SECURITY AGREEMENT

 

This Security Agreement dated as of February 13, 2001, is made by and between
Vanguard Airlines, Inc., a Delaware Corporation having its principal place of
business at 533 Mexico City Avenue, Kansas City, Missouri, 64153 ("Grantor"), in
favor of J. F. Shea Co., Inc., a Nevada Corporation ("Shea") and The Hambrecht
1980 Revocable Trust (the "Hambrecht Trust") (individually, a "Lender" and,
collectively, the "Lenders").

Recitals

A. Corporation has requested that the Lenders arrange for the issuance of
letters of credit to be issued in favor of Michigan National Bank for the
account of the Corporation in the aggregate amount of Four Million Dollars
($4,000,000) (the "Letter of Credit.").

B.

Substantially concurrently herewith Grantor and Lenders have entered into that
certain Reimbursement Agreement dated as of February 13, 2001 (as the same may
from time to time be amended, modified, supplemented or restated, the
"Reimbursement Agreement") whereby Grantor has agreed to reimburse Lenders in
full for any an all drawings made under the Letter of Credit.

C.

Lenders are willing to arrange for the issuance of the Letters of Credit, but
only upon the condition, among others, that Grantor shall have executed and
delivered to Lenders this Security Agreement in order to secure Grantor's
obligations to Lenders under and in connection with the Transaction Documents
(as defined herein).

 

Agreement

Now, Therefore,

in order to induce Lenders to arrange the Letters of Credit, enter into the
Reimbursement Agreement and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, and intending to be
legally bound, Grantor hereby represents, warrants, covenants and agrees as
follows:

Defined Terms.

Unless otherwise defined herein the following terms shall have the following
meanings (such meanings being equally applicable to both the singular and plural
forms of the terms defined):

"Accounts"

means (i) any and all accounts or other distributions acquired by, owned by,
owed to or payable to Grantor in any manner, whether now existing or hereafter
acquired, in connection with the MNB Merchant Agreement and (ii) all rights to
payments (including, without limitation actual collections held by MNB Bank,
from Cardholders or card issuers, whether now existing or hereafter acquired, in
the amount of and as a result of such transactions, and, which with respect to
each case (i) and (ii) above, shall include, without limitation, accounts
receivable, book debts and other forms of obligations now owned or hereafter
received or acquired by or belonging or owing to Grantor (including, without
limitation, under any trade name, style or division thereof) whether arising out
of goods sold or services rendered by Grantor or from any other transaction,
whether or not the same involves the sale of goods or services by Grantor
(including, without limitation, any such obligation which may be characterized
as an account or contract right under the UCC) and all of Grantor's rights in,
to and under all purchase orders or receipts now owned or hereafter acquired by
it for goods or services, and all of Grantor's rights to any goods represented
by any of the foregoing (including, without limitation, unpaid seller's rights
of rescission, replevin, reclamation and stoppage in transit and rights to
returned, reclaimed or repossessed goods), and all monies due or to become due
to Grantor under all purchase orders and contracts or other agreements for the
sale of goods or the performance of services or both by Grantor (whether or not
yet earned by performance on the part of Grantor or in connection with any other
transaction), now in existence or hereafter occurring, including, without
limitation, the right to receive the proceeds of said purchase orders and
contracts, and all Collateral and guarantees of any kind given by any Person
with respect to any of the foregoing;

"Account Debtor"

means any "account debtor," as such term is defined in Section 9-105(1)(a) of
the UCC, including, without limitation, all Cardholders.

"Act of Bankruptcy"

shalh have the meaning assigned to such term in Section 1.1 of the Reimbursement
Agreement.

"Credit Card"

shall have the meaning assigned to such term in Section 1 of the MNB Merchant
Agreement.

"Cardholders" shall have the meaning assigned to such term in Section A of the
MNB Merchant Agreement, whichever is applicable.

"Chattel Paper"

means any "chattel paper," as such term is defined in Section 9-105(1)(b) of the
UCC, now owned or hereafter acquired by Grantor.

"Collateral"

shall have the meaning assigned to such term in Section 2.1 of this Agreement.

"Contracts"

shall mean all contracts, undertakings, franchise agreements or other agreements
in or under which Grantor may now or hereafter have any right, title or interest
with respect to an Account, any agreement relating to the terms of payment or
the terms of performance with respect to an Account, including, without
limitation, the MNB Merchant Agreement.

"Deposits"

shall mean cash, Instruments, Documents or Chattel Paper or any securities,
including, without limitation, the Letters of Credit, now existing or hereafter
received, acquired or arising, deposited by or on behalf of Grantor with MNB
Bank, all additions thereto from time to time and all monies, securities
investments and instruments purchase therewith and all interest, profits and/or
dividends accruing thereon and proceeds thereof, all of the foregoing held by
MNB Bank in an account or otherwise, whether or not within MNB Bank sole
dominion or control, relating to the payment and/or performance by Grantor of
its obligations to Bank under or in connection with the MNB Merchant Agreement.

"Documents"

shall mean any "documents," as such term is defined in Section 9-105(1)(f) of
the UCC, now owned or hereafter acquired by Grantor.

"Event of Default" has the meaning given to it in the Reimbursement Agreement.

 

"Gross Exposure"

shall mean the Gross Exposure, as such term is defined in Section C of Amendment
to the MNB Merchant Agreement by and between Grantor and MNB.

"Instruments"

means any "instrument," as such term is defined in Section 9-105(1)(i) of the
UCC, now owned or hereafter acquired by Grantor, including, without limitation,
all notes, certificated securities, and other evidences of indebtedness, other
than instruments that constitute, or are a part of a group of writings that
constitute, Chattel Paper.

"Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment for
security, security interest, encumbrance, levy, lien or charge of any kind,
whether voluntarily incurred or arising by operation of law or otherwise,
against any property of Grantor, including any agreement to grant any of the
foregoing, any conditional sale or other title retention agreement, any lease in
the nature of a security interest, and the filing of or agreement to file or
deliver any financing statement (other than a precautionary financing statement
with respect to a lease that is not in the nature of a security interest) under
the UCC or comparable law of any jurisdiction.

"MNB Bank"

means Michigan National Bank, a national banking association, with its principal
office located at 77 Monroe Center, Grand Rapids, MI 49503.

"MNB Merchant Agreement"

means an Agreement between Michigan National Bank and Vanguard Airlines, Inc.,
that may be entered into with respect to credit card processing services, as the
same may from time to time be amended, modified or restated.

"Permitted Lien" means (a) any lien in favor of Lenders granted hereunder or
arising under any of the Transaction Agreements to secure the Secured
Obligations and (b) any interest in the Pledged Collateral securing a credit to
Grantor which is listed on Schedule III attached hereto and incorporated herein
by this reference.

"Person" means any individual, sole proprietorship, partnership, limited
liability company, limited liability partnership, joint venture, trust,
unincorporated organization, association, corporation, institution, public
benefit corporation, firm, joint stock corporation, estate, other entity or
governmental agency.

"Proceeds"

means "proceeds," as such term is defined in Section 9-306(1) of the UCC, and,
in any event, shall include, without limitation, (a) any and all Accounts,
Chattel Paper, Instruments, cash or other proceeds payable to Grantor from time
to time in respect of the Collateral, (b) any and all proceeds of any insurance,
indemnity, warranty or guaranty payable to Grantor from time to time with
respect to any of the Collateral, (c) any and all payments (in any form
whatsoever) made or due and payable to Grantor from time to time in connection
with any requisition, confiscation, condemnation, seizure or forfeiture of all
or any part of the Collateral above by any governmental body, authority, bureau
or agency (or any person acting under color of governmental authority), and
(d) any and all other amounts from time to time paid or payable under or in
connection with any of the Collateral.

"Reimbursement Loans" shall have the meaning assigned to such term in Section
1.1 of the Reimbursement Agreement.

"Reimbursement Loan Note" shall have the meaning assigned to such term in
Section 1.1 of the Reimbursement Agreement.

"Secured Obligations"

means all now existing and hereafter arising loans, advances, debts, liabilities
and obligations, for monetary amounts owed by Grantor to Lenders whether due or
to become due (including the Reimbursement Loan Notes and all reimbursement
amounts for any Drawing), matured or unmatured, liquidated or unliquidated,
contingent or non-contingent, and all covenants and duties regarding such
amounts, of any kind or nature, present or future, whether or not evidenced by
any note, agreement or other instrument, arising under the Transaction
Documents. This term includes, without limitation, all principal, interest
(including interest that accrues after the commencement of a case against
Grantor or any affiliate of Grantor under the Bankruptcy Code), fees, including,
without limitation, any and all closing fees, prepayment fees, commitment fees,
advisory fees, agent fees and attorneys' fees and any and all other fees,
expenses, costs or other sums chargeable to Guarantor under any of the
Transaction Documents.

"Security Agreement"

means this Security Agreement and all Schedules hereto, as the same may from
time to time be amended, modified or supplemented.

"Transaction Documents" has the meaning set forth in the Reimbursement
Agreement.

"UCC"

means the Uniform Commercial Code as the same may, from time to time, be in
effect in the State of California; provided, however, in the event that, by
reason of mandatory provisions of law, any or all of the attachment, perfection
or priority of Lenders' security interest in any collateral is governed by the
Uniform Commercial Code as in effect in a jurisdiction other than the State of
California, the term "UCC" shall mean the Uniform Commercial Code as in effect
in such other jurisdiction for purposes of the provisions hereof relating to
such attachment, perfection of priority and for purposes of definitions related
to such provisions.

"Vanguard" means Vanguard Airlines, Inc.

Grant of Security Interest.

As collateral security for the prompt and complete payment and performance when
due (whether at stated maturity, by acceleration or otherwise) of all the
Secured Obligations and in order to induce Lenders to arrange the Letters of
Credit, to enter into the Transaction Documents and to make the Reimbursement
Loans, each in accordance with the terms and conditions thereof, Grantor hereby
assigns, conveys, mortgages, pledges, hypothecates and transfers to Lenders, and
hereby grants to Lenders, a security interest in and to all of Grantor's right,
title and interest in, to and under the following (all of which being
hereinafter collectively called the
"Collateral"
):

(a)

All Accounts;

(b)

All Contracts;

(c)

The Deposits; and

(d)

To the extent not otherwise included, all Proceeds of each of the foregoing and
all accessions to, substitutions and replacements for, and rents, profits and
products of each of the foregoing.

Rights of Lenders; Collection of Accounts.

(a) Notwithstanding anything contained in this Security Agreement to the
contrary, Grantor expressly agrees that it shall remain liable under each of its
Contracts to observe and perform all the conditions and obligations to be
observed and performed by it thereunder and that it shall perform all of its
duties and obligations thereunder, all in accordance with and pursuant to the
terms and provisions of each such Contract. Lenders shall not have any
obligation or liability under any Contract by reason of or arising out of this
Security Agreement or the granting to Lenders of a Lien therein or the receipt
by Lenders of any payment relating to any Contract pursuant hereto, nor shall
Lenders be required or obligated in any manner to perform or fulfill any of the
obligations of Grantor under or pursuant to any Contract, or to make any
payment, or to make any inquiry as to the nature or the sufficiency of any
payment received by it or the sufficiency of any performance by any Person under
any Contract, or to present or file any claim, or to take any action to collect
or enforce any performance or the payment of any amounts which may have been
assigned to it or to which it may be entitled at any time or times.

(b)

Lenders authorizes Grantor to collect its Accounts, provided that such
collection is performed in a prudent and businesslike manner, and Lenders may,
upon the occurrence and during the continuation of any Event of Default and
without notice, limit or terminate said authority at any time. If required by
Lenders at any time during the continuation of any Event of Default, any
Proceeds, when first collected by Grantor, received in payment of any such
Account or on account of any of its Contracts shall, subject to the rights of
MNB under the MNB Merchant Agreement, be promptly deposited by Grantor in
precisely the form received (with all necessary endorsements) in a special bank
account maintained by Lenders subject to withdrawal by Lenders only, as
hereinafter provided, and until so turned over shall be deemed to be held in
trust by Grantor for and as Lenders' property and shall not be commingled with
Grantor's other funds or properties. Such Proceeds, when deposited, shall
continue to be Collateral for all of the Secured Obligations and shall not
constitute payment thereof until applied as hereinafter provided. Lenders may,
in its sole discretion, apply all or a part of the funds on deposit in said
special account to the principal of or interest on or both in respect of any of
the Secured Obligations in accordance with the provisions of Section 7.1(d)
hereof, and any part of such funds which Lenders elects not so to apply and deem
not required as Collateral for the Secured Obligations shall be paid over from
time to time by Lenders to Grantor. If an Event of Default has occurred and is
continuing, at the request of Lenders, subject to the rights of MNB Bank under
the MNB Merchant Agreement, Grantor shall deliver all original and other
documents evidencing and relating to, the performance of service which created
such Accounts, including, without limitation, all original orders, invoices, and
shipping receipts.

(c) Lenders may at any time, upon the occurrence and during the continuation of
any Event of Default after first notifying Grantor of its intention to do so,
notify Account Debtors of Grantor, parties to the Contracts of Grantor and
obligors in respect of Instruments and Chattel Paper of Grantor constituting or
relating to the Collateral, that the Accounts and the right, title and interest
of Grantor in and under such Contracts, Instruments and Chattel Paper have been
assigned to Lenders and that payments shall be made directly to Lenders. Upon
the request of Lenders, Grantor shall so notify such Account Debtors, parties to
such Contracts, obligors in respect of such Instruments and such Chattel Paper.
Upon the occurrence and during the continuation of an Event of Default, Lenders
may, in its name, or in the name of others communicate with such Account
Debtors, parties to such Contracts, such Instruments and such Chattel Paper to
verify with such parties, to Lenders' satisfaction, the existence, amount and
terms of any such Accounts, Contracts, Instruments or Chattel Paper.

(d)

Notwithstanding anything to the contrary set forth in paragraphs (a) or (b)
above or elsewhere herein, Grantor shall, promptly notify MNB of the security
interest granted hereby and (b) authorize and direct MNB, at such time as
Lenders shall notify MNB as to the occurrence of an Event of Default hereunder,
to pay and or distribute to Lenders all Collateral owned by, owed to, payable to
or otherwise distributable to Grantor pursuant to the MNB Merchant Agreement. In
the event that the Company's credit card processing function is transferred to
MNB Bank, Grantor shall cause to be executed a Notification of Assignment from
MNB Bank.

Representations and Warranties.

Grantor hereby represents and warrants to Lenders that:

Except for the security interest granted to Lenders under this Security
Agreement and other Permitted Liens, Grantor is the sole legal and equitable
owner of each item of the Collateral in which it purports to grant a security
interest hereunder, having good, marketable and insurable title thereto free and
clear of any and all Liens other than Permitted Liens.

This Security Agreement creates a legal and valid security interest on and in
all of the Collateral in which Grantor now has rights, and all filings and other
actions necessary or desirable to perfect and protect such security interest
have been duly taken. Accordingly, Lenders has a fully perfected first priority
security interest in all of the Collateral in which Grantor now has rights,
subject only to the Permitted Liens. This Security Agreement will create a legal
and valid and fully perfected first priority security interest in the Collateral
in which Grantor later acquires rights, when Grantor acquires those rights,
subject only to the Permitted Liens.

Subject to the Permitted Liens, Grantor's chief executive office, principal
place of business, and the place where Grantor maintains its records concerning
the Collateral are presently located at the addresses set forth on Schedule
I attached hereto and incorporated herein by this reference. Grantor is
incorporated in the State of Delaware and its name is as set forth in the first
paragraph of this Agreement. Grantor shall not, during the continuance of this
Security Agreement, change such chief executive office or principal place of
business or remove or cause to be removed, except in the ordinary course of
Grantor's business, the records relating to the Collateral from those premises
without prior written notice to Lenders.

All Collateral of Grantor with respect to which a security interest may be
perfected by the secured party's taking possession thereof, including, without
limitation, all Chattel Paper and Instruments, except for any such Collateral
which is in the possession of Bank, are set forth on Schedule II attached hereto
and incorporated herein by this reference. All action necessary or desirable to
protect and perfect such security interest in each item set forth on
Schedule II, including, without limitation, the delivery of all originals
thereof to Lenders, has been duly taken, except with respect to those Chattel
Paper, Instruments or other documents constituting or relating to the Collateral
evidencing obligations of non-material amounts payable to Grantor. The security
interest of Lenders in the Collateral listed on Schedule II is prior in right
and interest to all other Liens and is enforceable as such against creditors of
and purchasers from Grantor.

The amount represented by Grantor to Lenders from time to time as owing by each
Account Debtor or by all Account Debtors in respect of the Accounts of Grantor
shall at such time be the correct amount actually and unconditionally owing by
such Account Debtors thereunder.

The amount represented by Grantor to Lenders from time to time as the Deposits
and as the Gross Exposure shall at such time be the correct total of such
Amounts.

Covenants.

Grantor covenants and agrees with Lenders that from and after the date of this
Security Agreement and until the Secured Obligations have been performed and
paid in full and the letter of credit has expired:

Further Assurances; Pledge of Instruments.

At any time and from time to time, upon the written request of Lenders, and at
the sole expense of Grantor, Grantor shall promptly and duly execute and deliver
any and all such further instruments and documents and take such further action
as Lenders may reasonably deem desirable to obtain the full benefits of this
Security Agreement and of the rights and powers herein granted, including,
without limitation, (a) using its best efforts to secure all consents and
approvals necessary or appropriate for the assignment to Lenders of any Contract
held by Grantor or in which Grantor has any rights not heretofore assigned,
(b) filing any financing or continuation statements under the UCC with respect
to the security interests granted hereby, and (c) transferring Collateral to
Lenders' possession (if a security interest in such Collateral can be perfected
by possession). Grantor also hereby authorizes Lenders to file any such
financing or continuation statement without the signature of Grantor. If any
amount payable under or in connection with any of the Collateral is or shall
become evidenced by any Instrument, such Instrument, other than checks and notes
received in the ordinary course of business, shall be duly endorsed in a manner
satisfactory to Lenders and, subject to the rights of MNB under the MNB Merchant
Agreement, be delivered to Lenders immediately upon Grantor's receipt thereof.

Maintenance of Records.

Grantor shall keep and maintain at its own cost and expense satisfactory and
complete records of the Collateral, including, without limitation, a record of
all payments received and all credits granted with respect to the Collateral and
all other dealings with the Collateral. Grantor shall mark its books and records
pertaining to the Collateral to evidence this Security Agreement and the
security interests granted hereby. All Chattel Paper shall be marked with the
following legend: "This writing and the obligations evidenced or secured hereby
are subject to the security interest of J.F. Shea Co., Inc. and the Hambrecht
1980 Revocable Trust."

Indemnification.

In any suit, proceeding or action brought by or against Lenders relating to any
Account or Contract, or any Chattel Paper, Instrument or Document constituting
or relating to the Collateral, for any sum owing thereunder, or to enforce any
provision of any Account or Contract, or any Chattel Paper, Instrument or
Document constituting or relating to the Collateral, Grantor shall save,
indemnify and keep Lenders harmless from and against all expense, loss or damage
suffered by reason of any defense, setoff, counterclaim, recoupment or reduction
of liability whatsoever of the obligor thereunder arising out of a breach by
Grantor of any obligation thereunder or arising out of any other agreement,
indebtedness or liability at any time owing to, or in favor of, such obligor or
its successors from Grantor, and all such obligations of Grantor shall be and
remain enforceable against and only against Grantor and shall not be enforceable
against Lenders.

Compliance with Terms of Accounts, etc.

In all material respects, Grantor shall perform and comply with all obligations
in respect of the Accounts and Contracts and in respect to any Chattel Paper,
Documents and Instruments constituting or relating to the Collateral.

Limitation on Liens on Collateral.

Grantor shall not create, permit or suffer to exist, and shall defend the
Collateral against and take such other action as is necessary to remove, any
Lien on the Collateral, except (a) Permitted Liens and (b) the Lien granted to
Lenders under this Security Agreement. Grantor shall further defend the right,
title and interest of Lenders in and to any of Grantor's rights under the
Contracts and Accounts or in the Deposit or under Chattel Paper, Documents, and
Instruments constituting or relating to the Collateral, and in and to the
Proceeds thereof against the claims and demands of all Persons whomsoever.

Limitations on Modifications of Accounts, Etc.

Upon the occurrence and during the continuation of any Event of Default, Grantor
shall not, without Lenders' prior written consent, (a) grant any extension of
the time of payment of any of the Accounts or amounts due under any Contract
(including, without limitation, amounts due from the Deposit) or under any
Chattel Paper, Instruments or Document constituting or relating to the
Collateral, (b) compromise, compound or settle the same for less than the full
amount thereof, (c) release, wholly or partly, any Person liable for the payment
thereof, or (d) allow any credit or discount whatsoever thereon other than trade
discounts granted in the ordinary course of business of Grantor.

Taxes, Assessments, Etc.

Grantor shall pay promptly when due all property and other taxes, assessments
and government charges or levies imposed upon, and all claims (including claims
for labor, materials and supplies) against, the Collateral except to the extent
the validity thereof is being contested in good faith and adequate reserves are
being maintained in connection therewith.

Limitations on Disposition.

Grantor shall keep the records regarding the Collateral and any Collateral in
possession of Grantor separate and identifiable from other property located on
the same premises as the Collateral and Grantor shall not sell, lease, transfer
or otherwise dispose of any of the Collateral, or attempt or contract to do so.

Further Identification of Collateral.

Grantor shall, if so requested by Lenders, furnish to Lenders, as often as
Lenders shall reasonably request, statements and schedules further identifying
and describing the Collateral and such other reports in connection with the
Collateral as Lenders may reasonably request, all in reasonable detail.

Notices.

Grantor shall advise Lenders promptly, in reasonable detail, of (a) any material
Lien, other than Permitted Liens, attaching to or asserted against any of the
Collateral, (b) any material change in the composition of the Collateral and
(c) the occurrence of any other event which would have a material adverse effect
on the aggregate value of the Collateral or on the Lien created hereunder.

Right of Inspection and Audit.

(a)

Upon reasonable notice to Grantor (unless an Event of Default has occurred and
is continuing, in which case no notice is necessary), Lenders shall at all times
have full and free access during normal business hours to all the books and
records and correspondence of Grantor, and Lenders or any agents or
representatives of Lenders may examine the same, take extracts therefrom and
make photocopies thereof, and Grantor agrees to render to Lenders, at Grantor's
cost and expense, such clerical and other assistance as may be reasonably
requested with regard thereto. Upon reasonable notice to Grantor (unless an
Event of Default has occurred and is continuing, in which case no notice is
necessary), Lenders and its agents and representatives shall also have the right
to enter into and upon any premises where any of records regarding the
Collateral are located for the purpose of conducting audits and making test
verifications of the Accounts in any manner and through any medium that it
considers advisable, and Grantor agrees to furnish all such assistance and
information as Lenders may reasonably require in connection therewith. Grantor,
at its own expense, shall cause certified independent public accountants,
reasonably satisfactory to Lenders, to prepare and deliver to Lenders the
results of and any test verification of Grantor's Accounts made or observed by
such accountants when and if such verification is conducted.

(b)

Lenders shall have all rights of Grantor to audit, copy or make extracts of the
records of MNB Bank as are specified under the respective agreements.

Continuous Perfection.

Grantor shall not change its name, identity or corporate structure in any manner
which might make any financing or continuation statement filed in connection
herewith seriously misleading within the meaning of Section 9-402(7) of the UCC
(or any other then applicable provision of the UCC) unless Grantor shall have
given Lenders at least thirty (30) days' prior written notice thereof and shall
have taken all action (or made arrangements to take such action substantially
simultaneously with such change if it is impossible to take such action in
advance) necessary or reasonably requested by Lenders to amend such financing
statement or continuation statement so that it is not seriously misleading.

Grantor shall provide upon written request of Lenders, or shall cause MNB Bank
to provide, to Lenders such reports and notices as are required to be sent, or
may be sent, by MNB to Grantor with respect to the Accounts, the Deposit, the
Gross Exposure, or as otherwise are required to be sent or may be made available
to Grantor pursuant to the MNB Merchant Agreement.

Grantor may not enter into any amendment to the MNB Merchant Agreement, without
the written consent of Lenders, except where such amendment only relates to the
fees and charges to be paid to MNB by Vanguard or the extension of said
agreement.

Lenders' Appointment as Attorney-in-Fact.

(a)

Grantor hereby irrevocably constitutes and appoints Lenders, and any officer or
agent thereof, with full power of substitution, as its true and lawful
attorney-in-fact with full irrevocable power and authority in the place and
stead of Grantor and in the name of Grantor or in its own name, from time to
time at Lenders' discretion, for the purpose of carrying out the terms of this
Security Agreement, to take any and all appropriate action and to execute and
deliver any and all documents and instruments which may be necessary or
desirable to accomplish the purposes of this Security Agreement and, without
limiting the generality of the foregoing, hereby gives Lenders the power and
right, on behalf of Grantor, without notice to or assent by Grantor, to do the
following:

(i)

to ask, demand, collect, receive and give acquittances and receipts for any and
all monies due or to become due under any Collateral and, in the name of Grantor
in its own name or otherwise to take possession of, endorse and collect any
checks, drafts, notes, acceptances or other Instruments for the payment of
monies due under any Collateral and to file any claim or to take or commence any
other action or proceeding in any court of law or equity or otherwise deemed
appropriate by Lenders for the purpose of collecting any and all such monies due
under any Collateral whenever payable;

(ii)

to pay or discharge any Liens, including, without limitation, any tax lien,
levied or placed on or threatened against the Collateral, to effect any repairs
or any insurance called for by the terms of this Security Agreement and to pay
all or any part of the premiums therefor and the costs thereof; and

(iii)

(1) direct any person liable for any payment under or in respect of any of the
Collateral to make payment of any and all monies due or to become due thereunder
directly to Lenders or as Lenders shall direct, (2) receive payment of any and
all monies, claims and other amounts due or to become due at any time arising
out of or in respect of any Collateral, (3) sign and endorse any invoices,
freight or express bills, bills of lading, storage or warehouse receipts, drafts
against debtors, assignments, verifications and notices in connection with
Accounts and other Instruments and Documents constituting or relating to the
Collateral, (4) commence and prosecute any suits, actions or proceedings at law
or in equity in any court of competent jurisdiction to collect the Collateral or
any part thereof and to enforce any other right in respect of any Collateral,
(5) defend any suit, action or proceeding brought against Grantor with respect
to any Collateral, (6) settle, compromise or adjust any suit, action or
proceeding described above and, in connection therewith, give such discharges or
releases as Lenders may deem appropriate, and (7) sell, transfer, pledge, make
any agreement with respect to or otherwise deal with any of the Collateral as
fully and completely as though Lenders were the absolute owner thereof for all
purposes, and to do, at Lenders' option and Grantor's expense, at any time, or
from time to time, all acts and things which Lenders may reasonably deem
necessary to protect, preserve or realize upon the Collateral and Lenders' Lien
therein in order to effect the intent of this Security Agreement, all as fully
and effectively as Grantor might do.

(b)

Lenders agrees that, except upon the occurrence and during the continuation of
an Event of Default, it shall not exercise the power of attorney or any rights
granted to Lenders pursuant to this Section 6.1 provided; however, that Lender
may exercise the power of attorney with respect to filing of financing
statements and otherwise perfecting its security interest in the Collateral when
no Event of Default exists. Grantor hereby ratifies, to the extent permitted by
law, all that said attorney shall lawfully do or cause to be done by virtue
hereof. The power of attorney granted pursuant to this Section 6.1 is a power
coupled with an interest and shall be irrevocable until the Secured Obligations
are paid and performed in full.

(c)

The powers conferred on Lenders hereunder are solely to protect Lenders'
interests in the Collateral and shall not impose any duty upon it to exercise
any such powers. Lenders shall be accountable only for amounts that it actually
receives as a result of the exercise of such powers and neither it nor any of
its officers, directors, employees, agents or representatives shall be
responsible to Grantor for any act or failure to act, except for its own gross
negligence or willful misconduct.

(d)

Grantor also authorizes Lenders, at any time and from time to time upon the
occurrence and during the continuation of any Event of Default, to
(i) communicate in its own name with any party to any Contract with regard to
the assignment of the right, title and interest of Grantor in and under the
Contracts hereunder and other matters relating thereto and (ii) execute, in
connection with the sale of Collateral provided for in Section 7.1 hereof, any
endorsements, assignments or other instruments of conveyance or transfer with
respect to the Collateral.

(e)

If Grantor fails to perform or comply with any of its agreements contained
herein and Lenders, as provided for by the terms of this Security Agreement,
shall perform or comply, or otherwise cause performance or compliance, with such
agreement, the reasonable expenses, including attorneys' fees, of Lenders
incurred in connection with such performance or compliance, together with
interest thereon at the rate then in effect in respect of the Reimbursement
Loans, shall be payable by Grantor to Lenders on demand and shall constitute
Secured Obligations secured hereby.

Rights and Remedies Upon Default.

(a)

If any Event of Default shall occur and be continuing, Lenders may exercise in
addition to all other rights and remedies granted to it under this Security
Agreement, the MNB Merchant Agreement, the other Transaction Documents and under
any other instrument or agreement securing, evidencing or relating to the
Secured Obligations, all rights and remedies of a secured party under the UCC.
Without limiting the generality of the foregoing, Grantor expressly agrees that
in any such event Lenders, without demand of performance or other demand,
advertisement or notice of any kind (except the notice specified below of time
and place of public or private sale) to or upon Grantor or any other person (all
and each of which demands, advertisements and notices are hereby expressly
waived to the maximum extent permitted by the UCC and other applicable law), may
forthwith collect, receive, appropriate and realize upon the Collateral, or any
part thereof, and may forthwith sell, lease, assign, give an option or options
to purchase or sell or otherwise dispose of and deliver said Collateral (or
contract to do so), or any part thereof, in one or more parcels at public or
private sale or sales, at any exchange or broker's board or at any of Lenders'
offices or elsewhere at such prices as it may deem best, for cash or on credit
or for future delivery without assumption of any credit risk. Lenders shall have
the right upon any such public sale or sales, and, to the extent permitted by
law, upon any such private sale or sales, to purchase the whole or any part of
said Collateral so sold, free of any right or equity of redemption, which equity
of redemption Grantor hereby releases. Grantor further agrees, at Lenders'
request, to assemble the Collateral and make it available to Lenders at places
which Lenders shall reasonably select, whether at Grantor's premises or
elsewhere. Lenders shall apply the net proceeds of any such collection,
recovery, receipt, appropriation, realization or sale as provided in
Section 7.1(d) hereof, Grantor remaining liable for any deficiency remaining
unpaid after such application, and only after so paying over such net proceeds
and after the payment by Lenders of any other amount required by any provision
of law, including Section 9-504(1)(c) of the UCC, need Lenders account for the
surplus, if any, to Grantor. To the maximum extent permitted by applicable law,
Grantor waives all claims, damages, and demands against Lenders arising out of
the repossession, retention or sale of the Collateral except such as arise out
of the gross negligence or willful misconduct of Lenders. Grantor agrees that
Lenders need not give more than ten (10) days' notice (which notification shall
be deemed given if given in accordance with Section 9.3 of the Reimbursement
Agreement) of the time and place of any public sale or of the time after which a
private sale may take place and that such notice is reasonable notification of
such matters. Grantor shall remain liable for any deficiency if the proceeds of
any sale or disposition of the Collateral are insufficient to pay all amounts to
which Lenders are entitled, Grantor also being liable for the reasonable fees of
any attorneys employed by Lenders to collect such deficiency.

(b)

Grantor also agrees to pay all fees, costs and expenses of Lenders, including,
without limitation, reasonable attorneys' fees, incurred in connection with the
enforcement of any of its rights and remedies hereunder.

(c)

Grantor hereby waives presentment, demand, protest or any notice (to the maximum
extent permitted by applicable law) of any kind in connection with this Security
Agreement or any Collateral.

(d)

The Proceeds of any sale, disposition or other realization upon all or any part
of the Collateral shall be distributed by Lenders in the following order of
priorities:

First, to Lenders in an amount sufficient to pay in full the reasonable costs of
Lenders in connection with such sale, disposition or other realization,
including all fees, costs, expenses, liabilities and advances incurred or made
by Lenders in connection therewith, including, without limitation, reasonable
attorneys' fees;

Second

, to Lenders in an amount equal to the then unpaid principal of and accrued
interest and prepayment premiums, if any, on the Secured Obligations;

Third

, to Lenders in an amount equal to any other Secured Obligations which are then
unpaid; and

Finally

, upon payment in full of all of the Secured Obligations, to Grantor or its
representatives or as a court of competent jurisdiction may direct.

Limitation on Lenders' Duty in Respect of Collateral.

Lenders shall be deemed to have acted reasonably in the custody, preservation
and disposition of any of the Collateral if it takes such action as Grantor
requests in writing, but failure of Lenders to comply with any such request
shall not in itself be deemed a failure to act reasonably, and no failure of
Lenders to do any act not so requested shall be deemed a failure to act
reasonably.

Reinstatement.

This Security Agreement shall remain in full force and effect and continue to be
effective should any petition be filed by or against Grantor for liquidation or
reorganization, should Grantor become insolvent or make an assignment for the
benefit of creditors or should a receiver or trustee be appointed for all or any
significant part of Grantor's property and assets, and shall continue to be
effective or be reinstated, as the case may be, if at any time payment and
performance of the Secured Obligations, or any part thereof, is, pursuant to
applicable law, rescinded or reduced in amount, or must otherwise be restored or
returned by any obligee of the Secured Obligations, whether as a "voidable
preference," "fraudulent conveyance," or otherwise, all as though such payment
or performance had not been made. In the event that any payment, or any part
thereof, is rescinded, reduced, restored or returned, the Secured Obligations
shall be reinstated and deemed reduced only by such amount paid and not so
rescinded, reduced, restored or returned.

Miscellaneous.

Notices.

Any notice or other communication hereunder to any party shall be addressed and
delivered (and shall be deemed given) in accordance with
Section 9.3
of the Reimbursement Agreement.

Severability.

Any provision of this Security Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.

Headings.

The various headings in this Security Agreement are inserted for convenience
only and shall not affect the meaning or interpretation of this agreement or any
provisions hereof.

No Waiver; Cumulative Remedies.

(a)

Lenders shall not by any act, delay, omission or otherwise be deemed to have
waived any of its respective rights or remedies hereunder, nor shall any single
or partial exercise of any right or remedy hereunder on any one occasion
preclude the further exercise thereof or the exercise of any other right or
remedy.

(b)

The rights and remedies hereunder provided are cumulative and may be exercised
singly or concurrently, and are not exclusive of any rights and remedies
provided by law.

(c)

None of the terms or provisions of this Security Agreement may be waived,
altered, modified or amended except by an instrument in writing, duly executed
by Grantor and Lenders.

Termination of this Security Agreement.

Subject to
Section 9.1
hereof, this Security Agreement shall terminate on the Termination Date, as
defined in the Reimbursement Agreement.

Successor and Assigns.

This Security Agreement and all obligations of Grantor hereunder shall be
binding upon the successors and assigns of Grantor, and shall, together with the
rights and remedies of Lenders hereunder, inure to the benefit of Lenders, any
future holder of any Reimbursement Loan Note executed by Grantor in connection
with the Reimbursement Agreement and their respective successors and assigns. No
sales of participations, other sales, assignments, transfers or other
dispositions of any agreement governing or instrument evidencing the Secured
Obligations or any portion thereof or interest therein shall in any manner
affect the Lien granted to Lenders hereunder.

Further Indemnification.

Grantor agrees to pay, and to save Lenders harmless from, any and all
liabilities with respect to, or resulting from any delay in paying, any and all
excise, sales or other similar taxes which may be payable or determined to be
payable with respect to any of the Collateral or in connection with any of the
transactions contemplated by this Security Agreement.

Governing Law.

In all respects, including all matters of construction, validity and
performance, this Security Agreement and the Secured Obligations arising
hereunder shall be governed by, and construed and enforced in accordance with,
the laws of the State of California applicable to contracts made and performed
in such state, without regard to the principles thereof regarding conflict of
laws.

Counterparts.

This Security Agreement may be executed in any number of counterparts, each of
which when so delivered shall be deemed an original, but all such counterparts
shall constitute but one and the same instrument. Each such agreement shall
become effective upon the execution of a counterpart hereof or thereof by each
of the parties hereto and telephonic notification thereof has been received by
Grantor and Lenders.

 

[Intentionally Left Blank]

In Witness Whereof,

each of the parties hereto has caused this Security Agreement to be executed and
delivered by its duly authorized officer on the date first set forth above.

Grantor

Vanguard Airlines, Inc.

 

 

By:

Printed Name:

Title:

 

 

 

Accepted and acknowledged by:

The Hambrecht 1980 Revocable Trust, William R. Hambrecht as Trustee

 

 

By:

Printed Name:

Title:

 

Accepted and acknowledged by:

J. F. Shea Co., Inc.

 

 

By:

Printed Name:

Title:

Schedule I

LOCATION OF GRANTOR'S CHIEF EXECUTIVE OFFICE

PRINCIPAL PLACE OF BUSINESS

AND RECORDS PERTAINING TO COLLATERAL

Chief Executive Office:

533 Mexico City Avenue

Kansas City, MO 64153

 

Records Pertaining to Collateral:

533 Mexico City Avenue

Kansas City, MO 64153

Principal Place of Business:

533 Mexico City Avenue

Kansas City, MO 64153

Schedule II

LIST OF COLLATERAL DELIVERED TO LENDERS

 

 

 

None

Schedule III

Permitted Liens

None