Timeframes
Report. For example, Exhibit A sets forth a Travel Timeframes
Report supplied by Merchant to MNB which shows a Daily Outstanding
Balance for the date shown thereon of $4,050,431.21. Merchant
agrees that the Daily Outstanding Balance set forth by Merchant
within each particular Travel Timeframes Report shall be subject to
reconciliation by Bank and that any adjustments made thereto by
Bank which Bank deems necessary, appropriate or desirable in Bank's
sole discretion shall be binding upon Merchant.
(C)"GROSS EXPOSURE" means, for any particular day, an amount
determined
<PAGE>
by multiplying Merchant's Daily Outstanding Balance for the
immediately-preceding day by one hundred thirty percent (130%).
The Gross Exposure for the day following the date shown on the
Travel Timeframes Report attached as Exhibit A is $5,265,560.57.
(D) "LETTER OF CREDIT" means any letter or letters of credit issued
on behalf of Merchant or an affiliate in favor of MNB and shall
have the meaning ascribed to such term under Article 5 of the
Michigan Uniform Commercial Code, as amended from time to time, as
supplemented by the Uniform Customs and Practice for Documentary
Credits, ICC Publication 500, as amended from time to time.
(E) "TRAVEL TIMEFRAMES REPORT" means the report of Merchant's
unearned revenue relating to tickets sold in connection with
Merchant's honor of Visa and Mastercard Credit Cards and relating
to flights occurring on or after such day which Merchant agrees to
generate for each calendar day upon which sales Transactions are
consummated and transmit to MNB via facsimile on the next-succeeding
Business Day.
1. AMENDMENT. Section 5 of the Agreement is hereby amended by
adding thereto an additional subparagraph (e) as follows:
(e) Except as may otherwise be set forth herein, Merchant shall
cause to be issued in favor of MNB and cause to remain outstanding
during the term of the Agreement an irrevocable direct-pay Letter
of Credit in an amount equal to the Gross Exposure as determined by
MNB in its sole discretion, adjustable upon twenty-four (24) hours
prior written notice from MNB. The Letter of Credit shall have
such Letter of Credit draft instructions as are acceptable to MNB
in its sole discretion. Merchant shall cause to be paid for each
Letter of Credit issued in favor of MNB on behalf of Merchant all
issuance fees, payment fees, amendment fees, non-utilization fees,
communication and delivery expenses arising in connection
therewith. Any Letter of Credit issued in favor of MNB shall have
an expiry date of not less than twelve (12) months after the issue
date.
The sum of the amount remaining to be drawn upon any valid and
outstanding Letter of Credit and the amount of the Security Deposit
which Bank may require shall at all times be no less than the Gross
Exposure. Merchant agrees that Bank shall have the absolute right
to determine the ratio of Letter of Credit to Security Deposit in
determining whether the Bank has been provided coverage in the
amount of the Gross Exposure. In the event that MNB reasonably
determines that it is likely that the issuer of the Letter of
Credit will be unable or unwilling to perform under the terms
thereof, MNB may require that the Security Deposit equal the amount
of the Gross Exposure.
Upon the occurrence of any default or any other event that gives
rise to MNB's right under the Agreement (i) to make demand on
Merchant for payment to MNB, (ii) to apply amounts represented by
the Security Deposit to obligations
<PAGE>
of Merchant under the Agreement or (iii) otherwise to retain and
not pay to Merchant amounts paid to MNB by MasterCard International
or the Visa System on account of Sales Drafts, then MNB, at its
option, may draw on the Letter of Credit without first taking any
of the actions described in clauses (i), (ii) and (iii) above or
elsewhere in the Agreement.
In addition to MNB's rights as set forth above, MNB, at its option,
may draw up to the full amount remaining undrawn on the Letter of
Credit upon the occurrence of any default; provided, however,
unless Merchant has failed to provide MNB with Merchant's Travel
Timeframes Report or MNB reasonably determines that such report has
become materially misleading, MNB shall limit the amount so drawn
to an amount equal to the then-current amount of the Gross
Exposure, as determined by MNB in its sole discretion. No failure
to draw or delay in making a draw on the Letter of Credit shall
impair MNB's right to draw thereon at a later time.
Merchant acknowledges that any Security Deposit which may be
required represents sums payable to Merchant, subject to the
occurrence or non-occurrence of certain events, rather than funds
owned by Merchant. Nevertheless, to the extent a court of
competent jurisdiction may hold to the contrary, Merchant hereby
grants MNB a continuing security interest in the Security Deposit,
if any, to secure amounts owed by Merchant to MNB hereunder or
under the Agreement. Merchant further acknowledges that upon any
draw by MNB on the Letter of Credit, MNB may apply the same in
satisfaction of Merchant's obligations to MNB under the Agreement
and MNB shall also be entitled to hold the proceeds thereof for
payment of MNB's obligations under the Agreement and otherwise
apply such proceeds in such manner as MNB deems reasonably
appropriate. Merchant agrees that if at such time, if ever, that
MNB determines that Merchant has no further obligations to MNB
under the Agreement, and MNB is holding funds that otherwise would
be payable to Merchant, MNB, subject to the terms of any agreement
with the issuer of the standby letter of credit, shall remit such
funds as a court of competent jurisdiction might decree.
Merchant agrees that in addition to the circumstances set forth in
subparagraph (a) of Section 5 of the Agreement the occurrence of
which, or any of them, would immediately give rise to MNB's right
at any time to require Merchant to provide MNB with a interest
bearing Security Deposit, in the event the amount of the Letter of
Credit is ever exceeded by the amount of the Gross Exposure, as
calculated by MNB in its sole discretion on each Business Day, MNB
shall also have the right in its sole discretion (i) to require the
implementation of the Security Deposit, (ii) to (y) transfer an
amount from the Settlement Account as a Security Deposit or (z)
withhold as a Security Deposit an amount from any prospective
credit to the Settlement Account pursuant to Sales Drafts of
Merchant properly transmitted to MNB or (iii) to require the
issuance in favor of MNB of an additional Letter of Credit. In
such event the amount of funds to be provided to MNB by Merchant or
withheld from any pending credit to the
<PAGE>
Settlement Account for the purpose of establishing the Security
Deposit or, in the alternative, the amount of any such additional
Letter of Credit to be obtained by Merchant in favor of MNB, shall
be that amount which is equal to the difference between the Gross
Exposure as calculated by MNB and the aggregate amount of the
Letter of Credit and any other then-existing Letter of Credit
issued in favor of MNB in connection with the Agreement, without
regard to whether the increase in Gross Exposure is the result of
increases in Merchant revenue or any other reason. Merchant
acknowledges that (i) MNB's preference in all cases shall be to
require Merchant to provide MNB with additional Letters of Credit
in the required amount in lieu of a Security Deposit and Merchant
shall have no right whatsoever to offer MNB a Security Deposit in
response to any demand made by MNB in accordance with the terms
hereof for additional Letters of Credit and that (ii) MNB may elect
to declare a default and exercise its rights hereunder with respect
to any existing Letters of Credit even if (y) Merchant is willing
and able to provide MNB with a Security Deposit in the required
amount or (z) MNB is capable of establishing the Security Deposit
by withholding funds from the Settlement Account.
1. REPRESENTATIONS AND WARRANTIES. Merchant hereby represents and
warrants to MNB that on and as of the date hereof and after giving
effect to this Amendment:
(a) All of Merchant's representations and warranties contained in
the Agreement are true, correct, and complete in all respects as of
the date hereof as though made on and as of such date.
(b) Merchant has the power and legal right and authority to enter
into this Amendment and has duly authorized as appropriate the
execution and delivery of this Amendment and none of the agreements
contained herein contravene or constitute a default under any
agreement, instrument, or indenture to which the Merchant is a
party or a signatory or a provision of Merchant's Certificate of
Incorporation, Bylaws, or, to the best of Merchant's knowledge and
belief, any other agreement or requirement of law, or result in the
imposition of any lien on any of its property under any agreement
binding on or applicable to Merchant on any of its property except,
if any, to MNB.
(c) Merchant is duly organized and in good standing under the laws
of the State of its organization and is qualified to do business in
each state where the nature of its activities or the character of
its properties makes such qualification necessary or desirable
except where the failure to so qualify would not have a material
adverse effect on the assets or operations of an airline.
(d) Upon the effective date of this Amendment, this Amendment and
the Agreement, as modified hereby, will constitute the legal, valid
and binding obligations of Merchant enforceable in accordance with
their terms.
2. OTHER DEFAULT. In addition to such other matters as may be set
forth in
<PAGE>
the Agreement, the occurrence of any of the following events shall
constitute a default under the Agreement:
(e) Receipt of notification by MNB from the issuer of any Letter of
Credit issued in favor of MNB in connection with the Agreement that
such issuer has elected not to renew such letter of credit.
(f) A substantial number of the scheduled flights of Merchant fail
to operate on any particular day for reasons other than weather or
regularly-scheduled maintenance.
(g) Any warranty or representation of Merchant in connection with
or contained in the Agreement, or any financial statements now or
hereafter furnished to MNB by or on behalf of the Merchant, is
false or misleading in any material respect.
(h) Any non-MNB indebtedness of Merchant is declared to be due and
payable prior to the stated maturity thereof.
(i) There shall be entered against Merchant any judgment which
materially affects Merchant's business, property or financial
condition, or if any tax lien, levy, attachment, forfeiture,
seizure, garnishment, execution or similar writ or process shall be
issued against Merchant's property or which materially affects
Merchant's business, property or financial condition, and which
remains unpaid, unstayed on appeal, undischarged, unbonded, or
undismissed for a period of thirty (30) days after the date
thereof.
(j) The institution of any criminal proceeding wherein forfeiture
of Merchant's property is a potential penalty.
(k) Merchant shall voluntarily suspend transaction of its business;
shall make a general assignment for the benefit of creditors; shall
file or have filed against Merchant any reorganization or
liquidation under the Bankruptcy Code or under any other State or
Federal law for the relief of debtors, or a receiver, trustee or
custodian shall be appointed for Merchant for any portion of
Merchant's property, which is not discharged within thirty (30)
days after filing.
2. ACCELERATION. If any default occurs, the obligations of MNB to
accept Sales Drafts shall automatically terminate and Merchant's
obligations to MNB under the Agreement shall immediately become due
and payable without any election or action on the part of MNB and
without presentment, demand, protest or notice of any kind, all of
which Merchant hereby expressly waives.
3. PRESERVATION OF RIGHTS; SETOFF. No delay or omission of MNB to
exercise any right hereunder or under the Agreement shall impair
such right or be construed to be a waiver of any default or an
acquiescence therein, and the acceptance of Sales Drafts
notwithstanding the existence of a default shall not constitute any
waiver or acquiescence. Any single or partial exercise of any such
<PAGE>
right shall not preclude other or further exercise thereof or the
exercise of any other right, and no waiver, amendment or other
variation of the terms, conditions or provisions of the Agreement
whatsoever shall be valid unless in writing signed by MNB and then
only to the extent in such writing specifically set forth. All
remedies contained in this Amendment, the Agreement or by law
afforded shall be cumulative and all shall be available to MNB
until the Merchant's obligations to MNB have been paid in full. In
addition to, and without limitation of, any rights of MNB under
applicable law, if Merchant becomes insolvent, however evidenced,
or any default occurs and is continuing, any and all deposits
(including all account balances, whether provisional or final and
whether or not collected or available) and any other indebtedness
at any time held or owing by MNB to or for the credit or account of
Merchant may be offset and applied toward the payment of the
obligations owing to MNB, whether or not the obligations of
Merchant to MNB, or any part thereof, shall then be due.
4. FINANCIAL INFORMATION; CANCELLATION. During the term of the
Agreement Merchant agrees to furnish to MNB, within forty-five (45)
days after the end of each fiscal quarter, a true and correct copy
of Merchant's filed 10-Q financial statements and, within one
hundred twenty (120) after the end of each fiscal year, a true and
correct copy of Merchant's filed 10-K financial statements.
Merchant also agrees to cause Hambrecht & Quist Group ("HQ") to
furnish to MNB, within forty-five (45) days after the end of each
fiscal quarter, a true and correct copy of HQ's filed 10-Q
financial statements and, within one hundred twenty (120) after the
end of each fiscal year, a true and correct copy of HQ's filed 10-K
financial statements. Merchant agrees to promptly furnish to MNB
such other information and reports which MNB may reasonably request
concerning Merchant's business, property, and financial condition
as are provided to Merchant's owners. Merchant agrees that MNB has
the right to cancel the Agreement at any time in MNB's sole
discretion upon thirty (30) days' prior written notice to Merchant.
Upon the expiration of such thirty (30) day period, if Merchant has
failed to repay all amounts due MNB hereunder and under the
Agreement, MNB may exercise any and all remedies available to it
under the Agreement and this Amendment. MNB agrees that Merchant
has the right to cancel this Agreement at any time in Merchant's
sole discretion upon thirty (30) days' prior written notice to MNB,
whereupon this Amendment and the Agreement shall terminate once the
Gross Exposure has been permanently reduced to zero (0) and MNB has
determined that any monies applied or held by MNB in satisfaction
of the Gross Exposure is no longer subject to return or restoration
to Borrower or to any trustee in bankruptcy under the U.S.
Bankruptcy Code.
5. EXPENSES. Merchant shall reimburse MNB upon demand for any
reasonable costs, internal charges and out-of-pocket expenses
(including attorneys' fees and time charges of attorneys for MNB,
which attorneys may be employees of MNB) paid or incurred by MNB in
connection with the collection or enforcement of this Amendment and
the Agreement. Any demand for such reimbursement shall include
reasonable detail of the costs, charges and expenses for which
<PAGE>
reimbursement is sought.
6. NOTICES. All notices and other communications provided to any
party hereto shall be in writing, by facsimile, first class U.S.
mail or overnight courier and addressed or delivered to such party
at its address set forth below its signature hereto or at such
other address as may be designated by such party in a notice to the
other parties. Any notice, if mailed and properly addressed with
first class postage prepaid, return receipt requested, shall be
deemed given three (3) Business Days after deposit in the U.S.
mail; any notice, if transmitted by facsimile, shall be deemed
given when transmitted; and any notice given by overnight courier
shall be deemed given when received by the addressee.
7. RATIFICATION OF AGREEMENT; ACKNOWLEDGEMENT. Except as expressly
modified under this Amendment, all of the terms, conditions,
provisions, agreements, requirements, promises, obligations,
duties, covenants, and representations of Merchant and MNB,
respectively, under the Agreement are hereby ratified by Merchant
and MNB, respectively.
8. EFFECTIVE DATE. This Amendment shall become effective upon
execution and delivery of duly executed counterparts by Merchant
and MNB.
9. MERGER AND INTEGRATION; SUPERSEDING EFFECT. This Amendment and
the Agreement, from and after the date hereof, embody the entire
agreement and understanding between the parties hereto, and
supersede and have merged therein all prior oral and written
agreements, on the same subjects by and between the parties hereto
with the effect that this Amendment and the Agreement shall control
with respect to the specific subjects hereof and thereof.
10. SUCCESSORS AND ASSIGNS. This Amendment and the Agreement shall
inure to the benefit of and shall be binding upon the parties
hereto and their respective successors and assigns, provided:
Merchant acknowledges that Merchant cannot assign or transfer its
rights or obligations under the Agreement or this Amendment without
MNB's prior written consent.
11. GOVERNING LAW. This Amendment and the Agreement shall be
governed by and construed in accordance with the internal laws,
without regard to conflict of laws provisions, of the state of
Michigan, but giving effect to federal laws applicable to national
banks.
12. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be
deemed to be an original, and all of which counterparts of this
Amendment when taken together, shall constitute one and the same
instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment as of the day and year first written above.
VANGUARD AIRLINES, INC.
By:_____________________________________
Bill Garrett, Vice President of Finance
MICHIGAN NATIONAL BANK
By:_____________________________________
<PAGE>
AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into as of the
______ day of January, 1997, by and between Vanguard Airlines,
Inc. ("Company"); Kenneth J. Wagnon, Daniel M. Carney, and
Starwood Investments, L.P., a Kansas limited partnership
(collectively "Guarantors"); and COMMERCE BANK, N.A. (WICHITA,
KANSAS) a national banking association ("Bank");
In consideration of the mutual benefits accruing to each of the
parties, the receipt and sufficiency of which are hereby
acknowledged, and in further consideration of the mutual
performance of this Agreement, the parties hereto agree as
follows:
ARTICLE I
Loan
1.01. Amount. Subject to the terms of this Agreement, Bank
agrees to lend to Company, from time to time until the
termination thereof, such sums as Company may request, but shall
not exceed in the aggregate principal amount at any time
outstanding of TWO MILLION TWO HUNDRED SEVENTY-FIVE THOUSAND
DOLLARS ($2,275,000) (the "Loan").
1.02. Note. On the date of closing, Company shall execute and
deliver its promissory note to Bank, in form and substance
satisfactory to Bank, and in the principal amount of the Loan
(the "Company Note").
1.03. Interest. The Company Note shall bear interest at a per
annum variable rate equal to the Prime Rate as published in the
Money Rates section of The Wall Street Journal, adjustable the
date of any change in the Prime Rate.
Interest on the Company Note shall be computed based upon a year
consisting of 360 days, actual number of days elapsed.
Interest after or during the continuation of any Event of Default
under Section 6.01, shall be at a rate equal to 3% in excess of
the stated rate, but not to exceed the maximum rate allowed by
law, and if not paid monthly, such interest shall be compounded
monthly.
<PAGE>
1.04. Repayment. Interest shall be payable in monthly
installments, in arrears, beginning on March 1, 1997, and
continuing on the first day of each month thereafter, until July
31, 1997, when the outstanding principal balance, together with
accrued interest, shall be due and payable in full.
ARTICLE II
Representations and Warranties
In borrowing hereunder the Company represents and warrants to
Bank (which representations and warranties will survive the
delivery of the Company Note and shall continue so long as any
sums remain outstanding under the Company Note or under this
Agreement) that:
2.01. Corporation Standing. Company is a corporation duly
organized and in good standing under the laws of the State of
Delaware and has the power to own its property and to carry on
its business and is qualified to do business and is in good
standing in each jurisdiction in which the character of the
properties owned by it or in which the transaction of its
business makes such qualification necessary, except where failure
to do so would not adversely affect Company's operations.
2.02. Authority. Company has the full power and authority to
execute and deliver this Agreement, and the Company Note
(hereinafter collectively referred to as the "Loan Documents"),
and the same constitute the binding and enforceable obligations
of Company in accordance with their terms.
2.03. Litigation. Except as set forth in Schedule 2.03 attached
hereto, there are no actions, suits or proceedings pending or, to
the knowledge of Company, threatened, or any basis therefor,
against or affecting Company at law or in equity, in any court or
before any governmental department or agency, which may result in
any material adverse change in the properties, assets, business
or condition, financial or otherwise, of Company or the ability
of Company to perform the obligations under this Agreement and/or
the other Loan Documents.
2.04. Conflicting Agreements. There are no bylaw provisions of
Company and no provision of any existing mortgage, indenture,
contract or agreement binding on Company or affecting its
property, which would conflict with or in any way prevent the
execution, delivery, or carrying out of the terms of this
Agreement and the other Loan Documents.
<PAGE>
2.05. Other. All written statements by Company contained in any
certificate, statement, document or other instrument delivered by
or on behalf of Company at any time pursuant to this Agreement or
the other Loan Documents shall constitute representations and
warranties made by Company hereunder.
2.06. Regulation U. No part of the proceeds of the Loan will be
used to purchase or carry any margin stock or to extend credit to
others for the purpose of purchasing or carrying any such margin
stock or to reduce or retire any indebtedness incurred for any
such purpose. If requested by Bank, Company will furnish to Bank
a statement in conformity with the requirements of Federal
Reserve Form U-1 referred to in Regulation U to the foregoing
effect.
ARTICLE III
Guaranty of Payment
3.01. Guaranties. The Company Note and all other indebtedness
arising hereunder or in connection herewith is hereby supported
by this guaranty of repayment by each of the Guarantors limited
to the following percentages of the outstanding indebtedness owed
on the Company Note, including principal, interest, and
reasonable attorney fees and expenses incurred in connection with
collection of the indebtedness ("Obligation"):
Kenneth J. Wagnon 54.95%
Daniel M. Carney 28.57%
Starwood Investments, L.P. 16.48%
In connection with this guaranty of repayment, each Guarantor, on
the date of this Agreement shall execute a line of credit
promissory note ("Personal Note") in form and substance
acceptable to Bank, limited to the percentages set forth above.
Bank may unilaterally, at any time and at Bank's sole discretion,
regardless of whether or not the Company Note is due, by
acceleration or otherwise, without prior notice or consent of the
Guarantors, advance funds on each Personal Note based on the
percentages set forth above, in such amounts as necessary to pay
the Obligation owed on the Company Note and assign the Company
Note, without representation or warranty, to Guarantors. The
Personal Notes shall have maturity dates one year from the date
of making advances to pay the Company Note, or July 31, 1998,
whichever is earlier, and shall include such other terms as more
fully set forth in the Personal Notes.
<PAGE>
ARTICLE IV
Closing
The Bank will not be obligated to make the Loan until it has
received fully executed copies of all documents required by this
Agreement and any other documents, instruments and reports as
Bank may reasonably require, including, but not limited to:
(A) Certificate of Good Standing for the Company issued by the
Secretary of State where Company is incorporated.
(B) Borrowing Resolution of Company in form satisfactory to Bank.
(C) Fully and properly executed Loan Documents.
(D) Fully and properly executed Personal Notes from each
Guarantor in form acceptable to Bank.
(E) Certificate of good standing for guarantor, Starwood
Investments, L.P.
(F) Certification of guarantor, Starwood Investments, L.P. as to
authenticity and completeness of partnership agreement and
authorization to execute Guaranty Agreement and Personal Note.
ARTICLE V
Affirmative Covenants
The Company and Guarantors, as applicable, covenant and agree
that during the term of this Agreement and until all of the
Obligations shall have been paid in full, they will duly perform
and observe each and all of the covenants and agreements
hereinafter set forth.
4.01. Financial Reporting. Deliver to Bank financial
information in such form and detail and at such times as are
satisfactory to Bank, including, without limitation:
<PAGE>
(A) Within ninety (90) days after the end of each calendar year,
the personal financial statements of each of the Guarantors for
the preceding year; and from time to time such further
information regarding the financial condition, business and/or
properties of each of the Guarantors as Bank may reasonably
request; and
(B) Such other financial information concerning the Guarantors as
Bank may reasonably require from time to time.
All financial statements required hereunder shall be complete and
correct in all respects and shall be prepared in reasonable
detail.
4.02. Corporate Existence; Compliance With Laws. Take or cause
to be taken such action as from time to time may be necessary to
maintain its organizational existence as a corporation (provided,
however, Company may change its organizational existence with the
prior written consent of Bank, which consent shall not be
unreasonably withheld or delayed) and use due diligence to comply
with all laws pertaining to the business or property of Company,
or any part thereof, and with all other lawful government
requirements relating to its business and property.
4.03. Litigation; Adverse Events. Notify Bank immediately of
the commencement of any material action, suit, proceeding or
investigation against Company or Guarantors, or the making of any
counterclaim against Company or Guarantors and promptly advise
Bank in writing of any other condition, event or act which comes
to the Company's of Guarantors' attention that would or might
prejudice Bank's rights under this Agreement or the Loan
Documents.
4.04. Notification. Notify Bank immediately if it becomes aware
of the occurrence of any Event of Default (as defined under
Article VI hereof) or of any fact, condition, or event that, only
with the giving of notice or passage of time or both, would
become an Event of Default, or if it becomes aware of a material
adverse change in the business prospects, financial condition
(including, without limitation, proceedings in bankruptcy,
insolvency, reorganization or the appointment of a receiver or
trustee of Company or any Guarantor), or results of operations of
Company, or the failure of Company to observe any of its
undertakings under the Loan Documents.
<PAGE>
ARTICLE V
Negative Covenants
So long as this Agreement remains in effect, or as long as there
is any principal or interest due under the Company Note or
Personal Notes, Company and Guarantors, as applicable, shall not,
without the prior written consent of Bank:
5.01. Fundamental Changes. Wind up, liquidate, or dissolve
Starwood Investments, L.P. or as to all Guarantors, sell,
transfer, convey or lease all or a substantial part of their
respective assets, to another person or entity.
5.02. Conduct of Business. Materially alter the character in
which Company conducts its business or the location of such
business or the nature of such business conducted at the date
hereof.
ARTICLE VI
Default
6.01. Events of Default. The occurrence of one or more of the
following events ("Events of Default") shall constitute a
"Default" by the Company hereunder:
(A) nonpayment of interest (within the ten (10) day grace period)
or nonpayment of principal when due on the Company Note; or
(B) any representation or warranty made by the Company or any
Guarantor herein or in any writing furnished in connection with
or pursuant to this Agreement shall prove to be false in any
material respect as of the date on which it is made; or
(C) a breach by Company or any Guarantor in the performance or
observance of any agreement, term, covenant or condition
contained herein (other than in (A) above), and such breach shall
not have been remedied within thirty (30) days after written
notice thereof shall have been given by Bank to Company,
provided, however, if Company or the applicable Guarantor, as the
case may be, has commenced to remedy such breach, and continues
to
diligently pursue such remedy, the time period to remedy such
breach shall be extended for an additional period of time, not to
exceed sixty (60) days,
<PAGE>
necessary for Company to complete the remedy of such breach; or
(D) any report, certificate, financial statement or other
instrument furnished in connection with this Agreement shall
prove to be false or misleading in any material respect; or
(E) Company or any Guarantor shall (i) generally not pay, or
admit in writing its inability to pay its debts as such debts
become due; or (ii) make an assignment for the benefit of
creditors, or petition or apply to any tribunal for the
appointment of a custodian, receiver, or trustee for it or for a
substantial part of its assets; or (iii) commence any proceeding
under any bankruptcy, reorganization, arrangement, readjustment
of debt, dissolution, or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect; or (iv) have
any such petition or application filed or any such proceeding
commenced against it which is not discharged within thirty (30)
days; or (v) take any action indicating its consent to, approval
of, or acquiescence in any such proceeding, or order for relief,
or the appointment of a custodian, receiver, or trustee for all
or any substantial part of its properties; (vi) suffer any
judgment, writ of attachment, execution or similar process to be
issued or levied against all or a substantial part of its
property which is not released, stayed or bonded within thirty
(30) days; or
(F) Company or any Guarantor suffers any judgment, writ of
attachment or execution or similar process to be issued or levied
against all or a substantial part of its property and which is
not released, stayed, bonded, insured or vacated within thirty
(30) days.
6.02. Remedies. In the event the Obligations are not paid when
due, whether by acceleration or otherwise, Bank may resort to any
and all security and to any remedy existing at law or in equity
for the collection of the Company Note according to its tenor and
enforcement of the covenants and provisions hereof, including,
but not limited to the option of funding the Personal Notes of
Guarantors and assigning the Loan Documents to Guarantors. In
addition to the remedies provided herein, in the event the
Company Note is due and payable, the Bank shall have the right of
setoff, without demand or notice to anyone, against the funds of
the Company on deposit with it. In the event of the Bankruptcy of
Company or any other event which acts as a stay or injunction
prohibiting the Bank from making demand on the Company Note, such
act or actions of the Company shall not act as a stay or
otherwise prevent the Bank from funding the Personal Notes in
order to pay the Obligation owed
<PAGE>
on the Company Note. Notwithstanding the foregoing, even if no
event of default exists, Bank, in its sole discretion, may fund
the Personal Notes in order to pay the Obligations, at any time.
6.03. Expenses of Collection. All reasonable costs, expenses
and liabilities incurred by Bank in collecting or attempting to
collect on the Company Note, including costs and expenses
incurred in proposing or selling or otherwise deriving upon any
security, and all reasonable attorneys' fees in connection with
such matters, shall constitute a demand obligation of the Company
and shall bear interest from the date of expenditure until paid
at the per annum rate of 3% in excess of the stated rate in the
Company Note, but not to exceed the maximum rate allowed by law.
6.04. Waiver. Any waiver of an Event of Default by Bank shall
not extend to or affect any subsequent Event of Default. No
failure or delay by Bank in exercising any right hereunder shall
operate as a waiver, nor shall any single or partial exercise of
any right preclude the exercise of any other right hereunder.
ARTICLE VII
Miscellaneous
7.01. Payment on Holidays. Whenever any payment to be made
pursuant to this Agreement or the Note shall be stated to be due
on a public holiday, Saturday or Sunday, such payment may be made
on the next succeeding business day of Bank and such extension of
time shall in such case be included in computing interest, if
any, in connection with such payment.
7.02. Delay; Waiver. No omission or delay by the Bank in
exercising any right, power or privilege under this Agreement,
the Note or any other agreement executed in connection herewith,
will impair such right, power or privilege or be construed to be
a waiver or acquiescence therein and any single or partial
exercise of any right, power or privilege will not preclude other
or further exercise of any other right, power or privilege and no
waiver will be valid unless in writing and signed by Bank and
then only to the extent specified. All remedies herein by law
afforded will be cumulative.
7.03. Binding Effect. This Agreement shall continue until
payment in full of all Obligations and shall be binding upon and
inure to the benefit of Company, Guarantors and their respective
heirs, legal representatives, successors and
<PAGE>
assigns and shall be binding upon and inure to the benefit of
Bank, its successors and assigns.
7.04. Notices. All notices, requests or demands required or
permitted by this Agreement shall be given to, or made upon, the
respective parties hereto by depositing the same in the United
States mail, postage prepaid, or by overnight (next day) courier,
charges prepaid, to the following addresses:
Commerce Bank, N.A.
150 North Main
P.O. Box 637
Wichita, Kansas 67201
Attention: Commercial Loan Department
Vanguard Airlines, Inc.
30 N.W. Rome Circle
Mezzanine Level, KCI Airport
Kansas City, Missouri 64153
Attention: Brian Gillman, Esq.
Kenneth J. Wagnon
P.O. Box 3358
Wichita, Kansas 67201
Daniel M. Carney
Building 1900
8100 East 22nd Street North
Wichita, Kansas 67226-2319
Starwood Investments, L.P.
P.O. Box 8904, Munger Station
Wichita, Kansas 67208-0904
7.05. Amendments. The parties hereto may from time to time
enter into written agreements supplemental hereto for the purpose
of modifying or adding any provision to this Agreement or
changing the rights and privileges of the parties hereto. Any
such supplemental agreement shall be binding upon the parties
hereto and the Bank and their respective successors and assigns.
<PAGE>
7.06 Headings. Article and Section headings in this Agreement
are included herein for convenience of reference only and shall
not constitute a part of this Agreement for any other purpose.
7.07. Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to
the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the
validity or enforceability of such provisions in any other
jurisdiction.
7.08. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Kansas.
7.09. Counterpart Agreements. This Agreement may be executed in
any number of counterparts, each of which shall be deemed an
original and all of which together shall constitute one and the
same Agreement.
7.10 Jury Trial Waiver. THE BORROWER AND BANK HEREBY AGREE TO
TRIAL BY COURT AND IRREVOCABLY WAIVE JURY TRIAL IN ANY ACTION OR
PROCEEDING (INCLUDING BUT NOT LIMITED TO ANY COUNTERCLAIM)
ARISING OUT OF OR IN ANY WAY RELATING TO OR CONNECTED TO THIS
AGREEMENT,
ANY RELATIONSHIP OR TRANSACTION BETWEEN BORROWER AND BANK, THE
ORIGINATION, ADMINISTRATION OR ENFORCEMENT OF THE INDEBTEDNESS
EVIDENCED OR SECURED BY THIS AGREEMENT, OR ANY OTHER MATTER.
7.11 Expenses. Company shall pay all reasonable attorney fees
and expenses of Bank in connection with the preparation of this
Agreement and related documents not to exceed $3,000.
7.12. Statutory Notice. ORAL AGREEMENTS OR COMMITMENTS TO LOAN
MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A
DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT
ENFORCEABLE. TO PROTECT YOU (BORROWER) AND US (CREDITOR) FROM
MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH
COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE
COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US,
EXCEPT AS WE MAY LATER
<PAGE>
AGREE IN WRITING TO MODIFY IT. BY SIGNING BELOW, YOU AND WE
AGREE THAT THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN US.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed on the day and year first above written.
VANGUARD AIRLINES, INC.
By: _______________________________
__________________, Vice President
COMMERCE BANK, N.A.
By: _______________________________
Title: _______________________________
_____________________________________
Kenneth J. Wagnon, Individually
_____________________________________
Daniel M. Carney, Individually
STARWOOD INVESTMENTS, L.P.
By: Robert A. Geist Revocable Trust, as
General Partner and Managing Partner
By: __________________________
Robert A. Geist, Trustee
<PAGE>
LINE OF CREDIT NOTE
$2,275,000.00 January _____, 1997
Maximum Amount and Interest Wichita, Kansas
FOR VALUE RECEIVED, VANGUARD AIRLINES, INC., a Delaware
corporation ("Company") hereby promises to pay to the order of
COMMERCE BANK, N.A. ("Bank"), at its offices in Wichita, Kansas,
on demand due to an Event of Default (as defined in the Agreement
of even date), or on July 31, 1997, whichever first occurs, the
aggregate unpaid principal amount and accrued interest of all
borrowings hereunder. Company may, at any time, make principal
prepayments without penalty.
1. Interest. Interest on this Line of Credit Note shall be
calculated on the actual number of days outstanding on the basis
of a year consisting of 360 days. The outstanding principal
amount hereunder shall bear interest at a per annum variable rate
equal to the Prime Rate, as published in the Money Rates section
of THE WALL STREET JOURNAL, adjustable the date of any change in
such rate. Accrued interest shall be payable the first day of
each month, in arrears, until and including the maturity of this
Line of Credit Note, whether by acceleration or otherwise. After
any expressed or accelerated maturity, this Line of Credit Note
shall bear interest at 3% above the stated rate, but not to
exceed the maximum rate allowed by law, and if not paid monthly,
such interest shall be compounded monthly. Company shall have a
ten (10) day grace period to make any interest payment hereunder.
2. Advances. So long as there is no Event of Default, the
Company may, from the date of this Line of Credit Note through
July 31, 1997, borrow, repay and reborrow the same not to exceed
at any time outstanding $2,275,000.
3. Credit to Account. All advances under this Line of Credit
Note will be credited to checking account no. _____________
carried on the books of Bank in the name of Company. All
advances and repayments hereunder shall be recorded in a
reasonable manner selected by Bank, and as between Company and
Bank such endorsements or recordings shall be prima facie
evidence of the amount advanced and repaid hereunder and the then
outstanding and unpaid balance of sums advanced or readvanced
hereunder, absent mainifest error by Bank. Payments will be
applied first to interest and then to principal.
<PAGE>
4. Costs of Collection. Unless prohibited by law, Company will
pay on demand all costs of collection, legal expenses and
reasonable attorneys' fees incurred or paid in collecting and/or
enforcing this Line of Credit Note. Furthermore, Bank reserves
the right to offset without notice all funds held by Bank against
matured debts owing to Bank by Company.
5. Waivers. Company waives presentment, protest, demand and
notice of dishonor or default.
6. Jury Trial Waiver. THE COMPANY AND BANK HEREBY AGREE TO
TRIAL BY COURT AND IRREVOCABLY WAIVE JURY TRIAL IN ANY ACTION OR
PROCEEDING (INCLUDING BUT NOT LIMITED TO ANY COUNTERCLAIM)
ARISING OUT OF OR IN ANY WAY RELATING TO OR CONNECTED TO THIS
LINE OF CREDIT NOTE, ANY RELATIONSHIP OR TRANSACTION BETWEEN
COMPANY AND BANK, THE ORIGINATION, ADMINISTRATION OR ENFORCEMENT
OF THE INDEBTEDNESS EVIDENCED OR SECURED BY THIS LINE OF CREDIT
NOTE, OR ANY OTHER MATTER.
7. Choice of Law. This Line of Credit Note shall be governed
by, and construed in accordance with, the laws of the State of
Kansas.
IN WITNESS WHEREOF, Company has duly caused this Line of Credit
Note to be executed and delivered at the place specified above
and as of the date first written above.
VANGUARD AIRLINES, INC.
By:__________________________
Title:_______________________
<PAGE>
WARRANT PURCHASE AGREEMENT
This WARRANT PURCHASE AGREEMENT ("Warrant Agreement"), dated as
of January 30, 1997 by and among VANGUARD AIRLINES, INC., a
Delaware corporation ("the "Company"), and the persons and
entities named on the Schedule I attached hereto and their
permitted successors and assigns (individually, a "Purchaser"
and, collectively, the "Purchasers").
SECTION 1. AMOUNT AND TERMS OF THE GUARANTEE; PURCHASE AND
SALE OF WARRANTS
1.1 THE GUARANTEE. Subject to the terms of this Agreement, the
Purchasers shall guarantee and promise to pay to Commerce Bank,
N.A. (Wichita, Kansas) ("Lender") or its order, the indebtedness
of the Company to the Lender in the amount of, and on the terms
and conditions set forth in that certain Agreement, dated January
30, 1997, executed by each of the Purchasers (the "Loan
Agreement"). A copy of the Loan Agreement is attached hereto as
Exhibit A. Upon the expiration of the Loan Agreement and in
consideration for the issuance of the Warrants, as hereinafter
defined, pursuant to Section 1.2 of this Warrant Agreement, the
Purchasers agree to enter into agreements to guarantee and
promise to pay the indebtedness of the Company, in the aggregate
maximum amount of two million two hundred seventy-five thousand
dollars ($2,275,000), until January 30, 1999.
1.2 ISSUANCE OF WARRANTS. In consideration of the Guaranty, the
Company will issue to each of the Purchasers a warrant to
purchase shares of the Common Stock in the form attached hereto
as Exhibit B (individually, a "Warrant" and, collectively, the
"Warrants"), which Warrants will be exercisable into the number
of shares of Common Stock pursuant to a vesting schedule set
forth in the Warrant up to an aggregate maximum amount set forth
opposite such Purchaser's name on Schedule I at a purchase price
of $1.00 per share (the "Exercise Price"). The number of the
shares of Common Stock (or other capital stock) issuable upon
exercise of the Warrants (collectively, the "Warrant Shares") and
Exercise Prices are subject to adjustment as provided in the
Warrants.
1.3 EXERCISE OF WARRANT. Each Purchaser may exercise his or its
Warrant at any time or from time to time on any business day
during the Exercise Period (as defined in the respective Warrant)
of such Warrant.
SECTION 2. THE CLOSINGS
2.1 CLOSING DATE. The closing (the "Closing") of the issuance
of the Warrants shall be held on January 30, 1997 at 3:00 p.m. at
the offices of the Company, or at such other time or place as the
Company and Purchasers shall
<PAGE>
agree (the "Closing Date").
2.2 DELIVERY. At the Closing, the Company shall deliver to each
Purchaser a Warrant, and the Purchasers shall deliver to the
Company the Agreement executed by the Purchasers.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to each Purchaser
as follows:
3.1 ORGANIZATION, GOOD STANDING, QUALIFICATION. The Company is
a corporation duly organized, validly existing and in good
standing under the laws of the state of Delaware. The Company
has full power and authority to own and operate its properties
and assets, and to carry on its business as currently conducted
and as currently proposed to be conducted. The Company is duly
qualified and is authorized to do business and is in good
standing as a foreign corporation in all jurisdictions in which
the nature of its activities and of its properties (both owned
and leased) makes such qualification necessary, except for those
jurisdictions in which failure to do so would not have a material
adverse effect on the Company or its business.
3.2 AUTHORIZATION. All corporate action on the part of the
Company, its directors and its stockholders necessary for the
authorization, execution, delivery and performance of this
Agreement by the Company and the performance of the Company's
obligations hereunder, including the issuance and delivery of the
Warrants has been taken or will be taken prior to the Closing.
This Agreement and the Warrants, when executed and delivered by
the Company, shall constitute valid and binding obligations of
the Company enforceable in accordance with their terms, except as
rights to indemnity may be limited by applicable laws and except
as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium or other
similar laws affecting creditors' rights and subject to general
equity principles and to limitations on availability of equitable
relief, including specific performance. The Common Stock
issuable upon exercise of the Warrants has been or will be duly
and validly reserved and, when issued in compliance with the
provisions of this Warrant Agreement, the Warrants and the
Restated Certificate of Incorporation of the Company (as the same
may hereinafter be amended, the "Certificate of Incorporation"),
will be validly issued, fully paid and nonassessable and free of
any liens or encumbrances.
<PAGE>
3.3 GOVERNMENT CONSENTS. All consents, approvals, orders, or
authorizations of, or registrations, qualifications,
designations, declarations, or filings with, any government
authority, required on the part of the Company in accordance with
the valid execution and delivery of this Warrant Agreement, the
offer, sale or issuance of the Warrants and the capital stock
issuable upon exercise of the Warrants, or the consummation of
any other transaction contemplated have been obtained, except for
the filing of notices pursuant to Regulation D under the
Securities Exchange Act of 1933, as amended (the "Securities
Act"), and any filing required under applicable state securities
laws which will be effective by the time required thereby.
3.4 OFFERING. Assuming the accuracy of the representations and
warranties of the Purchasers contained in Section 4 hereto, the
offer, issue, and sale of the Warrants are and will be exempt
from the registration and prospectus delivery requirements of the
Securities Act, and have been registered or qualified (or are
exempt from registration and qualifications) under the
registration, permit, or qualification requirements of all
applicable state securities laws.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
4.1 REQUISITE POWER AND AUTHORITY. Each Purchaser has all
necessary power and authority under all applicable provisions of
law to execute and deliver this Agreement and to carry out its
provisions. All actions on each Purchaser's part required for
the lawful execution and delivery of this Warrant Agreement has
been or will be effectively taken prior to the Closing. Upon
execution and delivery of this Warrant Agreement, this Warrant
Agreement will be a valid and binding obligation of each
Purchaser, enforceable in accordance with its terms, except (i)
as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting
enforcement of creditors' rights and (ii) general principles of
equity that restrict the availability of equitable remedies.
4.2 PURCHASE FOR OWN ACCOUNT. Each Purchaser represents that it
is acquiring the Warrants and the capital stock issuable upon
exercise of the Warrants (collectively, the "Securities") solely
for its own account and beneficial interest for investment and
not for sale or with a view to distribution of the Securities or
any part thereof, has no present intention of selling (in
connection with a distribution or otherwise), granting any
participation in, or otherwise distributing the same, and does
not currently have reason to anticipate a change in such
intention.
<PAGE>
4.3 INFORMATION AND SOPHISTICATION. Each Purchaser acknowledges
having received all the information such Purchaser has requested
from the Company and considers necessary or appropriate for
deciding whether to acquire the Warrants. Each Purchaser
represents that such Purchaser has had an opportunity to ask
questions and receive answers from the Company regarding the
terms and conditions of the offering of the Warrants and to
obtain any additional information necessary to verify the
accuracy of the information given the Purchaser. Each Purchaser
further represents that such Purchaser has sufficient knowledge
and experience in financial and business matters so as to be
capable of evaluating the merits and risk of this investment.
4.4 ABILITY TO BEAR ECONOMIC RISK. Each Purchaser acknowledges
that investment in the Warrants involves a high degree of risk,
and represents that such Purchaser is able, without material
impairment of financial condition, to hold the Securities for an
indefinite period of time and to suffer a complete loss of its
investment.
4.5 FURTHER LIMITATIONS ON DISPOSITION. Without any way
limiting the representations set forth above, each Purchaser
further agrees not to make any disposition of all or any portion
of the Securities unless and until;
(a) There is then in effect a Registration Statement under the
Securities Act covering such proposed disposition and such
disposition is made in accordance with such Registration
Statement; or
(b) (i) The Purchaser shall have notified the Company of the
proposed disposition and shall have furnished the Company with a
detailed statement of the circumstances surrounding the proposed
disposition, and (ii) if reasonably requested by the Company,
such Purchaser shall have furnished the Company with an opinion
of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration under the Securities
Act.
(c) Notwithstanding the provisions of paragraphs (a) and (b)
above, no such registration statement or opinion of counsel shall
be necessary for a transfer by such Purchaser to a stockholder or
partner (or retired partner) or "affiliate" (as defined under the
Securities Exchange Act of 1934) of such Purchaser, or transfers
by gift, will or interstate succession to any spouse or lineal
descendants or ancestors, if all transferees agree in writing to
be subject to the terms hereof to the same extent as if they were
Purchasers hereunder.
4.6 EXPERIENCE. Each Purchaser is an "accredited investor" as
such term is defined in Rule 501 promulgated under the Securities
Act.
<PAGE>
SECTION 5. MISCELLANEOUS.
5.1 REGISTRATION RIGHTS. The Purchasers and the Company agree
that all Securities issuable upon exercise of the Warrants shall
be subject to the terms and conditions of that certain Amended
and Restated Investor Rights Agreement, dated August 24, 1994 (as
the same may hereinafter be amended, the "Investors' Rights
Agreement"), by and among the Company and those certain parties
identified therein.
5.2 BINDING AGREEMENT. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the
respective successors and assigns of the parties. Nothing in
this Agreement, express or implied, is intended to confer upon
any third party any rights, remedies, obligations, or liabilities
under or by reason of this Agreement, except as expressly
provided in this Agreement.
5.3 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of Missouri as applied to
agreements made and to be performed entirely within the State of
Missouri.
5.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
5.5 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be
considered in construing or interpreting this Agreement.
5.6 NOTICES. Any notice required or permitted under this
Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery or upon deposit with the
United States Post Office, postage prepaid, addressed to the
Company at 30 NW Rome Circle, Terminal B, Kansas City
International Airport, Mezzanine, Kansas City, MO 64153 or to a
Purchaser at its address shown on Schedule I, or at such other
address as such party may designate by ten (10) days advance
written notice to the other party.
5.7 MODIFICATION; WAIVER. No modification or waiver of any
provision of this Warrant Agreement or consent to departure
therefrom shall be effective unless in writing and approved by
the Company and the holders of more than fifty percent (50%) of
the outstanding Warrants.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as
to the date first written above.
VANGUARD AIRLINES, INC.
By:_______________________
Name: Brian S. Gillman
Title: Vice President and
General Counsel
PURCHASER
__________________________
Name:
Title:
<PAGE>
VANGUARD AIRLINES, INC.
WARRANT PURCHASE AGREEMENT
AS OF JANUARY 30, 1997
<PAGE>
SCHEDULE I
PURCHASERS; NUMBER OF SHARES
Name and Address No. of Shares/Warrant
Kenneth J. Wagnon
300 No. Main Street, Suite 200
Wichita, KS 67202 1,250,000
Daniel M. Carney
8100 E. 22nd Street, North
Building 1900
Wichita, KS 67226 650,000
Starwood Investments, L.P.
P.O. Box 8904 - Munger Station
Wichita, KS 67208-0904 375,000
Total 2,275,000
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR
UNDER THE SECURITIES LAWS OF ANY STATE. ANY TRANSFER OF SUCH
SECURITIES WILL BE INVALID UNLESS A REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND AS REQUIRED BY BLUE SKY LAWS IS IN EFFECT
AS TO SUCH TRANSFER OR IN THE OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY SUCH REGISTRATION IS UNNECESSARY IN ORDER FOR SUCH
TRANSFER TO COMPLY WITH THE SECURITIES ACT AND BLUE SKY LAWS.
Vanguard Airlines, Inc.
WARRANT FOR THE PURCHASE
OF SHARES OF COMMON STOCK
No. PB---- January 30, 1997
VANGUARD AIRLINES, INC., a Delaware corporation (the
"COMPANY"), hereby certifies that, for value received,
_____________, the transferee who has received this warrant (the
"WARRANT") in compliance with applicable law and the terms hereof
(the "HOLDER"), is entitled, on the terms set forth below, to
purchase from the Company, on or before the Expiration Time (as
defined in Section 17 below) six hundred fifty thousand
(2,275,000) shares of Common Stock, par value $0.001 per share,
of the Company at a price of one dollar ($1.00) per share,
subject to adjustment as provided below (the "EXERCISE PRICE").
1. WARRANT AGREEMENT. This Warrant is the "Warrant"
referred to in the Warrant Purchase Agreement dated as of January
30, 1997, by and between the Company and the purchasers thereto
(the "WARRANT AGREEMENT"). Any capitalized term used but not
defined herein shall have the meaning ascribed to it in the
Warrant Agreement.
2. EXERCISE OF WARRANT.
(a) INITIAL VESTING. The Holder may exercise this
Warrant, in whole or in part, at any time or from time to time on
any business day prior to the Expiration Date (as defined
herein), for nine hundred and ten thousand (910,000) shares of
Common Stock.
(b) SUBSEQUENT VESTING. On any business day beginning
30 days after the end of each Measurement Period (as defined
below) and prior to the Expiration Date, the Holder may exercise
this Warrant, in whole or in part, at any time or from time to
time, as to an additional number of shares of Common Stock equal
to (i) the product of (A) the average amount outstanding under
the line of credit with Commerce Bank, N.A. (Wichita, KS, N.A.)
during the Measurement Period and (B) one-tenth (0.1), divided
by (ii) one dollar ($1.00). Notwithstanding the preceding
sentence, in no event shall this Warrant be exercisable for more
than six hundred fifty thousand (650,000) shares of Common Stock.
For the purposes of this Warrant, "MEASUREMENT PERIOD" <PAGE> shall mean
the 90 day period commencing on the date of this Warrant and each
succeeding 90 day period thereafter prior to the Termination
Date.
(c) The Holder may exercise any shares then
exercisable by surrendering this Warrant to the Company at its
principal office, with a duly executed Subscription Form (in
substantially the form attached hereto), together with payment of
the sum obtained by multiplying the number of shares of Common
Stock to be purchased by the Exercise Price then in effect.
Promptly after such exercise, the Company shall issue and deliver
to or upon the order of the Holder a certificate or certificates
for the number of shares of Common Stock issuable upon such
exercise, and the Company will pay all issue or transfer taxes in
connection with the issue thereof. To the extent permitted by
law, this Warrant shall be deemed to have been exercised
immediately prior to the close of business on the date of its
surrender for exercise as provided herein, even if the Company's
stock transfer books are at that time closed, and the Holder
shall be treated for all purposes as the holder of record of the
Common Stock to be issued upon such exercise as of the close of
business on such date. Upon any partial exercise, the Company
will issue to or upon the order of the Holder a new Warrant for
the number of shares of Common Stock as to which this Warrant has
not been exercised.
(d) NET ISSUE EXERCISE. Notwithstanding any
provisions herein to the contrary, if the fair market value of
one share of the Common Stock subject to this Warrant is greater
than the Exercise Price (at the Date of Determination, as defined
below), in lieu of exercising this Warrant for cash, the Holder
may elect to receive shares equal to the value (as determined
below) of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the principal office of the Company
together with the properly endorsed Form of Subscription and
notice of such election (the date of such delivery being referred
to herein as the "Date of Determination") in which event the
Company shall issue to the Holder a number of shares of Common
Stock computed using the following formula:
X = Y (A-B)
A
Where X = the number of shares of Common Stock to be
issued to the Holder
Y = the number of shares of Common Stock
purchasable under the Warrant or, if only a
portion of the Warrant is being exercised,
the portion of the Warrant being canceled (at
the Date of Determination)
A = the fair market value of one share of the
Common Stock (at the Date of Determination)
B = Exercise Price (as adjusted to the Date of
Determination)
For purposes of the above calculation, fair market value of one
share of Common Stock shall be determined by the Company's Board
of Directors in good faith as of the Date of Determination;
provided, however, when there is a public market for the
Company's Common Stock, the fair <PAGE> market value per share shall be
the average of the closing prices of the Company's Common Stock
quoted on the Nasdaq National Market or on the primary securities
exchange on which the Common Stock is then listed, whichever is
applicable, as published in the Wall Street Journal for the ten
(10) trading days prior to the Date of Determination.
3. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT
SHARES. The Exercise Price and the number of shares of Common
Stock subject to this Warrant (and all other adjustment to
exercise price and shares herein as appropriate) shall be subject
to adjustment from time to time as follows:
(a) ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. If at any
time the Company:
(i) pays a dividend or makes a distribution
on its Common Stock in shares of its
Common Stock;
(ii) subdivides its outstanding shares of
Common Stock into a greater number of
shares;
(iii) combines its outstanding shares of
Common Stock into a smaller number of
shares;
(iv) makes a distribution on its Common Stock
in shares of its capital stock other
than Common Stock; or
(v) issues by reclassification of its Common
Stock any shares of its capital stock;
then the Exercise Price in effect immediately prior to such
action shall be adjusted so that the Holder may receive upon
exercise of the Warrant and payment of the same aggregate
consideration the number of shares of capital stock of the
Company which the Holder would have owned immediately following
such action if the Holder had exercised the Warrant immediately
prior to such action.
The adjustment shall become effective immediately after the
record date in the case of a dividend or distribution and
immediately after the effective date in the case of a
subdivision, combination or reclassification.
(b) REORGANIZATION, CONSOLIDATION OR MERGER. In the
event of any consolidation or merger of the Company with or into
another corporation (other than a merger in which merger the
Company is the continuing corporation and that does not result in
any reclassification, capital reorganization or other change of
outstanding shares of Common Stock issuable upon exercise of this
Warrant) or in the event of any sale, lease, transfer or
conveyance to another corporation of the property and assets of
the Company as an entirety or substantially as an entirety, the
Company shall cause effective provisions to be made so that the
Holder shall have the right thereafter, by exercising this
Warrant, to purchase the kind and amount of shares of stock and
other securities and property (including cash) receivable upon
such capital <PAGE> reorganization and other change, consolidation,
merger, sale, lease, transfer or conveyance by a holder of the
number of shares of Common Stock that might have been received
upon exercise of this Warrant immediately prior to such capital
reorganization, change, consolidation, merger, sale, lease,
transfer or conveyance. Any such provision shall include
provisions for adjustments in respect of such shares of stock and
other securities and property that shall be as nearly equivalent
as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Section 3(b) shall
similarly apply to successive capital reorganizations and changes
of shares of Common Stock and to successive consolidations,
mergers, sales, leases, transfers or conveyances. In the event
that in connection with any such capital reorganization, or
change, consolidation, merger, sale, lease, transfer or
conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in
part, for, or of, a security of the Company other than Common
Stock, any such issue shall be treated as an issue of Common
Stock covered by the provisions of Section 3(a) hereof.
(c) MINIMAL ADJUSTMENTS. No adjustment in the
Exercise Price and/or the number of shares of Common Stock
subject to this Warrant need be made if such adjustment would
result in a change in the Exercise Price of less than one percent
(1%) of the Exercise Price (the "Adjustment Threshold Amount") or
a change in the number of subject shares of less than one (1)
share. Any adjustment which is less than the Adjustment
Threshold Amount and not made shall be carried forward and shall
be made, together with any subsequent adjustments, at the time
when (a) the aggregate amount of all such adjustments is equal to
at least the Adjustment Threshold Amount or (b) the Warrant is
exercised.
(d) DEFERRAL OF ISSUANCE OR PAYMENT. In any case in
which an event covered by this Section 3 shall require that an
adjustment in the Exercise Price be made effective as of a record
date, the Company may elect to defer until the occurrence of such
event (i) issuing to the Holder, if this Warrant is exercised
after such record date, the shares of Common Stock and other
capital stock of the Company, if any, issuable upon such exercise
over and above the shares of Common Stock or other capital stock
of the Company, if any, issuable upon such exercise on the basis
of the Exercise Price in effect prior to such adjustment, and
(ii) paying to the Holder by check any amount in lieu of the
issuance of fractional shares pursuant to Section 7 hereof.
(e) WHEN NO ADJUSTMENT REQUIRED. No adjustment need
be made for a change in the par value or no par value of the
Common Stock. To the extent the Warrants become exercisable into
cash, no adjustment need be made thereafter as to the cash, and
interest will not accrue on the cash.
(f) CERTIFICATE AS TO ADJUSTMENTS. Upon the
occurrence of each adjustment or readjustment of the Exercise
Price pursuant to this Section 3, the Company, at its expense,
shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and prepare and furnish to the
Holder a certificate setting forth such adjustment or
readjustment and showing the facts upon which such adjustment or
readjustment is based. The Company shall, upon written request
at any time of the Holder, furnish or cause to be furnished to
the Holder a like certificate setting forth (a) such adjustments
and readjustments, (b) the then effective Exercise Price and
number of shares of Common Stock subject to the <PAGE> Warrant, and (c)
the then effective amount of securities (other than Common Stock)
and other property, if any, which would be received upon exercise
of the Warrant.
4. REGISTRATION RIGHTS. Shares of the Company's Common
Stock issued or issuable pursuant to the exercise of this Warrant
shall be deemed to be "Registrable Securities" for purposes of
that certain Amended and Restated Investor Rights Agreement,
dated as of August 24, 1994, among the Company and the persons
named therein (the "Investors Rights Agreement"), as such
agreement may be subsequently amended or restated or consolidated
with other similar agreements granting registration rights in the
securities of the Company, and the holder of such shares shall
have all the rights, subject to the obligations, of a holder of
Registrable Securities pursuant to the Investors Rights
Agreement, and shall be treated for all purposes as a holder of
Registrable Securities under and subject to the terms of the
Investor Rights Agreement.
5. RIGHTS OF THE HOLDER. The Holder shall not, solely by
virtue of this Warrant, be entitled to any rights of a
stockholder in the Company, either at law or equity, and the
rights of the Holder are limited to those expressed in this
Warrant. Nothing contained in this Warrant shall be construed as
conferring upon the Holder hereof the right to vote or to consent
or to receive notice as a stockholder of the Company on any
matters or with respect to any rights whatsoever as a stockholder
of the Company. No dividends or interest shall be payable or
accrued in respect of this Warrant or the interest represented
hereby or the shares of Common Stock purchasable hereunder until,
and only to the extent that, this Warrant shall have been
exercised in accordance with its terms.
6. NO IMPAIRMENT. The Company will not, by any voluntary
action, avoid or seek to avoid the observance or performance of
any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in
order to protect the rights of the Holder against dilution or
other impairment.
7. NO FRACTIONAL SHARES. No fractional share shall be
issued upon exercise of this Warrant. The Company shall, in lieu
of issuing any fractional share, pay the Holder entitled to such
fraction a sum in cash equal to the fair market value of such
fraction on the date of exercise (as determined in good faith by
the Board of Directors of the Company). The fair market value of
a fraction of a share is determined by multiplying the fair
market price of a full share by the fraction of a share, rounded
to the nearest cent.
8. RESERVATION OF STOCK ISSUABLE ON EXERCISE OF WARRANT.
The Company will at all times reserve and keep available, solely
for issuance and delivery upon the exercise of this Warrant,
all such shares of Common Stock or other shares of capital stock,
from time to time issuable upon the exercise of this Warrant. If
at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the exercise of
this Warrant, the Company will use its best efforts to take such
corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for
such purposes. All shares that may be issued upon exercise of
the rights represented by this Warrant and payment of the
Exercise Price, all as set <PAGE> forth herein, will be free from all
taxes, liens and charges in respect of the issue of such shares
(other than taxes in respect of any transfer occurring
contemporaneously with such exercise and payment or otherwise
specified herein). All such shares shall be duly authorized and
when issued, sold and delivered in accordance with the terms of
the Warrant for the consideration expressed herein, will be duly
and validly issued, fully paid and nonassessable, and will be
free of restrictions on transfer other than restrictions on
transfer set forth in this Warrant and applicable state and
federal securities laws.
9. COVENANTS OF THE COMPANY.
(a) The Company shall cause a report of the amount
outstanding under the line of credit in each Measurement Period
(each, a "REPORT") to be delivered to the Holder at the address
specified in Section 14 hereof within 30 days of the end of such
Measurement Period so long as this Warrant remains subject to
additional vesting.
10. NOTICES OF RECORD DATE. Upon (a) any taking by the
Company of a record of the holders of any class of securities for
the purpose of determining the holders thereof who are entitled
to receive any dividend or other distribution or (b) any capital
reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, any merger
or consolidation of the Company with or into any other
corporation, or any transfer of all or substantially all the
assets of the Company to any other person, or any voluntary or
involuntary dissolution, liquidation or winding up of the
Company, the Company shall mail to the Holder at least twenty
(20) days, or such longer period as is required by law, prior to
the record date, a notice specifying (i) the date on which any
such record is to be taken for the purpose of such dividend or
distribution and a description of such dividend or distribution,
(ii) the date on which any such reorganization, reclassification,
transfer, consolidation, merger, dissolution, liquidation or
winding up is expected to become effective, and (iii) the date,
if any, that is to be fixed as to when the holders of record of
Common Stock (or other capital stock at that time receivable upon
exercise of the Warrant) shall be entitled to exchange their
shares of Common Stock (or such other stock or securities) for
securities or other property deliverable upon such
reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding up.
11. EXCHANGES OF WARRANT. Upon surrender for exchange of
this Warrant (in negotiable form, if not surrendered by the
Holder named on the face hereof) to the Company at its principal
office, the Company, at its expense, will issue and deliver a new
Warrant or Warrants calling in the aggregate for the same number
of shares of Common Stock, in the denomination or denominations
requested, to or on the order of such Holder upon payment by such
Holder of any applicable transfer taxes; provided that any
transfer of the Warrant shall be subject to the conditions on
transfer set forth herein.
12. REPLACEMENT OF WARRANT. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of
loss, theft or destruction) upon delivery of an indemnity
agreement in such reasonable amount as the Company may determine,
or (in the case of mutilation) upon surrender and cancellation
hereof, the Company, at its expense, shall issue a replacement.
<PAGE>
13. NOTICES. Any notice required or permitted under this
Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery or upon deposit with the
United States Post Office, postage prepaid, addressed to the
Company at 30 NW Rome Circle, Mezzanine Level, Kansas City
International Airport, Kansas City, MO 64153, or to the Holder at
________________________________________________________________,
Attention: _____________________, or at such other address as the
Company or any Holder may designate by ten (10) days advance
written notice to the other party.
14. MODIFICATION; WAIVER. Except as provided in this
Warrant, no modification or waiver of any provision of this
Warrant or consent to departure therefrom shall be effective
unless in writing and approved by the Company and the Holder.
15. TITLES AND SUBTITLES. The titles and subtitles used in
this Warrant are used for convenience only and are not to be
considered in construing or interpreting this Warrant.
16. GOVERNING LAW. This Warrant shall be construed in
accordance with and governed by and under the laws of the State
of Missouri as applied to contracts made and to be performed
entirely within the State of Delaware.
17. EXPIRATION TIME. This Warrant will be wholly void and
of no effect after 5:00 p.m. (San Francisco time) January 30,
2007 (the "EXPIRATION TIME").
18. TRANSFER RESTRICTIONS. The Company is relying upon an
exemption from registration of this Warrant and the shares of
Common Stock issuable upon exercise hereof under the Securities
Act and applicable state securities laws. The Holder by
acceptance hereof represents that the Holder understands that
neither this Warrant nor the Common Stock issuable upon exercise
hereof has been registered with the Securities and Exchange
Commission nor under any state securities law. By acceptance
hereof, the Holder represents and warrants that (a) it is
acquiring the Warrant (and the shares of Common Stock or other
securities issuable upon exercise hereof) for its own account for
investment purposes and not with a view to distribution, (b) has
received all such information as the Holder deems necessary and
appropriate to enable the Holder to evaluate the financial risk
inherent in making an investment in the Company, and satisfactory
and complete information concerning the business and financial
condition of the Company in response to all inquiries in respect
thereof, (c) the Holder's acquisition of shares upon exercise
hereof will be a highly speculative investment, (d) the Holder is
able, without impairing its financial condition, to hold such
shares for an indefinite period of time and to suffer a complete
loss of the Holder's investment, and (e) the Holder has such
knowledge and experience in financial and business matters that
it is capable of evaluating the merits and risks of acquisition
of this Warrant and the shares issuable upon exercise hereof and
of making an informed investment decision with respect thereto.
This Warrant may not be exercised and neither this Warrant
nor any of the shares issuable upon exercise of the Warrant, nor
any interest in either, may be sold, assigned, pledged,
hypothecated, encumbered or in any other manner transferred or
disposed of, in <PAGE> whole or in part, except in compliance with
applicable United States federal and state securities or Blue Sky
laws and the terms and conditions hereof. Each Warrant or each
certificate representing shares of Common Stock or other
securities issued upon exercise of this Warrant shall have
conspicuously endorsed on its face, at the time of its issuance,
such legends as counsel to the Company deems necessary or
appropriate, including without limitation the legend set forth on
the top of the first page of this Warrant. Any certificate for
any securities issued at any time in exchange or substitution for
any certificate for any shares of Common Stock bearing such
legend shall also bear such legend unless, in the opinion of
counsel for the Company, the securities represented thereby need
no longer be subject to the restriction contained herein.
Without in any way limiting the foregoing, the Holder agrees
not to make any disposition of all or any portion of the
Securities unless and until:
a. There is then in effect a Registration Statement
under the Securities Act covering such proposed disposition and
such disposition is made in accordance with such Registration
Statement; or
b. (i) The Holder shall have notified the Company of
the proposed disposition and shall have furnished the Company
with a detailed statement of the circumstances surrounding the
proposed disposition, and (ii) if reasonably requested by the
Company, the Holder shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration under the
Securities Act.
c. Notwithstanding the provisions of paragraphs (i)
and (ii) above, no such registration statement or opinion of
counsel shall be necessary for a transfer by the Holder to (i) an
underwriter acceptable to the Company for immediate exercise by
such underwriter in connection with a fully underwritten public
offering of the Company's Common Stock underlying this Warrant
(ii) transfers by gift, will or intestate succession to any
spouse or lineal descendants or ancestors of any such partner,
retired partner or affiliate, if all transferees agree in writing
to be subject to the terms hereof to the same extent as if they
were a purchaser hereunder.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to
be duly executed and delivered on the date first set forth above.
VANGUARD AIRLINES, INC.
By:_________________________
Name:_______________________
Title:_______________________
<PAGE>
SUBSCRIPTION FORM
[To be executed if holder desires to exercise the Warrant]
The undersigned, holder of this Warrant, (1) hereby
irrevocably elects to exercise the right of purchase represented
by this Warrant for, and to purchase thereunder, ______________
full shares of the Common Stock of Vanguard Airlines, Inc.
provided for therein, (2) makes payment in full (as permitted in
Section 2 of the Warrant) of the purchase price of such shares,
(3) requests that certificates for such shares be issued in the
name of
________________________________________________________________
(Please print name and address)
________________________________________________________________
(Please insert social security or other identifying number)
and (4) if said number of shares shall not be all the shares
purchasable thereunder, requests that a new Warrant for the
unexercised portion of this Warrant be issued in the name of and
delivered to:
________________________________________________________________
________________________________________________________________
(Please print name and address)
Dated:__________________________ _________________________
By:______________________
_________________________
Title
LOSS PER COMMON SHARE COMPUTATION
VANGUARD AIRLINES, INC.
Period From
April 24, 1994
Year Ended Year Ended (Date of Inception)
December 31, December 31, to December 31,
1996 1995 1994
Net Loss $(25,808,070) $(12,195,530) $(3,442,457)
Weighted
average number
of common
shares outstanding
during the year 9,056,888 1,796,083 406,533
Add - common
equivalent shares
representing shares
issuable upon the
conversion of Serise
A Preferred Stock/2/ 1,665,753 1,872,000
Add - common
equivalent shares
representing shares
issuable upon the
conversation of Series
B Preferred Stock /2/ 3,032,540 1,890,066
Add - common
equivalent shares
(determined using
the "treasury stock
method") representing
the shares issuable
upon the exercise
of stock options
outstanding 570,864 567,094
Add - common
equivalent shares
(determined using the
"treasury stock method")
representing shares
issuable upon the
exercise of warrants
outstanding /1/ 330,681 171,684
Weighted average
number of common
and common equivalent
shares outstanding 9,056,888 7,395,921 4,907,377
Net loss per share $(2.85) $(1.65) $(.70)
/1/ In 1995, the computation of loss per share was determined
under the provisions of Securities and Exchange Commission Staff
Accounting Bulletin No. 83. In 1996, outstanding stock options
and warrants were not considered in the net loss per share
calculation, as their effects are antidilutive.
/2/ Series A and Series B Preferred Stock converted on November
3, 1995 in connection with the closing of the Company's initial
public offering of Common Stock.
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 333-00172 and Form S-8 No. 333-342)
pertaining to the Vanguard Airlines, Inc. 1994 Stock Option Plan
and the Employee Stock Purchase Plan of Vanguard Airlines, Inc.
of our report dated March 10, 1997 with respect to the financial
statements and schedule of Vanguard Airlines, Inc. included in
the Annual Report (Form 10-K) for the year ended December 31,
1996.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Kansas City, Missouri
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 402,083
<SECURITIES> 0
<RECEIVABLES> 3,684,137
<ALLOWANCES> 229,719
<INVENTORY> 673,338
<CURRENT-ASSETS> 9,709,211
<PP&E> 7,651,607
<DEPRECIATION> (2,601,949)
<TOTAL-ASSETS> 20,318,247
<CURRENT-LIABILITIES> 31,006,092
<BONDS> 0
0
0
<COMMON> 9,982
<OTHER-SE> (13,247,999)
<TOTAL-LIABILITY-AND-EQUITY> 20,318,247
<SALES> 68,589,101
<TOTAL-REVENUES> 68,589,101
<CGS> 92,503,417
<TOTAL-COSTS> 92,503,417
<OTHER-EXPENSES> 1,698,026
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 195,728
<INCOME-PRETAX> (25,808,070)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,808,070)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,808,070)
<EPS-PRIMARY> (2.85)
<EPS-DILUTED> (2.85)
</TABLE>
