<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported):
March 13, 1996
SHARED TECHNOLOGIES FAIRCHILD INC.
----------------------------------
(Exact name of registrant as specified in charter)
DELAWARE 0-17366 87-0424558
- -------- ------- ----------
(State of other (Commission (I.R.S. Employer
jurisdiction of incorporation) File Number) Identification No.)
100 Great Meadow Road, Suite 104, Wethersfield, CT 06109
- -------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (860)258-2400
Shared Technologies Inc.
------------------------
(Former name or former address, if changed since last report).
<PAGE>
This Form 8-K/A amends Item 7 of that certain Form 8-K dated March 13, 1996,
(The "Original Form 8-K") by including the financial statements referred to
below,
Item 7, Financial Statements and Exhibits
(a) Financial statements of businesses acquired.
In connection with the business acquisition described in Item 2 or the
original Form 8-K, attached are the financial statements of the business
acquired for the required periods, consisting of Pre-Recapitalization/Merger
financials; (i) Report of the Independent Auditor, (ii) balance sheets of
Fairchild Industries, Inc. and subsidiary ("FII") as of June 30, 1994 and 1995,
(iii) the related statements of income and cash flows for the years ended June
30, 1995, 1994, 1993, (iv) unaudited balance sheet of FII as of December 31,
1995, (v) the related unaudited statements of income and cash flow for each of
the six months ended December 31, 1994 and 1995, and Post-
Recapitalization/Merger Financials; (i) Report of Independent Auditor, (ii)
balance sheets of FII as of June 30, 1994, 1996 and December 31, 1995
(unaudited), (iii) the related statements of income and cash flows for the years
ended June 30, 1993, 1994 and 1995 and the six months ended December 31, 1995
(unaudited).
(b) Pro forma financial information
In connection with the business acquisition described in Item 2 of the
Original Form 8-K, attached is the pro forma financial information required
pursuant to Article 11 of Regulation S-X, consisting of condensed combining
statements of operations of Shared Technologies Fairchild Inc. and its
subsidiaries and FII for the year ended December 31, 1995.
<PAGE>
Signature
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 hereunto duly authorized.
Share Technologies Fairchild Inc.
By:
------------------------------
Vincent DiVincenzo
Senior Vice President-
Administration and
Finance, Treasurer and Chief
Financial Officer
Dated: May 27, 1996
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fairchild Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Fairchild
Industries, Inc. (a Delaware corporation) and subsidiaries as of June 30, 1994
and 1995, and the related consolidated statements of earnings, stockholders'
equity and cash flows for the years ended June 30, 1993, 1994 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fairchild Industries, Inc.
and subsidiaries as of June 30, 1994 and 1995 and the results of their
operations and their cash flows for the years ended June 30, 1993, 1994, and
1995, in conformity with generally accepted accounting principles.
As discussed in Notes 5 and 6 to the consolidated financial statements,
effective July 1, 1993, the Company changed its method of accounting for
postretirement benefits other than pensions, and income taxes.
ARTHUR ANDERSEN LLP
Washington, D.C.
September 15, 1995
F-1
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 2,468 $ 2,412
Accounts receivable-trade, less allowances of $2,135 and
$4,478..................................................... 68,364 84,927
Inventories:
Finished goods............................................ 46,358 50,963
Work-in-process........................................... 28,418 19,976
Raw materials............................................. 10,120 17,866
-------- --------
84,896 88,805
Prepaid expenses and other current assets................... 29,353 15,239
-------- --------
Total Current Assets.................................... 185,081 191,383
Property, plant and equipment, net.......................... 157,301 158,191
Net assets held for sale.................................... 34,515 34,811
Cost in excess of net assets acquired, (goodwill) less
accumulated amortization of $28,864 and $34,707............ 195,929 195,986
Deferred loan costs......................................... 7,820 5,648
Prepaid pension assets...................................... 17,795 15,336
Other assets................................................ 19,035 14,433
-------- --------
Total Assets............................................ $617,476 $615,788
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-2
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1994 1995
--------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank notes payable and current maturities of long-term
debt.................................................... $ 12,735 $ 15,352
Accounts payable......................................... 32,372 39,124
Due to affiliated companies.............................. 52,250 13,759
Accrued liabilities:
Wages, salaries and commissions........................ 13,527 14,655
Employee benefit plans................................. 2,015 1,352
Insurance.............................................. 13,662 15,150
Interest............................................... 6,836 6,647
Other.................................................. 28,311 28,002
--------- ---------
64,351 65,806
Total Current Liabilities............................ 161,708 134,041
Long-term debt........................................... 224,132 249,306
Retiree health care liabilities.......................... 49,200 47,567
Noncurrent income taxes.................................. 26,576 18,049
Other long-term liabilities.............................. 16,412 13,179
--------- ---------
Total liabilities.................................... 478,028 462,142
Redeemable preferred stock:
$3.60 Cumulative Series A Convertible preferred stock,
without par value, 424,701 shares authorized, issued
and outstanding at redemption value of $45.00 per
share................................................. 19,112 19,112
Stockholders' Equity:
Series B Preferred Stock, without par value, 3,000 shares
authorized, 2,025 and 2,278 issued and outstanding;
liquidation value of $100,000 per share................. 202,500 227,800
Series C Cumulative Preferred Stock, without par value,
558,360 shares authorized issued and outstanding;
liquidation value of $45.00 per share................... 24,015 24,015
Common Stockholder's Equity:
Common stock, par value of $100.00 per share, 1,400
shares authorized, issued, and outstanding.............. 140 140
Paid-in capital.......................................... 2,390 2,523
Accumulated deficit...................................... (111,855) (128,116)
Cumulative translation adjustment........................ 3,146 8,172
--------- ---------
Total Common Stockholder's Deficit................... (106,179) (117,281)
--------- ---------
Total Stockholders' Equity........................... 120,336 134,534
--------- ---------
Total Liabilities and Stockholders' Equity........... $ 617,476 $ 615,788
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-3
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Sales...................................... $ 463,567 $ 444,145 $ 508,612
Other income, net.......................... 5,666 544 2,908
--------- --------- ---------
469,233 444,689 511,520
Costs and Expenses:
Cost of sales.............................. 351,074 337,881 392,802
Selling, general & administrative.......... 74,228 72,601 85,383
Research and development................... 3,262 3,940 4,100
Amortization of goodwill................... 5,838 5,806 5,842
Restructuring.............................. 15,469 18,860 --
Unusual items.............................. -- 6,000 --
--------- --------- ---------
449,871 445,088 488,127
Operating income (loss)...................... 19,362 (399) 23,393
Interest expense............................. 32,821 30,667 35,284
Interest income.............................. (459) (311) (184)
--------- --------- ---------
Net interest expense......................... 32,362 30,356 35,100
Investment income............................ 1,424 3,354 924
Equity in earnings of affiliates............. 522 541 762
Minority interest............................ (129) (181) (121)
--------- --------- ---------
Loss from continuing operations before
taxes....................................... (11,183) (27,041) (10,142)
Income tax provision (benefit)............... 264 (4,792) 2,017
--------- --------- ---------
Net loss from continuing operations.......... (11,447) (22,249) (12,159)
Loss on disposal of discontinued operations,
net......................................... -- -- (200)
--------- --------- ---------
Net loss before extraordinary items and
changes in accounting principles............ (11,447) (22,249) (12,359)
Extraordinary items, net..................... (810) -- --
Cumulative effect of change in accounting for
postretirement benefits, net................ -- (252) --
Cumulative effect of change in accounting for
income taxes, net........................... -- (11,486) --
--------- --------- ---------
Net loss..................................... $ (12,257) $ (33,987) $ (12,359)
========= ========= =========
Series A preferred dividends................. $ 1,713 $ 1,529 $ 1,529
Series C preferred dividends................. 2,160 2,373 2,373
--------- --------- ---------
Loss after preferred dividends............... $ (16,130) $ (37,889) $ (16,261)
========= ========= =========
Dividends to RHI Holdings, Inc. (Parent)..... $ 50,000 $ -- $ --
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-4
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES B SERIES C CUMULATIVE
COMMON PREFERRED PREFERRED PAID-IN ACCUMULATED TRANSLATION
STOCK STOCK STOCK CAPITAL DEFICIT ADJUSTMENT TOTAL
------ --------- --------- ------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1992.. $140 $192,600 $ -- $2,230 $ (6,985) $ 6,169 $194,154
Net loss................ -- -- -- -- (12,257) -- (12,257)
Issuance of Series B
preferred stock to
parent................. -- 5,000 -- -- -- -- 5,000
Exchange of Series A
preferred stock for
issuance of Series C
preferred stock........ -- -- 24,015 -- -- -- 24,015
Cash dividends to
preferred
stockholders........... -- -- -- -- (3,873) -- (3,873)
Cash dividends to
parent................. -- -- -- -- (50,000) -- (50,000)
Cumulative translation
adjustment, net........ -- -- -- -- -- (3,503) (3,503)
---- -------- ------- ------ --------- ------- --------
BALANCE, June 30, 1993.. $140 $197,600 $24,015 $2,230 $ (73,115) $ 2,666 $153,536
Net loss................ -- -- -- -- (33,987) -- (33,987)
Issuance of Series B
preferred stock to
parent................. -- 4,900 -- 143 -- -- 5,043
Transfer of subsidiary
from parent............ -- -- -- 17 (851) -- (834)
Cash dividends to
preferred
stockholders........... -- -- -- -- (3,902) -- (3,902)
Cumulative translation
adjustment, net........ -- -- -- -- -- 480 480
---- -------- ------- ------ --------- ------- --------
BALANCE, June 30, 1994.. $140 $202,500 $24,015 $2,390 $(111,855) $ 3,146 $120,336
Net loss................ -- -- -- -- (12,359) -- (12,359)
Issuance of Series B
preferred stock to
parent................. -- 25,300 -- 88 -- -- 25,388
Transfer of pension plan
from parent............ -- -- -- 45 -- -- 45
Cash dividends to
preferred
stockholders........... -- -- -- -- (3,902) -- (3,902)
Cumulative translation
adjustment, net........ -- -- -- -- -- 5,026 5,026
---- -------- ------- ------ --------- ------- --------
BALANCE, June 30, 1995.. $140 $227,800 $24,015 $2,523 $(128,116) $ 8,172 $134,534
==== ======== ======= ====== ========= ======= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-5
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
------------------------------
1993 1994 1995
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $ (12,257) $ (33,987) $(12,359)
Adjustments to reconcile net loss:
Cumulative effect of accounting changes,
net......................................... -- 11,738 --
Depreciation and amortization................ 30,477 32,295 35,172
Accretion of discount on long-term
liabilities................................. 2,205 3,070 3,311
Undistributed earnings of affiliates......... (266) (230) (450)
Provision for restructuring and unusual items
(excluding cash payments of $7,896 in 1993
and $6,020 in 1994)......................... 7,573 18,840 --
Minority interest............................ 129 181 121
Loss on sale of property, plant and
equipment................................... 2,364 583 726
Change in accounts receivable................ 6,942 (2,114) (16,563)
Change in inventories........................ 9,444 4,246 (3,696)
Change in other current assets............... (11,896) (10,063) 9,545
Change in other non-current assets........... (5,899) 387 3,538
Change in accounts payable, accrued and other
liabilities................................. (17,295) (11,772) (4,062)
--------- --------- --------
Net cash provided by operating activities...... 11,521 13,174 15,283
--------- --------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired........... (7,313) -- (11,550)
Collections on notes and other receivables
related to operations sold.................. 218 1,183 --
Purchases of property, plant and equipment... (15,508) (16,092) (19,779)
Proceeds from sales of property, plant and
equipment................................... 975 1,351 1,787
Change in net assets held for sale........... 2,015 (1,291) 1,914
--------- --------- --------
Net cash used for investing activities......... (19,613) (14,849) (27,628)
--------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of debt............... 180,942 106,960 72,117
Debt repayments and repurchase of debentures,
net......................................... (125,072) (103,951) (82,817)
Issuance of Series B preferred stock......... 5,000 4,000 24,400
Issuance of Series C preferred stock......... 24,015 -- --
Purchase/exchange of Series A preferred
stock....................................... (25,126) -- --
Paid-in capital contribution................. -- 143 88
Payment of dividends......................... (53,782) (3,902) (3,902)
--------- --------- --------
Net cash provided by financing activities...... 5,977 3,250 9,886
--------- --------- --------
Effect of exchange rate changes on cash........ (2,900) 893 2,403
Net increase (decrease) in cash and cash
equivalents................................... (5,015) 2,468 (56)
Cash and cash equivalents, beginning of year... 5,015 -- 2,468
--------- --------- --------
Cash and cash equivalents, end of year......... $ -- $ 2,468 $ 2,412
========= ========= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-6
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Corporate Structure: Fairchild Industries, Inc. is incorporated in the State
of Delaware. As used herein, the term "Company" refers to Fairchild
Industries, Inc. and its subsidiaries unless otherwise indicated. The Company
is a subsidiary of RHI Holdings, Inc. ("RHI") which is in turn a wholly-owned
subsidiary of The Fairchild Corporation ("TFC"). The Company conducts its
operations through its wholly-owned subsidiary VSI Corporation ("VSI").
Fiscal Year: The fiscal year ("Fiscal") of the Company ends on June 30. All
references herein to "1993", "1994", and "1995" mean the fiscal years ended
June 30, 1993, 1994 and 1995, respectively.
Principles of Consolidation: The consolidated financial statements are
prepared in accordance with generally accepted accounting principles and
include the accounts of the Company and its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Investments in companies owned between 20 percent and 50
percent are recorded using the equity method. On June 30, 1995, approximately
$1,620,000 of the Company's $(128,116,000) accumulated deficit were from
undistributed earnings of 50 percent or less owned affiliates.
Cash Equivalents/Statements of Cash Flows: For purposes of these statements,
the Company considers all highly liquid investments with original maturity
dates of three months or less as cash equivalents. Total cash disbursements
made by the Company for income taxes and interest were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest............................................. $19,129 $25,050 $29,898
Income taxes......................................... 1,171 270 1,867
</TABLE>
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined primarily using the last-in, first-out (LIFO) method. Inventories
from continuing operations are valued as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Last-in, first-out (LIFO).................................. $69,828 $69,211
First-in, first-out (FIFO)................................. 15,068 19,594
------- -------
Total inventories.......................................... $84,896 $88,805
======= =======
</TABLE>
For inventories valued on the LIFO method, the excess of current FIFO value
over stated LIFO value was approximately $7,924,000 and $7,447,000 at June 30,
1994 and 1995, respectively. The LIFO decrement was immaterial for Fiscal
1995.
F-7
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Properties and Depreciation: Properties are stated at cost and depreciated
over estimated useful lives, generally on a straight-line basis. For Federal
income tax purposes, accelerated depreciation methods are used. No interest
costs were capitalized in any of the years presented. Property, plant, and
equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1994 1995
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land.................................................... $ 14,229 $ 14,022
Buildings and improvements.............................. 32,937 33,353
Machinery and equipment................................. 183,693 208,475
Transportation vehicles................................. 529 513
Furniture and fixtures.................................. 5,118 8,025
Construction in progress................................ 6,358 4,419
-------- ---------
242,864 268,807
Less: Accumulated depreciation.......................... (85,563) (110,616)
-------- ---------
Net property, plant, and equipment...................... $157,301 $ 158,191
======== =========
</TABLE>
Amortization of Goodwill: The excess of cost of purchased businesses over
the fair value of their net assets at acquisition dates (goodwill) is being
amortized on a straight-line basis over 40 years.
Deferred Loan Costs: Deferred loan costs associated with various debt issues
are being amortized over the terms of the related debt, based on the amount of
outstanding debt, using the effective interest method. Amortization expense
for these loan costs was $1,895,000, $2,201,000 and $2,259,000, for Fiscal
1993, 1994 and 1995, respectively.
Impairment of Long-Lived Assets: The Company reviews its long-lived assets,
including property, plant and equipment, identifiable intangibles and
goodwill, for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be fully recoverable. To
determine recoverability of its long-lived assets the Company evaluates the
probability that future undiscounted net cash flows, without interest charges,
will be less than the carrying amount of the assets. Impairment is measured at
fair value.
Despite three consecutive years of operating losses in the Company's
Aerospace Fasteners segment, the Company believes that future net cash flows
from this segment will be sufficient to permit recovery of the segment's long-
lived assets, including the remaining goodwill.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
SFAS 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS 121 is required to be implemented by the
Company on, or before, July 1, 1996. Since the Company's present policy is
identical to the policy prescribed by SFAS 121, there will be no effect from
implementation. (For further discussion, see "Impact of future accounting
changes" included in Item 7, Management Discussion and Analysis of Results of
Operations and Financial Condition).
Foreign Currency Translation: All balance sheet accounts of foreign
subsidiaries are translated at current exchange rates at the end of the
accounting period. Income statement items are translated at average exchange
F-8
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
rates during the period. The resulting translation adjustment is recorded as a
separate component of stockholders' equity. Foreign transaction gains and
losses are included in other income and were insignificant in Fiscal 1993,
1994 and 1995.
Research and Development: Company-sponsored research and development
expenditures are expensed as incurred.
Reclassification: Certain amounts in prior years' financial statements have
been reclassified to conform to the Fiscal 1995 presentation.
2. ACQUISITIONS
In Fiscal 1993, Fairchild Communications Services Company ("Fairchild
Communications"), a partnership whose partners are indirect subsidiaries of
the Company, acquired all the telecommunication assets of Office Networks,
Inc. for approximately $7,300,000.
On November 28, 1994, Fairchild Communications completed the acquisition of
substantially all of the telecommunications assets of JWP Telecom, Inc.
("JWP") for approximately $11,000,000, plus the assumption of approximately
$3,000,000 of liabilities. JWP is a telecommunications system integrator,
specializing in the distribution, installation and maintenance of voice and
data communications equipment. In the first quarter of Fiscal 1995, Fairchild
Communications acquired all the shared telecommunications assets of Eaton &
Lauth Co., Inc., for approximately $550,000.
Pro forma financial statements are not required for these acquisitions on an
individual basis.
3. NET ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
The Company has decided not to sell Fairchild Data Corporation ("Data")
which previously was included in net assets held for sale. The Company is
recording the Fiscal 1994 and Fiscal 1995 results from Data with the Company's
Industrial Products Segment. Sales from Data formerly included in net assets
held for sale, and not included in results of operations, were $15,432,000 for
the twelve months ended June 30, 1993. The impact of Data's earnings on the
Fiscal 1993 period was immaterial.
Net assets held for sale at June 30, 1995, includes two parcels of real
estate in California and an 88 acre parcel of real estate located in
Farmingdale, New York, which the Company plans to sell, lease or develop,
subject to the resolution of certain environmental matters and market
conditions, and a limited partnership interest in a real estate development
joint venture.
Net assets held for sale are recorded at estimated net realizable values,
which reflect anticipated sales proceeds and other carrying costs to be
incurred during the holding period. Interest is not allocated to net assets
held for sale.
The Company recorded a $200,000 after tax loss on disposal of discontinued
operations, relating to workers' compensation claims from employees of
operations which were previously discontinued.
F-9
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. NOTES PAYABLE AND LONG-TERM DEBT
At June 30, 1994 and 1995, notes payable and long-term debt consisted of the
following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Short-term notes payable (weighted average interest rates
of 8.5% and 8.2% in 1994 and 1995, respectively)......... $ 3,592 $ 5,348
======== ========
Bank credit agreement..................................... $ 97,315 $126,396
9.75% Subordinated Debentures, due annually 1996 through
1998..................................................... 3,998 2,999
12.25% Senior secured notes due 1999...................... 125,000 125,000
10.65% Industrial revenue bonds........................... 1,500 1,500
Capital lease obligations, interest from 5.85% to 15.50%
(see Note 13)............................................ 3,302 1,253
Other notes payable, collateralized by property or
equipment, interest from 5.50% to 10.65%................. 2,160 2,162
-------- --------
233,275 259,310
Less: Current maturities.................................. 9,143 10,004
-------- --------
$224,132 $249,306
======== ========
</TABLE>
The Company maintains a credit agreement (the "Credit Agreement") with a
consortium of banks, which provides a revolving credit facility and term loans
(collectively the "Credit Facilities"). The Credit Facilities generally bear
interest at 3.75% over the London Interbank Offer Rate ("LIBOR") for the
revolving credit facility and Term Loan VIII, and at 2.75% over LIBOR for Term
Loan VII, respectively. The commitment fee on the unused portion of the
revolving credit facility was 1.0% at June 30, 1995. The Credit Facilities
mature March 31, 1997 and are secured by substantially all the Company's
assets.
The following table summarizes the Credit Facilities under the Credit
Agreement.
<TABLE>
<CAPTION>
OUTSTANDING TOTAL
AS OF AVAILABLE
JUNE 30, 1995 FACILITIES
------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Revolving Credit Facility(a)........................ $ 34,700 $ 50,250
Term Loan VII....................................... 49,696 49,696
Term Loan VIII...................................... 42,000 42,000
-------- --------
$126,396 $141,946
======== ========
</TABLE>
- --------
(a) In the first quarter of Fiscal 1995, the revolving credit facility was
reduced by $9,250,000 to $50,250,000. In addition, the borrowing rate
increased by 1.0% to generally bear interest at 3.75% over LIBOR and the
commitment fee increased by 0.5% to 1.0%.
On June 30, 1995, the Company had outstanding letters of credit of
$7,554,000 which were supported by the Credit Agreement and other bank
facilities on an unsecured basis. At June 30, 1995, the Company had unused
short-term bank lines of credit aggregating $7,996,000 at interest rates
slightly higher than the prime rate. The Company also has short-term lines of
credit relating to foreign operations aggregating $9,529,000 against which the
Company owed $5,349,000 at June 30, 1995.
The Credit Agreement, as amended, contains certain covenants, including a
material adverse change clause, and restrictions on dividends, capital
expenditures, capital leases, operating leases, investments and indebtedness.
F-10
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
It requires the Company to comply with certain financial covenants including
achieving cumulative earnings before interest, taxes, depreciation and
amortization ("EBITDA Covenant"), and maintaining certain coverage ratios. To
comply with the minimum EBITDA Covenant requirements (as amended), the
Company's subsidiary, VSI Corporation ("VSI"), must earn for the cumulative
total of the trailing four quarters, EBITDA as follows: $60,000,000 for the
first quarter of Fiscal 1996, $65,000,000 for the second quarter of 1996,
$70,000,000 for the third quarter of Fiscal 1996, and $80,000,000 for the
fourth quarter of Fiscal 1996. VSI's ability to meet the minimum requirements
under the EBITDA Covenant in Fiscal 1996 is uncertain, and there can be no
assurance that the Company will be able in the future to comply with the
minimum requirements under the EBITDA Covenant and other financial covenants
under the Credit Agreement. Noncompliance with any of the financial covenants,
without cure, would constitute an event of default under the Credit Agreement.
An event of default resulting from a breach of a financial covenant may
result, at the option of lenders holding a majority of the loans, in an
acceleration of the principal and interest outstanding, and a termination of
the revolving credit line. However, if necessary, management believes a waiver
can be obtained.
VSI's capital expenditures are limited during the remaining term of the
Credit Agreement to the lower of (i) an annual ceiling of $25,200,000 to
$26,500,000 per year, or (ii) 30% of the prior Fiscal year's earnings before
interest, taxes, depreciation and amortization. Capital expenditure reductions
can be offset by cash contributions from RHI. Capital expenditures can also be
increased if cash proceeds are received from the sale of other property,
subject to approval by the senior lenders under the Credit Agreement. The
Company's sale of property, plant, and equipment is limited during the
remaining term of the Credit Agreement.
Any available cash may be paid as dividends to RHI if the purpose of such
dividends is to provide TFC with funds necessary to meet its debt service
requirements under specified notes and debentures. All other dividends to RHI
are subject to certain limitations under the Credit Agreement. As of June 30,
1995, the Company was unable to provide dividends to RHI. The Credit Agreement
also restricts all additional borrowings under the Credit Facilities for the
payment of any dividends.
The indenture, covering the Company's 9.75% subordinated debentures, places
restrictions on payment of dividends and the creation of additional debt of
equal priority with the debentures. The Company is in compliance with these
restrictions at June 30, 1995.
Annual maturities of long-term debt obligations (exclusive of capital lease
obligations) for each of the five years following June 30, 1995 are as
follows: $14,338,000 for 1996, $121,231,000 for 1997, $1,001,000 for 1998,
$125,056,000 for 1999, and $56,000 for 2000.
5. PENSIONS AND POSTRETIREMENT BENEFITS
Pensions
The Company has established defined benefit pension plans covering
substantially all employees. Employees in foreign subsidiaries may participate
in local pension plans, which are in the aggregate insignificant and are not
included in the following disclosures. The Company's funding policy for the
plans is to contribute each year the minimum amount required under the
Employee Retirement Income Security Act of 1974.
F-11
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table provides a summary of the components of net periodic
pension cost for the plans:
<TABLE>
<CAPTION>
1993 1994 1995
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost of benefits earned during the
period...................................... $ 4,183 $ 3,827 $ 3,917
Interest cost of projected benefit
obligation.................................. 5,479 5,665 5,784
Return on plan assets........................ (13,397) (41) (10,102)
Net amortization and deferral................ 6,939 (7,407) 3,248
Amortization of prior service cost........... 111 125 81
-------- ------- --------
Net periodic pension cost.................... 3,315 2,169 2,928
Early retirement payout...................... 817 758 414
-------- ------- --------
Total pension cost......................... $ 4,132 $ 2,927 $ 3,342
======== ======= ========
</TABLE>
Assumptions used in accounting for the plans were:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Discount Rate.............................................. 8.5% 8.5% 8.5%
Expected rate of increase in salaries...................... 4.5% 4.5% 4.5%
Expected long term rate of return on plan assets........... 9.0% 9.0% 9.0%
</TABLE>
The following table sets forth the funded status and amounts recognized in
the Company's consolidated balance sheets at June 30, 1994 and 1995 for its
defined benefit pension plans:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Projected benefit obligation:
Vested benefit obligation............................... $60,372 $72,636
Non-vested benefits..................................... 4,908 3,880
------- -------
Accumulated benefit obligation.......................... $65,280 $76,516
======= =======
Projected benefit obligation............................ $69,697 $82,331
Plan assets at fair value............................... 75,904 86,916
------- -------
Plan assets in excess of projected benefit obligations.... 6,207 4,585
Unrecognized net loss..................................... 16,823 16,310
Unrecognized prior service cost........................... 406 329
------- -------
Prepaid pension cost prior to SFAS 109 implementation..... $23,436 $21,224
Effect of SFAS 109 implementation......................... (5,641) (5,888)
------- -------
Prepaid pension cost...................................... $17,795 $15,336
======= =======
</TABLE>
All of the Company's defined benefit plans have assets in excess of
accumulated benefit obligations.
Plan assets include Class A common stock of The Fairchild Corporation of
$3,172,000 and $2,763,000 at June 30, 1994 and 1995, respectively.
Substantially all of the plan assets are invested in listed stocks and bonds.
Postretirement Health Care Benefits
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 ("SFAS No. 106"), "Employers' Accounting for
Postretirement Benefits Other Than Pensions". This standard requires that the
expected cost of postretirement benefits be accrued and charged to expense
during the years the
F-12
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
employees render the service. This is a significant change from the Company's
previous policy of expensing these costs for active employees when paid.
The Company elected the immediate recognition method of adoption of SFAS No.
106. The unamortized portion of the overstated liability for discontinued
operations was $10,652,000, net of tax, which substantially offset a
$10,904,000, net of tax, charge relating to the transition obligation for
active employees and retirees of continuing operations. The charge to net
earnings from the cumulative effect of this accounting change was $252,000,
net of tax.
The Company provides health care benefits for most retired employees.
Postretirement health care expense from continuing operations totaled
$1,366,000, $1,948,000, and $1,385,000 for the years ended June 30, 1993, 1994
and 1995, respectively. The Company has accrued approximately $33,397,000 and
$31,998,000 as of June 30, 1994 and 1995, respectively, for postretirement
health care benefits related to discontinued operations. This represents the
cumulative discounted value of the long-term obligation and includes interest
expense of $4,866,000, $2,849,000 and $3,068,000 for the years ended June 30,
1993, 1994 and 1995, respectively. The components of expense for continuing
operations and discontinued operations combined in 1994 and 1995 are as
follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Service cost of benefits earned............................ $ 437 $ 318
Interest cost on liabilities............................... 4,364 4,258
Net amortization and deferral.............................. (4) (123)
------- -------
Net periodic postretirement benefit cost................... $ 4,797 $ 4,453
======= =======
</TABLE>
The following table sets forth the funded status for the Company's
postretirement health care benefit plan at June 30, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligations:
Retirees................................................. $46,881 $44,494
Fully eligible active participants....................... 497 531
Other active participants................................ 4,962 5,738
------- -------
Accumulated postretirement benefit obligation.............. 52,340 50,763
Unrecognized net loss...................................... (427) (527)
------- -------
Accrued postretirement benefit cost........................ $51,913 $50,236
======= =======
</TABLE>
The accumulated postretirement benefit obligation was determined using a
discount rate of 8.5%, and a health care cost trend rate of 8.0% and 7.5% for
pre-age-65 and post-age-65 employees, respectively, gradually decreasing to
4.5% and 4.5%, respectively, in the year 2003 and thereafter.
Increasing the assumed health care cost trend rates by 1% would increase the
accumulated postretirement benefit obligation as of June 30, 1995, by
approximately $2,353,000, and increase net periodic postretirement benefit
cost by approximately $260,000 for Fiscal 1995.
F-13
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
Effective July 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes".
Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Prior to
the adoption of SFAS No. 109, income tax expense was determined using the
deferred method. Deferred tax expense was based on items of income and expense
that were reported in different years in the financial statements and tax
returns and were measured at the tax rate in effect in the year the difference
originated.
As permitted under SFAS No. 109, prior years' financial statements have not
been restated. The Company elected the immediate recognition method and
recorded a $11,486,000 charge, in Fiscal 1994, representing the prior years'
cumulative effect. This charge represents deferred taxes that had to be
recorded related primarily to fixed assets, prepaid pension expense, and
inventory basis differences.
The provision (benefit) for income taxes from continuing operations is
summarized as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Continuing operations:
Current:
Federal......................................... $(3,059) $(9,355) $ 4,443
State........................................... 1,002 635 1,588
Foreign......................................... 1,335 158 1,767
------- ------- -------
(722) (8,562) 7,798
Deferred:
Federal......................................... 960 3,528 (5,947)
State........................................... 26 242 166
------- ------- -------
986 3,770 (5,781)
------- ------- -------
Net tax provision (benefit)....................... $ 264 $(4,792) $ 2,017
======= ======= =======
</TABLE>
The income tax provision for continuing operations differs from that
computed using the statutory Federal income tax rate of 34.0% in 1993 and
35.0% in 1994 and 1995 for the following reasons:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed statutory amount....................... $(3,802) $(9,465) $(3,549)
State income taxes, net of applicable Federal
tax benefit.................................... 678 655 1,199
Foreign Sales Corporation benefits.............. (340) (350) --
Nondeductible acquisition valuation items....... 1,136 4,356 1,918
Tax on foreign earnings, net of tax credits..... 2,956 138 2,638
Other........................................... (364) (126) (189)
------- ------- -------
$ 264 $(4,792) $ 2,017
======= ======= =======
</TABLE>
F-14
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table is a summary of the significant components of the
Company's deferred tax assets and liabilities as of June 30, 1994 and 1995:
<TABLE>
<CAPTION>
1995 1995
DEFERRED DEFERRED
JUNE 30, (PROVISION) JUNE 30, (PROVISION)
1994 BENEFIT 1995 BENEFIT
-------- ----------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deferred tax assets:
Accrued expenses............. $ 8,774 $ 1,454 $ 5,914 $(2,860)
Asset basis differences...... 64 (1,133) 10 (54)
Employee compensation and
benefits.................... 4,985 (837) 5,200 215
Environmental reserves....... 4,239 (464) 3,329 (910)
Credit carryforwards......... 2,891 -- 2,891 --
Postretirement benefits...... 19,160 (231) 19,712 552
Other........................ 1,518 (3,789) 2,061 543
-------- ------- -------- -------
41,631 (5,000) 39,117 (2,514)
Deferred tax liabilities:
Asset basis differences...... (42,186) (8) (38,148) 4,038
Inventory.................... (9,870) 1,310 (6,473) 3,397
Pensions..................... (5,169) 1,184 (4,230) 939
Other........................ (1,609) (121) (1,688) (79)
-------- ------- -------- -------
(58,834) 2,365 (50,539) 8,295
-------- ------- -------- -------
(17,203) (2,635) (11,422) 5,781
Less amount related to
accounting change............. -- 1,135 -- --
-------- ------- -------- -------
Net deferred tax liability..... $(17,203) $(3,770) $(11,422) $ 5,781
======== ======= ======== =======
The amounts included in the
balance sheet are as follows:
Prepaid expenses and other
current assets:
Current deferred............. $ 5,367 $ 7,642
Taxes receivable (payable)... 6,419 (1,438)
-------- --------
$ 11,786 $ 6,204
======== ========
Other assets:
Taxes receivable............. $ 2,873 $ --
======== ========
Noncurrent income tax
liabilities (assets):
Noncurrent deferred.......... $ 22,570 $ 19,064
Other noncurrent............. 4,006 (1,015)
-------- --------
$ 26,576 $ 18,049
======== ========
</TABLE>
F-15
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For Fiscal 1993 prior to the change in the method of accounting for taxes,
the deferred income tax component of the income tax provision for continuing
operations consists of the effect of timing differences related to:
<TABLE>
<CAPTION>
1993
--------------
(IN THOUSANDS)
<S> <C>
Compensation and other wage related........................... $ 813
Pension expense and reversion................................. 200
Depreciation.................................................. 2,839
Other......................................................... (2,866)
-------
$ 986
=======
</TABLE>
Domestic income taxes, less allowable credits, are provided on the
unremitted income of foreign subsidiaries and affiliated companies, to the
extent that such earnings are intended to be repatriated. No domestic income
taxes or foreign withholding taxes are provided on the undistributed earnings
of foreign subsidiaries and affiliates that are considered permanently
invested, or which would be offset by allowable foreign tax credits. At June
30, 1995, the amount of domestic taxes payable upon distribution of such
earnings is not significant.
In the opinion of management, adequate provision has been made for all
income taxes and interest, and any tax liability that may arise for prior
periods will not have a material effect on the financial condition or results
of operations of the Company.
7. REDEEMABLE PREFERRED STOCK
The Series A Preferred Stock is subject to annual mandatory redemptions of
165,564 shares per annum at $45.00 per share and annual dividend payments of
$3.60 per share. In addition, the Company has the option of redeeming any or
all shares at $45.00 per share. The Company announced on August 30, 1989, that
the Board of Directors authorized expenditure of up to $25,000,000 for
additional early redemption of these shares as market conditions permit. The
Company did not purchase any shares during the past three fiscal years. Series
A Preferred Stock is listed on the New York Stock Exchange ("NYSE").
Holders of the Series A Preferred Stock have general voting rights.
Additionally, in the event of a cumulative arrearage equal to six quarterly
dividends, all Series A Preferred stockholders have the right to elect
separately, as a class, two members to the Board of Directors. No cash
dividends can be declared or paid on any stock junior to the Series A
Preferred Stock in the event of dividend arrearages or a default in the
obligation to redeem such Series A Preferred Stock. Due to the merger of the
Company with RHI in August 1989, holders of the Series A Preferred Stock are
entitled, at their option, but subject to compliance with certain covenants
under the Company's Credit Agreement, to redeem their shares for $27.18 in
cash.
Annual maturity redemption requirements for redeemable preferred stock as of
June 30, 1995, are as follows: $4,211,000 for 1996, $7,450,000 for 1997, and
$7,450,000 for 1998.
8. EQUITY SECURITIES
3,000 shares of Series B Preferred Stock were authorized, 2,025 and 2,278
shares were issued and outstanding at June 30, 1994 and 1995, respectively.
All of which is owned by the Company's parent, RHI.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS 107"),
"Disclosures about Fair Value of Financial Instruments," requires disclosures
of fair value information about financial instruments, whether or not
F-16
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of
the instrument. SFAS 107 excludes certain financial instruments and all non-
financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
The carrying amount reported in the balance sheet approximates the fair
value for cash and cash equivalents, short-term borrowings, current maturities
of long-term debt, and all other variable rate debt (including borrowings
under the Credit Agreement).
Fair values for equity securities, long-term public debt issued by the
Company, and redeemable preferred stock of the Company, are based on quoted
market prices, where available. For equity securities not actively traded,
fair values are estimated by using quoted market prices of comparable
instruments or, if there are no relevant comparables, on pricing models or
formulas using current assumptions. The fair value of limited partnerships,
other investments, and notes receivable are estimated by discounting expected
future cash flows using a current market rate applicable to the yield,
considering the credit quality and maturity of the investment.
The fair value for the Company's other fixed rate long-term debt is
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
Fair values for the Company's off-balance-sheet instruments (letters of
credit, commitments to extend credit, and lease guarantees) are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counter parties' credit standing.
The fair value of the Company's off-balance-sheet instruments at June 30,
1995, is not material.
The carrying amounts and fair values of the Company's financial instruments
at June 30, 1994 and June 30, 1995 are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1994 JUNE 30, 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.............. $ 2,468 $ 2,468 $ 2,412 $ 2,412
Investment Securities:
Long-term limited partnership........ 3,396 4,299 -- --
Notes receivable-current............... 1,275 1,229 -- --
Short-term debt........................ 3,592 3,592 5,348 5,348
Long-term debt:
Bank Credit Agreement................ 97,315 97,315 126,396 126,396
Subordinated debentures and senior
notes............................... 128,998 128,428 127,999 128,681
Industrial revenue bonds............. 1,500 1,500 1,500 1,500
Capitalized leases................... 3,302 3,302 1,253 1,253
Other................................ 2,160 2,160 2,162 2,162
Redeemable preferred stock............. 19,112 15,608 19,112 15,714
</TABLE>
F-17
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. RESTRUCTURING CHARGES
In Fiscal 1993 and 1994, the Company recorded the restructuring charges in
the Aerospace Fasteners segment in the categories shown below. Except for the
costs included in the other category (see note (d) below), all costs
classified as restructuring were the direct result of formal plans to close
plants, to terminate employees, or to exit product lines. Substantially all of
these plans have been executed. These charges were either incurred during the
year shown or shortly after each year end. Other than a reduction in the
Company's existing cost structure and manufacturing capacity, none of the
restructuring charges resulted in future increases in earnings or represented
an accrual of future costs. The costs included in restructuring were
predominately non-recurring in nature and to a large degree non-cash charges.
<TABLE>
<CAPTION>
SIGNIFICANT COMPONENTS 1993 1994
---------------------- ------- -------
(IN THOUSANDS)
<S> <C> <C>
Write off of goodwill related to discontinued products
lines..................................................... $ -- $ 6,959
Write down of inventory to net realizable value related to
discontinued product lines(a)............................. 540 2,634
Write down of fixed assets related to discontinued product
lines..................................................... 3,465 3,000
Severance benefits for terminated employees (substantially
all paid within twelve months)............................ 4,213 471
Plant closings facility costs(b)........................... 3,164 851
Relocation of business from closed plant in New Jersey to
California(c)............................................. 1,884 1,795
Contract termination claims................................ -- 128
Lease penalty for closed plant............................. 388 --
Other(d)................................................... 1,815 3,022
------- -------
$15,469 $18,860
======= =======
</TABLE>
- --------
(a) Write down was required because product line was discontinued, otherwise
inventory would have been sold at prices in excess of book value.
(b) Includes lease settlements, write offs of leasehold improvements,
maintenance, restorations and clean up costs.
(c) Principally consists of costs to move equipment, inventory, tooling and
personnel.
(d) Includes costs associated with a requalification of product lines by a
customer, nonrecurring costs of cellularization and reengineering of
manufacturing processes and methods.
11. UNUSUAL ITEMS
On January 17, 1994, the Company's Chatsworth, California Aerospace
Fasteners manufacturing facility suffered extensive damage from the Southern
California earthquake. As a result, the Company relocated the Chatsworth
manufacturing operations to its other Southern California facilities. This
disruption caused increased costs and reduced revenues in Fiscal 1994, and
negatively affected Fiscal 1995 as well. While the Company carries insurance
for both business interruption and property damage caused by earthquakes, the
policy has a 5% deductible. The Company recorded an unusual pretax loss of
$4,000,000 in Fiscal 1994 in the Aerospace Fasteners segment to cover the
estimated net cost of the damages and related business interruption caused by
the earthquake. In addition, the Company recorded a write down of $2,000,000
in Fiscal 1994 relating to the damaged real estate which is included in net
assets held for sale.
F-18
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. RELATED PARTY TRANSACTIONS
The Company's corporate staff performs work for each of the three corporate
entities. Corporate administrative expense incurred by the Company is invoiced
to RHI and to TFC on a monthly basis and represents the estimated cost of
services performed on behalf of such companies by the Company. The estimated
cost is based primarily on estimated hours spent by corporate employees on
functions related to RHI and to TFC. In addition, TFC bills the Company for
services performed by TFC on behalf of the Company.
The Company has entered into a tax sharing agreement with its parent whereby
the Company is included in the consolidated federal income tax return of the
parent. The Company makes payments to the parent based on the amounts of
federal income taxes, if any, it would have paid had it filed a separate
federal income tax return.
The Aerospace Fasteners segment had sales to Banner Aerospace, Inc. a 47.2%
affiliate of RHI, of $8,750,000, $5,680,000 and $5,494,000 for the years ended
June 30, 1993, 1994 and 1995, respectively.
13. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain of its facilities and equipment under capital and
operating leases. The following is an analysis of the assets under capital
leases included in property, plant and equipment:
<TABLE>
<CAPTION>
JUNE 30,
DESCRIPTION 1995
----------- --------------
(IN THOUSANDS)
<S> <C>
Buildings and improvements.................................... $ 422
Machinery and equipment....................................... 12,688
Furniture and fixtures........................................ 297
Less: Accumulated depreciation................................ (7,167)
-------
$ 6,240
=======
</TABLE>
Future minimum lease payments:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
1996.................................................. $ 8,131 $1,109
1997.................................................. 7,302 244
1998.................................................. 7,278 8
1999.................................................. 6,771 --
2000.................................................. 7,253 --
------- ------
$36,735 1,361
======
Less: Amount representing interest.................... (108)
------
Present value of capital lease obligations............ $1,253
======
</TABLE>
Rental expense under all leases amounted to $9,575,000, $7,193,000 and
$10,811,000 for the years ended June 30, 1993, 1994 and 1995, respectively.
In connection with the sale of Metro Credit Corporation, the Company
remained contingently liable as a guarantor of the payment and performance of
obligations of third party lessees under aircraft leases, which call for
aggregate annual base lease payments of approximately $3,094,000 in 1996, and
approximately $7,942,000
F-19
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
over the remaining 4-year guaranty period. In each case, the Company has been
indemnified by the purchasers and lessors from any losses related to such
guaranties.
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 the Company did not comply with Federal Acquisition
Regulations and Cost Accounting Standards in accounting for (i) the 1985
reversion to the Company of certain assets of terminated defined benefit
pension plans, and (ii) pension costs upon the closing of segments of the
Company's business. The ACO has directed the Company 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. The Company believes it has properly accounted for the
asset reversions in accordance with applicable accounting standards. The
Company has entered into discussions with the government to attempt to resolve
these pension accounting issues.
Environmental Matters
The Company and other aerospace fastener and industrial product
manufacturers are subject to stringent Federal, state and local 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
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 June 30, 1995, the consolidated total recorded liabilities of the
Company for environmental matters referred to above totalled $8,601,000. As of
June 30, 1995, the estimated probable exposures for these matters was
$8,580,000. It is reasonalby possible the Company's total exposure for these
matters could be approximately $15,778,000.
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 discussed above, will not have a material adverse
effect on the financial condition or the future operating results of the
Company.
F-20
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. BUSINESS SEGMENTS
The Company's operations are conducted in three principal business segments.
The Aerospace Fasteners segment includes the manufacture of high performance
specialty fasteners and fastening systems. The Industrial Products segment is
primarily engaged in the manufacture of tooling and injection control systems
for the plastic injection molding and die casting industries and the supply of
modems for use in high speed digitized voice and data communications. The
Communications Services segment provides telecommunication services to office
buildings and sells, installs and maintains telecommunications systems for
business and government customers. Intersegment sales are insignificant to the
sales of any segment.
Identifiable assets represent assets that are used in the Company's
operations in each segment at year end. Corporate assets are principally in
cash and short-term investments, notes receivable, assets held for sale, and
property maintained for general corporate purposes.
The Company's financial data by business segment is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales by Business Segment:
Aerospace Fasteners........................ $247,080 $203,456 $219,129
Industrial Products(a)..................... 148,449 166,499 180,773
Communications Services.................... 68,038 74,190 108,710
-------- -------- --------
Total Segment Sales...................... $463,567 $444,145 $508,612
======== ======== ========
Operating Income (Loss) Segment:
Aerospace Fasteners(b)..................... $(15,398) $(32,208) $(14,073)
Industrial Products(a)..................... 19,081 21,024 23,625
Communications Services.................... 14,688 16,483 18,498
-------- -------- --------
Total Segment Operating Income........... 18,371 5,299 28,050
Corporate administrative expense........... (3,260) (3,638) (5,203)
Other corporate income (expense)........... 4,251 (2,060) 546
-------- -------- --------
Total Consolidated Operating Income
(loss).................................. $ 19,362 $ (399) $ 23,393
======== ======== ========
Capital Expenditures:
Aerospace Fasteners........................ $ 5,711 $ 4,320 $ 4,974
Industrial Products........................ 4,002 3,997 4,440
Communications Services.................... 5,792 7,775 10,349
Corporate and Other........................ 3 -- 16
-------- -------- --------
Total Capital Expenditures............... $ 15,508 $ 16,092 $ 19,779
======== ======== ========
Depreciation and Amortization:
Aerospace Fasteners........................ $ 14,280 $ 14,373 $ 15,619
Industrial Products........................ 6,154 6,765 6,962
Communications Services.................... 7,936 8,948 10,329
Corporate and Other........................ 2,107 2,209 2,262
-------- -------- --------
Total Depreciation and Amortization...... $ 30,477 $ 32,295 $ 35,172
======== ======== ========
</TABLE>
F-21
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Identifiable Assets at June 30,:
Aerospace Fasteners............................ $337,185 $306,008 $290,465
Industrial Products............................ 146,754 147,910 152,697
Communications Services........................ 78,752 79,087 108,666
Corporate and Other............................ 77,319 84,471 63,960
-------- -------- --------
Total Identifiable Assets.................... $640,010 $617,476 $615,788
======== ======== ========
</TABLE>
- --------
(a) Included in Fiscal 1994 and 1995 are the results of Fairchild Data
Corporation. Sales from this division, formerly included in net assets
held for sale, and not included in the results of operations, were
$15,432,000 for Fiscal 1993. The impact of this division's earnings on the
Fiscal 1993 results was immaterial.
(b) Includes charges to reflect the cost of restructuring of $15,469,000 and
$18,860,000 in Fiscal 1993 and 1994, respectively, and an unusual loss
from earthquake damage and related business interruption of $4,000,000 in
Fiscal 1994.
15. FOREIGN OPERATIONS AND EXPORT SALES
The Company's operations are located primarily in the United States and
Europe. Interarea sales are not significant to the total sales of any
geographic area. The Company's financial data by geographic area is as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales by Geographic Area
United States................................ $369,343 $358,614 $402,414
Europe....................................... 85,479 76,366 95,420
Other........................................ 8,745 9,165 10,778
-------- -------- --------
Total Sales................................ $463,567 $444,145 $508,612
======== ======== ========
Operating Income by Geographic Area
United States................................ $ 15,390 $ (1,011) $ 24,639
Europe....................................... 2,034 5,847 2,107
Other........................................ 947 463 1,304
-------- -------- --------
Total Segment Operating Income............. $ 18,371 $ 5,299 $ 28,050
======== ======== ========
Identifiable Assets by Geographic Area at June
30:
United States................................ $479,751 $454,635 $473,269
Europe....................................... 78,176 73,809 79,029
Other........................................ 4,764 4,561 9,465
Corporate and Other.......................... 77,319 84,471 54,025
-------- -------- --------
Total Identifiable Assets.................. $640,010 $617,476 $615,788
======== ======== ========
</TABLE>
F-22
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Export sales are defined as sales to customers in foreign countries by the
Company's domestic operations. Export sales amounted to the following:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Export Sales
Europe............................................. $15,297 $12,692 $16,547
Other.............................................. 13,546 16,593 17,031
------- ------- -------
Total Export Sales............................... $28,843 $29,285 $33,578
======= ======= =======
</TABLE>
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1994:
Sales............................ $110,491 $108,830 $112,836 $111,988
Gross profit..................... 22,962 25,875 27,138 30,289
Loss from continuing operations.. (4,528) (5,960) (2,416) (9,345)
Cumulative effect of change in
accounting for postretirement
benefits, net................... (252) -- -- --
Cumulative effect of change in
accounting for income taxes,
net............................. (11,486) -- -- --
Net loss......................... (16,266) (5,960) (2,416) (9,345)
1995:
Sales............................ $114,562 $119,921 $138,912 $135,217
Gross profit..................... 30,176 26,800 31,994 26,840
Earnings (loss) from continuing
operations...................... 307 (1,906) (2,439) (8,121)
Loss on disposal of discontinued
operations...................... -- -- (200) --
Net earnings (loss).............. 307 (1,906) (2,639) (8,121)
</TABLE>
Charges to reflect the cost of restructuring the Company's Aerospace
Fasteners Segment, of $9,903,000 and $8,957,000 in the second and fourth
quarters of Fiscal 1994, respectively, are included in earnings (loss) from
continuing operations. The Company recorded an unusual loss in the third and
fourth quarters of Fiscal 1994, of $3,200,000 and $2,800,000, respectively, to
cover the estimated net cost of the damages and related business interruption
caused by an earthquake and the related write down of real estate and other
assets. Net earnings (loss) from continuing operations in the fourth quarter
of Fiscal 1995, include adjustments to inventories and receivables of the
Company's Aerospace Fasteners Segment, to reflect required valuation
allowances against these assets.
The Fiscal 1994 first and second quarter data presented vary from the
amounts previously reported in each of their respective Form 10-Q filings due
to the Company's decision not to sell a division which was included in net
assets held for sale, and not included in the results of operations. Sales
from the division were $4,141,000 and $3,438,000 in the first and second
quarters, respectively, of Fiscal 1994. Earnings from the division had no
material effect during these periods.
F-23
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1995
------------ --------
(UNAUDITED) (*)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $ 6,329 $ 2,412
Accounts receivable-trade, less allowances of $2,322 and
$2,839.................................................. 60,425 56,766
Inventories:
Finished goods......................................... 41,170 35,975
Work-in-process........................................ 13,130 12,222
Raw materials.......................................... 13,667 13,963
-------- --------
67,967 62,160
Prepaid expenses and other current assets................ 8,136 13,874
Net current assets of discontinued operations............ 34,609 34,626
-------- --------
Total Current Assets................................. 177,466 169,838
Property, plant and equipment, net of accumulated
depreciation of $93,372 and $84,331..................... 116,427 120,205
Net assets held for sale................................. 35,697 34,811
Net noncurrent assets of discontinued operations......... 85,577 88,209
Cost in excess of net assets acquired, (Goodwill) less
accumulated amortization of $27,179 and $25,047......... 138,456 140,322
Prepaid pension assets................................... 13,615 15,336
Other assets............................................. 15,524 15,479
-------- --------
Total Assets......................................... $582,762 $584,200
======== ========
</TABLE>
- --------
* Condensed and restated for discontinued operations (see Note 3) from audited
financial statements.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
F-24
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1995
------------ ---------
(UNAUDITED) (*)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank notes payable and current maturities of long-term
debt.................................................. $ 74,598 $ 15,352
Accounts payable....................................... 26,444 29,322
Due to affiliated companies............................ 23,405 13,759
Other accrued liabilities.............................. 50,962 54,062
--------- ---------
Total Current Liabilities.......................... 175,409 112,496
Long-term debt, less current maturities................ 188,427 249,306
Other long-term liabilities............................ 12,241 12,763
Retiree health care liabilities........................ 42,310 42,803
Noncurrent income taxes................................ 17,884 18,049
--------- ---------
Total Liabilities.................................. 436,271 435,417
Redeemable Preferred Stock: $3.60
Cumulative Series A Convertible preferred stock,
without par value, 370,901 and 424,701 shares
authorized, issued and outstanding at redemption value
of $45.00 per share................................... 16,691 19,112
Stockholders' Equity:
Series B preferred stock, without par value, 3,000
shares authorized, 2,302 and 2,278 issued and
outstanding; liquidation value of $100,000 per share.. 230,200 227,800
Series C Cumulative preferred stock, without par value,
558,360 shares authorized, issued and outstanding;
liquidation value of $45.00 per share................. 24,015 24,015
Common stock, par value of $100.00 per share, 1,400
shares authorized, issued, and outstanding............ 140 140
Paid-in capital........................................ 2,925 2,523
Accumulated deficit.................................... (130,124) (128,116)
Cumulative translation adjustment...................... 2,644 3,308
--------- ---------
Total Stockholders' Equity......................... 129,800 129,671
--------- ---------
Total Liabilities and Stockholders' Equity......... $ 582,762 $ 584,200
========= =========
</TABLE>
- --------
* Condensed and restated for discontinued operations (see Note 3) from audited
financial statements.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
F-25
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1995 1994
------------ ------------ ------------ ------------
(*) (*)
<S> <C> <C> <C> <C>
Revenue:
Net sales of products.... $62,241 $55,433 $121,454 $107,124
Revenues from services... 26,636 20,408 53,743 40,791
Other income, net........ 44 987 350 1,639
------- ------- -------- --------
88,921 76,828 175,547 149,554
Costs and Expenses:
Cost of goods sold....... 50,664 48,857 98,871 89,947
Cost of services......... 19,239 14,765 39,177 29,723
Selling, general &
administrative.......... 12,977 11,905 26,364 22,433
Research and
development............. 23 288 44 584
Amortization of
goodwill................ 1,070 1,065 2,132 2,120
Restructuring............ 285 -- 285 --
------- ------- -------- --------
84,258 76,880 166,873 144,807
Operating income (loss).. 4,663 (52) 8,674 4,747
Interest expense......... 8,744 8,466 17,889 16,933
Interest income.......... (131) (50) (172) (72)
------- ------- -------- --------
Net interest expense..... 8,613 8,416 17,717 16,861
Investment income........ -- -- -- 278
Equity in earnings of
affiliates.............. -- (73) -- --
Minority interest........ 1 (1) 20 (34)
------- ------- -------- --------
Loss from continuing
operations before
taxes................... (3,949) (8,542) (9,023) (11,870)
Income tax benefit....... (28) (3,443) (1,626) (4,081)
------- ------- -------- --------
Loss from continuing
operations.............. (3,921) (5,099) (7,397) (7,789)
Earnings from
discontinued operations,
net..................... 3,420 3,193 7,290 6,190
------- ------- -------- --------
Net loss................. (501) (1,906) (107) (1,599)
Series A preferred
dividends............... 332 382 714 764
Series C preferred
dividends............... 594 594 1,187 1,187
------- ------- -------- --------
Net loss after preferred
dividends............... $(1,427) $(2,882) $ (2,008) $ (3,550)
======= ======= ======== ========
</TABLE>
- --------
* Condensed and restated for discontinued operations. (See Note 3).
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
F-26
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
*
<S> <C> <C>
Cash flows provided by (used for) Operations:
Net loss........................................... $ (107) $ (1,599)
Depreciation and amortization...................... 14,580 12,959
Accretion of discount on long-term liabilities..... 1,701 1,567
Minority interest.................................. (20) 99
Loss on sale of fixed assets....................... 95 169
Changes in assets and liabilities.................. (12,426) (7,468)
Non-cash charges and working capital changes of
discontinued operations........................... 3,524 6,998
-------- --------
Net cash provided by operations.................... 7,347 12,725
Investments:
Purchase of property, plant and equipment.......... (6,222) (6,831)
Acquisitions, net of cash acquired................. -- (11,550)
Other changes, net................................. (904) (263)
Investing activities of discontinued operations.... (875) (1,233)
-------- --------
Net cash used for investments...................... (8,001) (19,877)
Financing:
Proceeds from issuance of debt..................... 28,568 2,607
Debt repayments, net............................... (21,975) (14,458)
Issuance of Series B preferred stock............... 2,400 23,100
Repurchase of Series A preferred stock............. (2,072) --
Payment of dividends............................... (1,951) (1,951)
Paid in capital contribution....................... 53 --
-------- --------
Net cash provided by financing..................... 5,023 9,298
Effect of exchange rate changes on cash.............. (452) (18)
Net increase in cash................................. 3,917 2,128
Cash and cash equivalents, beginning of period....... 2,412 2,468
-------- --------
Cash and cash equivalents, end of period............. $ 6,329 $ 4,596
======== ========
</TABLE>
- --------
* Condensed and restated for discontinued operations. (see Note 3).
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
F-27
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--FINANCIAL STATEMENTS:
The consolidated balance sheet as of December 31, 1995, and the consolidated
statements of earnings and cash flows for the six months ended December 31,
1995 and 1994 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 December 31, 1995, and for all periods presented, have been
made. All financial information has been restated for discontinued operations.
The balance sheet at June 30, 1995, was condensed and restated from 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, 1995, Form 10-K. The results
of operations for the period ended December 31, 1995 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.
NOTE 2--MERGER AGREEMENT:
On November 9, 1995, the Company, RHI Holdings, Inc. ("RHI", the Company's
parent), and The Fairchild Corporation ("TFC", RHI's parent), entered into an
Agreement and Plan of a Merger with Shared Technologies Inc. ("STI"), pursuant
to which STI is to acquire the Company's Fairchild Communications Services
Company ("FCSC") telecommunications systems and services business. The
acquisition is to be effected by a merger of the company into STI (the
"Merger"), with STI being the surviving corporation. Prior to the Merger, the
Company is to undergo a restructuring pursuant to which the Company will
transfer all of its assets to, and cause all of its liabilities to be assumed
by RHI, except for (i) the assets and liabilities of FCSC, (ii) the
outstanding Series A and Series C Preferred Stock of the Company (having a
liquidation value of $41,817,000 at December 31, 1995), (iii) the $125,000,000
principal amount outstanding 12 1/4% Senior Notes due 1999 (the "Senior
Notes") of the Company, and (iv) an amount of bank and other indebtedness of
approximately $56,683,000 (the "Assumed Indebtedness"). Pursuant to the
Merger, the Series A and Series C Preferred Stock of the Company will be
cancelled and converted into the right to receive an amount of cash equal to
their liquidation value ($45.00 per share plus accrued and unpaid dividends),
and the Series B Preferred Stock of the Company, all of which is owned by RHI,
will be cancelled. Prior to the Merger, the Company will make a cash tender
offer to purchase all of the outstanding Senior Notes and seek to obtain such
Noteholders' consent to amend the indenture under which the Senior Notes were
issued to remove all covenants which can be amended or deleted by majority
vote (see Note 5). The amount of the Assumed Indebtedness will be reduced, by
(i) the extent the purchase price to be paid in such offering for the Senior
Notes exceeds par, and (ii) the amount of accrued and unpaid dividends on the
Series A and Series C Preferred Stock of the Company on the date of the
Merger.
Upon the Merger, STI, as the surviving corporation, is required to (i)
purchase all Senior Notes tendered (and assume the Company's obligations with
respect to any Senior Notes not so tendered), (ii) repay the Assumed
Indebtedness in full, and (iii) deposit in escrow the funds necessary to
redeem the Series A and Series C Preferred Stock. As a result of the Merger,
RHI is to receive (i) 6,000,000 shares of Common Stock of STI (representing
approximately 41% of the outstanding shares after giving effect to such
issuance), (ii) shares of 6% Cumulative Convertible Preferred Stock of STI
having an aggregate liquidation preference of $25,000,000 (subject to upward
adjustment) and which are convertible into Common Stock of STI at a conversion
price of $6.375 per share (which, if converted, would represent, together with
the other Common Stock issued to RHI, approximately 41% of the Common Stock of
STI on a fully diluted basis), and (iii) shares of a Special Preferred Stock
having an initial liquidation preference of $20,000,000 (which could accrue up
to a maximum of
F-28
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$30,000,000 over a ten-year period if not redeemed earlier). In connection
with its stock ownership, TFC and RHI has the right to elect up to four of the
eleven members of the Board of Directors of STI and have agreed, subject to
certain exceptions, not to sell any of STI's shares, other than the Special
Preferred Stock, for a two-year period.
The closing of the Merger is subject to a number of conditions, including
(i) the approval of the Merger by the shareholders of STI, and (ii) holders of
at least 51% of the outstanding principal amount of the Senior Notes tendering
their Senior Notes and consenting to the covenant changes described above. The
Company and STI are scheduled to complete this transaction in Fiscal 1996. The
Company expects a significant gain upon consummation of this transaction.
NOTE 3--DISCONTINUED OPERATIONS:
During the Fiscal 1996 second quarter, the Company resolved to sell the D-M-
E Company ("DME"), a mold equipment manufacturer, and the Fairchild Data
Corporation ("Data"), a satellite communications company. On January 26, 1996,
the Company completed the sale of certain assets, liabilities and the business
of DME to Cincinnati Milacron Inc. ("Cincinnati Milacron") for approximately
$245,000,000 in cash and notes, subject to audit and adjustment. On January
27, 1996, the Company completed the sale of Data to SSE Telecom, Inc. ("SSE")
for book value of approximately $5,250,000 and 100,000 shares of SSE's common
stock valued at $9.0625 per share or $906,000 at January 26, 1996, and
warrants to purchase an additional 50,000 shares of SSE's common stock at
$11.09 per share. In addition, the Company has an opportunity to earn an
additional 100,000 shares based on the future performance of SSE during the
twelve months following the date of sale. The sale of DME will result in a
significant gain to the Company in the third quarter ended March 31, 1996.
Accordingly, DME and Data have been accounted for as discontinued operations
and the prior periods' financial statements have been restated to reflect the
discontinuance of these companies. The combined net sales of DME and Data
totaled $45,475,000 and $44,080,000 for the second quarter of Fiscal 1996 and
1995, respectively, and $91,342,000 and $86,568,000 for the first six months
of Fiscal 1996 and 1995, respectively. The combined net tax provision recorded
on earnings from discontinued operations amounted to $2,673,000 and $2,471,000
for the second quarter of Fiscal 1996 and 1995, respectively, and $5,050,000
and $4,829,000 for the first six months of Fiscal 1996 and 1995, respectively.
The components of net assets of discontinued operations on the consolidated
balance sheet are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1995
------------ --------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable................................. $ 28,064 $ 28,161
Inventories......................................... 26,732 26,645
Prepaid and other current assets.................... 1,098 1,365
Accounts payable.................................... (9,176) (9,801)
Other current liabilities........................... (12,109) (11,744)
-------- --------
Net current assets of discontinued operations..... $ 34,609 $ 34,626
======== ========
Property, plant and equipment, net of accumulated
depreciation....................................... $ 36,175 $ 37,986
Goodwill, net of accumulated amortization........... 54,846 55,664
Other assets........................................ 4,202 4,602
Retiree health care liabilities..................... (4,756) (4,764)
Minority interest in subsidiaries................... (504) (416)
Cumulative translation adjustment................... (4,386) (4,863)
-------- --------
Net noncurrent assets of discontinued operations.. $ 85,577 $ 88,209
======== ========
</TABLE>
F-29
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--PROPOSED SALE OF DIVISION:
During the second quarter ended December 31, 1995, the Company entered into
preliminary discussions concerning the exchange of shares of common stock of a
new subsidiary (Harco, Inc.), into which the Company would transfer
substantially all assets of, and cause Harco, Inc. to assume all liabilities
of the Company's Harco Division, for shares of common stock of, to Banner
Aerospace, Inc. ("Banner").
RHI currently owns approximately 47% of Banner common shares, and if the
exchange is consummated would become the majority shareholder of Banner. Harco
is a distributor of precision fasteners to the aerospace industry.
NOTE 5--TENDER OFFER:
On December 22, 1995, the Company commenced an offer (the "Tender Offer") to
purchase for cash, upon terms and subject to conditions set forth in an Offer
to Purchase and Consent Solicitations and related Letter of Transmittal (the
"Offer to Purchase"), all $125,000,000 of its outstanding 12 1/4% Senior
Secured Notes Due 1999 (the "Senior Notes"). The Tender Offer, as amended and
restated, provides a purchase price per $1,000 principal amount of the Senior
Notes of (i) $1,066.60 if the Tender Offer is consummated on or prior to
February 28, 1996, or (ii) $1,063.90 if the Tender Offer is consummated
between February 29, 1996 and March 31, 1996, or (iii) $1,057.50 if the Tender
Offer is consummated after March 31, 1996, and in each case, accrued and
unpaid interest up to, but not including, the payment date. Concurrently with
the Tender Offer, the Company solicited (the "Tender Offer Consent
Solicitation") consents of the holders of the Senior Notes to (i) the adoption
of the proposed amendments to the indenture pursuant to which the Senior Notes
were issued (the "Indenture"), and (ii) the release of the collateral securing
the Company's obligations under the Senior Notes and the Indenture, upon terms
set forth in the Offer to Purchase.
In addition, independent of the Tender Offer and the Tender Offer Consent
Solicitation, the Company also solicited consents to the waiver of any and all
violations of the Indenture arising out of or relating to (i) the transfer by
VSI Corporation ("VSI"), a wholly-owned subsidiary of the Company, of the
stock of Harco, Inc. to Banner (see Note 4), and (ii) the sale by VSI of DME
to Cincinnati Milacron (see Note 3).
The Company will pay to holders of Senior Notes who validly tender Senior
Notes pursuant to the Tender Offer and Consent Solicitations a consent fee of
$25.00 per $1,000 principal amount of Senior Notes so tendered. The consent
fee will be paid to holders of Senior Notes after, and subject to, the
consummation of the Tender Offer. Additionally, the Company will pay an early
consent fee of $5.00 per $1,000 principal amount to holders of Senior Notes
who on or prior to January 19, 1996, validly tender their notes, irrespective
of whether the Tender Offer is consummated. The Tender Offer and the Tender
Offer Consent Solicitations expire February 29, 1996.
The Company is to recognize an extraordinary loss, net of any related tax
benefits, in the third quarter of Fiscal 1996, reflecting the contractual
commitment to repurchase the Senior Notes at a premium and pay consent fees.
NOTE 6--ACQUISITIONS:
On November 28, 1994, FCSC completed the acquisition of substantially all of
the telecommunications assets of JWP Telecom, Inc. ("JWP") for approximately
$11,000,000, plus the assumption of approximately $3,000,000 of liabilities.
The Company recorded $5,595,000 in goodwill as a result of this acquisition.
JWP is a telecommunications system integrator, specializing in the
distribution, installation and maintenance of voice and data communications
equipment. In the first quarter of Fiscal 1995, Fairchild Communications
acquired all the shared telecommunications assets of Eaton & Lauth Co., Inc.
for approximately $550,000. Approximately $300,000 of the acquisition price
was recorded as goodwill.
F-30
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Proforma financial statements are not required for these acquisitions on an
individual basis.
NOTE 7--RESTRUCTURING CHARGES:
During the second quarter ended December 31, 1995, the Company recorded
$285,000 in restructuring charges relating to the closing of a small Aerospace
Fasteners business located in Japan.
NOTE 8--REDEEMABLE PREFERRED STOCK:
The Company's Series A Preferred Stock has a mandatory redemption value of
$45.00 per share and an annual dividend requirement of $3.60 per share. During
the six months ended December 31, 1995, the Company repurchased 55,700 shares
of Series A Preferred Stock (52,400 shares were purchased from RHI Holdings,
Inc., the Company's parent). There were 370,901 and 424,701 shares of Series A
Preferred Stock authorized, issued and outstanding at December 31, 1995 and
June 30, 1995, respectively.
NOTE 9--COMMITMENTS AND 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 the Company did not comply with Federal Acquisition
Regulations and Cost Accounting Standards in accounting for (i) the 1985
reversion to the Company of certain assets of terminated defined benefit
pension plans, and (ii) pension costs upon the closing of segments of the
Company's business. The ACO has directed the Company 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. 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 and other aerospace fastener and industrial product
manufacturers are subject to stringent Federal, state and local 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
F-31
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 December 31, 1995, the consolidated total recorded liabilities of the
Company for environmental matters referred to above totalled $7,580,000. As of
December 31, 1995, the estimated probable exposures for these matters was
$7,559,000. It is reasonably possible that the Company's total exposure for
these matters could be approximately $14,757,000.
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 discussed above, will not have a material adverse
effect on the financial condition, future results of operations, or net cash
flows of the Company.
NOTE 10--SUBSEQUENT EVENTS:
As of January 31, 1996, holders of approximately 93.6% of the aggregate
principal amount of Senior Notes have tendered their Senior Notes pursuant to
the Tender Offer, and have consented pursuant to the terms of the Tender Offer
Consent Solicitation. (See Note 5).
In connection with the sale of DME and Data, (see Note 3), the Company
negotiated an amendment to its bank credit agreement, effective January 22,
1996. Among other things, the amendment permits the sale of DME and Data and
amends certain financial covenants accordingly.
F-32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fairchild Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Fairchild
Industries, Inc. (a Delaware Corporation) as of June 30, 1994 and 1995, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years ended June 30, 1993, 1994 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fairchild Industries, Inc.
as of June 30, 1994 and 1995, and the results of its operations and its cash
flows for the years ended June 30, 1993, 1994 and 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 13, 1996
F-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fairchild Industries, Inc.:
We have reviewed the accompanying consolidated balance sheet of Fairchild
Industries, Inc. (a Delaware corporation, the "Company") as of December 31,
1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the six-month periods ended December
31, 1995 and 1994. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 13, 1996
F-34
<PAGE>
FAIRCHILD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
------------------ DECEMBER 31,
1994 1995 1995
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 64 $ 1,469 $ 905
Billed accounts receivable--trade, net of
allowances of $204, $254 and $471........... 6,369 14,429 15,582
Unbilled accounts receivable................. 3,487 6,218 6,602
Inventories.................................. -- 1,246 1,064
Prepaid and other current assets............. 1,326 2,283 2,208
Net current assets of operations transferred
to RHI...................................... 25,760 56,876 65,220
-------- -------- --------
Total current assets..................... 37,006 82,521 91,581
Property, plant and equipment, at cost:
Buildings and improvements................... 3,417 3,733 3,873
Equipment and autos.......................... 59,455 73,968 80,821
Furniture and fixtures....................... 734 3,097 1,358
-------- -------- --------
63,606 80,798 86,052
Accumulated depreciation..................... (23,104) (31,239) (35,872)
-------- -------- --------
Property, plant and equipment, net....... 40,502 49,559 50,180
Goodwill, less accumulated amortization of
$2,389, $3,013 and $3,376................... 20,686 25,958 25,811
Other intangible assets, less accumulated
amortization of $4,383, $5,938 and $6,771... 6,682 7,589 6,756
Deferred loan costs.......................... 5,960 4,561 3,882
Prepaid pension cost......................... 216 195 173
Net non-current assets of operations
transferred to RHI.......................... 220,266 180,926 169,878
-------- -------- --------
Total assets............................. $331,318 $351,309 $348,261
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
FAIRCHILD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
-------------------- DECEMBER 31,
1994 1995 1995
--------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 6,744 $ 12,780 $ 11,268
Advanced billings........................ -- 941 850
Deferred revenue on maintenance
contracts............................... 371 3,109 2,844
Accrued liabilities--
Salaries and wages...................... 935 1,986 775
Sales, payroll and use taxes............ 1,254 1,162 1,371
Commissions............................. 297 293 236
Dividends............................... 975 975 925
Other................................... 1,103 3,182 2,850
Current portion of capital lease
obligations............................. 1,954 751 303
--------- --------- ---------
Total current liabilities.............. 13,633 25179 21,422
12.25% senior secured notes due 1999....... 125,000 125,000 125,000
Bank credit agreement...................... 55,373 55,373 57,794
Capital lease obligations.................. 932 185 86
Post retirement benefits................... 78 98 112
Redeemable preferred stock: $3.60
cumulative Series A Convertible preferred
stock, without par value, 424,701 shares
authorized, issued and outstanding at
redemption value of $45.00 per share...... 19,112 19,112 16,691
--------- --------- ---------
Total liabilities...................... 214,128 224,947 221,105
Stockholders' equity:
Series B preferred stock: without par
value, 3,000 shares authorized, 2,025,
2,278 and 2,302 issued and outstanding;
liquidation value of $100,000 per
share................................... 202,500 227,800 230,200
Series C cumulative preferred stock:
without par value, 558,360 shares
authorized, issued and outstanding;
liquidation value of $45.00 per share... 24,015 24,015 24,015
Common stock, par value of $100.00 per
share, 1,400 shares authorized, issued
and outstanding......................... 140 140 140
Paid-in capital.......................... 2,390 2,523 2,925
Accumulated deficit...................... (111,855) (128,116) (130,124)
--------- --------- ---------
Total stockholders' equity............. 117,190 126,362 127,156
--------- --------- ---------
Total liabilities and stockholders'
equity................................ $ 331,318 $ 351,309 $ 348,261
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
FAIRCHILD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, SIX MONTHS ENDED
---------------------------- -------------------------
DECEMBER 31, DECEMBER 31,
1993 1994 1995 1994 1995
-------- -------- -------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 68,639 $ 74,897 $109,741 $48,564 $64,631
Cost of revenues........ 33,735 36,979 58,360 25,765 34,467
-------- -------- -------- ------- -------
Gross profit............ 34,904 37,918 51,381 22,799 30,164
General and
administrative
expenses............... 19,944 21,258 32,504 14,161 20,349
Goodwill amortization... 540 578 624 320 363
-------- -------- -------- ------- -------
Operating income.... 14,420 16,082 18,253 8,318 9,452
Interest expense........ 20,033 19,538 21,280 10,754 10,952
-------- -------- -------- ------- -------
Net loss from
continuing
operations
before taxes....... (5,613) (3,456) (3,027) (2,436) (1,500)
Taxes................... -- -- -- -- --
Operating results of
operations transferred
to RHI................. (6,644) (30,531) (9,332) 837 1,393
-------- -------- -------- ------- -------
Net earnings (loss)
before preferred
dividends.......... (12,257) (33,987) (12,359) (1,599) (107)
Series A preferred
dividends.............. 1,713 1,529 1,529 764 714
Series C preferred
dividends.............. 2,160 2,373 2,373 1,187 1,187
-------- -------- -------- ------- -------
Net loss after
preferred
dividends.......... $(16,130) $(37,889) $(16,261) $(3,550) $(2,008)
======== ======== ======== ======= =======
Dividends to RHI
Holdings, Inc.
(Parent)............... $ 50,000 $ -- $ -- $ -- $ --
======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
FAIRCHILD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES C SERIES B
COMMON PREFERRED PREFERRED PAID-IN ACCUMULATED
STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
------ --------- --------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1992.. $140 $ -- $192,600 $2,230 $ (6,985) $187,985
Net loss.............. -- -- -- -- (12,257) (12,257)
Issuance of Series B
preferred stock to
parent............... -- -- 5,000 -- -- 5,000
Exchange of Series A
preferred stock for
issuance of Series C
preferred stock...... -- 24,015 -- -- -- 24,015
Cash dividends to
preferred
stockholders......... -- -- -- -- (3,873) (3,873)
Cash dividends to
parent............... -- -- -- -- (50,000) (50,000)
---- ------- -------- ------ --------- --------
BALANCE, June 30, 1993.. 140 24,015 197,600 2,230 (73,115) 150,870
Net loss.............. -- -- -- -- (33,987) (33,987)
Issuance of Series B
preferred stock to
parent............... -- -- 4,900 143 -- 5,043
Transfer of subsidiary
from parent.......... -- -- -- 17 (851) (834)
Cash dividends to
preferred
stockholders......... -- -- -- -- (3,902) (3,902)
---- ------- -------- ------ --------- --------
BALANCE, June 30, 1994.. 140 24,015 202,500 2,390 (111,855) 117,190
Net loss.............. -- -- -- -- (12,359) (12,359)
Issuance of Series B
preferred stock to
parent............... -- -- 25,300 88 -- 25,388
Transfer of pension
plan from parent..... -- -- -- 45 -- 45
Cash dividends to
preferred
stockholders......... -- -- -- -- (3,902) (3,902)
---- ------- -------- ------ --------- --------
BALANCE, June 30, 1995.. 140 24,015 227,800 2,523 (128,116) 126,362
Net Income............ -- -- -- -- (107) (107)
Issuance of Series B
preferred stock to
parent............... -- -- 2,400 -- -- 2,400
Cash dividends to
preferred
stockholders......... -- -- -- -- (1,901) (1,901)
Paid-in capital from
parent............... -- -- -- 402 -- 402
---- ------- -------- ------ --------- --------
BALANCE, December 31,
1995 (unaudited)....... $140 $24,015 $230,200 $2,925 $(130,124) $127,156
==== ======= ======== ====== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
FAIRCHILD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, SIX MONTHS ENDED
---------------------------- -------------------------
DECEMBER 31, DECEMBER 31,
1993 1994 1995 1994 1995
-------- -------- -------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows (used
in)/provided by operating
activities:
Net loss from continuing
operations............... $ (5,613) $ (3,396) $ (3,027) $(2,436) $(1,500)
Adjustments to reconcile
net income to net cash
(used in)/provided by
operating activities:
Amortization and
depreciation........... 7,935 8,947 10,330 4,113 5,627
(Decrease) increase in
advanced billings...... -- -- 326 352 (91)
Increase in billed
accounts receivable.... (1,086) (251) (8,060) (6,730) (1,153)
(Increase) decrease in
unbilled
accounts receivable.... (666) 277 (2,014) (4,054) (384)
(Decrease) increase in
non-current assets..... (404) (43) (536) (765) (4,625)
Increase in
inventories............ -- -- (1,033) (2,437) 182
(Decrease) increase in
prepaid and other
assets................. (20) (374) (709) (401) 75
(Decrease) increase in
accrued liabilities.... 339 406 2,716 (68) (1,441)
(Decrease) increase in
deferred revenue....... 359 (24) (162) 197 (265)
Increase (decrease) in
accounts payable....... (86) (1,325) 5,576 5,588 (1,512)
Operations transferred
to RHI................. 16,579 6,438 14,341 17,156 7,501
-------- -------- -------- ------- -------
Net cash (used
in)/provided by
operating activities.. 17,337 10,655 17,748 10,515 2,414
-------- -------- -------- ------- -------
Cash flows used in
investing activities:
Acquisitions, net of
cash acquired.......... (7,313) -- (11,550) (11,550) --
Purchases of property,
plant and equipment.... (5,769) (7,775) (10,349) (4,540) (5,476)
Proceeds from sales of
property, plant
and equipment.......... 8 31 25 --
Operations transferred
to RHI................. (6,539) (7,105) (5,754) (3,787) (2,525)
-------- -------- -------- ------- -------
Net cash used in
investing
activities........... (19,613) (14,849) (27,628) (19,877) (8,001)
-------- -------- -------- ------- -------
Cash flows provided by
financing activities:
Issuance of Series B
preferred stock........ 5,000 4,000 24,400 23,100 2,400
Issuance of Series C
preferred stock........ 24,015 -- -- -- --
Purchase/exchange of
Series A preferred
stock.................. (25,126) -- -- -- (2,072)
Payment of dividends.... (53,782) (3,902) (3,902) (1,951) (1,951)
Paid-in capital
contribution........... -- 143 88 -- 402
Repayments of capital
lease obligations...... (3,200) (3,118) (1,950) (1,171) (547)
Decrease (increase) in
deferred loan cost..... (3,703) 1,008 1,399 692 (679)
Operations transferred
to RHI................. 59,070 6,127 (8,750) (11,372) 7,470
-------- -------- -------- ------- -------
Net cash provided by
financing
activities........... 2,274 4,258 11,285 9,298 5,023
-------- -------- -------- ------- -------
Net increase (decrease) in
cash..................... (2) 64 1,405 (64) (564)
Cash, beginning of
period/year.............. 2 -- 64 64 1,469
-------- -------- -------- ------- -------
Cash, end of period/year.. $ -- $ 64 $ 1,469 $ $ 905
======== ======== ======== ======= =======
Supplementary disclosures
of cash flow information:
Cash paid during the
period/year for
interest............... $ 20,033 $ 19,538 $ 21,280 $10,754 $10,952
-------- -------- -------- ------- -------
Cash paid during the
period/year for taxes.. $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO DECEMBER 31, 1995 AND THE SIX MONTHS ENDED DECEMBER
31, 1995 AND 1994)
1. ORGANIZATION, MERGER AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Fairchild Industries, Inc. is incorporated in the State of Delaware. As used
herein, the term "Company" refers to Fairchild Industries, Inc. The Company is
a subsidiary of RHI Holdings, Inc. ("RHI") which is in turn a wholly-owned
subsidiary of The Fairchild Corporation ("TFC").
Subsequent to June 30, 1995, TFC announced plans to recapitalize the Company
in order to improve the financial and operating flexibility and strengthen the
financial position of TFC and its subsidiaries (the "Reorganization"). The
Company's plans to merge into Shared Technologies Inc. ("STI") (the "Merger")
are an integral part of the Reorganization. Concurrent with the Merger, and as
part of the Reorganization, the Company is transferring to its immediate
parent, RHI, all of its assets and liabilities except those expressly related
to the Company's telecommunications business (the "Telecommunications
Business"), $125 million principal amount of the Company's 12 1/4% Senior
Secured Notes Due 1999 (the "12 1/4% Notes"), and approximately $57.8 million
of existing bank indebtedness. The Merger is contingent on STI obtaining
sufficient financing.
In the Merger Agreement, TFC, RHI and FII make representations and
warranties with respect to the Telecommunications Business and the Merger
Agreement provides that STI and TFC on the one hand and RHI on the other hand
shall indemnify each other from losses arising out of any breaches of their
respective representations and warranties in the Merger Agreement to the
extent that losses to a party exceed $4,000,000.
Upon consummation of the Merger, all outstanding shares of FII common stock
will be converted into the right to receive in the aggregate (i) 6,000,000
shares of STI Common Stock, (ii) shares of STI Cumulative Convertible
Preferred Stock bearing a six percent initial annual dividend and having an
aggregate liquidation preference of $25,000,000 plus an amount equal to the
total amount of dividends the holders would have received if dividends had
been paid at the rate of ten percent, less the amount of dividends actually
paid, and (iii) shares of STI Special Preferred having an aggregate initial
liquidation preference of $20,000,000 (the "Common Consideration"). In
connection with the Merger, all shares of Series A Convertible Preferred Stock
and Series C Cumulative Preferred Stock of FII will be redeemed by STI and
canceled in consideration of the payment of the full liquidation value thereof
together with accrued dividends aggregating approximately $41,600,000 (the
"Preferred Consideration"). RHI is transferring to the Company as a
contribution to its capital all of the outstanding shares of the Company's
Series B Preferred Stock.
Prior to the Reorganization, in addition to the Telecommunications Business,
the Company conducted two other businesses: the Aerospace Fasteners and
Industrial Products businesses. The Aerospace Fasteners business designs,
manufactures and markets high performance, specialty fastening systems,
primarily for aerospace applications. The Industrial Products business
designs, manufacturers and markets tooling and electronic control systems for
the plastic injection molding and die casting industries. The
Telecommunications Business is the sole continuing operation of the Company
and accounted for 21.4% of the Company's total combined sales for the three
businesses for the fiscal year ended June 30, 1995. The Telecommunications
Business has no operations or sales outside of the United States of America.
The transaction between STI and FII was structured as a merger. As a result
of this structure, the Surviving Corporation will be liable for all
liabilities of FII with respect to its operations prior to the Effective Time.
Prior to the Merger, and as a precondition of the Merger, FII, RHI, TFC and
certain other subsidiaries of TFC will undergo a reorganization pursuant to
which FII will divest itself of all assets unrelated to the Telecommunications
Business. RHI will assume all liabilities of FII unrelated to the
Telecommunications Business, including but not limited to: (i) contingent
liabilities related to the Company's alleged failure to comply
F-40
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
with certain Federal Acquisition Regulations and Cost Accounting Standards in
accounting for (a) the 1985 reversion to the Company of certain assets of
terminated defined benefit pension plans and (b) pension costs associated with
the discontinuation of certain of its former operations; (ii) all
environmental liabilities except those related to the Company's
Telecommunications Business; (iii) approximately $50,000,000 (at June 30,
1995) of costs associated with postretirement healthcare benefits; (iv) a
secured note payable in an aggregate principal amount of approximately
$3,300,000 at September 30, 1995; and (v) all other accrued and any and all
other unasserted liabilities that do not relate to or arise out of the
Telecommunications Business (which liabilities consist principally of those
related to certain divested businesses).
The Company and RHI will enter into an agreement (the "Indemnification
Agreement") pursuant to which RHI will assume and agree to discharge in full,
and will indemnify the Company from the Assumed Liabilities. Notwithstanding
the Indemnification Agreement, the Company will not be released from its
obligations with respect to the Assumed Liabilities as a matter of law.
Accordingly, to the extent RHI is unable to meet its obligations under the
Indemnification Agreement, the Company will be required to satisfy in full any
of the Assumed Liabilities not satisfied by RHI. RHI is primarily a holding
company and, therefore, any claim by the Company pursuant to the
Indemnification Agreement will be effectively subordinated to the creditors of
RHI's subsidiaries. There is no expiration date with respect to the
Indemnification Agreement. All indemnification obligations are secured by all
of the shares of preferred stock issued by STI to RHI in the Merger.
On January 26, 1996, FII sold its industrial products business to Cincinnati
Milacron, Inc. ("CM") pursuant to an asset purchase agreement dated as of
January 23, 1996 for approximately $245.0 million (the "D-M-E Asset Sale"),
comprised of approximately $62.3 million in cash and three 8% promissory notes
of CM. One note, in the amount of $11.7 million, will be payable upon the
receipt of required regulatory clearance in Belgium, and will be canceled and
the corresponding Belgium assets reconveyed, in the event such clearance is
not obtained. Of the other two notes, one is in the aggregate principal amount
of approximately $166 million, which note is collateralized by a letter of
credit issued by Bankers Trust Company in the amount equal to the principal of
such promissory note (the "Collateralized D-M-E Note"), and the other is
unsecured and is in the aggregate principal amount of approximately $5.0
million (the "Unsecured D-M-E Note" and, collectively with the Collateralized
D-M-E Note, the "D-M-E Term Notes"). Each of the D-M-E Term Notes is due and
payable one year following the consummation of the D-M-E Asset Sale, except
that upon 30 days' prior notice, Fairchild may require prepayment of, or CM
may prepay, each D-M-E Note at any time beginning on or after July 29, 1996.
On January 28, 1996, Fairchild sold substantially all of the assets of
Fairchild Data Corporation to SSE Datacom, Inc. ("SSED"), a wholly owned
subsidiary of SSE Telecom, Inc. ("SSET"), pursuant to an asset purchase
agreement dated as of January 26, 1996, for approximately $7 million (the
"Fairchild Data Corporation Sale"), comprised of approximately $5.2 in cash
and approximately $1.8 million (200,000 shares) of the common stock of SSET
(the "SSET Common Stock"). Fairchild's right to retain 100,000 shares of the
SSET Common Stock is subject to SSED's achieving specified profit margins
within twelve months of the Fairchild Data Corporation Sale. Also, Fairchild
was issued a three-year warrant to purchase 50,000 additional shares of the
common stock of SSET.
With respect to the contingent liabilities described in clause (i) of the
second preceding paragraph, the Corporate Administrative Contracting Officer
(the "ACO") has directed the Company 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. The
Company believes it properly accounted for the asset reversions in accordance
with applicable accounting standards. The Company has had discussions with the
government to attempt to resolve these pension accounting issues. However,
there can be no assurance that the Company will be able to satisfactorily
resolve them.
F-41
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of June 30, 1995, the consolidated total recorded liabilities of the
Company for the environmental matters referred to above totaled $8,601,000
which was the estimated probable exposure for these matters. It is reasonably
possible that the total exposure for these matters could be as much as
$15,778,000.
Fiscal year
The fiscal year ("fiscal") of the Company ends on June 30. All references
herein to "1993", "1994", and "1995" mean the fiscal years ended June 30,
1993, 1994 and 1995, respectively.
Cash Equivalents/Statements of Cash Flows
For purposes of these statements, the Company considers all highly liquid
investments with original maturity dates of three months or less as cash
equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
primarily using the weighted average method. The inventories consist of
telecommunications equipment waiting to be installed at customer sites.
Properties and Depreciation
Properties are stated at cost and depreciated over estimated useful lives,
generally on a straight-line basis. No interest costs were capitalized in any
of the years presented. Useful lives for property, plant and equipment are:
<TABLE>
<S> <C>
Buildings and improvements....................................... 17-40 years
Equipment and autos.............................................. 3-10 years
Furniture and fixtures........................................... 10 years
</TABLE>
Depreciation expense related to property, plant and equipment amounted to
$6,191,000, $6,998,000 and $8,153,000 for fiscal 1993, 1994 and 1995
respectively.
Unbilled Receivables and Advanced Billings
Unbilled receivables arise from those contracts under which billings can
only be rendered upon the achievement of certain contract stages or upon
submission of appropriate billing detail. Advance billings represent pre-
billings for services not yet rendered. Unbilled receivables and advance
billings are generally for services rendered within one year.
Revenue Recognition
The majority of the Company's revenues are related to the sale and
installation of telecommunications equipment and services and maintenance
after the sale. Service revenues are billed and earned on a monthly basis. For
systems installations, usually three to five months, the Company uses the
percentage-of-completion method, measured by costs incurred versus total
estimated cost at completion. The Company bills maintenance contracts in
advance. The deferred revenue is relieved when the revenue is earned.
F-42
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Intangible Assets and Goodwill
Intangible assets as of June 30, 1994 and 1995, respectively, are comprised
of the following:
<TABLE>
<CAPTION>
USEFUL
1994 1995 LIVES
------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Noncompete contracts............................ $ 2,774 $ 3,659 5-10 years
Subscriber base................................. 6,256 6,456 10 years
Right of first refusal.......................... 700 700 10 years
Acquisition/organization costs.................. 720 1,321 5-20 years
Other........................................... 615 1,391 8-10 years
------- -------
11,065 13,527
Accumulated amortization........................ (4,383) (5,938)
------- -------
$ 6,682 $ 7,589
======= =======
</TABLE>
The intangible assets are being amortized over their expected useful lives
described above. Amortization expense related to these intangible assets
amounted to $1,203,000, $1,371,000 and $1,555,000 for the years ended June 30,
1993, 1994 and 1995, respectively.
The Company allocates the excess of cost of purchased businesses over the
fair value of their net tangible assets at acquisition dates to identifiable
intangible assets to the extent possible. The residual is treated as goodwill
and is amortized on a straight-line basis over 40 years.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including property, plant and
equipment, identifiable intangibles and goodwill, for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. To determine recoverability of its long-
lived assets the Company evaluates the probability that future undiscounted
net cash flows, without interest charges, will be less than the carrying
amount of the assets. Impairment is measured at fair value.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
SFAS 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS 121 is required to be implemented by the
Company on, or before, July 1, 1996. Since the Company's present policy is
identical to the policy prescribed by SFAS 121, there will be no effect from
implementation.
Interim Financial Statements
The accompanying interim consolidated financial statements, as of December
31, 1995 and for the six months ended December 31, 1995 and 1994, of the
Company have been prepared by the Company without audit. Certain information
and footnote disclosures normally included in financial statements presented
in accordance with generally accepted accounting principles have been omitted
from the accompanying interim statements. The Company believes the disclosures
made are adequate to make the information presented not misleading.
In the opinion of the Company, the accompanying unaudited interim
consolidated financial statements reflect all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
F-43
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
position of the Company as of December 31, 1995 and the results of its
operations and its cash flows for the six months ended December 31, 1994 and
1995.
Interim results are not necessarily indicative of annual performance because
of the impact of seasonal variations.
2. ACQUISITIONS:
On November 28, 1994, the Company completed the acquisition of substantially
all of the telecommunications assets of JWP Telecom, Inc. ("JWP") for
approximately $11,000,000, plus the assumption of approximately $4,000,000 of
liabilities. The Company recorded $1,610,000 and $5,595,000 in identifiable
intangibles and goodwill, respectively, as a result of this acquisition. JWP
is a telecommunications system integrator, specializing in the distribution,
installation and maintenance of voice and data communications equipment. In
the first quarter of fiscal 1995, the Company acquired all the shared
telecommunications assets of Eaton & Lauth Co., Inc., for approximately
$550,000. The Company recorded $250,000 and $300,000 of the acquisition price
as identifiable intangibles and goodwill, respectively. See Note 12 for the
pro forma information assuming acquisition of JWP at the beginning of fiscal
1995 and at the beginning of fiscal 1994.
In fiscal 1993, the Company acquired all the telecommunications assets of
Office Networks, Inc. for approximately $7,300,000. The Company recorded
$2,282,000 and $2,748,000 in identifiable intangibles and goodwill,
respectively, as a result of this acquisition.
3. OPERATIONS BEING TRANSFERRED TO RHI:
The operations being transferred to RHI had the following operating results
and net assets (in thousands).
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Current assets......................................... $ 173,835 $ 165,738
Property, plant and equipment, net..................... 116,799 108,632
Goodwill............................................... 175,243 170,028
Net assets held for sale............................... 34,515 34,811
Other assets........................................... 31,792 23,072
Current liabilities.................................... (148,075) (108,862)
Debt to be assumed by RHI.............................. (94,393) (84,982)
Other liabilities...................................... (40,544) (62,463)
Cumulative Translation Adjustment...................... (3,146) (8,172)
--------- ---------
Net assets to be transferred......................... $ 246,026 $ 237,802
========= =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
----------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues..................................... $400,594 $369,792 $401,779
Cost of sales................................ 302,067 284,850 311,150
Selling, general and administrative.......... 69,549 67,438 76,171
Research and development..................... 3,262 3,940 4,100
Amortization of goodwill..................... 5,298 5,228 5,218
Restructuring charges........................ 15,469 18,860 --
Unusual items................................ -- 6,000 --
-------- -------- --------
Operating income (loss)...................... 4,949 (16,524) 5,140
Interest expense............................. 12,788 11,129 14,004
Other income................................. 2,269 4,008 1,549
Income tax provision (benefit)............... 264 (4,792) 2,017
Cumulative effect of accounting changes for
income taxes and postretirement benefits.... 810 11,678 --
-------- -------- --------
Net loss of transferred operations........... $ (6,644) $(30,531) $ (9,332)
======== ======== ========
</TABLE>
F-44
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The interest allocated to discontinued operations represents the interest on
the debt to be assumed by RHI. Goodwill was allocated to business segments at
the acquisition date of FII by TFC (June 1989) based on the ratio of estimated
fair value of the units to total estimated fair value. In addition, the
remaining goodwill allocated to the telecommunications business relates to
acquisitions made by the telecommunications business. The provision for income
taxes, which was calculated on a separate company basis, was allocated
entirely to discontinued operations as the continuing operations experienced
losses after interest in all historical periods. The cumulative effect from
changing accounting for income taxes has been solely allocated to operations
transferred to RHI as the telecommunications business has experienced losses
after interest in all historical periods and any tax assets could not be
realized. The cumulative effect from changing accounting for postretirement
benefits was partially allocated to continuing operations based upon actuarial
reports. See Note 5 for further discussion regarding the cumulative effect
from changing accounting for postretirement benefits. The Company's litigation
contingencies are part of the liabilities being transferred to RHI. These
contingencies include the determination by the ACO, based upon the advise of
the United States Defense Contract Audit Agency, that the Company did not
comply with Federal Acquisition Regulations and Cost Accounting Standards in
accounting for (i) the 1985 reversion to the Company of certain assets of
terminated defined benefit pensions plans, and (ii) costs upon the closing of
segments of the Company's business. The ACO has directed the Company 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. The Company believes it has properly
accounted for the asset reversions in accordance with applicable accounting
standards. The Company has had discussions with the government to attempt to
resolve these pension accounting issues.
To date, the stringent Federal, state and local environmental laws and
regulations, which apply to the Company and other aerospace fastener and
industrial product manufacturers, concerning, among other things, the
discharge of materials into the environment and the generation, handling,
storage, transportation and disposal of waste and hazardous materials, have
not had a material effect on the financial condition of the Company.
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 to take corrective action or to contribute to a cleanup. 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 investigations
and take any necessary corrective actions or make any necessary contributions.
None of the amounts estimated for FII's environmental liabilities are related
to the Communications Services Business. 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. The reserves recorded by the Company related
to the litigation discussed above have been included in operations transferred
to RHI.
4. LONG-TERM OBLIGATIONS:
The Company maintains a credit agreement (the "Credit Agreement") with a
consortium of banks, which provides a revolving credit facility and term loans
(collectively the "Credit Facilities"). The Credit Facilities generally bear
interest at 3.75% over the London Interbank Offer Rate ("LIBOR") for the Term
Loan VIII, at 2.5% over the bank's prime rate for the revolving credit
facility and at 2.75% over LIBOR for Term Loan VII, respectively. The LIBOR
was approximately 6% as of June 30, 1995. The commitment fee on the unused
portion of the revolving credit facility was 1.0% at June 30, 1995. The Credit
Facilities mature March 31, 1997 and are
F-45
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
secured by substantially all the Company's assets. RHI has assumed $94,393,000
and $84,982,000 of this debt as of June 30, 1994 and 1995, respectively, in
connection with the Merger. The remaining debt related to the continuing
operations will be repaid as part of the Merger and there will be no further
obligation of the Company.
The Credit Agreement, as amended, contains certain covenants, including a
material adverse change clause, and restrictions on dividends, capital
expenditures, capital leases, operating leases, investments and indebtedness.
It requires the Company to comply with certain financial covenants including
achieving cumulative earnings before interest, taxes, depreciation and
amortization ("EBITDA Covenant"), and maintaining certain coverage ratios.
The Company issued the 12 1/4% Senior Secured Notes (the "Notes") in August
1992. The Notes require semi-annual interest payments and mature in 1999,
however, the Company may redeem the Notes at any time after July 31, 1997. If
the Company desires to redeem the Notes prior to July 31, 1997, a majority of
the holders must consent to the redemption. The Notes are secured by a lien on
all of the issued and outstanding common stock and Series B Preferred Stock of
the Company and all issued and outstanding common stock of its wholly-owned
subsidiary, VSI Corporation. There are no direct or contingent liabilities or
compensating balance arrangements as a result of the Notes.
The Company is party to several capital leases with interest rates ranging
from 5.85% to 15.50%. (See Note 11 for additional capital lease disclosures.)
Annual maturities of long-term debt obligations (exclusive of capital lease
obligations) for each of the five years following June 30, 1995 are as
follows: $14,338,000 for 1996, $121,231,000 for 1997, $1,001,000 for 1998,
$125,056,000 for 1999 and $56,000 for 2000.
5. PENSIONS AND POSTRETIREMENT BENEFITS:
Pensions
The Company has established defined benefit pension plans covering
substantially all employees. The Company's funding policy for the plans is to
contribute each year the minimum amount required under the Employee Retirement
Income Security Act of 1974. A portion of the Company's pension cost and
prepaid pension cost have been included in operations transferred to RHI.
The following table provides a summary of the components of net periodic
pension cost for the plans:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost of benefits earned during the period.......... $ 55 $ 97 $106
Interest cost of projected benefit obligation.............. 35 56 63
Return on plan assets...................................... (39) (57) (55)
Net amortization and deferral.............................. 8 12 5
Amortization of prior service cost......................... 4 (8) (8)
---- ---- ----
Total pension cost....................................... $ 63 $100 $111
==== ==== ====
</TABLE>
Assumptions used in accounting for the plans were:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate.............................................. 8.5% 8.5% 8.5%
Expected rate of increase in salaries...................... 4.5% 4.5% 4.5%
Expected long-term rate of return on plan assets........... 9.0% 9.0% 9.0%
</TABLE>
F-46
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the funded status and amounts recognized in
the Company's balance sheets at June 30, 1994 and 1995 for the continuing
operations portion of its defined benefit pension plans:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Vested benefit obligation................................... $ 421 $ 493
Non-vested benefit obligation............................... 27 32
------- -------
Accumulated benefit obligation............................ 448 525
------- -------
Projected benefit obligation................................ 642 758
Plan assets at fair value................................... 699 800
------- -------
Plan assets in excess of projected benefit obligation....... 57 42
Unrecognized net loss....................................... 155 150
Unrecognized prior service cost............................. 4 3
------- -------
Prepaid pension cost........................................ $ 216 $ 195
======= =======
</TABLE>
Postretirement Health Care Benefits
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 ("SFAS No. 106"), "Employers' Accounting for
Postretirement Benefits Other Than Pensions". This standard requires that the
expected cost of postretirement benefits be accrued and charged to expense
during the years the employees render the services. The impact of the
accounting change was $60,000 which was included in general and administrative
expenses. A portion of the Company's net periodic postretirement benefit cost
and accrued postretirement benefit cost have been included in operations
transferred to RHI.
The components of expense for continuing operations in 1994 and 1995 are as
follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Service cost of benefits earned............................ $ 12 $ 13
Interest cost on liabilities............................... 6 7
------- -------
Net periodic postretirement benefit cost................... $ 18 $ 20
======= =======
</TABLE>
The following table sets forth the funded status for the continuing portion
of the Company's postretirement health care benefit plan at June 30, 1994 and
1995.
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation.............. $ 67 $ 87
Unrecognized net gain...................................... 11 11
------- -------
Accrued postretirement benefit cost........................ $ 78 $ 98
======= =======
</TABLE>
The accumulated postretirement benefit obligation was determined using a
discount rate of 8.5%, and a health care cost trend rate of 8.0% and 7.5% for
pre-age-65 and post-age-65 employees, respectively, gradually decreasing to
4.5% and 4.5%, respectively, in the year 2003 and thereafter.
Increasing the assumed health care cost trend rates by 1% would increase the
accumulated postretirement benefit obligation related to the continuing
operations of the Company as of June 30, 1995, by approximately $29,000, and
increase net periodic postretirement benefit cost by approximately $7,000 for
fiscal 1995.
F-47
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES:
Effective July 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes".
Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Prior to
the adoption of SFAS No. 109, income tax expense was determined using the
deferred method. Deferred tax expense was based on items of income and expense
that were reported in different years in the financial statements and tax
returns and were measured at the tax rate in effect in the year the difference
originated.
As permitted under SFAS No. 109, prior years' financial statements were not
restated. The effect of the accounting change was not material.
There was no provision or benefit for current or deferred income taxes from
continuing operations for 1993, 1994 and 1995 due to the historical losses of
continuing operations.
The income tax provision for continuing operations differs from that
computed using the statutory Federal income tax rate of 34.0% in 1993 and
35.0% in 1994 and 1995 and for the following reasons:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed statutory amount........................ $(1,908) $(1,189) $(1,059)
Effect of net operating losses................... 1,719 981 826
Nondeductible acquisition valuation items........ 184 202 218
Other............................................ 5 6 15
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
The following table is a summary of the significant components of the
continuing operations portion of the Company's deferred tax assets and
liabilities as of June 30, 1994 and 1995.
<TABLE>
<CAPTION>
1994 1995
DEFERRED DEFERRED
(PROVISION) JUNE 30, (PROVISION) JUNE 30,
BENEFIT 1994 BENEFIT 1995
----------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DEFERRED TAX ASSETS:
Accrued expenses.............. $ (15) $ 72 $ 17 $ 89
Employee compensation and
benefits..................... 32 192 45 237
Deferred revenue.............. (9) 130 958 1,088
NOL carryforwards............. 1,682 12,311 822 13,133
Postretirement benefits....... 41 135 27 162
Other......................... 58 40 8 48
------ ------- ------- -------
1,673 12,880 1,877 14,757
DEFERRED TAX LIABILITIES:
Asset basis differences--fixed
assets....................... (592) (5,367) -- (5,367)
Asset basis differences--
intangible assets............ (143) (1,426) (198) (1,624)
Other......................... (10) (326) -- (326)
------ ------- ------- -------
(745) (7,119) (198) (7,317)
------ ------- ------- -------
LESS--VALUATION ALLOWANCE....... (928) (5,761) (1,679) (7,440)
------ ------- ------- -------
Net deferred tax liability.... $ -- $ -- $ -- $ --
====== ======= ======= =======
</TABLE>
F-48
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For fiscal 1993, prior to the change in method of accounting for taxes, the
deferred income tax component of the income tax provision for continuing
operations consists of the effect of timing differences related to:
<TABLE>
<CAPTION>
1993
--------------
(IN THOUSANDS)
<S> <C>
Deferred revenue.............................................. 122
Intangible amortization....................................... (386)
Depreciation.................................................. (1,346)
Effect of net operating loss.................................. 1,610
-------
$ --
=======
</TABLE>
In the opinion of management, adequate provision has been made for all
income taxes and interest, and any tax liability that may arise for prior
periods will not have a material effect on the financial condition or results
of operations of the Company.
The Company has entered into a tax sharing agreement with its parent whereby
the Company is included in the consolidated federal income tax return of TFC.
The Company makes payments to TFC based on the amount of federal income taxes,
if any, it would have paid had it filed a separate federal income tax return.
7. REDEEMABLE PREFERRED STOCK:
As part of the Merger discussed in Note 1, the outstanding Series A
Preferred Stock will be redeemed at $45.00 per share. The Series A Preferred
Stock is subject to annual mandatory redemptions and annual dividend payments
of $3.60 per share. The Company did not purchase any shares during the past
three fiscal years. Series A Preferred Stock is listed on the New York Stock
Exchange ("NYSE").
Holders of the Series A Preferred Stock have general voting rights.
Additionally, in the event of a cumulative arrearage equal to six quarterly
dividends, all Series A Preferred stockholders have the right to elect
separately, as a class, two members to the Board of Directors. No cash
dividends can be declared or paid on any stock junior to the Series A
Preferred Stock in the event of dividend arrearages or a default in the
obligation to redeem such Series A Preferred Stock. Due to the merger of the
Company with RHI in August 1989, holders of the Series A Preferred Stock are
entitled, at their option, but subject to compliance with certain covenants
under the Company's Credit Agreement, to redeem their shares for $27.18 in
cash.
Annual maturity redemption requirements for redeemable preferred stock as of
June 30, 1995, are as follows: $4,211,000 for 1996, $7,450,000 for 1997, and
$7,450,000 for 1998.
8. EQUITY SECURITIES:
As part of the Merger discussed in Note 1, the Series C Preferred Stock will
be redeemed at redemption value of $45.00 per share. 558,360 shares of Series
C Preferred Stock were authorized, issued and outstanding at June 30, 1994 and
1995, respectively. Also, as part of the Merger, RHI will contribute to the
Company all of the Company's outstanding Series B Preferred Stock. Such Series
B Preferred Stock will be retired and canceled in connection with the Merger.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 ("SFAS 107"),
"Disclosures about Fair Value of Financial Instruments," requires disclosures
of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. Financial instruments are
F-49
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
defined as cash, evidence of an ownership interest in an entity or a contract
that imposes a contractual obligation to deliver cash or other financial
instruments to the second party. In cases where quoted market prices are not
available, fair values are based on estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
The carrying amount reported in the balance sheet approximates the fair
value for cash and cash equivalents, accounts receivable, accounts payable,
advanced billings, deferred revenue, accrued liabilities and capital lease
obligations.
Fair values of Series A and Series C preferred stock of the Company are
based on quoted market prices.
There is no active market for the Company's long-term debt. Therefore, the
fair value for the Company's fixed rate long-term debt is estimated using
discounted cash flow analysis, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
Fair values for the Company's off-balance-sheet instruments, lease
guarantees, are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counter parties' credit standing. The fair value of the Company's off-balance-
sheet instruments at June 30, 1995, is not material.
The carrying amounts and fair values of the Company's financial instruments
at June 30, 1994 and June 30, 1995 are as follows.
<TABLE>
<CAPTION>
JUNE 30, 1994 JUNE 30, 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.............. $ 64 $ 64 $ 1,469 $ 1,469
Accounts receivable.................... 9,856 9,856 20,647 20,647
Accounts payable....................... 6,744 6,744 12,780 12,780
Accrued liabilities.................... 3,589 3,589 6,623 6,623
Advanced billings...................... -- -- 941 941
Deferred revenue on maintenance
contracts............................. 371 371 3,109 3,109
Bank credit agreement.................. 55,373 55,373 55,373 55,373
12.25% senior secured notes............ 125,000 125,000 125,000 125,000
Redeemable preferred stock............. 19,112 15,608 19,112 15,714
Series C cumulative preferred stock.... 24,015 21,427 24,015 20,939
</TABLE>
F-50
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. RELATED PARTY TRANSACTIONS:
Corporate general and administrative expense was billed to the Company on a
monthly basis during 1993, 1994 and 1995. These costs represent the cost of
services incurred on behalf of the Company by TFC and its subsidiaries based
primarily on estimated hours spent by corporate employees. The Company has
reimbursed TFC and its subsidiaries for such services. Corporate general and
administrative expense allocated to the Company was $342,000, $441,000 and
$537,000 in fiscal 1993, 1994 and 1995, respectively.
The Company had sales to TFC and subsidiaries of TFC of $601,000, $707,000
and $1,031,000 for the years ended June 30, 1993, 1994 and 1995, respectively.
11. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases certain of its facilities and equipment under capital and
operating leases. The following is an analysis of the assets under capital
leases included in property, plant and equipment.
<TABLE>
<CAPTION>
JUNE 30,
DESCRIPTION 1995
----------- --------------
(IN THOUSANDS)
<S> <C>
Building improvements......................................... $ 422
Equipment and autos........................................... 11,582
Furniture and fixtures........................................ 297
Less-Accumulated depreciation................................. (6,446)
-------
$ 5,855
=======
</TABLE>
Future minimum lease payments:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
(IN THOUSANDS)
<S> <C> <C>
1996...................................................... $ 4,414 $ 812
1997...................................................... 4,635 189
1998...................................................... 4,867 8
1999...................................................... 5,110 --
2000...................................................... 5,366 --
------- ------
$24,392 1,009
=======
Less-Amount representing interest......................... (73)
------
Present value of capital lease obligations................ $ 936
======
</TABLE>
Rental expense under all leases amounted to $2,985,000, $3,023,000 and
$4,204,000 for the years ended June 30, 1993, 1994 and 1995, respectively.
Other Matters
The Company's continuing operations are involved in various claims and
lawsuits incidental to its business. 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 will not have a
material adverse effect on the financial condition or the future operating
results of the Company. See further discussion of the Assumed Liabilities in
Note 1.
F-51
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. PRO FORMA INFORMATION (UNAUDITED):
As described in Note 2, the Company acquired substantially all of the
telecommunications assets of JWP on November 28, 1994. The following unaudited
pro forma condensed results of operations for the years ended June 30, 1994 and
1995, give effect to the JWP acquisition as if the acquisition had occurred at
the beginning of each year.
<TABLE>
<CAPTION>
UNAUDITED
-----------------------
FISCAL 1994 FISCAL 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Sales................... $122,426 $132,716
Cost of sales........... (86,860) (98,628)
Other expenses.......... (38,917) (36,926)
-------- --------
Net loss from continuing
operations............. (3,351) (2,838)
Operating results of
operations transferred
to RHI................. (30,591) (9,332)
-------- --------
Net loss before
preferred dividends.... $(33,942) $(12,170)
======== ========
</TABLE>
F-52
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements (the "Pro
Forma Combined Financial Statements") are based on the historical financial
statements of STFI and FII included elsewhere in this Prospectus, adjusted to
give effect to the following (collectively, the "Specified Events"): (i)
certain acquisitions by STFI and FII since January 1, 1995 (the "Prior
Acquisitions"), (ii) the issuance of certain preferred stock of STC in
December 1995 resulting in STFI's loss of voting control of STC (the "STC
Equity Issuance"), (iii) the adjustment to FII's historical consolidated
statements of operations data to present FII on a calendar year basis and (iv)
the Transactions, including (A) the FII Recapitalization, (B) the Tender
Offer, (C) the Merger, (D) borrowings under the Credit Facility in connection
with the foregoing and (E) the Offering. The Unaudited Pro Forma Combined
Statements of Operations give effect to the Prior Acquisitions, the STC Equity
Issuance and the Transactions as if they had occurred as of January 1, 1995,
and the Unaudited Pro Forma Combined Balance Sheet gives effect to the STC
Equity Issuance and the Transactions as if they had occurred as of December
31, 1995. The Specified Events and the related adjustments are described in
the accompanying notes. The pro forma adjustments are based upon available
information and certain assumptions that management believes are reasonable.
The Pro Forma Combined Financial Statements do not purport to represent what
the Company's results of operations or financial condition would actually have
been had the applicable Specified Events in fact occurred on such dates or to
project the Company's results of operations for any future period or the
Company's financial condition at any future date. The Pro Forma Combined
Financial Statements should be read in conjunction with the historical
financial statements of STFI and FII including elsewhere in this Prospectus
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations".
The Merger was accounted for using the purchase method of accounting. The
total purchase consideration for the acquisition of FII has been allocated to
the tangible and intangible assets and liabilities of FII based upon their
respective fair values. The allocation of the aggregate purchase price
included in the Pro Forma Combined Financial Statements is preliminary as the
Company believes further refinement is impractical to perform at this time.
However, the Company does not expect the final allocation of the purchase
price will materially differ from the preliminary allocation set forth herein.
F-53
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC.
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA COMBINED
STFI* FII** ADJUSTMENTS COMPANY
--------- --------- ----------- --------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash........................... $ 476 $ 905 $ -- $ 1,381
Accounts receivable, less
allowance for doubtful
accounts...................... 9,855 13,184 23,039
Advances to subsidiaries....... 985 -- 985
Other current assets........... 754 3,272 4,026
-------- -------- -------- --------
Total current assets......... 12,070 17,361 -- 29,431
-------- -------- -------- --------
Equipment, at cost:
Telecommunications
equipment................... 28,904 80,821 (35,872)(a) 73,853
Office and data processing
equipment................... 6,049 5,231 11,280
-------- -------- -------- --------
34,953 86,052 (35,872) 85,133
Less--accumulated
depreciation.................. (18,305) (35,872) 35,872 (a) (18,305)
-------- -------- -------- --------
16,648 50,180 -- 66,828
-------- -------- -------- --------
Other assets................... 12,564 36,622 (30,622)(a) 277,393
251,329 (a)
7,500 (b)
Investment in subsidiary....... 1,581 -- 1,581
-------- -------- -------- --------
Total assets............... $ 42,863 $104,163 $228,207 $375,233
======== ======== ======== ========
</TABLE>
- --------
*See Unaudited Pro Forma Consolidated Financial Statements of STFI
**See Unaudited Pro Forma Consolidated Financial Statements of FII
See accompanying notes to these pro forma combined financial statements.
F-54
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC.
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA COMBINED
STFI* FII** ADJUSTMENTS COMPANY
--------- --------- ----------- --------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Notes payable and current portion
of long-term debt and capital
lease obligations............... $ 2,870 $ 303 $ (1,600)(b) $ 17,955
16,382 (b)
Accounts payable................. 9,035 11,268 20,303
Accrued expenses................. 2,221 6,157 7,000 (a) 10,497
7,500 (b)
(12,381)(b)
Advanced billings................ 1,337 3,694 5,031
-------- --------- --------- --------
Total current liabilities...... 15,463 21,422 16,901 53,786
-------- --------- --------- --------
Long-term debt and capital lease
obligations,
less current portion............ 4,128 170,780 12,100 (a) 225,313
(182,794)(b)
(2,519)(b)
115,000 (b)
125,000 (b)
(16,382)(b)
-------- --------- --------- --------
Post retirement benefits......... 112 112
-------- --------- --------- --------
Redeemable put warrant........... 428 428
-------- --------- --------- --------
FII Series A preferred stock..... -- 16,691 (16,691)(b) --
-------- --------- --------- --------
STFI Cumulative preferred stock,
250,000 shares outstanding...... -- -- 25,000 (a) 25,000
-------- --------- --------- --------
STFI Special preferred stock,
20,0000 shares outstanding...... -- -- 20,000 (a) 20,000
-------- --------- --------- --------
STOCKHOLDERS' EQUITY:
STFI Series C preferred stock.... 9 9
STFI Series D preferred stock.... 5 5
FII Series C preferred stock..... 24,015 (24,015)(b) --
FII Series B preferred stock..... 230,200 (230,200)(a) --
Common stock, 14,698 STFI shares
outstanding..................... 34 140 (140)(a) 58
24 (a)
Additional paid-in capital....... 44,777 2,925 (2,925)(a) 72,503
27,726 (a)
Accumulated deficit.............. (21,981) (362,122) 362,122 (a) (21,981)
-------- --------- --------- --------
Total stockholders' equity..... 22,844 (104,842) 132,592 50,594
-------- --------- --------- --------
Total liabilities and
stockholders' equity........ $ 42,863 $ 104,163 $ 228,207 $375,233
======== ========= ========= ========
</TABLE>
- --------
*See Unaudited Pro Forma Consolidated Financial Statements of STFI
**See Unaudited Pro Forma Consolidated Financial Statements of FII
See accompanying notes to these pro forma combined financial statements.
F-55
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA COMBINED
STFI* FII** ADJUSTMENTS COMPANY
--------- --------- ----------- --------
<S> <C> <C> <C> <C>
Revenues........................... $49,044 $125,808 $ -- $174,852
Cost of revenue.................... 30,105 67,062 (806)(f) 96,361
------- -------- ------- --------
Gross margin....................... 18,939 58,746 806 78,491
Selling general & administrative
expenses.......................... 16,879 39,359 5,616(d) 59,408
(2,446)(f)
------- -------- ------- --------
Operating income (loss)............ 2,060 19,387 (2,364) 19,083
Gain on sale of subsidiary stock... 1,375 1,375
Equity in loss of subsidiary....... (2,634) (2,634)
Interest expense................... (1,106) (21,478) (3,051)(e) (26,552)
(917)(c)
Interest income.................... 205 205
------- -------- ------- --------
Income before income tax........... (100) (2,091) (6,332) (8,523)
Income tax......................... (45) -- 40 (h) (5)
------- -------- ------- --------
Net income......................... (145) (2,091) (6,292) (8,528)
Preferred stock dividends.......... (398) (3,852) 352(g) (3,898)
------- -------- ------- --------
Net income (loss) applicable to
common stock...................... $ (543) $ (5,943) $(5,940) $(12,426)
======= ======== ======= ========
Income (loss) per common share..... $ (0.06) $ (0.86)
======= ========
Weighted average number of common
shares outstanding................ 8,482 6,000 14,482
======= ======= ========
Other data:
Depreciation & amortization........ 4,118 11,844 5,616 21,578
EBITDA(i).......................... 6,178 31,231 3,252 40,661
Capital expenditures............... 3,689 11,285 -- 14,974
Cash interest expense, net(j)...... 11,342
Ratio of EBITDA to interest ex-
pense, net........................ 1.54
Ratio of EBITDA to cash interest
expense, net...................... 3.58
Ratio of earnings to fixed
charges(k)........................ .74
Ratio of earnings to fixed charges
and preferred stock
dividends......................... .66
</TABLE>
- --------
* See Unaudited Pro Forma Consolidated Financial Statements of STFI.
** See Unaudited Pro Forma Consolidated Financial Statements of FII.
See accompanying notes to these pro forma combined financial statements.
F-56
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) The pro forma combined balance sheet gives effect to the merger of FII,
after the FII recapitalization, into STFI by combining the respective balance
sheets of the two companies at December 31, 1995. The Merger was accounted for
using the "purchase" method of accounting in accordance with generally
accepted accounting principles. Therefore the aggregate consideration paid in
connection with the merger will be allocated to FII's assets and liabilities
based on their fair market values and any excess has been treated as goodwill.
The purchase was paid with the issuance of $72,750,000 in STFI equity to the
former shareholders of FII. The STFI equity consisted of 6 million shares of
common stock at a market value of $4.625 per share, shares of 10% cumulative
convertible preferred stock with an aggregate liquidation preference of
$25,000,000 and shares of special preferred stock with an aggregate
liquidation preference of $20,000,000. Both issues of preferred stock have a
mandatory redemption feature. The following schedule details the calculation
of adjustments to record the transaction at fair market value (FMV), accrue
acquisition costs and record the issuance of $72,750,000 in STFI equity.
<TABLE>
<CAPTION>
FMV
PRO FORMA ADJUSTED
FII * FII ADJUSTMENT
--------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Cash........................................... $ 905 $ 905 $ --
Accounts receivable, less allowance for
doubtful accounts............................. 13,184 13,184 --
Other current assets........................... 3,272 3,272 --
Telecommunications equipment................... 80,821 44,949 (35,872)
Office and data processing equipment........... 5,231 5,231 --
Accumulated depreciation....................... (35,872) -- 35,872
Other assets................................... 36,622 6,000 (30,622)
New goodwill................................... 251,329 251,329
--------- -------- ---------
Total assets................................. $ 104,163 $324,870 $ 220,707
========= ======== =========
LIABILITIES:
Notes payable and current portion of long-term
debt and capital lease obligations............ $ 303 $ 303 --
Accounts payable............................... 11,268 11,268 --
Accrued expenses............................... 6,157 6,157 --
Accrued acquisition costs...................... 7,000 7,000
Advanced billings.............................. 3,694 3,694 --
Long-term debt and capital lease obligations,
less current portion.......................... 170,780 182,880 12,100
Post retirement benefits....................... 112 112 --
--------- -------- ---------
Total liabilities............................ 192,314 211,414 19,100
--------- -------- ---------
FII Series A preferred stock................... 16,691 16,691 --
--------- -------- ---------
STFI cumulative preferred stock................ 25,000 25,000
--------- -------- ---------
STFI special preferred stock................... 20,000 20,000
--------- -------- ---------
STOCKHOLDERS' EQUITY:
FII Series C preferred stock................... 24,015 24,015 --
FII Series B preferred stock................... 230,200 -- (230,200)
Common stock................................... 140 -- (140)
New common stock............................... 24 24
Additional paid-in capital..................... 2,925 -- (2,925)
Additional paid-in capital..................... 27,726 27,726
Accumulated deficit............................ (362,122) -- 362,122
--------- -------- ---------
Total stockholders' equity................... (104,842) 51,765 156,607
--------- -------- ---------
Total liabilities and stockholders'
equity.................................... $ 104,163 $324,870 $ 220,707
========= ======== =========
</TABLE>
- --------
* See unaudited pro forma consolidated financial statements of FII
F-57
<PAGE>
(b) An adjustment was recorded in the pro forma combined balance sheet to
reflect the issuance of $240,000,000 in new debt; $115,000,000 in 12 1/4% zero
coupon bonds and $125,000,000 in term loans from the Credit Facility. Proceeds
from these borrowings is expected to be used as follows:
<TABLE>
<CAPTION>
(AMOUNTS IN
THOUSANDS)
<S> <C>
Repurchase of FII series A preferred stock..................... $ 16,691
Repurchase of FII series C preferred stock..................... 24,015
Retirement of 12 1/4% Notes.................................... 125,000
Estimated premium on retirement of 12 1/4% Notes............... 12,100
Retirement of FII indebtedness................................. 45,694
Retirement of current portion State Street debt................ 1,600
Retirement of long term portion State Street debt.............. 2,519
Payment of bank finance fees................................... 7,500
Payment of certain acquisition costs........................... 4,881
--------
Total proceeds............................................... $240,000
========
</TABLE>
The pro forma combined balance sheet assumes all these events took place
with the Merger. $7,000,000 in acquisition costs were accrued related to the
merger, approximately $4,881,000 are expected to be paid immediately with the
remaining $2,000,000 to be paid over the course of the first year of
operations. All interest expense related to retired debt and all preferred
stock dividends related to retired preferred stock were eliminated in the pro
forma combined statement of operations. See footnotes (e) and (g).
Scheduled aggregate payments on long-term debt and capital lease obligations
are as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
<S> <C>
1996.............................................................. 17,955
1997.............................................................. 12,936
1998.............................................................. 12,626
1999.............................................................. 12,211
2000.............................................................. 7,097
Thereafter........................................................ 180,443
-------
243,268
=======
</TABLE>
(c) $7,500,000 in financing fees associated with the assumption of
$240,000,000 in new debt were capitalized. See footnote (b). Additional
interest expense was recorded based on an amortization period of 10 years for
$3,600,000 of the fees and 7 years for the remaining $3,900,000. The
allocation of fees is based on the respective amounts of zero coupon bonds and
bank debt issued and the respective lives of each. The adjustment resulted in
additional interest expense of $917,000 for the year ended December 31, 1995.
(d) The purchase accounting for the merger resulted in $251,329,000 of
goodwill which will be amortized over 40 years. See footnote (a). Certain
intangible assets acquired from FII were given zero value and the
corresponding goodwill amortization was eliminated from the pro forma combined
statements of operations. The pro forma combined statement of operations
reflect a net adjustment to goodwill amortization of $5,616,000 for the year
ended December 31, 1995. The following table details the calculation of the
adjustment (amounts in thousands):
<TABLE>
<CAPTION>
1995
------
<S> <C>
New goodwill amortization.......................................... $6,283
FII goodwill amortization eliminated............................... (667)
------
Net adjustment................................................... $5,616
======
</TABLE>
F-58
<PAGE>
(e) Interest expense, in the pro forma combined statement of operations, has
been adjusted to reflect the net effect of the change in outstanding debt
described in Note (b) as if it had occurred on January 1, 1995. The following
table details the calculation of the adjustment by period (amounts in
thousands).
<TABLE>
<CAPTION>
1995
--------
<S> <C>
$115 million in zero coupon bonds 12 1/4% interest............... $ 14,088
$125 million in bank debt estimated 8.6% interest................ 10,750
Retirement of 12 1/4% Notes...................................... (15,312)
Retirement of FII indebtedness................................... (6,116)
Retirement of STFI indebtedness.................................. (359)
--------
Net adjustment................................................. $ 3,051
========
</TABLE>
A 1/8% change in the estimated interest rates for the $125 million in bank
debt would result in a change in interest expense of $156,250 on a yearly
basis.
(f) The pro forma combined statement of operations include the estimated
effect of certain cost savings and increases associated with the consolidation
of the operations of STFI and FII. The following table details the components
of the adjustment (amounts in thousands).
<TABLE>
<CAPTION>
1995
------
<S> <C>
Net S,G & A savings................................................. $2,446
Network savings..................................................... 806
------
Total adjustment.................................................. $3,252
======
</TABLE>
(g) Preferred stock dividends in the pro forma combined statement of
operations were adjusted to reflect the change in outstanding preferred stock
described in notes (a) and (b). The net effect was to decrease preferred stock
dividends by approximately $352,000 for the year ended December 31, 1995. The
following table details the components of the adjustment (amounts in
thousands).
<TABLE>
<CAPTION>
1995
-------
<S> <C>
Preferred stock dividends added (footnote a):
STFI cumulative preferred stock dividend....................... $(2,500)
STFI special preferred stock dividends......................... (1,000)
Preferred stock dividends eliminated (footnote b)
FII series A preferred stock dividend.......................... 1,479
FII series C preferred stock dividend.......................... 2,373
-------
Total adjustment............................................. $ 352
=======
</TABLE>
(h) STFI incurred certain state income taxes for 1995. The pro forma
combined statement of operations have been adjusted to reduce state income
taxes to an estimated minimum required amount. This resulted in a reduction of
income taxes of $40,000 for the year ended December 31, 1995.
(i) EBITDA. EBITDA is defined as net income plus income taxes, interest
expense, depreciation and amortization. However, EBITDA excludes (i) income
(or loss) from discontinued operations, (ii) the net income of subsidiaries
accounted for on the equity basis (other than distributions or dividends
actually received from such subsidiaries but only to the extent of the equity
held in such subsidiaries) and (iii) for the year ended December 31, 1995, the
$1.4 million gain on sale of subsidiary stock. EBITDA is presented because it
is a widely accepted financial indicator of a company's ability to incur and
service debt. EBITDA should not be considered by an investor as an alternative
to net income, as an indicator of the operating performance of the Company,
STFI or FII or as an alternative to cash flow as a measure of liquidity.
F-59
<PAGE>
(j) Cash Interest Expense, Net. Excludes amortization of debt issuance
costs, the cost of interest rate protection agreements and accretion of the
Notes.
(k) Ratio of Earnings to Fixed Charges. For purposes of computing the ratio
of earnings to fixed charges, earnings consist of earnings from continuing
operations before income taxes and fixed charges. Fixed charges include
interest expense and that proportion of rental expense considered to be
representative of the interest component of lease expense.
F-60
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma Shared Technologies Fairchild Inc.
("STFI") consolidated financial statements give effect, on a purchase
accounting basis, to the acquisition of Office Telephone Management (OTM). The
unaudited pro forma STFI financial statements also reflect the STC Equity
Adjustment.
The unaudited pro forma STFI consolidated financial statements are not
necessarily indicative of the results or financial position which actually
would have occurred if the acquisition of OTM and the STC Equity Adjustment
had been in effect since January 1, 1995, nor are they necessarily indicative
of future results or financial position.
The unaudited pro forma STFI consolidated statements of operations gives
effect to the acquisition of OTM and the STC Equity Adjustment as if they had
occurred on January 1, 1995, and the unaudited pro forma STFI consolidated
balance sheet gives effect to these items as if they had occurred on December
31, 1995 for the purpose of presenting the unaudited pro forma STFI
consolidated financial statements.
F-61
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
STFI ADJUSTMENTS STFI
-------- ----------- ---------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash.......................................... $ 476 $ -- $ 476
Accounts receivable, less allowance for
doubtful accounts............................ 9,855 9,855
Advances to subsidiaries...................... 985 985
Other current assets.......................... 754 754
-------- ----- --------
Total current assets........................ 12,070 -- 12,070
-------- ----- --------
Equipment, at cost:
Telecommunications equipment................ 28,904 28,904
Office and data processing equipment........ 6,049 6,049
-------- ----- --------
34,953 -- 34,953
Less--Accumulated depreciation................ (18,305) (18,305)
-------- ----- --------
16,648 -- 16,648
-------- ----- --------
Other assets.................................. 12,564 12,564
Investment in subsidiary...................... 1,581 1,581
-------- ----- --------
Total assets.............................. $ 42,863 $ -- $ 42,863
======== ===== ========
CURRENT LIABILITIES:
Notes payable and current portion of long-term
debt and capital lease obligations........... $ 2,870 $ -- $ 2,870
Accounts payable.............................. 9,035 9,035
Accrued expenses.............................. 2,221 2,221
Advanced billings............................. 1,337 1,337
-------- ----- --------
Total current liabilities................... 15,463 -- 15,463
-------- ----- --------
Long-term debt and capital lease obligations,
less current portion......................... 4,128 4,128
-------- ----- --------
Redeemable put warrant........................ 428 428
-------- ----- --------
STOCKHOLDERS' EQUITY
STFI Series C preferred stock................. 9 9
STFI Series D preferred stock................. 5 5
Common stock.................................. 34 34
Additional paid-in capital.................... 44,777 44,777
Accumulated deficit........................... (21,981) (21,981)
-------- ----- --------
Total stockholders' equity.................. 22,844 -- 22,844
-------- ----- --------
Total liabilities and stockholders'
equity................................... $ 42,863 $ -- $ 42,863
======== ===== ========
</TABLE>
See accompanying notes to these pro forma consolidated financial statements
F-62
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
(2)
OTM PRO FORMA PRO FORMA
STFI ACQUISITION ADJUSTMENTS STFI
------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues......................... $47,086 $1,958 $49,044
Cost of revenue.................. 28,872 1,233 30,105
------- ------ ------- -------
Gross margin..................... 18,214 725 18,939
Selling, general & administration
expenses........................ 16,188 627 64 (2) 16,879
------- ------ ------- -------
Operating income (loss) 2,026 98 (64) 2,060
Gain on sale of subsidiary
stock........................... 1,375 1,375
Equity in (loss) of subsidiary... (1,752) (882)(1) (2,634)
Interest expense................. (882) (119) (34)(2) (1,106)
(71)(2)
Interest income.................. 205 205
------- ------ ------- -------
Income before income taxes....... 972 (21) (1,051) (100)
Income taxes..................... (45) (45)
------- ------ ------- -------
Net income....................... 927 (21) (1,051) (145)
Preferred stock dividends........ (398) (398)
------- ------ ------- -------
Net income (loss) applicable to
common stock.................... $ 529 $ (21) $(1,051) $ (543)
======= ====== ======= =======
</TABLE>
See accompanying notes to these pro forma consolidated financial statements
F-63
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) STFI owns approximately 59% of the outstanding common stock of STC;
formerly a consolidated subsidiary of STFI. During December 1995 STC issued
approximately $3,000,000 in voting preferred stock to third parties. While
STFI's ownership percentage did not change, the voting rights assigned to the
voting preferred stock reduced STFI's voting interest in STC to 42.7%,
resulting in STFI's loss of voting control of STC. In November 1995 STC
completed its purchase of certain assets and liabilities of PTC Cellular Inc.
In May and June 1995 STC completed its purchase of Cellular Hotline Inc. for
$617,000. The $617,000 was comprised of $367,000 in cash and the issuance of
50,000 shares of STC common stock. An adjustment of $882,000 was recorded to
reflect the effect of these acquisitions on the equity in loss for the year
ended December 31, 1995.
(2) In June 1995, STFI purchased all the outstanding capital stock of OTM
for an aggregate purchase price of $2,135,000. OTM provides telecommunications
management services primarily to businesses located in executive office
suites. The purchase was paid with $1,335,000 in cash and the issuance of a
$800,000 note payable in quarterly installments of $30,000 including interest
at 8.59% over ten years. The acquisition was recorded as a purchase and the
unallocated purchase price over fair market value of assets acquired was
$1,915,000 which is being amortized over 15 years. The unaudited pro forma
consolidated statement of operations for the year ended December 31, 1995
includes adjustments to record OTM operations for the period prior to the
acquisition in June 1995; $64,000 was recorded for additional goodwill
amortization; $34,000 for additional interest expense related to the $800,000
note; and $71,000 for additional interest expense related to the estimated
interest cost at 10.5% on additional borrowings of $1,355,000 required to
obtain the cash paid to acquire OTM.
F-64
<PAGE>
FAIRCHILD INDUSTRIES INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma Fairchild Industries Inc. ("FII")
consolidated financial statements reflect the adjustment to a December 31 year
end basis from a June 30 year end basis and a recapitalization (the
Recapitalization) which transfers certain non telecommunications assets to
FII's parent company RHI prior to the merger.
The unaudited pro forma FII financial statements are not necessarily
indicative of the results or financial position which actually would have
occurred if the change to a December 31 year end and the Recapitalization had
been in effect since January 1, 1995 nor are they necessarily indicative of
future results or financial position.
The unaudited pro forma FII consolidated statements of operations gives
effect to the Recapitalization as if it had occurred on January 1, 1995, and
the unaudited pro forma FII consolidated balance sheet gives effect to the
Recapitalization as if it had occurred on December 31, 1995 for the purpose of
presenting the unaudited pro forma FII consolidated financial statements.
F-65
<PAGE>
FAIRCHILD INDUSTRIES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
(1), (3)
RECAPITALIZE PRO FORMA
FII FII FII
--------- ------------ ---------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash....................................... $ 905 $ -- $ 905
Accounts receivable, less allowance for
doubtful accounts......................... 22,184 (9,000) 13,184
Other current assets....................... 3,272 3,272
Net current assets of operations
transferred to RHI........................ 65,220 (65,220) --
--------- --------- ---------
Total current assets..................... 91,581 (74,220) 17,361
--------- --------- ---------
Equipment, at cost:
Telecommunications equipment............. 80,821 80,821
Office and data processing equipment..... 5,231 5,231
--------- --------- ---------
86,052 86,052
Less--Accumulated depreciation............. (35,872) (35,872)
--------- --------- ---------
50,180 -- 50,180
--------- --------- ---------
Other assets............................... 36,622 36,622
Net non-current assets transferred to RHI.. 169,878 (169,878) --
--------- --------- ---------
Total assets........................... $ 348,261 $(244,098) $ 104,163
========= ========= =========
CURRENT LIABILITIES:
Notes payable and current portion of long-
term debt and capital lease obligations... $ 303 $ -- $ 303
Accounts payable........................... 11,268 11,268
Accrued expenses........................... 6,157 6,157
Advanced billings.......................... 3,694 3,694
--------- --------- ---------
Total current liabilities................ 21,422 -- 21,422
--------- --------- ---------
Long-term debt and capital lease
obligations, less current portion......... 182,880 (12,100) 170,780
--------- --------- ---------
Post retirement benefits................... 112 112
--------- --------- ---------
FII Series A preferred stock............... 16,691 16,691
STOCKHOLDERS' EQUITY:
FII Series C preferred stock............... 24,015 24,015
FII Series B preferred stock............... 230,200 230,200
Common stock............................... 140 140
Additional paid-in capital................. 2,925 2,925
Accumulated deficit........................ (130,124) (231,998) (362,122)
--------- --------- ---------
Total stockholders' equity............... 127,156 (231,998) (104,842)
--------- --------- ---------
Total liabilities and stockholders'
equity................................ $ 348,261 $(244,098) $ 104,163
========= ========= =========
</TABLE>
See accompanying notes to these pro forma consolidated financial statements.
F-66
<PAGE>
FAIRCHILD INDUSTRIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FII (2)
SIX MONTHS ADJUST FII TO PRO FORMA PRO FORMA
ENDED 12/31/95 CALENDAR YEAR ADJUSTMENTS FII
-------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues.................. $ 64,631 $ 61,177 $ -- $125,808
Cost of revenue........... 34,467 32,595 67,062
-------- -------- ------ --------
Gross margin.............. 30,164 28,582 -- 58,746
Selling, general &
administrative expenses.. 20,712 18,647 39,359
-------- -------- ------ --------
Operating income.......... 9,452 9,935 -- 19,387
Interest expense.......... (10,952) (10,526) (21,478)
-------- -------- ------ --------
Net income................ (1,500) (591) -- (2,091)
Operating results of
operations transferred to
RHI...................... 1,393 (10,169) 8,776(1) --
Preferred stock
dividends................ (1,901) (1,951) (3,852)
-------- -------- ------ --------
Net income applicable to
common stock............. $ (2,008) $(12,711) $8,776 $ (5,943)
======== ======== ====== ========
</TABLE>
See accompanying notes to these pro forma consolidated financial statements
F-67
<PAGE>
FAIRCHILD INDUSTRIES INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) The unaudited pro forma FII consolidated financial statements were
adjusted to reflect a recapitalization of FII prior to the merger. Subsequent
to June 30, 1995, FII and its immediate parent RHI announced plans to
recapitalize FII in order to improve its financial and operating flexibility
and strengthen its financial position. Concurrent with the merger, and as part
of the recapitalization, FII is transferring to RHI, all of its assets and
liabilities except those expressly related to FII's telecommunications
business, $125,000,000 principal amount of 12 1/4% Senior Secured Notes Due
1999, the Series A and Series C Preferred Stock of FII, an estimated
$12,100,000 in accrued premium on early retirement of the 12 1/4% Senior
Secured Notes Due 1999 and approximately $45,694,000 of existing bank
indebtedness.
(2) The FII historical consolidated statements of operations were based on a
fiscal year ended June 30. The pro forma consolidated statements of operations
were adjusted to present FII on a December 31 (calendar year) basis, in order
to conform to STFI's fiscal year.
(3) The sale of DME on January 26, 1996 only affects the businesses
transferred to RHI in the recapitalization.
F-68
