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 SEPTEMBER 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 September 30, 2000, there were 19,469,144 shares of Common
Stock, par value $0.001 per share, issued and outstanding.
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
VANGUARD AIRLINES, INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,571,846 $6,825,238
Accounts receivable, less
allowance of $22,000 and $96,000
at September 30, 2000 and
December 31, 1999, respectively 3,450,236 1,295,515
Inventories 1,208,394 1,321,047
Current portion of supplemental
maintenance deposits 3,521,708 5,351,279
Prepaid expenses and other
current assets 1,411,765 1,835,125
---------- ----------
Total current assets 11,163,949 16,628,204
Property and equipment, at cost:
Aircraft improvements
and leasehold costs 9,877,764 7,626,144
Reservation system and
communication equipment 1,804,783 1,804,783
Aircraft engines and
rotable inventory 9,014,283 7,763,835
Other property and equipment 5,242,384 4,777,339
----------- -----------
25,939,214 21,972,101
Less accumulated depreciation
and amortization (13,769,578) (11,122,590)
------------ ------------
12,169,636 10,849,511
Other assets:
Supplemental maintenance
deposits, less current portion 5,927,115 4,168,617
Deferred debt issuance costs 148,212 595,038
Leased aircraft deposits 3,699,000 3,428,000
Fuel and security deposits 700,518 708,030
Other 2,052,817 1,710,322
---------- ----------
12,527,662 10,610,007
---------- ----------
Total assets $35,861,247 $38,087,722
------------ -----------
------------ -----------
</TABLE>
<PAGE>
<TABLE>
VANGUARD AIRLINES, INC.
CONDENSED BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Notes payable $ 500,000 $ --
Accounts payable 10,486,519 7,742,375
Accrued expenses 4,439,096 4,701,841
Accrued maintenance 12,224,259 10,057,044
Air traffic liability 11,268,135 8,649,452
Current portion of capital
lease obligations 293,409 188,692
----------- ----------
Total current liabilities 39,211,418 31,339,404
Accrued maintenance, less
current portion 5,535,796 4,713,701
Capital lease obligations,
less current portion 249,646 356,755
Stockholders' equity (deficit):
Common stock, $.001 par value:
Authorized shares - 100,000,000
Issued and outstanding shares -
19,469,144 in 2000
and 17,107,617 in 1999 19,469 17,108
Preferred stock, $.001 par value:
Authorized shares - 2,000,000
Issued and outstanding
shares - 302,362 302 302
Liquidation preference
- $3,023,620
Additional paid-in capital 82,166,891 77,979,912
Accumulated deficit (91,322,275) (76,319,460)
------------- ------------
Total stockholders' equity
(deficit) (9,135,613) 1,677,862
------------- -----------
Total liabilities and
stockholders' equity(deficit)$ 35,861,247 $ 38,087,722
------------- ------------
------------- ------------
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
Vanguard Airlines, Inc.
Statements of Operations
Three Months ended Nine Months ended
September 30, September 30,
-------------------- -----------------
2000 1999 2000 1999
---- ---- ----- -----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating revenues:
Passenger revenues $33,831,139 $33,806,906 $96,227,143 $88,776,038
Other 1,650,303 1,636,641 5,344,456 5,170,345
-------------- ----------- ----------- ----------
Total operating
revenues 35,481,442 35,443,547 101,571,599 93,946,383
Operating expenses:
Flying operations 7,651,990 6,633,291 22,415,960 17,146,556
Aircraft fuel 10,003,832 5,454,636 27,657,096 13,089,084
Maintenance 7,562,751 7,621,154 21,918,526 19,680,942
Passenger service 1,979,784 2,191,484 6,269,178 5,567,308
Aircraft and traffic
servicing 5,737,304 5,642,085 17,263,026 14,990,537
Promotion and sales 4,871,694 5,559,196 14,568,938 15,081,787
General and
administrative 999,735 1,072,973 3,160,373 3,000,305
Depreciation and
amortization 991,578 1,144,467 2,646,988 3,155,948
------------- ---------- --------- ----------
Total operating
expenses 39,798,668 35,319,286 115,900,085 91,712,467
-------------- ---------- ----------- -----------
Operating income
(loss) (4,317,226) 124,261 (14,328,486) 2,233,916
Other income (expense):
Deferred debt issuance
cost amortization (226,974) (114,631) (580,826) (274,008)
Interest expense (58,111) --- (90,540) ---
Interest income 57,424 162,636 230,637 371,588
Other (68,120) (45,531) (134,360) (88,829)
--------------- --------- --------- ---------
Total other income
(expense), net (295,781) 2,474 (575,089) 8,751
-------------- --------- --------- ---------
Income (loss)
before taxes (4,613,007) 126,735 (14,903,575) 2,242,667
Income tax benefit
(expense) (99,240) 63,159 (99,240) (57,091)
--------------- --------- ------------ ----------
Net income (loss) $ (4,712,247) $189,894 $(15,002,815) $2,185,576
--------------- -------- ------------- -----------
--------------- -------- ------------- -----------
Net income (loss) per share:
Basic $ (0.27) $ 0.01 $ (0.87) $ 0.13
--------------- -------- ------------- -----------
Diluted $ (0.27) $ 0.01 $ (0.87) $ 0.11
--------------- -------- ------------- ----------
--------------- -------- ------------- ----------
Weighted average shares used
in per share computation:
Basic 17,674,083 17,091,550 17,298,337 17,083,204
------------- ----------- ---------- -----------
------------- ----------- ---------- -----------
Diluted 17,674,083 19,583,069 17,298,337 19,404,783
------------- ----------- ---------- ------------
------------- ----------- ---------- ------------
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
VANGUARD AIRLINES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Net cash provided by (used in)
operating activities (7,550,676) 4,423,788
INVESTING ACTIVITIES
Purchases of property and
equipment (2,041,874) (3,699,968)
FINANCING ACTIVITIES
Proceeds from issuance of
notes payable 4,500,000 ---
Principal payments on capital
lease obligations (164,690) ---
Proceeds from exercise of
stock options 3,848 58,633
------------ -----------
Net cash provided by
financing activities 4,339,158 58,633
------------ ----------
Net increase (decrease) in
cash and cash equivalents (5,253,392) 782,453
Cash and cash equivalents at
beginning of period 6,825,238 7,874,684
------------ ----------
Cash and cash equivalents
at end of period $ 1,571,846 $8,657,137
------------ ----------
------------ ----------
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash paid during the period
for interest $ 37,608 $ ---
------------ ----------
------------ ----------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Aircraft leasehold costs
associated with
accrued maintenance $ 1,762,941 $ 1,571,167
------------ -----------
------------ -----------
Deferred debt issuance costs
recorded in conjunction
with warrants issued $ 134,000 $ 688,000
----------- -----------
----------- -----------
Conversion of notes payable to
related parties and accrued
interest to common stock $ 4,051,492 $ ---
----------- -----------
----------- -----------
Property and equipment acquired
through issuance of capital
lease obligations $ 162,298 $ ---
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
<PAGE>
VANGUARD AIRLINES, INC.
NOTES TO UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 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 of Regulation 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 nine-month periods ended September 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 generate negative cash
flows from operations. In addition, the Company has a
significant working capital deficit and a stockholders' deficit
at September 30, 2000. 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 completed
a private sale of equity securities to these two stockholders in
September 2000. In connection with the sale, the Company
converted approximately $4.0 million in demand notes payable to
equity. Since completing this transaction, the Company borrowed
$500,000 on September 21, 2000 and an additional $500,000 on
November 3, 2000 from one of its principal stockholders. However,
there can be no assurance that the Company will receive the
remaining $2.5 million investment from this commitment. 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
nine months ended September 30.
<TABLE>
Three-months Nine-months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
----- ----- ----- ----
Numerator:
<S> <C> <C> <C> <C>
Numerator for basic
and diluted earnings
per share-income
(loss) available to
common stockholders
after assumed
conversions $(4,712,247) $189,894 $(15,002,815) $ 2,185,576
---------- -------- ------------- -----------
---------- -------- ------------ -----------
</TABLE>
<PAGE>
<TABLE>
Three-months Nine-months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ----- ----- -----
Denominator:
<S> <C> <C> <C> <C>
Denominator for basic
earnings per share
-weighted average
shares outstanding 17,674,083 17,091,550 17,298,337 17,083,204
Effect of dilutive
securities:
Employee stock options --- 1,067,130 --- 912,149
Warrants --- 214,941 --- 199,982
Convertible preferred
stock --- 1,209,448 --- 1,209,448
---------- ----------- ---------- -----------
Dilutive potential
common shares --- 2,491,519 --- 2,321,579
---------- ---------- ---------- -----------
Denominator for diluted
earnings per share
-adjusted weighted-average
shares and assumed
conversions 17,674,083 19,583,069 17,298,337 19,404,783
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
For the three and nine months ended September 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 nine months ended September 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 nine months ended September 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. NOTES PAYABLE
Between June and August 2000, the Company borrowed
approximately $4.0 million from its principal stockholders in the
form of an unsecured 10.5% demand note. On September 8, 2000,
the Company converted the $4.0 million debt plus $51,492 accrued
interest into 2,359,223 units of one share of common stock and
one warrant at a unit price of $1.7173. The warrants have an
exercise price of $1.89 and expire in seven years. The Company
borrowed $500,000 on September 21, 2000 and an additional
$500,000 on November 3, 2000 in the form of unsecured demand
notes payable to one of the two principal stockholders.
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 was $238,000. This amount was
recorded in other assets and is being charged to expense over the
term of the facility. Since January 1999, a total of 637,333
warrants have been issued under this agreement, with a total fair
value of $1,101,000 which was recorded in other assets. The
remaining warrants vest quarterly through October 2000 based on
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, as additional collateral to 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.
6. RECLASSIFICATION
Certain amounts in the 1999 financial statements have been
reclassified to conform to the 2000 presentation.
<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."
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1999
Selected Financial and Operational Data:
<TABLE>
Three months ended September 30,
--------------------------------
2000 1999 Change % Change
----- ----- ------ --------
<S> <C> <C> <C> <C>
Revenue passengers
carried 490,578 554,516 (63,938) (11.5)
Revenue passenger miles -
RPMs (000s) 248,481 251,518 (3,037) (1.2)
Available seat miles -
ASMs (000s) 421,396 368,694 52,702 14.3
Load Factor 59.0% 68.2% (9.2)pts.(13.5)
Departures 7,093 6,989 104 1.5
Average stage length 507 454 53 11.7
Miles flown (000s) 3,512 3,063 449 14.7
Block hours flown 11,097 9,871 1,226 12.4
Passenger Yield $ 0.1362 $ 0.1344 $ 0.0018 1.3
Total Revenue per ASM $ 0.0842 $ 0.0961 $ (0.0119) (12.4)
Operating Expenses
per ASM $ 0.0944 $ 0.0958 $ (0.0014) (1.5)
Operating cost per
blockhour 3,586 3,578 8 0.2
Average fuel cost per
gallon $ 1.07 $ 0.62 $ 0.45 72.6
Average size of fleet
for period 13.8 12.2 1.6 13.1
</TABLE>
Net loss for the third quarter 2000 was $4.7 million
compared with net income of $0.2 million for the third quarter
1999. Operating revenue increased less than 1 percent for the
quarter ended September 30, 2000 compared with the quarter ended
September 30, 1999. Operating expenses increased 13% or $4.5
million, most of which is attributable to increased fuel costs
which increased 83% year over year.
Total operating revenues remained flat at approximately
$35.5 million for the quarters ended September 30, 1999 and
September 30, 2000. Capacity increased 14% from 368,694,000
available seat miles for the quarter ended September 30, 1999 to
421,396,000 available seat miles for the quarter ended September
30, 2000. The number of passengers decreased 12% from 554,516 in
the quarter ended September 30, 1999 to 490,578 in the quarter
ended September 30, 2000. Load factor decreased from 68% for the
quarter ended September 30, 1999 to 59% for the quarter ended
<PAGE>
September 30, 2000. This decrease was primarily the result of
the 14% increase in the ASMs due to a 13% increase in average
fleet size and a 1% decrease in RPMs due to a 12% decrease in
revenue passengers in the quarter ended September 30, 2000 as
compared to the quarter ended September 30, 1999.
Passenger revenue, which includes the value of non-
refundable tickets upon forfeiture, remained flat for the quarter
ended September 30, 2000 compared with the quarter ended
September 30, 1999 as a result of the factors discussed in the
previous paragraph. Other revenue also remained flat for the
same period. Other revenues include mail, cargo, liquor sales,
and change fees required from passengers who change flight
reservations. Generally, a customer must pay a $50 service
charge ($75 from October 1999 to June 15, 2000) to offset the
value of the unused reservation against a new reservation,
provided the new reservation is within 180 days of the original
reservation. These service charges were $1.1 million
(approximately 3% of total operating revenues) and $1.2 million
(approximately 3% of operating revenues) in the quarters ended
September 30, 2000 and 1999, respectively.
The Company cannot predict future fare levels, which depend
to a substantial extent on actions of competitors and the
Company's ability to deliver a reliable product. When sale
prices or other price changes have been made by competitors in
the Company's markets, the Company believes that it must, in most
cases, match these competitive fares in order to maintain its
market share. The Company believes that the negative impact of
entering new markets and the use of discounted fares should
decrease as the Company increases its overall revenue base and
improves upon its brand awareness.
The Company's strategic plan will focus on (i) improving
performance; (ii) improving reliability; (iii) improving its
image; (iv) increasing the number of routes; and (v) improving
amenities such as increased leg room, newer more efficient
aircraft and fixed ticket pricing under the Road Warrior
(Registered Trademark) Program. In addition the Company plans
to enhance its hub strategy for Kansas City.
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
------------------
September 30,
------------------
2000 1999
----- -----
Percent of Cent(s) Percent of Cent(s)
Revenues Per ASM Revenues Per ASM
--------- ------- --------- --------
<S> <C> <C> <C> <C>
Total operating revenues 100.0 % 8.42 100.0 % 9.61
----- ----- ----- -----
----- ----- ----- -----
Flying operations 21.6 1.82 18.7 1.80
Aircraft fuel 28.2 2.37 15.4 1.48
Maintenance 21.3 1.79 21.5 2.07
Passenger service 5.6 0.47 6.2 0.59
Aircraft and traffic
servicing 16.2 1.36 15.9 1.53
Promotion and sales 13.7 1.16 15.7 1.51
General and administrative 2.8 0.24 3.0 0.29
Depreciation & amortization 2.8 0.24 3.3 0.31
----- ----- ----- -----
Total operating expenses 112.2 9.45 99.7 9.58
Total other expense, net 0.8 0.07 0.0 0.00
Income tax expense/(benefit) 0.3 0.02 (0.2) (0.02)
Net income (loss) (13.3)% (1.12) 0.5 % 0.05
----- ----- ----- -----
----- ----- ----- -----
</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 15% from $6.6 million (approximately 19% of operating
revenues) for the quarter ended September 30, 1999 to $7.7
million (approximately 22% of operating revenues) for the quarter
ended September 30, 2000. The increase in flying operations
expenses was primarily the result of an increase in the average
number of aircraft flown to 13.8 in the quarter ended September
30, 2000 from 12.2 in the quarter ended September 30, 1999, or a
13% increase. Pilot salaries also increased as a result of
hiring additional flight crews. Approximately three months of
salary costs are incurred while pilots attend training classes.
In May 1999, our pilots voted to be represented by an independent
union, the Vanguard Airlines Pilots Association ("VAPA"). 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 83% from $5.5 million
(approximately 15% of operating revenues) for the quarter ended
September 30, 1999 to $10.0 million (approximately 28% of
operating revenues) for the quarter ended September 30, 2000.
Higher fuel expense is directly related to an increase in cost
per gallon in the quarter ended September 30, 2000 as compared to
the same period in 1999. Average fuel cost per gallon (including
taxes and into-plane costs) increased $0.45 or 73% from $0.62 in
the quarter ended September 30, 1999 to $1.07 in the quarter
ended September 30, 2000, causing fuel costs to be a
significantly higher percentage of operating revenues for the
quarter ended September 30, 2000. A 15% increase in miles flown
for the quarter ended September 30, 2000 compared to the quarter
ended September 30, 1999 accounted for the remaining increase in
fuel costs. The Company devised and set in place an incentive
plan to compensate pilots for meeting certain fuel efficiency
targets during the third quarter of 2000. 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 decreased 1% from $7.6 million
(approximately 22% of operating revenues) for the quarter ended
September 30, 1999 to $7.6 million (approximately 21% of
operating revenues) for the quarter ended September 30, 2000.
The decrease in maintenance expense is due primarily to the lower
maintenance costs per block hour, substantially offset by the 13%
growth in the aircraft fleet size and the accompanying 12%
increase in block hours flown. The total maintenance cost per
block hour has decreased from $772 to $682, or a decrease of 12%.
The decrease on a cost per block hour basis is primarily due to
economies of scale associated with a larger fleet size,
improvements in component repair and overhaul costs derived from
vendor agreements implemented in September 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 auxiliary power units
("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
2.07 cents for the quarter ended September 30, 1999 to 1.79 cents for
the quarter ended September 30, 2000. This decrease of 0.28 cents per
ASM mainly resulted from spreading slightly decreased 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
decreased 10% from $2.2 million (approximately 6% of operating
revenues) for the quarter ended September 30, 1999 to $2.0
million (approximately 6% of operating revenues) for the quarter
ended September 30, 2000. Flight attendant salaries increased
compared with the same quarter in 1999 in relation to increased
fleet size, while inconvenienced passenger charges decreased with
improved performance reliability.
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 2% from $5.6 million (approximately 16% of operating
revenues) for the quarter ended September 30, 1999 to $5.7
<PAGE>
million (approximately 16% of operating revenues) for the quarter
ended September 30, 2000. Increases in aircraft cleaning and
outside services and commissary expense, related to the 2%
increase in departures in the quarter ended September 30, 2000
from the same quarter in 1999, accounted for the difference.
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 12% from $5.6
million (approximately 16% of operating revenues) in the quarter
ended September 30, 1999 to $4.9 million (approximately 14% of
operating revenues) in the quarter ended September 30, 2000.
Travel agency commissions decreased 42% primarily as a result of
a reduction in commission rates from 8% to 5% in October 1999.
The Company began selling tickets through its website in November
1999 and currently averages approximately 30% of its sales
through the internet. This strategic move has reduced
reservation personnel and costs for booking passengers. Direct
advertising increased $0.1 million, or 6%. The average promotion
and sales cost per passenger decreased $0.10 or 1% from $10.03 in
the quarter ended September 30, 1999 to $9.93 in the quarter
ended September 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 decreased 7% from
$1.1 million (approximately 3% of operating revenues) in the
quarter ended September 30, 1999 to $1.0 million (approximately
3% of operating revenues) in the quarter ended September 30,
2000.
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 13% from $1.1 million (approximately 3% of operating
revenues) in the quarter ended September 30, 1999 to $1.0 million
(approximately 3% of operating revenues) in the quarter ended
September 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
September 30, 2000 is the principal reason for the increase
in other expense. Due to the Company's reduced cash position
in 2000, interest income decreased for the quarter ended
September 30, 2000 compared to the quarter ended September 30,
1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1999
Selected Financial and Operational Data:
<TABLE>
Nine months ended September 30,
-------------------------------
2000 1999 Change % Change
----- ----- ------ -------
<S> <C> <C> <C> <C>
Revenue passengers
carried 1,506,006 1,426,297 79,709 5.6
Revenue passenger miles
- RPMs (000s) 726,550 647,972 78,578 12.1
Available seat miles
- ASMs (000s) 1,208,615 936,617 271,998 29.0
Load Factor 60.1 % 69.2 % (9.1) (13.2)
Departures 21,275 17,659 3,616 20.5
Average stage length 482 454 28 6.2
Miles flown (000s) 10,072 7,757 2,315 29.8
Block hours flown 32,535 25,594 6,941 27.1
Passenger Yield $ 0.1324 $ 0.1370 $(0.0046) (3.4)
Total Revenue per ASM $ 0.0840 $ 0.1003 $(0.0163) (16.3)
Operating Expenses
per ASM $ 0.0959 $ 0.0979 $(0.0020) (2.0)
Operating cost per
blockhour 3,562 3,583 (21) (0.6)
Average fuel cost per
gallon $ 1.01 $ 0.59 $ 0.42 71.2
Average size of fleet
for period 13.3 10.7 2.6 24.3
</TABLE>
<PAGE>
The net loss for the nine months ended September 30, 2000
was $15.0 million compared with net income of $2.2 million for
the nine months ended September 30, 1999. Operating revenue
increased $7.6 million for the nine months ended September 30,
2000 compared with the nine months ended September 30, 1999,
while operating expenses increased $24.2 million. Fuel costs
increased $14.6 million, or 111%.
Total operating revenues increased 8% from $93.9 million for
the nine months ended September 30, 1999 to $101.6 million for the
nine months ended September 30, 2000. Capacity increased 29%
from 936,617,000 available seat miles for the nine months ended
September 30, 1999 to 1,208,615,000 available seat miles for the
nine months ended September 30, 2000. The number of passengers
increased 6% from 1,426,297 in the nine months ended September
30, 1999 to 1,506,006 in the nine months ended September 30,
2000. Load factor decreased from 69% for the nine months ended
September 30, 1999 to 60% for the nine months ended September 30,
2000. This decrease was primarily the result of the 29% increase
in the ASMs due to a 24% increase in average fleet size and only
a 12% increase in the RPMs due to a 6% increase in the number of
revenue passengers in the nine months ended September 30, 2000 as
compared to the nine months ended September 30, 1999.
Passenger revenue increased $7.5 million, or 8%, for the
nine months ended September 30, 2000 compared with the nine
months ended September 30, 1999 as a result of the factors
discussed in the previous paragraph. Other revenue increased
$0.2 million, or 3%, for the same period. 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 $3.8 million (approximately 4%
of total operating revenues) and $3.9 million (approximately 4%
of operating revenues) in the nine months ended September 30,
2000 and 1999, respectively.
OPERATING EXPENSES
Expenses are generally categorized as related to flying
operations, aircraft fuel, maintenance, passenger service,
aircraft and traffic servicing, promotion and sales, general and
administrative, depreciation and amortization and other expense,
including interest expense and amortization of deferred debt
issuance costs. The following table sets forth the percentage of
total operating revenues represented by these expense categories:
<TABLE>
Nine months ended
------------------
September 30,
------------------
2000 1999
----- ----- Percent of Cent(s) Percent of Cent(s)
Percent of Cent(s) Percent of Cent(s)
Revenues Per ASM Revenues Per ASM
--------- ------- --------- --------
<S> <C> <C> <C> <C>
Total operating revenues 100.0 % 8.40 100.0 % 10.03
----- ----- ----- -----
----- ----- ----- -----
Flying operations 22.1 1.85 18.2 1.83
Aircraft fuel 27.2 2.29 13.9 1.40
Maintenance 21.6 1.81 21.0 2.10
Passenger service 6.2 0.52 5.9 0.59
Aircraft and traffic
servicing 17.0 1.43 16.0 1.60
Promotion and sales 14.3 1.21 16.0 1.61
General and administrative 3.1 0.26 3.2 0.32
Depreciation and
amortization 2.6 0.22 3.4 0.34
----- ----- ----- -----
Total operating expenses 114.1 9.59 97.6 9.79
Total other expense, net 0.6 0.05 0.0 0.00
Income tax expense/(benefit) 0.1 0.00 0.1 0.01
----- ----- ----- -----
Net income (loss) (14.8) % (1.24) 2.3 % 0.23
----- ----- ----- -----
----- ----- ----- -----
</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 31% from $17.1 million (approximately 18% of operating
revenues) for the nine months ended September 30, 1999 to $22.4
million (approximately 22% of operating revenues) for the nine
months ended September 30, 2000. The increase in flying
operations expenses was primarily the result of an increase in
aircraft rent related to the 24% increase in average fleet size
from 1999 to 2000, 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 Airline's Pilot's 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 111% from $13.1 million
(approximately 14% of operating revenues) for the nine months
ended September 30, 1999 to $27.7 million (approximately 27% of
operating revenues) for the nine months ended September 30, 2000.
Higher fuel expense is directly related to an increase in cost
per gallon in the nine months ended September 30, 2000 versus
1999. Average fuel cost per gallon (including taxes and into-
plane costs) increased $0.42 or 71% from $0.59 in the nine months
ended September 30, 1999 to $1.01 in the nine months ended
September 30, 2000, causing fuel costs to be a significantly
higher percentage of operating revenues for the nine months ended
September 30, 2000. A 30% increase in miles flown for the nine
months ended September 30, 2000 compared to the nine months ended
September 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 the 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 11% from $19.7 million
(approximately 21% of operating revenues) for the nine months
ended September 30, 1999 to $21.9 million (approximately 22% of
operating revenues) for the nine months ended September 30, 2000.
The increase in maintenance expense is due primarily to the 24%
growth in the aircraft fleet size and the accompanying 27%
increase in block hours flown. These increases were partially
offset by economics of scale associated with a large fleet size,
improvements in component repair and overhaul costs derived from
vendor agreements implemented in September and October of 1999,
and various engine maintenance costs not incurred in the nine
months ended September 30, 2000 compared with the nine months
ended September 30, 1999. The total maintenance cost per block
hour has increased from $666 to $674, or an increase of 1%. 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
2.10 cents for the nine months ended September 30, 1999 to 1.81 cents for
the nine months ended September 30, 2000. This decrease of 0.29 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 13% from $5.6 million (approximately 6% of operating
revenues) for the nine months ended September 30, 1999 to $6.3
million (approximately 6% of operating revenues) for the nine
months ended September 30, 2000. Flight attendant salaries and
overnight costs increased in relation to increased capacity
during the nine months. Improved performance reliability in the
third quarter 2000 led to savings in inconvenienced passenger
charges.
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 15% from $15.0 million (approximately 16% of operating
revenues) for the nine months ended September 30, 1999 to $17.3
<PAGE>
million (approximately 17% of operating revenues) for the nine
months ended September 30, 2000, primarily due to the 21%
increase in departures during the nine months ended September 30,
2000 as compared to the same period in 1999. 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 also realized significant
savings in 2000 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 decreased 3% from $15.1
million (approximately 16% of operating revenues) in the nine
months ended September 30, 1999 to $14.6 million (approximately
14% of operating revenues) in the nine months ended September 30,
2000. Savings resulted from reduced reservation salaries due to
increased Internet orders and decreased commissions due to a 3
point or 38% reduction in commission rates effective October
1999. The average promotion and sales cost per passenger
decreased $0.90 or 9% from $10.57 in the nine months ended
September 30, 1999 to $9.67 in the nine months ended September
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 5% from
$3.0 million (approximately 3% of operating revenues) in the nine
months ended September 30, 1999 to $3.2 million (approximately 3%
of operating revenues) in the nine months ended September 30,
2000.
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 16% from $3.2 million (approximately 3% of operating
revenues) in the nine months ended September 30, 1999 to $2.6
million (approximately 3% of operating revenues) in the nine
months ended September 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 for the nine months ended
September 30, 2000 is the principal reason for the increase in
other expense. Due to the Company's reduced cash position in
2000, interest income decreased for the nine months ended
September 30, 2000 compared to the nine months ended September
30, 1999 and interest expense increased.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $7.6 million for
the nine-month period ending September 30, 2000, as compared to
$4.4 million of cash provided from operating activities 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 September 30, 2000, the Company has received
net proceeds from the sale of its equity securities aggregating
approximately $74.4 million. In addition, the Company has
partially financed its operations during the third quarter of
2000 by delaying payments to certain of its creditors. Most of
the Company's vendors provide goods, services and operating
equipment on open credit terms. If such terms were eliminated,
the Company's cash position and possibly, its ability to continue
to operate, would be materially and adversely affected. The
Company has obtained deferrals from certain of its aircraft
lessors and is in discussions with the remaining lessors. The
Company's balance sheet reflected cash and cash equivalents of
$1.6 million and a working capital deficit of $28.0 million as of
September 30, 2000.
<PAGE>
The Company primarily secures its credit card processor
related to advance ticket sales with (i) a $4 million letter of
credit and (ii) an $8 million surety bond. The $4.0 million letter
of credit was established by the Company's two principal
stockholders. The letter of credit expires in January 2001. The
$8 million surety bond established by the Company expires in
March 2001. At September 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 (i.e., advance ticket sales) 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. 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. The failure to replace
or renew these facilities will have a material adverse effect on
the Company's financial condition.
The Company estimates that scheduled heavy maintenance of
its existing aircraft fleet through September 2001 will cost
$12.2 million, of which $3.5 million will be funded from existing
supplemental rent payments recoverable from aircraft lessors. In
addition, the Company expects to expend approximately $3.5
million on various capital expenditures in the next year.
The Company will require additional debt or equity financing
in 2000. Two of the Company's principal stockholders committed,
but are not contractually bound, to invest up to $7.5 million in
the Company. In September 2000, the Company completed a private
sale of securities. In connection with this sale, the Company
converted approximately $4.0 million in demand notes plus accrued
interest to equity in accordance with the agreed upon terms. On
September 21, 2000 and November 3, 2000 the Company borrowed an
additional aggregate $1.0 million from one of its principal investors.
There can be no assurance that the Company will receive the
remaining $2.5 million in additional financing from this
commitment. The Company's stockholders will likely experience
significant dilution in connection with anticipated financings.
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 in
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 nine months of 2000,
the Company recorded a net loss of $15.0 million and incurred
negative cash flow of $7.6 million. As of September 30, 2000 the
Company had an accumulated deficit of $91.3 million, a working
capital deficit of $28.0 million and a stockholders' deficit of
$9.1 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 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 24% of the
Company's operating expenses for the nine months ended September
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 nine months ended
September 30, 2000 was $1.01.
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 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.
<PAGE>
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.
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
its Common Stock from the Nasdaq SmallCap Market, 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 thirteen 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. 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. None.
b. None.
c. On September 8, 2000, the Company completed a private
sale of 2,359,223 units of securities, each unit
consisting of one share of Common Stock, par value $0.001
per share, and a common stock purchase warrant (the
"Units"). The Unit Price was $1.7173. Each warrant
entitles the holder to purchase one share of common stock
at an exercise price of $1.89. The warrants have a term
of seven years and are immediately exercisable. In
conjunction with the sale of the Units, the Company
converted approximately $4,051,492 in Demand Notes in
principal and interest. Units were sold to a limited
number of "accredited investors" as defined in the
Securities Act of 1933.
d. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Unit Purchase Agreement, dated September 8, 2000,
between Registrant and certain Investors
10.2 Warrant PB-83 issued to J.F. Shea Co., Inc.
10.3 Warrant PB-84 issued to The Hambrecht 1980
Revocable Trust
27 Financial Data Schedule
<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 November 14, 2000
Jeff S. Potter, President and Chief Executive Officer
\S\ MICHAEL D. MASON November 14, 2000
Chief Financial Officer
(Principal Accounting Officer)
<PAGE>
