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, 2000
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
(816) 243-2100
(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, 2000, there were 17,109,921 shares of
Common Stock, par value $0.001 per share, issued and outstanding.
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VANGUARD AIRLINES, INC.
CONDENSED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 235,266 $ 6,440,684
Accounts receivable, less
allowance of $83,000
and $96,000 at June 30, 2000
and December 31, 1999,
respectively 2,083,647 1,295,515
Inventories 1,224,793 1,321,047
Current portion of
supplemental maintenance
deposits 6,477,090 5,351,279
Prepaid expenses and other
current assets 1,904,137 1,835,125
---------- -----------
Total current assets 11,924,933 16,243,650
Property and equipment,
at cost:
Aircraft improvements and
leasehold costs 9,834,864 7,626,144
Reservation system and
communication equipment 1,804,783 1,804,783
Aircraft engines and rotable
inventory 8,599,600 7,763,835
Other property and equipment 5,070,588 4,777,339
--------- ----------
25,309,835 21,972,101
Less accumulated depreciation
and amortization (12,778,000) (11,122,590)
----------- ----------
12,531,835 10,849,511
Other assets:
Supplemental maintenance
deposits, less current
portion 5,337,597 4,168,617
Deferred debt issuance
costs 365,186 595,038
Leased aircraft deposits 4,088,000 3,428,000
Fuel and security deposits 700,518 708,030
Other 2,331,995 1,710,322
---------- ----------
12,823,296 10,610,007
---------- ----------
Total assets $ 37,280,064 $ 37,703,168
============ ===========
<PAGE>
VANGUARD AIRLINES, INC.
CONDENSED BALANCE SHEETS (CONTINUED)
JUNE 30, DECEMBER 31,
2000 1999
--------------- --------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Notes Payable $ 1,000,000 $ --
Accounts payable 6,758,465 7,357,821
Accrued expenses 5,122,268 4,701,841
Accrued maintenance 13,507,601 10,057,044
Air traffic liability 13,772,973 8,649,452
Current portion of capital
lease obligations 248,459 188,692
----------- ------------
Total current liabilities 40,409,766 30,954,850
Accrued maintenance, less
current portion 5,063,383 4,713,701
Capital lease obligations,
less current portion 291,773 356,755
Commitments and contigencies
Stockholders' equity (deficit):
Common stock, $.001 par value:
Authorized shares - 100,000,000
Issued and outstanding
shares - 17,109,921 17,110 17,108
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 78,107,758 77,979,912
Accumulated deficit (86,610,028) (76,319,460)
------------ ------------
Total stockholders' equity
(deficit) (8,484,858) 1,677,862
------------ ------------
Total liabilities and
stockholders' equity (deficit) $37,280,064 $37,703,168
============ ============
See accompanying notes.
<PAGE>
<TABLE>
VANGUARD AIRLINES, INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
2000 1999 2000 1999
---- ----- ----- -----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenues:
Passenger revenues $35,709,528 $ 31,500,022 $ 62,396,004 $ 54,969,132
Other 1,938,201 2,095,798 3,694,153 3,533,704
------------ ------------ ------------ ------------
Total operating
revenues 37,647,729 33,595,820 66,090,157 58,502,836
Operating expenses:
Flying operations 7,972,469 5,786,795 14,763,970 10,513,265
Aircraft fuel 9,530,870 4,747,879 17,653,264 7,634,448
Maintenance 8,095,014 6,966,239 14,355,775 12,059,788
Passenger service 2,186,595 1,812,390 4,289,394 3,375,824
Aircraft and traffic
servicing 5,537,454 5,046,203 11,525,722 9,348,452
Promotion and sales 4,717,658 5,190,419 9,697,244 9,522,591
General and
administrative 1,189,486 970,359 2,160,638 1,927,332
Depreciation and
amortization 893,067 1,079,789 1,655,410 2,011,481
------------ ------------ ------------ ------------
Total operating
expenses 40,122,613 31,600,073 76,101,417 56,393,181
------------ ------------ ------------ ------------
Operating income
(loss) (2,474,884) 1,995,747 (10,011,260) 2,109,655
Other income (expense):
Deferred debt
issuance cost
amortization (175,093) (46,179) (353,852) (159,377)
Interest expense (18,697) --- (32,429) ---
Interest income 40,833 87,428 173,213 208,952
Other (69,542) (33,953) (66,240) (43,298)
------------ ------------ ------------ ------------
Total other income
(expense), net (222,499) 7,296 (279,308) 6,277
------------ ------------ ------------ ------------
Income (loss)
before taxes (2,697,383) 2,003,043 (10,290,568) 2,115,932
Income tax expense --- (48,750) --- (120,250)
------------ ------------ ------------ ------------
Net income (loss) $ (2,697,383) $ 1,954,293 $(10,290,568) $ 1,995,682
============ ============ ============ ============
Net income (loss)
per share:
Basic $ (0.16) $ 0.11 $ (0.60) $ 0.12
============ ============ ============ ============
Diluted $ (0.16) $ 0.10 $ (0.60) $ 0.10
============ ============ ============ ============
Weighted average
shares used in
per share
computation:
Basic 17,109,177 17,080,806 17,108,399 17,079,031
============ ============ ============ ============
Diluted 17,109,177 18,966,138 17,108,399 19,008,124
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
VANGUARD AIRLINES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 1999
--------- ---------
(UNAUDITED)
Net Cash provided by (used in)
operating activities $(5,629,258) $3,063,806
INVESTING ACTIVITIES
Purchases of property and
equipment (1,466,970) (2,837,915)
FINANCING ACTIVITIES
Proceeds from issuance of notes
payable to related parties 1,000,000 ---
Proceeds (payments) on capital
lease obligations (113,038) ---
Proceeds from exercise of
stock options 3,848 18,801
-------- ---------
Net cash provided by financing
activities 890,810 18,801
Net increase in cash and
cash equivalents (6,205,418) 244,692
Cash and cash equivalents at
beginning of period 6,440,684 7,417,048
------------ ----------
Cash and cash equivalents at
end of period $ 235,266 $7,661,740
============ ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period
for interest $ 27,248 $ ---
============ ===========
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Aircraft leasehold costs
associated with accrued
maintenance $ 1,762,941 $ 850,000
=========== ==========
Deferred debt issuance
costs recorded in
conjunction with warrants
issued $ 124,000 $ 353,000
=========== ==========
Property and equipment
acquired through issuance
of capital lease obligations $ 107,823 $ ---
============ ===========
See accompanying notes.
<PAGE>
VANGUARD AIRLINES, INC.
NOTES TO UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS
JUNE 30, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of
Vanguard Airlines, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to
Form 10-Q and Article 10 ofRegulation S-X. Accordingly,
they do not include all of the
information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three
and six-month periods ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 2000.
The balance sheet at December 31,1999 has been derived from
the audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The
Company continues to incur losses and generates negative cash
flows from operations. In addition, the Company has a
significant working capital deficit. The Company will require
additional debt or equity financing during 2000. Two of the
Company's principal stockholders have committed, but are not
contractually bound, to invest up to $7.5 million in the
Company. The Company has received a term sheet on a $4.0 million
investment from two of its principal stockholders, provided,
however, the transaction is subject to definitive negotiation and
documentation. However, there can be no assurance that the
Company will receive the additional $3.5 million investment.
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.
For further information, refer to the consolidated financial
statements and footnotes thereto included in Vanguard Airlines,
Inc. annual report on Form 10-K for the year ended December 31,
1999.
2. 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:
<TABLE>
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- --------------------
2000 1999 2000 1999
------- ------ ------- -------
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for
basic and diluted
earnings per share
-income (loss)
available to common
stockholders after
assumed
conversions $(2,697,383) $1,954,293 $(10,290,568) $1,995,682
============ ========== ============= ==========
<PAGE>
DENOMINATOR:
Denominator for
basic earnings
per share
-weighted average
shares 17,109,177 17,080,806 17,108,399 17,079,031
Effect of dilutive
securities:
Employee stock
options --- 666,161 --- 709,367
Warrants --- 9,723 --- 10,278
Convertible demand
notes payable --- --- --- ---
Convertible
preferred stock --- 1,209,448 --- 1,209,448
---------- ---------- ---------- ----------
Dilutive potential
common shares --- 1,885,332 --- 1,929,093
---------- ---------- ---------- ----------
Denominator for
diluted earnings
per share -adjusted
weighted-average
shares and assumed
conversions 17,109,177 18,966,138 17,108,399 19,008,124
========== ========== ========== ==========
</TABLE>
For the three and six months ended June 30, 2000 and
1999, the computation of basic earnings per share was
based on the weighted average number of outstanding common
shares. For the three and six months ended June 30,
1999, the computation of diluted earnings per share was based on
the weighted average number of shares and dilutive potential
common shares. For the three and six months ended June
30, 2000 the computation of diluted net loss per share was based
solely on the weighted average number of outstanding common
shares. Outstanding preferred stock, employee stock options and
warrants were not included in the calculation of diluted loss per
share, as their effect was antidilutive.
3. NOTE PAYABLE
In June 2000, the Company entered into an unsecured demand
note payable with a major stockholder of the Company with
interest payable on demand at a rate of 10.5 percent. As of June
30, 2000, the outstanding balance was $1,000,000 plus accrued
interest.
4. FINANCIAL INSTRUMENTS
In January 1999, two principal stockholders of the Company
agreed to renew the two-year $4,000,000 letter of credit in favor
of the Company's credit card processor. As consideration for
renewing the letter of credit, the Company agreed to issue up to
800,000 warrants to purchase shares of the Company's common stock
at an exercise price of $5.00. Upon execution of the letters of
credit, the Company issued 160,800 warrants that vested
immediately. Accordingly, in January 1999, the estimated fair
value of the warrants issued of $238,000 was recorded in other
assets and is being charged to expense over the term of the
facility. Since January 1999, a total of
557,333 warrants have been issued under this agreement with a
total fair value of $1,070,000 recorded in other assets. The
remaining warrants vest quarterly through October 2000 according
to the amount of exposure under such letter of credit, as defined
in the agreement. In March 2000, the Company established a one-
year $8 million surety bond, which replaced the expired $2.0
million guaranty, as collateral to additionally secure the credit
card processor. There were no warrants associated with the
surety bond.
5. 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.
<PAGE>
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,
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 "FACTORS THAT MAY
AFFECT FUTURE RESULTS OF OPERATIONS."
<PAGE>
<TABLE>
Results of Operations
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE
MONTHS ENDED JUNE 30, 1999
Selected Financial and Operational Data:
THREE MONTHS ENDED JUNE 30,
---------------------------
PERCENT
2000 1999 CHANGE CHANGE
----- ---- ------ ------
<S> <C> <C> <C> <C>
Revenue passengers carried 563,050 500,033 63,017 12.6 percent
Revenue passenger miles -
RPMs (000s) 271,553 222,668 48,885 22.0 percent
Available seat miles -
ASMs (000s) 441,356 315,532 125,824 39.9 percent
Load Factor 61.5 percent 70.6 percent (9.1) pts. (12.9) percent
Departures 7,712 6,040 1,672 27.7 percent
Average stage length 482 445 37 8.3 percent
Miles flown (000s) 3,678 2,608 1,070 41.0 percent
Block hours flown 11,891 8,730 3,161 36.2 percent
Passenger Yield $ 0.1315 $ 0.1415 $(0.0100) (7.1) percent
Total Revenue per ASM $ 0.0853 $ 0.1065 $(0.0212) (19.9) percent
Operating Expenses
per ASM $ 0.0909 $ 0.1001 $(0.0092) (9.2) percent
Operating cost
per blockhour 3,374 3,620 (246) (6.8) percent
Average fuel cost
per gallon $ 0.95 $ 0.63 $ 0.32 50.8 percent
Average size of fleet
for period 14.7 10.8 3.9 36.1 percent
</TABLE>
Net loss for the second quarter 2000 was $2.7
million compared with net income of $2.0 million for the
second quarter 1999. Operating revenue increased $4.1
million for the quarter ended June 30, 2000 compared with
the quarter ended June 30, 1999, while operating expenses
increased $8.5 million. Fuel costs increased $4.8
million, or 101 percent.
Total operating revenues increased 12 percent from
$33.6 million for the quarter ended June 30, 1999 to
$37.6 million for the quarter ended June 30, 2000.
Capacity increased 40 percent from 315,532,000 available
seat miles for the quarter ended June 30, 1999 to
441,356,000 available seat miles for the quarter ended
June 30, 2000. The number of passengers increased 13
percent from 500,033 in the quarter ended June 30,
1999 to 563,050 in the quarter ended June 30,
2000. Load factor decreased from 71 percent for the quarter
ended June 30, 1999 to 62 percent for the quarter ended
June 30, 2000. This decrease was primarily the result of
a 40 percent increase in the ASMs and only a 13 percent
increase in the number of passengers in the quarter ended
June 30, 2000 as compared to the quarter ended June 30, 1999.
Passenger revenue increased $4.2 million, or 13
percent, for the quarter ended June 30, 2000 compared
with the quarter ended June 30, 1999 as a result of the
factors discussed in the previous paragraph. Other
revenue decreased $0.2 million, or 8 percent, for the same
period. Nonrefundable tickets are realized as "passenger
revenue" when forfeited. Other revenues, in addition to mail,
cargo and liquor sales, include fees generated as a result of
service charges from passengers who change flight reservations.
Subject to certain restrictions, a customer must pay a $50
service charge ($75 from in October 1999 to June 15, 2000)
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 $1.4 million
(approximately 4 percent of total operating revenues) and $1.7
million (approximately 5 percent of operating revenues) in the
quarters ended June 30, 2000 and 1999, respectively.
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 ticket option,
greater legroom, fixed ticket pricing under the Road Warrior
Registered Trademark Program and reasonable frequencies between
city pairs. The Company, however, cannot predict future fare
levels, which depend to a substantial extent on actions of
competitors
<PAGE>
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.
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,
--------
2000 1999
------ -----
PERCENT OF CENTS PERCENT OF CENTS
---------- ---- ---------- ----
REVENUES PER ASM REVENUES PER ASM
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Total operating revenues 100.0 PERCENT 8.53 CENTS 100.0 PERCENT 10.65 CENTS
============= =========== ============= ===========
Operating expenses:
Flying operations 21.2 percent 1.81 cents 17.2 percent 1.83 cents
Aircraft fuel 25.3 2.16 14.1 1.51
Maintenance 21.5 1.83 20.7 2.21
Passenger service 5.8 0.50 5.4 0.57
Aircraft and traffic
servicing 14.7 1.25 15.0 1.60
Promotion and sales 12.5 1.07 15.5 1.64
General and administrative 3.2 0.27 2.9 0.31
Depreciation and
amortization 2.4 0.20 3.2 0.34
------------- ----------- ------------- -----------
Total operating expenses 106.6 9.09 94.0 10.01
Total other expense, net 0.6 0.05 0.0 0.00
Income tax expense 0.0 0.00 0.2 0.02
------------- ----------- ------------- -----------
Net income (loss) (7.2) PERCENT (0.61) CENTS 5.8 PERCENT 0.62 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 38 percent from $5.8 million (approximately 17
percent of operating revenues) for the quarter ended June
30, 1999 to $8.0 million (approximately 21 percent of
operating revenues) for the quarter ended June 30, 2000.
The increase in flying operations expenses was primarily the
result of an increase in the average number of aircraft to 14.7
from 10.8, or 35.4 percent. Pilot salaries also increased
as a result ofhiring for additional flight crews. Approximately
three months of salary costs are
incurred while pilots attend training classes before new aircraft
are placed in service. In May 1999, our pilots voted to be
represented by an independent union, the Vanguard Airlines Pilots
Association. The first bargaining agreement for the pilots,
which has a four year term, was ratified and made effective in
June 2000.
Aircraft fuel expenses include the direct cost of fuel,
taxes and the costs of delivering fuel into the aircraft.
Aircraft fuel expenses increased 101 percent from $4.7
million (approximately 14 percent of operating revenues) for the
quarter ended June 30, 1999 to $9.5 million
(approximately 25 percent of operating revenues) for the quarter
ended June 30, 2000. Higher fuel expense is directly
related to an increase in cost per gallon in the quarter ended
June 30, 2000 versus 1999. Average fuel cost per gallon
(including taxes and into-plane costs) increased $0.32 or 50
percent from $0.63 in the quarter ended June 30, 1999
to $0.95 in the quarter ended June 30, 2000, causing
fuel costs to be a significantly higher percentage of operating
revenues for the quarter ended June 30, 2000. A 41 percent
increase in miles flown for the quarter ended June 30,
2000 compared to the quarter ended June 30, 1999
accounted for the remaining increase in fuel costs. The
Company will seek to pass on any significant fuel cost increases
to the Company's customers through fare increases as permitted by then
<PAGE>
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 16 percent from
$7.0 million (approximately 21 percent of operating
revenues) for the quarter ended June 30, 1999 to $8.1
million (approximately 22 percent of operating revenues) for
the quarter ended June 30, 2000. The increase in
maintenance expense is due primarily to the 25 percent growth in
the aircraft fleet size and the accompanying 36 percent increase
in block hours flown. The total maintenance cost per block hour
has decreased from $798 to $681, or a decrease of 15
percent. The decrease on a cost per block hour basis is
primarily due to receipt of a settlement for parts lost in 1998
at an engine repair facility, economies of scale associated
with a larger fleet size, improvements in component repair
and overhaul costs derived from vendor agreements implemented in
June and October of 1999, and
various engine maintenance costs not incurred in this quarter as
compared to the same quarter last year. The Company deposits
supplemental rents 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. These
supplemental rents will vary and are based on flight hours flown.
The costs of routine aircraft and engine maintenance are charged
to maintenance expense as incurred. Maintenance expenses
decreased on a cents per ASM basis from 2.21 cents for the
quarter ended June 30, 1999 to 1.83 cents for the
quarter ended June 30, 2000. This decrease in cents per
ASM mainly resulted from spreading maintenance costs over a
greater number of ASMs.
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 21 percent from $1.8 million (approximately 5
percent of operating revenues) for the quarter ended June
30, 1999 to $2.2 million (approximately 6 percent of
operating revenues) for the quarter ended June 30, 2000.
Flight attendant salaries and overnight costs increased
in relation to increased capacity during the quarter. Those
costs were partially offset by lower ($0.19 per passenger)
inconvenienced passenger expense.
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 10 percent from $5.0 million (approximately 15
percent of operating revenues) for the quarter ended June
30, 1999 to $5.5 million (approximately 15 percent of
operating revenues) for the quarter ended June 30, 2000.
The Company realized significant savings during the quarter as a
result of obtaining signatory status at Chicago-Midway and
receiving a one-time retroactive rebate for overpayment of
landing fees for 1998 and 1999.
Promotion and sales expenses include the costs of the
reservations functions, including all wages and benefits for
reservationists, 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 decreased 9 percent
from $5.2 million (approximately 16 percent of operating
revenues) in the quarter ended June 30, 1999 to $4.7
million (approximately 13 percent of operating revenues) in the
quarter ended June 30, 2000. Travel agency
commissions decreased 46 percent as a result of a reduction in
commission rates from 8 percent to 5 percent in October 1999.
The Company began selling tickets through its website in November
1999 and currently averages approximately 30 percent of its sales
through the internet. This strategic move has reduced
reservation personnel and costs for booking passengers. Direct
advertising increased $0.2 million, or 11 percent.
The average promotion and sales
cost per passenger decreased $2.00 or 19 percent from
$10.38 in the quarter ended June 30, 1999 to
$8.38 in the quarter ended June 30, 2000.
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 23
percent from $1.0 million (approximately 3 percent of
operating revenues) in the quarter ended June 30, 1999 to
$1.2 million (approximately 3 percent of operating revenues)
in the quarter ended June 30, 2000. Higher professional
fees as well as higher franchise and property taxes contributed
to this increase.
<PAGE>
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
decreased 17 percent from $1.1 million (approximately 3
percent of operating revenues) in the quarter ended June
30, 1999 to $0.9 million (approximately 2 percent of operating
revenues) in the quarter ended June 30, 2000. The
decrease in depreciation expense is primarily the result of
certain assets becoming fully depreciated.
Other expense, net, consists primarily of debt issuance cost
amortization, interest income and interest expense. The Company
renewed its letter of credit securing the Company's credit card
processor in January 1999. Under the arrangement, warrants were
issued which vest quarterly in amounts dependent upon the
Company's exposure under the letter of credit, as defined in the
agreement. The warrants' estimated fair value is recorded as
deferred debt issuance costs and related amortization expense is
recorded over the terms of the related guarantees. Increased
amortization of the debt issuance cost in the quarter ended June
30, 2000 is the principle reason for the increase in other
expense. Due to the Company's reduced cash position in 2000,
interest income decreased for the quarter ended
June 30, 2000 compared to the quarter ended June
30, 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1999
Selected Financial and Operational Data:
<TABLE>
SIX MONTHS ENDED JUNE 30,
-------------------------
percent
2000 1999 CHANGE CHANGE
---------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenue passengers carried 1,015,428 871,781 143,647 16.5 percent
Revenue passenger miles -
RPMs (000s) 478,069 396,454 81,615 20.6 percent
Available seat miles -
ASMs (000s) 787,219 567,922 219,297 38.6 percent
Load Factor 60.7 percent 69.8 percent (9.1) pts. (13.0) percent
Departures 14,182 10,670 3,512 32.9 percent
Average stage length 471 455 16 3.5 percent
Miles flown (000s) 6,560 4,694 1,866 39.8 percent
Block hours flown 21,438 15,723 5,715 36.3 percent
Passenger Yield $0.1305 $0.1387 $(0.0082) (5.9) percent
Total Revenue per ASM $0.0840 $0.1030 $(0.0190) (18.4) percent
Operating Expenses per ASM $0.0967 $0.0993 $(0.0026) (2.6) percent
Operating cost per blockhour 3,550 3,587 (37) (1.0) percent
Average fuel cost per gallon $ 0.98 $ 0.57 $ 0.41 71.9 percent
Average size of fleet for
period 13.1 10.0 3.1 31.0 percent
</TABLE>
The net loss for the six months June 30, 2000 was $10.3
million compared with net income of $2.0 million for the six
months ended June 30, 1999. Operating revenue increased $7.6
million for the six months ended June 30, 2000 compared with the
six months ended June 30, 1999, while operating expenses
increased $19.7 million. Fuel costs increased $10.0 million, or
131 percent.
Total operating revenues increased 13 percent from $58.5
million for the six months ended June 30, 1999 to $66.1 million
for the six months ended June 30, 2000. Capacity increased 39
percent from 567,922,000 available seat miles for the six months
ended June 30, 1999 to 787,219,000 available seat miles for the
six months ended June 30, 2000. The number of passengers
increased 16 percent from 871,781 in the six months ended June
30, 1999 to 1,015,428 in the six months ended June 30, 2000.
Load factor decreased from 70 percent for the six months ended
June 30, 1999 to 61 percent for the six months ended June 30,
2000. This decrease was primarily the result of a 39 percent
increase in the ASMs and only a 16 percent increase in the number
of passengers in the six months ended June 30, 2000 as compared
to the six months ended June 30, 1999.
<PAGE>
Passenger revenue increased $7.4 million, or 14 percent, for
the six months ended June 30, 2000 compared with the six months
ended June 30, 1999 as a result of the factors discussed in the
previous paragraph. Other revenue increased $0.2 million, or 5
percent, for the same period. Nonrefundable tickets are realized
as "passenger revenue" when forfeited. Other revenues, in
addition to mail, cargo and liquor sales, include fees generated
as a result of service charges from passengers who change flight
reservations. Subject to certain restrictions, a customer must
pay a $50 service charge ($75 from October 1999 to June 15, 2000)
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 $2.6 million (approximately 4
percent of total operating revenues) and $2.7 million
(approximately 5 percent of operating revenues) in the six months
ended June 30, 2000 and 1999, respectively.
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 ticket option,
greater legroom, fixed ticket pricing under the Road Warrior
Registered Trademark Program and reasonable frequencies between
city pairs. 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.
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>
SIX MONTHS ENDED
----------------
JUNE 30,
-------
2000 1999
---- ----
PERCENT OF CENTS PERCENT OF CENTS
---------- ---- ---------- ----
REVENUES PER ASM REVENUES PER ASM
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Total operating revenues 100.0 PERCENT 8.40 CENTS 100.0 PERCENT 10.30 CENTS
============= =========== ============= ===========
Operating expenses:
Flying operations 22.3 percent 1.88 cents 18.0 percent 1.85 cents
Aircraft fuel 26.7 2.24 13.0 1.34
Maintenance 21.7 1.82 20.6 2.12
Passenger service 6.5 0.55 5.8 0.60
Aircraft and traffic
servicing 17.5 1.47 16.0 1.65
Promotion and sales 14.7 1.23 16.3 1.68
General and administrative 3.3 0.27 3.3 0.34
Depreciation and
amortization 2.5 0.21 3.4 0.35
------------- ----------- ------------ ------------
Total operating expenses 115.2 9.67 96.4 9.93
Total other expense, net 0.4 0.04 0.0 0.00
Income tax expense 0.0 0.00 0.2 0.02
------------- ----------- ------------ ------------
Net income (loss) (15.6) PERCENT (1.31) CENTS 3.4 PERCENT 0.35 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 40 percent from $10.5 million (approximately 18 percent
of operating revenues) for the six months ended June 30, 1999 to
<PAGE>
$14.8 million (approximately 22 percent of operating revenues)
for the six months ended June 30, 2000. The increase in flying
operations expenses was primarily the result of an increase in
aircraft rent as well as increased pilot salaries. Aircraft rent
increased as a result of four additional aircraft in March, April
and May of 2000. Pilot salaries increased as a result of hiring
for additional flight crews. Typically, three months of salary
costs are incurred while pilots attend training classes before
new aircraft are placed in service. The Company and the Vanguard
Airlines Pilots Association (VAPA) entered into a four-year
agreement, effective June 1, 2000.
Aircraft fuel expenses include the direct cost of fuel,
taxes and the costs of delivering fuel into the aircraft.
Aircraft fuel expenses increased 131 percent from $7.6 million
(approximately 13 percent of operating revenues) for the six
months ended June 30, 1999 to $17.7 million (approximately 27
percent of operating revenues) for the six months ended June 30,
2000. Higher fuel expense is directly related to an increase in
cost per gallon in the six months ended June 30, 2000 versus
1999. Average fuel cost per gallon (including taxes and into-
plane costs) increased $0.41 or 72 percent from $0.57 in the six
months ended June 30, 1999 to $0.98 in the six months ended June
30, 2000, causing fuel costs to be a significantly higher
percentage of operating revenues for the six months ended June
30, 2000. A 40 percent increase in miles flown for the six
months ended June 30, 2000 compared to the six months ended June
30, 1999 accounted for the remaining increase in fuel costs. 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 19 percent from $12.1
million (approximately 21 percent of operating revenues) for the
six months ended June 30, 1999 to $14.4 million (approximately 22
percent of operating revenues) for the six months ended June 30,
2000. The increase in maintenance expense is due primarily to
the 31 percent growth in the aircraft fleet size and the
accompanying 36 percent increase in block hours flown. The total
maintenance cost per block hour has decreased from $767 to $670,
or a decrease of 13 percent. The decrease on a cost per block
hour basis is primarily due to both economies of scale associated
with a larger fleet size and improvements in component repair and
overhaul costs derived from vendor agreements implemented in the
June and October of 1999. The Company deposits supplemental
rents 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. These supplemental rents will
vary and are based on flight hours flown. The costs of routine
aircraft and engine maintenance are charged to maintenance
expense as incurred. Maintenance expenses decreased on a cents
per ASM basis from 2.12 cents for the six months ended June 30,
1999 to 1.82 cents for the six months ended June 30, 2000. This
decrease in cents per ASM mainly resulted from spreading
maintenance costs over a greater number of ASMs.
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 27 percent from $3.4 million (approximately 6 percent
of operating revenues) for the six months ended June 30, 1999 to
$4.3 million (approximately 7 percent of operating revenues) for
the six months ended June 30, 2000. Flight attendant salaries
and overnight costs increased in relation to increased capacity
during the six months. Delays in receiving new aircraft and an
increase in the number of passengers flown resulted in higher
inconvenienced passenger charges for the six months ended June
30, 2000.
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 23 percent from $9.3 million (approximately 16 percent
of operating revenues) for the six months ended June 30, 1999 to
$11.5 million (approximately 18 percent of operating revenues)
for the six months ended June 30, 2000. The Company added
service to Buffalo/Niagara Falls in July 1999. Service to
Cincinnati was added in April 1999 and stopped in March 2000 due
to competitive pressures. The Company realized significant
savings during the period as a result of being recognized as a
signatory lessor at Chicago/Midway including a retroactive
rebate.
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 2 percent
from $9.5 million (approximately 16 percent of operating
revenues) in the six months ended June 30, 1999 to $9.7 million
<PAGE>
(approximately 15 percent of operating revenues) in the six
months ended June 30, 2000. Higher credit card processing fees,
advertising costs, and telecommunications costs more than offset
savings in reservation salaries due to increased Internet orders
and in commissions due to a 3 point or 38 percent reduction in
commission rates effective October 1999. The average promotion
and sales cost per passenger decreased $1.37 or 13 percent from
$10.92 in the six months ended June 30, 1999 to $9.55 in the six
months ended June 30, 2000.
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 12
percent from $1.9 million (approximately 3 percent of operating
revenues) in the six months ended June 30, 1999 to $2.2 million
(approximately 3 percent of operating revenues) in the six months
ended June 30, 2000. Higher professional fees accounted for the
increase.
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
decreased 18 percent from $2.0 million (approximately 3 percent
of operating revenues) in the six months ended June 30, 1999 to
$1.7 million (approximately 3 percent of operating revenues) in
the six months ended June 30, 2000. The decrease in depreciation
expense is primarily the result of certain assets becoming fully
depreciated.
Other expense, net, consists primarily of debt issuance cost
amortization, interest income and interest expense. The Company
renewed its letter of credit securing the Company's credit card
processor in January 1999. Under the arrangement, warrants were
issued which vest quarterly in amounts dependent upon the
Company's exposure under the letter of credit, as defined in the
agreement. The warrants' estimated fair value is recorded as
deferred debt issuance costs and related amortization expense is
recorded over the terms of the related guarantees. Increased
amortization of the debt issuance cost in the quarter ended June
30, 2000 is the principle reason for the increase in other
expense. Due to the Company's reduced cash position in 2000,
interest income decreased for the six months ended June 30, 2000
compared to the six months ended June 30, 1999 and interest
expense increased.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations were $5.7 million for the
six-month period ending June 30, 2000, as compared to $3.1
million of positive operational cash flows provided in the comparable
period of 1999. Since inception, the Company has
financed its operations and met its capital expenditure
requirements primarily with proceeds from sales of its
equity securities and the issuance of debt primarily to its principal
stockholders. As of June 30, 2000, the Company has
received net proceeds from the sale of its equity securities
aggregating approximately $70.3 million. The Company's
balance sheet reflected cash and cash equivalents of $0.2
million and a working capital deficit of $28.5 million as of
June 30, 2000.
In January 1999, two principal stockholders of the Company
agreed to renew a two-year $4.0 million letter of credit facility
to secure the Company's credit card processor. In March 2000,
the Company established a one-year $8 million surety bond, which
replaced the expired $2.0 million guaranty, as collateral to
additionally secure the credit card processor. As a result,
approximately $6.0 million was released by the Company's credit
processor from a restricted cash account to the Company's
operating account. At June 30, 2000, the credit card
exposure was less than $12.0 million and, consequently, the
Company had no funds held as restricted cash. In 2000,
to the extent that exposure exceeds $12.0 million, the Company
must deposit cash from ticket sales as collateral to secure the
Company's credit card processor. The Company estimates that its
credit card exposure will range between $10.0 million and $13.0
million through the end of the third quarter when the balance
should decline due to expected seasonality. Any cash utilized as
collateral will be refunded by the credit card processor, on a
daily basis, when the Company's exposure falls below the
previously calculated exposure or $12.0 million. The Company
must replace the $4.0 million letter of credit and renew the $8.0
million surety bond in January and March 2001, respectively, or
secure the credit card processor with available cash on hand.
The failure to replace or renew these facilities will have a
material adverse effect on the Company's financial condition.
<PAGE>
The Company estimates that scheduled heavy maintenance of
its existing aircraft fleet through June 2001 will cost $13.0
million, of which $4.0 million will be funded from existing
supplemental rent payments recoverable from aircraft lessors.
In addition, the Company expects to expend approximately $4.5
million on various capital expenditures in the next year, which
are primarily related to improvements for existing aircraft,
increased aircraft parts inventory levels, additional heavy
ground equipment and improvements to its inhouse computer systems.
In November 1999, the Company entered into a letter of
intent for the lease of six additional Boeing 737-200 jet
aircraft. The Company accepted four of the six aircraft
during the first and second quarters of 2000. The agreement to lease the
two additonal aircraft has been terminated the Company
anticipates that deposits previously placed on these aircraft will
be applied to the lessor's other four aircraft as additional security
deposits.
The Company will require additional debt or equity financing
in 2000. Two of the Company's principal stockholders have
committed, but are not contractually bound, to invest up to
$7,500,000 in the Company. The Company has received a term sheet
on a $4 million investment from two of its principal
stockholders, provided, however, the transaction is subject to
definitive negotiation and documentation. As of August 1, 2000
the Company has received $2.0 million of the $4 million in the
form of demand notes, which the Company intends to convert to
equity in accordance with the agreed upon terms. There can be no
assurance that the $4 million will be sufficient to meet the
Company's capital needs for 2000 or that the Company will receive
the additional $3.5 million in financing. The
Company's stockholders will likely experience significant
dilution in connection with the anticipated financing. Failure
to raise additional funds in the future could result in the
Company significantly curtailing or ceasing operations. 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 management
can provide for the Company's necessary capital requirements or
that principal stockholders will continue to provide financing.
Please see "Factors that May Affect Future Results of Operations"
below.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
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 flow
from operations of $6.0 million. In 1999, the Company recorded a
loss from operations of $5.0 million and generated positive cash
flow from operations of $3.3 million. For the first six months
of 2000, the Company recorded a net loss of $10.3 million and
incurred negative cash flow of $6.2 million. As of June
30, 2000 the Company had an accumulated deficit of $86.6
million, a working capital deficit of $28.5 million and a
stockholders' deficit of $8.5 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 consistently achieve 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 financings 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
<PAGE>
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."
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,
1999 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 and
working capital deficit, the Company anticipates that additional
debt or equity capital will be required to fund operations in
2000. 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 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.
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 25 percent of
the Company's operating expenses for the quarter ended June 30, 2000.
The cost of jet fuel has risen dramatically in the past twelve months.
The Company's average cost per gallon for the past three years have
been $0.74 per gallon in the year ended December 31, 1997, $0.58 per
gallon in the year ended December 31, 1998, and $0.67 for the year
ended December 31, 1999. The Company's average cost per gallon
for the quarter ended June 30, 2000 was $0.95. Jet fuel costs are
subject to wide fluctuations as a result of disruptions in supply
or other international events. 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 has resulted in a disproportionately
higher increase in the Company's fuel expenses as compared with
many of its competitors who have, on average, newer and thus more
fuel-efficient aircraft. The Company has not entered into any
agreements that fix the price of jet fuel over any period of
time. Therefore, 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 would will also have a material
adverse effect on the Company's business, financial condition and
results of operations.
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>
IMPACT OF CONTINUED NASDAQ LISTING ON MARKETABILITY OF
COMMON STOCK. The Company's Common Stock currently is quoted on
the Nasdaq SmallCap Market. The National Association of
Securities Dealers, Inc. ("NASD") has rules that establish
criteria for the continued listing of the Common Stock on the
Nasdaq SmallCap Market. Under these rules, the Company must meet
certain financial qualifications for continued listing on the
Nasdaq SmallCap Market. In addition to other requirements, the
Company must meet net tangible assets of $2.0 million; market
capitalization of $35.0 million; or net income of $500,000 (in
the latest fiscal year or two of the last three fiscal years).
The Company currently does not meet any of these requirements.
While the Company intends to take steps to avoid the removal of
the Common Stock from the Nasdaq SmallCap Market, including the
raising of additional capital, there can be no assurance that
such steps will be successful. If the Company's Common Stock
does not continue to be listed on the Nasdaq SmallCap Market,
trading in the Common Stock will be conducted on the OTC Bulletin
Board. Removal from the Nasdaq SmallCap Market may have a
negative impact on the price or volume of trading of the
Company's Common Stock.
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.
LIMITED NUMBER OF AIRCRAFT; AIRCRAFT ACQUISITIONS. The
Company's fleet consists of fourteen 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. The Company's ability to lease
additional aircraft will likely be dependent on the Company's
ability to raise additional capital or achieve profitable
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 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
<PAGE>
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. None.
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 Stockholders on
May 24, 2000, at which stockholders re-elected one
director, elected to decrease the number of shares of
common stock the Company shall have the authority to
issue, elected to approve the Company's 2000 Stock Option
Plan and ratified the appointment of the accounting firm
of Ernst & Young LLP, as the Company's independent
auditors for 2000.
Results of the voting in connection with each issure were
as follows:
Election of Director Lee M. Gammill, Jr.
For 11,578,177
Against 0
Abstain 27,434
Election to decrease the number of authorized shares of
Ccommon Sstock to 100,000,000
In favor 11,588,740
Against 11,391
Abstain 5,480
Election to approve the 2000 Stock Option Plan
In favor 9,237,502
Against 60,362
Abstain 7,390
<PAGE>
Ratification of Ernst & Young LLP to serve as Company's
independent auditors
In favor 11,600,762
Against 2,489
Abstain 2,360
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K
On May 24, 2000, the Company filed a report on Form 8-K
under Item 5 - Other Events regarding a press release
issued by the Company announcing that Robert J. Spane
resigned as Chief Executive Officer and President. Mr.
Spane remained as Chairman of the Board. The Board of
Directors named Jeff S. Potter as Chief Executive Officer
and President.
<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\ JEFF S. POTTER August 11, 2000
------------------
Jeff S. Potter
President and
Chief Executive Officer
and Chief Financial Officer
(Principal Accounting Officer)
<PAGE>
