SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended Commission File No.
March 31, 1997 33-67422
SABRELINER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 43-1289921
(State of Incorporation) (I.R.S. Employer
Identification No.)
Pierre Laclede Center
Suite 1500
7733 Forsyth Blvd.
St. Louis Missouri 63105-1821
(314) 863-6880
(Name, address, including ZIP Code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [ ]
The number of shares of the Company's common stock outstanding on
April 30, 1997 was 870,934.
PART I - FINANCIAL INFORMATION
Condensed Financial Statements
Sabreliner Corporation
Consolidated Balance Sheets
(Dollars in Thousands)
Unaudited Audited
March 31, June 30,
1997 1996
Assets
Current assets:
Cash $ 491 $ 12,254
Accounts receivable (net
allowances of $880 and $962, 28,843 29,352
respectively)
Inventories 31,204 24,669
Contracts in process (net of
customer advances and progress
payments of $14,719 and 17,586 11,917
$10,940, respectively)
Prepaid and other current 10,777 7,134
assets
Total current assets 88,901 85,326
Property and equipment, net 49,449 48,311
Goodwill (net of amortization of
$498 and $239, respectively) 4,725 4,984
Deferred financing costs and 8,027 5,997
other assets
Total assets $151,102 $144,618
Liabilities and stockholders'
equity
Current liabilities:
Accounts payable $ 21,803 $ 20,152
Accrued compensation 6,062 6,389
Other accrued liabilities 5,221 4,706
Royalties payable 122 2,300
Accrued interest expense 4,794 1,959
Other current liabilities 3,762 1,154
Total current liabilities 41,764 36,660
Long-term debt and capital 94,941 93,999
leases
Revolving credit facility 4,290 -
Other long-term liabilities 3,816 3,823
Stockholders' equity:
Common stock and paid-in 2,066 2,066
capital
Less: Treasury stock, at (1,006) (1,007)
cost
Retained earnings 5,231 9,077
Total stockholders' equity 6,291 10,136
Total liabilities and $151,102 $144,618
stockholders' equity
Sabreliner Corporation
Consolidated Statements of Operations
(Unaudited)
(Dollars in Thousands, Share and per Share Data as Stated)
Three Months Ended Nine Months Ended
March 31 March 31 March 31 March 31
1997 1996 1997 1996
Net revenue $56,897 $51,631 $159,595 $149,360
Cost of revenue 47,709 42,353 135,113 124,140
Gross margin 9,188 9,278 24,482 25,220
Selling, general
and administrative
expense 6,929 5,847 23,035 16,638
Operating income 2,259 3,431 1,447 8,582
Interest expense, 3,392 2,908 9,676 8,804
net
Other income 1,007 (81) 1,004 754
(expense)
Earnings (loss)
before income (126) 442 (7,225) 532
taxes
Income tax 415 (168) 3,379 (202)
(expense) benefit
Net Income (loss) $ 289 $ 274 $ (3,846) $ 330
Earnings per share data
Net earnings
(loss) per $ 0.33 $ 0.31 $ (4.42) $ 0.38
common share
Dividends paid per
common share $ 0.00 $ 0.00 $ 0.00 $ 0.00
Average common and
common equivalent 870,934 872,541 870,901 872,906
shares
Sabreliner Corporation
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
Nine Months Ended
March 31, March 31,
1997 1996
Cash flows from operating activities:
Net income (loss) $(3,846) $ 330
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 5,443 10,370
Changes in assets and (12,438 (3,074)
liabilities
Net cash provided by (used in) (10,841) 7,626
operating activities
Cash flows from investing activities:
Capitalized expenditures (5,897) (1,938)
Acquisition, net of cash acquired - (1,533)
Net cash used in investing activities (5,897) (3,471)
Cash flows from financing activities:
Principal payments on long-term debt (773) (493)
and capital leases
Proceeds from revolving credit 4,290 -
facility
Other long-term borrowings 1,457 -
Treasury stock transactions 1 (87)
Net cash provided by (used in) 4,975 (580)
financing activities
Net increase (decrease) in cash an (11,763) 3,575
cash equivalents
Cash and cash equivalents, beginning 12,254 9,879
of period
Cash and cash equivalents, end of $ 491 $13,454
period
Basis of Presentation:
The information set forth in these interim financial
statements as of and for the three and nine months ended
March 31, 1997 and March 31, 1996, is unaudited. In the
opinion of management, the unaudited financial statements
reflect all adjustments necessary to present fairly the
financial results for the periods indicated of Sabreliner
Corporation and its subsidiaries Dimension Aviation, Inc.,
Midcoast Aviation, Inc., SabreTech, Inc. and Turbotech
Repairs, Inc. (now operating as part of the Company's
Premier Turbines division). Results of operations for the
interim period ended March 31, 1997, are not necessarily
indicative of the results of operations for the full fiscal
year.
Inventories:
Components of inventories as of March 31, 1997 and June 30,
1996 were:
March June
Aircraft parts $28,259 $22,105
Raw materials 1,195 1,419
Pre-owned aircraft 1,750 1,145
Total $31,204 $24,669
Property and Equipment:
Components of property and equipment as of March 31, 1997
and June 30, 1996 were:
March June
Service contract assets (UNFO)* $98,346 $99,118
Other 44,445 41,931
142,791 141,049
Less accumulated depreciation (99,274) (96,235)
43,517 44,814
Construction in progress 5,932 3,497
Total $49,449 $48,311
* Represents training system including aircraft, engines
and simulators dedicated to the Undergraduate Naval
Flight Officers (UNFO) logistics support contract.
Contingencies:
See PART II - OTHER INFORMATION, Item 1. Legal Proceedings.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Although net income for the quarter ended March 31, 1997, is
essentially unchanged from the same period of last year,
recent developments indicate stronger future results. The
backlog of firm orders has increased from $107.2 million as
of December 31, 1996 to nearly $270 million as of March 31,
1997. In addition, an agreement in principle was reached on
May 2, 1997, with the U.S. Navy for Sabreliner to sell the
UNFO training system assets for $42.5 million, pending final
negotiations of sale terms and conditions. The Company
believes the sale transaction will be completed no later
than June 30, 1997.
For the quarter ended March 31, 1997, the Company reported
an operating profit, before interest and taxes of $2.3
million, representing a decline from the same period of last
year of $1.2 million. The decline in third quarter
operating profit is attributed to reductions in commercial
aviation operating profit totaling $3.8 million for the
quarter, as compared to the corresponding period of last
year. Commercial aviation profit decreases for the quarter
were primarily due to lower volumes and fixed price overruns
at the Phoenix facility and the initial operating losses and
carrying cost of the idled Orlando facility. Partially
offsetting the effect of commercial aviation operating
losses were increased activity in government and corporate
aviation, generating $2.6 million of operating earnings.
Operating profits for the nine months ended March 31, 1997,
were lower than the same period a year ago as a result of
costs associated with the ValuJet crash (see PART II - OTHER
INFORMATION, Item 1. Legal Proceedings). Legal and
professional fees incurred in response to the incident,
coupled with increased aviation liability insurance costs,
reduced operating profit by $5.2 million for the period.
Related to the crash, customer demand at the SabreTech Miami
facility fell reducing operating profit by $2.8 million from
the same period of last year. As a result, the Company
ceased revenue-generating activity at its Miami facility and
sold or relocated its operating assets. In addition, the
Company voluntarily surrendered its repair station
certificate for the start-up Orlando operation. The Company
is exploring alternatives for this site, with resolution
expected by December 31, 1997. Initial operating losses and
carrying costs of the Company's Orlando facilities were
approximately $1.4 million. Without the effects of these
now idled or closed SabreTech facilities, operating profit
for the nine months ended March 31, 1997, would have been
$10.8 million, representing a $9.4 million or 26% increase
over the corresponding period of the prior year. This
increase is largely attributed to the increased corporate
aviation activity at the Company's Midcoast Aviation
subsidiary.
Quarter and Nine Months Ended March 31, 1997 as Compared to
Quarter and Nine Months Ended March 31, 1996
Revenues for the quarter and nine months ended March 31,
1997, were 10% and 7% higher than their respective periods
of the prior year. Excluding the revenues provided by the
Miami and Orlando operations from all periods results in
same-facility increases of $13.2 million and $24.1 million
or 30% and 19% for the quarter and nine months ended March
31, 1997, respectively, as compared to the corresponding
periods of the prior year. The increases recognized in
revenue for these periods reflect the higher volume on the
Air Force C-20 logistics contract and the Navy T-2/A-4
contract, more than offsetting the drop in the UNFO
logistics contract and other government programs. In total,
government aviation revenues for the third quarter were $5.4
million higher than the same period of last year. Corporate
aviation revenues for the third quarter are also higher than
the same period last year by $11.2 million due to the
increased major modification activity at Midcoast and
Sabreliner locations and additional revenues provided by
Turbotech Repairs, Inc. which was acquired in June, 1996.
Gross margin reported for the quarter ended March 31, 1997,
was $0.1 million lower than the same period of fiscal 1996.
Without the gross margin provided by the Miami and Orlando
facilities of $1.5 million, gross margins would have
increased by 15% during the quarter, as compared to the
corresponding period of the previous year. Midcoast Aviation
provided $1.5 million in increased gross margin from the
same period last year largely due to the capture of larger
major modification customers. Other existing corporate
aviation facilities provided $1.4 million in increased gross
margins, largely through additional engine business. The
acquisition of Turbotech Repairs, now operating as part of
the Premier Turbines division, also provided $0.4 million in
new gross margins for the quarter. Offsetting the gains in
corporate aviation were reductions in commercial aviation
gross margin earned at the Phoenix operations. Lower demand
and fixed-price overruns were the primary causes of the
third quarter decline in Phoenix gross margins of $2.0
million, as compared to the same period last year.
Gross margins reported for the nine months ended March 31,
1997, were $0.7 million less than the corresponding period
of the previous year. After removing the effects of the
Miami and Orlando facilities from the periods, adjusted
gross margin reflects an increase for the nine months of
$4.8 million or 19% from the same period of last year. This
increase is largely due to corporate aviation performance
above prior year levels. Midcoast Aviation had $2.2 million
more in gross margins during the last nine months than for
the same period of the previous year, reflecting the
increased customer demand for major modifications.
Turbotech Repairs, now operating as part of the Premier
Turbines division, provided an additional $1.2 million.
Exclusive of the Miami and Orlando locations, the remaining
commercial aviation facilities also reported $1.3 million
more gross margins for the nine months ended March 31, 1997
than recognized for the corresponding period of the past
year.
Selling, general and administrative expenses for the quarter
increased by $1.0 million from the third quarter of the
previous year. Approximately $0.5 million of this was due
to increased aviation liability insurance premiums resulting
from the ValuJet incident; the remainder is largely due to
the start-up of the new Dimension Aviation subsidiary at
Goodyear, Arizona and the increased administrative costs
associated with the acquisition of Turbotech Repairs, Inc.
Selling, general and administrative expenses for the nine
months ended March 31, 1997, were $6.4 million higher than
the same period a year ago. Continuing legal and
professional services relating to the ValuJet crash and
increased aviation liability insurance represented $5.2
million of this increase (see PART II - OTHER INFORMATION,
Item 1. Legal Proceedings). Excluding the expenses relating
to the ValuJet incident, selling, general and administrative
expenses would have increased from the previous year by $1.2
million, reflecting the increased administrative costs
associated with the acquisition of Turbotech Repairs, Inc.
and the pursuit of government contracts.
Interest expenses for the quarter and nine months ended
March 31, 1997 were higher than the corresponding periods of
the prior year, reflecting the Company's use of its working
capital credit facility.
Other income for the quarter and nine months to date
represents the gain realized on an insurance settlement
received by the Company's Midcoast Aviation subsidiary. The
proceeds of this settlement are not subject to income taxes,
as is reflected in income tax benefit for the period.
Outlook
A comparison of backlog by business area as of March 31,
1997, and June 30, 1996, follows:
Outstanding Backlog
March June
(Dollars in Thousands)
Government Business $128,420 $ 77,404
Corporate Aviation 14,233 5,807
Commercial Aviation 125,414 24,880
$268,067 $108,091
The increase in government business backlog reflects the
U.S. Government's exercise of options or award of follow-on
contracts, including the T-2/A-4, C-20 and J85 contracts,
providing over $47.0 million in firm business and a
subcontract award with Lockheed-Martin, providing nearly
$15.0 million in new business backlog.
Corporate aviation backlog has more than doubled since June
due to the increased major modifications in work at Midcoast
Aviation, Inc.
The award of the MD-10 and MD-11 conversion subcontracts
from McDonnell Douglas on February 14, 1997, has increased
commercial aviation backlog by nearly $110.0 million. These
subcontracts are for the conversion of passenger airline
aircraft to freighter configuration, to be performed by the
Company's new Dimension Aviation subsidiary headquartered at
Goodyear, Arizona. The current order, for 27 aircraft
conversions, is scheduled to be complete within four years.
Options for additional aircraft orders could exceed $200.0
million in estimated revenue, requiring over ten years to
complete using existing and planned facilities.
The March 31, 1997, backlog does not reflect the sale of the
UNFO training system assets to the U.S. Navy, valued at
$42.5 million. On May 2, 1997, an agreement in principle
was reached with the Navy, which would provide the Company
with approximately $37.0 million before June 30, 1997. The
remaining $5.5 million would be received in the next fiscal
year upon performance of tasks specified in the agreement.
Liquidity and Capital Resources
During the nine months ended March 31, 1997, cash used for
operating and investing activities totaled $16.7 million,
derived from cash on hand and the Company's revolving credit
facility. The growth in inventories in support of new
engine product lines and the acquisition and modification of
pre-owned aircraft for resale required $6.5 million.
Capital expenditures, including facility enhancements for
the new Goodyear plant, required an additional $5.9 million.
Losses from operations required $3.8 million. Other working
capital investments used approximately $0.5 million during
the period.
Future cash balances will be increased by the sale of the
Company's UNFO training system assets to the U.S. Government
as discussed above. Approximately $37.0 million is expected
to be received before the end of this fiscal year. Net
proceeds should approximate $35.0 million, after completion
of all additional services and after implementation of tax
strategies.
Major capital commitments are planned for facility
enhancements during the next three quarters. The largest of
these is for improvements of the Goodyear, Arizona facility,
to fully perform the McDonnell Douglas subcontracts,
requiring a capital commitment of approximately $11.0
million. The Company is also planning to invest $3.2
million in another hangar for Midcoast at its Cahokia,
Illinois facility to accommodate the increased corporate
aviation demand. Both of these enhancements will be funded
with the Company's revolving credit facility and cash
generated through operations.
Due to the shortfalls in year to date results of operations,
the Company was unable to meet all of the covenant
requirements called for in the revolving credit agreement.
The Company has received a waiver for the March 31, 1997,
measurement date. In addition, the Company is in
discussions with its lead lender, Star Bank, N.A., to extend
the revolving credit agreement and modify certain terms to
accommodate its working capital needs. The Company expects
to complete the agreement modification no later than the end
of the fiscal year. The Company believes the modified
agreement and operating cash flows will provide adequate
capital resources to meet future cash requirements.
PART II - OTHER INFORMATION
Item 1. 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. After consultation
with ValuJet's flight crew, these 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 were 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, naming SabreTech, ValuJet and others.
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.
In connection with a wrongful death action brought against
it in Georgia State Court, Fulton County, on or about April
10, 1997, ValuJet sought leave of the court to file a third-
party complaint against SabreTech. The proposed third-party
complaint asserts claims for contribution, indemnity,
negligence and breach of contract, with ValuJet seeking to
recover all damages sustained by it resulting from the
crash. The court has not yet ruled on ValuJet's motion. If
ValuJet is permitted to file the complaint, the Company
intends to assert defenses to these claims, and
counterclaims, and will seek to confirm coverage under the
Company's insurance policies.
On its behalf, SabreTech filed an action on May 9, 1997
against ValuJet in U.S. District Court for the Southern
District of Florida. SabreTech is seeking a judicial ruling
on contractual rights and obligations for costs and damages
resulting from the crash. In particular, SabreTech asserts
ValuJet is required to indemnify SabreTech for damages
relating to the crash due to ValuJet's negligence. The suit
also asserts SabreTech's lack of obligation for damages
incurred by ValuJet due to ValuJet's negligence and SabreTech's
lack of obligation to provide insurance against ValuJet's
negligent acts. The suit also seeks confirmation SabreTech is
not liable for consequential damages.
The Company has recognized its own costs of approximately
$5.9 million associated with the ValuJet accident, of which
$5.2 million were recorded during the nine months ended
March 31, 1997. Included are such expenses as media
relations, incremental professional services, legal fees not
covered by insurance, increased insurance premiums and other
costs related to the various investigations and other
lawsuits.
In January, fiscal 1997, the Company sold certain assets
associated with the Miami facility and exited its operations
there. Remaining assets were relocated to other operational
units within the Company. Shutdown costs of the facility,
including provision for continuing ValuJet related expenses
of $2.5 million, were recognized in December.
The ultimate outcome of legal actions related to the ValuJet
Flight 592 crash and the length of time necessary to resolve
all outstanding issues cannot be determined at this time.
The Company does not know whether the continuing effects of
the investigations and lawsuits will have a material adverse
effect upon the future 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. Supplemental requests for documents
concerning this matter were received during fiscal 1996.
The Company has complied with all requests for documents.
No other significant actions or developments have occurred
during fiscal 1997.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits Filed
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during
the quarter March 31, 1997.
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.
SABRELINER CORPORATION
/s/ F. Holmes Lamoreux
Date: May 15, 1997
F. Holmes Lamoreux
Chairman of the Board and
Chief Executive Officer
/s/ Rodney E. Olson
Date: May 15, 1997 Rodney E. Olson
Senior Vice President, Finance
and Corporate Development and
Chief Financial Officer
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