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, 1997
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) 954-5000
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
Series A Cumulative Convertible Exchangable Preferred Stock,
Par value $0.001 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,
1998, was approximately $83,739,528 at a price of $8.00 per share.
The number of shares outstanding of each of the Registrant's classes of
common stock, as of March 1, 1998, was as follows:
Class Number of Shares
----- ----------------
Common Stock, Par Value $.01 Per Share 10,578,271
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 55
(Index of Exhibits Filed with this Report on Page 45)
<PAGE>
RENO AIR, INC.
Table of Contents to
Annual Report on Form 10-K
Page
Part I
Item 1 Business.............................................. 4
Cautionary Statements................................. 8
Item 2 Properties............................................ 9
Item 3 Legal Proceedings..................................... 10
Item 4 Submission of Matters to a Vote of Security Holders... 10
Executive Officers of the Registrant.................. 11
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters................................... 13
Item 6 Selected Financial Data............................... 14
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 16
Item 8 Financial Statements and Supplementary Data........... 23
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................ 40
Part III
Item 10 Directors and Executive Officers of the Registrant.... 40
Item 11 Executive Compensation................................ 40
Item 12 Security Ownership of Certain Beneficial Owners
and Management........................................ 40
Item 13 Certain Relationships and Related Transactions........ 40
Part IV
Item 14 Exhibits, Financial Statements Schedules, and
Reports on Form 8-K................................... 41
Table of Exhibits filed with Form 10-K................ 41
<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 all-jet scheduled airline
passenger service. The Company also transports cargo and mail and provides
charter service.
As of March 1, 1998, the Company operates 30 aircraft flying scheduled
service primarily from its two hubs in Reno/Tahoe and Las Vegas, Nevada, and in
high frequency service between San Jose and southern California. In addition to
these cities, the Company serves Anchorage, Atlanta, Chicago, Colorado Springs,
Oklahoma City, Los Angeles, Orange County (California), Portland, San Diego, San
Francisco, Seattle, Tucson and Vancouver (British Columbia). Service to
Albuquerque, Ontario, Detroit, Gulfport and St. Petersberg is being discontinued
in the second quarter of 1998 as the Company concentrates on its core markets.
As of March 1, 1998, the Company operated approximately 90 daily departures
to or from Reno, 64 daily departures to or from Las Vegas, and 56 daily
departures to or from San Jose.
In addition to its scheduled operations, Reno Air conducts ad hoc charter
flights and track charter programs. The Company operates an in-house tour
program called QQuick Escapes, 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) 954-5000.
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
seven years as of March 1998); and its service amenities, such as advanced seat
assignments, first-class service on all scheduled flights and participation in
the American Airlines ("American") AAdvantage(R) frequent-flyer program on most
scheduled flights, distinguish the Company from its primary competition.
As of January 6, 1998, the Company has codeshare relationships with three
airlines: Wings West Airlines d/b/a American Eagle, Hawaiian Airlines, and
Qantas Airlines. These agreements permit passengers to book travel under a
single airline code for travel connecting between the carriers. The Company's
marketing code ("QQ") is carried on some American Eagle flights to and from Los
Angeles International Airport. Hawaiian's marketing code ("HA") is carried on
certain of the Company's flights to and from Los Angeles. Qantas' marketing code
("QF") is carried on Reno Air's flights between Los Angeles and San Francisco
(which commenced January 6, 1998). Management believes that codeshare
relationships potentially increase the Company's unit revenues and intends to
pursue further codeshare opportunities. There can be no assurance that the
Company's current codeshare arrangements will continue or that it will be
successful in obtaining additional codeshare agreements.
The Company participates in all major domestic travel agency reservation
systems ("CRS"), and approximately 55% 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. On October 6, 1997,
the Company reduced the normal commission it pays to travel agencies from 10% to
8% matching similar reductions implemented by most major airlines. 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.
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 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. In 1997, approximately 30% of Reno Air's passenger sales were sold
as ticketless travel.
Many vendors (including travel agencies, CRS systems and others) have
developed internet booking methods whereby individuals can book travel on Reno
Air through the internet. Such access may increase the CRS charges to Reno Air
when measured as a percentage of total sales, due to possible increases in
booking activity without matching increases in actual 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 airlines' 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 March 1, 1998, the Company had 2,299 employees, including 1,949
full-time and 350 part-time personnel as follows: 285 pilots, 482 flight
attendants, 574 customer service agents, 473 reservation agents, 131 mechanics
and maintenance clerks, 51 sales and marketing personnel, 168 general management
and accounting personnel, and 135 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. The
Company's labor costs increased in 1997 as compared to 1996 due to general
increases in staffing levels and in rates of pay.
The Company's flight attendants became represented by the International
Brotherhood of Teamsters ("IBT") on April 23, 1997, and the Company's pilots
became represented by the Air Line Pilots Association ("ALPA") on September 22,
1997. The Company is negotiating a contract with the IBT and expects to
negotiate a contract with ALPA.
Flight Operations and Training
The Company conducts essentially all its flight operations with pilots and
flight attendants employed by the Company. 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 American Airlines,
AAR Corporation and Greenwich Air Services.
Reservations
The Company operates a reservation center in Reno, Nevada and opened a
second reservations facility in Las Vegas in the second quarter of 1997.
Effective November 4, 1997, the Company converted its host reservations database
system to SABRE, under a seven-year contract. This conversion caused temporary
disruption in the Company's reservation and yield management systems. SABRE is a
majority owned subsidiary of AMR Corporation, which is the parent company of
American.
Fuel
The cost of aircraft fuel is a major component of the Company's operating
expense, and accounted for approximately 17% of all operating expenses in 1997.
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 on occasion entered into future
purchase contracts locking-in the price of fuel for a portion of the Company's
fuel purchase requirements and may in the future enter into similar agreements.
Forward purchase contracts not only lock in advantageous fuel prices for future
periods, but also provide the Company with pre-purchase discounts that further
lower the Company's fuel costs. However, if the price of fuel declines below the
contracted price, the Company still must pay the contracted price. 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.
Frequent Flyer Programs
Since 1993, the Company has participated in American's AAdvantage(R)
frequent flyer program. The AAdvantage(R) program allows passengers to earn
AAdvantage(R) miles for travel on most scheduled Company flights and allows
AAdvantage(R) members to redeem accumulated miles on such flights. Approximately
20% of the Company's passengers in 1997 were AAdvantage(R) members. The
AAdvantage(R) agreement, which originally had an expiration date of December 31,
1997, has been extended through June 30, 1998, while the Company and American
negotiate the terms of a longer extension. Such negotiations are continuing.
Absent a longer term extension, the AAdvantage(R) agreement may be terminated by
either American or the Company on June 30, 1998. The failure to renew,
termination of or material changes in the terms of the AAdvantage(R) agreement
could have a material adverse effect on the Company.
Passengers can earn AAdvantage(R) mile credit on all scheduled Reno Air
flights within the Pacific 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 QQuick Miles (TM), its own frequent flyer program on all
its scheduled flights; participants in this program accrue mileage based on
mileage flown and promotional programs. Accrued mileage can be redeemed for free
travel awards and upgrades. Reno Air controls the number of seats available on
its flights for QQuick Miles (TM) award redemptions. Reno Air has agreements
with a number of other companies, including hotels and ski resorts, for
participation in the QQuick Miles program. Such companies pay a fee to Reno Air
for miles which they award to their customers.
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 for participation in the AAdvantage(R) frequent flyer program,
provision of a host reservation system (SABRE), 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.
Competition and Competitive Reaction
The airline industry is highly competitive. Airlines compete 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"), 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 entrant 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 low
cost, 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. Such activity by other airlines can reduce fares or passenger traffic to
levels where profitable operations can not be achieved or sustained. On March
28, 1997, the Company commenced an antitrust action against Northwest Airlines
seeking damages arising from Northwest's response to the Company's attempted
institution of service between Minneapolis and Reno in the second quarter of
1993. Reno Air has amended such lawsuit to seek additional damages from
Northwest's response to the Company's institution of service between Reno and
Detroit in 1997. Due to its smaller size and limited liquidity, the Company may
be less able to withstand fare wars or aggressive marketing tactics 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 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 1997, the Company conducted several track charter
operations for established tour wholesalers, primarily involving weekend flying
and flying during the seasonally slower periods of the year.
In 1997, Reno Air entered into an 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. Reno Air has announced it will discontinue
service to Gulfport effective June 1, 1998.
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 Company's
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% as long as
the difference between the 25% statutory limit on voting stock and the 49%
equity interest allowed by the DOT is comprised of non-voting securities).
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. 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.
Changes to Airline Excise Tax
Historically, airlines have remitted to the United States government an
excise tax on airline ticket sales (recently 10% of a ticket's fare). In October
1996, the United States Congress ("Congress") established a National Civil
Aviation Review Commission in part to review financing of the FAA, including the
possibility of establishing a "cost-based" user fee system. In July 1997,
Congress adopted changes to the federal excise ticket tax. The new legislation
reduced the excise tax to 9%, and eventually to 7.5%, but imposes an additional
surcharge of $1.00, which eventually increases to $3.00, for each trip segment
flown. This initial structure was effective on October 1, 1997, with the full
changes being phased in through the year 2002. This new structure increases the
excise taxes on low-fare, short-haul transportation. The impact to the Company
will depend on the extent to which the tax increase is passed on to passengers
and the extent to which any such increase in the cost of travel decreases the
demand for air travel. Because the demand for air travel varies in response to
many factors, management has not been able to quantify the impact of the change,
but believes that, to date, the impact has not been significant.
In December 1997, the National Civil Aviation Review Commission issued its
report. The Commission recommended that the Federal Aviation Administration move
toward an essentially cost-based system funded by user fees in lieu of ticket
taxes, with implementation of such new system in the year 2000. the Commission
did not recommend any specific user fee charges. Management of the Company
cannot predict whether additional user fees will be imposed or whether there
will be changes to the ticket tax/user fee system adopted in July 1997.
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"). Currently, the Company operates fifteen slots at Orange County, five
of which are used pursuant to an agreement with American and 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. In 1997, the Company obtained another pair of special purpose slots at
Chicago that will allow the Company to add a fourth round-trip flight between
Reno and Chicago. 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 and ownership
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. The Company's labor costs increased in 1997 as compared to 1996
due to general increases in staffing levels and in rates of pay.
In 1997, the Company's flight attendants and pilots elected the
International Brotherhood of Teamsters and the Airline Pilots Association,
respectively, as such employees' collective bargaining representatives. The
involvement of labor unions in the Company's labor relations may adversely
affect the Company. The Company is negotiating a contract with the IBT and
expects to negotiate a contract with ALPA.
Management cannot predict when contracts might be entered into or the
extent to which such contracts would contain terms different from the Company's
current work and pay rules. Any changes may result in increased costs and
reduced flexibility for the Company. Labor unions have from time to time
inquired of the Company's other employee groups as to their interest in joining
a union. Unionization of the Company's employees restricts the Company's
flexibility in dealing with such employees, which could result in a material
increase in its labor costs.
The Company has historically experienced significant attrition in its
personnel, many of whom require specialized training. Any increase in the rate
of attrition would increase the Company's costs. In addition, as the size of the
Company's workforce increases, the cost of attrition may become relatively
greater as it may become more difficult for the Company to attract and train
sufficient numbers of qualified personnel.
Aircraft Cost and Availability
As of March 1, 1998, the Company operates 30 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.
The McDonnell Douglas Corporation merged with the Boeing Company in August
1997. As a result, there may in the future be less competition by manufacturers
of aircraft to place their aircraft with airline owners or lessees. The Boeing
Company has announced its intention to discontinue production of MD-80 and MD-90
aircraft in mid-1999; however, the Boeing Company announced that it will
continue to provide spare parts and engineering support for these aircraft. This
consolidation of the airline manufacturing industry may lead to shortages in the
supply of aircraft and/or higher aircraft prices. The price or availability of
spare parts and services for the Company's aircraft also may be adversely
affected.
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 and Las Vegas hubs, and on its routes between San Jose and southern
California. 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 gaming destinations or to
Tahoe as a ski resort. Traffic levels in San Jose are largely dependent on the
California economy.
The availability of terminal gates and other facilities is limited at many
airports served by the Company. At Chicago (O'Hare) and Orange County
(California), landing rights are strictly controlled. A loss of slots or gate
space at airports served by the Company could have a material adverse impact on
the Company.
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 passed 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 or MD-90 series aircraft.
Reliance on Third Parties
The Company depends on arrangements with other companies, including
American, for many essential services, for access to certain airports and for
participation in the AAdvantage Program. Any significant change in the Company's
relationships with third parties, including travel agencies, could have an
immediate material impact on the Company. The Company depends on sales by travel
agencies for a substantial portion of its revenues.
The Company operates two aircraft types, the MD-80 series and the MD-90
series, each of which has a single engine type. Pratt & Whitney JT8D engines
are used on the MD-80 aircraft and International Aero Engines V2500 engines are
used on the MD-90 aircraft. Any disruption in the availability of parts or
overhaul services for the Company's aircraft or engines can adversely impact the
Company's operations and financial results.
Item 2. Properties
The Company leases (i) approximately 60,000 square feet of office space for
its principal offices at 220 and 230 Edison Way, Reno, Nevada, under leases
which expire on November 30, 2000; (ii) approximately 14,000 square feet at 5450
Equity Avenue, Reno, Nevada for a reservations facility under a lease which
expires in 1998, and (iii) approximately 27,000 square feet at 500 East Warm
Springs Road, Las Vegas, Nevada for a second reservations facility, which became
operational in the second quarter of 1997, under a lease which is extendible
through 2017. The Company owns 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 and Reno and at other airports it serves.
Aircraft
As of March 1, 1998 the Company's fleet consisted of 31 aircraft, as
indicated in the following chart. Except as indicated, all aircraft are leased.
Aircraft Type Number Ownership Seating Capacity
_____________ ______ _________ ________________
MD-82 6 All Leased 140
MD-83 15 Two Owned 140
MD-87 5 One Owned 117
MD-90 5 All Leased 148
One owned MD-83 aircraft is currently leased to another airline and two
MD-82 aircraft are being returned to the lessor at expiration of the leases. The
foregoing chart does not include two additional MD-82 aircraft which were leased
in February 1998 with a purchase option and are being marketed to potential
buyers. Management anticipates the Company's operating fleet will total 28
aircraft as of April 15, 1998.
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 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, 1998, the average age of the Company's fleet was less than
seven 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 by agreement with 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 as
defendant are either covered by insurance or are immaterial to its financial
position, results of operations and liquidity.
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 1997.
<PAGE>
Executive Officers of the Registrant
The executive officers of the Company are :
Name Age Position
Joseph R. O'Gorman 54 Chairman, Chief Executive Officer
and President
Beverly Grear 49 Senior Vice President - Operations
Annette Murphy 51 Senior Vice President - Customer Service
Joanne Smith 39 Senior Vice President - Marketing and
Planning
Edward F. Upton 47 Senior Vice President - Maintenance
Vicki Bretthauer 40 Vice President - Administration
Richard Cannon 51 Vice President - Human Resources
Todd Kehoe 40 Vice President and Treasurer
Dennis Mitchell 47 Vice President - Flight Operations
Robert M. Rowen 41 Vice President, General Counsel
and Secretary
Steve Sarner 39 Vice President - Sales and Marketing
Joseph R. O'Gorman has been Chairman, Chief Executive Officer and President
since February 19, 1998. From April 1995 through October 1997 (when he retired)
Mr. O'Gorman was Executive Vice President - Fleet Operations and Administration
for United Airlines. Prior to April 1995, Mr. O'Gorman held various positions at
United and USAir. Mr. O'Gorman has also served as Senior Vice President -
Airline Operations for AirCal, as Chief Executive Officer of Aloha Airlines and
as Chief Executive Officer of Frontier Airlines.
Beverly Grear was appointed Senior Vice President - Operations on March 18,
1998. Previously, Ms. Grear was Senior Vice President - Operations for AFSA Data
Corporation.
Annette Murphy has been Senior Vice President - Customer Service since
October 14, 1997. From March 1, 1997, to October 14, 1997, Ms. Murphy was Vice
President - Customer Service for the Company. 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.
Joanne Smith was appointed Senior Vice President - Marketing and Planning
on March 23, 1998. Previously, Ms. Smith was Senior Vice President of Midway
Airlines.
Edward F. Upton has been Senior Vice President - Maintenance since March
18, 1998 and was Senior Vice President - Operations from December 1, 1997 until
March 18, 1998. Since July 1993, Mr. Upton has been a principal owner of
Aviation Assistance Company, and from May 1993 until December 1997, Mr. Upton
was a Senior Associate with PRC Aviation; both organizations provide technical
consulting to the aviation industry. Prior to May 1993, Mr. Upton held
management positions with Fokker Aircraft USA, Inc., Eastern Airlines, and
Northwest Airlines.
Vicki Bretthauer was appointed Vice President - Operations on March 18,
1998. Previously, Ms. Bretthauer was Director-Information Services
Administration with United Airlines.
Richard Cannon has been the Vice President - Human Resources since April
21, 1997. From 1995 to 1996, Mr. Cannon was Senior Vice-President of Human
Resources and Administration at Credence Systems Corporation, a semiconductor
automatic test equipment manufacturer. Prior to 1995, Mr. Cannon was employed by
Lockheed Martin Missiles and Space Co., Inc., most recently as Director of
Staffing and Employee Relations.
Todd Kehoe has been Vice President and Treasurer of the Company since
September 2, 1997. From February 1996 to September 1997, Mr. Kehoe was Vice
President and Chief Financial Officer of Geo-Marine Corporation. From December
1994 through December 1995, Mr. Kehoe was Financial Consultant to Sterling
Software. Previously, Mr. Kehoe held senior financial management positions with
Advacare, Inc. and Archive Corporation.
Dennis Mitchell has been Vice President - Flight Operations since May 15,
1997. From February 1, 1996 until May 15, 1997, Mr. Mitchell was Director of
Planning; from April 1994 to February 1996, he was Director of Operations and
from January 1992 to April 1994, he was Chief Pilot for the Company. Prior to
joining the Company, Mr. Mitchell was a commercial airline pilot for over 20
years.
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, most recently Staff Vice President and Deputy General
Counsel.
Steve Sarner has been Vice President - Sales and Marketing since April
1996. From July 1994 to April 1996, Mr. Sarner was Director of Sales for the
Company. From June 1992 through July 1994, Mr. Sarner was Director of Sales -
Western Region for Rosenbluth International Travel, one of the nation's largest
travel agencies. Prior to 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, 1998, there were 600 registered holders of record and
approximately 7,150 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 quarterly high and low sale prices of
the Company's common stock for the last two years.
Common Stock:
Fiscal Year High Low
1997
First Quarter $7 5/8 $6 3/8
Second Quarter 8 15/16 6 1/2
Third Quarter 9 1/16 6 13/16
Fourth Quarter 7 5/8 4 1/2
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 and the Company's Series A Cumulative Convertible
Exchangeable Preferred Stock 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, 1997, 1996, 1995, 1994 and 1993 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 December 31,
-------------------------------------------------------------------------
1993 1994 1995 1996 1997
(in thousands, except for per share data and selected operating statistics)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Operating revenues .......................... $ 124,640 $ 195,519 $ 256,508 $ 349,884 $ 383,924
Operating expenses .......................... 131,974 209,371 252,899 347,400 394,573
---------- ---------- ---------- ----------- -----------
Operating income (loss) ..................... (7,334) (13,852) 3,609 2,484 (10,649)
Non-operating expense, net .................. 10 141 1,658 454 978
---------- ---------- ---------- ----------- -----------
Net income (loss) ............................ $ (7,344) $ (13,993) $ 1,951 $ 2,030 $ (11,627)
========== ========== ========== =========== ============
Net income (loss) applicable
to common stock ......................... $ (7,334) $ (13,993) $ 1,818 $ 2,030 $ (12,345)
=========== ========== ========== =========== ============
Net income (loss per common share ............ $ (1.06) $ (1.73) $ 0.20 $ 0.20 $ (1.18)
=========== ========== ========== =========== ============
Net income (loss) per common share
assuming dilution ......................... $ (1.06) $ (1.73) $ 0.18 $ 0.19 $ (1.18)
=========== ========== ========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Selected Operating Statistics (unaudited):
Revenue passenger miles (RPM)(000)(1) ....... 930,850 1,622,630 2,090,014 3,035,169 3,124,312
Available seat miles (ASM)(000)(1)........... 1,619,737 2,678,144 3,322,475 4,503,363 4,698,332
Passenger load factor ....................... 57.5% 60.6% 62.9% 67.4% 66.5%
Breakeven load factor ....................... 61.1% 65.2% 62.4% 67.0% 68.8%
Average fare ................................ $ 63.06 $ 54.03 $ 61.23 $ 64.11 $ 65.27
Passenger revenues per RPM (cents) .......... 12.6 11.2 11.6 10.9 11.6
Passenger revenues per ASM (cents) .......... 7.3 6.8 7.3 7.3 7.7
Operating expenses per ASM (cents) .......... 8.1 7.8 7.6 7.7 8.4
Aircraft in service (at period end) ......... 17 21 23 29 30
Cities served (at period end) ............... 11 15 16 20 21
Full-time equivalent employees
(at period end) 1,122 1,323 1,490 1,964 2,058
Depreciation and amortization (000)......... $ 768 $ 1,827 $ 2,595 $ 6,447 $ 10,310
EBITDAR(2)(000) ............................. $ 17,380 $ 29,702 $ 54,082 $ 71,220 $ 70,584
Average aircraft utilization (hours per day). 8.7 9.4 9.6 9.9 9.8
Average aircraft stage length (miles)....... 445 449 494 536 510
Average cost of fuel (per gallon)(3)......... $ 0.70 $ 0.63 $ 0.69 $ 0.79 0.75
Ratio of earnings to fixed charges(4) -- -- 1.09 1.05 --
Ratio of earnings to combined fixed
charges and preferred stock dividends(4).. -- -- 1.08 1.05 --
</TABLE>
<TABLE>
As of December 31,
--------------------------------------------------------------------------
1993 1994 1995 1996 1997
(in thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash and cash equivalents .................. $ 6,543 $ 9,104 $ 34,986 $ 16,221 $ 29,058
Short-term investments ..................... 5,174 -- 2,944 2,319 129
Current assets ............................. 24,787 32,935 72,064 55,118 86,678
Total assets ............................... 37,204 51,683 99,484 143,706 193,409
Current liabilities ........................ 22,611 43,389 53,802 67,015 80,397
Long-term debt ............................. -- 4,788 28,755 50,698 62,584
Total liabilities .......................... 25,255 53,481 90,581 131,575 158,685
Shareholders' equity (deficit).............. 11,948 (1,798) 8,903 12,131 34,724
Working capital (deficit)................... 2,176 (10,454) 18,262 (11,897) 6,281
</TABLE>
(1) Includes track charter operations (multi-flight contracts requiring
dedicated aircraft time).
(2) Net income (loss) before interest, income taxes, depreciation and
amortization and flight equipment rental.
(3) Includes fuel servicing fees and taxes.
(4) In computing the ratio of earnings to fixed charges and the ratio of
earnings to combined fixed charges and preferred stock dividends: (a)
earnings have been based on income before income taxes and fixed charges;
and (b) fixed charges consist of interest, amortization of debt discount
and expense, and the estimated interest portion of rentals. Net losses for
the years ended December 31, 1993, 1994 and 1997 resulted in coverage
deficiencies of $7,344,000, $13,993,000, and $12,345,000 respectively.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Selected Operating Statistics
<TABLE>
Percent Percent
Year Ended Increase Year Ended Increase Year Ended
Dec. 31, (Decrease) Dec. 31, (Decrease) Dec. 31,
1997 1996 to 1997 1996 1995 to 1996 1995
<S> <C> <C> <C> <C> <C>
Revenue Passengers(1) .......................... 5,530,454 7.2% 5,161,009 30.5% 3,954,578
Revenue Passenger Miles (000s)(2) .............. 3,124,312 2.9 3,035,169 45.2 2,090,014
Available Seat Miles (000s)(3) ................. 4,698,332 4.3 4,503,363 35.5 3,322,475
Passenger Load Factor (percent)(4)............. 66.5 (1.3) 67.4 7.2 62.9
Breakeven Load Factor (percent)(5) ............. 68.8 2.7 67.0 7.4 62.4
Yield per RPM (cents)(6) ....................... 11.6 6.4 10.9 (6.0) 11.6
Operating Cost per ASM (cents) ................. 8.4 9.1 7.7 1.3 7.6
Aircraft in Service At End of Period ........... 30 3.4 29 26.1 23
Avg. Daily Aircraft Utilization (block hours) .. 9.8 (1.0) 9.9 3.1 9.6
Avg. Cost of Fuel (cents per gallon)(7) ........ 75 (2.6) 77 16.7 66
</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.
Overview
The Company was incorporated in Nevada in June 1990 and commenced
operations in July 1992. The Company operates a modern fleet of Stage III
McDonnell Douglas MD-80 and MD-90 aircraft that have an average age of less than
seven years. The Company's stated business and marketing strategy is to be "A
Better Low Fare Airline" by offering, at a low operating cost, low fares with
premium service, a modern, comfortable and reliable aircraft type and marketing
relationships, including participation in the American Airlines AAdvantage (R)
frequent flyer program.
As of January 6, 1998, the Company has codeshare relationships with three
airlines: Wings West Airlines d/b/a American Eagle, Hawaiian Airlines, and
Qantas Airlines. Management continues to pursue additional marketing
relationships.
The Company experienced rapid growth from commencement of operations
through 1996, and slower growth in 1997, as demonstrated by the following chart:
<TABLE>
<S> <C> <C> <C> <C> <C>
Cities Avg. Daily Capacity Avg. Daily Aircraft
Date Aircraft (#) Served (#) Flights (1)(2) Utilization (hours) (1)
December 31, 1992 5 7 29 332 10.5
December 31, 1993 17 11 71 1,620 8.7
December 31, 1994 21 15 117 2,678 9.4
December 31, 1995 23 16 134 3,322 9.6
December 31, 1996 29 20 168 4,503 9.9
December 31, 1997 30 21 194 4,698 9.8
</TABLE>
- -----------
(1) For the year ended December 31.
(2) Millions of available seat miles.
As of March 1, 1998, the Company served 21 cities with approximately
200 daily departures.
During 1997, the Company significantly expanded its service at Las Vegas,
creating a mini-hub linking seven cities in the Southwest, and also added
service to Detroit, Oklahoma City and Ontario (California). In 1998, the Company
is discontinuing service to Albuquerque, Detroit, Ontario, Gulfport and St.
Petersburg and may discontinue service to other cities in order to focus on its
core markets.
During 1997, the Company opened a second reservations facility, in Las
Vegas, and terminated its use of Teletech, Inc. for reservations call handling
service. The Company switched its host reservation database from the Shares
system to the SABRE (R) system effective November 4, 1997.
In 1997, the Company introduced its own frequent flyer program, QQuick
Miles(TM), introduced self-booking over its internet worldwide web page, and
expanded the use of paperless tickets. In October 1997, the Company reduced the
commission it pays on most travel agency sales from 10% to 8% in order to remain
competitive with the major airlines.
On April 23, 1997, the Company's flight attendants became represented by
the International Brotherhood of Teamsters ("IBT") and, on September 22, 1997,
the Company's pilots became represented by the Air Line Pilots Association
("ALPA"). The Company is negotiating a contract with the IBT and anticipates
commencing contract talks with ALPA in the near future. Management cannot
predict when any contracts might be entered into, or the extent to which such
contracts will contain terms different from the Company's current work and pay
rules. Unionization of the Company's employees restricts the Company's
flexibility in dealing with such employees, which could result in a material
increase in its labor costs. The Company's other employees are not represented
by a union.
In 1997, Congress adopted changes to the federal transportation excise tax,
which had been 10% of a ticket's fare. The new legislation reduced this tax to
9%, and will eventually reduce this tax to 7.5%; but it also imposes an
additional surcharge of $1, which eventually increases to $3, for each trip
segment flown. This initial structure became effective on October 1, 1997, with
the full changes being phased in through the year 2002. The legislation
increases the taxes on lower fare tickets. Management cannot predict the extent
the new taxes will be passed on to passengers, because fares continue to be
volatile in response to industry conditions and competitors' fare actions. Many
airlines, including the Company, are absorbing some of the per segment charges;
for instance, when a passenger's itinerary includes two or more segments but
could also have been flown with fewer segments.
The Boeing Company has acquired the McDonnell Douglas Company, which
manufactured the Company's MD-80 and MD-90 series aircraft. The Boeing Company
has announced its intention to discontinue production of these aircraft in
mid-1999; however, The Boeing Company announced that it will continue to provide
spare parts and engineering support for these aircraft. Although management does
not expect the Company to suffer any material adverse impact from these events
in the foreseeable future, there can be no assurance that the Company will not
suffer financially or operationally on account of these events.
The Company's business is characterized, as is true for the airline
industry generally, by high fixed costs relative to revenues and low profit
margins. A slight change in fare levels or load factors can have a substantial
impact on the Company's revenues. Generally, approximately one-half 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
and significant financial impact on the Company. In addition, the Company's
business 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's financial position.
Many computer systems need to be reprogrammed to operate properly in the
Year 2000 because such systems rely on two digits to indicate the relevant year
and cannot properly recognize the digits "00" as indicating the Year 2000. The
Company is implementing a Year 2000 compliance program. However, the Company's
operations depend on the operation of third-party computer systems, including
the air traffic control system of the Federal Aviation Administration, as well
as the computer systems that operate the Company's reservation database,
scheduling systems, flight control, and other essential functions. The Company
is cooperating with the vendors of such systems to detect and correct potential
Year 2000 problems; however, the ultimate resolution of such problems is under
the control of the vendors. Accordingly, there can be no assurance that the
Company's operations will not be affected by Year 2000 computer problems.
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Generally,
such statements are indicated by words or phrases such as "anticipate,"
"expect," "intend," "management believes" and similar words or phrases. Such
statements are based on current expectations and are subject to risks,
uncertainties and assumptions. Certain of these risks are described under Item
1. "Cautionary Statements" in this Annual Report on Form 10-K. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, expected, intended or believed results.
Results of Operations - General
The Company's revenues are derived principally from the sale of airline
services to passengers, and are initially recorded in the air traffic liability
account. Revenue earned from these 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 in the month of sale. Total airline revenues are primarily a function of
fare levels and the number of seats sold per flight. Other revenues, which
generally total less than 10% of the Company's revenues, include primarily
revenues derived from cargo, mail, ad hoc charters and QQuick Escapes tour
operations.
The Company's revenues depend primarily on its yield (ticket revenue per
passenger mile) and its load factor (percentage of seats occupied by revenue
passengers).
The Company leases most of its aircraft. Under the terms of certain of its
lease agreements, the Company is required to make monthly aircraft maintenance
deposits based on usage; such deposits are applied against the cost of major
airframe maintenance checks and engine overhauls. Such deposits are recorded as
prepaid expenses (current portion) and deposits (non-current portion). The
Company accrues the estimated costs relating to major airframe and engine
overhauls over the flight hours or cycles of operation. In the fourth quarter of
1997, the Company recorded a $3.8 million charge to aircraft maintenance expense
to adjust its accruals primarily for increases in the costs of engine overhauls.
<PAGE>
<TABLE>
Operating Expenses per Available Seat Mile (cents)
Percent Percent
Year Ended Increase Year Ended Increase Year Ended
December 31, (Decrease) December 31, (Decrease) December 31,
Operating Expenses 1997 1996 to 1997 1996 1995 to 1996 1995
- ----------------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Salaries, wages and benefits .......... 1.44 20.0% 1.20 (5.2)% 1.26
Aircraft fuel and oil ................. 1.46 (1.4) 1.48 9.8 1.35
Aircraft leases ....................... 1.47 8.1 1.36 (8.9) 1.50
Aircraft Maintenance .................. 0.83 43.1 0.58 22.2 0.48
Handling, landing and airport fees .... 0.83 6.4 0.78 4.3 0.75
Advertising, sales and distribution ... 0.61 (9.0) 0.67 9.5 0.61
Commissions ........................... 0.43 0.0 0.43 (12.6) 0.49
Facilities leases ..................... 0.30 20.0 0.25 (13.9) 0.29
Insurance ............................. 0.13 (23.5) 0.17 (14.0) 0.20
Communications ........................ 0.12 20.0 0.11 3.3 0.10
Depreciation and amortization ......... 0.22 57.1 0.14 83.3 0.08
Other operating expenses .............. 0.56 3.7 0.54 6.6 0.50
------------ ------------ ------------
8.40 8.9% 7.71 1.3% 7.61
============ ============ ============
</TABLE>
<PAGE>
Results of Operations -- Year Ended December 31, 1997, Compared to Year Ended
December 31, 1996.
Net Income.
The Company recognized a net loss of $11.6 million for the year ended
December 31, 1997, as compared to net income of $2.0 million for the year ended
December 31, 1996. The net loss in 1997 is attributable to a significant
increase in the Company's unit costs, offset in part by increases in the
Company's yields. The Company's load factor decreased slightly in 1997.
General.
The Company's results for the year ended December 31, 1997 were
significantly impacted by unusually harsh weather in the first quarter of 1997,
an unusually high rate of unscheduled engine removals for heavy maintenance, the
transition to a new reservations systems (SABRE(R)) in the fourth quarter of
1997, and general increases in labor costs.
The high rate of engine removals resulted in increased cost due to
necessary maintenance, and lost revenues due to flight cancellations. The
Company was required to ground up to three aircraft at a time due to the
unavailability of engines. The transition to a new host reservation system
resulted in increased training costs, transition costs and lost revenues from
disruption of the Company's reservation call handling operations and yield
management system.
The Company's load factor declined from 67.4% for the year ended December
31, 1996, to 66.5% for the year ended December 31, 1997, in part as a result of
proportionately fewer seats being available at deeply discounted fares.
Revenues.
The Company's operating revenues increased by 9.7% from 1996 to 1997 due to
a 6.4% increase in yield and a 4.3% increase in operations (measured by
available seat miles), slightly offset by a 1.3% decline in load factor. The
Company's operations increased due to the realization over the full year 1997 of
the growth in the Company's aircraft fleet that occurred during the course of
the 1996 year. The growth in average fleet size was slightly offset by a 1.0%
decline in average daily aircraft utilization, attributable in part to the
engine maintenance issues discussed above.
Passenger revenue per available seat mile (RASM) increased 4.5% from 1996
to 1997 due to the increase in yield, partly offset by the decline in load
factor.
The Company's yield increased from 10.9 cents for the year ended December
31, 1996, to 11.6 cents for the year ended December 31, 1997, as a result of a
general increase in fare levels on many of the Company's routes and improvements
in the Company's yield management. The Company's routes are focused along the
west coast of the United States, where domestic yields have been lower than
national averages due to a highly competitive industry environment. This
competitive environment moderated slightly during 1997.
Yields also fluctuated during the year due to the expiration and
reinstatement of the federal excise tax. The tax lapsed for two and a half
months during 1997 and for seven months during 1996, resulting in higher yields
during such periods.
The Company's average length of flight decreased to 510 miles in 1997 from
536 miles in 1996 primarily due to the increase in short-haul flights to and
from Las Vegas.
Other revenues increased 20.1% from 1996 to 1997, primarily due to
increased charter flying, but remain less than 6% of total revenues.
Operating Expenses.
The Company's unit operating expenses (operating expenses per available
seat mile) increased significantly in 1997, from 7.71 cents for the year ended
December 31, 1996, to 8.40 cents for the year ended December 31, 1997. This
increase is primarily attributable to increased labor and maintenance expense
and the decrease in the Company's average length of flight (which causes
ground-related expenses, such as passenger handling costs and landing fees, to
be higher on a per seat-mile basis). Most items of expense, including
maintenance, salaries, aircraft leases and depreciation increased on a
percentage basis more than the increase in scope of operations.
Salaries, wages and benefits increased 25% from 1996 to 1997. The increase
is primarily due to the Company's opening of a second reservations center and
corresponding discontinuance of its outsourcing of reservations call handling,
increases in number of employees and increases in salary levels.
Maintenance expense increased 48% from 1996 to 1997 due to the unusually
high rate of unscheduled engine removals and general increases in the cost of
engine overhauls.
Communications expense increased from 1996 to 1997 due primarily to the
high volume of reservations calls, increased hold times on reservation calls
resulting from the switch in reservation systems and the opening of the Las
Vegas reservation center to replace third party reservations services.
Facilities leases expense increased from 1996 to 1997 due primarily to the
rent increases, the addition of new cities served, and the opening of the Las
Vegas reservations center.
Fuel expenses increased 2.5% from 1996 to 1997, less than the increase in
scope of operations, on account of declines in fuel price. The average cost paid
by the Company for a gallon of fuel (excluding fuel servicing fees and taxes)
decreased from 77 cents in 1996 to 75 cents in 1997. Fuel costs have declined
further in the first quarter of 1998. Each one cent decline in the Company's
cost of fuel translates to an approximately $1 million decline in annual
operating costs, based on the Company's 1997 level of operations. The Company
has contracted to purchase approximately 8 million gallons of fuel at a fixed
price for delivery from June through September 1998. The Company may enter into
similar fuel purchase agreements, or otherwise hedge its fuel prices, in the
future. Management cannot predict future fuel costs, which in 1997 comprised 17%
of the Company's total operating expenses.
Depreciation and amortization expense increased 60% from 1996 to 1997
primarily due to the Company's acquisition of an additional aircraft and two
spare engines in 1997, as well as the full year impact of the Company's property
acquisitions that occurred during 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
General.
In 1996, continued over-capacity on the West Coast, due to added flying by
the Company, Southwest, Alaska and United, led to intense competition to attract
passengers and numerous attempts, primarily by other airlines, to stimulate
additional traffic through fare initiatives. Southwest initiated $19, $25 and
$29 non-stop fares in many markets. Many of the Company's passengers are very
price sensitive, so the Company matched these fare levels. Management believes
that certain of these fare initiatives caused a dilution of earnings, in that
revenue generated did not fully cover average passenger carrying costs. As a
result of these fare sales, the Company's passenger load factor increased
significantly to 67.4% in 1996 from 62.9% in 1995. However, these fare sales and
an 11% increase in average passenger stage length reduced passenger yield to
10.9 cents in 1996 from 11.6 cents in 1995. As a result, break-even load factor
climbed to 67.0% from 62.4% for the comparable periods, and earnings in 1996
compared to 1995 were generally unchanged.
Net Income.
In 1996, the Company generated net income of approximately $2.03 million,
or $0.19 per share, slightly higher than the $1.95 million in net income, or
$0.19 per share, earned in 1995. 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. 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.
Revenues.
In 1996, operating revenues grew 36.4% to $349.9 million from $256.5
million for 1995. This growth was primarily due to a 26.1% increase in fleet
size to 29 aircraft as of December 31, 1996 from 23 aircraft as of December 31,
1995, a 35.5% increase in available seat miles and 7.2% increase in passenger
load factor (which combined to result in a 45.2% increase in RPMs), partially
offset by a 6.0% decrease in yield. Due to widespread fare sales on the West
Coast, yield declined in 1996 as compared to 1995 despite the elimination of the
federal excise tax during the first seven months of 1996. In the fourth quarter
of 1996, the Company benefited from a re-estimation of ticket breakage
recognized during the year that resulted in fourth quarter adjustments of
approximately $2.0 million, as compared to a similar benefit of approximately $5
million recognized in 1995.
Other revenues accounted for 5.4% and 5.6%, respectively, of 1996 and 1995
total revenues. Growth in other revenues year to year resulted primarily from
the Company's increased charter flying.
Operating Expenses.
Total operating expenses have increased steadily as a result of capacity
growth from approximately $209 million in 1994 to $253 million in 1995 to $347
million in 1996. To facilitate analysis of other trends, operating expenses are
discussed on a cost per available seat mile basis.
The Company's operating cost per available seat mile increased to 7.7 cents
in 1996 from 7.6 cents in 1995, due principally to a 16.7% increase
year-over-year in the average price of fuel, which added $9.7 million to 1996
operating expenses. On a pro forma basis, holding fuel prices constant from 1995
to 1996, the Company's operating unit costs would have declined to 7.5 cents in
1996 from 7.6 in 1995.
A number of costs declined on a unit basis from 1995 to 1996 due to
economies of scale and greater aircraft and airport gate utilization. Commission
unit costs declined 12.6% as the Company increased the percentage of tickets it
sold directly through its reservations and airport ticket offices. The Company
lowered insurance unit costs by 15% by obtaining lower hull and liability
insurance rates. Maintenance unit costs increased 22.2% in 1996 as compared to
1995 as a result of industry airworthiness directives, fleet interior
refurbishments, general aging of the fleet, and expiration of manufacturer
warranties. Advertising, sales and distribution unit costs increased 9.5% as
the Company devoted more resources to develop new markets and solidify the
Company's marketing presence in core West Coast markets.
Depreciation and amortization costs increased by 148.4% in 1996 compared to
1995 as the Company increased its flight equipment assets to $64.0 million from
$11.1 million with the purchase of two aircraft and four spare engines. In the
same time frame, ground property and equipment grew to $8.4 million from $4.8
million, primarily resulting from the Company's construction of a new
maintenance hanger.
Liquidity and Capital Resources
As of December 31, 1997, the Company's cash and cash equivalents and short
term investments totaled $29.2 million, as compared to $18.5 million as of
December 31,1996. Cash increased primarily as a result of the Company's issuance
of $35.9 million liquidation preference of Series A Cumulative Convertible
Exchangeable Preferred Stock (the "Series A Preferred") in October 1997, which
yielded to the Company net proceeds of approximately $34.0 million (net of
issuance discounts and other offering expenses.) The preferred stock accrues
dividends at a rate of 9% and is convertible into common stock at an initial
conversion price of $8.625 per share.
Not including the proceeds from the issuance of the Series A Preferred, the
Company's cash and cash equivalents and short term investments declined $23.3
million during the 1997 year. This decline is primarily attributable to the
$11.6 million net loss, an increase in accounts receivable and prepaid expenses
and purchases of property and equipment in excess of amounts financed.
The Company has no lines of credit. A previous line of credit with U.S.
Bank was terminated by agreement between the Company and U.S. Bank in February
1998.
During 1997, approximately $10.5 million of cash was used in operating
activities. The net loss of $11.6 million, the increase in accounts receivable
resulting from greater fourth quarter traffic in 1997, and the increase in the
current position of prepaid maintenance deposits relating to expected
reimbursements from lessors in 1998 were the primary uses of cash. These were
offset in part by depreciation and increases in accruals for the aircraft
maintenance and air traffic liabilities.
During 1997, approximately $45.0 million of net cash was provided from
financing activities, primarily related to the issuance of the Series A
Preferred and the financing of an aircraft purchase. The Company purchased an
MD-83 aircraft in September 1997 using $15.5 million of five year debt bearing
interest at LIBOR plus 2.8%.
During 1997, approximately $21.6 million of net cash was used in investing
activities, primarily related to the purchases of an aircraft and other property
and equipment aggregating approximately $29.9 million. This was partially offset
by approximately $6.0 million of cash realized from sales of spare engines in
September and December 1997.
As of March 1, 1998, the Company's fleet totaled 26 MD-87/MD-80 aircraft
and five MD-90 aircraft. The Company owns three of the MD-87/MD-80 aircraft, and
leases the remainder of its fleet under operating leases with initial terms
between one and 18 years. Included in the above fleet are two MD-90 aircraft
leased in January 1998, two MD-80 aircraft which are being returned to the
lessor in the second quarter of 1998, and one MD-80 aircraft leased to another
airline until June 1998 (which lease may be extended). The foregoing fleet
numbers do not include two MD-82 aircraft that the Company leased in February
1998 for a six-month term. The Company paid an aggregate of $2.4 million for the
option to purchase these two aircraft, and is currently marketing the aircraft
to potential buyers. Management anticipates the Company's operating fleet will
total 28 aircraft by the end of April 1998.
The Company has not been required to pay maintenance reserves on eight
aircraft leased from McDonnell Douglas Corporation or affiliates. However,
unless waivers of certain financial convenants are obtained, the Company will be
required to commence paying maintenance reserves on such aircraft, in an amount
aggregating approximately $800,000 per month, commencing April 1, 1998.
Management believes that the Company's current cash position, together with
expected cash flow generated from operations and anticipated funding for capital
expenditures will be sufficient to meet the Company's obligations and capital
requirements for the next twelve months. Nevertheless, airline results are
highly sensitive to various factors including the price of fuel and the actions
of competing airlines, either of which can materially and adversely affect the
Company's liquidity and cash flows. The Company may seek to raise additional
funds through sales of equity or debt (secured or unsecured) securities, or the
sale and leaseback of assets, including aircraft and spare engines.
<PAGE>
Item 8. Financial Statements and Supplementary Data
RENO AIR, INC. FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
Table of Contents
Page
Report of Ernst & Young LLP, Independent Auditors................ 24
Audited Financial Statements
Balance Sheets................................................... 25
Statements of Operations......................................... 26
Statements of Shareholders' Equity (Deficit)..................... 27
Statements of Cash Flows......................................... 28
Notes to Financial Statements.................................... 29
<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, 1997 and 1996, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG, LLP
Reno, Nevada
February 13, 1998
<PAGE>
Reno Air, Inc.
Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31
1997 1996
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ...................................... $ 29,058 $ 16,221
Short-term investments ......................................... 129 2,319
Accounts receivable ............................................ 24,808 17,435
Inventories and operating supplies ............................. 2,983 2,109
Prepaid expenses and other ..................................... 29,700 17,034
------------- ------------
Total current assets .............................................. 86,678 55,118
Property and equipment:
Flight equipment ............................................... 88,299 63,975
Ground property, equipment and improvements .................... 13,564 8,377
------------- ------------
101,863 72,352
Accumulated depreciation ....................................... (21,399) (11,254)
------------- -------------
80,464 61,098
Restricted cash and investment .................................... 5,122 6,519
Deposits and other ................................................ 21,145 20,971
------------- -------------
$ 193,409 $ 143,706
============= =============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable ............................................... $ 19,611 $ 19,071
Accrued liabilities ............................................ 25,894 20,141
Air traffic liability .......................................... 27,025 22,493
Current maturities of long-term debt ........................... 7,867 5,310
----------- -------------
Total current liabilities ......................................... 80,397 67,015
Long-term debt .................................................... 62,584 50,698
Noncurrent liabilities ........................................... 15,704 13,862
Commitments and contingencies
Shareholders' equity:
Series A Cumulative Convertible Exchangeable Preferred Stock ($25
per share liquidation preference), $.001 par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 1,436,000 in 1997 and none in
1996 1 --
Common stock, $.01 par value:
Authorized shares - 30,000,000
Issued and outstanding shares - 10,542,075 in 1997 and
10,333,446 in 1996............................................ 105 104
Additional paid-in capital ..................................... 66,825 32,607
Accumulated deficit ............................................ (32,207) (20,580)
------------- -------------
Total shareholders' equity ........................................ 34,724 12,131
------------- -------------
$ 193,409 $ 143,706
============= =============
See accompanying notes.
</TABLE>
<PAGE>
Reno Air, Inc.
Statements of Operations
(in thousands, except per share data)
<TABLE>
Year ended December 31
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Operating revenues:
Passenger ..................................... $ 360,973 $ 330,861 $ 242,134
Other ......................................... 22,951 19,023 14,374
------------- ------------- -------------
383,924 349,884 256,508
Operating expenses:
Salaries, wages and benefits .................. 67,675 53,989 41,995
Aircraft fuel and oil ......................... 68,490 66,806 44,872
Aircraft leases ............................... 68,908 61,322 49,674
Aircraft Maintenance .......................... 38,860 26,190 15,808
Handling, landing and airport fees ............ 39,218 35,192 24,894
Advertising, sales and distribution ........... 28,790 30,244 20,380
Commissions ................................... 20,341 19,402 16,382
Facility leases ............................... 14,098 11,206 9,600
Insurance ..................................... 6,057 7,671 6,579
Communications ................................ 5,663 4,699 3,354
Depreciation and amortization ................. 10,310 6,447 2,595
Other operating expenses ...................... 26,163 24,232 16,766
------------- ------------- -------------
394,573 347,400 252,899
------------- ------------- -------------
Operating income (loss) .......................... (10,649) 2,484 3,609
Nonoperating (expense) income:
Interest expense .............................. (5,473) (4,348) (2,142)
Interest income ............................... 2,480 3,013 2,308
Other, net .................................... 2,015 881 (1,824)
------------- ------------- -------------
(978) (454) (1,658)
------------- ------------- -------------
Net income (loss) ................................ $ (11,627) $ 2,030 $ 1,951
Preferred stock dividends (718) - (133)
-------------- ------------- --------------
Net income (loss) applicable to common
stock......................................... $ (12,345) $ 2,030 $ 1,818
============= ============= =============
Net income (loss) per common share ............... $ (1.18) $ .20 $ .20
============= ============= =============
Net income (loss) per common share -
assuming dilution ............................ $ (1.18) $ .19 $ .18
============= ============= =============
See accompanying notes.
</TABLE>
<PAGE>
Reno Air, Inc.
Statements of Shareholders' Equity (Deficit)
(in thousands, except share data)
<TABLE>
<CAPTION>
For the years ended December 31, 1997, 1996, and 1995
Additional
Common Stock Preferred Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------
Balance at December 31, 1994 8,212,788 $ 82 -- $ -- $ 22,681 $ (24,561) $ (1,798)
Exercise of stock options 279,500 3 -- -- 334 -- 337
Conversion of 7.25%
convertible subordinated
notes 930,744 9 -- -- 5,779 -- 5,788
Issuance of common stock
under the 401(k) Plan 69,192 1 -- -- 380 -- 381
Issuance of common stock
under private placement 482,576 5 -- -- 2,372 -- 2,377
Issuance of preferred stock -- -- 96,515 2,413 -- -- 2,413
Dividends on preferred stock -- -- -- -- (133) -- (133)
Redemption of preferred stock -- -- (96,515) (2,413) -- -- (2,413)
Net income -- -- -- -- -- 1,951 1,951
------------------------------------------------------------------------------------
Balance at December 31, 1995 9,974,800 100 -- -- 31,413 (22,610) 8,903
Exercise of stock options 322,000 4 -- -- 813 -- 817
Exercise of stock warrants 14,000 -- -- -- 121 -- 121
Conversion of 7.25%
convertible subordinated
notes 7,512 -- -- -- 53 -- 53
Issuance of common stock
under the 401(k) Plan 15,134 -- -- -- 207 -- 207
Net income -- -- -- -- -- 2,030 2,030
------------------------------------------------------------------------------------
Balance at December 31, 1996 10,333,446 104 -- -- 32,607 (20,580) 12,131
Exercise of stock options 170,200 1 -- -- 670 -- 671
Issuance of preferred stock -- -- 1,436,000 1 34,014 -- 34,045
Issuance of common stock
under the 401(k) Plan 38,429 -- -- -- 222 -- 222
Dividends on preferred stock -- -- -- -- (718) -- (718)
Net loss -- -- -- -- -- (11,627) (11,627)
------------------------------------------------------------------------------------
Balance at December 31, 1997 10,542,075 $ 105 1,436,000 $ 1 $ 66,825 $ (32,207) $ 34,724
====================================================================================
See accompanying notes
</TABLE>
<PAGE>
Reno Air, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
Year ended December 31
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities
Net income (loss) .......................................... $ (11,627) $ 2,030 $ 1,951
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization .......................... 10,310 6,447 2,595
Common stock issued/to be issued under 401(k) Plan ..... 323 207 194
Gains on sale of equipment ............................. (2,429) (1,125) --
Amortization of deferred lease credits ................. (1,696) (1,869) (113)
Fair value of inducement on conversion of 7.25% Notes... -- -- 1,392
Changes in operating assets and liabilities:
Accounts receivable .................................... (7,373) (597) (2,994)
Inventories and operating supplies ..................... (874) (810) (442)
Prepaid expenses and other ............................. (12,666) (2,436) (7,123)
Restricted cash ........................................ 1,397 (4,369) (518)
Deposits and other noncurrent assets .................. (174) (4,991) (5,289)
Accounts payable ....................................... 540 1,825 7,547
Accrued liabilities .................................... 7,348 4,693 (10,427)
Fuel purchase agreement ................................ -- (1,841) 8,094
Air traffic liability .................................. 4,532 3,569 8,898
Noncurrent liabilities ................................ 1,842 3,166 2,833
------------ ------------ ------------
Net cash provided by (used in) operating activities ........ (10,547) 3,899 6,598
Investing activities
Proceeds from sales of short-term investments.......... 4,679 4,918 4,528
Proceeds from sales of fixed assets .................. 6,034 2,500 41
Purchases of property and equipment ................... (29,861) (38,361) (3,874)
Purchases of short-term investments ................... (2,489) (4,292) (7,472)
------------- ------------ ------------
Net cash used in investing activities ...................... (21,637) (35,235) (6,777)
Financing activities
Proceeds from exercise of stock options and warrants ... 671 938 337
Proceeds from issuance of long-term debt ............... 20,921 14,447 472
Proceeds from issuance of preferred stock ............. 34,045 -- 2,413
Proceeds from issuance of common stock under private
placement, net ................................... -- -- 2,377
Proceeds from issuance of convertible notes, net ...... -- -- 27,123
Redemption of preferred stock ......................... -- -- (2,413)
Dividends on preferred stock .......................... (718) -- (133)
Repayments of long-term debt and capital leases ....... (9,898) (2,814) (4,115)
------------- ------------ ------------
Net cash provided by financing activities .................. 45,021 12,571 26,061
------------- ------------ ------------
Increase (decrease) in cash and cash equivalents ........... 12,837 (18,765) 25,882
Cash and cash equivalents at beginning of period ........... 16,221 34,986 9,104
------------ ------------ ------------
Cash and cash equivalents at end of period ................ $ 29,058 $ 16,221 $ 34,986
============ ============ ============
See accompanying notes.
</TABLE>
<PAGE>
Reno Air, Inc.
Notes to Financial Statements
Years ended December 31, 1997, 1996, and 1995
1. Accounting Policies
Organization and Operations
Reno Air, Inc. (the "Company"), a national carrier operating primarily in
the western United States, was incorporated in Nevada in June 1990 and commenced
operations in July 1992. The Company's primary strategy is to provide low-cost,
low-fare, high quality scheduled airline passenger service from its hubs in
Reno/Tahoe and Las Vegas Nevada, and in high-frequency service between San Jose
and southern California. 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 in the month of sale. 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
The Company realized gains of approximately $2.4 million in 1997 and $1.1
million in 1996 on the sales of three surplus aircraft engines (two engines in
1997 and one in 1996). These gains are included in other nonoperating income in
the respective statements of operations.
Advertising
Advertising costs are charged to expense in the period the costs are
incurred. Advertising expense for the years ended December 31, 1997, 1996 and
1995 was approximately $7.1, $6.2 and $3.7 million, respectively.
Frequent Flyer Program
In July 1997, the Company initiated its own frequent flyer program called
QQ Miles(TM). This program provides for passengers to receive rewards consisting
primarily of free flights and upgrades to first class. The Company is accruing
for frequent flyer reward expense based on the incremental costs of awards that
may be redeemed.
In July 1993, the Company and American Airlines, Inc. ("American") entered
into an agreement pursuant to which the Company participates in American's
AAdvantage(R) frequent flyer program. This agreement has been extended to June
30, 1998, and the Company and American are negotiating a longer extension. The
Company expenses the costs related to this program as the applicable
AAdvantage(R) awards are redeemed by the passenger.
Cash and Cash Equivalents and Short-Term Investments
The Company considers 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 with maturities of more than three
months, but less than one year.
Restricted Cash and Investment
Restricted cash and investment consists of cash and cash equivalents and a
debt security, all of which are collateral for letters of credit and notes
payable.
Inventories and Operating Supplies
Expendable parts, materials and supplies relating to flight equipment are
stated at average cost and are charged to expense when issued for use.
Depreciation and Amortization
Property and equipment are recorded at cost and are depreciated and
amortized to residual values using the straight-line method. The estimated
useful lives of the Company's owned flight equipment are 20 years from the date
of manufacture for aircraft and five to 10 years for aircraft engines and all
other flight equipment. The estimated useful lives of the Company's ground
property and equipment, including its Reno, Nevada maintenance facility, range
from three to 25 years. Assets acquired under capitalized leases and leasehold
improvements for flight equipment and other property are amortized over the
useful lives of the assets or the lease terms, whichever is less.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Stock Based Compensation
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant. Alternatively,
SFAS No. 123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provision of APB Opinion No. 25 and
provide the pro forma disclosure provision of SFAS No. 123 (Note 5 "Stock Option
Plans".)
Aircraft Maintenance
Routine maintenance and repairs are expensed when incurred. The Company
uses the accrual method to account for the future costs associated with major
scheduled airframe, engine and certain component overhauls. Under this method,
such estimated future costs are charged to the aircraft maintenance expense in
the periods currently benefited based on calculated rates and actual aircraft
utilization, as measured in flight hours and cycles.
At December 31, 1997 and 1996, the Company has current maintenance accruals
of approximately $13.4 million and $9.3 million (included in accrued
liabilities), respectively. Noncurrent maintenance accruals at December 31, 1997
and 1996 were $11.7 million and $9.4 million, respectively, which amounts are
included with noncurrent liabilities.
Under the terms of certain of the Company's aircraft leases, the Company is
required to pay monthly prepaid maintenance deposits based on the applicable
contractual rates and actual aircraft utilization. These deposits are
reimbursable to the Company upon the completion of certain defined major
scheduled overhauls of the subject aircraft during the lease terms.
At December 31, 1997 and 1996, such current prepaid maintenance deposits
were $16.6 million and $8.5 million, respectively, which amounts are recorded as
prepaid expenses and other. Such noncurrent deposits at December 31, 1997 and
1996, were $8.8 million and $8.7 million, respectively, and are recorded as
deposits and other.
In the fourth quarter of 1997, the Company recorded a $3.8 million charge
to aircraft maintenance expense to adjust its accruals primarily for the
increases in the costs of engine overhauls. In the fourth quarter 1996, and
resulting from amendments to the prepaid maintenance deposit provisions and
termination dates for four of its aircraft leases, the Company recorded a $1.5
million reduction in aircraft maintenance expense. In 1995, and resulting from
amendments and scheduled terminations to several of its aircraft leases, the
Company recorded a $3.2 million reduction to aircraft maintenance expense.
Per Share Data
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." SFAS No. 128 establishes new standards for computing and
presenting earnings per share (EPS) and simplified the standards for computing
EPS set forth in Accounting Principles Board Opinion No. 15 "Earnings Per Share"
("APB No.15"). SFAS No. 128 replaces the presentation of primary and fully
diluted EPS per APB No. 15 with the presentation of "basic" and "diluted" EPS.
Unlike primary EPS, basic EPS excludes the dilutive effects of options, warrants
and convertible securities. Diluted EPS is very similar to fully diluted EPS as
previously calculated under APB No. 15. The Company adopted the provisions of
SFAS No. 128 for the year ended December 31, 1997, and retroactively applied its
provisions to reported 1996 and other prior years' and quarterly EPS amounts
(Note 6, "Earnings per Share").
Supplemental Statement of Cash Flows Information
Certain non-cash activities are not reflected in the statements of cash
flows. Such activities are: the Company acquired an engine using seller-financed
debt and computer equipment under capital leases at an aggregate cost of $3.4
million during 1997, and an aircraft and two engines using seller-financed debt
at an aggregate cost of approximately $15.3 million during 1996. In 1996, 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 accrued liabilities; and recorded approximately $2.9
million of deferred maintenance expense related to the acquisition of certain
other aircraft and engines.
The Company paid interest of approximately $5.6 million, $3.6 million, and
$1.1 million for the years ended December 31, 1997, 1996 and 1995, respectively.
New Accounting Pronouncements
In 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued. SFAS
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components in a full set of general purpose financial statements,
and it is effective for fiscal years beginning after December 15, 1997.
Management of the Company does not believe that this statement will have a
material impact on the financial statements of the Company.
In 1997, SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information" was also issued, which statement supersedes SFAS No. 14.
The new rules change the way that public companies report information about
operating segments in their annual financial statements, and it is effective for
fiscal years beginning after December 15, 1997. Management of the Company does
not believe this statement will have a material impact on the financial
statements of the Company.
Reclassification
Certain reclassifications have been made in the prior years' financial
statements to conform them to the current year's presentation.
<PAGE>
2. Commitments
Aircraft Leases
At December 31, 1997, the Company operated 28 leased aircraft, all of which
are accounted for under operating leases with initial terms from one to 18
years.
Certain of the aircraft leases are secured in part by cash deposits. At
December 31, 1997 and 1996, such deposits (including interest) approximated $9.6
million and $10.5 million, respectively, and are included in deposits and other
on the accompanying balance sheets.
The Company has entered into an agreement to lease two additional aircraft
for a period of 18 years which began service in January 1998. The monthly lease
payments for these aircraft are 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 2021.
At December 31, 1997, 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 Leases Total
- ----------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
1998 $ 67,977 $ 5,502 $ 73,479
1999 57,758 5,120 62,878
2000 51,293 4,932 56,225
2001 46,629 3,652 50,281
2002 37,374 2,605 39,979
Thereafter 243,996 10,585 254,581
---------------------------------------------------------------------
$ 505,027 $ 32,396 $ 537,423
=====================================================================
</TABLE>
<PAGE>
3. Long-Term Debt
The components of long-term debt are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
(in thousands)
<S> <C> <C>
9% Senior Convertible Notes due September 30, 2002, interest
payable semi-annually........................................................ $ 28,750 $ 28,750
Note payable -
secured by an aircraft which has a net book value of $16.5 million at December
31, 1997. Monthly accelerating principal payments of $145,000 to $179,000 plus
interest at LIBOR plus 2.25% (7.89% at December 31, 1997) are due through July
2000. Balloon payment of $4,695,000 due July 2000. 9,726 11,425
Note payable -
secured by an aircraft which has a net book value of $17.2 million at December
31, 1997. Monthly principal payments of $178,000 plus interest at LIBOR plus
2.80% (8.49% at December 31, 1997) are due through September 2002. Balloon
payment of $4,982,000 due September 2002. 14,965 --
Notes payable -
secured by an aircraft which has net book value of $12.4 million at December 31,
1997. Quarterly accelerating principal payments of $326,000 to $477,000 plus
interest at LIBOR plus 2% (7.84% at December 31, 1997) are due through February
2003. 8,327 9,569
Notes payable -
secured by property which as a net book value of $3.8 million at December 31,
1997. Monthly payments of $26,000 including interest at LIBOR plus 2.69% (8.65%
at December 31, 1997) are due through February 2012. 2,535 --
Notes payable -
secured by aircraft engines with an aggregate net book value of $9.9 million at
December 31, 1997. Monthly accelerating principal payments of $32,000 to $96,000
plus interest at LIBOR plus 2.85% to 3.15% (8.57% to 9.11% at December 31, 1997)
are due through dates ranging from July 1999 through September 2002. 5,520 5,700
Other notes payable at interest rates from 6.75% to 15.37% due through
September 1999............................................................... 628 564
------------ ------------
Total long-term debt ........................................................... 70,451 56,008
Less current maturities ........................................................ (7,867) (5,310)
------------ ------------
$ 62,584 $ 50,698
============ ============
</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, 1997, principal payments on long-term debt are due as follows:
(in thousands)
1998 $ 7,867
1999 7,310
2000 10,658
2001 4,673
2002 37,510
Thereafter 2,433
---------------
$ 70,451
===============
4. Shareholders' Equity (Deficit)
During the fourth quarter of 1997, the Company sold 1.436 million shares of
9% Series A Cumulative Convertible Exchangeable Preferred Stock (the "Preferred
Stock") for net proceeds of approximately $34.0 million. The stock was issued in
a private placement to SBC Warburg Dillon Read, Inc., as initial purchaser, who
remarketed the shares to institutional and other qualified buyers. The Preferred
Stock was sold by the Company at its stated liquidation preference of $25.00 per
share, less a $1.00 per share discount to the initial purchaser.
Dividends on the Preferred Stock are cumulative from the date of original
issuance and are payable quarterly in arrears, commencing December 15, 1997, at
the rate of 9% per annum of the liquidation preference value of the Preferred
Stock, or $35.9 million (equivalent to $2.25 per share of Preferred Stock). The
dividends are payable in cash, except under certain circumstances related to the
conversion of the Preferred Stock, in which case dividends may be issued in
additional shares of common stock.
The Preferred Stock is convertible at any time at the option of the holders
into shares of the Company's common stock, at the initial conversion price of
$8.625 per share of common stock (equivalent to a rate of approximately 2.9
shares of common stock per share of Preferred Stock), subject to adjustment in
certain events, including a corporate change or an ownership change, as defined.
The Preferred Stock is redeemable, in whole or in part, at the option of
the Company on and after December 20, 2000, initially at a price of $26.125 per
share and thereafter at prices declining to $25.00 per share on or after
December 15, 2003, plus accrued and unpaid dividends, if any, to the redemption
date.
The Preferred Stock is also exchangeable, in whole but not in part, at the
option of the Company on any dividend payment date, beginning on December 15,
1999, for the Company's 9% Convertible Subordinated Debentures due December 15,
2004, at the rate of $25.00 principal amount of Debentures per share. The
Debentures contain conversion and optional redemption provisions similar to
those of the Preferred Stock.
The holders of Preferred Stock, as a class, may vote on certain matters
adversely affecting the Preferred Stock, including without limitation, the
creation and/or issuance of any capital stock ranking senior to the Preferred
Stock.
In 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 Subordinated Notes were originally convertible into
common stock at a price of approximately $7.03 per share. Commencing in April
1995, the Company offered holders of the Subordinated Notes the opportunity to
convert the Subordinated Notes into shares of common stock at a conversion price
of $5.00 per share. In May 1995, $4.6 million principal amount of the
Subordinated Notes plus accrued interest were tendered for conversion. The
Company accounted for the conversion as an inducement to noteholders to convert
below the originally scheduled conversion price, and recognized a charge of
approximately $1.4 million, which is included in other nonoperating expense in
the accompanying statement of operations. This charge did not impact total
shareholders' equity as there was an offsetting increase to additional paid-in
capital. In connection with the placement of the Subordinated Notes, the Company
issued warrants to the placement agent to purchase 65,431 shares of common stock
at an exercise price of $8.44 per share, exercisable through April 28, 1999. All
of these warrants were outstanding at December 31, 1997.
During 1995, the Company issued in a private placement 482,576 shares of
common stock for $2.4 million and 96,515 shares of 16% redeemable preferred
stock for $2.4 million. The preferred stock was redeemed for $2.4 million in
cash in September 1995.
5. Stock Option Plans
In February 1992, the Board of Directors of the Company adopted a Stock
Option Plan (the "Plan"), providing for the grants of options to officers,
directors, certain consultants and key employees 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 4,600,000. At December 31, 1997,
1,004,700 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 generally the options must be
exercised within a period of not more than ten years after the date of grant. An
optionee must remain 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 to sixty
days after such termination, 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 generally vest over five years.
In May 1995, the Company canceled substantially all outstanding options
granted to employees and directors with exercise prices 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 of the common stock
on the date of the regrant. All other terms of the options remained the same,
except that none of the regranted options were exercisable prior to November 10,
1995.
A summary of the Plan's stock option activity and related information for
the years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 1,751,200 $ 7.23 1,534,000 $ 4.51 1,560,500 $ 4.59
Granted 1,334,800 7.37 665,500 10.98 1,209,500 5.26
Exercised (170,200) 3.74 (322,000) 2.54 (279,500) 1.21
Canceled (447,700) 8.07 (126,300) 5.88 (956,500) 6.56
--------- -------- --------- -------- --------- --------
Outstanding-end of year 2,468,100 $ 7.38 1,751,200 $ 7.23 1,534,000 $ 4.51
========= ======== ========= ======== ========= ========
Exercisable at end of year 422,800 $ 6.08 333,700 $ 4.67 454,000 $ 3.08
Weighted-average fair value of
options granted during the year $ 5.86 $ 8.94 $ 4.13
</TABLE>
A summary of the outstanding and exercisable options at December 31, 1997,
segregated by certain 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 - 5.74 808,900 $ 5.12 6.9 328,800 $ 4.85
$ 6.25 - 8.75 1,323,700 7.58 9.3 41,300 8.05
$ 9.06 - 13.00 335,500 12.03 8.4 52,700 12.18
----------- ------- ----- ------- ========
2,468,100 $ 7.38 8.4 422,800 $ 6.08
=========== ======= ===== ======= ========
</TABLE>
Pro forma information regarding net income and earnings per share is
required by SFAS No. 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" as defined in that
statement. The fair value for these options was estimated at the respective
dates of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1997, 1996 and 1995, respectively: risk-free
interest rates of 6.0%, 6.42% and 6.2%, no dividend yields on common stock;
volatility factors of the expected market price of the Company's common stock of
.692, .755 and .755, and a weighted-average expected life of the options of
5.6, 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 unconditionally transferable. Additionally, option valuation models
require the input of highly subjective assumptions, especially 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 estimates, in management's opinion, the existing models do not
necessarily provide a reliable measure of the actual fair value on the grant
dates of its employee stock options.
For purposes of the SFAS No. 123 pro forma disclosures, the estimated fair
value of the options is charged to compensation expense over the vesting period
of the options. The Company's pro forma information for the years ended December
31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Pro forma net income (loss)
applicable to common stock $ (14,368) $ 1,137 $ 1,389
=========== ============= ============
Pro forma net income (loss)
per common share $ (1.37) $ .11 $ .15
=========== ============= ============
Pro forma net income (loss)
per common share-
assuming dilution $ (1.37) $ .10 $ .14
=========== ============= ============
</TABLE>
SFAS No. 123 is applicable only to options and stock based awards granted
subsequent to December 15, 1994, and therefore its pro forma effect will not be
fully reflected until 1999.
Directors Stock Option Plan
In May 1997, the Company adopted the Reno Air, Inc. Directors Stock Option
Plan (the "Directors Stock Option Plan"), a non-qualified stock option plan,
under which 300,000 shares are reserved for issuance upon exercise of options
granted to members of the Company's Board of Directors.
Pursuant to the terms of the Directors Stock Option Plan, options to
acquire 30,000 shares of common stock will be granted to each director who first
becomes a director of the Company after May 22, 1997 (a "Qualified Director").
Beginning in June 1998, and in each June thereafter, options to acquire 10,000
shares of common stock will be granted to each Qualified Director then serving
on the board and who has served on the board during the immediately preceding
six months, and to each non-employee director who has served on the board for at
least the immediately preceding four years (and in each case was reelected by
the Company's shareholders). Options granted under the Directors Stock Option
Plan fully vest over three years from the grant date and terminate in 10 years
(unless terminated earlier as provided for in the Directors Stock Option Plan).
The Directors Stock Option Plan is administered and may be amended by the
Company's Board of Directors, provided, however, that certain changes to the
Directors Stock Option Plan, such as increases in the number of common shares
granted thereunder, are subject to shareholder approval.
At December 31, 1997, no grants had been made under the Directors Stock
Option Plan.
<PAGE>
6. Earnings Per Share
The following table presents the computations of basic and diluted earnings
(loss) per share for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ----------------- -----------------
(in thousands, except per share data)
<S> <C> <C> <C>
Numerator:
Net income (loss) before preferred stock
dividends $ (11,627) $ 2,030 $ 1,951
Preferred stock dividends (718) -- (133)
------------ ------------ -----------
Numerator for basic earnings per share - income
(loss) applicable to common stock (12,345) 2,030 1,818
Effect of dilutive securities -- -- --
------------ ------------ -----------
Numerator for diluted earnings per share - income
(loss) applicable to common stock (12,345) 2,030 1,818
Denominator:
Denominator for basic earnings per share -
weighted average shares 10,472,992 10,239,957 9,281,012
Effect of dilutive securities:
Employee stock options -- 568,553 556,110
Warrants -- 55,362 25,640
------------ ----------- ----------
-- 623,915 581,750
------------ ----------- ----------
Denominator for diluted earnings per share -
adjusted weighted average shares 10,472,992 10,863,872 9,862,762
============ =========== ==========
Basic earnings (loss) per share $ (1.18) $ 0.20 $ 0.20
============ =========== ==========
Diluted earnings (loss) per share $ (1.18) $ 0.19 $ 0.18
============ =========== ==========
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, certain securities
were not included in the respective diluted EPS computations because their
exercise prices were greater than the average market prices of the Company's
common stock, or were otherwise anti-dilutive. These securities are listed
below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ------------------------------ ------------------------------
Weighted-Average Weighted-Average Weighted-Average
Common Shares Price Common Shares Price Common Shares Price
-------------- -------------- --------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Employee Stock
Options 1,772,456 $ 7.44 981,847 $ 6.70 608,502 $ 4.11
Warrants 179,076 7.69 146,620 7.96 189,791 7.84
Senior
convertible
notes 2,875,000 10.00 2,875,000 10.00 1,048,573 10.00
7.5% Convertible
notes payable -- -- -- -- 7,512 5.00
Convertible
preferred stock 927,725 8.63 -- -- -- --
--------- ------- --------- -------- ----------- -------
5,754,257 $ 8.92 4,003,467 $ 9.12 1,854,378 $ 7.83
========= ======= ========= ======== =========== =======
</TABLE>
For additional disclosures regarding the outstanding preferred stock, the
warrants and the employee stock options see Notes 4 and 5, respectively.
7. Income Taxes
The differences between the Company's provisions for income taxes and such
provisions (benefit) for income taxes computed at the federal statutory rate is
comprised of the items shown in the following table:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------- ------------------
(in thousands)
<S>
<C> <C> <C>
Income tax provision (benefit) at the statutory rate $ (3,953) $ 690 $ 663
Net operating loss producing no current benefit 3,953 -- --
Benefit of net operating loss carryforward -- (690) (663)
-------------- ------------- --------------
Income tax provision $ -- $ -- $ --
============== ============= ==============
</TABLE>
The significant components of the deferred income tax assets and liabilities are
as follows at December 31, 1997 and 1996:
1997 1996
------------------ ------------------
(in thousands)
Deferred tax assets (liabilities):
Maintenance $ 761 $ 918
Vacation and other allowances 549 766
Deferred rent expense 1,015 1,557
Net operating loss carryforward 10,563 4,444
Depreciation (737) 1,390
------------- -------------
Net deferred tax assets 12,151 9,075
Valuation allowance (12,151) (9,075)
------------- -------------
$ -- $ --
============= =============
The valuation allowance is provided since it is uncertain that the deferred
tax assets will be realized. The Company established the valuation allowance
based principally on its historical financial results from operations.
At December 31, 1997, the Company has available net operating loss
carryforwards for Federal income tax purposes of approximately $31 million which
expire during the years 2005 through 2012. Approximately $6.7 million represents
a deduction related to the exercise of stock options, the benefit of which will
be credited to additional paid-in capital upon utilization. Utilization of these
carryforwards may be limited due to the ownership change provisions as enacted
by the Tax Reform Act of 1986 and subsequent legislation.
8. 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 the participant's date of hire. During 1997, 1996 and 1995, the
Company expensed $323,000, $207,000, and $194,000, respectively, 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, each
eligible full time employee receives 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 Profit Plan year. In 1997, 1996 and 1995, the Company
paid approximately $281,000, $387,000 and $364,000, respectively, pursuant to
the Profit Plan. The Company may amend the Profit Plan from time to time.
9. Fair Value of Financial Instruments
The fair value of the Company's financial instruments approximate their
recorded book values at December 31, 1997 and 1996, except for the Senior Notes
whose fair value was approximately $26.1 million and $27.2 million at December
31, 1997 and 1996, respectively. The fair values are based on quoted market
prices for the same and similar debt, including debt of comparable remaining
maturities.
<PAGE>
10. Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1997
Three Months Ended
----------------------------------------------------------------------------
March 31 June 30 September 30 December 31 (a)
----------------------------------------------------------------------------
(in thousands,except per share data)
<S> <C> <C> <C> <C>
Operating revenues $ 89,684 $ 97,422 $ 105,181 $ 91,637
Operating income (loss) (4,172) 944 4,401 (11,822)
Net income (loss) (4,997) 224 4,797 (11,651)
Net income (loss) applicable
to common shareholders (4,997) 224 4,797 (12,369)
Net income (loss) per share:
Basic $ (0.48) $ 0.02 $ 0.46 $ (1.17)
========================================================================
Diluted $ (0.48) $ 0.02 $ 0.39 $ (1.17)
========================================================================
1996
Three Months Ended
-----------------------------------------------------------------------------
March 31 June 30 September 30 December 31 (b)
-----------------------------------------------------------------------------
(in thousands,except per share data)
Operating revenues $ 72,820 $ 90,916 $ 101,328 $ 84,820
Operating income (loss) 444 3,626 4,513 (6,099)
Net income (loss) 275 3,275 4,748 (6,267)
Net income (loss) per share:
Basic $ 0.03 $ 0.32 $ 0.46 $ (0.61)
========================================================================
Diluted $ 0.03 $ 0.27 $ 0.38 $ (0.61)
========================================================================
(a) As described in Note 1, the Company incurred a $3.8 million charge to
aircraft maintenance expense to adjust its accruals primarily for the
increases in the costs of engine overhauls.
(b) As described in Note 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.
</TABLE>
<PAGE>
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
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, 1998.
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, 1998.
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, 1998.
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, 1998.
<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
Balance Sheets, December 31, 1997 and 1996 29
Statements of Operations for the Years Ended
December 31, 1997, 1996, and 1995 30
Statements of Shareholders' Equity (Deficit)
for the Years Ended December 31, 1997, 1996 and 1995 31
Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 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.
3.3* Certificate of Designations for the Preferred Stock (Incorporated
by reference to Exhibit 3 to the Company's Form 8-A Registration
Statementfiled on November 13, 1997 (the "1997 Form 8-A")).
3.4* Form of Indenture (Incorporated by reference to Exhibit 4 to the 1997
Form 8-A).
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).
10.4* Employment Agreement with Robert M. Rowen dated March 31, 1994.
(Incorporated by reference to Exhibit 10.4 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1994 (the "1994
10-K")).
- -----------------------
* 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 Company's Annual Report on Form 10-K for the
year ended December 31, 1993 (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 Form 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 Form S-2).
10.20* Reno Air Profit Sharing Plan (Incorporated by reference to Exhibit
10.20 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.)
10.21* MultiHost Agreement with the SABRE Group, Inc. (Incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1997 (the "September
1997 10-Q"))
10.22* Reno Air, Inc. Employee Stock Incentive Plan (Incorporated by
reference to Exhibit 10.3 of the September 1997 10-Q).
10.23* Reno Air, Inc. Director Stock Option Plan (Incorporated by
reference to Exhibit 10.4 to the September 1997 10-Q).
- ------------------------
* Exhibit incorporated by reference.
+ Confidential treatment has been granted with respect to portions of
this Exhibit.
<PAGE>
23.1 Consent of Ernst & Young LLP 58
(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/ JOSEPH R. O'GORMAN
Joseph R. O'Gorman
Chief Executive Officer
Dated: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Position Date
/s/ DONALD L. BECK Director March 27, 1998
Donald L. Beck
/s/ BARRIE K. BRUNET Director March 27, 1998
Barrie K. Brunet
/s/ LEE M. HYDEMAN Director March 27, 1998
Lee M. Hydeman
/s/ JOE M. KILGORE Director March 27, 1998
Joe M. Kilgore
/s/ JAMES T. LLOYD Director March 27, 1998
James T. Lloyd
/s/ EMMETT E. MITCHELL Director March 27, 1998
Emmett E. Mitchell
/s/ JOSEPH R. O'GORMAN Chairman of the Board March 27, 1998
Joseph R. O'Gorman Chief Executive Officer
and President
Dr. Wayne L. Stern Director March __, 1998
/s/ AGNIESZKA WINKLER Director March 27, 1998
Agnieszka Winkler
/s/ TODD M. KEHOE Acting Chief Financial March 27, 1998
Todd M. Kehoe Officer and Chief
Accounting Officer
<PAGE>
INDEX TO EXHIBITS
Page
Exhibit 3.2 Bylaws, as amended 46
Exhibit 23.1 Consent of Ernst & Young LLP 53
Exhibit 27 Financial Data Schedule 54
EXHIBIT 3.2
NINTH AMENDED AND RESTATED CODE OF BYLAWS
NINTH AMENDED AND RESTATED
CODE OF BYLAWS
OF
RENO AIR, INC.
I
IDENTIFICATION
A. Name. The name of the corporation is Reno Air, Inc., hereafter referred
to as the "Corporation."
B. Principal Office and Resident Agent. The address of the principal office
of the Corporation is 220 Edison Way, Reno Nevada 89502; and the name of the
Resident Agent for the Corporation in Nevada is Walther, Key, Maupin, Oats, Cox,
Lee & Klaich, A Professional Corporation, 3500 Lakeside Court, Reno, Nevada.
C. Seal. The seal of the Corporation shall be circular in such form as is
adopted by the Secretary from time to time, containing the name "Reno Air,
Inc.", the state of incorporation, "Nevada", and the date of incorporation,
"1990".
D. Fiscal Year. The fiscal year of the Corporation shall be the calendar
year.
II
CAPITAL STOCK
A. Classes of Stock. The authorized capital stock of the Corporation is as
set forth in its Articles of Incorporation, as amended from time to time.
B. Consideration for Shares. The capital stock may be issued for such
consideration as shall be determined by the Board of Directors. When the
consideration for which shares are to be issued has been received by the
Corporation, the shares shall fully paid and nonassessable. In the absence of
fraud in the transaction, the judgment of the Board of Directors as to the value
of the consideration received for shares shall be conclusive.
C. Certificates Representing Shares. Each holder of the capital stock of
the Corporation shall be entitled to a certificate evidencing the number of
shares owned by the shareholder. Signatures on certificates may be facsimile.
The validity of certificates shall not be affected by the fact that any officer
whose signature appears thereon ceases to be an officer of the Corporation.
D. Transfer of Stock. The Corporation shall register the transfer of any
stock certificate presented to it for transfer if the following conditions have
been fulfilled:
1. Endorsement. The certificate is properly endorsed by the
registered holder or by his duly authorized attorney-in-fact;
2. Witnessing. The endorsement or endorsements are witnessed
by one witness unless this requirement is waived by the Secretary of the
Corporation;
3. Adverse Claims. The Corporation has no notice of any adverse
claims or has discharged any duty to inquire into any such claims; and
4. Collection of Taxes. There has been compliance with any
applicable law relating to the collection of taxes.
III
SHAREHOLDERS
A. Place of Meetings. Meetings of the shareholders of the Corporation shall
be held at the principal office of the Corporation, in Reno, Nevada, or at such
other place as may be designated by the Chairman of the Board of Directors or
President of the Corporation.
B. Annual Meeting. The annual meeting of the shareholders shall be held at
such time and date as may be designated by the Chairman of the Board of
Directors or the President of the Corporation. Failure to hold the annual
meeting at the designated time shall not cause a forfeiture or dissolution of
the Corporation.
C. Special Meetings. Special meetings of the shareholders may be called by
a majority of the Board of Directors, the Chairman of the Board of Directors or
the President.
D. Notice of Meetings -- Waiver. Written notice stating the place, day,
hour, and purpose of the meeting shall be delivered not less than ten (10) nor
more than sixty (60) days before the date of the meeting, either personally or
by mail, by or at the direction of the Chairman of the Board of Directors, the
President, the Secretary, or the Officer or persons calling the meeting, to each
registered shareholder entitled to vote at such meeting. If mailed, the notice
shall be considered to be delivered when deposited in the United States mail
addressed to the registered shareholder at the shareholder's address as it
appears on the stock transfer books of the Corporation, with postage prepaid.
Waiver by a shareholder in writing of notice of a shareholders' meeting shall be
equivalent to notice. Attendance by a shareholder, without objection to the
notice, whether in person or by proxy, at a shareholders meeting shall
constitute a waiver of notice of the meeting.
E. Quorum. A majority of the shares entitled to vote, represented in person
or by proxy, shall constitute a quorum at a meeting of the shareholders. The
shareholders present at a duly organized meeting may continue to do business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum. Unless the Articles of Incorporation or these by-laws
provide for different proportions, the vote of stockholders who hold at least a
majority of the voting power present at a meeting at which a quorum is present
shall be the act of the stockholders. Shares which are present at a meeting, in
person or by proxy, but that are not voted on a matter and that do not indicate
an abstention on such matter shall not be considered shares present for purposes
of determining the voting power present on any such matter.
F. Proxies. A shareholder may vote either in person or by proxy executed in
writing by the shareholder or by his duly authorized attorney-in-fact. No proxy
shall be valid after six (6) months from the date of its execution, unless
otherwise provided in the proxy, and in no event shall a proxy be valid more
than seven (7) years after its execution unless it is coupled with an interest.
G. No Action By Written Consent. Shareholders may not take action by
written consent.
H. Nomination of Directors. Only persons who are nominated in accordance
with the procedures set forth in this paragraph H. shall be eligible to serve as
directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at an annual meeting of shareholders (a) by or at the
direction of the Board of Directors, or (b) by any shareholder of the
Corporation who is a shareholder of record at the time of giving the notice
provided for in this paragraph H. who shall be entitled to vote for the election
of directors at the meeting and who complies with the procedures set forth
below. Any such nominations (other than those made by or at the direction of the
Board of Directors) must be made pursuant to timely notice in writing to the
Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than sixty (60) days nor more than ninety (90) days prior
to the anniversary date of the immediately preceding annual meeting; provided,
however, that in the event that the annual meeting with respect to which such
notice is to be tendered is not held within thirty (30) days before or after
such anniversary date, to be timely, notice by the shareholder must be received
no later than the close of business on the tenth (10th) day following the day on
which notice of the meeting or public disclosure thereof was given or made. Such
shareholder's notice shall set forth (a) as to each person whom the shareholder
proposes to nominate for election or re-election as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(including such person's written consent to being named as a nominee and to
serving as a director if elected), and (b) as to the shareholder giving the
notice (i) the name and address, as they appear on the Corporation's books, of
such shareholder, (ii) the class and number of shares of stock of the
Corporation that are beneficially owned by such shareholder, and (iii) a
description of all arrangements or understandings between such shareholder and
any other person or persons (including their names) in connection with such
nomination and any material interest of such shareholder in such nomination. At
the request of the Board of Directors, any person nominated by the Board of
Directors for election as a director shall furnish to the Secretary of the
Corporation that information required to be set forth in a shareholder's notice
of nomination that pertains to the nominee. Notwithstanding anything in these
Bylaws to the contrary, no person shall be eligible to serve as a director of
the Corporation unless nominated in accordance with the procedures set forth in
this paragraph H. If the Board of Directors shall determine, based on the facts,
that a nomination was not made in accordance with the procedures set forth in
this paragraph H., the Chairman shall so declare to the meeting, and the
defective nomination shall be disregarded. Notwithstanding the foregoing
provisions of this paragraph H., a shareholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder with respect to the matters set forth in
this paragraph H.
I. Notice of Business. At any annual meeting of the shareholders, only such
business shall be conducted as shall have been brought before the meeting (a) by
or at the direction of the Board of Directors, or (b) by any shareholder of the
Corporation who is a shareholder of record at the time of giving the notice
provided for in this paragraph I., who shall be entitled to vote at such meeting
and who complies with the procedures set forth below. For business to be
properly brought before a shareholder annual meeting by a shareholder, the
shareholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a shareholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than sixty (60) days nor more than ninety (90) days prior to the
anniversary date of the immediately preceding annual meeting; provided, however,
that in the event that the annual meeting with respect to which such notice is
to be tendered is not held within thirty (30) days before or after such
anniversary date, to be time on the Corporation's books, of the shareholder
proposing such business, (c) the class and the number of shares of stock of the
Corporation that are beneficially owned by the shareholder, and (d) a
description of all arrangements and understandings between such shareholder and
any other person or persons (including their names) in connection with such
business and any material interest of the shareholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at a shareholder meeting except in accordance with the procedures set
forth in this paragraph I. If the Board of Directors of the meeting shall
determine, based on the facts, that business was not properly brought before the
meeting in accordance with the procedures set forth in this paragraph I., the
Chairman shall so declare to the meeting, and any such business not properly
brought before the meeting shall not be transacted. Notwithstanding the
foregoing provisions of this paragraph I., a shareholder shall also comply with
all applicable requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder with respect to the matters set forth
in this paragraph I.
IV
BOARD OF DIRECTORS
A. Number of Directors. The Board of Directors of the Corporation shall
consist of such number of members, not less than three (3) and not more than
eleven (11), as shall be determined from time to time by the Board of Directors.
The members of the Board of Directors need not be shareholders. This paragraph
may be amended only by the affirmative vote of the majority of the issued and
outstanding shares of voting stock of the Corporation.
B. Vacancies. Except as otherwise provided in paragraph D. below, any
vacancy occurring in the Board of Directors may be filled by the unanimous vote
of the remaining Directors though less than a quorum of the Board of Directors.
If the vacancy is not filled in this manner, a special meeting of the
shareholders shall be called to fill the vacancy. A Director elected to fill a
vacancy shall be elected for the unexpired term of his predecessor in office.
C. Removal of Directors. Any member of the Board of Directors may be
removed and replaced by the affirmative vote of not less than seventy-five (75%)
of the issued and outstanding shares of voting stock of the Corporation. Any
Director elected to replace a Director who is removed pursuant to this
paragraph, shall be elected for the unexpired term of his predecessor in office.
D. Place of Meetings. Meetings of the Board of Directors, annual, regular,
or special, may be held within or without the State of Nevada.
E. Annual Meetings. Unless otherwise determined by the President and
noticed to the Board, the Board of Directors shall meet each year immediately
after the annual meeting of the shareholders, at the same place as the meeting
of the shareholders for the purpose of organization, election of officers, and
consideration of any other business that may properly be brought before the
meeting. No notice of any kind to either old or new members of the Board of
Directors for this annual meeting shall be necessary.
F. Other Meetings; Notice; Waiver. Other meetings of the Board of Directors
may be called at the direction of the President, the Chairman of the Board or
the Chairman of the Executive Committee, and must be called by any of such
officers at the request of any two Directors upon written notice addressed to
such officers. Notice of each such meeting shall be given by letter, facsimile,
telegram, cable, or radiogram, delivered for transmission not less than the
third day immediately preceding the day for the meeting, or by word of mouth,
telephone, facsimile, or radiophone received not less than the second day
immediately preceding the day for the meeting.
G. Agenda of Meetings. The agenda for meetings of the Board of Directors
shall be prepared by the Chairman of the Board in consultation with the Chairman
of the Executive Committee. The Chairman of the Executive Committee or any two
Directors may cause any matter to be placed on the agenda for consideration of
the whole Board at meetings of the Board of Directors.
H. The Chairman of the Executive Committee. The Chairman of the Executive
Committee shall have such powers and perform such duties as the Board of
Directors may from time to time prescribe or as may be prescribed in these
Bylaws. He or she shall preside at the meetings of the Executive Committee and
shall be a voting member of all other committees constituted and appointed by
the Board of Directors. The Chairman of the Executive Committee shall not be an
officer or employee of the Corporation. The Chairman of the Executive Committee
and the Chairman of the Board shall not be the same person.
I. Quorum. A majority of the number of Directors fixed by the Code of
Bylaws shall constitute a quorum for the transaction of business. The act of the
majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors unless the action of a greater number
is required by law, the Articles of Incorporation, or the Code of Bylaws.
J. Action or Ratification of Action Without a Meeting. Any action that may
be taken or ratified at a meeting of the Directors or of a committee may be
taken or ratified without a meeting if a consent in writing, setting forth the
action to be taken or to be ratified, is signed by all of the Directors or all
of the members of the committee, as the case may be.
K. Loans. The Corporation shall have the following power with respect to
loans:
1. Loans of Funds, Generally. To loan money in furtherance of
any of the purposes of the Corporation, to invest the funds of the Corporation
from time to time, and to take and hold any property as security for the payment
of funds so loaned or invested.
2. Loans to Employees. To loan money to employees, officers,
and Directors, and to otherwise assist employees, officers, and Directors.
Loans to members of the Board of Directors shall be made only upon the approval
of a majority of the Board of Directors, excluding the Director to whom the loan
is to be made.
L. Officers of the Board. The Board of Directors of the Corporation may, by
resolution adopted by a majority of the whole Board, designate one of its
members to serve as Chairman of the Board. The Chairman of the Board shall
preside over all meetings of the Board of Directors, and shall perform such
other duties as are prescribed from time to time by resolution of the Board. In
addition, the Board of Directors may designate a Secretary who shall be elected
or appointed by the Board from time to time and who may or may not serve as a
member of the Board of Directors. The Secretary of the Board shall maintain
formal minutes of all meetings and actions of the Board. The Secretary of the
Board shall, in addition, perform such other duties as are prescribed from time
to time by resolution of the Board.
M. Executive Committee. The Board of Directors shall constitute a general
executive committee for the Board and appoint the members thereof. No member of
the executive committee shall be an officer or employee of the Corporation. The
executive committee shall have all the authority of the Board, except that the
executive committee shall have no power: (i) to declare dividends, (ii) to
adopt, amend, or repeal the bylaws of the Corporation, (iii) to amend the
certificate of incorporation of the Corporation, (iv) to effect a merger of the
Corporation with another entity, (v) to effect the sale of all or substantially
all of the assets of the Corporation, or (vi) to do any act or thing not
permitted by the General Corporation Law of Nevada.
The executive committee shall report periodically to the Board. The
committee shall act by a majority of the members thereof, and any action duly
taken by the executive committee within the course and scope of its authority
shall be binding on the Corporation.
During the course of the executive committee's existence, the membership
thereof may be increased or decreased and the authority and duties of the
committee changed by the Board of Directors as it may deem appropriate.
N. Other Committees. The Board of Directors, at its discretion, may
constitute and appoint special committees of its members, in addition to the
executive committee, to assist in the supervision, management, and control of
the affairs of the Corporation, with responsibilities and powers appropriate to
the nature of the several committees and as provided by the Board of Directors
in the resolution of appointment or in subsequent resolutions and directives.
Such committees may include, but are not limited to, the following:
nominating/compensation committee, audit committee, finance committee, advisory
committee, membership or stockholders' committee, complaint committee, public
relations committee, public and/or governmental affairs committee, and employee
relations committee. Each committee so constituted and appointed by the Board
shall serve at the pleasure of the Board.
In addition to such obligations and functions as may be expressly provided
for by the Board of Directors, each committee so constituted and appointed by
the Board shall from time to time report to and advise the Board on corporate
affairs within its particular area of responsibility and interest.
The Board of Directors may provide by general resolution applicable to all
such special committees for the organization and conduct of the business of the
committees.
O. Ex-officio Committee Members. The Board of Directors may appoint any
person, whether or not he is a director, as an ex-officio member of any
committee. Any ex-officio member shall not be entitled to vote, and may be
removed by the vote of a majority of the Board of Directors.
P. Director-Emeritus. The Board of Directors may appoint as
Director-Emeritus any person who had served the Company as a Director. Any
Director Emeritus shall enjoy all rights and privileges of a Director, except he
shall not be entitled to vote on any matter and shall not receive compensation
as a Director except for attendance at meetings which he is requested to attend.
V
OFFICERS
A. Officers. The officers of the Corporation shall consist of a Chairman of
the Board, President, one or more Vice-Presidents, Secretary, Treasurer, and
such other officers and assistant officers and agents as may be considered
necessary by the Board of Directors, each of whom shall be elected by the Board
of Directors at its annual meeting. Any two (2) or more offices may be held by
the same person. Except for the Chairman of the Board of Directors, officers
need not be Directors of the Corporation. In the absence of contrary direction
by the Board of Directors, officers other than the President or the Chairman of
the Board may also be appointed by the President of the Corporation, to hold
office until the next annual meeting of the Board of Directors. The officers
shall each perform such duties as the Board of Directors (or the President)
shall prescribe.
B. Vacancies. Whenever any vacancy shall occur in any office by death,
resignation, removal, increase in the number of offices of the Corporation, or
otherwise, the vacancy may be filled by the President (as permitted under
subsection A) or by the Board of Directors, and the officer so elected shall
hold office until his successor is duly elected and qualified.
C. The Chairman of the Board. The Chairman of the Board shall have general
supervisory duties over the entire Corporation, including the Board of Directors
and the officers of the Corporation. The Chairman of the Board or his designee
shall preside at all meetings of shareholders of the Corporation and all
meetings of the Board of Directors.
D. The President. The President shall have active management of the
operations of the Corporation, subject to the direction of the Board of
Directors and the Chairman of the Board. In the absence of the Chairman of the
Board or his designee, the President shall preside at all meetings of
shareholders and Directors. The President shall supervise and direct the
day-to-day business and affairs of the Corporation.
E. Vice-Presidents. Each Vice-President shall have such authority and
responsibility as the Board of Directors may from time to time prescribe
F. The Secretary. The Secretary shall maintain a record of the proceedings
of the shareholders and of the Board of Directors. The Secretary shall be the
custodian of the records of the Corporation.
G. The Treasurer. The Treasurer shall keep the financial accounts of the
Corporation. The Treasurer shall safeguard all moneys, notes, securities, and
other valuables in the possession of the Corporation.
H. Corporate Bank Accounts. The President and Chief Financial Officer of
the Corporation, acting either individually or jointly, and any employee or
employees designated in writing by either of them are each individually
empowered, to act in the name and on behalf of the Corporation, to open accounts
and deposit and transfer funds of the Corporation and take any further action
and execute any documentation necessary or appropriate to open and continue any
of the foregoing accounts and to accomplish the foregoing.
VI
SPECIAL CORPORATE ACTS
(NEGOTIABLE INSTRUMENTS, DEEDS, CONTRACTS AND VOTING OF SHARES)
All checks, drafts, notes, bonds, bills of exchange, and orders for the
payment of money of the Corporation (together, "Checks"), all deeds, mortgages,
and other written contracts and agreements to which the Corporation shall be a
party, and all assignments or endorsements of stock certificates, registered
bonds, or other securities owned by the Corporation shall, unless otherwise
required by law, be signed only by the Chairman of the Board, the President or
by any Vice-President of the Company or the Chief Accounting Officer. Checks on
any of the accounts of any depository approved by the President or Chief
Financial Officer of the Corporation may be signed by any one or more officers
of the Corporation or by any other persons and who are so designated by either
the President of Chief Financial Officer of the Corporation. Any check for the
payment of money in excess of $25,000.00 shall require separate signatures from
two persons authorized above. Any signature on a Check may be a facsimile
signature, provided that any Check for the payment of money in excess of
$25,000.00 shall require at least one manual signature.
Any shares of stock issued by any other corporation and owned or controlled
by the Corporation may be voted by the Chairman of the Board, the President, or
any Vice President of the Corporation.
VII
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES, AND AGENTS
A. Actions Brought by Third Persons. The Corporation shall indemnify any
officer or Director and may indemnify any employee, or agent of the Corporation
who is a party or who is threatened to be made a party to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or on behalf of the
Corporation, resulting from any alleged acts or omissions of the officer,
Director, employee, or agent while acting in the course and scope of the
person's duties, or while serving at the request of the Corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, from all liabilities and expenses,
including attorneys' fees, judgments, fines, and amounts paid in settlement
actually and reasonably incurred in connection with the action, suit, or
proceeding, if the person acted in good faith and in a manner which the person
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the person's conduct was unlawful.
B. Actions Brought By Corporation. The Corporation shall also indemnify any
officer or Director and may indemnify any employee, or agent of the Corporation
who is a party or is threatened to be made a party to any threatened, pending,
or completed action, suit, or proceeding by or on behalf of the Corporation to
procure a judgment in favor of the Corporation as a result of any alleged acts
or omissions of the officer, Director, employee, or agent of the Corporation
while acting within the course and scope of the person's duties, or while
serving at the request of the Corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust, or other
enterprise, from all expenses, including attorneys' fees, actually and
reasonably incurred by the person in connection with the defense or settlement
of the action, suit, or proceeding if the person acted in good faith and in a
manner which the person reasonably believed to be in or not opposed to the best
interests of the Corporation; provided, however, that no indemnification shall
be made with respect to any claim, issue, or matter as to which the person has
been adjudged to be liable for negligence or misconduct in the performance of
the person's duties to the Corporation unless and only to the extent that the
court in which the action, suit, or proceeding was brought determines upon
application that, despite the adjudication of liability, but in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for the expenses as the court deems proper.
C. Determination of Liability. The determination of the liability of the
Corporation for indemnification of any officer, Director, employee, or agent
pursuant to paragraph A. or B. above shall be made pursuant to the then existing
provisions of Nevada law.
D. Insurance. The Corporation may, but shall not be required to, purchase
and maintain insurance on behalf of any officer, Director, employee, or agent
against any liability asserted against the person as a result of any alleged
acts or omissions of the person within the course and scope of the person's
duties as an officer, Director, employee, or agent of the Corporation, including
attorneys' fees and costs. The determination of whether or not the Corporation
should maintain any such insurance shall be made by the Board of Directors.
VIII
FOREIGN OWNERSHIP RESTRICTIONS
The following Bylaw is intended to comply with the provisions of Section
78.242 of the Nevada General Corporation Law permitting certain restrictions on
transfer of stock:
Except as otherwise provided by law, not more than 25 percent of the
aggregate number of shares of stock outstanding shall at any time be
Beneficially Owned by or for the account of Persons ("Foreign Persons") who are
not "Citizens of the United States" as defined in 49 U.S.C. 40102(15), as now in
effect or as it may hereafter from time to time be amended, or their
representatives, a foreign government or representative thereof or any
corporation organized under the laws of a foreign country.
As used herein, the term "Beneficially Owned" refers to beneficial
ownership as defined in Rule 13d-3 (without regard to the 60-day provision in
paragraph (d)(1)(i) thereof) under the Securities Exchange Act of 1934, as
amended.
Shares of stock shall be transferable on the books of the Corporation to
Foreign Persons and their representatives, foreign governments and
representatives thereof, and corporations organized under the laws of foreign
countries (or to any persons holding for the account of Foreign Persons and
their representatives, foreign governments and representatives thereof, and
corporations organized under the laws of foreign countries) only, if after
giving effect to such transfer, the aggregate number of shares of voting stock
owned by or for the account of Foreign Persons and their representatives,
foreign governments and representatives thereof and corporations organized under
the laws of foreign countries, would be not more than 25 percent of the number
of shares of stock then outstanding.
In the event that, notwithstanding the foregoing provisions of this
Section, shares of stock of the Corporation are transferred to Foreign Persons
or their representatives, foreign governments or representatives thereof, or
corporations organized under the laws of foreign countries (or to any persons
holding for the account of Foreign Persons and their representatives, foreign
governments and representatives thereof, and corporations organized under the
laws of foreign countries) and as a result more than 25 percent of the aggregate
number of shares of stock then outstanding are Beneficially Owned by or for the
account of Foreign Persons, then the shares of stock so transferred shall not be
voted by, or at the direction of, Foreign Persons.
The Board of Directors may from time to time make such rules and
regulations as it may deem necessary or appropriate to enforce the foregoing
provisions of this Section.
IX
AMENDMENTS
Except as otherwise specifically provided in this Code of Bylaws, the power
to alter, amend, or repeal this Code of Bylaws, or adopt a new Code of Bylaws,
is vested in the Board of Directors.
X
EFFECTIVE DATE
The effective date of this Ninth Amended And Restated Code of Bylaws of
Reno Air, Inc., a Nevada corporation, shall be February 19, 1998.
CERTIFICATE OF SECRETARY
The undersigned the duly elected and acting Secretary of Reno Air, Inc., a
Nevada corporation, hereby certifies that the foregoing Ninth Amended And
Restated Code of Bylaws was duly adopted by the Board of Directors.
/s/Robert M. Rowen
Robert M. Rowen, Secretary
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. 33-57632, No.
33-88986 and No. 333-43435), the Reno Air 401(K) Plan (Form S-8 No. 33-89168)and
the sale of common stock (Form S-3 No.33-94918) of our report dated February 13,
1998, with respect to the financial statements of Reno Air, Inc., included in
the Annual Report (Form 10-K) for the year ended December 31, 1997.
ERNST & YOUNG LLP
Reno, Nevada
March 25, 1998
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