PROSPECTUS RULE 424(b)(1)
PROSPECTUS
333-33705
VANGUARD AIRLINES
Rights to purchase up to 30,455,714 shares of Common Stock
Expiring December 5, 1997
Vanguard Airlines, Inc. ("Vanguard" or the "Company") is
distributing at no cost to holders of its common stock, par value
$.001 per share (the "Common Stock"), of record as of the close
of business on October 10, 1997 (the "Record Date")
nontransferable rights to purchase shares of Common Stock (the
"Rights"). Each such holder (a "Holder") will receive two Rights
for each share of Common Stock held on the Record Date (the
"Rights Offering"), with each such Right entitling the Holder to
subscribe for and purchase one share of Common Stock (the "Basic
Subscription Privilege") for a price of $0.50 per share (the
"Subscription Price"). On October 21, 1997, the closing sales
price for the Common Stock on the OTC Bulletin Board was $0.5625.
The Rights will expire at 4:00 p.m. Kansas City, Missouri Time,
on December 5, 1997, unless extended as provided herein (the
"Expiration Date"). The Expiration Date will not be extended
beyond December 31, 1997 (the "Termination Date").
If shares of Common Stock offered hereby are not purchased
by Holders pursuant to the Basic Subscription Privilege (such
shares, in the aggregate, are sometimes hereinafter referred to
as the "Excess Shares"), any Holder purchasing all of the shares
of Common Stock available to it pursuant to the Basic
Subscription Privilege may purchase the number of Excess Shares
specified by the Holder in the Subscription Documents, subject to
proration (the "Oversubscription Privilege"). See "The Rights
Offering -- Basic Subscription Privilege; Oversubscription
Privilege."
As of the date of this Prospectus, J.F. Shea Company, Inc.
and certain entities affiliated with Hambrecht & Quist Group who
are being issued Rights in the Rights Offering (the "Principal
Stockholders") have indicated their intention to subscribe for
and purchase an aggregate of 19,842,498 shares of Common Stock
pursuant to their Basic Subscription Privilege and, to the extent
available, additional shares of Common Stock pursuant to the
Oversubscription Privilege. The Principal Stockholders have
indicated that in connection with any exercise of Rights by them,
they intend that in lieu of paying the Subscription Price in
cash, they will relieve and discharge Vanguard from the repayment
to them of a like amount of indebtedness under outstanding demand
notes issued by the Company during the past six months. All
other stockholders of the Company subscribing for shares of
Common Stock in the Rights Offering must make payment of the
Subscription Price in cash. If the Principal Stockholders fully
exercise their Basic Subscription Privilege, they collectively
will own approximately 74% of the outstanding Common Stock after
completion of the Rights Offering (which percentage includes
warrants exercisable within 60 days of the date of this
Prospectus with respect to 14,482,763 shares of Common Stock).
Such percentage would increase to the extent that the Principal
Stockholders subscribe for shares pursuant to the
Oversubscription Privilege. Consequently, it is anticipated that
at the conclusion of the Rights Offering the Principal
Stockholders will be able to control all matters requiring
approval by the stockholders of the Company, including the
election of directors. See "The Rights Offering - Exercise of
Rights," "Risk Factors - Control by Existing Stockholders;
Certain Charter, Bylaw and Other Provisions," and "Certain
Transactions."
This Prospectus relates to the shares of Common Stock
issuable upon the exercise of the Rights. Accompanying this
Prospectus are certain documents (collectively, the "Subscription
Documents") that must be completed and returned by a Holder in
accordance with the related instructions in order to exercise the
Basic Subscription Privilege or the Oversubscription Privilege.
Once a Holder has exercised any Right, such exercise may not be
revoked, unless there is a material amendment to the terms of
this Rights Offering. See "The Rights Offering -- Amendment,
Extension and Termination." Holders exercising Rights should
complete and return their Subscription Documents with payment of
the Subscription Price promptly to insure timely receipt and the
collection of any funds prior to the Expiration Date. Included
with the Subscription Documents is evidence of the total number
of Rights to which a Holder is entitled. See "Rights Offering --
Exercise of Rights."
A PURCHASE OF THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. STOCKHOLDERS WHO DO NOT EXERCISE THEIR RIGHTS IN
FULL WILL SUFFER DILUTION IN THEIR PROPORTIONATE INTEREST IN THE
EQUITY OWNERSHIP AND VOTING POWER OF THE COMPANY. SEE "RISK
FACTORS," BEGINNING ON PAGE 10.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Rights may not be exercised by any person, and neither
this Prospectus nor any Subscription Document shall constitute an
offer to sell or a solicitation of an offer to purchase any
shares of Common Stock, in any jurisdiction in which such
transactions would be unlawful. See "The Rights Offering --
State and Foreign Securities Laws."
Subscription Price/1/ Underwriting Discounts/
Commissions/2/
Per Share $.50 None
Total $15,227,857 None
/1/ Before deducting expenses payable by the Company estimated
at $100,000. If all of the Rights are exercised, the
Company will issue 30,455,714 shares of Common Stock.
/2/ The shares of Common Stock are being offered and sold
directly by the Company, and no commissions or other
remuneration is intended to be paid to any person for
soliciting purchases of the shares in the Rights Offering.
See "The Rights Offering -- Method of Offering."
October 24, 1997
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-3
(of which this Prospectus is a part) under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the
Rights and the Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration
Statement and the exhibits thereto. For further information with
respect to the Company, the Rights and the Common Stock,
reference is hereby made to such Registration Statement with all
exhibits filed therewith. The Registration Statement, including
the exhibits thereto, may be inspected without charge at the
public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. The statements
contained in this Prospectus as to the contents of any contract
or other document filed as an exhibit to the Registration
Statement are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each statement
being qualified in all respects by such reference and the
exhibits thereto. Copies of each such contract in Washington,
D.C. upon payment of the charges prescribed by the Commission.
The Company is subject to the informational requirements of
the Securities Exchange Act of 1934 (the "Exchange Act"), and in
accordance therewith files periodic reports, proxy and
information statements and other information with the Commission.
The Registration Statement, including the exhibits thereto, as
well as such reports, proxy and information statements and other
information filed by the Company with the Commission, may be
inspected, without charge, and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, Room: 1024; 7 World Trade Center,
13th Floor, New York, New York 10048; and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such materials may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, Room 1024, at prescribed rates. The Commission has a
World Wide Web site (http://www.sec.gov) that contains material
regarding issuers that file electronically with the Commission.
The Registration Statement, of which the Prospectus forms a part,
has been filed and may be obtained at such site.
INCORPORATION BY REFERENCE
The documents listed below have been filed with the
Commission and are incorporated herein by reference: (i) Annual
Report on Form 10-K for the fiscal year ended December 31, 1996;
(ii) Proxy Statement dated May 5, 1997 in connection with the
1997 Annual Meeting of Stockholders; (iii) Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1997; (iv)
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1997; (v) Form 8-K dated June 5, 1997; (vi) Form 8-K dated
June 15, 1997; (vii) Form 8-K dated July 22, 1997; (viii) Form
8-K dated August 22, 1997; and (ix) Description of the Company's
Common Stock contained in the Company's Registration Statement on
Form 8-A declared effective on October 30, 1995, except that the
number of authorized shares of capital stock and common stock
have been increased to 51,000,000 and 50,000,000, respectively.
All documents filed by the Company pursuant to Sections
13(a), 13(c) 14 and 15(d) of the Exchange Act subsequent to the
date of this Prospectus and prior to the termination of the
offering made by this Prospectus shall be deemed to be
incorporated by reference in this Prospectus and to be a part
hereof from the date of filing such documents, except that in no
event shall any information included in such document in respect
to item 402(i), (k) or (l) of Registration S-3 be deemed to
constitute a part of the Prospectus.
Any statement contained herein or in a document incorporated
or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein, or in any other
subsequently filed document which also is or is deemed to be
incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute
a part of this Prospectus.
The Company will furnish without charge to each person to
whom this Prospectus is delivered, on written or oral request of
such person, a copy of any or all documents incorporated by
reference in this Prospectus, without exhibits to such documents
(unless such exhibits are specifically incorporated by reference
into such documents). Copies of this Prospectus, as amended or
supplemented from time to time, and any other documents (or parts
of documents) that constitute part of the Prospectus under
Section 10(a) of the Securities Act will also be provided without
charge to each such person, upon written or oral request.
Requests should be directed to Investor Relations, 7000 Squibb
Road, Third Floor, Mission, Kansas 66202, (913) 789-1388.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the
more detailed information and Financial Statements and Notes
thereto appearing elsewhere herein in this Prospectus or
incorporated herein by reference. Each investor is urged to read
this prospectus in its entirety prior to making an investment
decision.
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF SECTIONS 27A OF THE SECURITIES ACT AND 21E OF THE
EXCHANGE ACT 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. 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 "RISK FACTORS ."
THE COMPANY
Vanguard Airlines, Inc., a Delaware corporation
headquartered in Kansas City, Missouri, is a low-fare airline
offering convenient, scheduled jet service primarily from its hub
in Kansas City, catering to both business and leisure travelers.
The Company serves markets with a high volume of passenger
traffic, which have limited or no low-fare air service. The
Company currently operates eight leased Boeing 737-200 jet
aircraft. The Company provides 48 daily weekday flights
between Kansas City and Atlanta, Chicago-Midway, Dallas/Fort
Worth, Denver, Minneapolis/St. Paul, New York City-JFK and San
Francisco. The Company also operates four daily flights between
Minneapolis/St. Paul and Chicago-Midway. The Company has signed
letters of intent to lease two additional Boeing 737-200 jet
aircraft; the Company anticipates delivery of its ninth and tenth
jet aircraft in December 1997. On December 17, 1997, in
connection with the delivery of its ninth and tenth aircraft, the
Company intends to initiate service from Kansas City to
Washington D.C.-Dulles, service from Chicago-Midway to Pittsburgh
with continuing service to New York City-JFK and service between
New York City-JFK and Atlanta. In addition to scheduled
passenger service, the Company provides limited charter services.
The Company commenced operations in December 1994, achieving
operating revenues of approximately $36.2 million, $68.6 million
and $43.1 million for the years ended December 31, 1995 and
December 31, 1996 and for the six months ended June 30, 1997,
respectively. The Company has not operated profitably during a
quarterly reporting period.
RISK FACTORS
A purchase of the Common Stock involves a high degree of risk.
See "Risk Factors" for certain factors that a potential investor
should carefully consider.
THE RIGHTS OFFERING
The Rights The Company is distributing Rights at no
cost to Holders of record as of the
Record Date. Each Holder will receive
two Rights for each share of the Common
Stock held by such Holder as of the
close of business on the Record Date.
See "The Rights Offering -- The Rights."
Nontransferability of
Rights The Rights are nontransferable.
Subscription Price $0.50 in cash per share of Common Stock
subscribed for pursuant to the Basic
Subscription Privilege or the
Oversubscription Privilege (the
"Subscription Price"). See "The Rights
Offering -- The Rights."
<PAGE>
Record Date October 10, 1997, at 4:00 p.m. Kansas
City, Missouri Time.
Expiration Date December 5, 1997, at 4:00 p.m. Kansas
City, Missouri Time, unless extended
(the "Expiration Date"). The Expiration
Date will be extended a reasonable
period of time (at least ten (10) days)
if the Company files an amendment to its
Registration Statement relating to the
Rights Offering that includes a material
change in the Rights Offering. The
Expiration Date will not be extended
beyond December 31, 1997 (the
"Termination Date"). The Company will
notify stockholders of any extension of
the Expiration Date of the Rights
Offering through the issuance of a press
release indicating such extension. See
"The Rights Offering -- Expiration
Date."
Basic Subscription
Privilege Each Right entitles a Holder to purchase
one share of Common Stock upon payment
of the Subscription Price (the "Basic
Subscription Privilege"). See "The
Rights Offering -- Basic Subscription
Privilege; Oversubscription Privilege."
Oversubscription
Privilege If any shares of Common Stock offered
hereby are not purchased pursuant to the
Basic Subscription Privilege (such
shares, in aggregate, are sometimes
hereinafter referred to as the "Excess
Shares"), any Holder purchasing all of
the shares of Common Stock available to
it pursuant to the Basic Subscription
Privilege may purchase the number of
Excess Shares specified by the Holders
in the Subscription Documents, subject
to proration (the "Oversubscription
Privilege"). See "The Rights Offering --
Basic Subscription Privilege;
Oversubscription Privilege."
Procedure for
Exercising Rights Rights may be exercised by a Holder by
properly completing and signing the
Subscription Documents and forwarding
such Subscription Documents (or
following the Guaranteed Delivery
Procedures described herein and
therein), with payment of the
Subscription Price for each share of
Common Stock subscribed for pursuant to
the Basic Subscription Privilege and
Oversubscription Privilege, if any, to
the Subscription Agent on or prior to
the Expiration Date. If the mail is
used to forward Subscription Documents
it is recommended that insured,
registered mail be used. No interest
will be paid on funds delivered in
payment of the Subscription Price. In
the case of a subscription by the
Principal Stockholders, payment of the
Subscription Price may be made through
the relief and discharge by them of a
like amount of indebtedness under
outstanding demand notes of the Company.
All other subscribing stockholders must
make payment of the subscription price
by (a) check or bank draft drawn upon a
U.S. bank or postal, telegraphic or
express money order payable to UMB Bank,
N.A., as Subscription Agent, or (b) wire
transfer of available funds to the
account maintained by the Subscription
Agent for such purpose at UMB Bank,
N.A., Kansas City, MO, ABA No.
101000695, Credit Trust Account Number
9800006823. ONCE A HOLDER HAS EXERCISED
ANY RIGHTS, SUCH EXERCISE MAY NOT BE
REVOKED UNLESS THE COMPANY FILES A POST-
EFFECTIVE AMENDMENT TO ITS REGISTRATION
STATEMENT RELATED TO THE RIGHTS OFFERING
THAT INCLUDES A MATERIAL CHANGE IN THE
TERMS OF THE RIGHTS OFFERING (A
"MATERIAL AMENDMENT"), IN WHICH CASE A
HOLDER WILL HAVE A REASONABLE PERIOD OF
TIME (AT LEAST <PAGE> TEN (10) DAYS) TO
EVALUATE THE MATERIAL AMENDMENT AND TO
REVOKE THE EXERCISE OF THEIR RIGHTS, IF
DESIRED.
See "The Rights Offering -- Exercise of
Rights" and "The Rights Offering -- No
Revocation."
Procedure for
Exercising Rights by
Foreign and Certain
Other Stockholders Subscription Documents will not be
mailed to holders of Common Stock whose
addresses are outside the United States
or who have an APO or FPO address, but
will be held by the Subscription Agent
for their account. To exercise the
Rights represented thereby, such holders
must contact the Subscription Agent on
or prior to the Expiration Date. See
"The Rights Offering-- Foreign and
Certain Other Stockholders."
Persons Holding Common
Stock and Wishing to
Exercise Rights Through
Others Holders who hold shares of the Common
Stock for the account of others, such as
brokers, trustees or depositories for
securities, should notify the respective
beneficial owners of such shares as soon
as possible to ascertain such beneficial
owners' intentions and to obtain
instructions with respect to the Rights.
If the beneficial owner so instructs,
the Holder shall complete Subscription
Documents and submit them to the
Subscription Agent with the proper
payment. See "The Rights Offering --
Exercise of Rights."
Issuance of Common
Stock Certificates representing shares of the
Common Stock purchased pursuant to the
valid exercise of the Rights will be
delivered to subscribers as soon as
practicable after the Expiration Date
and the conditions to the Rights
Offering have been satisfied. See "The
Rights Offering -- Basic Subscription
Privilege; Oversubscription Privilege."
Conditions to the
Rights Offering The issuance of shares pursuant to the
Rights Offering is subject to the
absence of any suit or other action
seeking to enjoin the Rights Offering.
See "The Rights Offering -- Conditions
to the Rights Offering."
Subscription Agent UMB Bank, N.A.
Common Stock to be
Outstanding After the
Rights Offering If all of the shares of Common Stock
offered hereby are purchased, 45,683,571
shares of Common Stock will be issued
and outstanding. The exact number of
shares of Common Stock issued and
outstanding depends on the number of
shares of Common Stock sold in the
Rights Offering. See "The Rights
Offering--Shares of Common Stock
Outstanding After the Rights Offering."
Symbol for the Common
Stock VNGD
Use of Proceeds The net proceeds, if any, from the sale
of the Common Stock in the Rights
Offering will be used by the Company for
major scheduled maintenance, deposit
requirements on additional aircraft
operating leases, capital expenditures
related to improvements to existing
aircraft, and working capital, including
the reduction of past due accounts
payable, and for general corporate
purposes. In addition, it is
anticipated that any subscription by the
Principal Stockholders in the Rights
Offering will result in the discharge of
an amount of indebtedness under
outstanding demand notes of the Company
equal to the <PAGE> Subscription Price payable
with respect to the Rights being
exercised by the Principal Stockholders.
There are no assurances of any proceeds
to the Company under the Rights
Offering. See "Use of Proceeds."
Amendment, Extension
and Termination The Company may amend, extend or
terminate the Rights Offering at any
time prior to the Expiration Date at the
Board of Directors' discretion. See
"The Rights Offering - Amendment,
Extension and Termination." The Company
will not terminate the Rights Offering
unless a suit or other action seeking to
enjoin the Rights Offering is filed.
The Company will issue a press release
with respect to any amendment, extension
or termination of the Rights Offering.
State Securities Laws The Rights may not be exercised by any
person, and neither this Prospectus nor
any Subscription Document shall
constitute an offer to sell or a
solicitation of an offer to purchase any
shares of Common Stock, in any
jurisdiction in which such transactions
would be unlawful. See "The Rights
Offering --State and Foreign Securities
Laws."
<PAGE>
Summary Financial and Operating Data
(In thousands, except per share and operating data)
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1996 1997
STATEMENT OF
OPERATIONS DATA:
Total operating
revenues $36,159 $68,589 $34,785 $43,145
Total operating
expenses 48,225 92,503 42,586 57,111
Operating loss (12,066) (23,914) (7,801) (13,966)
Total other
income (expense)
net (129) (1,894) 3 (1,137)
Net loss $(12,195) $(25,808) $(7,798) $(15,103)
Net loss
per share/1/ $ (1.65) $ (2.85) $ (.91) $ (1.29)
Weighted average
common and common
equivalent shares
outstanding/1/ 7,396 9,057 8,574 11,752
Supplementary net
loss per
share/2/ $ - $ (2.82) $ - $ (.94)
Supplementary
weighted
average common
and common
equivalent shares
outstanding/2/ - 9,143 - 15,740
SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1997
OPERATING DATA: /3/
Revenue passenger miles
(RPMs)(000) 337,774 429,974
Available seat miles (ASMs)(000) 515,702 713,649
Load factor 65.50% 60.25%
Break-even load factor 80.99% 81.36%
Passenger yield per RPM 9.76 cents 9.50 cents
Total revenue per ASM 6.75 cents 6.05 cents
Operating cost per ASM 8.26 cents 8.00 cents
Block hours flown 11,966 15,676
Average flight length (miles) 502 596
Operating cost per block hour $3,559 $3,643
Aircraft in service (end of period) 8 8
Airports served (end of period) 10 12
JUNE 30, 1997
ACTUAL AS ADJUSTED/4/
BALANCE SHEET DATA:
Cash and cash equivalents $587 $5,794
Working capital (deficiency) (25,036) (9,908)
Property and equipment, net 4,812 4,812
Total assets 24,119 29,326
Total stockholders' equity
(deficit) (14,274) 854
/1/ See Note 1 of Notes to Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996
and Notes 3 and 4 of Notes to the Financial Statements included in the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
/2/ Supplementary net loss per share for the year ended December
31, 1996 is computed by adjusting both the net loss and shares outstanding
as if the April 1997 conversion of demand notes payable through the
private placement offering (see Note 8 of Notes to the Financial
Statements included in the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997) occurred on the dates the demand
notes were issued in 1996. The net loss adjustment in 1996 was
approximately $11,000 reflecting the interest expense incurred on
the demand notes from the date of issuance to December 31, 1996.
Supplementary net loss per share for the six months ended June 30,
1997 is computed by adjusting both the net loss and shares outstanding
as if the April 1997 conversion of demand notes payable through the
private placement offering occurred on the dates the demand notes
were issued and as if demand notes payable entered into subsequent to
the April 1997 private placement were converted on the dates the demand
notes were issued as these demand notes are expected to be retired with
proceeds from the Rights Offering. The net loss adjustment in 1997 was
approximately $243,000 reflecting interest expense incurred on the demand
notes from the date of issuance to June 30, 1997.
/3/ "REVENUE PASSENGER MILES" or "RPMs" represent the aggregate
number 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. "LOAD FACTOR" represents revenue
passenger miles divided by available seat miles. "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 PER 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/ Adjusted to give effect to the exercise of 30,455,714 Rights
of which 19,842,498 Rights are anticipated to be exercised
by Principal Stockholders upon the conversion of $9,921,249
in demand notes due to the Principal Stockholders in lieu of
paying the Subscription Price for the exercise of their
Rights pursuant to the Basic Subscription Privilege and
10,613,216 Rights which may be exercised by stockholders,
other than the Principal Stockholders, offered hereby at the
subscription price of $0.50 per share, after deducting
estimated offering expenses payable by the Company. See
"Use of Proceeds" and "Capitalization."
<PAGE>
RISK FACTORS
A purchase of the Common Stock offered hereby involves a
high degree of risk. Prior to deciding to exercise the Rights
and purchase the Common Stock in this Rights Offering, potential
investors should carefully consider the following factors,
together with other information contained in or incorporated by
reference into this Prospectus, in evaluating the Company and its
businesses. Vanguard's business operations and financial results
are subject to various uncertainties and future developments that
cannot be predicted.
LIMITED OPERATING HISTORY; HISTORY OF SIGNIFICANT LOSSES.
The Company has a limited history of operations, beginning flight
operations on December 4, 1994. The Company, to date, has yet to
report profitable operations during a quarterly reporting period.
Since the Company's inception on April 25, 1994, the Company has
incurred significant losses and as of June 30, 1997 had an
accumulated deficit of approximately $56.5 million, a
stockholders' deficit of approximately $14.3 million and a
working capital deficit of approximately $25.0 million. The
Company's limited operating history makes the prediction of
future operating results difficult. There can be no assurance
that the Company will achieve profitability and the Company
expects losses to continue through 1997.
AVAILABILITY OF WORKING CAPITAL AND FUTURE FINANCING
RESOURCES. The airline business is extremely capital intensive,
including, but not limited to, lease payment obligations for
existing and new aircraft and related maintenance requirements.
The Company has not operated profitably during any quarterly
reporting period. Consequently, the Company has been dependent
upon equity and debt financings primarily from major stockholders
in order to maintain operations. The Company will require
additional financing, both short term and long term, if it is to
maintain operations and is evaluating additional sources of
working capital and other financings, but there is no assurance
that additional sources of working capital will be available on
acceptable terms, or at all. 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. Further,
there can be assurance that the Company's principal stockholders
will continue to provide working capital for the Company's
operations. Any inability to obtain additional financing when
needed could require the Company to cease or significantly
curtail operations and would have a material adverse effect on
the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DEPARTURE OF DIRECTORS; NEED TO ATTRACT AND RETAIN
DIRECTORS. Since October 13, 1996, six directors of the Company
have resigned due, in part, to the Company's disappointing
financial performance. The loss of these directors has impeded
the achievement of the Company's business objectives.
Furthermore, there can be no assurance that the Company will be
able to retain its current directors or attract new directors in
the future, given the Company's present financial situation. The
inability to retain or attract new directors could have a
material adverse impact on the Company's business operations and
achievement of its business objectives.
DEPENDENCE ON MANAGEMENT. The Company is highly dependent
upon the efforts and abilities of its senior management staff and
key individuals in all areas of the Company. The performance of
the Company will depend to a large extent upon its ability to
retain and attract qualified management and other employees. The
loss of key management and other employees could have a material
adverse effect on the Company's business, financial condition and
results of operation. There can be no assurance that the Company
will be able to retain its current management staff or key
employees, or to attract qualified employees in the future, given
its present financial situation.
ABILITY TO CONTINUE AS A GOING CONCERN; EXPLANATORY
PARAGRAPH IN ACCOUNTANTS' REPORT. The report issued by the
Company's independent auditors for the year ended December 31,
1996 contains an explanatory paragraph expressing substantial
doubt about the Company's ability to continue as a going concern.
The report states that, because of the Company's net losses,
negative cash flows and working capital deficit, the Company has
been dependent upon financings from the Principal Stockholders.
The report further states that there can be no assurance as to
the availability of further financing and that there is
substantial doubt about the Company's ability to continue as a
going concern. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SIGNIFICANT DILUTION OF HOLDERS OF COMMON STOCK NOT
EXERCISING RIGHTS. Each Right entitles the Holder to purchase
one share of Common Stock at a price below the average closing
sales prices of the Common Stock over the <PAGE> sixty (60) day period
ended on the Record Date. Holders of the Common Stock who
exercise their Rights will preserve, and may increase, their
proportionate interest in the equity ownership and voting power
of the Company. Holders who do not exercise their Rights will
experience a dilution in their proportionate interest in the
equity ownership and voting power of the Company. The
consummation of the sale of the shares offered hereby would
increase the number of shares of Common Stock outstanding as of
Record Date (i) by 30,455,714 shares (or 200%) to 45,683,571
shares, assuming all of the shares offered hereby are issued, or
(ii) by 20,000,000 shares (or 131%) to 35,227,857 shares,
representing the approximate number of shares that would be
issued to Principal Stockholders upon the tender of the demand
notes in lieu of paying the Subscription Price for the exercise
of their Rights pursuant to the Basic Subscription Privilege.
MARKET LIQUIDITY OF COMMON STOCK. The Company's Common
Stock is listed for quotation on the Over-the-Counter Bulletin
Board ("OTC"). Consequently, investors who choose to exercise
their Rights may find it difficult to trade the Company's Common
Stock and difficult to obtain accurate price quotations of the
Common Stock. In addition, that price quotation of the Company's
Common Stock on the OTC may not be an accurate reflection of the
Company's underlying worth.
PENNY STOCK. Because the Common Stock currently trades for
less than $5.00 per share, trading in the Common Stock is subject
to the requirements of Rule 15g-9 promulgated under the Exchange
Act. Under such rule, broker/dealers who recommend such low-
priced securities to persons other than established customers and
accredited investors must satisfy special sales practice
requirements, including a requirement that they make an
individualized written suitability determination for the
purchaser and receive the purchaser's written consent prior to
the transaction. The Securities Enforcement Remedies and Penny
Stock Reform Act of 1990 also requires additional disclosure in
connection with any trades involving a stock defined as a penny
stock (generally, according to recent regulations adopted by the
Commission, any equity security not traded on an exchange or
quoted on Nasdaq that has a market price of less than $5.00 per
share, subject to certain exceptions), including the delivery,
prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated
therewith. Such requirements could severely limit the market
liquidity of the Common Stock and the ability of purchasers in
this Rights Offering to sell the Common Stock in the secondary
market.
CONTROL BY EXISTING STOCKHOLDERS; CERTAIN CHARTER, BYLAW AND
OTHER PROVISIONS. If the Principal Stockholders exercise all of
their Rights pursuant to their Basic Subscription Privilege, they
will, in the aggregate, beneficially own approximately 74% of the
Company's Common Stock outstanding after this Rights Offering
(which percentage includes warrants exercisable within 60 days of
the date of this Prospectus with respect to 14,482,763 shares of
Common Stock). As a result, the Principal Stockholders, if
acting together, would be able to control all matters requiring
approval by the stockholders of the Company, including the
election of directors. Certain provisions of the Company's
Certificate of Incorporation and By laws could have the effect of
making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of the
Common Stock. Certain of these provisions allow the Company to
issue Preferred Stock with rights senior to those of the Common
Stock without any further vote or action by the stockholders,
eliminate the right of stockholders to act by written consent and
impose various procedural and other requirements which could also
make it more difficult for stockholders to effect certain
corporate actions. See "Description of Capital Stock--Preferred
Stock" and "--Certain Provisions of Statues, Certificate of
Incorporation and Bylaws."
MARKET CONSIDERATIONS. There can be no assurance that the
market price of the Common Stock will not decline during the
subscription period or that, following the issuance of the Rights
and the issuance of the underlying shares of Common Stock upon
exercise of the Rights, a subscribing Rights Holder will be able
to sell shares purchased in the Rights Offering at a price equal
to or greater than the Subscription Price. The election of a
Holder to exercise Rights in the Rights Offering is irrevocable,
except in the case of Material Amendment. See "The Rights
Offering - No Revocation." Moreover, until certificates are
delivered, subscribing Rights holders may not be able to sell the
Common Stock that they have purchased in the Rights Offering.
Certificates representing shares of the Common Stock purchased
pursuant to the Basic Subscription Privilege will be mailed as
soon as practicable after the subscriptions have been accepted by
the Subscription Agent to Holders not participating in the
Oversubscription Privilege. Certificates for shares of Common
Stock issuable upon exercise of the Basic Subscription Privilege
and Oversubscription Privilege will be made as soon as
practicable after the Expiration Date. No interest will be paid
on any funds delivered to exercise Rights.
RIGHTS NOT TRANSFERABLE; NO MARKET FOR RIGHTS. The Rights
are not transferable, and thus there will be no market or other
means for holders of the Rights to directly realize any value
associated with the Rights. Thus, holders of the Rights must
exercise them and acquire additional shares of the Common Stock
in order to realize any <PAGE> such value. The election of a Rights
holder to exercise Rights in the Rights Offering is irrevocable,
except in the case of a Material Amendment. See "The Rights
Offering - No Revocation."
INTENSE COMPETITION AND COMPETITIVE REACTION. The Company
is subject to intense competition. Under the Airline
Deregulation Act of 1978 (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, schedules (frequency and flight times), destinations,
type (jet or propeller) and size of aircraft and frequent flyer
programs. The Company competes with numerous other airlines on
its routes and expects to compete with these and other airlines
on any future routes. Substantially all of these airlines are
larger and have greater name recognition and 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.
CONSUMER CONCERN ABOUT OPERATING SAFETY AT LOW-FARE, START-
UP CARRIERS OR TYPE OF AIRCRAFT. Aircraft accidents or other
safety related issues involving any carrier, such as the 1996
accidents involving ValuJet and Trans World Airlines, have had an
adverse effect on airline passengers' perceptions regarding
airline safety and particularly the safety of low-fare carriers.
The Company utilizes older Boeing 737-200 jet aircraft, one was
manufactured in 1982, and seven were manufactured between 1968
and 1970, which may also have an effect on passengers perceptions
regarding safety. 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 whether operated by the Company or not could
have a material adverse effect on the Company's business,
financial condition and results of operations.
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, the Company may experience
variations in passenger demand based on its particular routes and
passenger demographics. The Company has experienced reduced
demand during the fall and winter with adverse effects on
revenues, operating results and cash flow. 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 and results of
operations.
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 17.7% of the
Company's operating expenses during the six months ended June 30,
1997. Jet fuel costs are subject to wide fluctuations as a
result of sudden disruptions in supply. The Company cannot
predict the effect of the future availability and cost of jet
fuel. The Boeing 737-200 jet aircraft are relatively fuel
inefficient compared to newer 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 been 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.
LIMITED NUMBER OF AIRCRAFT; AIRCRAFT ACQUISITIONS. The
Company's fleet currently consists of eight aircraft (with
anticipated delivery of a ninth and tenth jet aircraft in
December 1997) 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 market for leased aircraft is very
competitive, and there can be no assurance that the Company will
be able to lease additional aircraft on satisfactory terms or at
the time needed. Due to the Company's financial condition and
losses since commencement <PAGE> of operations, the Company has found it
and may find it more difficult in the future to lease additional
aircraft on acceptable terms. See "Business --Aircraft."
GOVERNMENT REGULATION. The Company is subject to 49 U.S.C.,
Subtitle VIII (formerly the Federal Aviation Act of 1958, as
amended) (the "Aviation Act"), under which the United States
Department of Transportation (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, start-up airlines, such as
the Company. During 1996 and 1997, after extensive FAA
investigations, ValuJet, Kiwi International, Great Lakes and Rich
International, among others, either temporarily or permanently
suspended operations. Because of the Company's start-up status,
(i.e., operating less than five years), the Company's operations
along with other start-up carriers recently have been and are
expected to be 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 eight 737-200 jet
aircraft. There can be no assurance 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 meets the current Stage-3 noise compliance requirements
(50% of its fleet is Stage-3 compliant), with four of its eight
Boeing 737-200 jet aircraft being equipped with hush kits. In
addition, the Company anticipated delivery of its ninth and tenth
aircraft which it has signed letters of intent, will be equipped
with hush kits to meet Stage-3 noise compliance requirements. 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.
EMPLOYEE RELATIONS. While the Company currently operates
with relatively low personnel costs, there can be no assurance
that the Company will be able to maintain these low costs. The
Company's employees are not represented by a labor union as are
many airline industry employees. If unionization of the
Company's employees were to occur, the Company's personnel costs
could increase substantially. See "Business--Motivated and
Trained Workforce."
SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL FOR ADVERSE
EFFECT ON STOCK PRICE. Sales of substantial amounts of Common
Stock in the public market could have an adverse effect on the
market price of the Common Stock. Upon completion of this Rights
Offering, all shares of the Company's Common Stock will be freely
tradable without restriction, or may be sold pursuant to Rule 144
under the Securities Act. As of June 30, 1997, options to
purchase 1,107,227 shares and warrants to purchase 20,356,044
shares of Common Stock were outstanding, of which options to
purchase 172,571 shares and warrants to purchase 17,330,580
shares were exercisable.
<PAGE>
PASSENGER TICKET TAX. The existing ten percent ticket tax
was converted on October 1, 1997 to a combination of a reduced
percentage tax based on the price of the ticket and a fee
assessed for each flight segment. Due to the Company's low fare
structure, the combination of a percentage tax and flight segment
fee will result in an overall higher tax paid by individuals who
purchase tickets on the Company's flights and, consequently,
could have a negative impact on the Company's business, financial
condition and results of operations if the Company is unable to
pass this increased tax burden on to its passengers through
increased fares. The Company is unable, however, to predict how
the new tax/segment fee will affect demand for the Company's
product.
ABSENCE OF DIVIDENDS. The Company has never declared or
paid cash dividends on its capital stock. The Company currently
intends to retain any future earnings to fund operations and to
continue development of its business and does not expect to pay
any cash dividends on the Common Stock in the foreseeable future.
See "Dividend Policy."
USE OF THE PROCEEDS
If all of the Rights held by stockholders other than the
Principal Stockholders are exercised, the net proceeds to the
Company from the sale of the Common Stock upon the exercise of
the Rights offered hereby are estimated to be approximately $5.2
million, after deducting estimated offering expenses. Other than
the anticipated conversion of demand notes by the Principal
Stockholders, which does not result in new proceeds to the
Company, there can be no assurance of any proceeds to the Company
under the Rights Offering.
If the Company receives approximately $5.2 million of net
proceeds from the exercise of Rights by stockholders other than
the Principal Stockholders, approximately $1.7 million of the net
proceeds will be used to fund costs of major scheduled
maintenance for the Company's existing fleet of aircraft.
Approximately $200,000 is estimated to be used for capital
expenditures relating to improvements to existing aircraft. The
Company intends to use approximately $500,000 to lease and place
into service the Company's ninth and tenth aircraft. The Company
is currently pursuing up to three additional Boeing 737-200 jet
aircraft that the Company estimates would require deposits and
certain other costs of approximately $1.2 million. The remaining
net proceeds, if any, will be used for working capital needs
including the reduction of past due accounts payable, and for
general corporate purposes. There can be no assurances that any
proceeds will be received by the Company under the Rights
Offering. In addition, it is anticipated that any subscription
by the Principal Stockholders in the Rights Offering will result
in the discharge of an amount of indebtedness under outstanding
demand notes of the Company equal to the Subscription Price
payable with respect to the Rights being exercised by the
Principal Stockholders. See "Certain Transactions."
<PAGE>
PRICE RANGE OF COMMON STOCK
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. On December 16, 1996 the Company's Common Stock was
delisted from the Nasdaq SmallCap Market for failing to meet the
Nasdaq minimum capital and surplus requirements. 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 Market from November 3, 1995 through December 16, 1996,
and on the Over-the-Counter Bulletin Board from December 17, 1996
through September 30, 1997.
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 3/8
1997
First Quarter 2 13/16 1 7/16
Second Quarter 2 3/16 1 5/16
Third Quarter 2 1 1/16
On September 30, 1997, the last reported sale price for
the Common Stock on the OTC Bulletin Board was $1 1/16 per share.
As of September 30, 1997, there were approximately 214 holders of
record of the Common Stock.
DIVIDEND POLICY
The Company has never declared or paid any cash
dividends on its Common Stock and does not expect to pay any cash
dividends on the Common Stock in the foreseeable future. The
Company intends to retain any future earnings to fund operations
and to continue the development of its business.
<PAGE>
CAPITALIZATION
The following table sets forth the short term debt and
capitalization of the Company as of June 30, 1997 (i) on an
actual basis, (ii) on a pro forma basis to reflect proceeds from
the issuance of $13.625 million of demand notes payable from
Principal Stockholders, subsequent to June 30, 1997, and (iii) as
adjusted giving effect to the exercise of 30,455,714 Rights of
which 19,842,498 Rights are anticipated to be exercised by
Principal Stockholders upon the conversion of $9,921,249 in
demand notes due to the Principal Stockholders (in lieu of paying
the Subscription Price for the exercise of their Rights pursuant
to the Basic Subscription Privilege) and 10,613,216 Rights which
may be exercised by stockholders, other than the Principal
Stockholders, pursuant to their Basic Subscription Privilege.
June 30, 1997
Actual Pro Forma As Adjusted
Short term debt, including
current portion of capital
lease obligations/1/ $7,864,355 $21,489,355 $11,568,106
Capital lease obligations,
less current portion/2/ $1,913 $1,913 $1,913
Stockholders' deficit:
Preferred Stock, $.001
par value; 1,000,000
shares authorized; no
shares issued and
outstanding, actual,
pro forma and as adjusted ____ ____ ____
Common Stock, $.001 par
value; 50,000,000 shares
authorized; 15,220,514 shares
issued and outstanding, actual
and pro forma; 45,676,228
shares issued and outstanding,
as adjusted/3/ 15,220 15,220 45,676
Additional paid-in
capital/1/ 42,238,403 42,238,403 57,335,804
Accumulated deficit (56,459,371) (56,459,371)(56,459,371)
Deferred stock
compensation (68,748) (68,748) (68,748)
Total stockholders'
equity (deficit) (14,274,496) (14,274,496) 853,361
Total capitalization $(14,272,583)$(14,272,583) $855,274
/1/ See Notes 3, 4 and 5 of Notes to the Financial Statements
included in the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997.
/2/ See Note 10 of Notes to the Financial Statements included in
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
/3/ Excludes: (i) 1,107,227 shares of Common Stock subject to
outstanding options, of which 172,571 were exercisable as of
June 30, 1997 at a weighted average exercise price of $2.00
per share, and (ii) 20,356,044 shares of Common Stock
subject to outstanding warrants of which 17,330,580 were
exercisable as of June 30, 1997 at a weighted average
exercise price of $2.45 per share. Does not give effect to
the exercise of options exercisable into 7,343 shares of
Common Stock. See "Management Stock Option Plan" and
"Description of Capital Stock Warrants."
<PAGE>
THE RIGHTS OFFERING
THE RIGHTS
The Company is distributing nontransferable Rights, at no
cost, to Holders of record as of the Record Date. Each Holder
will receive two Rights for each share of Common Stock held on
the Record Date. Each Right entitles the Holder thereof to
subscribe for and purchase one share of Common Stock, the ("Basic
Subscription Privilege") for a price of $0.50 per share (the
"Subscription Price"). On October 21, 1997 the closing sales
price for the Common Stock on the OTC Bulletin Board was $0.5625.
The Expiration Date will be extended a reasonable period of time
(at least ten (10) days) if the Company files an amendment to its
registration statement relating to the Rights Offering which
includes a material change in the Rights Offering. There can be
no assurance that shares of the Common Stock will trade at prices
above the Subscription Price. See "Risk Factors Market
Considerations."
The Rights are nontransferable by a Holder.
All commissions, fees and other expenses (including
brokerage commissions and transfer taxes) incurred in connection
with the exercise of Rights are the responsibility of the holder
of the Rights and none of such commissions, fees or expenses
shall be paid by the Company.
METHOD OF OFFERING
The Rights Offering is being made directly by the Company.
The Company will pay no underwriting discounts or commissions,
finders fees or other remuneration in connection with any
distribution of the Rights or sales of the shares of Common Stock
offered hereby, other than the fees paid to UMB Bank, N.A., as
Subscription Agent. The Company estimates that the expenses of
the Rights Offering will total approximately $100,000.
EXPIRATION DATE
The Rights will expire at 4:00 p.m. Kansas City, Missouri
Time, on December 5, 1997, unless extended by the Company as
provided herein (the "Expiration Date"). On and after the
Expiration Date, all unexercised Rights will be null and void.
The Company will notify stockholders of any extension of the
Expiration Date of the Rights Offering through the issuance of a
press release indicating such extension. The Company will not be
obligated to honor any purported exercise of Rights received by
the Subscription Agent after 4:00 p.m. Kansas City, Missouri
Time, on the Expiration Date, regardless of when the documents
relating to such exercise were transmitted, except when timely
transmitted pursuant to the Guaranteed Delivery Procedures
described below. The Expiration Date will not be extended beyond
December 31, 1997 (the "Termination Date").
BASIC SUBSCRIPTION PRIVILEGE; OVERSUBSCRIPTION PRIVILEGE
The Subscription Privilege entitles the Holder of each Right
the right to receive, upon payment of the Subscription Price, one
share of Common Stock. No interest will be paid on funds
delivered in payment of Subscription Price. If any shares of
Common Stock offered hereby are not purchased pursuant to the
Basic Subscription Privilege (such shares, in aggregate, are
sometimes hereinafter referred to as the "Excess Shares"), any
Holder purchasing all of the shares of Common Stock available to
it pursuant to the Basic Subscription Privilege may purchase the
number of Excess Shares specified by the Holders in the
Subscription Documents subject to proration (the
"Oversubscription Privilege"). Certificates representing shares
of the Common Stock purchased pursuant to the Basic Subscription
Privilege will be mailed as soon as practicable after the
Expiration Date and after the subscriptions have been received by
the Subscription Agent and accepted by the Company to Holders not
participating in the Oversubscription Privilege. Certificates
for shares of Common Stock issuable upon exercise of the Basic
Subscription Privilege and Oversubscription Privilege will be
mailed as soon as practicable after the Expiration Date. If a
proration, which proration shall be based upon the number of
shares held by the Holder on the Record Date, of the Excess
Shares results in a Holder's receiving fewer shares of Common
Stock than the Holder subscribed for pursuant to the
Oversubscription Privilege, then the excess funds paid by that
Holder as the Subscription Price for shares not issued will be
returned by mail to Holders as soon as practicable after the
Expiration Date, without interest or deduction.
The Company will notify a Holder exercising the
Oversubscription Privilege promptly after the Expiration Date of
the number of Excess Share available to such Holder for
oversubscription. If a proration of the Excess <PAGE> Shares results in
a Holder's receiving fewer shares of Common Stock than the Holder
subscribed for pursuant to the Oversubscription Privilege, then
the excess funds paid by that Holder as the Subscription Price
for shares of Common Stock not issued will be returned by mail to
Holders as soon as practicable after the Expiration Date, without
interest or deduction.
In order to exercise the Oversubscription Privilege, banks,
brokers and other nominee Holders who exercise the
Oversubscription Privilege on behalf of beneficial owners of
Rights will be required to certify (a "Nominee Holder
Certification") to the Subscription Agent and the Company the
number of shares held on the Record Date on behalf of each such
beneficial owner of Rights, the number of Rights as to which the
Basic Subscription Privilege has been exercised on behalf of each
such beneficial owner, that each such beneficial owner's Basic
Subscription Privilege held in the same capacity has been
exercised in full and the number of shares of Common Stock
subscribed for pursuant to the Oversubscription Privilege by each
such beneficial owner, and to record certain other information
received from each such beneficial owner.
EXERCISE OF RIGHTS
Rights may be exercised by delivering for receipt by the
Subscription Agent, on or prior to the Expiration Date, the
properly completed and executed Subscription Documents evidencing
those Rights with any required signature guarantees, together
with payment in full of the Subscription Price for each share of
the Common Stock subscribed for pursuant to the Basic
Subscription Privilege and Oversubscription Privilege. In the
case of a subscription by the Principal Stockholders, payment of
the Subscription Price may be made through the relief and
discharge by them of a like amount of indebtedness under
outstanding demand notes of the Company. All other subscribing
stockholders must make payment of the subscription price by (a)
check or bank draft drawn upon a U.S. bank or postal,
telegraphic, or express money order payable to UMB Bank, N.A., as
Subscription Agent, or (b) wire transfer of available funds to
the account maintained by the Subscription Agent for such purpose
at UMB Bank, N.A., Kansas City, MO, ABA No. 101000695, Credit
Trust Account Number 9800006823. Payment of the Subscription
Price will be deemed to have been received by the Subscription
Agent only upon (i) clearance of any uncertified check, (ii)
receipt of available funds by the Subscription Agent of any
certified check or bank draft drawn upon a U.S. bank or any
postal, telegraphic or express money order, (iii) receipt of
available funds in the Subscription Agent's account designated
above, or (iv) in the case of a subscription by the Principal
Stockholders, receipt of written certification of the Company to
the effect that indebtedness under outstanding demand notes of
the Company has been discharged by the Principal Stockholders in
the amount equal to the Subscription Price payable with respect
to the Rights being exercised by the Principal Stockholders.
HOLDERS WISHING TO PAY BY UNCERTIFIED PERSONAL CHECK SHOULD NOTE
THAT SUCH A CHECK MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR
AND SHOULD TRANSMIT THE CHECK SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE TO ENSURE THAT IT IS RECEIVED AND CLEARS BY SUCH
DATE OR CONSIDER PAYMENT BY MEANS OF CERTIFIED OR CASHIER'S
CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.
The address to which the Subscription Documents and payment
of the Subscription Price should be delivered are:
By Mail, hand or: UMB Bank, N.A., as Subscription Agent
Overnight Corporate Trust Department
928 Grand Avenue
Kansas City, Missouri 64106
If a Rights holder wishes to exercise Rights, but time will not
permit such holder to cause the Subscription Documents evidencing
such Rights to reach the Subscription Agent on or prior to the
Expiration Date, such Rights may nevertheless be exercised if all
of the following conditions (the "Guaranteed Delivery
Procedures") are met:
(i) such holder has caused payment in full of the
Subscription Price for each share of the Common Stock being
subscribed for pursuant to the Basic Subscription Privilege
and Oversubscription Privilege to be received (in the manner
set forth above) by the Subscription Agent on or prior to
the Expiration Date;
(ii) the Subscription Agent receives, on or prior to
the Expiration Date, a guarantee notice (a "Notice of
Guaranteed Delivery"), substantially in the form provided
with the Instructions as to Use of Vanguard Airlines, Inc.
Subscription Cards (the "Instructions") distributed with the
Subscription Documents and this Prospectus, from a member
firm of a registered national securities exchange or a
member of the <PAGE> National Association of Securities Dealer,
Inc. (the "NASD"), or from a commercial bank or trust
company having an office or correspondent in the United
States (each, an "Eligible Institution"), stating the name
of the exercising Rights holder, the number of Rights
represented by the Subscription Documents held by such
exercising Rights holder, the number of shares of the Common
Stock being subscribed for pursuant to the Basic
Subscription Privilege and Oversubscription Privilege, and
guaranteeing the delivery to the Subscription Agent of any
Subscription Documents evidencing such Rights within three
business days following the date of the Notice of Guaranteed
Delivery; and
(iii) the properly completed Subscription Documents
evidencing the Rights being exercised, with any required
signatures guaranteed, are received by the Subscription
Agent within three business days following the date of the
Notice of Guaranteed Delivery relating thereto. The Notice
of Guaranteed Delivery may be delivered to the Subscription
Agent in the same manner as Subscription Documents at the
addresses set forth above. Additional copies of the form of
Notice of Guaranteed Delivery are available upon request
from the Company.
Funds received in payment of the Subscription Price for
shares of Common Stock subscribed for pursuant to the Rights will
be held in a segregated account by pending issuance of such
shares.
Unless a Subscription Document (i) provides that the shares
of the Common Stock to be issued pursuant to the exercise of
Rights represented thereby are to be delivered to the record
holder of such Rights or (ii) is submitted for the account of an
Eligible Institution, signatures on such Subscription Document
must be guaranteed by an Eligible Guarantor Institution which is
a member of or a participant in a signature guarantee program as
defined by SEC Rule 17Ad-15 (17CFR 240.17Ad-15) acceptable to the
Subscription Agent.
Holders who hold shares of the Common Stock for the account
of others, such as brokers, trustees or depositaries for
securities, should notify the respective beneficial owners of
such shares as soon as possible to ascertain such beneficial
owners' intentions and to obtain instructions with respect to the
Rights. If the beneficial owner so instructs, the record holder
of such Right should complete Subscription Cards and submit them
to the Subscription Agent with the proper payment.
The instructions accompanying the Subscription Cards should
be read carefully and followed in detail. DO NOT SEND
SUBSCRIPTION DOCUMENTS TO THE COMPANY.
THE METHOD OF DELIVERY OF SUBSCRIPTION DOCUMENTS AND PAYMENT
OF THE SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT
THE ELECTION AND RISK OF HOLDERS, BUT IF SENT BY MAIL IT IS
RECOMMENDED THAT SUCH SUBSCRIPTION DOCUMENTS AND PAYMENTS ARE
SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF
PAYMENT PRIOR TO THE EXPIRATION DATE. BECAUSE UNCERTIFIED
PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR,
YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS
OR CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF
FUNDS.
All questions concerning the timeliness, validity, form and
eligibility of any exercise of Rights will be determined by the
Company, whose determinations will be final and binding. The
Company in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected
within such time as it may determine, or reject the purported
exercise of any Right. Subscriptions will not be deemed to have
been received or accepted until all irregularities have been
waived or cured within such time as the Company determines in its
sole discretion. Neither the Company nor the Subscription Agent
will be under any duty to give notification of any defect or
irregularity in connection with the submission of Subscription
Cards or incur any liability for failure to give notification.
The Company will pay the fees and expenses of the
Subscription Agent.
FOREIGN AND CERTAIN OTHER STOCKHOLDERS
Subscription cards will not be mailed to holders whose
addresses are outside the United States or who have an APO or FPO
address, but will be held by the Subscription Agent for their
account. To exercise such Rights, such holders must deliver the
necessary Subscription Documents and payment for receipt by the
Subscription Agent on or prior to the Expiration Date.
<PAGE>
NO REVOCATION
ONCE A HOLDER OF RIGHTS HAS EXERCISED THE BASIC SUBSCRIPTION
PRIVILEGE OR THE OVERSUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY
NOT BE REVOKED UNLESS THE COMPANY FILES A POST-EFFECTIVE
AMENDMENT TO ITS REGISTRATION STATEMENT RELATED TO THE RIGHTS
OFFERING THAT INCLUDES A MATERIAL AMENDMENT. IN WHICH CASE A
HOLDER WILL HAVE A REASONABLE PERIOD OF TIME (AT LEAST TEN (10)
DAYS) TO EVALUATE THE MATERIAL AMENDMENT AND TO REVOKE THE
EXERCISE OF THEIR RIGHTS, IF DESIRED.
CONDITIONS TO THE RIGHTS OFFERING
The issuance of shares pursuant to the exercise of the
Rights is subject to the absence of any suit or other action
seeking to enjoin the Rights Offering.
AMENDMENT, EXTENSION AND TERMINATION
The Company may amend, extend or terminate the Rights
Offering at any time prior to the Expiration Date or thereafter
at the Board of Directors' discretion or if the conditions to the
Rights Offering have not been satisfied. It is not anticipated
that there will be any changes in the terms of the Rights
Offering. The Company will not terminate the Rights Offering
unless a suit or other action seeking to enjoin the Rights
Offering is filed. The Company will issue a press release with
respect to any amendment, extension or termination of the Rights
Offering.
SHARES OF THE COMMON STOCK OUTSTANDING AFTER THE RIGHTS OFFERING
Assuming the issuance of all of the shares offered hereby,
30,455,714 shares of the Common Stock will be issued in
connection with the Rights Offering. Based on the 15,227,857
shares of Common Stock outstanding as of the Record Date, the
issuance of all of the shares offered pursuant to the Rights
Offering would result (on a pro forma basis as of such date) in a
200% increase in the number of outstanding shares of Common Stock
to 45,683,571 shares of Common Stock issued and outstanding.
Assuming the issuance of 20,000,000 of the shares offered hereby,
representing the approximate number of shares that would be
issued to the Principal Stockholders upon the tender of demand
notes in lieu of paying the Subscription Price for the exercise
of their Rights pursuant to the Basic Subscription Privilege, the
issuance of such shares would result (on a pro forma basis as of
the Record Date) in a 131% increase in the number of outstanding
shares of Common Stock to 35,227,857 shares of Common Stock
issued and outstanding.
FEDERAL INCOME TAX CONSEQUENCES
The following summary of federal income tax consequences is
based upon the Internal Revenue Code of 1986, as amended to date
(the "Code"), the regulations promulgated or proposed thereunder,
the position of the Internal Revenue Service (the "Service") set
forth in published revenue rulings, revenue procedures and other
announcements and court decisions as in effect on the date of
this Prospectus. No assurance can be given that future
legislative or administrative actions or decisions will not
result in changes in the law which would result in significant
modifications to the following discussion. The following summary
does not discuss all aspects of federal income taxation that may
be relevant to a particular investor or to certain types of
investors subject to special treatment under the federal income
tax laws (for example, and without limitation, banks, dealers in
securities, life insurance companies, tax exemption organizations
and foreign taxpayers), and does not discuss any aspect of state,
local or foreign tax laws. However, the following information
includes the material tax consequences to holders who will hold
the Rights, and any shares of Common Stock received thereafter
upon exercise, as capital assets. The following discussion is
limited to holders who will hold the Rights, and any shares of
the Common Stock received therefor upon exercise of, as capital
assets.
Receipt of Rights. Pursuant to Section 305(a) of the Code,
a Holder should not recognize income for federal income tax
purposes by reason of the receipt of a Right, and the Company
intends to so treat the distribution of Rights as a nontaxable
distribution.
Basis and Holding Period of the Rights. A Holder's basis in
the Rights received by such holder of Common Stock as a
distribution with respect of such Holder's shares of Common Stock
will be zero, unless either (i) the fair market value of the
Rights on the date of issuance is 15% or more of the fair market
value (on the date of issuance) of <PAGE> the shares of the Common
Stock with respect to which they are received or (ii) the holder
of Common Stock elects, in his or her federal income tax return
for the taxable year in which the Rights are received, to
allocate part of the basis of such shares of the Common Stock to
the Rights. If the conditions set forth in either (i) or (ii)
above are satisfied, then upon exercise of the Rights or sale (if
the terms of the Rights are changed to allow any such sale) of
the Rights, the Holder's basis in such shares of Common Stock
will be allocated between the shares of Common Stock and the
Rights in proportion to the fair market values of each on the
date of issuance. The holding period of the Rights received by a
holder as a distribution on such holder's shares of the Common
Stock will include the holder's holding period (as of the date of
issuance) for the shares of the Common Stock with respect to
which Rights were issued.
Lapse of Rights. Holders of shares of the Common Stock who
allow the Rights received by them at the issuance to lapse will
not recognize any gain or loss, and no adjustment will be made to
the basis of the shares of the Common Stock, owned by such
Holders of the Rights.
Exercise of the Rights; Basis and Holding Period of Shares
of Common Stock. Holders of the Rights will not recognize any
gain or loss upon the exercise of such Rights. The basis of the
shares of the Common Stock acquired through exercise of the
Rights generally will be equal to the sum of the Subscription
Price paid therefor and the holder's basis in such Rights (if
any). The holding period for the shares of the Common Stock
acquired through exercise of the Rights will begin on the date
such Rights are exercised.
Disposition of Common Stock. The sale or other disposition
of Common Stock acquired on exercise of a Right will result in
the recognition of gain or loss by the Holder of such Common
Stock in an amount equal to the difference between the amount
realized and the Holder's adjusted tax basis in the Common Stock.
Gain or loss will be capital gain or loss if the Common Stock was
held as a capital asset. Capital gain may be subject to more
favorable federal income tax rates than the rates applicable to
ordinary income if the holding period on the capital asset is
either (i) greater than twelve months and is not more than
eighteen months or (ii) more than eighteen months. The holding
period of shares of Common Stock acquired by exercise of the
Rights commences on the date such Rights are exercised.
EACH HOLDER OF RIGHTS AND COMMON STOCK SHOULD CONSULT WITH
HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES OF ACQUISITION, OWNERSHIP AND DISPOSITION OF
THE RIGHTS AND COMMON STOCK, INCLUDING THE APPLICABILITY AND
EFFECT OF STATE, LOCAL, FOREIGN AND INCOME TAX LAWS.
INFORMATION AVAILABLE
Any questions or requests for assistance concerning the
method of exercising Rights or additional copies of the
Prospectus, the Subscription Documents the Instructions or the
Notice of Guaranteed Delivery may be directed to the Company at
the telephone number and address below.
Vanguard Airlines, Inc.
Attention: Rights Offering Department
7000 Squibb Road, Third Floor
Mission, KS 66202
(913) 789-1388
STATE SECURITIES LAWS
The Rights Offering is not being made in any state or other
jurisdiction in which it is unlawful to do so, nor is the Company
selling or accepting any offers to purchase any shares of the
Common Stock from Rights holders who are residents of any such
state or other jurisdiction. The Company, if it so determines in
its sole discretion, may decline to make modifications to the
terms of the Rights Offering requested by certain states or other
jurisdictions or to qualify the Common Stock in any state or
other jurisdiction, in which event Rights holders resident in
those states or jurisdictions will not be eligible to participate
in the Rights Offering.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Vanguard is a low-fare airline offering convenient scheduled
jet service primarily from its hub in Kansas City catering to
both business and leisure travelers. The Company serves markets
with a high volume of passenger traffic and with limited or no
low-fare air service. The Company currently operates eight
leased Boeing 737-200 jet aircraft. The Company currently
operates 48 daily weekday flights between Kansas City and
Atlanta, Chicago-Midway, Dallas/Fort Worth, Denver,
Minneapolis/St. Paul, San Francisco, and New York City-JFK. The
Company also operates four flights per day between
Minneapolis/St. Paul and Chicago-Midway. In September 1997, the
Company signed letters of intent to lease two additional Boeing
737-200 jet aircraft. The Company anticipates delivery of its
ninth and tenth aircraft in December 1997. The Company also
provides limited charter services. The Company to date has not
operated profitably during a quarterly reporting period. See
"Business."
The Company's operating revenues are derived principally
from the sale of airline 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 in established markets out of Kansas City that
are not serviced by other low fare airlines.
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 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 June 30, 1997, the Company
had an accumulated deficit of $56.5 million and stockholders'
deficit of $14.3 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.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1996
OPERATING REVENUES
Total operating revenues increased approximately 24% from
approximately $34.8 million for the first six months of 1996 to
approximately $43.1 million for the first six months of 1997.
This increase was primarily attributable to an increase in the
number of daily flights and the number of passengers on those
flights offset by the drop in passenger yield per revenue
passenger mile. During the first six months of 1996, the Company
averaged 42 flights per day which increased to 54 flights per day
during the first six months of 1997. The Company began flying a
new route structure on December 21, 1996, which included the
initiation of services from Kansas City to Atlanta, Ft. Meyers,
Las Vegas, Miami, Orlando and Tampa/St. Petersburg as well as
non-stop service between Chicago and Kansas City. This route
restructuring refocused the Company's strategy by creating a
Kansas City hub. ASMs increased approximately 38%, from
approximately 516 million during the first six months ended of
1996 to approximately 714 million during the first six months of
1997. RPMs increased approximately 27% from approximately 338
million during the first six months of 1996 to approximately 430
million during the first six months of 1997. The increase in
ASMs was primarily attributable to an increase in 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, the number of
passengers on those additional flights and the addition of
destinations with greater flight lengths. Load factor decreased
from approximately 66% for the first six months of 1996 to
approximately 60% for the first six months of 1997. This
decrease was primarily the result of a 38% increase in capacity
and the addition of destinations with greater flight lengths
while experiencing only a 7% increase in the number of
passengers.
<PAGE>
Passenger yield per RPM decreased approximately 3% from
approximately 9.8 cents for the first six months of 1996 to
approximately 9.5 cents for the first six months of 1997. The Company
had to discount fares to stimulate travel in a number of the new
markets that were introduced in conjunction with the Company's
major route restructuring in December 1996. In addition, with
the initiation of the new route structure, the Company's average
stage length increased to 596 miles from 502 miles during the
first six months of 1997 compared to the first six months of
1996. The Company offered promotional fares on its new city
pairs throughout the first six months of 1997, which routes
accounted for approximately 32% of the system wide ASMs during
this period. During 1996 and 1997, the Company attempted to
increase fares in selected markets in order to improve passenger
yield. The Company cannot predict future fare levels, which
depend to a substantial extent on actions of competitors and the
Company's ability to deliver a reliable product. When 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 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 $1.1 million (approximately 3.25% of operating
revenue) and approximately $1.7 million (approximately 3.85% of
operating revenues) in the six months ended June 30, 1996 and the
six months ended June 30, 1997, respectively.
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. The following table sets forth the percentage of
total operating revenues represented by these expense categories
as well as certain other selected financial data.
SIX MONTHS ENDED JUNE 30,
1996 1997
PERCENT CENTS PERCENT CENTS
OF PER OF PER
REVENUES ASM REVENUES ASM
Total operating
revenues 100.0% 6.75 cents 100.0% 6.05 cents
Operating expenses:
Flying operations 23.8% 1.61 cents 21.5% 1.30 cents
Aircraft fuel 20.7 1.39 23.4 1.42
Maintenance 18.8 1.27 23.1 1.40
Passenger service 8.8 .59 9.0 .54
Aircraft and traffic
servicing 21.9 1.48 20.6 1.24
Promotion and sales 21.2 1.43 26.5 1.60
General and
administration 5.2 .35 5.9 .36
Depreciation and
amortization 2.0 .14 2.4 .14
Total operating expenses 122.4 8.26 132.4 8.00
Total other income
(expense), net 0.0 .00 (2.6) (.16)
Net loss (22.4%) (1.51 cents) (35.0%) (2.11 cents)
Flying operations expenses include aircraft lease 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 12% from approximately $8.3
million (approximately 24% of operating revenues) for the first
six months of 1996 to approximately $9.3 million (approximately
22% of operating revenues) for the first six months of 1997.
This increase was primarily attributable to the increase in the
number of departures and the increase in the number of aircraft.
The number of departures increased approximately 20% from 8,168
for the first six months of 1996 to 9,838 for the first six
months of 1997. 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. Flying operations expenses decreased as a percentage of
operating <PAGE> revenue as a result of the increase in flying and
revenue generated from the Company's fleet, especially the
737-300 jet aircraft, during the first six months of 1997 versus the
same period in 1996.
Aircraft fuel expenses include the direct cost of fuel,
taxes and the costs of delivering fuel into the aircraft.
Aircraft fuel cost increased approximately 40% from approximately
$7.2 million (approximately 21% of operating revenues) for the
first six months of 1996 to approximately $10.1 million
(approximately 23% of operating revenues) for the first six
months of 1997. Higher fuel expense is directly related to the
increase in ASMs flown by the Company and increased cost per
gallon in the first six months of 1997 versus 1996. Fuel cost
per ASM increased 0.3 cents or 2% from 1.39 cents in the first
six months of 1996 to 1.42 cents in the first six months of 1997
primarily due to an increase in average fuel price per gallon.
Specifically, the average price increased from $0.74 per gallon
(including taxes and into-plane costs) in the first six months of
1996 to $0.77 per gallon in the first six months of 1997, a 4%
increase. The Company will continue to seek to pass on
significant fuel cost increases to the Company's customers
through fare increases as permitted by 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 52% from
approximately $6.5 million (approximately 19% of operating
revenues) for the first six months of 1996 to approximately
$10.0 million (23% of operating revenues) for the first six
months of 1997. This increase was primarily due to the increase
in block hours and cycles flown. In addition, during the later
part of 1996 and 1997, 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 major scheduled
airframe, engine and landing gear maintenance checks. The
Company attributes the increase in costs associated with major
scheduled airframe, engine and landing gear maintenance checks to
the following: a change in the vendors providing the major
scheduled overhaul services; the lack of available
overhauled/used engine and landing gear replacement parts; and
the funding of nonroutine airframe repairs not normally
experienced during major scheduled airframe overhauls. As a
result, in the fourth quarter of 1996 and again in the second
quarter of 1997, the Company increased the monthly maintenance
provisions for major scheduled maintenance checks. In the second
quarter of 1997, the Company also provided for the under accrual
of completed major maintenance checks. The Company deposits
funds with its aircraft lessors to cover a portion of or all of
the cost of its future major scheduled maintenance. The costs of
routine aircraft and engine maintenance are charged to
maintenance expense as incurred. Additionally, the Company
significantly increased the capacity of its in-house maintenance
department subsequent to January 1, 1997. 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 the Chicago-Midway and Minneapolis/St.
Paul airports.
Passenger service expenses include flight attendant wages
and benefits, in-flight service, flight attendant training,
uniforms and overnight expenses, inconvenience passenger charges
and passenger liability insurance. Passenger service expenses
increased approximately 26% from approximately $3.1 million
(approximately 9% of operating revenues) for the first six months
of 1996 to approximately $3.9 million (approximately 9% of
operating revenues) for the first six months of 1997. This
increase was primarily due to the 38% increase in ASMs and the
27% increase in RPMs. Passenger service expenses per ASM
decreased approximately 8% from approximately .59 cents for the
first six months of 1996 to .54 cents for the first six months of
1997. This decrease per ASM is primarily due to the addition of
destinations with greater flight lengths in the period from June
30, 1996 to June 30, 1997. The average stage length increased
19% from 502 miles in the first six months of 1996 to 596 miles
in the first six months of 1997.
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 17% from approximately $7.6 million
(approximately 22% of operating revenues) in the first six months
of 1996 to approximately $8.9 million (approximately 21% of
operating revenues) in the first six months of 1997. 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 20% from 8,168 during the first six
months of 1996 to 9,838 during the first six months of 1997. 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 the first six months of 1997 and the
first six months of 1996. The decrease of .24 cents per ASM was
primarily due to the 19% increase in average stage length from
502 miles to 596 miles in the first six months of 1996 and 1997,
respectively.
<PAGE>
Promotion and sales expenses include the costs of the
reservations functions, including all wages and benefits for
reservations, rent, electricity, communication charges, credit
card fees, travel agency commissions, advertising expenses and
wages and benefits for the marketing department. Promotion and
sales expenses increased approximately 56% from approximately
$7.4 million (approximately 21% of operating revenues) in the
first six months of 1996 to approximately $11.5 million
(approximately 27% of operating revenues) in the first six months
of 1997. 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 in addition to the Company's strategy to increase
spending on advertising programs in existing cities. The Company
incurred significant increases in late 1996 and early 1997
promoting its major route restructuring, which created a hub in
Kansas City. 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 $4.95 or 45% from $10.93 in the first six
months of 1996 to $15.88 in the first six months of 1997.
General and administrative expenses include the wages and
benefits for the Company's corporate employees and various other
administrative personnel, the costs for office supplies, office
rent, legal, accounting, insurance, and other miscellaneous
expenses. General and administrative expenses increased
approximately $748,000 from approximately $1.8 million
(approximately 5% of operating revenues) in the first six months
of 1996 to approximately $2.6 million (approximately 6% of
operating revenues) in the first six months of 1997. The
increase in general and administrative expenses as a percentage
of operating revenues and on a per ASM basis in 1997 was
primarily attributable to the increase in administrative
personnel in the Company's accounting, MIS and legal departments
as well as initiation of directors and officers insurance
coverage.
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 43% from approximately $709,000
(approximately 2% of operating revenues) in the first six months
of 1996 to approximately $1.0 million (approximately 2% of
operating revenues) in the first six months of 1997. This
increase was primarily the result of improvements to new and
existing aircraft and gate space at the Kansas City Airport and
those costs associated with modifications to the Company's
reservation system. In addition, the Company incurred two full
quarters of depreciation and amortization charged in the first
six months of 1997 on property and equipment added in the first
six months of 1996.
Other income (expense), net consists primarily of debt
issuance cost amortization, interest income and interest expense.
In connection with the guarantees of the letter of credit and the
bank line of credit agreements, each executed in January 1997 as
discussed in Notes 5 and 6 of the Company's June 30, 1997 10-Q
quarterly filing, the Company issued certain stockholders
warrants to purchase shares of common stock at an exercise price
of $1.00 per share. Accordingly, the estimated fair value of the
warrants issued related to each agreement totaling $3,654,000
during the six months ended June 30,1997 was recorded as deferred
debt issuance costs and is being amortized to expense over the
terms of the related guarantees. Interest expense increased
during the first six months of 1997, as a result of borrowings
against the line of credit and the addition of demand notes
payable to related parties during the first six months of 1997.
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 1995 added
service to Dallas/Fort Worth, Milwaukee, Wichita, Des Moines,
Minneapolis/St. 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 Myers, 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 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. 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 <PAGE> 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 services.
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 10%
passenger 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
again as of December 31, 1996, and was reinstated by Congress as
of March 7, 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 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. The following table sets forth the percentage of
total operating revenues represented by these expense categories
as well as certain other selected financial data.
<PAGE>
YEAR ENDED DECEMBER 31,
1995 1996
PERCENT CENTS PERCENT CENTS
OF PER OF PER
REVENUES ASM REVENUES ASM
Total operating
revenues 100.0% 6.43 cents 100.0% 6.29 cents
Operating expenses:
Flying operations 23.8% 1.53 cents 25.2% 1.59 cents
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 1.65 22.9 1.44
General and
administrative 7.6 .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 cents) (37.6%) (2.37 cents)
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 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 <PAGE> 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/St. 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 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 the result of improvements to new and
existing aircraft and costs <PAGE> 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.
YEAR ENDED DECEMBER 31, 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 year 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 private sales of equity securities, the proceeds from its
initial public offering of its Common Stock and the issuance of
debt. The Company to date has received net proceeds from the
sale of its equity securities in the aggregate amount of
approximately $36.4 million. 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.
On January 30, 1997, the Company established a six-month
$2.275 million line of credit with Commerce Bank, N.A. (Wichita,
KS), all of which is outstanding as of the date of the
Prospectus. The Line of Credit is guaranteed by major
stockholders of the Company. On August 1, 1997, the Company
renewed the line of credit and the guaranties for an additional
six months. In consideration for an agreement to guarantee the
Company's line of credit for two years, the Company granted
warrants to purchase up to 2,275,000 shares of the Company's
Common Stock. There can be no assurance that a replacement
$2.275 million 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 or extend the line of credit prior
to January 31, 1998, the Company would be required to utilize
available cash balances, which would materially adversely affect
the Company's then current cash position. There can be no
assurance that the Company will have adequate cash resources to
pay down the line of credit. See "Certain Transactions."
On January 17, 1997, one of the Company's major stockholders
agreed to establish 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 such processor. On May 7, 1997 major stockholders of the
Company agreed to establish a two-year $2.0 million guarantee on
behalf of the Company in favor of the Company's credit card
processor in order to further reduce required restricted cash
balances with such processor to secure its increased exposure due
to increased advance ticket sales. In consideration for these
agreements, the Company granted warrants to purchase up to
5,030,928 shares of the Company's Common Stock. See "Certain
Transactions." The Company anticipates increased requirements
with respect to restricted cash balances and there can be no
assurance that the Company's principal stockholders will increase
the letter of credit or guarantee 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 April through October 23, 1997, the Company borrowed
an aggregate $19.1 million from the Principal Stockholders of the
Company in the form of unsecured demand notes payable
(collectively, the "Notes"). The proceeds received in connection
with these Notes are being used mainly for working capital
purposes. The Company has also used proceeds of approximately
$800,000 from the Notes to meet a portion of the deposit
requirements of its eighth, ninth and tenth aircrafts. In
addition, the Company used proceeds from the Notes of
approximately $200,000 to purchase software for its new
reservation system. Finally, the Company used proceeds from the
Notes of approximately $400,000 to upgrade the appearance of its
fleet, move certain administrative offices and change its
employees uniforms. The Notes accrue interest at 8.0%. The
Company anticipates converting <PAGE> approximately $10.0 million of
Notes in connection with the Principal Stockholders exercise of
their Rights. There can be no assurance that the Company's
Principal Stockholders will continue to provide cash through the
issuance of unsecured demand notes payable, or otherwise.
During the six months ended June 30, 1997, the Company has
not generated sufficient passenger ticket sales to provide for
its operational cash needs. During the six months ended June 30,
1997, the Company's operating activities resulted in a cash flow
deficit of $9.7 million. These cash flow deficits have been
funded primarily through the sale of equity securities and debt
borrowings, as discussed above. At June 30, 1997, the Company
had cash and cash equivalents of approximately $587,000. The
Company had a working capital deficit at June 30, 1997 of
approximately $25.0 million. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
Further, the financial statements incorporated by reference
herein and the financial information presented herein were
prepared assuming the Company will continue as a going concern
and, as such, do not include any adjustments that might result
from the outcome of this uncertainty.
The Company estimates that major scheduled maintenance of
its existing aircraft fleet through June 1998 will cost
approximately $8.0 million, of which $3.8 million will be funded
from existing supplemental rent payments recoverable from
aircraft lessors. The Company expects to expend approximately
$1.1 million on various capital expenditures related to the
upgrade of the Company's reservation systems and improvements to
existing aircraft. As of September 30, 1997, the Company has
entered into signed letters of intent or aircraft operating lease
agreements for three additional aircraft. Deposit requirements
for these aircraft total $1.1 million. The Company is also
pursuing aircraft through operating lease agreements for up to
three additional aircraft. Deposit requirements for these
aircraft will approximate $1.2 million and such deposit amounts
could vary based on age of aircraft, the Company's financial
position and the availability of Boeing 737-200 jet aircraft.
The Company does not anticipate generating sufficient cash
flow from operations during the remainder of the third and fourth
quarters of 1997. Accordingly, the Company plans to implement
certain actions designed to achieve long-term profitablilty, as
described below.
Management's plans to achieve long-term profitability
include: the introduction of the Company's revised schedule, the
introduction of new markets in December 1997, participation in
certain of the airline industry's computerized reservation
systems (each a "CRS"), increased focus on the price-sensitive
business traveler and pricing strategies to maximize passenger
revenue and cost controls. There can be no assurance that their
efforts will be successful.
Whether or not the Company receives any proceeds from the
Rights Offering or the Company's strategic plans to achieve
long-term profitability are successful, the Company's continued
operations are dependent upon the additional financing.
Management plans to raise additional capital and secure
additional bank financing to fund continued operations. Failure
to raise such funds could result in the Company significantly
curtailing or ceasing operations. The Company's ability to raise
additional cash through equity or debt financings that may be
required to continue operations during the remainder of 1997 and
early 1998 will likely be dependent upon the Company's success in
implementing actions designed to achive long-term profitability,
as described above, and its ability to operate at profitable
levels during early 1998, as to which there can be no assurance.
There can be no assurance that management can provide for the
Company's necessary capital requirements or that the Principal
Stockholders will continue to provide cash through the issuance
of unsecured demand notes payable, or otherwise.
<PAGE>
BUSINESS
GENERAL
Vanguard Airlines, Inc. 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,
scheduled jet service primarily from its hub in Kansas City,
catering to both business and leisure travelers. The Company
serves markets with a high volume of passenger traffic, which
have limited or no low-fare air service. The Company currently
operates eight leased Boeing 737-200 jet aircraft. The Company
provides 48 daily weekday flights between Kansas City and
Atlanta, Chicago-Midway, Dallas/Ft. Worth, Denver,
Minneapolis/St. Paul, New York City-JFK and San Francisco. The
Company also operates four daily flights between Minneapolis/St.
Paul and Chicago-Midway. In September 1997, the Company signed
letters of intent to lease two additional Boeing 737-200 jet
aircraft. The Company anticipates delivery of its ninth and
tenth aircraft in December 1997. On December 17, 1997, in
connection with the delivery of its ninth and tenth aircraft, the
Company intends to initiate (i) non-stop service to Washington
D.C.-Dulles Airport from Kansas City, (ii) service between
Pittsburgh and Chicago-Midway, (iii) service between Pittsburgh
and New York City-JFK, and (iv) service between New York City-JFK
and Atlanta. In addition to scheduled passenger service, the
Company provides limited charter services.
The Company commenced operations in December 1994,
achieving operating revenues of approximately $36.2 million,
$68.6 million and $43.1 million for the years ended December 31,
1995 and December 31, 1996 and for the six months ended June 30,
1997, respectively.
LOW-FARE SERVICE
The Company's low-fare service is designed to meet the needs
of, and stimulate increased demand among, price-sensitive
business travelers and leisure travelers. 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,
especially with respect to reservations that are made within
seven days of day of departure. The Company believes its low-
fare strategy 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
the range of the Company's fares for one-way, non-stop service in
its markets as of September 30, 1997:
BETWEEN AND ONE WAY FARES
FROM TO
Chicago-Midway............ Minneapolis/
St. Paul $59 $119
Kansas City .............. Atlanta $59 $199
Kansas City............... Chicago-Midway $39 $99
Kansas City .............. Dallas/
Ft. Worth $59 $149
Kansas City................ Denver $59 $199
Kansas City............... Minneapolis/
St. Paul $49 $119
Kansas City .............. San Francisco $99 $249
Kansas City .............. New York-JFK $99 $249
The Company has recently upgraded its reservation software
which now permits the Company to establish separate fares for
through-service that are generally less than the sum of the fares
for the component segments. This policy affords the Company the
opportunity to price fares for such through-service markets at
rates that are appropriate for each specific through-service
market. For example, the Company offers the only one-stop low-
fare service between Dallas/Ft. Worth and Chicago-Midway and
Dallas/Ft. Worth and Minneapolis/St. Paul with fares that range
from $64 to $218 in each market. See "--Reservations and
Information Systems."
In October 1997, the Company expects to begin utilizing an
enhanced revenue/yield management system that establishes its
airfares 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 Company's flight and existing number of
reservations on such flights and are <PAGE> tailored to specific
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
and to monitor pricing of competitors, thereby maximizing revenue
per available seat mile.
In addition to the low fares offered by the Company, none of
the Company's fares require minimum or Saturday night stay. Most
of the Company's published fares are sold on a non-refundable
basis; however, the Company anticipates offering certain
refundable fares beginning in the fourth quarter of 1997.
Customers who wish to change, or who fail to use a purchased
flight reservation may apply the funds toward the purchase of
another Vanguard flight for use within 180 days 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 current non-
refundable fare structure and low "no-show" rate, it is
unnecessary for the Company to over book flights. The Company is
reviewing the merits of over booking flights in connection with
the implementation of CRSs and the anticipated change to offer
refundable tickets for sale. The Company is also evaluating
arrangements with certain corporate customers to sell a certain
number of fully-refundable tickets at specified price levels. In
order to stimulate demand among business travelers, the Company
now permits travelers to change flight times on the same day of
travel for same fare classes without incurring service charges or
fare difference charges.
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
reliable airline where customers receive more than they expect
from typical low-fare airlines. The Company offers greater leg
room in certain rows than typical low-fare airlines and, as of
September 1997, offers advance seat assignments. 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 most routes, low-fares, a frequent flyer
program, in-flight beverages, the ability to make advance
reservations and seat assignments. The Company, however, does
not offer airport clubs, city ticket offices (except for its city
ticket office in Mission, Kansas) or certain other amenities
offered by many of its competitors. In addition, the Company
does not interline with other domestic jet airlines, which
affects, but does not prevent, the Company's ability to
reaccommodate its passengers in the event of flight cancellations
or delays. 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 the price-sensitive business travelers
and leisure travelers.
ROUTE SYSTEM AND SCHEDULING
The Company serves primarily medium-haul markets with one to
four round-trip flights per day. As of September 30, 1997, the
average stage length of the Company's flights was approximately
540 miles. Average stage length represents the scheduled service
aircraft miles flown divided by the total number of departures.
The Company's original route structure was based on a point to
point strategy that focused on short- to medium-haul markets and
offered a limited number of flights within the Midwestern and
Rocky Mountain regions of the United States.
Since the Company commenced flying in December 1994, the
Company has implemented various modifications to its route
structure. In December 1996, the Company launched a new route
system by establishing a hub and spoke operation based in Kansas
City. During the first quarter of 1997, the Company operated
approximately 60 flights per day in Kansas City and provided
service to the most non-stop destinations from Kansas City. This
schedule included three "red-eye" flights from the west coast
(Las Vegas, Los Angeles and San Francisco) as part of its
strategy to offer more destinations with the same number of
aircraft, thereby increasing aircraft utilization and ASMs.
Due to poor reliability and financial performance of the hub
and spoke schedule implemented in December 1996, in September
1997, the Company began flying a revised schedule that added
service to New York-JFK and dropped service to Des Moines, Las
Vegas, Los Angeles, Orlando and Tampa (the "September Schedule").
In the September Schedule, the Company increased its service
between (i) Kansas City and Atlanta to three flights per day,
from two flights per day, (ii) Kansas City and Dallas to four
flights per day, from three flights per day, and (iii) Kansas
City and Chicago-Midway to three flights per day, from two
flights per day. The Company also eliminated its "red-eye"
routes. By eliminating the "red-eye" flying and increasing
turn-times, the Company hopes to increase its reliability and on-time
performance. The Company will continue to monitor the
effectiveness in delivering a reliable product at acceptable fare
levels and make changes as needed. The September Schedule
reduced ASMs by approximately 18.8% and daily average aircraft
utilization by approximately 16.4%. Unit cost increases as a
result of <PAGE> reducing ASMs are expected to be offset by cost
reduction strategies that are currently being implemented by the
Company and improved reliability.
On December 17, 1997, the Company anticipates commencement
to a new schedule with the delivery of its ninth and tenth
aircraft (the "December Schedule"). The December Schedule will
reduce flying between Kansas City and Atlanta from three flights
per day to two flights per day and increase service between
Chicago-Midway and Kansas City from three flights per day to four
flights per day and between Minneapolis/St. Paul and Kansas City
from three flights per day to four flight per day. In connection
with the December Schedule, the Company intends to initiate non-
stop service to Washington D.C.-Dulles from Kansas City with one
flight per day, and service between Chicago-Midway and Pittsburgh
with two flights per day and Pittsburgh and New York City-JFK
with two flights per day. In addition, the Company intends to
initiate service between New York City-JFK and Atlanta with one
flight per day.
The Company's strategy allows 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
Company's strategy allows it 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 Dallas/Ft. Worth, Denver, Minneapolis/St.
Paul and San Francisco will arrive in Kansas City in time to
connect to non-stop flights to New York City-JFK. The Company's
schedule also provides for convenient one-stop service between
Dallas/Ft. Worth and cities such as Denver, Minneapolis/St. Paul
and Chicago-Midway.
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 as sensitive to
price as schedule or flight frequency. As a result, the
Company's schedule generally provides two or four flights per day
in any given market, except in selected markets such as San
Francisco where it has one flight per day. The Company may add
or reduce flights to existing markets to satisfy increased or
decreased demand.
RESERVATION AND INFORMATION SYSTEMS
Technology is a key component of the Company's strategy.
The Company has recently purchased new reservations software.
The Company utilized cash flow from operations and/or proceeds
received from the issuance of demand note payable to Principal
Stockholders to purchase the new reservation software. This
software is designed to continue 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 and eliminating
paper records when possible. The Company's system provides
immediate access to detailed market by market, customer and
financial information obtained through the reservation process.
This 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. Management believes
that the ease of immediate access to timely, detailed information
through its reservation system enhances certain 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.
As discussed above, the Company has purchased new
reservation software, which permits the Company to participate in
the SABRE and WORLDSPAN CRSs. The Company anticipates
participation in the SABRE CRS and WORLDSPAN CRS in mid October
1997 and early November 1997, respectively. This participation
allows travel agents to book seats on the Company without the
need to call the Company's reservation center. The Company
previously only displayed its flight schedules in the WORLDSPAN
and GALILEO CRSs. The Company did not previously display its
fares in the much larger SABRE CRS system. The Company will
continue to display its flights in the GALILEO CRS, but travel
agents who utilize the GALILEO CRS will have to call the
Company's reservation center to book a flight. The Company's
software and level of CRS participation allows travel agents to
send requests to the Company's reservation system to verify
availability of seat and price; the travel agent will then
utilize a credit card to complete the sale. The Company intends
to continue to be a totally ticketless operation.
<PAGE>
At present, the Company does not intend to participate in
the Airline Reporting Corporation ("ARC"), the airline industry
collection agent for travel agency sales. Currently, at the time
a travel agency reservation or sale is made, the Company
identifies the travel agency making the booking, by either taking
credit card information or charging the travel agency's account
for future collection. Each travel agency then receives an
invoice summarizing these transactions. Although travel agencies
are most accustomed to doing business through ARC, the Company
believes that the cost savings realized by avoiding the fees,
ticket handling and revenue accounting costs inherent in the ARC
system justify the Company's decision not to participate in ARC.
The Company's participation in the SABRE and WORLDSPAN CRSs will
require the travel agent to utilize a credit card to guarantee
the completion of the sale. Under this method, the Company
collects cash from the travel agency bookings directly from the
credit card processor. As a result, the importance of collecting
outstanding travel agency bookings is diminished regardless of
whether the Company participates in ARC or maintains its own
internal billing and collection functions.
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.
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
primarily newspapers, television, and radio. Since November
1996, 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.
Various permanent and temporary personnel with successful low-
fare airline marketing experience have been recruited recently to
focus the marketing efforts of the Company in order to address
the Company's new long-term strategy and improve ticket sales
with its target markets. Numerous promotions to attract business
travelers will also be run in the Company's markets.
Approximately 40% of the Company's customers use travel
agents to make their reservations. Most airlines generate 60-80%
of their business through travel agencies. The Company is now
focusing on better distribution of its product and, consequently,
Vanguard intends to begin participation in the SABRE and
WORLDSPAN CRSs to allow travel agents to book flights directly on
the Company. 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, or eight round trips, 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 entitled customers to a free
round-trip ticket, valid for one year, for anyone who completed
three round-trip flights on Vanguard between January 26, 1997 and
June 1, 1997. The Company is currently working on further
enhancements to its frequent flyer program to establish more
active communication with frequent flyers. The Company's new
reservation software will be more effective than the previous
system in achieving these goals.
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, Mr. Spane, and other executive
officers of the Company. In addition, the Company established an
information line, which Mr. Spane updates regularly, to improve
the flow of information and communications throughout 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 and an
employee <PAGE> stock purchase plan and has adopted a profit sharing
plan. In August 1997, Mr. Spane implemented an incentive plan
for all of the Company's employees that gives each employee
$25.00 per week if the Company meets certain operating
performance criteria. The Company expects that the
aforementioned programs 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 Company's Boeing
737-200 jet aircraft are generally provided by independent
contractors, including other airlines. Currently, the average
age and flight time of the Company's pilots is 45 years and 6,100
hours, respectively.
Regulations promulgated by the 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.
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, 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, however, currently
performs its own underwing ground handling services at Chicago-
Midway Airport.
The Company serves 8 airports and will serve 10 airports as
of December 17, 1997. The Company has leases with the
appropriate airport authority at certain airports and sublease or
handling arrangements directly with other airlines at other
airports. All of the sublease or handling arrangements can be
terminated by the other airlines or the Company 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's flights at New York City-JFK are
scheduled to operate at times during the day that do not require
slot allocations or exemptions.
AIRCRAFT
The Company's aircraft fleet consists of eight leased Boeing
737-200 jet aircraft. The Company anticipates delivery of its
ninth and tenth Boeing 737-200 jet aircraft in December 1997.
The Company has leased three of its 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 terms extendable
through 2002; one of its Boeing 737-200 has been leased for a
term expiring in 2002; and two for a terms expiring in 2004. The
Company anticipates that the leases for its ninth and tenth jet
aircraft will be five year operating leases. The Company has
options to purchase five of the Boeing 737-200 jet aircraft
during the terms of their respective leases. See "Risk Factors
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.
<PAGE>
The Company's aircraft must be brought into compliance with
Federal Stage 3 noise level requirements in phases: 75% by
December 31, 1998 and 100% by December 31, 1999. The Company's
fleet meets the current Stage 3 noise compliance requirements.
The Company may be required to modify aircraft in its existing
fleet to meet the future Stage 3 requirements. 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.
Because the Company's aircraft fleet consists of eight, if
one or more of its aircraft was 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 financial performance.
MAINTENANCE AND REPAIRS
Except for one Boeing 737-200 jet aircraft that was
manufactured in 1982, seven of the Company's Boeing 737-200 jet
aircraft were manufactured between 1968 and 1970. 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 for aging aircraft issued by the FAA. In addition,
the Company may be required to comply with future ADs or
regulations regarding maintenance and repairs, including aging
aircraft ADs. For example, the FAA has ordered a number of ADs
for rudder modifications on Boeing 737-200 jet aircraft.
Although Boeing is willing to pay for the cost of the replacement
parts, the Company is responsible for 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 and
Minneapolis/St. Paul by the Company's employees or in various
other cities, as needed, by independent contractors. The Company
has contracted with various independent certified maintenance
operations to perform major scheduled maintenance. Through June
30, 1998, the Company's aircraft will require major scheduled
maintenance in accordance with the Company's maintenance program
at an estimated aggregate cost of $8.0 million of which $3.8
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 acquisition of
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 rotable 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. The Company recently
returned its two Boeing 737-300 jet aircraft pursuant to the
terms of their respective leases and, consequently, has returned
approximately $1.1 million inventory of spare parts.
FUEL
The cost of jet fuel is one of the Company's largest
operating expenses (approximately 17.7% of operating expenses
when including taxes and the cost of delivering fuel into the
aircraft for the six months ended June 30, 1997). While
currently stable, significant changes in jet fuel prices have
materially affected the Company's operating results in the past.
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 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
"Risk Factors--Rising Fuel Costs."
<PAGE>
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, with respect to short-haul markets from ground
transportation alternatives. See "Risk Factors--Competition and
Competitive Reaction."
GOVERNMENT REGULATION
All interstate air carriers are subject to regulation by the
DOT and the FAA under the Aviation Act. The DOT's jurisdiction
extends primarily to the economic aspects of air transportation,
while the FAA's regulatory authority relates primarily to air
safety, including aircraft certification and operations, crew
licensing and training and maintenance standards. 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.
Presently, four airports, Chicago-O'Hare, New York City-
LaGuardia, New York City-JFK and Washington, D.C.-National, are
regulated by means of "slot" allocations, which represent
governmental authorizations to take off or land at a particular
airport within a specified time period. The DOT regulations
currently permit the buying, selling, trading or leasing of
slots. Slot values depend on several factors, including the
airport, time of day covered, the availability of slots, and the
class of aircraft. FAA regulations require the use of each slot
at least 80% of the time and provide for forfeiture of slots in
certain circumstances without compensation. The DOT may require
forfeiture of slots without compensation if it determines slots
are needed to meet operational needs of international or
essential air transportation. The Company does not have slot
allocations or leases at New York City-JFK. The slot
restrictions at New York City-JFK cover a four-hour period. The
Company's service to New York City-JFK operates in times that are
not subject to slot regulation and, consequently, the Company's
arrivals and departures are timed accordingly. The Company's
ability to expand service at New York City-JFK is restricted by
the availability of slots or its ability to obtain a slot
exemption, to which there can be no assurance.
The DOT has previously determined that the present structure
of the slot system should not be changed at this time; however
reports in the press have indicated that the DOT may reconsider
its position. The Company's ability to gain access to the four
airports is affected by the number of slots available to it for
takeoffs and landings.
Vanguard began flight operations in December 1994. Since
then, Vanguard has had no reportable incidents to the DOT that
have involved serious bodily injury or significant damage to any
of the Company's aircraft.
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
Company believes that its operations and compliance with FAA
regulations are within industry standards.
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."
<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 September 30, 1997, the Company employed approximately
485 full- and part-time employees consisting of 74 pilots, 100
flight attendants, 66 mechanics, 145 station agents and 100
management and staff personnel (including accounting). In
addition, the Company's reservation centers, operated by a third
party, employs approximately 212 full- and part-time people as of
September 30, 1997. In early September 1997, the Company closed
one of its two reservations centers. Accordingly, the Company
reduced its reservation center staff by 60% or approximately 175
full-time equivalent employees, in order to bring the Company's
service levels into line with the industry norms and take account
of the Company's anticipated participation in the SABRE and
WORLDSPAN CRSs.
<PAGE>
MANAGEMENT
The following table sets forth the names, ages and positions
of the Company's executive officers and directors as of September
30, 1997:
Name Age Position
Robert J. Spane 56 Chairman of the Board, Chief Executive
Officer and President
William A. Garrett 32 Vice President - Finance and Chief
Financial Officer
Brian S. Gillman 28 Vice President, General Counsel and
Secretary
Ronald L. McClellan 48 Vice President - Maintenance
William F. McKinney 57 Vice President - Operations
Russell Winter 31 Vice President - Marketing and Planning
Lee M. Gammill, Jr. 63 Director
Denis T. Rice 65 Director
Edmund H. Shea, Jr. 68 Director
Set forth below is a description of the business experience
of each executive officer and director of the Company.
VICE ADMIRAL ROBERT J. SPANE USN (RET.) was elected as a
director of the Company in May 1996 and elected Chairman of the
Board, Chief Executive Officer and President of the Company in
June 1997. 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. Mr. Spane is a 1962 graduate of the
U.S. Naval Academy.
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
in Kansas City, Missouri. From 1987 to 1993, he served on the
staff of and as manager for Coopers and Lybrand LLP. Mr. Garrett
is a certified public accountant and a member of the American
Institute of Public Accountants. Mr. Garrett obtained a B.S.
degree in Business Administration and Accounting from Washington
& Lee University.
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. Mr. Gillman
received his J.D. from the University of Iowa College of Law in
May 1994.
RONALD L. MCCLELLAN joined the Company in May 1994, as one
of its founding officers, as Vice President - Maintenance. Prior
to joining the Company, Mr. McClellan served as Director of
Aircraft Reliability Engineering for Continental Airlines from
1987 to 1994. From 1981 to 1986, he was employed by People
Express Airlines as Director of Quality Control and advanced to
Managing Officer of Technical Services.
WILLIAM F. 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
served as a pilot for Trans World Airlines for 29 years, where he
served most recently as General Manager of Flying (Chief Pilot)
for the Western Region of the United States.
RUSSELL WINTER joined the Company in August 1997 as Vice
President - Marketing and Planning. From January 1995 to August
1997, Mr. Winter was a Vice President at Hambrecht & Quist
California, a wholly-owned subsidiary of Hambrecht & Quist Group.
Hambrecht & Quist Group is an investment banking firm based in
San Francisco, California. While at Hambrecht & Quist, Mr.
Winter served as a member of Hambrecht & Quist TSP Investment
Management Co., L.L.C. and Hambrecht & Quist TSP II Investment
Management, L.L.C., one of the general partners of Hambrecht &
Quist TSP Investors, L.P. and Hambrecht & Quist TSP II Investors,
L.P., respectively. From August 1992 to January 1995, Mr.
Winter was a Business Analyst with the Airbus Division of British
Aerospace. See "Certain Relationships."
<PAGE>
LEE M. GAMMILL, JR. was elected a director in September
1997. Mr. Gammill is the retired Vice Chairman of the Board of
New York Life Insurance Company. From 1989 until he retired in
May 1997, Mr. Gammill served as Executive Vice President -
Individual Insurance Operations at New York Life. Mr. Gammill
joined New York Life in 1957 as a sales agent and held various
management and executive positions throughout his 40-year career.
DENIS T. RICE was elected a director of the Company in April
1997. Mr. Rice is a director in the law firm of Howard, Rice,
Nemerovski, Canady, Falk & Rabkin, P.C., San Francisco,
California, a firm he has been associated with since 1961.
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, an investment firm based
in San Francisco, California. See "Certain Relationships."
STOCK OPTION PLAN
The Company has one stock option plan pursuant to which
options are outstanding: the 1994 Vanguard Airlines, Inc. Stock
Option Plan ("Stock Option Plan"). The total number of shares
of Common Stock issuable pursuant to the exercise of options
under the Stock Option Plan is 1,700,000. As of June 30, 1997,
options with respect to 1,107,227 shares of Common Stock had been
granted under the Plan of which 172,571 are exercisable. On July
7, 1997, the Board of Directors approved stock option grants of
approximately 456,000 options to the Company's pilots.
The Stock Option Plan is administered by the Board of
Directors (the "Plan Administrator"). Subject to the terms of
the Stock Option Plan, the Plan Administrator determines the
persons to whom awards are granted, the type of award granted,
the number of shares granted, the vesting schedule, the type of
consideration to be paid to the Company upon exercise of options,
and the term of each option (not to exceed ten years).
Under the Stock Option Plan, the Company may grant stock
options, ("incentive stock options") intended to qualify under
Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and stock options which are not qualified as incentive
stock options ("non-qualified stock options"). Incentive stock
options must be granted at an exercise price equal to or greater
than the fair market value of the Common Stock on the date of
grant. The exercise price of non-qualified stock options granted
under the Stock Option Plan will be determined by the Plan
Administrator on the date of grant but may not be less than 85%
of the fair market value of the Common Stock on the date of
grant. The exercise price of incentive stock options granted to
holders for more than 10% of the Common Stock must be at least
110% of the fair market value of the Common Stock on the date of
grant, and the term of these options may not exceed five years.
PROFIT SHARING PLAN
The Company adopted the Vanguard Airlines, Inc. Profit
Sharing Plan (the "Plan") effective January 1, 1995. The amount
of the Company's annual contribution to the Plan, if any, is
discretionary. The Company's contribution can be made in one of
three ways: cash, Common Stock, or cash and Common Stock.
Employees are eligible to participate in the plan for a
calendar year if they are employed on January 1st of such year.
The Company's contribution will be allocated to the accounts of
participating employees in proportion to their allowable
compensation. The amount of allowable compensation is the maximum
permitted under the Code (currently $150,000).
At least 25% of each employee's annual allocation of the
Company's contribution must be invested in Common Stock. The
remaining contribution will be invested as directed by the
employee among various investment options which include Common
Stock. An employee may change his or her investment mix once each
quarter.
Subject to certain provisions of the Code and the Plan each
eligible employee vests after five years of service with the
Company and will forfeit his or her entire account balance if he
or she terminates employment prior to such time. Forfeited
amounts are used first to restore accounts of employees who are
rehired, then allocated pro rata to each employee's account,
based on compensation.
SECTION 401(K) PLAN
The Company adopted the Vanguard Airlines, Inc. 401(k) Plan
(the "401(k) Plan") effective January 1, 1995. All employees of
the Company are eligible to participate in the 401(k) Plan.
Pursuant to the 401(k) Plan, employees may elect to reduce their
current compensation by up to the lesser of 15% of compensation
or the statutorily prescribed annual limit ($9,500 in 1996) and
to have the amount of such reduction contributed to the 401(k)
Plan. No additional contributions will be made to the 401(k) Plan
by the Company. The 401(k) Plan is intended to qualify under
Section 401(k) of the Code, so that contributions to the 401(k)
Plan by employees and the investment earnings thereon, are not
taxable to employees until withdrawn or distributed from the
401(k) Plan.
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
The Company adopted the Vanguard Airlines, Inc. Employee
Stock Purchase Plan (the "Purchase Plan") in connection with its
initial public offering. The Purchase Plan is administered by a
committee appointed by the Board of Directors. Under the Purchase
Plan, the Company will withhold 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. Any employee who is a full-time employee and has
completed ninety (90) days of employment with the Company is
eligible to participate in the Purchase Plan. The amount withheld
will be allocated to an account for each participating employee
held by a custodian, and will be applied monthly by the custodian
to purchase whole shares of Common Stock. Common Stock purchased
from the Company under the Purchase Plan will be 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 will be paid 85% by the
participating employee and 15% by the Company. Employees may
change their withholding under the Purchase Plan every six
months. Employees may terminate their withholding under the
Purchase Plan at any time, but may not then participate again
until the expiration of six months. Common Stock purchased under
the Purchase Plan may be withdrawn by participating employees on
January 1 and July 1 of each year.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Restated Certificate of Incorporation
eliminates the personal liability of its directors to the Company
and its stockholders for monetary damages for breach of the
directors' fiduciary duties in certain circumstances. Delaware
law provides that directors of a corporation will not be
personally liable for monetary damages for breach of their
fiduciary duties as directors, except liability for (i) any
breach of their duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law,
(iii) unlawful payments of dividends or unlawful stock
repurchases or redemptions or (iv) any transaction from which the
director derived an improper personal benefit. Such limitation of
liability does not apply to liabilities arising under the federal
securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company will indemnify
its officers and directors to the fullest extent permitted by
law. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in
the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is,
therefore, unenforceable.
CERTAIN TRANSACTIONS
In July 1996, the Company established a $4.0 million line of
credit. In August 1996, the Company amended its line of credit
to increase it to $5.0 million. The Company's obligations under
this line of credit were guaranteed by, among others, Hambrecht &
Quist Group and Ken Wagnon, both of whom own more than 5% of the
outstanding Common Stock. In connection with the guarantee of
the initial $4.0 million line of credit, the Company granted
warrants to purchase 354,375 shares and 78,750 shares to
Hambrecht & Quist Group and Ken Wagnon, respectively, at an
exercise price of $7.10 per share. In connection with the
guarantee of the $1.0 million increase to the line of credit, the
Company granted warrants to purchase 88,593 shares and 19,608
shares to Hambrecht & Quist Group and Ken Wagnon, respectively,
at an exercise price of $4.85 per share. See "Description of
Capital Stock--Warrants."
In August and September 1996, the Company completed a
private sale of 1,319,774 units of securities (each a "Unit"),
each Unit consisting of one share of the Company's Common Stock
and a redeemable common stock purchase warrant for $5.53 per unit
for aggregate net proceeds to the Company of approximately $7.1
million. In this private placement transaction, the Company sold
867,797 units to H & Q TSP Investors, L.P., an affiliate of
Hambrecht & Quist Group and 170,641 units to Ken Wagnon. See
"Description of Capital Stock--Warrants."
On January 17, 1997, Hambrecht & Quist California, a wholly
owned subsidiary of Hambrecht & Quist Group, 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 the letter of credit, the
Company issued to Hambrecht & Quist California warrants to
purchase up to 4,000,000 shares of Common Stock. Upon execution
of the letter of credit, warrants to purchase 1,600,000 shares of
Common Stock immediately vested. The remaining warrants to
purchase 2,400,000 shares of Common Stock vest quarterly
according to the amount of exposure under such letter of credit.
Each warrant expires 10 years from the date of issuance with an
exercise price of $1.00 per share. See "Description of Capital
Stock--Warrants."
On January 30, 1997, the Company entered into an agreement
with Commerce Bank, N.A. (Wichita, KS) to provide a line of
credit for six months in the amount of $2.275 million. The
Company's obligations under this facility are guaranteed in part
by Ken Wagnon and other major stockholders of the Company. In
consideration for Mr. <PAGE> Wagnon's guarantee, the Company issued to
Mr. Wagnon warrants to purchase up to 1,250,000 shares of Common
Stock. Upon execution of the line of credit, 500,000 of Mr.
Wagnon's warrants immediately vested. The remaining warrants to
purchase 750,000 shares of Common Stock vest quarterly according
to the amount outstanding under the line of credit. On August 1,
1997 Commerce Bank and the Company entered into an Agreement to
extend the line of credit for another six months with the same
terms and guarantees. See "Description of Capital Stock -
Warrants."
On April 28, 1997, the Company completed a $10.3 million
private sale of 5,150,000 units of securities, each unit
consisting of one share of Common Stock and two redeemable common
stock purchase warrants for $2.00 per unit. Each redeemable
common stock purchase warrant entitles the registered holder to
purchase one share of Common Stock, at any time over a five year
period, at an exercise price of $2.50. In this private placement
transaction, the Company sold 1,687,500 units to H & Q TSP
Investors, L.P., 475,000 units to H & Q TSP II Investors, L.P.,
also an affiliate of Hambrecht & Quist Group, 1,135,000 units to
Hambrecht & Quist California, 851,250 units to The Hambrecht 1980
Revocable Trust, William Hambrecht as Trustee (the "Hambrecht
Trust") and 851,250 units to J.F. Shea Co., Inc. ("J.F. Shea") of
which Edmund H. Shea, Jr. is a Vice President. Mr. Shea, a
director of the Company, is also a director of Hambrecht & Quist
Group. The exercise price of these warrants is subject to
adjustment in the event the Company issues equity securities
raising net proceeds in an aggregate amount of $1,000,000 at a
price below $2.00 per share of Common Stock. In such event, the
exercise price of the warrants is reduced to the offering price
of the equity offering. Consequently, the exercise price of the
warrants issued in connection with the April 28, 1997 private
placement will be reduced to the Subscription Price. See
"Description of Capital Stock--Warrants."
On May 7, 1997, Hambrecht & Quist California agreed to
establish a two year $2.0 million guarantee in favor of the
Company's credit card processor on behalf of the Company. As
consideration for the establishment of this guarantee, the
Company issued to Hambrecht & Quist California warrants to
purchaseup to 1,030,928 shares of Common Stock at an exercise
price of $1.94 per share. Upon execution of the guarantee,
412,371 warrants vested immediately. The remaining 618,557
warrants vest according to the amount of exposure under such
guarantee. Each warrant expires 10 years from the date of
issuance. See "Description of Capital Stock--Warrants."
As of October 23, 1997, the Company has outstanding demand
notes with Hambrecht & Quist California, J.F. Shea and the
Hambrecht Trust, aggregating approximately $19.1 million. The
demand notes bear interest of 8% per annum. The Principal
Stockholders have indicated their intention to subscribe for and
purchase an aggregate of 19,842,498 shares of Common Stock
pursuant to their Basic Subscription Privilege and, to the extent
available, additional shares of Common Stock pursuant to the
Oversubscription Privilege. See "Use of Proceeds."
<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Each share of Common Stock entitles the holder thereof to
one vote on all matters submitted to a vote of the stockholders.
The Common Stock is not subject to redemption or future calls or
assessment by the Company. Holders of Common Stock do not have
preemptive rights or rights to convert their Common Stock into
other securities. Subject to preferences which may be applicable
to any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available
therefore. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of
the Common Stock have the right to a ratable portion of the
assets remaining after the payment of liabilities subject to, and
may be adversely affected by, the rights of holders of shares of
any series of Preferred Stock which the Company may designate in
the future. All shares of Common Stock outstanding and to be
outstanding upon completion of this offering are and will be
fully paid and non-assessable. As of the date of this
Prospectus, the Company had 216 record holders of its Common
Stock.
PREFERRED STOCK
The Preferred Stock may be issued from time to time in one
or more series. The Board of Directors is authorized to
determine the rights, preferences, privileges and restrictions,
including dividend rights, conversion rights, voting rights,
terms of redemption (including mandatory redemption provisions,
if any) and liquidation preference, granted to and imposed upon
any wholly unissued series of Preferred Stock and to fix the
number of shares of any series of Preferred Stock and the
designation of any such series, without any vote or action by the
stockholders of the Company. Accordingly, the Board of Directors
could authorize a series of Preferred Stock which adversely
affects the voting power and other rights of the holders of
Common Stock of the Company. Moreover, the existence of
Preferred Stock which could be issued by the Company may have a
depressive effect on the market price of the Common Stock. No
shares of Preferred Stock will be outstanding as of the closing
of this Rights Offering and the Company has no present plans to
issue any shares of Preferred Stock.
WARRANTS
In connection with the guarantee of the Company's previously
outstanding lines of credit, the Company issued to certain
stockholders of the Company warrants to purchase 1,190,341 shares
of Common Stock. The warrants vested as to exercisability based
upon the dollar amount and duration that borrowings under the
lines of credit were actually outstanding. Each warrant entitles
the holder thereof to purchase a specified number of shares of
Common Stock, at a price of $1.10 per share with respect to
386,365 shares of Common Stock, $3.50 per share with respect to
147,726 shares of Common Stock, $7.10 per share with respect to
525,000 shares of Common Stock and $4.85 with respect to 131,250
shares of Common Stock.
In connection with the Company's initial public offering the
Company issued RvR Securities Corp., as the Underwriter, warrants
to purchase 240,000 shares of Common Stock at an exercise price
per share equal to $7.20 (the "Underwriter's Warrants"). The
Underwriter's Warrants are exercisable at any time from November
1, 1996 to November 1, 2000.
In August and September 1996, the Company completed a $7.3
million private placement transaction of units, each unit
consisting of one share of common stock and one redeemable common
stock purchase warrant ("Redeemable Warrants"). Each Redeemable
Warrant entitles the registered holder thereof the right to
purchase one share of Common Stock at an exercise price of $6.64.
The Company issued 1,319,774 Redeemable Warrants in connection
with this transaction. Each redeemable Warrant expires five
years from the date of issuance.
On January 17, 1997, Hambrecht & Quist California agreed to
establish a two-year $4.0 million letter of credit on behalf of
the Company in favor of the Company's credit card processor. In
consideration for the two year letter of credit, the Company has
granted to Hambrecht & Quist California warrants to purchase up
to 4,000,000 warrants to purchase shares of the Company's Common
Stock. The warrants vest pursuant to a schedule according to the
amount of exposure under such letter of credit and the warrants
are exercisable for ten years at an exercise price of $1.00 per
share.
On January 30, 1997, the Company established a $2.275
million, six-month line of credit, guaranteed by certain
stockholders of the Company. In exchange for the commitment to
guarantee 2.275 million in loans for two years, the Company and
guarantors of this line of credit entered into an agreement
whereby the Company granted to the guarantors warrants to
purchase up to 2,275,000 shares of Common Stock. The warrants
vest over an eighteen-month period, with forty percent
immediately exercisable. Each warrant expires 10 years from the
date of issuance and has an exercise price of $1.00 per share.
See "Description of Capital Stock--Warrants."
<PAGE>
On April 28, 1997, the Company completed a $10.3 million
private placement transaction of units, each unit consisting of
one share of Common Stock and two redeemable Common Stock
purchase warrants ("Redeemable Warrants"). Each Redeemable
Warrant entitles the registered Holder thereof the right to
purchase one share of Common Stock at an initial price of $2.50.
The Company issued 10,300,000 warrants in connection with this
private placement. The exercise price on the Redeemable Warrants
is subject to adjustment in the event the Company issues equity
securities raising net proceeds in an aggregate amount of
$1,000,000 at a price below $2.00 per share of Common Stock. In
such event, the exercise price is reduced to issuance price of
the equity securities. Consequently, the exercise price for the
Redeemable Warrants will be equal to the Subscription Price upon
consummation of the Rights Offering. Each Redeemable Warrant
expires five years from the date of issuance.
On May 7, 1997, Hambrecht & Quist California agreed to
establish a $2.0 million guarantee on behalf of the Company in
favor of the Company's credit card processor in order to further
reduce restrict cash held on deposit. In consideration for the
two year guarantee, the Company issued to certain stockholders
warrants to purchase 1,030,928 shares of Common Stock. The
warrants vest over an eighteen-month period, with forty percent
immediately exercisable. Each warrant expires 10 years from the
date of issuance and has an exercise price of $1.94 per share.
In connection with the various financing transactions, the
Company has issued warrants to purchase up to 20,356,044 shares
of Common Stock. The terms of these warrants are described above
in this section. The Company's Restated Certificate of
Incorporation, as amended, authorizes the Company to issue up to
50,000,000 shares of Common Stock. As a result of the number of
shares with respect to which outstanding warrants can be
exercised, a sufficient number of warrant holders, including the
Principal Stockholders, have agreed not to exercise their
warrants until the earlier of June 30, 1998 or the date a
Certificate of Amendment to the Company's Restated Certificate of
Incorporation is filed increasing the number of authorized
shares, which date shall not be later than 5 business days after
a special or annual meeting of stockholders of the Company at
which stockholders approve such amendment.
REGISTRATION RIGHTS
The holders of approximately 25,506,044 (including shares
upon exercise of outstanding warrants) are entitled to certain
rights with respect to the registration of such shares under the
Securities Act.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares of Common Stock by existing
stockholders could adversely affect the prevailing market price
of the Company's Common Stock. Upon the completion of this
Rights Offering, based on the number of shares outstanding as of
the Record Date, the Company will have 45,683,571 shares of
Common Stock issued and outstanding if all of the Rights are
exercised. All of the shares issued upon exercise of the Rights
will be freely tradeable without restriction under the Securities
Act. As of the Record Date, 10,077,857 shares are freely
tradable without restriction under the Securities Act or may be
sold pursuant to Rule 144 under the Securities Act ("Rule 144")
and 5,150,000 shares are "restricted securities" (as such term is
defined in Rule 144) with rights to require the Company to
register such shares. See "Description of Capital Stock -
Warrants and Registration Rights."
In general, under Rule 144, as currently in effect, a person
(or persons whose shares are aggregated) who has beneficially
owned "restricted securities" (as such term is defined in Rule
144) for at least one year, including a person who may be deemed
an affiliate of the Company, is entitled to sell within any three
month period a number of shares of Common Stock that does not
exceed the greater of 1% of the then outstanding shares of Common
Stock of the Company and the average weekly trading volume of the
Common Stock during the four calender weeks preceding such sale.
Sales under Rule 144 are further subject to certain restrictions
relating to the manner of sale, notice and the availability of
current public information about the Company. A person who is
not an affiliate of the Company at any time during the 90 days
preceding a sale and who has beneficially owned shares of Common
Stock for at least two years, is entitled to sell such shares
without regard to the volume limitations, manner of sale
provisions, notice or other requirements in Rule 144. However,
the Company's transfer agent may require an opinion of counsel
that a proposed sale of shares comes within the terms of Rule 144
prior to effecting a transfer of such shares. Such opinion, if
appropriate, will be provided at the expense of the Company.
Under the Company's Stock Option Plan, the Company has
issued options to purchase Common Stock and may issue options to
purchase additional shares of Common Stock in the future. As of
June 30, 1997, options to purchase 1,107,227 shares of Common
Stock were outstanding. Options to purchase 172,571 were
immediately exercisable. The Company has filed a Registration
Statement on Form S-8 to permit the shares acquired upon exercise
of options to be freely tradable or sold pursuant to Rule 144.
On June 30, 1997, warrants to purchase 20,356,044 shares of
Common Stock were outstanding, of which warrants to purchase
17,330,580 shares were exercisable. See "Certain Transactions"
and "Description of Capital Stock--Warrants."
<PAGE>
No prediction can be made as to the effect, if any, that
market sales of shares or the availability of shares will have on
the market price prevailing from time to time. Sales of
substantial number of shares of Common Stock could adversely
affect prevailing market prices.
TRANSFER AGENT
UMB Bank, N.A. is the Transfer Agent and registrar for the
Common Stock.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be
passed upon for the Company by the Company's General Counsel,
Brian S. Gillman.
EXPERTS
The financial statements of Vanguard Airlines, Inc.
appearing in the Company's Annual Report (Form 10-K) for the year
ended December 31, 1996 have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such
financial statements are incorporated herein by reference in
reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
<PAGE>
No dealer, salesman or any other person has been authorized
to give any information or to make any representation not
contained in this Prospectus and, if given or made, such
information or representation must not be relied on as having
been authorized by the Company. This Prospectus does not
constitute an offer or a solicitation of an offer to buy any
securities other than the Rights or the Common Stock to which it
relates, or an offer in any jurisdiction to any person to whom
it is unlawful to make such an offer in such jurisdiction.
Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication
that the information contained by references herein is correct at
any time after the date hereof.
TABLE OF CONTENTS
Page
Available Information............................. 3
Incorporation By Reference...................... 3
Prospectus Summary............................... 4
Risk Factors......................................... 10
Use of Proceeds..................................... 14
Price Range of Common Stock................... 15
Dividend Policy..................................... 15
Capitalization........................................ 16
The Rights Offering................................ 17
Management's Discussion and Analysis
of Financial Condition and Results of
Operations.......................................... 22
Business...............................................31
Management.......................................... 39
Certain Transactions................................ 41
Description of Capital Stock...................... 43
Shares Eligible for Future Sale................... 44
Legal Matters........................................ 45
Experts................................................45
VANGUARD AIRLINES, INC.
RIGHTS TO PURCHASE
COMMON STOCK
EXPIRING DECEMBER 5, 1997
PROSPECTUS
October 24, 1997
<PAGE>
