UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period
from _____________ to
Commission File Number 33-96884
VANGUARD AIRLINES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 48-1149290
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
30 N.W. Rome Circle
Mezzanine Level
Kansas City International Airport
Kansas City, Missouri 64153
(913) 789-1388
(Address of principal executive offices, including zip code;
Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 3, 1998, there were 45,694,816 shares of Common
Stock outstanding, of which 37,555,883 shares were owned by
affiliates. The aggregate market value of the outstanding Common
Stock of the Registrant held by non-affiliates, based on the
average of bid and asked prices of such stock on March 3, 1998 of
$0.59, was $4,801,970.47.
Documents incorporated by reference: Portions of the
Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Vanguard Airlines, Inc. ("Vanguard" or the "Company") was
incorporated in Delaware on April 25, 1994. The Company's
principal offices are located at 30 N. W. Rome Circle, Mezzanine
Level, Kansas City International Airport, Kansas City, Missouri
64153, and its telephone number is (913) 789-1388.
Vanguard is a lowfare airline offering convenient, non-stop
and connecting scheduled jet service to destinations in
established markets for both business and leisure travelers. The
Company currently operates nine leased Boeing 737200 jet
aircraft. The Company's schedule provides an average of 54 daily
weekday flights serving Kansas City, Atlanta, Chicago-Midway,
Dallas/Fort Worth, Denver, Minneapolis/St. Paul, Pittsburgh, and
New York City-JFK. In January 1998, the Company signed a letter
of intent to lease its tenth Boeing 737-200 jet aircraft with
delivery anticipated in mid-May 1998. The Company also provides
limited charter services. The Company has experienced
significant growth since the commencement of operations in
December 1994, and has achieved operating revenues of
approximately $36.2 million for the year ended December 31, 1995,
$68.6 million for the year ended December 31, 1996 and $81.4
million for the year ended December 31, 1997. However, despite
this significant growth in revenue levels, the Company to date
has yet to report a profitable quarterly reporting period.
THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS AND
INFORMATION THAT ARE BASED ON MANAGEMENT'S BELIEFS AS WELL AS
ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO
MANAGEMENT. WHEN USED IN THIS DOCUMENT, THE WORDS "ESTIMATE,"
"ANTICIPATE," "PROJECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE CURRENTLY
ANTICIPATED. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, AVAILABILITY OF WORKING CAPITAL AND
FUTURE FINANCING RESOURCES, GENERAL ECONOMIC CONDITIONS, THE COST
OF JET FUEL, THE OCCURRENCE OF EVENTS INVOLVING OTHER LOW-COST
CARRIERS, THE CURRENT LIMITED SUPPLY OF BOEING 737 JET AIRCRAFT
AND THE HIGHER LEASE COSTS ASSOCIATED WITH SUCH AIRCRAFT,
POTENTIAL CHANGES IN GOVERNMENT REGULATION OF AIRLINES OR
AIRCRAFT AND ACTIONS TAKEN BY OTHER AIRLINES PARTICULARLY WITH
RESPECT TO SCHEDULING AND PRICE IN THE COMPANY'S CURRENT OR
FUTURE ROUTES. FOR ADDITIONAL DISCUSSION OF SUCH RISKS, SEE
"BUSINESS -- FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS."
COMPANY'S LOW-FARE SERVICE
The Company's low-fare service is designed to meet the needs
of, and stimulate demand among, price-sensitive business 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 markets,
are competitive with ground transportation alternatives. The
Company typically offers its airline services at fares that are
substantially lower than fares offered prior to its entry into
its markets, especially with respect to reservations made within
seven days of departure. The Company's fares, however, are
typically matched by the incumbent carriers, especially with
respect to reservations made more than seven days prior to
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 most markets.
In October 1997, the Company purchased and installed an
enhanced revenue management system that monitors its fares and
inventory in each of its markets. The primary price categories
are: (i) promotional; (ii) 14-day advance; (iii) seven-day
advance; (iv) one-day advance and (v) walk-up. Within each
primary category, there are smaller fare price increments that
are tailored to specific conditions and historical operating
data. The <PAGE> purpose of the revenue management system is to achieve
and maintain acceptable load factor and yield levels in each
market, thereby maximizing revenue per available seat mile
("ASM").
Most of the Company's fares are sold on a nonrefundable
basis and do not require a minimum or a Saturday night stay.
Customers who change their itinerary on a nonrefundable ticket,
or who fail to use a purchased flight reservation when scheduled
and provide advance notice to the Company, 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 primarily nonrefundable fare
structure, the Company's passengers typically take their
designated flights, and the Company believes its "no-show" rate
is approximately 6%. In addition, the Company began selling
refundable fares during the fourth quarter of 1997 and, as a
result, began overbooking flights.
The Company's lowfare service is intended to satisfy most of
the basic air transportation needs of the Company's targeted
customers while establishing the Company's reputation as a small
yet reliable airline where customers receive more than they
expect from typical lowfare airlines. The Company offers advance
seat assignments and more leg room than typical low-fare
airlines. The Company believes that the basic air transportation
needs of its targeted customers can be satisfied by providing a
limited number of flights per day on most routes, lowfares, a
frequent flyer program, inflight beverages and advance seat
assignments. The Company, however, does not offer airport clubs,
city ticket offices (except for the 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 lowfare service both from the
pricesensitive business travelers and leisure travelers.
ROUTE SYSTEM AND SCHEDULING
The Company serves primarily short- to medium-haul,
high-volume markets with two to four round-trip flights per day.
On March 1, 1998, the average stage length of the Company's
flights was approximately 480 miles. Average stage length
represents the scheduled service aircraft miles flown divided by
the total number of departures. The Company has implemented
various modification to its route structure since 1994. The
Company's original 1994 route structure was based on a point to
point strategy that focused on short- to medium-haul markets
within the Midwestern and Rocky Mountain regions of the United
States.
In December 1996, the Company launched a hub and spoke
strategy based in Kansas City. During the first quarter of 1997,
the Company operated approximately 60 flights per day mainly 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 ASM's.
Due to poor reliability and financial performance of the hub
and spoke schedule implemented in December 1996, the Company
revised the cities it served and the related schedule in
September 1997. The Company added service to New York-JFK from
Kansas City and terminated service to Des Moines, Las Vegas, Los
Angeles, Orlando and Tampa. The Company eliminated its "red-eye"
flying and increased times between arrivals and departures in
order to increase its reliability and on-time performance. The
revised schedule reduced ASMs and daily average aircraft
utilization. Unit cost increases as a result of reducing ASMs
are expected to be offset by cost reduction strategies, improved
reliability and higher fares and passenger loads in denser
markets. In December 1997, the Company initiated service between
Chicago-Midway and Pittsburgh and Pittsburgh and New York
City-JFK, with two flights per day. In January 1998, the Company
terminated its daily non-stop flights between Kansas City and San
Francisco.
<PAGE>
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. As of
March 1, 1998, the Company operated non-stop service in the
following markets: (i) Atlanta and Kansas City; (ii)
Chicago-Midway and Kansas City; (iii) Chicago-Midway and
Minneapolis/St. Paul; (iv) Chicago-Midway and Pittsburgh; (v)
Dallas/Ft. Worth and Kansas City; (vi) Denver and Kansas City;
(vii) Minneapolis/St. Paul and Kansas City; (viii) New York
City-JFK and Kansas City; and (ix) New York City-JFK and
Pittsburgh. The Company's flights are also timed to provide
connecting opportunities to and from other combinations of these
city pairs. For example, the Company's schedule provides for
convenient direct service between Dallas/Ft. Worth and
Chicago-Midway as well as convenient one-stop service between
Atlanta, Denver, Minneapolis, Dallas, Chicago, New York-JFK via
Kansas City.
RESERVATION AND INFORMATION SYSTEMS
In the third quarter of 1997, the Company purchased and
installed a new reservation system. This software continues 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 eliminate paper records when possible. The
Company's system provides immediate access to detailed market by
market data, as well as customer and financial information
obtained throughout the reservation and boarding process. This
system also collects, organizes and stores data on customers in
support of the Company's frequent flyer program and a number of
other direct marketing efforts. Management believes that the
ease of immediate access to timely, detailed information through
its reservation system enhances management functions. In
connection with its new reservation software, the Company
anticipates the ability to sell tickets over the internet through
its home page on the internet, [email protected], in 1998.
While a number of traditional airlines now offer ticketless
service in certain circumstances, these airlines continue to
maintain their ticketed service and the expenses associated with
the supporting accounting functions. The Company's reservation
system and processes are entirely ticketless. At the time a
reservation or sale is made, the Company provides its customers
with a confirmation number. At the airport, this information is
available to the gate agent facilitating customer check-in,
effectively eliminating slow moving customer check-in lines. The
Company's ticketless service also eliminates traditional revenue
accounting functions and the direct and indirect costs of
handling tickets.
The Company's new reservation software permits the Company
to participate in the SABRE and WORLDSPAN Computer Reservation
Systems (CRSs). The Company began participating in the SABRE CRS
in February 1998 and anticipates participation in the WORLDSPAN
CRS in April 1998. Travel agents utilizing the SABRE CRS may
book seats on the Company's flights, without the need to call the
Company's reservation center. The Company's software and level of
CRS participation allows travel agents to send automated requests
to the Company's reservation system to verify availability of
seat and price; upon verification from Vanguard's reservation
system, the travel agent utilizes a credit card to complete the
automated sale. The Company intends to continue to be a totally
ticketless operation. The Company previously only displayed its
flight schedules in the WORLDSPAN and GALILEO CRSs and the
Company did not display its schedule 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.
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. Effective April 1, 1998,
the Company intends to require most travel <PAGE> agencies to pay by
credit card. 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. The Company refers to this guaranteed credit card
process as "guaranteed ticketing." Under guaranteed ticketing,
the Company collects cash from the travel agency bookings
directly from the credit card processor. Further, 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. The Company's
advertisements feature the Company's destinations, lowest
available fares and the Company's toll free phone number,
1800VANGUARD. Currently, the marketing efforts of the Company
are concentrated on price and destination advertisements. The
Company recently introduced numerous initiatives designed to
capture a larger share of the business traveler market. In
November 1997, the Company launched a new class of service called
Road Warrior Class SM to attract more business travelers. The
Company's Road Warrior Class SM offers among other amenities,
guaranteed timely arrivals, guaranteed seats on every flight,
preferred seating, pre-assigned seating, refundable tickets, no
change fees and a business class hotline. In addition to its
Road Warrior Class,SM the Company now aggressively pursues group
and bulk ticket sales.
Approximately 40% of the Company's customers use travel
agents to make their reservations. The Company has implemented
marketing strategies and programs to build on its relationships
with travel agencies throughout its route system. The Company
has maintained its 10% commission paid to travel agents as well
as occasionally matching such commission with an equivalent 10%
travel credit that agencies may use on future Vanguard flights.
The Company also communicates regularly with travel agents
through personal visits, parties, direct mail and telemarketing.
The Company anticipates increased travel agent bookings due to
its participation in the SABRE CRS and projected participation in
the WORLDSPAN CRS. See " Reservation and Information Systems."
The Company's frequent-flyer program, Vantage Points,SM
awards free round-trip tickets on Vanguard to customers who
complete 16 Vanguard flights, or eight round trips, within any 12
month period. In addition to its standard frequent flyer
program, the Company on occasion accelerates rewards on its
frequent flyer program. The Company is currently working on
further enhancements and partnerships to its frequent flyer
program in order to establish more active communication with
frequent flyers and partners. The Company's new reservation
software is expected to be more effective than the Company's
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 developed a corporate culture that provides an
environment of relaxed, casual professionalism for its employees.
The Company attempts to provide a working environment conducive
to <PAGE> 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,
Robert J. Spane, and other executive officers of the Company. In
addition, the Company established an information line, which Mr.
Spane updates regularly, and a marketing news line, 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. Management believes that its
base wage and benefit levels are generally at market rates of
other similar airlines. The Company expects to maintain a
motivated workforce through its selection process and a casual
and friendly working environment. In addition, the Company has
implemented a 401(K) plan, employee stock purchase plan and
adopted a profit sharing plan. In August 1997, Mr. Spane
implemented a Company wide incentive plan that gives each
employee $25.00 per week if the Company meets certain operating
performance criteria with respect to on-time performance and
flight completion goals. The Company expects that the
aforementioned programs will further align the interests of its
employees, the Company and its customers.
The airline business is highly regulated. Regulations
promulgated by the Federal Aviation Administration ("FAA")
require pilots to be licensed as commercial pilots, with specific
ratings for aircraft to be flown and to be medically certified as
physically fit. Licenses and medical certification requirements
are subject to periodic continuation requirements including
recurrent training and recent flying experience. Both pilot
training and mechanic training for the Boeing 737200 jet aircraft
are generally provided by independent contractors, including
other airlines. Currently, the average age and flight time of
the Company's pilots is 41 years and 6,400 hours, respectively.
Mechanics, quality control inspectors and flight dispatchers must
be licensed and qualified for the Company's aircraft. Flight
attendants must have initial and periodic training and
certification. All of these employees are subject to
preemployment 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 lowcost structure
is derived 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
The Company currently serves eight airports. The Company
has leases with the appropriate airport authorities at certain
airports and sublease or handling arrangements directly with
signatory airlines at other airports. Most of the sublease or
handling arrangements, as discussed below, 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. Although 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, the Company has filed a slot application with the
Department of Transportation ("DOT") in order to operate certain
flights in slot-controlled times. There can be no assurance that
the Company's slot application will be successful. See
" Government Regulation."
<PAGE>
Ground handling services typically involve (i) public
contact services, such as meeting, greeting and serving the
Company's customers at the checkin counter, gate and baggage
claim areas and (ii) underwing ground handling services such as
marshaling the aircraft into and out of the gate, baggage loading
and unloading, as well as lavatory and water servicing, deicing
and certain services provided to the aircraft overnight. Public
contact services at the Company's various airports are conducted
by the Company's full- and part-time employees. Underwing ground
handling services are primarily provided by other airlines and/or
fixed based operators. The Company performs its own underwing
ground handling services at Chicago-Midway Airport.
AIRCRAFT
The Company's aircraft fleet consists of nine leased Boeing
737-200 jet aircraft. Eight of the Company's jet aircraft were
manufactured between 1968 and 1970. One aircraft and the
aircraft scheduled to arrive in May 1998 were manufactured in
1982 and 1977, respectively. Four of the Company's aircraft were
leased under operating leases that originally expired in 1997;
the leases provided for up to two renewal terms of two years each
with no increase in base rent. The Company renewed the leases
for the first two-year renewal period and three leases now expire
in December 1999 and one in January 2000. The remaining five
aircraft have varying lease termination dates: one of its Boeing
737-200 jet aircraft has been leased for a term extendable
through 2001; two of its aircraft have been leased for a term
extendable through 2002; and two for terms extendable through
2004. The Company has options to purchase five of the Boeing
737-200 jet aircraft during the terms of their respective leases.
See "Factors That May Affect Future Results of
Operations Limited Number of Aircraft; Aircraft Acquisitions."
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
(AADs") and regulations for aging aircraft, the Company believes
that the total costs of operating the Boeing 737-200 jet aircraft
is competitive with newer aircraft types because the Company's
aircraft have significantly lower acquisition or lease costs.
Lower acquisition or lease costs result in lower fixed costs,
which the Company believes will allow greater flexibility to
adjust capacity to demand.
The Company's aircraft must be brought into compliance with
Federal Stage 3 noise level requirements in phases: 75% by
December 31, 1998 and 100% by December 31, 1999. Currently, the
Company's fleet meets the Stage 3 noise compliance requirements
of 50%. The Company's tenth aircraft anticipated in May 1998
will meet Stage 3 requirements. The Company must modify one
aircraft in its existing fleet to satisfy the December 31, 1998
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
fleet to meet the December 31, 1998 Stage 3 requirements.
Because the Company's aircraft fleet consists of nine
aircraft (ten in May 1998), 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. In addition, the demand for Boeing 737
aircraft has increased markedly in the last two years. In the
event the Company seeks to lease additional aircraft in order to
expand its service and/or route system, there can be no assurance
that the Company will be able to lease additional aircraft on
satisfactory terms or at the times needed.
<PAGE>
MAINTENANCE AND REPAIRS
All maintenance and repairs are accomplished in accordance
with the Company's maintenance program approved by the FAA.
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. 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 and daily
maintenance and major overhauls. Routine or daily maintenance is
generally performed by the Company's mechanics in Kansas City,
Chicago-Midway and Minneapolis/St. Paul or in various other
cities, as needed, by independent contractors. The Company plans
to hire its own mechanics in Pittsburgh in April 1998 for routine
and daily maintenance requirements. The Company employs
approximately 64 mechanics and related personnel. The Company
has contracted with various independent FAA certified maintenance
operations to perform major scheduled maintenance.
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. In 1997, the Company
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 17.4% of operating expenses
when including taxes and the cost of delivering fuel into the
aircraft for the year ended December 31, 1997). The Company is
currently purchasing fuel for approximately $0.65 per gallon
(including taxes and the cost of delivering fuel into the
aircraft), which is significantly less than the 1997 and 1996
average cost of $0.74 and $0.79 per gallon, respectively.
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 will result 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
"Factors That May Affect Future Results of Operations C Fuel
Costs"
COMPETITION
Under the Airline Deregulation Act of 1978 (the
"Deregulation Act"), domestic certificated airlines are free to
enter and exit domestic routes and to set fares without
regulatory approval, and all city pair domestic airline markets
are generally open to any domestic certificated airline. As a
consequence, the airline industry is intensely competitive and
susceptible to price discounting. Airlines compete primarily
with respect to fares, scheduling (frequency and flight time),
destinations, frequent-flyer programs and type (jet or propeller)
and size <PAGE> of aircraft. The Company competes with numerous other
airlines on its routes and expects to compete with other airlines
on any future routes. Most of the Company's competitors are
larger and have greater name recognition and greater financial
resources than the Company. In response to the Company's
commencement of service in 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
nonstop 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 lowfare market
(including any airlines that may be formed by major airlines) and
from ground transportation alternatives. See AFactors that may
Affect Future Results of Operations Intense Competition and
Competitive Reaction."
GOVERNMENT REGULATION
All interstate air carriers are subject to regulation by the
DOT and the FAA under the Federal 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 intercarrier 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 the 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 currently does not
have slot allocations or leases at New York City-JFK. The slot
restrictions at New York City-JFK cover a five-hour period
between 3:00 p.m. and 7:59 p.m. The Company filed an application
for slot exemption to allow the Company to offer non-stop service
between Kansas City and New York City-JFK and between Pittsburgh
and New York City-JFK. 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 its ability to obtain a slot exemption,
to which there can be no assurance.
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 and 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 startup 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 <PAGE> 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."
INSURANCE
The Company carries the types and amounts of insurance
required by the DOT, which 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 March 1, 1998 the Company employed approximately 456
full-time and 85 part-time employees consisting of 73 pilots, 112
flight attendants, 64 maintenance personnel, 130 station agents
and 162 management and staff personnel. In addition, the
Company's reservation center, which is currently operated by a
third party, employed 274 full- and part-time people as of March
1, 1998. In April 1998, upon the expiration of the management
contract with the third-party provider, the Company intends to
directly manage and hire employees to run the Company's
reservation center.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Vanguard's business operations and financial results are
subject to various uncertainties and future developments that
cannot be predicted. Certain of the principal risks and
uncertainties that may affect Vanguard's operations and financial
results are identified below.
LIMITED OPERATING HISTORY; HISTORY OF 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 December 31, 1997 had an
accumulated deficit of $69.7 million, a stockholders' deficit of
$11.9 million and a working capital deficit of $22.4 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.
AVAILABILITY OF WORKING CAPITAL AND FUTURE FINANCING
RESOURCES. The airline business is extremely capital intensive,
including, but not limited to, lease payment obligations and
related maintenance requirements for existing or new aircraft.
The Company has not operated profitably during any quarterly
reporting period. Consequently, the Company's continued
operations has been dependent upon equity and debt financings
primarily from principal stockholders. The Company will likely
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 no 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."
<PAGE>
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,
1997 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 dependant upon financing from 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 Liquidity and Capital
Resources."
INTENSE COMPETITION AND COMPETITIVE REACTION. The Company
is subject to intense competition in all of its routes. Under
the Deregulation Act, domestic certificated airlines may enter
and exit domestic markets and set fares without regulatory
approval. All city-pair domestic airline markets, except for
those that are slot-controlled, are generally open to any
domestic certificated airline. Airlines compete primarily with
respect to fares, schedules (frequency and flight times),
destinations, frequent flyer programs and type (jet or propeller)
and size of aircraft. The Company competes with various other
airlines on its routes and expects to compete with other airlines
on any future routes. Most of the Company's competitors are
larger and have greater name recognition and financial resources
than the Company. In response to the Company's commencement of
service in a particular market, competing airlines have, at
times, added flights and capacity and lowered their fares in the
market, making it more difficult for the Company to achieve
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 in that market.
CONSUMER CONCERN ABOUT OPERATING SAFETY AT NEW-ENTRANT
CARRIERS OR TYPE OF AIRCRAFT. Aircraft accidents or other
safety-related issues involving any carrier, may have an adverse
effect on airline passengers' perceptions regarding the safety of
new-entrant, low-fare carriers. 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 aging aircraft could
have a material adverse effect on the Company's business,
financial condition and results of operations, even though the
Company itself may not experience any such problems with its jet
aircraft.
SEASONALITY AND CYCLICALITY. The Company's operations are
dependent upon passenger travel demand. Airlines typically
experience reduced demand at various times during the fall and
winter and increased demand for service during the spring and
summer. Within these periods, the Company experiences 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,
would 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 17.4% of the
Company's operating expenses for the year ended December 31,
1997. The Company's average cost per gallon decreased from $0.79
per gallon in the year ended December 31, 1996, to $0.74 per
gallon in the year ended December 31, 1997. Jet fuel costs are
subject to wide fluctuations as a result of sudden disruptions in
supply. The Company cannot predict the effect on the future
availability and cost of jet fuel. The Boeing 737-200 jet
aircraft is relatively fuel inefficient compared to newer
aircraft. Accordingly, a significant increase in the price of
jet fuel will result 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
<PAGE>
agreements that fix the price of jet fuel over any period of
time. Therefore, an increase in the cost of jet fuel will be
immediately passed through to the Company by suppliers. 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 is able to raise
selected fares, the Company has experienced reduced margins on
sales prior to such fare increases. In addition to increases in
fuel prices, a shortage of supply will also have a material
adverse effect on the Company's business, financial condition and
results of operations.
LIMITED NUMBER OF AIRCRAFT; AIRCRAFT ACQUISITIONS. The
Company's fleet consists of nine aircraft (the Company has signed
a letter of intent for its tenth aircraft) and if one or more of
its aircraft were not in service, the Company would experience a
proportionally greater loss of capacity than would be the case
for an airline utilizing a larger fleet. Any interruption of
aircraft service as a result of scheduled or unscheduled
maintenance could materially and adversely affect the Company's
service, reputation and financial performance. The market for
leased aircraft has become more competitive than it was at the
time of the Company's inception, and there can be no assurance
that the Company would be able to lease additional aircraft on
satisfactory terms or at the time needed. Further, if the Company
is unable to lease additional aircraft that are in compliance
with the Stage-3 noise compliance requirements, it may have to
make significant capital expenditures to make its aircraft fleet
meet such requirements. See "Business -- Aircraft."
GOVERNMENT REGULATION. The Company is subject to the
Federal Aviation Act (the "Aviation Act"), under which the DOT
and the FAA exercise regulatory authority over airlines. This
regulatory authority includes, but is not limited to: (i) the
initial determination and continuing review of the fitness of air
carriers (including financial, managerial, compliance-disposition
and citizenship fitness); (ii) the certification and regulation
of aircraft and other flight equipment; (iii) the certification
and approval of personnel who engage in flight, maintenance and
operations activities; and (iv) the establishment and enforcement
of safety standards and requirements with respect to the
operation and maintenance of aircraft, all as set forth in the
Aviation Act and the Federal Aviation Regulations. The FAA has
promulgated a number of maintenance regulations and directives
relating to, among other things, retirement of aging aircraft,
increased inspections and maintenance procedures to be conducted
on aging aircraft, collision avoidance systems, aircraft
corrosion, airborne windshear avoidance systems and noise
abatement. As a result of recent incidents involving airlines,
the FAA has increased its review of commercial airlines generally
and particularly with respect to small and new-entrant airlines,
such as the Company. The Company's operations are subject to
constant review by the FAA.
Additional rules and regulations have been proposed from
time to time in the last several years and that, if enacted,
could significantly increase the cost of airline operations by
imposing substantial additional requirements or restrictions on
airline operations. There can be no assurances that any of these
rules or regulations would not have a 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 Stage-3 compliance). 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.
<PAGE>
ITEM 2. PROPERTIES
The Company leases approximately 11,000 square feet of
office space at Kansas City International Airport ("KCI") for
corporate, operation and quality assurance functions under a
lease that expires in 1998. The Company leases approximately
12,000 square feet from Trans World Airlines near KCI for
training, purchasing and aircraft parts inventory functions
pursuant to a month to month lease. The Company leases
approximately 17,000 square feet of office space in Mission,
Kansas for corporate offices and reservation's center, under a
lease that expires in September 1999. The Company intends to
consolidate its office space at KCI used for corporate, operation
and quality assurance functions to a Trans World Airlines, leased
building in May 1998. The Company also leases approximately 7,250
square feet in Lawrence, Kansas, which was used as one of its two
reservations facilities. The Company closed its Lawrence, Kansas
reservation center in September 1997. The Company has subleased
this center to an independent call center operator since
September 1997 and is in current discussions to sublease or
assign the remaining three years of its lease to a third party.
The check-in counters, gates and airport office facilities
at each of the airports the Company serves are leased from the
appropriate airport authority or other airlines pursuant to
subleases or other arrangements. Such arrangements may include
baggage handling, station operations, cleaning and other
services. If such facilities at current or new cities served by
the Company are not available to the Company at acceptable rates,
or if such facilities become no longer available to the Company
at acceptable rates, the Company may choose not to service such
markets.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material litigation or
legal proceedings at this time and is not aware of any material
litigation or legal proceedings threatened against it.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of
the Company during the fourth quarter of the fiscal year ended
December 31, 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names, ages and positions
of the Company's executive officers and directors as of March 1,
1998:
Name Age Position
Robert J. Spane 57 Chairman of the Board, Chief
Executive Officer and
President
James E. Eckart 54 Vice President - Customer
Relations
William A. Garrett 33 Vice President - Finance and
Chief Financial Officer
Brian S. Gillman 28 Vice President, General
Counsel and Secretary
James B. Miller 59 Vice President - Maintenance
William F. McKinney 58 Vice President - Operations
Russell Winter 31 Vice President - Marketing and
Planning
Lee M. Gammill, Jr. 63 Director
Denis T. Rice 65 Director
<PAGE>
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 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. Vice Admiral Spane is a 1962 graduate
of the U.S. Naval Academy.
JAMES E. ECKART joined the Company in July 1997 as a
customer service consultant and was appointed Vice President of
Customer Relations in August 1997. For over 30 years Mr. Eckart
was involved in aviation-related activities as a United States
Naval Aviator, where he served most recently as a Captain. While
in the Navy, Mr. Eckart commanded aviation squadrons and major
aviation shore stations, was also involved in aviation training
and served as liaison between the U.S. Navy and the FAA. Mr.
Eckart holds a commercial pilot license and a degree in Human
Resources Management.
WILLIAM A. GARRETT joined the Company in June 1996 as
Corporate Controller and was appointed Vice President - Finance
and Chief Financial Officer in July 1996. From December 1993 to
June 1996, he served as a Senior Manager with Ernst_& Young LLP.
From 1987 to 1993, he served on the staff of and as manager for
Coopers and Lybrand LLP. 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, where he
served as a corporate counsel for the Company. Mr. Gillman
received his Juris Doctorate from the University of Iowa in 1994.
JAMES B. MILLER joined the Company in April 1996 as Manager
of Maintenance Programs and Planning, was appointed to Director
of Quality Assurance in July 1997 and Vice President -
Maintenance in March 1998. Prior to joining the Company, Mr.
Miller was employed with Trans World Airlines for 28 years. Mr.
Miller served most recently as a Staff Vice-President,
Engineering and Quality Assurance for Trans World Airlines.
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, a
wholly-owned subsidiary of Hambrecht & Quist Group. Hambrecht &
Quist is an investment banking firm based in San Francisco,
California. Mr. Winter serves 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.
LEE M. GAMMILL, JR. was elected a director of the Company 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 the Executive Vice
President - Individual Insurance Operations at New York Life.
<PAGE>
Mr. Gammill joined New York Life in 1957 as a sales agent and
held various management and executive positions throughout his
40-year career with New York Life.
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.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
The Common Stock began trading publicly on the Nasdaq
SmallCap Market under the symbol "VNGD" on November_3, 1995.
Prior to that date, there was no public market for the Common
Stock. The following table sets forth, for the periods
indicated, the high and low sales prices of the Common Stock as
reported on the Nasdaq SmallCap Market. The Common Stock was
delisted from the Nasdaq SmallCap Market on December 16, 1996.
The Common Stock currently trades on the OTC Bulletin Board.
High Low
1996
First Quarter $ 9 5/8 $6
Second Quarter $12 1/4 $8
Third Quarter $ 9 1/2 $3 7/16
Fourth Quarter $ 5 1/4 $1 3/4
1997
First Quarter $3 1/8 $1 3/4
Second Quarter $2 3/16 $1 3/8
Third Quarter $2 $1 1/8
Fourth Quarter $1 1/8 $ 4/10
1998
January $ 3/4 $ 9/16
February $ 5/8 $ 5/10
The above OTC Bulletin Board quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may
not necessarily represent actual transactions. As of March 3,
1998, there were approximately 242 holders of record of Common
Stock.
DIVIDEND POLICY
The Company has not declared or paid dividends on its Common
Stock. The Company currently intends to retain any future
earnings to fund operations and to continue the development of
its business and, thus, does not expect to pay any cash dividends
on its common stock in the foreseeable future.
RECENT SALE OF UNREGISTERED SECURITIES
On December 10, 1997, the Company completed its Rights
Offering, effecting the sale of 30,455,714 shares of Common Stock
for $0.50 per share. In the Rights Offering, the Company
distributed, at no cost to holders of its Common Stock as of
October 10, 1997 ("Record Date"), nontransferable rights to
purchase shares of Common Stock. Each record holder received two
rights for each share of Common Stock held on the Record Date.
Each right entitled the record holder to purchase one share of
Common Stock for a price of $0.50 per share.
<PAGE>
On March 20, 1998, the Company completed a private sale of
$10.00 preferred stock units (the "Preferred Units"). Each
Preferred Unit consists of one share of Series A Preferred Stock,
$0.001 par value, and a warrant to purchase forty (40) shares of
Common Stock. Each share of Series A Preferred Stock is
convertible at the option of the holder thereof at any time after
July 15, 1998, into the number of fully paid and non-assessable
shares of Common Stock as is determined by dividing $10.00 by the
conversion price of $0.50 per share. In the Preferred Unit
private placement, the Company sold 151,200 and 151,162 Preferred
Units to J. F. Shea Co. Inc. and The Hambrecht 1980 Revocable
Trust, William Hambrecht as Trustee, respectively. In addition,
the Company, under the same agreement, has the option to sell an
additional 150,000 Preferred Units under the same terms and
conditions within 90 days of March 20, 1998.
In addition, on March 20, 1998, the Company entered into a
Note Exchange Agreement with holders of its 8% demand notes (the
"Holders"). The Holders have agreed to exchange an aggregate
amount of $9,467,741 existing 8% demand notes for new notes that
provide for automatic conversion into the Company's Common Stock
at such time as the Company has an adequate number of authorized
shares. The Holders have also agreed to convert all outstanding
interest in connection with these 8% Demand Notes as well as
other accumulated interest associated with previous outstanding
demand notes. The Company and the Holders have agreed to convert
approximately $958,134 in interest to Common Stock. The
conversion price of the Notes and interest is $0.50 per share.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data and
other operating data of the Company for the years ended December
31, 1995, 1996 and 1997. The selected financial data in the
table have been derived from the audited financial statements of
the Company, which are included elsewhere herein. The data
should be read in conjunction with the Financial Statements of
the Company and the related Notes thereto, and AManagement's
Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
STATEMENT OF
OPERATIONS DATA:
Total operating $ 36,159,018 $ 68,589,101 $ 81,384,138
revenues
Total Operating 48,225,313 92,503,417 106,758,900
expenses
Operating loss (12,066,295) (23,914,316) (25,374,762)
Total other (129,235) (1,893,754) (2,871,241)
expense, net
Net loss $(12,195,530) $ (25,808,070) $ (28,246,003)
<PAGE>
Net loss per $ (1.65) $ (2.85) $ (1.85)
share /1/
Weighted average 7,395,921 9,056,888 15,232,901
common shares
outstanding /1/
OPERATING DATA: /2/
Revenue passenger 290,030,187 667,845,140 767,239,664
miles (RPMs)
Available seat 562,340,660 1,090,058,358 1,295,760,836
miles (ASMs)
Load factor 51.58% 61.27% 59.21%
Break-even load 70.06% 83.87% 79.62%
factor /3/
Passenger yield $ 0.1172 $ 0.0973 $ 0.0998
per RPM
Total revenue
per ASM $ 0.0643 $ 0.0629 $ 0.0628
Operating cost
per ASM $ 0.0858 $ 0.0849 $ 0.0824
Block hours flown 14,781 24,721 29,859
Average flight 372 530 585
length (miles)
Operating cost per $ 3,263 $ 3,742 $ 3,575
block hour
Aircraft in service 7 8 9
(end of period)
Airports served
(end of period) 9 15 9
<PAGE>
BALANCE SHEET DATA:
Cash and cash $ 3,491,640 $ 402,083 $ 1,082,712
equivalents
Working capital (4,172,305) (16,296,881) (22,352,910)
deficiency
Property and
equipment net 4,550,818 5,049,658 5,484,684
Total assets 16,425,698 20,318,247 24,763,884
Long-term debt -- 5,000,000 1,900,000
Total stockholders'
equity (deficit) 3,544,633 (13,238,247) (11,944,434)
/1/ See Note 1 of Notes to Financial Statements.
/2/ "REVENUE PASSENGER MILES" or "RPMs" represents the aggregate amount of
miles flown by revenue passengers. "AVAILABLE SEAT MILES" or "ASMs"
represents the number of seats available for passengers multiplied by
the number of miles those seats are flown. "BREAK-EVEN LOAD FACTOR"
represents the percentage of RPMs that must be flown for the airline to
break-even after operating and interest expenses assuming non-passenger
operations, primarily mail, operate at break-even. Break-even load
factor is calculated by taking total expenses, minus non-passenger
revenue, divided by ASMs, divided by passenger yield per RPM.
"PASSENGER YIELD PER RPM" represents the total passenger revenue divided
by RPMs. "TOTAL REVENUE PER ASM" represents total revenues divided by
total ASMs. "OPERATING COST PER ASM" represents operating expenses
divided by total ASMs. "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.
/3/ Excludes $1,858,767 and $1,833,335 of noncash deferred debt issuance
cost amortization for the years ended December 31, 1997 and 1996,
respectively.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated on April 25, 1994 and operates
as a lowfare, short to mediumhaul passenger airline that provides
convenient, scheduled jet service to attractive destinations in
established markets in the United States. The Company's flight
operations began on December 4, 1994 with two Boeing 737200 jet
aircraft operating two daily flights each way between Kansas City
and Denver and two daily flights each way between Denver and Salt
Lake City. As of December 31, 1997, the Company operates a total
of nine leased Boeing 737200 jet aircraft, which provides an
average of 53 daily weekday flights serving Kansas City, Atlanta,
Chicago-Midway, Dallas/Fort Worth, Denver, Minneapolis/St. Paul,
Pittsburgh, New York City-JFK and San Francisco. On January 11,
1998, the Company terminated its daily non-stop flights between
Kansas City and San Francisco.
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 <PAGE> 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, high passenger-volume markets
that are not served 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 continuation or commencement of operations by the Company
in a particular market (including changes in their fare
structure, aircraft type and schedule), the possible entry of
other lowfare 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, general economic conditions and seasonality factors.
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, rent
for gates and other facilities and marketing and advertising
expenses. The Company has a limited history of operations and
since its inception on April_25, 1994 has experienced significant
losses. As of December 31, 1997, the Company had an accumulated
deficit of $69.7 million and stockholders' deficit of $11.9
million. As disclosed in the audited financial statements, the
Company had a net loss of approximately $28.2 million and net
cash flows used in operating activities amounting to
approximately $26.4 million for the year ended December 31, 1997.
Additionally, at December 31, 1997, current liabilities exceeded
current assets by $22.4 million. As a result of its limited
operating history, together with the uncertainty in the airline
industry generally, management is unable to predict the future
operating results of the Company.
The Company has been dependent upon equity and debt
financings from its principal stockholders. There can be no
assurance as to the availability of further financings.
Management's plans include raising additional capital and
securing additional bank financings to fund ongoing operations
and the possible expansion of operations, however, there can be
no assurance the Company will be successful in this regard.
Certain amounts and percentages disclosed in management's
discussion and analysis of financial condition and results of
operations for the year ended December 31, 1996 have been changed
to conform to the 1997 presentation.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER
31, 1996
OPERATING REVENUES
Total operating revenues increased approximately 19% from
approximately $68.6 million for the year ended December 31, 1996
to approximately $81.4 million for the year ended December 31,
1997. This increase was primarily attributable to an increase in
the number of daily flights and the number of passengers on those
flights. During the year ended December 31, 1996, the Company
averaged 45 flights per day which increased to 50 flights per day
during the year ended December 31, 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-Midway and Kansas City.
This route restructuring refocused the Company's strategy by
creating a hub in Kansas City. ASMs increased approximately 19%,
from approximately 1,090_million during the year ended December
31, 1996 to approximately 1,296 million during the year ended
December 31, 1997. RPMs increased approximately 15%, from
approximately 668 million during the year ended December 31, 1996
to approximately 767 million during the year ended December 31,
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 <PAGE> flights and
the addition of destinations with greater flight lengths. These
increases in ASMs and RPMs that resulted from the December 1996
schedule change were offset by a schedule change in September
1997 that reduced or eliminated service in a number of these
cities. The Company discontinued round trip service from Kansas
City to Des Moines, Las Vegas, Los Angeles, Orlando and Tampa/St.
Petersburg while adding round trip service from Kansas City to
New York-JFK in September 1997 and round trip service from
Chicago-Midway and New York City-JFK to Pittsburgh in December
1997. Load factor decreased from approximately 61% for the year
ended December 31, 1996 to approximately 59% for the year ended
December 31, 1997. This decrease was primarily the result of a
19% increase in capacity and the addition of destinations with
greater flight lengths while experiencing only a 15% increase in
RPMs.
Passenger yield per RPM increased approximately 3% from
approximately 9.74 for the year ended December 31, 1996 to
approximately 10.04 for the year ended December 31, 1997. The
Company initially discounted 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.
The Company attempted on a number of occasions to increase fares
in most of its markets in the second and third quarters of 1997.
This strategy reduced passenger demand and, often, was not
followed by the Company's competitors in the respective markets
and, thus, limited the Company's ability to increase fares. In
addition, with the initiation of the December 1996 route
structure, the Company's average stage length increased to
587_miles from 530_miles during the nine months ended September
30, 1997 as compared to the year ended December 31, 1996. In
September, the Company terminated service to a number of
long-haul markets in conjunction with the Company's September
1997 schedule change, its average stage length then decreased to
554 miles in the fourth quarter of 1997. As a result of the
Company's inability to increase fares in its markets, the Company
was required to stimulate travel by continuing to offer
discounted fares on the majority of the city pairs it served
throughout the year ended December 31, 1997. In order to
increase fares and passenger yield effectively, the Company
focused on improving its product beginning in September 1997. The
Company's strategic plan to improve its product includes the
delivery of a reliable product with a number of amenities found
on larger, better known airlines that specifically cater to
price-sensitive business travelers. Those amenities, include
assigned seating, refundable tickets, fixed ticket pricing under
the Road Warrior Class SM and greater frequencies between city
pairs. The Company believes it has improved its brand awareness
in each of its markets through its direct advertising program
that was modified in August 1997. The Company's implementation
of its strategic plan showed positive results in the fourth
quarter of 1997 with passenger yield increasing to 11.14. The
Company anticipates the passenger yield will continue to rise in
the first and second quarters of 1998 as the Company continues to
carry out its strategic plan. The Company, however, 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 and continues to
improve its service and reliability.
The Company also generates operating revenues as a result of
service charges from passengers who change flight reservations.
For a period of 180 days (90 days prior to March 24, 1997) after
the flight date, the customer may use the value of the unused
reservation, subject to certain restrictions, for transportation,
less a $50 ($25 through October 1996) service charge. These
operating revenues were approximately $2.1 million (approximately
3% of total operating revenues) and approximately $3.6 million
(approximately 4% of operating revenues) in the years ended
December 31, 1996 and 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 <PAGE> following table sets forth the percentage of
total operating revenues represented by these expense categories
as well as certain other selected financial data.
YEAR ENDED DECEMBER 31,
1996 1997
Percent of Cents Per Percent of Cents Per
Revenues ASM Revenues ASM
Total operating
revenues 100.0% 6.29 100.0% 6.28
Operating
expenses:
Flying
operations 25.2% 1.59 21.0% 1.32
Aircraft fuel 23.3 1.47 22.8 1.43
Maintenance 23.4 1.48 23.8 1.49
Passenger
service 9.1 0.57 9.0 0.57
Aircraft and
traffic
servicing 22.2 1.39 20.6 1.29
Promotion and
sales 22.9 1.44 25.5 1.60
General and
administration 6.4 0.40 6.0 0.38
Depreciation
and
amortization 2.3 0.15 2.5 0.16
Total
operating
expenses 134.8 8.49 131.2 8.24
Total other
income
(expense),
net (2.8) (0.17) (3.5) (0.22)
<PAGE>
Net loss (37.6%) (2.37) (34.7%) (2.18)
Flying operations expenses include aircraft lease expenses,
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 decreased approximately 1% from approximately $17.3
million (approximately 25% of operating revenues) for the year
ended December 31, 1996 to approximately $17.1 million
(approximately 21% of operating revenues) for the year ended
December 31, 1997. In late 1995 and early 1996, the Company
leased two Boeing 737-300 jet aircraft that were newer, more
advanced aircraft and have a larger capacity and substantially
higher lease and insurance costs. The decrease in flying
operation expenses in 1997 was primarily the result of the return
of these two Boeing 737-300 jet aircraft to the lessor in May and
July 1997. In addition, the Company was successful in
negotiating more favorable hull insurance rates on its fleet in
1997 as compared to 1996. These decreases were offset by
increases in pilot compensation directly related to the increase
in block hours. Block hours increased to 29,859 in 1997 from
24,721 in 1996. Flying operations expenses decreased as a
percentage of operating revenue as a result of the increase in
flying and revenue generated from the Company's fleet, especially
the 737-300 and long-range 737-200 jet aircraft, during the first
eight 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 expenses increased approximately 16% from
approximately $16.0_million (approximately 23% of operating
revenues) for the year ended December 31, 1996 to approximately
$18.6_million (approximately 23% of operating revenues) for the
year ended December 31, 1997. Higher fuel expense is directly
related to the increase in ASMs flown by the Company offset by a
decrease in cost per gallon in the year ended December 31, 1997
versus 1996. Fuel cost per ASM decreased 0.044 or 3% from 1.474
in the year ended December 31, 1996 to 1.434 in the year ended
December 31, 1997 primarily due to a decrease in average fuel
price per gallon. Specifically, the average price decreased from
$0.79 per gallon (including taxes and into-plane costs) in the
year ended December 31, 1996 to $0.74 per gallon in the year
ended December 31, 1997, a 6% decrease. The Company will seek to
pass on any 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 increased fuel costs.
Maintenance expenses include all maintenance-related labor,
parts, supplies and other expenses related to the upkeep of
aircraft. Maintenance expenses increased approximately 20% from
approximately $16.1_million (approximately 23% of operating
revenues) for the year ended December 31, 1996 to approximately
$19.3_million (approximately 24% of operating revenues) for the
year ended December 31, 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
underaccrual of completed major air frame 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 for airframes, engines, landing gears and APUs. 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, <PAGE> 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 18% from approximately $6.2_million
(approximately 9% of operating revenues) for the year ended
December 31, 1996 to approximately $7.3_million (approximately 9%
of operating revenues) for the year ended December 31, 1997.
This increase was primarily due to the 19% increase in ASMs and
the 15% increase in RPMs which directly resulted in an increase
in flight attendant wages and inconvenienced passenger charges.
These increases were offset by cost savings from the reduction in
the Company's passenger liability insurance rates. Passenger
service expenses per ASM remained consistent at approximately
0.574 for the year ended December 31, 1996 and 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 10% from approximately $15.2_million
(approximately 22% of operating revenues) in the year ended
December 31, 1996 to approximately $16.7_million (approximately
21% of operating revenues) in the year ended December 31, 1997.
This increase was primarily due to an increase in the number of
cities served during the first nine months of 1997 and an
increase in the number of departures. Departures increased
approximately 11% from 16,383 during the year ended December 31,
1996 to 18,195 during the year ended December 31, 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 year ended December 31, 1997 and
the year ended December 31, 1996. The decrease of .104 per ASM
was primarily due to the 10% increase in average stage length
from 530 miles in 1996 to 585 miles in 1997.
Promotion and sales expenses include the costs of the
reservations functions, including all wages and benefits for
reservations, rent, electricity, telecommunication charges,
credit card fees, travel agency commissions, advertising expenses
and wages and benefits for the marketing department. Promotion
and sales expenses increased approximately 32% from approximately
$15.7_million (approximately 23% of operating revenues) in the
year ended December 31, 1996 to approximately $20.7_million
(approximately 26% of operating revenues) in the year ended
December 31, 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. The Company continues to rely on its direct
advertising methods to attract its passengers and therefore
continued to incur significant advertising expenses in each month
and with each of its schedule changes. The average promotion and
sales cost per passenger increased $3.31 or 27% from $12.47 in
the year ended December 31, 1996 to $15.79 in the year ended
December 31, 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 12% from approximately $4.4 million (approximately
6% of operating revenues) in the year ended December 31, 1996 to
approximately $4.9 million (approximately 6% of operating
revenues) in the year ended December 31, 1997. The increase in
general and administrative expenses 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 in
February 1997.
<PAGE>
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 31% from approximately $1.6 million
(approximately 2% of operating revenues) in the year ended
December 31, 1996 to approximately $2.1 million (approximately 3%
of operating revenues) in the year ended December 31, 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 a full
year of depreciation and amortization charged in the year ended
December 31, 1997 on property and equipment added in the year
ended December 31, 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 issued
on behalf of its credit card processor and the bank line of
credit agreements, each executed in_1997 as discussed in Notes 6
and 8 of the audited financial statements of the Company, which
are included elsewhere herein, the Company issued certain
stockholders warrants to purchase shares of common stock at an
exercise price of $1.00 and $1.94 per share. Accordingly, the
estimated fair value of the warrants issued related to the
agreements totaling $4,082,000 during the year ended December
31,1997 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 year ended December 31,
1997, as a result of borrowings against the line of credit and
the addition of demand notes payable to related parties during
the year ended December 31, 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER
31, 1995
OPERATING REVENUES
Total operating revenues increased approximately 90% from
approximately $36.2 million for the year ended December 31, 1995
to approximately $68.6 million for the year ended December 31,
1996. This increase was primarily attributable to an increase in
the number of daily flights and the number of passengers on those
flights off-set by the drop in passenger yield per revenue
passenger mile. At December 31, 1995, the Company operated 44
daily weekday flights with seven aircraft and during the year
then ended added service to Dallas/Fort Worth, Milwaukee,
Wichita, Des Moines, Minneapolis/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 Meyers, Las Vegas, Miami, Orlando
and Tampa during the year. Service to Salt Lake City,
Cincinnati, Seattle and Phoenix terminated in November and
December of 1996. Total available seat miles ("ASMs") increased
approximately 94%, from approximately 562 million during the year
ended December 31, 1995 to approximately 1,090 million during the
year ended December 31, 1996. Revenue passenger miles ("RPMs")
increased approximately 130% from approximately 290 million
during the year ended December 31, 1995 to approximately 668
million during the year ended December 31, 1996. The increase in
ASMs was primarily attributable to an increase in the number of
jet aircraft in service throughout the year, the number of daily
flights and the addition of destinations with greater flight
lengths. The increase in RPMs was primarily attributable to an
increase in the number of daily flights, an increase in the
number of passengers on those flights and the addition of
destinations with greater flight lengths. Load factor increased
from approximately 52% for the year ended December 31, 1995 to
approximately 61% for the year ended December 31, 1996. This
increase was primarily the result of adjustments in capacity to
meet market demand, increases and changes in the number of city
pairs served, reduced fares, and an increase in market awareness
of the Company's service.
<PAGE>
Passenger yield per RPM decreased approximately 17% from
approximately 11.74 for the year ended December 31, 1995 to
approximately 9.74 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 systemwide 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 factors which decreased yield were
offset by the increase yield in the first half of 1996 as a
result of the absence of the ticket tax. The benefit received by
the Company from the expiration of the ticket tax cannot
precisely be determined. The ticket tax was reinstated in August
1996, the tax lapsed as of December 31, 1996, and Congress
reinstated the ticket tax as of March 7, 1997 with the tax
scheduled to lapse again on September 30, 1997.
The Company also generates operating revenues as a result of
service charges from passengers who change flight reservations.
For a period of 180 days (90 days prior to 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 2% of total operating
revenue) and approximately $2.1 million (approximately 3% of
total operating revenues) in the year ended December 31, 1995 and
the year ended December 31, 1996, respectively.
OPERATING EXPENSES
The following table sets forth the percentage of total
operating revenues represented by these expense categories as
well as certain other selected financial data.
YEAR ENDED DECEMBER 31,
1995 1996
PERCENT OF CENTS PER PERCENT OF CENTS PER
REVENUES ASM REVENUES ASM
Total operating
revenues 100.0% 6.43 100.0% 6.29
Operating expenses:
Flying operations 23.8% 1.53 25.2% 1.59
Aircraft fuel 20.0 1.29 23.3 1.47
Maintenance 17.8 1.15 23.4 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
administration 7.6 .49 6.4 .40
Depreciation and
amortization 3.0 .20 2.3 .15
Total operating
expenses 133.3 8.60 134.8 8.49
Total other income
(expense), net (.4) .00 (2.8) (.17)
Net loss (33.7)% (2.17) (37.6%) (2.37)
<PAGE>
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 101% from approximately $8.6 million (approximately
24% of operating revenues) for the year ended December 31, 1995
to approximately $17.3 million (approximately 25% of operating
revenues) for the year ended December 31, 1996. The number of
departures increased approximately 39% 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 122% from
approximately $7.2 million (approximately 20% of operating
revenues) for the year ended December 31, 1995 to approximately
$16.0 million (approximately 23% of operating revenues) for the
year ended December 31, 1996. These fuel expenses represent an
increase in the fuel cost per ASM of 0.184 or 14% from 1.294 in
the year ended December 31, 1995 to 1.474 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 4.304 per gallon federal excise
tax on domestic fuel consumption that began October 1, 1995.
Maintenance expenses include all maintenance-related labor,
parts, supplies and other expenses related to the upkeep of
aircraft. Maintenance expenses increased approximately 150% from
approximately $6.4 million (approximately 18% of operating
revenues) for the year ended December 31, 1995 to approximately
$16.1 million (23% of operating revenues) for the year ended
December 31, 1996. This increase was primarily due to the
increase in the fleet size and block hours and cycles flown. For
the year ended December 31, 1995, the average fleet size was
approximately 5.0 aircraft compared to an average fleet size for
the year ended December 31, 1996 of approximately 7.9 aircraft.
In late 1995 and early 1996, the Company leased two Boeing
737-300 jet aircraft, which generally are more costly with
respect to major scheduled maintenance. In addition, the Company
incurred greater lease pool charges for the significant amount of
Boeing 737-300 jet aircraft parts held in stock. During 1996,
the Company incurred charges related to certain Boeing 737-200
jet aircraft that were in excess of what traditionally had been
accrued by the Company for three scheduled maintenance checks.
The Company also charged approximately $300,000 to maintenance
expense in the fourth quarter for the early induction of three
aircraft for scheduled maintenance checks in November and
December 1996. These scheduled maintenance checks were
originally scheduled during the first and second quarters of
1997. This change in the Company's major maintenance schedule
corresponded to the major route restructuring completed by the
Company in December 1996. The costs of routine aircraft and
engine maintenance are charged to maintenance expense as
incurred. In addition, the Company accrues the cost of future
major scheduled maintenance on a monthly basis. The Company
deposits funds with its aircraft lessors to cover a portion of
the cost of its future major scheduled maintenance. Finally, the
Company significantly increased the capacity of its in-house
maintenance department during 1996. The Company's maintenance
administration function expanded by eight employees to insure
compliance with all FAA and DOT regulations and requirements.
The Company also increased line maintenance personnel by twelve
employees including the introduction of maintenance operations at
Chicago-Midway and Minneapolis/St. Paul airports.
<PAGE>
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
116% from approximately $2.9 million (approximately 8% of
operating revenues) for the year ended December 31, 1995 to
approximately $6.2 million (approximately 9% of operating
revenues) for the year ended December 31, 1996. This increase
was primarily due to the 39% increase in the number of departures
and the 62% increase in number of passengers carried. Passenger
service expenses per ASM increased approximately 11% from
approximately 0.524 for the year ended December 31, 1995 to 0.574
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 53% from approximately $10.0 million
(approximately 28% of operating revenues) in the year ended
December 31, 1995 to approximately $15.2 million (approximately
22% 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 39% 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% 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 0.384
per ASM was primarily due to a 42% increase in average stage
length from 372 miles in 1995 to 530 miles in 1996.
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 70% from approximately
$9.3 million (approximately 26% of operating revenues) in the
year ended December 31, 1995 to approximately $15.7 million
(approximately 23% 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.
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%
from $2.8 million (approximately 8% of operating revenues) in the
year ended December 31, 1995 to $4.4 million (approximately 6% 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% from approximately $1.1 million
(approximately 3% of <PAGE> operating revenues) in the year ended
December 31, 1995 to approximately $1.6 million (approximately 2%
of operating revenues) in the year ended December 31, 1996. This
increase was primarily a result of improvements to new and
existing aircraft and costs associated with modifications of the
Company's reservation system as well a full year of depreciation
and amortization charged in 1996 on 1995 additions.
Other income (expense), net consists primarily of debt
issuance cost amortization, interest income and interest expense.
In connection with a guarantee of a bank line of credit executed
in July 1996, the Company issued certain stockholders (the
guarantors) warrants to purchase an aggregate of up to 656,250
shares of common stock at a weighted-average exercise price of
$6.65 per share. Accordingly, the estimated fair value of the
warrants issued of $1,850,000 was recorded in other current
assets as deferred debt issuance costs and was amortized to
expense over the term of the line which expired January 1997.
Interest income increased during the year ended December 31,
1996, as a result of greater average interest bearing cash
balances compared to 1995. Interest expense decreased during the
year ended December 31, 1996, as a result of lower average
borrowings during the year as compared to 1995.
<PAGE>
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, proceeds from its initial
public offering of Common Stock, proceeds from its public Rights
Offering and the issuance of debt mostly to its principal
stockholders. As of March 20, 1998, the Company has received net
proceeds from the sale of its equity securities in the aggregate
amount of approximately $54.7 million. In addition, the Company
has utilized 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 cash prepayment, the Company's cash position and possibly
its ability to continue to operate would be materially and
adversely affected.
On January 30, 1998, the Company borrowed $1.9 million under
a credit agreement that expires on January 30, 1999 with INTRUST
Bank, N.A. (Wichita, KS). The Company used the proceeds to repay
the amount outstanding under the Commerce Bank, N.A. line of credit
that matured on January 30, 1998. The line of credit is guaranteed
by certain stockholders. In consideration for the guarantees, the
Company granted the guarantors warrants to purchase shares of the
Company's Common Stock. There can be no assurance that a
replacement $1.9_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_30, 1999, 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.
On January 17, 1997, a principal stockholder of the Company
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 the same principal stockholder 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 agreed to issue warrants to purchase up to
5,030,928 shares of the Company's Common Stock. The Company
anticipates increased requirements with respect to restricted cash
balances and there can be no assurance that the Company's principal
stockholder 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.
In April 1997, the Company completed a private sale of units
of securities, each unit consisting of one share of Common Stock
and two redeemable common stock purchase warrants. In connection
with the sale, the Company issued 5,150,000 shares of its Common
Stock for net proceeds of approximately $10.2 million. Included in
this private sale were 5,000,000 shares of Common Stock issued to
certain principal stockholders in lieu of repayment of $10.0
million of notes payable to the stockholders in conjunction with
this offering.
In December 1997, the Company completed a sale of 30,455,714
shares of Common Stock through a Rights Offering. Under the Rights
Offering, the Company distributed nontransferable rights, at no
cost, to stockholders of record. Each record holder received two
rights, with each right entitling the holder to purchase one share
of Common Stock for a price of $0.50 per share. Certain principal
stockholders exercised all of their rights pursuant to the basic
subscription and the oversubscription privileges of the Rights
Offering. In lieu of paying the subscription price in cash, they
relieved and discharged the Company of approximately $12.2 million
notes payable to principal stockholders. The net cash proceeds to
the Company from the sale of its Common Stock upon the exercise of
the rights offered totaled approximately $3.0 million.
<PAGE>
On March 20, 1998, the Company closed on a private sale of
equity securities, each unit costing $10 and consisting of one
share of Series A Convertible Preferred Stock, par value $.001, and
one common stock purchase warrant (each a "Preferred Unit"). In
connection with the sale, the Company converted approximately $3.0
million of bridge financing notes and interest. Each warrant
entitles the holder to purchase, at any time over a seven-year
period commencing six months after the closing, 40 shares of Common
Stock at an exercise price of $0.55 per share of Common Stock. In
addition, under the same agreement, the Company has the option to
sell additional 150,000 Preferred Units under the same terms and
conditions, provided the sale occurs not later than 90 days from
March 20, 1998. The Company has not determined whether to sell
additional Preferred Units.
During the period from January 1, 1997 through March 20, 1998,
the Company borrowed an aggregate $30.6 million from the principal
stockholders of the Company in the form of unsecured demand notes
payable (collectively, the "Notes"). The Notes accrue interest at
8.0% to 9.0%. During 1997, approximately $22.2 million of notes
payable to stockholders was converted to Common Stock in
conjunction with the sales of certain equity securities completed
in 1997. On March 20, 1998, the Company entered into a Note
Exchange Agreement whereby the principal stockholders holding the
notes agreed to exchange their remaining unsecured demand notes
payable totaling approximately $9.5 million, and all accrued unpaid
interest, for new unsecured convertible demand notes payable (the
"Convertible Notes"). The Convertible Notes are automatically
convertible at such time as the Company has an adequate number of
authorized shares available for issuance. 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 year ended December 31, 1997, the Company did not
generate sufficient passenger ticket sales to provide for its
operational cash needs. During the year ended December 31, 1997,
the Company's operating activities resulted in a cash flow deficit
of $26.4 million. This cash flow deficit has been funded primarily
through the sale of equity securities and debt borrowings from its
principal stockholders, as discussed above. At December 31, 1997,
the Company had cash and cash equivalents of approximately $1.1
million. The Company had a working capital deficit at December 31,
1997 of approximately $22.4 million. The Company's working capital
deficit is expected to be reduced by approximately $10.4 million in
connection with the conversion of demand notes and associated
interest in May 1998. These factors raise substantial doubt about
the Company's ability to continue as a going concern. Further, the
financial statements presented elsewhere 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 December 1998 will cost
approximately $7.5 million, of which $4.4 million will be funded
from existing supplemental rent payments recoverable from aircraft
lessors. The Company must modify one of its existing aircraft to
satisfy the December 31, 1998 Stage 3 noise requirements. The
Company believes that through modification of current lease terms,
the acquisition of a FAA certified hush kit would be available to
allow the Company's fleet to meet Stage 3 noise requirements by
December 31, 1998. If the Company is unable to renegotiate one of
its leases it would be required to a acquire a hush kit at a cost
of approximately $1.4 million. The Company expects to expend
approximately $1.8 million on various capital expenditures
primarily related to improvements to existing aircraft and
improvements to its in-house computer resources. As of December
31, 1997, the Company has entered into a letter of intent to lease
one additional Boeing 737-200 aircraft and anticipates
approximately $360,000 of deposit requirements.
The Company does not anticipate generating sufficient cash
flow from operations until the second quarter of 1998. The Company
plans to implement certain actions designed to achieve long-term
profitability. Management's plans to achieve long-term
profitability include the reduction of frequency in certain under
performing routes, the introduction of new markets in December
1997, participation in the SABRE CRS and anticipated participation
in the Worldspan CRS, increased focus on the price-sensitive
business traveler and pricing strategies designed to maximize
passenger revenue, passenger yield and cost controls. There can be
no assurance that their efforts will be successful.
<PAGE>
Whether or not 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. The Company can raise
approximately $1.5 million more through the sale of additional
Preferred Units, as described above. Failure to raise additional
funds in the future 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 1998 will likely be
dependent upon the Company's success in implementing actions
designed to achieve long-term profitability, as described above,
and its ability to operate at profitable levels during the second
and third quarters of 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.
OTHER MATTERS
YEAR 2000 COMPLIANCE
Management has begun the process to modify the Company's
information technology to recognize the year 2000 and has begun
converting critical data process systems. The Company's new
reservations software installed in the third quarter of 1997 is
Year 2000 compliant. In addition, the Company purchased a new
revenue management system in February 1998 that is year 2000
compliant. The Company believes these two systems are critical
data processing systems.
Vanguard has not yet completed its assessment of the impact
of the Year 2000 on operational systems such as aircraft
avionics, accounting and airport operations as well as
relationships with key business partners, including the FAA,
other governmental agencies and suppliers. The Company will need
to address issues related to key business partners that are
common to other air carriers. As a result, the Company cannot
estimate what the total cost will be to implement the required
efforts for all critical data processing systems.
While the Company believes it is taking all appropriate
steps to assure Year 2000 compliance, it is dependent on key
business and governmental partners compliance to some extent.
The Year 2000 problem is pervasive and complex as virtually every
computer operation will be affected in some way. Consequently,
no assurance can be given that Year 2000 compliance can be
achieved without a material cost. The Company will continue to
implement systems with strategic value though some projects may
be delayed due to resource constraints.
NEW ACCOUNTING STANDARDS
Recent pronouncements of the FASB, which are not required to
be adopted until 1998, include SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130") and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of
general purpose financial statements. The statement requires
that all items that are required to be recognized under
accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company expects
the affects of the adoption of SFAS 130 to be immaterial on the
Company's financial statements. Applicability of SFAS 130 will
not impact amounts previously reported for net income.
SFAS 131 supersedes SFAS No. 14 and establishes new
standards for the way that public companies report selected
information about operating segments in annual financial
statements and requires that those companies report selected
information about segments in interim financial reports issued to
shareholders. It <PAGE> also establishes standards for related
disclosures about products and services, geographic areas and
major customers. The Company does not believe the adoption will
have a material effect on the Company's financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the financial statements and schedules
and Report of Independent Auditors included later in this report
under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 15,
1998 contains under the caption "Election of Directors" certain
information required by Item 10 of Form 10-K and such information
is incorporated herein by this reference. The information
required by Item 10 of Form 10-K as to executive officers is set
forth in Item 4A of Part I hereof.
The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 15,
1998 contains under the caption "Compliance with Section 16(a) of
the Securities Exchange Act of 1934" certain information required
by Item 10 of Form 10-K and such information is incorporated
herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 15,
1998 contains under the caption "Executive Compensation" the
information required by Item 11 of Form 10-K and such information
is incorporated herein by this reference (except that the
information set forth under the following subcaptions is
expressly excluded from such incorporation: "Executive
Compensation and Stock Option Committee Report" and "Company
Performance").
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 15,
1998 contains under the caption "Voting Securities and Principal
Holders Thereof" the information required by Item 12 of Form 10-K
and such information is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 15,
1998 contains under the caption "Certain Transactions" the
information required by Item 13 of Form 10-K and such information
is incorporated herein by this reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND
REPORTS ON FORM 8-K
(a) Financial Statements.
(1) Audited Financial Statements:
Report of Independent Auditors 38
Balance Sheets -
December 31, 1997 and December 31, 1996 39
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 41
Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1997, 1996 and 1995 42
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 43
Notes to Financial Statements 45
(2) The following financial statement schedule is included
herein:
Schedule II - Valuation and Qualifying Accounts 67
All other schedules are omitted, as the required information is
inapplicable or the information is presented in the financial
statements or related notes.
(3) The exhibits required to be filed by this item are set
forth in paragraph (c) below:
(b) Reports on Form 8-K.
On January 15, 1998, the Company filed a report on Form
8-K under Item 5-Other Events regarding a press release
issued by the Company on January 13, 1998 announcing
the resignation of Edmund H. Shea, Jr. from the
Company's Board of Directors. This item was reported
under Item 5 of Form 8-K rather than Item 6 because Mr.
Shea's resignation was not the result of a disagreement
with the Registrant on any matter relating to
Registrant's operations, policies or practices.
(c) Exhibits.
3.1 Restated Certificate of Incorporation, as amended of
Registrant (filed as Exhibit 3.1 to the Registrants
Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
<PAGE>
3.2 Certificate of Designation of Series A Preferred Stock
of Registrant, as filed with Delaware Secretary of
State on March 18, 1998
3.3 By laws of Registrant, as amended to date (filed as
Exhibit 3.2 to Amendment No. 2 to the Registrant's
Registration Statement No. 33-96884 and incorporated
herein by reference).
10.1 Registrant's 1994 Stock Option Plan, as amended to date
(filed as Exhibit 10.1 to the Registrant's Registration
Statement No. 33-96884 and incorporated herein by
reference).
10.2 Form of Incentive Stock Option Agreement (filed as
Exhibit 10.2 to the Registrant's Registration Statement
No. 33-96884 and incorporated herein by reference).
10.3 Form of Nonstatutory Stock Option Agreement (filed as
Exhibit 10.3 to the Registrant's Registration Statement
No. 33-96884 and incorporated herein by reference).
10.4 Form of Employee Stock Purchase Plan (filed as Exhibit
10.4 to the Registrant's Registration Statement No.
33-96884 and incorporated herein by reference).
10.5 Registrant's 401(k) Plan (filed as Exhibit 10.4 to the
Registrant's Registration Statement No. 33-96884 and
incorporated herein by reference).
10.6 Form of Registrant's Profit Sharing Plan (filed as
Exhibit 10.6 to the Registrant's Registration Statement
No. 33-96884 and incorporated herein by reference).
10.7 Aircraft Lease Agreement, dated as of December 8, 1994,
between US Air, Inc. and Registrant, along with Lease
Supplements Nos. 1, 2, 3 and 4 (filed as Exhibit 10.7
to the Registrant's Registration Statement No. 33-96884
and incorporated herein by reference).
10.8 Supplementary Lease Agreement, dated as of October 28,
1997, between US Air, Inc. and Registrant (filed as
Exhibit 10.8 to the Registrant's Registration Statement
No. 33-96884 and incorporated herein by reference).
10.9 Modification to Aircraft Lease Agreement, dated
September 1, 1995, between U.S. Air, Inc. and
Registrant (filed as Exhibit 10.9 to the Registrant's
Registration Statement No. 33-96884 and incorporated
herein by reference).
10.10 Acknowledgment and Consent of the Registrant regarding
assignment of Aircraft Lease Agreement between US Air,
Inc. and Registrant (filed as Exhibit 10.10 to the
Registrant's Form 10-K for the year ended December 31,
1996 and incorporated herein by reference).
10.11 Amendment No. 1 to Lease Agreement, by and between
Registrant and First Security Bank as owner, trustee
and successor-in-interest to U.S. Airways, Inc. (f/k/a
U.S. Air, Inc.) (filed as Exhibit 10. 1 to Registrants
Form 10-Q for the Quarterly Period Ended June 30,
1997).
<PAGE>
10.12 Aircraft Lease Agreement, dated as of December 6, 1994,
between EA 727, Inc. and Registrant (filed as Exhibit
10.10 to the Registrant's Registration Statement No.
33-96884 and incorporated herein by reference).
10.13 Aircraft Lease Agreement, dated December 11, 1995,
between the Registrant and Mimi Leasing Corporation
(filed as Exhibit 10.30 to the Registrant's Form 10-K
for the year ended December 31, 1995).
10.14 Aircraft Lease Agreement, dated as of May 30, 1997,
between Interlease Aviation Investors III (TACA),
L.L.C. and the Registrant (filed as Exhibit 10.14 to
the Registrant's Form 10-Q for the Quarterly Period
Ended June 30, 1997 and incorporated herein by
reference).
10.15 Aircraft Lease Agreement, dated September 18, 1997,
between Interlease Aviation Investors II (Aloha),
L.L.C. and the Registrant (filed as Exhibit 10.1 to the
Registrant's Form 10-Q for the quarterly period ended
September 30, 1997 and incorporated herein by
reference).
10.16 Aircraft Lease Agreement, dated November 18, 1997
between Mimi Leasing Corporation and the Registrant
10.17 Employment Agreement, dated November 3, 1997 between
the Registrant and Robert J. Spane
10.18 Registration Rights Agreement, dated as of March 20,
1998
10.19 Unit Purchase Agreement, dated as of March 20, 1998,
between the Registrant and J. F. Shea Co., Inc. and The
Hambrecht 1980 Revocable Trust
10.20 Note Exchange Agreement, dated as of March 20, 1998,
between the Registrant and the Holders
10.21 Computer Software Nonexclusive License Agreement, dated
as of September 14, 1994, between Morris Air
Corporation and the Registrant (filed as Exhibit 10.11
to the Registrant's Registration Statement No. 33-96884
and incorporated herein by reference).
10.22 Lease, dated September 27, 1994, between the Gerson
Company and Registrant, as amended to date (Mission, KS
Corporate/Reservations Office) (filed as Exhibit 10.13
to the Registrant's Registration Statement No. 33-96884
and incorporated herein by reference).
10.23 Shopping Center Lease, dated February 28, 1996, between
the Registrant and Southern Hills Center, L.L.C.
(Lawrence, KS Office) (filed as Exhibit 10.31 to the
Registrant's Form 10-K for the year ended December 31,
1995).
10.24 Second Amendment and Restated Warrant Purchase
Agreement among Registrant and certain of its
stockholders (filed as Exhibit 10.18 to the
Registrant's Registration Statement No. 33-96884 and
incorporated herein by reference).
<PAGE>
10.25 Form of Amended and Restated Warrant for the Purchase
of Shares of Series B Preferred Stock (Amended Warrant)
(filed as Exhibit 10.19 to the Registrant's
Registration Statement No. 33-96884 and incorporated
herein by reference).
10.26 Reimbursement Agreement, dated as of December 31, 1996,
by and among Registrant and Hambrecht & Quist
California, a wholly owned subsidiary of Hambrecht &
Quist Group (filed as Exhibit 10.21 to the Registrants
Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
10.27 Security Agreement, dated as of December 31, 1996, by
Registrant in favor of Hambrecht & Quist California
(filed as Exhibit 10.22 to the Registrants Form 10-K
for the year ended December 31, 1996 and incorporated
herein by reference).
10.28 Amended and Restated Reimbursement Loan Note in the
amount of $4,000,000 (filed as Exhibit 10.23 to the
Registrants Form 10-K for the year ended December 31,
1996 and incorporated herein by reference).
10.29 Warrant for the purchase of shares of Common Stock
issued to Hambrecht & Quist California (filed as
Exhibit 10.24 to the Registrants Form 10-K for the year
ended December 31, 1996 and incorporated herein by
reference).
10.30 Merchant Agreement, dated as of February 27, 1997, by
and between Registrant and Michigan National Bank
(filed as Exhibit 10.25 to the Registrants Form 10-K
for the year ended December 31, 1996 and incorporated
herein by reference).
10.31 Amendment to Merchant Agreement, dated as of February
6, 1997, by and between Registrant (filed as Exhibit
10.26 to the Registrants Form 10-K for the year ended
December 31, 1996 and incorporated herein by
reference).
10.32 Promissory Note in the amount of $1,900,000 to Intrust
Bank, N.A., dated January 30, 1998
10.33 Warrant Purchase Agreement, dated as of January 30,
1997 (filed as Exhibit 10.29 to the Registrants Form
10-K for the year ended December 31, 1996 and
incorporated herein by reference).
10.34 Form of Warrant to purchase shares of Common Stock in
connection with the Commerce Bank Line of Credit (filed
as Exhibit 10.30 to the Registrants Form 10-K for the
year ended December 31, 1996 and incorporated herein by
reference).
21.1 List of Subsidiaries of Registrant (filed as Exhibit
21.1 to the Registrant's Registration Statement No.
33-96884 and incorporated herein by reference).
23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on the signature page of
this Form 10-K)
27 Financial Data Schedule.
<PAGE>
(d) Financial Statement Schedules.
The response to this portion of Item 14 is submitted as a
separate section of this report.
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Vanguard Airlines, Inc.
We have audited the accompanying balance sheets of Vanguard
Airlines, Inc. (the Company) as of December 31, 1997 and 1996,
and the related statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the
period ended December 31, 1997. Our audits also included the
financial statement schedule listed on the Index at Item 14(a).
These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Vanguard Airlines, Inc. as of December 31, 1997 and 1996, and
the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. Also in our opinion,
the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed
in Note 2 to the financial statements, the Company has recurring
operating losses and a working capital deficiency. In
addition, the Company has an accumulated deficit and net capital
deficiency. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 2. The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Ernst & Young LLP
Kansas City, Missouri
February 27, 1998
except for Notes 2 and 12
as to which the date
is March 20, 1998
<PAGE>
Vanguard Airlines, Inc.
Balance Sheets
December 31
1997 1996
Assets
Current assets:
Cash and cash equivalents $ 1,082,712 $ 402,083
Restricted cash - 1,822,998
Accounts receivable, less
allowance for doubtful
accounts of $354,000 in
1997 ($230,000 in 1996)
2,312,439 3,454,418
Inventories 842,620 673,338
Prepaid expenses and other
current assets 1,011,417 867,104
Current portion of supplemental
maintenance deposits 4,546,824 2,489,270
Total current assets 9,796,012 9,709,211
Property and equipment, at cost:
Aircraft improvements and
leasehold costs 4,611,528 3,731,046
Reservation system and
communication equipment 1,844,981 1,516,440
Other property and equipment 3,695,943 2,404,121
10,152,452 7,651,607
Less accumulated depreciation
and amortization (4,667,768) (2,601,949)
5,484,684 5,049,658
Other assets:
Supplemental maintenance deposits,
less current portion 3,221,875 2,233,988
Deferred debt issuance costs 2,223,233 --
Leased aircraft deposits 2,258,500 1,506,000
Fuel and security deposits 1,240,284 1,093,185
Other 539,296 726,205
9,483,188 5,559,378
Total assets $24,763,884 $20,318,247
<PAGE>
December 31
1997 1996
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to related parties $ 9,467,741 $ 2,500,000
Accounts payable 6,095,903 8,404,196
Accrued expenses 4,007,363 3,652,162
Accrued maintenance 6,588,830 4,684,550
Air traffic liability 5,989,085 6,609,609
Current portion of capital
lease obligations -- 155,575
Total current liabilities 32,148,922 26,006,092
Line of credit 1,900,000 5,000,000
Accrued maintenance, less
current portion 2,659,396 2,547,088
Capital lease obligations,
less current portion -- 3,084
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $.001 par value:
Authorized shares 1,000,000
Issued and outstanding shares none -- --
Common stock, $.001 par value:
Authorized shares 50,000,000 in
1997 (15,000,000 in 1996)
Issued and outstanding shares
45,695,908 in 1997 (9,982,452
in 1996) 45,696 9,982
Additional paid-in capital 57,753,488 28,283,996
Accumulated deficit (69,692,060) (41,446,057)
(11,892,876) (13,152,079)
Deferred stock compensation (51,558) (85,938)
Total stockholders' deficit (11,944,434) (13,238,017)
Total liabilities and
stockholders' deficit $24,763,884 $20,318,247
See accompanying notes.
<PAGE>
Vanguard Airlines, Inc.
Statements of Operations
Year ended December 31
1997 1996 1995
Operating revenues:
Passenger revenue $ 76,560,373 $ 64,977,645 $ 33,980,209
Other 4,823,765 3,611,456 2,178,809
Total operating
revenues 81,384,138 68,589,101 36,159,018
Operating expenses:
Flying operations 17,080,316 17,306,500 8,615,286
Aircraft fuel 18,571,472 16,005,041 7,223,040
Maintenance 19,334,251 16,074,921 6,440,702
Passenger service 7,342,237 6,245,678 2,894,113
Aircraft and traffic
servicing 16,746,727 15,193,426 9,950,014
Promotion and sales 20,701,511 15,722,822 9,253,974
General and
administrative 4,914,469 4,371,150 2,764,313
Depreciation and
amortization 2,067,917 1,583,879 1,083,871
Total operating
expenses 106,758,900 92,503,417 48,225,313
Operating loss (25,374,762) (23,914,316) (12,066,295)
Other income (expense):
Deferred debt issuance
cost amortization (1,858,767) (1,833,335) --
Interest expense (1,110,465) (195,728) (217,603)
Interest income 97,991 135,309 88,368
Total other expense, net (2,871,241) (1,893,754) (129,235)
Net loss $(28,246,003)$(25,808,070) $(12,195,530)
Net loss per share $ (1.85) $ (2.85) $ (1.65)
Weighted-average common
shares outstanding 15,232,901 9,056,888 7,395,921
See accompanying notes.
<PAGE>
<TABLE>
Vanguard Airlines, Inc.
Statements of Stockholders' Equity (Deficit)
<CAPTION> Total
Convertible Preferred Stock Common Stock Additional Deferred Stockholders'
Series A Series B Paid-In Accumulated Stock Equity
Shares Amount Shares Amount Shares Amount Capital Deficit Compensation (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December
31, 1994 2,000,000 $2,000 3,641,043 $3,641 433,333 $ 433 $ 6,012,406 $ (3,442,457) $ -- $ 2,576,023
Issuance
of warrants -- -- -- -- -- -- 71,000 -- -- 71,000
Issuance of
compensatory
options -- -- -- -- -- -- 250,000 -- (250,000) --
Amortization of
deferred stock
compensation -- -- -- -- -- -- -- -- 122,159 122,159
Conversion of
preferred stock
to common
stock (2,000,000) (2,000)(3,641,043) (3,641) 5,641,043 5,641 -- -- -- --
Issuance of
common stock
in public
offering -- -- -- -- 2,400,000 2,400 12,953,581 -- -- 12,955,981
Exercise of
stock options -- -- -- -- 50,000 50 14,950 -- -- 15,000
Net loss -- -- -- -- -- -- -- (12,195,530) -- (12,195,530)
Balance at
December 31,
1995 -- -- -- -- 8,524,376 8,5241 9,301,937 (15,637,987) (127,841) 3,544,633
Issuance of
warrants -- -- -- -- -- -- 1,850,000 -- -- 1,850,000
Amortization
of deferred
stock
compensation -- -- -- -- -- -- -- -- 41,903 41,903
Issuance of
common stock
and warrants
in a private
placement -- -- -- -- 1,319,774 1,320 7,114,188 -- -- 7,115,508
Exercise of
stock options -- -- -- -- 138,302 138 17,871 -- -- 18,009
Net loss -- -- -- -- -- -- -- (25,808,070) -- (25,808,070)
Balance at
December 31,
1996 -- -- -- -- 9,982,452 9,982 28,283,996 (41,446,057) (85,938) (13,238,017)
Issuance of
warrants -- -- -- -- -- -- 4,082,000 -- -- 4,082,000
Amortization
of deferred
stock
compensation -- -- -- -- -- -- -- -- 34,380 34,380
Issuance of
common stock in
a private
placement -- -- -- -- 5,150,000 5,150 10,229,850 -- -- 10,235,000
Issuance of
common stock
in a rights
offering -- -- -- -- 30,455,714 30,456 15,144,544 -- -- 15,175,000
Exercise of
stock options -- -- -- -- 107,742 108 13,098 -- -- 13,206
Net loss -- -- -- -- -- -- -- (28,246,003) -- (28,246,003)
Balance at
December 31,
1997 -- $ -- -- $ -- 45,695,908 $45,696 $57,753,488 $(69,692,060) $ (51,558) $(11,944,434)
See accompanying notes.
<TABLE\>
<PAGE>
Vanguard Airlines, Inc.
Statements of Cash Flows
Year ended December 31
1997 1996 1995
OPERATING ACTIVITIES
Net loss $(28,246,003) $(25,808,070) $(12,195,530)
Adjustments to
reconcile net
loss to net cash
used in operating
activities:
Depreciation 848,948 681,982 345,067
Amortization 1,218,969 901,897 738,804
Loss on sale and
disposal of
property and
equipment 11,400 117,954 --
Deferred debt issuance
cost amortization 1,858,767 1,850,000 71,000
Compensation related
to stock options 34,380 41,903 122,159
Provision for
uncollectible
accounts 253,276 32,719 197,000
Changes in operating
assets and liabilities:
Restricted cash 1,822,998 (1,822,998) --
Accounts receivable 888,703 (2,215,892) (1,128,214)
Inventories (169,282) (335,219) (331,110)
Prepaid expenses and
other current
assets (144,313) 635,008 (780,133)
Supplemental maintenance
deposits (3,045,441) (1,793,220) (2,930,038)
Accounts payable (2,308,293) 5,937,339 3,395,860
Accrued expenses 355,201 1,348,785 904,818
Accrued maintenance 1,563,588 2,503,081 2,872,983
Air traffic
liability (620,524) 4,348,888 1,482,684
Deposits and other (712,690) (983,664) (935,007)
Net cash used in
operating
activities (26,390,316) (14,559,507) (8,169,657)
INVESTING ACTIVITIES
Purchases of property
and equipment (2,061,343) (2,958,406) (2,341,478)
FINANCING ACTIVITIES
Proceeds from issuance
of notes payable
to related parties 29,148,816 3,900,000 --
Proceeds from line of
credit borrowings 2,275,000 9,700,000 2,000,000
Principal payments
on line of credit (5,375,000) (4,700,000) (2,000,000)
Principal payments on
notes payable to
related parties -- (1,400,000) --
Proceeds from sale of
common stock and the
exercise of stock
options, net of
offering costs 3,242,131 7,133,517 12,970,981
Principal payments on
notes payable and
capital lease
obligations (158,659) (205,161) (95,015)
Net cash provided
by financing
activities 29,132,288 14,428,356 12,875,966
<PAGE>
Vanguard Airlines, Inc.
Statements of Cash Flows (continued)
Year ended December 31
1997 1996 1995
Net increase (decrease)
in cash and cash
equivalents $ 680,629 $ (3,089,557) $ 2,364,831
Cash and cash
equivalents at
beginning of year 402,083 3,491,640 1,126,809
Cash and cash
equivalents at
end of year $ 1,082,712 $ 402,083 $ 3,491,640
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during
the period for
interest $ 377,122 $ 159,541 $ 146,603
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Conversion of
related-party
notes payable to
common stock $ 22,181,075 $ -- $ --
Deferred debt
issuance costs
recorded in
conjunction with
warrants issued $ 4,082,000 $ 1,850,000 $ 71,000
Aircraft leasehold
costs associated
with accrued
maintenance at
inception of lease $ 453,000 $ -- $ 620,052
Property and
equipment accrued
through issuance
of capital lease
obligations $ -- $ 134,031 $ 84,267
Aircraft improvements
financed through the
issuance of notes
payable $ -- $ 1,000,000 $ --
Retirement of notes
payable through sale
of property and
equipment $ -- $ 958,333 $ --
Reduction of accounts
payable through
sale of property
and equipment $ -- $ 933,431 $ --
Conversion of
preferred stock to
common stock $ -- $ -- $ 6,005,147
Deferred compensation
costs associated
with issuance of
compensatory stock
options $ -- $ -- $ 250,000
See accompanying notes.
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Vanguard Airlines, Inc. (the Company) was incorporated in
Delaware in April 1994. The Company offers low-fare, convenient,
short- to medium-haul passenger air transportation service
primarily in the midwestern, Rocky Mountain, northeastern and
southeastern regions of the United States and commenced flight
operations on December 4, 1994.
The airline industry is highly competitive primarily due to the
effects of the Airline Deregulation Act of 1978, which has
substantially eliminated government authority to regulate
domestic routes and fares and has increased the ability of
airlines to compete with respect to flight frequencies and fares.
The airline industry is significantly affected by general
economic conditions. Because a substantial portion of business
and personal airline travel is discretionary, the industry
has experienced adverse financial results during general economic
downturns and positive financial results during economic upturns.
The Company's business is also seasonal, which can affect the
Company's results of operations from quarter to quarter.
Fuel is a major component of operating expenses for all airlines.
Both the cost and availability of fuel are subject to many
economic and political factors and events occurring throughout
the world. The future cost and availability of fuel to the
Company cannot be predicted, and substantial sustained price
increases or the inability to obtain adequate fuel supplies could
have a material adverse effect on the Company's operations and
profitability.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTRICTED CASH
Restricted cash includes cash equivalents that secure the risk of
loss exposure estimated by the Company's credit card processor.
At December 31, 1997, the restricted cash balance totaling
$217,396 is considered noncurrent and is included as a component
of other assets on the accompanying balance sheet. The
significant reduction in restricted cash balance from December
31, 1996 is attributable to certain of the Company's stockholders
providing guarantees of performance to the credit card
processors, thereby releasing the cash restrictions.
ACCOUNTS RECEIVABLE
Accounts receivable are primarily due from major credit card
processors and travel agents. These receivables are unsecured.
The Company provides an allowance for doubtful accounts equal to
the estimated losses expected to be incurred in the collection of
accounts receivable.
CONCENTRATION OF CREDIT RISK
Although the Company does not expect losses associated with
supplemental payments recoverable from aircraft lessors, which
are described in Note 10, recoverability of these payments
is dependent on the continued financial stability of its three
lessors and on the Company's ability to perform aircraft
maintenance required for a return of such supplemental payments.
INVENTORIES
Inventories of flight equipment, expendable parts, materials,
tools, food, beverages and promotional items are carried at cost.
These items are charged to expense when issued for use.
In 1996, the Company entered into an agreement with a supplier
for consigned parts and supplies for its Boeing 737-200 and
Boeing 737-300 aircraft. The Company is required to pay a monthly
consignment fee, based on the value of the consigned parts, and
to replenish any such parts when used with a like part. At
December 31, 1997 and 1996, the
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company held consigned parts and supplies of approximately
$2,088,000 and $3,943,000, respectively, which are not included
in the accompanying balance sheet. The decrease in the consigned
inventory is the result of the return of the Boeing 737-300
aircraft in 1997. See Note 10.
PROPERTY AND EQUIPMENT
Depreciation and amortization of aircraft improvements and
leasehold costs are recorded using the straight-line method over
their estimated useful lives or remaining lease terms of the
related aircraft, whichever is shorter, ranging from five to
seven years. Reservation system and communication equipment and
other property and equipment are depreciated on a straight-line
basis over the shorter of their estimated useful lives or
remaining lease terms ranging from five to seven years.
AIRCRAFT AND ENGINE MAINTENANCE
The Company accounts for aircraft overhaul and major engine
maintenance costs using the accrual method. The Company accrues
the estimated cost of the next aircraft overhaul based on
aircraft utilization. The actual cost of an aircraft overhaul is
charged to the accrual, with any deficiency or excess charged or
credited to expense. The Company accrues major engine maintenance
based on the greater of engine cycles or flight hours multiplied
by the estimated long-term cost per flight hour or cycle. The
actual cost of engine maintenance is charged to the accrual. The
cost of routine maintenance is charged to expense as incurred.
ADVERTISING COSTS
Advertising costs are charged to expense in the period the costs
are incurred. Advertising expense was approximately $7,792,000,
$4,316,000 and $2,372,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PASSENGER REVENUE RECOGNITION
Passenger ticket sales are initially recorded as a component of
air traffic liability. Revenue derived from ticket sales is
recognized at the time transportation is provided. However, due
to various factors, including a multi-tier ticket pricing
structure, certain amounts are recognized in revenue using
estimates regarding both the timing of the revenue recognition
and the amount of revenue to be recognized. Actual results could
differ from those estimates.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principals Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for its employee stock
options, because, as discussed in Note 4, the alternative fair
value accounting provided for under the Financial Accounting
Standards Board's Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation,"
requires the use of option valuation models that were not
developed for use in valuing employee stock options.
Pro forma information regarding net loss and loss per share is
required by SFAS No. 123 and has been determined as if the
Company had accounted for its stock options under the fair value
method of that statement. This pro forma information is included
in Note 4.
LOSS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share."
Under SFAS No. 128, the Company is required to calculate basic
earnings per share based on the weighted average common shares
outstanding, by excluding the effect of dilutive stock
options and to restate all prior periods. In 1997 and 1996, the
computation of net loss per share is based on the weighted-
average number of common shares outstanding. The adoption of SFAS
No. 128 had no impact on the Company, as outstanding stock
options and warrants in these years were antidilutive. The
aggregate number of options and warrants not considered in the
calculation of net loss per share due to their antidilutive effect
is 28,220,270, 3,223,343 and 1,361,091 at December 31, 1997, 1996
and 1995, respectively.
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 1995, net loss per share is based on the weighted-average
number of common and preferred shares outstanding and common
stock equivalents considered "cheap stock" outstanding prior to
the November 1995 effective date of the Company's initial public
offering (the Offering). Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, common stock and
preferred stock issued for consideration below the offering price
of $6.00 per share (the Offering Price) and stock options and
preferred stock warrants issued with exercise prices below the
Offering Price during the 12-month period preceding the initial
filing of the Registration Statement are considered cheap stock
and have been included in the calculation of common shares for
the year ended December 31, 1995, using the treasury stock
method, as if they were outstanding in 1995 through the effective
date of the Offering.
INCOME TAXES
The Company utilizes the liability method in accounting for
income taxes, whereby deferred tax assets and liabilities are
determined based on differences between financial reporting and
tax bases of assets and liabilities utilizing enacted rates and
laws that will be in effect when the differences are expected to
reverse.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, restricted
cash and supplemental maintenance deposits reported in the
balance sheet approximate fair value. Based on the guarantee of
the line of credit by certain stockholders of the Company,
management believes the carrying amount of such borrowings
reported in the balance sheet approximates fair value. As a
result of the uncertainties described in Note 2, management is
unable to estimate the fair value of the notes payable to related
parties at December 31, 1997 and 1996. The fair values of
warrants issued in 1997 and 1996, as described in Notes 6 and 8,
were estimated using the discounted Black-Scholes pricing model.
RECLASSIFICATION
Certain amounts in the 1996 and 1995 financial statements have
been reclassified to conform to the 1997 presentation.
<PAGE>
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. The Company
had a net loss and operating cash deficiency of $28,246,003 and
$26,390,316, respectively, for the year ended December 31, 1997.
Further, the Company had a working capital deficiency and
stockholders' deficit of $22,352,910 and $11,944,434,
respectively, at December 31, 1997. These factors have been
present since the Company's inception and, as a result, the
Company has been dependent on financing from its principal
stockholders, which during the period from January 1, 1997
through March 20, 1998, included $3,228,925 in equity
contributions and $32,148,816 in short-term loans. There is no
assurance that these stockholders will provide further financing.
These factors raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.
Management's plans include raising additional capital and
securing additional bank financing to fund ongoing operations and
the possible expansion of operations. Management's plans also
include actions designed to achieve long-term profitability,
including the reassessment of existing markets, possible
expansion into new markets, pricing strategies to maximize
operating income and cost controls. During 1997, the Company did
not generate sufficient passenger revenue to provide for its
operation's cash needs. As a result, in the third and fourth
quarters of 1997, the Company completed a route restructuring,
including the introduction of service to two new cities. This
route restructuring focused on the Company's strategy of
providing travel alternatives for price sensitive business and
leisure travelers between major metropolitan markets that were
not adequately served by other major carriers. As discussed in
Note 12, the Company has received bridge financing from
certain major stockholders in the form of demand notes payable in
connection with the Company's $3.0 million private convertible
preferred stock offering of equity securities in March 1998.
Management believes these sources of cash will provide for its
cash requirements through the first quarter of 1998. The Company
anticipates generating positive cash flow from operations during
the second and third quarters of 1998. The Company's ability to raise
additional cash through equity or debt financings that may be
required to fund expansion during 1998 or fund fourth quarter
operations will be greatly dependent on the Company operating
profitably during the second and third quarters of 1998. There
can be no assurance that the Company can achieve such positive
cash flows or operating profits.
<PAGE>
2. BASIS OF PRESENTATION (CONTINUED)
In addition, there can be no assurance that management's restructuring
efforts or its efforts to provide for the necessary cash requirements of
the Company will be successful. Even if the Company is successful
in restructuring operations, there can be no assurance that
management can provide for the Company's cash requirements which
may be necessary during the remainder of 1998.
Inability to obtain necessary cash from subsequent financings
would have a material adverse effect on the Company, including
the possibility that the Company would have to cease operations.
3. STOCKHOLDERS' EQUITY
In December 1997, the Company completed a sale of 30,455,714
shares of common stock through a Rights Offering. Under the
Rights Offering, the Company distributed nontransferable rights,
at no cost, to stockholders of record. Each record holder
received two rights, with each right entitling the holder to
purchase one share of common stock for a price of $0.50 per
share. Certain principal stockholders exercised all of their
rights pursuant to the basic subscription and the
oversubscription privileges of the Rights Offering. In lieu of
paying the subscription price in cash, they relieved and
discharged the Company of $12,181,075 in notes payable to related
parties. The cash proceeds to the Company from the sale of the
common stock upon the exercise of the rights offered totaled
approximately $2,994,000, after deducting approximately $53,000
in offering expenses.
In April 1997, the Company completed a private sale of units of
securities, each unit consisting of one share of common stock and
two redeemable common stock purchase warrants. In connection with
the sale, the Company issued 5,150,000 shares of common stock for
aggregate proceeds of approximately $10,235,000, net of offering
costs of approximately $65,000. Included in this private sale
were 5,000,000 shares of common stock issued to certain principal
stockholders in lieu of repayment of $10,000,000 in notes payable
to related parties. Each redeemable warrant originally entitled
the holder to purchase, at any time over a five-year period
commencing with the closing of this private offering, one share
of common stock at an exercise price of $2.50. The redeemable
warrant exercise price was subject to adjustment in the event the
Company issued equity securities raising net proceeds in an
aggregate amount of $1,000,000 at a price below $2.00 per share.
In conjunction with the Company's Rights Offering discussed
above, the redeemable warrants were repriced to $0.50, the
offering price of the common stock in
<PAGE>
3. STOCKHOLDERS' EQUITY (CONTINUED)
the Rights Offering. The Company has the right to redeem the
warrants at a redemption price of $0.05 per warrant on 45 days'
prior notice if the average closing bid price of the Company's
common stock equals or exceeds $1.00 for any 20 days within a
period of 30 consecutive trading days, as defined by the warrant
agreement.
In September 1996, the Company completed a private sale of units
of securities, each unit consisting of one share of common stock
and one redeemable common stock purchase warrant. In connection
with the sale, the Company issued 1,319,774 shares of common
stock for aggregate proceeds of approximately $7,116,000, net of
offering costs of approximately $184,000. Each redeemable warrant
entitles the holder to purchase, at any time over a five-year
period commencing with the closing of this private offering, one
share of common stock at an exercise price of $6.64. The
redeemable warrant exercise price is subject to adjustment under
certain circumstances as defined in the warrant agreement. The
Company has the right to redeem the warrants at a redemption
price of $0.05 per warrant on 45 days' prior notice if the
average closing bid price of the Company's common stock equals or
exceeds $13.28 for any 20 days within a period of 30 consecutive
trading days, as defined by the warrant agreement.
On November 3, 1995, the Company completed the issuance of
2,400,000 shares of common stock at a price of $6.00 per share
through an initial public offering, resulting in net proceeds,
after underwriting commissions and offering expenses, of
approximately $12,956,000. In connection with the Offering, the
Company issued the underwriter warrants to purchase 240,000
shares of common stock at an exercise price of $7.20. The
warrants are exercisable at any time from November 1, 1996 to
November 1, 2000.
In March 1997, the Company held a special meeting of stockholders
and approved an amendment to the Company's Restated Certificate
of Incorporation to increase the number of authorized shares of
the Company's common stock from 15,000,000 to 50,000,000 shares.
The Company's principal stockholders and certain other
stockholders as well as certain officers and directors of the
Company have agreed not to exercise the warrants discussed above
and in Notes 6 and 8 or options granted under the 1997 Program
(see Note 4) until the earlier of June 30, 1998 or the date of a
Certificate of Amendment to the Company's Restated Certificate of
Incorporation is filed increasing the number of authorized shares
of common stock to an amount sufficient to cover all outstanding
and available stock options and stock purchase warrants.
<PAGE>
3. STOCKHOLDERS' EQUITY (CONTINUED)
The Company will reserve, in conjunction with a restated Certification
of Incorporation that the Company plans to amend in 1998, 29,258,961
shares of common stock for issuances related to the exercise of
outstanding or available stock options and outstanding stock purchase
warrants and for shares available under the employee stock purchase
plan as follows:
NUMBER
OF SHARES
RESERVED
Stock options (Note 4) 8,277,918
Stock purchase warrants (Notes 6 and 8) 19,981,043
Employee stock purchase plan 1,000,000
29,258,961
4. STOCK OPTIONS
The Company established the Vanguard Airlines, Inc. 1994 Stock
Option Plan (the 1994 Plan) whereby options for up to 1,700,000
shares may be granted to officers, directors, key employees and
consultants to purchase shares of common stock. Vesting and term
of these options are determined by the Board of Directors and may
vary by optionee; however, the term may be no longer than 10
years from the date of issuance.
During 1997, the Company repriced certain options under the 1994
Plan due to a significant decline in the market price of the
stock from the grant date. The first option repricing occurred on
February 6, 1997 whereby options to purchase up to 76,000 shares
of common stock were repriced to the then current market price of
$1.81. The repricing resulted in an adjusted vesting start date
for all repriced options equal to a three-month extension. A
second option repricing occurred on November 3, 1997 whereby
options repriced on February 6, 1997 and options granted in 1997
to purchase up to 1,037,500 shares of common stock were repriced
to the then current market price of $0.50. This repricing also
resulted in an adjusted vesting start date for all repriced
options equal to another three-month extension.
<PAGE>
4. STOCK OPTIONS (CONTINUED)
A summary of stock option activity related to the 1994 Plan is as
follows:
1997 1996 1995
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
Outstanding
at beginning
of year 473,227 $2.40 587,000 $0.17 489,500 $0.11
Granted 2,252,500 1.16 133,500 8.66 147,500 0.35
Repriced (1,113,500) 2.28 -- -- -- --
Exercised (107,742) 0.12 (138,302) 0.13 (50,000) 0.30
Forfeited (239,220) 1.68 (108,971) 0.93 -- --
Outstanding
at end of
year 1,265,265 0.64 473,227 2.40 587,000 0.17
Exercisable
at end of
year 235,033 1.35 202,821 2.55 152,719 0.12
Weighted-
average fair
value of
options
granted
during the
year 0.56 4.08 0.84
Exercise prices for options outstanding under the 1994 Plan as of
December 31, 1997 for incentive stock options granted to
employees range from $0.11 to $0.50. The exercise prices for
certain nonstatutory options granted equals $9.25 for 25,000
options and $1.13 for 25,000 additional options outstanding
under the Plan. The weighted-average remaining contractual life
at December 31, 1997 of all outstanding options under the Plan is
8.97 years.
Under a separate stock option program (the 1997 Program), the
Company granted options to purchase 6,973,962 shares of
common stock to certain directors and officers of the Company at
exercise prices ranging from $0.50 to $0.69. Vesting and term
provisions of these options are determined by the Board of
Directors and may vary by optionee; however, the term may be no
longer than 10 years from the date of issuance. There were no
options exercised or forfeited during the year ended December 31,
1997. The weighted-average fair value of options granted under
the 1997 Program is $0.21. At December 31, 1997, there are
1,446,745 options exercisable under the 1997 Program and the
weighted-average remaining contractual life of all outstanding
options is 9.91 years.
<PAGE>
4. STOCK OPTIONS (CONTINUED)
The fair values of options granted after November 3, 1995, were
estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for
1997 and 1996, respectively: risk free interest rates of 5.78%
and 6.32%, volatility factors of the expected market price of the
Company's common stock of .55 and .61, and a weighted-average
expected life of the option of 2.96 and 3.21 years.
The fair values of options granted prior to November 3, 1995,
were estimated using the Minimum Value option pricing model with
the following weighted-average assumptions for 1995, including a
risk free interest rate of 6.19% and a weighted-average expected
life of four years. Under the Minimum Value model, the volatility
factor is excluded. There were no options granted during the
period from November 3, 1995 to December 31, 1995. Under both the
Black-Scholes and the Minimum Value models, the Company assumed a
0% dividend yield over the expected life of the options.
These models were developed for use in estimating the fair value
of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require
the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's stock
options have characteristics significantly different from those
of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting
period. The effects of applying SFAS No. 123 for pro forma
disclosures are not likely to be representative of the effects on
reported net income or losses for future years. The Company's pro
forma information follows:
1997 1996 1995
Pro forma net loss $(28,701,314) $(25,948,409) $(12,089,631)
Pro forma net loss per share (1.88) (2.87) $(1.63)
<PAGE>
5. EMPLOYEE STOCK PURCHASE PLAN
Effective January 1, 1996, the Company adopted the Vanguard
Airlines, Inc. Employee Stock Purchase Plan (the Purchase Plan).
Under the Purchase Plan, the Company registered 1,000,000 shares
of common stock for issuance to participating eligible employees.
The Company withholds a specified amount (at least $20.00 per
month and not to exceed 15% of compensation for that particular
month) from the paychecks of participating eligible employees.
The custodian of the Purchase Plan purchases common stock within
five business days of the allocation of the participating
employee's contribution. Any employee who has completed ninety
(90) days of employment with the Company is eligible to
participate in the Purchase Plan. Common stock is purchased by
the employees from the Company at 85% of the fair market value of
the common stock as determined on the last market trading day
prior to the purchase date. Common stock purchased on the open
market is paid 85% by the participating employee and 15% by the
Company.
6. LINES OF CREDIT
On January 30, 1997, the Company entered into a bank line of
credit (the Agreement) that permitted borrowings up to $2,275,000
with interest payable monthly at the prime rate published in The
Wall Street Journal. As of December 31, 1997, the Company had
borrowed $1,900,000 under the Agreement. The prime rate was 8.50%
and 8.25% at December 31, 1997 and 1996, respectively. The Agreement
matured on January 30, 1998 and was subsequently paid off. The
Agreement was guaranteed by certain stockholders of the Company (the
Guarantors) for a period of up to two years.
On January 30, 1998, the Company entered into another bank line
of credit agreement (the New Agreement) that permitted borrowings
up to $1,900,000 with interest payable monthly at the prime rate
published in The Wall Street Journal. The New Agreement matures
on January 30, 1999. On January 30, 1998, the Company borrowed
$1,900,000 under the terms of the New Agreement to repay amounts
outstanding under the Agreement. The New Agreement is also
guaranteed by certain stockholders of the Company.
<PAGE>
6. LINES OF CREDIT (CONTINUED)
In connection with the execution of the Agreement and a related
two-year guarantee, the Company agreed to issue the Guarantors
warrants to purchase an aggregate of up to 2,275,000 shares of
common stock at an exercise price of $1.00. Upon execution of the
Agreement, the Company issued 910,000 warrants that vested
immediately. Accordingly, effective January 30, 1997, the
estimated fair value of the warrants issued of $1,100,000 was
recorded as deferred debt issuance costs in the accompanying
balance sheet and is being charged to expense over the term of
the guarantee. The remaining warrants vest quarterly and the
number is dependent on the amount of borrowings against the line,
as defined in the warrant agreement. In April, July and October
1997, the Company issued in each month an additional 227,500
warrants. Accordingly, effective April 30, July 31 and October
31, 1997, the estimated fair value of the warrants issued of
$197,000, $120,000 and $6,000, respectively, was recorded as
deferred debt issuance costs and is being charged to expense over
the remaining term of the guarantee. Accumulated amortization
related to the warrants totaled $613,348 at December 31, 1997.
Each warrant expires 10 years from the date of issuance. Warrants
for purchase of 262,476 shares expired unexercised and warrants
for purchase of 112,524 shares were forfeited in December 1997 as a
result of the release of one of the stockholder's guarantee.
On July 30, 1996, the Company entered into a bank line of credit
that permitted borrowings up to $4,000,000 with interest payable
monthly at the prime rate published in The Wall Street Journal.
On August 12, 1996, the amount available under the agreement was
increased to $5,000,000. As of December 31, 1996, the Company had
borrowed $5,000,000 under the agreement. The agreement matured on
January 30, 1997 and was subsequently paid off. The agreement was
guaranteed by certain stockholders of the Company (the
Guarantors). In connection with the execution of the Agreement
and related guarantee, the Company issued the Guarantors warrants
to purchase an aggregate of up to 656,250 shares of common stock
at a weighted-average exercise price of $6.65 per share. The
warrants vested immediately and expire on July 30, 2006.
Accordingly, effective July 31, 1996, the estimated fair value of
the warrants issued under the Agreement of $1,850,000 was
recorded in other current assets as deferred debt issuance costs
and was charged to expense over the term of the agreement.
<PAGE>
6. LINES OF CREDIT (CONTINUED)
In 1995, warrants were issued to certain stockholders related to
the guarantee of a bank line of credit outstanding during that
year. At December 31, 1997, there were 534,091 warrants vested in
connection with the guarantee, originally issued in 1995 at a
weighted-average exercise price of $1.76. Each warrant expires 10
years from the date of issuance. In connection with the warrant
issuance, $71,000 was recorded in other assets as deferred debt
issuance costs and was charged to expense upon the termination of
the related outstanding line of credit in 1995.
7. NOTES PAYABLE TO RELATED PARTIES
In 1997 and 1996, the Company entered into unsecured demand notes
payable with certain major stockholders of the Company with
interest payable on demand at a rate of 8.00%. As of December 31,
1997 and 1996, unsecured demand notes payable of $9,467,741 and
$2,500,000, respectively, were outstanding.
In July 1996, the Company entered into promissory note agreements
totaling $900,000 with two stockholders at an interest rate of
8.25%. In August 1996, the Company repaid the principal and
interest balance of the notes.
The weighted-average stated interest rate on short-term
borrowings outstanding (excluding deferred debt issuance
costs amortization) as of December 31, 1997 and 1996 equaled
8.00%. The Company had no short-term borrowings oustanding as
of December 31, 1995. The Company recorded related-party interest
expense (excluding deferred debt issuance costs amortization)
during 1997 and 1996 of approximately $762,000 and $11,000,
respectively. There were no interest payments made to related
parties in 1997 and 1996.
<PAGE>
8. FINANCIAL INSTRUMENTS
In January 1997, a major stockholder of the Company agreed to
establish a two-year $4,000,000 letter of credit facility in
favor of the Company's credit card processor. As consideration
for establishing the letter of credit, the Company agreed to
issue up to 4,000,000 warrants to the major stockholder to
purchase shares of the Company's common stock at an exercise
price of $1.00. Upon execution of the letter of credit, the
Company issued 1,600,000 warrants that vested immediately.
Accordingly, in January 1997, the estimated fair value of the
warrants issued of $1,900,000 was recorded in other current
assets and is being charged to expense over the term of the
facility. The remaining 2,400,000 warrants vest quarterly
according to the amount of exposure under such letter of credit,
as defined in the agreement. In April, July and October 1997, the
Company issued in each month an additional 400,000 warrants.
Accordingly, effective April, July and October 1997, the
estimated fair value of the warrants issued of $367,000, $211,000
and $14,000, respectively, was recorded as deferred debt issuance
costs and is being charged to expense over the remaining term of
the facility. Accumulated amortization related to the warrants
totaled $1,180,419 at December 31, 1997. Each warrant expires 10
years from the date of issuance. In addition, the Company granted
the major stockholder a security interest in all credit card
receivables processed by the Company's credit card processor.
In May 1997, the Company completed an additional $2,000,000
guarantee facility in favor of the Company's credit card
processor. This guarantee facility expires in January 1999 and
was established by the same major stockholder of the Company. As
consideration for establishing the guarantee, the Company agreed
to issue up to 1,030,928 warrants to the major stockholder to
purchase shares of the Company's common stock at an exercise
price of $1.94. Upon execution of the guarantee, the Company
issued 412,371 warrants that vested immediately. Accordingly, in
May 1997, the estimated fair value of the warrants issued of
$150,000 was recorded in other current assets and is being
charged to expense over the term of the facility. The remaining
618,557 warrants vest quarterly according to the amount of
exposure under such letter of credit, as defined in the
agreement. In August 1997, the Company issued an additional
103,093 warrants, with the estimated fair value of $17,000 being
recorded as deferred debt issuance costs. Each warrant expires 10
years from the date of issuance. Accumulated amortization related
to the warrants totaled $65,000 at December 31, 1997.
<PAGE>
9. INCOME TAXES
A reconciliation of the provision (benefit) for income taxes to
income (benefit) at the federal statutory rate of 34% is as follows:
Year ended December 31
1997 1996 1995
Benefit at statutory
rate $ (9,603,640) $(8,774,744) $(4,146,480)
State benefit,
net of federal
benefit (1,304,965) (1,192,333) (563,433)
Amortization of
deferred debt
issuance costs 724,919 715,001 --
Other (39,586) 12,444 (80,137)
Change in valuation
allowance 10,223,272 9,239,632 4,790,050
$ -- $ -- $ --
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities as of December 31 are as follows:
1997 1996
Deferred tax assets:
Net operating loss carryforwards $24,264,808 $13,928,498
Accrued overhaul maintenance 3,606,808 2,820,339
Accrued vacation 172,076 142,308
Amortization of aircraft
leasehold costs 451,306 293,243
Other 262,757 132,963
Total deferred tax assets 28,757,755 17,317,351
Valuation allowance (25,536,269) (15,312,997)
3,221,486 2,004,354
Deferred tax liabilities:
Prepaid overhaul maintenance 3,029,793 1,842,071
Prepaid insurance 109,687 99,668
Other 82,006 62,615
Total deferred tax liabilities 3,221,486 2,004,354
$ -- $ --
<PAGE>
9. INCOME TAXES (CONTINUED)
The Company has provided a valuation reserve of $25,536,269 and
$15,312,997 as of December 31, 1997 and 1996, respectively, to
fully reserve for net deferred tax assets in the same amounts due
to the uncertainty of their future realization.
As of December 31, 1997, net operating loss carryforwards of
approximately $62,217,000 are available to reduce income taxes of
future years and will begin to expire in 2009, if unused. The
Company made no income tax payments during the years ended
December 31, 1997, 1996 and 1995.
10. LEASES
AIRCRAFT
From the date of inception through December 31, 1997, the Company
has entered into operating lease agreements (collectively, the
Lease Agreements) for nine Boeing 737-200 and two Boeing 737-300
Series aircraft requiring fixed monthly rental payments. The two
Boeing 737-300 Series aircraft were returned upon expiration of
their respective lease terms in 1997. The Company recorded rent
expense for aircraft of approximately $9,261,000, $10,404,000
and $4,613,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
In addition, the Company is required to make supplemental
payments to the aircraft lessors based on the number of
cycles/flight hours, as defined by the Lease Agreements. Certain
supplemental payments are recoverable from the lessor upon the
performance of required engine, airframe, landing gear and
auxiliary power unit overhauls. At December 31, 1997 and 1996,
the Company has recorded approximately $7,769,000 and $4,723,000,
respectively, in supplemental maintenance deposits recoverable
from aircraft lessors.
The Lease Agreements require the Company to pay the entire cost
of the initial overhauls, even though a portion of the cycles or
flight hours were incurred prior to initiation of the Lease
Agreements. Accordingly, at the inception of the lease, the
Company accrued (as accrued maintenance) the portion of the
estimated cost of the initial overhaul pertaining to cycles or
flight hours incurred prior to inception of the lease. The
amounts capitalized as aircraft leasehold costs totaled
approximately $453,000 for the year ended December 31, 1997.
There was no overhaul component capitalized for the year ended
<PAGE>
10. LEASES (CONTINUED)
December 31, 1996. The amounts capitalized as aircraft leasehold
costs totaled approximately $620,000 for the year ended December
31, 1995. The capitalized component is being amortized on the
straight-line method over five to seven years, the estimated
lease terms. Amortization totaled approximately $405,000,
$422,000 and $399,000 for the years ended December 31, 1997,
1996, and 1995, respectively.
The Lease Agreements have lease terms ranging from three to seven
years with the option to extend the lease term for certain
aircraft for two to four additional years. The Company exercised
its option to extend the lease term on four Boeing 737-200
aircraft for two additional years effective December 1997. The
Boeing 737-200 Lease Agreements each have an option to purchase
the aircraft at a value defined by the respective agreement.
SALE AND LEASEBACK OF AIRCRAFT ENGINES
In March 1996, the Company made cash down payments of $260,000
and signed promissory notes totaling $1,000,000 to finance the
purchase of two aircraft engines. In July 1996, the Company
restructured these note agreements, whereby the two aircraft
engines were sold back to the vendor and the vendor subsequently
leased the aircraft engines back to the Company. This transaction
was completed in conjunction with the sale and leaseback of two
additional engines. In total, the Company completed the sale and
leaseback of four aircraft engines under operating leases with
terms ranging from one month to four years. The Company has
purchase and lease renewal options at the projected fair market
values under such agreements. As of the date of these
transactions in July 1996, the book values and related long-term
debt of the aircraft engines totaling approximately $1,525,000
and $959,000, respectively, were removed from the Company's
balance sheet. In addition, the Company reduced accounts payable
due to the lessor, a vendor of the Company, by approximately
$567,000. Gains and losses recorded by the Company in conjunction
with these transactions were immaterial. Fixed rental payments of
approximately $13,000 per engine are due monthly. In addition,
the Company is required to make supplemental payments to the
lessor based on the number of cycles/flight hours the engines are
utilized, as defined by the Lease Agreements.
<PAGE>
10. LEASES (CONTINUED)
OTHER
The Company leases facilities as well as office space for its
corporate headquarters from local airport authorities. These
operating leases have terms ranging from one month to five years.
In addition, the Company leases aircraft engines, certain equipment
and other office space. These operating leases have terms ranging
from one to three years. Total rental expense for operating
leases other than aircraft charged to operations for the years
ended December 31, 1997, 1996 and 1995 were approximately
$2,073,000, $1,574,000 and $634,000, respectively.
Future minimum lease payments under noncancelable operating
leases (excluding supplemental payments) at December 31, 1997
were as follows:
1998 $11,970,548
1999 10,977,050
2000 6,488,831
2001 4,710,425
2002 3,170,000
Total minimum lease payments $37,316,854
11. CONTINGENCIES
The Company is party to various legal proceedings and claims
which arise during the ordinary course of business. In the
opinion of management, the ultimate outcome of these matters will
not have a material adverse effect on the Company's financial
position or results of operations.
12. SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Company entered into a
bridge financing arrangement whereby additional unsecured demand
notes payable totaling $3,000,000 were issued to certain
major stockholders of the Company with interest payable on demand
at a rate of 9.00%.
On March 20, 1998, the Company entered into an agreement for the
private sale of units of securities for proceeds of up to
$4,500,000. Under the terms of the agreement, each unit
consists of one share of Series A Convertible preferred stock
(Series A stock) and one common stock purchase warrant, costing
$10 per unit. In conjunction therewith, the Company
converted $3,024,000 of outstanding principal and interest on the
bridge financing notes payable, described above, to Series A
Convertible preferred stock under the terms of the agreement. Each
warrant will entitle the holder to purchase, at any time over a
seven-year period commencing six months after the closing, 40
shares of common stock at an exercise price of $0.55 per share.
<PAGE>
12. SUBSEQUENT EVENTS (CONTINUED)
The Series A stock will not be redeemable and will pay dividends
at an annual rate of $0.80 per share only, when and if declared
by the Company's Board of Directors. Dividends will not be
cumulative. The liquidation preference of each share of Series A
stock is $10 plus any accrued and unpaid dividends. Each share of
Series A stock is convertible into 20 shares of common stock
(subject to certain antidilution adjustments) at any time
commencing six months after the sale closing, and holders of the
Series A stock will be entitled to voting rights determined on an
as-converted basis. Under the same agreement, the Company has
the option to sell additional units of securities (amounting to
$1,476,000 as of March 20, 1998) at a price of not less than $10
per unit, provided the agreement for said units is executed not
later than 90 days from the initial closing.
In addition, on March 20, 1998, the Company entered into a Note Exchange
Agreement whereby the major stockholders holding the notes payable
of approximately $9.5 million (see Note 7) have agreed to exchange
their existing unsecured demand notes payable, and all accrued
unpaid interest, for new unsecured convertible demand notes
payable (Convertible Notes). The Convertible Notes are
automatically convertible at $0.50 per share at such time as the
Company has an adequate number of authorized shares available
for issuance. The remaining terms of the Convertible Notes
remain unchanged.
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
VANGUARD AIRLINES, INC.
Balance at Charged to
Beginning Charged to Other Deductions Balance at End
of Costs and Accounts-- -- of
Description Period Expenses Describe Describe Period
YEAR ENDED DECEMBER 31, 1997:
Reserves and
allowances
deducted from
asset accounts:
Allowance for
uncollectible
accounts: $ 230,000 $ 253,276 $ -- $129,276/1/ $ 354,000
Valuation
reserve for
deferred tax
assets: $15,312,997 $10,223,272 $ -- $-- $25,536,269
YEAR ENDED DECEMBER 31, 1996:
Reserves and
allowances
deducted from
asset accounts:
Allowance for
uncollectible
accounts: $ 197,000 $32,719 $281 $ -- $ 230,000
Valuation reserve
for deferred
tax assets: $6,073,365 $9,239,632 $-- $ -- $15,312,997
PERIOD ENDED DECEMBER 31, 1995:
Reserves and
allowances
deducted from
asset
accounts:
Allowance for
uncollectible
accounts: $ -- $ 197,000 $-- $ -- $ 197,000
Valuation
reserve
for deferred
tax assets: $1,283,315 $4,790,050 $-- $ -- $ 6,073,365
/1/ amounts charged against the allowance for accounts determined
uncollectible during the year.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VANGUARD AIRLINES, INC.
Dated: March 27, 1998 By:/s/ Robert J. Spane
Robert J. Spane
Chairman of the Board, Chief
Executive Officer and
President
We, the undersigned, directors and officers of Vanguard
Airlines, Inc. (the "Company"), do hereby severally constitute
and appoint Robert J. Spane and William A. Garrett and each or
any of them, our true and lawful attorneys and agents, with full
power of substitution and resubstitution, for him or her and in
his or her name, place and stead, in any and all capacities, to
sign any and all amendments to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, and to
file the same with all exhibits thereto, and all other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys and agents, and each or
any of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully
to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys
and agents, and each of them, or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities indicated and on
the dates indicated.
Signature and Title Date
/s/ Robert J. Spane March 27, 1997
Robert J. Spane, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
/s/ William A. Garrett March 27, 1997
William A. Garrett, Vice President-Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
/s/ Lee M. Gammill, Jr. March 27, 1997
Lee M. Gammill, Jr. Director
/s/ Denis T. Rice March 27, 1997
Denis T. Rice, Director
</TABLE>
CERTIFICATE OF DESIGNATION
of
SERIES A PREFERRED STOCK
of
VANGUARD AIRLINES, INC.
_______________________________________________
(Pursuant to Section 151 of the
Delaware General Corporation Law)
________________________________________________
Vanguard Airlines, Inc., a Corporation organized and
existing under the General Corporation Law of the State of
Delaware (hereinafter called the "Company"), hereby certifies
that the following resolution was adopted by the Board of
Directors of the Company as required by Section 151 of the
General Corporation Law by Unanimous Written Consent duly
executed on January 23, 1998:
RESOLVED, that pursuant to the authority granted to and
vested in the Board of Directors of this Company (hereinafter
called the "Board of Directors" or the "Board") in accordance
with the provisions of the Restated Certificate of Incorporation,
as amended, of the Company (the "Restated Certificate"), the
Board of Directors hereby creates a series of Preferred Stock,
par value $0.001 per share (the "Preferred Stock"), of the
Company and hereby states the designation and number of shares,
and fixes the relative rights, preferences, and limitations
thereof as follows:
Section 1. Designation and Amount. The shares of this
series shall be designated as "Series A Preferred Stock" (the
"Series A Preferred") and the number of shares constituting the
Series A Preferred shall be 450,000. Such number of shares may
be increased or decreased by resolution of the Board of
Directors; provided, that no decrease shall reduce the number of
shares of Series A Preferred to a number less than the number of
shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities
issued by the Company convertible into Series A Preferred.
Section 2. Dividend Provisions. Subject to the rights of
additional series of Preferred Stock that may be designated by
the Board from time to time, the holder of each share of Series A
Preferred shall be entitled to receive, out of funds legally
available for the purpose, dividends at an annual rate of $0.80
per share, as adjusted to reflect stock dividends (except stock
dividends paid with respect to Series A Preferred), stock splits,
<PAGE>
combinations, recapitalizations or the like after the date upon
which shares of Series A Preferred were first issued (the
"Initial Series A Issue Date"), payable when, as, and if declared
by the Board of Directors. Such dividends shall not be
cumulative. The holder of each share of Series A Preferred shall
be entitled to receive the dividend prior and in preference to
any declaration and payment of any dividend (payable other than
in stock of this Company) on the Common Stock.
Section 3. Liquidation Preferences.
(a) In the event of any liquidation, dissolution or winding
up of this Company, either voluntary or involuntary, and subject
to the rights of series of Preferred Stock which may from time to
time come into existence, the holders of shares of Series A
Preferred shall be entitled to receive, prior and in preference
to any distribution of any of the assets of this Company to the
holders of Common Stock by reason of their ownership thereof, an
amount per share equal to the sum of (i) $10.00 for each
outstanding share of Series A Preferred (the "Original Series A
Issue Price") and (ii) an amount equal to declared but unpaid
dividends on such share, such amounts being adjusted to reflect
stock dividends (except stock dividends paid with respect to
Series A Preferred), stock splits, combinations,
recapitalizations or the like after the Initial Series A Issue
Date. If, upon the occurrence of such event, the assets and
funds thus distributed among the holders of the Series A
Preferred shall be insufficient to permit the payment to such
holders of the full aforesaid preferential amounts, then, subject
to the rights of series of Preferred Stock which may from time to
time come into existence, the entire assets and funds of the
Company legally available for distribution to the holders of the
Series A Preferred shall be distributed ratably among the holders
of shares of Series A Preferred in proportion to the preferential
amount each such holder is otherwise entitled to receive.
(b) Upon the completion of the distribution required by
subsection (a) above and any other distribution which may be
required with respect to other series of Preferred Stock which
may from time to time come into existence, the remaining assets
of the Company available for distribution to holders shall be
distributed (i) if such distribution shall occur prior to July
15, 1998, among the holders of Series A Preferred and Common
Stock pro rata based on the number of shares of Common Stock held
by each (assuming full conversion of all such Series A Preferred)
and (ii) if such distribution shall occur after July 15, 1998,
among the holders of Common Stock pro rata based on the number of
shares of Common Stock held by each.
(c) (i) For purposes of this Section 3, a liquidation,
dissolution or winding up of this Company shall be deemed to be
occasioned by, or to include, (A) the acquisition of the Company
by another entity by means of any transaction or series of
related transactions (including, without limitation, any
reorganization, merger or consolidation that results in the
transfer of fifty percent (50%) or more of the outstanding voting
power of the Company); or (B) a sale of all or substantially all
of the assets of the Company.
<PAGE>
(ii) In any of such events, if the consideration
received by the Company or its stockholders is other than cash,
its value will be deemed its fair market value. Any securities
shall be valued as follows:
A. Securities not subject to investment letter
or other similar restrictions on free marketability covered
by (B) below:
(1) If traded on a securities exchange or
through the Nasdaq National Market, the value shall be deemed to
be the average of the closing prices of the securities on such
exchange over the thirty (30) day period ending three (3) days
prior to the closing;
(2) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or
sale prices (whichever is applicable) over the thirty (30) day
period ending three (3) days prior to the closing; and
(3) If there is no active public market, the
value shall be the fair market value thereof, as mutually
determined by the Company and the holders of at least a majority
of the voting power of all then outstanding shares of Preferred
Stock.
(B) The method of valuation of securities subject
to investment letter or other restrictions on free marketability
(other than restrictions arising solely by virtue of a
stockholder's status as an affiliate or former affiliate) shall
be to make an appropriate discount from the market value
determined as above in (A)(1), (2) or (3) to reflect the
approximate fair market value thereof, as mutually determined by
the Company and the holders of at least a majority of the voting
power of all then outstanding shares of such Preferred Stock.
(iii) In the event the requirements of this
subsection 3(c) are not complied with, this Company, shall
forthwith either:
(A) cause such closing to be postponed until such
time as the requirements of this Section 3 have been complied
with; or
(B) cancel such transaction, in which event the
rights, preferences and privileges of the holders of the Series A
Preferred shall revert to and be the same as such rights,
preferences and privileges existing immediately prior to the date
of the first notice referred to in subsection 3(c)(iv) hereof.
(iv) The Company shall give each holder of record of
Series A Preferred written notice of such impending transaction
not later than twenty (20) days prior to the stockholders'
meeting called to approve such transaction, or twenty (20) days
prior to the closing of such transaction, whichever is earlier,
and shall also notify such holders in writing of the final
approval of such transaction. The first of such notices shall
describe the material terms and conditions of the impending
transaction and the <PAGE> provisions of this Section 3, and the Company
shall thereafter give such holders prompt notice of any material
changes. The transaction shall in no event take place sooner
than twenty (20) days after the Company has given the first
notice provided for herein or sooner than ten (10) days after the
Company has given notice of any material changes provided for
herein; provided, however, that such periods may be shortened
upon the written consent of the holders of Series A Preferred
that are entitled to such notice rights or similar notice rights
and that represent at least a majority of the voting power of all
then outstanding shares of such Series A Preferred.
Section 4. Redemption. The Series A Preferred is not
redeemable.
Section 5. Conversion. The holders of Series A Preferred
shall have conversion rights as follows (the "Conversion
Rights"):
(a) Right to Convert.
(i) Each share of Series A Preferred shall be
convertible at the option of the holder thereof, at any time
after July 15, 1998, at the office of this Company or any
transfer agent for the Series A Preferred, into the number of
fully paid and non-assessable shares of Common Stock as is
determined by dividing $10.00 by the Conversion Price, determined
as hereinafter provided, in effect at the time of conversion. The
initial Conversion Price (the "Conversion Price") shall be $0.50.
Such initial Conversion Price shall be subject to adjustment as
hereinafter provided. The number of shares of Common Stock into
which a share of Series A Preferred is convertible is hereinafter
referred to as the "Conversion Rate".
(b) Mechanics of Conversion. Before any holder of Series
A Preferred shall be entitled to convert the same into shares of
Common Stock, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of this
Company or of any transfer agent for the Series A Preferred, and
shall give written notice to this Company at such office that he
elects to convert the same, and shall state therein the name or
names which he wishes the certificate or certificates for shares
of Common Stock to be issued. This Company shall, as soon as
practicable thereafter, issue and deliver at such office to each
holder of Series A Preferred, or to his nominee or nominees, a
certificate or certificates for the number of shares of Common
Stock to which he shall be entitled. Such conversion shall be
deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Series A
Preferred to be converted, and the person or persons entitled to
receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders
of such shares of Common Stock on such date.
(c) Fractional Shares. No fractional shares shall be
issued upon conversion of the Series A Preferred. In lieu of the
Company issuing any fractional shares to holders upon the
conversion of the Series A Preferred, the Company shall pay to
such holders an amount equal to the product obtained by
multiplying the Conversion Price by the fraction of a share not
issued pursuant to the previous sentence.
<PAGE>
(d) Adjustment for Dilutive Issuances.
(i) (A) If this Company shall issue, after the
Initial Series A Issue Date to and including March 18, 2001, any
Additional Stock (as defined below) without consideration or for
a consideration per share less than the Conversion Price for such
series in effect immediately prior to the issuance of such
Additional Stock, the Conversion Price for such series in effect
immediately prior to each such issuance shall forthwith (except
as otherwise provided in this clause (i)) be adjusted to a price
equal to the price paid per share for such Additional Stock;
provided, however that the Conversion Price shall not be adjusted
to a price below $0.10 (as adjusted for stock dividends, stock
splits, combinations, recapitalizations or like changes in the
Company's capital structure).
(B) Except to the limited extent provided for in
subsections (E)(3) and (E)(4), no adjustment of such Conversion
Price pursuant to this subsection 5(d)(i) shall have the effect
of increasing the Conversion Price above the Conversion Price in
effect immediately prior to such adjustment.
(C) In the case of the issuance of Common Stock
for cash, the consideration shall be deemed to be the amount of
cash paid therefor before deducting any reasonable discounts,
commissions or other expenses allowed, paid or incurred by this
Company for any underwriting or otherwise in connection with the
issuance and sale thereof.
(D) In the case of the issuance of the Common
Stock for a consideration in whole or in part other than cash,
the consideration other than cash shall be deemed to be the fair
value thereof as determined by the Board of Directors
irrespective of any accounting treatment.
(E) In the case of the issuance (whether before,
on or after the applicable purchase date) of options to purchase
or rights to subscribe for Common Stock, securities by their
terms convertible into or exchangeable for Common Stock or
options to purchase or rights to subscribe for such convertible
or exchangeable securities, the following provisions shall apply
for all purposes of this subsection 5(d)(i) and subsection
5(d)(ii):
(1) The shares of Common Stock deliverable
upon exercise (to the extent then exercisable) of such options to
purchase or rights to subscribe for Common Stock shall be deemed
to have been issued at the time such options or rights were
issued and for a consideration equal to the consideration
(determined in the manner provided in subsections 5(d)(i)(C) and
(d)(i)(D)), if any, received by this Company upon the issuance of
such options or rights plus the minimum exercise price provided
in such options or rights for the Common Stock covered thereby.
(2) The shares of Common Stock deliverable
upon conversion of, or in exchange (to the extent then
convertible or exchangeable) for, any such convertible or
exchangeable securities or upon the exercise of options to
<PAGE>
purchase or rights to subscribe for such convertible or
exchangeable securities and subsequent conversion or exchange
thereof shall be deemed to have been issued at the time such
securities were issued or such options or rights were issued and
for a consideration equal to the consideration, if any, received
by this Company for any such securities and related options or
rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the minimum additional
consideration, if any, to be received by this Company upon the
conversion or exchange of such securities or the exercise of any
related options or rights (the consideration in each case to be
determined in the manner provided in subsections 5(d)(i)(C) and
(d)(i)(D)).
(3) In the event of any change in the
consideration payable to this Company upon exercise of such
options or rights or upon conversion of or in exchange for such
convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions
thereof, the Conversion Price of the Series A Preferred, to the
extent in any way affected by such options, rights or securities,
shall be recomputed to reflect such change, but no further
adjustment shall be made for the actual issuance of Common Stock
or any payment of such consideration upon the exercise of any
such options or rights or the conversion or exchange of such
securities.
(4) Upon the expiration of any such options
or rights, the termination of any such rights to convert or
exchange or the expiration of any options or rights related to
such convertible or exchangeable securities, the Conversion Price
of the Series A Preferred, to the extent in any way affected by
such options, rights or securities or options or rights related
to such securities, shall be recomputed to reflect the issuance
of only those shares of Common Stock (and convertible or
exchangeable securities that remain in effect) actually issued
upon the exercise of such options or rights, upon the conversion
or exchange of such securities or upon the exercise of the
options or rights related to such securities.
(5) The shares of Common Stock deemed issued
and the consideration deemed paid therefor pursuant to
subsections 5(d)(i)(E)(1) and (2) shall be appropriately adjusted
to reflect any change, termination or expiration of the type
described in either subsection 5(d)(i)(E)(3) or (4).
(ii) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to
subsection 5(d)(i)(E)) by this Company after the Initial Series A
Issue Date other than:
(A) Common Stock issued pursuant to a transaction
described in subsection 5(e) hereof; or
(B) Shares of Common Stock issuable or issued to
employees, consultants, directors or vendors (if in transactions
with primarily non-financing purposes) of this Company directly
or pursuant to a stock option plan, <PAGE> employee stock purchase plan
or other plan or agreement approved by the Board of Directors of
this Company.
(e) Stock Splits and Dividends. In the event this Company
should at any time or from time to time after the Initial
Series A Issue Date fix a record date for the effectuation of a
split or subdivision of the outstanding shares of Common Stock or
the determination of holders of Common Stock entitled to receive
a dividend or other distribution payable in additional shares of
Common Stock or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly,
additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration
by such holder for the additional shares of Common Stock or the
Common Stock Equivalents (including the additional shares of
Common Stock issuable upon conversion or exercise thereof), then,
as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed),
the Conversion Price of the Series A Preferred shall be
appropriately decreased so that the number of shares of Common
Stock issuable on conversion of each share of such series shall
be increased in proportion to such increase of the aggregate of
shares of Common Stock outstanding and those issuable with
respect to such Common Stock Equivalents with the number of
shares issuable with respect to Common Stock Equivalents
determined from time to time in the manner provided for deemed
issuances in subsection 5(d)(i)(E).
(f) Combinations. If the number of shares of Common Stock
outstanding at any time after the Initial Series A Issue Date is
decreased by a combination of the outstanding shares of Common
Stock, then, following the record date of such combination, the
Conversion Price for the Series A Preferred shall be
appropriately increased so that the number of shares of Common
Stock issuable on conversion of each share of Series A Preferred
shall be decreased in proportion to such decrease in outstanding
shares.
(g) Other Distributions. In the event this Company shall
declare a distribution payable in securities of other persons,
evidences of indebtedness issued by this Company or other
persons, assets (excluding cash dividends) or options or rights
not referred to in subsection 5(e), then, in each such case for
the purpose of this subsection 5(g), the holders of the Series A
Preferred shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of
shares of Common Stock of this Company into which their shares of
Series A Preferred are convertible as of the record date fixed
for the determination of the holders of Common Stock of this
Company entitled to receive such distribution.
(h) Recapitalizations. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than
a subdivision, combination or merger or sale of assets
transaction provided for elsewhere in this Section 5 or
Section 3) provision shall be made so that the holders of the
Series A Preferred shall thereafter be entitled to receive upon
conversion of the Series A Preferred the number of shares of
<PAGE>
stock or other securities or property of the Company or
otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In
any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 5 with respect to
the rights of the holders of the Series A Preferred after the
recapitalization to the end that the provisions of this Section 5
(including adjustment of the Conversion Price then in effect and
the number of shares purchasable upon conversion of the Series A
Preferred) shall be applicable after that event as nearly
equivalent as may be practicable.
(i) No Impairment. This Company will not, by amendment of
its Restated Certificate or through any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid
the observance or performance of any of the terms to be observed
or performed hereunder by this Company, but it will at all times
in good faith assist in the carrying out of all of the provisions
of this Section 5 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion
Rights of the holders of the Series A Preferred against
impairment.
(j) Certificate as to Adjustments. Upon the
occurrence of each adjustment or readjustment of the Conversion
Price of the Series A Preferred pursuant to this Section 5, this
Company, at its expense, shall promptly compute such adjustment
or readjustment in accordance with the terms hereof and prepare
and furnish to each holder of such Series A Preferred a
certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or
readjustment is based. This Company shall, upon the written
request at any time of any holder of Series A Preferred, furnish
or cause to be furnished to such holder a like certificate
setting forth (A) such adjustment and readjustment, (B) the
Conversion Price at the time in effect, and (C) the number of
shares of Common Stock and the amount, if any, of other property
which at the time would be received upon the conversion of a
share of Series A Preferred.
(k) Notices of Record Date. In the event of any taking by
this Company of the record of the holders of any class of
securities for the purpose of determining the holders thereof who
are entitled to receive any dividend (other than a cash dividend)
or other distribution, this Company shall mail to each holder of
Series A Preferred, at least twenty (20) days prior to the date
specified herein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend or
distribution.
(l) Reservation of Stock. This Company shall at all times
reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the
conversion of the shares of the Series A Preferred such number of
its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of
Series A Preferred; and if at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all the then outstanding shares of the
Series A Preferred, this Company will <PAGE> take such corporate action
as may be necessary, in the opinion of its counsel, to increase
its authorized but unissued shares of Common Stock to such number
of shares as shall be sufficient for such purpose.
(m) Notices. Any notice required by the provisions of this
Section 5 to be given to the holders of shares of Series A
Preferred shall be deemed given if deposited in the United States
mail, postage prepaid, and addressed to each holder of record at
his or her address appearing on the books of this Company.
Section 6. Voting Rights.
(a) The holder of each share of Series A Preferred shall
have the right to one vote for each share of Common Stock into
which such Series A Preferred could then be converted, and with
respect to such vote, such holder shall have full voting rights
and powers equal to the voting rights and powers of the holders
of Common Stock, and shall be entitled, notwithstanding any
provision hereof, to notice of any stockholders' meeting in
accordance with the bylaws of this Company, and shall be entitled
to vote, together with holders of Common Stock, with respect to
any question upon which holders of Common Stock have the right to
vote. Fractional votes shall not, however, be permitted and any
fractional voting rights available on an as-converted basis
(after aggregating all shares into which shares of Series A
Preferred held by each holder could be converted) shall be
rounded to the nearest whole number (with one-half being rounded
upward).
(b) So long as shares of the Series A Preferred Stock are
outstanding, this Company shall not, without first obtaining the
approval (by vote or written consent, as provided by law) of at
least fifty percent (50%) of the then outstanding shares of the
Series A Preferred Stock, voting together as a single class on an
as-converted basis, (i) alter or change the rights, preferences,
or privileges of the Series A Preferred Stock so as to affect
adversely such series of Preferred Stock or (ii) increase the
authorized number of shares of Series A Preferred Stock.
<PAGE>
IN WITNESS WHEREOF, this Certificate of Designation is
executed on behalf of the Company this 18th day of March, 1998.
VANGUARD AIRLINES, INC.
By:
Title: Chief Executive Officer &
President
AIRCRAFT LEASE AGREEMENT
Dated as of
November 18, 1997
between
MIMI LEASING CORP.
as
Lessor
and
VANGUARD AIRLINES, INC.
as
Lessee
in respect of Boeing 737 Aircraft,
Serial Number 19607,
U.S. Federal Aviation Registration No. N912MP
<PAGE>
THIS AIRCRAFT LEASE AGREEMENT (this "Agreement") is made as
of the 18th day of November, 1997 between MIMI LEASING CORP., an
Iowa corporation whose principal office is at 600 Sunset Ridge,
Dubuque, Iowa 52003, its successors and assigns ("Lessor"), and
VANGUARD AIRLINES, INC., a company incorporated under the laws of
the State of Delaware whose chief executive office is at 30 N.W.
Rome Circle, Mezzanine Level, Kansas City International Airport,
Kansas City, Missouri 64153 ("Lessee").
WHEREAS, Lessor wishes to lease to Lessee, and Lessee is
willing to lease from Lessor, the Aircraft (as defined herein) on
the terms of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises,
covenants and agreements of the parties herein set forth, Lessor
and Lessee agree as follows:
1. INTERPRETATION
1.1 DEFINITIONS
In this Agreement, the following terms have the meanings set
forth below:
ACCEPTANCE LOCATION Such location in the United States
of America as Lessor and Lessee may
agree.
ADVANCE RENT The amount of Rent payable in
advance pursuant to paragraph 2
of the Letter Agreement.
AGREED MAINTENANCE
PERFORMER Lessee (up to and including B Check)
or any FAA approved maintenance
facility (for C Check and higher) or
any other person agreed to from time
to time in writing by Lessor (such
agreement not to be unreasonably
withheld).
AGREED MAINTENANCE
PROGRAM The Maintenance Program agreed to
from time to time in writing by
Lessor (such agreement not to be
unreasonably withheld).
AGREED VALUE $5,350,000 or, if higher, the
appraised value of the Aircraft most
recently determined by an appraiser
selected by Lessor in writing and
provided to Lessee from appraisers
<PAGE>
experienced in valuing Boeing 737
aircraft.
AIR AUTHORITY The FAA.
AIRCRAFT The aircraft described in Part 1 of
Schedule 1 (which term includes,
where the context permits, a
separate reference to all Engines,
Parts and Aircraft Documents).
AIRCRAFT DEPOSITS All amounts payable pursuant to
Section 5.1.
AIRCRAFT DOCUMENTS The documents, data and records
identified in Part 2 of Schedule 1
and all additions, renewals, revi-
sions and replacements from time to
time made in accordance with this
Agreement.
AIRFRAME The Aircraft, excluding the Engines
and Aircraft Documents.
APU The auxiliary power unit installed
on the Aircraft on the Delivery Date
and any replacement auxiliary power
unit installed in accordance with
this Agreement.
BANKS Such financial institution(s) or
other lenders which from time to
time finance(s) the Aircraft for
Lessor and/or for whose benefit
security over, or rights relating
to, the Aircraft and/or this
Agreement is granted by Lessor or at
its request.
BOEING The Boeing Company, a Delaware
corporation with its principal
office in Seattle, Washington.
BUSINESS DAY A day (other than a Saturday or
Sunday) on which business of the
nature required by this Agreement is
carried out in the State of Iowa or
where used in relation to payments
on which banks are open for banking
business in Cedar Rapids, Iowa and
Kansas City, Missouri.
<PAGE>
CERTIFICATED AIR
CARRIER Any corporation (except the United
States Government) domiciled in the
United States of America and holding
a Certificate of Convenience and
Necessity issued under 49 U.S.C.
Section 41102 by the Department of
Transportation or any predecessor or
successor agency thereto and an Air
Carrier Certificate issued by the
FAA under 49 U.S.C. Section 44705, or, in
the event such Certificates shall no
longer be issued, any corporation
(except the United States Govern-
ment) domiciled in the United States
of America and legally engaged in
the business of transporting for
hire passengers or cargo by air
predominantly to, from or between
points within the United States of
America, and, in either event, oper-
ating commercial jet aircraft, which
also is certificated so as to fall
within the purview of Section 1110
of Title 11 of the United States
Code or any similar statute.
COLD SECTION
REFURBISHMENT The completion of the following
tasks with respect to an Engine:
completely unstack both high and low
compressors and accomplish complete
visual inspection; de-blade disks as
necessary; accomplish visual
inspections of all disks; measure to
assure all snap diameters on disks
are within limits; inspect blades
for proper chord dimensions and
cracking; repair or replace blades
below minimums; inspect and repair
stators as necessary; blade up disks
using new lock plates; assemble
compressor rotors; balance both
rotors; and install rotors in such
Engine.
CYCLE One take-off and landing of the
Aircraft.
DAMAGE NOTIFICATION
THRESHOLD $200,000.
<PAGE>
DEFAULT Any Event of Default and any event
or condition which with the giving
of notice or lapse of time would
constitute an Event of Default.
DELIVERY DATE The date on which the Aircraft is
tendered for delivery by Lessor in
the condition required by Section
4.2 and Schedule 1 in accordance
with this Agreement.
DELIVERY LOCATION Kansas City, Missouri, or such other
location as the parties may agree.
DOLLARS AND $ The lawful currency of the United
States of America.
ENGINE Whether or not installed on the
Aircraft:
(a) each engine of the manufacture
and model specified in Part 1
of Schedule 1 (each of which
has 750 or more rated takeoff
horsepower or the equivalent
of such horsepower) which
Lessor tenders to Lessee with
the Aircraft on the Delivery
Date, such engines being
described as to serial numbers
on the certificate of
acceptance to be executed by
Lessee upon delivery of the
Aircraft; or
(b) any engine which has replaced
that engine, title to which
has, or should have, passed to
Lessor in accordance with this
Agreement;
and in each case includes all
modules and Parts from time to
time belonging to or installed
in that engine but excludes
any properly replaced engine,
title to which has, or should
have, passed to Lessee pursu-
ant to this Agreement.
EVENT OF DEFAULT An event or condition specified in
Section 13.1.
<PAGE>
EVENT OF LOSS With respect to the Aircraft
(including for the purposes of this
definition the Airframe):
(a) the actual or constructive
total loss of the Aircraft
(including any damage to the
Aircraft which results in an
insurance settlement on the
basis of a total loss, or
requisition for use or hire
which results in an insurance
settlement on the basis of a
total loss); or
(b) it being destroyed, damaged
beyond repair or permanently
rendered unfit for normal use
for any reason whatsoever; or
(c) the requisition of title, or
other compulsory acquisition,
capture, seizure, deprivation,
confiscation or detention for
any reason of the Aircraft by
the government of the State of
Registration or other
competent authority (whether
de jure or de facto), but
excluding requisition for use
or hire not involving requisi-
tion of title; or
(d) the hijacking, theft, condem-
nation, confiscation, seizure
or requisition for use or hire
of the Aircraft which deprives
any person permitted by this
Agreement to have possession
and/or use of the Aircraft of
its possession and/or use for
more than 15 days.
EXCUSABLE DELAY With respect to delivery of the
Aircraft, delay or non-performance
due to or arising out of acts of God
or public enemy, civil war,
insurrection or riot, fire, flood,
explosion, earthquake, accident,
epidemic, quarantine restriction,
any act of government, governmental
priority, allocation, regulation or
<PAGE>
order affecting directly or
indirectly, the Aircraft, any
vendor, Lessor or any materials or
facilities which are necessary for
the delivery of the Aircraft in
accordance with, and in the
condition required by this
Agreement, strike or labor dispute
causing cessation, slowdown or
interruption of work which are
necessary for the delivery of the
Aircraft in accordance with, and in
the condition required by this
Agreement, inability after due and
timely diligence to procure
equipment, data or materials which
are necessary for the delivery of
the Aircraft in accordance with, and
in the condition required by this
Agreement from manufacturers,
suppliers, any existing owner,
seller or lessee in a timely manner,
damage to the Aircraft, destruction
or loss of the Aircraft, or any
other cause to the extent that such
cause is beyond the control of
Lessor.
EXPIRATION DATE Subject to Section 4.6, the day
preceding the numerically corre-
sponding day 60 months after the
Delivery Date or, if earlier, the
date on which:
(a) the Aircraft has been
redelivered in accordance with
this Agreement; or
(b) Lessor receives the Agreed
Value following an Event of
Loss.
FAA The Federal Aviation Administration
of the United States of America and
any successor thereof.
FEDERAL AVIATION ACT 49 U.S.C. Subtitle VII, as amended,
or any similar legislation of the
United States of America enacted in
substitution or replacement thereof.
<PAGE>
FINANCING STATEMENTS Uniform Commercial Code Financing
Statements in respect of this
Agreement and the collateral
described therein prepared in a form
acceptable for filing with the
applicable Government Entities in
the Habitual Base, the State in
which the chief executive office (as
that term is defined in Article 9 of
the Uniform Commercial Code as in
effect in the State of Missouri) and
such other jurisdiction as Lessor
shall reasonably require.
FLIGHT HOUR Each hour or part thereof (rounded
to two decimal places) elapsing from
the moment the wheels of the
Aircraft leave the ground on take
off until the wheels of the Aircraft
next touch the ground.
GOVERNING LAW The laws of the State of Iowa.
GOVERNMENT ENTITY Any of the following:
(a) any national government,
political subdivision thereof,
or local jurisdiction therein;
(b) any instrumentality, board,
commission, court or agency of
any thereof, however
constituted; and
(c) any association, organization,
or institution of which any of
the above is a member or to
whose jurisdiction any thereof
is subject or in whose activi-
ties any of the above is a
participant.
HABITUAL BASE The State of Missouri, or, subject
to the prior written consent of
Lessor, any other state, country or
countries in which the Aircraft is
for the time being habitually based.
HOT SECTION
REFURBISHMENT The complete visual inspection and
repair as necessary of the com-
bustion section of an Engine. In
<PAGE>
conducting such inspection and
repair, the engine shop must
completely unstack the high pressure
turbine and accomplish complete
visual inspection; de-blade disks as
necessary; accomplish visual
inspections of all disks; measure to
assure all snap diameters on disks
are within limits; inspect blades
for proper chord dimensions and
cracking; repair or replace blades
below minimums; inspect and repair
stators as necessary; blade up disks
using new lock plates; assemble
compressor rotors, balance both
rotors; and install rotors in such
Engine.
INDEMNITEES Each of Lessor and Banks and any of
their respective successors and
assigns, shareholders, subsidiaries,
affiliates, partners, contractors,
directors, officers, servants,
agents and employees.
LANDING GEAR The landing gear assembly of the
Aircraft excluding any rotable
components.
LESSOR LIEN Any of the following:
(a) any security interest
whatsoever from time to time
created by or through Lessor
in connection with the
financing of the Aircraft;
(b) any other security interest in
respect of the Aircraft which
results from acts of or claims
against Lessor not related to
the transactions contemplated
by or permitted under this
Agreement; and
(c) liens in respect of the
Aircraft for Lessor Taxes.
LESSOR TAXES Taxes:
(a) imposed as a result of
activities of Lessor in the
<PAGE>
jurisdiction imposing the
liability unrelated to
Lessor's dealings with Lessee
with respect to the Aircraft
or to the transactions contem-
plated by this Agreement or
the operation of the Aircraft
by Lessee; or
(b) imposed on or measured by the
gross or net income, profits,
capital or gains of Lessor by
any Government Entity in the
United States of America; or
(c) imposed with respect to (i)
any period prior to the
Delivery Date, (ii) any event
occurring prior to the
Delivery Date (other than the
execution of this Agreement),
or (iii) any period commencing
or event occurring after the
Expiration Date; or
(d) penalties, surcharges, fines
or interest which otherwise
would not be Lessor Taxes but
which are imposed as a direct
result of (i) the failure of
Lessor to timely and properly
file a tax return or to pay
any Taxes which are required
to be filed or paid by Lessor;
or (ii) the failure by Lessor
to timely and properly furnish
to Lessee any information,
document or signature required
by Lessee in order for Lessee
to timely and properly file a
tax return or to pay any Taxes
on behalf of Lessor which
Lessee is obligated to do
hereunder; or
(e) imposed by reason of the gross
negligence or wilful
misconduct of Lessor (or any
assignee of Lessor);
(f) imposed on Lessor as a direct
result of an assignment or
<PAGE>
disposition by Lessor of the
Aircraft, any interest in or
with respect to the Aircraft,
or any interest in or with
respect to this Agreement or
the Rent; or
(g) any Taxes based or measured by
any fees received by any
Trustee holding title to the
Aircraft on behalf of the
Lessor; or
(h) any Tax imposed on, resulting
from, or which would not have
occurred but for a Lessor
Lien.
LETTER AGREEMENT Letter Agreement of even date
herewith between Lessor and Lessee
in respect of the Aircraft, the
terms of which constitute an
integral part of this Agreement.
MAINTENANCE PROGRAM An FAA-approved maintenance program
for the Aircraft encompassing
scheduled maintenance (including
block maintenance), condition
monitored maintenance, and/or
on-condition maintenance of
Airframe, Engines and Parts,
including but not limited to,
servicing, testing, preventive
maintenance, repairs, structural
inspections, system checks,
overhauls, approved modifications,
service bulletins, engineering
orders, airworthiness directives,
corrosion control, inspections and
treatments.
MAINTENANCE RESERVES All amounts payable under
section 5.4(a).
MAJOR CHECKS Any C-Check, multiple C-Check, Q-Check,
D-Check or annual heavy
maintenance visit or segment thereof
suggested for commercial aircraft of
the same model as the Aircraft by
its manufacturer (however
denominated) as set out in the
Agreed Maintenance Program.
<PAGE>
MANUFACTURER Boeing.
MINIMUM LIABILITY
COVERAGE $400,000,000 on each occurrence.
OTHER AGREEMENTS Any agreement (other than this
Agreement) made or to be made
between Lessor (or an affiliate,
associate or subsidiary of Lessor)
and Lessee (or a Subsidiary of
Lessee), including, but not limited
to, that certain Aircraft Lease
Agreement dated as of December 11,
1995 between Mimi Leasing Corp. and
Lessee, that certain Aircraft Lease
Agreement dated as of May 31, 1997
between Interlease Aviation
Investors III (TACA), L.L.C. and
Lessee and that certain Aircraft
Lease Agreement dated as of
September 18, 1997 between
Interlease Aviation Investors II
(Aloha), L.L.C. and Lessee.
PART Whether or not installed on the
Aircraft:
(a) any component, furnishing or
equipment (other than a
complete Engine) furnished
with the Aircraft on the
Delivery Date; and
(b) any other component,
furnishing or equipment (other
than a complete Engine) title
to which has, or should have
passed to Lessor pursuant to
this Agreement;
but excludes any such items, title
to which has, or should have, passed
to Lessee pursuant to this
Agreement.
PERMITTED LIEN The following, and only the
following:
(a) any lien for Taxes not
assessed or, if assessed, not
yet due and payable, or being
<PAGE>
contested in good faith by
appropriate proceedings;
(b) any lien of a repairer,
mechanic, carrier, hangar-
keeper or other similar lien
arising in the ordinary course
of business or by operation of
law in respect of obligations
which are not overdue or are
being contested in good faith
by appropriate proceedings;
but only if (in the case of both (a)
and (b)) (i) adequate reserves have
been provided by Lessee for the
payment of the Taxes or obligations;
and (ii) such proceedings, or the
continued existence of the lien, do
not give rise to any likelihood of
the sale, forfeiture or other loss
of the Aircraft or any interest
therein or of criminal liability on
Lessor or any Bank; and
(c) any Lessor Lien.
PERSON Any individual person, corporation,
partnership, limited liability
company or partnership, firm, joint
stock company, joint venture, trust,
estate, unincorporated organization,
association, Government Entity, or
organization or association of which
any of the above is a member or a
participant.
PRIME RATE The rate of interest most recently
announced by Lessor's bank as its
prime rate, as in effect from time
to time.
REDELIVERY LOCATION Kansas City, Missouri, or such other
location as the parties may agree.
RENT All amounts payable pursuant to
section 5.3.
RENTAL PERIOD Each period ascertained in
accordance with section 5.2.
RENT DATE The first day of each Rental Period.
<PAGE>
SECURITY INTEREST Any mortgage, charge, pledge, lien,
assignment, hypothecation, right of
set off or any agreement or arrange-
ment having the effect of creating a
security interest other than a
Permitted Lien, or any agreement to
create the foregoing other than a
Permitted Lien.
STATE OF INCORPORATION The State of Delaware.
STATE OF REGISTRATION The United States of America.
SUBSIDIARY (a) in relation to any reference
to financial statements, any
company whose accounts are
consolidated with the accounts
of Lessee in accordance with
accounting principles
generally accepted under
accounting standards of the
State of Incorporation; and
(b) for any other purpose an
entity from time to time:
(i) of which another has
direct or indirect
control or owns
directly or indirectly
more than fifty (50)
percent of the voting
share capital; or
(ii) which is a direct or
indirect subsidiary of
another under the laws
of the jurisdiction of
its incorporation.
TAXES Taxes, duties and the like of all
kinds and any other amount
corresponding to any taxation,
together with any penalties, fines,
surcharge or interest thereon, which
are imposed by any Government Entity
or other competent authority having
power to collect public charges.
TERM The period commencing on the
Delivery Date and ending on the
Expiration Date.
<PAGE>
1.2 CONSTRUCTION
(a) In this Agreement, unless a contrary intention is
expressly stated, a reference to:
(i) each of "Lessor" or "Lessee" or any
other person includes without prejudice to the provisions of
this Agreement any successor in title to it and any
permitted assignee;
(ii) words importing the plural shall include
the singular and vice versa;
(iii) any document shall include that document
as amended, modified, novated or supplemented;
(iv) a law [A] includes any statute, decree,
constitution, regulation, order, judgment or directive of
any Government Entity; [B] includes any treaty, pact,
compact or other agreement to which any Government Entity is
a signatory or party; [C] includes any judicial or adminis-
trative interpretation or application thereof and [D] is a
reference to that provision as amended, substituted or
re-enacted;
(v) a Section or a Schedule is a reference
to a section of or a schedule to this Agreement; and
(b) The headings in this Agreement are for convenience
only and shall not be considered part of any Section for purposes
of construing this Agreement.
2. REPRESENTATIONS AND WARRANTIES
2.1 LESSEE'S REPRESENTATIONS AND WARRANTIES: Lessee
represents and warrants to Lessor that:
(a) STATUS. Lessee is a corporation duly incorporated
and validly existing in good standing under the laws of the State
of Incorporation and has the corporate power to own its assets
and carry on its business as it is being conducted and is the
holder of all necessary air transportation licenses required in
connection therewith and with the use and operation of the
Aircraft;
(b) POWER AND AUTHORITY. Lessee has the corporate
power to enter into and perform, and has taken all necessary
corporate action to authorize the entry into, performance and
delivery of, this Agreement and the transactions contemplated by
this Agreement;
<PAGE>
(c) LEGAL VALIDITY. This Agreement constitutes
Lessee's legal, valid and binding obligation, enforceable against
Lessee in accordance with its terms;
(d) NO CONFLICTS, ETC. The entry into and performance
by Lessee of, and the transactions contemplated by, this
Agreement do not and will not:
(i) conflict with any laws binding on
Lessee; or
(ii) conflict with any provisions of the
organizational documents of Lessee, or
(iii) conflict with or result in default under
any indenture, mortgage, chattel mortgage, deed of trust,
conditional sales contract, lease, bank loan or credit
agreement or other agreement which is binding upon Lessee or
any of its assets nor result in the creation of any Security
Interest over any of its assets;
(e) AUTHORIZATIONS. All authorizations, consents,
registrations and notifications required in connection with the
entry into, performance, validity and enforceability of, this
Agreement and the transactions contemplated by this Agreement,
have been (or will on or before the Delivery Date have been)
obtained by Lessee or effected (as appropriate) and are (or will
on their being obtained or effected be) in full force and effect;
(f) NO IMMUNITY.
(i) Lessee is subject to civil U.S.
commercial law with respect to its obligations under this
Agreement; and
(ii) neither Lessee nor any of its assets is
entitled to any right of immunity and the entry into and
performance of this Agreement by Lessee constitute private
and commercial acts;
(g) FINANCIAL STATEMENTS. The audited consolidated
financial statements of Lessee and its Subsidiaries most recently
delivered to Lessor:
(i) have been prepared in accordance with
United States generally accepted accounting principles
applied consistently with the past practices of Lessee and
its Subsidiaries; and
(ii) fairly represent the consolidated
financial condition of Lessee and its Subsidiaries as at the
date thereof;
<PAGE>
(h) CHIEF EXECUTIVE OFFICE. Lessee's chief executive
office (as that term is defined in Article 9 of the Uniform
Commercial Code as in effect in the State of Missouri) is located
at 30 N.W. Rome Circle, Mezzanine Level, Kansas City
International Airport, Kansas City, Missouri 64153;
(i) CERTIFICATED AIR CARRIER. Lessee is a
Certificated Air Carrier and Lessor, as lessor of the Aircraft to
Lessee, is entitled to the benefits of Section 1110 of Title 11
of the United States Code with respect to the Aircraft; and
(j) CITIZEN OF THE UNITED STATES. Lessee is a
"citizen of the United States" as defined in 49 U.S.C.
Section 40102(15) of the Federal Aviation Act.
2.2 LESSEE'S FURTHER REPRESENTATIONS AND WARRANTIES: Lessee
further represents and warrants to Lessor that:
(a) NO DEFAULT.
(i) no Default has occurred and is continu-
ing or might result from the entry into or performance of
this Agreement; and
(ii) except as disclosed to Lessor in
writing:
[A] no other event has occurred and is
continuing which constitutes a material event
of default under any indenture, mortgage,
chattel mortgage, deed of trust, conditional
sales contract, lease, bank loan or credit
agreement or other material agreement which
is binding on Lessee or any assets of Lessee
as to which the other party has accelerated
the entire unpaid balance or commenced the
exercise of any remedy; and
[B] Lessee is not insolvent, is not
failing to pay its debts in the ordinary
course of business as they mature and is not
deferring, postponing or extending the
payment of any material portion of its
liabilities beyond its customary payment
practices during the preceding 12 month
period, except to the extent described in
Lessee's quarterly report filed with the
Securities and Exchange Commission on Form
10-Q for the fiscal quarter ended
September 30, 1997.
<PAGE>
(b) REGISTRATION.
(i) except for the filing of this Agreement
with the FAA and the Financing Statements and related
documents with the appropriate Governmental Entity, it is
not necessary under the laws of the State of Incorporation
or the Habitual Base in order to ensure the validity,
effectiveness and enforceability of this Agreement or to,
establish, perfect or protect the property rights of Lessor
in the Aircraft or any Engine or Part that this Agreement or
any other instrument relating thereto be filed, registered
or recorded or that any other action be taken or if any such
filings, registrations, recordings or other actions are
necessary, the same have been effected or will have been
effected on or before the Delivery Date; and
(ii) upon the filing of the Financing
Statements and related documents with the appropriate
Governmental Entity, and the filing of this Agreement with
the FAA, under the laws of the State of Incorporation and
the Habitual Base the property rights of Lessor in the
Aircraft have been fully established, perfected and
protected and this Agreement will have priority in all
respects over the claims of all creditors of Lessee;
(c) LITIGATION. No litigation, arbitration, adminis-
trative proceedings or investigation are pending or to Lessee's
knowledge threatened against Lessee which, if adversely
determined, would have a material adverse effect upon its
financial condition or business or its ability to perform its
obligations under this Agreement;
(d) PARI PASSU. The obligations of Lessee under this
Agreement rank at least pari passu with all other present and
contingent unsecured and unsubordinated obligations (including
contingent obligations) of Lessee, with the exception of such
obligations as are mandatorily preferred by law and not by virtue
of any contract;
(e) MATERIAL ADVERSE CHANGE. There has been no
material adverse change in the consolidated financial condition
of Lessee and its Subsidiaries or the financial condition of
Lessee since the date of the most recent audited consolidated
financial statements provided to Lessor on or prior to the
Delivery Date;
(f) TAXES. Lessee has delivered all necessary returns
and payments due to the tax authorities in the State of Incorpo-
ration and the Habitual Base and all other jurisdictions in which
Lessee is required to pay taxes and/or file tax returns or tax
reports, the failure of which is reasonably likely to result in
the creation or imposition of a Security Interest in the Aircraft
<PAGE>
or otherwise might have a material adverse effect on Lessee's
ability to perform its obligations under this Agreement and on
its financial condition, and Lessee is not required by law to
deduct any Taxes from any payments under this Agreement;
(g) INFORMATION. To Lessee's knowledge, the financial
and other information furnished by Lessee in connection with this
Agreement does not contain any untrue statement or omit to state
facts, the omission of which makes the statement therein, in the
light of the circumstances under which they were made,
misleading, nor omits to disclose any material matter to Lessor
and all forecasts and opinions contained therein were honestly
made on reasonable grounds after due and careful inquiry by
Lessee;
(h) FOREIGN ASSET CONTROL. As of the date of this
Agreement, Lessee does not hold any contract or other obligation
to operate the Aircraft to any of the countries designated under
the United States Foreign Asset Control Regulations (31 C.F.R.
Parts 500-599), including, as of the date hereof, Cuba, Haiti,
Iraq, Libya, North Korea, the Federal Republic of Yugoslavia
(Serbia and Montenegro) and the Unita Rebels of Angola;
(i) ERISA. Lessee is not engaged in any transaction
in connection with which it could be subjected to either a civil
penalty assessed pursuant to Section 502(c) of ERISA or any tax
imposed by Section 5975 of the Internal Revenue Code of 1986, as
amended; no material liability of the Pension Benefit Guaranty
Corporation has been or is expected by Lessee to be incurred with
respect to any employee pension benefit plan (as defined in
Section 3 of ERISA) maintained by Lessee; there has been no
reportable event (as defined in Section 4043(b) of ERISA) with
respect to any such employee pension benefit plan. There is no
event of termination of any such employee pension benefit plan by
the Pension Benefit Guaranty Corporation; and no accumulated
funding deficiency (as defined in Section 302 of ERISA or Section
412 of the Internal Revenue Code), whether or not waived, exists
with respect to any such employee pension benefit plan; and
(j) MAINTENANCE PROGRAM. The Maintenance Program for
the Aircraft complies with all FAA requirements and is based on
the Boeing MPD.
2.3 SURVIVAL. The representations and warranties in
Sections 2.1 and 2.2 will survive the execution of this Agreement
will be deemed to be remade by Lessee on the Delivery Date with
reference to the facts and circumstances then existing. The
representations and warranties contained in Clause 2.1 will be
deemed to be remade by Lessee on each Rent Date as if made with
reference to the facts and circumstances then existing.
<PAGE>
2.4 LESSOR'S REPRESENTATIONS AND WARRANTIES. Lessor
represents and warrants to Lessee that:
(a) STATUS. Lessor is a corporation incorporated and
validly existing under the laws of the State of Iowa and has the
power to own its assets and carry on its business as it is now
being conducted and is the holder of all necessary air
transportation licenses required in connection with the ownership
of the Aircraft;
(b) POWER AND AUTHORITY. Lessor has the corporate
power to enter into and perform, and has taken all necessary
corporate action to authorize the entry into, performance and
delivery of, this Agreement and the transactions contemplated by
this Agreement;
(c) LEGAL VALIDITY. This Agreement constitutes
Lessor's legal, valid and binding obligation, enforceable against
Lessor in accordance with its terms;
(d) NO CONFLICTS. The entry into and performance by
Lessor of, and the transactions contemplated by, this Agreement
do not and will not:
(i) conflict with any laws binding on
Lessor; or
(ii) conflict with the organizational
documents of Lessor; or
(iii) conflict with or result in default under
any indenture, mortgage, chattel mortgage, deed of trust,
conditional sales contract, lease, bank loan or credit
agreement or other agreement which is binding upon Lessor or
any of its assets;
(e) AUTHORIZATIONS. All authorizations, consents,
registrations and notifications required in connection with the
entry into, performance, validity and enforceability of, and the
transactions contemplated by, this Agreement by Lessor have been
(or will on or before the Delivery Date have been) obtained by
Lessor or effected (as appropriate) and are (or will on their
being obtained or effected be) in full force and effect;
(f) NO IMMUNITY
(i) Lessor is subject to civil U.S.
commercial law with respect to its obligations under this
Agreement; and
(ii) neither Lessor nor any of its assets is
entitled to any right of immunity and the entry into and
<PAGE>
performance of this Agreement by Lessor constitute private
and commercial acts;
(g) CITIZEN OF THE UNITED STATES. Lessor is a
"citizen of the United States" as defined in 49 U.S.C.
Section 40102(15) of the Federal Aviation Act; and
(h) LITIGATION. No litigation, arbitration, adminis-
trative proceedings or investigation are pending or to Lessor's
knowledge threatened against Lessor which, if adversely
determined, would have a material adverse effect upon its
financial condition or business or its ability to perform its
obligations under this Agreement.
3. CONDITIONS PRECEDENT
3.1 LESSOR'S CONDITIONS PRECEDENT. Lessor's obligation to
deliver and lease the Aircraft to Lessee under this Agreement is
subject to satisfaction of each of the following conditions:
(a) Receipt by Lessor from Lessee on the Delivery Date
of the following, reasonably satisfactory in form and substance
to Lessor:
(i) ORGANIZATIONAL DOCUMENTS. A copy of the
organizational documents of Lessee, certified by the
Secretary or an Assistant Secretary of Lessee;
(ii) RESOLUTIONS. A copy of resolutions of
the board of directors of Lessee, certified by the Secretary
or an Assistant Secretary of Lessee, approving the terms of,
and the transactions contemplated by, this Agreement,
resolving that it enter into this Agreement, and authorizing
a specified person or persons to execute this Agreement and
accept delivery of the Aircraft on its behalf;
(iii) OPINION. An opinion, dated the Delivery
Date, by legal counsel for Lessee, as to such matters and in
form and substance reasonably acceptable to Lessor;
(iv) FAA OPINION. An opinion of counsel for
Lessee, acceptable to Lessor, who are recognized specialists
with regard to FAA matters, as to such FAA matters and in
form and substance reasonably acceptable to Lessor;
(v) APPROVALS. Each approval, license and
consent which may be required in relation to the performance
by Lessee of any of its obligations hereunder;
(vi) IMPORT. Any required import license,
and all customs formalities, relating to the import of the
Aircraft into the Habitual Base have been obtained or
<PAGE>
complied with by Lessor, and that the import of the Aircraft
into the Habitual Base is exempt from Taxes;
(vii) LICENSES. Certified copies of Lessee's
air transport license, air operator's certificates and all
other licenses, certificates and permits required by Lessee
in relation to, or in connection with, the operation of the
Aircraft;
(viii) PROCESS AGENT. A letter from the
process agent appointed by Lessee in this Agreement
accepting that appointment;
(ix) CERTIFICATE. A certificate of the
Secretary or an Assistant Secretary of Lessee:
(a) Setting out a specimen of each
signature referred to in Section 3.1(a)(ii); and
(b) Certifying that each copy of a
document specified in this Section is correct, complete and
in full force and effect;
(x) GENERAL. Such other documents as Lessor
may reasonably request;
(b) The receipt by Lessor on or before the Delivery
Date of:
(i) OPINIONS. A signed original of each of
the opinions referred to in Sections 3.1(a)(iii) and (iv);
(ii) PAYMENTS. All sums due to Lessor under
this Agreement on or before the Delivery Date, including,
without limitation, the first payment of Rent;
(iii) INSURANCE. Certified copies of all
policies of insurance, and other evidence satisfactory to
Lessor that Lessee has complied with the provisions of this
Agreement as to Insurance effective on and after the
Delivery Date;
(iv) FINANCIAL STATEMENTS. The latest
available financial statements of Lessee as described in
Sections 8.2(b)(i) and (ii);
(v) DOCUMENTS. A confirmation of receipt of
the Aircraft Documents delivered with the Aircraft on the
Delivery Date;
(vi) RELEASES. Partial releases or
subordination agreements, in form and substance acceptable
<PAGE>
to Lessor, duly executed by those secured creditors of
Lessor having security interests in assets of Lessee, to the
extent deemed necessary or appropriate by Lessor to ensure
that Lessor will have priority in all respects over the
claims of such creditors in the Aircraft, the Rent, the
Deposits and any other sums paid or payable to Lessor under
this Agreement;
(vii) GENERAL. Such other documents as Lessor
may reasonably request;
(c) Receipt by Lessor of such information and
documents relating to the proposed Maintenance Program as Lessor
may reasonably require and Lessor having agreed the proposed
Maintenance Program on or prior to the Delivery Date; and
(d) Evidence that on the Delivery Date (i) the
Financing Statements have been duly filed and that all filings,
registrations, recordings and other actions have been or will be
taken which are necessary or advisable to ensure the validity,
effectiveness and enforceability of this Agreement and to protect
the property rights of Lessor in the Aircraft or any Part, and
(ii) a Lease Supplement, substantially in the form set forth in
Schedule 1, Part 3, hereof has been filed, along with this Lease,
with the FAA's aircraft registry in Oklahoma City, Oklahoma.
3.2 FURTHER CONDITIONS PRECEDENT. The obligations of
Lessor to deliver and lease the Aircraft under this Agreement are
subject to the further conditions precedent that:
(a) The representations and warranties of Lessee under
Sections 2.1 and 2.2 are correct and remain correct on the
Delivery Date as if remade on delivery of the Aircraft under this
Agreement; and
(b) No Default has occurred and is continuing or might
result from the leasing of the Aircraft to Lessee under this
Agreement.
3.3 LESSEE'S CONDITIONS PRECEDENT. Lessee's obligation
lease the Aircraft from Lessor under this Agreement is subject to
the receipt by Lessee from Lessor on the Delivery Date of the
following, reasonably satisfactory in form and substance to
Lessee:
(a) ORGANIZATIONAL DOCUMENTS. A copy of the
organizational documents of Lessor, certified by the Secretary or
an Assistant Secretary of Lessor;
(b) RESOLUTIONS. A copy of resolutions of managers of
Lessor, approving the terms of, and the transactions contemplated
by, this Agreement, resolving that it enter into this Agreement,
<PAGE>
and authorizing a specified person or persons to execute this
Agreement on its behalf;
(c) OPINION. A signed original of an opinion, dated
the Delivery Date, by independent legal counsel for Lessor, as to
the matters referred to in Sections 2.4(a), (b), (c), (e), (f),
(g) and, to the best knowledge of such counsel, (d) and (h), in
form and substance reasonably acceptable to Lessee;
(d) APPROVALS. Each approval, license and consent
which may be required in relation to the performance by Lessor of
any of its obligations hereunder, if any;
(e) CERTIFICATE. A certificate of a Manager of
Lessor:
(i) Setting out a specimen of each signature
referred to in Section 3.3(b); and
(ii) Certifying that each copy of a document
specified in this Section is correct, complete and in full
force and effect;
(f) VALID REGISTRATION. Evidence that on the Delivery
date the Aircraft has been validly registered under the laws of
the State of Registration; and
(g) OFFICER'S CERTIFICATE. A certificate of an officer of
Lessor, certifying that:
(i) The representations and warranties of
Lessor under Section 2.4 are correct and
remain correct on delivery of the
Aircraft under this Agreement; and
(ii) No Default has occurred and is
continuing or might result from the
leasing of the Aircraft by Lessor under
this Agreement.
3.4 WAIVER. The conditions specified in Sections 3.1, 3.2
and 3.3 are for the sole benefit of Lessor or Lessee, as the case
may be, and may be waived in whole or in part and with or without
conditions by Lessor or Lessee, as the case may be. If any of
those conditions are not satisfied on the Delivery Date and
Lessor (in its absolute discretion) nonetheless agrees to deliver
the Aircraft to Lessee, or Lessee (in its absolute discretion)
nonetheless agrees to accept the Aircraft, Lessor or Lessee, as
the case may be, will ensure that those conditions are satisfied
within fifteen (15) days after the Delivery Date and Lessor or
Lessee may treat as an Event of Default the failure of Lessee or
Lessor to do so.
<PAGE>
4. COMMENCEMENT
4.1 LEASING. Lessor will lease the Aircraft to Lessee, and
Lessee will lease the Aircraft from Lessor, in accordance with
this Agreement for the duration of the Term. Lessor will tender
the Aircraft in the condition required under Schedule 1 for
acceptance on or about December 1, 1997 or such other day as may
be agreed.
4.2 ACCEPTANCE AND DELIVERY.
(a) On or about December 1, 1997 Lessor shall give
Lessee written notice that the Aircraft is available for
inspection at the Acceptance Location. Within three (3) Business
Days thereafter, Lessee will inspect the Aircraft at such
location. Lessee's inspection shall be long enough to permit
Lessee to: (i) inspect the Aircraft Documents; (ii) inspect the
Aircraft; and (c) inspect the Engines, including without
limitation, to conduct, at Lessee's expense, a complete boroscope
inspection which covers both hot and cold sections and a power
assurance run; provided, however, that such inspection will not
exceed three (3) consecutive days. Such inspection shall also
include a demonstration flight, at Lessor's cost and expense, of
up to two (2) hours in duration in accordance with Boeing
standard flight operation check procedures, during which Lessee
shall be entitled to have up to four (4) representatives on board
the Aircraft. Lessor will maintain all insurance and assume full
responsibility for loss or damage during such demonstration
flight (unless such loss or damage is caused by the willful
misconduct or gross negligence of Lessee or its representatives),
and Lessor's pilot shall be the pilot-in-command for such flight,
unless otherwise agreed by Lessor and Lessee. Except as
otherwise provided herein, all other costs and expenses
associated with Lessee's inspection will be the responsibility of
Lessee.
(b) The Aircraft will be tendered for delivery to
Lessee in the condition described in Schedule 1 at the Acceptance
Location; provided, however, that Lessor and Lessee may agree
that the demonstration flight shall terminate at Kansas City,
Missouri, in which event the Acceptance Location shall also be
the Delivery Location. Lessee will effect acceptance of the
Aircraft, if delivered in the condition described in Schedule 1,
by execution and delivery of a Certificate of Acceptance in the
form of Schedule 2, upon the conclusion of Lessee's inspection.
In the event that the Aircraft is not in the condition specified
in Schedule 1 to this Agreement, Lessee will notify Lessor in
writing of those defects or deficiencies which cause the Aircraft
not to meet the delivery conditions set forth in Schedule 1, in
which event, Lessor shall, at its cost and expense, promptly
correct such defects or deficiencies and cause the Aircraft to
meet the delivery conditions set forth in Schedule 1 to this
<PAGE>
Lease Agreement. If Lessor fails to cure such defects or
deficiencies and cause the Aircraft to meet the delivery
conditions set forth in Schedule 1 to this Lease, on or before
December 31, 1997 (other than by reason of a Default by Lessee),
Lessee may terminate this Agreement, and Lessor will promptly
refund to Lessee the amount of any and all Aircraft Deposits paid
under this Agreement.
(c) Unless otherwise agreed pursuant to Subsection (b)
above, after acceptance by Lessee, the Aircraft will be delivered
to Lessee at the Delivery Location or such other location as may
be agreed by Lessor and Lessee in the same condition as the
Aircraft was in when accepted by Lessee, except for ferry time.
In the event the Aircraft is not in the same condition as the
Aircraft was in when accepted by Lessee, except ferry time,
Lessee will notify Lessor in writing of any defects and
deficiencies which cause the Aircraft not to be in the same
condition as when the Aircraft was accepted, and Lessor shall at
its sole cost and expense promptly correct such defects and
deficiencies. Lessor will acknowledge delivery of the Aircraft
in the required condition by execution and delivery to Lessor of
an Acknowledgement of Delivery in the form of Schedule 6.
(d) After delivery, the Aircraft and every Part will be
in every respect at the sole risk of Lessee, who will bear all
risk of loss, theft, damage or destruction to the Aircraft from
any cause whatsoever.
4.3 DELAYED DELIVERY. If, as a result of any Excusable
Delay, Lessor delays in the tender for acceptance of, or fails to
tender for acceptance, the Aircraft under this Agreement:
(i) Lessor will not be responsible for any
losses, including loss of profit, costs or expenses arising
from or in connection with the delay or failure suffered or
incurred by Lessee;
(ii) Lessee will not be entitled to terminate
this Agreement or to reject the Aircraft when tendered for
acceptance by Lessor in the condition required by the terms
of this Agreement, on the grounds of any such delay, unless
such delay or failure continues after December 31, 1997 or
unless mutually agreed by Lessor and Lessee; and
(iii) Upon any such termination, neither
Lessor nor Lessee will have any further obligation to the
other under this Agreement other than as expressly set out
in this Agreement, except that Lessor will refund to Lessee
the amount of any Aircraft Deposits paid under this
Agreement.
<PAGE>
4.4 LICENSES. During the Term, Lessee will at its expense
obtain and maintain all licenses, permits and approvals, if any,
which may be necessary to transport the Aircraft from the
Delivery Location. Lessor will furnish such data and information
as may be reasonably requested by Lessee in connection with
obtaining any such license, permit or approval.
4.5 EXTENSION OPTION. Not Used.
4.6 C CHECK OPTION. Provided that (x) no Default shall have
occurred and is continuing; and (y) there shall have been no
material adverse change in Lessee's financial condition since the
Delivery Date, Lessee shall have the option (the "C Check
Option") to extend the Term for up to 2 months provided that such
extension of the Term is required by Lessee so as to enable
Lessee to perform the C Check required by paragraph 1 (e) of
Schedule 3 at the time at which such check would otherwise fall
to be performed pursuant to the Agreed Maintenance Program in the
absence of the requirement contained in such section. The
C Check Option shall be exercised, if at all, by Lessee deliver-
ing an irrevocable written notice (a "C Check Notice") to Lessor
not later than one hundred eighty (180) days prior to the New
Expiration Date (as defined below) proposed by Lessee which
notice shall state whether Lessee desires to extend the Term and
the proposed date of performance and completion of the
aforementioned C Check. Upon the receipt by Lessor of the C
Check Notice, (xx) Lessee shall be obliged to lease the Aircraft
from Lessor until the date (the "New Expiration Date") of
completion of the aforementioned C Check in accordance with the
terms and conditions of this Agreement; and (yy) the definition
of "Expiration Date" shall be deemed to have been amended so as
to refer to the New Expiration Date and the Aircraft shall be
redelivered to Lessor on that date (or, as may be applicable, any
other date contemplated by such definition) in accordance with
the terms and conditions of this Agreement.
5. PAYMENTS
5.1 AIRCRAFT DEPOSIT. In order to faithfully secure its
obligations hereunder, Lessee shall pay to Lessor an Aircraft
Deposit in the amount set forth in paragraph 1 of the Letter
Agreement in accordance with the schedule set forth in that
paragraph. Unless this Lease Agreement shall have been earlier
terminated pursuant to Section 13.2, and provided that no Default
shall have occurred and be continuing, the Aircraft Deposit shall
be returned by Lessor to Lessee in accordance with the terms of
paragraph 1 of the Letter Agreement. The Aircraft Deposit shall
also be refunded to Lessee in whole, without set off, in
accordance with the terms of Sections 4.2(b) and/or 4.3(ii) and
(iii).
<PAGE>
5.2 RENTAL PERIODS. The Term will be divided into Rental
Periods. The first Rental Period will commence on the Delivery
Date and end on the last day of the calendar month during which
the Delivery Date occurs, with the Rent for such first Rental
Period and the last Rental Period to be prorated on a daily basis
to reflect the actual number of days in such initial and last
Rental Periods. The second and each subsequent Rental Period
will commence on the first day of each month next following the
last day of the previous Rental Period. Each Rental Period will
end on the last day of each month, except that if the last Rental
Period would otherwise overrun the Expiration Date, it will end
on the Expiration Date.
5.3 RENT. Lessee will pay to Lessor or its order on each
Rent Date, Rent, in advance, in immediately available funds in
accordance with and in the amount set forth in paragraph 2 of
Letter Agreement. Payment must be initiated adequately in
advance of the Rent Date to ensure that Lessor receives
immediately available funds on the Rent Date. If a Rental Period
begins on a non-Business Day, the Rent payable in respect of that
Rental Period shall be paid on the Business Day immediately
preceding the date on which such Rental Period commences.
5.4 MAINTENANCE RESERVES.
(a) AMOUNT. Lessee will also pay to Lessor Maintenance
Reserves in relation to each Rental Period (including without
limitation the last Rental Period of the Term) on the 10th day of
the month following the end of the preceding Rental Period as
follows:
(i) in respect of the Airframe, the amount
set forth in paragraph 3(i) of Letter Agreement in respect
of each Flight Hour or Cycle, whichever is higher, operated
by the Aircraft during that Rental Period ("Airframe
Maintenance Reserves");
(ii) in respect of each Engine, the amount
set forth in paragraph 3(ii) of Letter Agreement in respect
of each Flight Hour or Cycle, whichever is higher, operated
by that Engine during that Rental Period ("Engine
Refurbishment Maintenance Reserves");
(iii) in respect of the APU, the amount set
forth in paragraph 3(iii) of Letter Agreement in respect of
each Flight Hour or Cycle, whichever is higher, operated by
that APU during that Rental Period ("APU Refurbishment
Maintenance Reserves"); and
(iv) in respect of each Landing Gear, the
amount set forth in paragraph 3(iv) of Letter Agreement in
respect of each Flight Hour or Cycle, whichever is higher,
<PAGE>
operated by that Landing Gear during that Rental Period
("Landing Gear Maintenance Reserves").
(b) ADJUSTMENT. Commencing on the first anniversary
of the Delivery Date, the rate of Maintenance Reserves may be
adjusted upwards annually by Lessor at a percentage rate per
annum not to exceed the percentage increase in the Consumer Price
Index for the Kansas City, Missouri Metropolitan Area since the
Delivery Date or the date of the last price adjustment under this
provision, if later. In addition, but not limited to the
foregoing, Lessee acknowledges that the rates of Maintenance
Reserves currently provided for in this Agreement are based upon
the assumption the Agreed Maintenance Program for the Aircraft
during the Term will be the same as that in effect on the
Delivery Date. In the event that such assumption proves to be
incorrect at any time during the Term, Lessor and Lessee agree
that Lessor shall have the right, upon written notice to Lessee,
to adjust the rate of Maintenance Reserves so as to reasonably
account for the incorrectness of such assumption. In the event
that the Agreed Maintenance Program changes during the Term (any
such change to be in accordance with the relevant terms and
conditions of this Agreement), Lessor shall make the
aforementioned adjustment in the manner which Lessor determines,
in its reasonable discretion, is necessary to maintain the rates
of Maintenance Reserves at levels which accurately reflect the
costs associated with obtaining the maintenance services referred
to in Section 7.2 at prevailing industry rates. Each such notice
shall specify the revised rate of Maintenance Reserves and the
effective date of such revision. Lessee agrees to advise Lessor,
in writing, of any circumstances or events which would result in
the foregoing assumption becoming incorrect at any time during
the Term.
5.5 PAYMENTS. All payments by Lessee to Lessor under this
Agreement will be made on the due date in Dollars and in immedi-
ately available funds settled through the New York Clearing House
System by wire transfer to Mercantile Bank of Dubuque, Dubuque,
Iowa (Acct. No. 28100164518), ABA No. 073900111. Such account
will be established in such fashion as shall ensure that the Bank
will be paid automatically from such account any amounts owing to
Bank in respect of the Aircraft.
5.6 GROSS-UP.
(a) All payments by Lessee under or in connection with
this Agreement will be made without set-off or counterclaim, free
and clear of and without deduction for or on account of all Taxes
(other than Lessor Taxes and other than a violation of 7.1);
(b) All Taxes (other than Lessor Taxes) in respect of
payments under this Agreement shall be for the account of and
<PAGE>
will be paid by Lessee for its own account prior to the date on
which penalties apply; and
(c) If Lessee is compelled by law to make payment
subject to any Tax (other than Lessor Taxes) and Lessor does not
actually receive for its own benefit on the due date a net amount
equal to the full amount provided for under this Agreement,
Lessee will pay all necessary additional amounts to ensure
receipt by Lessor of the full amount so provided for.
5.7 TAXATION. Lessee will on demand pay and indemnify
Lessor against all Taxes (other than Lessor Taxes) levied or
imposed against or upon Lessor or Lessee and relating to or
attributable to Lessee, this Agreement or the Aircraft directly
or indirectly in connection with the importation, exportation,
registration, ownership, leasing, subleasing, delivery,
possession, use, operation, repair, maintenance, overhaul,
transportation, landing, storage, presence or redelivery of the
Aircraft or any part thereof or any rent, receipts, insurance
proceeds, income or other amounts arising therefrom.
5.8 VALUE ADDED TAX.
(a) For the purposes of this subsection:
(i) "VAT" means value added tax and any
sales or turnover tax or imposition of a like nature;
(ii) "supply" includes anything on which VAT
is chargeable;
(b) Lessee will pay to Lessor the amount of any VAT
chargeable in respect of any supply of goods or services for VAT
purposes under this Agreement (other than any Lessor Taxes); and
(c) Each amount stated as payable by Lessee under this
Agreement is exclusive of VAT (if any) and is accordingly to be
construed as a reference to that amount plus any VAT in respect
of it.
5.9 INFORMATION. If Lessee is required by any applicable
law, or by any third party, to deliver any report or return in
connection with any Taxes, Lessee will complete the same in a
manner satisfactory to Lessor and in particular will state
therein that Lessee is exclusively responsible for the use and
operation of the Aircraft and for any Taxes arising therefrom,
and Lessee will, on request supply a copy of the report or return
to Lessor.
<PAGE>
5.10 TAXATION OF INDEMNITY PAYMENTS.
(a) If and to the extent that any sums payable to
Lessor by Lessee under this Agreement by way of indemnity are
insufficient, by reason of any Taxes (other than Lessor Taxes)
payable in respect of those sums, for Lessor to discharge the
corresponding liability to the relevant party (including any
taxation authority), or to reimburse Lessor for the cost incurred
by it to a third party (other than Lessor Taxes) (including any
taxation authority), Lessee will pay to Lessor such sum as will
after the tax liability has been fully satisfied leave Lessor
with the same amount as it would have been entitled to receive in
the absence of that liability together with interest on the
amount of the deficit at the rate of interest stated in
Section 5.11 in respect of the period commencing on the date on
which the payment of taxation is finally due until payment by
Lessee (both before and after judgment); and
(b) If and to the extent that any sums constituting
(directly or indirectly) an indemnity to Lessor but paid by
Lessee to any person other than Lessor are treated as taxable in
the hands of Lessor (other than Lessor Taxes), Lessee will pay to
Lessor such sum as will after the tax liability has been fully
satisfied indemnify Lessor to the same extent as it would have
been indemnified in the absence of such liability together with
interest on the amount payable by Lessee under this subsection at
the rate of interest stated in Section 5.11 in respect of the
period commencing on the date on which the payment of taxation is
finally due until payment by Lessee (both before and after
judgment) provided however that Lessee will not be liable for any
Lessor Taxes incurred as a result of the payment of the Agreed
Value pursuant to Section 11.
5.11 DEFAULT INTEREST. If Lessee fails to pay any amount
payable under this Agreement on the due date, Lessee will pay on
demand from time to time to Lessor interest (both before and
after judgment) on that amount, from the due date to the date of
payment in full by Lessee to Lessor, at the rate calculated by
Lessor to be the Prime Rate plus five percent (5%) per annum.
All such interest will be compounded monthly and calculated on
the basis of the actual number of days elapsed and a 360 day
year.
5.12 CONTEST. Lessee may, at its own cost and expense,
either in its own name or in Lessor's name, contest the validity,
applicability or assessment of any Taxes by (i) resisting payment
thereof, (ii) paying same under protest, or (iii) using
reasonable efforts to obtain a refund thereof in appropriate
proceedings. If Lessee disputes the payment of any Taxes payable
by Lessor for which Lessee is responsible under this Agreement,
Lessor will take such action as Lessee may reasonably request, at
<PAGE>
Lessee's expense, to contest that payment but will not be obliged
to take any such action:
(a) Which Lessor considers in its reasonable
discretion may materially prejudice it unless Lessee will have
provided security reasonably satisfactory to Lessor to cover the
liability for the Taxes; or
(b) Which Lessor considers does not have a reasonable
prospect of success; or
(c) For which Lessee has not made adequate provision
to the reasonable satisfaction of Lessor in respect of the
expense concerned.
If Lessor shall obtain a refund of any amount paid by Lessee
pursuant to Sections 5.7, 5.8, 5.10, Lessor shall pay Lessee the
amount of such refund together with any interest actually
received by Lessor on account of such refund.
5.13 ABSOLUTE AND CONDITIONAL OBLIGATIONS OF LESSEE.
Lessee's obligations under this Agreement are absolute and
unconditional irrespective of any contingency whatsoever
including (but not limited to):
(a) Any right of set-off, counterclaim, recoupment,
defence or other right which either party to this Agreement may
have against the other;
(b) Any unavailability of the Aircraft for any reason
other than Lessor's failure to deliver the Aircraft in the
condition required under Schedule 1 and other than a breach by
Lessor of its covenant set forth in Section 7.1, including, but
not limited to, a requisition of the Aircraft or any prohibition
or interruption of or interference with or other restriction
against Lessee's use, operation or possession of the Aircraft;
(c) Any lack, invalidity of or defect in
airworthiness, merchantability, fitness for any purpose,
condition, design, or operation of any kind or nature of the
Aircraft for any particular use or trade, or for registration or
documentation under the laws of any relevant jurisdiction, or any
Event of Loss in respect of or any damage to the Aircraft;
(d) Any insolvency, bankruptcy, reorganization,
arrangement, readjustment of debt, dissolution, liquidation or
similar proceedings by or against Lessor or Lessee;
(e) Any invalidity or unenforceability or lack of due
authorization of, or other defect in, this Agreement; and
<PAGE>
(f) Any other cause which but for this provision would
or might otherwise have the effect of terminating or in any way
affecting any obligation of Lessee under this Agreement.
5.14 SECURITY.
(a) It is intended by Lessor and Lessee that the
Maintenance Reserves payable to Lessor pursuant to Section 5.4
are amounts paid by Lessee to Lessor in consideration for Lessor
acquiring the Aircraft and removing the Aircraft from the market,
the use of the Aircraft by Lessee and the satisfaction of
Lessee's obligations under this Agreement and that, once paid,
those monies irrevocably and unconditionally shall be the
property of Lessor. Notwithstanding that stated intent, if and
to the extent that those monies or any thereof, under any
applicable law or otherwise, are determined to be security
deposits or otherwise the property of Lessee or if it is so
determined those monies are a debt owed to Lessee or that Lessee
shall have any interest in those monies (the "Maintenance Reserve
Account"), the parties agree that subsections (c), (d) and (e)
below shall apply.
(b) It is further intended by Lessor and Lessee that
Aircraft Deposit payable by Lessee to Lessor pursuant to Section
5.1 and, if applicable, the Insurance Security Deposit
contemplated by the first paragraph of Schedule 4 (collectively
the "Deposits") are security deposits to faithfully secure the
satisfaction by Lessee of its obligations under the Agreement.
(c) To the fullest extent permitted by law and by way
of continuing security, Lessee grants to Lessor a security-
interest in the Maintenance Reserve Account, the Deposits and all
rights of Lessee to payment thereof, the debt represented thereby
and/or any and all interest of Lessee therein to Lessor by way of
first priority security interest as security for Lessee's obliga-
tions and liabilities under this Agreement and the Other Agree-
ments (the "Secured Liabilities"). Except as expressly permitted
under Section 7.2 of this Agreement, Lessee will not be entitled
to payment of the Maintenance Reserve Account. Lessee will not
assign, transfer or otherwise dispose of all or part of its
rights in the Maintenance Reserve Account, the Deposits, and
Lessee agrees that it will enter into any additional documents
and instruments necessary or reasonably requested by Lessor to
evidence, create or perfect Lessor's rights to the Maintenance
Reserve Account and the Deposits.
(d) If Lessee fails to comply with any provision of
this Agreement or any Event of Default has occurred and is
continuing Lessor may immediately or at any time thereafter,
without prior notice to Lessee:
<PAGE>
(i) Set-off all or any part of the Secured
Liabilities against the liabilities of Lessor in respect of
the Maintenance Reserve Account and/or the Deposits;
(ii) Apply or appropriate the Maintenance
Reserve Account and/or the Deposits in or towards the
payment or discharge of the Secured Liabilities in such
order as Lessor sees fit; and
(e) If Lessor has exercised the set-off described in
sub-clause (d) above, Lessee shall, following a demand in writing
from Lessor, promptly restore the Maintenance Reserve Account
and/or the Deposits to the level at which they stood immediately
prior to such set-off.
6. MANUFACTURER'S WARRANTIES
6.1 ASSIGNMENT. Notwithstanding this Agreement, Lessor
will remain entitled to the benefit of each warranty, express or
implied, with respect to the Aircraft, any Engine or Part so far
as concerns any manufacturer, vendor, subcontractor or supplier
or any seller from whom Lessor acquired the Aircraft. Except to
the extent Lessor otherwise directs, Lessor hereby authorizes
Lessee to pursue any claim against any manufacturer, vendor,
subcontractor or supplier (but not any seller of the Aircraft) in
relation to defects affecting the Aircraft, any Engine or Part
and Lessee agrees diligently to pursue any such claim which
arises at its own cost. Lessee will notify Lessor promptly upon
becoming aware of any such claim.
6.2 PROCEEDS. Except to the extent Lessor otherwise agrees
in a particular case, all proceeds of any such claim will be paid
directly to Lessor, except, but if and to the extent that such
claim relates:
(a) To defects affecting the Aircraft which Lessee has
rectified; or
(b) To compensation for loss of use of the Aircraft,
an Engine or any Part during the Term; and
provided no Default has occurred and is continuing the proceeds
will be paid to Lessee by Lessor but in the case of (a) only on
receipt of evidence satisfactory to Lessor that Lessee has
rectified the relevant defect.
6.3 PARTS. Except to the extent Lessor otherwise agrees in
a particular case, Lessee will procure all engines, components,
furnishings or equipment provided by the manufacturer, vendor,
subcontractor or supplier in replacement of a defective Engine or
Part pursuant to the terms of any warranty, all of which will be
installed promptly by Lessee such that title thereto free of
<PAGE>
Security Interests vests in Lessor. On installation those items
will be deemed to be an Engine or Part as applicable.
6.4 AGREEMENT. To the extent any warranties relating to
the Aircraft are made available under an agreement between any
manufacturer, vendor, subcontractor or supplier and Lessee, this
Section 6 is subject to that agreement. However Lessee will:
(a) Pay the proceeds received by Lessee of any claim
thereunder to Lessor to be applied pursuant to Section 6.2 and
pending such payment will hold the claim and the proceeds on
trust for Lessor; and
(b) Lessee will take all such steps as are necessary
at the end of the Term to ensure the benefit of any of those
warranties which have not expired are vested in Lessor.
7. LESSOR'S COVENANTS
7.1 QUIET ENJOYMENT. Lessor and any person lawfully acting
or claiming by or through Lessor will not interfere with the
quiet use, possession, operation and enjoyment of the Aircraft by
Lessee, but the exercise by Lessor of its rights under or in
connection with this Agreement will not constitute such an
interference.
7.2 MAINTENANCE CONTRIBUTION. Provided no Default has
occurred and is continuing, Lessor will pay promptly to third
party vendors, suppliers, maintenance shops, service facilities
or other contractors, by way of contribution to the cost of
maintenance of the Aircraft, upon submission by Lessee to Lessor
within six (6) months of the commencement of that maintenance and
before thirty (30) days after the Expiration Date of an invoice
and supporting documentation reasonably satisfactory to Lessor,
evidencing with respect to (x) the Airframe, any "D" or "Q"
check or any "C-1 through "heavy" C-7 plus SI" check, or (y) any
Engine or APU, the performance in accordance with this Agreement
of a Hot Section Refurbishment, a Cold Section Refurbishment
and/or the replacement of Life Limited Parts or (z) any Landing
Gear, work in the nature of overhaul requiring removal and
disassembly (in each case, other than (i) repairs arising as a
result of foreign object damage or operational or maintenance
mishandling; and/or (ii) removal, installation, maintenance and
repair of QEC (Quick Engine Change) kits; and/or (iii) air-
worthiness directives) the lesser of (a) the amount of that
invoice and (b) an amount equal to the aggregate amount of
Maintenance Reserves paid in respect of the Airframe, that Engine
or APU or that Landing Gear under this Agreement at the time of
commencement of such maintenance less the aggregate amount
previously paid in respect of the Airframe, that Engine or APU or
the Landing Gear by Lessor under this subsection.
<PAGE>
7.3 LESSOR OBLIGATIONS FOLLOWING EXPIRATION DATE. Within
five (5) Business Days after:
(a) Redelivery of the Aircraft to Lessor in accordance
with and in the condition required by this Agreement; or
(b) Payment to Lessor of the Agreed Value following an
Event of Loss after the Delivery Date;
or in each case such later time as Lessor is satisfied Lessee has
irrevocably paid to Lessor all amounts which may then be out-
standing or become payable under this Agreement and provided that
no Default shall have occurred and is continuing, Lessor will pay
to Lessee:
(i) the amount of any Rent received in
respect of any period falling after the date of redelivery
of the Aircraft or payment of the Agreed Value, as the case
may be; and
(ii) the Aircraft Deposit.
8. LESSEE'S COVENANTS
8.1 DURATION. The obligations in this Section and in
Section 12 will:
(a) Except as otherwise stated, be performed at the
expense of Lessee; and
(b) Remain in force until the Expiration Date in
accordance with this Agreement and thereafter to the extent of
any accrued rights of Lessor in relation to those obligations.
8.2 INFORMATION. Lessee will:
(a) Notify Lessor forthwith of the occurrence of any
Default or any other event which might adversely affect Lessee's
ability to perform any of its obligations under this Agreement;
(b) Furnish to Lessor:
(i) 45 days after the last day of each
fiscal quarter, the consolidated unaudited financial
statements of Lessee (comprising a balance sheet and profit
and loss statement) prepared for the most recent previous
month or fiscal quarter, as filed with the Securities and
Exchange Commission, or if Lessee is not a reporting company
under the Securities Exchange Act of 1934, as amended, such
statements shall be certified by Lessee's chief financial
officer as being true and correct;
<PAGE>
(ii) as soon as available but not in any
event later than one hundred twenty (120) days after the
last day of each fiscal year of Lessee, its audited
consolidated financial statements for the year ending on
such day;
(iii) at the same time the same are issued to
the shareholders or creditors of Lessee generally, a copy of
each report to or filing with the SEC; and
(iv) on request from time to time, such other
information relevant to the transactions contemplated by
this Agreement regarding Lessee and its business and affairs
as Lessor may reasonably request;
(c) Keep Lessor informed as to current serial numbers
of the Engines and any engine installed on the Aircraft;
(d) Promptly furnish to Lessor all information Lessor
from time to time reasonably requests regarding the Aircraft, any
Engine or any Part, its use, location and condition including,
without limitation, the hours available on the Aircraft and any
Engine until the next scheduled check, inspection, overhaul or
shop visit, as the case may be;
(e) On request, within ten (10) days after such
request, furnish to Lessor evidence satisfactory to Lessor of
payment of all Taxes due during the Rental Period most recently
ended or any previous Rental Period the nonpayment of which could
give rise to the imposition of a Security Interest on the
Aircraft;
(f) On request, furnish to Lessor evidence satisfac-
tory to Lessor that all Taxes and charges incurred by Lessee with
respect to the Aircraft, including without limitation all
payments due to the relevant air traffic control authorities, the
nonpayment of which could give rise to the imposition of a
Security Interest on the Aircraft, have been paid and discharged
in full;
(g) Provide Lessor with a monthly report on the Flight
Hours and Cycles accumulated in respect of each Engine and APU
during the preceding month in the form required from time to time
by Lessor;
(h) Give Lessor not less than thirty (30) days'
written notice as to the time and location of all Major Checks;
and
<PAGE>
(i) Promptly notify Lessor of:
(i) Any loss, theft, damage or destruction
to the Aircraft, any Engine or any Part, or any modification
to the Aircraft if the potential cost may exceed the Damage
Notification Threshold; and
(ii) Any occurrence reasonably likely to give
rise to a claim under the Insurance (but in the case of an
occurrence with respect to the hull, only claims in excess
of the Damage Notification Threshold) and details of any
negotiations with the insurance brokers over any such claim.
8.3 LAWFUL AND SAFE OPERATION. Lessee will:
(a) Comply with all laws in force in any country or
jurisdiction which may be applicable to the Aircraft or, so far
as concerns the use and operation of the Aircraft or an owner or
operator thereof and take all reasonable steps to ensure that the
Aircraft is not used for any illegal purpose;
(b) Not use the Aircraft in any manner contrary to any
recommendation of the manufacturer of the Aircraft, any Engine or
any Part or any recommendation or regulation of the Air Authority
or for any purpose for which the Aircraft is not designed or
reasonably suitable;
(c) Ensure that the crew and engineers employed by it
in connection with the operation and maintenance of the Aircraft
have the qualifications and hold the licenses required by the Air
Authority and applicable law;
(d) Use the Aircraft solely in commercial or other
operations for which Lessee is duly authorized by the Air
Authority and applicable law;
(e) Not use the Aircraft for the carriage of:
(i) whole animals living or dead except in
the cargo compartments according to I.A.T.A. regulations,
and except domestic pet animals carried in a suitable
container to prevent the escape of any liquid and to ensure
the welfare of the animal;
(ii) acids, toxic chemicals, other corrosive
materials, explosives, nuclear fuels, nuclear wastes, or any
nuclear assemblies or components, except as permitted for
passenger aircraft under the "Restriction of Goods" schedule
issued by I.A.T.A. from time to time and provided that all
the requirements for packaging or otherwise contained
therein are fulfilled;
<PAGE>
(iii) any other goods, materials or items of
cargo which could reasonably be expected to cause damage to
the Aircraft and which would not be adequately covered by
the Insurances; or
(iv) any illegal item or substance;
(f) Not utilize the Aircraft for purposes of training,
qualifying or reconfirming the status of cockpit personnel except
for the benefit of Lessee's cockpit personnel, and then only if
the use of the Aircraft for such purpose is not disproportionate
to the use for such purpose of other aircraft of the same type
operated by Lessee;
(g) Not cause or permit the Aircraft to proceed to, or
remain at, any location which is then the subject of a
prohibition order (or any similar order or directive), sanctions
or restrictions by:
(i) the United Nations Security Council, the
U.S. International Economic Emergency Powers Act or U.N.
Security Council directives or the U.S. Export
Administration Act Regulations (15 C.F.R. Parts 730-799),
except as may be permitted by operating in accordance with
the conditions specified by the U.S. Export Administration
Regulations, General License GATS (15 C.F.R. Part 771.19);
(ii) any Government Entity of the State of
Registration or the Habitual Base;
(iii) any Government Entity of the country in
which such location is situated; or
(iv) any Government Entity having jurisdic-
tion over Lessor, the Banks or the Aircraft;
(h) Obtain and maintain in full force all certifi-
cates, licenses, permits and authorizations required for the use
and operation of the Aircraft for the time being, and for the
making of payments required by, and the compliance by Lessee with
its other obligations under, this Agreement;
(i) Not operate or locate the Aircraft or suffer or
permit the Aircraft to be operated or located during the Term in
any area excluded from coverage by any insurance policy issued
pursuant to the requirements of this Agreement; and
(j) Not operate or locate the Aircraft in, to or over
any country which is (x) the subject of sanctions under the U.S.
International Economic Emergency Powers Act or United Nations
Security Council Directives and/or (y) restricted under the
United States Trading with the Enemy Act or the United States
Export Administration Act except as may be permitted by operating
in accordance with the conditions specified by the United States
<PAGE>
Export Administration Regulations, General License GATS (15 CFR
Part 771.19).
8.4 TAXES AND OTHER PAYMENTS. Lessee will promptly pay:
(a) All license and registration fees, Taxes (other
than Lessor Taxes) and other amounts of any nature imposed by any
Government Entity with respect to the Aircraft, including without
limitation the purchase, ownership, delivery, leasing, posses-
sion, use, operation, return, sale or other disposition of the
Aircraft; and
(b) All rent, fees, charges, Taxes (other than Lessor
Taxes) and other amounts in respect of any premises where the
Aircraft or any Part thereof is located from time to time;
except to the extent that in the reasonable opinion of Lessor
such payment is being contested in good faith by appropriate
proceedings, in respect of which adequate reserves have been
provided by Lessee and non-payment of which does not give rise to
any material likelihood of the Aircraft or any interest therein
being sold, forfeited or otherwise lost or of criminal liability
on the part of Lessor or any Bank.
8.5 SUB-LEASING. LESSEE WILL NOT, WITHOUT THE PRIOR
WRITTEN CONSENT OF LESSOR, SUB-LEASE OR OTHERWISE PART WITH
POSSESSION OF THE AIRCRAFT, THE ENGINES OR ANY PART EXCEPT THAT
LESSEE MAY PART WITH POSSESSION (A) WITH RESPECT TO THE AIRCRAFT,
THE ENGINES OR ANY PART TO THE RELEVANT MANUFACTURERS FOR TESTING
OR SIMILAR PURPOSES OR TO THE AGREED MAINTENANCE PERFORMER FOR
SERVICE, REPAIR, MAINTENANCE OR OVERHAUL WORK, OR ALTERATIONS,
MODIFICATIONS OR ADDITIONS TO THE EXTENT REQUIRED OR PERMITTED BY
THIS AGREEMENT, AND (B) WITH RESPECT TO AN ENGINE OR PART, AS
EXPRESSLY PERMITTED BY THIS AGREEMENT.
8.6 INSPECTION.
(a) Lessor and any person designated by Lessor may at
any time visit, inspect and survey the Aircraft, any Engine or
any Part and for such purpose may, subject to any applicable Air
Authority regulation, travel on the flight deck as observer;
(b) Lessee will pay to Lessor on demand all reasonable
out-of-pocket expenses (but not including the salaries of
Lessor's employees) incurred by Lessor in connection with each
such visit, inspection or survey which takes place during the
continuance of a Default; and
(c) Lessor will have no duty or liability to make, or
arising out of any such visit, inspection or survey; and
<PAGE>
(d) So long as no Default has occurred and is
continuing, Lessor will not exercise such right other than on
reasonable notice and during normal business hours and so as not
to disrupt unreasonably the commercial operations of Lessee.
8.7 OWNERSHIP; PROPERTY INTERESTS; RELATED MATTERS. Lessee
will:
(a) Not do or knowingly permit to be done or omit or
knowingly permit to be omitted to be done any act or thing which
might reasonably be expected to jeopardize the rights of Lessor
as owner and lessor of the Aircraft;
(b) On all occasions when the ownership of the
Aircraft, any Engine or any Part is relevant, make clear to third
parties that title is held by Lessor;
(c) Not at any time (i) represent or hold out Lessor
or the Banks as carrying goods or passengers on the Aircraft or
as being in any way connected or associated with any operation or
carriage (whether for hire or reward or gratuitously) which may
be undertaken by Lessee or (ii) pledge the credit of Lessor or
the Banks;
(d) Ensure that there is always affixed, and not
removed or in any way obscured, a fireproof plate (having
dimensions of not less than 10 cm. x 7 cm.) in a reasonably
prominent position in the cockpit of the Aircraft adjacent to the
certificate of airworthiness and on each Engine stating:
"This Aircraft/Engine is owned by Mimi Leasing
Corp. ("Mimi") and is leased to Vanguard Airlines,
Inc. and may not be operated by any other person
without the prior written consent of Mimi;"
(e) Not create or permit to exist any Security
Interest upon the Aircraft, any Engine or any Part;
(f) Not do or permit to be done anything which may
reasonably be expected to expose the Aircraft, any Engine or any
Part to penalty, forfeiture, impounding, detention, appropri-
ation, damage or destruction and without prejudice to the fore-
going, if any such penalty, forfeiture, impounding, detention or
appropriation, damage or destruction occurs, give Lessor notice
and use best endeavors to procure the immediate release of the
Aircraft, any Engine or the Part, as the case may be;
(g) Not abandon the Aircraft, the Engine or any Part;
(h) Pay and discharge or cause to be paid and dis-
charged when due and payable or make adequate provision by way of
security or otherwise for all debts, damages, claims and liabili-
<PAGE>
ties which have given or might give rise to a Security Interest
over or affecting the Aircraft, any Engine or any Part; and
(i) Not attempt, or hold itself out as having any
power, to sell, lease or otherwise dispose of the Aircraft, any
Engine or any Part.
8.8 GENERAL. Lessee will:
(a) Not liquidate or dissolve and Lessee shall not
convey, transfer, lease or otherwise dispose of all or
substantially all of its property and other assets, whether in
one or series of related transactions;
(b) Not consolidate with or merge into, any other
corporation, except that:
(i) Lessee may merge with or into any other
corporation for the sole purpose of reincorporating Lessee
in another state, provided that the surviving corporation
shall execute and deliver to Lessor an agreement by which
such survivor expressly assumes the due and punctual
performance of all of the covenants and conditions of this
Agreement; and
(ii) Lessee may merge with or into any other
corporation, provided that:
[A] the corporation formed by or
surviving such consolidation or merger (the "Successor
Entity"):
(1) shall be a corporation
organized and existing under the laws of the United
States of America or any state thereof;
(2) immediately after giving
effect to such transaction, shall be Lessee or shall
have acquired or succeeded to all or substantially all
of the property and other assets (including, without
limitation, all or substantially all of Lessee's
property and other assets) as an entity; and
(3) shall execute and deliver to
Lessor an agreement, in form and substance reasonably
satisfactory to Lessor, which is a legal, valid,
binding and enforceable assumption by such Successor
Entity of the due and punctual performance and
observance of each covenant and condition of this
Agreement and agreement to be bound thereby, and shall
execute, deliver and/or file such recordations and
filings with any Government Entity and such other
<PAGE>
documents as Lessor shall reasonably deem to be
necessary or advisable (including, without limitation,
to preserve and protect the interests of Lessor) to
evidence, or in connection with, such consolidation,
merger,sale, lease, transfer or other disposition or
acquisition and an officer's certificate from a
responsible officer of the Successor Entity confirming
the legal, valid, binding and enforceable nature of
such assumption, and to the effect that the other
requirements of this paragraph have been satisfied, and
a legal opinion from counsel confirming the legal,
valid, binding and enforceable nature of such
assumption and otherwise in such form and substance
reasonably satisfactory to Lessor; and
[B] prior to and immediately after giving
effect to such transaction, no Default or Event of Default
shall have occurred and be continuing.
No such permitted transaction involving a Successor Entity shall
relieve or release Lessee of or from any obligations hereunder
which arose or existed prior to such transaction. Promptly
following the closing of such transaction, Lessee shall provide
Lessor with a certificate signed by Lessee's chief financial
officer to the effect that such transaction, will not have a
material adverse effect on Lessee's ability to perform its
obligations under this Agreement;
(c) Use the Aircraft predominantly in the United
States and ensure that no change will occur in the Habitual Base
of the Aircraft without the prior written consent of Lessor.
Lessor agrees that it shall not withhold its consent to a change
in the Habitual Base to another state of the United States of
America if Lessee shall have provided Lessor with an opinion of
counsel practicing in the state of the United States of America
proposed by Lessee to be the Habitual Base in form and in
substance reasonably satisfactory to Lessor to the effect that
the rights and interests of Lessor are duly protected; and
(d) Not, without giving Lessor thirty (30) days prior
notice (in accordance with this Agreement), change its chief
executive office (as such term is defined in Article 9 of the
Uniform Commercial Code as in effect in the State of Missouri)
from 30 N.W. Rome Circle, Mezzanine Level, Kansas City
International Airport, Kansas City, Missouri 64153;
(e) remain a Certificated Air Carrier and maintain,
without limitation, its status so as to fall within the purview
of Section 1110 of Title 11 of the United States Code or any
analogous Statute; and
<PAGE>
(f) remain a "citizen of the United States" as defined
in 49 U.S.C. Section 40102(15) of the Federal Aviation Act.
8.9 RECORDS. Lessee will:
(a) Cause accurate, complete and current records of
all flights made by, and all maintenance carried out on, the
Aircraft (including in relation to each Engine and Part subse-
quently installed, before the installation) to be kept; keep the
records in such manner as the Air Authority may from time to time
require, and ensure that they comply with the recommendations of
any manufacturers of the Aircraft, any Engine or any Part. The
records will form part of the Aircraft Documents; and
(b) Maintain its own or procure access to a revision
service in respect of, and will maintain with appropriate
revisions, all Aircraft Documents, records, logs, and other
materials required by applicable laws and best practice of major
international air transport operators in respect of the Aircraft.
8.10 PROTECTION: Lessee will:
(a) Maintain the registration of the Aircraft with the
Air Authority in the name of Lessor and, to the extent permitted
under the laws of the State of Registration, reflecting the
interests of Lessor and not do or suffer to be done anything
which might adversely affect that registration; and
(b) Do all acts and things (including, without
limitation, making any filing or registration with the Air
Authority or any other Government Entity) and execute and
deliver, notarize, file, register and record all documents
(including, without limitation, any amendment of this Agreement,
other than an amendment which would alter any of the material
terms hereof in a manner adverse to Lessee) as may be required by
Lessor, which shall be at Lessor's cost with respect to item (i)
and at Lessee's cost with respect to items (ii) and (iii) below:
(i) following any change or proposed change
in the ownership or financing of the Aircraft or in the
manner of securing Lessor's obligations to the Banks; or
(ii) following any modification of the
Aircraft, any Engine or any Part or the permanent
replacement of any Engine or Part in accordance with this
Agreement, so as to ensure that the rights of Lessor as
owner and lessor of the Aircraft and under this Agreement
apply with the same effect as before; or
(iii) to establish, maintain, preserve,
perfect and protect the rights of Lessor under this
<PAGE>
Agreement or the interest of Lessor as owner of the
Aircraft.
8.11 MAINTENANCE AND REPAIR. Lessee will:
(a) Keep the Aircraft airworthy in all respects and in
good repair and condition;
(b) Not change the Agreed Maintenance Program or the
schedule of the Agreed Maintenance Program without the written
consent of Lessor;
(c) Maintain the Aircraft in accordance with the
Agreed Maintenance Program through one or more Agreed Maintenance
Performers and perform (at the respective intervals provided in
the Agreed Maintenance Program) all Major Checks;
(d) Maintain the Aircraft in accordance with FAA
Federal Air Regulations Part 121 and any other rules and regula-
tions of the FAA as may be applicable to passenger category
aircraft and in at least the same manner and with at least the
same care, including, without limitation, maintenance scheduling,
modification status and technical condition, as is the case with
respect to similar aircraft owned or otherwise operated by Lessee
including, without limitation, all maintenance to the Airframe,
any Engine or any Part required to maintain all warranties, per-
formance guarantees or service life policies in full force and
effect and will not discriminate in the care, scheduling, scope,
status or technical condition of maintenance of the Aircraft as
compared with other aircraft included in Lessee's fleet of Boeing
737 Aircraft;
(e) Comply with all mandatory inspection and modifi-
cation requirements, airworthiness directives and similar
requirements applicable to the Aircraft, any Engine or Part
having a compliance date during the Term or within sixty (60)
days after the Expiration Date and which are required by the Air
Authority (each of the foregoing being hereinafter referred to as
a "Relevant AD").
The cost of compliance with any single Relevant AD
shall be allocated among Lessor and Lessee as follows:
(i) Lessee shall be responsible for the first
$200,000 of such cost;
(ii) Lessor and Lessee shall share, on an equal
basis, the portion of such cost (if any) which exceeds
$200,000 up to and including $350,000; and
(iii) Lessor shall be wholly responsible for the
portion of such cost (if any) which exceeds $350,000
<PAGE>
(subject always to the provisions of the following
paragraph.
Notwithstanding the foregoing, in the event that the
total cost of any single Relevant AD (such total cost to be
mutually agreed, in good faith, between Lessor and Lessee)
exceeds $350,000 (the "Threshold Amount"), Lessor may elect not
to make its contribution to the cost of compliance with such
Relevant AD as described in (iii) above. If Lessor shall so
elect, Lessee shall be entitled, by giving prior written notice
to Lessor, to terminate this Agreement and redeliver the Aircraft
to Lessor in accordance with the terms of Sections 12.1 through
12.8 and Schedule 3 (except for compliance with the Relevant AD
which gave rise to such termination) on the earlier of (x) the
date which is 30 days after the date of such notice from Lessee
to Lessor or (y) the date on which the Aircraft is required to be
removed from service by reason of non-compliance with the
applicable Relevant AD. Such notice shall specify the proposed
redelivery date of the Aircraft by Lessee and, upon the receipt
of such notice by Lessor, the then current definition of
Expiration Date shall be deemed to have been amended accordingly.
Upon any termination of this Agreement pursuant to this Section
8.11(e), neither party shall be under any further obligation in
the other hereunder except for (x) accrued obligations of Lessee
hereunder; and (y) obligations hereunder which are expressed to
continue notwithstanding the expiration of the Term; provided,
however, that Lessor shall, if applicable having regard to the
provisions of Section 7.3, make the payments described in Section
7.3(b) but shall be under no obligation to repay, rebate or
otherwise refund any Maintenance Reserves previously paid by
Lessee under this Agreement.
(f) Comply with all applicable laws and the regula-
tions of the Air Authority and other aviation authorities with
jurisdiction over Lessee or the Aircraft, any Engine or Part
regardless of upon whom such requirements are imposed and which
relate to the maintenance, condition, use or operation of the
Aircraft or require any modification or alteration to the
Aircraft, any Engine or Part;
(g) Maintain in good standing a current certificate of
airworthiness (in the appropriate category for the nature of the
operations of the Aircraft) for the Aircraft issued by the Air
Authority except where (i) the Aircraft is undergoing
maintenance, modification or repair required or permitted by this
Agreement or (ii) the Aircraft's Certificate of Airworthiness is
withdrawn by the Air Authority for all Aircraft of the same model
as the Aircraft, and will from time to time provide to Lessor a
copy of such certificate of airworthiness on request;
(h) If required by the Air Authority, maintain a
current certification as to maintenance issued by or on behalf of
<PAGE>
the Air Authority in respect of the Aircraft and will from time
to time provide to Lessor a copy on request; and
(i) Procure promptly the replacement of any Engine or
Part which has become time, cycle or calendar expired, lost,
stolen, seized, confiscated, destroyed, damaged beyond repair,
unserviceable or permanently rendered unfit for use, with an
engine or part complying with the conditions set out in
Section 8.13(a).
8.12 REMOVAL OF ENGINES AND PARTS. Lessee will ensure that
no Engine or Part installed on the Aircraft is at any time
removed from the Aircraft other than:
(a) If replaced as expressly permitted by this
Agreement; or
(b) If the removal is of an obsolete item and is in
accordance with the Agreed Maintenance Program; or
(c) (i) during the course of maintaining,
servicing, repairing, overhauling or testing that Engine or
the Aircraft, as the case may be; or
(ii) as part of a normal engine or part
rotation program; or
(iii) for the purpose of making such modifi-
cations to the Engine or the Aircraft, as the case may be,
as are permitted under this Agreement;
and then in each case only if it is reinstalled or replaced
by an engine or part complying with Section 8.13(a) as soon
as practicable and in any event no later than the Expiration
Date.
8.13 INSTALLATION OF ENGINES AND PARTS. Lessee will:
(a) Ensure that, except as permitted by this Agree-
ment, no engine or part is installed on the Aircraft unless:
(i) in the case of an engine, it is an
engine of the same model as, or an improved or advanced
version of the Engine it replaces, which is in the same or
better operating condition, has substantially similar or
greater hours available until the next scheduled checks,
inspections, overhauls and shop visits (taking into account
for this purpose the hours available in respect of all
compressor and turbine discs) and has the same or greater
value and utility as the replaced Engine;
<PAGE>
(ii) in the case of a part, it is in as good
operating condition, has substantially similar hours avail-
able until the next scheduled checks, inspections, overhauls
and shop visits, is of the same or a more advanced make and
model and is of the same interchangeable modification status
as the replaced Part;
(iii) in each case, it has become and remains
the property of Lessor free from Security Interests and on
installation on the Aircraft will without further act be
subject to this Agreement;
(iv) in each case, Lessee has sufficient
details as to its source and maintenance records to assure
compliance with applicable Air Authority requirements;;
(b) If no Default has occurred which is continuing, be
entitled to install any engine or part on the Aircraft by way of
replacement notwithstanding Section 8.13(a) if:
(i) there is not available to Lessee at the
time and in the place that that engine or part is required
to be installed on the Aircraft, a replacement engine or, as
the case may be, part complying with the requirements of
Section 8.13(a);
(ii) it would result in an unreasonable
disruption of the operation of the Aircraft and/or the
business of Lessee to ground the Aircraft until an engine or
part, as the case may be, complying with Section 8.13(a)
becomes available for installation on the Aircraft; and
(iii) as soon as practicable after installa-
tion of the same on the Aircraft but, in any event, no later
than the Expiration Date, Lessee removes any such engine or
part and replaces it with the Engine or Part replaced by it
or by an engine or part, as the case may be, complying with
Section 8.13(a).
8.14 NON-INSTALLED ENGINES AND PARTS. Lessee will:
(a) Ensure that any Engine or Part which is not
installed on the Aircraft (or any other aircraft as permitted by
this Agreement) is, except as expressly permitted by this
Agreement, properly and safely stored, and kept free from
Security Interests;
(b) Notify Lessor whenever any Engine is removed from
the Aircraft and, from time to time, on request procure that any
person to whom possession of an Engine is given acknowledges in
writing to Lessor, in form and substance satisfactory to Lessor,
that it will respect the interests of Lessor and as owner of the
<PAGE>
Engine and will not seek to exercise any rights whatsoever in
relation to it;
(c) Notwithstanding the foregoing provisions of this
subsection, be permitted, if no Default has occurred and is
continuing, to install any Part (other than an Engine, Landing
Gear or APU) on an aircraftor an engine:
(i) owned and operated by Lessee free from
Security Interests; or
(ii) leased or hired to Lessee by Lessor or
one of Lessor's Affiliates or otherwise pursuant to a lease
or conditional sale agreement on a long-term basis and on
terms whereby Lessee has full operational control of that
aircraft or engine; or
(iii) acquired by Lessee and/or financed or
refinanced, and operated by Lessee, on terms that ownership
of that aircraft or engine, as the case may be, pursuant to
a lease or conditional sale agreement, or a Security
Interest therein, is vested in or held by any other person;
provided that in the case of (ii) and (iii):
(1) the terms of any such lease,
conditional sale agreement or Security Interest will
not have the effect of prejudicing the interests of
Lessor as owner and lessor of that Engine or Part; and
(2) the lessor under such lease, the
seller under such conditional sale agreement or the
holder of such Security Interest, as the case may be,
has confirmed and acknowledged in writing to Lessor, in
form and substance satisfactory to Lessor, that it will
respect the interest of Lessor as owner and lessor of
that Engine or Part and that it will not seek to
exercise any rights whatsoever in relation thereto.
8.15 POOLING OF ENGINES AND PARTS. Lessee will not enter
into nor permit any pooling agreement or arrangement in respect
of an Engine or Part without the prior written consent of Lessor.
8.16 EQUIPMENT CHANGES.
(a) Lessee will not make any modification or addition
to the Aircraft (each an "Equipment Change"), except for an
Equipment Change which:
(i) is expressly permitted by this Agree-
ment, or
<PAGE>
(ii) has the prior written approval of Lessor
and which does not diminish the value, utility, condition,
or airworthiness of the Aircraft; and
(b) So long as a Default has not occurred and is
continuing, Lessee may remove any Equipment Change if it can be
removed from the Aircraft without diminishing or impairing the
value, utility, condition or airworthiness of the Aircraft.
8.17 TITLE ON AN EQUIPMENT CHANGE.
(a) Title to all Engines and Parts installed on the
Aircraft whether by way of replacement, as the result of an
Equipment Change or otherwise (except those installed pursuant to
Section 8.13(b)) will on installation, without further act, vest
in Lessor subject to this Agreement free and clear of all
Security Interests. Lessee will at its own expense take all such
steps and execute, and procure the execution of, all such
instruments as Lessor may require and which are necessary to
ensure that title so passes to Lessor according to all applicable
laws. At any time when requested by Lessor, Lessee will provide
evidence to Lessor's satisfaction (including the provision, if
required, to Lessor of one or more legal opinions) that title has
so passed to Lessor;
(b) Lessor may require Lessee to remove any Equipment
Change and to restore the Aircraft to its condition prior to that
Equipment Change at the end of the Term; and
(c) Except as referred to in Section 8.17(b) any
Engine or Part at any time removed from the Aircraft will remain
the property of Lessor until a replacement has been made in
accordance with this Agreement and until title in that replace-
ment has passed, according to applicable laws, to Lessor subject
to this Agreement free of all Security Interests whereupon title
to the replaced Engine or Part will pass to Lessee.
8.18 THIRD PARTY. Lessee will use its best efforts to
ensure that no person (other than Lessor or any Bank) will act in
any manner inconsistent with its obligations under this Agreement
and that all persons will comply with those obligations as if
references to "Lessee" included a separate reference to those
persons.
9. INSURANCE
9.1 INSURANCE. Lessee will maintain in full force during
the Term insurance in respect of the Aircraft in form and
substance satisfactory to Lessor (the "Insurance", which
expression includes, where the context so admits, any relevant
re-insurance(s)) through such brokers and with such insurers and
having such deductibles and being subject to such exclusions as
<PAGE>
may be approved by Lessor. The Insurance will be effected
either: (a) on a direct basis with insurers of recognized
standing who normally participate in aviation insurance in the
leading international insurance markets and led by reputable
underwriter(s) approved by Lessor; or (b) with a single insurer
or group of insurers approved by Lessor who does not retain the
risk but effects substantial reinsurance with reinsurers in the
leading international insurance markets and through brokers each
of recognized standing and acceptable to Lessor for a percentage
acceptable to Lessor of all risks insured (the "Reinsurance").
9.2 REQUIREMENTS. Lessor's current requirements as to
required Insurance are as specified in this Section and in
Schedule 4. Lessor may from time to time stipulate other
requirements for the Insurance so that the scope and level of
cover is maintained in line with best industry practice and the
interests of Lessor protected.
9.3 CHANGE. If at any time Lessor reasonably determines
that it is necessary to revoke its approval of any insurer,
reinsurer, insurance or reinsurance, Lessor and/or its brokers,
in order to protect the interests of the parties insured, Lessor
will first consult with Lessee and Lessee's brokers (as for the
time being approved by Lessor) regarding whether that approval
should be revoked to protect the interests of the parties
insured. If, following the consultation, Lessor reasonably
determines that any change should be made to protect the
interests of the Lessor and the parties insured, Lessee will then
arrange or procure the arrangement of alternative cover
satisfactory to Lessor.
9.4 INSURANCE COVENANTS. Lessee will:
(a) Ensure that all legal requirements as to insurance
of the Aircraft, any Engine or any Part which may from time to
time be imposed by the laws of the State of Registration or any
state which can assert jurisdiction over the Lessee, its business
or the Aircraft, in so far as they affect or concern the
operation of the Aircraft, are complied with and in particular
those requirements compliance with which is necessary to ensure
that (i) the Aircraft is not in danger of detention or
forfeiture, (ii) the Insurance remain valid and in full force and
effect, and (iii) the interests of the Indemnitees in the
Insurance and the Aircraft or any Part are not thereby
prejudiced;
(b) Not use, cause or permit the Aircraft, any Engine
or any Part to be used for any purpose or in any manner not
covered by the Insurance or outside any geographical limit
imposed by the Insurance;
<PAGE>
(c) Comply with the terms and conditions of each
policy of the Insurance and not do, consent or agree to any act
or omission which:
(i) invalidates or may invalidate the
Insurance; or
(ii) renders or may render void or voidable
the whole or any part of any of the Insurance; or
(iii) brings any particular liability within
the scope of an exclusion or exception to the Insurance;
(d) Not take out without the prior written approval of
Lessor any insurance or reinsurance in respect of the Aircraft
other than those required under this Agreement unless relating
solely to hull total loss, business interruption, profit
commission and deductible risk;
(e) Commence renewal procedures within a reasonable
period prior to expiration of any of the Insurance and provide to
Lessor:
(i) if requested by Lessor, a written status
report of renewal negotiation 14 days prior to each
expiration date;
(ii) facsimiled confirmation of completion of
renewal prior to each expiration date;
(iii) certificates of insurance and broker's
(and any reinsurance brokers') letter of undertaking in a
form acceptable to Lessor, detailing the coverage and
confirming the insurers' (and any reinsurers') agreement to
the specified insurance requirements of this Agreement
within seven (7) days after each renewal date;
(f) On request, provide to Lessor copies of documents
evidencing the Insurance;
(g) On request, provide to Lessor evidence that the
Insurance premiums have been paid;
(h) Not make any modification or alteration to the
Insurance material and adverse to the interests of any of the
Indemnitees;
(i) Be responsible for any deductible under the
Insurance; and
<PAGE>
(j) Provide any other insurance and reinsurance
related information, or assistance, in respect of the Insurance
as Lessor may reasonably require.
9.5 FAILURE TO INSURE. If Lessee fails to maintain the
Insurance in compliance with this Agreement, each of the
Indemnitees will be entitled but not bound (without prejudice to
any other rights of Lessor under this Agreement):
(a) To pay the premiums due or to effect and maintain
insurance satisfactory to it or otherwise remedy Lessee's failure
in such manner (including, without limitation to effect and
maintain an "owner's interest" policy) as it considers
appropriate. Any sums so expended by it will become immediately
due and payable by Lessee to Lessor together with interest
thereon at the rate specified in Section 5.11, from the date of
expenditure by it up to the date of reimbursement by Lessee; and
(b) At any time while such failure is continuing to
require the Aircraft to remain at any airport or to proceed to
and remain at any airport designated by it until the failure is
remedied to its satisfaction.
9.6 CONTINUING INDEMNITY. Lessor may require Lessee to
effect and to maintain insurance after the Expiration Date with
respect to its liability under the indemnities in Section 10 for
such period as Lessor may reasonably require (but in any event
not more than three (3) years) which provides for each Indemnitee
to be named as additional insured. Lessee's obligation in this
Section shall not be affected by Lessee ceasing to be lessee of
the Aircraft and/or any of the Indemnitees ceasing to have any
interest in respect of the Aircraft.
9.7 APPLICATION OF INSURANCE PROCEEDS. As between Lessor
and Lessee:
(a) All insurance payments received as the result of
an Event of Loss occurring during the Term will be paid to
Lessor, and Lessor will pay the balance of those amounts to
Lessee after deduction of all amounts which may be or become
payable by Lessee to Lessor under this Agreement (including under
Section 11.1(b));
(b) All insurance proceeds of any property damage or
loss to the Aircraft, any Engine or any Part occurring during the
Term not constituting an Event of Loss and in excess of the
Damage Notification Threshold will be paid to Lessor and applied
in payment (or to reimburse Lessee) for repairs or replacement
property upon Lessor being satisfied that the repairs or replace-
ment have been effected in accordance with this Agreement.
Insurance proceeds in amounts below the Damage Notification
<PAGE>
Threshold may be paid by the insurer directly to Lessee. Any
balance remaining may be retained by Lessor;
(c) All insurance proceeds in respect of third party
liability will, except to the extent paid by the insurers to the
relevant third party, be paid to Lessor to be paid directly in
satisfaction of the relevant liability or to Lessee in reimburse-
ment of any payment so made; and
(d) Notwithstanding Sections 9.7(a), (b) or (c), if at
the time of the payment of any such insurance proceeds a Default
has occurred and is continuing, all such proceeds will be paid to
or retained by Lessor to be applied toward payment of any amounts
which may be or become payable by Lessee in such order as Lessor
sees fit or as Lessor may elect.
10. INDEMNITY
10.1 GENERAL. Lessee agrees to assume liability for,
defend, indemnify and hold harmless the Indemnitees on an after
tax basis from and against any and all claims, proceedings,
losses, liabilities, damages (whether direct, indirect, special,
incidental or consequential) suits, judgments, costs, expenses
(including, without limitation, reasonable legal fees and
expenses), penalties (whether civil or criminal) or fines (each a
"Claim") (regardless of when the same is made or incurred,
whether during or after the Term):
(a) Which may at any time be suffered or incurred
directly or indirectly as a result of or in any manner connected
with the possession, delivery, performance, management, owner-
ship, registration, control, maintenance, condition, service,
repair, overhaul, leasing, use, operation or return of the
Aircraft, any Engine or Part (either in the air or on the
ground), whether or not the Claim may be attributable to any
defect in the Aircraft, any Engine or any Part or to its design,
testing or use or otherwise, and regardless of when the same
arises or whether it arises out of or is attributable to any act
or omission, negligent or otherwise, of any Indemnitee except as
otherwise provided herein; or
(b) Which arise out of any act or omission which
invalidates or which renders voidable any of the Insurance; or
(c) Which may at any time be suffered or incurred as a
consequence of any design, article or material in the Aircraft,
any Engine or any Part or its operation or use constituting an
infringement of patent, copyright, trademark, design or other
proprietary right or a breach of any obligation of confidenti-
ality owed to any person; or
<PAGE>
(d) Which results from Lessee's breach of any of its
representations or warranties or any other Event of Default under
this Agreement;
but excluding any Claim in relation to a particular Indemnitee to
the extent that that Claim is covered pursuant to another indem-
nity provision of this Agreement or to the extent it arises as a
result of the gross negligence or wilful misconduct of that
Indemnitee, Lessor, Lessor Taxes or a Lessor Lien, or to the
extent it arises out of facts or circumstances occurring after
the Expiration Date, where such facts or circumstances do not
result from acts or omissions of Lessee.
10.2 DURATION. The indemnities contained in this Agreement
will continue in full force after the Expiration Date.
10.3 SUBROGATION. Lessee shall be subrogated to an
Indemnitee's rights to any matter with respect to which Lessee
has reimbursed such Indemnitee for amounts expended or incurred
by it or has paid such amount directly pursuant to Section 10.1.
10.4 NOTICE AND COOPERATION. In case any action, suit or
proceeding is brought against an Indemnitee in connection with
any Claim indemnified against under this Agreement, such
Indemnitee will, promptly after receipt of notice of such action,
suit or proceeding, notify Lessee thereof, enclosing a copy of
all papers served upon such Indemnitee. Lessee may resist or
defend such action, suit or proceeding. The Indemnitee shall
take all actions reasonably requested by Lessee, at Lessee's cost
and expense, in connection with Lessee's defense or resistance of
such action, suit or proceeding.
11. EVENTS OF LOSS
11.1 EVENTS OF LOSS.
(a) If an Event of Loss occurs prior to delivery of
the Aircraft to Lessee, this Agreement will immediately terminate
and, except as expressly stated in this Agreement, neither party
will have any further obligation or liability under this
Agreement except that Lessor will refund to Lessee the amount of
any Aircraft Deposit paid under this Agreement; and
(b) If an Event of Loss occurs after delivery of the
Aircraft to Lessee, Lessee will pay the Agreed Value to Lessor on
or prior to the later of (i) five (5) Business Days after the
Event of Loss and (ii) the date of receipt of insurance proceeds
in respect of that Event of Loss. Subject to the rights of any
insurers and reinsurers or other third party, upon irrevocable
payment in full to Lessor of that amount and all other amounts
which may be or become payable to Lessor under this Agreement,
Lessor will without recourse or warranty (except as to Lessor's
<PAGE>
Liens) and without further act, be deemed to have transferred to
Lessee all of Lessor's rights to Parts not installed when the
Event of Loss occurred, all on an as-is where-is basis, and will
at Lessee's expense, execute and deliver such bills of sale and
other documents and instruments as Lessee may reasonably request
to evidence (on the public record or otherwise) the transfer and
the vesting of Lessor's rights in such Parts in Lessee, free and
clear of all rights of Lessor and Lessor Liens.
11.2 REQUISITION. During any requisition for use or hire of
the Aircraft, any Engine or Part which does not constitute an
Event of Loss:
(a) The Rent, Maintenance Reserves and other charges
payable under this Agreement will not be suspended or abated
either in whole or in part, and Lessee will not be released from
any of its other obligations under the Agreement (other than
operational obligations with which Lessee is unable to comply
solely by virtue of the requisition); and
(b) So long as no Default has occurred and is continu-
ing, Lessee will be entitled to any hire or other compensation
paid by the requisitioning authority in respect of the Term.
Lessee will, as soon as practicable after the end of any such
requisition, cause the Aircraft to be put into the condition
required by this Agreement. Lessor will be entitled to all
compensation payable by the requisitioning authority in respect
of any change in the structure, state or condition of the
Aircraft arising during the period of requisition, and Lessor
will apply such compensation in reimbursing Lessee for the cost
of complying with its obligations under this Agreement in respect
of any such change, but so that, if any Default has occurred and
is continuing, Lessor may apply the compensation or hire in or
towards settlement of any amounts owing by Lessee under this
Agreement.
12. RETURN OF AIRCRAFT.
12.1 RETURN. On the Expiration Date or earlier termination
of the lease of the Aircraft under this Agreement, unless an
Event of Loss has occurred, Lessee will, at its expense,
redeliver the Aircraft and Aircraft Documents to Lessor at the
Redelivery Location or such other airport as is mutually
acceptable to the parties hereto, in a condition complying with
Schedule 3, free and clear of all Security Interests and
Permitted Liens (other than Lessor Liens) and in a condition
qualifying for immediate certification of airworthiness by the
FAA or as otherwise agreed by Lessor and Lessee.
12.2 FINAL INSPECTION. Immediately prior to redelivery of
the Aircraft, Lessee will make the Aircraft available to Lessor
for inspection ("Final Inspection") in order to verify that the
<PAGE>
condition of the Aircraft complies with this Agreement. The
Final Inspection will be long enough to permit Lessor to:
(a) Inspect the Aircraft Documents;
(b) Inspect the Aircraft and uninstalled Parts;
(c) Inspect the Engines, including without limitation
(i) at Lessor's expense, a video boroscope inspection of (A) the
low pressure and high pressure compressors and (B) turbine area
and (ii) at Lessee's expense, engine condition runs; and
(d) Observe a two (2) hour demonstration flight (with
Lessor's representatives as on-board observers).
Provided, however, that such Final Inspection will not exceed
three (3) consecutive days.
12.3 NON-COMPLIANCE. To the extent that, at the time of
Final Inspection, the condition of the Aircraft does not comply
with this Agreement, Lessee will at Lessor's option:
(a) Immediately rectify the non-compliance and to the
extent the non-compliance extends beyond the Expiration Date, the
Term will be automatically extended and this Agreement will
remain in force until the non-compliance has been rectified; or
(b) Redeliver the Aircraft to Lessor and indemnify
Lessor, and provide to Lessor's satisfaction cash as security for
that indemnity, against the cost of putting the Aircraft into the
condition required by this Agreement.
12.4 REDELIVERY. Upon redelivery Lessee will provide to
Lessor all documents necessary to export the Aircraft from the
Habitual Base, if any, provided, however, that Lessee will not be
required to provide documents necessary to export the Aircraft to
a place outside the United States.
12.5 ACKNOWLEDGEMENT. Provided Lessee has complied with its
obligations under this Agreement, upon redelivery of the Aircraft
by Lessee to Lessor at the Redelivery Location, Lessor will
deliver to Lessee an acknowledgement confirming that Lessee has
redelivered the Aircraft to Lessor in accordance with this
Agreement.
12.6 MAINTENANCE PROGRAM.
(a) Prior to the Expiration Date and upon Lessor's
request, Lessee will provide Lessor or its agent reasonable
access to the Agreed Maintenance Program and the Aircraft
Documents in order to facilitate the Aircraft's integration into
any subsequent operator's fleet;
<PAGE>
(b) Lessee will, if requested by Lessor to do so, upon
return of the Aircraft, deliver to Lessor a certified true cur-
rent and complete copy of the Agreed Maintenance Program,
together with a letter authorizing Lessor to use such copy for
"bridging" purposes for the next lessee of the Aircraft. Lessor
agrees that it will not disclose the contents of the Agreed
Maintenance Program to any person or entity except to the extent
necessary to monitor Lessee's compliance with this Agreement
and/or to bridge the maintenance program for the Aircraft from
the Agreed Maintenance Program to another program after the
Expiration Date; provided, however, that this will not give
Lessor or any third party any rights to use the Agreed
Maintenance Program.
12.7 FUEL. Upon redelivery of the Aircraft to Lessor, an
adjustment will be made in respect of fuel on board on the
Delivery Date and the Expiration Date at the price then
prevailing at the Habitual Base.
12.8 AIRCRAFT STORAGE. During the period of thirty (30)
days after the Expiration Date, Lessor shall have the right to
require Lessee to maintain, store and insure the Aircraft at a
location having a facility capable of performing required
maintenance of the Aircraft (to be mutually agreed by Lessor and
Lessee), at Lessor's sole cost and expense as provided below.
Any maintenance or insurance cost actually incurred or paid by
Lessee to any third party vendor in connection with the foregoing
shall be payable by Lessor at Lessee's direct cost without
"mark-up". No later than thirty (30) days prior to the
Expiration Date, Lessor shall advise Lessee as to whether Lessor
requires Lessee to provide the services contemplated by this
Section 12.8.
13. DEFAULT
13.1 EVENTS OF DEFAULT. Each of the following events or
conditions will constitute an Event of Default (whether any such
event or condition is voluntary or involuntary or occurs by
operation of law or pursuant to or in compliance with any
judgment, decree or order of any court or any order, rule or
regulation of any Government Entity):
(a) NON-PAYMENT. Lessee fails to make any payment
under this Agreement on the due date and such failure continues
for five (5) Business Days; or
(b) INSURANCE. Lessee fails to comply with any
provision of Section 9 or any insurance required to be maintained
under this Agreement is cancelled or terminated or notice of
cancellation is given in respect of any such insurance and such
insurance is not renewed or replaced before cancellation or
termination; or
<PAGE>
(c) BREACH. Lessee fails to comply with any other
provision of this Agreement and, if such failure is in the
reasonable opinion of Lessor capable of remedy, the failure
continues for fifteen (15) days after written notice from Lessor
to Lessee; or
(d) REPRESENTATION. Any material representation or
warranty made (or deemed to be repeated) by Lessee in or pursuant
to this Agreement or in any document or certificate or statement
to Lessor is or proves to have been incorrect in any material
respect when made or deemed to be repeated; or
(e) CROSS DEFAULT. Any other indebtedness of Lessee
in excess of $150,000 in the aggregate owing to Lessor, to
Interlease Aviation Investors II (Aloha), L.L.C. and/or to
Interlease Aviation Investors III (TACA), L.L.C. is not paid when
due or Lessee has failed to comply with any other provision of
any of the Other Agreements (after notice and the expiration of
any applicable cure periods); or
(f) APPROVALS: Any consent, authorization, license,
certificate or approval of or registration with or declaration to
any Government Entity in connection with this Agreement
(including, without limitation):
(i) required by Lessee to authorize, or in
connection with, the execution, delivery, validity, enforce-
ability or admissibility in evidence of this Agreement or
the performance by Lessee of its obligations under this
Agreement; or
(ii) the registration of the Aircraft (to the
extent that the same is within the control of Lessee); or
(iii) Lessee's authority to operate the
Aircraft under Part 121 of the Federal Aviation Regulations
and Lessee's interstate Certificate of Convenience and
Necessity issued under Section 401 of the Federal Aviation
Act;
is modified in a manner unacceptable to Lessor or is withheld, or
is revoked, suspended, cancelled, withdrawn, terminated or not
renewed, or otherwise ceases to be in full force provided the
foregoing is not the result of any act, omission or breach of
Lessor; or
(g) BANKRUPTCY, ETC.
(i) Lessee consents to the appointment of a
custodian, receiver, trustee or liquidator of itself or all
or any material part of Lessee's property or Lessee's
consolidated property, or Lessee admits in writing its
<PAGE>
inability to, or is unable to, or does not, pay its debts
generally as they come due, or makes a general assignment
for the benefit of creditors, or Lessee files a voluntary
petition in bankruptcy or a voluntary petition seeking
reorganization in a proceeding under any bankruptcy or
insolvency laws (as now or hereafter in effect), or an
answer admitting the material allegations of a petition
filed against Lessee in any such proceeding, or Lessee by
voluntary petition, answer or consent seeks relief under the
provisions of any other bankruptcy, insolvency or other
similar law providing for the reorganization or winding-up
of corporations, or provides for an agreement, composition,
extension or adjustment with its creditors, or any corporate
action (including, without limitation, any board of
directors or shareholder action) is taken by Lessee in
furtherance of any of the foregoing, whether or not the same
is fully effected or accomplished; or
(ii) an order, judgment or decree is entered
by any court appointing, without the consent of Lessee, a
custodian, receiver, trustee or liquidator of Lessee, or of
all or any material part of Lessee's property or Lessee's
consolidated property is sequestered, and any such order,
judgment or decree of appointment or sequestration remains
in effect, undismissed, unstayed or unvacated for a period
of thirty (30) days after the date of entry thereof or at
any time an order for relief is granted; or
(iii) an involuntary petition against Lessee
in a proceeding under the United States Federal Bankruptcy
laws or other insolvency laws (as now or hereafter in
effect) is filed and is not withdrawn or dismissed within
thirty (30) days thereafter or at any time an order for
relief is granted in such proceeding, or if, under the
provisions of any law providing for reorganization or
winding-up of corporations which may apply to Lessee, any
court of competent jurisdiction assumes jurisdiction over,
or custody or control of, Lessee or of all or any material
part of Lessee's property, or Lessee's consolidated property
and such jurisdiction, custody or control remains in effect,
unrelinquished, unstayed or unterminated for a period of
thirty (30) days or at any time an order for relief is
granted in such proceeding; or
(h) UNLAWFUL. It becomes unlawful for Lessee to
perform any of its obligations under this Agreement or this
Agreement becomes wholly or partly invalid or unenforceable; or
(i) SUSPENSION OF BUSINESS. Lessee or any of its
Subsidiaries suspends or ceases or threatens to suspend or cease
to carry on all or a substantial part of its business as a
<PAGE>
Certificated Air Carrier for a period of more than seven (7)
days; or
(j) DISPOSAL. Except for a reorganization the terms
of which have received the previous consent in writing of Lessor,
Lessee or any of its Subsidiaries disposes, conveys or transfers
or threatens to dispose, convey or transfer of all or a material
part of its assets, liquidates or dissolves or consolidates or
merges with any other Person (other than a consolidation or
merger permitted by the terms of Section 8.8(b) above), whether
by one or a series of transactions, related or not.
(k) RIGHTS. The existence, validity, enforceability
or priority of the rights of Lessor as owner and lessor in
respect of the Aircraft are challenged by Lessee or any other
person claiming by or through Lessee, except if such challenge is
in connection with a breach by Lessor of Section 7.1; or
(l) DELIVERY. Lessee fails to accept the Aircraft
when validly tendered for acceptance or delivery by Lessor in the
condition required by and pursuant to this Agreement.
13.2 RIGHTS. If an Event of Default occurs, Lessor may at
its option (and without prejudice to any of its other rights
under this Agreement), at any time thereafter (without notice to
Lessee except as required under applicable law):
(a) By written notice to Lessee and with immediate
effect, terminate this lease of the Aircraft (but without
prejudice to the continuing obligations of Lessee under this
Agreement), whereupon all rights of Lessee under this Agreement
shall cease; and/or
(b) Proceed by appropriate court action or actions to
enforce performance of this Agreement or to recover damages for
the breach of this Agreement; and/or
(c) Either:
(i) Take possession of the Aircraft, for
which purpose Lessor may enter any premises belonging to or
in the occupation of or under the control of Lessee where
the Aircraft may be located, or cause the Aircraft to be
redelivered to Lessor at Dubuque, Iowa (or such other
location in the continental U.S. as Lessor may require), and
Lessor is hereby irrevocably by way of security for Lessee's
obligations under this Agreement appointed attorney for
Lessee in causing the redelivery or in directing the pilots
of Lessee or other pilots to fly the Aircraft to that
airport and will have all the powers and authorizations
necessary for taking that action; or
<PAGE>
(ii) By serving written notice require Lessee
to redeliver the Aircraft to Lessor at Dubuque, Iowa (or
such other location in the continental U.S. as Lessor may
require).
13.3 DEREGISTRATION. If an Event of Default occurs, Lessor
may sell or otherwise deal with the Aircraft free and clear of
any leasehold or other interest of Lessee as if this Agreement
had never been made and Lessee will, at the request and expense
of Lessor, take all steps necessary to effect (if applicable)
deregistration of the Aircraft and its export from the country
where the Aircraft is situated and any other steps necessary to
enable the Aircraft to be delivered, at Lessor's option, outside
the United States; Lessee hereby irrevocably and by way of
security for its obligations under this Agreement appoints (which
appointment is coupled with an interest) Lessor as its attorney
to execute and deliver any documentation and to do any act or
thing required in connection with the foregoing.
13.4 DEFAULT PAYMENTS. If:
(a) An Event of Default occurs; or
(b) The Aircraft is not delivered on the proposed
Delivery Date by reason of failure of Lessee to satisfy any
conditions to that delivery and such failure is not the result of
Lessor's breach hereunder;
Lessee will indemnify Lessor on demand against any loss, damage,
expense, cost or liability which Lessor may sustain or incur
directly or indirectly as a result including but not limited to:
(a) Any amount of principal, interest, fees or other
sums whatsoever paid or payable on account of funds borrowed in
order to carry any unpaid amount;
(b) Any loss, premium, penalty or expense which may be
incurred in repaying funds raised to finance the Aircraft or in
unwinding any swap, forward interest rate agreement or other
financial instrument relating in whole or in part to Lessor's
financing of the Aircraft; and
(c) Any loss, cost, expense or liability sustained or
incurred by Lessor owing to Lessee's failure to redeliver the
Aircraft on the date, at the place and in the condition required
by this Agreement.
14. ASSIGNMENT
14.1 LESSEE WILL NOT ASSIGN, TRANSFER (VOLUNTARILY OR
INVOLUNTARILY BY OPERATION OF LAW OR OTHERWISE) OR CREATE OR
<PAGE>
PERMIT TO EXIST ANY SECURITY INTEREST IN, TO OR UNDER, ANY OF ITS
RIGHTS UNDER THIS AGREEMENT.
14.2 Subject to Section 14.4, Lessor may assign or transfer
all of its rights under this Agreement and in the Aircraft,
provided that Lessor will in the case of an assignment other than
by way of security have no further obligation under this
Agreement following the assignment of all its rights under this
Agreement but notwithstanding that assignment will remain
entitled to the benefit of each indemnity and the liability
insurances effected under this Agreement; and provided that such
assignment, novation or transfer does not violate any provision
of the Federal Aviation Act or any rule or regulation thereunder,
or prevent the continued U.S. registration of the Aircraft. Any
such assignment, transfer or novation will be subject to Lessee's
rights under this Agreement. Lessee will comply with all
reasonable requests of Lessor, its successors and assigns in
respect of any such assignment, and Lessor will promptly notify
Lessee of any such assignment.
14.3 If Lessor desires to effect any assignment or transfer
of its rights and obligations under this Agreement, Lessee agrees
to cooperate and take all such steps as Lessor may reasonably
request to give the transferee the benefit of this Agreement.
Any reasonable expenses incurred by Lessee directly as a result
of any assignment contemplated by Section 14.2 shall be advanced
by Lessor.
14.4 Any assignment, novation or transfer by Lessor will be
at Lessor's cost and expense and will not result in any increase
in Lessee's obligations hereunder in excess of those which would
exist in the absence of such assignment, novation or transfer.
15. ILLEGALITY
If it is or becomes unlawful in any jurisdiction for Lessor
to give effect to any of its obligations as contemplated by this
Agreement or to continue this Agreement Lessor may by notice in
writing to Lessee terminate the leasing of the Aircraft under
this Agreement and Lessee will forthwith redeliver the Aircraft
to Lessor in accordance with Section 12. Without prejudice to
the foregoing Lessor will consult in good faith with Lessee as to
any steps which may be taken to restructure the transaction to
avoid that unlawfulness but will be under no obligation to take
any such steps.
16. MISCELLANEOUS
16.1 WAIVERS, REMEDIES CUMULATIVE. The rights of each party
under this Agreement:
(a) May be exercised as often as necessary;
<PAGE>
(b) Are cumulative and not exclusive of its rights
under any law; and
(c) May be waived only in writing and specifically.
Delay in exercising or non-exercise of any such right will not
constitute a waiver of that right.
16.2 DELEGATION. Lessor may delegate to any person or
persons all or any of the trusts, powers or discretions vested in
it by these presents and any such delegation may be made upon
such terms and conditions and subject to such regulations
(including power to sub-delegate) as Lessor in its absolute
discretion thinks fit.
16.3 CERTIFICATES. Except where expressly provided in this
Agreement, any certificate or determination by Lessor as to any
rate of interest or as to any other amount payable under this
Agreement will, in the absence of error, be conclusive and
binding on Lessee.
16.4 APPROPRIATION. If any sum paid or recovered in respect
of the liabilities of Lessee under this Agreement is less than
the amount then due, Lessor may apply that sum to amounts due
under this Agreement in such proportions and order and generally
in such manner as Lessor may determine at its sole discretion.
16.5 INTENTIONALLY LEFT BLANK.
16.6 SET-OFF. Lessor may set off any matured obligation
owed by Lessee under this Agreement or the Other Agreements (to
the extent beneficially owned by Lessor) against any obligation
(whether or not matured) owed by Lessor to Lessee, regardless of
the place of payment or currency. If an obligation is
unascertained or unliquidated, Lessor may in good faith estimate
that obligation and set off in respect of the estimate, subject
to the relevant party accounting to the other when the obligation
is ascertained or liquidated. Lessor will not be obliged to pay
any amounts to Lessee under this Agreement so long as any sums
which are then due from Lessee under this Agreement or the Other
Agreements remain unpaid and any such amounts which would
otherwise be due will fall due only if and when Lessee has paid
all such sums except to the extent Lessor otherwise agrees or
sets off such amounts against such payment pursuant to the
foregoing.
16.7 SEVERABILITY. If a provision of this Agreement is or
becomes illegal, invalid or unenforceable in any jurisdiction,
that will not affect:
(a) The legality, validity or enforceability in that
jurisdiction of any other provision of this Agreement; or
<PAGE>
(b) The legality, validity or enforceability in any
other jurisdiction of that or any other provision of this
Agreement.
16.8 REMEDY. If Lessee fails to comply with any provision
of this Agreement, Lessor may, without being in any way obliged
to do so or responsible for so doing and without prejudice to the
ability of Lessor to treat the non-compliance as a Default or an
Event of Default, effect compliance on behalf of Lessee, where-
upon Lessee shall become liable to pay immediately any sums
expended by Lessor together with all costs and expenses
(including legal costs) in connection therewith.
In the event that Lessee obtains a judgment against
Lessor, Lessee will be entitled to receive all costs and expenses
(including legal costs) in connection therewith.
16.9 EXPENSES. Unless this Agreement is terminated by
reason of Lessor's failure to deliver the Aircraft to Lessee
through no breach or default of Lessee of the terms of this
Agreement, Lessee will pay to Lessor on demand, upon the
occurrence of a Default, all reasonable expenses (including
legal, survey and other costs) payable or incurred by Lessor in
contemplation of, or otherwise in connection with, the
enforcement of or preservation of any of Lessor's rights under
this Agreement, or in respect of the repossession of the
Aircraft.
All expenses payable pursuant to this Section 16.9 will be paid
as they are incurred by Lessor.
16.10 TIME OF ESSENCE. The time stipulated in this
Agreement for all payments payable by Lessee to Lessor and for
the performance of Lessee's other obligations under this
Agreement will be of the essence of this Agreement.
16.11 NOTICES. All notices under, or in connection with,
this Agreement will, unless otherwise stated, be given in
writing. Any such notice is deemed effectively to be given, if
by letter, by registered mail, return receipt requested, or by an
overnight courier which provides a receipt upon deposit with such
courier, when delivered.
The address of Lessee and Lessor are as follows:
Lessee: Vanguard Airlines, Inc.
30 N.W. Rome Circle - Mezzanine Level
Kansas City International Airport
Kansas City, Missouri 64153
Attn: Brian Gillman
<PAGE>
Lessor: Mimi Leasing Corp.
600 Sunset Ridge
Dubuque, Iowa 52003
Attn: Philip Coleman
16.12 LAW AND JURISDICTION:
(a) THIS AGREEMENT IN ALL RESPECTS IS GOVERNED BY AND TO
BE INTERPRETED IN ACCORDANCE WITH LAWS OF THE STATE OF THE
GOVERNING LAW, WITHOUT REGARD TO ITS CONFLICTS OF LAW PRINCIPLES.
(b) For the benefit of Lessor, Lessee agrees that the
federal courts of the Eastern District of Iowa, are to have
nonexclusive jurisdiction to settle any disputes in connection with
this Agreement and submits itself and its property to the
jurisdiction of the courts of the State of Iowa in connection with
this Agreement;
(c) Without prejudice to any other mode of service:
(i) Lessee appoints Prentice Hall as its agent
for service of process relating to any proceedings before the
Iowa courts in connection with this Agreement and agrees to
maintain the process agent in Iowa notified to Lessor;
(ii) Lessee agrees that failure by a process
agent to notify Lessee of the process shall not invalidate the
proceedings concerned;
(iii) Lessee consents to the service of process
relating to any such proceedings by prepaid mailing of a copy
of the process to Lessee's agent at the address identified in
paragraph (i);
(d) Lessee:
(i) waives objection to the federal courts in
the State of Iowa on grounds of inconvenient forum or
otherwise as regards proceedings in connection with this
Agreement; and
(ii) agrees that a judgment or order of a
federal court in the State of Iowa in connection with this
Agreement is conclusive and binding on it and may be enforced
against it in the courts of any other jurisdiction;
(e) Nothing in this Section limits the right of Lessor
to bring proceedings against Lessee in connection with this
Agreement:
(i) in any other court of competent
jurisdiction; or
<PAGE>
(ii) concurrently in more than one
jurisdiction; and
(f) Lessee and Lessor irrevocably and unconditionally:
(i) agrees that if the other party brings
legal proceedings against it or its assets in relation to this
Agreement no immunity from such legal proceedings (which will
be deemed to include without limitation, suit, attachment
prior to judgment, other attachment, the obtaining of
judgment, execution or other enforcement) will be claimed by
or on behalf of itself or with respect to its assets;
(ii) waives any such right of immunity which it
or its assets now has or may in the future acquire;
(iii) consents generally in respect of any such
proceedings to the giving of any relief or the issue of any
process in connection with such proceedings including, without
limitation, the making, enforcement or execution against any
property whatsoever (irrespective of its use or intended use)
of any order or judgment which may be made or given in such
proceedings.
16.13 ENTIRE AGREEMENT. This Agreement and the Letter
Agreement are the sole and entire agreement between Lessor and
Lessee in relation to the leasing of the Aircraft, and supersede
all previous agreements in relation to that leasing.
16.14 INDEMNITIES. All rights expressed to be granted to each
Indemnitee under this Agreement (other than Lessor) are given to
Lessor on behalf of that Indemnitee.
16.15 COUNTERPARTS. This Agreement may be executed in
counterparts each of which will constitute one and the same
document.
17. DISCLAIMERS AND WAIVERS
17.1 EXCLUSION. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED
HEREIN, THE AIRCRAFT IS DELIVERED "AS IS, WHERE IS" AND LESSEE
AGREES AND ACKNOWLEDGES THAT UPON ACCEPTANCE OF DELIVERY OF THE
AIRCRAFT BY LESSEE, SAVE AS EXPRESSLY STATED IN THIS AGREEMENT,
LESSOR WILL HAVE NO LIABILITY IN RELATION TO, AND LESSOR HAS NOT
AND WILL NOT BE DEEMED TO HAVE MADE OR GIVEN, ANY WARRANTIES OR
REPRESENTATIONS, EXPRESS OR IMPLIED, WITH RESPECT TO, THE AIRCRAFT,
INCLUDING BUT NOT LIMITED TO:
(a) THE DESCRIPTION, AIRWORTHINESS, MERCHANTABILITY,
FITNESS FOR ANY PARTICULAR USE OR PURPOSE, VALUE, CONDITION, OR
DESIGN, OF THE AIRCRAFT OR ANY PART; OR
<PAGE>
(b) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN
TORT, WHETHER OR NOT ARISING FROM LESSOR'S NEGLIGENCE, ACTUAL OR
IMPUTED; OR
(c) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY
FOR LOSS OF OR DAMAGE TO THE AIRCRAFT, FOR ANY LIABILITY OF LESSEE
TO ANY THIRD PARTY, OR FOR ANY OTHER DIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES.
17.2 WAIVER. LESSEE HEREBY WAIVES, AS BETWEEN ITSELF AND THE
LESSOR, ALL ITS RIGHTS IN RESPECT OF ANY WARRANTY OR
REPRESENTATION, EXPRESS OR IMPLIED, ON THE PART OF LESSOR AND ALL
CLAIMS AGAINST LESSOR HOWSOEVER AND WHENEVER ARISING AT ANY TIME IN
RESPECT OF OR OUT OF THE OPERATION OR PERFORMANCE OF THE AIRCRAFT
OR THIS AGREEMENT EXCEPT TO THE EXTENT ARISING UNDER SECTION 2.4.
17.3 CONFIRMATION. LESSEE CONFIRMS THAT IT IS FULLY AWARE OF
THE PROVISIONS OF THIS SECTION 17 AND ACKNOWLEDGES THAT RENT AND
OTHER AMOUNTS HAVE BEEN CALCULATED BASED ON ITS PROVISIONS.
18. SECTION 1110
Lessee acknowledges that Lessor would not have entered into
this Agreement unless it had available to it the benefits of a
lessor under Section 1110 of Title 11 of the United States Code.
Lessee covenants and agrees with Lessor that to better ensure the
availability of such benefits, Lessee shall support any motion,
petition or application filed by Lessor with any bankruptcy court
having jurisdiction over Lessee, whereby Lessor seeks recovery of
possession of the Aircraft under said Section 1110 and shall not in
any way oppose such action by Lessor unless Lessee shall have
complied with the requirements of said Section 1110 to be fulfilled
in order to entitle Lessee to continued use and possession of the
Aircraft hereunder. In the event said Section 1110 is amended, or
if it is repealed and another statute is enacted in lieu thereof,
Lessor and Lessee agree to amend this Agreement and take such other
action not inconsistent with this Agreement as Lessor reasonably
deems necessary so as to afford to Lessor the rights and benefits
as such amended or substituted statute confers upon owners and
lessors of aircraft similarly situated to Lessor.
<PAGE>
IN WITNESS whereof the parties hereto have executed this
Agreement on the date shown at the beginning of this Agreement.
WITNESS: Lessor:
MIMI LEASING CORP.
______________________ By: _____________________________
Name: ___________________________
Title: __________________________
WITNESS: Lessee:
VANGUARD AIRLINES, INC.
_______________________ By: ____________________________
Name: __________________________
Title: _________________________
<PAGE>
SCHEDULE 1
PART 1
DESCRIPTION OF AIRCRAFT
AIRCRAFT
MANUFACTURER: Boeing
MODEL: 737-247
SERIAL NUMBER: 19607
U.S. REGISTRATION NO. N912MP
ENGINES
ENGINE TYPE AND NO.: Pratt & Whitney JT8D-9A x 2 with FAA FAR
36 Stage III Hushkits
SERIAL NOS: 674165 and 674214
At the time for acceptance and on the Delivery Date, Lessor
will tender for delivery the Aircraft to Lessee in the following
condition:
(1) General Conditions
(A) The Aircraft will be a U.S. registered aircraft in
airworthy condition and ready for flight by Lessee under Part 121
with all of the equipment, components and systems fully functional
and operating within limits and/or guidelines established by the
relevant manufacturers and the FAA. The Aircraft shall have
installed full complements of engines, avionics, instruments, parts
and other equipment.
(B) The Aircraft shall be free of damage, free of loose,
pulled or missing fasteners, clean by typical good international
airline standards and commensurate with a deep cleaning of such
Aircraft, and all external doublers must be within Boeing SRM
limits and have no evidence of corrosion.
(C) The Aircraft shall have a certificate of
airworthiness issued by the FAA, comply with the manufacturer's
type certificate as revised to the Date of Delivery, and be
delivered in full compliance with all applicable Airworthiness
Directives, mandatory Service Bulletins and FARs affecting such
model aircraft/engine that by their terms require compliance within
two (2) months after the Delivery Date or 540 Flight Hours or 210
Cycles, whichever is applicable, without waiver, exemption or
extension, including but not limited to, requirements relating to
TCAS, windshear, flight data recorders, type-3 exits, aging
<PAGE>
aircraft, corrosion and handicapped requirements. Corrosion shall
be within acceptable limits per the Boeing SRM.
(D) All pilot logbook reports and discrepancies,
deferred maintenance items (including CDL and MEL items) shall have
been corrected without exemption or extension, and neither the
Aircraft nor any Engine shall have any open, deferred continued or
placarded maintenance item that would normally be corrected in U.S.
121 airline operations. All impact damage will be repaired in
accordance with the Boeing SRM.
(2) Airframe.
(A) The Airframe shall be delivered to Lessee with zero
time since the next "C" check under the Agreed Maintenance Program.
(B) All hard-time components (except the Engines and
landing gear) will have approximately 50% of the time, hours or
cycles remaining to the next scheduled overhaul per the Boeing MPD.
If any item is materially close but has less than 50% of the time,
hours or cycles remaining, Lessor and Lessee will negotiate in good
faith and agree whether such item(s) can be delivered "as is" or
will be overhauled. In addition, the Lessor shall make available
the appropriate paper-work so that Lessee can verify last overhaul
of other rotables that are not addressed under the Boeing MPD
limits that Vanguard is required to track. If any component lacks
documentation per FAA FAR 380a and is a "hard" time component for
the Lessee even if it is not on the Boeing MPD as such, it will be
overhauled at Lessor's expense. For components with hardtime
limits based on calendar limit, or which have a Boeing MPD limit of
less than 4,000 hours or 3,000 cycles, each such component will be
delivered to Lessee with at least thirteen (13) months remaining
(per the Boeing MPD) based on 4,000 hours or 3,000 cycles equals
thirteen (13) months remaining.
(3) Engines. Subject to the terms of Section 4.2(b) of
the Lease Agreement concerning conditional acceptance of the
Aircraft:
(A) The Engines shall be delivered to Lessee with an
average of 5,400 cycles and 8,100 hours remaining on each limiter
which applies to the C-1 through C-13 and T-1 through T-4 disks,
and each Engine will have a minimum of two (2) years, 5,400 cycles
or 8,100 hours, whichever applies, to compliance with all
applicable Engine repetitive ADs. Neither Engine will have less
than 5,000 cycles.
(B) Upon delivery, each engine of the Aircraft shall
have completed (at Lessee's expense) a complete (100% of all
stages) boroscope inspection which will cover both hot and cold
sections and Engine condition power assurance runs, and any defects
that exceed the engine manufacturer's limits shall have been
corrected.
<PAGE>
(C) The current C-2 on Engine S/N 67214, which has
approximately 1,700 cycles remaining will be replaced by an engine
shop road team as soon as an economic replacement can be obtained
to provide equal "life" to the most restrictive alternate limiter
if an appropriate C-2 cannot be located right now. The replacement
of the C-2 will be at the sole expense of Lessor when it is
exchanged.
(4) APU. The APU will be serviceable ("on condition") on
Delivery.
(5) Landing Gears. Each landing gear will not have less than
50% of time, hours or cycles remaining until the next scheduled
overhaul.
(6) Configuration.
(A) Lessor will supply the Aircraft in a single-class
service 122-seat all coach configuration (including all engineering
support), with an equivalent number of PSUs, and provide the
Aircraft with closed style bins.
(B) The Aircraft will be stripped and painted, as
required by Lessee, in Lessee's new livery.
(C) Lessor shall reweigh the Aircraft upon completion of
its pre-Delivery workscope for the Aircraft if required by the
Boeing SRM.
(7) Improvements. Before Delivery, Lessor shall:
(A) Aircraft will be delivered to Lessor zero time since
compliance with all applicable repetitive Airworthiness Directives
which have less than 4,000 hours or 3,000 cycles, or if calendar
limited, thirteen (13) months remaining before compliance is due.
(B) Aircraft will be delivered to Lessee zero time since
compliance with all applicable repetitive "Aging Aircraft" Service
Bulletin Modifications or inspections which have less than 4,000
hours or 3,000 cycles, or if calendar is limited, thirteen (13)
months remaining before compliance is due per AD 93-08-04.
(C) Aircraft will be delivered to Lessee zero time since
the compliance with all applicable Tasks (CPCP) which have less
than 4,000 hours or 3,000 cycles or thirteen (13) months remaining.
(D) Supply the Aircraft with a forward and an aft
lavatory and with #1, #2 and #4 galleys in accordance with Lessee's
LOPA.
<PAGE>
(8) Other
(A) Aircraft will be delivered to Lessee zero time since
installation of AvAero engine "hush" kits to comply with FAR 36,
Stage III. Lessor will provide all AFM supplements related to the
hush kits.
(B) Performance Modifications. Lessor will supply and
install Boeing master change to increase max takeoff weight to
109,000 pounds. In addition, Lessor will provide Boeing master
change to increase zero fuel weight to 89,500 pounds. Lessee
acknowledges Boeing master change applicable to zero fuel weight
will be applied and paid for by Lessor prior to lease signing and
will not be installed until Boeing master change is received from
Boeing.
(C) Radar. Remove Bendix 2067157 weather radar.
Install used, tagged Honeywell Primus 90 digital color indicator
weather radar.
<PAGE>
SCHEDULE 1
PART 2
AIRCRAFT DOCUMENTS
A. CERTIFICATES
o FAA Certificate of Airworthiness
B. AIRCRAFT STATUS RECORDS
o Log Books
o Airframe Maintenance Status Report
o Supplemental Structural Inspection Document Status (if
applicable)
o Manufacturer's Service Bulletin Status Report
o Airworthiness Directive Service Bulletin Compliance
Records and Report (terminated and repetitive), including
documentation adequate to determine the method of
compliance, but not limited to current status
o Modification Status Report List documents will be
provided upon request)
o Last Weighing Report
o List of Life Limited Components with remaining
hours/cycles, with FAA-approved serviceable tags or other
documentation or releases approved by the FAA under Part
121
C. AIRCRAFT MAINTENANCE RECORDS (last heavy maintenance visits)
o Test Flight Reports
o X-ray pictures
o Last annual check and heaviest maintenance check Work
Cards
D. AIRCRAFT HISTORY RECORDS
o Aircraft Maintenance History Cards
o Service Difficulty Report
o Accident or Incident Report (Major Structural Repair)
E. ENGINE RECORDS (for each engine)
o Engine time and cycle records
o Last overhaul and repair documents (including FAA Forms
337)
o Airworthiness Directive Compliance Records and Report
(terminated and repetitive), including documentation
adequate to determine the method of compliance, but not
limited to current status
<PAGE>
o Manufacturer's Service Bulletin Status Report including
documentation adequate to determine the method of
compliance, but not limited to current status
o List of Time Controlled Components with remaining hours
and cycles with FAA-approved serviceable tags or other
documentation or releases approved by the FAA under Part
121
o Modification Status Report
o Engine Disc Sheets
o Engine Build Specifications
F. APU RECORDS
o Last Overhaul and Repair Documents (including
modification status)
o Airworthiness Directive Compliance Records and Report
(terminated and repetitive), including documentation
adequate to determine the method of compliance, but not
limited to current status
o Manufacturer's Service Bulletin Records and Status Report
o List of Time Controlled Components with remaining
hours/cycles o Modification Status Report, with FAA-
approved serviceable tags or other documentation or
releases approved by the FAA under Part 121
G. COMPONENT RECORDS
o Time Controlled Component Historical Records with
Installation and FAA-approved Serviceability Tags or
other documentation or releases approved by the FAA under
Part 121
H. MANUALS
o Airplane Flight Manual (Manufacturer Approved, FAA
Approved)
o Flight Crew Operating Manual
o Weight and Balance Manual
o Wiring Diagram Manual (microfilm and hard copy if
available)
o Illustrated Parts Catalog (microfilm)
o Aircraft Maintenance Manual (microfilm)
o Manufacturer's Engine Maintenance Manual and any approved
engineering changes, as applicable
I. MISCELLANEOUS TECHNICAL DOCUMENTS
o Maintenance Program Specifications
o Interior Configuration Drawings
o Original Delivery Documents
o Loose Equipment Inventory
<PAGE>
SCHEDULE 1
PART 3
LEASE SUPPLEMENT
THIS LEASE SUPPLEMENT is dated as of __________, 1997,
and is executed by Vanguard Airlines, Inc. ("Lessee") and Mimi
Leasing Corp. ("Lessor"), pursuant to Section 3.1(d) of the
Aircraft Lease Agreement between Lessor and Lessee dated as of
November 18, 1997 (the "Lease"). All capitalized terms used herein
which are not otherwise defined herein shall have the meaning given
to such terms in the Lease.
Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Aircraft described below (the "Aircraft") upon and
subject to all of the terms, conditions and provisions of the
Lease, and Lessor and Lessee further agree and state as follows:
1. Description of the Aircraft:
(a) Airframe: Boeing 737-247
Manufacturer's Serial No.: 19607
U.S. Registration No. N912MP
(b) Engines: Two (2) Pratt & Whitney engines,
Model JT8D-9A, Serial Numbers 674165 and
674214, each of said engines having 750 or more
rated take-off horsepower or the equivalent
thereof;
(c) All Parts (other than Engines) installed on or
associated with the Airframe and Engines; and
(d) The Aircraft Documents relating to the Airframe
and Engines.
2. The main base of the Aircraft is Kansas City,
Missouri.
3. The Term for the Lease commences on __________, 1997
(the "Delivery Date") and ends on the day preceding the numerically
corresponding day 60 months after the Delivery Date, both dates
inclusive, unless sooner terminated in accordance with the
provisions of the Lease.
4. The Rent for the Aircraft shall be payable in
advance for each calendar month of the Term commencing on the
Delivery Date and shall be the amount set forth in the Letter
Agreement to the Lease.
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have caused this
Lease Supplement to be executed by their respective corporate
officers as of the date first above written.
VANGUARD AIRLINES, INC. (LESSEE)
By: _______________________________
Title: ____________________________
MIMI LEASING CORP. (LESSOR)
By: ______________________________
Title: ___________________________
<PAGE>
SCHEDULE 2
CERTIFICATE OF ACCEPTANCE
This Certificate of Acceptance is delivered, on the date set
forth below by Vanguard Airlines, Inc. ("Lessee"), to Mimi Leasing
Corp. ("Lessor"), pursuant to the Aircraft Lease Agreement dated as
of November 18, 1997 between Lessor and Lessee (the "Agreement").
Capitalized terms used in this Certificate shall have the meaning
given to such terms in the Agreement.
1. DETAILS OF ACCEPTANCE
Lessee hereby confirms to Lessor that Lessee has at _________
o'clock on this ____ day of _____________, 199_, at_______________,
accepted the following, in accordance with the provisions of the
Agreement:
(a) Boeing 737-247 airframe, Manufacturer's Serial No. 19708;
U.S. Registration No. N912MP
(b) 2 Pratt & Whitney JT8D-9A Engines:
Manufacturer's Serial No.
674165; and
674214
(Each of which shall have more than 750 rated takeoff horsepower or
the equivalent of such horsepower).
(c) Loose Equipment Check List: as per list signed by Lessor
and Lessee and attached hereto.
2. HOURS AND CYCLES DATA (as of Acceptance Date)
(a) Airframe:
Number of Hours since last "D" Check (Heaviest Check):
____ hours
"C" Check (or Equivalent):
Interval: ____________________________
Time Since: __________________________
(b) Landing Gear Overhaul:
Number of Hours Since Last Overhaul:
<PAGE>
Left Gear ___________________________ Hours
Right Gear ___________________________ Hours
Nose Gear ____________________________ Hours
Interval: Left Gear ________________________
Right Gear _______________________
Nose Gear ________________________
(c) Engines:
Total Number of Hours and Cycles:
S/N ______:_________ hours; _____________ cycles
S/N ______:_________ hours; _____________ cycles
Number of Hours Since Last Hot Section Refurbishment:
S/N ______:_________ hours
S/N ______:_________ hours
Number of Hours Since Last Cold Section Refurbishment:
S/N ______:_________ hours
S/N ______:_________ hours
Hot Section Refurbishment:
Interval _________________________________
Time Since (S/N _________): ______________________
Time Since (S/N _________): ______________________
Time Remaining to First Restriction:
Engine S/N: ________________
Hours: ____________ Restriction: ____________
Cycles: ___________ Restriction: ____________
<PAGE>
Engine S/N: ________________
Hours: ____________ Restriction: ____________
Cycles: ___________ Restriction: ____________
Average Cycles in Life Limited Parts (see attached
Schedule): ______________
(d) Auxiliary Power Unit:
Number of APU Hours Since Last Heavy Shop Visit:
_________ hours __________ Date accomplished
Hot Section Refurbishment:
Interval: _______________________
Time Since: _____________________
(e) Time Controlled Components: [see attached report]
(f) Interior Equipment:
Number of Passenger Seats
and Configuration: _____ _____
Number of Galleys and Location: _____ _____
Number of Lavatories and Location: _____ _____
LOPA - Attached: _____ _____
List of Loose Equipment on Board:
__________________________________ _____ _____
__________________________________ _____ _____
__________________________________ _____ _____
__________________________________ _____ _____
__________________________________ _____ _____
__________________________________ _____ _____
<PAGE>
(g) Avionics:
Part
Description Model No.
__________________________________ _____ _____
__________________________________ _____ _____
__________________________________ _____ _____
__________________________________ _____ _____
__________________________________ _____ _____
__________________________________ _____ _____
IN WITNESS WHEREOF, Lessee has, by its duly authorized
representative, executed this Certificate on the date in paragraph
1 above.
LESSEE:
VANGUARD AIRLINES, INC.
By: __________________________
Title: _______________________
<PAGE>
SCHEDULE 3
OPERATING CONDITION AT REDELIVERY
On the Expiration Date, the Aircraft shall:
(1) GENERAL CONDITION
(a) Possess a valid Certificate of Airworthiness with respect
to the Aircraft issued by the Air Authority. The Aircraft will
also meet all requirements for U.S. domestic operations under FAR
Part 121 and will meet the requirements of FAR Part 36, Appendix C,
Stage 3 noise compliance, without waiver or restriction. There
will be no deferred, open or carryover items on the Aircraft or any
Engine on the Expiration Date;
(b) Be clean by U.S. airline standards;
(c) Have installed the full complement of engines and other
equipment, parts and accessories and loose equipment as is normally
installed in the Aircraft, and be in the same economy configuration
of 122 seats, in accordance with an approved STC, as at Delivery;
(d) If Lessee is on a Q Check system, have undergone,
immediately prior to redelivery, the next full C Check in
accordance with the Approved Maintenance Program, so that all
airframe inspections falling due within the next following C Check
interval, in accordance with the Approved Maintenance Program, have
been accomplished, and have at least no less than 3,600 hours or
cycles, whichever applies as the limiting factor, remaining to the
next Q Check;
Notwithstanding Paragraph 1(d) above, if Lessee wishes to
redeliver the Airframe to Lessor with less than the minimum hours,
cycles or years so remaining, Lessee shall give written notice to
Lessor no later than sixty (60) days prior to the Expiration Date,
and:
(i) Lessor may, at Lessor's sole option, agree to accept
or reject such nonconforming redelivery by requiring Lessee to
perform either a premature C-1 through C-7 plus SI inspection or Q
Check and utilize the Airframe Maintenance Reserves (if such work
qualifies for contribution by Lessor pursuant to Section 7.2) held
by Lessor under the Lease); or
(ii) At Lessee's sole option, if Lessor agrees to accept
such nonconforming delivery, accept redelivery of the Airframe in
such condition with an additional payment (in addition to the
Airframe Maintenance Reserves otherwise payable) equal to the
number of Flight Hours or Cycles remaining to the time such
scheduled servicing would become mandatory in accordance with the
<PAGE>
Approved Maintenance Program multiplied by the amount of Airframe
Maintenance Reserve per Flight Hour then in effect under the Lease.
(e) If Lessee is on a C-1 through C-7 plus SI Major Check
system, have undergone, immediately prior to redelivery, the next
full C check (including all phases and multiples) in accordance
with the Approved Maintenance Program, so that all airframe
inspections falling due within the next following C check interval
in accordance with the Approved Maintenance Program, have been
accomplished, and have at least 3,600 hours or 2,400 cycles,
whichever applies as the most limiting factor, so remaining to the
next C-1 through C-7 plus SI Major Check per the Boeing MPD.
Notwithstanding Paragraph 1(e) above, if Lessee wishes to
redeliver the Airframe to Lessor with less life so remaining,
Lessee shall give written notice to Lessor no later than sixty (60)
days prior to the Expiration Date, and:
(i) Lessor may, at Lessor's sole option, agree to accept
or reject such nonconforming redelivery by requiring Lessee to
perform a premature C-1 through C-7 plus SI Major Check and utilize
the Airframe Maintenance Reserves (if such work qualifies for
contribution by Lessor pursuant to Section 7.2) held by Lessor
under the Lease; or
(ii) At Lessee's sole option, if Lessor agrees to accept
such nonconforming redelivery, accept redelivery of the Airframe in
such condition with an additional payment (in addition to the
Airframe Maintenance Reserves otherwise payable) equal to the
number of Flight Hours or Cycles remaining to the time such
scheduled servicing would become mandatory in accordance with the
Approved Maintenance Program multiplied by the amount of Airframe
Maintenance Reserve per Flight Hour or Cycle then in effect under
the Lease.
If Lessor requires the "Q" check or "C-7" check (formerly "D"
check) to be accomplished, this Agreement will automatically be
extended by the time required to perform such maintenance check and
the Rent shall be paid by Lessee to Lessor for this time interval.
(f) Be in compliance with all mandatory airworthiness
Directives issued by the FAA (ADs) for compliance during the Term
and within 60 days after the Expiration Date, including being
current with all tasks of the Corrosion Prevention and Control
Program (CPCP) under the Boeing D6-38528 document, with no
exceptions or deviations and with proper supporting documentation;
(g) Be stripped and freshly painted, with an "all white"
fuselage and Boeing gray wings;
(h) Have all required signs and decals clean, secure and
legible.
<PAGE>
(2) COMPONENTS
(a) All hard time components/inspections (including all
three(3) Landing Gears) shall have the same number of hours, cycles
or days remaining to the next scheduled overhaul per the Boeing MPD
as each had at Delivery, as evidenced by Lessee's summary prepared
within 30 days of Delivery.
(b) Promptly following Delivery, Lessor and Lessee will
create a listing of components and their respective status on the
Delivery Date. Each "on-condition" and "condition monitored"
component shall not be less than as set forth on such listing.
(c) The APU will be in the same operational condition as at
the Delivery Date with temperatures and air outputs within the APU
manufacturer's limits at all operational settings; and
(3) ENGINES
Each Engine will be installed on the Aircraft and will be
accompanied by all documentation Lessor may require to evidence
that title thereto is properly vested in Lessor and:
(a) Each Engine and each life limited part within each Engine
will have no less than 50% of the hours or cycles remaining until
the next scheduled life limited part replacement as such Engine or
part had on delivery.
(b) Each Engine will, at Lessor's option and expense, have
had a complete hot (including combustion chamber) and cold section
video boroscope inspection, and a power assurance run in accordance
with the Engine manufacturer's maintenance manual and all items
beyond such manufacturer's limits will be repaired at Lessee's
expense. No Engine will be "on watch" for any reason requiring any
special or out of sequence inspection.
Notwithstanding Paragraph 3(a) above, if Lessee wishes to
redeliver an Engine to Lessor with less life so remaining, Lessee
shall give written notice to Lessor no later than sixty (60) days
prior to the Expiration Date, and:
(i) Lessor may, at its sole option, accept or reject
such nonconforming delivery by requiring Lessee to perform a
premature Hot Section Refurbishment Inspection and shop visit and
utilize the Engine Maintenance Reserves (if such work qualifies for
contribution by Lessor pursuant to Section 7.2) held by Lessor
under the Lease; or
(ii) At Lessee's sole option, if Lessor agrees to accept
such nonconforming redelivery, Lessor shall accept redelivery of
the Engines in such condition with an additional payment (in
addition to Maintenance Reserves otherwise payable per Engine)
<PAGE>
equal to the number of Flight Hours or Cycles remaining to the time
this scheduled servicing would become mandatory in accordance with
the Approved Maintenance Program multiplied by the amount of Engine
Maintenance Reserves per Flight Hour then in effect.
(4) FUSELAGE, WINDOWS AND DOORS
(a) The fuselage will be free of major dents outside
allowable Boeing Maintenance or Structural Repair Manual Limits and
abrasions and loose or pulled or missing rivets;
(b) Doors will be free moving, correctly rigged and be fitted
with serviceable seals, free from damage as defined by the Boeing
Maintenance or Structural Repair Manual Limits.
(5) WINGS AND EMPENNAGE
(a) Leading edges will be free from damage, outside allowance
Boeing Maintenance or Structural Repair Manual Limits;
(b) Wings will be free of fuel leaks.
(6) INTERIOR
(a) Ceilings, sidewalls and bulkhead panels will be clean and
reasonably free of noticeable cracks and stains.
(b) Carpets and seat covers will be in good condition, clean
and reasonably free of noticeable stains and meet FAR burn
certification regulations;
(c) Seats will be serviceable, in good condition and
repainted as necessary;
(d) Emergency equipment having a calendar life will have a
minimum of 1 year or 100% of its total approved life, whichever is
less, remaining;
(e) Galleys will contain all equipment installed and
functional including service carts (trolleys), containers and
coffee pots, which will be reasonably clean by airline standards
and shall have all FAA required markings installed;
(f) Overhead stowage compartments will be clean by airline
standards and serviceable with proper markings installed; and
(g) Lavatories will be clean by airline standards and
serviceable with correct FAA markings installed.
<PAGE>
(7) COCKPIT
(a) Trim panels shall be reasonably free of noticeable stains
and cracks, will be clean secure and repainted as necessary;
(b) Seat covers will be in good condition, clean and free of
stains and will conform to FAR burn certification regulations; and
(8) CARGO COMPARTMENTS
(a) Panels will be in good condition; and
(b) Nets will be in good condition.
(9) LANDING GEAR
Time since overhaul on the Landing Gear will not be less than
[50%] remaining until the next scheduled overhaul. The Landing
Gear and wheel wells will be clean, free of leaks and repaired as
necessary.
(10) CORROSION
(a) The Aircraft will have been inspected and treated with
respect to corrosion as defined in the Agreed Maintenance Program
and/or Boeing Document No.D6-38528 relative to compliance with the
Corrosion Prevention and Control Program (CPCP). The entire
fuselage will be substantially free from corrosion and will be
adequately treated and an approved corrosion prevention program
will be in operation; and
(b) Fuel tanks will be free from contamination and corrosion
and a tank treatment program will be in operation.
Notwithstanding anything contained in this Schedule 3, Lessor
shall not be required to make any payments to Lessee in the event
that the Airframe, the Engines, the Landing Gear, any time, cycle
or calendar controlled component is returned to Lessor in a
condition better than that specified in Section 12 and this
Schedule 3.
<PAGE>
SCHEDULE 4
INSURANCE REQUIREMENTS
The Insurance required to be maintained are as follows:
(a) HULL ALL RISKS of Loss or Damage (while flying and on the
ground) with respect to the Aircraft on an "agreed value basis" for
the Agreed Value and with a deductible not exceeding $100,000
(including, without limitation, foreign object damage coverage with
a deductible not exceeding $100,000 per engine per occurrence), or
such other amount agreed by Lessor from time to time. Without
prejudice to the foregoing, with the prior written consent of
Lessor, Lessee may increase the aforesaid deductible amount to
$500,000 if, prior to doing so, Lessee shall have paid to Lessor
the sum of $250,000 by way of an insurance security deposit (the
"Insurance Security Deposit") (which Insurance Deposit shall also
be available to be applied to deductible losses between $100,000
and $500,000). Insurance Security Deposit (which shall be held by
Lessor as security for the performance by Lessee of its obligations
under this Agreement and the Other Agreements), shall be returned
to Lessee on the Expiration Date if all amounts payable by Lessee
under this Agreement and any Other Agreement shall have been paid
in full and no Default shall have occurred and be continuing. With
Lessor's prior consent, the Insurance Deposit may be provided by
Lessee by way of letter of credit issued by a bank acceptable to
Lessor and in form and in substance satisfactory to Lessor.
In the event that the Insurance Security Deposit is applied to
a loss claim thereby reducing the balance thereof, Lessee will
either (a) replace any deficiency in such balance; or (b) lower the
all risk hull insurance deductible to $100,000 within 15 days after
the aforementioned application.
(b) HULL WAR AND ALLIED PERILS, being such risks excluded
from the Hull All Risks Policy to the fullest extent available from
the leading international insurance markets including confiscation
and requisition by the State of Registration for the Agreed Value;
(c) ALL RISKS (INCLUDING WAR AND ALLIED RISK except when on
the ground or in transit other than by air) property insurance on
all Engines and Parts when not installed on the Aircraft on an
"agreed value" basis and including engine test and running risks;
(d) AIRCRAFT THIRD PARTY, PROPERTY DAMAGE, PASSENGER,
BAGGAGE, CARGO AND MAIL AND AIRLINE GENERAL THIRD PARTY (INCLUDING
PRODUCTS) LEGAL LIABILITY for a Combined Single Limit (Bodily
Injury/Property Damage) of an amount not less than the Minimum
Liability Coverage for any one occurrence (but in respect of
products and personal injury liability this limit may be an
aggregate limit for any and all losses occurring during the
currency of the policy). War and Allied Risks are also to be
<PAGE>
covered under the Policy to the fullest extent available from the
leading international insurance markets;
(e) All required hull and spares insurance (as specified
above), so far as it relates to the Aircraft will:
(i) name Lessor and their respective successors and
assigns as additional assureds for their respective rights and
interests, warranted, each as to itself only, no operational
interest;
(ii) provide that any loss will be settled jointly
with Lessor and Lessee, subject to final prior approval of
Lessor and will be payable in Dollars to Lessor, for the
account of all interests except where the loss does not exceed
the Damage Notification Threshold, and Lessor has not notified
the insurers to the contrary, in which case the loss will be
settled with and paid to Lessee;
(iii) include a notice and/or acknowledgement of
assignment in a form acceptable to Lessor;
(iv) if separate Hull "all risks" and "war risks"
insurances are arranged, include a 50/50 provision in
accordance with market practice (AVS. 103 is the current
market language);
(v) confirm that the insurers are not entitled to
replace the Aircraft in the event of an insured Event of Loss;
(vi) confirm that the insurers will not obtain a
valid discharge of the obligations under the Insurance by
payment to the broker, notwithstanding market practice to the
contrary;
(f) All required liability insurances (specified above) will:
(i) include Lessor and Mercantile Bank of Dubuque
and their respective successors and assigns, and their
respective shareholders, subsidiaries, directors, officers,
agents, employees and indemnitees as additional insureds for
their respective rights and interests, warranted, each as to
itself only, no operational interest;
(ii) include a Severability of Interest Clause which
provides that the insurance, except for the limit of
liability, will operate to give each assured the same
protection as if there was a separate policy issued to each
assured;
(iii) contain a provision confirming that the policy
is primary without right of contribution and the liability of
<PAGE>
the insurers will not be affected by any other insurance of
which Lessor or Lessee have the benefit so as to reduce the
amount payable to the additional insureds under such policies;
(g) All Insurance will:
(i) be in accordance with normal industry practice
of persons operating similar aircraft in similar
circumstances;
(ii) provide cover denominated in Dollars and any
other currencies which Lessor may reasonably require in
relation to liability insurance;
(iii) operate on a worldwide basis subject to such
reasonable limitations and exclusions as Lessor may agree;
(iv) acknowledge the insurer is aware (and has seen
a copy) of this Agreement and that the Aircraft is owned by
Lessor;
(v) provide that, in relation to the interests of
each of the additional assureds the Insurance will not be
invalidated by any act or omission by Lessee, or any other
person other than the respective additional assured seeking
protection and shall insure the interests of each of the
additional assureds regardless of any breach or violation by
Lessee, or any other person other than the respective
additional assured seeking protection of any warranty,
declaration or condition, contained in such Insurances;
(vi) provide that the insurers will hold harmless
and waive any rights of recourse and/or subrogation against
the additional assureds or to be subrogated to any rights of
the Banks against Lessor or Lessee;
(vii) provide that the additional assureds will have
no obligation or responsibility for the payment of any
premiums due (but reserve the right to pay the same should any
of them elect so to do) and that the insurers will not
exercise any right of set-off or counter-claim in respect of
any premium due against the respective interests of the
additional assureds other than outstanding premiums relating
to the Aircraft, any Engine or Part the subject of the
relevant claim;
(viii) provide that the Insurance will continue
unaltered for the benefit of the additional assureds for at
least thirty (30) days after written notice by registered mail
or telex of any cancellation, change, event of non-payment of
premium or instalment thereof has been sent to Lessor, except
in the case of war risks for which seven (7) days (or such
<PAGE>
lesser period as is or may be customarily available in respect
of war risks or allied perils) will be given, or in the case
of war between the five (5) great powers or nuclear peril for
which termination is automatic;
(ix) contain a provision entitling Lessor or any
insured party to initiate a claim under any policy in the
event of the refusal or failure of Lessee to do so; and
(x) accept and insure the indemnity provisions of
this Agreement to the extent of the risks covered by the
policies.
<PAGE>
SCHEDULE 5
FORM OF LEGAL OPINION
To: [Lessor]
[Date]
Dear Sir or Madam:
You have asked us to render an opinion in connection with
the transaction governed, inter alia, by the Lease (as hereinafter
defined). Words and expressions used herein will have the same
meanings as defined in an Aircraft Lease Agreement (the "Lease")
dated as of November 18, 1997 between Mimi Leasing Corp. ("Lessor")
and Vanguard Airlines, Inc. ("Lessee") in respect of one Boeing 737
aircraft, with manufacturer's serial number 19708, together with
the 2 installed Pratt & Whitney JT8D-9A engines (the "Aircraft").
In connection with our opinion, we have reviewed, inter alia,
the following:
(a) The Lease;
(b) The Articles of Incorporation and Bylaws of Lessee;
(c) All other documents, approvals and consents of
whatever nature and wherever kept which it was, in our judgment and
to our knowledge, necessary or appropriate to examine to enable us
to give the opinion expressed below.
After reviewing the documents listed in the preceding
paragraph above, and having regard to the relevant laws of the
State of Iowa, we are of the opinion that:
(a) Lessee is a corporation duly organized and validly
existing under the laws of ________, is qualified to do business as
a foreign corporation in each jurisdiction where failure to so
qualify would have a materially adverse effect on Lessee's business
or its ability to perform its obligations under the Lease;
(b) Lessee has the corporate power to enter into and
perform, and has taken all necessary corporate action to authorize
the entry into, performance and delivery of, the Lease and the
transactions contemplated by the Lease; and
(c) The entry into and performance by Lessee of, and the
transactions contemplated by, the Lease do not and will not:
<PAGE>
(i) conflict with any laws binding on Lessee;
or
(ii) conflict with the Articles of
Incorporation or Bylaws of Lessee;
(d) No authorizations, consents, licenses, approvals and
registrations (other than those which have been obtained and of
which copies are attached hereto) are necessary or desirable to be
obtained from any federal governmental or other regulatory
authorities in having jurisdiction over Lessee or its properties to
enable Lessee:
(1) To enter into and perform the transactions
contemplated by the Lease;
(2) To import the Aircraft into the United States
and Missouri for the duration of the Term;
(3) To operate the Aircraft in the United States
for the transport of fare-paying passengers; or
(4) To make the payments provided for in the Lease;
(e) Except for the filing and recordation of the Lease
with the FAA and the filing of the Financing Statements with the
Secretary of State of Missouri (which filing has been duly made on
or before this date), it is not necessary to ensure the priority,
validity and enforceability of all the obligations of Lessee under
the Lease that the Lease be filed, registered, recorded or
notarized in any public office or elsewhere or that any other
instrument relating thereto be signed, delivered, filed, registered
or recorded, that any tax or duty be paid or that any other action
whatsoever be taken;
(f) No other steps are necessary to record or perfect
Lessor's interest in the Aircraft in the United States or Missouri;
(g) On termination of the Lease (whether on expiration
or otherwise) as contemplated in the Lease, Lessor will be
entitled;
(1) To repossess the Aircraft;
(2) To de-register the Aircraft from the aircraft
registry of the Air Authority; and
(3) To export the Aircraft from the United States;
without requiring any further consents, approvals or licenses from
any federal governmental or regulatory authority in the United
States;
<PAGE>
(h) The Lease has been properly signed and delivered on
behalf of Lessee and the obligations on the part of Lessee
contained therein, assuming them to be valid and binding according
to the Governing Law, are valid and legally binding on and
enforceable against Lessee respectively under the laws of Iowa;
(i) Lessee is a Certificated Air Carrier;
(j) Lessee is a "citizen of the United States" as
defined in 49 U.S.C. Section 40102(a)(15).
(k) Lessor is entitled to the benefits of Section 1110
of Title 11 of the United States Code with respect to the Aircraft
to the extent the Aircraft constitutes aircraft, engines and spare
parts as defined in 49 U.S.C. Section 40102(a).
(l) The consent to the jurisdiction by Lessee contained
in the Lease is valid and binding on Lessee and not subject to
revocation.
Very truly yours,
<PAGE>
SCHEDULE 6
CERTIFICATE OF DELIVERY
This Certificate of Delivery is made on the date set forth
below by Vanguard Airlines, Inc. ("Lessee"), to Mimi Leasing Corp.
("Lessor"), pursuant to the Aircraft Lease Agreement dated as of
November 18, 1997 between Lessor and Lessee (the "Agreement").
Capitalized terms used in this Certificate shall have the meaning
given to such terms in the Agreement.
1. DETAILS OF ACCEPTANCE
Lessee hereby confirms to Lessor that Lessee has at _________
o'clock on this ____ day of _______________, 199_, at ________,
delivered the following in the same condition as at acceptance
(except for ferry time), in accordance with the provisions of the
Agreement.
(a) Boeing 737-247 airframe, Manufacturer's Serial No. 19708;
U.S. Registration No. N912MP
(b) 2 Pratt & Whitney JT8D-9A Engines:
Manufacturer's Serial No.
674165; and
674214
(Each of which has more than 750 rated takeoff horsepower or the
equivalent of such horsepower).
(c) Loose Equipment Check List: as per list signed by Lessor
and Lessee and attached hereto.
2. CONFIRMATION
Lessee confirms to Lessor that as at the time indicated above,
being the Delivery Date:
(a) The representations and warranties contained in Section 2
are hereby repeated;
(b) The Aircraft is insured as required by the Agreement;
(c) Lessee confirms that there have been affixed to the
Aircraft and the Engines the notices required by the Agreement; and
(d) Lessee's authorized technical experts have inspected the
Aircraft to ensure the Aircraft is in accordance with the
conditions required by the Agreement.
<PAGE>
3. HOURS AND CYCLES DATA (as of Delivery Date)
(a) Airframe:
Number of Hours since last "D" Check (Heaviest Check):
____ hours
"C" Check (or Equivalent):
Interval: ____________________________
Time Since: __________________________
(b) Landing Gear Overhaul:
Number of Hours Since Last Overhaul:
Left Gear ___________________________ Hours
Right Gear __________________________ Hours
Nose Gear ___________________________ Hours
Interval: Left Gear ________________________
Right Gear _______________________
Nose Gear ________________________
(c) Engines:
Total Number of Hours and Cycles:
S/N ______:_________ hours; _____________ cycles
S/N ______:_________ hours; _____________ cycles
Number of Hours Since Last Hot Section Refurbishment:
S/N ______:_________ hours
S/N ______:_________ hours
Number of Hours Since Last Cold Section Refurbishment:
S/N ______:_________ hours
S/N ______:_________ hours
<PAGE>
Hot Section Refurbishment:
Interval _________________________________
Time Since (S/N _________): ______________________
Time Since (S/N _________): ______________________
Time Remaining to First Restriction:
Engine S/N: ________________
Hours: ____________ Restriction: ____________
Cycles: ___________ Restriction: ____________
Engine S/N: ________________
Hours: ____________ Restriction: ____________
Cycles: ___________ Restriction: ____________
Average Cycles in Life Limited Parts (see attached
Schedule): ______________
(d) Auxiliary Power Unit:
Number of APU Hours Since Last Heavy Shop Visit:
_________ hours __________ Date accomplished
Hot Section Refurbishment:
Interval: _______________________
Time Since: _____________________
(e) Time Controlled Components: [see attached report]
(f) Fuel on Board on Delivery Date: ______________________
(g) Interior Equipment:
Number of Passenger Seats
and Configuration: _____ _____
Number of Galleys and Location: _____ _____
Number of Lavatories and Location: _____ _____
LOPA - Attached: _____ _____
<PAGE>
List of Loose Equipment on Board:
__________________________________ _____ _____
__________________________________ _____ _____
__________________________________ _____ _____
__________________________________ _____ _____
__________________________________ _____ _____
__________________________________ _____ _____
(h) Avionics:
Part
Description Model No.
__________________________________ _____ _____
__________________________________ _____ _____
__________________________________ _____ _____
__________________________________ _____ _____
__________________________________ _____ _____
__________________________________ _____ _____
IN WITNESS WHEREOF, Lessee has, by its duly authorized
representative, executed this Certificate on the date in paragraph
1 above.
LESSEE:
VANGUARD AIRLINES, INC.
By: __________________________
Title: _______________________
<PAGE>
LETTER AGREEMENT
From: Mimi Leasing Corp.
To: Vanguard Airlines, Inc.
Date: November 18, 1997
Re: Aircraft Lease Agreement (the "Lease Agreement") of even date
herewith between Mimi Leasing Corp. ("Lessor") and Vanguard
Airlines, Inc. (the "Lessee") in respect of Boeing 737-247
Aircraft, Serial Number 19708
Dear Sirs,
This is the Letter Agreement referred to in the Lease
Agreement. This Letter Agreement, upon your acceptance of its
terms, will record our further agreement with respect to the Lease
Agreement. Capitalized terms used, but not defined, in this Letter
Agreement shall have the respective meanings assigned to them in
the Lease Agreement.
For valuable consideration (the receipt and sufficiency of
which is acknowledged), Lessor and Lessee agree as follows:
In order to preserve the confidentiality of certain other
business terms of the Lease Agreement, Lessor and Lessee have
agreed that certain provisions referred to in the Lease Agreement
shall be set forth in this Letter Agreement rather than in the body
of the Lease Agreement, as follows:
Paragraph 1
AIRCRAFT DEPOSIT. The amount of the Aircraft Deposit
contemplated by Section 5.1 of the Lease Agreement shall be
$250,000, receipt of $122,500 on September __, 1997 and $122,500 on
the date hereof is hereby acknowledged.
Paragraph 2
RENT. The amount of Rent payable by Lessee in respect of each
Rental Period pursuant to Section 5.3 of the Lease Agreement shall
be as follows:
Rental Periods 1-60 $122,500
Notwithstanding the terms of Section 5.3 or any other
provision of the Lease Agreement to the contrary, upon acceptance
(whether conditional or not) of the Aircraft, Lessee shall pay to
Lessor the first payment of Rent.
<PAGE>
Paragraph 3
MAINTENANCE RESERVES. The amount of Maintenance Reserves
payable pursuant to Section 5.4 of the Lease Agreement shall be as
follows:
(i) Airframe Maintenance Reserves - $75 per Flight Hour
or Cycle, whichever is higher;
(ii) Engine Maintenance Reserves - $85 per Flight Hour or
Cycle, whichever is higher, in respect of each Engine ($170 for
both);
(iii) APU Maintenance Reserves - $10 per Flight Hour or
Cycle, whichever is higher, in respect of the APU; and
(iv) Landing Gear Maintenance Reserves - $8 per Flight
Hour or Cycle, whichever is higher ($24 for all three).
Lessor and Lessee acknowledge that the rates of Maintenance
Reserves specified herein are based upon the assumption that the
Agreed Maintenance Program applicable to the Aircraft during the
Term will be the same as the Agreed Maintenance Program in effect
on the Delivery Date. In the event that either or both of the
foregoing assumptions prove to be incorrect at any time during the
Term, Lessor and Lessee agree that Lessor shall have the right,
upon written notice to Lessee, to adjust the rate of Maintenance
Reserves in accordance with the terms of the Agreement.
Except as amended hereby, the Lease Agreement remains in full
force and effect as the legal, valid and binding obligations of
Lessor and Lessee.
This letter shall be governed by, and construed in accordance
with, the Governing Law. Please indicate your acceptance of the
foregoing by signing this letter at the place indicated and return
it to us.
Yours truly,
MIMI LEASING CORP.
By _______________________________
Its ______________________________
Agreed and accepted
VANGUARD AIRLINES, INC.
By _______________________________
Its ______________________________
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is
made and entered into effective as of the third day of November,
1997 (the "Effective Date") by and between Vanguard Airlines,
Inc., a Delaware corporation (the "Company") and Robert J. Spane,
an individual ("Employee").
R E C I T A L S:
A. The Company is engaged in the business of owning and
operating an air carrier certificated by the U.S. government to
engage in the provision of air transportation services in the
common carriage of persons, property and mail (the "Compan y
Business"). The Company is based in Kansas City, Missouri and
provides scheduled passenger service in the United States.
B. The Company hereby agrees to employ Employee and
Employee hereby agrees to accept such employment engagement with
the Company in accordance with the terms and conditions set forth
in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises
and covenants as
contained herein, the parties hereto, intending to be legally
bound, agree as follows:
1. Employment.
Subject to the terms and conditions hereinafter set forth,
the Company hereby agrees to employ Employee, and Employee hereby
agrees to be employed by Company, during the two-year period (the
"Employment Term") beginning on June 15, 1997 (the "Commencement
Date"), and ending on June 15, 1999. The Employment Term may be
terminated pursuant to the provisions of Section 4 or Section 5
hereof.
2. Duties.
Employee shall be employed in the capacity of Chairman of
the Board, President and Chief Executive Officer of the Company.
Employee shall have such duties as may reasonably be assigned to
him by the Board of Directors of the Company. Employee shall
perform such duties diligently and to the best of his ability,
and shall comply with the Company's business conduct policies as
in effect from time to time. Employee's responsibilities
include, but are not limited to, the following actions: (a)
supervise, operate, and manage the overall operations of the
Company Business, including by way of illustration but not
limitation, decisions regarding (i) airline schedules and routes;
(ii) regulation of the Company Business by governmental
authorities, (iii) aircraft and other equipment and real estate
acquisitions and/or leases, (iv) formulation, implementation, and
<PAGE>
administration of strategies, policies, and practices, (v)
formulation, implementation, and administration of budgets,
business and financial plans, (vi) hiring, firing, and
supervising employees and consultants, and (vii) setting
compensation and benefit programs for employees. Except as
otherwise set forth herein, during the Employment Term, Employee
shall devote his entire working time, attention and energy to the
business of the Company, and shall not be engaged in any other
business activity that, in any significant way, conflicts with or
interferes with Employee's performance of his duties hereunder,
except as authorized by the Board of Directors of the Company.
3. Compensation and Benefits.
(a) Salary. During the Employment Term, the Company shall
pay Employee for his services hereunder a base salary at the rate
of $200,000 per annum, for the Employment Term and, subject
further to upward adjustment in accordance with the Company's
salary review practices and procedures in effect from time to
time. Such salary shall be payable semi-monthly in accordance
with the regular payroll policies of the Company in effect from
time to time. Upon each anniversary of this Agreement, Employee
shall participate in any performance bonus plan that may be
adopted by the Company's Board of Directors.
(b) Benefits. During the Employment Term, Employee shall be
entitled to participate in, to the extent Employee is eligible
under the terms thereof, all benefit plans and programs that are
generally provided from time to time by the Company to its
executive personnel, including an incentive compensation plan, a
pension or profit sharing plan, a stock purchase plan, a bonus
plan, a group benefit plan and a medical plan. Subject to the
rights of Employee set forth in Sections 4 and 5 hereof, nothing
herein shall preclude the Company from terminating or amending
any employee benefit plan or program.
(c) Options. The Company hereby agrees to grant options to
purchase 3,386,980 shares of Common Stock, par value $.001 per
share, of the Company to Employee (the "Employee Options"). The
terms of the grant of the Employee Options to Employee shall be
as follows:
(i) the exercise price for the Employee Options shall
be $0.50 per share (the "Exercise Price");
(ii) payment of the exercise price per share is due in
full upon exercise of all or any part of each installment that
has accrued to you;
(iii) in the event this Agreement is terminated before
the end of the Employment Term for any of the reasons set forth
in Sections 4(a), 4(d), or 4(e), all unvested options shall lapse
and become void; and
<PAGE>
(iv) the Employee Options shall vest as follows:
(A) in equal quarterly increments during the
Employment Term commencing with the commencement of employment of
Employee with the Company, with such vesting to be effective upon
the last day of each calender quarter, (B) one-half of any
"unvested" Employee Options shall vest upon the death or
permanent disability of Employee, (C) all of the unvested options
shall vest upon the merger of the Company into or with another
person, unless (X) the Company is the surviving entity and (Y)
this Agreement remains in full force and effect, or (D) all of
the unvested options shall vest upon the sale of all or
substantially all of the assets or stock of the Company to
another person.
(d) Expense Reimbursement. The Company shall reimburse
Employee or directly pay all of the reasonable expenses incurred
by Employee in connection with the scope of his assignment as set
forth in this Agreement, including by way of illustration but not
limited, as follows:
(a) all ordinary and necessary travel, lodging,
entertainment, and related expenses;
(b) the cost of renting an apartment as a temporary
living expense in Kansas City, Missouri and leasing or renting a
car in Kansas City, Missouri; and
(c) the cost to move Employee's family and household
goods to the Kansas City area.
The foregoing terms regarding the Employee Options shall, if the
parties hereto mutually so agree, be set forth in a separate
agreement (the "Stock Option Agreement"). The Stock Option
Agreement shall contain all usual and customary provisions,
including the foregoing terms.
4. Termination of Engagement.
This Agreement shall be terminated and the employment
relationship between the Company and Employee shall cease upon
the occurrence of any of the following events:
(a) by Employee for any reason, upon 30 days prior written
notice;
(b) by the Company for any reason, upon 30 days prior
written notice;
(c) by any party upon the expiration of the Employment
Term;
(d) by the Company upon the death or permanent disability
of Employee or his resignation as the President and Chief
Executive Officer of the Company;
<PAGE>
(e) by the Company for "Cause," which for purposes of this
Section 4 shall mean any of the following: (i) Employee's breach
of or failure to comply with or observe any of the material
terms, conditions or agreements contained in this Agreement,
which breach or failure to comply has not been cured within 30
days following written notice by the Company to Employee setting
forth in detail the specific nature of such breach or failure to
comply, or if such breach or failure to comply cannot be cured
within such 30 day period, Employee has not, (A) within such 30
day period, commenced actions to cure such breach or failure to
comply and diligently pursued such actions and (B) actually cured
such breach or failure to comply within 90 days following such
initial written notice by the Company to Employee, (ii) Employee
shall be adjudged by a court of competent jurisdiction as guilty
of (A) any willful or grossly negligent act which causes material
harm to the Company, (B) any criminal act which causes material
harm to the Company, (C) any act involving moral turpitude which
causes material harm to the Company, or (D) any fraud upon the
Company, or (iii) Employee shall be guilty of habitual
absenteeism, chronic alcoholism or other form of chronic
addiction.
5. Termination Obligations of the Company.
(a) In the event of termination of this Agreement by the
Company under Section 4(c) because of the expiration of the
Employment Term, the Company shall have the following obligations
to Employee:
(i) any unpaid portion of the Employee salary earned
through the date of termination shall be paid by the Company to
Employee;
(ii) any unreimbursed expenses owed by the Company to
Employee for expenses incurred through the date of termination
shall be paid by the Company to Employee;
(iii) the Employee Options shall be fully vested;
(iv) Employee shall be offered full-time employment
with the Company upon mutually satisfactory terms usual and
customary in the airline industry for companies of comparable
operations as the Company; provided, however, that the Company
and Employee shall enter into a written employment agreement (the
"Spane Employment Agreement") which shall, for purposes of
illustration but not limitation, contain the following
provisions:
(1) he shall have the officer title of Chief
Executive Officer, President, and member of the Board of
Directors of the Company;
<PAGE>
(2) he shall have duties at least as
expansive as the Services set forth in Section 2 of this
Agreement;
(3) he shall have an annual base salary and
annual bonus as mutually agreed upon and usual and customary in
the airline industry for companies of comparable operations as
the Company;
(4) a term and severance arrangement as
mutually agreed upon and usual and customary in the airline
industry companies of comparable operations as the Company.
(b) In the event of termination of this Agreement by the
Company under Sections 4(a), 4(d), or 4(e), the Company shall
have the following obligations to Employee:
(i) any unpaid portion of the Employee's salary earned
through the date of termination shall be paid by the Company to
Employee;
(ii) any unreimbursed expenses owed by the Company to
Employee for expenses incurred through the date of termination
shall be paid by the Company to Employee;
(iii) Employee Options that have not vested as of the
date of termination shall lapse and become void.
(c) In the event of termination of this Agreement by the
Company under Section 4(b), the Company shall have the following
obligations to Employee:
(i) any unpaid portion of the Employee's salary earned
through the date of termination shall be paid by the Company to
Employee;
(ii) any unreimbursed expenses owed by the Company to
Employee for expenses incurred through the date of termination
shall be paid by the Company to Employee; and
(iii) Company shall pay to Employee as a severance
payment the lesser of (x) $100,000 or (y) the aggregate remaining
amount to be paid to Employee at his current salary through the
remainder of the Employment Term.
(iv) one-half of those shares of the Employee Options
that have not vested as of the date of termination shall lapse
and become void and the remaining one-half of the Employee
Options shall fully vest and the Company's purchase option shall
lapse. Employee shall have 90 days from the date of termination
to exercise Employee Options.
(v) the expenses associated with moving Employee and
Employee's family including all household goods to San Diego,
California shall be paid by the Company.
<PAGE>
6. Registration Rights.
Employee shall, with respect to the shares received upon
exercise of the Employee Options be granted unlimited piggy-back
registrations, with any cut-backs of shares to be registered
pursuant to the applicable registration statement to be done on a
pro-rata basis among all of the Sellers of Common Stock of the
Company pursuant to the applicable registration statement. A
specific Registration Rights Agreement containing all usual and
customary provisions shall be entered into among Employee and the
Company.
7. Authorized Stock and Reservation of Shares.
(a) The Company's Restated Certificate of Incorporation, as
amended, authorizes the Company to issue up to 50,000,000 shares
of Common Stock. As of the date of this Agreement, there are
insufficient shares of Common Stock for Employee to exercise the
Employee Options. The Company shall use its best efforts to amend
the Company's Restated Certificate of Amendment, as amended, to
provide sufficient authorized capital stock to exercise Employee
Options or take such other action that provides for sufficient
authorized Common Stock for Employee to exercise Employee
Options.
(b) The Company shall use at all times hereforth its best
efforts to reserve and keep available solely for issuance and
delivery upon the exercise of any Employee Options, all such
shares of Common Stock or other shares of capital stock, from
time to time issuable upon the exercise of this Warrant.
8. Indemnification.
Neither the Company or Employee shall be liable for any of
the debts, liabilities or obligations of the other. Accordingly,
the Company will indemnify Employee and Employee will indemnify
the Company, and each will hold the other harmless from and
against any and all loss, cost, damage injury or expense
(including court costs and reasonable attorneys' fees) whatsoever
and howsoever arising which Employee or the Company (as the case
may be) or any of their respective agents, successors or assigns
incurs as a proximate result of (a) Employee or the Company (as
the case may be) being held liable for any debt, liability or
obligation of the Company or Employee (as the case may be) or (b)
any breach of this Agreement by the Company or Employee (as the
case may be).
In Employee's rendering of the Services hereunder and in his
capacity as officer, director, employee of the Company, the
Company shall, as and to the extent permitted by the General
Corporation Law of Delaware, indemnify Employee and hold Employee
harmless from and against any and all loss, cost, damage, injury
or expense (including court costs and reasonable attorneys' fees)
whatsoever and howsoever arising which Employee incurs relating
<PAGE>
to his action under this Agreement and the status of Employee as
officer, director, employee of the Company. In addition, the
Company shall include Employee as beneficiary and covered person
in the Company's insurance policy to protect Employee relating to
his status as officer, director, employee, independent
contractor, and/or agent of the Company.
9. Notice.
All notices, requests, demands and other communications
hereunder shall be deemed duly given if delivered by hand or if
mailed by certified or registered mail with postage prepaid as
follows:
If to the Company:
Vanguard Airlines, Inc.
7000 Squibb Road, 3rd Floor
Mission, KS 66202
Attention: Corporate Secretary
If to the Employee:
Robert J. Spane
333 W. 46th Terrace
Apt. # 201
Kansas City, MO 64112
or to any other address as either party may provide to the other
in writing.
10. Assignment.
This Agreement is personal and not assignable by the
Employee but it may be assigned by the Company without notice to
or consent of the Employee to, and shall thereafter be binding
upon enforceable by any other person which shall acquire or
succeed to substantially all of the business or assets of the
Company (and such person shall be deemed included in the
definition of the "Company" for all purposes of this Agreement)
but it is not otherwise assignable by the Company.
<PAGE>
IN WITNESS WHEREOF, the Company and Employee have each
caused this Agreement to be duly executed in duplicate by its
respective duly authorized officer and each of the parties hereto
has executed this Agreement on the date and year first above
written.
WITNESS/ATTEST:
COMPANY:
VANGUARD AIRLINES, INC.
On Behalf of the Board of Directors,
By: ________________________
Name:
EMPLOYEE:
ROBERT J. SPANE
_____________________________
Robert J. Spane
VANGUARD AIRLINES, INC.
REGISTRATION RIGHTS AGREEMENT
MARCH 20, 1998
<PAGE>
TABLE OF CONTENTS
Page
1. General 1
1.1 Definitions 1
2. Restrictions on Transfer; Registration 3
2.1 Restrictions on Transfer 4
2.2 Demand Registration 5
2.3 Piggyback Registrations 5
2.4 Form S3 Registration 6
2.5 Obligations of the Company 7
2.6 Furnish Information 9
2.7 Delay of Registration 9
2.8 Indemnification 9
2.9 Assignment of Registration Rights 11
2.10 Termination of Registration Rights 11
2.11 "Market Stand-Off" Agreement 12
3. Miscellaneous 12
3.1 Governing Law 12
3.2 Survival 12
3.3 Successors and Assigns 12
3.4 Separability 12
3.5 Amendment and Waiver 12
3.6 Delays or Omissions 13
3.7 Notices 13
3.8 Attorneys' Fees 13
3.9 Titles and Subtitles 13
3.10 Counterparts 13
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is
entered into as of the 20th day of March, 1998, by and among
Vanguard Airlines, Inc., a Delaware corporation (the "Company"),
J.F. Shea Co., Inc., as nominee 1998-19 and The Hambrecht 1980
Revocable Trust (collectively, the "New Investors") and the
holders of a majority of the registrable securities under the
following agreements (the "Existing Investors," and together with
the New Investors, the "Investors"): (i)_the Amended and Restated
Investors' Rights Agreement dated as of August_24, 1994 by and
among the Company, the Series_A Purchasers and the Series_B
Purchasers (each as defined therein), (ii)_the Registration
Rights Agreement dated April 30, 1997 (the "1997 Registration
Rights Agreement") by and among the Company and the Holders (as
defined therein), and (iii)_the Registration Rights Agreement
dated as of September 9, 1996 (the "1996 Registration Rights
Agreement") by and among the Company and the Holders (as defined
therein) (collectively, the "Prior Agreements").
RECITALS
WHEREAS, as a condition to their purchase of Units pursuant
to a Unit Purchase Agreement of even date herewith by and among
the Company and the New Investors (the "Unit Purchase
Agreement"), the New Investors have requested that the Company
extend to them certain registration rights as set forth below;
WHEREAS, in order to facilitate the grant by the Company of
additional rights, the Company and the respective Existing
Investors desire to amend and restate the Prior Agreements and
set forth in a single agreement the registration rights granted
to the Investors; and
WHEREAS, the Existing Investors agree to consolidate the
Prior Agreements and to amend and restate all of their rights,
obligations and privileges as follows;
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants, and conditions set forth
in this Agreement and the Unit Purchase Agreement, the parties
mutually agree as follows:
1. General.
1.1.Definitions. As used in this Agreement the
following terms shall have the following respective meanings:
"1934 ACT" means the Securities Exchange Act of 1934,
as amended.
"1995 WARRANTS" means those certain Warrants for the
Purchase of Shares of Common Stock of the Company issued during
1995 to Kenneth J. Wagnon, Daniel M. Carney, H&Q TSP Investors,
L.P., Hambrecht & Quist London Ventures and Starwood Investments,
L.P.
<PAGE>
"1996 WARRANTS" means those certain Warrants for the
Purchase of Shares of Common Stock of the Company issued during
1996 to H&Q TSP Investors, L.P.
"1997 WARRANTS" means those certain Warrants for the
Purchase of Shares of Common Stock of the Company issued during
1997 to Kenneth J. Wagnon, Daniel M. Carney, H&Q TSP Investors,
L.P., Hambrecht & Quist California and H&Q TSP II Investors, L.P.
"CONVERTIBLE NOTES" means those certain Convertible
Promissory Notes of the Company issued pursuant to that certain
Note Exchange Agreement dated the date hereof by and among the
Company and the Holders listed on Exhibit A attached thereto.
"FAMILY MEMBER" means a Holder's spouse, siblings,
children, stepchildren and grandchildren.
"FINAL PROSPECTUS" means an amended prospectus filed
with the SEC pursuant to SEC Rule 424(b) of the Securities Act.
"HOLDER" means any person owning of record Registrable
Securities.
"INITIATING HOLDERS" means the Holders of at least
forty percent (40%) of the Registrable Securities then
outstanding.
"REGISTER," "REGISTERED" and "REGISTRATION" refer to a
registration effected by preparing and filing a registration
statement in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration
statement or document.
"REGISTRABLE SECURITIES" means (i)_all shares of Common
Stock issued or issuable upon conversion of the shares of Series
A Preferred Stock issued pursuant to the Unit Purchase Agreement;
(ii)_all shares of Common Stock issued or issuable upon the
exercise of Common Stock Purchase Warrants issued pursuant to the
Unit Purchase Agreement; (iii)_all shares of Common Stock issued
to the Investors and their affiliates in January 1998 pursuant to
the Company's rights offering; (iv)_all shares of Common Stock
issued or issuable pursuant to the exercise of the 1995 Warrants;
(v)_all shares of Common Stock issued or issuable pursuant to the
exercise of the 1996 Warrants; (vi)_all shares of Common Stock
issued or issuable pursuant to the exercise of the 1997 Warrants;
(vii)_all shares of Common Stock issued pursuant to the terms of
the Confidential Private Placement Memorandum dated August 16,
1996 (the "1996 PPM"); (viii)_all shares of Common Stock issued
or issuable upon the exercise of the Redeemable Common Stock
Purchase Warrants issued pursuant to the 1996 PPM; (ix)_all
shares of Common Stock issued pursuant to the Confidential
Private Placement Memorandum dated April 1, 1997 (the "1997
PPM"); (x)_all shares of Common Stock issued or issuable pursuant
to the exercise of the Redeemable Common Stock Purchase Warrants
issued pursuant to the 1997 PPM; (xi)_all shares of Common Stock
issued or issuable upon conversion of the Convertible Notes;
(xii)_all shares of Common Stock issued or issuable upon
conversion of the Shares as defined in the Amended and Restated
Investors' Rights Agreement dated August 24, 1994; and (xiii)_any
Common Stock of the Company issued as (or issuable upon the
conversion or exercise of any warrant, right or other security
which is issued as) a dividend or other distribution with respect
to, or in exchange for or in replacement of, such above-described
securities. Notwithstanding the foregoing, Registrable
Securities shall not include any securities sold by a person to
the public <PAGE> either pursuant to a registration statement or
Rule_144 or sold in a private transaction in which the
transferror's rights under this Agreement are not assigned.
"SECURITIES ACT" shall mean the Securities Act of 1933,
as amended.
"FORM S-3" means such form under the Securities Act as
in effect on the date hereof or any successor registration form
under the Securities Act subsequently adopted by the SEC which
permits inclusion or incorporation of substantial information by
reference to other documents filed by the Company with the SEC.
"SEC" or "COMMISSION" means the Securities and Exchange
Commission.
2. Restrictions on Transfer; Registration
2.1 Restrictions on Transfer.
(a) Each Holder agrees not to make any
disposition of all or any portion of the Registrable Securities
unless and until the transferee has agreed in writing for the
benefit of the Company to be bound by this Section_2.1, provided
and to the extent such Sections are then applicable and:
(i) There is then in effect a registration
statement under the Securities Act covering such proposed
disposition and such disposition is made in accordance with such
registration statement; or
(ii) Such Holder shall have notified the
Company of the proposed disposition and shall have furnished the
Company with a detailed statement of the circumstances
surrounding the proposed disposition, and if reasonably requested
by the Company, such Holder shall have furnished the Company with
an opinion of counsel, reasonably satisfactory to the Company,
that such disposition will not require registration of such
shares under the Securities Act.
(iii) Notwithstanding the provisions of
paragraphs_(i) and (ii) above, no such registration statement or
opinion of counsel shall be necessary for a transfer by (A) a
Holder which is a partnership to its partners in accordance with
partnership interests, (B) by a Holder that is a corporation to
its stockholders or (C)_to the Holder's family member or trust
for the benefit of an individual Holder, provided the transferee
will be subject to the terms of this Section_2.1 to the same
extent as if he were an original Holder hereunder.
(b) Each certificate representing Registrable
Securities shall (unless otherwise permitted by the provisions of
this Agreement) be stamped or otherwise imprinted with a legend
substantially similar to the following (in addition to any legend
required under applicable state securities laws or as provided
elsewhere in this Agreement):
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT") OR THE LAWS OF
ANY STATE. THEY MAY NOT SOLD, OFFERED FOR
SALE, PLEDGED, HYPOTHECATED OR OTHERWISE
TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT, OR AN
OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER SUCH ACT OR UNLESS SOLD
PURSUANT TO RULE_144 UNDER SUCH ACT.
(c) The Company shall be obligated to reissue
promptly unlegended certificates at the request of any holder
thereof if the holder shall have obtained an opinion of counsel
(which counsel may be counsel to the Company) reasonably
acceptable to the Company to the effect that the securities
proposed to be disposed of may lawfully be so disposed of without
registration, qualification or legend.
(d) Any legend endorsed on an instrument pursuant
to applicable state securities laws and the stop-transfer
instructions with respect to such securities shall be removed
upon receipt by the Company of an order of the appropriate blue
sky authority authorizing such removal.
2.2 Demand Registration.
(a) Subject to the conditions of this
Section_2.2, if the Company shall receive at any time a written
request from the Initiating Holders that the Company file a
registration statement under the Securities Act covering the
registration of Registrable Securities, then the Company shall,
within thirty (30) days of the receipt thereof, give written
notice of such request to all Holders, and subject to the
limitations of Section_2.2(b), effect, as soon as practicable,
the registration under the Securities Act of at least 25% of the
Registrable Securities held by such Initiating Holders; provided,
however, that the Company may register less than 25% of such
Registrable Securities if the anticipated aggregate offering
price, net of underwriting discounts and commissions, exceeds
$5,000,000.
(b) If the Initiating Holders intend to
distribute the Registrable Securities covered by their request by
means of an underwriting, they shall so advise the Company as a
part of their request made pursuant to this Section_2.2 and the
Company shall include such information in the written notice
referred to in Section_2.2(a). In such event, the right of any
Holder to include his Registrable Securities in such registration
shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable
Securities in the underwriting (unless otherwise mutually agreed
by a majority in interest of the Initiating Holders and such
Holder) to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall enter
into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by a
majority in interest of the Initiating Holders (which underwriter
or underwriters shall be reasonably acceptable to the Company).
Notwithstanding any other provision of this Section_2.2, if the
underwriter advises the Company in writing that marketing factors
require a limitation of the number of securities to be
underwritten (including Registrable Securities) then the Company
shall so advise all Holders of Registrable Securities which would
otherwise be underwritten <PAGE> pursuant hereto, and the number of
shares that may be included in the underwriting shall be
allocated to the Holders of such Registrable Securities on a pro
rata basis based on the number of Registrable Securities held by
all such Holders (including the Initiating Holders). Any
Registrable Securities excluded or withdrawn from such
underwriting shall be withdrawn from the registration.
(c) The Company shall not be obligated to effect
more than two (2) registrations pursuant to this Section_2.2.
(d) Notwithstanding the foregoing, if the Company
shall furnish to Holders requesting a registration statement
pursuant to this Section_2.2, a certificate signed by the
Chairman of the Board stating that in the good faith judgment of
the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such
registration statement to be filed and it is therefore essential
to defer the filing of such registration statement, the Company
shall have the right to defer such filing for a period of not
more than ninety (90) days after receipt of the request of the
Initiating Holders; provided that such right to delay a request
shall be exercised by the Company no more than once in any
one-year period.
(e) All expenses incurred in connection with a
registration pursuant to this Section_2.2 (excluding
underwriters' discounts and commissions, which shall be paid by
the selling Holders pro rata with respect to their included
shares), including without limitation all registration, filing,
qualification, printers' and accounting fees, fees and
disbursements of counsel for the Company, and the reasonable fees
and disbursements of a single counsel for the selling Holders,
shall be borne by the Company; provided, however, that the
Company shall not be required to pay for any expenses of any
registration proceeding begun pursuant to Section_2.2 if the
registration request is subsequently withdrawn, unless the
withdrawal of the registration request results from either
(a)_intentional actions by the Company outside the normal course
of business that materially reduce the feasibility of the
registration proceeding, or (b)_the discovery of information
about the Company that was not known at the time of the
Initiating Holders' request made pursuant to Section_2.2(a), and
such information materially reduces the feasibility of the
registration proceeding. If the Company is required to pay the
registration expenses pursuant to this Section_2.2(e), then the
Holders shall not forfeit their rights pursuant to this
Section_2.2 to a demand registration.
(f) A request by the New Investors that the
Company effect a registration under the Unit Purchase Agreement
shall not be deemed to be request for registration under this
Section 2.2.
2.3 Piggyback Registrations.
(a) The Company shall notify all Holders in
writing at least thirty (30) days prior to the filing of any
registration statement under the Securities Act for purposes of a
public offering of securities of the Company (including, but not
limited to, registration statements relating to secondary
offerings of securities of the Company, but excluding
registration statements relating to employee benefit plans and
corporate reorganizations) and will <PAGE> afford each such Holder an
opportunity to include in such registration statement all or part
of such Registrable Securities held by such Holder. Each Holder
desiring to include in any such registration statement all or any
part of the Registrable Securities held by it shall, within
twenty (20) days after receipt of the above-described notice from
the Company, so notify the Company in writing. Such notice shall
state the intended method of disposition of the Registrable
Securities by such Holder. If a Holder decides not to include
all of its Registrable Securities in any registration statement
thereafter filed by the Company, such Holder shall nevertheless
continue to have the right to include any Registrable Securities
in any subsequent registration statement or registration
statements as may be filed by the Company with respect to
offerings of its securities, all upon the terms and conditions
set forth herein. Notwithstanding anything to the contrary, the
foregoing shall not apply to any registrations occurring on or
after March 18, 2003.
(b) If the registration statement under which the
Company gives notice under this Section_2.3 is for an
underwritten offering, the Company shall so advise the Holders.
In such event, the right of any such Holder to be included in a
registration pursuant to this Section_2.3 shall be conditioned
upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders
proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for
such underwriting. Notwithstanding any other provision of the
Agreement, if the underwriter determines in good faith that
marketing factors require a limitation of the number of shares to
be underwritten, the number of shares that may be included in the
underwriting shall be allocated, first, to the Company; second,
to the Holders on a pro rata basis based on the total number of
Registrable Securities held by the Holders; and third, to any
stockholder of the Company (other than a Holder) on a pro rata
basis. No such reduction shall reduce the securities being
offered by the Company for its own account to be included in the
registration and underwriting, except that in no event shall the
amount of securities of the selling Holders included in the
registration be reduced below twenty percent (20%) of the total
amount of securities included in such registration.
(c) The Company shall bear all fees and expenses
incurred in connection with any registration under this Section
2.3 (excluding underwriters' discounts and commissions, which
shall be paid by the selling Holders pro rata with respect to
their included shares), including without limitation all
registration, filing, qualification, printers' and accounting
fees, fees and disbursements of counsel to the Company, and the
reasonable fees and disbursements of a single counsel to the
selling Holders (which counsel shall also be counsel to the
Company unless counsel to the Company has a conflict of interest
with respect to the representation of any selling Holder or the
underwriters object to the selling Holders representation by
Company counsel).
2.4 Form S3 Registration. In case the Company shall
receive at any time from the Holders of at least ten percent
(10%) of the Registrable Securities a written request or requests
that the Company effect a registration on Form S3 and any related
qualification or compliance with respect to all or a part of the
Registrable Securities owned by such Holder or Holders, the
Company will:
<PAGE>
(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all
other Holders of Registrable Securities; and
(b) use all reasonable efforts to effect, as soon
as practicable, such registration and all such qualifications and
compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of
such Holder's or Holders' Registrable Securities as are specified
in such request, together with all or such portion of the
Registrable Securities of any other Holder or Holders joining in
such request as are specified in a written request given within
fifteen (15) days after receipt of such written notice from the
Company; provided, however, that the Company shall not be
obligated to effect any such registration, qualification or
compliance pursuant to this Section_2.4: (i)_if Form S-3 is not
available under the Securities Act or rules or regulations
promulgated thereunder for such offering by the Holders, (ii)_if
the Holders, together with the holders of any other securities of
the Company entitled to inclusion in such registration, propose
to sell Registrable Securities and such other securities (if any)
at an aggregate price to the public of less than $500,000,
(iii)_if the Company shall furnish to the Holders a certificate
signed by the Chairman of the Board of Directors of the Company
stating that in the good faith judgment of the Board of Directors
of the Company, it would be seriously detrimental to the Company
and its stockholders for such Form S-3 Registration to be
effected at such time, in which event the Company shall have the
right to defer the filing of the Form S3 registration statement
for a period of not more than ninety (90) days after receipt of
the request of the Holder or Holders under this Section 2.4,
provided that, such right to defer the filing may be exercised by
the Company no more than once in any twelve (12) month period,
(iv) if the Company has, within the twelve (12) month period
preceding the date of such request, already effected two (2)
registrations on Form S3 for the Holders pursuant to this Section
2.4, or (v) in any particular jurisdiction in which the Company
would be required to qualify to do business or to execute a
general consent to service of process in effecting such
registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall
file a Form_S3 registration statement covering the Registrable
Securities and other securities so requested to be registered as
soon as practicable after receipt of the request or requests of
the Holders. All such expenses incurred in connection with
registrations requested pursuant to this Section_2.4 shall be
paid by the selling Holders pro rata with respect to their
included shares, including without limitation all registration,
filing, qualification, printers' and accounting fees, fees and
disbursements of counsel for the Company, and the reasonable fees
and disbursements of a single counsel for the selling Holder or
Holders.
(d) A request by the New Investors that the
Company effect a registration under the terms of the Unit
Purchase Agreement shall not be deemed to be a request for
registration under this Section 2.4.
2.5 Obligations of the Company. Whenever required to
effect the registration of any Registrable Securities, the
Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration
statement with respect to such Registrable Securities and use its
best efforts to cause such registration statement to <PAGE> become
effective, and, upon the request of the Holders of a majority of
the Registrable Securities registered thereunder, keep such
registration statement effective for up to one hundred twenty
(120) days.
(b) Prepare and file with the SEC such amendments
and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be
necessary to comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such number of copies
of a prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and such
other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by
them that are included in such registration.
(d) Use its best efforts to register and qualify
the securities covered by such registration statement under such
other securities or Blue Sky laws of such jurisdictions as shall
be reasonably requested by the Holders, provided that the Company
shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(e) In the event of any underwritten public
offering, enter into and perform its obligations under an
underwriting agreement, in usual and customary form, with the
managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and
perform its obligations under such an agreement.
(f) Cause all such Registrable Securities
registered pursuant hereunder to be listed on each securities
exchange or automated quotation system on which similar
securities issued by the Company are then listed;
(g) Notify each Holder of Registrable Securities
covered by such registration statement at any time when a
prospectus relating thereto is required to be delivered under the
Securities Act of the happening of any event as a result of which
the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the
light of the circumstances then existing.
(h) Furnish, at the request of a majority of the
Holders participating in the registration, on the date that such
Registrable Securities are delivered to the underwriters for
sale, if such securities are being sold through underwriters, or,
if such securities are not being sold through underwriters, on
the date that the registration statement with respect to such
securities becomes effective, (i)_an opinion, dated as of such
date, of the counsel representing the Company for the purposes of
such registration, in form and substance as is customarily given
to underwriters in an underwritten public offering and reasonably
satisfactory to a majority in interest of the Holders requesting
registration, addressed to the underwriters, if any, and to the
Holders requesting registration of Registrable Securities and
(ii)_a letter dated as of such date, from the independent
certified public accountants of the Company, in form and
substance as is <PAGE> customarily given by independent certified public
accountants to underwriters in an underwritten public offering
and reasonably satisfactory to a majority in interest of the
Holders requesting registration, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable
Securities.
2.6 Furnish Information. It shall be a condition
precedent to the obligations of the Company to take any action
pursuant to Sections 2.2, 2.3 or 2.4 that the selling Holders
shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them, and the
intended method of disposition of such securities as shall be
required to effect the registration of their Registrable
Securities.
2.7 Delay of Registration. No Holder shall have any
right to obtain or seek an injunction restraining or otherwise
delaying any such registration as the result of any controversy
that might arise with respect to the interpretation or
implementation of this Article II.
2.8 Indemnification. In the event any Registrable
Securities are included in a registration statement under
Sections 2.2, 2.3 or 2.4:
(a) To the extent permitted by law, the Company
will indemnify and hold harmless each Holder, the partners,
shareholders, officers, directors, employees and agents of each
Holder, any underwriter (as defined in the Securities Act) for
such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the 1934
Act, against any losses, claims, damages, or liabilities (joint
or several) to which they may become subject under the Securities
Act, the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a "Violation")
by the Company: (i)_any untrue statement or alleged untrue
statement of a material fact contained in such registration
statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements
thereto, (ii)_the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make
the statements therein not misleading, or (iii)_any violation or
alleged violation by the Company of the Securities Act, the 1934
Act, any state securities law or any rule or regulation
promulgated under the Securities Act, the 1934 Act or any state
securities law in connection with the offering covered by such
registration statement; and the Company will reimburse each such
Holder, partner, shareholder, officer, director, employee, agent,
underwriter or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action;
provided however, that the indemnity agreement contained in this
Section_2.8(a) shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim,
damage, liability or action to the extent that it arises out of
or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished to the Company
expressly for use in connection with such registration by such
Holder, partner, officer, director, underwriter or controlling
person of such Holder.
<PAGE>
(b) To the extent permitted by law, each selling
Holder will indemnify and hold harmless the Company, each of its
directors, each of its officers, each person, if any, who
controls the Company within the meaning of the Securities Act,
any underwriter and any other Holder selling securities under
such registration statement or any of such other Holder's
partners, directors or officers or any person who controls such
Holder, against any losses, claims, damages or liabilities (joint
or several) to which the Company or any such director, officer,
controlling person, underwriter or other such Holder, or partner,
director, officer or controlling person of such other Holder may
become subject under the Securities Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereto) arise out of or are
based upon any Violation, in each case to the extent (and only to
the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by
such Holder expressly for use in connection with such
registration; and each such Holder will reimburse any legal or
other expenses reasonably incurred by the Company or any such
director, officer, controlling person, underwriter or other
Holder, or partner, officer, director or controlling person of
such other Holder in connection with investigating or defending
any such loss, claim, damage, liability or action if it is
judicially determined that there was such a Violation; provided,
however, that the indemnity agreement contained in this
Section_2.8(b) shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which
consent shall not be unreasonably withheld; provided further,
that in no event shall any indemnity under this Section_2.8
exceed the net proceeds from the offering received by such
Holder.
(c) Promptly after receipt by an indemnified
party under this Section_2.8 of notice of the commencement of any
action (including any governmental action), such indemnified
party will, if a claim in respect thereof is to be made against
any indemnifying party under this Section_2.8, deliver to the
indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate
in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party_similarly noticed, to assume
the defense thereof with counsel mutually satisfactory to the
parties; provided, however, that an indemnified party shall have
the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying
party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to
deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action, if
materially prejudicial to its ability to defend such action,
shall relieve such indemnifying party of any liability to the
indemnified party under this Section_2.8, but only to the extent
that such indemnifying party is prejudiced with respect to a
specific claim. The omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this
Section 2.8.
(d) If the indemnification provided for in this
Section_2.8 is held by a court of competent jurisdiction to be
unavailable to an indemnified party with respect to any losses,
claims, damages or liabilities referred to herein, the
indemnifying party, in lieu of indemnifying such indemnified
party thereunder, shall to the extent permitted by applicable law
<PAGE>
contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability in
such proportion as is appropriate to reflect the relative fault
of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s) that
resulted in such loss, claim, damage or liability, as well as any
other relevant equitable considerations. The relative fault of
the indemnifying party and of the indemnified party shall be
determined by a court of law by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party
and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement
or omission; provided that, in no event shall any contribution by
a Holder hereunder exceed the proceeds from the offering received
by such Holder. No person or entity guilty of fraudulent
misrepresentation (within the meaning of Section_II(f) of the
Securities Act) will be entitled to contribution from any person
or entity who was not guilty of such fraudulent
misrepresentation.
(e) The foregoing indemnity agreements of the
Company and Holders are subject to the condition that, insofar as
they relate to any Violation made in a preliminary prospectus but
eliminated or remedied in the amended prospectus on file with the
SEC at the time the registration statement in question becomes
effective or the Final Prospectus, such indemnity agreement shall
not inure to the benefit of any person obligated under the
Securities Act to furnish to the person asserting the loss,
liability, claim or damage a copy of the Final Prospectus if a
copy of the Final Prospectus was furnished to the indemnified
party and was not furnished to the person asserting the loss,
liability, claim or damage at or prior to the time such action is
required by the Securities Act.
(f) The obligations of the Company and Holders
under this Section 2.9 shall survive the completion of any
offering of Registrable Securities pursuant to a registration
statement, or otherwise.
2.9 Assignment of Registration Rights. The rights to
cause the Company to register Registrable Securities pursuant to
this Article II may be assigned by a Holder to a transferee or
assignee of Registrable Securities; provided, however, that no
such transferee or assignee shall be entitled to registration
rights under Sections 2.2, 2.3 or 2.4 hereof unless such
transferee or assignee: (i)_is a Holder; (ii)_holds after such
transfer or assignment at least one hundred thousand (100,000)
shares of Registrable Securities (as adjusted for stock
dividends, splits and combinations); or (iii)_is a Family Member
or a subsidiary, parent, general partner, limited partner,
retired partner or shareholder of a Holder. In each such case,
the Company shall, within twenty (20) days after such transfer,
be furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which
such registration rights are being assigned.
2.10 Termination of Registration Rights. No Holder
shall be entitled to exercise any right provided for in this
Section 2 after the time at which all Registrable Securities held
by such Holder (and any affiliate of the Holder with whom such
Holder must aggregate its sales under Rule 144) can be sold in
any three (3)-month period without registration in compliance
with Rule 144 of the Securities Act.
<PAGE>
2.11 "Market Stand-Off" Agreement. If requested by the
Company and an underwriter of Common stock (or other securities)
of the Company, a Purchaser shall not sell or otherwise transfer
or dispose of any Common Stock (or other securities) of the
Company held by such Stockholder (other than those included in
the registration) for a period specified by the underwriters not
to exceed ninety_(90) days following the effective date of a
registration statement of the Company filed under the Securities
Act, provided, that all officers and directors of the Company and
holders of at least ten percent_(10%) of the Company's voting
securities enter into similar agreements. The obligations
described in this Section_2.11 shall not apply to a registration
relating solely to employee benefit plans on Form_S-1 or Form_S-8
or similar forms that may be promulgated in the future, or a
registration relating solely to a Commission Rule_145 transaction
on Form_S-4 or similar forms that may be promulgated in the
future. The Company may impose stop-transfer instructions with
respect to the shares (or securities) subject to the foregoing
restriction until the end of said ninety_(90) day period.
3. MISCELLANEOUS.
3.1 Governing Law. This Agreement shall be governed
by and construed under the laws of the State of California as
applied to agreements among California residents entered into and
to be performed entirely within California.
3.2 Survival. The representations, warranties,
covenants, and agreements made herein shall survive any
investigation made by any Holder and the closing of the
transactions contemplated hereby. All statements as to factual
matters contained in any certificate or other instrument
delivered by or on behalf of the Company pursuant hereto in
connection with the transactions contemplated hereby shall be
deemed to be representations and warranties by the Company
hereunder solely as of the date of such certificate or
instrument.
3.3 Successors and Assigns. Except as otherwise
expressly provided herein, the provisions hereof shall inure to
the benefit of, and be binding upon, the successors, assigns,
heirs, executors, and administrators of the parties hereto and
shall inure to the benefit of and be enforceable by each person
who shall be a holder of Registrable Securities from time to
time; provided, however, that prior to the receipt by the Company
of adequate written notice of the transfer of any Registrable
Securities specifying the full name and address of the
transferee, the Company may deem and treat the person listed as
the holder of such shares in its records as the absolute owner
and holder of such shares for all purposes, including the payment
of dividends or any redemption price.
3.4 Separability. In case any provision of the
Agreement shall be invalid, illegal, or unenforceable, the
validity, legality, and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
3.5 Amendment and Waiver. Any provision of this
Agreement may be amended and the observance thereof may be waived
(either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of
the Company and the Holders of a majority of the Registrable
Securities (including for purposes of such calculation Common
Stock issuable upon the conversion, exchange or exercise of
outstanding securities). <PAGE> Any amendment or waiver effected in
accordance with this Section_3.5 shall be binding upon each
Holder and the Company. By acceptance of any benefits under this
Agreement, Holders hereby agree to be bound by the provisions
hereunder. This Agreement and the Unit Purchase Agreement
contain the entire agreement of the parties with respect to the
subject matter contained herein.
3.6 Delays or Omissions. It is agreed that no delay
or omission to exercise any right, power, or remedy accruing to
any Holder, upon any breach, default or noncompliance of the
Company under this Agreement shall impair any such right, power,
or remedy, nor shall it be construed to be a waiver of any such
breach, default or noncompliance, or any acquiescence therein, or
of any similar breach, default or noncompliance thereafter
occurring. It is further agreed that any waiver, permit,
consent, or approval of any kind or character on any Holder's
part of any breach, default or noncompliance under the Agreement
or any waiver on such Holder's part of any provisions or
conditions of this Agreement must be in writing and shall be
effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement, by law, or
otherwise afforded to Holders, shall be cumulative and not
alternative.
3.7 Notices. All notices required or permitted
hereunder shall be in writing and be deemed to have been given or
made for all purposes: (i)_upon personal delivery, (ii)_upon
confirmation receipt that the communication was successfully sent
to the applicable number if sent by facsimile, (iii)_one day
after being sent, when sent by professional overnight courier
service, or (iv)_five_(5) days after posting when sent by
registered or certified mail. All communications shall be sent
to the party to be notified at the address as set forth on the
signature page hereof or at such other address as such party may
designate by ten (10) days advance written notice to the other
parties hereto.
3.8 Attorneys' Fees. If legal action is brought to
enforce or interpret this Agreement, the prevailing party shall
be entitled to recover its reasonable attorneys' fees and legal
costs in connection therewith.
3.9 Titles and Subtitles. The titles of the sections
and subsections of this Agreement are for convenience of
reference only and are not to be considered in construing this
Agreement.
3.10 Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be an original,
but all of which together shall constitute one instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the date set forth in the first paragraph
hereof.
COMPANY:
VANGUARD AIRLINES, INC.
By:
Title:
Address:
INVESTORS:
J.F. SHEA CO, INC. The Hambrecht 1980
Revocable Trust
By: By:
Title: Title:
Address: 675 Brea Canyon Road, 550 15th Street
Suite 9 San Francisco, CA 94103
Walnut Canyon, CA 91789
HAMBRECHT & QUIST CALIFORNIA H&Q TSP II INVESTORS, L.P.
By: By:
Title: Title:
Address: One Bush Street Address: One Bush Street
San Francisco, CA 94104 San Francisco, CA 94104
H&Q TSP INVESTORS, L.P.
By:
Title:
Address: One Bush Street
San Francisco, CA 94104
<PAGE>
KENNETH J. WAGNON DANIEL M. CARNEY
Address: 3445 North Webb Rd. Address: 8100 E. 22nd St.,
Wichita, KS 67226-8190 North Bldg. 1900
Wichita, KS 67226-2319
STARWOOD INVESTMENTS, L.P. H&Q LONDON VENTURES
By: By:
Title: Title:
Address: 1313 N. Webb Rd., Address:
Suite 200
Wichita, KS 67226
UNIT PURCHASE AGREEMENT
This Unit Purchase Agreement (the "Agreement") is made
and entered into as of March 20, 1998 by and among Vanguard
Airlines, Inc., a Delaware corporation (the "Company"), and those
parties listed on the signature page hereof as "Investors" (who
are referred to individually as an "Investor" and collectively as
the "Investors").
In consideration of the mutual promises and covenants
made herein, the parties hereby agree as follows:
1. Sale of Units; Closing; Delivery.
a. Purchase and Sale of Units. Subject to the terms and
conditions hereof, the Company will issue and sell to
each Investor, and each Investor will purchase from the
Company, at the Closing (as defined below) the number
of Units set forth opposite each Investor's name on
Exhibit_A at a purchase price per Unit (the "Unit
Purchase Price") equal to $10.00 up to an aggregate of
450,000 Units. A "Unit" shall be composed of one share
(a "Share") of Series A Preferred Stock, $0.001 par
value, of the Company (the "Preferred Stock"), and a
warrant in the form attached hereto as Exhibit B (a
"Warrant") to purchase forty (40) shares of Common
Stock, $0.001 par value (the "Warrant Shares"). The
exercise price of the Warrant shall be $0.55 per
Warrant Share. The Preferred Stock shall have the
rights, preferences, privileges and restrictions set
forth in the Certificate of Designation attached hereto
as Exhibit C (the "Certificate of Designation").
b. Closing. The closing of the purchase and sale of the
Units shall take place at 2:00 p.m. on March_20, 1998,
or at such other date and time as the Investors and the
Company shall mutually agree upon (which date and time
are designated as the "First Closing"). The date of
the First Closing is hereinafter referred to as the
"First Closing Date."
c. Subsequent Sale of Units. Subject to the terms and
conditions of this Agreement, the Company may sell any
Units not purchased at the First Closing in one or more
subsequent closings (the "Subsequent Closings") at a
price not less than $10.00 per Unit, provided the
agreement for sale is executed not later than ninety
(90) days from the date hereof. If the Company intends
to sell any Units in Subsequent Closings it shall first
offer the Investors the right to purchase their
pro-rata share of any such Units to be offered. An
Investor's pro-rata share shall be equal to the number
of Units being offered multiplied by a fraction the
numerator of which is the number of Units held by the
Investor and the denominator of which is the number of
Units held by all Investors. If the Investors elect to
purchase less than all of the additional Units being
offered, the Company shall have the right to offer such
remaining Units to any other purchasers it selects.
Any such purchaser shall <PAGE> become a party this Agreement
and that certain Registration Rights Agreement dated
the date hereof, by and among the Company, the
Investors and the other parties named therein. The
First Closing and the Subsequent Closings are each
referred to individually as a Closing and collectively
as the Closings.
d. Delivery. Subject to the terms and conditions of this
Agreement, at a Closing, the Company shall deliver to
each Investor (i) a stock certificate representing the
Shares included in the Units to be purchased by such
Investor and (ii) a Warrant reflecting the number of
Units to be purchased against payment of the purchase
price therefor by cancellation of indebtedness, a check
payable to the order of the Company, or by wire
transfer of immediately available funds to the bank
account of the Company. In the event that payment by
an Investor is made, in whole or in part, by
cancellation of indebtedness, then such Investor shall
surrender to the Company for cancellation at the
Closing any evidence of such indebtedness or shall
execute an instrument of cancellation in form and
substance acceptable to the Company.
2. Representations and Warranties of the Company. The Company
hereby represents and warrants to each Investor, that,
except as set forth on the Schedule of Exceptions attached
hereto as Exhibit_D (the "Schedule of Exceptions"), with any
disclosure thereon being deemed disclosure for all purposes
and all relevant subsections hereof, which exceptions will
be deemed to be representations and warranties as if made
hereunder:
a. Organization and Good Standing. The Company is a
corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware.
The Company has all necessary corporate power and
authority to own its assets and to carry on its
business as now being conducted and presently proposed
to be conducted. The Company is duly qualified to do
business as a foreign corporation and is in good
standing in each jurisdiction in which its ownership or
leasing of assets, or the conduct of its business,
makes such qualification necessary, except where
failure to do so would not have a material adverse
effect on the operations or financial condition of the
Company.
b. Requisite Power and Authorization. Subject to receipt
of stockholder approval to increase the Company's share
capital as provided in Section 5(a)(i) below (the
"Stockholder Approval") and the filing of an amendment
(the "Amendment") to the Company's Restated Certificate
of Incorporation, as amended (the "Restated
Certificate") to effect such increase, the Company will
have all necessary corporate power and authority under
the laws of the State of Delaware and all other
applicable provisions of law to execute and deliver
this Agreement, to issue the Shares, the shares of
Common Stock issuable upon conversion of the Shares
(the "Conversion Shares"), the Warrants and the Warrant
Shares and to carry out the provisions of this
Agreement and the Warrants. All corporate action on
the part of the Company required for the lawful
execution and delivery of this Agreement, and issuance
and delivery of the Shares, the Conversion Shares, the
Warrants and the Warrant Shares has been duly and
effectively taken, subject to receipt of the
<PAGE>
Stockholder Approval and the filing of the Amendment.
Upon execution and delivery, this Agreement and the
Warrants constitute valid and binding obligations of
the Company enforceable in accordance with their
respective terms, except as enforcement may be limited
by insolvency and similar laws affecting the
enforcement of creditors' rights generally and
equitable remedies. The Shares and the Warrants (and
the Warrant Shares issuable upon exercise of the
Warrants) when issued in compliance with the provisions
of this Agreement or the Warrants, as the case may be,
and the Conversion Shares when issued in accordance
with the Restated Certificate, will, upon receipt of
the Stockholder Approval and the filing of the
Amendment, be duly authorized and validly issued, fully
paid, non-assessable, and issued in compliance with
federal securities laws and the securities laws of the
State of California. No stockholder of the Company or
other person has any preemptive right of subscription
or purchase or contractual right of first refusal or
similar right with respect to the Shares, the
Conversion Shares, the Warrants or the Warrant Shares.
The Company has reserved, subject to receipt of the
Stockholder Approval and the filing of the Amendment,
such number of shares of its Common Stock necessary for
issuance of the Warrant Shares and the Conversion
Shares.
c. Consents. No consent, approval, authorization or order
of any court, governmental agency or third party is
required for the execution and delivery by the Company
of this Agreement or the performance by the Company of
any of its obligations hereunder (including issuance of
the Shares and the Warrant Shares) and under the
Restated Certificate other than the Stockholder
Approval.
d. SEC Documents. The Company has timely filed all
documents that the Company was required to file with
the Securities and Exchange Commission (the "SEC")
under Sections_13 or 14(a) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), since
December 31_, 1996 (collectively, the "SEC Documents").
As of their respective filing dates, or such later date
on which such reports were amended, the SEC Documents
complied in all material respects with the requirements
of the Exchange Act or the Securities Act of 1933, as
amended (the "1933 Act"), as applicable. No SEC
Documents as of their respective dates, or such later
date on which such reports were amended, or press
release, containing information material to the
business as a whole, contained any untrue statement of
a material fact or omitted to state a material fact
required to be stated therein or necessary to make the
statements made therein, in light of the circumstances
under which they were made, not misleading. The
financial statements included in the SEC Documents (the
"Financial Statements") comply as to form in all
material respects with applicable accounting
requirements and with the published rules and
regulations of the SEC with respect thereto. Except as
may be indicated in the notes to the Financial
Statements or, in the case of <PAGE> unaudited statements, as
permitted by Form 10-Q of the SEC, the Financial
Statements have been prepared in accordance with
generally accepted accounting principles consistently
applied and fairly present the consolidated financial
position of the Company and any subsidiaries at the
dates thereof and the consolidated results of their
operations and consolidated cash flows for the periods
then ended (subject, in the case of unaudited
statements, to normal, recurring adjustments).
e. Capital Stock. The authorized capital stock of the
Company consists of 50,000,000 shares of Common Stock,
$.001 par value, and 1,000,000 shares of Preferred
Stock, $.001 par value, 600,000 of which have been
designated Series A Preferred Stock. As of January 31,
1998, there were 45,683,045 shares of Common Stock
issued and outstanding and no shares of Preferred Stock
issued and outstanding. All outstanding shares of
Common Stock and Preferred Stock have been duly
authorized and validly issued and are fully paid and
non-assessable. Except for (A) the conversion
privileges of the Preferred Stock to be issued under
this Agreement, (B) 20,430,044 shares of Common Stock
issuable upon exercise of the Warrants and exercise of
the Company's outstanding warrants, (C) 8,239,227
shares of Common Stock issuable upon exercise of stock
options granted to employees, consultants, officers or
directors of the Company and (D) ___________ shares
issuable upon conversion of the convertible promissory
notes (the "New Notes") being issued pursuant to the
Note Exchange Agreement of even date herewith (the
"Note Exchange Agreement"), the Company has no
outstanding securities convertible into or exchangeable
for Common Stock and no contracts, rights, options or
warrants to purchase or otherwise acquire Common Stock
or securities convertible into or exchangeable for
Common Stock. Since January 31, 1998 the Company has
not issued any shares of capital stock or any options,
warrants or other rights with respect thereto except
for shares issued upon exercise of options, warrants or
rights, all as set forth on the Schedule of Exceptions.
f. Compliance with Other Agreements. Subject to receipt
of the Stockholder Approval and the filing of the
Amendment, neither the execution and delivery of, nor
the consummation of any transaction or execution of any
instrument contemplated by, this Agreement, nor the
issuance of the Shares, the Warrants and the Warrant
Shares, has constituted or resulted in, or will
constitute or result in, a default under or breach or
violation of any term or provision of the Company's
Bylaws, Restated Certificate, or contracts with third
parties, state or federal laws, rules or regulations,
writs, orders or judgments or decrees which are
applicable to the Company or its properties.
g. No Material Adverse Change. Since the date of the
Company's most recent quarterly report on Form 10-Q or
most recent periodic report on Form 8-K filed with the
SEC, there has not been:
i. any changes in the assets, liabilities, financial
condition or operations of the Company from that
reflected in the Financial Statements except
<PAGE>
changes resulting from ongoing operating losses
during such period;
ii. any material change, except in the ordinary course
of business, in the contingent obligations of the
Company whether by way of guarantee, endorsement,
indemnity, warranty or otherwise;
iii. any damage, destruction or loss, whether or not
covered by insurance, materially and adversely
affecting the properties or business of the
Company; or
iv. any declaration or payment of any dividend or
other distribution of the assets of the Company.
h. Litigation. There is no pending or, to the best
knowledge of the Company, threatened action, suit,
proceeding or investigation before any court,
governmental agency or body, or arbitrator having
jurisdiction over the Company or any of its affiliates
that would materially adversely affect the execution by
the Company of, or the performance by the Company of
its obligations under, this Agreement.
i. Registration Rights. Except as set forth in the
Registration Rights Agreement (the "Registration Rights
Agreement") attached hereto as Exhibit E, the Company
has not granted or agreed to grant any registration
rights, including piggyback rights, to any person or
entity. None of the registration rights contained in
the Registration Rights Agreement are senior to the
registration rights provided for in this Agreement.
j. No Misrepresentation. No representation or warranty by
the Company in this Agreement and no statements in the
SEC Documents, as amended, nor any other document,
statement, certificate or schedule furnished or to be
furnished by or on behalf of the Company pursuant to
this Agreement, when taken together with the foregoing,
contains or shall contain any untrue statement of a
material fact or omits or shall omit to state a
material fact necessary in order to make such
statements, in light of the circumstances under which
they were made, not misleading. The Company has
delivered true and complete copies of all documents
requested by the Investors.
k. Non-Exercise of Options and/or Warrants. The Company
has received, or by the Closing Date will have
received, fully executed and enforceable Agreements Not
to Exercise Options and/or Warrants (in the form
attached hereto as Exhibit_F) from each director and
officer of the Company.
3. Representations and Warranties of Investors. Each Investor
represents and warrants, severally and not jointly, to the
Company that:
a. Authorization. Such Investor has full power and
authority to enter into this Agreement, and this
Agreement constitutes the valid and legally binding
obligation of such Investor, enforceable in accordance
with its terms, except as such enforcement may be
limited by bankruptcy, insolvency and similar laws
affecting the enforcement of creditors' rights
generally and equitable remedies, and except as
<PAGE>
indemnity provisions in the enforcement of Section_4 of
this Agreement (relating to registration rights) may be
limited by law.
b. Purchase for Investment. Such Investor is purchasing
the Units for investment purposes only and not with a
view to, or for sale in connection with, a distribution
of the Units within the meaning of the 1933 Act. Such
Investor has no present intention of selling or
otherwise disposing of all or any portion of the Units.
c. Access to Information. Such Investor has had an
opportunity to ask questions of the Company's
representatives concerning the Company, its present and
prospective business, assets, liabilities and financial
condition that such Investor has deemed necessary and
appropriate as a prudent and knowledgeable investor in
evaluating the risks of purchasing the Units. The
foregoing, however, does not limit or modify the
representations and warranties of the Company in
Section_3 of this Agreement or the rights of the
Investors to rely thereon.
d. Understanding of Risks. Such Investor is fully aware
of: (i)_the highly speculative nature of the
investment in the Units; (ii)_the financial hazards
involved; (iii) the risk of loss of the investment if
the Company is unable to finance its continuing
operations; (iv)_the lack of liquidity of the Shares,
the shares of Common Stock issuable upon conversion of
the Shares, the Warrants and the Warrant Shares
(collectively, the "Securities") and the restrictions
on the transferability of the Securities (e.g., that
such Investor may not be able to sell or dispose of the
Securities or use them as collateral for loans); and
(v)_the tax consequences of investment in the Units.
The foregoing, however, does not limit or modify the
representations and warranties of the Company in
Section 3 of this Agreement and the rights of the
Investors to rely thereon.
e. Investor's Qualifications. Such Investor is an
"accredited" investor as defined under Regulation_D
under the 1933 Act. Such Investor is aware of the
general business and financial circumstances of the
Company and, by reason of such Investor's business or
financial experience, such Investor is capable of
evaluating the merits and risks of this investment and
is financially capable of bearing a total loss of this
investment.
f. Compliance with Securities Laws. Such Investor
understands and acknowledges that, in reliance upon the
representations and warranties made by such Investor
herein, the Securities are not being registered with
the SEC under the 1933 Act or being qualified under the
California Corporate Securities Law of 1968, as amended
(the "Law"), but instead are being issued under an
exemption or exemptions from the registration and
qualification requirements of the 1933 Act or the Law
or other applicable state securities laws which impose
certain restrictions on such Investor's ability to
transfer the Shares and the Warrant Shares.
g. Restrictions on Transfer. Such Investor understands
that such Investor may not transfer any of the
Securities unless such Securities are registered under
the 1933 Act or pursuant to an exemption from such
registration and qualification requirements. Such
Investor understands that only the Company may file a
registration statement with the SEC. Such Investor has
also been advised that <PAGE> exemptions from registration and
qualification may not be available or may not permit
such Investor to transfer all or any of the Securities
in the amounts or at the times proposed by such
Investor.
h. Rule 144. In addition, such Investor has been advised
that SEC Rule 144 ("Rule 144") promulgated under the
1933 Act, which permits certain limited sales of
unregistered securities, is not presently available
with respect to the Securities solely due to the
holding periods required thereunder and, in any event,
requires that the Securities be held for a minimum of
one year, and in certain cases two years, after they
have been purchased and paid for (within the meaning of
Rule 144), before they may be resold under Rule 144.
Such Investor understands that Rule_144 may
indefinitely restrict transfer of the Securities if
such Investor is an "affiliate" of the Company and
"current public information" about the Company (as
defined in Rule 144) is not publicly available.
i. Legends and Stop-Transfer Orders. Such Investor
understands that certificates or other instruments
representing any of the Securities acquired by such
Investor may bear legends substantially similar to the
following, in addition to any other legends required by
federal or state laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR THE LAWS OF ANY STATE. THEY MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT, OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION
IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT
TO RULE 144 UNDER SUCH ACT.
In order to ensure and enforce compliance with the
restrictions imposed by applicable law and those referred to in
the foregoing legend, or elsewhere herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent,
if any, with respect to any certificate or other instrument
representing the Securities, or if the Company transfers its own
securities, it may make appropriate notations to the same effect
in the Company's records. Any legend endorsed on a certificate
pursuant to this Subsection (i) and the related stop transfer
instructions with respect to such Securities shall be removed,
and the Company shall issue a certificate or warrant without such
legend to the holder thereof, if such Securities are registered
under the 1933 Act and a prospectus meeting the requirements of
Section 10 of the 1933 Act is available, if such legend may be
properly removed under the terms of Rule 144 promulgated under
the 1933 Act or if such holder provides the Company with an
opinion of counsel for such holder, reasonably satisfactory to
legal counsel for the Company, to the effect that a sale,
transfer or assignment of such securities may be made without
registration.
<PAGE>
4. Registration Rights.
a. Definitions. For purposes of this Section 4:
i. "Register," "registered" and "registration" refer to
a registration effected by preparing and filing a
registration statement in compliance with the 1933
Act, and the declaration or ordering of
effectiveness of such registration statement.
ii. "Registrable Securities" means (A) all shares of
Common Stock issued or issuable upon conversion of
the Preferred Stock (B) all shares of Common Stock
issued or issuable pursuant to the exercise of the
Warrants, (C) all shares of Common Stock issued to
the Investors and their affiliates in January 1998
pursuant to the Company's rights offering, (D) all
shares of Common Stock issued to the Investors
upon the conversion of the New Notes and (E) any
Common Stock of the Company issued (or issuable
upon the conversion or exercise of any warrant,
right or other security that is issued) as a
dividend or other distribution with respect to, or
in exchange for, or in replacement of, the shares
referenced in (A), (B), (C) or (D) above.
iii. "Holder" means any person owning of record
Registrable Securities that have not been sold to
the public or any assignee of record of such
Registrable Securities to whom rights under this
Section 4 (and/or, with respect to the rights of
the Investors set forth in Section 5, under such
Section 5) have been assigned in accordance with
this Agreement.
b. Shelf Registration. If the Company shall receive at
any time during the period commencing on the date
hereof and ending at 5:00 p.m. on March 18, 2001 from
the Holders of at least twenty percent (20%) of the
Registrable Securities a written request that the
Company effect a registration with respect to the
Registrable Securities owned by such Holder or Holders,
the Company shall:
i. within thirty (30) days of receipt of such written
request, file a registration statement under the
1933 Act for and all such qualifications and
registrations as may be so required and as would
permit the sale and distribution of all of the
Holders' Registrable Securities and thereafter
shall use its best efforts to secure the
effectiveness of such registration statement
within sixty (60) days of such filing;
ii. pay all expenses incurred in connection with any
registration qualification and compliance
requested hereunder, (excluding underwriters' or
brokers' discounts and commissions), including
without limitation all filing, registration and
qualification, printers' and accounting fees and
the reasonable fees and disbursements of one
counsel for the selling Holder or Holders and
counsel for the Company; and
<PAGE>
iii. use its best efforts to cause the registration
statement to remain effective until the earlier of
(A) the date ending three (3) years after the
effective date of the registration statement filed
pursuant to this Section 4(b), or (B) the date on
which each Holder of Registrable Securities is
able to sell all of such Holder's Registrable
Securities in any single three (3) month period
without registration under the 1933 Act pursuant
to Rule 144, provided that if the Company elects
to terminate the effectiveness of the registration
statement under (B), the Company shall prior to
such termination provide each Holder an opinion of
counsel, based on factual representations of the
Holders, that such Holder is able to sell all of
the Registrable Securities held by such Holder and
its affiliates in any single three (3) month
period without registration under the 1933 Act
pursuant to Rule 144.
c. Obligations of the Company. Whenever required to
effect the registration of Registrable Securities under
this Agreement, the Company will, as expeditiously as
reasonably possible:
i. prepare and file with the SEC a registration
statement with respect to such Registrable
Securities and use its best efforts to cause such
registration statement to become effective;
ii. prepare and file with the SEC such amendments and
supplements to such registration statement and the
prospectus used in connection with such
registration statement as may be necessary to
comply with the provisions of the 1933 Act with
respect to the disposition of all securities
covered by such registration statement;
iii. furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in
conformity with the requirements of the 1933 Act,
and such other documents as they may reasonably
request in order to facilitate the disposition of
the Registrable Securities owned by them that are
included in such registration;
iv. use its best efforts to register and qualify the
securities covered by such registration statement
under such other securities or "blue sky" laws of
such jurisdictions as shall be reasonably
requested by the Holders, provided that the
Company will not be required in connection
therewith or as a condition thereto to qualify to
do business or to file a general consent to
service of process in any such states or
jurisdictions;
v. in the event of any underwritten public offering,
enter into and perform its obligations under an
underwriting agreement, in usual and customary
form, with the managing underwriter(s) of such
offering;
vi. cause all such Registrable Securities registered
pursuant hereunder to be listed on each securities
exchange on which similar securities issued by the
Company are then listed;
<PAGE>
vii. provide a transfer agent and registrar for all
Registrable Securities registered pursuant
hereunder and a CUSIP number for all such
Registrable Securities, in each case not later
than the effective date of such registration; and
viii. notwithstanding anything else in this Section_4,
if, at any time during which a prospectus is
required to be delivered in connection with the
sale of any Registrable Securities, the Company
determines in good faith and in its reasonable
judgment that such sale would require public
disclosure by the Company of material non-public
information that the Company deems it advisable
not to disclose, or that a development has
occurred or a condition exists as a result of
which the registration statement or the prospectus
filed as a part thereof contains a material
misstatement or omission, the Company will
immediately notify each Holder thereof by
telephone and in writing. Upon receipt of such
notification, Holder and its affiliates will
immediately suspend all offers and sales of any
Registrable Securities pursuant to the
registration statement. In such event, the
Company will amend or supplement the registration
statement as promptly as practicable and will take
such other steps as may be required to permit
sales of the Registrable Securities thereunder by
Holder and its affiliates in accordance with
applicable federal and state securities laws. The
Company will promptly notify Holder after it has
determined in good faith that such sales have
become permissible in such manner and will
promptly deliver copies of the registration
statement and the prospectus (as so amended or
supplemented). Notwithstanding the foregoing,
(A)_under no circumstances shall the Company be
entitled to exercise its right to suspend sales of
any Registrable Securities pursuant to the
registration statement more than two (2) times in
any twelve-month period, (B)_the period during
which such sales may be suspended (each a
"Blackout Period") shall not exceed thirty (30)
calendar days and (C)_no Blackout Period may
commence less than sixty (60) calendar days after
the end of the preceding Blackout Period.
Upon the commencement of a Blackout Period pursuant to
this Section_4, Holder will immediately notify the Company of any
contracts to sell any Registrable Securities (each a "Sales
Contract") that Holder or any of its affiliates has entered into
prior to notification of the commencement of such Blackout Period
and that would require delivery of such Registrable Securities
during such Blackout Period, which notice will contain the
aggregate sale price and volume of Registrable Securities
pursuant to such Sales Contract. Upon receipt of such notice,
the Company will immediately notify Holder of its election either
(i)_to terminate the Blackout Period and, as promptly as
practicable, amend or supplement the registration statement or
the prospectus filed as a part thereof in order to correct the
material misstatement or omission and deliver to Holder copies of
such amended or supplemented registration statement and
prospectus or (ii)_to continue the Blackout Period in accordance
with this paragraph. If the Company elects to continue the
Blackout <PAGE> Period, and Holder or any of its affiliates is therefore
unable to consummate the sale of Registrable Securities pursuant
to the Sales Contract (such unsold Registrable Securities being
hereinafter referred to herein as the "Unsold Securities"), the
Company will promptly indemnify each Holder against any loss,
claim or damage that each Holder may incur arising out of or in
connection with Holder's breach or alleged breach of any such
Sales Contract, and the Company shall reimburse each Holder for
any reasonable costs or expenses (including reasonable legal
fees) incurred by such party in investigating or defending any
such proceeding (collectively, the "Indemnification Amount");
provided, however, that each Holder shall take all actions
reasonably necessary or appropriate to mitigate such
Indemnification Amount; and provided further, however, that the
Indemnification Amount shall be reduced by an amount equal to the
number of Unsold Securities multiplied by the difference between
(x)_the actual per share price received by Holder or any of its
affiliates upon the sale of the Unsold Securities (if such sale
occurs within three (3) trading days of the end of the Blackout
Period) or the closing sale price of the Common Stock on the
NASDAQ or other national securities exchange on which the Common
Stock is then listed on the third trading day after the end of
the Blackout Period (if the Unsold Securities are not sold by
Investor or any of its affiliates within three (3) trading days
of the end of the Blackout Period), and (y)_the per share sale
price for the Unsold Securities provided in the Sales Contract.
d. Furnish Information. It will be a condition precedent
to the obligations of the Company to take any action
pursuant to Section 4 hereof that the selling Holders
will furnish to the Company such information regarding
themselves, the Registrable Securities held by them,
and the intended method of disposition of such
securities as will be required to effect the
registration of their Registrable Securities.
e. Delay of Registration. No Holder will have any right
to obtain or seek an injunction restraining or
otherwise delaying any registration as the result of
any controversy that might arise with respect to the
interpretation or implementation of this Section_4.
f. Indemnification. In the event any Registrable
Securities are included in a registration statement
under Section 4 hereof:
i. To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, the
partners, shareholders, officers, directors,
employees and agents of each Holder, any
underwriter (as defined in the 1933 Act) for such
Holder and each person, if any, who controls such
Holder or underwriter within the meaning of the
1933 Act or the Exchange Act against any losses,
claims, damages, or liabilities (joint or several)
to which they may become subject under the 1933
Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise
out of or are based upon any of the following
statements, omissions or violations (collectively,
a "Violation"):
<PAGE>
(1) any untrue statement or alleged untrue
statement of a material fact contained in
such registration statement, including any
preliminary prospectus or final prospectus
contained therein or any amendments or
supplements thereto;
(2) the omission or alleged omission to state
therein a material fact required to be stated
therein, or necessary to make the statements
therein not misleading; or
(3) any violation or alleged violation by the
Company of the 1933 Act, the Exchange Act,
any federal or state securities law or any
rule or regulation promulgated under the 1933
Act, the Exchange Act or any federal or state
securities law in connection with the
offering covered by such registration
statement;
and the Company will reimburse each such Holder, partner,
shareholder, officer, director, employee, agent, underwriter or
controlling person for any legal or other expenses reasonably
incurred by them, as incurred, in connection with investigating
or defending any such loss, claim, damage, liability or action;
provided however, that the indemnity agreement contained in this
Section_4(f)(i) will not apply to amounts paid in settlement of
any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company (which
consent will not be unreasonably withheld), nor will the Company
be liable in any such case for any such loss, claim, damage,
liability or action to the extent that it arises out of or is
based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use
in connection with such registration by such Holder, partner,
shareholder, officer, director, underwriter or controlling person
of such Holder.
ii. To the extent permitted by law, each selling
Holder will indemnify and hold harmless the
Company, each of its directors, each of its
officers who have signed the registration
statement, each person, if any, who controls the
Company within the meaning of the 1933 Act, any
underwriter and any other Holder selling
securities under such registration statement or
any of such other Holder's partners, directors or
officers or shareholders or any person who
controls such Holder within the meaning of the
1933 Act or the Exchange Act, against any losses,
claims, damages or liabilities (joint or several)
to which the Company or any such director,
officer, controlling person, underwriter or other
such Holder, partner or director, officer,
shareholder or controlling person of such other
Holder may become subject under the 1933 Act, the
Exchange Act or other federal or state law,
insofar as such losses, claims, damages or
liabilities (or actions in respect thereto) arise
out of or are based upon any Violation that arises
solely as a result of written information
furnished by such Holder expressly for use in
connection with such registration; and each such
Holder will reimburse any legal or other expenses
reasonably incurred by the Company or any such
<PAGE>
director, officer, controlling person, underwriter
or other Holder, partner, officer, director,
shareholder or controlling person of such other
Holder in connection with investigating or
defending any such loss, claim, damage, liability
or action: provided, however, that the indemnity
agreement contained in this Section_4(f)(ii) will
not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if
such settlement is effected without the consent of
the Holder, which consent will not be unreasonably
withheld; and provided further, that the total
amounts payable in indemnity by a Holder under
this Section_4(f)(ii) in respect of any Violation
will not exceed the lesser of (A)_the aggregate
proceeds (net of discounts) received by such
Holder upon the sale of the Shares or Warrant
Shares and (B)_that proportion of aggregate
losses, claims, damages, liabilities or expenses
indemnified against which equals the proportion
which the number of Registrable Securities being
sold by such Holder bears to the total number of
Securities being sold by the Company and all
Holders.
iii. Promptly after receipt by an indemnified party
under this Section_4(f) of notice of the
commencement of any action (including any
governmental action), such indemnified party will,
if a claim in respect thereof is to be made
against any indemnifying party under this
Section_4(f), deliver to the indemnifying party a
written notice of the commencement thereof and the
indemnifying party will have the right to
participate in, and, to the extent the
indemnifying party so desires, jointly with any
other indemnifying party similarly noticed, to
assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however,
that an indemnified party will have the right to
retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if
representation of such indemnified party by the
counsel retained by the indemnifying party would
be inappropriate due to actual or potential
differing interests between such indemnified party
and any other party represented by such counsel in
such proceeding. The failure to deliver written
notice to the indemnifying party within a
reasonable time of the commencement of any such
action, if the indemnifying party is materially
prejudiced thereby, will relieve such indemnifying
party of liability, but only to the extent that
such indemnifying party is prejudiced with respect
to a specific claim.
iv. The foregoing indemnity agreement with respect to
any preliminary prospectus shall not inure to the
benefit of any Holder or underwriter, or any
person controlling such Holder or underwriter,
from whom the person asserting any losses, claims,
damages or liabilities purchased shares, if a copy
of the prospectus (as then amended or supplemented
if the Company <PAGE> shall have furnished any amendments
or supplements thereto) provided by the Company
was not sent or given by or on behalf of such
Holder or underwriter to such person, if required
by law so to have been delivered, at or prior to
the written confirmation of the sale of the
purchased shares to such person, and if the
prospectus (as so amended or supplemented) would
have cured the defect giving rise to such loss,
claim, damage or liability.
v. If the indemnification provided for in
Sections_4(f)(i) or 4(f)(ii) hereof shall be
unavailable to hold harmless an indemnified party
in respect of any liability under the 1933 Act,
then, and in each such case, the indemnifying
party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount
paid or payable by such indemnified party as a
result of such loss, liability, claim, damage or
expense in such proportion as is appropriate to
reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party
on the other in connection with the statement or
omissions that resulted in such loss, liability,
claim, damage or expense as well as any other
relevant equitable considerations. The relative
fault of the indemnifying party and of the
indemnified party shall be determined by reference
to, among other things, whether the untrue or
alleged untrue statement of a material fact or the
omission to state a material fact relates to
information supplied by the indemnifying party or
by the indemnified party and the parties' relative
intent, knowledge, access to information and
opportunity to correct or prevent such statement
or omission; provided that in no event shall any
contribution under this subsection (v) by any
Holder exceed the gross proceeds from the offering
received by such indemnifying party. No person or
entity guilty of fraudulent misrepresentation
(within the meaning of Section_II(f) of the 1933
Act) will be entitled to contribution from any
person or entity who was not guilty of such
fraudulent misrepresentation.
vi. The obligations of the Company and Holders under
this Section_4(f) will survive the completion of
any offering of Registrable Securities in a
registration statement, and otherwise.
g. Rule 144 Reporting. With a view to making available
the benefits of certain rules and regulations of the
SEC which may at any time permit the sale of the
Registrable Securities to the public without
registration, while a public market exists for the
Common Stock of the Company, the Company will:
i. make and keep public information available, as
those terms are understood and defined in Rule 144
under the 1933 Act, at all times while the Company
is reporting under the Exchange Act;
ii. use its best efforts to file with the SEC in a
timely manner all reports and other documents
required of the Company under the 1933 Act and the
Exchange Act (at any time it is subject to such
reporting requirements); and
<PAGE>
iii. so long as a Holder owns any Registrable
Securities, furnish to the Holder forthwith upon
request a written statement by the Company as to
its compliance with the reporting requirements of
Rule_144, and of the 1933 Act and the Exchange Act
(at any time it is subject to the reporting
requirements of the Exchange Act), a copy of the
most recent annual or quarterly report of the
Company, and such other reports and documents of
the Company as a Holder may reasonably request in
availing itself of any rule or regulation of the
SEC allowing a Holder to sell any such securities
without registration (at any time the Company is
subject to the reporting requirements of the
Exchange Act).
5. Covenants.
a. Affirmative Covenants. The Company covenants and
agrees that unless the Holders of a majority of
Registrable Securities shall otherwise give their prior
consent in writing (which consent any such Holder may
at its sole discretion withhold):
i. Authorized Shares. The Company's Board of
Directors shall use its best efforts to obtain
stockholder approval to increase the Company's
authorized shares of Common Stock in a sufficient
number at its next annual stockholder meeting to
cover the issuance of the Warrant Shares and the
Conversion Shares, the issuance of the Common
Stock issuable upon the conversion of the New
Notes, any issuances of shares of Common Stock
upon the exercise, conversion or exchange of any
options, warrants, securities or rights
convertible or exchangeable for shares of Common
Stock, any issuances of shares of Common Stock
pursuant to any other rights, commitments or
agreements of the Company and any shares reserved
for issuance under the Company's stock plans as
set forth on the Schedule of Exceptions. The
Company shall, from and at all times after the
Closing maintain a reserve of authorized shares
sufficient to cover the conversion of the
Preferred Stock and the exercise in full of the
outstanding Warrants until the conversion of the
Preferred Stock and the expiration or earlier
exercise of the Warrants, respectively.
ii. Exchange Act Filings. The Company shall continue
to file with the SEC all reports and other filings
required under the rules of the SEC and such
documents shall comply in all material respects
with the requirements of the Exchange Act or the
1933 Act, as applicable, as long as the Company
continues to be subject to reporting requirements
under Sections 13 or 15(d) of the Exchange Act.
iii. Negative Covenants. The Company covenants and
agrees that unless the Holders of a majority of
the Registrable Securities shall otherwise give
their prior consent in writing (which consent any
such Holder may at its sole discretion withhold),
the Company will not issue shares of Common <PAGE> Stock
pursuant to the exercise of an option and/or
warrant subject to an Agreement Not to Exercise
Options and/or Warrants so long as such agreement
is in effect.
6. Conditions to Obligations of the Investors. The obligation
of each Investor to purchase the Units at the Closing is
subject to the fulfillment on or prior to the Closing Date
of the following conditions, any of which may be waived by
such Investor:
a. Representations and Warranties Correct; Performance of
Obligations. The representations and warranties made
by the Company in Section 2 hereof shall be true and
correct when made, and shall be true and correct on the
Closing Date with the same force and effect as if they
had been made on and as of said date, except for
representations and warranties made as of a specific
date which shall be true and correct as of such date;
and the Company shall have performed all obligations
and conditions herein required to be performed or
observed by it under this Agreement on or prior to the
Closing Date.
b. Consents and Waivers. The Company shall have obtained
any and all consents (including all governmental or
regulatory consents, approvals or authorizations
required in connection with the valid execution and
delivery of this Agreement), permits and waivers, other
then the Stockholder Approval, necessary or appropriate
for consummation of the transactions contemplated by
this Agreement.
c. Compliance Certificate. The Company shall have
delivered to the Investors a certificate, executed by
the Chairman of the Board and Chief Executive Officer
of the Company, dated the Closing Date, certifying to
the fulfillment of the conditions specified in
subsections (a), (b), (g) and (h) of this Section 6.
d. Opinion of Company's Counsel. Investors shall have
received from Brian Gillman, General Counsel to the
Company, an opinion addressed to the Investors, dated
the Closing Date in substantially the form attached
hereto as Exhibit G.
e. Agreement Not to Exercise Options and/or Warrants.
Each director and officer of the Company shall have
executed the Agreement Not to Exercise Options and/or
Warrants, in the form attached hereto as Exhibit_F.
f. Registration Rights Agreement. The Company and each
Investor shall have entered into the Registration
Rights Agreement in the form attached hereto as Exhibit
E.
g. Fairness Opinion. The Company shall have received from
an independent third party satisfactory to the
Investors an opinion stating that the transactions
contemplated by this Agreement are fair to the
stockholders of the Company.
h. Amendment of Restated Certificate. The Board of
Directors of the Company shall have approved an
increase in the authorized Common Stock of the Company
to 200,000,000 shares of Common Stock.
i. Certificate of Designation. The Company shall have
filed with the Secretary of State of the State of
Delaware the Certificate of Designation in the form
attached hereto as Exhibit C.
<PAGE>
j. Note Exchange Agreement. The Company and the Investors
shall have entered into the Note Exchange Agreement in
substantially the form attached hereto as Exhibit H.
7. Conditions to Obligations of the Company. The obligation of
the Company to sell and issue the Shares to each Investor at
the Closing is subject to the fulfillment on or prior to the
Closing Date of the following conditions, any of which may
be waived by the Company:
a. Representations and Warranties. The representations
and warranties made by such Investor in Section 3
hereof shall be true and correct when made, and shall
be true and correct on the Closing Date with the same
force and effect as if they had been made on and as of
said date.
b. Consents and Waivers. The conditions set forth in
subsections (b) and (g) of Section_6 hereof shall have
been fulfilled.
c. Note Exchange Agreement. The Company and the Investors
shall have entered into the Note Exchange Agreement in
substantially the form attached hereto as Exhibit H.
8. Miscellaneous.
a. Governing Law. This Agreement will be governed by and
construed in accordance with the internal laws of the
State of California applicable to contracts made among
residents of, and wholly to be performed within, the
State of California, without regard to principles of
conflict of laws or choice of laws.
b. Further Instruments. From time to time, each party
hereto will execute and deliver such instruments and
documents as may be reasonably necessary to carry out
the purposes and intent of this Agreement.
c. Successors and Assigns. Except as otherwise provided
herein, the terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the
respective successors and assigns of the parties
(including transferees of any shares of Registrable
Securities). Nothing in this Agreement, express or
implied, is intended to confer upon any party other
than the parties hereto or their respective successors
and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
d. Counterparts. This Agreement may be executed in two or
more counterparts, each of which will be deemed an
original, but all of which together will constitute one
and the same instrument. This Agreement will be
effective following the parties signatory hereto upon
such counterpart signature by all initial parties
hereto.
e. Entire Agreement. This Agreement, including and
incorporating the Schedule of Exceptions and all
Exhibits attached hereto and referred to herein,
constitutes and contains the entire agreement and
understanding of the parties regarding the subject
matter of this Agreement and supersedes in its entirety
any and all prior negotiations, correspondence,
understandings and agreements among the parties
respecting the subject matter hereof.
<PAGE>
f. Notices. All notices required to be given or delivered
to the Company under the terms of this Agreement shall
be deemed to have been given or made for all purposes
(i) upon personal delivery, or (ii) upon confirmation
receipt that the communication was successfully sent to
the applicable number if sent by facsimile, or (iii)
one day after being sent, when sent by professional
overnight courier service, or (iv) five (5) days after
posting when sent by registered or certified mail.
Notices to the Company shall be sent to the principal
office of the Company (or at such other place as the
Company shall notify the Investor of in writing).
Notices to the Investor shall be sent to the address of
the Investor on the books of the Company (or at such
other place as the Investor shall notify the Company of
in writing).
g. Finders' Fee. Each party represents that it neither is
nor will be obligated for any finders' fee or
commission in connection with this transaction other
than described in this section. Each party agrees to
indemnify and to hold the other parties hereto harmless
from any liability for any commission or compensation
in the nature of a finders' fee (and the costs and
expenses of defending against such liability or
asserted liability) for which such party or any of its
officers, partners, employees or representatives is
responsible.
h. Amendments and Waivers. Any term of this Agreement may
be amended and the observance of any term of the
Agreement may be waived (either generally or in a
particular instance and either retroactively or
prospectively), only with the written consent of the
Company and by Investors holding at least a majority of
the Registrable Securities. Any amendment or waiver
effected in accordance with this Section_8(h) will be
binding upon the Company, each Investor, and their
permitted transferees and assignees.
i. Severability. If one or more provisions of this
Agreement are held to be unenforceable under applicable
law, such provisions will be excluded from this
Agreement to the extent unenforceable and the balance
of such provisions, and of this Agreement, will be
interpreted as if such provision or part hereof were so
excluded and will be enforceable in accordance with its
terms.
j. Aggregation of Stock. All Securities held or acquired
by affiliated entities or persons will be aggregated
together for the purpose of determining the
availability of any rights under this Agreement.
k. Expenses. The Company shall pay all of the costs and
expenses that it incurs, and will pay the reasonable fees and
expenses of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel to the Investors, with respect to the
negotiation, execution, delivery and performance of this
Agreement, not to exceed $15,000.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the date and year first above written.
COMPANY
VANGUARD AIRLINES, INC.
By:
Title:
Address:
INVESTOR:
J.F. SHEA CO., INC., as nominee 1998-19
By:
Title:
Address: 655 Brea Canyon Road
Walnut, CA 91788-0489
THE HAMBRECHT 1980 REVOCABLE TRUST
By:
William Hambrecht
Address: 550 15th Street
San Francisco, CA 94103
<PAGE>
EXHIBIT A
SCHEDULE OF INVESTORS
Investor Number of Units Purchase Price
J.F. Shea Co., Inc., 151,200 $1,512,000.00
as nominee 1998-19
The Hambrecht 1980 151,162 $1,511,620.00
Revocable Trust
<PAGE>
EXHIBIT B
FORM OF WARRANT
<PAGE>
EXHIBIT C
CERTIFICATE OF DESIGNATION
<PAGE>
EXHIBIT D
SCHEDULE OF EXCEPTIONS
<PAGE>
EXHIBIT E
REGISTRATION RIGHTS AGREEMENT
<PAGE>
EXHIBIT F
AGREEMENT NOT TO EXERCISE OPTIONS AND/OR WARRANTS
<PAGE>
EXHIBIT G
FORM OF OPINION
<PAGE>
EXHIBIT H
NOTE EXCHANGE AGREEMENT
VANGUARD AIRLINES, INC.
NOTE EXCHANGE AGREEMENT
THIS NOTE EXCHANGE AGREEMENT (the "Agreement") is
entered into as of March 20, 1998, by and between Vanguard
Airlines, Inc., a Delaware corporation (the "Company") and the
Holders (each a "Holder" and collectively, the "Holders") set
forth on the Schedule of Holders attached as Exhibit A hereto.
RECITALS
WHEREAS, each Holder is the holder of multiple demand
notes issued by the Company (the "Existing Notes") which Existing
Notes are listed on Exhibit B hereto; and
WHEREAS, certain of the Holders are concurrently
entering into a Unit Purchase Agreement (the "Purchase
Agreement") pursuant to which they have agreed to provide
additional financing to the Company; and
WHEREAS, the Holders have agreed to exchange their
Existing Notes for new notes in the form attached hereto as
Exhibit C (the "New Notes") which provide for automatic
conversion of the New Notes at such time as the Company has an
adequate number of authorized shares available for issuance under
the terms of the New Notes and under the terms of all of its
other securities, agreements, commitments and plans.
NOW, THEREFORE, in consideration of the mutual promises
and covenants hereinafter set forth, the Company and the Holders
hereby agree as follows:
1. Subject to the terms and conditions of this Agreement, each
Holder agrees, severally and not jointly, to exchange at the
Closing (as defined below) all of its Existing Notes and the
Company agrees to issue to each Holder at the Closing a New
Note in the principal amount set forth on Exhibit_A hereto
which principal amount shall be equal to the sum of the
principal balance and accrued and unpaid interest as of the
date of the Closing on the Existing Notes held by the
Holder. The New Note shall be exchanged by each Holder by
surrendering to the Company for cancellation such Holder's
Existing Notes.
2. Closing. The exchange and issuance shall take place at the
offices of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, 155_Constitution Drive, Menlo Park,
California, at 2:00 p.m., on March_20, 1998, or at such
other time and place as the Company and the Holders mutually
agree upon orally or in writing (which time and place are
designated as the "Closing"). At the Closing the Company
shall deliver to each Holder a New Note in the amount set
forth opposite such Holder's name on Exhibit A. Each such
Holder shall surrender to the Company for cancellation at
the Closing such Holder's Existing Notes.
<PAGE>
3. Representations and Warranties of the Company. In
connection with the transactions provided for herein, the
Company hereby represents and warrants to the Holders that:
4. Organization, Good Standing, and Qualification. The Company
is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Delaware and
has all requisite corporate power and authority to carry on
its business as now conducted and as proposed to be
conducted. The Company is duly qualified to transact
business and is in good standing in each jurisdiction in
which the failure so to qualify would have a material
adverse effect on its business or properties.
5. Authorization. Subject to receipt of the Stockholder
Approval (as defined in the Purchase Agreement) and the
filing of the Amendment (as defined in the Purchase
Agreement), all corporate action on the part of the Company,
its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the
performance of all obligations of the Company hereunder, and
the delivery of the New Notes being exchanged hereunder and
the Common Stock issuable upon conversion of the New Notes
has been taken or will be taken prior to the Closing, and
this Agreement and the New Notes constitute valid and
legally binding obligations of the Company, enforceable in
accordance with its terms, except (i)_as limited by
applicable bankruptcy, insolvency, reorganization,
moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, and (ii)_as
limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.
6. Valid Issuance of Common Stock. Subject to the receipt of
the Stockholder Approval and the filing of the Amendment,
the Common Stock issuable upon conversion of the New Notes
issued under this Agreement has been duly and validly
reserved for issuance and, upon issuance in accordance with
the terms of the Restated Certificate of Incorporation of
the Company, will be duly and validly issued, fully paid,
and nonassessable and will be free of restrictions on
transfer other than restrictions on transfer under this
Agreement and the New Note and under applicable state and
federal securities laws.
7. Representations and Warranties of the Holders. In
connection with the transactions provided for herein, each
Holder hereby represents and warrants to the Company that:
8. Authorization. This Agreement constitutes such Holder's
valid and legally binding obligation, enforceable in
accordance with its terms.
9. Purchase Entirely for Own Account. Holder acknowledges that
this Agreement is made with Holder in reliance upon Holder's
representation to the Company that the New Notes and the
Common Stock issuable upon conversion of the New Notes
(collectively, the "Securities") will be acquired for
investment for Holder's own account and not with a view to
the resale or distribution of any part thereof, and that
Holder has no present intention of selling, granting any
participation in, or otherwise distributing the same. By
executing this Agreement, Holder further represents that
Holder does not have any contract, undertaking, agreement,
or arrangement with any person to sell, transfer, or grant
participations to such person or to any third person, with
respect to the Securities. Holder represents that it has
full power and authority to enter into this Agreement.
<PAGE>
10. Investment Experience. Holder is an investor in securities
of companies in the development stage and acknowledges that
it is able to fend for itself, can bear the economic risk of
its investment, and has such knowledge and experience in
financial or business matters that it is capable of
evaluating the merits and risks of the investment in the
Securities.
11. Restricted Securities. Holder understands that the
Securities are characterized as "restricted securities"
under the federal securities laws inasmuch as they are being
acquired from the Company in a transaction not involving a
public offering and that under such laws and applicable
regulations such securities may be resold without
registration under the Securities Act of 1933, as amended
(the "Act"), only in certain limited circumstances. In this
connection, Holder represents that it is familiar with SEC
Rule 144, as presently in effect, and understands the resale
limitations imposed thereby and by the Act.
12. Legends. It is understood that the Securities may bear the
following legend:
"The securities represented hereby have not
been registered under the Securities Act of
1933, as amended (the "Act"), or the laws of
any state. They may not be sold, offered for
sale, pledged, hypothecated, or otherwise
transferred except pursuant to an effective
registration statement under the Act or an
opinion of counsel satisfactory to the
Company that registration is not required
under such Act or unless sold pursuant to
Rule 144 under such Act."
13. California Corporate Securities Law. THE SALE OF THE
SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT
BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE
STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR
SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL,
UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION
BY SECTION_25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS
AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION
BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
14. Conditions of Holders' Obligations at Closing. The
obligations of each Holder under Section_1 of this Agreement
are subject to the fulfillment on or before the Closing of
each of the following conditions, the waiver of which shall
not be effective against any Holder who does not consent
thereto:
15. Representations and Warranties. The representations and
warranties of the Company contained in Section_3 shall be
true on and as of the Closing with the same effect as though
such representations and warranties had been made on and as
of the date of such Closing.
16. Performance. The Company shall have performed and complied
with all agreements, obligations and conditions contained in
this Agreement that are required to be performed or complied
with by it on or before the Closing.
<PAGE>
17. Qualifications. All authorizations, approvals, or permits,
if any, of any governmental authority or regulatory body of
the United States or of any state that are required in
connection with the lawful issuance of the Securities
pursuant to this Agreement shall be duly obtained and
effective as of the Closing.
18. Conditions of the Company's Obligations at Closing. The
obligations of the Company to each Holder under this
Agreement are subject to the fulfillment on or before the
Closing of each of the following conditions by that Holder:
19. Representations and Warranties. The representations and
warranties of the Holders contained in Section_4 shall be
true on and as of the Closing with the same effect as though
such representations and warranties had been made on and as
of such Closing.
20. Qualifications. All authorizations, approvals, or permits,
if any, of any governmental authority or regulatory body of
the United States or of any state that are required in
connection with the lawful issuance and sale of the
Securities pursuant to this Agreement shall be duly obtained
and effective as of the Closing.
Miscellaneous.
21. Successors and Assigns. Except as otherwise provided
herein, the terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this
Agreement, express or implied, is intended to confer upon
any party other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
22. Governing Law. This Agreement shall be governed by and
construed under the laws of the State of California as
applied to agreements among California residents, made and
to be performed entirely within the State of California.
23. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same
instrument.
24. Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be
considered in construing or interpreting this Agreement.
25. Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and
shall be deemed effectively given upon personal delivery to
the party to be notified, by confirmed facsimile
transmission to the party to be notified or upon deposit
with the United States Post Office, by registered or
certified mail, postage prepaid and addressed to such party
at the address set forth on Exhibit A hereto, or at such
other address as such party may designate by ten (10) days'
advance written notice to the other parties.
<PAGE>
26. Finder's Fee. Each party represents that it neither is or
will be obligated for any finder's fee or commission in
connection with this transaction. Holder agrees to
indemnify and to hold harmless the Company from any
liability for any commission or compensation in the nature
of a finder's fee (and the costs and expenses of defending
against such liability or asserted liability) for which
Holder or any of its officers, partners, employees, or
representatives is responsible.
The Company agrees to indemnify and hold harmless
Holder from any liability for any commission or compensation in
the nature of a finder's fee (and the costs and expenses of
defending against such liability or asserted liability) for which
the Company or any of its officers, employees, or representatives
is responsible.
27. Expenses. The Company shall pay the costs and expenses that
it incurs, and will pay the reasonable fees and expenses of
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP, counsel to the Investors, with respect to the
negotiation, execution, delivery and performance of this
Agreement, not to exceed $5,000.
28. Entire Agreement; Amendments and Waivers. This Agreement
constitutes the full and entire understanding and agreement
between the parties with regard to the subjects hereof. Any
term of this Agreement may be amended and the observance of
any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and
the Holders of twothirds in principal amount of the New
Notes (or the Common Stock issuable upon conversion of the
New Notes). Any waiver or amendment effected in accordance
with this Section shall be binding upon each holder of any
securities issued under this Agreement at the time
outstanding (including securities into which such securities
have been converted), each future holder of all such
securities, and the Company.
29. Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such
provision shall be excluded from this Agreement and the
balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in
accordance with its terms.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first above written.
VANGUARD AIRLINES, INC.
By:
Title:
Address:
HOLDERS:
J.F. Shea Co., Inc.,
as Nominee 1998-19
By:
Title:
The Hambrecht 1980 Revocable Trust
By:
Title:
Hambrecht & Quist California
By:
Title:
H&Q TSP II Investors, L.P.
By:
Title:
<PAGE>
EXHIBIT A
SCHEDULE OF HOLDERS
Name and Address Principal Amount of New Note
J.F. Shea Co., Inc.,
as Nominee 1998-19 $2,276,682.99
Attn: Edmund H. Shea, Jr.
J.F. Shea Co., Inc.
675 Brea Canyon Road, Suite 8
Walnut Canyon, CA 91789
The Hambrecht 1980 Revocable Trust $3,328,528.00
Attn: William R. Hambrecht
W.R. Hambrecht
550 15th Street
San Francisco, CA 94103
Hambrecht & Quist California $4,603,664.31
Attn: Patrick Allen
Hambrecht & Quist, LLC
One Bush Street
San Francisco, CA 94104
H&Q TSP II Investors, L.P. $216,999.82
Attn: Patrick Allen
Hambrecht & Quist, LLC
One Bush Street
San Francisco, CA 94104
<PAGE>
EXHIBIT B
Existing NOTES
Name of Holder Date of Existing Notes Principal Amount
J.F. Shea Co., Inc. September 11, 1997 $ 90,000
September 19, 1997 $150,000
October 6, 1997 $600,000
October 14, 1997 $240,000
October 23, 1997 $172,500
November 6, 1997 $300,000
November 13, 1997 $300,000
November 25, 1997 $150,000
December 10, 1997 $ 29,891
The Hambrecht 1980 August 21, 1997 $240,000
Revocable Trust
August 22, 1997 $150,000
<PAGE>
September 4, 1997 $720,000
September 11, 1997 $ 38,246
September 19, 1997 $150,000
October 6, 1997 $600,000
October 14, 1997 $240,000
October 23, 1997 $172,500
November 6, 1997 $300,000
November 13, 1997 $300,000
November 25, 1997 $150,000
Hambrecht & Quist September 4, 1997 $583,783.50
California
September 11, 1997 $1,120,000
September 19, 1997 $200,000
October 6, 1997 $800,000
October 14, 1997 $320,000
October 23, 1997 $230,000
November 6, 1997 $400,000
<PAGE>
November 13, 1997 $400,000
November 25, 1997 $200,000
H&Q TSP II May 29, 1997 $120,820.50
Investors, L.P.
<PAGE>
EXHIBIT C
FORM OF NEW NOTE
Intrust Bank
PROMISSORY NOTE
Principal$1,900,000.00~
Loan Date01-30-1998~
Maturity01-30-1999~
Loan No.32473~
Call04A0~
~
<PAGE>
CollateralA5
AccountN-189033
Initial Rate
8.500 %
OfficerJJL
InitialsJL
<PAGE>
Borrower: Vanguard Airlines, Inc. Lender: INTRUST Bank, N.A.
7000 Squibb Rd P.O. Box One
3rd Floor 106 N. Main
Mission, KS 66202 Wichita, KS 67201
PROMISE TO PAY. Vanguard Airlines, Inc. ("Borrower") promises to
pay to INTRUST Bank, N.A. ("Lender"), or order, in lawful money
of the United States of America, the principal amount of One
Million Nine Hundred Thousand & 00/100 Dollars ($1,900,000.00) or
so much as may be outstanding, together with interest on the
unpaid outstanding principal balance of each advance. Interest
shall be calculated from the date of each advance until repayment
of each advance.
PAYMENT. Borrower will pay this loan in one payment of all
outstanding principal plus all accrued unpaid interest on January
30, 1999. In addition, Borrower will pay regular monthly
payments of accrued unpaid interest beginning February 28, 1998,
and all subsequent interest payments are due on the same day of
each month after that. The annual interest rate for this Note is
computed on a 365/360 basis; that is, by applying the ratio of
the annual interest rate over a year of 360 days, multiplied by
the outstanding principal balance, multiplied by the actual
number of days the principal balance is outstanding. Borrower
will pay Lender at Lender's address shown above or at such other
place as Lender may designate in writing. Unless otherwise
agreed or required by applicable law, payments will be applied
first to accrued unpaid interest, then to principal, and any
remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is
subject to change from time to time based on changes in an
independent index which is the Prime Rate as published in the
Wall Street Journal Southwest Edition (the "Index"). The Index
is not necessarily the lowest rate charged by Lender on its
loans. If the Index becomes unavailable during the term of this
loan, Lender may designate a substitute index after notice to
Borrower, Lender will tell Borrower the current Index rate upon
Borrower's request. Borrower understands that Lender may make
loans based on other rates as well. The interest rate change
will not occur more often than each day on the day the index
changes. The Index currently is 8.500% per annum. The interest
rate to be applied to the unpaid principal balance of this Note
will be at a rate equal to the Index, resulting in an initial
rate of 8.500% per annum. NOTICE: Under no circumstances will
the interest rate on this Note be more than the maximum rate
allowed by applicable law.
PREPAYMENT. Borrower may pay without penalty all or a portion of
the amount owed earlier than it is due. Early payments will not,
unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments of accrued
unpaid interest. Rather, they will reduce the principal balance
due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will
be charged 5.000% of the unpaid portion of the regularly
scheduled payment or $100.00, whichever is less.
<PAGE>
DEFAULT. Borrower will be in default if any of the following
happens: (a) Borrower fails to make any payment when due. (b)
Borrower breaks any promise Borrower has made to Lender, or
Borrower fails to comply with or to perform when due any other
term, obligation, covenant, or condition contained in this Note
or any agreement related to this Note, or in any other agreement
or loan Borrower has with Lender. (c) Any representation or
statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect
either now or at the time made or furnished. (d) Borrower becomes
insolvent, a receiver is appointed for any part of Borrower's
property, Borrower makes an assignment for the benefit of
creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (e) Any
creditor tries to take any of Borrower's property on or in which
Lender has a lien or security interest. This includes a
garnishment of any of Borrower's accounts with Lender. (f) Any
guarantor dies or any of the other events described In this
default section occurs with respect to any guarantor of this
Note. (g) A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment
or performance of the Indebtedness is impaired. (h) Lender in
good faith deems itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire
unpaid principal balance on this Note and all accrued unpaid
interest immediately due, without notice, and then Borrower will
pay that amount. Upon default, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted
under applicable law, increase the variable interest rate on this
Note to 5.000 percentage points over the Index. The interest
rate will not exceed the maximum rate permitted by applicable
law. Lender may hire or pay someone else who is not a salaried
employee of Lender to help collect this Note if Borrower does not
pay. Borrower will be liable for all reasonable costs incurred
in the collection of this Note, including but not limited to,
court costs, attorneys' fees, and collection agency fees, except
that such costs of collection shall not include the recovery of
both attorneys' fees and collection agency fees. This Note has
been delivered to Lender and accepted by Lender in the State of
Kansas. If there is a lawsuit, Borrower agrees upon Lender's
request to submit to the jurisdiction of the courts of Sedgwick
County, the State of Kansas. This Note shall be governed by and
construed In accordance with the laws of the State of Kansas.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $20.00
if Borrower makes a payment on Borrower's loan and the check or
preauthorized charge with which Borrower pays Is later
dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual
possessory security interest in, and hereby assigns, conveys,
delivers, pledges, and transfers to Lender all Borrower's right,
title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else
and all accounts Borrower may open in the future, excluding
however all IRA and Keogh accounts, and all trust accounts for
which the grant of a security interest would be prohibited by
law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note
against any and all such accounts.
<PAGE>
LINE OF CREDIT. This Note evidences a revolving line of credit.
Advances under this Note, as well as directions for payment from
Borrower's accounts, may be requested orally or in writing by
Borrower or by an authorized person. Lender may, but need not,
require that all oral requests be confirmed in writing. The
following party or parties are authorized to request advances
under the line of credit until Lender receives from Borrower at
Lender's address shown above written notice of revocation of
their authority: William A. Garrett, VP Finance & CFO. Borrower
agrees to be liable for all sums either: (a) advanced in
accordance with the instructions of an authorized person or (b)
credited to any of Borrower's accounts with Lender. The unpaid
principal balance owing on this Note at any time may be evidenced
by endorsements on this Note or by Lender's internal records,
including daily computer print-outs. Lender will have no
obligation to advance funds under this Note if: (a) Borrower or
any guarantor is in default under the terms of this Note or any
agreement that Borrower or any guarantor has with Lender,
including any agreement made in connection with the signing of
this Note; (b) Borrower or any guarantor ceases doing business or
is insolvent; (c) any guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such guarantor's guarantee of
this Note or any other loan with Lender; (d) Borrower has applied
funds provided pursuant to this Note for purposes other than
those authorized by Lender; or (e) Lender in good faith deems
itself insecure under this Note or any other agreement between
Lender and Borrower.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of
its rights or remedies under this Note without losing them.
Borrower and any other person who signs, guarantees or endorses
this Note, to the extent allowed by law, waive presentment,
demand for payment, protest and notice of dishonor. Upon any
change in the terms of this Note, and unless otherwise expressly
stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be
released from liability. All such parties agree that Lender may
renew or extend (repeatedly and for any length of time) this
loan, or release any party or guarantor or collateral; or impair,
fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender
without the consent of or notice to anyone. All such parties
also agree that Lender may modify this loan without the consent
of or notice to anyone other than the party with whom the
modification is made.
NO ORAL AGREEMENTS. This written agreement is the final
expression of the agreement between Lender and Borrower and may
not be contradicted by evidence of any prior oral agreement or of
a contemporaneous oral agreement between Lender and Borrower.
NONSTANDARD TERMS. The following space contains all nonstandard
terms, including all previous oral agreements, if any, between
Lender and Borrower:
Lender's Initials By initialing the boxes to the left,
Lender and Borrower affirm that
Borrower's Initials no unwritten oral agreement exist
between them.
<PAGE>
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE
PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
Vanguard Airlines, Inc.
By: /s/ William A. Garrett
William A. Garrett
Vice President Finance & Chief Financial Officer
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 333-172 and Form S-8 No. 333-342)
pertaining to the Vanguard Airlines, Inc. 1994 Stock Option Plan
and the Employee Stock Purchase Plan of Vanguard Airlines, Inc.
of our report dated February 27, 1998, except for Notes 7 and 12,
as to which the date is March 20, 1998, with respect to the financial
statements and schedule of Vanguard Airlines, Inc. included in
the Annual Report (Form 10-K) for the year ended December 31,
1997.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Kansas City, Missouri
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,082,712
<SECURITIES> 0
<RECEIVABLES> 2,666,439
<ALLOWANCES> 354,000
<INVENTORY> 842,620
<CURRENT-ASSETS> 9,796,012
<PP&E> 10,152,452
<DEPRECIATION> (4,667,768)
<TOTAL-ASSETS> 24,763,884
<CURRENT-LIABILITIES> 32,148,922
<BONDS> 0
0
0
<COMMON> 45,696
<OTHER-SE> (11,990,130)
<TOTAL-LIABILITY-AND-EQUITY> 24,763,884
<SALES> 81,384,138
<TOTAL-REVENUES> 81,384,138
<CGS> 106,758,900
<TOTAL-COSTS> 106,758,900
<OTHER-EXPENSES> 1,760,776
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,110,465
<INCOME-PRETAX> (28,246,003)
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,246,003)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,246,003)
<EPS-PRIMARY> (1.85)
<EPS-DILUTED> (1.85)
</TABLE>
