Item 1. BUSINESS
Sabreliner Corporation with its subsidiaries Midcoast Aviation, Inc. and SabreTech, Inc. is a diversified aerospace company providing services in airframe maintenance and modification, gas turbine engine overhaul and repair, logistics support and other aerospace products and services for commercial, corporate and government aviation markets. During fiscal 1996, Sabreliner reported revenue of $206 million, of which 40% was provided by commercial aviation, 33% was provided by corporate aviation and the remaining 27% was provided by government aviation business.
During the last fiscal year, the Company achieved a 70% growth in its revenues, largely due to acquisitions completed in the prior year and the capture of significant new government contracts. The Company continued its acquisition strategy during fiscal 1996, expanding its engine business through the purchase of two additional product lines. Turbotech Repairs, Inc. ("Turbotech"), acquired in June, 1996, increases the Company's market penetration by adding new engine component repairs and major inspection and overhaul services. The Company also expanded its capabilities by acquiring the heavy maintenance tooling and license for the AlliedSignal TFE 731 engine from UNC-Airwork in May, 1996. The Company believes these acquisitions will expand its market share within its engine business area, enhancing future growth and stability. Existing cash balances and an unused $35 million credit facility will enable the Company to continue its acquisition strategy, seeking existing businesses and facilities complementary to its current operations or providing entrance into new markets (see "Acquisition Strategy" below).
In addition to growth from its acquisition strategy, the Company plans to expand its existing business through the aggressive pursuit of new contracts and through increased investment in existing facilities and new tooling capabilities. The continued expansion of the Company's engine business, including working capital investments to accommodate the recently acquired product lines and the entry into new engine types, and the establishment of new commercial aviation facilities at Orlando are areas of existing business investments under consideration for the upcoming year. The Company also intends to build upon its expanded capabilities to capture new contract awards for government and corporate aviation. The Company's technical expertise and customer support are providing opportunities to increase future revenues by capturing new contracts and by enlarging its capabilities.
During fiscal 1996, the Company's SabreTech subsidiary was involved in the crash of ValuJet Flight 592 (see Item 3. LEGAL PROCEEDINGS and Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS).
Corporate Aviation Business
The Company's corporate aviation business provides airframe, powerplant and ancillary systems repair, overhaul and modification services and flight line and spare parts support to the business aviation market. The revenues of this business area derive from work on a wide variety of business aircraft including the Sabreliner, Gulfstream, Falcon, Cessna, Hawker, Challenger, Lear, and other business jet and turboprop airframes. The Company services these aircraft for both domestic and foreign operators, with international sales in excess of 12% of the corporate aviation business. Total revenues reported in fiscal 1996 for corporate aviation were $68.2 million, and are comprised of the following product lines:
Maintenance and Modification Business
Maintenance is the routine and as-required inspection and resulting repair of aircraft, including airframe corrosion condition; maintenance and service bulletin compliance; avionic, instrument, electrical and hydraulic systems repairs and overhauls; and the troubleshooting and repair of aircraft. Modification is the periodic enhancement or conversion of aircraft, including aircraft painting; avionics systems installation; interior refurbishment; structural life extensions or enhancements; and other major corrections or improvements.
The Company maintains four facilities to provide maintenance and modification services:
The Perryville Maintenance Center, performing routine maintenance and modifications on the Sabreliner fleet;
The St. Louis Downtown Parks Maintenance Center, dedicated to maintenance and modification efforts on larger "heavy iron"aircraft, such as Gulfstreams, Falcons and Challengers;
The Little Rock Maintenance Center, specializing in smaller and mid-size business aircraft; and
Lambert Field Maintenance Center, which supports base customers and drop-ins at the Lambert-International Airport in St. Louis.
The combined facilities of Midcoast and Sabreliner provided approximately $38.4 million in aggregate maintenance and modification revenue during fiscal 1996.
Engine Business
The engine business area includes the repair, overhaul and maintenance of powerplants installed on a variety of corporate aviation and military aircraft. The Company's current engine component repair or engine overhaul capabilities include the following engines:
Manufacturer Engine
Pratt & Whitney PT6, JT12, JT8, J52, J75 General Electric CF700, T700, CJ610, J85 AlliedSignal TFE 731, TPE 331 Lycoming T53 Teledyne J69 Allison A250, T63, T56
The Company's primary facility dedicated to the engine business is the Neosho plant, with advanced capabilities in lathing, milling, machining, electron beam and conventional welding, plating, coating, blending, shotpeening, plasma spraying, X-ray and magnetic diagnostics, and other capabilities. During the last fiscal year, the Company acquired Turbotech, adding component repair capability for the Pratt & Whitney PT6 and AlliedSignal TPE 331, as well as, full overhaul authority for the Allison A250. In addition, the Company acquired the heavy maintenance tooling and license for the AlliedSignal TFE 731 engine from UNC-Airwork in May, 1996. The addition of the heavy maintenance license for the AlliedSignal TFE 731 makes Sabreliner one of three companies in the United States capable of performing an overhaul on this popular powerplant.
The Company believes growth can be achieved in the engine business area, due to the recent acquisitions and the continued investment in tooling and capabilities for other powerplants and their accessories. Total revenues from the engine business area in fiscal 1996 were $9.2 million for corporate aviation.
Other Corporate Aviation Business
In addition to the products and services described above, the Company provides other aerospace support to the corporate aviation market, including: fueling, long-term tenant leasing and flight line services, collectively known as the Fixed Base Operator (FBO) business, which generated $9.7 million in fiscal 1996 revenue; over-the-counter spare parts, which generated $6.1 million in revenue during fiscal 1996; and preowned aircraft sales, which generated $4.8 million in revenue during the year.
Government Business
Sabreliner performs work with the U.S. and foreign governments for both military and civilian agencies. Of the $55.6 million in revenue reported on these contracts in fiscal 1996, 48% was derived from the U.S. Navy, 41% from the U.S. Air Force and 5% from the U.S. Army. Subcontracts and civilian agencies, such as the FAA, represent the remaining 6% of this total. Although the U.S. Department of Defense budget has steadily declined over the last decade, spending for operations and maintenance - the funding category for most of the Company's contracts - has remained and is projected by the government to remain stable. During 1995, a major task force of government and industry leaders recommended increasing the government's outsourcing to the private sector to reduce costs, particularly in the areas of depot maintenance in which the Company has previously performed contracts. The Company believes its experience and low- cost structure enable it to effectively compete on a broad spectrum of government contracting opportunities.
A description of the Company's significant government business follows:
The Undergraduate Naval Flight Officers (UNFO) Training Program
The Company was awarded the UNFO contract in March, 1990, to perform training services for Navy pilots and navigators, including: airborne training missions on company-owned radar- equipped Sabreliner aircraft; simulator training of groundbased intercept radar and radar mapping; and all logistics, maintenance and mission support services. To meet the requirements of this contract, the Company purchased and modified 17 Sabreliner aircraft, designed and installed simulator training stations, modified airborne tactical radars, and provided on-site maintenance and logistics crews. This was achieved by assembling a team of five major subcontractors and through the initial capital investment of over $99.1 million, requiring nearly eighteen months of engineering design, aircraft and radar modifications and other management efforts. The Company has maintained outstanding performance on the UNFO program, evidenced through several meritorious commendations awarded by the Navy, including the prestigious Vice Admiral Goldthwaite Award. Revenue from this contract in the last year was $22.8 million.
The 50-month basic contract ended on September 30, 1995 and the Navy exercised its 36-month option. Quarterly revenues during the option period are contracted at $3.9 million. Opportunities exist to generate additional revenue under this program through the sale of the UNFO aircraft, engines and simulator stations. Funding in the amount of $45.0 million has been appropriated by Congress for the U.S. Navy for such a transaction; further developments await conclusive legislative actions. Although the Company believes the purchase transaction will occur within the next fiscal year, there can be no assurance that this transaction will occur within this time frame or that it will ever occur.
The C-20 Joint Logistics Support Contract
The U.S. Air Force C-20 contract was awarded to the Company in July, 1995, to perform on-site logistics support, depot-level maintenance and engine maintenance of the government's fleet of 24 Gulfstream C-20 aircraft, which operate out of four military bases. Performance on the contract started on October 1, 1995. The contract's base year revenue is expected to exceed $19 million. The contract provides for six more option years, with an average value of $27 million per year, each exercisable by the Air Force; the option for the first additional year, starting October 1, 1996, has been exercised.
The contract was awarded to Sabreliner based upon its team approach: Sabreliner as prime contractor, providing materials and administration; UNC, Inc., providing on-site maintenance and stockroom support; Sabreliner's subsidiary, Midcoast Aviation, performing depot level maintenance at its Parks facility; and Rolls Royce-Canada providing engine overhaul and repair support.
Revenues realized in the first nine months of performance, ending June 30, 1996, were $15.1 million.
The Navy T-2/A-4 Depot Level Maintenance Program
On August 24, 1995, the Company was awarded the T-2/A-4 Depot Level Maintenance contract for the inspection and repair of the Navy's fleet of T-2 aircraft and Foreign Military Sales (FMS) repairs on A-4 aircraft. The contract's base year started October 1, 1995, and includes four option years; the option for the first additional year has been exercised. Significant over and above work requests have been approved by the Navy to enable the Company to fabricate structural parts for this aircraft. On December 28, 1995, the Navy inducted its first T-2 aircraft into the Company's Perryville facility under this contract. As of June 30, 1996, a total of ten Navy T-2 aircraft have been inducted, with two aircraft completed and delivered, generating revenues in excess of $1.1 million.
The Company has included approximately $9.7 million in its fiscal 1997 backlog for expected deliveries on this contract (see "Backlog" below). The Company believes opportunities exist to further increase contract revenues due to the prospect of FMS orders in the next year.
Government Engine Contracts
The Company holds various contracts for the overhaul and repair of government-owned engines and engine components. The largest of these is the Air Force J85 engine component repair contract, which generated $6.1 million in revenue during fiscal 1996. The expansion of the Company's capabilities in engine overhaul and component repair, gained through the acquisitions of Turbotech and the AlliedSignal TFE 731 heavy maintenance license and tooling, is expected to increase government engine contract opportunities. In addition, the Company is continuing to pursue subcontracts for government engines, successfully capturing major subcontracts for the repair of Navy T56 components and for the overhaul of Navy J52 engine components during fiscal 1996. Total government engine contract revenues during fiscal 1996 were $12.3 million.
Other Government Business
The Company's broad capabilities and extensive experience in government contracting enables it to perform a variety of other government aviation contracts and subcontracts. Other government business revenues generated in the last year include subcontracts to provide spare parts and contracts to repair hydraulic and other system components. Other government contracts generated revenue of $4.2 million during fiscal 1996.
Commercial Aviation Business
The Company's acquisition of the three subsidiaries of DynCorp collectively known as the DynAir Companies, on June 30, 1995, now known as SabreTech, Inc., expanded the Company into the commercial aviation market. The commercial aviation market includes: third-party aircraft maintenance services for commercial carriers, primarily airlines and major freight carriers; modification and completion services for manufacturers of airline aircraft; and airline aircraft storage and spare parts support. The Company maintains three principal facilities to provide commercial aviation services:
The Phoenix facility at Sky Harbor Airport, providing major modification and third party maintenance services to commercial airlines and aircraft manufacturers.
The Miami facility at Miami International Airport, performing heavy maintenance and line maintenance for airlines.
The Amarillo facility, a long-term storage and logistics center for aircraft leasing companies and an aircraft painting center.
In addition to these established facilities, the Company recently expanded its facilities by adding third-party maintenance hangars at Orlando, Florida. These facilities are in their initiation and start-up phase, with significant revenues beginning in fiscal 1997.
During fiscal 1996, the Company's revenues from the commercial aviation business were $81.8 million. Of this, over $21.3 million was generated in support of McDonnell Douglas aircraft repairs and modifications. The Company is working to expand upon the existing relationship with McDonnell Douglas to provide increased revenues in the next year. Another $5.4 million in fiscal 1996 commercial aviation revenues was attributed to foreign carriers.
Worldwide demand for air service is expected to grow in all commercial aviation sectors, due to increased travel and the proliferation of smaller, independent airlines. In addition, the expected increase in the conversion of airline passenger aircraft to freight or cargo carrier aircraft is anticipated to generate substantial demand for commercial aviation modification services. Despite the Company's expectations of growth in the commercial aviation business, future revenues could be adversely affected by customer perceptions of the Company's involvement in the crash of ValuJet Flight 592 (see Item 3. LEGAL PROCEEDINGS).
Acquisition Strategy
The Company has employed a strategy of acquiring aerospace businesses to improve its current market position and capitalize on its established expertise. The Company is focusing on two types of acquisition strategies. The first of the Company's strategies is to identify opportunities where it can add its existing resources and experience to enhance the performance of the acquired operation. The Company believes its strengths in this area include: Original Equipment Manufacturer (OEM) technical skills; complex operating capabilities and available facilities; strong contracts administration; sophisticated financial controls; and the ability to perform complex programs. The Company's second acquisition strategy is to seek acquisitions of product lines and businesses complementary to the Company's existing holdings. The integration and consolidation of such acquisitions can provide increases in technical capabilities through sharing of unique resources and savings in fixed costs by eliminating redundant operations and administration.
During the last four years, the Company has implemented these strategies, acquiring five companies or product lines.
In September, 1992, the Company acquired the Neosho Division of Teledyne Industries, Inc. The acquisition provided the Company substantial new technical and operating capabilities in engine and engine component overhaul and repair. Since the acquisition, the Company has won several government contracts and captured new commercial product lines for performance at the Neosho facility and its satellite in Independence, Kansas. The Company expects to use the capabilities and resources provided by the Neosho acquisition as a foundation to build new growth, with the recently-acquired Allison A250 engine platform and the AlliedSignal TFE 731 heavy maintenance business to be added to this facility during fiscal year 1997.
The Company acquired Midcoast Aviation, Inc. in November, 1994. Midcoast performs maintenance and modifications on mid-sized jets and on larger "heavy iron" aircraft. Midcoast has a reputation for high-quality interior refurbishment modifications, employing the latest computer-aided design, skilled craftsmen and sophisticated tooling and processes. The Company has capitalized on these attributes, combining its existing contracts administration and financial controls with Midcoast's technical background to capture the C20 Logistics Support contract.
In June, 1995, the Company acquired the former DynAir Companies, now known as SabreTech, Inc. This acquisition introduced the Company to a complementary market, which added $81.8 million in revenues and over $3.0 million in operating profits to fiscal 1996 results before recognition of the $0.7 million of expenses associated with the crash of ValuJet flight 592. Since the acquisition, the Company has added new business and expanded the acquired facilities to include new facilities at Orlando, Florida.
The Company acquired the heavy maintenance license, tooling and inventories for the AlliedSignal TFE 731 engine from UNC-Airwork in May, 1996. Sabreliner's previous experience in TFE 731 maintenance and its existing engine capabilities at the Neosho facility made this acquisition complementary to ongoing operations. After establishing this product line in Neosho, Sabreliner will be one of only three companies in the United States authorized by the OEM to perform heavy maintenance on this popular engine.
In June, 1996, the Company acquired Turbotech Repairs, Inc. (Turbotech). Turbotech is an engine components overhaul and repair facility located in San Diego, California. By acquiring Turbotech, the Company has gained entrance into new engine capabilities including the Pratt & Whitney PT6, the AlliedSignal TPE 331 accessory market, and the Allison A250, which will be moved to the Neosho facility.
The Company intends to continue its acquisition strategy, maximizing its current capabilities and transferring existing skills to similar recently-acquired businesses. The Company's existing cash balances and unused credit facility can enable it to effect an immediate acquisition, allowing rapid response to changing markets and new opportunities. However, there can be no assurance the Company will be successful in implementing its acquisition strategies or whether or when the Company will make other acquisitions.
Product Liability Exposure
The Company is the OEM for the Sabreliner series of aircraft and, in accordance with the agreement pursuant to which the Company purchased the Sabreliner Division of Rockwell International in 1983, Rockwell bears the responsibility for all known liabilities relating to such aircraft occurring on or before June 30, 1983, while the Company is responsible for all occurrences after such date. In addition to the inherent risks of the Company's OEM status regarding the Sabreliner aircraft, the Company is responsible for its performance in the repair and modification of critical engine and airframe components and its performance in the support of its other income-producing functions.
The Company's involvement in the crash of ValuJet Flight 592 has led to civil lawsuits filed by the families of the 110 victims. The Company believes its product liability insurance coverage will be adequate to fund such legal costs (see Item 3. LEGAL PROCEEDINGS).
Although the Company has historically maintained adequate insurance coverage for such risks, there can be no assurance that such coverage will continue to be available in amounts or on terms acceptable to the Company or that such coverage will be adequate for liabilities actually incurred. The Company has not experienced any material loss from product liability claims and believes that its present insurance coverage is adequate to protect it against any claims to which it may be subject.
Competition
Most of the Company's production and service capabilities are possessed in varying degrees by other companies in the industry, including both domestic and foreign firms. Many of these companies are larger and have greater resources than the Company. Competition is intense among companies currently involved in the industry. Competitive advantages are afforded to those with high-quality products and services, low-cost manufacturing, excellent customer service, on-time deliveries, and engineering and production expertise. The Company believes it competes favorably with respect to these factors.
The corporate aviation industry is the Company's most competitive arena, with hundreds of small and large shops vying for market share. The Company's primary competitors are Atlantic Aviation, UNC-Garrett, K.C. Aviation, AVMATS, Bizjet, Duncan Aviation and other, smaller companies that perform aircraft maintenance and modification work.
The Company's competition for government contract awards include original equipment manufacturers, incumbent contractors, small businesses, government-owned and operated depot maintenance facilities, foreign-owned and operated businesses and designated service facilities appointed by original equipment manufacturers. All major government contracts currently being performed by the Company were subject to competitive award; the Company holds no significant sole-source contracts.
Although the commercial aviation business is subject to a smaller number of competitors due to the larger facility and capital intensive tooling requirements, competition for customer demand is still strong. Key market considerations used by the Company to differentiate its capabilities from competitors include: location for line maintenance customers; on-time delivery and accelerated turn-times for the airline industry; and quality and reliability for aircraft manufacturers support. The Company's primary competitors include: Aero Corporation; Dee Howard Company; Lockheed Aeromod; Mobile Aerospace Engineering; Pemco Aeroplex; Timco; and Tramco as well as the internal maintenance operations of many of the Company's potential customers.
Suppliers
In the ordinary course of business, the Company procures materials and purchased services from outside vendors, subject to internal "make vs. buy" determinations and competitive bidding, if appropriate. With the exception of certain proprietary engine assemblies, all of the Company's supplier needs can be fulfilled by alternate supplier competitors. The Company does not place undue reliance on any one supplier; the majority of its revenue is derived from labor services performed by employees.
Backlog
The total contract price of undelivered firm orders by business area as of June 30, 1996 and 1995 was as follows:
Backlog as of June 30 1996 1995 (Dollars in Thousands)
Government Business $77,404 $ 70,018 Corporate Aviation 5,807 7,570 Commercial Aviaton 24,880 17,997
$108,091 $95,585
Of the total backlog as of June 30, 1996, over 70% will be completed and delivered during fiscal year 1997. Not included in backlog is the possible sale of the UNFO training system assets, funded for $45 million but not yet ordered.
Regulatory Compliance
Environmental Regulation
The Company is subject to extensive, stringent and changing federal, state and local environmental laws and regulations, including those regulating the use, handling, storage, discharge and disposal of hazardous substances and the remediation of any potential environmental contamination. Accordingly, the Company is involved from time to time in administrative and judicial investigations and proceedings regarding environmental issues.
The Company has been subject to governmental inquiry regarding an alleged environmental incident that may have occurred at the Perryville facility prior to the flooding of the facility in July 1993. Requests for documents concerning this matter were received during fiscal 1996. All requests for documents have been complied with or are in the process of resolution and no other significant actions or developments have occurred during fiscal 1996.
The Company's handling of oxygen generators prior to the ValuJet Flight 592 crash has instigated an investigation by federal and state environmental regulatory authorities into the hazardous material handling procedures at the Company's facility at Miami. The status and any findings of these investigations has not been announced. The Company continues to cooperate fully throughout these investigations (see Item 3. LEGAL PROCEEDINGS).
In addition to the environmental regulatory actions identified above, the Company has performed internal investigations and evaluations of environmental regulatory compliance. There are three sites under evaluation, total remediation costs are expected to be less than $300,000, much of which is expected to be borne by Superfund insurance funds or paid by previous facility operators, in accordance with indemnity provisions contained within purchase agreements.
The Company continues to design and implement a system of programs and facilities for the management of its production processes and industrial waste to provide compliance with environmental requirements. Efforts are under way to provide systematic monitoring of fuel and waste storage tanks and to upgrade certain underground storage tanks to comply with the Environmental Protection Agency's recent directives. The Company anticipates aggregate capital expenditures made during the next four years to comply with current EPA guidelines will be less than $500,000.
Other Government Regulation
The Federal Aviation Administration (FAA) prescribes standards and licensing requirements for aircraft components and licenses component repair stations within the United States, and comparable agencies regulate such matters in other countries. The Company holds several FAA component certificates and performs component repairs at all of its operating facilities.
In the aftermath of the ValuJet Flight 592 crash, the Company has been subjected to increased scrutiny by the FAA and the National Transportation Safety Board (NTSB). These agencies are conducting investigations into the circumstances surrounding the ValuJet crash and have sought information from the Company in connection therewith. The Company has complied with all investigation requests. To date, the NTSB has not determined the probable cause(s) of the ValuJet crash, nor has the FAA issued any proposed enforcement actions arising out of its investigations (see Item 3. LEGAL PROCEEDINGS).
Employees
As of June 30, 1996, the Company had approximately 1,750 employees, of which approximately 1,550 were engaged in operations, including the repair and maintenance of aircraft, aircraft components and jet engines. The remaining approximately 200 employees were dedicated to sales, marketing and general administration. Approximately 12% of the Company's employees are represented by unions. In addition, the Company utilizes contract mechanics to perform work on aircraft and aircraft components within its facilities. As of June 30, 1996, the Company contracted for the services of approximately 520 contract mechanics.
Item 2.
Item 2. PROPERTIES
The Company leases or owns an aggregate of approximately 2.5 million square feet of space. The Company believes its facilities are well maintained, are suitable to support the Company's business and are adequate for the Company's present and anticipated needs.
The following table sets forth the Company's principal facilities and indicates the location and function of each:
Approximate Location Sq. Footage Primary Function Owned/Leased*
Perryville, 150,000 Airframe Leased through Missouri maintenance and 2031 modification for corporate aviation and government markets.
Neosho, 320,000 Engine and Owned Missouri component overhaul and repair for corporate aviation and government markets.
Cahokia, 160,000 Airframe Various leases Illinois maintenance and through 2012 modification for corporate aviation and government markets.
Phoenix, 300,000 Airframe Leased through Arizona maintenance and 2004 modification for commercial aviation markets.
* Includes all exercisable options.
Item 3.
Item 3. LEGAL PROCEEDINGS
On May 11, 1996, ValuJet Flight 592 from Miami, carrying 110 passengers and crew crashed into the Florida Everglades. Prior to take-off, employees of SabreTech's Miami facility returned to ValuJet various company materials, including five boxes containing oxygen generators, which, after consultation with ValuJet's flight crew, were loaded into the cargo bay of Flight 592 by ValuJet employees. Although the cause of the crash has not been officially determined by the National Transportation Safety Board (NTSB), SabreTech's actions associated with Flight 592 have been included in the NTSB investigation. The Federal Aviation Administration (FAA) is also conducting an investigation into the circumstances surrounding the ValuJet crash and has sought information from SabreTech and various of its employees and contract workers in connection therewith. In addition, SabreTech is one of several subjects of an investigation being conducted by a federal grand jury in conjunction with the United States Attorney for the Southern District of Florida. The Company has cooperated fully throughout these investigations and is continuing to do so. Public hearings concerning the crash of Flight 592 are expected to be held in November, 1996.
SabreTech, ValuJet and others have been named as defendants in numerous wrongful death actions that have been filed by families of victims. Additional wrongful death actions are expected to be filed. The Company's legal costs of defending against these civil actions and any possible claim settlements are funded by the Company's insurance policies. Management believes coverage is adequate to provide for such legal actions.
SabreTech, ValuJet and others also have been named as defendants in two class action lawsuits brought by stockholders of ValuJet. The Company believes that it has meritorious defenses in the two actions.
Costs associated with this incident, such as media relations, incremental professional services, legal fees and other costs related to the various investigations and other lawsuits, of approximately $0.7 million were incurred in the Company's fourth quarter. Additional costs incurred in subsequent periods will be recognized as incurred. While the ultimate outcome of the legal actions related to the ValuJet Flight 592 crash and the length of time necessary to resolve all the outstanding issues cannot be determined at this time, the Company believes the continuing effects of the investigations and related lawsuits will not have a material adverse effect upon the results of operations or financial condition of the Company.
The Company has been subject to government inquiry regarding an alleged environmental incident that may have occurred at the Perryville facility prior to the flooding of the facility in July, 1993. Requests for documents concerning this matter were received during fiscal 1996. All requests for documents have been complied with or are in the process of resolution and no other significant actions or developments have occurred during fiscal 1996.
In addition to the litigation discussed above, the Company is subject to other legal proceedings and claims arising in the ordinary course of its business. Although there can be no assurance as to the outcome of litigation, it is the opinion of management (based upon the advice of legal counsel) that all such actions or proceedings are covered by insurance or will be resolved without material effect on the Company's financial position or results of operations.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The outstanding shares of the Company's common stock are not traded on any established public market.
As of August 31, 1996, there were 34 shareholders of the Company's common stock.
The Company has paid one dividend in the amount of $9,932,000 in the first quarter of fiscal 1994. The Company expects to pay annual dividends as its earnings and debt convenant restrictions allow. For further information, see Note 7 of the Notes to Financial Statements on pages through of this report.
Item 6.
Item 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per share amounts)
Fiscal Years Ended June 30
1996 1995 1994 Income Statement Data Revenue (1) $205,633 $120,908 $103,786 Cost of revenue 171,045 91,867 79,626 Gross margin 34,588 29,041 24,160 Selling, general and administrative expense 22,956 17,251 14,655 Operating income 11,632 11,790 9,505 Interest expense 11,789 11,123 11,459 Litigation settlement (2) - - - Other income expense) 877 481 33 Income tax (expense) benefit (350) (350) 3,651 Net income (loss) before extraordinary loss and change in accounting principle 370 798 (5,883) Extraordinary loss on early debt extinguishment - - - Cumulative effect of change in accounting principle, postretirement benefits - - - Net income (loss) $ 370 $ 798 $(5,883)
Other Data EBITDA (3) $ 24,397 $36,243 $ 24,024 Cash flows from operating activities 10,582 20,038 11,329 Cash flows from investing activities (7,354) (31,857) (5,568) Cash flows from financing activities (853) (578) (9,617) Depreciation and amortization (4) 11,888 23,972 22,099 Capital expenditures (4) 4,346 3,788 5,568 Ratio of EBITDA to consolidated interest expense (5) 2.1x 3.3x 2.1x Ratio of earnings to fixed charges 1.1x 1.1x .2x
Per Share Data Earnings Per Share (EPS)(6): EPS before extraordinary loss and change in accounting principle $ 0.42 $ 0.91 $ (6.66) Extraordinary loss - - - Cumulative change in accounting principle - - - Total earnings per share (6) $ 0.42 $ 0.91 $ (6.66)
Book value per share $ 11.64 $ 11.18 $ 10.33 Cash dividends declared - - -
Balance Sheet Data Cash and cash equivalents $ 12,254 $ 9,879 $22,276 Total current assets 85,326 74,279 70,257 Total assets 144,618 135,855 126,403 Total current liabilities 36,660 28,879 25,681 Total long-term debt, including current portion 94,915 93,214 88,630 Stockholders' equity 10,136 9,853 9,116
Fiscal Years Ended June 30
1993 1992 Income Statement Data Revenue (1) $121,174 $119,043 Cost of revenue 94,464 87,717 Gross margin 26,710 31,326 Selling, general and administrative expense 14,469 13,250 Operating income 12,241 18,076 Interest expense 4,942 5,342 Litigation settlement (2) - - Other income expense) (111) (790) Income tax (expense) benefit (2,660) (4,459) Net income (loss) before extraordinary loss and change in accounting principle 4,528 7,485 Extraordinary loss on early debt extinguishment (1,150) - Cumulative effect of change in accounting principle, postretirement benefits (682) - Net income (loss) $ 2,696 $ 7,485
Other Data EBITDA (3) $34,996 $32,859 Cash flows from operating activities 32,591 21,609 Cash flows from investing activities (8,853) (39,385) Cash flows from financing activities (486) 19,603 Depreciation and amortization (4) 22,877 15,358 Capital expenditures (4) 6,815 39,385 Ratio of EBITDA to consolidated interest expense (5) 7.1x 4.7x Ratio of earnings to fixed charges 2.4x 2.4x
Per Share Data Earnings Per Share (EPS)(6): EPS before extraordinary loss and change in accounting principle $ 5.24 $ 8.99 Extraordinary loss (1.33) - Cumulative change in accounting principle (0.79) - Total earnings per share (6) $ 3.12 $ 8.99
Book value per share $ 17.59 $ 26.56 Cash dividends declared 11.25 -
Balance Sheet Data Cash and cash equivalents $26,132 $ 2,880 Total current assets 76,126 61,308 Total assets 146,332 147,031 Total current liabilities 34,666 55,724 Total long-term debt, including current portion 88,510 88,051 Stockholders' equity 14,823 19,555
(1) Revenue for fiscal 1994 was adversely affected by the flooding of the Company's facilities in Perryville and St. Louis. Revenue for fiscal 1995 includes eight months of Midcoast Aviation, Inc. activity. Fiscal 1996 revenue includes the addition of the SabreTech acquisition made on June 30, 1995 and a full twelve months of Midcoast Aviation revenue (see Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Overview
Key acquisitions made by the Company during fiscal 1995 generated significant growth during fiscal 1996, resulting in revenue exceeding $205 million for the year. The gross margin provided by these acquisitions more than offset the expected decline in gross margin associated with the Company's largest government contract, the Undergraduate Naval Flight Officers (UNFO) contract, resulting in a total gross margin increase of $5.5 million. Despite these positive actions, overall net income for fiscal 1996 declined from the previous year by $0.3 million due to the $0.7 million in expenses recognized by the Company relating to the ValuJet incident (see Item 3. LEGAL PROCEEDINGS).
During fiscal 1996, the Company continued its acquisition strategy, acquiring new businesses to bolster its position in the engine maintenance market. In addition, the Company captured two significant government contracts during fiscal 1996, the C- 20 logistics contract, valued at over $181 million over seven years, and the Navy T-2/A-4 contract, valued at $30 million over five years. The Company also expanded its commercial aviation business during the year by adding a new facility at Orlando, Florida. These developments, coupled with the possible award of other major contracts with the government and subcontracts, are anticipated to continue the growth in revenues and augment net income in the next year. Despite the Company's expectations of growth in each of its major business areas, no assurance can be provided that the Company will be successful in capturing new business. In addition, future revenues and results of operations could be adversely affected by customer reactions to the perceptions of the Company's involvement in the crash of ValuJet Flight 592 (see Item 3. LEGAL PROCEEDINGS).
Fiscal 1996 Compared to Fiscal 1995
Revenue. The acquisition of SabreTech and Midcoast Aviation in fiscal 1995 provided increased volume in fiscal 1996, contributing to a revenue increase of 70% from the prior year. Revenue increases attributable to these two acquisitions were $104.0 million during fiscal 1996. Without these acquisitions, the remaining business revenues would have declined by $19.3 million due to reductions in government contract revenues, primarily the UNFO program. The conversion of the UNFO program from its base contract period, ended September 30, 1995, to its three-year option period reduced revenues by $21.5 million. Offsetting the previously anticiapted decline in UNFO revenues were increases in other areas of the remaining businesses due to new contract awards, including the C-20 logistics contract and the Navy T-2/A-4 depot level maintenance contract.
Gross Margin. During fiscal 1996, the Company was able to increase gross margins from the preceding year by $5.5 million, or 19%, despite the gross margin decline from the conversion of the UNFO contract to its option period. The conversion of the UNFO basic contract to its three-year option period reduced fiscal 1996 gross margin by $7.1 million from the previous year. The acquisitions of Midcoast and SabreTech more than compensated for this reduction by providing $11.8 million in increased gross margin.
Although the dollar value of gross margin increased, gross margin as a percent of net revenue declined for the year, compared to fiscal 1995. The overall decline in gross margin percentage, from 24% in fiscal 1995 to 17% in fiscal 1996 reflects the change in the Company's revenue mix toward the lower-yield, labor-intensive commercial aviation business.
Selling, General and Administrative Expense. The expansion in administration staff and the new responsibilities stemming from the acquisition of SabreTech increased selling, general and administrative expense during fiscal 1996 by $5.2 million over the preceding year. In addition, the legal and other professional costs attributed to the ValuJet incident (see Item 3. LEGAL PROCEEDINGS) required the recognition of $0.7 million in expense during 1996. Without these items, selling, general and administrative expense would have declined by $0.2 million from the prior year, reflecting the Company's continued cost containment and centralization initiatives.
Interest Expense. The $0.7 million increase in interest expense experienced in fiscal 1996, versus the prior year, is attributable to a decline in interest income earned on available cash balances due to the deployment of cash to acquire new businesses during fiscal 1995.
Other Income (Expense). Of the total $0.9 million in other income recognized during fiscal 1996, $0.7 million is attributable to an insurance claim paid to the Company for lost property.
Fiscal 1995 Compared to Fiscal 1994
Revenue. Net revenue for fiscal year 1995 increased by $17.1 million over the prior year. The acquisition of Midcoast Aviation, Inc. on November 2, 1994, added revenue of $25.0 million. Without the revenue generated by Midcoast, revenue would have declined from fiscal 1994 by $7.7 million. This revenue reduction can largely be attributed to two factors: a nonrecurring price adjustment on the UNFO contract experienced in fiscal 1994 which increased that year's revenue by $2.5 million, and a reduction in pre-owned aircraft sales activity in fiscal 1995 versus 1994, resulting in a drop in revenues of $4.3 million.
Gross Margin. Gross margin for fiscal year 1995 increased by $4.9 million over the prior year. The Midcoast acquisition provided $3.4 million of this increase. The resumption of activities at the Company's Perryville facility, temporarily shut down during most of fiscal 1994 due to flooding, increased fiscal 1995 gross margin from the prior year by approximately $1.1 million. Cost containment initiatives, particularly in the on-site logistic costs of the UNFO program, generated an additional $0.5 million in gross margin.
Selling, General and Administrative Expense. Excluding nonrecurring legal fees of $1.9 million associated with the Hannon-Armstrong lawsuit, which were incurred in the first two quarters of fiscal 1994, selling, general and administrative expenses for fiscal 1995 were higher than the previous year by $4.5 million. These increases were largely due to the expansion in administrative staff and the responsibilities stemming from the Midcoast acquisition.
Interest Expense. Interest expense declined slightly in 1995 from the prior year, by $0.3 million. This reduction reflects the increased interest income earned on outstanding cash balances throughout the year.
Fiscal 1994 Compared to Fiscal 1993
Revenue. Revenue for fiscal 1994 was lower than the prior year results by $17.4. The decline in revenue reported for fiscal 1994 was due to reductions in deliveries in government contracts and to business interruption and delays caused by the flooding of the Company's facilities in Perryville and Chesterfield, Missouri. The decrease or delay of revenue attributable to the flood was partially offset by increases attributable to new business generated by new contract awards at the Company's Neosho facility, representing improvements in fiscal year 1994 net revenue of $8.1 million.
Gross Margin. Gross margin for fiscal year 1994 was $2.5 million lower than the previous year. Although the flooding of the Company's facilities reduced revenue for fiscal 1994, insurance proceeds and mitigating actions taken by the Company prevented an adverse impact on gross margin. During fiscal 1993, significant deliveries were made on the Army T53 engine contract for a retroactive pricing change, yielding over $2.7 million in related gross margin. These types of deliveries were not repeated in fiscal 1994.
Selling, General and Administrative Expense. Selling, general and administrative expense for fiscal 1994 reflects an increase over the prior year of $0.2 million. This increase was primarily due to costs associated with an internal investigation of environmental compliance totaling $0.7 million. Excluding this item, selling, general and administrative expense declined from fiscal 1993 by $0.5 million. This decline was largely due to the cost containment initiatives implemented in the last quarter of fiscal 1993.
Interest Expense. The increase in interest expense for fiscal 1994 reflects the Company's issuance of $90.0 million in Senior Notes on June 28, 1993, bearing an interest rate of 12.5%. These Senior Notes were used to retire the outstanding indebtedness from the Company's previous financing facility, which bore a lower interest rate.
Litigation Settlement. The litigation settlement reported for fiscal 1994 represents an agreement with Hannon-Armstrong entered into on December 30, 1993. The settlement agreement followed a U.S. District Court judgment against the Company on November 30, 1993.
Liquidity and Financial Resources
The Company's cash balance increased during fiscal 1996 by $2.4 million, resulting in an ending cash balance as of June 30, 1996 of $12.4 million. Earnings before depreciation and amortization added $12.3 million during the year, offset by increases in working capital of $1.7 million, capital expenditures of $4.3 million, and acquisitions of $3.0 million. Also reducing cash generated by earnings were debt repayments and treasury stock purchases, totaling $0.9 million.
During 1995, net income, depreciation and amortization generated $24.8 million in cash flow. Combined with beginning cash balances of $22.3 million, the Company had $47.1 million in available resources in 1995 to fund operations, acquire assets and repay debt. Increases in working capital absorbed $4.7 million, largely due to the realization of deferred contract revenue and deferred tax liabilities. Investing activities required $31.8 million in 1995, consisting of $15.4 million for the acquisition of Midcoast Aviation, Inc., and $12.6 million for the acquisition SabreTech, with the remaining $3.8 million required for capital expenditures for the existing business. After deducting debt repayments and other financing activities of $0.6 million, the remaining cash balance at June 30, 1995, was $9.9 million.
In the next year, the Company expects to make investments in facilities, tooling and capabilities of its existing businesses to permit expansion within the growing markets of commercial and corporate aviation. The acquisition of tooling and the investment in working capital to add new engine types to the Company's capabilities and the establishment of the new commercial aviation facility at Orlando are among the investments under consideration for the upcoming year. In addition to capital expenditures planned for the next year, the Company is required to make contingent purchase price payments to DynCorp for the acquisition of SabreTech of approximately $2.3 million.
Future cash balances may be increased by the possible sale of the Company's UNFO training system assets to the U.S. Government. Funding in the amount of $45.0 million has been appropriated by Congress for the U.S. Navy for such a transaction; further developments await conclusive legislative actions. If the proposed sale occurs, the Company's cash balances would be increased, after taxes, by approximately $35 million. Although the Company believes this transaction will occur during the next fiscal year, there can be no assurance that this transaction will occur within this time frame or that it will ever occur.
In anticipation of future capital investment needs, the Company expanded its secured working capital credit facility with Star Bank during 1996 to allow borrowings up to $35 million. As of June 30, 1996, this credit facility remained unused. The Company believes this credit facility, combined with its current $12 million cash balance and the cash flows generated by operations, will be adequate to meet future cash requirements for operations the funding of capital expenditures and acquisitions.
The Corporation had an overall net deferred tax asset of approximately $1.5 million at June 30, 1996. Management believes it is more likely than not the deferred tax asset will be realized through future reversals of existing taxable temporary differences against existing deductible differences and projects of taxable income in future periods.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of Sabreliner Corporation and Notes to Consolidated Financial Statements appear on pages through of this report.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain biographical information with respect to Directors and Executive Officers of the Company.
Name Positions Held Age
F. Holmes Lamoreux Chairman of the Board of 54 Directors, President and Chief Executive Officer
Jerry L. Leath Executive Vice President and 55 Chief Operating Officer
Rodney E. Olson Senior Vice President, Finance 41 and Corporate Development and Chief Financial Officer
Susan S. Aselage Director, Vice President, 41 Secretary and Assistant Treasurer
Bob D. Hanks Vice President - Operations 56
Gene L. Harbula Vice President - Government 49 Marketing and Corporate Communications
Gail B. Johnson Vice President, Assistant 58 Secretary and Administrative Assistant
Arthur H. Fredston Director 67
Mary B. Harmon Director 48
F. Holmes Lamoreux has been Chairman of the Board of Directors, President and Chief Executive Officer of the Company since before 1991. He is also a partner in Wolsey & Co. Mr. Lamoreux is a Director of General Aviation Manufacturers Association and the Civic Entrepreneurs Organization in St. Louis and a Trustee of The Hill School in Pottstown, Pennsylvania.
Jerry L. Leath has served as Executive Vice President and Chief Operating Officer since September, 1994. In June, 1996 Mr. Leath also assumed direct responsibility for Quality Assurance and Environmental and Safety. Prior to rejoining the Company, Mr. Leath served as Vice President, Administration of Figgie International, Inc. since 1992. Prior to that he had served as Vice President, Administration for the Company since before 1991.
Rodney E. Olson has served as Senior Vice President, Finance and Corporate Development and Chief Financial Officer since September, 1994. Mr. Olson joined the Company in June, 1992 as Vice President, Finance/Administration and Chief Financial Officer. Prior to joining the Company, Mr. Olson was a Senior Manager with the accounting firm of Ernst & Young since before 1991.
Susan S. Aselage has been a Director of the Company and its Vice President, Secretary and Assistant Treasurer since before 1991. She is a Trustee of the Aircraft Builders Council.
Bob D. Hanks has served as the Company's Vice President, Operations since June, 1995. In 1993 he also assumed responsibility for Quality Assurance which was assumed by Mr. Leath in June, 1996. Mr. Hanks had served as Vice President, Engineering since before 1991.
Gene L. Harbula has served as Vice President, Government Marketing and Corporate Communications since September, 1995. Mr. Harbula had served as Vice President, Corporate Development from before 1991. In 1993 he also assumed responsibility for Government Marketing.
Gail B. Johnson has been Vice President, Assistant Secretary and Administrative Assistant since September, 1995. Ms. Johnson had been Assistant Secretary and Administrative Assistant from before 1991.
Arthur H. Fredston has been a Director of the Company since before 1991. Mr. Fredston has also been a partner in the law firm Winthrop, Stimson, Putnam & Roberts since before 1991. Mr. Fredston is also a co-trustee of a trust which holds all of the common stock beneficially owned by Mr. Lamoreux. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" below.
Mary B. Harmon became a Director of the Company in 1992. Ms. Harmon is a private investor in Florida, and is Chairman of the Board of Directors and Senior Officer of Thames Pharmacal Co., Inc.
Directors of the Company hold office until the next annual meeting of stockholders or until their successors are duly elected and qualified. All officers of the Company are elected by and serve at the discretion of the Board of Directors of the Company.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to the Chief Executive Officer and the four most highly compensated executive officers of the Company for the year ended June 30, 1996.
Summary Compensation Table Name and Option All Other Principal Position Year Salary Bonus Granted Compensation (1)
F. Holmes Lamoreux 1996 $346,643 $ - - $14,730 Chairman of the 1995 320,000 - - 12,977 Board of Directors, 1994 320,000 - - 18,986 President and Chief Executive Officer
Jerry L. Leath, 1996 184,698 - 5,000 12,551 Executive Vice 1995 139,028 65,000 5,000 73,696(2) President and 1994 - - - - Chief Operating Officer
Rodney E. Olson, 1996 137,583 - 4,500 10,820 Senior Vice 1995 125,833 65,000 3,000 9,092 President, Finance 1994 100,417 - - 10,384 and Corporate Development and Chief Financial Officer
Bob D. Hanks, 1996 106,625 - - 11,427 Vice President, 1995 97,825 40,000 - 44,223(3) Operations 1994 90,900 - - 9,159
Gene L. Harbula, 1996 106,349 - - 7,583 Vice President, 1995 103,257 50,000 - 4,465 Marketing and 1994 101,000 - - 6,194 Corporate Communications
(1) Represents 401(k) plan payments (including matching, profit sharing and discretionary contributions) and term life insurance premiums. For fiscal year 1996, 401(k) plan payments were $10,500 for F. Holmes Lamoreux, $10,500 for Jerry L. Leath, $10,500 for Rodney E. Olson, $7,199 for Gene L. Harbula and $10,264 for Bob D. Hanks. Term life insurance premiums for fiscal year 1995 were $4,230 for F. Holmes Lamoreux, $2,051 for Jerry L. Leath, $320 for Rodney E. Olson, $1,163 for Bob D. Hanks and $384 for Gene L. Harbula. (2) Includes moving allowance of $65,590. (3) Includes moving allowance of $35,780.
Stock Option Plans
The Company currently maintains two stock option plans, pursuant to which options to purchase shares of common stock are outstanding or available for future grant. The plans are administered by the Company's Board of Directors. No member of the Board of Directors receives awards under the plans.
Set forth in the following tables is summary information regarding stock options granted in 1996 and stock options exercised during 1996 and outstanding at June 30, 1996 for each of the executive officers listed in the Summary Compensation Table.
Options Granted in 1996
Individual Grants
Number of % of Total Securities Options Underlying Granted to Exercise Options Employees Price Expiration Name Granted in 1996 ($/Share) Date
F. Holmes Lamoreux - - $ - - Jerry L. Leath 5,000 31% 12.50 7/25/2005 Rodney E. Olson 4,500 28% 12.50 7/25/2005 Bob D. Hanks - - - - Gene L. Harbula - - - -
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
Name 5% ($) 10% ($)
F. Holmes Lamoreux $ - $ - Jerry L. Leath 39,300 99,600 Rodney E. Olson 35,370 89,640 Bob D. Hanks - - Gene L. Harbula - -
Number of Securities Value of Underlying Unexercised In- Unexercised the-Money Options at Options at June 30, 1996 June 30, 1996 Shares (#) ($) Acquired Exercisable Exercisable on Value (E)/ (E)/ Exercise Realized Unexercisable Unexercisable Name (#) ($) (U) (U) F. Holmes Lamoreux - $ - - $ - Jerry L. Leath - - 2,500 E 5,950 E 7,500 U 7,650 U Rodney E. Olson - - 1,500 E 3,570 E 6,000 U 5,100 U Bob D. Hanks - - - - Gene L. Harbula - - - -
Compensation of Directors
Directors of the Company are compensated for their services as directors. Each director of the Company receives $24,000 annually in respect of his or her services as director, and is reimbursed for ordinary and necessary expenses in attending Board meetings.
Employment Contracts and Termination of Employment and Change of Control Arrangements
The Company's Executive Vice President's employment is subject to a three-year agreement which expires September 15, 1997. The agreement survives any merger or consolidation. If termination occurs, for any reason other than cause, after the expiration of the agreement, a minimum of six months' base salary will be paid at the then current base salary.
The Company's Senior Vice President and Vice Presidents (other than Ms. Aselage) have entered into agreements with the Company regarding arrangements in an event of a sale or a merger of the Company (the "Change of Control Arrangements"). In the event of a sale or merger of the Company, each such person will be entitled to a bonus equal to six months of such person's salary at such time. Such bonus will be paid in a lump sum one month after the date of the sale or merger if the individual remains with the Company through the date of sale. An additional bonus amounting to six months salary will be paid to each such person one year from the date of sale if his or her employment continues and such person does not voluntarily terminate employment before the one-year anniversary date. In addition to regular severance compensation, a separation allowance (the "Separation Allowance") will be paid if employment is terminated subsequent to the sale or merger. The Separation Allowance amounts to six months salary, which will be paid over a six month period beginning 30 days after the date of the sale or merger, or upon termination of employment by the buyer of the Company. However, the Separation Allowance will not be paid if a buyer of the Company terminates the employment for cause.
Amounts payable as of June 30, 1996, in scenarios discussed above with respect to officers listed in the Summary Compensation Table would be $226,260 for Mr. Leath, $139,100 for Mr. Olson, $119,000 for Mr. Hanks and $109,200 for Mr. Harbula. The remaining eligible Vice Presidents would be paid an aggregate of $90,000.
Additional Information
The annual salary and bonus allocations for the executive officers set forth in the Summary Compensation Table are determined annually by Mr. Lamoreux in his capacity as the Chief Executive Officer of the Company. The adjustment of Mr. Lamoreux's compensation is determined and approved by the Board of Directors.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and notes thereto set forth certain information with respect to the beneficial ownership of the Company's common stock as of August 31, 1996, by (i) each person who is known to the Company to beneficially own more than 5% of the outstanding shares of common stock of the Company, (ii) each director who owns shares of common stock (iii) for the Chief Executive Officer and the four most highly compensated officers and (iv) all directors and officers as a group. Except as otherwise indicated, each of the stockholders named below has sole voting and investment power with respect to the shares of common stock beneficially owned by him or her.
Name and Address Number of Percent of Shares Total
F. Holmes Lamoreux 462,458(1) 53.1% (1) Sabreliner Corporation Pierre Laclede Center, Suite 1500 7733 Forsyth Blvd. St. Louis, MO 63105-1821
Mary B. Harmon, as 187,873 21.6% personal representative of the estate of Douglas A. Harmon 1447 Tahiti Dr. Sanibel, FL 33957
G.S. Beckwith Gilbert 100,000 11.5% 104 Field Point Road Greenwich, CT 06830
Susan S. Aselage 28,903 3.3%
Jerry L. Leath 6,250 0.7%
Rodney E. Olson 7,000 0.8%
Bob D. Hanks 9,000 1.0%
Gene L. Harbula 5,000 0.6%
Arthur H. Fredston 462,458(1) 53.1% (1) Winthrop, Stimson, Putnam & Roberts One Battery Park Plaza New York, NY 10004-1490
All directors and 814,234(2) 92.2% executive officers as a group
(1) Mr. Lamoreux and Mr. Fredston, a Director of the Company, are voting trustees pursuant to a voting trust agreement relating to the 462,458 shares held by a trust, of which Mr. Lamoreux is the sole beneficiary. The voting trust agreement may be terminated at any time by Mr. Lamoreux, and Mr. Fredston may resign at any time as a voting trustee. Accordingly, Mr. Fredston disclaims beneficial ownership of the 462,458 shares subject to such agreement.
(2) Includes 9,500 exercisable options and 2,000 options exercisable within 60 days of August 31,1996.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company retained the law firm of Winthrop, Stimson, Putnam & Roberts during fiscal 1996 and 1995. Arthur H. Fredston, a director of the Company, is a partner in such firm.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Page Number in this Report (1) Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheets - as of -F3 June 30, 1996 and 1995.
Consolidated Statements of Operations - Years ended June 30, 1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity - Years ended June 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows - Years ended June 30, 1996,1995 and 1994.
Notes to Consoldiated Financial Statements. -F19
(2) Financial Statement Schedules:
No schedules have been filed since either they are not required, they are not applicable, or the required information is shown in the Consolidated Financial Statements or in Notes to Consolidated Financial Statements.
(3) Exhibits:
Exhibit Description Number
3(1) Certificate of Incorporation of Sabreliner Corporation dated June 15, 1983 (Filed with the Registration Statement on Form S-4, Registration Number 33-67422, by Sabreliner Corporation on August 16, 1993.)
3(2) Certificate of Amendment of the Certificate of Incorporation of Sabreliner Corporation dated July 27, 1984 (Filed with the Registration Statement on Form S-4, Registration Number 33- 67422, by Sabreliner Corporation on August 16, 1993.)
3(3) Certificate of Amendment of the Certificate of Incorporation of Sabreliner Corporation dated September 4, 1986 (Filed with the Registration Statement on Form S-4, Registration Number 33-67422, by Sabreliner Corporation on August 16, 1993.)
3(4) By-laws of Sabreliner Corporation (Filed with the Registration Statement on Form S-4, Registration Number 33-67422, by Sabreliner Corporation on August 16, 1993.)
4(1) Indenture dated as of June 25, 1993 between Sabreliner Corporation and IBJ Schroder Bank & Trust Company, as Trustee, with respect to Sabreliner Corporation's 12 1/2% Senior Notes due 2003, Series A, and Sabreliner Corporation's 12 1/2% Senior Notes due 2003, Series B (Filed with the Registration Statement on Form S-4, Registration Number 33-67422, by Sabreliner Corporation on August 16, 1993.)
4(2) Purchase Agreement dated as of June 18, 1993 between Sabreliner Corporation and each Purchaser referred to therein relating to the Units referred to therein, in the form executed by each Purchaser (Filed with the Registration Statement on Form S-4, Registration Number 3367422, by Sabreliner Corporation on August 16, 1993.)
4(3) Registration Rights Agreement dated as of June 25, 1993 among Sabreliner Corporation and the purchasers of Sabreliner Corporation's 12 1/2% Senior Notes due 2003, Series A (Filed with the Registration Statement on Form S-4, Registration Number 33-67422, by Sabreliner Corporation on August 16, 1993.)
4(4) Warrant Agreement dated as of June 25, 1993 between Sabreliner Corporation and IBJ Schroder Bank & Trust Company, as Warrant Agent, with respect to Sabreliner Corporation's Warrants to purchase 1.1111 shares of its Common Stock (Filed with the Registration Statement on Form S-4, Registration Number 33-67422, by Sabreliner Corporation on August 16, 1993.)
4(5) Financing Agreement, dated as of February 13, 1995, between Star Bank, National Association and Sabreliner Corporation and its subsidiaries, Midcoast Aviation, Inc. and Midcoast-Little Rock (filed on Form 10Q, Registration Number 33-67422, by Sabreliner Corporation on February 14, 1995)
4(6) First Amendment to Financing Agreement between Star Bank, National Association and Sabreliner Corporation, Midcoast Aviation, Inc., and Midcoast Little Rock, Inc. dated as of November 10, 1995 (filed on Form 10-Q, Registration Number 33- 67422, by Sabreliner Corporation on November 14, 1995)
4(7) Second Amendment to Financing Agreement between Star Bank, National Association and Sabreliner Corporation, Midcoast Aviation, Inc., Midcoast-Little Rock, Inc. and SabreTech, Inc. dated as of January 26,1996 (filed on Form 10-Q, Registration Number 33-67422, by Sabreliner Corporation on February 14, 1996)
9 Voting Trust Agreement dated March 25, 1993, between F. Holmes Lamoreux and Arthur H. Fredston, as voting trustee, relating to 462,458 shares of Sabreliner Corporation's Common Stock held by a trust of which Mr. Lamoreux is the sole beneficiary (Filed with the Registration Statement on Form S-4, Registration Number 33-67422, by Sabreliner Corporation on August 16, 1993.)
10(1) Undergraduate Naval Flight Officers Contract with the United States Navy awarded to Sabreliner Corporation on March 6, 1990 (Filed with the Registration Statement on Form S-4, Registration Number 33-67422, by Sabreliner Corporation on August 16, 1993.)
10(2) C-20 Contractor Logistics Support Contract with the United States Air Force awarded to Sabreliner Corporation July 21, 1995 (filed with Form 10-K Registration Number 33-67422, by Sabreliner Corporation on September 28, 1995)
10(3) Sublease Agreement dated June 25, 1990 between Pegasus I, L.P., as sublessor, and Sabreliner Corporation as sublessee (Filed with Registration Statement on Form 8-4, Registration Number 33-67422, by Sabreliner Corporation on August 16, 1993.)
10(4) Lease Agreement dated December 17, 1986, as amended February 7, 1990, June 25, 1990 and April 17, 1995 between Sabreliner Corporation, as lessee, and the City of Perryville, Missouri, as lessor.
10(5) Lease Agreement dated July 28, 1992, between Midcoast Aviation, Inc., as lessee, and the Bi-State Development Agency of the Missouri Illinois Metropolitan District, as lessor, for two parcels east of hangar 9 at St. Louis Downtown- Parks Airport (filed with Form 10-K Registration Number 3367422, by Sabreliner Corporation on September 28, 1995)
10(6) Lease Agreement dated March 23, 1984, as amended April 20, 1990, and July 2, 1990, between Midcoast Aviation, Inc., as lessee, and the Bi-State Development Agency of the Missouri-Illinois Metropolitan District, as lessor, for 8.33 acres of land located at St. Louis Downtown-Parks Airport (filed with Form 10-K Registration Number 33-67422, by Sabreliner Corporation on September 28, 1995)
10(7) Lease Agreement dated June 1, 1984,between Midcoast Aviation, Inc., as lessee, and the Bi-State Development Agency of the Missouri Illinois Metropolitan District, as lessor, for hangar 12 located at St. Louis Downtown Parks Airport (filed with Form 10-K Registration Number 33-67422, by Sabreliner Corporation on September 28, 1995)
10(8) Lease Agreement dated November 7, 1979, as amended February 9, 1981, April 20, 1990, July 1, 1990, and November 22, 1994, between Midcoast Aviation, Inc., as lessee, and the Bi-State Development Agency of the Missouri-Illinois Metropolitan District, as lessor, for hangar 7 land and building located at St. Louis Downtown Parks Airport (filed with Form 10-K Registration Number 33-67422, by Sabreliner Corporation on September 28, 1995)
10(9) Contract for Provision of Line Service dated August 1, 1988 as amended May 8, 1991, between Midcoast Aviation, Inc., as operator, and the Bi-State Development Agency of the Missouri Illinois Metropolitan District, as agency, located at St. Louis Downtown-Parks Airport (filed with Form 10-K Registration Number 33 67422, by Sabreliner Corporation on September 28, 1995)
10(10) Terminal Building Lease Agreement, dated December 4, 1991, between Midcoast Aviation, Inc., as lessee, and the BiState Development Agency of the Missouri Illinois Metropolitan District, as lessor, located at St. Louis DowntownParks Airport (filed with Form 10-K Registration Number 3367422, by Sabreliner Corporation on September 28, 1995)
10(11) Lease Agreement dated March 1, 1985, as amended May 16, 1988, June 5, 1989, July 15, 1992, September 28, 1992 and November 30, 1994, between DynAir Tech, Inc., as lessee, and City of Phoenix, as lessor, located at Phoenix Sky Harbor International Airport (filed with Form 10-K Registration Number 33-67422, by Sabreliner Corporation on September 28, 1995)
10(12) Stock Purchase Agreement Between Sabreliner Corporation and Trans World Airlines, Inc. dated as of October 31, 1994 (filed on Form 10-Q, Registration Number 33 67422, by Sabreliner Corporation on November 14, 1994)
10(13) Stock Purchase Agreement Among Sabreliner Corporation, DynCorp and DynCorp Aviation Services, Ind. dated as of June 30, 1995 (filed on Form 8-K, Registration Number 33-67422, by Sabreliner Corporation on July 14, 1995)
10(14) Employment Agreement dated August 18, 1994 between Sabreliner Corporation and Jerry L. Leath (filed on Form 10-K, Registration Number 33 67422, by Sabreliner Corporation on September 27, 1994)
10(15) 1994 Stock Option Plan of Sabreliner Corporation (filed with Form 10-K Registration Number 33-67422, by Sabreliner Corporation on September 28, 1995)
21 Subsidiaries of Registrant
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended June 30, 1996.
(c) Exhibits Filed
A listing of exhibits required to be filed is given in the Sequential Exhibit Index.
(d) Financial Schedules
The information regarding Financial Statement Schedules in this item is provided in Item 14 (a) 1 and 2.
Report of Independent Auditors
The Board of Directors and Stockholders Sabreliner Corporation
We have audited the accompanying consolidated balance sheets of Sabreliner Corporation as of June 30, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of Sabreliner Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sabreliner Corporation at June 30, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1996 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
August 28, 1996 St. Louis, Missouri
Sabreliner Corporation
Consolidated Balance Sheets
June 30 1996 1995 (In Thousands Except Share and Per Share Data) Assets Current assets: Cash and cash equivalents $12,254 $ 9,879 Accounts receivable: Commercial (net of allowances of $962 in 1996 and $1,089 in 1995) 21,619 16,416 Government 7,733 7,960 Inventories 24,669 25,769 Contracts in process (net of customer advances and progress payments of $10,940 in 1996 and $10,373 in 1995) 11,917 9,474 Income taxes receivable 1,927 647 Deferred tax asset 3,310 2,941 Prepaid and other assets 1,897 1,193
Total current assets 85,326 74,279
Property and equipment (net of accumulated depreciation of $96,235 in 1996 and $86,856 in 1995) 48,311 54,042
Goodwill (net of amortization of $239 in 1996 and $98 in 1995) 4,984 1,958 Deferred financing costs and other assets 5,997 5,576
Total assets $144,618 $135,855
Sabreliner Corporation
Consolidated Balance Sheets
June 30 1996 1995 (In Thousands Except Share and Per Share Data)
Liabilities and stockholders' equity Current liabilities: Accounts payable $20,152 $12,324 Accrued compensation 6,389 6,155 Customer deposits 238 1,338 Other accrued liabilities 4,706 5,734 Deferred contract revenue and cost - 904 Royalties payable 2,300 - Accrued interest expense 1,959 1,976 Current portion of long-term debt 916 448 and capital leases
Total current liabilities 36,660 28,879
Long-term debt and capital leases 93,999 92,766 Other long-term liabilities 2,000 4,041 Deferred income taxes 1,823 316
Stockholders' equity (shares and par value as stated): Common stock, $.01 par value, 2,000,000 shares authorized; 955,750 shares issued 10 10 Additional paid-in capital 2,056 2,056 Retained earnings 9,077 8,707
11,143 10,773 Less treasury stock, at cost 84,916 shares in 1996: 77,916 shares in 1995) (1,007) (920)
Total stockholders' equity 10,136 9,853 Total liabilities and stockholders' equity $144,618 $135,855
See accompanying notes.
Sabreliner Corporation Consolidated Statements of Operations
Year ended June 30 1996 1995 1994 (In Thousands Except Share and Per Share Data)
Net revenue $205,633 $120,908 $103,786 Cost of revenue 171,045 91,867 79,626 Gross margin 34,588 29,041 24,160
Selling, general and administrative expense 22,956 17,251 14,655
Operating income 11,632 11,790 9,505
Other income (expense): Interest (11,789) (11,123) (11,459) Litigation settlement - _ (7,613) Other 877 481 33 (10,912) (10,642) (19,039) Earnings (loss) before income taxes 720 1,148 (9,534)
Income tax (expense) benefit (350) (350) 3,651
Net income (loss) $ 370 $ 798 $(5,883)
Earnings (loss) per share $0.42 $ 0.91 $ (6.66)
Average number of common and common equivalent shares outstanding 872,491 881,084 882,834
See accompanying notes.
Sabreliner Corporation Consolidated Statements of Stockholders'Equity June 30, 1996
Number of Shares Amounts (In Thousands) Common Treasury Common Paid-In Retained Treasury Stock Stock Stock Capital Earnings Stock
Balances 955,750 114,116 $ 10 $1,933 $13,799 $(1,119) at June 30, 1993
Treasury stock sold pursuant to Stock Option Plan - (41,200) - 123 (7) 260
Net Loss - - - - (5,883) -
Balances at June 30, 1994 955,750 72,916 10 2,056 7,909 (859)
Treasury stock purchased - 5,000 - - - (61)
Net Income - - - - 798 -
Balances at June 30, 1995 955,750 77,916 10 2,056 8,707 (920)
Treasury Stock purchased - 7,000 - - - (87)
Net Income - - - - 370 -
Balances at June 30, 1996 955,750 84,916 $ 10 $2,056 $ 9,077 $(1,007)
See accompanying notes.
Sabreliner Corporation Consolidated Statements of Cash Flows
Year ended June 30 1996 1995 1994 (In Thousands Except Share and Per Share Data) Operating Activities Net income (loss) $ 370 $ 798 $(5,883) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and 11,888 23,972 22,099 amortization Changes in assets and liabilities: Accounts receivable (4,183) 12,089 (8,421) Inventories 1,399 (1,524) 7,660 Contracts in process (2,041) (2,704) (2,126) Prepaid expenses and other assets 545 (1,033) (27) Accounts payable 6,183 (6,110) 2,727 Customer deposits (1,248) (40) 13
Deferred contract revenue and cost (904) (3,806) (3,111) Accrued liabilities (1,600) (1,484) 1,508 Accrued income taxes 173 (120) (3,110)
Total adjustments 10,212 19,240 17,212
Net cash provided by 10,582 20,038 11,329 operating activities
Investing activities Capitalized expenditures (4,346) (3,788) (5,568) Acquisitions, net of cash (3,008) (28,069) - acquired Net cash used in investing (7,354) (31,857) (5,568) activities
Financing activities
Dividend payment - - (9,932) Principal payments on long- (600) (170) (60) term borrowings Debt issuance costs (166) (347) - Sale of treasury stock - - 375 Purchase of treasury stock (87) (61) - Net cash used by financing activities (853) (578) (9,617) Increase (decrease) in cash 2,375 (12,397) (3,856) Cash and cash equivalents at 9,879 22,276 26,132 beginning of year Cash and cash equivalents at $12,254 $ 9,879 $22,276 end of year
Supplemental cash flow information Interest paid $11,775 $11,794 $ 9,454 Taxes paid $ 63 $ 1,970 $ 1,043
Capitalized expenditures and debt proceeds shown in 1995 exclude capital leases of $1.2 million.
See accompanying notes.
1. Nature of Business
Sabreliner is a diversified aerospace company providing services in airframe maintenance and modification, gas turbine engine overhaul and repair, logistics support and other aerospace products and services for commercial, corporate and government aviation markets. During fiscal 1996, 40% of the Company's revenue was provided by commercial aviation, 33% was provided by corporate aviation and the remaining 27% was provided by the government aviation business.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the assets, liabilities and operations of Sabreliner Corporation and its wholly owned subsidiaries, Midcoast Aviation, Inc., SabreTech, Inc. and Turbotech Repairs, Inc. Intercompany items and transactions have been eliminated in the preparation of these statements, including unrealized intercompany profits and losses.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Earnings reported for certain major long-term contracts are predicated upon estimates of probable outcome by management. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of short-term highly liquid investments purchased with a maturity of three months or less.
Inventories
Corporate aviation inventories are valued at the lower of average cost or market. Inventory costs include the appropriate elements of material, labor, and manufacturing overhead. Commercial aviation inventories are valued at the lower of first-in, first-out (FIFO) cost or market. Provision is made for excess aircraft parts based upon historical usage and known future requirements. Obsolete and unusable materials are physically removed from inventory stores in accordance with FAA guidelines and periodic condition inspections.
In accordance with trade practice, aircraft parts inventory is included in current assets. In certain specific instances, some portion of the aircraft parts are carried for estimated service requirements that exceed one year.
Revenue Recognition
Revenues on contracts are recognized under the percentage of completion method. Progress is based on contract costs incurred to date compared to total estimated contract costs or man-hours incurred to date compared to total estimated man hours. Earnings expectations are based upon estimates of contract values and costs. Contracts in process are reviewed on a periodic basis with adjustments to revenues and earnings made in the current accounting period based upon revisions in contract value and estimated costs at completion. Provisions for estimated losses on contracts are recorded when identified.
Contract payments received in advance of services to be provided are deferred and recognized over the term of the contract as the services are performed. Service contracts include training services and on-site contractor spares, maintenance and technical support.
Contracts in Process
Contracts in process represent accumulated costs and estimated earnings thereon based upon the percentage of completion of undelivered customer orders. The contracts in process balance reflects the actual costs incurred, net of applicable customer advance payments, and include: direct engineering, production, tooling, applicable overhead and other costs (excluding general and administrative costs which are charged against income as incurred). Contracts in process do not include any significant amounts of costs, claims or similar items subject to uncertainty concerning their realization. Title to or a security interest in certain items included in contracts in process is vested in the U.S. Government by reason of progress payment provisions of related contracts. In accordance with industry standards, contracts in process related to long-term contracts are classified as current assets even though a portion may not be realized within one year.
Property and Equipment
Property and equipment are stated at acquisition cost. Significant additions or improvements which extend asset lives are capitalized; repair and maintenance costs are expensed as incurred. Capital leases are recorded at the lower of fair market value or the present value of future minimum lease payments. These leases are amortized over the life of the lease. Leasehold improvements are amortized over the term of the respective lease or the estimated useful life of the improvement, whichever is shorter. Buildings and equipment are depreciated over the estimated useful life of each asset. Service contract assets composed of retrofitted aircraft, flight simulators and engines utilized on the UNFO contract, less salvage value, are depreciated over the basic contract life (50 months), exclusive of option periods. All depreciable property and equipment are depreciated using the straight-line method.
Goodwill
The Company has recorded a value for goodwill arising out of purchase cost in excess of fair value of tangible assets acquired in the purchase of Midcoast Aviation, Inc. and SabreTech, Inc. Goodwill is amortized on a straight-line basis over 15 years. In accordance with FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to Be Disposed Of," the Company records impairment losses on such long-lived assets when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets.
Income Taxes
Income tax expense is based upon reported income and expense, adjusted for permanent differences between income reported for financial statement purposes and taxable income. Deferred income taxes are provided using the liability method for items of revenue and expense recognized in different periods for financial and income tax reporting. The Company adopted the provisions of FAS 109 "Accounting for Income Taxes" during fiscal 1994 without any material effect to the Company's financial position.
Earnings Per Share
Earnings per share of common stock are calculated by dividing net earnings by the weighted average number of common shares outstanding during each year plus, when their effect is dilutive, common stock equivalents consisting of certain shares subject to stock options and warrants.
3. Acquisitions
On May 23, 1996, the Company acquired the tooling, inventories and license for the AlliedSignal TFE 731 engine heavy maintenance product line from UNC-Airwork for $2.0 million. Payments for the tooling and license of $0.5 million were made during fiscal 1996; remaining amounts owed for inventories of $1.5 million are subject to a financing agreement payable on the first anniversary of the purchase date. No goodwill was recorded. Revenues recorded by UNCAirwork in the last twelve months for this product line were in excess of $10 million.
On June 27, 1996, the company paid $1.0 million to acquire 100% of the outstanding stock and retire outstanding debt owed investors of Turbotech Repairs, Inc., an engine component repair and authorized maintenance center for certain engine manufacturers. During fiscal 1997, the Company will be required to make full payment on certain revolving term and trade credit facilities initiated by Turbotech prior to the acquisition of $1.6 million, resulting in a total purchase price of $2.6, million exclusive of mortgage debt kept in place of $1.4 million. Total assets as of the date of acquisition were $4.6 million. No goodwill was recorded. Revenues in the twelve months prior to acquisition were $5.9 million.
On June 30, 1995, the Company acquired the DynAir Companies, now known as SabreTech, Inc. A base purchase price of $12.8 million was paid during fiscal 1995, subject to an adjustment in working capital asset values and continuing purchase costs of $1.5 million, paid in fiscal 1996. In addition to this base purchase price, the purchase price includes contingent payments of 10% of SabreTech's annual revenues in excess of $60 million reported for the Company's fiscal years 1996 and 1997. The first installment of the contingent payments, estimated at $2.3 million, has been recorded as a liability on the June 30, 1996 balance sheet payable to DynCorp in fiscal year 1997. The second and final installment of contingent payments, due in fiscal 1998, will be recorded upon determination of final fiscal 1997 revenues as an increase to the purchase price of SabreTech. Goodwill arising out of this transaction has been recorded at $3.4 million. Revenues provided by the SabreTech acquisition during fiscal 1996 were $81.8 million.
On November 2, 1994, the Company acquired Midcoast Aviation, Inc. for approximately $20 million. Assets as of the date of acquisition were approximately $25 million, of which $2.0 million represented goodwill. Revenues provided by the Midcoast acquisition for fiscal 1995 and 1996 were $25.0 million and $43.4 million, respectively.
4. Significant Customers
The Company sells its products and services to the U.S. Government and to foreign and domestic private individuals, corporations and governments. The Company performs periodic credit evaluations of its customers' financial condition and the results of these evaluations determine the amount of prepayment, or other security, such as letters of credit, which may be required. The June 30, 1996, commercial receivable balance includes $2,972 due from ValuJet. The Company expects full collection of this receivable within the next year.
Foreign revenues amounted to approximately $14,279 in 1996, $5,945 in 1995 and $6,800 in 1994.
Contract revenues from U.S. Government agencies amounted to approximately $55,600 in 1996, $73,600 in 1995 and $74,399 in 1994. The largest of these contracts is the Undergraduate Naval Flight Officer Training contract (UNFO). Contract revenues for UNFO accounted for approximately $22,790 in 1996, $44,300 in 1995 and $46,800 in 1994.
During fiscal 1996, McDonnell Douglas accounted for approximately $21,330 in commercial aviation revenues.
5. Inventories
Inventories consist of the following categories:
June 30 1996 1995 Aircraft parts $22,105 $21,515 Assembly parts in process 1,419 1,130 Aircraft held for resale 1,145 3,124 $24,669 $25,769
6. Property and Equipment
The major categories of property and equipment consist of the following:
June 30 1996 1995 Land and buildings $ 4,053 $ 2,500 Leasehold improvements 17,299 17,768 Machinery and equipment 11,539 12,011 Tools, dies and jigs 4,243 4,108 Furniture and other equipment 4,797 3,216 Service contract assets 99,118 98,801
141,049 138,404 Less accumulated depreciation (96,235) (86,856)
44,814 51,548
Construction-in-progress 3,497 2,494
$48,311 $54,042
7. Long-Term Debt and Capital Leases
Long-term debt and capital leases consist of the following:
June 30 1996 1995 12.5% Senior Notes Due in 2003 $88,740 $88,560 Revolving credit - - Mortgage notes 4,054 2,825 Capital leases 1,189 1,179 Other 932 650 94,915 93,214 Less current portion (916) (448)
$93,999 $92,766
Senior Notes
On June 28, 1993, the Company issued $90,000 of 12.5 percent Senior Notes (Notes) due April 15, 2003, and detachable Warrants entitling Warrant holders to purchase an aggregate of 94,444 shares of Common Stock. The net proceeds of $89,900 were allocated on a fair value basis between long term debt and Warrants.
The Warrants have an exercise price of $25.00 per share, and are exercisable on or after June 25, 1998, on or after the occurrence of a Triggering Event, as defined in the Warrant Agreement governing the Warrants, or in connection with the voluntary or involuntary dissolution of the Company.
The Notes, which are publicly registered, are senior, unsecured obligations of the Company and rank "pari passu" in right of payment with all other existing and future unsecured senior indebtedness of the Company, and are senior in right of payment to all existing and future subordinated obligations. Interest on the Notes is payable semi- annually.
The Indenture under which the Notes were issued contains several covenants, including interest coverage and the incurrence of additional debt. Should the Company not meet the annually measured Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) coverage ratio as identified in the Indenture, the Company will be required to offer to repurchase ten percent of the outstanding Notes. The Indenture also restricts the payment of dividends by limiting the percentage of consolidated net income eligible for dividends and requiring the EBITDA coverage ratio to be at least 2.5. In the event of a Change of Control, as defined in the Indenture, the Company is required to offer to purchase all outstanding Notes at a purchase price equal to 101 percent of the principal amount thereof plus accrued interest to the Change of Control purchase date.
The Notes are not redeemable at the option of the Company prior to May 1, 1998. On or after that date, the Notes are redeemable at the option of the Company, in whole or in part any time, at a premium which declines annually.
Revolving Credit
The Company and its subsidiaries, Midcoast Aviation, Inc. and Midcoast-Little Rock, entered into a financing agreement with Star Bank of Cincinnati, Ohio, to establish a secured revolving credit and letter of credit facility in 1995. The facility provides a three-year renewable line of credit, secured by inventory, accounts receivable and general intangibles. During fiscal 1996, the credit facility was amended to include SabreTech and increase borrowing limits. The Company has available, on a discretionary basis, the lesser of $35 million or the amount determined under a borrowing base formula. Included in this credit agreement are covenants which require the Company to maintain certain interest coverage, equity values, and other performance criteria throughout the term of the financing agreement.
Mortgage Notes
The Company kept in place the mortgage note owed to Jefferson Bank and Trust as part of its acquisition of Midcoast Aviation, Inc. The mortgage is secured by leasehold improvements at the St. Louis Downtown Parks facility. The interest rate on this note is fixed for three year periods throughout the note's life, using one-half percent over the bank's prime rate. The current rate, until the next adjusting period, starting January, 1997, is 6.5%. The monthly payment, fixed for a term coinciding with interest rate redetermination, is $31. The Note matures on December 26, 1999.
As part of its acquisition of Turbotech Repairs, Inc., the Company kept in place two mortgage notes totaling $1.4 million, secured by real property and buildings. The largest of these notes is owed to Union Bank, with principal value of $782. The interest rate on the note is equal to the bank's CD rate plus two percent. The principal portion of the monthly payment is a fixed amount and the Note matures on March 1, 2005. The remaining mortgage is owed to the Small Business Administration. The interest rate on this note is fixed at 7.7% per annum and the note matures on June 1, 2015. Combined monthly payments made under these mortgages, estimated under current interest rates are $13.
Capital Leases
During fiscal year 1995, the Company entered into capital leases for both the purchase of a mainframe information system and transportation equipment. As of June 30, 1996, these assets (included in property and equipment) totaled $1,031, net of accumulated depreciation of $11. During fiscal year 1996, the Company kept in place $253 in capital equipment leases as a result of the acquisition of Turbotech Repairs, Inc. Annual lease payments under capital leases for the years ended June 30, 1997 through 2001, are $406, $419, $404, $314 and $131, respectively.
Aggregate maturities of long-term borrowings and capital leases are as follows:
1997 $ 916 1998 861 1999 688 2000 546 2001 395 Thereafter 91,509
$94,915
8. Lease Commitments, Rent Expense and Rental Revenues
The Company has lease commitments (both income and expense) expiring at various dates, principally for real property and office equipment. Income leases are primarily subleases and offset lease commitments.
Future minimum lease payments and rental revenues under noncancellable, operating leases are as follows:
Total Total Lease Income Net Payments Leases Commitments
Years Ended June 30 1997 $ 4,508 $(2,379) $ 2,129 1998 4,355 (959) 3,396 1999 4,212 (219) 3,993 2000 3,707 (13) 3,694 2001 and thereafter 18,766 (50) 18,716
Total $35,548 $(3,620) $31,928
Rent expense for operating leases totaled $6,179 in 1996, $1,726 in 1995, and $1,646 in 1994. Rental revenue totaled $3,493 in 1996, $1,362 in 1995, and $1,141 in 1994.
9. Benefit Plans
Pensions
The Company has three hourly pension plans covering substantially all non-salaried union employees. Pension benefits are based on the employee's length of service and defined benefit rates. Normal service costs are funded currently using the projected unit credit method.
Net periodic pension expense for 1996, 1995, and 1994 is comprised of the following:
1996 1995 1994
Service cost $192 $185 $207 Interest cost on projected 387 340 312 benefit obligation Return on plan assets (842) (860) (35) Amortization of unrecognized net assets and deferral 348 430 (414)
Net periodic pension expense $ 85 $ 95 $ 70
The following table sets forth the funded status of these three plans: 1996 1995
Plan assets at fair value, primarily $6,272 $5,526 stock and bond funds Actuarial present value of benefit obligations: Vested 4,570 4,060 Nonvested 766 636 Projected benefit obligation 5,336 4,696
Plan assets in excess of projected 936 830 benefit obligation
Unrecognized net (gain) or loss from past experience different from that assumed and effects of changes in (702) (419) assumptions
Prior service cost not yet recognized in net periodic pension costs 374 241
Unrecognized net asset at June 30, 1987 being recognized over 12 years (129) (188)
Prepaid pension cost $ 479 $ 464
The discount rate used to develop net pension expense was 8.0 percent in 1996, 8.0 percent in 1995 and 8.25 percent in 1994. The expected long-term rate of return on retirement plan assets for 1996, 1995 and 1994 was 8.7 percent, 8.6 percent and 8.8 percent, respectively.
Savings Plans
The Company maintains savings plans for salaried personnel and nonunion hourly employees. Under the provisions of one of the savings plans the Company makes contributions based upon employee voluntary contributions and eligible compensation. The Company's cost was $678 in 1996, $662 in 1995 and $702 in 1994.
Stock Option Plans
The Company has two incentive stock option plans for officers and key employees. A summary of stock option activity follows:
Per Share Data 1996 1995 1994
Outstanding at beginning 10,900 2,400 43,600 of year Granted 16,000 13,500 - Exercised - - (41,200) Canceled (1,500) (5,000) -
Outstanding at end of 25,400 10,900 2,400 year
As of June 30, 1996, 5,650 options are exercisable at prices ranging from $10.46 to $22.64 per share. The remaining 19,750 options, which were granted at exercise prices ranging from $10.46 per share to $12.84 per share become exercisable as follows: 9,875 in 1997; 6,000 in 1998 and 3,875 in 1999. The plans are authorized to grant up to 175,500 additional options.
FAS 123, "Accounting for Stock-Based Compensation," which established financial accounting and reporting standards for stock-based employee compensation plans, was issued in October, 1995 and is effective for years beginning after December 15, 1995. The Company will comply with this standard in fiscal year 1997. Alternatives available within the standard are being evaluated to determine the method to be adopted.
Postretirement Benefits
A select group of retired employees are provided medical insurance on a continuing basis. The plan is contributory, with retiree contributions adjusted periodically, and contains other cost-sharing features, such as deductibles and co-insurance. The Company's policy is to fund the cost of medical benefits as incurred. The accrued postretirement benefit cost as of June 30, 1996 and 1995, was $1.1 million.
The continuing cost of covered health care benefits is expected to increase 12 percent each year through 2000, with increases expected to gradually decrease to 6 percent by the year 2006 and remain constant thereafter. The effect of a one percentage point increase in the assumed health care trend rate in the projected liability at June 30, 1996 is $88. The discount rate used to determine the accumulated postretirement benefit obligations as of June 30, 1996 was 8.25 percent.
10. Income Taxes
Components of the provision for income taxes attributable to continuing operations are as follows:
1996 1995 1994
Current $1,098 $(667) $ 860 Deferred (1,448) 317 2,791
Total (expense) benefit $(350 $(350) $3,651
The reconciliation of income tax attributable to continuing operations computed at the U.S. federal statutory tax rates to the effective income tax rates for 1996, 1995 and 1994 is as follows:
1996 1995 1994
Expected statutory rate 34.00% 34.00% (34.00)% State income tax 4.10% 1.78% (2.02)% Goodwill 6.60% (5.80)% (1.05)% Foreign sales corporation (6.00)% (5.00)% (.26)% Nondeductible expense 11.80% 4.10% .10 % Other (1.90)% 1.48% (1.07)%
Effective rate 48.60% 30.56% (38.30)%
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities are as follows: 1996 1995 Deferred Tax Assets: AMT credits $2,237 $ 1,772 Inventory reserves and UNICAP 1,777 1,503 Deferred contract revenue and cost - 369 Retirement benefits - FAS 106 355 403 Vacation accrual 409 656 Other 770 1,229 Total deferred tax assets $5,548 $5,932
Deferred tax liabilities: Tax over book depreciation and $4,061 $3,130 accelerated contract costs Other - 189 Total deferred tax liabilities 4,061 3,319 Net deferred tax asset $1,487 $2,613
No valuation allowance is considered necessary for the remaining $1,487 million net deferred tax asset as management believes it is more likely than not that the deferred tax asset will be realized through future reversals of existing taxable temporary differences against existing deductible differences and projections of income on future periods.
The Company is subject to the alternative minimum tax (AMT) system for income tax purposes. The Company began fiscal 1996 with $1,772 in AMT credit carryforwards, which carry forward indefinitely. An additional AMT credit carryforward was generated in 1996, resulting in a total AMT credit carryforward of $2,237 at June 30, 1996. In 1995, the regular tax expense exceeded the AMT expense, resulting in utilization of AMT credits of approximately $1,600.
11. Litigation and Contingencies
On May 11, 1996, ValuJet Flight 592 from Miami, carrying 110 passengers and crew crashed into the Florida Everglades. Prior to take-off, employees of SabreTech's Miami facility returned to ValuJet various company materials, including five boxes containing oxygen generators, which, after consultation with ValuJet's flight crew, were loaded into the cargo bay of Flight 592 by ValuJet employees. Although the cause of the crash has not been officially determined by the National Transportation Safety Board (NTSB), SabreTech's actions associated with Flight 592 have been included in the NTSB investigation. The Federal Aviation Administration (FAA) is also conducting an investigation into the circumstances surrounding the ValuJet crash and has sought information from SabreTech and various of its employees in connection therewith. In addition, SabreTech is one of several subjects of an investigation being conducted by a federal grand jury in conjunction with the United States Attorney for the Southern District of Florida. The Company cooperated fully throughout these investigations and is continuing to do so. Public hearings concerning the crash of Flight 592 are expected to be held in November, 1996.
SabreTech, ValuJet and others have been named as defendants in numerous wrongful death actions that have been filed by families of the victims. Additional wrongful death actions are expected to be filed. The legal cost of defending against these civil actions and any possible claim settlements will be funded by the Company's insurance policies. Management believes coverage is adequate to provide for such legal actions. SabreTech, ValuJet and others also have been named as defendants in two class action lawsuits brought by stockholders of ValuJet. The Company believes that it has meritorious defenses in the two actions.
Costs associated with this incident, such as media relations, incremental professional services, legal fees and other costs related to the various investigations and other lawsuits, of approximately $0.7 million were incurred in the Company's fourth quarter. Additional costs incurred in subsequent periods will be recognized as incurred. While the ultimate outcome of the legal actions related to the ValuJet Flight 592 crash and the length of time necessary to resolve all the outstanding issues cannot be determined at this time, the Company believes the continuing effects of the investigations and related lawsuits will not have material adverse effect upon the results of operations or financial condition of the Company.
The Company has been subject to government inquiry regarding an alleged environmental incident that may have occurred at the Perryville facility prior to the flooding of the facility in July, 1993. Requests for documents concerning this matter were received during fiscal 1996. All requests for documents have been complied with or are in the process of resolution and no other significant actions or developments have occurred during fiscal 1996.
In addition to the litigation discussed above, the Company is subject to other legal proceedings and claims arising in the ordinary course of its business. Although there can be no assurance as to the outcome of such litigation, it is the opinion of management (based upon the advice of legal counsel) that all such actions or proceedings are covered by insurance or will be resolved without material effect on the Company's financial position or results of operations.
On December 30, 1993, the Company entered into a settlement agreement with Hannon-Armstrong to resolve litigation arising out of proposed financing in support of a Navy contract awarded to Sabreliner. The settlement provided for the payment of $7,613 to Hannon-Armstrong. Legal costs incurred by the Company associated with this litigation in fiscal year 1994 of $1,883 is included in general and administrative expense.
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, as of September 27, 1996.
SABRELINER CORPORATION
By: /s/ F. Holmes Lamoreux F. Holmes Lamoreux Chairman of the Board of Directors, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ F. Holmes Lamoreux Chairman of the September 27, 1996 F. Holmes Lamoreux Board of Directors, President and Chief Executive Officer
/s/ Jerry L. Leath Executive Vice September 27, 1996 Jerry L. Leath President and Chief Operating Officer
/s/ Rodney E. Olson Senior Vice September 27, 1996 Rodney E. Olson President, Finance and Corporate Development and Chief Financial Officer (principal financial and accounting officer)
/s/ Susan S. Aselage Vice President, September 27, 1996 Susan S. Aselage Secretary and Assistant Treasurer, and Director
/s/ Arthur H. Fredston Director September 27, 1996 Arthur H. Fredston
/s/ Mary B. Harmon Director September 27, 1996 Mary B. Harmon
SEQUENTIAL EXHIBIT INDEX
The following exhibits are filed herewith:
Exhibit Number Description
10(4) Lease Agreement dated December 17, 1986 as amended February 7, 1990, June 25, 1990 and April 17, 1995 between Sabreliner Corporation, as lessee, and the City of Perryville, Missouri, as lessor.
21 Subsidiaries of Registrant