SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to _________________
Commission file number
0-20360
RENO AIR,INC.
(Exact name of registrant as specified in its charter)
Nevada 88-0259913
(State and other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
220 Edison Way, Reno, Nevada 89502
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (702) 686-3835
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, Par Value $.01 Per Share
Items omitted from this report: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate value of the voting stock held by persons who are not
officers or directors (or their affiliates) of the Registrant, as of March 1,
1997, was approximately $65,000,000.
The number of shares outstanding of each of the Registrant's classes of
common stock, as of March 1, 1997, was as follows:
Class Number of Shares
----- ----------------
Common Stock, Par Value $.01 Per Share 10,370,846
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be sent to stockholders
in connection with the Annual Meeting of Stockholders to be held on May 22, 1997
(the "Proxy Statement") have been incorporated by reference into Part III of
this Form 10-K.
Page 1 of 59
(Index of Exhibits Filed with this Report on Page 46)
<PAGE>
RENO AIR, INC.
Table of Contents to
Annual Report on Form 10-K
Page
Part I
Item 1 Business.............................................. 3
Cautionary Statements................................. 10
Item 2 Properties............................................ 12
Item 3 Legal Proceedings..................................... 13
Item 4 Submission of Matters to a Vote of Security Holders... 13
Executive Officers of the Registrant.................. 14
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters................................... 16
Item 6 Selected Financial Data............................... 17
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 18
Item 8 Financial Statements and Supplementary Data........... 26
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................ 45
Part III
Item 10 Directors and Executive Officers of the Registrant.... 45
Item 11 Executive Compensation................................ 45
Item 12 Security Ownership of Certain Beneficial Owners
and Management........................................ 45
Item 13 Certain Relationships and Related Transactions........ 45
Part IV
Item 14 Exhibits, Financial Statements Schedules, and
Reports on Form 8-K................................... 46
Table of Exhibits filed with Form 10-K................ 46
<PAGE>
PART I
Item 1. Business
General Description
Reno Air, Inc. ("Reno Air" or the "Company") is a national air carrier
operating primarily in the western United States. The Company's primary strategy
is to provide low-cost, low-fare and high quality scheduled airline passenger
service. The Company also transports cargo and mail and provides charter
service.
As of March 1, 1997, the Company operates twenty-nine aircraft flying
scheduled service primarily from a hub in Reno/Tahoe, Nevada, between San Jose
and southern California and to and from its focus cities of Las Vegas, Los
Angeles and Seattle. In addition to these cities, the Company serves
Albuquerque, Anchorage, Chicago, Colorado Springs, Denver, Detroit, Durango
(through March 15), Fairbanks, Laughlin (Nevada), Las Vegas, Los Angeles, Orange
County (California), Palm Springs, Portland, San Diego, San Francisco, Seattle,
Tucson and Vancouver (British Columbia). Service to Laughlin and Palm Springs is
seasonal. In May 1997, the Company is adding service to Ontario, California.
As of March 1, 1997, the Company operated approximately 82 daily departures
to or from Reno, 60 daily departures to or from San Jose, 40 daily departures to
or from Los Angeles, 26 daily departures to or from Las Vegas and 22 daily
departures to or from Seattle. The Company is significantly increasing its
service to Las Vegas in May 1997 with the addition of 24 flights.
In April 1997, the Company is commencing scheduled service at
Gulfport-Biloxi, Mississippi, with service to Sanford/Orlando (Florida), St.
Petersburg/Tampa and Atlanta. This schedule can be operated using one aircraft.
In addition to its scheduled operations, Reno Air conducts ad hoc charter
flights and track charter programs. The Company also operates an in-house tour
program called QQuickEscapes, which offers resort packages including airfare,
lodging and other services, primarily to Reno/Tahoe, Las Vegas and Southern
California.
Reno Air was incorporated in 1990 in the State of Nevada. Reno Air's
principal executive offices are located at 220 Edison Way, Reno, Nevada 89502,
and its telephone number is (702) 686-3835.
Marketing
Reno Air markets its product as "A Better Low Fare Airline". Management
believes that the Company's low fare structure, with minimal restrictions on
travel; its relatively new fleet of aircraft (with an average age of less than
six years as of March 1997); and its service amenities, such as advanced seat
assignments, first-class service on all scheduled flights and participation in
the American Airlines AAdvantage(R) frequent-flyer program, distinguish the
Company from its primary competition.
Passengers can earn AAdvantage(R) mile credit on all scheduled Reno Air
flights within the Western and Mountain time zones and on its flights to Alaska
and Chicago. As a participant in the AAdvantage(R) program, Reno Air makes a
controlled number of seats available on such scheduled flights for AAdvantage(R)
award redemptions, at no additional cost to the AAdvantage(R) member. Reno Air
limits the number of seats that are made available on each flight to minimize
any potential cost of such redemptions. Reno Air offers its own frequent flyer
program on scheduled flights for which AAdvantage(R) credit is not available;
participants in this program obtain a free ticket once a specified number of
segments are flown.
The Company has codesharing agreements with Wings West Airlines, an
American Eagle commuter airline operating from Los Angeles, and Hawaiian
Airlines. Such agreements enhance the marketing of Reno Air's flights connecting
to markets served by these airlines. Under these agreements, certain American
Eagle flights are identified in CRS systems (defined below) under Reno Air's
"QQ" code, and certain Reno Air flights are identified in CRS systems under
Hawaiian's "HA" code.
The Company participates in all major domestic travel agency reservation
systems ("CRS"), and a majority of the Company's tickets are sold through travel
agencies. Travel agencies can significantly impact the Company's business by
directing passenger traffic to or away from the Company. The Company pays travel
agencies a commission generally equal to 10% of the ticketed fare. From time to
time airlines, including the Company, may pay additional "override" commissions
to travel agencies.
In addition to paying travel agency commissions, the Company pays fees to
each CRS for all booking transactions made through its system. Certain of the
traditional CRS systems have in recent years changed their pricing policies to
be based on the number and kind of messages generated by the travel agency,
rather than being based on the net number of segments booked, as they had been
previously. This generally has resulted in an increase in CRS charges. Also, the
CRS charges are a substantial expense in the case of lower fare tickets and
thereby disproportionately affect low fare, high volume carriers such as Reno
Air.
The fees payable through CRS distribution methods constitute a significant
portion of the Company's costs. The Company has undertaken several measures and
is considering additional programs to reduce these costs, potentially including
reducing its participation in CRS systems. In 1995, Reno Air instituted its
EZTrip(TM) ticketless travel option, which allows passengers to confirm a
reservation and travel without the need for a standard paper airline ticket. In
addition to reducing processing costs, the ticketless option facilitates
passengers booking directly with the Company, eliminating or reducing CRS
charges on such transactions. Currently, approximately 30% of Reno Air's
passenger sales are sold as ticketless travel.
The Company has interline agreements with most major carriers which
facilitate the ability of passengers to fly itineraries that include segments
connecting between the Company's flights and other airline's flights by
providing, among other benefits, an automatic transfer of checked baggage and
single ticketing for the entire itinerary.
The Company advertises primarily in newspapers and magazines, on billboards
and by radio. The Company also sponsors sports and other events in order to
obtain television exposure, but has purchased minimal direct television
advertising due to its generally high cost. The Company also sponsors cultural
and other community events in the cities it serves.
Employees
As of December 31, 1996, the Company had 2,137 employees, including 1,791
full-time and 346 part-time personnel as follows: 282 pilots, 477 flight
attendants, 522 customer service agents, 352 reservation agents, 60 mechanics
and maintenance clerks, 49 sales and marketing personnel, 110 general management
and accounting personnel, and 285 personnel performing other miscellaneous
functions.
The Company believes it operates with lower personnel costs than many
established airlines, principally due to control of personnel costs, a more
junior work force and greater flexibility in the utilization of personnel. There
can be no assurance that these cost advantages will continue to exist.
None of the Company's employees are currently represented by labor unions
or other collective bargaining units. Airline labor groups have in the past and
may at any time seek to represent the Company's employees. The International
Brotherhood of Teamsters has filed an application with the National Mediation
Board ("NMB") seeking to represent the Company's flight attendants. The NMB has
advised the Company that ballots are being mailed to flight attendants on March
24, 1997, and will be counted on April 23, 1997. If unionization of the
Company's employees occurs, the Company's flexibility in dealing with its
employees would be restricted, which could result in a material increase in
costs and the Company would be required to negotiate a contract with the union.
Management cannot predict the timing of such negotiations if a union were to be
elected, when a contract might be entered into, or the extent such a contract
would contain terms different from the Company's current work and pay rules.
Flight Operations and Training
The Company conducts flight operations with its own pilots and flight
attendants. On occasion, aircraft and crews are chartered from other U.S.
carriers to provide substitute service. The Company conducts its own pilot,
flight attendant, maintenance, reservations agent and customer service agent
training at its training center in Reno, Nevada.
Maintenance
The Company conducts overnight checks and moderate maintenance at its own
facilities. At certain stations, such maintenance is contracted to FAA-approved
vendors. The Company contracts its heavy airframe maintenance and engine
overhauls to established FAA-approved vendors, principally including American
Airlines, AAR Corporation and Greenwich Air Services.
Reservations
The Company operates a reservation center in Reno, Nevada and will open its
second reservations facility in Las Vegas in the second quarter of 1997. Since
March 1995, the Company has also obtained contract reservations services from
Teletech, Inc. In 1997, the Company expects to discontinue its use of third
party reservations services, as it brings its Las Vegas facility into full
operations, in order to control costs.
Fuel
The cost of aircraft fuel is a major component of the Company's operating
expense, and accounted for approximately 19% of all operating expenses in 1996.
Both the cost and availability of fuel are subject to many economic and other
factors and events occurring throughout the world and, therefore, fuel prices
can fluctuate substantially. The Company has not entered into long-term fuel
purchases or hedging agreements assuring the availability and price of fuel
because the cost of such agreements, in the context of the benefit they provide,
has been considered prohibitive. The Company may enter into such agreements in
the future dependent on their cost and perceived benefit. Increases in the price
of fuel or the unavailability of adequate fuel supplies could have a material
adverse effect on the Company's operations and profitability.
Agreements with American Airlines and Others
The Company has entered into agreements with contractors, including other
airlines, to provide facilities and services required for its operations,
including reservations and data processing, aircraft maintenance, ground
facilities, and aircraft ground handling. The Company has agreements with
American Airlines for participation in the AAdvantage(R) frequent flyer program,
use of landing rights at Orange County, and ground handling and rental of
terminal space in San Jose, among other services. These agreements are subject
to termination, in some cases on short notice. Any termination or significant
interruption in such services could have a material adverse effect on the
Company. Although the subcontracting of many services is intended to help the
Company control costs, the Company's reliance upon others to provide essential
services may also result in a more limited ability to control the costs or
quality of such services.
Reno Air's agreement with American to participate in the AAdvantage(R)
program is terminable by either party on December 31, 1997; Reno Air and
American have been discussing renewal terms.
Reno Air's agreement with Electronic Data Systems for reservation data
processing services terminates in the second quarter of 1997; the Company has
agreed (subject to documentation and resolution of certain issues) with SABRE
Decision Technologies ("SDT"), a division of The SABRE Group, Inc., on terms
whereby SDT will provide the Company's reservations database system thereafter
under a seven-year agreement. Although this change is intended in part to reduce
Reno Air's reservation costs and to improve the efficiency of Reno Air's
reservations and passenger handling, there will be additional one-time costs
from the conversion primarily related to personnel training and data transfer.
The Company has postponed the SABRE implementation date to the fourth quarter of
1997 to ensure adequate time for preparations by the Company and by SABRE. EDS
has agreed to continue to provide reservations services until the cutover date.
The SABRE Group, Inc. is a majority owned subsidiary of AMR Corporation; AMR
Corporation is the parent company of American Airlines.
Competition and Competitive Reaction
The airline industry is highly competitive. Airlines compete primarily with
respect to fare levels, schedule convenience, dependability of service,
frequency of service, number of markets served and passenger amenities
(including frequent flyer programs). The Company competes on many of its routes
with Southwest Airlines ("Southwest"), and, to a lesser extent, with United
Airlines ("United") and its Shuttle by United(TM), Alaska Airlines ("Alaska"),
America West Airlines and Northwest Airlines, Inc., each of which is larger and
has greater name recognition and substantially greater resources than the
Company. The Company may at any time also face competition from other existing
airlines or from new low-cost airlines. The Company's results are highly
sensitive to changes in fare levels. The Company cannot predict future fare
levels, which can change rapidly, and are subject to actions by the Company's
competitors.
In many areas, Southwest has achieved market dominance through its high
frequency service. United operates a short-haul airline division (Shuttle by
United(TM)) on the West Coast at a cost lower than United's other operations,
principally to compete with Southwest. Although management believes the Company
is able to compete with United, Southwest and other airlines in terms of cost
and quality of service, these or other competing airlines have in the past and
may at any time undercut the Company's fares and/or expand capacity on routes
beyond market demand in order to increase their respective market shares. Major
airlines have also engaged in predatory pricing when low-fare airlines commence
service to hub airports they dominate, as the major airline seeks to drive out
the new competition. Although the Company intends to compete vigorously and to
assert its rights against any predatory conduct, such activity by other airlines
can reduce fares or passenger traffic to levels where profitable operations can
not be achieved or sustained. Due to its smaller size and limited liquidity, the
Company may be less able to withstand aggressive marketing tactics, fare wars or
capacity dumping engaged in by its competitors.
The Company is also subject to varying degrees of competition from surface
transportation in many of its markets, particularly from buses and automobiles.
Charter and Revenue-Guaranteed Service
In addition to its regular, scheduled flying, Reno Air operates for fixed
fees both ad hoc and long term "track" charter programs. Ad hoc charters
generally involve single flights or short-term contracts carrying military
personnel, sports teams or tour groups. Track charters involve seasonal or year
`round contract flying for a specific contractor. In 1996, the Company based one
full time aircraft in Detroit to operate track charters for tour operator
Hamilton, Miller, Hudson and Fayne (HMHF). It operated another aircraft on a
part time basis for Apple Vacations from Chicago O'Hare airport. Both of these
programs involved flights generally to recreation destinations including
Florida, Las Vegas, Mexico and/or the Caribbean. In November 1996, the Company
added a full-time track charter program out of Gulfport, Mississippi for tour
operator Casino Airlink. During the winter ski season, the Company flew track
charters between Reno and Victoria and Kelowna, BC, for Sunquest Tours, and
between Reno and Dallas for Adventure Tours. It also operated a daily
revenue-guaranteed, scheduled flight between Albuquerque and Durango, Colorado
for Purgatory ski resort.
Reno Air has also entered into a three-year agreement with the Harrison
County Jet Service Task Force under which the task force guarantees Reno Air a
minimum amount of revenue per block hour for scheduled flying by one Reno Air
aircraft based in Gulfport, Mississippi.
Government Regulation
All interstate air carriers are subject to regulation by the United States
Department of Transportation (the "DOT") and the United States Federal Aviation
Administration (the "FAA"). The DOT's jurisdiction extends primarily to the
economic aspects of air transportation, while the FAA's regulatory authority
relates primarily to air safety, including aircraft certification and operation,
crew licensing and training and maintenance standards.
The Company has a Certificate of Public Convenience and Necessity ("DOT
Certificate") issued by the DOT on July 1, 1992, which allows the Company to
engage in air transportation. Pursuant to law and DOT regulation, the President
and at least two-thirds of the Company's Board of Directors and other managing
officers must be United States citizens; and not more than 25% of the Company's
voting stock can be owned by foreign nationals (although subject to DOT approval
the percent of foreign ownership may be as high as 49%).
Authority to operate international routes is regulated by the DOT and by
the foreign governments involved, and may be subject to the approval of the
President of the United States for conformance with national defense and foreign
policy objectives.
The FAA regulates flight operations generally, including the licensing of
pilots and maintenance personnel, and the establishment of minimum standards for
training, maintenance, flight operations, security, communications and ground
equipment. An FAA Operating Certificate was issued to the Company on June 29,
1992. The Company's training and maintenance records, flight and emergency
procedures, and aircraft and maintenance facilities are subject to periodic
inspections and tests by the FAA. The FAA inspected the Company in March of 1995
under its National Aviation Safety Inspection Program and found the Company to
be operating safely. As is the case with other airlines, the Company is required
to obtain FAA approval of any new vendor providing significant contract
maintenance or training.
The Airport Noise and Capacity Act of 1990 ("ANCA") requires the phase-out
of Stage II aircraft (which meet less stringent noise emission standards than
later Stage III aircraft) in the contiguous 48 states by December 31, 1999. The
Company's fleet consists entirely of Stage III aircraft and, therefore, the
Company is in compliance with ANCA. Many airports served by the Company impose
more stringent noise restrictions, including curfews and limitations on the type
of aircraft that may be used. The Company is subject to various other federal,
state and local laws and regulations regarding the protection of the
environment.
Reno Air is subject to various other governmental regulations. All air
carriers are subject to certain provisions of the Communications Act of 1934
because of their extensive use of radio and other communication facilities, and
are required to obtain an aeronautical radio license from the Federal
Communications Commission ("FCC"). The United States Postal Service has
authority over certain aspects of the transportation of mail. Tariffs and rates
for the carriage of domestic mail are determined through negotiations or
competitive bidding. The labor relations of all air carriers which have received
a DOT Certificate, including the Company, are covered under Title II of the
Railway Labor Act of 1926 and are subject to the jurisdiction of the National
Mediation Board. Furthermore, during a period of past fuel scarcity, air carrier
access to jet fuel was subject to allocation regulations promulgated by the
Department of Energy, and air carriers could again be subject to such
regulations. Management believes that the Company is in material compliance with
the laws and regulations set forth above.
Proposals to Replace Excise Tax with User Fees
For decades, airlines have remitted to the federal government an excise tax
on airline ticket sales. The tax (currently 10% of a ticket's fare) has recently
been extended from time to time for only short durations. The tax currently
expires on September 30, 1997. Certain of the Company's larger competitors have
lobbied for imposition of a user fee (based on operating statistics such as
number of passengers or number of departures) in lieu of the federal excise tax
and the DOT has been studying various alternatives including a user fee or
alternate form of tax. Management believes that imposition of a user fee in lieu
of the excise tax could negatively impact the Company's ability to compete
against its larger competitors, by increasing disproportionately the fees
imposed on short-haul low-fare transportation. The Company has lower average
fares and a shorter average stage length (and thus more passengers and
departures per day) than industry average. On the other hand, the Company does
not operate any large hub complexes, which are significant contributors to FAA
costs. The impact of a user fee would depend on the structure of the fee, and
the extent the fee can be passed on in higher ticket prices. The Company cannot
predict when or if a user fee will be implemented.
Airport Operations and Landing Rights
The Company's operations at John Wayne Airport in Orange County
(California) and O'Hare International Airport in Chicago are regulated by
governmental entities through allocation of take-off and landing authorizations
("slots"). During 1994, the Company obtained use of slots at Orange County in
connection with an agreement with American Airlines and received restricted
slots at Chicago O'Hare from the FAA. Currently, the Company operates fifteen
slots at Orange County, five of which may be recalled on short notice. The
Company's three slots at O'Hare may be used only for service to Reno and will
expire on issuance of final rules regarding special slot allocations unless
renewed by the DOT; however, no such rules have been proposed. There can be no
assurance that Reno Air will be able to obtain additional slots or to retain
sufficient slots at O'Hare or Orange County for all its desired operations.
Seasonality
The Company's results are sensitive to seasonal variations in traffic, with
the highest levels of traffic and revenue generally realized in the third
quarter and the lowest levels of traffic and revenue generally realized in the
fourth quarter. Because the Company's costs do not vary significantly in
response to traffic levels, such seasonality substantially affects the Company's
profitability from quarter to quarter.
Insurance
The Company carries passenger liability insurance, aircraft loss or damage
insurance, property insurance and customary other insurance. Management believes
such insurance is adequate to protect the Company and its property and to comply
both with federal regulations and the Company's aircraft lease agreements.
Cautionary Statements
Airline Industry Competition
The airline industry is highly competitive. A slight change in fare levels
or load factor can have a substantial impact on the Company. Most of the
Company's tickets are sold within the two weeks preceding the date of travel.
Accordingly, any changes in the Company's competitive environment (for instance,
changes in fares or service offered by its competitors) can have an immediate
significant financial impact on the Company.
In addition, the airline industry is highly sensitive to general economic
conditions. Any reduction in airline passenger traffic (whether general or
specific to the Company) may materially and adversely affect the Company. A
shortfall from expected revenue levels could have a material adverse effect on
the Company's growth or viability.
Fuel
The future cost and availability of fuel to the Company cannot be
predicted, and increases in the cost of fuel or the unavailability of adequate
supplies of fuel could have a material adverse effect on the Company.
Employee Relations
The Company depends on a skilled and motivated workforce to provide good
customer service at a low cost. If the Company's relationship with its employees
were to become significantly adverse, the Company's service levels could suffer
and its costs could increase.
The Company operates with lower personnel costs than many established
airlines due to lower average seniority of the Company's workforce, lower salary
structures and more flexible work rules. Management anticipates that the
Company's personnel costs will increase as the Company's workforce gains
seniority and as the Company's salary structure matures in response to
profitability.
Aircraft Cost and Availability
As of March 1, 1997, the Company operates 29 aircraft. Any interruption in
service as a result of maintenance requirements or the loss of aircraft could
materially and adversely affect the Company. A majority of the Company's
aircraft are leased with remaining terms of less than five years. Any
significant increases in cost to renew the leases, or unavailability of lease
renewals or alternate aircraft, could materially and adversely affect the
Company.
Liquidity and Leverage
The Company has limited liquidity and is highly leveraged. These factors
may adversely affect the Company's ability to respond to new opportunities or
competitive conditions and may make the Company more vulnerable to downturns in
its financial results.
Limited Routes
The Company's results are largely dependent on traffic levels at its
Reno/Tahoe hub, on its routes between San Jose and southern California, and at
its focus cities of Las Vegas, Los Angeles and Seattle. Traffic levels at
Reno/Tahoe and Las Vegas are based largely on tourist and recreational travel
and could be materially and adversely affected, for instance, by declines in
traffic to such cities as a gaming destination or to Tahoe as a ski resort.
Traffic levels in San Jose are largely dependent on the California economy.
Regulatory Costs
Additional legislation or FAA regulations could increase operating costs or
otherwise adversely affect the Company. The Company also may be adversely
impacted by any prolonged inspection activity by the FAA.
The FAA has stated that it is increasing its oversight of airlines during
their first five years of operations. The Company will pass its fifth
anniversary on July 1, 1997. The Company could be adversely impacted by any
increased FAA regulations or review activity directed toward the Company, toward
younger airlines in general, or toward operators of MD-80 series aircraft.
Reliance on Others
The Company depends on arrangements with vendors, including American
Airlines, for many essential services and for access to certain airports. Any
significant change in the Company's relationships with its major vendors,
including travel agencies, could have an immediate material impact on the
Company.
Item 2. Properties
The Company leases approximately 60,000 square feet of office space at its
principal offices at 220 and 230 Edison Way, Reno, Nevada, for general corporate
use under leases which expire on November 30, 2000. The Company leases
approximately 14,000 square feet at 5450 Equity Avenue, Reno, Nevada for a
reservations facility under a lease which expires in 1998. The Company recently
leased approximately 27,000 square feet at 500 East Warm Springs Road, Las
Vegas, Nevada for a second reservations facility which is expected to be
operational in the second quarter of 1997. This lease is extendible through
2017. The Company has built an aircraft hangar at 365 South Rock Boulevard,
Reno, Nevada, on land leased through 2021. The hangar is used for overnight
maintenance checks and moderate repairs. Management believes its office
facilities are adequate for the foreseeable future. The Company leases
additional facilities in San Jose, Reno and at other airports it serves.
Aircraft
As of March 1, 1997, the Company owns one MD-87 and one MD-83 aircraft and
leases twenty-eight aircraft, including eight MD-82, fourteen MD-83, three MD-87
aircraft and three MD-90 aircraft. (The owned MD-83 aircraft is currently leased
to another airline.) The MD-82 and MD-83 aircraft are very similar, modern
aircraft, which have quiet and fuel-efficient engines and which are configured
by the Company with 20 first-class and 120 coach-class seats. The MD-87 aircraft
are smaller versions of the same aircraft type, with 12 first-class and 105
coach-class seats in the Company's configuration. The MD-90 aircraft are
extremely quiet and fuel-efficient state-of-the-art aircraft with 128 coach and
20 first class seats. The MD-90 aircraft were necessary to allow Reno Air the
flexibility to expand at Orange County Airport, due to the airport's stringent
noise restrictions. The terms for the leased aircraft range from less than one
year to eighteen years. A majority of the Company's leased aircraft have
remaining terms of less than five years.
As of March 1, 1997, the average age of the Company's fleet was less than
six years.
Airport Facilities
Ticket counters, gates, and airport office facilities at each of the
airports the Company serves are leased from the airport or municipal agency, as
the case may be, and/or sub-leased or used under use agreements from other
airlines. Although the Company has, from time to time, experienced difficulty in
obtaining suitable gate space at certain congested airports, management believes
the Company will be able to maintain existing and/or obtain additional airport
terminal space adequate for its needs.
At all airports to which it flies, Reno Air has entered into use agreements
which provide for the non-exclusive use of runways, taxiways and, in some
instances, other facilities. Landing fees under these agreements normally are
based on the number of landings and weight of aircraft. In addition, certain
airports require deposits and/or letters of credit in various amounts for
various periods.
Item 3. Legal Proceedings
Management believes that all legal proceedings involving the Company are
either covered by insurance or are immaterial to its financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders in the fourth
quarter of 1996.
<PAGE>
Executive Officers of the Registrant
The Chairman of the Board and the executive officers of the Company are :
Name Age Position
Lee M. Hydeman 68 Chairman of the Board
Robert W. Reding 47 Chief Executive Officer
and President
David W. Asai 41 Vice President Controller and Chief
Accounting Officer
Jeffrey C. Buckio 51 Vice President - Maintenance
Jimmy W. Duke 58 Vice President - Flight Operations
Jeffrey T. Fisher 35 Vice President - Finance and Chief
Financial Officer
Annette Murphy 50 Vice President - Customer Service
Robert M. Rowen 40 Vice President, Secretary and
General Counsel
Steve Sarner 38 Vice President - Marketing and
Sales
Lee M. Hydeman has been a director of the Company since September 1990,
Chairman since December 1991. Mr. Hydeman was Chief Executive Officer of the
Company from April 1, 1994, to September 21, 1995. Mr. Hydeman has 30 years
experience in the airline industry, including 13 years as Washington, D.C.
counsel to and an officer of Continental Air Lines.
Robert W. Reding has been Chief Executive Officer of the Company since
September 21, 1995, and President and a director of the Company since April 1,
1994. From January 1992 through March 1994, Mr. Reding was Vice President -
Operations of the Company and prior to such time had acted as a consultant to
the Company at various times during 1991. Mr. Reding is a director of the
Reno-Sparks Convention and Visitors Authority.
David W. Asai has been Vice President since January 1997 and Controller and
Chief Accounting Officer of the Company since December 1994. From July 1992 to
November 1994, Mr. Asai was Vice President - Finance and Chief Financial Officer
of Spirit Airlines, Inc. From 1981 to June 1992, Mr. Asai was employed by Midway
Airlines, Inc. in various capacities, most recently as Director of Financial
Planning and Analysis. Mr. Asai is a Certified Public Accountant.
Jeffrey C. Buckio has been the Vice President - Maintenance since January
1, 1996. From January 1992 until January 1996, Mr. Buckio was Director of
Quality Assurance and Maintenance/Engineering. Prior to joining the Company, Mr.
Buckio was the Director of Technical Services and the Director of Quality
Assurance of Midway Airlines for over 12 years. Previously, Mr. Buckio held
various management positions with Air International, Inc. (a commercial aircraft
repair facility).
Jimmy W. Duke has been Vice President - Flight Operations since February
26, 1996. From April 1992 until February 1996, Mr. Duke was Vice President of
Operations of Ryan International Airlines, Inc. Prior to 1992, Mr. Duke was
employed by Midway Airlines since 1987, most recently as Director of Flight
Operations.
Jeffrey T. Fisher has been Vice President - Finance and Chief Financial
Officer since January 23, 1997. From June 1995 to January 1997, Mr. Fisher was
Vice President - Planning and Corporate Development. From November 1994 to June
1995, he was Director of Planning for the Company. From August 1989 to October
1994, Mr. Fisher was in the Corporate Finance and Planning group at American
Airlines, with responsibility for various agreements between American and the
Company. From 1985 through 1989, Mr. Fisher was a financial analyst with
McDonnell Douglas Corporation.
Annette Murphy has been Vice President - Customer Service since March 1,
1997. Prior to joining Reno Air, Ms. Murphy was Director of Sales - Western
Region with USAir for 13 years. Ms. Murphy began her career with American
Airlines where for 17 years she held positions in station management, customer
service, reservations, inflight and sales.
Robert M. Rowen has been Vice President, General Counsel and Secretary
since April 13, 1994. Prior to joining the Company, Mr. Rowen was an attorney
with Continental Airlines since 1987, most recently Staff Vice President and
Deputy General Counsel.
Steve Sarner has been Vice President - Marketing and Sales since April
1996. From July 1994 to April 1996, Mr. Sarner was Director of Sales for the
Company. Prior to joining the Company, Mr. Sarner was Director of Sales -
Western Region for Rosenbluth International Travel, one of the nation's largest
travel agencies. From 1985 through June 1992, Mr. Sarner held various sales
management positions with USAir.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
As of March 1, 1997, there were 592 registered holders of record and
approximately 6,500 beneficial holders of the Company's common stock.
The Company's common stock has been traded in the NASDAQ/NMS under the
symbol "RENO" since March 8, 1993, and has been traded on the Pacific Stock
Exchange under the symbol "RNO" since July 19, 1993.
The following table sets forth the high and low sale prices of the
Company's common stock for the last two years.
Common Stock:
Fiscal Year High Low
1995
First Quarter $5 3/4 $3 5/8
Second Quarter 8 4 1/2
Third Quarter 8 7/8 6 1/4
Fourth Quarter 9 9/16 6 1/16
1996
First Quarter $12 5/8 $7
Second Quarter 14 1/4 10 1/4
Third Quarter 12 3/8 7 5/8
Fourth Quarter 8 5/8 6 3/4
The Company intends to retain earnings to finance the development and
growth of its business. Accordingly, no cash dividends have been declared by the
Company on the common stock and the Company does not anticipate that any
dividends will be declared on the common stock for the foreseeable future.
Future payment of cash dividends, if any, will depend on the Company's financial
condition, results of operations, business conditions, capital requirements,
restrictions contained in agreements, future prospects and other factors deemed
relevant by the Company's Board of Directors. The Company's 9% Senior
Convertible Notes due 2002 contain restrictions on the Company's ability to pay
dividends.
<PAGE>
Item 6. Selected Financial Data
The following selected financial data as of and for each of the fiscal
years ended December 31, 1996, 1995, 1994, 1993 and 1992 are derived from the
audited financial statements of the Company. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the financial statements and the related notes
thereto included elsewhere in this Report.
<TABLE>
<CAPTION>
Year ended Year ended Year ended Year ended Year ended
December 31, December 31, December 31, December 31, December 31,
1996 1995 1994 1993 1992(1)
------------- ------------- ------------- ------------- -------------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Operating Revenue .................... $ 349,884,007 $ 256,507,759 $ 195,518,838 $ 124,640,186 $ 27,091,873
Operating Expenses ................... 347,399,746 252,898,866 209,370,662 131,973,791 29,218,758
------------- ------------- ------------- ------------- -------------
Operating Income (Loss) .............. 2,484,261 3,608,893 (13,851,824) (7,333,605) (2,126,885)
Non-Operating Expense, Net ........... (453,694) (1,657,923) (141,112) (10,074) (58,104)
------------- ------------- ------------- ------------- -------------
Net Income (Loss) .................... $ 2,030,567 $ 1,950,970 $ (13,992,936) $ (7,343,679) $ (2,184,989)
============= ============= ============= ============= =============
Net Income (Loss) per Common
and Common Share Equivalent ....... $ 0.19 $ 0.19 $ (1.73) $ (1.06) $ (0.39)
============= ============= ============= ============= =============
Balance Sheet Data:
Cash and Cash Equivalents ............ $ 16,221,297 $ 34,985,808 $ 9,103,564 $ 6,542,601 $ 5,669,511
Short-Term Investments ............... 2,318,407 2,944,188 -- 5,174,250 --
Current Assets ....................... 56,517,824 72,063,749 32,934,639 24,786,896 10,382,477
Total Assets ......................... 143,706,412 99,483,923 51,683,194 37,203,597 13,791,706
Current Liabilities .................. 67,015,223 53,801,744 43,389,416 22,611,212 9,194,045
Long-Term Debt ....................... 50,698,058 28,755,019 4,787,755 -- --
Total Liabilities .................... 131,575,613 90,580,784 53,481,049 25,255,151 9,194,045
Shareholders' Equity (Deficit) ....... 12,130,799 8,903,139 (1,797,855) 11,948,446 4,597,661
Working Capital (Deficit) ............ (10,497,399) 18,262,005 (10,454,777) 2,175,684 1,188,432
- ------------------------
(1) For the six months ended June 30, 1992, the Company was a development stage company. The Company commenced
commercial flight operations on July 1, 1992.
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Selected Operating Statistics
<TABLE>
<CAPTION>
Percent Percent
Year Ended Increase Year Ended Increase Year Ended
Dec. 31, (Decrease) Dec. 31, (Decrease) Dec. 31,
1996 1995 to 1996 1995 1994 to 1995 1994
<S> <C> <C> <C> <C> <C>
Revenue passengers(1) .......................... 5,161,009 30.5% 3,954,578 17.4% 3,369,446
Revenue Passenger Miles (000s)(2) .............. 3,035,169 45.2 2,090,014 28.8 1,622,630
Available Seat Miles (000s)(3) ................. 4,503,363 35.5 3,322,475 24.1 2,678,144
Passenger load factor (percent)(4) ............. 67.4 7.2 62.9 3.8 60.6
Breakeven load factor (percent)(5) ............. 67.0 7.4 62.4 (4.3) 65.2
Yield per RPM (cents)(6) ....................... 10.9 (6.0) 11.6 3.6 11.2
Operating Cost per ASM (cents) ................. 7.7 1.3 7.6 (2.6) 7.8
Aircraft in Service At End of Period ........... 29 26.1 23 9.5 21
Avg. Daily Aircraft Utilization (block hours) .. 9.9 3.1 9.6 2.1 9.4
Avg. Cost of Fuel (cents per gallon)(7) ........ 77 16.7 66 4.8 63
</TABLE>
- -----------
(1) The number of trip segments flown by paying passengers.
(2) The number of miles flown by paying passengers.
(3) The number of seats available multiplied by the number of miles such seats
are flown on revenue flights.
(4) RPMs divided by ASMs.
(5) The passenger load factor that would have resulted in the Company breaking
even on a net income basis during the year, assuming yield and operating
costs remained constant.
(6) Passenger revenue divided by RPMs.
(7) Jet fuel prices excluding into plane service charges.
(8) Selected Operating Statistics include scheduled flights and flights operated
under track charter programs.
General
This report contains forward looking statements within the meaning of the
Securities Litigation Reform Act. Due to the factors described under "Business -
Cautionary Statements," actual results may differ materially from those
forward-looking statements.
In 1996, the Company continued to expand its route network and flight
operations and, despite rising jet fuel prices, recurring West Coast fare sales
primarily initiated by a major competitor and increased maintenance expense, the
Company recorded its second consecutive annual profit. For the year, Reno Air
posted a net profit of $2,030,567, an increase of 4.1% versus 1995, grew
available seat mile ("ASM") capacity by 35.5%, and carried a total of 5,161,009
passengers.
Management believes that the Company's 1996 net profit was achieved as a
result of its maturing route structure, and increased market awareness of its
high quality, low cost product. The Company also benefited from efficiencies
resulting from its expanded base of operations, increased aircraft and asset
utilization and increased charter flying.
In 1996, the Company's fleet increased to an average of 27 aircraft, from
21 in the prior year. This added aircraft capacity enabled Reno Air to generate
a total of 4,503,363,418 ASMs, up 35.5% over 1995. At the same time, revenue
passenger miles ("RPMs") grew by 45.2%, to 3,035,169,220, producing an annual
load factor of 67.4%, versus 62.9% in 1995. The Company's load factor has
increased in each of the last three years.
Total passengers carried in 1996 increased by 30.5% to 5,161,009, while
passenger stage length, or the average distance of each one-way passenger trip,
increased by 11%, to 588 miles. Management believes that passenger stage length
increased in response to the Company's added capacity in long haul markets and
its increased scheduling focus on "hubbing," which increases the number of
connecting destinations and flights available to a passenger traveling over a
Reno Air hub city.
In 1996, the Company began serving three new year-round markets, Denver,
San Francisco and Fairbanks, Alaska. It also expanded operations in a number of
existing markets including Portland-Seattle, Anchorage-Seattle and Reno-Colorado
Springs, and expanded its charter business.
Reno Air competes primarily with Southwest Airlines, Alaska Airlines, and
Shuttle by United(TM). Southwest Airlines is the Company's main competitor, in
that it operates non-stop service in a majority of the Company's non-stop
markets. No other carrier competes head-to-head in more than 25% of the
Company's non-stop markets. In 1996, Southwest Airlines initiated highly
stimulative marketing programs on the West Coast including wide-spread
availability of $19, $25 or $29 non-stop fares. Many of the Company's passengers
are substantially price sensitive, so the Company matched these fare levels.
Financial results are very sensitive to external revenue and cost factors
including industry fare levels and fuel prices. Fare levels can change rapidly.
Management believes that the West Coast fare sales described above reduced the
Company's profitability and cannot predict whether, or to what degree, such
sales may recur. In 1996, the Company experienced fuel prices that averaged
16.7% higher than 1995 levels, which increased the Company's fuel expense by
$9.7 million as compared to what 1996 fuel expense would have been at the
average price of fuel paid in 1995. Fuel prices increased each quarter in 1996
and were at their highest level in the fourth quarter. Although fuel prices
continued to increase in January 1997, they have since declined moderately.
Management cannot predict whether fuel prices will remain at these levels, will
increase further, or will return to lower levels.
The Company entered into a codeshare relationship in September 1996, with
American Eagle carrier Wings West Airlines, under which Reno Air's marketing
code ("QQ") is carried on some American Eagle flights into and out of Los
Angeles International Airport. The Company also entered into a codeshare
relationship with Hawaiian Airlines in November 1996 under which Hawaiian's
marketing code ("HA") is carried on some of Reno Air flights into and out of Los
Angeles. These agreements permit passengers to book travel under a single
airline code for travel connecting between the carriers.
On January 1, 1996, the 10% federal excise tax applicable to domestic
passenger air travel expired. In August 1996, the tax was reinstated through
December 31, 1996. The tax was again reinstated on March 7, 1997, effective
through September 30, 1997. The expiration and reinstatement of these taxes can
raise or lower the net ticket revenue that the Company generates on ticket
sales, although the precise value of that cost or benefit is difficult to
assess. Congress is studying an alternate user fee or tax system which,
depending on its structure, could disproportionately impact low-fare carriers
like the Company.
In 1996, Reno Air increased its usage of Teletech, Inc. to supplement the
Company's internal reservations capacity, thus boosting its direct sales. This
significantly increased the Company's call handling capability.
The Company began using a new automated yield management system in July
1996 to optimize its revenues by better allocating the optimal amount of
discount seat inventory on each flight.
The International Brotherhood of Teamsters has filed an application with
the National Mediation Board to represent the Company's flight attendants. The
NMB has advised the Company that ballots are being mailed to flight attendants
on March 24, 1997, and will be counted on April 23, 1997. If unionization of the
Company's employees occurs, the Company's flexibility in dealing with its
employees would be restricted, which could result in a material increase in
costs and the Company would be required to negotiate a contract with the union.
Management cannot predict the timing of such negotiations if a union were to be
elected, when a contract might be entered into, or the extent such a contract
would contain terms different from the Company's current work and pay rules.
The West Coast, and Reno in particular, experienced unusually harsh weather
at the beginning of 1997, including a New Year's Day flood which shut the
Reno/Tahoe airport and Reno Air's Reno reservations office for approximately 36
hours. Although these facilities and the city of Reno in general, recovered
rapidly from the flood, the adverse publicity surrounding the flood depressed
tourist and gambling traffic to Reno for at least six weeks. Reno Air's results
for the first quarter of 1997 will reflect the adverse impact of the flood.
Management expects the Company to grow at a significantly slower rate in
1997 than the Company experienced in 1996, as management focuses on improving
profitability of the existing fleet.
Results of Operations
In 1996, the Company generated net income of $2,030,567, or 19(cent) per
share, slightly higher than the $1,950,970 net income (also 19(cent) per share),
earned in 1995. In 1994, the Company had a net loss of $13,992,936, or $1.73 per
share.
Operating income for 1996 was $2,484,261, versus $3,608,893 in 1995, and an
operating loss of $13,851,824 in 1994. The Company's 1996 net earnings were
achieved despite a difficult operating and competitive environment characterized
by widespread fare sales throughout the year, and fuel prices that averaged
16.7% higher than in 1995.
In 1996, continued over-capacity on the West Coast, due to added flying by
the Company, Southwest Airlines, Alaska Airlines and Shuttle by United(TM), led
to intense competition to attract passengers and numerous attempts, primarily by
other airlines, to stimulate additional traffic through fare initiatives.
Management believes that certain of these fare initiatives were earnings
dilutive, in that revenue generated did not fully cover average passenger
carrying costs. As a result of these fare sales, the Company's load factor
increased significantly versus 1995, from 62.9% to 67.4% in 1996. However, these
fare sales and an 11% increase in average passenger stage length reduced
passenger yields from 11.6(cent) in 1995 to 10.9(cent) in 1996. As a result,
breakeven load factor climbed from 62.4% to 67.0% for the comparable periods,
and earnings from 1995 to 1996 were generally flat.
Revenue derived from ticket sales is recognized at the time transportation
is provided. However, some tickets sold are never used, refunded, or matched to
ticket lifts, and become "breakage," which is estimated and recognized as
revenue. In 1996, as in 1995, the Company benefited from a re-estimation of
ticket breakage recognized during the year that resulted in fourth quarter
adjustments of approximately $2 million in 1996 and $5 million in 1995.
The significant improvement in the Company's operating results from 1994 to
1995 reflected a 7.4% increase in unit revenues (yield per ASM) due to an
increase in passenger yield from 11.2(cent) to 11.6(cent), and an increase in
load factor from 60.6% to 62.9%, along with a 2.6% decrease in unit expenses
(cost per ASM) spread over a 24.1% increase in the Company's available seat
miles.
Operating Revenues
Total revenues in 1996 grew 36%, to $349,884,007, as compared to
$256,507,759 in 1995. In 1994, the Company generated $195,518,838 in operating
revenues.
Passenger revenue increased 37% to $330,860,967 in 1996, versus
$242,134,351 in 1995, and was up 81.7% versus its 1994 total of $182,048,708.
In 1996, the Company's fleet increased to an average of 27 aircraft, from
21 in the prior year. This added aircraft capacity enabled Reno Air to generate
a total of 4,503,363,418 ASMs, up 35.5% over 1995. From 1994 to 1995, passenger
revenue growth resulted from a 29% increase in RPMs and a 3.6% increase in yield
per RPM.
Other revenues, comprised primarily of cargo, mail, ad hoc charters and
QQuickEscapes tour revenues, grew to $19,023,040 in 1996, from $14,373,408 in
1995 and $13,470,130 in 1994. They accounted for 5.4%, 5.6%, and 6.9%,
respectively, of 1996, 1995 and 1994 total revenues. Growth in other revenues
year to year resulted primarily from the Company's increased charter flying.
Operating Expenses
Despite high jet fuel prices in 1996, the Company maintained a cost
structure that is one of the lowest in the industry, and the Company's unit
costs remained competitive with its chief low fare competitor, Southwest
Airlines, despite the Company offering a full-service product versus Southwest's
no-frills product.
Total operating expenses grew in line with capacity, from $252,898,866 in
1995 to $347,399,746 in 1996, up 37% year-over-year. Operating expenses in 1994
totaled $209,370,662.
On a unit cost basis, the Company's operating cost structure grew from
7.6(cent) per ASM in 1995, to 7.7(cent) in 1996. However, fuel price increases
year-over-year added $9.7 million to operating expenses, or approximately
0.2(cent) per ASM. On a pro forma basis, holding fuel prices constant from 1995
to 1996, the Company's operating unit costs would have declined from 7.6(cent)
in 1995 to 7.5(cent) in 1996. The Company's 1994 operating costs were 7.8(cent)
per ASM.
A number of cost categories, including aircraft leases, commissions,
facilities leases, and insurance, saw meaningful unit cost reductions from 1995
to 1996 due to economies of scale and greater aircraft utilization. Commission
expense costs were reduced by 12.6% as the Company increased the percentage of
tickets it sold directly through its reservations and airport ticket offices.
This resulted in part from the Company's outsourcing of overflow reservations
calls to Teletech. Facilities lease costs declined by 13.9% as the Company grew
its overall capacity primarily within its existing facilities, thereby
increasing utilization. The Company lowered insurance costs in 1996 by 14% by
negotiating lower insurance rates. Management cannot predict future insurance
rates.
Cost categories which experienced significant year-over-year unit cost
increases included aircraft fuel, maintenance inspections and repairs,
advertising and sales, and depreciation and amortization. In addition to rising
market prices for jet fuel, fuel costs in 1996 were impacted by the expiration,
effective October 1, 1995, of the 4.3(cent) per gallon aviation fuel tax
exemption from federal excise taxes. Maintenance costs increased 22.2% in 1996
as a result of industry airworthiness directives, fleet interior refurbishments,
general aging of the fleet, and expiration of manufacturer warranties.
Advertising, sales and distribution costs increased 9.5% as the Company devoted
more resources to develop new markets and solidify Reno Air's marketing presence
in core West Coast markets. Sales costs also increased due to the Company's
contract with Teletech to handle reservations call overflow until the Company's
Las Vegas reservations center is completed. Management believes that this
outsourcing enabled the Company to respond to customer calls more quickly, and
sell more tickets. Depreciation and amortization costs increased by 83.3%
year-over-year as the Company increased its flight equipment assets from $11.1
million to $64.0 million with the purchase of two aircraft and four spare
engines. In the same timeframe, ground property and equipment grew from $4.8
million to $8.4 million, primarily resulting from the Company's construction of
a new maintenance hanger.
From 1994 to 1995, the Company's unit cost declined as a result of, among
other factors, a 2.1% increase in aircraft utilization, a 9.8% increase in
average passenger stage length and efficiencies from the Company's increased
size, offset by a 4.8% increase in the average cost per gallon of fuel from
$0.63 to $0.66. Part of the fuel cost increase was due to the expiration,
effective October 1, 1995, of the 4.3(cent) per gallon aviation fuel exemption
from federal excise taxes.
<TABLE>
<CAPTION>
Operating Expenses per Available Seat Mile
Percent Percent
Year Ended Increase Year Ended Increase Year Ended
December 31, (Decrease) December 31, (Decrease) December 31,
Operating Expenses 1996 1995 to 1996 1995 1994 to 1995 1994
- ----------------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Salaries, wages and benefits .......... 1.20 (5.2)% 1.26 0.7 % 1.26
Aircraft fuel and oil ................. 1.48 9.8 1.35 5.3 1.28
Aircraft leases ....................... 1.36 (8.9) 1.50 (4.6) 1.57
Maintenance ........................... 0.58 22.2 0.48 (15.8) 0.57
Handling, landing and airport fees .... 0.78 4.3 0.75 (2.6) 0.77
Advertising, sales and distribution ... 0.67 9.5 0.61 (10.3) 0.68
Commissions ........................... 0.43 (12.6) 0.49 0.5 0.49
Facilities leases ..................... 0.25 (13.9) 0.29 (3.1) 0.30
Insurance ............................. 0.17 (14.0) 0.20 5.7 0.19
Communications ........................ 0.10 3.3 0.10 (1.2) 0.10
Depreciation and amortization ......... 0.14 83.3 0.08 14.5 0.07
Other operating expenses .............. 0.54 6.6 0.50 (7.9) 0.55
------------ ------------ ------------ ------------ ------------
7.70 1.3 % 7.61 (2.6)% 7.83
============ ============ ============ ============ ============
</TABLE>
Liquidity and Capital Resources
From December 31, 1995 to December 31, 1996, key balance sheet changes
included a decrease in current assets, from $72.1 million to $56.5 million,
primarily due to reduced cash and cash equivalents. At the same time, property
and equipment grew year-over-year from $10.7 million to $61.1 million, as the
Company acquired two aircraft and four spare engines, and built a new
maintenance hangar during the year.
Current liabilities increased year-over-year, as well, from $53.8 million
to $67.0 million, primarily from an increase in the Company's accrued
liabilities, air traffic liability, and current maturities of long term debt.
Long term debt grew year-over-year from $28.8 million to $50.7 million
primarily due to the Company acquiring aircraft and aircraft engines. Other
non-current liabilities increased from $8.0 million to $13.9 million.
Shareholders' equity increased by $3.2 million, to $12.1 million
year-over-year, primarily due to the $2.0 million profit and the exercise of
warrants and stock options.
For the year ended December 31, 1996, the Company's cash, cash equivalents
and short term investments declined by $19.4 million, to a total of $18.5
million at the end of the year.
Net cash provided by 1996 operations totaled $3.9 million, versus $6.6
million in the prior year. Investing activities used a total of $35.2 million,
versus $6.8 million in 1995, principally for the purchase of property and
equipment, which used $38.4 million and $3.9 million, respectively. The Company
generated $2.5 million from the sale of equipment in 1996. Short-term investment
transactions generated $600,000 of net proceeds in 1996, and used $2.9 million
of cash in 1995.
Financing activities provided the Company $12.6 million during the year, of
which $14.5 million resulted from financing on an aircraft and spare engines
that the Company purchased, partially offset by $2.8 million used to service
principal payments on notes. In 1995, the Company's financing activities
generated $26.1 million, primarily through the issuance of convertible notes in
that year. In February 1997, the Company generated $2.6 million in proceeds from
a mortgage with U.S. Bank on the Company's new maintenance hangar in Reno,
Nevada.
Included in the Company's balance sheet as non-current liabilities are
deferred lease payables of $4.5 million, down from $5.0 million a year ago.
Security deposits related to leased aircraft at December 31, 1996 and 1995
totaled $9.5 and $7.8 million, respectively. The Company's aggregate minimum
annual lease payment service for 1997, as of December 31, 1996 was $68.7
million.
In March 1996, the Company took delivery of its first two MD90 jet aircraft
from McDonnell Douglas. It deployed these aircraft principally to operate out of
Orange County airport in Southern California, because the MD90s can operate
under even the most stringent noise limitations in place at the airport. The
third MD90 was placed in service in August 1996 to provide additional seat
capacity to Chicago O'Hare and to establish new service from Orange County to
San Francisco.
During 1996, the Company operated an average of 27 MD80 and MD90 aircraft
and, as of December 31, 1996, the Company's fleet totaled 30 aircraft. Two
aircraft, an MD87 and an MD83, were owned by the Company, while the remainder
are leased under operating leases with initial terms of between 1 and 18 years.
The MD83 aircraft owned by the Company has been leased to another carrier for an
initial 12 month term through May 1997, and management expects to renew this
lease for a period of 12 to 24 months upon expiration of the current lease. In
March 1997, the Company expects to take delivery of an MD87 aircraft under a six
year lease. This aircraft will be used to support the Company's planned
scheduled service expansion on May 22, 1997. The Company has also been in
discussions to purchase an MD83 aircraft on expiration of its lease in July
1997.
In September, 1996, the Company canceled a fuel purchase agreement with
American Airlines which provided Reno Air with access to a $12 million revolving
line of credit on fuel purchases. The Company initiated this cancellation to
cease paying American an administrative service charge for this fuel purchasing
service and to release American's lien on a substantial portion of the Company's
assets.
Management believes that the Company's current cash balances, cash flow
generated from operations and its short term investments will, in the aggregate,
be sufficient to meet its obligations, liquidity and capital needs for the next
twelve months. Subject to market conditions, the Company may seek to boost its
liquidity by pursuing a public or private offering of its equity or debt
securities. Management believes the Company also has several options to increase
cash through sales or re-financings of its owned aircraft and spare engines. The
Company's total equity in owned aircraft and spare engines as of December 31,
1996 was $16.5 million.
<PAGE>
Item 8. Financial Statements and Supplementary Data
RENO AIR, INC. FINANCIAL STATEMENTS
Table of Contents
Page
Report of Ernst & Young LLP, Independent Auditors................ 27
Report of Arthur Andersen LLP, Independent Public Accountants.... 28
Balance Sheets................................................... 29
Statements of Operations......................................... 30
Statements of Shareholders' Equity (Deficit)..................... 31
Statements of Cash Flows......................................... 32
Notes to Financial Statements.................................... 33
<PAGE>
Report of Independent Auditors
The Board of Directors
Reno Air, Inc.
We have audited the accompanying balance sheets of Reno Air, Inc. (the
"Company") as of December 31, 1996 and 1995, and the related statements of
operations, shareholders' equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Reno Air, Inc. at December 31,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG, LLP
Reno, Nevada
February 18, 1997
<PAGE>
Report of Independent Public Accountants
The Board of Directors and Stockholders of
Reno Air, Inc.:
We have audited the balance sheets of RENO AIR, INC. (a Nevada corporation) as
of December 31, 1994 and 1993, and the related statements of operations,
stockholders' (deficit) equity and cash flows for each of the three years in the
period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Reno Air, Inc. as of December
31, 1994 and 1993, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
March 28, 1995.
<PAGE>
Reno Air, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31
1996 1995
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ...................................... $ 16,221,297 $ 34,985,808
Short-term investments ......................................... 2,318,407 2,944,188
Accounts receivable ............................................ 18,834,788 18,237,295
Inventories and operating supplies ............................. 2,109,364 1,298,894
Prepaid expenses and other ..................................... 17,033,968 14,597,564
------------- -------------
Total current assets .............................................. 56,517,824 72,063,749
Property and equipment, at cost:
Flight equipment ............................................... 63,974,552 11,061,841
Ground property, equipment and improvements .................... 8,377,217 4,839,542
Accumulated depreciation ....................................... (11,253,987) (5,212,862)
------------- -------------
61,097,782 10,688,521
Restricted cash and investment .................................... 6,519,249 2,150,327
Deposits and other ................................................ 19,571,557 14,581,326
$ 143,706,412 $ 99,483,923
============= =============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable ............................................... $ 19,071,306 $ 19,087,156
Accrued liabilities ............................................ 19,775,738 14,419,993
Air traffic liability .......................................... 21,392,594 18,924,676
Current maturities of long-term debt ........................... 5,309,758 342,061
Current portion of deferred lease payable ...................... 1,465,827 1,027,858
------------- -------------
Total current liabilities ......................................... 67,015,223 53,801,744
Long-term debt .................................................... 50,698,058 28,755,019
Non-current liabilities ........................................... 13,862,332 8,024,021
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 10,000,000
Issued and outstanding shares - zero in 1996 and 1995 ........ -- --
Common stock, $.01 par value:
Authorized shares - 30,000,000
Issued and outstanding shares - 10,333,446 in 1996 and
9,974,800 in 1995 ............................................ 103,334 99,748
Additional paid-in capital ..................................... 32,607,130 31,413,623
Accumulated deficit ............................................ (20,579,665) (22,610,232)
------------- -------------
Total shareholders' equity ........................................ 12,130,799 8,903,139
------------- -------------
$ 143,706,412 $ 99,483,923
============= =============
See accompanying notes.
</TABLE>
<PAGE>
Reno Air, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Operating revenues:
Passenger ..................................... $ 330,860,967 $ 242,134,351 $ 182,048,708
Other ......................................... 19,023,040 14,373,408 13,470,130
------------- ------------- -------------
349,884,007 256,507,759 195,518,838
Operating expenses:
Salaries, wages and benefits .................. 53,989,015 41,995,391 33,614,751
Aircraft fuel and oil ......................... 66,806,385 44,872,145 34,334,117
Aircraft leases ............................... 61,322,245 49,673,789 41,983,147
Maintenance ................................... 26,189,953 15,807,634 15,139,921
Handling, landing and airport fees ............ 35,191,750 24,893,657 20,592,650
Advertising, sales and distribution ........... 30,243,533 20,379,733 18,312,362
Commissions ................................... 19,402,065 16,381,842 13,145,391
Facility leases ............................... 11,206,312 9,599,725 7,988,365
Insurance ..................................... 7,671,101 6,579,587 5,018,991
Communications ................................ 4,698,629 3,354,545 2,735,582
Depreciation and amortization ................. 6,447,112 2,595,188 1,826,784
Other operating expenses ...................... 24,231,646 16,765,630 14,678,601
------------- ------------- -------------
347,399,746 252,898,866 209,370,662
------------- ------------- -------------
Operating income (loss) .......................... 2,484,261 3,608,893 (13,851,824)
Non-operating (expense) income:
Interest expense .............................. (4,348,160) (2,141,616) (928,822)
Interest income ............................... 3,012,931 2,307,689 1,043,493
Other, net .................................... 881,535 (1,823,996) (255,783)
------------- ------------- -------------
(453,694) (1,657,923) (141,112)
------------- ------------- -------------
Net income (loss) ................................ $ 2,030,567 $ 1,950,970 $ (13,992,936)
============= ============= =============
Net income (loss) applicable to common
stock ......................................... $ 2,030,567 $ 1,817,543 $ (13,992,936)
============= ============= =============
Net income (loss) per common share and
common share equivalent ....................... $ .19 $ .19 $ (1.73)
============= ============= =============
Weighted average number of common shares
and common share equivalents outstanding ...... 10,870,968 9,786,288 8,093,356
============= ============= =============
See accompanying notes.
</TABLE>
<PAGE>
Reno Air, Inc.
Statements of Shareholders' Equity (Deficit)
For the years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Preferred Additional
Common Stock Stock Paid-In Accumulated
Shares Amount Amount Capital Deficit Total
--------- ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 ............ 7,984,288 $ 79,843 $ -- $ 22,436,869 $(10,568,266) $11,948,446
Exercise of stock options ............ 228,500 2,285 -- 244,350 -- 246.635
Net loss ............................. -- -- -- -- (13,992,936) (13,992,936)
--------- ------------ ----------- ------------ ------------ -----------
Balance at December 31, 1994 ............ 8,212,788 82,128 -- 22,681,219 (24,561,202) (1,797,855)
Exercise of stock options ............ 279,500 2,795 -- 334,070 -- 336,865
Conversion of 7.25%
convertible subordinated
notes .............................. 930,744 9,307 -- 5,779,511 -- 5,788,818
Issuance of common stock
under the 401(k) Plan .............. 69,192 692 -- 380,313 -- 381,005
Issuance of common stock
under private placement ............ 482,576 4,826 -- 2,371,937 -- 2,376,763
Issuance of 96,515 shares
of preferred stock ................. -- -- 2,412,875 -- -- 2,412,875
Dividend and issuance costs
on preferred stock ................. -- -- -- (133,427) -- (133,427)
Redemption of 96,515 shares
of preferred stock ................. -- -- 2,412,875) -- -- (2,412,875)
Net income ........................... -- -- -- -- 1,950,970 1,950,970
--------- ------------ ----------- ------------ ------------ -----------
Balance at December 31, 1995 ............ 9,974,800 99,748 -- 31,413,623 (22,610,232) 8,903,139
Exercise of stock options ............ 322,000 3,220 -- 813,514 -- 816,734
Exercise of stock warrants ........... 14,000 140 -- 120,680 -- 120,820
Conversion of 7.25%
convertible subordinated
notes .............................. 7,512 75 -- 52,734 -- 52,809
Issuance of common stock
under the 401(k) Plan .............. 15,134 151 -- 206,579 -- 206,730
Net income ........................... -- -- -- -- 2,030,567 2,030,567
--------- ------------ ----------- ------------ ------------ -----------
Balance at December 31, 1996.............10,333,446 $ 103,334 $ -- $ 32,607,130 $(20,579,665) $12,130,799
========= ============ ========== ============ ============ ===========
See accompanying notes.
</TABLE>
<PAGE>
Reno Air, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities
Net income (loss) .......................................... $ 2,030,567 $ 1,950,970 $(13,992,936)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization .......................... 6,447,112 2,595,188 1,826,784
Common stock issued under 401(k) Plan .................. 206,730 194,411 186,594
Gain on sale of equipment .............................. (1,124,875) -- --
Fair value of inducement on conversion of 7.25%
Notes ................................................. -- 1,391,692 --
Accounts receivable .................................... (597,493) (2,994,127) (6,199,466)
Inventories and operating supplies ..................... (810,470) (441,860) (546,946)
Prepaid expenses and other ............................. (2,436,404) (7,123,285) (4,014,618)
Restricted cash and investment ......................... (4,368,922) (518,676) (726,708)
Deposits and other assets .............................. (4,990,231) (5,288,811) (308,687)
Accounts payable ....................................... 1,825,375 7,546,877 2,843,495
Accrued liabilities .................................... 5,355,747 (9,298,041) (2,005,376)
Fuel purchase agreement ................................ (1,841,226) 8,094,359 11,139,267
Air traffic liability .................................. 2,467,918 7,608,758 5,849,453
Deferred lease payable ................................. (1,715,903) (109,015) 2,895,537
Non-current liabilities ................................ 3,451,454 2,989,349 --
------------ ------------ ------------
Net cash provided by (used in) operating activities ........ 3,899,379 6,597,789 (3,053,607)
Investing activities
Purchases of property and equipment ........................ (38,360,946) (3,873,580) (5,942,803)
Proceeds from sale of equipment ............................ 2,500,000 41,485 185,368
Purchases of short-term investments ........................ (4,292,200) (7,472,483) --
Proceeds from sale of short-term investments ............... 4,917,981 4,528,295 5,174,250
Purchase of long-term investment ........................... -- -- (900,041)
------------ ------------ ------------
Net cash used in investing activities ...................... (35,235,165) (6,776,283) (1,483,226)
Financing activities
Proceeds from notes payable ................................ 14,447,567 472,877 8,129,816
Payments on notes payable .................................. (2,813,846) (4,115,115) (5,415,638)
Proceeds from issuance of convertible notes, net of
issuance costs ........................................... -- 27,122,775 4,136,983
Proceeds from issuance of common stock under
private placement, net of issuance costs ................. -- 2,376,763 --
Proceeds from issuance of preferred stock .................. -- 2,412,875 --
Redemption of preferred stock .............................. -- (2,412,875) --
Dividend and issuance costs on preferred stock ............. -- (133,427)
Proceeds from issuance of options and warrants ............. 937,554 336,865 246,635
------------ ------------ ------------
Net cash provided by financing activities .................. 12,571,275 26,060,738 7,097,796
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ........... (18,764,511) 25,882,244 2,560,963
Cash and cash equivalents at beginning of year ............. 34,985,808 9,103,564 6,542,601
------------ ------------ ------------
Cash and cash equivalents at end of year .................. $ 16,221,297 $ 34,985,808 $ 9,103,564
============ ============ ============
See accompanying notes.
</TABLE>
<PAGE>
Reno Air, Inc.
Notes to Financial Statements
Years ended December 31, 1996, 1995, and 1994
1. Accounting Policies
Organization and Operations
Reno Air, Inc. (the "Company") was incorporated in Nevada in June 1990 and
commenced operations in July 1992. The Company is a national air carrier
operating primarily in the western United States. The Company's primary strategy
is to provide low-cost, low-fare high quality scheduled airline passenger
service primarily from a hub in Reno/Tahoe, Nevada, between San Jose and
Southern California and to and from its focus cities of Las Vegas, Los Angeles
and Seattle. The Company also operates both track and ad-hoc charter flights and
an in-house tour operation ("QQuick Escapes") that provides vacation packages
which generally include air transportation, lodging accommodations and ground
transportation.
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which require the Company's management
to make estimates and assumptions that affect the amounts reported therein.
Actual results could vary from such estimates.
Passenger Revenues and Air Traffic Liability
Passenger ticket sales are initially recorded in the air traffic liability
account. Revenue derived from ticket sales is recognized at the time
transportation is provided. Some ticket sales are never used, refunded or
matched to lifts, and become "breakage", which is estimated and recognized as
revenue. Net income for the fourth quarter of 1996 and 1995 includes a benefit
of approximately $2 million and $5 million, respectively, resulting from
adjustments to the ticket breakage estimate relating to earned passenger
revenues. Passenger revenues include revenues from track charter programs.
Other Revenue
Other revenue, which consists primarily of cargo, mail, ad-hoc charter and
QQuick Escapes, is recognized when the related service is provided.
Non Operating Income
During September 1996, the Company sold a spare engine and recognized a gain of
approximately $1.1 million. This gain is included in other non-operating income
in the accompanying statement of operations.
Advertising
Advertising costs are charged to expense in the period the costs are incurred.
Advertising expense for the years ended December 31, 1996, 1995 and 1994 was
approximately $6,229,000, $3,704,000 and $5,197,000, respectively.
Frequent Flyer Program
On July 1, 1993, the Company and American Airlines, Inc. ("American") entered
into an agreement pursuant to which the Company participates in the
AAdvantage(R) frequent flyer program of American. The Company's agreement with
American to participate in the AAdvantage(R) program is terminable by either
party on December 31, 1997; the Company and American have been discussing
renewal terms. The Company expenses the costs related to this program as the
passenger miles are flown. The Company does not accrue any liability for award
travel it may be required to provide because the incremental cost of redemptions
have not been, and are not expected to be, material.
Cash and Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents consist
primarily of commercial paper and money market investments, while short-term
investments consist of commercial paper.
Restricted Cash and Investment
Restricted cash and investment consists of cash and a United States government
obligation securing letters of credit required by various airport authorities
and other entities.
Inventories and Operating Supplies
Expendable parts, materials and supplies relating to flight equipment are stated
at average cost. These items are charged to expense when issued for use.
Depreciation and Amortization
Depreciation and amortization of property, equipment and improvements are
computed using the straight-line method over the estimated useful lives of the
related assets or related leases. The estimated useful lives and residual values
used are as follows:
<TABLE>
<CAPTION>
Description Depreciable Life Residual Value
<S> <C> <C>
Aircraft 20 years from date of manufacture 20%
Aircraft engines 10 years 10%
Flight equipment and rotable parts 5-10 years 0%
Ground property 3-10 years 0%
Equipment and improvements Shorter of 3-7 years or term of lease 0%
</TABLE>
Included in ground property equipment and improvements is approximately $3.1
million of construction-in-progress costs related to the construction of an
airplane hanger.
Income Taxes
Deferred tax asset and liabilities are determined based on the differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
temporary differences are expected to reverse. Additionally, deferred tax assets
and liabilities are separated into current and non-current amounts based on the
classification of the related assets and liabilities for financial reporting
purposes.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed in Note 5, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("Statement
123") requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Maintenance
Routine maintenance and repairs are expensed when incurred.
Under the terms of certain of its aircraft lease agreements, the Company is
required to make monthly maintenance deposits based on usage; such deposits are
applied against the cost of major airframe maintenance checks and engine
overhauls. Prior to 1995, these deposits were expensed as paid because deposit
balances remaining at lease termination (after satisfying return conditions)
either remained with the lessor or their ultimate disposition was uncertain, and
the Company did not have sufficient historical experience to estimate the future
cost of such maintenance checks and overhauls. During 1995, the Company
renegotiated certain lease agreements, clarified the disposition of any
remaining deposits in other lease agreements, and developed sufficient
experience to estimate the future cost of maintenance checks and overhauls.
Accordingly, the Company accrues the estimated costs relating to major airframe
and engine overhauls over the flight hours or cycles remaining before such
periodic maintenance must be performed.
During the fourth quarter of 1996, the Company renegotiated the maintenance
reserve provisions and the termination dates on four of its aircraft leases, and
as a result, recorded a $1.5 million reduction of maintenance expense. In
connection with the scheduled termination of two of the Company's aircraft
leases in mid 1995, the Company received $1.8 million from the lessor,
representing the excess of the maintenance deposit over the amount required,
based on the condition of the aircraft. Accordingly, a credit of $1.8 million
was recognized as a reduction of maintenance expense in the second quarter.
During the fourth quarter of 1995, the Company renegotiated the maintenance
reserve provisions on five of its aircraft leases, and as a result, recorded an
additional $1.4 million reduction of maintenance expense.
At December 31, 1996 and 1995, the Company had current maintenance reserves of
approximately $9,316,000 and $5,337,000 (included in accrued liabilities),
respectively, and long-term maintenance reserves of $9,449,000 and $2,989,000
(included in non-current liabilities), respectively. In addition, the Company
had current prepaid maintenance deposits of approximately $8,547,000 and
$6,909,000 (included in prepaid expenses and other), respectively, and long-term
prepaid maintenance deposits of $8,301,000 and $4,293,000 (included in deposits
and other) at December 31, 1996 and 1995, respectively.
Per Share Data
Net income (loss) per share of common stock is computed based on the weighted
average number of shares of common stock and dilutive common stock equivalents
(stock options and warrants) outstanding during the period. The Company's
convertible debt securities (Note 3) are not considered common stock
equivalents.
Supplemental Statement of Cash Flows Information
Certain noncash activities are not reflected in the statement of cash flows.
Such activities are the following: the Company purchased an aircraft and two
engines at a cost of approximately $15.3 million during the year ended December
31, 1996 using seller-financed debt; the Company received a credit of
approximately $1.7 million toward the purchase of aircraft parts and equipment
as a result of certain aircraft lease negotiations which was recorded to the
deferred lease payable; and, the Company recorded approximately $2.9 million of
deferred maintenance expense related to the acquisition of certain aircraft and
engines.
The Company paid interest of approximately $3.6 million, $1.1 million, and
$300,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
<PAGE>
2. Commitments
Aircraft Leases
At December 31, 1996, the Company operated 28 aircraft which are accounted for
under operating leases with initial terms ranging from one to eighteen years.
With respect to some leases, the expense recognized has exceeded the cash
payments, with the excess having been recorded as a deferred lease payable on
the accompanying balance sheet. Included in non-current liabilities are related
deferred lease payables of approximately $4,546,000 and $5,035,000 at December
31, 1996 and 1995, respectively. Security deposits related to aircraft leased at
December 31, 1996 and 1995 totaled approximately $9,452,000 and $7,765,000,
respectively, and are included in deposits and other on the accompanying balance
sheet.
The Company has entered into an agreement to lease an additional aircraft for a
period of 6 years, to be delivered March 1997. The monthly lease payments for
this aircraft have been included in the following minimum payment schedule.
Gates and Facilities Leases
The Company subleases several gates and related space from American at San Jose
International Airport, and leases administrative, airport, maintenance and
reservation facilities at various locations under operating lease agreements
expiring at various dates through November 30, 2007. Amounts charged to rental
expense for these facility operating leases were approximately $11.2 million,
$9.6 million and $8.6 million in 1996, 1995, and 1994, respectively.
At December 31, 1996, the Company's minimum rental payments under non-cancelable
operating leases with original terms of more than one year were as follows:
<TABLE>
<CAPTION>
Year ending December 31 Aircraft Leases Other Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $ 64,834,854 $ 3,862,687 $ 68,697,541
1998 56,026,454 3,630,366 59,656,820
1999 39,781,454 3,258,250 43,039,704
2000 30,865,786 3,111,420 33,977,206
2001 26,201,452 2,499,778 28,701,230
Thereafter 160,455,690 14,672,992 175,128,682
-------------------------------------------------------------------------
$ 378,165,690 $ 31,035,493 $ 409,201,183
=========================================================================
</TABLE>
<PAGE>
3. Long-Term Debt
The components of long-term debt are as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
9% Senior Convertible Notes due September 30, 2002, interest
payable semi-annually ....................................................... $ 28,750,000 $ 28,750,000
Note payable - secured by the aircraft purchased which has a net book value of
$17,987,000 at December 31, 1996. Monthly accelerating principal payments of
$137,000 to $179,000 plus interest at LIBOR plus 2.25% (7.78% at December 31,
1996) are due through July 2000. Balloon payment of $4,695,000 due July 2000. 11,425,477 --
Note payable - secured by the aircraft purchased which has a net book value of
$13,547,000 at December 31, 1996. Quarterly accelerating principal payments
of $326,000 to $477,000 plus interest at LIBOR plus 2% (7.53% at December 31,
1996) are due through February 2003.......................................... 9,569,000 --
Notes payable - secured by aircraft engines which have an aggregate net book
value of $ 9,451,000 at December 31, 1996. Monthly accelerating principal
payments of $146,000 to $172,000 plus interest at LIBOR plus 2.85% to 3.15%
(8.38% to 8.68% at December 31, 1996) are due through dates ranging from July
1999 through July 2001....................................................... 5,699,602 --
Other notes payable at interest rates from 2.60% to 15.37% due
through December 1997 ...................................................... 563,737 347,080
------------ ------------
Total long-term debt ........................................................... 56,007,816 29,097,080
Less: current maturities ...................................................... (5,309,758) (342,061)
------------ ------------
$ 50,698,058 $ 28,755,019
============ ============
</TABLE>
The 9% Senior Convertible Notes (the "Senior Notes") are convertible into the
Company's common stock, at the holder's option, at a defined conversion rate of
100 shares per $1,000 principal amount of Senior Notes, subject to adjustment
under certain circumstances, or the equivalent of $10.00 per share of common
stock. The Senior Notes are not redeemable prior to September 30, 1998, unless
certain events, as defined, occur.
The Senior Notes are unsecured obligations of the Company and rank senior in
right of payment to all indebtedness of the Company which is by its terms
expressly subordinated in right of payment to the Senior Notes and will rank
pari passu with all other existing or future indebtedness of the Company. The
Senior Notes contain certain covenants, including, among others, covenants
limiting payment of dividends, lines of business, transactions with affiliates,
certain mergers and consolidations and the maintenance of a consolidated net
worth, as defined.
At December 31, 1996, principal payments on long-term debt are due as follows:
1997 $ 5,309,758
1998 5,094,126
1999 4,804,487
2000 7,874,750
2001 1,878,695
Thereafter 31,046,000
=====================
$ 56,007,816
=====================
4. Shareholders' Equity (Deficit)
In April and May 1994, the Company issued approximately $4.6 million principal
amount of 7.25% Convertible Subordinated Promissory Notes due July 15, 1996 (the
"Subordinated Notes"). The Notes were originally convertible into common stock
at a price of approximately $7.03 per share. Commencing April 10, 1995, the
Company offered holders of the Subordinated Notes the opportunity to convert the
Notes into shares of common stock at a conversion price of $5.00 per share. On
May 8, 1995, $4,551,750 principal amount of Notes plus accrued interest were
accepted for conversion. The Company accounted for the conversion as an
inducement to noteholders to convert below the originally scheduled conversion
price and accordingly, recognized a charge of approximately $1.4 million, which
is included in other non-operating expense in the accompanying statement of
operations. This charge does not impact total shareholders' equity, as there was
an offsetting increase to paid-in capital.
During 1995, the Company issued in a private placement 482,576 shares of common
stock (at an issue price of $5 per share) and $2,412,875 (96,515 shares)
liquidation preference of a new issue of Series A 16% Redeemable Preferred Stock
(the "Series A Preferred"). The Series A Preferred was redeemed for cash on
September 25, 1995.
During 1992, warrants for the purchase of 50,000 shares of the Company's common
stock at $3.00 per share were issued to one of the Company's aircraft lessors.
These warrants are exercisable through July 1997, and were all outstanding at
December 31, 1996.
In November 1993, the Company issued to its financial advisor warrants to
purchase 100,000 shares of common stock at an exercise price of $8.63,
exercisable through November 29, 1997. During 1996, 14,000 shares were
exercised. In connection with the placement of the 7.25% Subordinated Notes
issued in 1994, the Company issued to the placement agent warrants to purchase
65,431 shares of Common Stock at an exercise price of $8.44, exercisable through
April 28, 1999. All of these warrants were outstanding at December 31, 1996.
5. Stock Option Plan
In February 1992, the Board of Directors of the Company adopted a Stock Option
Plan (the "Plan"), providing for the grant to officers, directors, consultants
and key employees of options to purchase up to 1,200,000 shares of common stock.
Since adoption, the Plan has been amended to increase the number of options that
may be granted to 2,900,000. At December 31, 1996, 191,800 options were
available for grant under the Plan.
Options may be granted under the Plan under such terms and conditions as the
Board of Directors may determine provided that options must be exercised within
a period of not more than ten years after the date of grant. An optionee must
remain either an employee, a director, or a consultant of the Company to retain
their options. If such status terminates, other than by reason of the death of
the optionee, the options will expire generally within thirty days, subject to
extension by the Board of Directors.
The exercise price of the options granted under the Plan cannot be less than the
fair market value of the common stock on the date the option is granted. Options
granted under the Plan vest over periods up to six years.
On May 19, 1995, the Company canceled substantially all outstanding options
granted to employees or directors with an exercise price in excess of $5.07 per
share and regranted the same number of options to the same persons at an
exercise price of $5.07 per share, the closing market price on date of grant.
All other terms of the options remained the same, except that none of the
regranted options were exercisable until November 10, 1995.
A summary of the Plan's stock option activity and related information for the
years ended December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------------------------------
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 1,534,000 $ 4.51 1,560,500 $ 4.59
Granted 665,500 10.98 1,209,500 5.26
Exercised (322,000) 2.54 (279,500) 1.21
Canceled (126,300) 5.88 (956,500) 6.56
------------------------------------------------------------------------
Outstanding-end of year 1,751,200 $ 7.23 1,534,000 $ 4.51
========================================================================
Exercisable at end of year 333,700 $ 4.67 454,000 $ 3.08
Weighted-average fair value of
options granted during the year $ 8.94 $ 4.13
</TABLE>
Exercise prices for options outstanding under the Plan as of December 31, 1996
ranged from $1.67 to $13. The weighted-average remaining contractual life of
those options is 8.2 years. A summary of the outstanding and exercisable options
at December 31, 1996, segregated by exercise price ranges, is as follows:
<TABLE>
<CAPTION>
Options Outstanding Exercisable Options
- -------------------------------------------------------------------------- --------------------------------
Weighted-Average
Weighted- Remaining Weighted-
Exercise Price Average Contractual Average
Range Number Exercise Price Life (in years) Number Exercise Price
- --------------------- ------------ ----------------- --------------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.67 - 5.07 $ 1,000,500 $ 4.79 7.4 315,000 $ 4.50
$ 6.86 - 8.63 $ 305,400 8.14 9.1 18,700 7.37
$ 10.75 - 13.00 $ 445,300 12.11 9.4 - -
============ ================= ===================== =============== ================
1,751,200 $ 7.23 8.2 333,700 $ 4.67
============ ================= ===================== =============== ================
</TABLE>
Pro forma information regarding net income and earnings per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1996
and 1995, respectively: risk-free interest rates of 6.42% and 6.2%, dividend
yields of 0% and 0%; volatility factors of the expected market price of the
Company's common stock of .755 and .755, and a weighted-average expected life of
the options of 6.0 and 6.8 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the options. The Company's
pro forma information for the years ended December 31 is as follows:
1996 1995
------------------ -------------------
Pro forma net income $ 1,136,538 $ 1,389,129
Pro forma net income per share $ .10 $ .14
<PAGE>
6. Income Taxes
The difference between the Company's provision (benefit) for income taxes and a
provision (benefit) for income taxes computed at the federal statutory rate is
comprised of the items shown in the following table:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------- ------------------
<S> <C> <C> <C>
Income tax provision (benefit) at the statutory rate
$ 690,000 $ 663,000 $ (4,758,000)
Net operating loss producing no current benefit -- -- 4,758,000
Benefit of net operating loss carryforward (690,000) (663,000) --
================== =================== ==================
Income tax provision (benefit) $ - $ - $ -
================== =================== ==================
</TABLE>
The significant components of the deferred income tax assets and liabilities are
as follows at December 31:
1996 1995
------------------ ------------------
Deferred tax assets:
Start up costs $ 63,000 $ 192,000
Depreciation 1,390,000 1,374,000
Vacation, maintenance and other reserves 1,621,000 281,000
Deferred rent expense 1,557,000 2,306,000
Net operating loss carryforward 4,444,000 4,372,000
------------------ ------------------
9,075,000 8,525,000
Valuation allowance (9,075,000) (8,525,000)
================== ==================
$ - $ -
================== ==================
The valuation allowance was provided since it is uncertain that the deferred tax
asset will be realized. The Company established the valuation allowance due to
the operating history of the Company.
At December 31, 1996, the Company has a tax net operating loss carryforward of
approximately $13 million expiring at various times from 2000 through 2004.
7. Employee Benefit Plans
401(k) Plan
In 1994, the Company adopted the Reno Air 401(k) Plan (the "401(k) Plan") which
qualifies under Section 401(k) of the Internal Revenue Code. All full-time
employees who meet the eligibility requirements are covered under the 401(k)
Plan. Participants can contribute as much as 15% of their annual gross income on
a before-tax basis. The Company makes a 100% matching contribution in shares of
the Company's common stock for the first $300 of an employee's annual
contribution to the 401(k) Plan. The Company's matching contribution vests over
four years from date of hire. During 1996, 1995 and 1994, the Company expensed
$235,000, $194,000 and $187,000 in matching contributions to the 401(k) Plan.
The Company may amend the 401(k) Plan from time to time.
Profit Sharing Plan
In 1993, the Company adopted a profit sharing plan (the "Profit Plan"). The
Profit Plan provides for eligible employees to participate in profit sharing
based upon the Company's income before income taxes measured on both a quarterly
and annual basis ("Pretax Income"). On a quarterly basis, eligible full time
employees receive up to the lesser of $150 or an allocation of 10% of the
Company's Pretax Income. On an annual basis, eligible employees receive an
allocation of 10% of the Company's Pretax Income, less the quarterly bonuses
paid during the Plan year. During 1996, 1995 and 1994, the Company paid
approximately $387,000, $364,000 and $62,000, respectively, pursuant to the
Bonus Plan. The Company may amend the Profit Plan from time to time.
8. Fair Value of Financial Instruments
The fair value of the Company's financial instruments approximate their recorded
book values at December 31, 1996 and 1995 except for the Senior Notes whose fair
value is approximately $27,262,000 at December 31, 1996. The fair values are
based on quoted market prices and discounted cash flow using the Company's
current incremental borrowing rate.
<PAGE>
9. Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------------
Three Months Ended
March 31 June 30 September 30 December 31 (a)
<S> <C> <C> <C> <C>
Operating revenues $ 72,819,861 $ 90,915,902 $ 101,328,237 $ 84,820,007
Operating income (loss) 444,011 3,626,206 4,513,234 (6,099,190)
Net income (loss) 275,104 3,274,910 4,747,832 (6,267,279)
Net income (loss) per common
and common equivalent share:
Primary $ 0.03 $ 0.30 $ 0.43 $ (0.58)
Fully Diluted $ 0.02 $ 0.28 $ 0.39 $ (0.58)
1995
----------------------------------------------------------------------------
Three Months Ended
March 31 June 30(b) September 30 December 31 (c)
Operating revenues $ 54,981,073 $ 61,434,939 $ 74,282,752 $ 65,808,995
Operating income (loss) (2,851,176) 1,684,199 4,537,874 237,996
Net income (loss) (3,190,780) 331,775 4,586,255 223,720
Net income (loss) per common
and common equivalent share
Primary $ (0.39) $ 0.03 $ 0.42 $ 0.02
Fully Diluted $ (0.39) $ 0.03 $ 0.40 $ 0.02
(a) As described in footnote 1, the Company recorded an adjustment to increase
passenger revenues resulting in an approximate $2 million benefit, and
recorded a maintenance credit of approximately $1.5 million.
(b) As described in footnotes 1 and 4, the Company recorded a maintenance
credit of approximately $1.8 million and a charge to non-operating
expenses of approximately $1.4 million, respectively.
(c) As described in footnote 1, the Company recorded an adjustment to increase
passenger revenues resulting in an approximate $5 million benefit, and
recorded a maintenance credit of approximately $1.4 million.
</TABLE>
<PAGE>
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable. The change in accountants during 1995 was reported on
Form 8-K dated October 17, 1995.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is incorporated by reference from
the section entitled "Election of Directors" contained in the definitive Proxy
Statement to be filed pursuant to Regulation 14A for the Company's Annual
Meeting of Stockholders to be held May 22, 1997.
Information with respect to the Company's Executive Officers follows
Item 4 of this Report.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from
the section entitled "Executive Compensation" contained in the definitive Proxy
Statement to be filed pursuant to Regulation 14A for the Company's Annual
Meeting of Stockholders to be held May 22, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference from
the section entitled "Security Ownership of Management" contained in the
definitive Proxy Statement to be filed pursuant to Regulation 14A for the
Company's Annual Meeting of Stockholders to be held May 22, 1997.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference from
the sections entitled "Election of Directors" and "Executive Compensation"
contained in the definitive Proxy Statement to be filed pursuant to Regulation
14A for the Company's Annual Meeting of Stockholders to be held May 22, 1997.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The following financial statements of the Company are included in Part II,
Item 8 of this Report: Page
Report of Ernst & Young LLP, Independent Auditors 27
Report of Arthur Andersen LLP, Independent Public Accountants 28
Balance Sheets, December 31, 1996 and 1995 29
Statements of Operations for the Years Ended
December 31, 1996, 1995, and 1994 30
Statements of Changes in Shareholders' Equity (Deficit)
for the Years Ended December 31, 1996, 1995 and 1994 31
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 32
Notes to Financial Statements 33
2. Financial Statement Schedules
All schedules have been omitted because they are inapplicable,
immaterial, or not required, or the information is included in the financial
statements or notes thereto.
3. Exhibits
3.1* Articles of Incorporation, as amended. (Incorporated by reference to
Exhibit 3.1 of the Registration Statement on Form S-1 (No.33-46031) filed
with the Commission on May 12, 1992 (the "May 1992 S-1").
3.2* Bylaws, as amended. (Incorporated by reference to Exhibit 3.2 of the
Registration Statement on Form S-8(No.33-88986) filed with the Commission
on January 31, 1995 (the "January 1995 S-8").
4.1* Specimen Certificate of Common Stock. (Incorporated by reference to
Exhibit 4.1 of the Registration Statement on Form S-2 (No.33-97990) filed
with the Commission on October 6, 1996 (the "1995 Form S-2")).
4.2* Indenture,dated as of August 15, 1995, between Reno Air, Inc. and Shawmut
Bank Connecticut, National Association as Trustee. (Incorporated by
reference to Exhibit 2 of the Form 8-K of Reno Air, Inc. filed with the
Commission on August 15, 1995).
4.3* Global Security Note, dated August 15, 1995.(Incorporated by reference to
Exhibit 4.3 to the 1995 Form S-2).
10.1* Employment Agreement with Robert W. Reding dated December 23, 1991.
(Incorporated by reference to Exhibit 10.5 of the May 1992 Form S-1.)
10.4* Employment Agreement with Robert M. Rowen dated March 31, 1994.
(Incorporated by reference to Exhibit 10.4 of the 1994 10-K).
10.5* Reno Air Stock Option Plan as Restated September 20, 1994. (Incorporated
by reference to Exhibit 4.1 of January 1995 S-8.)
10.6* Form of Non-Statutory Stock Option Agreement under the Reno Air Stock
Option Plan (Incorporated by reference to Exhibit 4.2 of the January 1995
S-8).
10.7* Airlines Operating Agreement between Airport Authority of Washoe
County, Reno Cannon International Airport and Reno Air. (Incorporated
by reference to Exhibit 10.19 of the Registration Statement on Form
S-1 (No. 33-50690) filed with the Commission on August 10, 1992 (the
"September 1992 S-1").
- -----------------------
* Exhibit incorporated by reference.
<PAGE>
10.8* First Amendment to Airline Operating Agreement and Terminal building
Lease between Airport Authority of Washoe County, Reno Cannon
International Airport and Reno Air, Inc. (Incorporated by reference
to Exhibit 10.8 of the 1993 10-K).
10.9* Terminal Building Lease and Loading Bridge Agreement with the Airport
Authority of Washoe County, Reno Cannon International Airport and
Reno Air. (Incorporated by reference to Exhibit 10.20 of the
September 1992 S-1).
10.11* Lease Agreement for 5450 Equity Avenue, Reno, Nevada (Incorporated by
reference to Exhibit 10.44 of the 1993 10-K).
10.12* Amendment to Lease Agreement for 5450 Equity Avenue, Reno, Nevada
(Incorporated by reference to Exhibit 10.44(a) of the 1993 10-K).
10.13*+ AAdvantage(R) Agreement between American Airlines and Reno Air, Inc.
(Incorporated by reference to Exhibit 10.49 of the 1993 10-K, as
amended by Form 10-K/A filed with the Commission on October 14,
1994.)
10.14*+ Agreement of Sublease for San Jose International Airport between
American Airlines and Reno Air, Inc. (Incorporated by reference to
Exhibit 10.15 of the 1993 10-K).
10.17* Airline Operating Agreement and Permit between the City of San Jose
and Reno Air, Inc. (Incorporated by reference to Exhibit 10.60
of the 1993 10-K).
10.18* Purchase Agreement, dated August 10, 1995, by and among Reno Air,
Inc., Forum Capital Markets L.P. ("Forum") and Fieldstone FPCG
Services, L.P. ("Fieldstone"). (Incorporated by reference to
Exhibit 10.18 to the 1995 S-2).
10.19* Registration Rights Agreement, dated as of August 14, 1995, by and
among Reno Air, Inc., Forum, and Fieldstone. (Incorporated by
reference to Exhibit 10.19 to the 1995 S-2).
10.20 Reno Air Profit Sharing Plan. 51
- ------------------------
* Exhibit incorporated by reference.
+ Conditional treatment has been granted with respect to portions of
this Exhibit.
<PAGE>
11 Statement Re: Computation of Per Share Earnings (Loss) of
Reno Air, Inc. 57
23.1 Consent of Ernst & Young LLP 58
23.2 Consent of Arthur Andersen LLP 59
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Annual Report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized.
RENO AIR, INC.
By: /s/ JEFFREY T. FISHER
Jeffrey T. Fisher
Vice President - Finance
Dated: March 26, 1997
Signature Position Date
/s/ DONALD L. BECK Director March 26, 1997
Donald L. Beck
/s/ BARRIE K. BRUNET Director March 26, 1997
Barrie K. Brunet
/s/ JOHN R. HARDESTY Director March 26, 1997
John R. Hardesty
/s/ LEE M. HYDEMAN Director March 26, 1997
Lee M. Hydeman
/s/ JOE M. KILGORE Director March 26, 1997
Joe M. Kilgore
/s/ JIM LLOYD Director March 26, 1997
Jim Lloyd
/s/ ROBERT W. REDING Director, President, & March 26, 1997
Robert W. Reding Chief Executive Officer
/s/ DR. WAYNE L. STERN Director March 26, 1997
Dr. Wayne L. Stern
/s/ AGNIESZKA WINKLER Director March 26, 1997
Agnieszka Winkler
/s/ JEFFREY T. FISHER Chief Financial Officer March 26, 1997
Jeffrey T. Fisher
/s/ DAVID W. ASAI Chief Accounting Officer March 26, 1997
David W. Asai
<PAGE>
EXHIBIT 10.20
RENO AIR, INC.
PROFIT SHARING PLAN
(As amended November 19, 1996)
Reno Air, Inc., a Nevada corporation ("Reno Air"), hereby adopts this
Profit Sharing Plan.
I
PURPOSE
The purpose of this Plan is to provide incentive compensation to
employees of Reno Air by allowing these employees to participate in the success
and profitability of Reno Air.
II
DEFINITIONS
As used in this Plan, the following definitions shall apply except
where the context otherwise indicates:
"Active Participant" means a Participant who was actively at work at
least 50% of the time during the relevant fiscal quarter. The determination of
whether an employee is an Active Participant shall be made by the Company under
uniform rules applicable to all employees.
"Administrator" means Reno Air or its designee.
"Annual Compensation" means each Participant's compensation for a Plan
Year, not to exceed Two Hundred Thousand Dollars ($200,000), including overtime
pay but excluding expense reimbursements and allowances, commissions, income
attributable to stock options or buddy passes, Company contributions to
retirement plans, incentive bonuses paid under this Plan and fringe benefits
received by the Participant. Compensation shall be before any pre-tax or
post-tax elective deductions from compensation (such as contributions to the
Company's 401(k) Plan.)
"Board of Directors" means the Board of Directors of the Company.
"Company" or "Reno Air" means Reno Air, Inc., a Nevada corporation, or
any successor by merger, consolidation, purchase, or otherwise.
"Effective Date" means January 1, 1995.
"Eligible Employee" means each individual employed by the Company in
the capacity of a common-law employee other than (i) non-resident aliens covered
by a separate profit sharing or bonus plan (including any government-mandated
profit sharing or bonus plan), and (ii) employees represented by a collective
bargaining representative unless the Company has agreed with the collective
bargaining representative that such employee will participate in this Plan.
"Net Profit" means the net income applicable to common stock of Company
for a particular quarter of a Plan Year or for the entire Plan Year, as the case
may be, determined in accordance with generally accepted accounting principles
and as reported in the Company's periodic reports filed with the Securities and
Exchange Commission, before any adjustments for any taxes upon or measured by
income or any incentive bonuses payable under this Plan with respect to such
period; provided that, in determining Net Profit, at the direction of the Board
of Directors there shall be disregarded gains and losses on the disposition of
assets, lines of business or operations, extraordinary gains or losses; and
non-operating and non-recurring gains or losses not arising from the Company's
usual business operations.
"Participant" means an Employee who has been admitted to Participation
in the plan under the provisions of Article III, and whose employment has not
terminated.
"Plan" means this Profit Sharing Plan.
"Plan Year" means the twelve-month period commencing on each January 1
and ending on each December 31.
III
ELIGIBILITY FOR PARTICIPATION
A. Participation. Any Eligible Employee shall become a Participant on
the first day of any fiscal quarter following the date on which the Employee
completes six consecutive months of service. Once an Employee has qualified as a
Participant under this Plan, the Employee's Participation shall continue until
such time as such Employee's Participation is terminated pursuant to paragraph B
below of this Article III.
B. Termination of Participation. A Participant shall cease to
be a Participant in the plan on the occurrence of the earliest of the following
events:
1. The date the Participant ceases to be an Eligible
Employee or the Participant's employment with the Company is terminated for
any reason whatsoever; or
2. The date on which the Plan is terminated.
Provided, that if a Participant terminates employment due to death or a
disability, such Participant will continue to be a Participant in the plan for
the fiscal quarter and the Plan Year in which the disability occurs.
C. Reemployment. Any Employee who ceases to be a Participant
due to termination of employment and subsequently returns to employment
shall be treated as a new employee and thereforeshall again become a Participant
only after satisfying the requirements in Paragraph A above.
IV
ANNUAL PROFIT SHARING BONUSES
The Company may pay an annual profit sharing bonus to each Participant
in the Plan as of the end of any Plan Year (or who died or became disabled
during such Plan Year), determined as follows:
The aggregate annual bonus shall be equal to 10% of the Company's Net
Profit for such Plan Year, less amounts previously paid or allocated as
quarterly profit sharing bonuses during and with respect to the Plan Year.
The aggregate annual bonus shall be allocated among such Participants
pro rata based upon each Participant's Annual Compensation for the Plan Year
including for any period prior to the time such employee became a Participant.
Subject to Section VI, the bonus shall be paid as soon as practicable
following the Company's determination of the aggregate annual bonus and the
Administrator's determination of the proper allocation of such bonus. The
Administrator shall use its best efforts to cause the bonus to be paid by May 15
of the year following each Plan Year for which an annual bonus is due.
The Board of Directors of the Company may, by appropriate action prior
to the end of any Plan Year, increase, decrease or eliminate completely the
aggregate annual bonus for such year.
V
QUARTERLY PROFIT SHARING BONUSES
The Company may pay a quarterly profit sharing bonus to each Active
Participant in the Plan as of the end of each of the first three fiscal quarters
of the Plan Year (i.e. the quarters ending March 31, June 30 and September 30),
in which the Company has a quarterly Net Profit of at least $500,000, determined
as follows:
The aggregate quarterly profit sharing bonus shall be equal to the
lesser of (i) 10% of the Company's Net Profit for such fiscal quarter, and (ii)
the sum of (a) $150 multiplied by the number of full time employees who are
Active Participants in the Plan as of the last day of such fiscal quarter (or
who died or became disabled during such quarter) and (b) $75 multiplied by the
number of part time employees of the Company who are Active Participants in the
Plan as of the last day of such fiscal quarter (or who died or became disabled
during such quarter).
The aggregate quarterly bonus shall be allocated among such Active
Participants on a per capita basis, provided that each full time employee shall
be entitled to twice the quarterly profit sharing bonus paid to each part time
employee.
In the event the Company has a quarterly Net Profit of less than
$500,000 in any quarter, the aggregate profit sharing allocation shall be rolled
over and included in the next distribution under the Profit Sharing Plan.
The bonus shall be paid as soon as practicable following the Company's
determination of the aggregate quarterly bonus and the Administrator's
determination of the proper allocation of such bonus. The Administrator shall
use its best efforts to cause the bonus to be paid within 90 days following the
end of each fiscal quarter for which a quarterly bonus is due.
The determination of whether an employee is a full time employee or a
part time employee shall be made by the Company under rules uniformly applied to
all employees.
The Board of Directors of the Company may, by appropriate action prior
to the end of any quarter, increase, decrease or eliminate the aggregate
quarterly bonus for such quarter.
VI
PAYMENT OF BONUSES
Bonuses shall be paid by check mailed to the last address of the
Participant on file with the Company, by inclusion of the bonus in a
Participant's normal paycheck, or by such other means as the Administrator deems
proper.
In the event a Participant dies during a quarter or before receipt of a
bonus to which he or she is due, the bonus shall be paid to his or her estate.
In no event shall any Participant be entitled to interest on any
quarterly or annual profit sharing bonus, regardless of the time at which the
bonus is paid.
Unless the Board of Directors by appropriate action directs otherwise,
in no event shall any annual bonus be payable in the event the aggregate amount
of the bonus, plus the aggregate amount of any bonus previously carried forward
pursuant to this paragraph and not previously paid, is less than $25 multiplied
by the number of Participants eligible to receive an allocation of such bonus.
Any bonus not payable pursuant to the foregoing sentence shall nevertheless be
allocated among Participants and carried forward to the next time a bonus is
payable, and, subject to any contrary law prohibiting such forfeiture, shall be
forfeited by any Participant to whom it has been allocated, if such Participant
ceases to be eligible for an allocation of any subsequent bonus.
VII
FORFEITURE OF BONUS
Until such time as the full amount of any quarterly or annual profit
sharing bonus has been actually paid to any Participant, his or her right to
receive such bonus shall be wholly contingent and, subject to any contrary law
prohibiting such forfeiture, shall be forfeited if the participant shall do any
act, or engage directly or indirectly (whether as owner, partner, officer,
Employee, or otherwise) in the operation or management of any business which, in
the judgment of the Company, shall be detrimental to or in competition with the
Company.
VIII
ADMINISTRATION OF THE PLAN
The Company shall determine all questions regarding interpretation,
application and administration of the Plan, and its determination of any
question shall be final, conclusive and binding upon all parties, including the
Company, the stockholders, and the Employees. The Company shall have the power
to construe the Plan, to determine all questions and make rules relating to the
administration of the plan and the eligibility of Employees to participate in
the plan, to authorize all disbursements and to engage such agents as are
necessary to carry out the provisions of this Plan.
To the maximum extent permitted by Nevada Law, no officer, director or
employee of the Company shall have any liability for any decision, action, or
omission, if done in good faith, nor for any error or miscalculation unless such
error or miscalculation is found by a court of law to constitute fraud or
deliberate disregard of any provisions of the Plan.
Neither the Administrator or the Company shall be required to search
for or ascertain the location of any Participant. If a Participant fails to
claim his or her profit sharing bonus within six months after the date such
bonus was generally announced, the Company may treat such bonus as having been
forfeited, subject to any contrary law prohibiting such forfeiture.
IX
AMENDMENT AND TERMINATION
The Company, by action of the Board of Directors, shall retain the
right to amend , modify, change, suspend or terminate this Plan, in whole or in
part, at any time, provided that no such amendment or termination shall affect
the right of a Participant to a profit sharing bonus for any quarter or Plan
Year ending prior to the date of such amendment or termination.
X
MISCELLANEOUS
Neither the establishment or communication of this Plan, the award or
payment of profit sharing bonuses hereunder, the determination that an employee
is an Eligible Employee or a Participant hereunder, or any other action or fact
with respect to this Plan shall (i) provide any employee any expectation or
rights of continued employment or promotional opportunity or (ii) be construed
as a statement or admission that an employee is adequately discharging his or
her job responsibilities.
No interest or expectation of an Eligible Employee or Participant under
or with respect to this Plan shall be (i) assignable, (ii) subject to any claim
of creditors, or (iii) subject to attachment or garnishment or any other legal
process.
Nothing contained in this Plan shall be deemed to create a trust of any
kind or create any fiduciary relationship. All funds, if any, set aside for
payment of the Company's obligations under this Plan, whether in cash or
invested, shall for all purposes remain part of the general assets of Company,
and no person other than Company shall, by virtue of any provision of this Plan,
have any interest in such funds. To the extent that any person acquires a right
to receive a profit sharing bonus from Company under the terms of this plan,
such rights shall be no greater than the right of any unsecured general creditor
of Company.
The validity of this Plan and the construction of its provisions shall
be governed and determined exclusively and solely in accordance with the laws of
the State of Nevada. The Plan is not intended to be subject to the Employee
Retirement Income Security Act, as amended, or other federal laws, except to the
extent required by any such law.
In witness whereof Reno Air, Inc., a Nevada corporation, has caused
this instrument to be executed by its President pursuant to authorization by its
Board of Directors.
Reno Air, Inc.
By /s/ ROBERT W. REDING
Robert W. Reding
President and Chief Executive Officer
Attest:
By /s/ ROBERT M. ROWEN
Robert M. Rowen
Secretary
[Corporate Seal]
Dated: November 19, 1996
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
Statement Re: Computation of Per Share Earnings (Loss)
For the Years Ended December 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Primary:
Weighted Average Shares Outstanding ................ 10,241,980 9,282,905 8,093,356
Common Stock Equivalents:
Options .................................. 573,576 476,639 anti-dilutive
Warrants ................................. 55,412 26,744 anti-dilutive
------------ ------------ ------------
10,870,968 9,786,288 8,093,356
============ ============ ============
Net Income (Loss) Applicable to
Common Stock ............................. $ 2,030,567 $ 1,817,543 $(13,992,936)
============ ============ ============
Per Share Earnings (Loss) .......................... $ 0.19 $ 0.19 $ (1.73)
============ ============ ============
Fully diluted:
Weighted Average Shares Outstanding ................ 10,241,980 9,282,905 8,093,356
Common Stock Equivalents:
Options .................................. 665,042 741,558 anti-dilutive
Warrants ................................. 55,412 30,952 anti-dilutive
------------ ------------ ------------
10,962,434 10,055,415 8,093,356
============ ============ ============
Net Income (Loss) Applicable to
Common Stock ............................. $ 2,030,567 $ 1,817,543 $(13,992,936)
============ ============ ============
Per Share Earnings (Loss) .......................... $ 0.19 $ 0.18 $ (1.73)
============ ============ ============
</TABLE>
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
pertaining to the Reno Air, Inc. Stock Option Plan (Forms S-8 No. 33-57623 and
No. 33-88986), the Reno Air 401(K) Plan (Form S-8 No. 33-89168) and the sale of
common stock (Forms S-3 No. 33-73708 and No. 33-94918) of our report dated
February 18, 1997, with respect to the financial statements of Reno Air, Inc.,
included in the Annual Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Reno, Nevada
March 25, 1997
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Form 10-K, into the Company's
previously filed Registration Statement File Nos. 33-94918, 33-83986, 33-73708,
33-88986, 33-89168, and 33-57632.
ARTHUR ANDERSEN LLP
Phoenix, Arizona
March 21, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 16,221,297
<SECURITIES> 2,318,407
<RECEIVABLES> 18,834,788
<ALLOWANCES> 0
<INVENTORY> 2,109,364
<CURRENT-ASSETS> 56,517,824
<PP&E> 72,351,769
<DEPRECIATION> 11,253,987
<TOTAL-ASSETS> 143,706,412
<CURRENT-LIABILITIES> 67,015,223
<BONDS> 50,698,058
0
0
<COMMON> 103,334
<OTHER-SE> 12,027,465
<TOTAL-LIABILITY-AND-EQUITY> 143,706,412
<SALES> 349,884,007
<TOTAL-REVENUES> 349,884,007
<CGS> 347,399,746
<TOTAL-COSTS> 347,399,746
<OTHER-EXPENSES> (881,535)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,348,160
<INCOME-PRETAX> 2,030,567
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,030,567
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,030,567
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
