29
UNITED STATES
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 the Quarterly Period Ended March 29, 1998
Commission File Number 1-6560
THE FAIRCHILD CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 34-0728587
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
45025 Aviation Drive, Suite 400
Dulles, VA 20166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703)478-5800
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety (90) days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Title of Class March 31, 1998
Class A Common Stock, $0.10 Par Value 18,197,640
Class B Common Stock, $0.10 Par Value 2,624,716
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX
Page
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of March 29, 1998
(Unaudited) and June 30, 1997 3
Consolidated Statements of Earnings for the Three and Nine
Months ended March 29, 1998 and March 30, 1997 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months ended March 29, 1998 and March 30, 1997 (Unaudited) 7
Notes to Condensed Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 15
PART II. OTHER INFORMATION
Item 1. Legal Information 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
* For purposes of Part 1 and this Form 10-Q, the term "Company" means The
Fairchild Corporation, and its subsidiaries, unless otherwise indicated.
For purposes of Part II, the term "Company" means The Fairchild
Corporation, unless otherwise indicated.
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1997 and March 29, 1998 (Unaudited)
(In thousands)
ASSETS
June 30, March 29,
1997 (*) 1998
CURRENT ASSETS:
Cash and cash equivalents, $4,830 and$
$0 restricted $ 19,420 $ 61,813
Short-term investments 25,647 6,442
Accounts receivable-trade, less 151,361 128,440
allowances of $6,905 and $5,329
Inventories:
Finished goods 292,441 171,462
Work-in-process 20,357 23,038
Raw materials 10,567 10,521
323,365 205,021
Net current assets of discontinued 17,884 14,580
operations
Prepaid expenses and other current 34,490 59,390
assets
Total Current Assets 572,167 475,686
Property, plant and equipment, net of
accumulated depreciation of $126,990
and $122,747 121,918 114,308
Net assets held for sale 26,147 23,831
Net noncurrent assets of discontinued 14,495 2,496
operations
Cost in excess of net assets acquired
(Goodwill), less accumulated
amortization of $36,672 and $40,806 154,129 165,442
Investments and advances, affiliated 55,678 22,338
companies
Prepaid pension assets 59,742 59,572
Deferred loan costs 9,252 6,300
Long-term investments 4,120 215,863
Other assets 35,018 51,806
Total Assets $1,052,666 $1,137,642
*Condensed from audited financial statements
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1997 and March 29, 1998 (Unaudited)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, March 29,
1997 (*) 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank notes payable and current
maturities of long-term debt $ 47,322 $ 21,377
Accounts payable 75,522 61,664
Other accrued liabilities 97,318 88,495
Income taxes 5,863 38,116
Total Current Liabilities 226,025 209,652
LONG-TERM LIABILITES:
Long-term debt, less current 416,922 278,140
maturities
Other long-term liabilities 23,622 24,455
Retiree health care liabilities 43,351 42,757
Noncurrent income taxes 42,013 82,863
Minority interest in subsidiaries 68,309 66,637
TOTAL LIABILITIES 820,242 704,504
STOCKHOLDERS' EQUITY:
Class A common stock, 10 cents par
value; authorized 40,000 shares,
24,445 (20,234 in June) shares issued
and 18,197 (13,992 in June) shares
outstanding 2,023 2,444
Class B common stock, 10 cents par
value; Authorized 20,000 shares, 2,625
(2,632 in June) shares Issued and
outstanding 263 263
Paid-in capital 71,015 148,020
Retained earnings 209,949 322,528
Cumulative translation adjustment 939 (2,811)
Net unrealized holding gain (loss) on (46) 14,540
available-for-sale securities
Treasury Stock, at cost, 6,247
(6,242 in June) shares of Class A
Common Stock (51,719) (51,836)
TOTAL STOCKHOLDERS' EQUITY 232,424 433,138
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,052,666 $1,137,642
*Condensed from audited financial statements
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) and Nine (9) Months Ended
March 30, 1997 and March 29, 1998
(In thousands, except per share data)
Three Months Ended Nine Months Ended
3/30/97 3/29/98 3/30/97 3/29/98
REVENUE:
Net sales $179,436 $164,164 $470,141 $567,142
Other income (expense), net 389 847 1,168 5,451
179,825 165,011 471,309 572,593
COSTS AND EXPENSES:
Cost of goods sold 131,884 126,374 348,712 426,201
Selling, general &
administrative 38,030 28,177 101,826 107,048
Research and development 24 42 69 139
Amortization of goodwill 1,240 1,573 3,460 4,179
171,178 156,166 454,067 537,567
OPERATING INCOME 8,647 8,845 17,242 35,026
Interest expense 13,500 9,369 39,629 38,027
Interest income (762) (587) (4,516) (1,501)
Net interest expense 12,738 8,782 35,113 36,526
Investment income (loss), net 741 234 2,202 (4,946)
Equity in earnings (loss) of
affiliates 1,370 509 2,984 2,630
Minority interest (1,076) (21,905) (2,637) (23,780)
Non-recurring income - 123,991 - 123,991 -
Income (loss) from continuing (3,056) 102,892 (15,322) 96,395
operations before taxes
Income tax provision (benefit) (2,939) 52,474 (9,448) 49,353
Earnings (loss) from continuing (117) 50,418 (5,874) 47,042
operations
Earnings (loss) from discontinued
operations, net 157 (1,578) (1,681) (4,260)
Gain on disposal of discontinued
operations, net - 46,548 - 76,522
Extraordinary items, net - (3,701) - (6,725)
NET EARNINGS (LOSS) $ 40 $91,687 $(7,555) $112,579
Other Comprehensive income, net
of tax:
Foreign currency translation
adjustments (2,359) (2,178) (2,197) (3,750)
Unrealized holding gains (losses)
on securities arising during the - 14,221 - 14,540
period
Other Comprehensive income (2,359) 12,043 (2,197) 10,790
COMPREHENSIVE INCOME (LOSS) $(2,319)$103,730 $(9,752) $123,369
The accompanying notes to summarized financial information are an integral
part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) and Nine (9) Months Ended
March 30, 1997 and March 29, 1998
(In thousands, except per share data)
Three Months Ended Nine Months Ended
3/30/97 3/29/98 3/30/97 3/29/98
Basic Earnings Per Share:
Earnings (loss) from continuing
operations $ (0.01) $ 2.52 $ (0.36) $ 2.62
Earnings (loss) from discontinued
operations, net 0.01 (0.08) (0.10) (0.24)
Gain on disposal of discontinued
operations, net - 2.32 - 4.27
Extraordinary items, net - (0.18) - (0.37)
NET EARNINGS (LOSS) $ 0.00 $ 4.58 $ (0.46) $ 6.28
Other Comprehensive income, net
of tax:
Foreign currency translation
adjustments $(0.14) $ (0.11) $ (0.13) $(0.21)
Unrealized holding gains (losses)
on securities arising during the - 0.71 - 0.81
period
Other Comprehensive income (0.14) 0.60 (0.13) 0.60
COMPREHENSIVE INCOME (LOSS) $(0.14) $ 5.18 $ (0.59) $6.88
Diluted Earnings Per Share:
Earnings (loss) from continuing
operations $(0.01) $ 2.41 $ (0.36) $2.50
Earnings (loss) from discontinued
operations, net 0.01 (0.08) (0.10) (0.23)
Gain on disposal of discontinued
operations, net - 2.22 - 4.07
Extraordinary items, net - (0.18) - (0.36)
NET EARNINGS (LOSS) $ 0.00 $ 4.38 $ (0.46) $5.98
Other Comprehensive income, net
of tax:
Foreign currency translation
adjustments $(0.14) $(0.10) $ (0.13) $(0.20)
Unrealized holding gains (losses)
on securities arising during the - 0.68 - 0.77
period
Other Comprehensive income (0.14) 0.58 (0.13) 0.57
COMPREHENSIVE INCOME (LOSS) $(0.14) $ 4.96 $ (0.59) $6.56
Weighted average shares
outstanding:
Basic 17,284 20,036 16,518 17,938
Diluted 17,284 20,922 16,518 18,813
The accompanying notes to summarized financial information are an integral
part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Nine (9) Months Ended March 30, 1997 and March 29, 1998
(In thousands)
For the Nine Months Ended
3/30/97 3/29/98
Cash flows from operating activities:
Net earnings (loss) $ (7,555) $112,579
Depreciation and amortization 15,523 16,268
Accretion of discount on long-term 3,702 2,744
liabilities
Net gain on the disposition of -- (99,766)
subsidiaries
Net gain on the disposal of -- (135,736)
discontinued operations
Extraordinary items, net of cash -- 6,725
payments
Distributed earnings of affiliates, 881 (165)
net
Minority interest 2,637 23,780
Changes in assets and liabilities (85,178) (48,466)
Non-cash changes and working capital (13,311) 17,983
changes of discontinued operations
Net cash used for operating (83,301) (104,054)
activities
Cash flows from investing activities:
Purchase of property, plant and (7,426) (23,706)
equipment
Net proceeds received from (used for) (14,009) 9,202
investments
Acquisition of subsidiaries, net of (52,555) (32,404)
cash acquired
Minority interest in subsidiaries -- (26,383)
Net proceeds from the sale of 173,719 167,987
discontinued operations
Changes in net assets held for sale (3,544) 2,239
Other, net 34 180
Investing activities of discontinued (1,418) (3,328)
operations
Net cash provided by investing 94,801 93,787
activities
Cash flows from financing activities:
Proceeds from issuance of debt 108,229 178,036
Debt repayments and repurchase of (131,737) (177,056)
debentures, net
Issuance of Class A common stock 861 54,176
Financing activities of discontinued (1,059) --
operations
Net cash provided by (used for) (23,706) 55,156
financing activities
Effect of exchange rate changes on (1,269) (2,496)
cash
Net increase in cash and cash (13,475) 42,393
equivalents
Cash and cash equivalents, beginning 39,649 19,420
of the year
Cash and cash equivalents, end of the
period $ 26,174 $ 61,813
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per share data)
1. FINANCIAL STATEMENTS
The consolidated balance sheet as of March 29, 1998 and the
consolidated statements of earnings and cash flows for the three and Nine
months ended March 30, 1997 and March 29, 1998 have been prepared by the
Company, without audit. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at March 29,
1998, and for all periods presented, have been made. The balance sheet at
June 30, 1997 was condensed from the audited financial statements as of
that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's June 30, 1997 Form
10-K, as amended, and Banner Aerospace, Inc.'s March 31, 1997 Form 10-K.
The results of operations for the period ended March 29, 1998 are not
necessarily indicative of the operating results for the full year. Certain
amounts in prior years' quarterly financial statements have been
reclassified to conform to the current presentation. The financial
statements for the periods ended March 30, 1997 have been restated to
present the results of Shared Technologies Fairchild Inc. and Fairchild
Technologies as discontinued operations (see Note 3).
Effective March 29, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income".
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements, which the Company is
presenting as part of its Statement of Earnings.
2. BUSINESS COMBINATIONS
On January 13, 1998, certain subsidiaries (the "Selling
Subsidiaries"), of Banner Aerospace, Inc. ("Banner", a majority-owned
subsidiary of the Registrant), completed the disposition of substantially
all of the assets and certain liabilities of the Selling Subsidiaries to
two wholly-owned subsidiaries of AlliedSignal Inc. (the "Buyers"), in
exchange for unregistered shares of AlliedSignal Inc. common stock with an
aggregate value equal to $369,000 (the "Banner Hardware Group
Disposition"). The purchase price received by the Selling Subsidiaries was
based on the consolidated net worth as reflected on an estimated closing
date balance sheet for the assets (and liabilities) conveyed by the Selling
Subsidiaries to the Buyers. Such estimated closing date balance sheet is
subject to review by the parties, and the purchase price will be adjusted
(up or down) based on the net worth as reflected on the final closing date
balance sheet. The assets transferred to the Buyers consists primarily of
Banner's hardware group, which includes the distribution of bearings, nuts,
bolts, screws, rivets and other type of fasteners, and its PacAero unit.
Approximately $196,000 of the common stock received from the Buyers was
used to repay outstanding term loans of Banner's subsidiaries and related
fees. The Company will account for its remaining investment in AlliedSignal
common stock as an available-for-sale security. Banner effected the Banner
Hardware Group Disposition to concentrate its efforts on the rotables and
jet engine businesses and because the Banner Hardware Group Disposition
presented a unique opportunity to realize a significant return on the
disposition of the hardware group. As a result of the Banner Hardware Group
Disposition and the repayment of outstanding term loans, the Company
recorded non-recurring income of $123,991 for the three and nine months
ended March 29, 1998.
The Company has accounted for following acquisitions by the using the
purchase method. The respective purchase price is assigned to the net
assets acquired based on the fair value of such assets and liabilities at
the respective acquisition dates.
On March 2, 1998, the Company consummated the acquisition of Edwards
and Lock Management Corporation, doing business as Special-T Fasteners
("Special-T"), in a business combination to be accounted for as a purchase
(the "Special-T Acquisition"). The purchase price for the acquisition was
approximately $47,600, of which $24,600 was paid in shares of Class A
Common Stock of the Company and the remainder was paid in cash. The
purchase price is subject to certain post-closing adjustments. The total
cost of the acquisition exceeded the fair value of the net assets of
Special-T by approximately $20,540, which is preliminarily being allocated
as goodwill and amortized using the straight-line method over 40 years.
Special-T manages the logistics of predominantly Company manufactured
precision fasteners worldwide as utilized primarily in the aerospace
industry, for government agencies, original equipment manufacturers
("OEM's"), and distributors.
In December 1997, the Company acquired AS+C GmbH, Aviation Supply +
Consulting ("AS&C") in a business combination accounted for as a purchase.
The total cost of the acquisition was $13,245, which exceeded the fair
value of the net assets of AS&C by approximately $7,350, which is
preliminarily being allocated as goodwill and amortized using the straight-
line method over 40 years. The Company purchased AS&C with cash borrowed.
AS&C is an aerospace parts, logistics, and distribution company primarily
servicing the European OEM market.
In February 1997, the Company completed a transaction (the "Simmonds
Acquisition") pursuant to which the Company acquired common shares and
convertible debt representing an 84.2% interest, on a fully diluted basis,
of Simmonds S.A. ("Simmonds"). The Company then initiated a tender offer to
purchase the remaining shares and convertible debt held by the public. By
June 30, 1997, the Company had purchased, or placed sufficient cash in
escrow to purchase, all the remaining shares and convertible debt of
Simmonds. The total purchase price of Simmonds, including the assumption of
debt, was approximately $62,000, which the Company funded with available
cash and borrowings. The Company recorded approximately $20,453 in
goodwill as a result of this acquisition, which will be amortized using the
straight-line method over 40 years. Simmonds is one of Europe's leading
manufacturers and distributors of aerospace and automotive fasteners.
On June 30, 1997, the Company sold all the patents of Fairchild
Scandinavian Bellyloading Company ("SBC") to Teleflex Incorporated
("Teleflex") for $5,000, and immediately thereafter sold all the stock of
SBC to a wholly owned subsidiary of Teleflex for $2,000. The Company may
also receive additional proceeds of up to $7,000 based on future net sales
of SBC's patented products and services.
3. DISCONTINUED OPERATIONS
On November 20, 1997, Shared Technologies Fairchild Inc. ("STFI"), a
corporation in which the Company owned approximately 42% of the outstanding
common stock, entered into a merger agreement with Intermedia
Communications Inc. ("Intermedia") pursuant to which holders of STFI common
stock received $15.00 per share in cash (the "STFI Merger"). The Company
was paid approximately $178,000 in cash (before tax and selling expenses)
in exchange for the common and preferred stock of STFI owned by the
Company. In the nine months ended March 29, 1998, the Company recorded a
$98,817 gain, net of tax, on disposal of discontinued operations, from the
proceeds received from the STFI Merger, which was completed on March 11,
1998. Accordingly, in the quarter ended March 29, 1998, the Company
recorded a $68,843 gain, net of tax, on disposal of discontinued
operations, from the proceeds received for the common stock of STFI. The
results of STFI have been accounted for as discontinued operations.
Earnings from discontinued operations includes the Company's net
equity in earnings of $1,095 and $622 from the STFI investments during the
nine months ended March 30, 1997 and March 29, 1998, respectively.
For the Company's fiscal years 1995, 1996, and 1997, and for the first
nine months of fiscal 1998, Fairchild Technologies ("Technologies") had
operating losses of approximately $1.5 million, $1.5 million, $3.6 million,
and $13.7 million, respectively. In addition, as a result of the downturn
in the Asian markets, Technologies has experienced delivery deferrals,
reduction in new orders, lower margins and increased price competition.
In response, in February, 1998 (the "measurement date"), the Company
adopted a formal plan to enhance the opportunities for disposition of
Technologies, while improving the ability of Technologies to operate more
efficiently. The plan includes a reduction in production capacity and
headcount at Technologies, and the pursuit of potential vertical and
horizontal integration with peers and competitors of the two divisions that
constitute Technologies, or the inclusion of those divisions in a spin-off
(see discussion under Item 2, "Management's Discussion and Analysis of
Results and Financial Condition"). If the Company elects to include
Technologies in the Spin-Off, the Company believes that it would be
required to contribute substantial additional resources to allow
Technologies the liquidity necessary to sustain and grow both the Fairchild
Technologies' operating divisions.
In connection with the adoption of such plan, the Company recorded an
after-tax charge of $22,352 in discontinued operations in the third quarter
ended March 29, 1998, of which, $13,377 (net of income tax benefit of
$4,623) represents the estimated loss on the disposal of certain assets of
Technologies, $4,197 (net of an income tax benefit of $1,450) relates to
the net losses of Technologies since the measurement date, and $4,721 (net
of an income tax benefit of $2,513) relates to a provision for expected
operating losses over the next ten months at Technologies. While the
Company believes that $22,000 is a reasonable charge for the expected
losses in connection with the disposition of Technologies, there can be no
assurance that this estimate is adequate.
Earnings from discontinued operations for the nine months ended March
30, 1997 and March 29, 1998 includes net losses of $2,776 (net of a tax
benefit of $667) and $4,287 (net of a tax benefit of $3,983), respectively,
from Technologies until the adoption date of a formal plan on the
measurement date.
4. PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial information for the
nine months ended March 29, 1998 and March 30, 1997, provide the results of
the Company's operations as though the STFI Disposition, the Banner
Hardware Group Disposition, and the Special-T Acquisition had been in
effect since the beginning of each period. The pro forma information is
based on the historical financial statements of the Company, Banner, STFI
and Special-T, giving effect to the aforementioned transactions. In
preparing the pro forma data, certain assumptions and adjustments have been
made, including reduced interest expense for revised debt structures and
estimates of changes to goodwill amortization. The following unaudited pro
forma information are not necessarily indicative of the results of
operations that actually would have occurred if the transactions had been
in effect since the beginning of each period, nor are they indicative of
future results of the Company.
Nine Months Ended
March 30, March 29,
1997 1998
Net sales $343,289 $468,975
Gross profit 80,011 105,257
Loss from continuing operations (3,593) (4,868)
Loss from continuing operations per
share $ (0.22) $ (0.27)
The pro forma financial information has not been adjusted for non-
recurring income and gains from disposal of discontinued operations that
have occurred or are expected to occur from these transactions within the
ensuing year.
5. EQUITY SECURITIES
On December 19, 1997, the Company completed a secondary offering of
public securities. The offering consisted of an issuance of 3,000,000
shares of the Company's Class A Common Stock at $20.00 per share (the
"Offering").
On February 12, 1998, the Company issued 24,545 deferred compensation
units pursuant to the Company's stock option deferral plan as a result of a
cashless exercise of 30,000 stock options.
On March 2, 1998, in accordance with the terms of Special-T
Acquisition, the Company issued 1,057,515 restricted shares of Company's
Class A Common Stock. (See Note 2).
On March 13, 1998, the Company issued 47,283 restricted shares of
Company's Class A Common Stock resulting from a cashless exercise of
100,000 warrants by Dunstan Ltd.
The Company had 18,197,640 shares of Class A common stock and
2,624,716 shares of Class B common stock outstanding at March 29, 1998.
Class A common stock is traded on both the New York and Pacific Stock
Exchanges. There is no public market for the Class B common stock. Shares
of Class A common stock are entitled to one vote per share and cannot be
exchanged for shares of Class B common stock. Shares of Class B common
stock are entitled to ten votes per share and can be exchanged, at any
time, for shares of Class A common stock on a share-for-share basis. For
the nine months ended March 29, 1998, 92,759 shares of Class A Common Stock
were issued as a result of the exercise of stock options, and shareholders
converted 7,800 shares of Class B common stock into Class A common stock.
6. DEBT
On December 19, 1997, immediately following the Offering, the Company
restructured its FHC and RHI Credit Agreements by entering into a new
credit facility to provide the Company with a $300,000 senior secured
credit facility (the "Facility") consisting of (i) a $75,000 revolving loan
with a letter of credit sub-facility of $30,000 and a $10,000 swing loan
sub-facility, and (ii) a $225,000 term loan. Advances made under the
Facility will generally bear interest at a rate of, at the Company's
option, either (i) 2% over the Citibank N.A. base rate, or (ii) 3% over the
Eurodollar Rate ("LIBOR") for the first nine months following closing, and
is subject to change based upon the Company's financial performance
thereafter. The Facility is subject to a non-use commitment fee of 1/2% of
the aggregate unused availability for the first nine months post-closing
and is subject to change based upon the Company's financial performance
thereafter. Outstanding letters of credit are subject to fees equivalent
to the LIBOR margin rate. A borrowing base is calculated monthly to
determine the amounts available under the Facility. The borrowing base is
determined monthly based upon (i) the EBITDA of the Company's Aerospace
Fastener business, as adjusted, and (ii) specified percentages of various
marketable securities and cash equivalents. The Facility will mature on
June 18, 2004. The term loan is subject to mandatory prepayment
requirements and optional prepayments. The revolving loan is subject to
mandatory prepayment requirements and optional commitment reductions. On
March 29, 1998, the Company was in compliance with all the covenants under
its credit agreements.
On February 3, 1998, with the proceeds of the Offering, term loan
borrowings under the Facility, and the after tax proceeds the Company
received from the STFI Merger, the Company redeemed (collectively, the
"Public Debt Repayment") all of its existing publicly held indebtedness
(other than indebtedness of Banner), consisting of (i) $63,000 to redeem
the 11 7/8% Senior Debentures due 1999; (ii) $117,600 to redeem the 12%
Intermediate Debentures due 2001; (iii) $35,856 to redeem the 13 1/8%
Subordinated Debentures due 2006; (iv) $25,063 to redeem the 13% Junior
Subordinated Debentures due 2007; and (v) accrued interest of $10,562.
The Company recognized an extraordinary loss of $6,725, net of tax, to
write-off the remaining deferred loan fees and original issue discounts
associated with early extinguishment of the Company's indebtedness pursuant
to the Public Debt Repayment and refinancing of the FHC and RHI Credit
Agreement facilities.
In August 1997, the Company entered into a delayed-start swap interest
rate lock hedge agreement (the "FHC Hedge Agreement") to reduce its
exposure to increases in interest rates on variable rate debt. In December
1997, the Company amended the FHC Hedge Agreement. Beginning on February
17, 1998, the FHC Hedge Agreement will provide interest rate protection on
$100,000 of variable rate debt for ten years, with interest being
calculated based on a fixed LIBOR rate of 6.715%. On January 14, 1998, the
FHC Hedge Agreement was further amended to provide interest rate protection
with interest being calculated based on a fixed LIBOR rate of 6.24% from
February 17, 1998 to February 17, 2003. On February 17, 2003, the bank will
have a one-time option to either (i) elect to cancel the ten-year
agreement; or (ii) do nothing and proceed with the transaction, using a
fixed LIBOR rate of 6.715% for the period February 17, 2003 to February 19,
2008. No costs were incurred as a result of these transactions.
On November 25, 1997, Banner amended its credit agreement to increase
its revolving credit facility by $50,000. On January 13, 1998, Banner
amended its credit agreement to (i) allow for the prepayment of all term
loans and a portion of the revolving credit obligation without any
reduction of the revolving credit facility; (ii) reduce the revolving
credit facility interest rate to prime plus 0.25% or LIBOR plus 1.50%; and
(iii) reduce the nonuse fee to a per annum rate equal to 0.30%. Also on
January 13, 1998, in conjunction with the Banner Hardware Group
Disposition, the outstanding balances of the term loans were reduced to
zero.
7. RESTRICTED CASH
On March 29, 1998, the Company did not have any restricted cash. On
June 30, 1997, the Company had restricted cash of approximately $4,839, all
of which was maintained as collateral for certain debt facilities.
8. SUMMARIZED STATEMENT OF EARNINGS INFORMATION
The following table presents summarized historical financial
information, on a combined 100% basis, of the Company's principal
investments, which are accounted for using the equity method.
Nine Months Ended
March 30, March 29,
1997 1998
Net sales $ 67,638 $ 63,615
Gross profit 25,778 23,095
Earnings from continuing operations 10,132 9,769
Net earnings 10,132 9,769
The Company owns approximately 31.9% of Nacanco Paketleme common
stock. The Company recorded equity earnings of $2,975 and $3,093 from this
investment for the nine months ended March 30, 1997 and March 29, 1998,
respectively.
9. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
On March 29, 1998, the Company had $66,637 of minority interest, of
which $66,619 represents Banner. Minority shareholders hold approximately
34% of Banner's outstanding common stock.
10. EARNINGS PER SHARE
Effective December 28, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128).
This statement replaces the previously reported primary and fully diluted
earnings (loss) per share with basic and diluted earnings (loss) per share.
Unlike primary earnings (loss) per share, basic earnings (loss) per share
excludes any diluted effects of options. Diluted earnings (loss) per share
is very similar to the previously reported fully diluted earnings (loss)
per share. All earnings (loss) per share have been restated to conform to
the requirements of SFAS 128.
The following table illustrates the computation of basic and diluted
earnings (loss) per share:
For the Three For the Nine
Months Ended Months Ended
3/30/97 3/29/98 3/30/97 3/29/98
Basic earnings per share:
Earnings from continuing
operations $ (117) $50,418 $(5,874) $47,042
Common shares outstanding 17,284 20,036 16,518 17,938
Basic earnings per share:
Basic earnings from continuing
operations per share $ (0.01) $ 2.52 $ (0.36) $ 2.62
Diluted earnings per share:
Earnings from continuing
operations $ (117) $50,418 $(5,874) $47,042
Common shares outstanding 17,284 20,036 16,518 17,938
Options antidilutive 595 antidilutive 579
Warrants antidilutive 291 antidilutive 296
Total shares outstanding 17,284 20,922 16,518 18,813
Diluted earnings from continuing
operations per share $(0.01) $ 2.41 $ (0.36) $ 2.50
The computation of diluted loss per share for the three-month and nine-
month periods ended March 30, 1997 excluded the effect of incremental
common shares attributable to the potential exercise of common stock
options outstanding and warrants outstanding, because their effect was
antidilutive.
11. CONTINGENCIES
Government Claims
The Corporate Administrative Contracting Officer (the "ACO"), based
upon the advice of the United States Defense Contract Audit Agency, has
made a determination that Fairchild Industries, Inc. ("FII"), a former
subsidiary of the Company, did not comply with Federal Acquisition
Regulations and Cost Accounting Standards in accounting for (i) the 1985
reversion to FII of certain assets of terminated defined benefit pension
plans, and (ii) pension costs upon the closing of segments of FII's
business. The ACO has directed FII to prepare cost impact proposals
relating to such plan terminations and segment closings and, following
receipt of such cost impact proposals, may seek adjustments to contract
prices. The ACO alleges that substantial amounts will be due if such
adjustments are made, however, an estimate of the possible loss or range of
loss from the ACO's assertion cannot be made. The Company believes it has
properly accounted for the asset reversions in accordance with applicable
accounting standards. The Company has held discussions with the government
to attempt to resolve these pension accounting issues.
Environmental Matters
The Company's operations are subject to stringent Government imposed
environmental laws and regulations concerning, among other things, the
discharge of materials into the environment and the generation, handling,
storage, transportation and disposal of waste and hazardous materials. To
date, such laws and regulations have not had a material effect on the
financial condition, results of operations, or net cash flows of the
Company, although the Company has expended, and can be expected to expend
in the future, significant amounts for investigation of environmental
conditions and installation of environmental control facilities,
remediation of environmental conditions and other similar matters,
particularly in the Aerospace Fasteners segment.
In connection with its plans to dispose of certain real estate, the
Company must investigate environmental conditions and may be required to
take certain corrective action prior or pursuant to any such disposition.
In addition, management has identified several areas of potential
contamination at or from other facilities owned, or previously owned, by
the Company, that may require the Company either to take corrective action
or to contribute to a clean-up. The Company is also a defendant in certain
lawsuits and proceedings seeking to require the Company to pay for
investigation or remediation of environmental matters and has been alleged
to be a potentially responsible party at various "Superfund" sites.
Management of the Company believes that it has recorded adequate reserves
in its financial statements to complete such investigation and take any
necessary corrective actions or make any necessary contributions. No
amounts have been recorded as due from third parties, including insurers,
or set off against, any liability of the Company, unless such parties are
contractually obligated to contribute and are not disputing such liability.
As of March 29, 1998, the consolidated total recorded liabilities of
the Company for environmental matters approximated $7,070, which
represented the estimated probable exposures for these matters. It is
reasonably possible that the Company's total exposure for these matters
could be approximately $11,870 on an undiscounted basis.
Other Matters
The Company is involved in various other claims and lawsuits
incidental to its business, some of which involve substantial amounts. The
Company, either on its own or through its insurance carriers, is contesting
these matters. In the opinion of management, the ultimate resolution of
the legal proceedings, including those aforementioned, will not have a
material adverse effect on the financial condition, or future results of
operations or net cash flows of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Fairchild Corporation (the "Company") was incorporated in October
1969, under the laws of the State of Delaware. On November 15, 1990, the
Company changed its name from Banner Industries, Inc. to The Fairchild
Corporation. RHI Holdings, Inc. ("RHI") is a direct 100% owned subsidiary
of the Company. RHI is the 100% owner of Fairchild Holding Corp. ("FHC")
and the majority owner of Banner Aerospace, Inc. ("Banner"). The Company's
principal operations are conducted through RHI and FHC. The Company holds a
significant equity interest in Nacanco Paketleme ("Nacanco"), and, during
the period covered by this report, held a significant equity interest in
Shared Technologies Fairchild Inc. ("STFI"). (See Note 3 to Financial
Statements, Discontinued Operations, as to the disposition of the Company's
interest in STFI.)
The following discussion and analysis provide information which
management believes is relevant to assessment and understanding of the
Company's consolidated results of operations and financial condition. The
discussion should be read in conjunction with the consolidated financial
statements and notes thereto.
CAUTIONARY STATEMENT
Certain statements in the financial discussion and analysis by
management contain forward-looking information that involves risk and
uncertainty, including current trend information, projections for
deliveries, backlog, and other trend projections. Actual future results
may differ materially depending on a variety of factors, including product
demand; performance issues with key suppliers; customer satisfaction and
qualification issues; labor disputes; governmental export and import
policies; worldwide political stability and economic growth; legal
proceedings; business combinations; investment risks; and acts of nature.
RECENT DEVELOPMENTS
The Company has effected a series of transactions designed to: (i)
reduce its total indebtedness and annual interest expense; (ii) increase
the number of publicly held shares of Class A Common Stock; and (iii)
increase the Company's operating and financial flexibility.
On November 20, 1997, Shared Technologies Fairchild Inc. ("STFI"), a
corporation in which the Company owned approximately 42% of the outstanding
common stock, entered into a merger agreement with Intermedia
Communications Inc. ("Intermedia") pursuant to which holders of STFI common
stock received $15.00 per share in cash (the "STFI Merger"). The Company
was paid approximately $178.0 million in cash (before tax and selling
expenses) in exchange for the common and preferred stock of STFI owned by
the Company. In the nine months ended March 29, 1998, the Company recorded
a $98.8 million gain, net of tax, on disposal of discontinued operations,
from the proceeds received from the STFI Merger, which was completed on
March 11, 1998. Accordingly, in the quarter ended March 29, 1998, the
Company recorded a $68.8 million gain, net of tax, on disposal of
discontinued operations, from the proceeds received for the common stock of
STFI. The results of STFI have been accounted for as discontinued
operations.
On December 19, 1997, the Company completed a secondary offering of
public securities. The offering consisted of an issuance of 3,000,000
shares of the Company's Class A Common Stock at $20.00 per share (the
"Offering").
On December 19, 1997, immediately following the Offering, the Company
restructured its FHC and RHI Credit Agreements by entering into a new six-
and-a-half-year credit facility to provide the Company with a $300 million
senior secured credit facility (the "Facility") consisting of (i) a $75
million revolving loan with a letter of credit sub-facility of $30 million
and a $10 million swing loan sub-facility, and (ii) a $225 million term
loan.
On January 13, 1998, certain subsidiaries (the "Selling
Subsidiaries"), of Banner Aerospace, Inc. ("Banner", a majority-owned
subsidiary of the Registrant), completed the disposition of substantially
all of the assets and certain liabilities of the Selling Subsidiaries to
two wholly-owned subsidiaries of AlliedSignal Inc. (the "Buyers"), in
exchange for unregistered shares of AlliedSignal Inc. common stock with an
aggregate value equal to $369 million (the "Banner Hardware Group
Disposition"). The purchase price received by the Selling Subsidiaries was
based on the consolidated net worth as reflected on an estimated closing
date balance sheet for the assets (and liabilities) conveyed by the Selling
Subsidiaries to the Buyers. Such estimated closing date balance sheet is
subject to review by the parties, and the purchase price will be adjusted
(up or down) based on the net worth as reflected on the final closing date
balance sheet. The assets transferred to the Buyers consists primarily of
Banner's hardware group, which includes the distribution of bearings, nuts,
bolts, screws, rivets and other type of fasteners, and its PacAero unit.
Approximately $196 million of the common stock received from the Buyers was
used to repay outstanding term loans of Banner's subsidiaries and related
fees. The Company will account for its remaining investment in AlliedSignal
common stock as an available-for-sale security. Banner effected the Banner
Hardware Group Disposition to concentrate its efforts on the rotables and
jet engine businesses and because the Banner Hardware Group Disposition
presented a unique opportunity to realize a significant return on the
disposition of the hardware group. As a result of the Banner Hardware Group
Disposition and the repayment of outstanding term loans, the Company
recorded non-recurring income of $124 for the three and nine months ended
March 29, 1998.
On March 2, 1998, the Company consummated the acquisition of Edwards
and Lock Management Corporation, doing business as Special-T Fasteners
("Special-T"), in a business combination to be accounted for as a purchase
(the "Special-T Acquisition"). The purchase price for the acquisition was
approximately $47.6 million, of which $24.6 million was paid in shares of
Class A Common Stock of the Company and the remainder was paid in cash. The
purchase price is subject to certain post-closing adjustments. The total
cost of the acquisition exceeded the fair value of the net assets of
Special-T by approximately $20.5 million, which is preliminarily being
allocated as goodwill and amortized using the straight-line method over 40
years. Special-T manages the logistics of predominantly Company
manufactured precision fasteners worldwide as utilized primarily in the
aerospace industry, for government agencies, original equipment
manufacturers ("OEM's"), and distributors.
On February 3, 1998, with the proceeds of the Offering, term loan
borrowings under the Facility, and the after tax proceeds the Company
received from the STFI Merger, the Company redeemed (collectively, the
"Public Debt Repayment") all of its existing publicly held indebtedness
(other than indebtedness of Banner), consisting of (i) $63.0 million to
redeem the 11 7/8% Senior Debentures due 1999; (ii) $117.6 million to
redeem the 12% Intermediate Debentures due 2001; (iii) $35.9 million to
redeem the 13 1/8% Subordinated Debentures due 2006; (iv) $25.1 million to
redeem the 13% Junior Subordinated Debentures due 2007; and (vi) accrued
interest of $10.6 million.
On November 28, 1997, the Company acquired AS+C GmbH, Aviation Supply
+ Consulting ("AS&C") in a business combination accounted for as a
purchase. The total cost of the acquisition was $13.2 million, which
exceeded the fair value of the net assets of AS&C by approximately $7.4
million, which is preliminarily being allocated as goodwill and amortized
using the straight-line method over 40 years. The Company purchased AS&C
with cash borrowed. AS&C is an aerospace parts, logistics, and distribution
company primarily servicing the European OEM market.
RESULTS OF OPERATIONS
The Company currently reports in two principal business segments:
Aerospace Fasteners and Aerospace Distribution. The results of Gas Springs
and SBC (for the prior year period) are included in the Corporate and Other
classification. The following table illustrates the historical sales and
operating income of the Company's operations for the three months and Nine
ended March 29, 1998 and March 30, 1997, respectively.
(In thousands) Three Months Nine Months
Ended Ended
March March March March
30, 29, 30, 29,
1997 1998 1997 1998
Sales by Segment:
Aerospace Fasteners $ 64,073 $102,857 $175,614 $270,718
Aerospace Distribution 113,743 60,865 294,835 303,393
Corporate and Other 4,738 1,442 9,385 4,166
Eliminations (a) (3,118) (1,000) (9,693) (11,135)
Total Sales $179,436 $164,164 $470,141 $567,142
Operating Income (Loss)
by Segment:
Aerospace Fasteners $ 3,563 $ 9,668 $ 7,827 $ 18,560
Aerospace Distribution 9,061 2,085 21,114 19,170
Corporate and Other (3,977) (2,999) (11,699) (2,704)
Total Operating Income $ 8,647 $ 8,845 $ 17,242 $ 35,026
(a) Represents intersegment sales from the Aerospace Fasteners segment to
the Aerospace Distribution segment.
CONSOLIDATED RESULTS
Net sales of $164.2 million in the third quarter of Fiscal 1998
decreased by $15.3 million, or 8.5%, compared to sales of $179.8 million in
the third quarter of Fiscal 1997. This decrease is primarily attributable
to the loss of revenues resulting from the Banner Hardware Group
Disposition. Net Sales of $567.1 million in the Fiscal 1998 nine-month
period improved by $97.0 million, or 20.6%, compared to sales of $470.1
million in the first nine months of Fiscal 1997. Approximately 24.0%
of the current nine months sales growth was stimulated by the resurgent
commercial aerospace industry. Recent acquisitions contributed
approximately 12.4% to the sales growth, while dispositions
decreased growth by approximately 15.8%.
Gross Margin as a percentage of sales was 26.5% and 23.0% in the third
quarter of Fiscal 1997 and 1998, respectively, and 25.8% and 24.9% in the
nine-month period of Fiscal 1997 and 1998, respectively. Lower margins in
the Fiscal 1998 periods is attributable to a change in product mix in the
Aerospace Distribution segment as a result of the Banner Hardware Group
Disposition. Partially offsetting overall lower margins, were improved
margins within the Aerospace Fasteners segment resulting from efficiencies
associated with increased production, improved skills of the work force,
and reduction in the payment of overtime.
Selling, General & Administrative expense as a percentage of sales was
21.2% and 17.2% in the third quarter of Fiscal 1997 and 1998, respectively,
and 21.7% and 18.9% in the nine-month period of Fiscal 1997 and 1998,
respectively. The improvement in the Fiscal 1998 periods is attributable
primarily to administrative efficiencies relative to increasing sales.
Other income increased $4.3 million in the current nine-month period,
compared to the prior year nine-month period, due primarily to the sale of
air rights over a portion of the property the Company owns and is
developing in Farmingdale, New York.
Operating income of $8.8 million in the third quarter of Fiscal 1998
increased 2.3%, compared to operating income of $8.6 million in the third
quarter of Fiscal 1997. Operating income of $35.0 million in the nine-
month period ended March 29, 1998, improved by $17.8 million, or 103.1%,
compared to the nine-month period ended March 30, 1997. The increase in
operating income was due primarily to the improved results provided by the
Company's Aerospace Fasteners segment.
Investment income (loss), net, decreased by $7.1 million in the first
nine months of Fiscal 1998, due to recognition of unrealized losses on the
fair market adjustments of investments previously classified as trading
securities in the Fiscal 1998 periods while recording unrealized gains from
trading securities in the Fiscal 1997 periods. Unrealized holding gains
(losses) on available-for-sale investments are marked to market value
through stockholders' equity and reported separately as part of
comprehensive income (see discussion below).
Minority interest increased by $21.1 million as a result of the $124.0
million non-recurring pre-tax gain recognized from the Banner Hardware
Group Disposition.
An income tax provision of $49.4 million in the first nine months of
Fiscal 1998 represented a 42.0% effective tax rate on pre-tax earnings from
continuing operations (excluding equity in earnings of affiliates and
minority interest) of $117.5 million. The tax provision was slightly higher
than the statutory rate because of goodwill associated with the Banner
Hardware Group Disposition.
Included in earnings (loss) from discontinued operations are the
results of Fairchild Technologies ("Technologies") through January 1998,
and the Company's equity in earnings of STFI prior to the STFI Merger.
Losses increased in the fiscal 1998 periods as a result of increased losses
recorded at Technologies and lower equity earnings contributed by STFI (See
Note 3).
In the nine months ended March 29, 1998, the Company recorded a $98.8
million gain, net of tax, on disposal of discontinued operations, from the
proceeds received from the STFI Merger. In the quarter ended March 29,
1998, the Company recorded a $68.8 million gain, net of tax, on disposal of
discontinued operations, from proceeds received for the common stock of
STFI. Partially offsetting this gain was an after-tax charge of $22.4
million the Company recorded in the third quarter ended March 29, 1998 in
connection with the adoption of a formal plan to enhance the opportunities
for disposition of Technologies. Included in this charge was (i) $13.4
million (net of income tax benefit of $4.6 million) representing the
estimated loss on the disposal of certain assets of Technologies; (ii) $4.2
million (net of an income tax benefit of $1.5 million) relating to the net
losses of Technologies since the measurement date; and (iii) $4.7 million
(net of an income tax benefit of $2.5 million) relating to a provision for
additional operating losses. The Company's results are affected by the
operations of Technologies, which may fluctuate because of industry
cyclicality, the volume and timing of orders, the timing of new product
shipments, customers' capital spending, and pricing changes by Technologies
and its competition. Technologies has experienced a reduction of its
backlog, and margin compression during the past nine months, which combined
with the existing cost base, may impact future earnings from Technologies.
While the Company believes that $22.4 million is a reasonable charge for
the expected losses in connection with the disposition of Technologies,
there can be no assurance that this estimate is adequate. (See Note 3).
The Company recognized an extraordinary loss of $6.7 million, net of
tax, to write-off the remaining deferred loan fees and original issue
discounts associated with early extinguishment of the Company's
indebtedness pursuant to the Public Debt Repayment and refinancing of the
FHC and RHI Credit Agreement facilities.
Net earnings of $112.6 million in the first nine months ended March
29, 1998, improved by $120.1 million compared to the $7.6 million net loss
recorded in the nine months ended March 30, 1997. This improvement is
attributable to a $17.8 million increase in operating income, a $124.0
million non-recurring gain from Banner Hardware Group Disposition, and the
$76.5 million gain on the disposal of discontinued operations. Partially
offsetting this increase was a $58.8 million increase in the income tax
provision, a $21.1 million change in minority interest, a $7.1 decrease in
investment income, and the $6.7 million extraordinary loss.
Comprehensive income includes foreign currency translation adjustments
and unrealized holding changes in the fair market value of available-for-
sale investment securities. The fair market value of unrealized holding
securities increased $14.5 million in the nine months ended March 29, 1998,
primarily as a result of an increase in the value of AlliedSignal common
stock which was received from the Banner Hardware Group Disposition.
SEGMENT RESULTS:
AEROSPACE FASTENERS SEGMENT
Sales in the Aerospace Fasteners segment increased by $38.8 million,
or 60.5%, in the third quarter and $95.1, or 54.2%, million for the Fiscal
1998 nine-month period, compared to the Fiscal 1997 periods, reflecting
significant growth in the commercial aerospace industry combined with the
effect of acquisitions. New orders have continued to be strong. The Company
reduced backlog to $187 million at March 29, 1998, down from $196 million
at June 30, 1997. Excluding sales contributed by acquisitions, sales
increased approximately 31% and 27% for the three and nine months ended March
29, 1998,respectively, compared to the same periods in the prior year.
Operating income improved by $6.1 million, or 171%, in the third
quarter and $10.7 million, or 137%, in the Fiscal 1998 nine-month period,
compared to the Fiscal 1997 periods. Acquisitions and marketing changes
were contributors to this improvement. Excluding the results provided by
acquisitions, operating income increased by approximately 100% in the third
quarter and 88% for the nine months of Fiscal 1998, compared to the same
periods in the prior year. The Company anticipates that manufacturing and
productivity efficiencies will further improve operating income in the coming
months.
AEROSPACE DISTRIBUTION SEGMENT
Aerospace Distribution sales were lower by $52.9 million, or 46.5% in
the third quarter and up $8.6 million, or 2.9%, in the first nine months of
Fiscal 1998, compared to the corresponding periods of the prior year. The
loss of revenues as a result of the Banner Hardware Group Disposition was
primarily responsible for the decrease in the current quarter, and
partially offset sales increases in the first nine months of Fiscal 1998,
which sales otherwise reflected a robust aerospace industry. Excluding
sales contributed by dispositions, sales increased 35% and 33% for the
three and nine months ended March 29, 1998, respectively, compared to the
same periods in the prior year.
Operating income decreased $7.0 million, in the third quarter and $1.9
million for the first nine months of Fiscal 1998, compared to the same
period of the prior year, due to the Banner Hardware Group Disposition.
Excluding the results from dispositions, operating income increased by 61%
for the nine months of Fiscal 1998,compared to the same periods in the prior
year.
CORPORATE AND OTHER
The Corporate and Other classification includes the Gas Springs
Division and corporate activities. The results of SBC, which was sold at
Fiscal 1997 year-end, are included in the prior period results. The group
reported a decrease in sales of $3.3 million, in the third quarter and $5.2
million, in the first nine months of Fiscal 1998, as compared to the same
periods in Fiscal 1997, due to the exclusion of SBC's results in the
current periods. The operating loss decreased by $1.8 million in the third
quarter and $9.2 million in the first nine months of Fiscal 1998, compared
to the Fiscal 1997 periods, as a result of an increase in other income and
a decrease in legal expenses.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $42.4 million from $19.4
million at June 30, 1997 to $61.8 million at March 29, 1998. Cash received
of $178.0 from the STFI Merger and $54.2 from the Offering was partially
offset by cash of $104.1 million used for operations, capital expenditures,
including acquisitions of $56.1 million, and minority interest purchases of
$26.4 million. The increase in cash used for operations was primarily
attributable to increases in working capital (net of the Banner Hardware
Group Disposition). The Company's principal cash requirements include debt
service, capital expenditures, acquisitions, and payment of other
liabilities. Other liabilities that require the use of cash include post-
employment benefits for retirees, environmental investigation and
remediation obligations, and litigation settlements and related costs. The
Company maintains credit agreements with a consortium of banks, which
provide a term loan and revolving credit facilities to the Company, and a
separate revolving credit facility is made available to Banner. The Company
anticipates that existing capital resources, cash generated from
operations, and cash from borrowings and asset sales will be adequate to
maintain the Company's current level of operations.
For the Company's fiscal years ended June 30, 1995, 1996 and 1997, and
for the first nine months of fiscal 1998, the Company had negative cash
flows from operations of $25.0 million, $49.0 million, $100.1 million and
$104.1 million, respectively. The Company believes that recent proceeds
from dispositions and the recent equity offering, along with a refinancing
of the Company's debt, will provide the Company with the necessary capital
to overcome these negative cash flows. The Company plans to focus on its
core businesses and capitalize on the resurgent aerospace industry in order
to improve operating cash flows.
With the proceeds of the Offering, borrowings under the Facility and
the after tax proceeds received from the STFI Merger, the Company
refinanced substantially all of its existing indebtedness (other than
indebtedness at Banner), consisting of the 11 7/8% Senior Debentures due
1999, the 12% Intermediate Debentures due 2001, the 13 1/8% Subordinated
Debentures due 2006, the 13% Junior Subordinated debentures due 2007 and
its existing bank indebtedness. The Public Debt Repayment reduced the
Company's total net indebtedness by approximately $132 million and reduced
the Company's annual interest expense, on a pro forma basis, by
approximately $21 million, and the STFI Merger reduced the Company's annual
interest expense by approximately an additional $3 million. A portion of
the proceeds from the Banner Hardware Group Disposition were used to repay
all of Banner's outstanding term loan indebtedness, which will further
reduce the Company's annual interest expense by approximately an additional
$14 million. The operating income of the subsidiaries included in the
Banner Hardware Group Disposition was $14.1 million for the nine months
ended March 29, 1998, respectively. Whereas the Company will no longer
benefit from the operations of the disposed Banner subsidiaries it expects
to benefit from lower interest expense and dividends paid on the
AlliedSignal stock.
The Company has made an offer to exchange (the "Exchange Offer") its
Class A common stock for up to a maximum of 4 million shares of Banner
common stock. The purpose of the Exchange Offer is for the Company to
increase its ownership of Banner to at least 80.1% such that the Company
can include Banner in its United States consolidated corporate income tax
return. Pending a successful Exchange Offer, the Company contemplates
issuing approximately .6046 of a share of its Class A common stock for each
validly tendered share of Banner common stock.
For the Company's fiscal years 1995, 1996, and 1997, and for the first
nine months of fiscal 1998, Technologies had operating losses of
approximately $1.5 million, $1.5 million, $3.6 million, and $13.7 million,
respectively. In addition, as a result of the downturn in the Asian
markets, Technologies has experienced delivery deferrals, reduction in new
orders, lower margins and increased price competition. In response, in
February 1998, the Company adopted a formal plan to enhance the
opportunities for disposition of Technologies, while improving the ability
of Technologies to operate more efficiently. The plan includes a reduction
in production capacity and headcount, and the pursuit of potential vertical
and horizontal integration with peers and competitors of the two divisions
that constitute Technologies, or the inclusion of those divisions in the
Spin-Off. If the Company elects to include Technologies in the Spin-Off,
the Company believes that it would be required to contribute substantial
additional resources to allow Technologies the liquidity necessary to
sustain and grow both the Fairchild Technologies' operating divisions.
In order to focus its operations on the aerospace industry, the
Company is considering distributing (the "Spin-Off") to its shareholders
all of the stock of a subsidiary to be formed ("Spin-Co"), which may own
substantially all of the Company's non-aerospace assets. Although the
Company's ability to effect the Spin-Off is uncertain, the Company may
effect a spin-off of certain non-aerospace assets as soon as it is
reasonably practicable following receipt of a solvency opinion relating to
Spin-Co and all necessary governmental and third party approvals. In order
to effect the Spin-Off, approval is required from the board of directors of
the Company, however, shareholder approval is not required. The composition
of the assets and liabilities to be included in Spin-Co, and accordingly
the ability of the Company to consummate the Spin-Off, is contingent, among
other things, on obtaining consents and waivers under the Company's New
Credit Facility. In addition, the Company may encounter unexpected delays
in effecting the Spin-Off, and the Company can make no assurance as to the
timing thereof. In addition, prior to the consummation of the Spin-Off, the
Company may sell, restructure or otherwise change the assets and
liabilities that will be in Spin-Co, or for other reasons elect not to
consummate the Spin-Off. Consequently, there can be no assurance that the
Spin-Off will occur.
In connection with the possible Spin-Off, it is anticipated that the
Company will enter into an indemnification agreement pursuant to which Spin-
Co will assume and be solely responsible for all known and unknown past,
present and future claims and liabilities of any nature relating to the
pension matter described under "Legal Proceedings"; certain environmental
liabilities currently recorded as $7.1 million, but for which it is
reasonably possible the total expense could be $11.9 million on an
undiscounted basis; certain retiree medical cost and liabilities related to
discontinued operations for which the Company has accrued approximately
$42.8 million as of March 29, 1998 (see Note 11 to the Company's
Consolidated Financial Statements); and certain tax liabilities. In
addition, the Spin-Co would also be responsible for all liabilities
relating to the Technologies business and an allocation of corporate
expenses. Responsibility for such liabilities would require significant
commitments.
Should the Spin-Off, as presently contemplated, occur prior to June of
1999, the Spin-Off may be a taxable transaction to shareholders of the
Company and could result in a material tax liability to the Company and its
shareholders. The amount of the tax to the Company and its shareholders is
uncertain, and if the tax is material to the Company, the Company may elect
not to consummate the Spin-Off. Because circumstances may change and
because provisions of the Internal Revenue Code of 1986, as amended, may be
further amended from time to time, the Company may, depending on various
factors, restructure or delay the timing of the Spin-Off to minimize the
tax consequences thereof to the Company and its shareholders.
With the year 2000 approaching, the Company is preparing all of its
computer systems to be Year 2000 compliant. Substantially all of the
systems within the Aerospace Fasteners segment are currently Year 2000
compliant. The Company expects to replace and upgrade some systems, which
are not Year 2000 compliant, within the Aerospace Distribution segment and
at Fairchild Technologies. The Company expects all of its systems will be
Year 2000 compliant on a timely basis. However, there can be no assurance
that the systems of other companies, on which the Company's systems rely,
will also be timely converted. Management is currently evaluating the cost
of ensuring that all of its systems are Year 2000 compliant.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131")
"Disclosures about Segments of an Enterprise and Related Information". SFAS
131 supersedes Statement of Financial Accounting Standards No. 14
"Financial Reporting for Segments of a Business Enterprise" and requires
that a public company report certain information about its operating
segments in annual and interim financial reports. The Company will adopt
SFAS 131 in Fiscal 1999.
In February 1998, FASB issued Statement of Financial Accounting
Standards No. 132 ("SFAS 132") "Employers' Disclosures about Pensions and
Other Postretirement Benefits". SFAS 132 revises and improves the
effectiveness of current note disclosure requirements for employers'
pensions and other retiree benefits by requiring additional information to
facilitate financial analysis and eliminating certain disclosures which are
no longer useful. SFAS 132 does not address recognition or measurement
issues. The Company will adopt SFAS 132 in Fiscal 1999.
PART II. OTHER INFORMATION
Item 5. Other Information
Articles have appeared in the French press reporting an inquiry by a
French magistrate into certain allegedly improper business transactions
involving Elf Acquitaine, a French petroleum company, its former chairman
and various third parties, including Maurice Bidermann. In connection with
this inquiry, the magistrate has made inquiry into allegedly improper
transactions between Mr. Steiner and that petroleum company. In response
to the magistrate's request that Mr. Steiner appear in France as a witness,
Mr. Steiner submitted statements concerning the transactions and has
offered to appear in person if certain arrangements were made. According
to the French press, the magistrate also requested permission to commence
an inquiry into transactions involving another French petroleum company,
but her request was not granted. If the magistrate were to renew her
request, and if it were granted, inquiry into transactions between such
company and Mr. Steiner, could ensue.
Mr. Steiner has recently been cited by a French prosecutor to appear
on May 18, 1998, before the Tribunal de Grande Instance de Paris, to answer
a charge of knowingly benefiting in 1990, from a misuse by Mr. Bidermann of
corporate assets of Societe Generale Mobiliere et Immobiliere, a French
corporation in which Mr. Bidermann is believed to have been the sole
shareholder.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (* filed herewith):
*10.1 Amendment No. 2 dated as of January 14, 1997, to the
Interest Rate Hedge Agreement between
Registrant and Citibank, N.A. dated as of August 19,
1997.
*10.2 Letter Agreement dated February 27, 1998, between Registrant and John
L. Flynn.
*10.3 Letter Agreement dated February 27, 1998, between Registrant and
Donald E. Miller.
*10.4 Stock Option Deferral Plan dated February 9, 1998.
*10.5 Amendment of Warrant Agreement dated February 9, 1998, between the
Registrant and Stinbes Limited.
10.6 Stock Option Agreement dated November 20, 1997 between RHI Holdings,
Inc. and Intermedia Communciations Inc. (Incorporated by reference to Scheduled
13D/A (Amendment No. 4) dated as of November 25, 1997 filed by the Company on
December 1, 1997).
10.7 Stock Purchase Agreement dated November 25, 1997 between RHI
Holdings, Inc. and Intermedia Communications Inc. (Incorporated by reference to
Schedule 13D/A (Amendment No. 4) dated as of November 25, 1997 filed by the
Company on December 1, 1997).
10.8 Asset Purchase Agreement dated as of December 8, 1997, among Banner
Aerospace, Inc. and seven of its subsidiaries (Adams Industries, Inc.,
Aerospace Bearing Support, Inc., Aircraft Bearing Corporation, Banner
Distribution, Inc., Burbank Aircraft Supply, Inc., Harco, Inc. and PacAero),
AlliedSignal Inc. and AS BAR LLC (incorporated by reference to Banner
Aerospace, Inc.'s Report on Form 8-K dated January 28, 1998).
10.9 Asset Purchase Agreement dated as of December 8, 1997, among Banner
Aerospace, Inc. and two of its subsidiaries (PB Herndon Aerospace, Inc. and
Banner Aerospace Services, Inc.), AlliedSignal Inc. and AS BAR PBH LLC
(incorporated by reference to Banner Aerospace, Inc.'s Report on Form 8-K dated
January 28, 1998).
10.10 Agreement and plan of Merger dated January 28, 1998, as amended on
February 20, 1998, and March 2, 1998, between the Company and the shareholders'
of Special-T Fasteners (Incorporated by reference to Form 8-K dated as of March
2, 1998 filed by the Company on March 12, 1998).
*10.11 Employment Agreement between Robert Edwards and Fairchild Holding
Corp., dated March 2, 1998.
*27 Financial Data Schedules.
(b) Reports on Form 8-K:
On January 28, 1998, the Company filed a Form 8-K to report on Item 2
and Item 7 regarding the completion of the Banner Hardware Group
Disposition. On March 12, 1998 the Company filed a Form 8-K to report on
Item 2 and Item 7 regarding the March 2, 1998 consummation of the Special-T
Acquisition. On March 25, 1998, the Company filed a Form 8-K to report on
Item 2 and Item 7 regarding the completion of the STFI Merger.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to the signed on
its behalf by the undersigned hereunto duly authorized.
For THE FAIRCHILD CORPORATION
(Registrant) and as its Chief
Financial Officer:
By: Colin M. Cohen
Senior Vice President and
Chief Financial Officer
Date: May 13, 1998