<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 March 31, 1997
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-26914
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VALUJET, INC.
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(Exact name of registrant as specified in its charter)
Nevada 58-2189551
- ------------------------------------------------ ----------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) No.
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 May 1, 1997, there were 54,878,330 shares of Common Stock of the
Registrant outstanding.
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VALUJET, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ------- --------------------
Consolidated Balance Sheets - December 31, 1996 and
March 31, 1997 (Unaudited) 3
Consolidated Statements of Operations - Three months
ended March 31, 1996 and 1997 (Unaudited) 5
Consolidated Statements of Cash Flows - Three months
ended March 31, 1996 and 1997 (Unaudited) 6
Condensed Notes to Unaudited Consolidated Interim
Financial Statements 7
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 17
EXHIBITS
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
VALUJET, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1996 1997
------------- ----------
ASSETS (Note) (Unaudited)
Current assets:
Cash and cash equivalents $150,012,695 $138,870,824
Accounts receivable, less allowance
of $838,000 and $988,000 at December 31,
1996 and March 31, 1997, respectively 7,014,702 6,493,156
Inventories of parts 6,607,307 6,343,023
Prepaid expenses 8,066,792 5,880,766
Income taxes receivable 36,440,653 46,249,293
Assets held for disposition 42,060,242 38,474,758
Other current assets 839,040 1,013,446
------------ ------------
Total current assets 251,041,431 243,325,266
Property and equipment, at cost
Flight equipment 126,829,882 127,175,366
Other property and equipment 65,662,504 69,711,711
Deposits on flight equipment
purchase contracts 14,534,895 14,534,895
------------ ------------
207,027,281 211,421,972
Less allowance for depreciation (44,455,397) (51,012,992)
------------ ------------
162,571,884 160,408,980
Debt issuance costs 3,573,561 3,376,686
------------ ------------
Total assets $417,186,876 $407,110,932
============ ============
Note: The balance sheet at December 31, 1996 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
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VALUJET, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, March 31,
1996 1997
------------- -------------
(Note) (Unaudited)
Current liabilities:
Accounts payable $ 3,221,542 $ 2,884,873
Accrued liabilities 22,718,555 29,336,412
Air traffic liability 3,813,583 9,594,526
Deferred tax liability 1,298,400 1,298,400
Current maturities of long-term debt 33,246,302 31,912,738
Debt on assets held for sale 18,188,222 12,572,648
------------ ------------
Total current liabilities 82,486,604 87,599,597
Long-term debt less current maturities 193,271,800 196,575,908
Deferred income taxes payable 18,028,835 18,028,835
Stockholders' equity:
Common stock, $.001 par value: 54,876 54,878
1,000,000,000 shares authorized: issued
and outstanding - 54,875,610 at December 31,
1996 and 54,878,320 at March 31, 1997
Additional paid-in capital 77,236,447 77,250,384
Retained earnings 46,108,314 27,601,330
------------ ------------
Total stockholders' equity 123,399,637 104,906,592
------------ ------------
Total liabilities and stockholders' equity $417,186,876 $407,110,932
============ ============
Note: The balance sheet at December 31, 1996 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
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VALUJET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended
-------------------
March 31, March 31,
1996 1997
------------ ------------
Operating revenues:
Passenger $105,569,244 $ 35,115,347
Cargo 1,445,946 449,250
Other 2,979,817 1,363,614
------------ -------------
Total operating revenues 109,995,007 36,928,211
Operating expenses and other, net:
Flight operations 7,518,095 4,103,189
Aircraft fuel 22,076,105 9,135,751
Maintenance 15,611,401 14,105,487
Station operations 17,892,629 10,352,864
Passenger services 3,992,040 1,695,087
Marketing and advertising 4,283,374 2,351,691
Sales and reservations 8,894,987 3,077,699
General and administrative 3,889,679 2,796,391
Employee bonus 1,795,000 0
Depreciation 6,516,380 4,885,297
Gain on sale of assets 0 (49,600)
Shutdown and other nonrecurring expenses 0 9,338,000
------------ -------------
Total operating expenses and other, net 92,469,690 61,791,856
------------ -------------
Operating income (loss) 17,525,317 (24,863,645)
Interest (income) expense:
Interest expense 2,402,992 6,209,708
Interest income ( 1,846,449) ( 1,566,369)
------------ -------------
Interest (income) expense, net 556,543 4,643,339
------------ -------------
Income (loss) before income taxes 16,968,774 (29,506,984)
Provision for income taxes 6,302,000 (11,000,000)
------------ -------------
Net income (loss) $ 10,666,774 $(18,506,984)
============ =============
Net income (loss) per share $ 0.18 $ (0.34)
============ =============
Weighted average shares outstanding 59,738,532 54,877,000
============ =============
See accompanying notes.
5
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VALUJET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
-------------------
March 31, March 31,
1996 1997
---------------- --------------
Operating activities:
Net income (loss) $ 10,666,774 $(18,506,984)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating
activities:
Depreciation 6,516,380 7,120,172
Provision for uncollectible accounts 1,165,597 558,822
Gain from disposal of assets 0 (49,600)
Changes in operating assets and liabilities:
Accounts receivable (5,035,572) (37,276)
Other current assets (3,521,754) 2,275,904
Accounts payable and accrued liabilities (9,722,794) 7,585,112
Air traffic liability 10,441,921 5,780,943
Income taxes payable 5,871,945 (9,808,640)
------------ -------------
Net cash provided by (used in) operating
activities 16,382,497 (5,081,547)
Investing activities:
Proceeds from disposal of equipment 0 704,974
Purchases of property and equipment (45,758,574) ( 3,134,207)
------------ -------------
Net cash used in investing activities (45,758,574) ( 2,429,233)
Financing activities:
Issuance of long-term debt 24,186,722 0
Proceeds from sale of common stock 2,078,157 13,939
Payment of long-term debt ( 5,235,388) ( 3,645,030)
------------ -------------
Net cash provided by (used in) financing
activities 21,029,491 ( 3,631,091)
------------ -------------
Net decrease in cash and cash equivalents (8,346,586) (11,141,871)
Cash and cash equivalents at beginning of
period 127,947,096 150,012,695
------------ -------------
Cash and cash equivalents at end of period $119,600,510 $ 138,870,824
============ =============
See accompanying notes.
6
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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 March 31, 1997 and December 31, 1996, the
results of operations for the three month periods ended March 31, 1997 and March
31, 1996, and cash flows for the three month periods ended March 31, 1997 and
March 31, 1996. 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
31, 1997, and amendments thereto.
The results of operations for the three month periods ended March 31, 1997
and 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. See Note G.
C. LONG-TERM DEBT
December 31, March 31,
1996 1997
------------ ------------
(Unaudited)
Senior Notes due 2001................... $150,000,000 $150,000,000
Promissory notes due 1998 through 2006.. 94,706,324 91,061,294
Less current maturities................. 33,246,302 31,912,738
Less debt on assets held for sale....... 18,188,222 12,572,648
------------ ------------
$193,271,800 $196,575,908
============ ============
During 1996, the Company signed promissory notes totaling $80,871,000 to
finance the purchase of 12 aircraft. During first quarter 1997, there were no
aircraft purchases and no debt incurred to purchase aircraft. During 1996, the
Company 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
seven 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 $13.6 million as of March 31, 1997, have a variable rate of
interest based on the London interbank offered rate ("LIBOR") plus 1.85% to 3%
(1.85% at December 31, 1996 and March 31, 1997) 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%. The aircraft and engines serve as
collateral on this debt. Total interest expense on secured debt was
approximately $2,403,000 and $2,454,000 for the three months ended March 31,
1996 and March 31, 1997, respectively.
7
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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. At March 31, 1997, the Company was in
violation of the fixed charge coverage ratio covenant related to approximately
$18.0 million of the secured debt. As a result, such debt has been classified
as current maturities or debt on assets held for disposition, where appropriate,
in the accompanying balance sheet.
D. COMMITMENTS AND CONTINGENCIES
On May 11, 1996, the Company suffered a tragic loss involving Flight 592.
The accident resulted in extensive media coverage calling into question the
safety of low-fare airlines in general and the Company in particular. In
response to the accident, the Federal Aviation Administration (FAA) conducted an
extraordinary review of the Company's operations. As a result, on June 17, 1996
the Company 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 was able to satisfy the FAA as to its various regulatory
compliance 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 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 arising out of the loss of
Flight 592 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.
On August 30, 1996, Metropolitan Nashville Airport Authority filed suit
against the Company in State Court in Tennessee for breach of contract and a
declaratory judgment for an anticipatory breach. The Nashville Airport
Authority seeks damages of approximately $2.6 million. The dispute involves
whether the Company was entitled to exercise a termination right contained in
its lease agreement. Management believes the ultimate resolution will not have
a materially adverse effect on the Company's financial position or results of
operations.
From time to time, the Company is engaged in litigation arising in the
ordinary course of business. The Company does not believe that any such pending
litigation will have a material adverse effect on its results of operations or
financial condition.
8
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E. SHUTDOWN AND OTHER NONRECURRING EXPENSES
Costs associated with the loss of Flight 592 and excess operating costs
related to the reduced schedule and grounded aircraft for the three months ended
March 31, 1997 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 unusual maintenance costs in excess of normal recurring maintenance.
In addition, depreciation on grounded aircraft as a result of the reduced
operations is included in shutdown and other nonrecurring expenses. No such
costs were incurred in the three months ended March 31, 1996 as the loss of
Flight 592 did not occur until May 11, 1996.
A summary of such costs is as follows:
Maintenance $7,300,000
Depreciation 2,338,000
----------
$9,338,000
==========
F. ASSETS HELD FOR DISPOSITION
During 1996, as a result of the loss of Flight 592 and the consent order
with the FAA which required the Company to reestablish operations with up to 15
aircraft and subjected further expansion of the Company's operations to FAA and
DOT approval, the Company plans to sell or lease certain of its aircraft. As of
March 31, 1997 the Company had 24 aircraft on its operations specifications.
Those aircraft which the Company will not place into operations and 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 March 31, 1997, the fair value, as estimated by the current market value,
less cost to sell exceeded the carrying amount of such aircraft.
G. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997 the Financial Accounting Standards Board issued a new
accounting pronouncement, SFAS No. 128, "Earnings per Share", which will change
the current method of computing earnings per share. The new standard requires
presentation of "basic earnings per share" and "diluted earnings per share"
amounts, as defined. SFAS No. 128 will be effective for the Company's quarter
and year ending December 31, 1997, and, upon adoption, all prior-period earnings
per share data presented shall be restated to conform with the provisions of the
new pronouncement. Application earlier than the Company's quarter ending
December 31, 1997 is not permitted.
Pro forma basic and diluted earnings per share for the three months ended
March 31, 1996 and 1997 calculated under the provisions of SFAS No. 128 are as
follows:
Quarter Ended March 31,
1996 1997
---------- ------------
Basic earnings (loss) per share $0.20 $(0.34)
Diluted earnings (loss) per share 0.18 (0.34)
9
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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 as of
various dates between January 1, 1996 and March 31, 1997:
Number
Total Number Number of Peak of Cities
As of of Aircraft Day Flights Served
------------------- --------------- ------------------- ---------
January 1, 1996 42 268 26
March 31, 1996 47 286 28
June 30, 1996 51 0 Service suspended to all
markets as of June 17, 1996
September 30, 1996 46* 16 Service resumed on
September 30, 1996 to
Atlanta, Fort Lauderdale,
Orlando, Tampa,
Washington, D.C.
December 31, 1996 43** 124 18
March 31, 1997 42*** 148 21
* Of which 4 had been approved for service by the FAA
** Of which 15 had been approved for service by the FAA
*** Of which 24 had been approved for service by the FAA
On May 11, 1996, ValuJet tragically lost its Flight 592 en route from Miami
to Atlanta. There were no survivors. The accident resulted in extensive media
coverage calling into question the safety of low-fare airlines in general and
the Company in particular. In response to the accident, the FAA conducted an
extraordinary review of the Company's operations. On June 17, 1996, the Company
entered into a consent order with the FAA under which the Company agreed to
suspend operations until such time as the Company was able to satisfy the FAA as
to various regulatory compliance concerns identified by the FAA as a result of
its intensive inspections of the Company's operations. On August 29, 1996, the
FAA returned the Company's operating certificate and the Department of
Transportation ("DOT") issued a "show cause" order regarding the Company's
fitness as an air carrier. The DOT gave its final approval on September 26,
1996, and the Company resumed operations with service between Atlanta and four
other cities on September 30, 1996.
Other effects of the accident, ensuing FAA inspections, media coverage and
suspension of operations include:
1. The suspension of operations has resulted in the failure of the Company
to meet certain financial covenants as of December 31, 1996 under certain of the
Company's secured debt. See Liquidity and Capital Resources below for further
discussion.
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
suspension of operations will affect load factors and yield or the length of
time load factors and yield will be impacted.
4. The Company has sold certain of its aircraft and has assigned its rights
to purchase certain aircraft previously under contract. In addition, the
Company plans to lease out or sell some of its other aircraft.
5. The Company's cost per ASM has increased and is likely to remain
inflated to some extent to reflect the cost of additional maintenance procedures
and infrastructure adopted by the Company and lower aircraft utilization levels.
10
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6. The Company's workforce may be lower than the May 1996 level permanently
if the Company is unable to reestablish its previous service levels.
7. 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 all claims will be
covered or that the aggregate of all claims will not exceed such insurance
limits.
8. Several stockholder lawsuits have been filed against the Company and
certain of its officers and directors alleging, among other things, violation of
applicable securities laws. While the Company denies that it has violated any
of its obligations under the applicable 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.
9. Various governmental authorities are conducting investigations of the
circumstances surrounding the accident. The Company is cooperating with the
authorities in connection with these investigations.
As a result of the accident, the ensuing extraordinary review of the
Company's operations by the FAA, 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 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 first quarter 1997 may not be
reflective of future operations as a result of the reduced level of service, the
Company's ownership of more aircraft than could be used during that period and
additional infrastructure to support larger operations. The following is a
description of the costs incurred by category for the three months ended March
31, 1997 compared to the three months ended March 31, 1996.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996 Three Months Ended March 31, 1997
---------------------------------- -----------------------------------
% of % of
Amount Revenues Per ASM Amount Revenues Per ASM
-------- ------------ --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
(000) (000)
OPERATING REVENUES $109,995 100.0% 8.22c $36,928 100.0% 7.21c
EXPENSE CATEGORY
Flight Operations $ 7,518 6.8% 0.56c $ 4,103 11.1% 0.80c
Aircraft Fuel 22,076 20.1 1.65 9,136 24.7 1.78
Maintenance 15,611 14.2 1.17 14,106 38.2 2.75
Station Operations 17,893 16.3 1.34 10,353 28.0 2.02
Passenger Services 3,992 3.6 0.30 1,695 4.6 0.33
Marketing and Advertising 4,283 3.9 0.32 2,352 6.4 0.46
Sales and Reservations 8,895 8.1 0.66 3,078 8.3 0.60
General and Administrative 3,890 3.5 0.29 2,796 7.6 0.55
Employee Bonuses 1,795 1.6 0.13 0 0.0 0.00
Depreciation 6,516 5.9 0.49 4,885 13.2 0.95
Other expenses (income), net 557 0.5 0.04 4,593 12.4 0.90
Shutdown and Other Nonrecurring 0 0.0 0.00 9,338 25.3 1.82
-------- ----- ---- ------- ----- ----
Total Expenses $ 93,026 84.5% 6.95c $66,435 179.8% 12.96c
</TABLE>
OPERATING REVENUES
- ------------------
Total operating revenues for the quarter ended March 31, 1997 were
approximately $36.9 million as compared to $110.0 million for the quarter ended
March 31, 1996. The decrease from 1996 to 1997 is a result of the Company's
reduced service level during the first quarter of 1997. The Company flew 512
million ASMs during the first quarter of 1997 as compared to 1.3 billion ASMs
during the first quarter of 1996. The Company's load factors for the three
month periods ending March 31, 1997 and 1996 were 53.9% and 58.0%, respectively.
The lower load factor in 1997 is due in part to publicity related to the
accident and increased competition. The Company's average fare was $60.47 for
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the three months ending March 31, 1997 and $72.01 for the three months ending
March 31, 1996 due to the Company offering numerous sales during 1997.
EXPENSES
- --------
Flight operations expenses include all expenses related directly to the
operation of the aircraft other than aircraft fuel, maintenance expenses and
passenger services expenses. Expenses for hull insurance and compensation of
pilots are included in flight operations. Flight operations expenses were
higher, on a per ASM basis, for the quarter ended March 31, 1997 than the
quarter ended March 31, 1996 due to additional training costs incurred as
aircraft are added to the schedule and the change in the Company's compensation
structure in September 1996 which reduced the percentage of compensation
represented by bonuses and shifted this cost to base pay charged to each
department. The cost of hull insurance also increased substantially as of
October 1, 1996.
Aircraft fuel expenses include both the direct cost of the fuel as well as
the costs of delivering fuel into the aircraft. Fuel expense, on a per ASM
basis, was higher for the first quarter 1997 than the first quarter 1996 due to
an increase in the average price of fuel. The average price of fuel increased
from $0.69 per gallon for the first quarter 1996 to $0.76 per gallon for the
first quarter 1997. This approximate 10% increase in the price per gallon of
fuel accounts for the 8% increase in fuel cost per ASM.
Maintenance expenses include all administrative costs of the maintenance
department as well as normal recurring maintenance performed during the year.
Expenses for engine overhaul and certain scheduled heavy maintenance procedures
are included in this cost. Most non-routine maintenance costs performed on
idled aircraft are included in the nonrecurring expense line item. Maintenance
expenses for the quarter ended March 31, 1997 were higher, on a per ASM basis,
than the quarter ended March 31, 1996 due to the reduced level of service during
the first quarter 1997 and the fact that the Company incurred substantial costs
to ready certain aircraft for service which expenses are not included in the
shutdown and other nonrecurring expenses line item. The Company also had a
lower utilization rate on the aircraft it operated which results in the
spreading of certain fixed costs over fewer ASMs or block hours. The Company
maintained or paid storage costs on many more aircraft than it was able to
operate.
Station operations expense includes all expenses incurred at the airports, as
well as station operations administration and liability insurance. Station
operations expenses were higher, on a per ASM basis, for the first quarter 1997
than the first quarter 1996 due largely to the inefficiencies generated from
restarting operations on a limited basis. Many of the station facilities were
not fully utilized during the first quarter 1997 due to the limited operation.
Another factor which contributed to a higher 1996 station operations expense was
an increase in insurance costs as of October 1, 1996.
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. The increase in passenger services
expenses for the first quarter 1997, on a per ASM basis, over the first quarter
1996 is due to the restructuring of the compensation policy in September 1996 as
it relates to flight attendants. The flight attendants' salary levels were
adjusted upward and the regular quarterly bonus portion of their compensation
was eliminated. This change caused the department expense to be higher while
reducing the amount of bonus expense.
Marketing and advertising expenses include all advertising expenses and wages
and benefits for the marketing department. Marketing and advertising expenses
for the first quarter 1997, as a percentage of revenue, were higher than the
first quarter 1996 due to the additional advertising costs incurred at the
resumption of operations into various markets being spread over a reduced
revenue base caused by lower service levels and load factors.
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 quarter ended March
31, 1997 were 8.3% of revenue as compared to 8.1 % for the quarter ended March
31, 1996.
General and administrative expenses include the wages and benefits for the
Company's executive officers and various other administrative personnel. Also
12
<PAGE>
included are costs for office supplies, legal expenses, bad debts, accounting
and other miscellaneous expenses. General and administrative costs for the
first quarter 1997 were higher, on a per ASM basis, than the first quarter 1996
due to the shift in compensation structure to one based to a larger extent on
base salaries and also due to increased legal fees and the reduced level of ASMs
over which to spread these costs.
There was no expense recorded in the first quarter 1997 related to bonuses as
the Company did not have income. The actual amount to be paid and the form of
such payout 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
quarter ended March 31, 1997 was lower than the quarter ended March 31, 1996 due
to depreciation on non-performing assets being recorded in the shutdown and
other nonrecurring expenses line item. During 1996, the Company made the
decision to dispose of certain idled aircraft. Subsequent to the decision to
sell or lease out such aircraft, no depreciation was recorded on aircraft held
for sale. Depreciation on aircraft idled as a result of the suspension of
operations and reduced operations and not yet returned to service has been
recorded in shutdown and other nonrecurring expenses.
Shutdown and other nonrecurring expenses for the first quarter 1997
include depreciation on non-performing assets which are not held for sale and
certain heavy maintenance procedures performed to ready aircraft for service.
The Company also expects to incur additional shutdown and nonrecurring expenses
in the second quarter of 1997 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.
Interest (income) expense, net includes interest income and interest
expense. During the quarter ended March 31, 1997, interest expense exceeded
interest income by approximately $4,643,000 due to increasing debt levels
attributable to the acquisition of aircraft and the completion in April 1996 of
the issuance of $150 million 10 1/4 % senior notes due 2001.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
For the quarter ended March 31, 1997, the Company used cash flow from
operations of approximately $5.1 million, used cash of approximately $3.1
million to acquire property and equipment and generated cash flow from the
disposal of property and equipment of $.7 million. Approximately $3.6 million
of cash was used for the repayment of debt.
As of March 31, 1997, the Company had cash and cash equivalents of
approximately $138.9 million and working capital of approximately $155.7
million. Included in working capital is approximately $36.4 million of income
tax receivable which the Company expects to receive during the second or third
quarter of 1997. There can be no assurance that the Internal Revenue Service
will not dispute or delay this refund.
As of March 31, 1997, the Company's fleet consisted of 42 DC-9-30
aircraft. 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 1997 and 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.
13
<PAGE>
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, disposing
of Stage 2 aircraft and acquiring Stage 3 aircraft. The Company expects that
FAA certified hush kits will cost approximately $2.3 million per aircraft or
approximately $55.0 million for a fleet of 24 non-hushed DC-9-30 aircraft as of
March 31, 1997. Any disposition of Stage 2 aircraft would reduce this
obligation. The Company may be able to finance a portion of the cost of these
hush kits and plans 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 expected terms of financing, if available, should allow the Company to
spread the payments for Stage 3 compliance over a number of years.
As of March 31, 1997, the Company's debt related to asset financing
totaled $91.1 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) as follows: remainder of
1997--$17.9 million, 1998--$23.1 million, 1999--$20.6 million, 2000--$15.5
million, 2001--$162.9 million, 2002 and after --$1.1 million. These notes
provide for acceleration of their maturities upon certain defaults, including a
payment default or defaults resulting in an acceleration of other debt of the
Company and its subsidiaries.
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 five-year period. Certain other notes with an aggregate unpaid
principal balance of approximately $13.6 million as of March 31, 1997 have a
variable rate of interest based on the London interbank offered rate (LIBOR)
plus 1.85% to 3% (1.85% at December 31, 1996 and March 31, 1997) based on the
Company's compliance with specific financial ratios concerning leverage and
fixed charge coverage. Certain other notes have a variable rate of interest
based on LIBOR plus 1.20% to 2.75%.
A substantial number 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. Of the $91.1 million principal amount of
secured debt as of March 31, 1997, there is debt with a principal balance of
approximately $62.8 million subject to loan agreements with financial covenants.
As of March 31, 1997, the Company was in violation of the fixed charge coverage
ratio with one lender on approximately $18.0 million of debt, which has been
classified as current maturities or debt on assets held for disposition, where
appropriate. The Company is attempting to meet with this lender in an effort to
reach an agreement and avoid a prepayment event or acceleration of debt. There
can be no assurance that such negotiations will be successful. The Company
continues to meet all of its debt payment obligations on time.
If the Company is unable to successfully negotiate waivers or forbearance
from its secured lender with financial covenants who has yet to agree to a
waiver and if such lender demands prepayment of debt, then the Company will be
required to prepay such debt within a short period of time. If the Company
fails to do so, then such secured lender 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).
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.
14
<PAGE>
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 and directors alleging, among other things, misrepresentations under
applicable securities laws. 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. 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 provides 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
27 - Financial Data Schedule
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: May 14, 1997 /s/ Robert L. Priddy
------------------------------
Robert L. Priddy
Chairman of the Board and Chief Executive
Officer
Date: May 14, 1997 /s/ Michael D. Acks
------------------------------
Michael D. Acks
Controller and Chief Accounting Officer
17
<PAGE>
Exhibit 11
VALUJET, INC.
COMPUTATION OF EARNINGS PER SHARE
Three Months Ended March31,
---------------------------
1996 1997
---------------------------
PRIMARY:
Weighted average common and common equivalent
shares outstanding during the period 54,586,278 54,877,153
Net effect of dilutive stock options and stock
warrants-based on the treasury stock method
using the average market price 5,152,254 -
-----------------------------
Total common and common equivalent shares 59,738,532 54,877,153
=============================
Net income (loss) $10,666,774 $(18,506,984)
=============================
Net income (loss) per share $ 0.18 $ (0.34)
=============================
FULLY DILUTED:
Weighted average common and common equivalent
shares outstanding during the period 54,586,278 54,877,153
Net effect of dilutive stock options and stock
warrants-based on the treasury stock method
using the ending market price 5,236,510 -
-----------------------------
Total common and common equivalent shares 59,822,788 54,877,153
=============================
Net income (loss) $10,666,774 $(18,506,984)
=============================
Net income (loss) per share $ 0.18 $ (0.34)
=============================
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 138,870,824
<SECURITIES> 0
<RECEIVABLES> 7,481,156
<ALLOWANCES> 988,000
<INVENTORY> 6,343,023
<CURRENT-ASSETS> 243,325,266
<PP&E> 211,421,972
<DEPRECIATION> 51,012,992
<TOTAL-ASSETS> 407,110,932
<CURRENT-LIABILITIES> 87,599,597
<BONDS> 196,575,908
0
0
<COMMON> 54,878
<OTHER-SE> 104,851,714
<TOTAL-LIABILITY-AND-EQUITY> 407,110,932
<SALES> 36,928,211
<TOTAL-REVENUES> 36,928,211
<CGS> 61,791,856
<TOTAL-COSTS> 61,791,856
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,643,339
<INCOME-PRETAX> (29,506,984)
<INCOME-TAX> (11,000,000)
<INCOME-CONTINUING> (18,506,984)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,506,984)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
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