<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------ --------------------
Commission file number 0-26914
---------------------------------------------------------
VALUJET, INC.
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 58-2189551
- --------------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1800 Phoenix Boulevard
Suite 126
Atlanta, Georgia 30349
---------------------------------------
(Address of principal executive offices)
(Zip Code)
(770) 907-2580
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ---------
As of November 1, 1996, there were 54,861,822 shares of Common Stock of
the Registrant outstanding.
<PAGE>
VALUJET, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
Consolidated Balance Sheets - December 31, 1995 and
September 30, 1996 (Unaudited) 3
Consolidated Statements of Operations - Three months
ended September 30, 1995 and 1996 (Unaudited);
Nine months ended September 30, 1995 and 1996 (Unaudited) 5
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1995 and 1996 (Unaudited) 7
Condensed Notes to Unaudited Consolidated Interim Financial
Statements 8
Item 2. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations 10
-----------------------------------
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
- ------ --------------------------------
SIGNATURES
EXHIBITS
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------ --------------------
VALUJET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------- -------------
ASSETS (Note) (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $127,947,096 $178,986,199
Accounts receivable, less allowance
of $405,000 and $663,000 at December 31,
1995 and September 30, 1996, respectively 12,074,394 4,362,625
Inventories of parts 4,016,266 6,566,015
Prepaid expenses 4,758,205 3,622,076
Income taxes receivable 0 14,622,494
Deferred tax asset 401,621 401,621
Assets held for disposition 0 68,416,006
Other current assets 589,986 2,353,016
------------ ------------
Total current assets 149,787,568 279,330,052
Property and equipment, at cost
Flight equipment 153,513,693 124,300,459
Other property and equipment 40,472,604 65,123,137
Deposits on flight equipment
purchase contracts 21,801,525 14,244,895
------------ ------------
215,787,822 203,668,491
Less allowance for depreciation (18,834,231) (32,395,095)
------------ ------------
196,953,591 171,273,396
Debt issuance costs 0 3,749,136
------------ ------------
Total assets $346,741,159 $454,352,584
============ ============
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. See condensed notes to
financial statements.
3
<PAGE>
VALUJET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
1995 1996
-------------- -------------
(Note) (Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 6,721,754 $ 1,979,189
Accrued liabilities 35,866,095 21,248,105
Air traffic liability 22,221,133 2,712,539
Income taxes payable 24,957 0
Current maturities of long-term debt 21,430,984 23,512,267
Debt on assets held for sale 0 47,227,664
------------ ------------
Total current liabilities 86,264,923 96,679,764
Long-term debt less current maturities 87,607,149 203,127,014
Deferred income taxes payable 10,803,856 10,803,856
Stockholders' equity:
Common stock, $.001 par value: 54,556 54,780
1,000,000,000 shares authorized: issued
and outstanding - 54,556,020 at December 31,
1995 and 54,779,630 at September 30, 1996
Additional paid-in capital 74,433,062 76,961,491
Retained earnings 87,577,613 66,725,679
------------ ------------
Total stockholders' equity 162,065,231 143,741,950
------------ ------------
Total liabilities and stockholders' equity $346,741,159 $454,352,584
============ ============
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. See condensed notes to
financial statements.
4
<PAGE>
VALUJET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
September 30, September 30,
1995 1996
-------------- --------------
<S> <C> <C>
Operating revenues:
Passenger $104,576,338 $ 16,890
Cargo 1,341,057 0
Other 3,378,487 294,029
------------ -------------
Total operating revenues 109,295,882 310,919
Operating expenses:
Flight operations 5,563,926 339,049
Aircraft fuel 14,444,593 45,000
Maintenance 12,484,549 6,748,554
Station operations 14,935,801 253,672
Passenger services 3,246,693 2,692
Marketing and advertising 1,695,176 415,891
Sales and reservations 9,265,856 52,957
General and administrative 2,707,130 2,784,562
Employee bonus 4,150,000 0
Depreciation 4,130,582 85,047
Arrangement fee for aircraft transfers 0 (1,175,000)
Gain from insurance recovery 0 0
Gain on sale of assets 0 (2,334,678)
Shutdown and other nonrecurring expenses 0 23,039,576
------------ -------------
Total operating expenses 72,624,306 30,257,322
------------ -------------
Operating income (loss) 36,671,576 (29,946,403)
Other expenses (income):
Interest expense 1,768,099 7,198,351
Interest income (1,113,824) (2,274,930)
------------ -------------
Total other expenses (income), net 654,275 4,923,421
------------ -------------
Income (loss) before income taxes 36,017,301 (34,869,824)
Provision for income taxes 13,356,162 (12,925,000)
------------ -------------
Net income (loss) $ 22,661,139 ($21,944,824)
============ =============
Net income (loss) per share $0.38 ($0.40)
============ =============
Weighted average shares outstanding 59,386,646 54,690,157
============ =============
</TABLE>
See accompanying notes.
5
<PAGE>
VALUJET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
September 30, September 30,
1995 1996
-------------- --------------
<S> <C> <C>
Operating revenues:
Passenger $246,378,212 $ 183,547,708
Cargo 3,366,324 2,707,764
Other 7,211,103 5,267,744
------------ -------------
Total operating revenues 256,955,639 191,523,216
Operating expenses:
Flight operations 11,412,451 13,271,766
Aircraft fuel 37,387,129 39,182,578
Maintenance 31,984,519 38,167,172
Station operations 35,556,924 32,894,975
Passenger services 6,957,129 7,626,481
Marketing and advertising 7,088,576 6,922,628
Sales and reservations 21,748,034 15,495,002
General and administrative 7,060,399 10,945,982
Employee bonus 10,782,000 1,245,000
Depreciation 9,734,119 13,296,135
Arrangement fee for aircraft transfers 0 (13,036,294)
Gain from insurance recovery (1,093,527) (2,814,785)
Gain on sale of assets 0 (2,334,678)
Shutdown and other nonrecurring expenses 0 54,662,986
------------ -------------
Total operating expenses 178,617,753 215,524,948
------------ -------------
Operating income (loss) 78,337,886 (24,001,732)
Other expenses (income):
Interest expense 4,854,554 15,822,366
Interest income (3,971,397) (6,799,164)
------------ -------------
Total other expenses (income), net 883,157 9,023,202
------------ -------------
Income (loss) before income taxes 77,454,729 (33,024,934)
Provision for income taxes 28,862,934 (12,173,000)
------------ -------------
Net income (loss) $ 48,591,795 ($20,851,934)
============ =============
Net income (loss) per share $0.82 ($0.38)
============ =============
Weighted average shares outstanding 59,403,840 54,646,157
============ =============
</TABLE>
See accompanying notes.
6
<PAGE>
VALUJET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------
September 30, September 30,
1995 1996
------------------ --------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 48,591,795 ($20,851,934)
Adjustments to reconcile net income
to cash provided by (used in) operating activities:
Depreciation 9,734,119 22,199,949
Provision for uncollectible accounts 1,967,488 3,187,931
Gain from disposal of assets 0 (5,149,463)
Deferred income taxes (14,277) 0
Changes in operating assets and liabilities:
Accounts receivable (17,905,471) 4,523,838
Other current assets (3,881,687) (3,176,650)
Accounts payable and accrued liabilities 24,641,549 (19,360,555)
Air traffic liability 21,961,861 (19,508,594)
Income taxes payable 7,788,378 (14,647,451)
------------ -------------
Net cash provided by (used in) operating activities 92,883,755 (52,782,929)
Investing activities:
Proceeds from insurance claim 0 4,000,000
Proceeds from dispossal of equipment 0 71,801,874
Purchases of property and equipment (76,743,264) (135,225,048)
------------ -------------
Net cash used in investing activities (76,743,264) (59,423,174)
Financing activities:
Issuance of long-term debt 46,177,098 222,694,800
Proceeds from sale of common stock 92,551 2,528,653
Proceeds from notes receivable 5,700,010 0
Payment of long-term debt (7,643,464) (61,978,247)
------------ -------------
Net cash provided by financing activities 44,326,195 163,245,206
------------ -------------
Net increase in cash and cash equivalents 60,466,686 51,039,103
Cash and cash equivalents at beginning of period 85,077,542 127,947,096
------------ -------------
Cash and cash equivalents at end of period $145,544,228 $ 178,986,199
============ =============
</TABLE>
See accompanying notes.
7
<PAGE>
VALUJET, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
----------------------------------------------------------------------
A. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
interim financial statements contain all adjustments necessary to present fairly
the Company's financial position as of September 30, 1996 and December 31, 1995,
the results of operations for the three and nine month periods ended September
30, 1996 and September 30, 1995, and cash flows for the nine month periods ended
September 30, 1996 and September 30, 1995. The adjustments made are of a normal
recurring nature. Certain information and footnote disclosures normally
included in the annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission for Form
10-Q. It is suggested that these unaudited interim financial statements be read
in conjunction with the audited financial statements and the notes thereto
included in the Annual Report on Form 10-K filed by the Company with the
Securities and Exchange Commission on March 29, 1996, and amendments thereto.
The results of operations for the three and nine month periods ended
September 30, 1996 are not necessarily indicative of the results to be expected
for the full fiscal year.
B. NET INCOME PER COMMON SHARE
Net income per share is based on the weighted average number of common
shares outstanding and common stock equivalents during the periods. Common
stock equivalents include shares issuable upon the assumed exercise of stock
options using the treasury stock method when dilutive.
<TABLE>
<CAPTION>
C. LONG-TERM DEBT
<S> <C> <C>
December 31, September 30,
1995 1996
------------ ------------
(Unaudited)
Promissory notes due 1998 through 2006.. $109,038,133 $273,866,945
Less current maturities................. 21,430,984 23,512,267
Less debt on assets held for sale....... 0 47,227,664
------------ ------------
$ 87,607,149 $203,127,014
============= ============
</TABLE>
During 1995 and during the nine months ended September 30, 1996, the
Company signed promissory notes totaling $76,095,000 and $80,871,000,
respectively, to finance the purchase of 21 aircraft and spare engines during
1995 and 12 aircraft during 1996. During 1996, the Company also closed a private
offering of $150,000,000 principal amount of 10 1/4% Senior Notes due 2001.
Interest on the senior notes is payable semi-annually on April 15 and October
15. The notes related to aircraft financing bear interest at rates ranging from
7.43% to 10.18% per annum and principal and interest payments are due in monthly
or quarterly installments over four to ten year terms on a mortgage-style
amortization based on the delivery date of the aircraft. Certain of these notes
with an aggregate unpaid principal balance of approximately $15.0 million as of
September 30, 1996, have a variable rate of interest based on the London
interbank offered rate plus 1.85% to 3% (1.85% at December 31, 1995 and
September 30, 1996) based on the Company's compliance with specific financial
ratios concerning leverage and fixed charge coverage. Certain other of these
notes have a variable rate of interest based on LIBOR plus a range of 1.20% to
2.75%. A substantial portion of the secured notes require prepayment if specific
financial ratios (concerning debt to equity, net worth, fixed charge coverage
and current ratio) are not maintained. The aircraft and engines serve as
collateral on this debt. Total interest expense on secured debt was
approximately $4,900,000 and $8,800,000 for the nine months ended September 30,
1995 and September 30, 1996, respectively.
D. COMMITMENTS AND CONTINGENCIES
On May 11, 1996, the Company suffered a tragic loss involving Flight 592.
The accident, following a number of incidents and heightened Federal Aviation
Administration (FAA) scrutiny resulted in extensive media coverage calling into
question the safety of low-fare airlines in general and the Company in
particular, despite the fact that the cause of the accident is still under
investigation by the National Transportation Safety Board. In response to the
accident, the FAA conducted an extraordinary review of the Company's operations.
As a result, the Company significantly reduced its schedule between May 19, 1996
and June 17, 1996, and
8
<PAGE>
on June 17, 1996 entered into a consent order with the FAA under which the
Company agreed to several matters including the suspension of operations until
such time as the Company is able to satisfy the FAA as to its safety concerns
and the payment of $2,000,000 to the FAA to compensate it for the cost of the
special inspections. The Company satisfied the FAA's requirements and received
FAA clearance during August 1996. The Company received its determination of
fitness from the Department of Transportation on September 25, 1996 and
restarted operations on September 30, 1996. See Note E regarding charges
associated with the accident and related shutdown of operations.
As a result of the above mentioned events, several class action suits have
been filed by shareholders against the Company and various officers alleging,
among other things, misrepresentations regarding the Company's safety. The
plaintiffs seek unspecified damages based upon the decrease in market value of
shares of the Company's stock. Management intends to defend these actions
vigorously and believes that the suits are without merit. While any litigation
contains elements of uncertainty, management presently believes, based on the
information available to it and discussions with outside counsel, that the
outcome of each such proceeding or claim which is pending or known to be
threatened, or all of them combined, will not have a material adverse effect on
the results of operations or the financial position of the Company.
Numerous lawsuits have also been filed against the Company seeking damages
attributable to the deaths of those on Flight 592, and additional lawsuits are
expected. The Company's insurance carrier has assumed defense of these lawsuits
under a reservation of rights and is providing the defense of such claims. As
all claims are handled independently by the Company's insurance carrier, the
Company cannot reasonably estimate the amount of liability which might finally
exist. As a result, no accruals for losses and the related claim for recovery
from the Company's insurance carrier have been reflected in the Company's
financial ststements. The Company maintains $750 million of liability insurance
per occurrence with a major group of independent insurers that provide
facilities for all forms of aviation insurance for many major airlines.
Although the Company believes, based on the information currently available to
it, that such coverage is sufficient to cover claims associated with this
accident and that the insurers have sufficient financial strangth to pay claims,
there can be no assurance that the total amount of judgments and settlements
will not exceed the amount of insurance available therefor or that all damages
awarded will be covered by insurance.
E. SHUTDOWN AND OTHER NONRECURRING EXPENSES
Costs associated with the loss of Flight 592 and excess operating costs
related to the reduced schedule from May 19, 1996 to June 17, 1996 and the
suspension of operations subsequent to June 17, 1996 are shown in the statement
of operations as shutdown and other nonrecurring expenses. Such costs consist
of expenses directly related to the accident and the ensuing extensive FAA
review of the Company's operations including legal fees, payments to the FAA,
inspection related costs and unusual maintenance costs in excess of normal
recurring maintenance. In addition, depreciation on grounded aircraft, rental
of abandoned or idled facilities and costs of personnel idled as a result of the
reduced and suspended operations during the second and third quarters of 1996
are included in shutdown and other nonrecurring expenses. Personnel costs
include full wages, salaries and benefits that were provided to idled employees
during the reduction and suspension of operations through September 30, 1996.
A summary of such costs is as follows:
<TABLE>
<CAPTION>
<S> <C>
Maintenance $16,874,000
Legal and other consulting 8,247,000
Facilities rental 5,950,000
Wages, salaries and benefits 5,679,000
Depreciation 8,904,000
FAA payment 2,000,000
Other 7,009,000
-----------
$54,663,000
===========
</TABLE>
No accrual was provided for costs to be incurred in future periods related to
aircraft depreciation and maintenance and rental costs associated with
temporarily idled facilities; such costs will be recognized as they are
incurred. There was no accrual for salaries and wages in connection with the
furlough of employees because they were paid through June 30, 1996 with no
additional severence benefits provided.
9
<PAGE>
F. ASSETS HELD FOR DISPOSITION
During 1996, as a result of the accident involving Flight 592 and the consent
order with the FAA which required the Company to reestablish operations with up
to 15 aircraft and subjects further expansion of the Company's operations to FAA
and DOT approval, the Company plans to sell or lease certain of its aircraft.
Those aircraft which the Company has decided to sell have been classified in the
balance sheet as assets held for disposition and are stated at the lower of
carrying amount or fair value less cost to sell. At September 30, 1996, the
fair value, as estimated by the current market value, less cost to sell exceeded
the carrying amount of such aircraft.
G. RECLASSIFICATIONS
In May 1996, the AICPA issued a new edition of its Industry Audit Guide, Audit
of Airlines, which changed the classification of gains and losses resulting from
the sale or involuntary conversion of property and equipment from nonoperating
gains or losses to operating gains or losses that must be reported as a
component of income (loss) from operations. Such amounts in prior period
financial statements were reclassified to conform to the current presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS
The following chart indicates the service offered by the Company from
January 1995 through September 1996:
<TABLE>
<CAPTION>
Number
As of Total Number Number of Peak of Cities
Quarter End of Aircraft Day Flights Served
----------- ------------- --------------- ------------
<S> <C> <C> <C>
March 1995 27 184 23
June 1995 28 208 24
September 1995 34 228 26
December 1995 42 268 26
March 1996 47 286 28
June 1996 51 0 Service suspended to all markets as of
June 17, 1996
September 1996 46 16 Service resumed on September 30, 1996 to
Atlanta, Fort Lauderdale, Orlando, Tampa,
Washington, D.C.
</TABLE>
On May 11, 1996, ValuJet Flight 592 from Miami to Atlanta crashed in the
Florida Everglades. There were no survivors among the 110 people aboard,
including 105 customers and five flight crew members. The accident, following a
number of incidents and heightened FAA scrutiny, resulted in extensive media
coverage calling into question the safety of low-fare airlines in general and
the Company in particular, despite the fact that the cause has not yet been
definitively determined. In response to the accident, the FAA conducted an
extraordinary review of the Company's operations, including an FAA inspection of
each aircraft before departure, the review of the maintenance history of each
aircraft and the presence of an FAA inspector onboard each Company aircraft at
least once per week. The intensive inspection process and the redoubling of the
Company's focus on safety resulted in many flight delays and cancellations. In
response to these circumstances, the Company reduced its schedule by more than
40% between May 19, 1996 and June 17, 1996, by reducing service to its markets
without eliminating service to any market. In addition, the Company retained
The Spectrum Group and named James B. Davis (General USAF-Ret.) as its "safety
czar" to conduct a thorough inspection of the Company's maintenance and safety
policies and procedures.
On June 17, 1996, the Company entered into a consent order with the FAA under
which: (i) the Company agreed to suspend operations until such time as the
Company was able to satisfy the FAA as to various safety concerns identified by
the FAA as a result of its intensive inspections of the Company's operations,
(ii) the FAA agreed to work with the Company in order to reestablish operations
with up to 15 aircraft, and (iii) the Company paid $2 million to the FAA to
compensate it for the costs of the special inspections conducted. In order to
reduce costs while the Company prepared its plan to restore service, the Company
furloughed more than 90% of its personnel for several weeks.
10
<PAGE>
Other consequences of the accident, ensuing FAA inspections, media coverage
and shutdown of operations include:
1. The suspension of operations is anticipated to result by year-end 1996 in
the failure of the Company to meet certain financial covenants under certain of
the Company's secured debt. Such failure could result in the acceleration of
that debt and possibly other debt of the Company.
2. The expansion of the Company's operations will likely be subject to FAA
and DOT approval for an indefinite period of time.
3. The Company is unable to predict how significantly the accident and
shutdown will affect load factors or the length of time load factors will be
impacted.
4. The Company has sold certain of its aircraft and has assigned its rights
to purchase certain aircraft previously under contract for delivery in 1996. In
addition, the Company may lease or sell some of its other aircraft.
5. During the second quarter 1996, the Company refunded fares paid by
customers affected by the Company's changing schedules and cancellations and by
those who otherwise chose to change their travel plans.
6. The Company's cost per ASM will likely increase to some extent to reflect
the cost of any additional maintenance procedures adopted by the Company and
lower aircraft utilization levels.
7. The Company may reduce its workforce permanently if the FAA, safety
concerns or lack of customer acceptance extends the period prior to the Company
reestablishing prior levels of service.
8. The aircraft destroyed was insured for $4.0 million which was in excess
of its book value. The Company carries $750 million of liability insurance.
Although the Company believes that such insurance will be sufficient to cover
all claims arising from the accident, there can be no assurance that the
aggregate of all claims will not exceed such insurance limits.
9. Several stockholder lawsuits have been filed against the Company and
certain of its officers and directors alleging, among other things, violations
of federal securities laws. While the Company denies that it has violated any
of its obligations under the federal securities laws and believes that the
lawsuits do not have any merit, there can be no assurance that the Company will
not sustain material liability under such or related lawsuits.
10. Various governmental authorities are conducting civil and criminal
investigations of the circumstances surrounding the accident. The Company is
cooperating with the authorities in connection with these investigations.
In light of these factors, persons investing in the securities of the Company
should be apprised of the following additional risks:
1. The suspension of operations is anticipated to result by year-end 1996
in the failure of the Company to meet certain financial covenants (the fixed
charge coverage ratio) under certain of the Company's secured debt. Such
failure could result in the acceleration of such debt and a reduction in the
Company's cash position. If the Company fails to timely repay all indebtedness
accelerated or if the Company's other secured lenders or the holders of the
Company's 10 1/4 % senior notes seek to accelerate their debt as a result of
such accelerations, then a substantial portion or all of the Company's debt
could be accelerated. The Company does not have sufficient cash to satisfy all
of its debt at this time.
2. There can be no assurance that the Company will be able to recover
sufficient customer acceptance in order to regain profitability.
3. Even if the Company regains profitability, the Company may have
permanently lost a certain amount of customer support which could decrease the
Company's profitability indefinitely.
4. If the National Transportation Safety Board (NTSB) were to determine that
the Company's maintenance procedures or aging aircraft contributed to the cause
of the accident, such determination could also have a substantial adverse effect
on the Company's future operations.
5. The occurrence of one or more subsequent incidents by ValuJet's aircraft
could likely have a substantial adverse effect on the Company's public
perception and future operations.
As a result of the accident, the ensuing extraordinary review of the Company's
operations by the FAA and the suspension of operations in June 1996 and the
current and prospective FAA imposed limitation on the number of aircraft that
may be operated by the
11
<PAGE>
Company, the Company's results for periods prior to May 11, 1996 are not
necessarily reflective of the results to be expected in future periods. The
Company's operations for the third quarter 1996 are also not reflective of
future operations as a result of the suspension of operations for all but one
day of such quarter. The Company's operations for previous quarters are not
necessarily reflective of future operations because the number of aircraft that
may be operated by the Company, currently and prospectively, is limited by the
FAA. Consequently, the following is a description of the actual costs incurred
by category for the three months ended September 30, 1996.
Three months ended September 30, 1996
- -------------------------------------
Operating revenues
Total operating revenues for the three months ended September 30, 1996 were
$310,919. This was made up of approximately $17,000 of passenger revenue for
the operations starting on September 30, 1996. The other revenue of
approximately $294,000 was from engine leases, gate sub-leases and other
sources.
Expenses
Flight operations expenses for the three months ended September 30, 1996
include expenses related to the administrative functions of flight operations.
These include payroll costs, certain consulting services, training costs and a
portion of the hull insurance.
Aircraft fuel expenses include both the direct cost of the fuel as well as the
costs of delivering fuel into the aircraft. Fuel expense for the third quarter
1996 represents the cost of fuel to operate on September 30, 1996, the first day
of the resumption of service.
Maintenance expenses for the three months ended September 30, 1996 include all
administrative costs of the maintenance department as well as normal recurring
maintenance performed during the quarter. Expenses for engine overhaul and
certain scheduled heavy maintenance procedures are included in this cost. All
non-routine maintenance costs performed during the suspension of operations are
included in the nonrecurring expense line item.
Station operations expenses for the third quarter 1996 include all expenses
related to the administrative functions of station operations as well as
expenses related to operating on September 30, 1996. Included in the
administrative expenses of station operations are certain payroll costs,
training expenses and other miscellaneuos expenses related to station
operations.
Passenger services expenses include flight attendant wages and benefits and
catering expenses. Also included are the costs for flight attendant training
and flight attendant overnight expenses.
Marketing and advertising expenses include all advertising expenses and wages
and benefits for the marketing department. Marketing and advertising expenses
for the three month period ended September 30, 1996 include those expenses
incurred in relation to the resumption of operations on September 30, 1996.
Sales and reservations expenses include all of the costs related to recording
a sale or reservation. These expenses include wages and benefits for
reservationists, rent, telecommunication charges, credit card fees and travel
agency commissions. Sales and reservations expenses for the third quarter 1996
represent those expenses incurred during the period from September 25, 1996 to
September 30, 1996 (the period that the Company's reservations services were
open during the third quarter 1996).
General and administrative expenses include the wages and benefits for the
Company's executive officers and various other administrative personnel. Also
included are costs for office supplies, legal expenses, bad debts, accounting
and other miscellaneous expenses. General and administrative expenses increased
3% from the third quarter 1995 to the third quarter 1996.
There was no accrual for employee bonuses for the third quarter 1996 due to
the lack of operating income. The actual amount to be paid out and the form of
such pay-out are at the sole discretion of the Company's Board of Directors.
Depreciation expense includes depreciation on aircraft and ground equipment,
but does not include any amortization of start-up and route development costs as
all of these costs are expensed as incurred. Depreciation expense for the third
quarter 1996 represents the amount of depreciation estimated for one day of
operations. The remainder of the depreciation expense for the quarter has been
classified as shutdown and other nonrecurring expenses.
The arrangement fee for aircraft transfers of $1,175,000 represents the amount
received in connection with the assignment of an MD-80 aircraft that was under
contract for delivery to the Company during the fourth quarter 1996.
12
<PAGE>
The gain on sale of assets represents the gain recognized on the sale of four
DC-9-21s, three MD-80s and certain aircraft engines.
Shutdown and other nonrecurring expenses include costs associated with the
loss of Flight 592 and excess operating costs related to the reduced schedule
from May 19, 1996 to June 17, 1996 and the suspension of operations subsequent
to June 17, 1996. Such costs consist of expenses directly related to the
accident and the ensuing extensive FAA review of the Company's operations
including legal fees, payments to the FAA, inspection related costs and unusual
maintenance in excess of normal recurring maintenance. In addition,
depreciation on grounded aircraft, rental of abandoned or idled facilities and
costs of personnel idled as a result of the reduced and suspended operations
during May, June and third quarter 1996 are included in shutdown and other
nonrecurring expenses. Personnel costs include full wages, salaries and
benefits that were provided to idled employees during the reduction and
suspension of operations through September 30, 1996.
A summary of such costs is as follows:
<TABLE>
<CAPTION>
<S> <C>
Maintenance $16,874,000
Legal and other consulting 8,247,000
Facilities rental 5,950,000
Wages, salaries and benefits 5,679,000
Depreciation 8,904,000
FAA payment 2,000,000
Other 7,009,000
-----------
$54,663,000
===========
</TABLE>
The Company also expects to incur additional shutdown and nonrecurring
expenses in the fourth quarter 1996 as a result of idled aircraft and facilities
due to the reduced level of service attributable to the Company's agreement with
the FAA.
No accrual was provided for costs to be incurred in future periods
related to aircraft depreciation and maintenance and rental costs associated
with temporarily idled facilities as such costs will be recognized as they are
incurred. There was no accrual for salaries and wages in connection with the
furlough of employees because they were paid through June 30, 1996 with no
additional severance benefits provided.
Other expenses (income), net includes interest income and interest
expense. During the third quarter of 1996, interest expense exceeded interest
income by approximately $4,923,000 due to increasing debt levels attributable to
the acquisition of aircraft and the completion of the issuance of $150 million
10 1/4 % Senior Notes due 2001.
Nine months ended September 30, 1996
- ------------------------------------
The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
provides a comparison of the Company's operations for the six months ended June
30, 1996 and June 30, 1995. Since the Company's operations were suspended for
all but one day of third quarter 1996, any comparison of the Company's
operations for the nine months ended September 30, 1996 (reflecting only six
months of active operations) with the nine months ended September 30, 1995 would
not be meaningful. The Company's operations for the first nine months of 1996
are not reflective of future operations as a result of the suspension of
operations for the period from June 18, 1996 until September 30, 1996. The
Company's operations for previous quarters are not necessarily reflective of
future operations because the number of aircraft that may be operated by the
Company, currently and prospectively, is limited by the FAA.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1995, the Company generated cash flow
from operations of approximately $113.8 million and used cash of approximately
$142.1 million to acquire property and equipment (of which approximately $73.7
million was funded through the issuance of long-term debt).
For the nine months ended September 30, 1996, the Company used cash
flow in operating activities of approximately $52.8 million and used cash of
approximately $59.4 million to acquire property and equipment (net of cash
received from disposal of equipment of approximately $75.8 million). As of
September 30, 1996, the Company had cash and cash equivalents of approximately
$179.0 million and working capital of approximately $182.7 million.
13
<PAGE>
As of September 30, 1996, the Company's fleet consisted of 45 DC-9-30
aircraft and one MD-80 aircraft. During the third quarter 1996, the Company
sold three of its four MD-80 aircraft and all four of its DC-9-21 aircraft,
purchased two DC-9-30 aircraft under contract and assigned its purchase rights
with respect to the remaining DC-9-30 aircraft and MD-80 aircraft under
contract. The Company is also actively trying to sell or lease its one
remaining MD-80 aircraft and up to 15 of its DC-9-30 aircraft that may not be in
the Company's short-term operating plans.
The Company has contracted with McDonnell Douglas for the purchase of
50 MD-95 aircraft, at a cost of approximately $1.0 billion (subject to
adjustments for inflation), for delivery in 1999 to 2002. Approximately $40
million of this amount will be paid in progress payments during 1996 to 1998.
The balance of the purchase price after all progress payments will need to be
paid or financed upon delivery of each aircraft. If the Company exercises its
option to acquire up to an additional 50 MD-95 aircraft, additional payments
could be required beginning in this period. The Company expects to finance at
least 80% of the cost of each of these aircraft. Although McDonnell Douglas has
agreed to provide assistance with respect to the financing of aircraft to be
acquired, the Company will be required to obtain the financing from other
sources. The Company believes that with the assistance to be provided by
McDonnell Douglas, aircraft related debt financing should be available when
needed. There is no assurance that the Company will be able to obtain
sufficient financing on attractive terms. If it is unable to do so, the Company
could be required to modify its aircraft acquisition plans or to incur higher
than anticipated financing costs, which could have a material adverse effect on
the Company's results of operations and cash flows.
The Company's compliance with Stage 3 noise requirements will require
substantial additional capital expenditures over the next several years. By
December 31, 1999, all of the Company's aircraft must be brought into compliance
with Stage 3 requirements. The Company intends to meet its Stage 3 noise
requirement obligations by installing hush kits on Stage 2 aircraft and
acquiring Stage 3 aircraft. The Company expects that FAA certified hush kits
will cost approximately $1.8 million per aircraft or approximately $45.0 million
for a fleet of 25 non-hushed DC-9-32 aircraft as of September 30, 1996. Any
disposition of Stage 2 aircraft would reduce this obligation. The Company
expects to finance a portion of the cost of these hush kits and to make the
balance of payments on these hush kits out of its working capital. The Company
expects to pay the debt service on such loans out of cash flow generated from
operations during the term of the financing. The phase in period for full
compliance with Stage 3 (until December 31, 1999) and the term of financing will
allow the Company to spread the payments for Stage 3 compliance over a number of
years.
As of September 30, 1996, the Company's long-term debt related to
asset financing totaled $123.9 million, with respect to which the Company's
aircraft and certain other equipment are pledged as security. The Company has
purchased all of its aircraft and, consequently, has no lease commitments
relating to its aircraft fleet. In addition, the Company has $150 million of 10
1/4 % senior unsecured notes outstanding. The principal balance of the senior
notes is due in 2001 and interest is payable semi-annually. All of the Company's
debt has final maturities ranging from 1998 to 2006 with scheduled debt
amortization (calculated without giving effect to any prepayment that may be
required as a result of any covenant violations or sale of assets) is as
follows: 1996--$7.5 million, 1997--$25.5 million, 1998--$27.4 million, 1999--
$24.6 million, 2000 and after --$188.8 million. These notes provide for
acceleration of their maturities upon certain defaults, including a payment
default under or defaults resulting in an acceleration of other debt of the
Company and its subsidiaries.
In September 1996, the Company received approximately $55.2 million
from the sale of its four DC-9-21 aircraft and three of its MD-80 aircraft,
applied approximately $39.2 million to the prepayment of debt secured by such
aircraft and purchased two additional DC-9-32 aircraft for approximately $13.1
million.
Certain debt bears interest at fixed rates ranging from 7.43% to
10.18% per annum and is repayable in consecutive monthly or quarterly
installments over a four- to ten-year period. Certain other notes with an
aggregate unpaid principal balance of approximately $15.0 million as of
September 30, 1996 have a variable rate of interest based on the London
interbank offered rate (LIBOR) plus 1.85% to 3% (1.85% at September 30, 1996 and
December 31, 1995) based on the Company's compliance with specific financial
ratios concerning leverage and fixed charge coverage. The Company anticipates
that its fixed charge coverage ratio as of December 31, 1996, may result in an
increase in interest rate, but that any increase in interest expense would not
be more than $200,000 on an annual basis. Certain other notes have a variable
rate of interest based on LIBOR plus 1.20% to 2.75%.
A substantial portion of the secured notes require prepayment if
specific financial covenants (concerning debt to equity, net worth fixed charge
coverage and current ratio) are not maintained. Of the $123.9 million principal
amount of secured debt as of September 30, 1996, there is debt with a principal
balance of $90.8 million subject to loan agreements with financial covenants.
As of September 30, 1996, the Company was in violation of the fixed charge
coverage ratio with one senior and one junior lender. The Company has received
a waiver of compliance with this financial covenant for the September 1996
quarter from these two lenders. The fixed charge coverage ratios contained in
the secured debt agreements with financial covenants range from 1 to 1 to 3 to
1. The Company anticipates that its fixed charge coverage ratio for the period
ending December 31, 1996 will be less than required and as a result, those
secured
14
<PAGE>
lenders would have the right to accelerate such debt (with a principal balance
of $90.8 million as of September 30, 1996) unless a forbearance or waiver is
obtained by the Company. After completion of its fourth quarter 1996
financial statements, the Company will be able to ascertain whether it failed to
satisfy these financial covenants for the period ending December 31, 1996. The
other financial covenants include a current ratio the most restrictive of which
is 1 to 1, a leverage ratio the most restrictive of which is 3 to 1 and a
minimum net worth requirement the most restrictive of which is approximately $80
million. As of September 30, 1996, the Company's current ratio exceeded 1 to 1,
its leverage ratio was less than 3 to 1 and its net worth was approximately $144
million. The Company expects that it will continue to be in compliance with
such other ratios in the short term. During the period since the Company's
suspension of operations, the Company has continued to make all payments under
its secured debt when due. The Company expects to continue negotiations with
the affected lenders during the fourth quarter of 1996 in an effort to avoid any
prepayment events or acceleration of debt. There can be no assurance that such
negotiations will be successful.
If the Company is unable to successfully negotiate waivers or
forbearance from its secured lenders with financial covenants and if such
lenders accelerate debt, then the Company will be required to prepay such debt
(up to approximately $90.8 million as of September 30, 1996) within a short
period of time. If the Company fails to do so, then such secured lenders would
have the right to foreclose upon the aircraft securing such debt and other debt
holders of the Company (including holders of the unsecured Company's 10 1/4 %
senior notes) would have the right to accelerate the Company's debt. Based on
the language of the Indenture governing the Company's 10 1/4 % senior notes, the
Company believes that the holders of the senior notes would not have the right
to accelerate the senior notes if the Company pays off debt within the time
provided after acceleration upon the occurrence of a prepayment event (such as
the failure to satisfy a financial covenant).
During the period of the Company's suspended operations, the Company
furloughed approximately 90% of its personnel to reduce costs during this
period. Although the Company has sufficient cash assets to pay its recurring
obligations and debt service for an extended period of time, the Company's
failure to resume profitable operations may result in defaults under the
Company's secured debt and the acceleration of the Company's debt. In such
event, there can be no assurance that the Company would be able to satisfy all
of its obligations on a timely basis.
As a result of the accident and suspension of operations, several
class action suits have been filed by stockholders against the Company and
various officers alleging, among other things, misrepresentations regarding the
Company's safety, compliance with regulatory requirements and inspections by the
FAA. The plaintiffs seek unspecified damages based upon the decrease in market
value of shares of the Company's stock. Although management of the Company
intends to defend these actions vigorously and believes that the suits are
without merit, any litigation contains elements of uncertainty and there can be
no assurance that the Company will not sustain material liability under such or
related lawsuits.
Numerous lawsuits have also been filed against the Company seeking
damages attributable to the deaths of those on Flight 592, and additional
lawsuits are expected. The Company's insurance carrier has assumed defense of
these lawsuits under a reservation of rights and is providing the defense of
such claims. As all claims are handled independently by the Company's insurance
carrier, the Company cannot reasonably estimate the amount of liability which
might finally exist. As a result, no accruals for losses and the related claim
for recovery from the Company's insurance carrier have been reflected in the
Company's financial statements. The Company maintains $750 million of liability
insurance per occurrence with a major group of independent insurers that provide
facilities for all forms of aviation insurance for many major airlines.
Although the Company believes, based on the information currently available to
it, that such coverage is sufficient to cover claims associated with this
accident and that the insurers have sufficient financial strength to pay claims,
there can be no assurance that the total amount of judgments and settlements
will not exceed the amount of insurance available therefor or that all damages
awarded will be covered by insurance.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(a) The following exhibits are filed as part of this report. The exhibit
numbers refer to Item 601 of Regulation S-K.
11 - Statement Re: Computation of Earnings Per Share
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALUJET, INC.
Date: November 12, 1996 /s/ Robert L. Priddy
---------------------------------------------
Robert L. Priddy
Chairman of the Board and Chief Executive Officer
Date: November 12, 1996 /s/ Michael D. Acks
-------------------------------------------------
Michael D. Acks
Controller and Chief Accounting Officer
17
<PAGE>
EXHIBIT 11
VALUJET, INC.
COMPUTATION OF EARNINGS PER SHARE(1)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------
1995 1996 1995 1996
------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average common and common
equivalent shares outstanding
during the period 54,494,748 54,690,157 54,053,564 54,646,896
Net effect of dilutive stock options
and stock warrants - based on the
treasury stock method 4,891,898 -- 5,350,276 --
-------------------------------------------------------
Total common and common equivalent
shares 59,389,646 54,690,157 59,403,840 54,646,157
=======================================================
Net income (loss) $22,661,139 $(21,944,824) $48,591,795 $(20,851,934)
=======================================================
Net income per share $ 0.38 $ (0.40) $ 0.82 $ (0.38)
=======================================================
FULLY DILUTED:
Weighted average common and common
equivalent shares outstanding
during the period 54,494,748 54,690,157 54,053,564 54,646,896
Net effect of dilutive stock options
and stock warrants - based on the
treasury stock method 4,933,970 -- 5,451,004 --
-------------------------------------------------------
Total common and common equivalent
shares 59,428,718 54,690,157 59,504,568 54,646,896
=======================================================
Net income $22,661,139 $(21,944,824) $48,591,795 $(20,851,934)
=======================================================
Net income per share $ 0.38 $ (0.40) $ 0.82 $ (0.38)
=======================================================
</TABLE>
(1) Common and common equivalent shares and net income per share have been
restated to reflect two two-for-one stock splits payable in the form of
stock dividends on April 10, 1995 and November 21, 1995.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 178,986,199 178,986,199
<SECURITIES> 0 0
<RECEIVABLES> 5,025,625 5,025,625
<ALLOWANCES> 663,000 663,000
<INVENTORY> 6,566,015 6,566,015
<CURRENT-ASSETS> 279,330,052 279,330,052
<PP&E> 203,668,491 203,668,491
<DEPRECIATION> 32,395,095 32,395,095
<TOTAL-ASSETS> 454,352,584 454,352,584
<CURRENT-LIABILITIES> 96,679,764 96,679,764
<BONDS> 0 0
0 0
0 0
<COMMON> 54,780 54,780
<OTHER-SE> 143,687,170 143,687,170
<TOTAL-LIABILITY-AND-EQUITY> 143,741,950 143,741,950
<SALES> 310,919 191,523,216
<TOTAL-REVENUES> 310,919 191,523,216
<CGS> 30,257,322 215,524,948
<TOTAL-COSTS> 30,257,322 215,524,948
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 7,198,351 15,822,366
<INCOME-PRETAX> (34,869,824) (33,024,934)
<INCOME-TAX> (12,925,000) (12,173,000)
<INCOME-CONTINUING> (21,944,824) (20,851,934)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (21,944,824) (20,851,934)
<EPS-PRIMARY> (.40) (.38)
<EPS-DILUTED> (.40) (.38)
</TABLE>
