UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
FORM 10-Q
--------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission File Number: 1-6560
THE FAIRCHILD CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 34-0728587
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Washington Dulles International Airport
300 West Service Road, P.O. Box 10803
Chantilly, Virginia 22021
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(703) 478-5800
----------------------------------------------------
(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
- ----- -----------------
Class A Common Stock, $.10 Par Value 13,657,525
Class B Common Stock, $.10 Par Value 2,635,148
----------
16,292,673
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES*
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of March 31, 1996 (Unaudited)
and June 30, 1995 3
Consolidated Statements of Earnings
for the Three and Nine Months Ended
March 31, 1996 and April 2, 1995
(Unaudited) 5
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended
March 31, 1996 and April 2, 1995
(Unaudited) 7
Notes to Condensed Consolidated Financial
Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 27
*For purposes of Part I of this Form 10-Q, the term "Company" means The
Fairchild Corporation, and its subsidiaries, unless otherwise indicated. For
purposes of Part II, the term "Company" means The Fairchild Corporation
unless otherwise indicated.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
March 31, June 30,
ASSETS 1996 1995
- ------ ----------- -----------
(Unaudited) (*)
<S> <C> <C>
Current Assets:
Cash and cash equivalents, $5,925 and $5,968
restricted................................. $ 58,642 $ 71,182
Short-term investments....................... 8,099 4,116
Accounts receivable-trade, less allowances
of $5,699 and $3,971....................... 99,547 65,446
Notes receivable............................. 170,331 --
Inventories:
Finished goods............................ 227,597 38,783
Work-in-process........................... 18,533 19,950
Raw materials............................. 18,698 19,531
--------- ---------
264,828 78,264
Prepaid expenses and other current assets.... 26,629 16,751
Net current assets of discontinued operations -- 34,626
--------- ---------
Total Current Assets......................... 628,076 270,385
Property, plant and equipment, net of
accumulated depreciation of $77,153 and
$89,374.................................... 89,758 132,940
Net assets held for sale..................... 46,138 51,573
Net noncurrent assets of discontinued
operations................................. -- 88,209
Cost in excess of net assets acquired,
(Goodwill) less accumulated amortization of
$26,154 and $26,120......................... 144,555 154,295
Investments and advances, affiliated
companies................................... 50,082 69,398
Prepaid pension assets....................... 58,069 59,567
Deferred loan costs.......................... 5,925 12,013
Other assets................................. 11,698 11,914
--------- ---------
Total Assets................................. $1,034,301 $ 850,294
========= =========
*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>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
March 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- ------------------------------------- ----------- ----------
(Unaudited) (*)
<S> <C> <C>
Current Liabilities:
Bank notes payable and current maturities
of long-term debt........................... $ 81,370 $ 40,989
Accounts payable............................. 59,544 38,299
Other accrued liabilities.................... 86,689 78,503
Income taxes payable......................... 1,787 --
--------- ---------
Total Current Liabilities.................... 229,390 157,791
Long-term debt, less current maturities...... 374,018 509,715
Other long-term liabilities.................. 18,827 19,435
Retiree health care liabilities.............. 44,321 44,710
Noncurrent income taxes...................... 70,039 38,004
Minority interest in subsidiaries............ 58,325 24,117
Redeemable preferred stock of subsidiary..... -- 16,342
--------- ---------
Total Liabilities............................ 794,920 810,114
Stockholders' Equity:
Class A common stock, 10 cents par value;
authorized 40,000,000 shares, 19,899,121
shares issued (19,647,705 in June) and
13,657,525 shares outstanding (13,406,109
in June)................................... 1,990 1,965
Class B common stock, 10 cents par value;
authorized 20,000,000 shares, 2,635,148
shares issued and outstanding (2,696,886
in June)................................... 264 270
Paid-in capital.............................. 68,312 67,011
Retained earnings............................ 216,684 18,912
Cumulative translation adjustment............ 3,970 3,861
Net unrealized holding loss on available-for-
sale securities............................ (120) (120)
Treasury Stock, at cost, 6,241,596 shares of
Class A Common Stock....................... (51,719) (51,719)
--------- ---------
Total Stockholders' Equity................... 239,381 40,180
--------- ---------
Total Liabilities and Stockholders' Equity... $1,034,301 $ 850,294
========= =========
*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>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(In thousands, expect per share data)
<CAPTION>
Three Months Ended Nine Months Ended
March 31, April 2, March 31, April 2,
1996 1995 1996 1995
-------- -------- -------- --------
(*) (*)
<S> <C> <C> <C> <C>
Revenue:
Net sales of products................... $120,388 $ 81,578 $292,007 $204,954
Revenues from services.................. 15,063 21,404 54,820 58,782
Other income (expense), net............. 369 (1,311) 505 (699)
------- ------- ------- -------
135,820 101,671 347,332 263,037
Costs and Expenses:
Cost of goods sold...................... 95,250 68,778 229,517 170,770
Cost of services........................ 11,165 15,384 39,039 42,227
Selling, general & administrative....... 25,556 19,872 66,830 52,638
Research and development................ 24 232 68 816
Amortization of goodwill................ 1,287 1,120 3,665 3,380
Restructuring........................... 959 -- 1,244 --
------- ------- ------- -------
134,241 105,386 340,363 269,831
Operating income (loss)................... 1,579 (3,715) 6,969 (6,794)
Interest expense.......................... 17,007 17,642 53,054 52,798
Interest income........................... (2,775) (818) (4,054) (2,859)
------- ------- ------- -------
Net interest expense...................... 14,232 16,824 49,000 49,939
Investment income, net.................... 1,150 190 3,062 2,825
Equity in earnings (loss) of affiliates... 864 (496) 2,753 1,252
Minority interest......................... (329) (796) (1,414) (2,004)
Non-recurring income (See Note 2)......... 161,480 -- 161,480 --
------- ------- ------- -------
Earnings (loss) from continuing operations
before taxes............................ 150,512 (21,641) 123,850 (54,660)
Income tax benefit........................ 4,089 6,495 14,040 16,000
------- ------- ------- -------
Earnings (loss) from continuing operations. 154,601 (15,146) 137,890 (38,660)
Earnings from discontinued operations,
net..................................... 1,769 4,389 9,059 10,578
Gain (loss) on disposal of discontinued
operations, net......................... 61,286 (184) 61,259 (234)
Extraordinary items, net.................. (10,436) 378 (10,436) 355
------- ------- ------- -------
Net earnings (loss)....................... $207,220 $(10,563) $197,772 $(27,961)
======= ======= ======= =======
* 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>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(In thousands, expect per share data)
<CAPTION>
Three Months Ended Nine Months Ended
March 31, April 2, March 31, April 2,
1996 1995 1996 1995
-------- --------- --------- ---------
(*) (*)
<S> <C> <C> <C> <C>
Primary Earnings Per Share:
Earnings (loss) from continuing
operations............................ $ 9.24 $ (.94) $ 8.35 $ (2.40)
Earnings from discontinued operations,
net................................... .11 .27 .55 .65
Gain (loss) on disposal of discontinued
operations, net....................... 3.66 (.01) 3.71 (.01)
Extraordinary items, net................ (.62) .02 (.63) .02
------- ------- ------- -------
Net earnings (loss)..................... $ 12.39 $ (.66) $ 11.98 $ (1.74)
======= ======= ======= =======
Fully Diluted Earnings Per Share:
Earnings (loss) from continuing
operations............................ $ 9.22 $ (.94) $ 8.23 $ (2.40)
Earnings from discontinued operations,
net................................... .10 .27 .54 .65
Gain (loss) on disposal of discontinued
operations, net....................... 3.65 (.01) 3.65 (.01)
Extraordinary items, net................ (.62) .02 (.62) .02
------- ------- ------- -------
Net earnings (loss)..................... $ 12.35 $ (.66) $ 11.80 $ (1.74)
======= ======= ======= =======
Weighted average number of shares
used in computing earnings per share:
Primary............................... 16,727 16,103 16,513 16,103
Fully diluted......................... 16,774 16,103 16,754 16,103
*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>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<CAPTION>
Nine Months Ended
March 31, April 1,
1996 1995
----------- -----------
(*)
<S> <S> <S>
Cash flows provided by (used for)
Operations:
Net loss....................................... $197,772 $(27,961)
Depreciation and amortization................. 23,723 23,245
Accretion of discount on long-term liabilities 3,637 3,209
Gain on the merger of subsidiaries
(See Note 2)................................ (162,859) --
Gain on the sale of discontinued operations
(See Note 3)................................ (117,573) --
Minority interest............................. 1,414 2,112
Undistributed earnings of affiliates.......... (1,817) (407)
Changes in assets and liabilities............. 13,361 (40,120)
Non-cash charges and working capital
changes of discontinued operations.......... -- 6,142
------- -------
Net cash used for operations.................. (42,342) (33,780)
Investments:
Purchase of property, plant and equipment..... (12,263) (11,570)
Acquisitions of subsidiaries, net of cash
acquired.................................... -- (12,061)
Proceeds from the sale of discontinued
operations.................................. 78,400 --
Proceeds received from (used for) investment
securities, net............................. (1,015) 6,593
Changes in net assets held for sale........... 5,670 3,712
Other, net.................................... (527) (915)
Investing activities of discontinued
operations.................................. -- (922)
------- -------
Net cash provided by (used for) investments... 70,265 (15,163)
Financing:
Proceeds from issuance of debt................ 58,240 14,417
Debt repayments and repurchase of debentures,
net......................................... (100,098) (31,921)
Issuance of Class A common stock.............. 948 --
------- -------
Net cash used for financing................... (40,910) (17,504)
Effect of exchange rate changes on cash........... 447 985
Net decrease in cash.............................. (12,540) (65,462)
Cash and cash equivalents, beginning of period.... 71,182 102,368
------- -------
Cash and cash equivalents, end of period.......... $ 58,642 $ 36,906
======= =======
*Condensed and restated for discontinued operations. (See Note 3).
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Financial Statements
The consolidated balance sheet as of March 31, 1996 and the consolidated
statements of earnings and cash flows for the nine months ended March 31,
1996 and April 2, 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 March 31, 1996 and for all periods presented,
have been made. All financial information has been restated for discontinued
operations, which includes the D-M-E Company ("DME") and Fairchild Data
Corporation ("Data"). The balance sheet at June 30, 1995 was also condensed
from the audited financial statements as of that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's June 30, 1995 Form
10-K and Banner Aerospace, Inc.'s March 31, 1995 Form 10-K. The results of
operations for the period ended March 31, 1996 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
The Company, RHI Holdings, Inc. ("RHI", the Company's subsidiary) and
Fairchild Industries, Inc. ("FII", RHI's subsidiary), entered into an
Agreement and Plan of Merger dated as of November 9, 1995 (as amended, the
"Merger Agreement") with Shared Technologies Inc. ("STI"). On March 13,
1996, in accordance with the Merger Agreement, STI has succeeded to the
telecommunications systems and services business operated by the Company's
Fairchild Communications Services Company ("FCSC").
The transaction was effected by a Merger of FII with and into STI (the
"Merger") with the resulting company named Shared Technologies Fairchild Inc.
("STFI"). Prior to the Merger, FII transferred all of its assets to, and all
of its liabilities were assumed by the Company, or the Company's continuing
subsidiaries, except for the assets and liabilities of FCSC, and $223,500,000
of the FII's existing debt and preferred stock consisting of (i) the
$44,027,000 liquidation value of the outstanding Series A and Series C
Preferred Stock of FII, (ii) the $125,000,000 principal amount outstanding of
FII 12 1/4% Senior Notes due 1999 (the "Senior Notes"), and (iii) an amount
of bank and other indebtedness of approximately $54,473,000 (the "Assumed
Indebtedness"). As part of the Merger Agreement, FII made a cash tender
offer to purchase all of the outstanding Senior Notes and obtained such
Noteholders' consent to amend the indenture under which the Senior Notes were
issued to remove all covenants which could be amended or deleted by majority
vote (the "Tender Offer") (see note 5). Pursuant to the Merger, an amount
sufficient to redeem the Series A and Series C Preferred Stock at their
liquidation value ($45.00 per share plus accrued and unpaid dividends) was
placed with Chemical Mellon Shareholder Services as Escrow Agent. Also as
part of the Merger, STFI, (i) purchased the $125,000,000 aggregate principal
amount of Senior Notes tendered pursuant to the aforesaid Tender Offer and
(ii) repaid the Assumed Indebtedness in full.
As a result of the Merger, the Company received (i) 6,000,000 shares of
Common Stock of STFI (representing approximately 41% of the outstanding
shares after giving effect to such issuance), (ii) shares of 6% Cumulative
Convertible Preferred Stock of STFI having an aggregate liquidation
preference of $25,000,000 (subject to upward adjustment), recorded at a fair
value of $20,500,000, and which are convertible into Common Stock of STFI at
a conversion price of $6.375 per share (which, if converted, would represent,
together with the other Common Stock issued to the Company, approximately 42%
of the Common Stock of STFI 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), recorded at a fair value of
$8,500,000. In connection with its stock ownership, TFC and the Company will
have the right to elect four of the eleven members of the Board of Directors
of STFI and have agreed, subject to certain exceptions, not to sell any of
STFI's shares for a two-year period.
The Merger was structured as a reorganization under section 368(a)(1)(A)
of the Internal Revenue Code of 1986, as amended. The Company recorded a
$162,859,000 non-recurring gain in the third quarter of Fiscal 1996 from this
transaction.
Note 3 - Discontinued Operations
During the Fiscal 1996 second quarter, FII adopted a formal plan to sell
DME, a mold equipment manufacturer, and Data, a satellite communications
company.
On February 22, 1996, pursuant to the Asset Purchase Agreement dated
January 26, 1996 (the "closing date"), the Company, through its subsidiaries,
completed the sale of certain assets, liabilities and the business of DME to
Cincinnati Milacron Inc. ("CMI") for a sales price of approximately
$244,331,000, as adjusted. The sales price consists of $74,000,000 in cash,
and two 8% promissory notes in the aggregate principal amount of
$170,331,000. The promissory notes mature one year following the closing
date; provided that the Company may require prepayment of, and CMI may at its
option, prepay such notes after the six-month anniversary of the closing
date.
As a result of the sale of DME, the Company recorded a gain on disposal
of discontinued operations, of approximately $61,338,000, net of a
$56,235,000 tax provision, in the quarter ended March 31, 1996.
On January 27, 1996, FII completed the sale of Data to SSE Telecom, Inc.
("SSE") for book value of approximately $4,400,000 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. There was no material
gain or loss from this transaction.
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 $16,789,000 and $47,773,000 for the third quarter of
Fiscal 1996 and 1995, respectively, and $108,131,000 and $134,341,000 for the
first nine 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>
June 30,
(In thousands) 1995
-------
<S> <C>
Accounts receivable............................... $ 28,161
Inventories....................................... 26,645
Prepaid and other current assets.................. 1,365
Accounts payable.................................. (9,801)
Other current liabilities......................... (11,744)
-------
Net current assets of discontinued operations..... $ 34,626
=======
Property, plant & equipment, net of accumulated
depreciation..................................... 37,986
Goodwill, net of accumulated amortization......... 55,664
Other assets...................................... 4,602
Retiree health care liabilities................... (4,764)
Minority interest in subsidiaries................. (416)
Cumulative translation adjustment................. (4,863)
-------
Net noncurrent assets of discontinued operations.. $ 88,209
=======
</TABLE>
Note 4 - Transfer of Division to Banner Aerospace
Effective February 25, 1996, the Company completed a transfer of the
Company's Harco Division ("Harco") to Banner Aerospace, Inc. ("Banner") in
exchange for 5,386,477 shares of Banner common stock. The exchange has
increased the Company's ownership of Banner common stock from approximately
47.2% to 59.4%, resulting in the Company becoming the majority shareholder of
Banner. There was no significant gain or loss from this transaction.
Accordingly, the Company consolidated Banner on February 25, 1996. Banner is
a leading international supplier to the aerospace industry as a distributor,
providing a wide range of aircraft parts and related support services. Harco
is a distributor of precision fasteners to the aerospace industry.
Note 5 - Tender Offer
On March 13, 1995, FII consummated the Tender Offer and purchased 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") dated as of December 22, 1995, all $125,000,000 of the Senior
Notes. Terms of the Tender Offer, as amended and restated, required a
purchase price of $1,063.90 per $1,000 principal amount of the Senior Notes
and accrued and unpaid interest up to, but not including, the payment date.
During the Tender Offer period, FII received consents solicited (the "Tender
Offer Consent Solicitation") 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 FII'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, FII also solicited and received 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 FII, of
the stock of Harco to Banner (see Note 4), and (ii) the sale by VSI of DME to
CMI (see Note 3).
As part of the consummation of the Tender Offer, FII paid holders of
Senior Notes who validly tendered Senior Notes pursuant to the Tender Offer
and Consent Solicitations a consent fee of $25.00 per $1,000 principal amount
of Senior Notes tendered. FII paid an early consent fee consisting of $5.00
per $1,000 principal amount to holders of Senior Notes who on or prior to
January 19, 1996, validly tendered their shares.
Note 6 - Acquisitions
On September 9, 1994, the Company acquired all of the outstanding Common
Stock of Scandinavian Bellyloading Company AB ("SBC"). SBC is the designer
and manufacturer of patented cargo loading systems, which are installed in
the cargo area of commercial aircraft. Several major airlines are expected
to equip existing fleets with the SBC system over the next three to four
years. The Company reports the results of SBC as part of its Industrial
Products segment.
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 $4,000,000 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 would not be material for the SBC
acquisition and are not required for the acquisitions by FCSC.
Note 7 - Pro forma Financial Statements
The Following unaudited pro forma information for the nine months ended
March 31, 1996 and April 2, 1995, provides the results of the Company's
operations as though (i) the disposition of DME and Data, (ii) the Merger of
FCS, and (iii) the transfer of Harco to Banner, resulting in the
consolidation of Banner, had been in effect since the beginning of each
period. The pro forma information is based on the historical financial
statements of the Company, DME, FCSC and Banner, giving effect to the
forementioned transactions. In preparing the pro forma data, certain
assumptions and adjustments have been made which (i) reduce interest expense
for revised debt structures, (ii) increase interest income for notes
receivable, (iii) reduce minority interest from Series C Preferred Stock of
FII being redeemed, and (iv) adjust equity in earnings of affiliates to
include the estimated results of STFI.
The following unaudited pro forma financial information are not
necessarily indicative of the results of operations that actually would have
occurred if the transactions had been in effect since the beginning of each
period, nor are they necessarily indicative of future results of the Company.
<TABLE>
<CAPTION>
Nine Months Ended
(In thousands) March 31, April 2,
1996 1995
---------- ----------
<S> <C> <C>
Sales................................... $447,086 $359,071
Loss from continuing operations......... (16,270) (29,985)
</TABLE>
The pro forma financial information has not been adjusted for non-
recurring income or expense and gains from disposal of discontinued
operations that have been or are expected to be incurred from these
transactions within the ensuing year.
Note 8 - Restructuring Charges
During the nine months ended March 31, 1996, the Company's Aerospace
Fasteners Segment recorded restructuring charges of $965,000 for severance
pay to employees terminated, and $279,000 relating to the closing of a small
subsidiary located in Japan.
Note 9 - Early Extinguishment of Debt
During the nine months ended March 31, 1996, the Company used the Merger
transaction and cash available to retire fully all of the Senior Notes, FII's
9 3/4% subordinated debentures due 1998, and bank loans under VSI's credit
agreement. The redemption of the Senior Notes at a premium, consent fees
paid to holders of the Senior Notes, the write off of the original issue
discount on FII 9 3/4% subordinated debentures and the write off of the
remaining deferred loan fees associated with the issuance of the debt
retired, resulted in an extraordinary loss of $10,436,000, net of a
$5,620,000 tax benefit.
Note 10 - Summarized Statement of Earnings Information
The following table presents summarized combined statement of earnings
information of Nacanco Paketleme ("Nacanco"), the Company's principal
investment, which is accounted for using the equity method.
<TABLE>
<CAPTION>
Nine Months Ended
(In thousands) ---------------------------
March 31, April 2,
1996 1995
------------ ------------
<S> <C> <C>
Net sales................................. $68,010 $50,086
Gross profit.............................. 21,905 19,565
Earnings from continuing operations....... 9,971 2,768
Net earnings.............................. 9,971 2,768
</TABLE>
The Company owns approximately 31.9% of Nacanco common stock. The
Company recorded equity earnings of $3,157,000 and $774,000 from this
investment for the nine months ended March 31, 1996 and April 2, 1995,
respectively.
Since March 13, 1996, as a result of the Merger in which the Company
received a 41% interest in STFI, the Company is accounting for its investment
in STFI using the equity method. Prior to March 13, 1996, the Company
consolidated the results of FCSC, which was merged into STFI (see Note 2).
The Company recorded an estimated equity loss of $60,000 during the nine
months ended March 31, 1996, from the investment in STFI.
On March 31, 1996, the Company's carrying value of its investments in
STFI consisted of (i) $20,500,000 for the Convertible Preferred Stock, and
(ii) $8,500,000 for the Special Preferred Stock. The Company did not record
a carrying value for 6,000,000 shares of common stock of STFI. At the close
of trading on March 29, 1996, STFI's common stock was quoted at $5.375 per
share. Based on this price, the Company's investment in STFI common stock
has an approximate market value of $32,250,000.
Effective February 25, 1996, the Company increased its percentage of
ownership of Banner Common Stock from 47.2% to approximately 59.4%. Since
February 25, 1996, the Company is consolidating Banner's results. Prior to
February 25, 1996, the Company accounted for its investment in Banner using
the equity method and held its investment in Banner as part of investments
and advances-affiliated companies. The Company recorded equity earnings of
$430,000 and $1,627,000 from this investment for the nine months ended March
31, 1996 and April 2, 1995, respectively.
In connection with the Company's December 23, 1993 sale of its interest
in Rexnord Corporation to BTR Dunlop Holdings, Inc. ("BTR"), the Company
placed shares of Banner, with a fair market value of $5,000,000, in escrow to
secure the Company's remaining indemnification of BTR against a contingent
liability. Once the contingent liability is resolved, the escrow will be
released.
Note 11 - Restricted Cash
The Company had approximately $5,925,000 and $5,968,000 of restricted
cash on March 31, 1996 and June 30, 1995, respectively, all of which is
maintained as collateral for certain debt facilities.
Note 12 - Credit Agreements
On March 13, 1996, in connection with the Merger, the Company replaced
VSI Corporation's credit agreement with a new credit agreement at a newly
formed subsidiary, Fairchild Holding Corporation ("FHC"). The new credit
agreement provides FHC with a $50,000,000 revolving credit facility and a
$30,000,000 term loan, both of which generally bear interest at 1/2% over the
prime rate. The revolving credit facility is subject to a non-use fee of
1/2% of the unused availability. Substantially all of FHC's assets are
pledged as collateral under the new credit agreement. The new credit
agreement matures on July 29, 1996.
FHC's credit agreement requires compliance with certain financial loan
covenants, including achieving a minimum of cumulative earnings before
interest, taxes, depreciation and amortization ("EBITDA Covenant") at March
31, 1996, and maintaining a certain interest ratio coverage at specified
periods. Additionally, the credit agreement restricts FHC's capital
expenditures during the term of the agreement to $6,000,000, in the
aggregate. The Company has remained in compliance with these covenants since
the inception of the new credit agreement.
Banner has a credit agreement ("Banner's Credit Agreement") which
provides Banner and its subsidiaries with a $55,000,000 term loan and a
$71,500,000 revolving credit facility, both of which initially bear interest
at prime plus 1 1/4% or London Interbank Offered Rate ("LIBOR") plus 2 1/2%.
Borrowings under both the prime rate and LIBOR may increase by 1/4% or
decrease by up to 1% based upon certain performance criteria. Banner's
performance level at December 31, 1995, resulted in a 1/4% interest rate
reduction for the quarter ended March 31, 1996. Banner's term loan requires
certain semiannual loan payments. Banner's revolving credit facility is
subject to a non-use fee of 1/2% of the unused availability. Substantially
all of Banner's assets are pledged as collateral under Banner's Credit
Agreement. Banner's Credit Agreement matures August 2001.
Banner's Credit Agreement requires quarterly compliance with various
financial and non-financial loan covenants, including maintaining a minimum
net worth, and minimum ratios of interest coverage, fixed charge coverage,
and debt to earnings before interest, taxes, depreciation and amortization.
Banner also has certain limitations on the incurrence of additional debt.
Banner has remained in compliance with all covenants under its credit
agreement since the inception of its credit agreement.
Banner has several interest rate hedge agreements ("Hedge Agreements")
to manage its exposure to increases in interest rates on its variable rate
debt. The Hedge Agreements provide interest rate protection on $60,000,000
of debt through September 2000, by providing for a cap of 7% if the 90-day
LIBOR rate exceeds 7%. If the 90-day LIBOR rate drops below 5%, Banner will
be required to pay a floor rate of approximately 6%.
Note 13 - Minority Interests in Consolidated Subsidiaries
The Company is including $57,982,000 of minority interest in its balance
sheet at March 31, 1996, representing approximately 9,506,300 shares of
Banner's common stock effectively outstanding on a consolidated basis.
The Company included $23,804,000 of minority interest on its balance
sheet at June 30, 1995, representing 553,460 shares of Series C Preferred
Stock of FII. The Series C Preferred Stock was assumed by STFI and redeemed
entirely as part of the Merger. (See Note 2).
Note 14 - Redeemable Preferred Stock of Subsidiary
The Company classified 553,460 shares of Series A Preferred Stock of FII
as a long-term liability at June 30, 1995. The Series A Preferred Stock was
assumed by STFI and redeemed entirely as part of the Merger. (See Note 2).
Note 15 - Equity Securities
The Company had 13,657,525 shares of Class A Common Stock and 2,635,148
shares of Class B Common Stock outstanding at March 31, 1996. During the
first nine months of Fiscal 1996, 189,678 shares of Class A Common Stock were
issued as a result of the exercise of stock options. Class A Common Stock is
traded on both the New York and Pacific Stock Exchanges while there is no
public market for the Class B Common Stock. Shares of Class A Common Stock
are entitled to one vote per share and cannot be exchanged for Class B Common
Stock. Shares of Class B Common Stock are entitled to ten votes per share
and can be exchanged, at any time, for shares of Class A Common Stock, on a
share for share basis. During the nine months ended March 31, 1996, 61,738
shares of Class B Common Stock were exchanged for Class A Common Stock.
Note 16 - Stock Warrants
On November 9, 1995, the Company issued warrants to purchase 500,000
shares of Class A Common Stock, at $9.00 per share, to Peregrine Direct
Investments Limited ("Peregrine"), in exchange for a standby commitment it
received on November 8, 1995, from Peregrine to purchase (i) $75,000,000
principal amount of senior secured notes to be issued by a wholly-owned
subsidiary of the Company, and (ii) warrants to purchase 5,000,000 shares of
Class A Common Stock at $7.50 per share. The Company elected not to exercise
its rights under the Peregrine commitment. The warrants are immediately
exercisable and will expire five years from the date of issuance.
On February 21, 1996, the Company issued warrants to purchase 25,000
shares of Class A Common Stock, at $9.00 per share, to a non-employee for
services provided in connection with the Company's various dealings with
Peregrine. The warrants issued are immediately exercisable and will expire
at the same time the Peregrine warrants expire.
The Company has recorded non-recurring expenses of $1,148,000 for the
estimated grant date fair market value of the stock warrants issued during
the nine months ended March 31, 1996.
Note 17 - Earnings Per Share
Primary and fully diluted earnings per share are computed by dividing
net income available to common stockholders by the weighted average number of
shares and share equivalents outstanding during the period. To compute the
incremental shares resulting from stock options and warrants for primary
earnings per share, the average market price of the Company's stock during
the period is used. To compute the incremental shares resulting from stock
options and warrants for fully diluted earnings per share, the greater of the
ending market price or the average market price of the Company's stock is
used.
In computing primary earnings per share for the three months ended March
31, 1996, and computing fully diluted earnings per share for the three and
nine months ended March 31, 1996, the conversion of options and warrants was
assumed, as the effect was dilutive. In computing primary earnings per share
for the nine months ended March 31, 1996, only the dilutive effect from the
conversion of options was assumed, as the effect from the conversion of
warrants alone was antidilutive.
In computing primary and fully diluted earnings per share for the three
and nine months ended April 2, 1995, the conversion of options and warrants
was not assumed, as the effect was antidilutive.
Note 18 - Commitments and Contingencies
CL Motor Freight ("CL") Litigation
- ----------------------------------
The Workers Compensation Bureau of the State of Ohio is seeking
reimbursement from the Company for up to $5,400,000 for CL workers
compensation claims which were insured under a self-insured program of CL.
The Company has contested a significant portion of this claim.
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 FII did not comply with Federal Acquisition Regulations
and Cost Accounting Standards in accounting for (i) the 1985 reversion to FII
of certain assets of terminated defined benefit pension plans, and (ii)
pension costs upon the closing of segments of FII's business. The ACO has
directed FII to prepare cost impact proposals relating to such plan
terminations and segment closings and, following receipt of such cost impact
proposals, may seek adjustments to contract prices. The ACO alleges that
substantial amounts will be due if such adjustments are made. 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 March 31, 1996, the consolidated total recorded liabilities of the
Company for environmental matters totalled $12,255,000, which represented the
estimated probable exposures for these matters. It is reasonably possible
that the Company's total exposure for these matters could be approximately
$21,038,000.
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 future results of operations or
net cash flows of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- -------------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
The Fairchild Corporation (the "Company") was incorporated in October,
1969, under the laws of the State of Delaware. On November, 15, 1990, the
Company changed its name from Banner Industries, Inc. to The Fairchild
Corporation. RHI Holdings, Inc. ("RHI") is a direct subsidiary of the
Company. RHI is the 100% owner of Fairchild Holding Corporation ("FHC") and
the majority owner of Banner Aerospace, Inc. ("Banner"). The Company's
principal operations are conducted through FHC and Banner. The Company also
holds significant equity interests in Shared Technologies Fairchild, Inc.
("STFI") and Nacanco Paketleme ("Nacanco").
RECENT DEVELOPMENTS
The Company, RHI and Fairchild Industries, Inc. ("FII," the company's
former subsidiary), entered into an Agreement and Plan of Merger dated as of
November 9, 1995 (as amended, the "Merger Agreement") with Shared
Technologies Inc. ("STI"). On March 13, 1996, in accordance with the Merger
Agreement, STI succeeded to the telecommunications systems and services
business operated by the Company's Fairchild Communications Services Company
("FCSC").
The transaction was effected by a Merger of FII with and into STI (the
"Merger") with the resulting company named STFI. Prior to the Merger, FII
transferred all of its assets to, and all of its liabilities were assumed by
the Company, or the Company's continuing subsidiaries, except for the assets
and liabilities of FCSC, and $223.5 million of the FII's existing debt and
preferred stock consisting of (i) the $44.0 million liquidation value of the
outstanding Series A and Series C Preferred Stock of FII, (ii) the $125.0
million principal amount outstanding of FII 12 1/4% Senior Notes due 1999
(the "Senior Notes"), and (iii) an amount of bank and other indebtedness of
approximately $54.5 million (the "Assumed Indebtedness"). As part of the
Merger Agreement, FII made a cash tender offer to purchase all of the
outstanding Senior Notes and obtained such holders consent to amend the
indenture under which the Senior Notes were issued to remove all covenants
which could be amended or deleted by majority vote (the "Tender Offer").
Pursuant to the Merger, an amount sufficient to redeem the Series A and
Series C Preferred Stock at their liquidation value ($45.00 per share plus
accrued and unpaid dividends) was placed with Chemical Mellon Shareholder
Services as Escrow Agent. Also as part of the Merger, STFI, (i) purchased
the $125.0 million aggregate principal amount of Senior Notes tendered
pursuant to the aforesaid tender offer and (ii) repaid the Assumed
Indebtedness in full.
As a result of the Merger, the Company received (i) 6,000,000 shares of
Common Stock of STFI (representing approximately 41% of the outstanding
shares after giving effect to such issuance), (ii) shares of 6% Cumulative
Convertible Preferred Stock of STFI having an aggregate liquidation
preference of $25.0 million (subject to upward adjustment) and which are
convertible into Common Stock of STFI at a conversion price of $6.375 per
share (which, if converted, would represent, together with the other Common
Stock issued to the Company, approximately 42% of the Common Stock of STFI 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).
In connection with its stock ownership, TFC and the Company will have the
right to elect four of the eleven members of the Board of Directors of STFI
and have agreed, subject to certain exceptions, not to sell any of STFI's
shares for a two-year period.
The Merger was structured as a reorganization under section 368(a)(1)(A)
of the Internal Revenue Code of 1986, as amended. The Company recorded a
$162.9 million non-recurring gain in the third quarter of Fiscal 1996 from
this transaction.
On February 22, 1996, pursuant to the Asset Purchase Agreement dated
January 26, 1996 (the "closing date"), the Company, through its subsidiaries,
completed the sale of certain assets, liabilities and the business of the
D-M-E Company ("DME") to Cincinnati Milacron Inc. ("CMI") for a sales price
of approximately $244.3 million, as adjusted. The sales price consists of
$74.0 million in cash, and two 8% promissory notes in the aggregate principal
amount of $170.3 million. The promissory notes mature one year following the
closing date; provided that the Company may require prepayment of, and CMI
may, at its option, prepay such notes after the six-month anniversary of the
closing date.
As a result of the sale of DME, the Company recorded an after-tax gain
on disposal of discontinued operations of approximately $61.3 million in the
quarter ended March 31, 1996.
On January 27, 1996, FII completed the sale of Fairchild Data
Corporation ("Data") to SSE Telecom, Inc. ("SSE") for book value of
approximately $4.4 million and 100,000 shares of SSE's common stock valued at
$9.0625 per share, or $.9 million, 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. There was no material gain or loss from
this transaction.
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 $16.8 million and $47.8 million for the third quarter of
Fiscal 1996 and 1995, respectively, and $108.1 million and $134.3 million for
the first nine months of Fiscal 1996 and 1995, respectively.
Effective February 25, 1996, the Company completed a transfer of the
Company's Harco Division ("Harco") to Banner in exchange for 5,386,477 shares
of Banner common stock. The exchange has increased the Company's ownership
of Banner common stock from approximately 47.2% to 59.4%, resulting in the
Company becoming the majority shareholder of Banner. Accordingly, the
Company consolidated Banner on February 25, 1996. Banner is a leading
international supplier to the aerospace industry as a distributor, providing
a wide range of aircraft parts and related support services. Harco is a
distributor of precision fasteners to the aerospace industry.
RESULTS OF OPERATIONS
The Company currently operates in four principal business segments:
Aerospace Fasteners, Aerospace Distribution, Industrial Products and
Communications Services. The following table illustrates the historical
sales and operating income of the Company's continuing operations for the
three and nine month periods ended March 31, 1996 and April 2, 1995.
<PAGE>
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Nine Months Ended
March 31, April 2, March 31, April 2,
1996 1995 1996 1995
-------- -------- -------- --------
(*) (*)
<S> <C> <C> <C> <C>
Sales by Business Segment:
Aerospace Fasteners....................... $ 57,885 $ 55,521 $165,875 $159,359
Aerospace Distribution.................... 35,698 -- 35,698 --
Industrial Products....................... 15,606 13,006 53,964 27,412
Communications Services (**).............. 26,262 34,455 91,290 76,965
------- ------- ------- -------
Total........................................ $135,451 $102,982 $346,827 $263,736
======= ======= ======= =======
Operating Income (Loss) by Business Segment:
Aerospace Fasteners....................... $ 18 $ (3,391) $ 1,710 $ (4,146)
Aerospace Distribution.................... 742 -- 742 --
Industrial Products....................... (87) 299 1,556 (2,805)
Communications Services (**).............. 4,773 5,172 14,544 13,423
------- ------- ------- -------
Total........................................ 5,446 2,080 18,552 6,472
Corporate administrative expense.......... (3,783) (4,140) (11,035) (10,901)
Other corporate expense................... (84) (1,655) (548) (2,365)
------- ------- ------- -------
Operating income (loss)...................... 1,579 (3,715) 6,969 (6,794)
Net interest expense......................... (14,232) (16,824) (49,000) (49,939)
Investment income, net....................... 1,150 190 3,062 2,825
Equity in earnings (loss) of affiliates...... 864 (496) 2,753 1,252
Minority interest............................ (329) (796) (1,414) (2,004)
Non-recurring income......................... 161,480 -- 161,480 --
------- ------- ------- -------
Earnings (loss) from continuing operations
before income taxes........................ 150,512 (21,641) 123,850 (54,660)
Income tax benefit........................... 4,089 6,495 14,040 16,000
------- ------- ------- -------
Earnings (loss) from continuing operations... $154,601 $(15,146) $137,890 $(38,660)
======= ======= ======= =======
* 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.
** Effective March 13, 1996, the Company's investment in the Communications
Services segment was recorded using the equity method.
</TABLE>
General
- -------
Overall sales from continuing operations increased by 31.5% in the third
quarter and 31.5% for the Fiscal 1996 nine month period, compared to sales
for the same periods in Fiscal 1995. Operating income from continuing
operations increased $5.3 million in the third quarter and $13.8 million in
the Fiscal 1996 nine months period, compared to operating income for the same
periods in Fiscal 1995. The net increase in both sales and operating income
reflects the inclusion of one month of sales and operating income from
Banner, consolidated effective February 25, 1996, offset partially by the
deconsolidation of FCSC effective March 13, 1996, as a result of the Merger
with STI. (See discussion below).
Aerospace Fasteners
- -------------------
Sales in the Aerospace Fasteners segment increased $2.4 million or 4.3%
in the third quarter and increased $6.5 million or 4.1% in the Fiscal 1996
nine 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 $3.4
million in the third quarter and $5.9 million in the Fiscal 1996 nine 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
$1.2 million restructuring charge was recorded in the Fiscal 1996 nine
months, primarily for severance pay to employees terminated as a result of
further downsizing and for the close down of a small subsidiary located in
Japan.
Aerospace Distribution
- ----------------------
As a result of the transfer of Harco to Banner effective February 25,
1996, the Company recorded five weeks of sales and operating income of Banner
including the Harco division for five weeks, as part of the Aerospace
distribution Segment. This segment reported $35.7 million in sales and $.7
million in operating income for this five week period ended March 31, 1996.
As a result of the transfer of Harco to Banner, effective February 25,
1996, Harco's sales and operating income for the five weeks ended March 31,
1996, are now being reported as part of the Aerospace Distribution segment.
The first eight months of Harco's sales and operating income are included in
the Aerospace Fasteners Segment.
Industrial Products
- -------------------
Sales in the Industrial Products segment increased $2.6 million or 20.0%
in the third quarter and $26.6 million or 96.9% in the first nine months of
Fiscal 1996, compared to the same periods in Fiscal 1995. $25.2 million of
this sales increase is attributable to the performance of Fairchild
Technologies which includes Fairchild Convac, a semiconductor equipment
manufacturer which had a strong nine months performance resulting from the
shipment of orders included in the prior year end backlog. This was compared
to a very slow Fiscal 1995 first nine months, which was the first nine month
period following the acquisition of Fairchild Convac.
Operating income in the Industrial Products segment decreased $.4
million in the third quarter, primarily the result of increased costs being
incurred to expand the sales and service organization of Fairchild
Technologies. Year-to-date operating income increased $4.4 million in the
first nine months of Fiscal 1996, compared to the same periods in Fiscal
1995. $3.6 million of this net increase was contributed by Fairchild
Technologies, primarily the result of its increase in sales.
Communications Services
- -----------------------
Sales in the Communications Services segment decreased 23.8% in the
third quarter and increased 18.6% in the Fiscal 1996 first nine month period,
compared with the same periods in Fiscal 1995. The decrease in the current
third quarter is primarily due to recording only ten weeks of operating
results in the current quarter compared to thirteen weeks of operating
results in the prior period quarter as a result of the March 13, 1996 merger
of the Communications Services segment with STI. The nine month increase is
primarily due to the inclusion of $36.5 million of sales in the first nine
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 7.7%
in the second quarter and 8.4% during the nine months period of Fiscal 1996,
compared to the same period in Fiscal 1995. The decrease in the current
quarter is due to recording only ten weeks of operating results in the
current quarter compared to thirteen weeks of operating results in the prior
period quarter as a result of the Merger mentioned above.
Other Expenses/Income
- ---------------------
Corporate administrative expense decreased 8.6% in the third quarter and
increased 1.2% for the nine month period of Fiscal 1996, compared to the same
periods in Fiscal 1995. The decrease in the current year quarter was
primarily due to increased legal expense in the prior year third quarter.
The Fiscal 1995 nine month period expense was lower, partially due to
reversal of several accruals not required.
Other corporate expense decreased $1.6 million in the third quarter and
$1.8 million in the nine month period ended March 31, 1996, compared to the
same periods in the prior year. The decrease in the current year periods is
primarily due to a favorable settlement of a bankruptcy case.
Net interest expense decreased 16.3% in the third quarter and 18.9% in
the nine month period ended March 31, 1996, compared to the prior year
periods, due primarily to lower debt, as a result of the sale of DME and the
Merger, and higher interest income earned on the $170 million notes
receivable from the DME sale during the Fiscal 1996 current quarter.
Investment income, net increased $1.0 million in the third quarter and
$.2 million in the first nine months of Fiscal 1996, principally as a result
of recording unrealized gains on the fair market value adjustments of trading
securities in the Fiscal 1996 periods.
Equity in earnings of affiliates increased $1.4 million in the third
quarter and $1.5 million in the nine month period ended March 31, 1996,
primarily as a result of higher earnings from Nacanco.
Minority interest expense represents primarily dividend expense on FII's
Series C Preferred Stock.
Non-recurring income includes a $162.9 million nontaxable gain resulting
from the Merger. Expenses related to other potential transactions that did
not take place are netted against the above gain.
Income taxes - The tax benefit from the continuing operations loss,
excluding the nontaxable non-recurring gain, was $14.0 million.
Earnings from discontinued operations, net, include the earnings, net of
tax from DME and Data for all periods presented.
Gain (loss) on disposal of discontinued operations resulted primarily
from the sale of DME to CMI.
Extraordinary items, net, resulted from premiums paid, redemption costs
and consent fees associated with the retirement of the Senior Notes and the
write off of deferred loan fees primarily related to Senior Notes and bank
debt extinguished early. This totaled $10.4 million net of tax benefit of
$5.6 million.
The net earnings increased $225.7 million in the first nine months of
Fiscal 1996, compared to the first six months of Fiscal 1995, primarily due
to: (i) the $13.8 million increase in operating income, (ii) the $162.9
million non-recurring pre-tax gain recorded from the Merger, and (iii) the
61.3 million gain, net of tax, from the disposal of discontinued operations.
Partially offsetting these increases was a $10.4 million extraordinary loss
from the early extinguishment of debt.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 31, 1996, was $398.7 million, which was $286.1
million higher than at June 30, 1995. The principal reasons for this
increase included a $170.3 million increase in notes receivable obtained from
the sale of DME. In addition, due primarily to the consolidation of Banner
and the deconsolidation of FCSC, there was a net increase in accounts
receivable of $34.1 million and increase in inventory of $186.6 million (the
FCSC business, a telecommunication services business had virtually no
inventory). Offsetting this increase in working capital were net increases
in accounts payable of $21.2 million and other accrued liabilities of $8.2
million reflecting the reconsolidation of Banner and the deconsolidation of
FCSC. The Company's current bank debt borrowings increased $40.4 million
reflecting the current debt on the new interim credit agreement at FHC
discussed below. Net current assets of discontinued operations decreased
$34.6 million reflecting the sale of DME and Data.
The Company's principal sources of liquidity are cash generated from
operations and borrowings under its credit agreement. The Company also
expects to generate cash from the sale of certain assets and liquidation of
investments. Net assets held for sale at March 31, 1996, had a book value of
$46.1 million and included two parcels of real estate in California, a 68
acre parcel of real estate located in Farmingdale, New York, two landfills in
Pennsylvania, a real estate joint venture in California, and several other
parcels elsewhere, which the Company plans to sell, lease or develop, subject
to market conditions or, with respect to certain of the parcels, the
resolution of environmental matters. Net assets held for sale decreased $5.4
million primarily resulting from the sale of 20 acres of a larger parcel of
real estate, owned by the Company, in Farmingdale, New York. The proceeds
were applied against the carrying value of this property.
The Company's principal cash requirements include debt service, capital
expenditures, acquisitions, and payment of other liabilities.
Property, plant and equipment ("PP&E") decreased $43.1 million from June
30, 1995 as a result of deconsolidating FCSC and consolidating Banner. At
March 13, 1996 FCSC had PP&E of $51.3 million which was deconsolidated, and
Banner had $13.1 million which was consolidated.
Investments and advances in affiliated companies decreased $19.3
million. Changes in investments and advances in affiliates included a $54.0
million decrease resulting from the consolidation of Banner, offset partially
by recording a $29.0 million investment from the Merger, in which the Company
retained a 41% interest in STFI, and recording equity earnings of $2.8
million (primarily Nacanco) during the year.
Other liabilities that require the use of cash include post-employment
benefits for retirees, environmental investigation and remediation
obligations, 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.
Management intends to take appropriate action to refinance portions of its
debt, if necessary to meet cash requirements.
On March 13, 1996, in connection with the Merger, the Company replaced
VSI Corporation's credit agreement with a new credit agreement at FHC, a
newly formed subsidiary. The new credit agreement provides FHC with a $50.0
million revolving credit facility and a $30.0 million term loan.
Substantially all of FHC's assets are pledged as collateral under the new
credit agreement. The new credit agreement matures on July 29, 1996.
The credit agreement requires compliance with certain financial loan
covenants, including achieving a minimum of cumulative earnings before
interest, taxes, depreciation and amortization ("EBITDA Covenant") at March
31, 1996, and maintaining a certain interest ratio coverage at specified
periods. Additionally, the credit agreement restricts FHC's capital
expenditures during the term of the agreement to $6,000,000, in the
aggregate. The Company has remained in compliance with these covenants since
the inception of the new credit agreement.
FHC may transfer available cash as dividends to the Company.
Banner has a credit agreement ("Banner's Credit Agreement") which
provides Banner and its subsidiaries with a $55.0 million term loan and a
$71.5 million revolving credit facility. Substantially all of Banner's
assets are pledged as collateral under Banner's Credit Agreement. Banner's
Credit Agreement matures August 2001.
Banner's Credit Agreement requires quarterly compliance with various
financial and non-financial loan covenants, including maintaining a minimum
net worth, and minimum ratios of interest coverage, fixed charge coverage,
and debt to earnings before interest, taxes, depreciation and amortization.
Banner also has certain limitations on the incurrence of additional debt.
Banner has remained in compliance with all covenants under its credit
agreement since the inception of its credit agreement.
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.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 18 of Notes to Consolidated Financial
Statements.
Item 6. Exhibits and Reports on Form 8-K
On February 12, 1996, the Company filed a Form 8-K to report on Item 5.
The Company reported that on January 26, 1996, pursuant to the Asset Purchase
Agreement dated as of January 23, 1996 (the "Purchase Agreement"), it
concluded the initial closing of the sale of the Company's DME business to
Cincinnati Milacron, Inc., ("CMI") for $245,377,000, subject to adjustment
based on the closing date value of DME's net tangible assets. The Company
filed the following exhibits in conjunction with this Form 8-K:
Exhibits
- --------
10 (b)(i) Asset Purchase Agreement dated as of January 26, 1996, between
the Company and CMI.
10 (b)(j) The Company's press release dated January 26, 1996.
On March 7, 1996, the Company filed a Form 8-K to report on Item 2 and
Item 7. The Company reported that on February 22, 1996, pursuant to the
Purchase Agreement, it had completed the sale of the Company's DME business
to CMI for $245,377,000, subject to adjustment based on the closing date
value of DME's net tangible assets. The Company provided unaudited pro forma
financial statements for this transaction.
On March 27, 1996, the Company filed a Form 8-K to report on Item 2 and
Item 7. The Company reported that on March 13, 1996, it had completed an
Agreement and Plan of Merger with Shared Technologies, Inc. ("STI"), in which
STI (i) acquired the telecommunications systems and services business
operated by Fairchild Communications Services Company, (ii) assumed
$223,500,000 of the Company's debt and preferred stock issuances, and (iii)
issued to the Company 6,000,000 shares of common stock of STI (representing
approximately 41% of the outstanding shares after giving effect to such
issuance), shares of 6% cumulative convertible preferred stock having an
aggregate liquidation preference of $25,000,000 (subject to upward
adjustment), and shares of special preferred stock having an initial
liquidation preference of $20,000,000. The Company provided unaudited pro
forma financial statements for this transaction and the sale of DME. The
Company filed the following exhibits in conjunction with this Form 8-K:
<PAGE>
Exhibits
- --------
10 (b)(g) Agreement and plan of Merger dated as of November 9, 1995 by and
among Fairchild, RHI, FII and Shared Technologies (" Merger
Agreement").
10 (b)(k) Amendment No. 1 to Merger Agreement dated as of February 2, 1996.
10 (b)(l) Amendment No. 2 to Merger Agreement dated as of February 23, 1996.
10 (b)(m) Amendment NO. 3 to Merger Agreement dated as of March 1, 1996.
<PAGE>
SIGNATURES
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 THE FAIRCHILD CORPORATION
(Registrant) and as its Chief
Financial Officer:
By: Michael T. Alcox
Senior Vice President and
Chief Financial Officer
Date: May 15, 1996
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