UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
Commission File Number: 1-3102
FAIRCHILD INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-0579835
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Washington Dulles International Airport
300 West Service Road, P.O. Box 10803
Chantilly, Virginia 22021
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(Address of principal executive offices)
(Zip Code)
(703) 478-5800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class December 31, 1995
- ----- -----------------
Common Stock, $100.00 par value 1,400
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES*
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of December 31, 1995 (Unaudited) and
June 30, 1995 3
Consolidated Statements of Earnings
for the Three and Six Months Ended
December 31, 1995 and January 1, 1995
(Unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the Six Months Ended
December 31, 1995 and January 1, 1995
(Unaudited) 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
*For purposes of Part I of this Form 10-Q, the term "Company" means
Fairchild Industries, Inc., and its subsidiaries, unless otherwise
indicated. For purposes of Part II, the term "Company" means Fairchild
Industries, Inc. unless otherwise indicated.
<PAGE>
PART 1. FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
<TABLE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
December 31, June 30,
ASSETS 1995 1995
- ------ ------------ ------------
(Unaudited) (*)
<S> <C> <C>
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
======= =======
*Condensed and restated for discontinued operations (see Note 3) from audited
financial statements.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
December 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1995
- ------------------------------------ ------------ ------------
(Unaudited) (*)
<S> <C> <C>
Current Liabilities:
Bank notes payable and current
maturities of long-term debt........... $ 74,598 $ 15,352
Accounts payable......................... 26,444 29,323
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 3,309
------- -------
Total Stockholders' Equity............... 129,800 129,671
------- -------
Total Liabilities and Stockholders'
Equity................................. $582,762 $584,200
======= =======
*Condensed and restated for discontinued operations (see Note 3) from audited
financial statements.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(In thousands)
<CAPTION>
Three Months Ended Six Months Ended
December 31, January 1, December 31, January 1,
1995 1995 1995 1995
------------ ------------ ------------ ------------
(*) (*)
<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)
======= ======= ======= =======
*Condensed and restated for discontinued operations. (See Note 3).
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<CAPTION>
Six Months Ended
December 31, January 1,
1995 1995
------------ ------------
(*)
<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
======= =======
*Condensed and restated for discontinued operations. (See Note 3).
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
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 January 1, 1995 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 October 1, 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 $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 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>
(In thousands)
December 31, June 30,
1995 1995
------------ --------
<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>
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.
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 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- -------------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
Fairchild Industries, Inc. (the "Company") is incorporated under the
laws of the State of Delaware. 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").
RECENT DEVELOPMENTS
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 $245.0 million in cash and notes, subject to audit adjustment.
On January 27, 1996, the Company completed the sale of Data to SSE Telecom,
Inc. ("SSE") for book value of approximately $5.3 million and 100,000 shares
of SSE's common stock valued at $9.0625 per share or $.9 million on 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.
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 $45.5 million and $44.1 million for the second quarter of Fiscal 1996
and 1995, respectively, and $91.3 million and $86.6 million for the first six
months of Fiscal 1996 and 1995, respectively.
On November 9, 1995, the Company, RHI and TFC 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 $41.8
million at December 31, 1995), (iii) the $125.0 million 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
$56.7 million (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).
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 $25.0 million (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 $20.0 million
(which could accrue up to a maximum of $30.0 million over a ten-year period
if not redeemed earlier).
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.
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.
RESULTS OF OPERATIONS
The Company currently operates in three principal business segments:
Aerospace Fasteners, Industrial Products and Communications Services. Set
forth below is a comparison of the results from continuing operations of the
Company for the three and six month periods ended December 31, 1995 and
January 1, 1995.
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended Six Months Ended
December 31, January 1, December 31, January 1,
1995 1995 1995 1995
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales by Business Segment:
Aerospace Fasteners..................... $ 55,794 $ 52,328* $107,990 $103,838*
Industrial Products..................... 1,052 945* 2,179 1,567*
Communications Services................. 32,031 22,568 65,028 42,510
------- ------- ------- -------
Total...................................... $ 88,877 $ 75,841 $175,197 $147,915
======= ======= ======= =======
Operating Income (Loss) by Business Segment:
Aerospace Fasteners..................... $ 1,382 $ (2,160)* $ 1,692 $ (755)*
Industrial Products..................... (114) (1,160)* (251) (1,394)*
Communications Services................. 4,862 3,829 9,771 8,251
------- ------- ------- -------
Total...................................... 6,130 509 11,212 6,102
Corporate administrative expense........ (1,239) (985) (2,386) (1,809)
Other corporate income.................. (228) 424 (152) 454
------- ------- ------- -------
Operating income (loss).................... 4,663 (52) 8,674 4,747
Net interest expense....................... (8,613) (8,416) (17,717) (16,861)
Investment income.......................... -- -- 278
Equity in earnings of affiliates, net
of minority interest..................... 1 (74) 20 (34)
------- ------- ------- -------
Loss from continuing operations before
income 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)
======= ======= ======= =======
* The Aerospace Fasteners and the Industrial Products segments were restated
for the transfer of the Gas Springs division from the Aerospace Fasteners
segment to the Industrial Products segment. The Industrial Products segment
was also restated for the sale of DME and Data, which are being reported as
discontinued operations.
</TABLE>
General
- -------
Overall sales from continuing operations increased by 17.2% in the
second quarter and 18.4% for the Fiscal 1996 six month period, compared to
sales for the same periods in Fiscal 1995, which reflected stronger sales
performances from all three business segments.
Operating income from continuing operations increased $4.7 million in the
second quarter and $3.9 millon for the Fiscal 1996 six month period, compared
to operating income for the same periods in Fiscal 1995. Net operating
income performance improved in all three business segments in both of the
Fiscal 1996 periods. (See discussion below.)
Aerospace Fasteners
- -------------------
Sales in the Aerospace Fasteners segment increased $3.5 million or 6.6%
in the second quarter and $4.2 million or 4.0% in the Fiscal 1996 six month
period, compared to the corresponding Fiscal 1995 periods, reflecting
moderate growth in this industry. New orders have been strong in recent
months.
Operating income in the Aerospace Fasteners segment increased $3.5
million in the second quarter and $2.4 million in the Fiscal 1996 six month
period, compared to the Fiscal 1995 periods. The Fiscal 1995 periods
included income from business interruption insurance resulting from the loss
sustained in the January 1994 earthquake. This segment continues to be
affected by soft demand, competitive pricing conditions and higher quality
control costs resulting from customers' requirements. Management will
continue to implement productivity improvements and reduce costs to bring the
breakeven point in line with demand, particularly in its U.S. operations. A
$.3 million restructuring charge was recorded in the Fiscal 1996 quarter for
the close down of a small subsidiary located in Japan.
Industrial Products
- -------------------
With the sale of DME and Data, the Gas Spring Division, a start up
operation in the U.K.) is the only operation being reported in the Industrial
Products segment, at the Company's level. The Fairchild Technologies
businesses are included in the Industrial Products segment at TFC and RHI
levels.
Sales in the Industrial Products segment increased 11.3% in the second
quarter and 39.1% in the Fiscal 1996 first six months, compared to the same
period in Fiscal 1995.
Operating losses in the Industrial Products segment decreased $1.0
million in the second quarter and $1.1 million in the Fiscal 1996 first six
months, compared to the same periods in Fiscal 1995.
Communications Services
- -----------------------
Sales in the Communications Services segment increased 41.9% in the
second quarter and 53.0% in the Fiscal 1996 first six month period, compared
with the same periods in Fiscal 1995. The increase is primarily due to the
inclusion of $12.2 million of sales in the second quarter and $25.3 million
in the first six months of Fiscal 1996 from the JWP Telecom, Inc. ("JWP")
acquisition made during the Fiscal 1995 second quarter, as well as sales to
new customers, the addition of telecommunications franchises in new office
buildings, and growth at existing sites.
Operating income in the Communications Services segment increased 27.0%
in the second quarter and 18.4% during the six months period of Fiscal 1996,
compared to the same period in Fiscal 1995, primarily due to increased sales
resulting from the reasons given above and related economies of scale.
Operating income as a percent of sales was 15.0% in the Fiscal 1996 first six
months compared to 19.4% in the Fiscal 1995 first six months. This lower
return on sales was anticipated as a result of the JWP acquisition, which has
lower, gross margins due to the nature of the business.
Other Expenses/Income
- ---------------------
Corporate administrative expense increased $.3 million in the second
quarter and $.6 million in the six month period of Fiscal 1996, compared to
the same periods in Fiscal 1995. This increase in Fiscal 1996 was primarily
the result of a greater percentage of staff time being spent to negotiate and
complete the sales of operations (DME and Data), the proposed sale of Harco,
and the proposed merger of the Company into STI, therefore, less time was
billed to the parent companies, RHI and TFC. Also, costs were allocated from
TFC to the Company which was not done in the prior year periods. Management
believes that the corporate administrative expense of the Company would be
higher if it operated as a separate independent entity.
Other corporate income decreased $.7 million in the second quarter and
$.6 million for the six month period ended December 31, 1995, primarily due
to additional carrying costs incurred on net assets held for sale.
Net interest expense - In the second quarter and six months ended
December 31, 1995, net interest expense increased 2.3% and 5.1%,
respectively, compared to the prior year period, primarily due to higher bank
borrowings during the Fiscal 1996 first six months compared to the prior year
periods.
Investment income of $.3 million was recorded in the first six months of
Fiscal 1995, resulting primarily from dividends realized on participating
annuity contracts.
Income taxes - In the first six months of Fiscal 1996, the Company
recorded a tax benefit of $1.6 million on losses from operations of $9.0
million. The effective tax rate was lower than the statutory rate, largely
due to the amortization of goodwill, which is not deductible for tax
purposes.
Earnings from discontinued operations, net-includes the earnings, net of
tax, from DME and Data for all periods presented.
Net losses decreased $1.8 million in the first six months of Fiscal
1996, compared to the first six months of Fiscal 1995, primarily due to
increased operating income, partially offset by higher net interest expense
and lower tax benefits on reduced losses from continuing operations in the
first six months of Fiscal 1996.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1995, was $2.1 million, which was $55.3
million lower than at June 30, 1995. This decrease was primarily attributed
to a $68.9 million increase in intercompany debt and current bank debt,
primarily resulting from long term bank debt, including revolver bank
borrowings, becoming current. This decrease was partially offset by an
increase in cash of $3.9 million, and a $9.5 million increase in receivables
and inventory. An increase of $3.7 million in accounts receivable is
partially due to an increase in Communications Services sales to local and
state governments, which have extended terms.
The Company's principal sources of liquidity are cash generated from
operations and borrowings under its credit agreement. The Company also
expects to generate significant amounts of cash from the sale of discontinued
operations and certain assets. Net assets held for sale at December 31, 1995
had a book value of $35.7 million and included 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 in
California.
The Company's principal cash requirements include debt service, capital
expenditures, acquisitions, payment of other liabilities, and payment of
dividends on preferred stock.
The level of the Company's capital expenditures varies from year to
year, depending upon the timing of capital spending for new production
equipment, periodic plant and facility expansion, acquisition of building
telecommunications assets, as well as cost reduction and labor efficiency
programs. For the six month period ended December 31, 1995, capital
expenditures, including the cost of acquisitions, were $6.2 million for
continuing operations and $1.0 million for discontinued operations. The
Company anticipates that for the fiscal year ending June 30, 1996, total
capital expenditures, including the cost of acquisitions, will be
approximately $15.0 million.
Other liabilities that require the use of cash include post-employment
benefits for retirees, environmental investigation and remediation
obligations, and litigation settlements and related costs.
The Company expects that cash on hand, cash generated from operations,
borrowings, and asset sales will be adequate to satisfy cash requirements.
If such sources are not adequate, the Company believes that additional
capital resources would be available from RHI, via either new equity
contributions or the assumption of certain of the Company's obligations.
However, there can be no assurance that RHI would make additional capital
resources available to the Company. During the six months ended December 31,
1995, RHI made equity contributions to the Company totaling $2.5 million.
Management intends to take appropriate action to refinance portions of its
debt, if necessary, to meet cash requirements.
The Company's Credit Agreement, as amended, 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. As of December 31,
1995, the Company was in compliance with the Credit Agreement, as amended.
To comply with the minimum EBITDA Covenant requirements, the Company's
subsidiary, VSI, must earn for the cumulative total of the trailing four
quarters, EBITDA as follows: $58.5 million for the third quarter of Fiscal
1996, $62.6 million for the fourth quarter of Fiscal 1996, $84.6 million for
the first quarter of Fiscal 1997, and $86.4 million for the second quarter of
Fiscal 1997. 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, as amended. Noncompliance with any of the financial covenants,
without cure, or waiver would constitute an event of default under the Credit
Agreement, as amended. 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. EBITDA is not a substitute for
GAAP income from operations or GAAP net cash flows from operating activities,
and is not prepared in accordance with generally accepted accounting
principles, even though it is used in a specific covenant 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 December 31, 1995, the Company was unable to provide
dividends to RHI. The Credit Agreement also restricts additional borrowings
under the Credit Facilities for the payment of any dividends.
IMPACT OF FUTURE ACCOUNTING CHANGES
Accounting For The Impairment Of Long-Lived Assets
- --------------------------------------------------
And For Long-Lived Assets To Be Disposed Of
- -------------------------------------------
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. The Company's
present policy is identical to the policy prescribed by SFAS 121; therefore
there will be no effect from implementation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 9 of Notes to Consolidated Financial
Statements (Unaudited).
Item 6. Exhibits and Reports on Form 8-K
On November 14, 1995, the Company filed a Form 8-K to report on Item 1
and Item 2. The Company reported that on November 9, 1995, it had entered
into an Agreement and Plan of Merger with Shared Technologies Inc. ("STI")
pursuant to which STI will acquire the telecommunications systems and
services business operated by Fairchild Communications Services Company.
Additionally, the Company reported that, on November 13, 1995, it had entered
into a letter setting forth the basic terms and conditions of a transaction
with Cincinnati Milacron Inc. ("CM"), pursuant to which CM will acquire the
Company's DME business for $260 million, subject to adjustment based on the
closing date value of DME's net tangible assets. The Company filed the
following exhibits in conjunction with the Form 8-K:
Exhibits
- --------
10 (b)(g) Agreement and Plan of Merger dated as of November 9, 1995 by
and among the Company and STI.
10 (b)(h) Letter Agreement dated November 13, 1995 between the Company
and CM.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
For FAIRCHILD INDUSTRIES, INC.
(Registrant) and as its Chief
Financial Officer:
By: Christopher Colavito
Vice President, Controller
and Chief Accounting Officer
By: Michael T. Alcox
Vice President and Chief
Financial Officer
Date: February 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<CASH> 6,329
<SECURITIES> 0
<RECEIVABLES> 62,747
<ALLOWANCES> 2,322
<INVENTORY> 67,967
<CURRENT-ASSETS> 177,466
<PP&E> 209,799
<DEPRECIATION> 93,372
<TOTAL-ASSETS> 582,762
<CURRENT-LIABILITIES> 175,409
<BONDS> 188,427
16,691
254,215
<COMMON> 140
<OTHER-SE> (124,555)
<TOTAL-LIABILITY-AND-EQUITY> 582,762
<SALES> 175,197
<TOTAL-REVENUES> 175,547
<CGS> 138,048
<TOTAL-COSTS> 166,873
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,717
<INCOME-PRETAX> (9,023)
<INCOME-TAX> (1,626)
<INCOME-CONTINUING> (7,397)
<DISCONTINUED> 7,290
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (107)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
