UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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 0-27034
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)
533 Mexico City Avenue
Kansas City International Airport
Kansas City, MO 64153
(913) 789-1388
(Address of principal executive offices, including zip code;
Registrant's telephone number, including area code)
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
------ ------
At June 30, 1999, there were 17,083,862 shares of Common Stock,
par value $.001 per share issued and outstanding.
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
VANGUARD AIRLINES, INC.
BALANCE SHEETS
JUNE 30, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including
restricted cash and cash equivalents
of $6,033,226 at June 30, 1999 $ 13,694,966 $ 7,417,048
Accounts receivable, less allowance
of $203,000 at June 30, 1999 and $303,000
at December 31, 1998 3,262,503 2,030,309
Inventories 1,373,530 1,168,054
Current portion of supplemental
maintenance deposits 3,251,757 4,490,281
Prepaid expenses and other current assets 1,346,476 1,022,953
-------------- ------------
Total current assets 22,929,232 16,128,645
Property and equipment, at cost:
Aircraft improvements and leasehold costs 6,004,508 4,854,683
Reservation system and communication
equipment 1,870,412 1,867,954
Aircraft engines and rotable inventory 7,559,219 6,243,693
Other property and equipment 3,593,815 2,624,579
-------------- -------------
19,027,954 15,590,909
Less accumulated depreciation and
amortization (9,220,067) (7,459,456)
-------------- -------------
9,807,887 8,131,453
Other assets:
Supplemental maintenance deposits, less
current portion 6,995,225 5,121,050
Deferred debt issuance costs 277,071 83,448
Leased aircraft deposits 3,170,000 2,299,000
Fuel and security deposits 817,339 883,610
Other 1,298,531 999,377
-------------- -------------
12,558,166 9,386,485
-------------- -------------
Total assets $ 45,295,285 $ 33,646,583
============== =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VANGUARD AIRLINES, INC.
BALANCE SHEETS (CONTINUED)
JUNE 30, DECEMBER 31,
1999 1998
--------------- ---------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,234,225 $ 5,848,635
Accrued expenses 3,520,720 3,062,823
Accrued maintenance 7,408,584 6,902,847
Air traffic liability 15,156,302 8,230,222
-------------- ----------------
Total current liabilities 31,319,831 24,044,527
Accrued maintenance, less current portion 5,806,921 3,818,184
Commitments
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares - 200,000,000
Issued and outstanding shares - 17,083,862
in 1999 (17,074,462 in 1998) 17,084 17,074
Preferred stock, $.001 par value:
Authorized shares - 2,000,000
Issued and outstanding shares - 302,362 302 302
Liquidation preference - $3,023,620
Additional paid-in capital 77,326,462 76,954,671
Accumulated deficit (69,175,315) (71,170,997)
-------------- --------------
8,168,533 5,801,050
Deferred stock compensation --- (17,178)
-------------- --------------
Total stockholders' equity 8,168,533 5,783,872
-------------- --------------
Total liabilities and stockholders'
equity $ 45,295,285 $ 33,646,583
============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
<TABLE>
<CAPTION>
VANGUARD AIRLINES, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
1999 1998 1999 1998
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues:
Passenger revenues $31,500,022 $23,462,781 $54,969,132 $43,040,555
Other 2,095,798 1,961,688 3,533,704 3,627,676
----------- ----------- ----------- -----------
Total operating revenue 33,595,820 25,424,469 58,502,836 46,668,231
Operating expenses:
Flying operations 5,786,795 4,461,886 10,513,265 8,856,556
Aircraft fuel 4,747,879 3,360,314 7,634,448 7,006,959
Maintenance 6,966,239 4,770,961 12,059,788 9,145,876
Passenger service 1,812,390 1,592,793 3,375,824 3,402,490
Aircraft and traffic
servicing 5,046,203 4,356,478 9,348,452 9,013,115
Promotion and sales 5,190,419 4,212,892 9,522,591 8,860,297
General and administrative 970,359 994,565 1,927,332 1,975,254
Depreciation and
amortization 1,079,789 620,563 2,011,481 1,133,350
----------- ---------- ---------- ----------
Total operating expense 31,600,073 24,370,452 56,393,181 49,393,897
----------- ---------- ---------- ----------
Operating income (loss) 1,995,747 1,054,017 2,109,655 (2,725,666)
Other income (expense):
Deferred debt issuance cost
amortization (46,179) (581,571) (159,377) (1,130,309)
Interest expense --- (168,690) --- (445,587)
Interest income 87,428 18,889 208,952 33,189
Other (33,953) --- (43,298) ---
---------- --------- ---------- ---------
Total other income (expense),
net 7,296 (731,372) 6,277 (1,542,707)
---------- --------- ---------- ----------
Income (loss) before
taxes 2,003,043 322,645 2,115,932 (4,268,373)
Income tax expense (48,750) --- (120,250) ---
---------- --------- --------- ---------
Net income (loss) $1,954,293 $ 322,645 $1,995,682 $(4,268,373)
========== ========= ========== ===========
Net income (loss) per share:
Basic $ 0.11 $ 0.03 $ 0.12 $ (0.42)
========== ========= ========== ===========
Diluted $ 0.10 $ 0.02 $ 0.10 $ (0.42)
========== ========= ========= ===========
Weighted average shares used
in per share computation:
Basic 17,080,806 11,047,734 17,079,031 10,093,600
========== =========== ========== ==========
Diluted 18,966,138 17,643,364 19,008,124 10,093,600
=========== =========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
<TABLE>
<CAPTION>
VANGUARD AIRLINES, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
1999 1998 1999 1998
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,954,293 $ 322,645 $ 1,995,682 $(4,268,373)
Adjustments to reconcile
net income (loss) to net
cash provided by (used in)
operating activities:
Depreciation 656,807 300,996 1,234,644 505,219
Amortization 422,982 319,567 776,837 628,131
Compensation related to
stock options 8,583 8,595 17,178 17,190
Debt issuance cost
amortization 46,179 581,571 159,377 1,130,309
Provision for uncollectible
accounts 10,967 522 10,967 25,190
Changes in operating assets
and liabilities:
Restricted cash (3,123,489) (929,354) (6,033,226) (929,354)
Accounts receivable (482,994) (426,206) (1,243,161) (163,387)
Inventories (51,272) (87,513) (205,476) (200,109)
Prepaid expenses and
other current assets (286,916) 146,510 (323,523) (566,311)
Supplemental maintenance
deposits (156,754) (1,744) (635,651) (863,601)
Accounts payable (267,713) (272,979) (614,410) 132,987
Accrued expenses 298,167 259,926 457,897 (2,693)
Accrued maintenance 1,509,066 149,180 1,644,474 232,374
Air traffic liability 3,476,112 1,364,853 6,926,080 4,012,710
Deposits and other (63,286) 283,186 (1,103,883) (288,033)
----------- ---------- ----------- ---------
Net cash provided by
(used in) operating
activities 3,950,732 2,019,755 3,063,806 (597,751)
Investing activities
Purchases of property
and equipment (1,605,437) (1,449,130) (2,837,915) (1,932,012)
Financing activities
Proceeds from line of
credit borrowings --- --- --- 1,900,000
Principal payments on
line of credit --- --- --- (1,900,000)
Proceeds from issuance
of notes payable to
related parties --- --- --- 3,000,000
Proceeds from issuance
of notes payable --- 275,000 --- 275,000
Principal payments on
notes payable --- (44,888) --- (44,888)
Proceeds from exercise
of stock options 9,460 22,229 18,801 22,967
Payment of preferred
stock offering costs --- (30,169) --- (101,873)
----------- ---------- ----------- ---------
Net cash provided by
financing activities 9,460 222,172 18,801 3,151,206
----------- ---------- ----------- ---------
Net increase in cash
and cash equivalents 2,354,755 792,797 244,692 621,443
Cash and cash equivalents
at beginning of period 5,306,985 911,358 7,417,048 1,082,712
----------- ---------- ----------- ---------
Cash and cash equivalents
at end of period (1) $ 7,661,740 $ 1,704,155 $ 7,661,740 $ 1,704,155
=========== ========== =========== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VANGUARD AIRLINES, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
1999 1998 1999 1998
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for
interest $ --- $ 43,564 $ --- $ 101,435
========== ========== ========== ==========
Supplemental schedule of noncash
investing and financing
activities:
Aircraft leasehold costs
associated with accrued
maintenance $ 503,000 $ --- $ 850,000 $ ---
========== ========== ========== ==========
Conversion of notes payable
to related parties and
accrued interest to
preferred stock $ --- $ --- $ --- $ 3,023,620
========== ========== ========== ==========
Conversion of notes payable
to related parties and
accrued interest to
common stock $ --- $10,564,887 $ --- $10,564,887
========== ========== ========== ==========
Deferred debt issuance
costs recorded in
conjunction with warrants
issued $ 115,000 $ 106,000 $ 353,000 $ 142,000
========== ========== ========== ==========
SEE ACCOMPANYING NOTES.
<FN>
<F1>
(1) Excludes restricted cash and cash equivalents of $6,033,226 at June 30, 1999.
</FN>
</TABLE>
VANGUARD AIRLINES, INC.
CONDENSED NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements of Vanguard Airlines, Inc. (the "Company")
presented herein, without audit except for balance sheet information
at December 31, 1998, have been properly prepared pursuant to the rules
of the Securities and Exchange Commission for quarterly reports on
Form 10-Q and do not include all of the information and note disclosures
required by generally accepted accounting principles. These statements
should be read in conjunction with the financial statements and notes
thereto for the year ended December 31, 1998, included in the Company's
Form 10-K as filed with the Securities and Exchange Commission on
March 31, 1999.
The balance sheet as of June 30, 1999, the statements of operations for
the three and six months ended June 30, 1999 and 1998, and the statements
of cash flows for the three and six months ended June 30, 1999 and
1998 are unaudited but, in the opinion of management, include all
adjustments (consisting of normal, recurring adjustments) necessary for
a fair presentation of results for these interim periods. The results
of operations for the three and six months ended June 30, 1999 are
not necessarily indicative of the results to be expected for the
entire fiscal year ending December 31, 1999.
2. REVERSE ONE-FOR-FIVE STOCK SPLIT
On May 18, 1999, the Company's shareholders approved a one-for-five
reverse stock split on all authorized shares of common stock. The
par value per share remained at $0.001 per share and 200,000,000
common shares remained authorized. All convertible warrants, options
and preferred stock agreements were updated to reflect the reverse
stock split. All historical information presented in this document
has been retroactively restated to reflect the one-for-five reverse
stock split.
<PAGE>
3. EARNINGS PER SHARE
The following table sets forth the computation of the adjusted
weighted average shares and assumed conversions used in the calculation
of diluted earnings per share for the three and six months ended
June 30, 1999 (adjusted to reflect the one-for-five reverse stock split):
<TABLE>
THREE-MONTHS ENDED JUNE 30, SIX-MONTHS ENDED 30,
------------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for basic and
diluted earnings per
share-income (loss)
available to common
stockholders after
assumed conversions $ 1,954,293 $ 322,645 $ 1,995,682 $ (4,268,373)
=========== ========== =========== ============
DENOMINATOR:
Denominator for basic
earnings per share -
weighted average shares 17,080,806 11,047,734 17,079,031 10,093,600
Effect of dilutive
securities:
Employee stock options 666,161 829,340 709,367 ---
Warrants 9,723 2,234,863 10,278 ---
Convertible demand
notes payable --- 2,321,978 --- ---
Convertible preferred
stock 1,209,448 1,209,448 1,209,448 ---
---------- ---------- ---------- ---------
Dilutive potential
common shares 1,885,332 6,595,630 1,929,093 ---
---------- ---------- ---------- ---------
Denominator for diluted
earnings per share -
adjusted weighted-average
shares and assumed
conversions 18,966,138 17,643,364 19,008,124 10,093,600
========== ========== ========== ===========
</TABLE>
Basic earnings per share for the three and six months ended June 30, 1999
and 1998 were computed using the weighted average number of outstanding
common shares. Diluted earnings per share for the three and six months
ended June 30, 1999, and the three months ended June 30, 1998 were
computed using the weighted average number of shares and any dilutive
potential common shares. For the six months ended June 30, 1998, the
computation of diluted net loss per share was based solely on the weighted
average number of
<PAGE>
outstanding common shares because the effect of outstanding preferred stock,
employee stock options and warrants was antidilutive.
4. 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.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT OF
FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES AND INFORMATION THAT IS 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 COMPANY'S ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO 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-FARE 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 AND UNANTICIPATED YEAR 2000 COMPLIANCE COSTS
AND EXPENSES. FOR ADDITIONAL DISCUSSION OF SUCH RISKS, SEE "FACTORS
THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS," AS WELL AS THOSE
DISCUSSED ELSEWHERE IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION.
COMPANY
The Company was incorporated on April 25, 1994 and operates as a
low-fare, short- to medium-haul passenger airline that provides
convenient scheduled jet service to attractive destinations in established
markets in the United States. The Company's flight operations began on
December 4, 1994 with two Boeing 737-200 jet aircraft operating two daily
flights each way between Kansas City and Denver and two daily flights each
way between Denver and Salt Lake City. The Company currently operates
twelve leased Boeing 737-200 jet aircraft. The Company's current
schedule provides an average of 86 daily weekday flights serving
Kansas City, Atlanta, Buffalo/Niagara Falls, Chicago-Midway, Cincinnati,
Dallas/Fort Worth, Denver, Minneapolis/St. Paul, Pittsburgh and Myrtle
Beach. The Company currently operates a concentration of its daily
flights in Chicago-Midway with 23 daily flights and Kansas City with
23 daily flights. The Company also provides limited charter services.
<PAGE>
The Company has experienced significant growth since the commencement
of operations in December 1994. The Company's operating revenues are
derived principally from the sale of airline services to passengers and
are recognized when transportation is provided. Total operating revenues
are primarily a function of fare levels and the number of seats sold per
flight. The Company's business is characterized, as is true for the
airline industry generally, by high fixed costs relative to operating
revenues and low profit margins. The Company's principal business
strategy is to provide airline services in established, high
passenger-volume markets that are not served by other low-fare
airlines.
OVERVIEW
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1998
Selected Financial and Operational Data:
<TABLE>
THREE MONTHS ENDED JUNE 30,
---------------------------
$ %
1999 1998 CHANGE CHANGE
------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenue passengers carried 500,033 367,332 132,701 36.1 %
Revenue passenger miles
- RPMs (000s) 222,668 169,808 52,860 31.1 %
Available seat miles
- ASMs (000s) 315,532 250,729 64,803 25.9 %
Load factor 70.6 % 67.7 % 2.9 pts. 4.3 %
Departures 6,040 4,572 1,468 32.1 %
Average stage length 445 462 (17) (3.7) %
Miles flown (000s) 2,608 2,072 536 25.9 %
Block hours flown 8,730 6,766 1,964 29.0 %
Passenger yield $ 0.142 $ 0.138 $ 0.004 2.4 %
Total revenue per ASM $ 0.107 $ 0.101 $ 0.006 5.9 %
Operating expenses per ASM $ 0.100 $ 0.097 $ 0.003 3.1 %
Operating cost per block hour $ 3,620 $ 3,602 18 0.5 %
Average fuel cost per gallon $ 0.63 $ 0.59 $ 0.04 6.8 %
Average size of fleet for
period 10.8 9.0 1.8 20.0 %
</TABLE>
OPERATING REVENUES
Total operating revenues increased 32% from $25.4 million for the quarter
ended June 30, 1998 to $33.6 million for the quarter ended June 30, 1999.
This increase was primarily attributable to increases in capacity and in
the number of passengers in addition to increases in passenger yield.
ASMs increased 26% from 251 million to 316 million. The number of
passengers increased 36% from 367,332 in the quarter ended June 30, 1998
to 500,033 in the quarter ended June 30, 1999. Passenger yield per RPM
increased 2% from 13.8 cents in the quarter ended June 30, 1998 to
14.2 cents in the quarter ended June 30, 1999. The increase in capacity
is the result of an additional
<PAGE>
aircraft placed in service in March and April 1999 offset by a 4%
decrease in average stage length. The reduction in average stage
resulted from the Company's route expansion and increased frequency on
shorter haul routes. Specifically, on April 15, 1999, the Company
commenced service between Chicago-Midway and Cincinnati four times a
day at an average stage length of 255 miles. RPMs increased 31% from
170 million in the quarter ended June 30, 1998 to 223 million in the
quarter ended June 30, 1999. This increase was the result of the
36% increase in the number of passengers coupled with a 4% decrease in
average stage length in the quarter ended June 30, 1999 as compared to
1998. Load factor increased from 68% for the quarter ended June 30, 1998
to 71% for the quarter ended June 30, 1999. This increase was primarily
the result of a 31% increase in the RPMs coupled with a 26% increase in
capacity in the quarter ended June 30, 1999 as compared to the quarter
ended June 30, 1998.
Other revenues include fees generated as a result of service charges
from passengers who change flight reservations, mail and liquor revenues.
Subject to certain restrictions, a customer may pay a $50 service charge
to use the value of the unused reservation for rebooking transportation
for a period of 180 days subsequent to the flight date. Service Charges
were $1.7 million (approximately 5% of total operating revenues) and
$1.6 million (approximately 6% of operating revenues) in the quarters
ended June 30, 1999 and 1998, respectively. The increase in service
fee revenue is a direct result of more passengers changing their
travel itineraries.
The Company's strategic plan to continue 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, greater legroom, fixed ticket pricing under the Road Warrior sm
Class 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 continued to show
positive results in the second quarter of 1999 with passenger yield
increasing by 2.4% and load factor increasing by 4.2%. 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 improves upon its brand awareness.
<PAGE>
OPERATING EXPENSES
Expenses are generally categorized as related to flying operations,
aircraft fuel, maintenance, passenger service, aircraft and traffic
servicing, promotion and sales, general and administrative, depreciation
and amortization and other expense, including interest expense and
amortization of deferred debt issuance costs. The following table
sets forth the percentage of total operating revenues represented by these
expense categories:
<TABLE>
THREE MONTHS ENDED JUNE 30,
----------------------------
1999 1998
---- ----
PERCENT OF PERCENT OF
---------- ----------
REVENUES CENTS PER ASM REVENUES CENTS PER ASM
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Total operating revenues 100.0 % 10.65 CENTS 100.0 % 10.14 CENTS
======== ============== ========= ============
Operating expenses:
Flying operations 17.2 % 1.83 CENTS 17.6 % 1.78 CENTS
Aircraft fuel 14.1 1.50 13.2 1.34
Maintenance 20.7 2.21 18.8 1.89
Passenger service 5.4 0.57 6.3 0.64
Aircraft and traffic servicing 15.0 1.60 17.1 1.74
Promotion and sales 15.5 1.64 16.6 1.68
General and administrative 2.9 0.31 3.9 0.40
Depreciation and amortization 3.2 0.34 2.4 0.25
--------- ------------- --------- ------------
Total operating expenses 94.1 10.01 95.9 9.72
Total other expense, net 0.0 0.00 2.8 0.29
Income tax expense 0.2 0.02 0.0 0.00
--------- -------------- --------- ------------
Net income 5.8 % 0.62 CENTS 1.3 % 0.13 CENTS
========= ============== ========= ============
</TABLE>
Flying operations expenses include aircraft lease expenses, compensation of
pilots, expenses related to 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 30% from $4.5 million (approximately 18%
of operating revenues) for the quarter ended June 30, 1998 to $5.8
million (approximately 17% of operating revenues) for the quarter ended
June 30, 1999. The increase in flying operations expenses was primarily
the result of an increase in pilot salaries as a result of the 29%
increase in block hours flown. Aircraft rent increased as a result of
the addition of the Company's tenth and eleventh aircraft in March and
April 1999, respectively. Finally, the Company continues to incur
significant pilot training costs as a result of the introduction of the
additional capacity during the second quarter of 1999.
<PAGE>
Aircraft fuel expenses include the direct cost of fuel, taxes and the
costs of delivering fuel into the aircraft. Aircraft fuel expenses
increased 41% from $3.4 million (approximately 13% of operating revenues)
for the quarter ended June 30, 1998 to $4.7 million (approximately 14%
of operating revenues) for the quarter ended June 30, 1999. The 29%
increase in block hours flown resulted in approximately $1 million in
increased fuel costs. The average fuel cost per gallon (including taxes
and into-plane costs) increased $0.04 or 7% from $0.59 in the quarter
ended June 30, 1998 to $0.63 in the quarter ended June 30, 1999. 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 46% from $4.8 million (approximately 19%
of operating revenues) for the quarter ended June 30, 1998 to $7.0
million (approximately 21% of operating revenues) for the quarter ended
June 30, 1999. Maintenance expenses increased by approximately $200,000
for provisions specifically related to the return of three aircraft
during the third and fourth quarters of 1999. The Company anticipates
it will be obligated to pay its lessor or overhaul facilities to meet
contracted aircraft return conditions. In addition, the Company incurred
cost overruns in conjunction with two airframe scheduled heavy checks
during the second quarter of 1999. The Company has also made a concerted
effort to improve its line maintenance capabilities in Pittsburgh,
Chicago-Midway and Minneapolis/St. Paul. As a result, the Company has
added approximately thirty additional employees to support these efforts.
The Company expenses a portion of the estimated cost of future major
scheduled maintenance for airframes, engines, landing gears, and APUs
each month based on flight hours flown. As the Company has added two
additional aircraft and flight hours have increased approximately 30%,
these accrued costs have increased accordingly. The costs of routine
aircraft and engine maintenance are charged to maintenance expense as
incurred. Maintenance expenses increased on a cents per ASM basis from
1.89 cents for the quarter ended June 30, 1998 to 2.21 cents for the
quarter ended June 30, 1999. This increase in cents per ASM mainly
resulted from the increases in maintenance expense as described above.
Passenger service expenses include flight attendant wages and benefits,
in-flight service, flight attendant training, uniforms and overnight
expenses, inconvenienced passenger charges and passenger liability
insurance. Passenger service expenses increased 14% from $1.6 million
(approximately 6% of operating revenues) for the quarter ended June 30,
1998 to $1.8 million (approximately 5% of operating revenues) for the
quarter ended June 30, 1999. The increase in passenger service expenses
was the result of an increase in flight attendant salaries and in-flight
supplies, food and beverages. Flight attendant salaries increased mainly
as a result of a 29% increase in block hours flown and in-flight supplies,
food and beverages increased as a result of the 36% increase in passengers
flown. These increases were offset by a realized cost savings during the
second quarter of 1999 from the reduction in the Company's passenger
liability insurance rates.
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 16% from $4.4 million
(approximately 17% of operating revenues) for the quarter ended
June 30, 1998 to $5.0 million
<PAGE>
(approximately 15% of operating revenues) for the quarter ended
June 30, 1999. The increase in aircraft and traffic servicing expenses
is a direct result of the increase in departures from 4,572 in the
second quarter of 1998 to 6,040 in the second quarter of 1999. The Company
began employing its own under-wing servicing in Kansas City in July 1998
and Minneapolis/St. Paul during February 1999, and has realized
significant savings from the decision to bring this function in-house.
Aircraft and traffic servicing expenses decreased on a per turn basis
from $953 (1.74 cents per ASM) for the quarter ended June 30, 1998 to
$837 (1.60 cents per ASM) for the quarter ended June 30, 1999 as a result
of the strategic moves described above.
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, as well as advertising expenses and wages and benefits for
the marketing department. Promotion and sales expenses increased 23%
from $4.2 million (approximately 17% of operating revenues) in the quarter
ended June 30, 1998 to $5.2 million (approximately 15% of operating
revenues) in the quarter ended June 30, 1999. The Company brought its
outside reservation system in-house in April of 1998. The ongoing
savings realized from this move were offset by increases in advertising
expenses and in passenger bookings, along with the corresponding
increases in both credit card processing fees paid and in travel
agency commissions paid in the second quarter of 1999 as compared to
1998. Direct advertising costs increased approximately $0.4 million,
or 28%, for the second quarter 1999 compared with the second quarter 1998.
The addition of two new destination cities
during 1999 contributed to the increase in direct advertising expenses.
The Company continues to rely on its direct advertising methods to
attract its passengers, and therefore, continues to incur significant
advertising expenses each month. However, the Company continues to
reduce its promotion and sales cost per passenger as the Vanguard
brand continues to be accepted in its key cities. The average promotion
and sales cost per passenger decreased $1.09 or 10% from $11.47 in the
quarter ended June 30, 1998 to $10.38 in the quarter ended June 30, 1999.
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 decreased 2% from $0.99 million (approximately 4% of operating
revenues) in the quarter ended June 30, 1998 to $0.97 million
(approximately 3% of operating revenues) in the quarter ended
June 30, 1999. The decrease in general and administrative expenses
in the second quarter of 1999 as compared to 1998 is the result of
decreases in general liability insurance, property taxes and a reduction
in accounting staff.
Depreciation and amortization expenses include depreciation and
amortization of aircraft modifications, ground equipment, computer and
reservation equipment, leasehold improvements and rotable parts
inventory. Depreciation and amortization expenses increased 74% from
$0.62 million (approximately 2% of operating revenues) in the quarter
ended June 30, 1998 to $1.08 million (approximately 3% of operating
revenues) in the quarter
<PAGE>
ended June 30, 1999. The increase in depreciation expense is mainly
the result of the increase in depreciable rotable part inventories of
approximately $3.4 million since June 30, 1998.
Other expense, net, consists primarily of debt issuance cost
amortization, interest income and interest expense. The Company's
renewal of the letters of credit issued securing the Company's credit
card processor under new terms and the termination of its bank line of
credit agreement in January 1999 significantly reduced the amount of
deferred debt issuance amortization in the second quarter 1999 compared
with the second quarter 1998. Under the previous arrangement, warrants
vested quarterly in amounts dependent upon the Company's exposure under
the letter and line of credit, as defined in the respective agreements.
The warrant's estimated fair value is recorded as deferred debt issuance
costs and related amortization expense is recorded over the terms of the
related guarantees. The Company's improved cash position has also
reduced interest expense for the quarter ended June 30, 1999 mainly as a
result of the payoff of the line of credit in August 1998 and the
conversion of demand notes payable to related parties to Common Stock
during 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
Selected Financial and Operational Data:
<TABLE>
SIX MONTHS ENDED JUNE 30,
-------------------------
$ %
1999 1998 CHANGE CHANGE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue passengers carried 871,781 713,482 158,299 22.2 %
Revenue passenger miles -
RPMs (000s) 396,454 337,319 59,135 17.5 %
Available seat miles -
ASMs (000s) 567,922 508,058 59,864 11.8 %
Load factor 69.8 % 66.4 % 3.4 pts. 5.1 %
Departures 10,670 9,055 1,615 17.8 %
Average stage length 455 473 (18) (3.8)%
Miles flown (000s) 4,694 4,199 495 11.8 %
Block hours flown 15,723 13,705 2,018 14.7 %
Passenger yield $ 0.139 $ 0.128 $ 0.011 8.7 %
Total revenue per ASM $ 0.103 $ 0.092 $ 0.011 12.0 %
Operating expenses per ASM $ 0.099 $ 0.097 $ 0.002 2.1 %
Operating cost per block hour $ 3,587 $ 3,604 $ (17) (0.5)%
Average fuel cost per gallon $ 0.57 $ 0.61 $ (0.04) (6.6)%
Average size of fleet for
period 10.0 9.0 1.0 11.1 %
</TABLE>
Total operating revenues increased 25% from $46.7 million for the six
months ended June 30, 1998 to $58.5 million for the six months ended
June 30, 1999. This increase was primarily attributable to increases in
capacity and in the number of passengers in addition to increases in
passenger yield. ASMs increased 12% from 508 million to 568 million. The
number of passengers
<PAGE>
increased 22% from 713,482 during the six months ended June 30, 1998 to
871,781 during the six months ended June 30, 1999. Passenger yield per
RPM increased 9% from 12.8 cents in the first half of 1998 to 13.9 cents
in the first half of 1999. The increase in capacity is the result of
additional aircraft placed in service in March and April 1999 offset by a
4% decrease in average stage length. RPMs increased 18% from 337 million
during the first half of 1998 to 396 million during the first half of 1999.
This increase was the result of the 22% increase in the number of passengers
coupled with a 4% decrease in average stage length in the six months ended
June 30, 1999 as compared to 1998. Load factor increased from 66.4% for
the six months ended June 30, 1998 to 69.8% for the six months ended
June 30, 1999. This increase was primarily the result of an 18% increase
in the RPMs coupled with a 12% increase in capacity in the six months
ended June 30, 1999 as compared to the six months ended June 30, 1998.
Other revenues include fees generated as a result of service charges from
passengers who change flight reservations, mail and liquor revenues.
Subject to certain restrictions, a customer may pay a $50 service charge
to use the value of the unused reservation for rebooking transportation
for a period of 180 days subsequent to the flight date. These service
charges were $2.7 million (approximately 5% of total operating revenues)
and $3.0 million (approximately 6% of operating revenues) for the six
months ended June 30, 1999 and 1998, respectively. Service charges
decreased mainly as a result of a reduction in change fees collected
from passengers.
Operating Expenses
The following table sets forth the percentage of total operating revenues
represented by these expense categories:
<TABLE>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
------ ------
PERCENT OF PERCENT OF
---------- ----------
REVENUES CENTS PER ASM REVENUES CENTS PER ASM
-------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Total operating revenues 100.0 % 10.30 CENTS 100.0 % 9.19 CENTS
========== ============= ========= =============
Operating expenses:
Flying operations 18.0 % 1.85 cents 19.0 % 1.74 cents
Aircraft fuel 13.0 1.35 15.0 1.38
Maintenance 20.6 2.12 19.6 1.80
Passenger service 5.8 0.59 7.3 0.67
Aircraft and traffic
servicing 16.0 1.65 19.3 1.78
Promotion and sales 16.3 1.68 19.0 1.74
General and administrative 3.3 0.34 4.2 0.39
Depreciation and amortization 3.4 0.35 2.4 0.22
----------- ------------ --------- -------------
Total operating expenses 96.4 9.93 105.8 9.72
Total other expense, net 0.0 0.00 3.3 0.31
Income tax expense 0.2 0.02 0.0 0.00
----------- ------------ ---------- ------------
Net income (loss) 3.4% 0.35 CENTS (9.1)% (0.84) CENTS
=========== ============ ========== ============
</TABLE>
<PAGE>
Flying operations expenses include aircraft lease expenses, compensation
of pilots, expenses related to 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 19% from $8.9 million (approximately 19%
of operating revenues) for the six months ended June 30, 1998 to $10.5
million (approximately 18% of operating revenues) for the six months
ended June 30, 1999. The increase in flying operations expenses was
primarily the result of an increase in pilot salaries as a result of
the 15% increase in block hours flown. In addition, aircraft rent
increased as a result of the addition of the Company's tenth aircraft
in March 1999 and eleventh aircraft in April 1999. Finally, the Company
incurred significant pilot training costs as a result of the introduction
of the additional capacity during the late first and second quarters of
1999.
Aircraft fuel expenses include the direct cost of fuel, taxes and the
costs of delivering fuel into the aircraft. Aircraft fuel expenses
increased 9% from $7.0 million (approximately 15% of operating revenues)
for the six months ended June 30, 1998 to $7.6 million (approximately
13% of operating revenues) for the six months ended June 30, 1999.
The 15% increase in block hours flown resulted in approximately
$1 million of the increase in fuel costs. However, fuel cost per gallon
(including taxes and into-plane costs) decreased $0.04 or 7% from $0.61
in the six months ended June 30, 1998 to $0.57 in the six months ended
June 30, 1999, leading to a $0.04 decrease in fuel costs for the period.
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 32% from $9.1 million (approximately 20% of operating
revenues) for the six months ended June 30, 1998 to $12.1 million
(approximately 21% of operating revenues) for the six months ended
June 30, 1999. Maintenance expenses increased as a result of accelerating
aircraft input dates for scheduled required major maintenance, providing
for costs overruns during two aircraft heavy checks, providing for
the return of three aircraft to a lessor in 1999 and providing for
engine maintenance costs incurred in excess of accrued amounts. The
Company had five aircraft in scheduled major maintenance during the
six months ended June 30, 1999 for which certain airworthiness directives
or Company required maintenance were performed and expensed as incurred
in accordance with Company policy. The Company incurred cost overruns
in conjunction with two airframe heavy checks as previously described
in the quarterly comparison. The Company had three aircraft in scheduled
major maintenance during the first half of 1998. In addition, the
Company provided approximately $200,000 to meet aircraft return
conditions of three leased aircraft. The Company has also made a
concerted effort to improve its line maintenance capabilities in
Pittsburgh, Chicago-Midway and Minneapolis/St. Paul. As a result,
the Company has added approximately thirty additional employees to
support these efforts. The Company expenses a portion of the estimated
cost of future major scheduled maintenance for airframes, engines,
landing gears, and APUs each month based on flight hours flown.
As flight hours have increased approximately 15%, these accrued costs
have increased accordingly. The costs of routine aircraft and engine
maintenance are charged to maintenance expense as incurred. Maintenance
expenses increased on a cents per ASM basis from 1.80 cents for the
six months ended June 30, 1998 to 2.12 cents for the six months ended
June 30, 1999. This increase in cents per ASM mainly resulted from the
increases in maintenance expense as described above.
Passenger service expenses include flight attendant wages and benefits,
in-flight service, flight attendant training, uniforms and overnight
expenses, inconvenienced passenger charges and passenger liability
insurance. Passenger service expenses decreased 14% from $1.6 million
(approximately 7% of operating revenues) for the six months ended
June 30, 1998 to $1.8 million (approximately 6% of operating revenues)
for the six months ended June 30, 1999. The increase in passenger
service expenses was the result of an increase in flight attendant
salaries and in-flight supplies, food and beverages. Flight attendant
salaries increased mainly as a result of a 15% increase in block hours
flown and in-flight supplies, food and beverages increased as a result
of the 22% increase in passengers flown.
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 4% from $9.0 million (approximately
19% of operating revenues) for the six months ended June 30, 1998 to
$9.3 million (approximately 16% of operating revenues) for the six
months ended June 30, 1999. The increase in aircraft and traffic
servicing expenses is the direct result of the increase in departures
from 9,055 for the six months ended June 30, 1998 to 10,670 for the
six months ended June 30, 1999. The Company began employing its own
under-wing servicing in Kansas City in July 1998 and Minneapolis/St. Paul
during February 1999, and has realized significant savings. Aircraft and
traffic servicing expenses decreased on a per turn basis from $995
(1.78 cents per ASM) for the six months ended June 30, 1998 to $876
(1.65 cents per ASM) for the six months ended June 30, 1999 as a result
of the strategic moves described above.
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, as well as advertising expenses and wages and benefits for
the marketing department. Promotion and sales expenses increased 7%
from $8.9 million (approximately 19% of operating revenues) in the
six months ended June 30, 1998 to $9.5 million (approximately 16% of
operating revenues) in the six months ended June 30, 1999. The Company
brought its outside reservation system in-house in April of 1998. The
ongoing savings realized from this move were offset by increases in
advertising expenses and in passenger bookings, along with the resultant
increases in both credit card processing fees and in travel agency
commissions paid in the second half of
<PAGE>
1999 as compared to 1998. The addition of two new destination cities
during 1999 increased direct advertising expenses. The Company continues
to rely on its direct advertising methods to attract its passengers, and
therefore, continues to incur significant advertising expenses each month.
However, the Company continues to reduce its promotion and sales costs
per passenger as the Vanguard brand continues to be accepted in all of
its cities. The average promotion and sales cost per passenger decreased
$1.50 or 12% from $12.42 in the six months ended June 30, 1998 to $10.92
in the six months ended June 30, 1999.
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 decreased 2% from $1.98 million (approximately 4% of operating
revenues) in the six months ended June 30, 1998 to $1.93 million
(approximately 3% of operating revenues) in the six months ended
June 30, 1999. The decrease in general and administrative expenses in
the first half of 1999 as compared to 1998 is the result of decreases
in general liability insurance, property taxes and a reduction in
accounting staff.
Depreciation and amortization expenses include depreciation and
amortization of aircraft modifications, ground equipment, computer
and reservation equipment, leasehold improvements and rotable parts
inventory. Depreciation and amortization expenses increased 77% from
$1.1 million (approximately 2% of operating revenues) in the six months
ended June 30, 1998 to $2.0 million (approximately 3% of operating
revenues) in the six months ended June 30, 1999. The increase in
depreciation expense is mainly the result of the increase in depreciable
rotable part inventories of approximately $3.4 million since June 30, 1998.
Other expense, net, consists primarily of debt issuance cost amortization,
interest income and interest expense. The Company's renewal of the
letters of credit issued securing the Company's credit card processor
under new terms and the termination of its bank line of credit agreement
in January 1999 significantly reduced the amount of deferred debt issuance
amortization in the first half of 1999 compared with the first half of
1998. Under the previous arrangement, warrants vested quarterly in
amounts dependent upon the Company's exposure under the letter and
line of credit, as defined in the respective agreements. The warrant's
estimated fair value is recorded as deferred debt issuance costs and
related amortization expense is recorded over the terms of the related
guarantees. The Company's improved cash position has also reduced
interest expense for the six months ended June 30, 1999 mainly as a
result of the payoff of the line of credit in August 1998 and the
conversion of demand notes payable to related parties to Common Stock
during 1998.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During 1999, the Company generated sufficient cash flows from operating
activities to support its operations and meet its capital expenditure
requirements. Prior to March 1998 and since inception, the Company has
primarily financed its operations and met its capital expenditure
requirements 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 primarily to
its principal stockholders. As of June 30, 1999, the Company has
received net proceeds from the sale of its equity securities aggregating
approximately $70.2 million.
During the quarter ended June 30, 1999, the Company continued to
experience a significant increase in advanced ticket sales that has
resulted in an increase to its air traffic liability. Consequently, the
Company had a working capital deficit of $8.4 million. In January 1999,
the principal stockholders of the Company agreed to renew the two-year
$4.0 million letter of credit facility in order to secure a portion of
the Company's exposure to its credit card processor. The letters of
credit expire in January 2001. In May 1999, a $2.0 million stockholder
guarantee also securing the Company's credit card processor expired.
The Company did not renew a $2.0 million stockholder guarantee. Instead,
the Company expects to transfer up to $2.0 million of available cash
reserves from its operating cash accounts to a restricted cash account
maintained at the Company's credit card processor during the third quarter.
Currently, the Company must deposit cash into a restricted cash account
to provide for the Company's credit card exposure in excess of $4.0
million. To the extent that exposure exceeds $4.0 million, the Company
must deposit cash from ticket sales as collateral to secure the Company
credit card processor. As of August 9, 1999 due to increased ticket sales,
the Company's credit card exposure was approximately $10.9 million.
The Company funded the credit card exposure in excess of $4.0 million with
available cash on hand. The Company estimates that its credit card
exposure will range between $8.0 to $13.0 million through the end of the
third quarter when the balance should decrease due to expected
seasonality. The Company's existing credit card facility limits its
ability to utilize cash generated from operations. For example, during
the quarter ended June 30, 1999, $3.1 million of cash generated from
operating activities was withheld by the Company's credit card
processing bank to provide additional collateral against the Company's
increased advance ticket sales. The Company would have increased cash
flows from operations to approximately $7.0 million had this
restrictive credit card collateral facility not been required during
the quarter ended June 30, 1999. As a result, the Company plans to
renegotiate its collateral requirements during the later part of 1999.
There can be no assurance that the Company will be successful with
these negotiations or that the Company will be able to reduce its
collateral requirements. Currently, any cash utilized as collateral
is refunded by the credit card processor, on a daily basis, when the
Company's exposure falls below the previously calculated exposure or
$4.0 million, whichever is greater.
The Company estimates that scheduled heavy maintenance of its existing
aircraft fleet through June 30, 2000 will cost $8.2 million, of which
$2.7 million has been funded from existing supplemental rent payments
recoverable from aircraft lessors. The Company will fund a significant
portion of this future scheduled heavy maintenance obligations in the
form of supplemental rent payments to be paid over the next 12 months
as required by the respective lease agreements. In addition, the
Company expects to expend $4.6 million on various capital expenditures
in the next year, which are primarily related to improvements for
existing or future aircraft, increased aircraft parts inventory levels
and improvements to its in-house computer systems.
<PAGE>
The Company continues to review its financing alternatives in order
to purchase or lease additional aircraft under suitable terms. The
Company accepted delivery of two Boeing 737-200 jet aircraft in the
first quarter of 1999. In connection with these leases, the Company
has established letters of credit in favor of the lessor to secure
said aircraft. The Company accepted delivery on its twelfth aircraft
on July 29, 1999. In addition, the Company has also signed letters
of intent for two additional aircraft to replace its two remaining
Stage II aircraft, which are to be returned to the lessor in
December 1999. The Company must deposit with the lessor or establish
a letter of credit in the aggregate amount of $690,000 for these
three aircraft. As of August 9, 1999, the Company had placed deposits
totaling $460,000 with the lessor. In addition, the Company is
currently in discussion with various aircraft lessors regarding the
addition of two more aircraft in the fourth quarter of 1999 in order
to maintain its current schedule of operations. The Company's
current cash balance is sufficient to provide for the estimated lease
deposit requirements for up to two additional aircraft. Historically,
the Company has been required to deposit between $140,000 and $400,000
per aircraft depending on the specific terms negotiated in the lease.
The Company has generally generated positive cash flows from operations
since March 1998 and expects that its existing cash balances along
with the improved operating results will be sufficient cash to support
its operations through June 30, 2000. The Company plans to continue
to implement certain actions designed to achieve long-term profitability
and improve its capital resources. Management's plans to achieve
long-term profitability include increased focus on the price-sensitive
business traveler, pricing strategies designed to maximize passenger
revenue and continued focus on cost savings programs. There can be no
assurance that its efforts will be successful.
Whether or not the Company's strategic plans to achieve long-term
profitability are successful, any expansion beyond that discussed
above would be dependent upon the Company raising additional capital.
The Company is evaluating options on raising additional capital or
issuing debt during 1999. The Company's success in implementing actions
designed to achieve long-term profitability and its ability to operate
at profitable levels will determine if the Company will be able to raise
additional capital. There can be no assurance that the Company's
necessary working capital requirements to expand operations will be
available on acceptable terms, or at all.
<PAGE>
OTHER MATTERS
YEAR 2000 COMPLIANCE
Older computers were programmed to use a two-digit code for the date
entry rather than a four-digit code. For example, the date
November 17, 1970 would be entered as "11/17/70" rather than "11/17/1970."
The decision to use two digits instead of four was based largely on
cost-reduction considerations and the belief that the code would no
longer be used at the millennium. Nevertheless, coding conventions have
not changed, and on January 1, 2000, computers may read the digits "00"
as denoting the year 1900 rather than 2000. At the least, this could
result in massive quantities of incorrect data. At worst, it could
result in the total or partial failure of time sensitive computer
systems and software.
THE COMPANY'S YEAR 2000 ISSUES. The Company began operations in December
1994, and its operations depend predominantly on third party computer
systems. Because of the Company's limited resources during its start-up,
the most cost-effective way to establish its computer systems was to
outsource or to use manual systems. Internal systems developed and any
software acquired are limited and were designed or purchased with the
Year 2000 taken into consideration.
Management has neared the completion of the modification of the Company's
information technology to recognize the Year 2000 and the conversion or
purchase of 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's
financial reporting software is currently not Year 2000 compliant. The
Company has purchased a new financial software system and expects to
begin the financial software conversion during the third quarter of 1999.
The Company believes these three systems are critical data processing
systems.
Secondary systems that the Company has completed its Year 2000
assessment on include, but are not limited to, the Company's telephone
switch software and equipment at its Reservations Center, intranet
network systems, flight operations and tracking software and maintenance
inventory tracking system. Management has completed the modification on
these systems and all are Year 2000 compliant. In July 1999, the Company
completed the installation of Year 2000 compliant telephone switch
software and equipment at its Reservation Center.
The Company relies on third parties that provide goods and services that
are imperative to the Company's operations including, but not limited to,
the FAA, the DOT, local airport authorities, utilities, communication
providers, credit card processor and fuel suppliers. The Company
continues to monitor each of these entities, and has initiated formal
communications with these third party service providers to determine their
Year 2000 readiness. There can be no assurance that the systems of such
third parties on which the Company's business relies (including those
of the FAA) will be modified on a timely basis. The Company's business,
financial condition and results of operations could be materially affected
by the failure of its equipment or systems or those operated by other
parties to operate properly beyond 1999.
<PAGE>
While the Company believes it is taking all appropriate steps to assure
Year 2000 compliance, it is dependent on key third party 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 by these outside parties. The Company has utilized
existing resources and has not incurred any significant costs to
implement its Year 2000 project to date and the total remaining cost
of the Year 2000 project is expected to be immaterial and will be
funded through cash from operations. The costs and the dates on which
the Company anticipates it will complete the Year 2000 project are
based on management's best estimates and estimates received in writing
from applicable third parties. There can be no guarantee that these
estimates will be achieved and actual results could differ materially
from those anticipated.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
The risk inherent in the Company's market risk sensitive position
is the potential loss arising from an adverse change in the price of
fuel as described below. The sensitivity analysis presented does not
consider either the effects that such an adverse change may have on
overall economic activity or additional actions management may take to
mitigate its exposure to such a change. At the present time, management
does not utilize fuel price hedging instruments to reduce the Company's
exposure to fluctuations in fuel prices. Actual results may differ.
The Company's earnings are affected by changes in the price and
availability of aircraft fuel. Market risk is estimated as a hypothetical
10 percent increase in the average cost per gallon of fuel over the past
twelve months. Based on actual fuel usage over the past twelve months,
such an increase would have resulted in an increase to aircraft fuel
expense of approximately $1.4 million over the past twelve months.
Comparatively, based on projected fuel usage over the next twelve months,
such an increase would result in an increase to aircraft fuel expense of
approximately $1.9 million over the next twelve months. The increase in
exposure to fuel price fluctuations during the next twelve months is due
to the Company's plan to increase its aircraft fleet, resulting in
additional gallons consumed.
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. Since the Company's inception on April 25, 1994 and
until 1997, the Company incurred significant losses from operations. In
1998, the Company recorded income from operations of $1.5 million and
generated positive cash
<PAGE>
flow from operations of $6.0 million. As of June 30, 1999 the Company
had an accumulated deficit of $69.2 million and a working capital deficit
of $8.4 million. As of June 30, 1999, the Company had positive stockholders'
equity of $8.2 million. The Company's limited operating history makes
the prediction of future operating results difficult. There can be no
assurance that the Company will be able to sustain profitable operations.
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 additional aircraft. Historically, the Company's continued
operations have been dependent upon equity and debt financing from its
principal stockholders. There can be no assurance that the Company's
principal stockholders will provide working capital for the Company's
operations if the Company is unable to continue to generate positive cash
flow from its 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."
INTENSE COMPETITION AND COMPETITIVE REACTION. The Company is subject to
intense competition on 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.
<PAGE>
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 14.1% of the Company's operating expenses for the quarter
ended June 30, 1999. The Company's average cost per gallon for the past
three years have been $0.79 per gallon in the year ended December 31,
1996, $0.74 per gallon in the year ended December 31, 1997, $0.58 per
gallon in the year ended December 31, 1998, and $0.57 for the six months
ended June 30, 1999. 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 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 twelve 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 fluctuates based on certain worldwide macroeconomic
factors. There can be no assurance that the Company will be able to
lease additional aircraft on satisfactory terms or at the times needed.
In order to maintain the Company's current schedule of operations following
the return of its two remaining Stage II aircraft in December 1999, the
Company must secure
<PAGE>
delivery of two additional aircraft. The inability to obtain suitable
lease terms or delivery delays could cause the Company to temporarily
reduce its fleet size, which would have an adverse effect on the Company's
business, financial condition and results of operations.
GOVERNMENT REGULATION. The Company is subject to the Aviation Act, under
which the DOT and the FAA exercise regulatory authority over airlines.
This regulatory authority includes, but is not limited to: (i) the initial
determination and continuing review of the fitness of air carriers
(including financial, managerial, compliance-disposition and citizenship
fitness); (ii) the certification and regulation of aircraft and other
flight equipment; (iii) the certification and approval of personnel who
engage in flight, maintenance and operations activities; and (iv) the
establishment and enforcement of safety standards and requirements with
respect to the operation and maintenance of aircraft, all as set forth
in the Aviation Act and the Federal Aviation Regulations. The FAA has
promulgated a number of maintenance regulations and directives relating
to, among other things, retirement of aging aircraft, increased inspections
and maintenance procedures to be conducted on aging aircraft, collision
avoidance systems, aircraft corrosion, airborne windshear avoidance
systems and noise abatement. As a result of recent incidents involving
airlines, the FAA has increased its review of commercial airlines
generally and particularly with respect to small and 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 III noise compliance requirements (75% of its fleet Stage III
compliance). By the end of 1999, the Company's aircraft fleet is required
be 100% Stage III compliant. The Company plans to return its three
remaining Stage II aircraft this year upon the expiration of their leases.
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>
PART II - OTHER INFORMATION
ITEM 1. 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 2. CHANGES IN SECURITIES
a. On May 20, 1999, the Company effected a one-for-five reverse stock
split of all outstanding shares of Common Stock, $0.001 par value per
share. The par value per share remained at $0.001 per share and
200,000,000 common shares remained authorized.
b. None.
c. None
d. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 18, 1999 at
which shareholders re-elected one director, elected to effect a one-for-five
reverse stock split of all outstanding shares of Common Stock and ratified
the appointment of the accounting firm of Ernst & Young, LLP as the
Company's independent auditors for 1999.
Results of the voting in connection with each issue were as follows (the
results have been converted to reflect post-reverse stock split numbers):
VOTING ON DIRECTOR ROBERT J. SPANE
- -----------------------------------
In Favor 16,624,868
Against 0
Abstain 17,331
ELECTION TO EFFECT A ONE-FOR-FIVE REVERSE STOCK SPLIT OF ALL OUTSTANDING
- ------------------------------------------------------------------------
SHARES OF COMMON STOCK
- ----------------------
In Favor 16,612,358
Against 29,038
Abstain 803
RATIFICATION OF ERNST & YOUNG, LLP TO SERVE AS AUDITOR
- ------------------------------------------------------
In Favor 16,638,145
Against 2,930
Abstain 1,124
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule
<PAGE>
(b) Reports on Form 8-K
On May 20, 1999, the Company filed a report on Form 8-K under
Item 5 - Other Events regarding a press release issued by the Company
on May 19, 1999 announcing approval by the Company's stockholders of
a one-for-five reverse stock split of all outstanding shares of
Common Stock, $0.001 par value per share, of the Company and a
temporary change in the Company's ticker symbol from "VNGD" to "VNGDD."
On June 14, 1999, the Company filed a report on Form 8-K under
Item 5 - Other Events regarding a press release issued by the Company
on June 11, 1999, announcing the acceptance by Nasdaq SmallCap Market
for listing effective June 15, 1999. The Company's ticker symbol
will return to "VNGD" as of June 15, 1999.
<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.
Signature and Title Date
\S\ ROBERT J. SPANE August 13, 1999
- ---------------------------
Robert J. Spane, President
and Chief Executive Officer
\S\ WILLIAM A. GARRETT August 13, 1999
- ------------------------------------
William A. Garrett, Vice President -
Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 13,694,966
<SECURITIES> 0
<RECEIVABLES> 3,465,503
<ALLOWANCES> (203,000)
<INVENTORY> 1,373,530
<CURRENT-ASSETS> 22,929,232
<PP&E> 19,027,954
<DEPRECIATION> (9,220,067)
<TOTAL-ASSETS> 45,295,285
<CURRENT-LIABILITIES> 31,319,831
<BONDS> 0
0
302
<COMMON> 17,084
<OTHER-SE> 8,151,147
<TOTAL-LIABILITY-AND-EQUITY> 45,295,285
<SALES> 58,502,836
<TOTAL-REVENUES> 58,502,836
<CGS> 56,393,181
<TOTAL-COSTS> 56,393,181
<OTHER-EXPENSES> (6,277)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,115,932
<INCOME-TAX> 120,250
<INCOME-CONTINUING> 1,995,682
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,995,682
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.10
</TABLE>
