UNITED STATES
SECURITIES AND EXCHANGE COMMISSION??
Washington, DC 20549
--------------------
FORM 10-K/A
--------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended June 30, 1997 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 20153
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(703) 478-5800
----------------------------------------------------
(Registrant's Telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of exchange on
Title of each class which registered
- ------------------- -------------------
Class A Common Stock, par value
$.10 per share New York and Pacific Stock Exchange
- ------------------------------- -----------------------------------
13 1/8% Subordinated Debentures
due 2006 New York Stock Exchange
- ------------------------------- -----------------------------------
12% Intermediate Subordinated
Debentures due 2001 New York Stock Exchange
- ------------------------------- -----------------------------------
13% Junior Subordinated
Debentures due 2007 New York Stock Exchange
- ------------------------------- -----------------------------------
Securities registered pursuant to Section 12(g) of the Act: None
----
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K [ ].
As of November 21, 1997, the aggregate market value of the common
shares (based upon the closing price of these shares on the New York Stock
exchange) of the Registrant held by nonaffiliates was approximately $190.7
million (excluding shares deemed beneficially owned by affiliates of the
Registrant under Commission Rules).
As of November 23, 1997, the number of shares outstanding of each of
the Registrant's classes of common stock were as follows:
Class A common stock, $.10 par value 14,035,767
------------
Class B common stock, $.10 par value 2,625,616
------------
AMENDMENT:
The purpose of this amendment is to revise and provide additional
disclosure for (i) Item 1, "Business", (ii) Item 2, "Properties", (iii)
Item 6, "Selected Financial Data", (iv) Item 7, "Management's Discussion
and Analysis of Results of Operations and Financial Condition", (v) Item 8,
"Financial Statements and Supplementary Data" and (vi) Item 14, "Exhibits,
Financial Statement Schedules and Reports on Form 8-K", as suggested by the
SEC staff from their review of the Company's filing.
THE FAIRCHILD CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JUNE 30, 1997
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . .
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 6. Selected Financial Data. . . . . . . . . . . . . . . .
Item 7. Management's Discussion and Analysis
of Results of Operations and
Financial Condition . . . . . . . . . . . . . . . . . 4
Item 8. Financial Statements and
Supplementary Data . . . . . . . . . . . . . . . . . . 14
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K . . . . . . . . . . 70
PART I
------
ITEM 1. BUSINESS
- -----------------
(a) General Development of Business
The Fairchild Corporation (the "Company") was incorporated in October
1969, under the laws of the State of Delaware. The Company changed its
name from Banner Industries, Inc. to The Fairchild Corporation on November
15, 1990. The Company is a holding company which owns all of the issued
and outstanding stock of RHI Holdings, Inc. ("RHI"), and through RHI all of
the issued and outstanding stock of Fairchild Holding Corporation ("FHC").
Through RHI, the Company is the majority stockholder of Banner Aerospace,
Inc. ("Banner").
The Company is the largest aerospace fastener manufacturer and is one of
the largest independent aerospace parts distributors in the world. Through
internal growth and strategic acquisitions, the Company has become one of
the leading aircraft parts suppliers to aircraft manufacturers such as
Boeing, Airbus, Lockheed Martin, British Aerospace and Bombardier and to
airlines such as Delta Airlines and US Airways.
The Company's primary business focus is on the aerospace industry and its
business consists primarily of two segments--fasteners and aerospace
partsdistribution. The aerospace fasteners segment, which accounted for
approximately 51.4% of the Company's net sales in Fiscal 1997, pro forma
for the Disposition, manufactures and markets fastening systems used in
themanufacturing and maintenance of commercial and military aircraft. The
aerospace distribution segment, which accounted for approximately 35.9% of
the Company's net sales in Fiscal 1997, pro forma for the Disposition,
stocks and distributes a wide variety of aircraft parts to commercial
airlines and air cargo carriers, OEMs, other distributors, fixed-base
operators, corporate aircraft operators and other aerospace and non-
aerospace companies. The Company's aerospace distribution business is
conducted through its 64% owned subsidiary, Banner.
Recent Developments
- -------------------
Recent developments of the Company are incorporated herein by reference
from "Recent Developments and Significant Business Combinations" included
in Item 7 "Management's Discussion and Analysis of Results of Operations
and Financial Condition".
(b) Financial Information about Business Segments
The Company's business segment information is incorporated herein by
reference from Note 21 of the Company's consolidated financial statements
included in Item 8, "Financial Statements and Supplementary Data".
(c) Narrative Description of Business Segments
INDUSTRY OVERVIEW
The aerospace parts industry currently is enjoying favorable trends
driven by strong growth in new commercial aircraft orders, an increase in
miles flown by existing aircraft, the need to modify older aircraft to
comply with noise regulations and increased orders for wide bodied
aircraft.
Demand for aerospace fasteners and other aerospace parts is closely
related to delivery and use rates for commercial and military aircraft.
Delivery and use rates are in turn directly related to the actual and
projected volume of passenger and freight traffic, average aircraft age,
global fleet size and government defense expenditures. According to the
Boeing 1997 Current Market Outlook (the "Boeing Market Outlook"),
world air traffic grew 6.7% from 1995 to 1996, following a 6.6% increase
from 1994 to 1995. Industry sources forecast that world air traffic will
grow by more than 5% per year for the next ten years. Boeing also projects
that during this period domestic and international airlines will lease or
purchase over 7,000 new aircraft, thereby increasing the worldwide
commercial fleet from approximately 11,500 aircraft at the end of 1996 to
approximately 17,000 aircraft (net of retirements) at the end of 2006.
Boeing, Airbus and McDonnell Douglas delivered over 277 new aircraft
in the first six months of 1997 compared to 184 in the comparable period of
the prior year. Orders for new aircraft at these manufacturers remained
stable, with 313 orders in the first six months of 1997 compared to 291 in
the comparable period of 1996. Cancellations, however, were greatly reduced-
- -Boeing experienced only five cancellations in the first six months of 1997
as compared to 77 in the first six months of 1996. The Company believes
that the world's airlines must continue to add capacity and order new
airplanes to be able to meet the anticipated demand.
The Company believes that over the next five years airlines will be
required to replace a significant portion of their existing fleets as the
large number of airplanes delivered in the 1960s become increasingly
uneconomical to operate and the deadlines for compliance with the stringent
noise regulations adopted in the United States and Europe approach.
The Company's fastener business benefits from noise reduction
modifications because modifying an airplane to comply with the noise
regulations and remain serviceable requires a substantial number of
fasteners. The Boeing Market Outlook reports that 560 airplanes in the U.S.
fleet had been modified to meet the new noise standards and projects that
1,080 planes in the U.S. fleet will be noise modified.
The Boeing Market Outlook projects that average airplane size should
rise worldwide over the next ten years. As airlines seek to serve a growing
number of air travelers with existing restrictions on arrival and departure
slots, airport gates and ramp capacity, commercial aircraft OEMs are
experiencing increased orders for heavier, widebodied aircraft of
intermediate size. Widebodied aircraft generally require a greater number
of fasteners than smaller aircraft.
AEROSPACE FASTENERS
The Company, through its Aerospace Fasteners segment, is a leading
worldwide manufacturer and supplier of fastening systems used in the
construction and maintenance of commercial and military aircraft. The
Aerospace Fasteners segment accounted for 36.4% and 35.2% of total Company
sales for the year ended June 30, 1997 and for the three months ended
September 28, 1997, respectively.
PRODUCTS
In general, aerospace fasteners produced by the Company are used to
join materials in applications that are not of themselves critical to
flight. Products range from standard aerospace screws, to more complex
systems that fasten airframe structures, and sophisticated latching or
quick disconnect mechanisms that allow efficient access to internal parts
which require regular servicing or monitoring, The Aerospace Fasteners
segment also manufactures and supplies fastening systems used in non-
aerospace industrial and electronic niche applications. The Aerospace
Fasteners segment produces and sells products under various trade names and
trademarks including Voi-Shan(R) (fasteners for aerospace structures),
Screwcorp(R) (standard externally threaded products for aerospace
applications), RAM(R) (custom designed mechanisms for aerospace
applications), Camloc(R) (components for the industrial, electronic,
automotive and aerospace markets), Tridair(R) and Rosan(R) (fastening
systems for highly-engineered aerospace, military and industrial
applications).
Principal product lines of the Aerospace Fasteners segment include:
Standard Aerospace Airframe Fasteners--These fasteners consist of
standard externally threaded fasteners used in non-critical airframe
applications on a wide variety of aircraft. These fasteners include Hi-
Torque Speed Drive(R), Tri-Wing(R), Torq-Set(R), Phillips(R) and Hex
Heads(R).
Commercial Aerospace Structural and Engine Fasteners--These fasteners
consist of more highly engineered permanent or semi-permanent fasteners
used in non-critical but more sophisticated airframe and engine
applications, which could involve joining more than two materials. These
fasteners are generally engineered to specific customer requirements or
manufactured to specific customer specifications for special applications,
often involving exactingstandards. These fasteners include Hi-Lok(R), Veri-
Lite(R), Eddie-Bolt2(R) and customer proprietary engine nuts.
Proprietary Products and Fastening Systems--These very highly
engineered proprietary fasteners are designed by the Company for specific
customer applications and include high performance structural latches and
hold down mechanisms. These fasteners are usually proprietary in nature and
are primarily used in either commercial aerospace or military applications.
These fasteners include Visu-Lok(R), Composi-Lok(R), Keen-serts(R), Mark
IV(TM), Flatbeam(TM) and Ringlock(TM).
Highly Engineered Fastening Systems for Industrial Applications--
Thesehighly engineered fasteners are designed by the Company for specific
niche applications in the electronic, automotive and durable goods markets
and are sold under the Camloc(R) trade name.
SALES AND MARKETS
The products of the Aerospace Fasteners segment are sold primarily to
domestic and foreign OEMs, and to the maintenance and repair market
throughdistributors. Sixty-six percent of its sales are domestic. Major
customers include OEMs such as Boeing, McDonnell Douglas and Airbus and
their subcontractors, as well as major distributors such as Burbank
Aircraft Supply, Special-T and Wesco. In addition, OEMs have implemented
programs to reduce inventories and pursue just-in-time relationships. This
has allowed parts distributors to significantly expand their business due
to their ability to better meet OEM objectives. In response, the Company,
which formerly supplied the OEMs directly, is expanding efforts to provide
parts through distributors, by establishing master distributorship
agreements, with Special-T, Wesco and others. No single customer accounts
for more than 10% of consolidated sales. The Company's backlog of orders in
the Aerospace Fasteners segment as of September 28, 1997 was $201 million.
The Company anticipates that approximately 95% of such backlog will be
delivered by September 28, 1998.
Products are marketed by a direct sales force team which coordinates
efforts with an internal technical sales force team. The direct sales force
team is organized by customer and region. The internal sales force is
organized by facility and product range and is focused on servicing
customers needs, identifying new product applications, and obtaining the
approval of new products. All the Company's products are leveraged through
centralized advertising and promotional activities.
Revenues in the Aerospace Fasteners segment bear a strong relationship
to aircraft production. As OEMs searched for cost cutting opportunities
during the aerospace industry recession, parts manufacturers, including the
Company, accepted lower-priced and/or smaller orders to maintain market
share, at lower profit margins. However, during the last two years, this
situation has improved as build rates in the aerospace industry have
increased and resulted in capacity constraints. As lead times have
increased, the Company has been able to negotiate contracts with its major
customers at more favorable pricing as well as larger minimum lot sizes
that are more economic to manufacture. In addition, the Company has
eliminated "make and hold" contracts under which large volume
buyers require current production of parts for long-term unspecified dates
of delivery. Overall, the Company believes existing backlog will result in
higher margins due to larger and more efficient lot sizes.
Fasteners also have applications in the automotive/industrial markets,
where numerous special fasteners are required (such as engine bolts, wheel
bolts and turbocharger tension bolts). The Company is actively targeting
the automotive market as a hedge against any potential downturn in the
aerospace industry.
MANUFACTURING AND PRODUCTION
The Aerospace Fasteners segment has seven primary manufacturing
facilities, of which three are located in the United States and four are
located in Europe. Each facility has virtually complete production
capability, and subcontracts only those orders which exceed capacity. Each
plant is designed to produce a specified product or group of products,
determined by production process involved and certification requirements.
The Company's largest customers have recognized its quality and operational
controls by conferring ISO D1-9000A status at all of its U.S. facilities,
and ISO D1-9000 status at all of its European facilities. The Company is
the first and only aerospace fasteners manufacturing company with all
facilities holding ISO-9000 approval.
The Company has a fully operational modern information system at all
of its U.S. facilities and will expand this information system to all its
European operations in Fiscal 1998. The new system performs detailed and
timely cost analysis of production by product and facility. Updated MIS
systems also help the Company to better service its customers. OEMs require
each product to be produced in an OEM-qualified/OEM-approved facility.
COMPETITION
Despite intense competition in the industry, the Company remains the
dominant manufacturer of aerospace fasteners. The worldwide aerospace
fastener market is estimated to be $1.3 billion (before distributor
resales). The Company holds approximately 20% of the market and competes
with SPS Technologies, Hi-Shear and Huck, which the Company believes hold
approximately 13%, 11% and 10% of the market, respectively. In Europe, its
largest competitors are Blanc Aero and Southco Fasteners.
The Company competes primarily in the highly engineered "systems"
segment, where its broad product range allows it to more fully serve each
OEM and distributor. The Company's product array is diverse and offers
customers a large selection to address various production needs. In
addition, roughly 45% of the Company's output is unique or is in a market
where the Company has a small number of competitors. The Company seeks to
maintain its technological edge and competitive advantage over its
competitors, and has historically demonstrated its innovative production
methods and new products to meet customer demands at fair price levels.
AEROSPACE DISTRIBUTION
The Company conducts its aerospace parts distribution through Banner.
In February 1996, the Company increased its ownership of Banner from 47.2%
to 59.3%, and further increased such ownership interest to 64% in June
1997. The Company, through its Aerospace Distribution segment, distributes
a wide variety of aircraft parts, which it carries in inventory. In
addition to selling products that it has purchased on the open market, the
Company also acts as a non-exclusive authorized distributor of several
different aerospace related product lines. No single distributor
arrangement is material to the Company's financial condition. The Aerospace
Distribution segment accounted for 35.9% of total Company sales in Fiscal
1997, pro forma for the Disposition. On December 8, 1997, Banner and eight
of its subsidiaries entered into an Asset Purchase Agreement pursuant to
which such subsidiaries have agreed to transfer substantially all of their
assets to Allied for approximately $345 million of common stock of Allied.
The assets transferred to Allied consists primarily of Banner's hardware
group, which includes the distribution of bearings, nuts, bolts, screws,
rivets and other types of fasteners.
PRODUCTS
Following consummation of the Disposition, the products of the
Aerospace Distribution segment will be divided into two groups: rotables
and engines. Rotables include flight data recorders, radar and navigation
systems, instruments, landing gear and hydraulic and electrical components.
Engines include jet engines and engine parts for use on both narrow and
wide body aircraft and smaller engines for corporate and commuter aircraft.
The Aerospace Distribution segment provides a number of services such as
immediate shipment of parts in aircraft-on-ground situations. The Aerospace
Distribution segment also provides products to OEMs to airlines under
inventory management programs. The Aerospace Distribution segment also buys
and sells commercial aircraft from time to time.
Rotable parts are sometimes purchased as new parts, but are generally
purchased as used parts which are then overhauled for the Company by
outside contractors, including the original manufacturers and FAA-licensed
facilities. Rotables are sold in a variety of conditions such as new,
overhauled, serviceable and "as is" Rotables may also be exchanged instead
of sold. An exchange occurs when an overhauled aircraft part in inventory
is exchanged for a used part from the customer and the customer is charged
an exchange fee plus the actual cost to overhaul the part. Engines and
engine components are sold as is, overhauled or disassembled for resale as
parts.
SALES AND MARKETS
Subsidiaries of the Aerospace Distribution segment sell their products
in the United States and abroad to most of the world's commercial airlines
and to air cargo carriers, as well as OEMs, other distributors, fixed base
operators, corporate aircraft operators and other aerospace and
nonaerospace companies. Approximately 76% of its sales, pro forma for the
Disposition, are to domestic purchasers, some of whom may represent
offshore users.
The Aerospace Distribution segment markets its products and services
through direct sales forces, outside representatives and, for some product
lines, overseas sales offices. Sales in the aviation aftermarket depend on
price, service, quality and reputation. The Aerospace Distribution
segment's business does not experience significant seasonal fluctuations or
depend on a single customer. No single customer accounts for more than 10%
of the Company's consolidated revenue, pro forma for the Disposition. The
Company's backlog of orders in the Aerospace Distribution segment as of
September 28, 1997 was $22 million, pro forma for the Disposition. The
Company anticipates that approximately 90% of such backlog will be
delivered by September 28, 1998.
COMPETITION
In the rotable group the major competitors are AAR Corp., Air Ground
Equipment Services ("AGES"), Aviation Sales Company, The Memphis
Group and other large and small companies in a very fragmented industry.
The major competitors for Banner's engine group are OEMs such as General
Electric Company and Pratt and Whitney, as well as the engine parts
division of AAR Corp., AGES, and many smaller companies.
TECHNOLOGIES
Acquired by the Company in June 1994, Fairchild Technologies
("Technologies") is a global organization that manufactures, markets and
services capital equipment for recordable compact disc ("CD-R") and
advanced semiconductor manufacturing. Technologies' products are used to
produce CD-Rs, CDs and CD-ROMs, as well as integrated circuits for the data
processing, communications, transportation, automotive and consumer
electronic industries,as well as for the military.
PRODUCTS
Technologies is a leader in microlithography manufacturing in Europe
and has four product lines, the first being equipment for wafer
microlithography processing. This includes the mainstay Series 6000
Flexible Wafer Process Line, consisting of lithographic processing systems
with flexible material flow, modular design and high throughput, and the
recently designed Falcon Modular Microlithography System for 0.25 micron
(65/256 Mbit DRAM) device manufacturing. The Falcon system has a fully
modular design and is expandable to accommodate expected technological
advancements and specific customer configurations.
Technologies has combined new and proven technology and a number of
leading edge components and systems in compact disc processing to recently
develop its Compact Disc Recordable ("CD-R10X") manufacturing system. The
CD-R10X system is a state of the art design for producing cost effective
recordable CDs by combining a high quality injection molding machine with
scanning, inspection, and pneumatic handling systems.
A third line is modular process equipment for use by the fabricators
of liquid crystal displays. Technologies supplies advanced modular
solutions with high throughput, small footprint and minimum cost of
ownership. Technologies is also a leading manufacturer of photolithography
processing equipment for photomask and thinfilm products.
Technologies specializes in providing system solutions, and in
coating, developing, priming, etching, stripping, cleaning and thermal
processing of wafers, substrates and related semiconductor products.
SALES AND MARKETS
With a strong base of controls/clean room technology and
software/services engineering, Technologies is able to provide systems with
multiple modular designs for a variety of customer applications. Today,
more than 1,000 Technologies wafer production systems are in operation
worldwide. Approximately 60% of the Company's Fiscal 1997 business was
derived from wafer related products and services. The remaining 40% was
divided between LCD and CD related systems, products, and services. Major
customers in the wafer product line include Motorola, Samsung, Siemens, GEC
Plessey, Texas Instruments, National Semiconductor, Macronix, and Erso.
Other major customers include Philips and Litton for the LCD product line,
Sonopress (Bertelsmann), and Krauss Maffei for the CD product line, and
Hyundai, NEC and Canon for the photomask product line. Approximately 76.3%
of Technologies' sales were to foreign customers.
MANUFACTURING AND PRODUCTION
Technologies has two manufacturing facilities consisting of Fairchild
Technologies GmbH, located in Vaihingen, Germany, and Fairchild
Technologies USA, Inc. located in Fremont, California.
COMPETITION
The wafer product line competes with Tokyo Electron, Dai Nippon Screen
and the Silicon Valley Group. Competitors in the CD product line consist of
Robi Systems, Leybold and Marubeni. Competition in the photomask product
line is provided by Mitsubishi Toyo, Tasmo and Solid State Equipment.
NACANCO PAKETLEME
Established in 1987, Nacanco is the largest manufacturer of aluminum
cans for soft drinks and beer in Turkey with an estimated 80% market share.
Nacanco generated EBITDA of approximately $39 million on annual sales of
$107 million for the fiscal year ended December 31, 1996. The Company owns
31.9% of the common stock, with Pechiney International SA and its
subsidiaries holding substantially all of the balance. The Company received
from Nacanco cash dividends in excess of $3 million in each of the past two
fiscal years.
REAL ESTATE
The Company has significant real estate holdings having a book value
of approximately $54.1 million as of June 30, 1997. The Company's real
estate holdings consist of (i) 80 acres on Long Island, New York which are
currently being developed into retail centers; (ii) various industrial
buildings from which the Company receives rental income; and (iii) property
to be used as landfills upon the receipt of necessary licenses and
government approvals.
RESEARCH AND PATENTS
The Company's research and development activities have included:
applied research; development of new products; testing and evaluation of,
and improvements to, existing products; improvements in manufacturing
techniques and processes; development of product innovations designed to
meet government safety and environmental requirements; and development of
technical services for manufacturing and marketing. The Company's sponsored
research and development expenditures amounted to $7.8 million, $0.1
million and $1.0 million for the years ended June 30, 1997, 1996, and 1995,
and $0.6 million for the three months ended September 28, 1997,
respectively, substantially all of such expenditures being attributable to
Fairchild Technologies. The Company owns patents relating to the design and
manufacture of certain of its products and is a licensee of technology
covered by the patents of other companies. The Company does not believe
that any of its business segments are dependent upon any single patent.
PERSONNEL
As of June 30, 1997, pro forma for the Disposition, the Company had
approximately 3,400 employees. Approximately 5% of these employees were
covered by collective bargaining agreements. The Company believes that its
relations with its employees are satisfactory.
ITEM 2. PROPERTIES
- ------------------
As of June 30, 1997, pro forma for the Disposition, the Company owned
or leased properties totaling approximately 1,631,000 square feet,
approximately 1,046,000 square feet of which was owned and 585,000 square
feet was leased. The Aerospace Fasteners segment's properties consisted of
approximately 1,020,000 square feet, with principal operating facilities
concentrated in Southern California, France and Germany. The Aerospace
Distribution segment's properties consisted of approximately 380,000 square
feet, with principal operating facilities of approximately 295,000 square
feet located in Florida, and Texas. Corporate and other operating
properties consisted of approximately 117,000 square feet, with principal
operating facilities of approximately 82,000 square feet located in
California and Germany. The Company owns its corporate headquarters at
Washington-Dulles International Airport.
The Company has several parcels of property which it is attempting to
market, lease and/or develop, including: (i) an eighty acre parcel located
in Farmingdale, New York; (ii) a six acre parcel in Temple City,
California; (iii) an eight acre parcel in Chatsworth, California; and (iv)
several other parcels of real estate, primarily located throughout the
continental United States.
The following table sets forth the location of the larger properties
used in the continuing operations of the Company, their square footage, the
business segment or groups they serve and their primary use. Each of the
properties owned or leased by the Company is, in management's opinion,
generally well maintained, suitable to support the Company's business and
adequate for the Company's present needs. All of the Company's occupied
properties are maintained and updated on a regular basis.
OWNED OR SQUARE
PRIMARY
LOCATION LEASED FOOTAGE BUSINESS SEGMENT/GROUP USE
-------- -------- ------- ---------------------- --------
- ----- Saint Cosme, France... Owned 304,000 Aerospace Fasteners
Manufacturing Torrance, California.. Owned 284,000 Aerospace
Fasteners Manufacturing Carrollton, Texas..... Leased 173,000
Aerospace Distribution Distribution City of Industry,
California........... Owned 140,000 Aerospace Fasteners
Manufacturing Chantilly, Virginia... Owned 125,000 Corporate
Office Lakeland, Florida..... Leased 65,000 Aerospace Distribution
Distribution Ft. Lauderdale, Florida.............. Leased 57,000
Aerospace Distribution Distribution Toulouse, France...... Owned
56,000 Aerospace Fasteners Manufacturing Fremont, California...
Leased 54,000 Technology Products Manufacturing Santa Ana,
California........... Owned 50,000 Aerospace Fasteners
Manufacturing Vaihingen, Germany.... Leased 49,000 Technology
Products Manufacturing Kelkheim, Germany..... Leased 42,000
Aerospace Fasteners Manufacturing Fremont, California... Leased
31,000 Technology Products Manufacturing
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
<TABLE>
Five-Year Financial Summary
(In thousands, except per share data)
<CAPTION>
For the years ended June 30, 1997 1996 1995 1994
1993
- --------------------------- ---------- ---------- ---------- -------
- --- ----------
<S> <C> <C> <C> <C>
<C>
Summary of Operations:
Net sales........................ $ 731,960 $ 409,520 $ 256,840 $
203,456 $ 247,080
Gross profit..................... 205,123 94,911 37,614
28,415 42,609
Operating income (loss).......... 30,517 (9,115) (31,917)
(46,845) (29,595)
Net interest expense............. 47,798 56,586 64,371
66,670 67,162
Earnings (loss) from continuing
operations..................... (1,818) (33,661) (57,763)
4,834 (62,413)
Earnings (loss) per share from
continuing operations:
Primary...................... (.10) (2.03) (3.59)
.30 (3.87)
Fully diluted................ (.10) (1.97) (3.59)
.30 (3.87)
Balance Sheet Data:
Total assets..................... $1,067,333 $1,009,938 $ 850,294 $
866,621 $ 941,675
Long-term debt, less current
maturities..................... 416,922 368,589 509,715
522,406 566,491
Redeemable preferred stock of
subsidiary..................... -- -- 16,342
17,552 17,732
Stockholders' equity............. 229,625 231,168 40,180
69,494 53,754
per outstanding common share... 13.81 14.10 2.50
4.32 3.34
</TABLE>
The results of Banner Aerospace, Inc. are included in the periods
since February 25, 1996, when Banner became a majority-owned subsidiary.
Prior to February 25, 1996, the Company's investment in Banner was
accounted for using the equity method. Fiscal 1994 includes the gain on the
sale of Rexnord Corporation stock. These transactions materially affect
the comparability of the information reflected in the selected financial
data.
ITEM 7. MANAGEMENT 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 owner of 100% of Fairchild Holding Corp. ("FHC") and
the majority owner of Banner Aerospace, Inc. ("Banner"). The Company's
principal operations are conducted through RHI and FHC. The Company also
holds significant equity interests in Shared Technologies Fairchild Inc.
("STFI") and Nacanco Paketleme ("Nacanco").
GENERAL
The Company is the largest aerospace fastener manufacturer and is one
of the largest independent aerospace parts distributors in the world.
Through internal growth and strategic acquisitions, the Company has become
one of the leading aircraft parts suppliers to aircraft manufacturers such
as Boeing, Airbus, Lockheed Martin, British Aerospace and Bombardier and to
airlines such as Delta Airlines and US Airways.
The Company's primary business focus is on the aerospace industry and
its business consists primarily of two aerospace segments--aerospace
fasteners and aerospace parts distribution. The aerospace fasteners
segment, which accounted for approximately 51.4% of the Company's net sales
in Fiscal 1997, pro forma for the Disposition, manufactures and markets
fastening systems used in the manufacturing and maintenance of commercial
and military aircraft. The aerospace distribution segment, which accounted
for approximately 35.9% of the Company's net sales in Fiscal 1997, pro
forma for the Disposition, stocks and distributes a wide variety of
aircraft parts to commercial airlines and air cargo carriers, OEMs, other
distributors, fixed-base operators, corporate aircraft operators and other
aerospace and non-aerospace companies. The Company's aerospace distribution
business is conducted through its 64% owned subsidiary, Banner.
CAUTIONARY STATEMENT
Certain statements in the financial discussion and analysis by
management contain forward-looking information that involves risk and
uncertainty, including current trend information, projections for
deliveries, backlog, and other trend projections. Actual future results
may differ materially depending on a variety of factors, including product
demand; performance issues with key suppliers; customer satisfaction and
qualification issues; labor disputes; governmental export and import
policies; worldwide political stability and economic growth; and legal
proceedings.
RECENT DEVELOPMENTS AND SIGNIFICANT BUSINESS COMBINATIONS
On November 20, 1997, STFI, a corporation of which the Company owns
approximately 42% of the outstanding common stock, entered into a merger
agreement with Intermedia Communications, Inc. ("Intermedia") pursuant to
which holders of STFI common stock will receive $15.00 per share in cash.
In connection with the STFI Sale, the Company has received approximately
$85 million in cash (before tax) in Exchange for certain preferred stock of
STFI and expects to receive an additional $93 million in cash (before tax)
in the first three months of 1998 in exchange for the 6,225,000 shares of
common stock of STFI owned by the Company. The Intermedia transaction
replaces an earlier merger agreement with the Tel-Save Holdings, Inc. under
which the Company would have received consideration primarily in common
stock of Tel-Save Holdings, Inc. Consummation of the STFI Sale is subject
to certain conditions.
On December 8, 1997, Banner and eight of its subsidiaries entered into
an Asset Purchase Agreement pursuant to which such subsidiaries have agreed
to transfer substantially all of their assets to AlliedSignal Inc.
("Allied") for approximately $345 million of common stock of Allied (the
"Disposition"). The assets sold to Allied consist primarily of Banner's
hardware group, which includes the distribution of bearings, nuts, bolts,
screws, rivets and other type of fasteners. Approximately $170 million of
the common stock received from Allied will be used to repay outstanding
term loans of Banner's subsidiaries and related fees. Consummation of the
Disposition is subject to certain conditions. The Company is effecting the
Disposition to concentrate its efforts on the rotables and jet engine
businesses and because the Disposition presented a unique opportunity to
realize a significant return on the sale of the hardware group.
In January 1997, Banner, through its subsidiary, Dallas Aerospace,
Inc., acquired PB Herndon Company ("PB Herndon") in a business combination
accounted for as a purchase. PB Herndon is a distributor of specialty
fastener lines and similar aerospace related components. The total cost of
the acquisition was $16.0 million, which exceeded the fair value of the net
assets of PB Herndon by approximately $3.5 million. The excess is being
amortized using the straight-line method over 40 years.
In February 1997, the Company completed a transaction (the "Simmonds
Acquisition") pursuant to which the Company acquired common shares and
convertible debt representing an 84.2% interest, on a fully diluted basis,
of Simmonds S.A. ("Simmonds"). The Company initiated a tender offer to
purchase the remaining shares and convertible debt held by the public. By
Fiscal year-end, the Company had purchased, or placed sufficient cash in
escrow to purchase, all the remaining shares and convertible debt of
Simmonds. The total purchase price of Simmonds, including the assumption
of debt, was approximately $62.0 million, which the Company funded with
available cash. The Company recorded approximately $13.0 million in
goodwill as a result of this acquisition. Simmonds is one of Europe's
leading manufacturers and distributors of aerospace and automotive
fasteners.
On June 30, 1997, the Company sold all the patents of Fairchild
Scandinavian Bellyloading Company ("SBC") to Teleflex Incorporated
("Teleflex") for $5.0 million, and immediately thereafter sold all the
stock of SBC to a wholly-owned subsidiary of Teleflex for $2.0 million. The
Company may also receive an additional amount of up to $7.0 million based
on future net sales of the patented products and services. In Fiscal 1997,
the Company recorded a $2.5 million nonrecurring gain as a result of these
transactions.
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 surviving company renamed STFI.
Prior to the Merger, FII transferred all of its assets to, and all of its
liabilities were assumed by FHC, except for the assets and liabilities of
FCSC, and $223.5 million of FII's existing debt and preferred stock. As a
result of the Merger, the Company received shares of Common Stock and
Preferred Stock of STFI, representing approximately a 41% ownership
interest in STFI.
On February 22, 1996, pursuant to the Asset Purchase Agreement dated
January 26, 1996, 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 consisted of
$74.0 million in cash, and two 8% promissory notes in the aggregate
principal amount of $170.3 million (together, the "8% CMI Notes"). On July
29, 1996, CMI paid in full the 8% CMI Notes.
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 $9.06 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.
Accordingly, DME and Data have been accounted for as discontinued
operations. The combined net sales of DME and Data totaled $108.1 million
(through January 26, 1996) and $180.8 million for Fiscal 1995. Net earnings
from discontinued operations were $9.2 million (through January 26, 1996)
and $14.0 million for Fiscal 1995.
Effective February 25, 1996, the Company completed the transfer of
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 59.3%, resulting in the Company becoming the
majority shareholder of Banner. Accordingly, the Company has consolidated
the results of Banner since February 25, 1996. In June 1997, the Company
purchased $28.0 million of newly issued Series A Convertible Paid-in-Kind
Preferred Stock of Banner. The Company now controls 64.0% of Banner's
voting stock. Banner is a leading international supplier to the aerospace
industry as a distributor, providing a wide range of aircraft parts and
related support services.
RESULTS OF OPERATIONS
The Company currently reports in two principal business segments:
Aerospace Fasteners and Aerospace Distribution. The Company consolidated
pre March 13, 1996 operating results from the Communications Services
segment and, effective February 25, 1996, began to consolidate the
operating results of the Aerospace Distribution segment. The results of
FT, together with the results of Gas Springs and SBC are included in
Corporate and Other. The following table illustrates the historical sales
and operating income of the Company's operations for the past three years.
<TABLE>
<CAPTION>
For the years ended June 30,
(In thousands) --------------------------------
1997 1996 1995
Sales by Segment: -------- -------- --------
<S> <C> <C> <C>
Aerospace Fasteners............... $269,026 $218,059 $215,364
Aerospace Distribution (a)........ 411,765 129,973 --
Corporate and Other(b)............ 66,382 67,330 41,476
Eliminations (c).................. (15,213) (5,842) --
------- ------- -------
Sales............................... $731,960 $409,520 $256,840
======= ======= =======
Operating Income (Loss) by Segment:
Aerospace Fasteners (d)........... $ 17,390 $ 135 $(11,497)
Aerospace Distribution (a)........ 30,891 5,625 --
Corporate and Other (b)........... (17,764) (14,877) (20,420)
------- ------- -------
Operating income (loss)............. $ 30,517 $ (9,115) $(31,917)
======= ======= =======
(a) Effective February 25, 1996, the Company became the majority
shareholder of Banner Aerospace, Inc. and, accordingly, began consolidating
their results as of that date.
(b) Includes sales from Fairchild Technologies of $57.7 million, $60.3
million, and $38.0 million in 1997, 1996 and 1995, respectively, and gross
margin from Fairchild Technologies of $23.8 million, $20.8 million, and
$11.1 million, respectively.
(c) Represents intersegment sales from the Aerospace Fasteners segment to
the Aerospace Distribution segment.
(d) Includes restructuring charges of $2.3 million in Fiscal 1996.
</TABLE>
The following unaudited pro forma table illustrates sales and
operating income of the Company's operations by segment, on a pro forma
basis, as if the Company had operated in a consistent manner for the past
three years ended June 30, 1997, 1996 and 1995. The pro forma results are
based on the historical financial statements of the Company and Banner as
though the Disposition and consolidation of Banner had been in effect since
the beginning of each period. The pro forma information is not necessarily
indicative of the results of operations that would actually have occurred
if the transactions had been in effect since the beginning of each period,
nor is it necessarily indicative of future results of the Company.
<TABLE>
<CAPTION>
For the years ended June 30,
(In thousands) --------------------------------
1997 1996 1995
Pro Forma Sales by Segment: -------- -------- --------
<S> <C> <C> <C>
Aerospace Fasteners (a)........... $269,026 $197,099 $190,287
Aerospace Distribution............ 187,768 153,830 108,359
Corporate and Other............... 66,382 67,330 41,476
Eliminations...................... (29) -- --
------- ------- -------
$523,147 $418,259 $340,122
======= ======= =======
Pro Forma Operating Income (Loss)
by Segment:
Aerospace Fasteners (a)........... $ 17,390 $ (2,639) $(15,736)
Aerospace Distribution ........... 8,272 5,431 (9,995)
Corporate and Other............... (17,764) (14,876) (20,420)
------- ------- -------
Operating income (loss)............. $ 7,898 $(12,084) $(46,151)
======= ======= =======
(a) Fiscal 1997 results include sales of $27.2 million and operating
income of $1.2 million provided by Simmonds since its acquisition in
February 1997.
</TABLE>
Consolidated Results
- --------------------
Net sales of $731.9 million in Fiscal 1997 improved significantly by
$322.4 million, or 78.7%, compared to sales of $409.5 million in Fiscal
1996. Sales growth was stimulated by the resurgent commercial aerospace
industry, together with the effects of several strategic business
combinations over the past 18 months. Net sales in Fiscal 1996 were up
59.3% from Fiscal 1995 reflecting strong sales performances from the
Aerospace Fasteners segment and Fairchild Technologies ("FT"), included in
the Corporate and Other business segment, and the inclusion of four months
of sales from the Aerospace Distribution segment. On a pro forma basis,
net sales increased 25.1% and 23.0% in Fiscal 1997 and 1996, respectively,
as compared to the previous Fiscal periods.
Gross Margin as a percentage of sales was 28.0%, 23.2%, and 14.6% in
Fiscal 1997, 1996, and 1995, respectively. The increase in the current
year was attributable to higher revenues combined with continued
productivity improvements achieved during Fiscal 1997. The increase in
Fiscal 1996 compared to Fiscal 1995 was due to consolidation of plants,
elimination of product lines, substantial downsizing and new productivity
programs put in place.
Selling, General & Administrative expense as a percentage of sales was
21.8%, 23.9%, and 25.6% in Fiscal 1997, 1996, and 1995, respectively. The
increase in the current year was attributable primarily to the increase in
selling and marketing costs incurred to support the increase in sales.
The decrease in Fiscal 1996 compared to Fiscal 1995 was due primarily to
the positive results obtained from restructuring and downsizing programs
put in place earlier.
Operating income of $30.5 million in Fiscal 1997 increased $39.6
million compared to operating income of $9.1 million in Fiscal 1996. The
increase in operating income was due primarily to the current year's growth
in sales and increased operational efficiencies. Operating income in
Fiscal 1996 improved by $22.8 million over Fiscal 1995 due primarily to
improved cost efficiencies applied in the Aerospace Fasteners segment and
the sales increase from FT in the Corporate and Other business segment. On
a pro forma basis, operating income increased $20.0 million in Fiscal 1997,
as compared to Fiscal 1996, and $34.1 million in Fiscal 1996, as compared
to Fiscal 1995.
Net interest expense decreased 15.5% in Fiscal 1997 compared to Fiscal
1996, and decreased 12.1% in Fiscal 1996 compared to Fiscal 1995. The
decreases are due to lower borrowings as a result of the sale of DME and
the Merger, both of which significantly reduced the Company's total debt.
Investment income, net, was $6.7 million, $4.6 million and $5.7
million in Fiscal 1997, 1996, and 1995, respectively. The 45.4% increase in
Fiscal 1997 is due primarily to realized gains from the sale of investments
in Fiscal 1997. The 19.8% decrease in Fiscal 1996 resulted from losses
realized on the write-off of two foreign investments.
Equity in earnings of affiliates decreased $0.2 million in Fiscal
1997, compared to Fiscal 1996, and increased $3.2 million in Fiscal 1996,
compared to Fiscal 1995. The current year's decrease is attributable to
the lower earnings of Nacanco. The prior year's increase was due primarily
to higher earnings from Nacanco, which improved the Company's equity in
earnings by $2.6 million.
Nonrecurring income in Fiscal 1997 includes the $2.5 million gain from
the sale of SBC.
Income Taxes included a $5.2 million tax benefit in Fiscal 1997 on a
pre-tax loss of $7.0 million from continuing operations. The tax benefit
was due primarily to reversing Federal income taxes previously provided due
to a change in the estimate of the required tax accruals. In Fiscal 1996,
the tax benefit from the loss from continuing operations was $26.3 million.
Earnings from discontinued operations, net, include the earnings, net
of tax, from STFI in Fiscal 1997 and 1996, and FCS, DME and Data in Fiscal
1996 and 1995.
The $53.6 million gain on disposal of discontinued operations resulted
primarily from the sale of DME to CMI in Fiscal 1996. Fiscal 1996 also
includes a $163.1 million nontaxable gain resulting from the Merger.
Extraordinary items, net, resulted from premiums paid for, and
redemption costs and consent fees associated with, the retirement of the
Senior Notes and the write off of deferred loan fees, related primarily to
Senior Notes and bank debt extinguished prior to maturity. This totaled
$10.4 million, net of a tax benefit, in Fiscal 1996.
Net earnings in Fiscal 1997, compared to Fiscal 1996, after excluding
the gain on sale of discontinued operations of $163.1 million from the
Merger and the $53.6 million gain on sale of discontinued operations in
1996 from the sale of DME, improved $28.3 million, reflecting a $39.6
million improvement in operating profit. The net earnings increased $223.5
million in Fiscal 1996, compared to Fiscal 1995, due primarily to the gain,
net of tax, from the sale of discontinued operations.
Segment Results
- ---------------
Aerospace Fasteners Segment
- ---------------------------
Sales in the Aerospace Fasteners segment increased by $51.0 million to
$269.0 million, up 23.4% in Fiscal 1997, compared to the Fiscal 1996
period, reflecting significant growth in the commercial aerospace industry
combined with the Simmonds acquisition. New orders have been strong in
recent months resulting in a backlog of $195.7 million at June 30, 1997, up
from $109.9 million at June 30, 1996. Sales increased slightly in Fiscal
1996 compared to Fiscal 1995. The Harco division was transferred to the
Aerospace Distribution segment on February 25, 1996. On a pro forma basis,
sales increased 36.5% in Fiscal 1997, compared to Fiscal 1996 and 3.6% in
Fiscal 1996, compared to Fiscal 1995.
Operating income improved from breakeven to $17.4 million during
Fiscal 1997, compared to Fiscal 1996. This improvement was achieved as a
result of accelerated growth in the commercial aerospace industry,
particularly in the second half of the year. Certain efficiencies achieved
during Fiscal 1997 continued to have positive effects on operating income.
Operating income was positive in the Aerospace Fasteners segment, which was
an $11.6 million improvement in the Fiscal 1996 period over the
corresponding Fiscal 1995 period. During Fiscal 1996, operating losses
decreased significantly in the Aerospace Fasteners segment, due primarily
to the cost of management changes, consolidation of plants, eliminating
unprofitable product lines, pricing adjustments, substantial work force
downsizing and new productivity, quality and marketing programs. A
restructuring charge of $2.3 million was recorded in Fiscal 1996, primarily
for severance pay to employees terminated as a result of further
downsizing. On a pro forma basis, operating income increased $20.0 million
in Fiscal 1997, as compared to Fiscal 1996, and $13.1 million in Fiscal
1996, as compared to Fiscal 1995.
Aerospace Distribution Segment
- ------------------------------
Aerospace Distribution sales were up $281.8 million and operating
income was up $25.3 million, primarily the result of reporting twelve
months in Fiscal 1997 versus four months in Fiscal 1996. On a twelve-month
pro forma basis sales were up $33.9 million, or 22.1%, and operating income
was up $2.8 million, or 52.3%. Sales increases in all three groups,
hardware, rotables and engines contributed to these strong results. This
segment has benefited from the extended service lives of existing aircraft,
growth from acquisitions and internal growth, which has increased market
share.
In Fiscal 1996, as a result of the transfer of Harco to Banner
effective February 25, 1996, the Company recorded four months of sales and
operating income of Banner, including Harco as part of the Aerospace
Distribution segment. This segment reported $130.0 million in sales and
$5.6 million in operating income for this four-month period ended June 30,
1996. In Fiscal 1996, the first eight months of Harco's sales and operating
income were included in the Aerospace Fasteners segment.
Corporate and Other
- -------------------
The Corporate and Other segment includes Fairchild Technologies,
Camloc Gas Springs Division and Fairchild Scandinavian Bellyloading Co. AB
(SBC) (formerly the Technology Products segment). Sales improved at SBC
which, was sold effective as of Fiscal 1997 year-end. Over the past three
years, corporate administrative expense as a percentage of sales has
decreased from 5.1% in 1995 to 3.5% in 1996 to 2.2% in 1997.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities for the fiscal years ended June
30, 1997 and 1996 amounted to $97.0 million and $48.7 million,
respectively. The primary use of cash for operating activities in fiscal
1997 was an increase in accounts receivable of $56.0 million and
inventories of $46.4 million which was mainly to support the Company's
sales growth. The primary use of cash for operating activities in fiscal
1996 was a decrease in accounts payable, accrued liabilities and other long-
term liabilities of $36.5 million.
Net cash provided from investing activities for the fiscal years ended
June 30, 1997 and 1996 amounted to $80.0 million and $57.5 million,
respectively. The primary source of cash from investing activities in
fiscal 1997 was the sale of discontinued operations, including DME, of
$173.7 million, which was slightly offset by the acquisition of
subsidiaries in the amount of $55.9 million. The primary source of cash
from investing activities in fiscal 1996 was the sale of discontinued
operations of $71.6 million.
Net cash used for financing activities for the fiscal years ended June
30, 1997 and 1996 amounted to $1.5 million and $39.4 million, respectively.
The primary use of cash for financing activities in fiscal 1997 was the
repayment of debt and the repurchase of debentures of $157.0 million offset
by proceeds from the issuance of additional debt of $154.4 million. The
primary use of cash for financing activities in fiscal 1996 was the
repayment of debt and the repurchase of debentures of $198.8 million which
was partially offset by proceeds from the issuance of additional debt of
$157.9 million.
The Company intends to issue three million shares of common stock (the
"Offering") and enter into a New Credit Facility that will provide for
total lending commitments of up to $300 million. The New Credit Facility
will be comprised of a revolving credit facility and a term loan facility.
With the proceeds of the Offering, borrowings under the New Credit
Facility and the after tax proceeds the Company has already received from
the STFI Sale, the Company will refinance substantially all of its existing
indebtedness (other than indebtedness at Banner), consisting of the 11 7/8%
Senior Debentures due 1999, the 12% Intermediate Debentures due 2001, the
13 1/8% Subordinated Debentures due 2006, the 13% Junior Subordinated
debentures due 2007 and its existing bank indebtedness. The Refinancing
will reduce the Company's total net indebtedness by approximately $132
million and will reduce the Company's annual interest expense, on a pro
forma basis, by approximately $21 million. The completion of the STFI Sale
will reduce the Company's annual interest expense by approximately $3
million. In addition, a portion of the proceeds from the Disposition will
be used to repay all of Banner's outstanding bank indebtedness, which will
further reduce the Company's annual interest expense by an additional $14
million.
The Company's principal cash requirements include debt service,
capital expenditures, acquisitions, and payment of other liabilities. Other
liabilities that require the use of cash include post-employment benefits
for retirees, environmental investigation and remediation obligations, and
litigation settlements and related costs. The Company expects that cash on
hand, cash generated from operations, and cash from borrowings and asset
sales will be adequate to satisfy cash requirements.
On November 20, 1997, STFI, a corporation of which the Company owns
approximately 42% of the outstanding common stock, entered into a merger
agreement with Intermedia pursuant to which holders of STFI common stock
will receive $15.00 per share in cash. In connection with the STFI Sale the
Company has received approximately $85 million in cash (before tax) in
exchange for certain preferred stock of STFI and expects to receive an
additional $93 million in cash (before tax) during the first three months
of 1998 in exchange for the 6,225,000 shares of common stock of STFI owned
by the Company. The Intermedia transaction replaces an earlier merger
agreement with the Tel-Save Holdings, Inc. under which the Company would
have received consideration primarily in common stock of Tel-Save Holdings,
Inc.
On December 8, 1997, Banner and eight of its subsidiaries entered into
an Asset Purchase Agreement pursuant to which such subsidiaries have agreed
to transfer substantially all of their assets to AlliedSignal Inc.
("Allied") for approximately $345 million of common stock of Allied. The
assets to be transferred to Allied pursuant to the Asset Purchase Agreement
consist primarily of Banner's hardware group, which includes the
distribution of bearings, nuts bolts, screws, rivets and other type of
fasteners. Approximately $170 million of the consideration received from
the Disposition will be used to repay outstanding term loans of Banner's
subsidiaries and related fees. Consummation of the Disposition is subject
to certain conditions. The Company is effecting the Disposition to
concentrate its efforts on the rotables and jet engine businesses
and because the Disposition presented a unique opportunity to realize a
significant return on the sale of the hardware group.
The increase in the Company's shareholder's equity is expected to be
approximately $36,501 resulting from the gain on sale projected to be
recorded at the closing of the Disposition of $103,379 and an estimated
tax provision of $41,826 and a minority interest effect of $25,052. The
operating income (loss) of the subsidiaries included in the Disposition
was $22,619 and $6,049 for fiscal year 1997 and the three months ended
September 28, 1997. Whereas the Company will no longer benefit from the
operations of the disposed Banner subsidiaries it expects to benefit from
lower interest expense and dividends paid on the Allied stock.
The Company may effect a spin-off of certain non-aerospace assets as soon
as is reasonably practicable following receipt of a solvency opinion
relating to these assets and all necessary governmental and third party
approvals (the "Spin-Off"). The solvency opinion with respect to the Spin-
Off is required by the Company's lenders and board of directors. In order
to effect a Spin-Off, approval is required from the board of directors of
the Company, however, shareholder approval is not required. The ability of
the Company to consummate a Spin-Off is contingent, among other things, on
the ability of the Company to obtain consents and waivers under the
Company's existing indebtedness and the New Credit Facility. The Company is
presently in negotiations with its lenders regarding obtaining such
consents and waivers and at the present time the Company has not reached an
agreement with its lenders that will allow the Company to consummate a Spin-
Off. There is no assurance that the Company will be able to obtain the
necessary consents and waivers from its lenders and consequently there is
no assurance that the Company will be able to consummate a Spin-Off. In
addition, the Company may encounter unexpected delays in effecting a Spin-
Off, and the Company can make no assurance as to the timing thereof. In
addition, prior to the consummation of a Spin-Off, the Company may sell,
restructure or otherwise change the assets and liabilities that will be in
Spin-Off, or for other reasons elect not to consummate a Spin-Off.
Consequently, there can be no assurance that a Spin-Off will occur.
In connection with the Spin-Off, it is anticipated that the Company
will enter into an indemnification agreement pursuant to which the
resulting Spin-Off company will assume and be solely responsible for all
known and unknown past, present and future claims and liabilities of any
nature relating to the Pension Reversion Case (as described under "Business-
- -Legal Proceedings"); certain environmental liabilities currently recorded
as $8.3 million, but for which it is reasonably possible the total expense
could be $13.0 million; certain retiree medical cost and liabilities
related to discontinued operations for which the Company has accrued
approximately $31.3 million as of September 28, 1997 (see Note 11 to the
Company's Consolidated Financial Statements); and certain tax liabilities.
In addition, the Spin-Off company would also be responsible for all
liabilities relating to the Technologies business. Responsibility for such
liabilities would require significant commitments.
Should a Spin-Off, as presently contemplated, occur prior to June of
1999, a Spin-Off will be a taxable transaction to shareholders of the
Company and could result in a material tax liability to the Company and its
stockholders. The amount of the tax to the Company and the Shareholders is
uncertain, and if the tax is material to the Company, the Company may elect
not to consummate a Spin-Off. Because circumstances may change and because
provisions of the Internal Revenue Code of 1986, as amended, may be further
amended from time to time, the Company may, depending on various factors,
restructure or delay the timing of a Spin-Off to minimize the tax
consequences thereof to the Company and its stockholders.
With the year 2000 approaching, the Company is preparing all of its
computer systems to be Year 2000 compliant. Substantially all of the
systems within the Aerospace Fasteners segment are currently Year 2000
compliant. The Company expects to replace and upgrade some systems, which
are not Year 2000 compliant, within the Aerospace Distribution segment and
at Fairchild Technologies. The Company expects all of its systems will be
Year 2000 compliant on a timely basis. However, there can be no assurance
that the systems of other companies, on which the Company's systems rely,
will also be timely converted. Management is currently evaluating the cost
of ensuring that all systems are Year 2000 compliant.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
In October 1996, the American Institute of Certified Public
Accountants issued Statement of Position 96-1 ("SOP 96-1") "Environmental
Remediation Liabilities". SOP 96-1 provides authoritative guidance on
specific accounting issues related to the recognition, measurement, and
display and disclosure of environmental remediation liabilities. The
Company is required to implement SOP 96-1 in Fiscal 1998. The Company's
present policy is similar to the policy prescribed by SOP 96-1, therefore,
there will be no effect from implementation.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued two pronouncements, Statement of Financial Accounting Standards No.
128 ("SFAS 128") "Earnings Per Share", and Statement of Financial
Accounting Standards No. 129 ("SFAS 129") "Disclosure of Information about
Capital Structure". SFAS 128 establishes accounting standards for
computing and presenting earnings per share ("EPS"). SFAS 128 is effective
for periods ending after December 15, 1997, including interim periods, and
requires restatement of all prior period EPS data presented. Results from
the calculation of simple and diluted earnings per share, as prescribed by
SFAS 128, would not be materially different from the calculations for
primary and fully diluted earnings per share for years ending June 30, 1997
and June 30, 1996. SFAS 129 establishes standards for disclosure of
information about the Company's capital structure and becomes effective for
periods ending after December 15, 1997.
In June 1997, FASB issued two pronouncements, Statement of Financial
Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income",
and Statement of Financial Accounting Standards No. 131 ("SFAS 131")
"Disclosures about Segments of an Enterprise and Related Information".
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. SFAS 131 supersedes
Statement of Financial Accounting Standards No. 14 "Financial Reporting for
Segments of a Business Enterprise" and requires that a public company
report certain information about its operating segments in annual and
interim financial reports. The Company will adopt SFAS 130 and SFAS 131 in
Fiscal 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The following consolidated financial statements of the Company and the
report of the Company's independent public accountants with respect
thereto, are set forth below.
Page
----
Consolidated Balance Sheets as of June 30, 1997 and 1996...... 28
Consolidated Statements of Earnings For The Three Years Ended
June 30, 1997, 1996, and 1995................................. 30
Consolidated Statements of Stockholders' Equity For The Three
Years Ended June 30, 1997, 1996, and 1995..................... 32
Consolidated Statements of Cash Flows For The Three Years
Ended June 30, 1997, 1996, and 1995........................... 33
Notes to Consolidated Financial Statements.................... 35
Report of Independent Public Accountants...................... 69
Supplementary data regarding "Quarterly Financial Information (Unaudited)"
is set forth under Item 8 in Note 23 to Consolidated Financial Statements.
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
June 30, June 30,
ASSETS 1997 1996
- ------ -------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents..................... $ 19,420 $ 39,649
(of which $4,839 and $8,224 is restricted)
Short-term investments........................ 25,647 10,498
Accounts receivable-trade, less allowances
of $8,103 and $6,327........................ 168,163 98,694
Notes receivable.............................. -- 170,384
Inventories:
Finished goods............................. 297,223 236,263
Work-in-process............................ 26,887 16,294
Raw materials.............................. 18,626 18,586
--------- ---------
342,736 271,143
Prepaid expenses and other current assets..... 33,631 19,275
--------- ---------
Total Current Assets.......................... 589,597 609,643
Property, plant and equipment, net............ 128,712 87,956
Net assets held for sale...................... 26,147 45,405
Cost in excess of net assets acquired,
(Goodwill) less accumulated amortization of
$36,672 and $31,912.......................... 154,808 140,201
Investments and advances, affiliated companies 55,678 53,471
Deferred loan costs........................... 9,252 7,825
Prepaid pension assets........................ 59,742 57,660
Long-term investments......................... 4,120 585
Notes receivable and other assets............. 39,277 7,192
--------- ---------
Total Assets.................................. $1,067,333 $1,009,938
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<CAPTION>
June 30, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- ------------------------------------ -------- --------
<S> <C> <C>
Current Liabilities:
Bank notes payable and current maturities
of long-term debt........................... $ 47,422 $ 84,892
Accounts payable............................. 84,953 65,478
Accrued salaries, wages and commissions...... 19,166 17,367
Accrued insurance............................ 15,397 16,340
Accrued interest............................. 16,011 10,748
Other........................................ 54,625 37,302
Income taxes................................. 5,881 24,635
--------- ---------
Total Current Liabilities.................... 243,455 256,762
Long-term debt............................... 416,922 368,589
Other long-term liabilities.................. 23,622 18,605
Retiree health care liabilities.............. 43,387 44,452
Noncurrent income taxes...................... 42,013 31,737
Minority interest in subsidiaries............ 68,309 58,625
--------- ---------
Total Liabilities............................ 837,708 778,770
Stockholders' Equity:
Class A common stock, 10 cents par value;
authorized 40,000,000 shares, 20,233,879,
(19,997,756 in 1996) shares issued, and
13,992,283 (13,756,160 in 1996) shares
outstanding................................ 2,023 2,000
Class B common stock, 10 cents par value;
authorized 20,000,000 shares, 2,632,516
shares issued and outstanding (2,633,704 in
1996)...................................... 263 263
Paid-in capital.............................. 71,015 69,366
Retained earnings............................ 209,949 208,618
Cumulative translation adjustment............ (1,860) 2,760
Net unrealized holding loss on available-for-
sale securities............................ (46) (120)
Treasury stock, at cost, 6,241,596 shares of
Class A common stock....................... (51,719) (51,719)
--------- ---------
Total Stockholders' Equity................... 229,625 231,168
--------- ---------
Total Liabilities and Stockholders' Equity... $1,067,333 $1,009,938
========= =========
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
(In thousands, except per share data)
<CAPTION>
For the Years Ended June
30,
--------------------------
- ------
1997 1996
1995
-------- -------- --
- ------
<S> <C> <C>
<C>
Revenue:
Net sales of products...................... $731,960 $409,520
$256,840
Other income (expense)..................... (658) 635
1,169
------- ------- -
- ------
731,302 410,155
258,009
Costs and expenses:
Cost of goods sold......................... 526,837 314,609
219,226
Selling, general & administrative.......... 161,309 98,075
65,830
Research and development................... 7,807 94
974
Amortization of goodwill................... 4,832 4,173
3,896
Restructuring.............................. -- 2,319
- --
------- ------- -
- ------
700,785 419,270
289,926
Operating income (loss)...................... 30,517 (9,115)
(31,917)
Interest expense............................. 52,493 64,658
67,742
Interest income.............................. (4,695) (8,072)
(3,371)
------- ------- -
- ------
Net interest expense......................... 47,798 56,586
64,371
Investment income, net....................... 6,651 4,575
5,705
Equity in earnings of affiliates............. 4,598 4,821
1,607
Minority interest............................ (3,514) (1,952)
(2,293)
Nonrecurring income.......................... 2,528 (1,724)
- --
------- ------- -
- ------
Earnings (loss) from continuing
operations before taxes.................... (7,018) (59,981)
(91,269)
Income tax benefit........................... 5,200 26,320
33,506
------- ------- -
- ------
Earnings (loss) from continuing operations... (1,818) (33,661)
(57,763)
Earnings from discontinued operations, net... 3,149 17,087
23,843
Gain (loss) on disposal of discontinued
operations, net............................ -- 216,716
(259)
------- ------- -
- ------
Earnings (loss) before extraordinary items... 1,331 200,142
(34,179)
Extraordinary items, net..................... -- (10,436)
355
------- ------- -
- ------
Net earnings (loss).......................... $ 1,331 $189,706
$(33,824)
======= =======
=======
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
(In thousands, except per share data)
<CAPTION>
For the Years Ended June 30,
-------------------------------
- -
1997 1996 1995
-------- -------- -------
- -
<S> <C> <C> <C>
Primary Earnings (Loss) Per Share:
Earnings (loss) from continuing
operations........................... $ (.10) $ (2.03) $
(3.59)
Earnings from discontinued operations,
net.................................. .18 1.03 1.48
Gain (loss) on disposal of discontinued
operations, net...................... -- 13.06
(.01)
------- ------- ------
- -
Earnings (loss) before extraordinary
items................................ .08 12.06
(2.12)
Extraordinary items, net............... -- (.63) .02
------- ------- ------
- -
Net earnings (loss) per share.......... $ .08 $ 11.43 $
(2.10)
======= =======
=======
Fully Diluted Earnings (Loss) Per Share:
Earnings (loss) from continuing
operations........................... $ (.10) $ (1.97) $
(3.59)
Earnings from discontinued operations,
net.................................. .18 1.00 1.48
Gain (loss) on disposal of discontinued
operations, net...................... -- 12.67
(.01)
------- ------- ------
- -
Earnings (loss) before extraordinary
items................................ .08 11.70
(2.12)
Extraordinary items, net............... -- (.61) .02
------- ------- ------
- -
Net earnings (loss) per share.......... $ .08 $ 11.09 $
(2.10)
======= =======
=======
Weighted Average Number of Shares used
in Computing Earnings Per Share:
Primary.................................. 17,230 16,600 16,103
Fully diluted............................ 17,321 17,100 16,103
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 STOCKHOLDERS' EQUITY
(In thousands)
<CAPTION>
Class A Class B Cumulative
Common Common Paid-in Retained Translation Treasury
Stock Stock Capital Earnings Adjustment Stock
Other Total
----- ----- ------- -------- ----------- ------- --
- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
<C>
Balance, July 1, 1994 $1,965 $ 270 $66,775 $52,736 $ 872 $(51,719)
$(1,405) $69,494
Net loss.............. - - - (33,824) - -
- - (33,824)
Cumulative translation
adjustment, net...... - - - - 2,989 -
- - 2,989
Gain on purchase of
preferred stock of
subsidiary........... - - 236 - - -
- - 236
Reduction of minimum
liability for pensions - - - - - -
1,405 1,405
Net unrealized holding
loss on available-for-
sale securities...... - - - - - -
(120) (120)
----- ---- ------ ------ ------ ------- --
- ---- -------
Balance, June 30, 1995 1,965 270 67,011 18,912 3,861 (51,719)
(120) 40,180
Net earnings.......... - - - 189,706 - -
- - 189,706
Cumulative translation
adjustment, net...... - - - - (1,101) -
- - (1,101)
Fair market value of
stock warrants issued - - 1,148 - - -
- - 1,148
Proceeds received from
options exercised.... 28 - 1,481 - - -
- - 1,509
Exchange of Class B
for Class A common
stock................ 7 (7) - - - -
- - -
Gain realized on
retirement of
preferred stock of
subsidiary........... - - (274) - - -
- - (274)
----- ---- ------ ------- ------ ------- --
- ---- -------
Balance, June 30, 1996 2,000 263 69,366 208,618 2,760 (51,719)
(120) 231,168
Net earnings.......... - - - 1,331 - -
- - 1,331
Cumulative translation
adjustment, net...... - - - - (4,620) -
- - (4,620)
Fair market value of
stock warrants issued - - 546 - - -
- - 546
Proceeds received from
options exercised.... 23 - 1,103 - - -
- - 1,126
Net unrealized holding
gain on available-for-
sale securities...... - - - - - -
74 74
----- ---- ------ ------- ------ ------- --
- ---- -------
Balance, June 30, 1997 $2,023 $ 263 $71,015 $209,949 $(1,860) $(51,719) $
(46) $229,625
===== ==== ====== ======= ====== =======
====== =======
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 CASH FLOWS
(In thousands)
<CAPTION>
For the Years
Ended June 30,
------------------
- --------------
1997 1996
1995
Cash flows from operating activities: -------- ------
- -- --------
<S> <C> <C>
<C>
Net earnings (loss)................................... $ 1,331 $
189,706 $ (33,824)
Adjustments to reconcile net earnings (loss) to net
cash used for operating activities:
Depreciation and amortization..................... 25,935
21,653 20,879
Accretion of discount on long-term liabilities.... 4,963
4,686 4,773
Net gain on the merger of subsidiaries............ --
(162,703) --
Net gain on the sale of discontinued operations... --
(53,942) --
Extraordinary items, net of cash payments......... --
4,501 --
Provision for restructuring (excluding cash
payments of $777 in 1996)....................... --
1,542 --
(Gain) loss on sale of property, plant and
equipment....................................... (72)
(9) 655
Undistributed earnings of affiliates.............. (2,329)
(3,829) (500)
Minority interest................................. 3,514
1,952 2,293
Change in trading securities...................... (5,733)
(5,346) 1,879
Change in receivables............................. (55,965)
(7,677) (3,623)
Change in inventories............................. (46,389)
(10,747) (8,578)
Change in other current assets.................... (14,237)
(1,468) (3,039)
Change in other non-current assets................ (17,859)
1,030 3,492
Change in accounts payable, accrued liabilities,
and other long-term liabilities................. 8,610
(41,255) (21,541)
Non-cash charges and working capital changes of
discontinued operations......................... 1,274
13,169 11,609
-------- ------
- -- --------
Net cash used for operating activities................ (96,957)
(48,737) (25,525)
Cash flows from investing activities:
Proceeds received from (used for) investment
securities, net..................................... (12,951)
265 12,281
Purchase of property, plant and equipment............. (22,116)
(6,622) (5,911)
Proceeds from sale of property, plant and equipment... 213
122 151
Equity investments in affiliates...................... --
(2,361) (1,051)
Minority interest in subsidiaries..................... (1,610)
(2,817) --
Acquisition of subsidiaries, net of cash acquired..... (55,916) --
(607)
Net proceeds from the sale of discontinued operations. 173,719
71,559 --
Changes in net assets held for sale................... 385
5,894 1,441
Investing activities of discontinued operations....... (1,749)
(8,500) (25,460)
-------- ------
- -- --------
Net cash (used for) provided by investing activities. 79,975
57,540 (19,156)
Cash flows from financing activities:
Proceeds from issuance of debt........................ 154,394
157,877 71,712
Debt repayments and repurchase of debentures.......... (156,975)
(197,825) (57,417)
Issuance of Class A common stock...................... 1,126
1,509 --
Financing activities of discontinued operations....... --
(936) (1,950)
-------- ------
- -- --------
Net cash provided by (used for) financing activities.. (1,455)
(39,375) 12,345
Effect of exchange rate changes on cash............... (1,792)
(961) 1,150
Net decrease in cash and cash equivalents............. (20,229)
(31,533) (31,186)
Cash and cash equivalents, beginning of the year...... 39,649
71,182 102,368
-------- ------
- -- --------
Cash and cash equivalents, end of the year............ $ 19,420 $
39,649 $ 71,182
========
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Corporate Structure: The Fairchild Corporation (the "Company") was
incorporated in October 1969, under the laws of the State of Delaware. RHI
Holdings, Inc. ("RHI") is a direct subsidiary of the Company. RHI is the
owner of 100% of Fairchild Holding Corp. ("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"). The Company's investment in STFI resulted from a
March 13, 1996 Merger of the Communications Services Segment of the Company
with Shared Technologies, Inc. (See Note 3). The proposed sale of STFI to
Intermedia Communications Inc., as discussed in Note 24, completes the
disposition of the Communications Services Segment. The Company's financial
statements have been restated to present the results of the Communications
Services Segment and STFI as discontinued operations.
Fiscal Year: The fiscal year ("Fiscal") of the Company ends June 30.
All references herein to "1997", "1996", and "1995" mean the fiscal years
ended June 30, 1997, 1996 and 1995, respectively.
Consolidation Policy: The accompanying consolidated financial
statements are prepared in accordance with generally accepted accounting
principles and include the accounts of the Company and all of its wholly-
owned and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Investments in companies in which ownership interest range from 20 to 50
percent are accounted for using the equity method (see Note 9).
Cash Equivalents/Statements of Cash Flows: For purposes of the
Statements of Cash Flows, the Company considers all highly liquid
investments with original maturity dates of three months or less as cash
equivalents. Total net cash disbursements (receipts) made by the Company
for income taxes and interest were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest....................... $ 48,684 $ 66,843 $ 66,262
Income Taxes................... (1,926) 9,279 (3,056)
</TABLE>
Restricted Cash: On June 30, 1997 and 1996, the Company had
restricted cash of $4,839 and $8,224, respectively, all of which is
maintained as collateral for certain debt facilities. Cash investments are
in short-term certificates of deposit.
Investments: Management determines the appropriate classification of
its investments at the time of acquisition and reevaluates such
determination at each balance sheet date. Trading securities are carried
at fair value, with unrealized holding gains and losses included in
earnings. Available-for-sale securities are carried at fair value, with
unrealized holding gains
and losses, net of tax, reported as a separate component of stockholders'
equity. Investments in equity securities and limited partnerships that do
not have readily determinable fair values are stated at cost and are
categorized as other investments. Realized gains and losses are determined
using the specific identification method based on the trade date of a
transaction. Interest on corporate obligations, as well as dividends on
preferred stock, are accrued at the balance sheet date.
Inventories: Inventories are stated at the lower of cost or market.
Cost is determined using the last-in, first-out ("LIFO") method at
principal domestic aerospace manufacturing operations and using the first-
in, first-out ("FIFO") method elsewhere. If the FIFO inventory valuation
method had been used exclusively, inventories would have been approximately
$4,868 and $4,756 higher at June 30, 1997 and 1996, respectively.
Inventories from continuing operations are valued as follows:
<TABLE>
<CAPTION>
June 30, June 30,
(In thousands) 1997 1996
-------- --------
<S> <C> <C>
First-in, first-out (FIFO)................. $ 312,840 $ 239,800
Last-in, first-out (LIFO).................. 29,896 31,343
-------- --------
Total inventories.......................... $ 342,736 $ 271,143
======== ========
</TABLE>
Properties and Depreciation: The cost of property, plant and
equipment is depreciated over estimated useful lives of the related assets.
The cost of leasehold improvements is depreciated over the lesser of the
length of the related leases or the estimated useful lives of the assets.
Depreciation is computed using the straight-line method for financial
reporting purposes and using accelerated depreciation methods for Federal
income tax purposes. No interest costs were capitalized in any of the
years presented. Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
-------- --------
<S> <C> <C>
Land....................................... $ 13,438 $ 10,408
Buildings and improvements................. 56,124 40,853
Machinery and equipment.................... 158,944 94,406
Transportation vehicles.................... 899 767
Furniture and fixtures..................... 26,815 18,466
Construction in progress................... 6,524 2,329
------- -------
262,744 167,229
Less: Accumulated depreciation............ (134,032) (79,273)
------- -------
Net property, plant and equipment.......... $128,712 $ 87,956
======= =======
</TABLE>
Amortization of Goodwill: Goodwill, which represents the excess of
the
cost of purchased businesses over the fair value of their net assets at
dates of acquisition, is being amortized on a straight-line basis over 40
years.
Deferred Loan Costs: Deferred loan costs associated with various debt
issues are being amortized over the terms of the related debt, based on the
amount of outstanding debt, using the effective interest method.
Amortization expense for these loan costs for 1997, 1996 and 1995 was
$2,847, $3,827, and $3,794, respectively.
Impairment of Long-Lived Assets: In Fiscal 1997, the Company adopted
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. The Company
reviews its long-lived assets, including property, plant and equipment,
identifiable intangibles and goodwill, for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets
may not be fully recoverable. To determine recoverability of its long-
lived assets the Company evaluates the probability that future undiscounted
net cash flows will be less than the carrying amount of the assets.
Impairment is measured based on the difference between the carrying amount
of the assets and fair value. The implementation of SFAS 121 did not have
a material effect on the Company's consolidated results of operations.
Foreign Currency Translation: For foreign subsidiaries whose
functional currency is the local foreign currency, balance sheet accounts
are translated at exchange rates in effect at the end of the period and
income statement accounts are translated at average exchange rates for the
period. The resulting translation gains and losses are included as a
separate component of stockholders' equity. Foreign transaction gains and
losses are included in other income and were insignificant in Fiscal 1997,
1996 and 1995.
Research and Development: The Company capitalizes software
development costs upon the establishment of technological feasibility. The
establishment of technological feasibility and the ongoing assessment of
recoverability require considerable judgment by management with respect to
certain external factors, including anticipated future revenues, estimated
economic life and changes in software and hardware technologies. Software
development costs are amortized on a straight-line basis over the lesser of
five years or the expected life of the product. All other Company-
sponsored research and development expenditures are expensed as incurred.
Capitalized software development costs were $3,651 at June 30, 1997.
Capitalization of interest and taxes: The Company capitalizes
interest expense and property taxes relating to property being developed.
Nonrecurring Income: Nonrecurring income in 1997 resulted from the
$2,528 gain recorded from the sale of Fairchild Scandinavian Bellyloading
Company ("SBC"), (See Note 2). Nonrecurring expense in 1996 resulted from
expenses incurred in 1996 in connection with other, alternative
transactions considered but not consummated.
Earnings Per Share: Primary and fully diluted earnings per share are
computed by dividing net income available to holders of the Company's
common stock, 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 and fully diluted earnings per share for 1997 and in
computing fully diluted earnings per share for 1996, the conversion of
options and warrants was assumed, as the effect was dilutive. In computing
primary earnings per share for Fiscal 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 Fiscal 1995, the conversion of options and warrants
was not assumed, as the effect was antidilutive.
Stock-Based Compensation: In Fiscal 1997, the Company implemented
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation". SFAS 123 establishes financial
accounting standards for stock-based employee compensation plans and for
transactions in which an entity issues equity instruments to acquire goods
or services from non-employees. As permitted by SFAS 123, the Company will
continue to use the intrinsic value based method of accounting prescribed
by APB Opinion No. 25, for its stock-based employee compensation plans.
Fair market disclosures required by SFAS 123 are included in Note 15.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications: Certain amounts in prior years' financial
statements have been reclassified to conform to the 1997 presentation.
Recently Issued Accounting Pronouncements: In October 1996, the
American Institute of Certified Public Accountants issued Statement of
Position 96-1 ("SOP 96-1") "Environmental Remediation Liabilities". SOP 96-
1 provides authoritative guidance on specific accounting issues related to
the recognition, measurement, and the display and disclosure of
environmental remediation liabilities. The Company is required to
implement SOP 96-1 in Fiscal 1998. The Company's present policy is similar
to the policy prescribed by SOP 96-1; therefore there will be no effect
from implementation.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued two pronouncements, Statement of Financial Accounting Standards No.
128 ("SFAS 128") "Earnings Per Share", and Statement of Financial
Accounting Standards No. 129 ("SFAS 129") "Disclosure of Information about
Capital Structure". SFAS 128 establishes accounting standards for
computing and presenting earnings per share ("EPS"). SFAS 128 is effective
for periods ending after December 15, 1997, including interim periods, and
requires restatement of all prior period EPS data presented. Results from
the calculation of simple and diluted earnings per share, as prescribed by
SFAS 128, would not differ materially from the calculations for primary and
fully diluted earnings per share for the years ending June 30, 1997, 1996
and 1995. SFAS 129 establishes standards for disclosure of information
about the Company's capital structure and becomes effective for periods
ending after December 15, 1997.
In June 1997, FASB issued two pronouncements, Statement of Financial
Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income",
and Statement of Financial Accounting Standards No. 131 ("SFAS 131")
"Disclosures about Segments of an Enterprise and Related Information".
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. SFAS 131 supersedes
Statement of Financial Accounting Standards No. 14 "Financial Reporting for
Segments of a Business Enterprise" and requires that a public company
report certain information about its operating segments in annual and
interim financial reports. The Company will adopt SFAS 130 and SFAS 131 in
Fiscal 1998.
2. ACQUISITIONS
------------
The Company's acquisitions described in this section have been
accounted for using the purchase method. The purchase prices assigned to
the net assets acquired were based on the fair value of such assets and
liabilities at the respective acquisition dates.
In January 1997, Banner, through its subsidiary, Dallas Aerospace,
Inc., acquired PB Herndon Company ("PB Herndon") in a business combination
accounted for as a purchase. PB Herndon is a distributor of specialty
fastener lines and similar aerospace related components. The total cost of
the acquisition was $16,000, which exceeded the fair value of the net
assets of PB Herndon by approximately $3,451. The excess is being amortized
using the straight-line method over 40 years. The Company purchased PB
Herndon with available cash.
In February 1997, the Company completed a transaction (the "Simmonds
Acquisition") pursuant to which the Company acquired common shares and
convertible debt representing an 84.2% interest, on a fully diluted basis,
of Simmonds S.A. ("Simmonds"). The Company initiated a tender offer to
purchase the remaining shares and convertible debt held by the public. By
Fiscal year-end, the Company had purchased, or placed sufficient cash in
escrow to purchase, all the remaining shares and convertible debt of
Simmonds. The total purchase price of Simmonds, including the assumption
of debt, was approximately $62,000, which the Company funded with available
cash. The Company recorded approximately $13,000 in goodwill as a result
of this acquisition. Simmonds is one of Europe's leading manufacturers and
distributors of aerospace and automotive fasteners.
In September 1994, the Company acquired all of the outstanding common
stock of Fairchild Scandinavian Bellyloading Company AB ("SBC") for the
assumption of a minimal amount of debt. SBC is a designer and manufacturer
of a patented cargo loading system, which is installed in the cargo area of
commercial aircraft. On June 30, 1997, the Company sold all the patents of
SBC to Teleflex Incorporated ("Teleflex") for $5,000, and immediately
thereafter sold all the stock of SBC to a wholly owned subsidiary of
Teleflex for $2,000. The Company may also receive an additional amount of
up to $7,000 based on future net sales of SBC's patented products and
services. In Fiscal 1997, the Company recorded a $2,528 nonrecurring gain
as a result of these transactions.
On November 28, 1994, the Company's former Communications Services
segment completed the acquisition of substantially all of the
telecommunications assets of JWP Telecom, Inc. ("JWP") for approximately
$11,000, plus the assumption of approximately $3,000 of liabilities. JWP
is a telecommunications system integrator, specializing in the
distribution, installation and maintenance of voice and data communications
equipment.
Pro forma information is not required for these acquisitions.
3. MERGER AGREEMENT
----------------
The Company, RHI 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 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 surviving company renamed STFI. Prior to the
Merger, FII transferred all of its assets to, and all of its liabilities
were assumed by FHC, except for the assets and liabilities of FCSC, and
$223,500 of the FII's existing debt and preferred stock. As a result of
the Merger, the Company received shares of Common Stock and Preferred Stock
of STFI representing approximately a 41% ownership interest in STFI.
The Merger was structured as a reorganization under section
386(a)(1)(A) of the Internal Revenue Code of 1986, as amended. In 1996, the
Company recorded a $163,130 gain from this transaction. Subsequent to year-
end the Company entered into an agreement to sell its investment in STFI.
See Note 24 for further discussion.
4. MAJORITY INTEREST BUSINESS COMBINATION
--------------------------------------
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 increased the Company's
ownership of Banner common stock from approximately 47.2% to 59.3%,
resulting in the Company becoming the majority shareholder of Banner.
Accordingly, the Company has consolidated the results of Banner since
February 25, 1996. The Company recorded a $427 nonrecurring loss from
outside expenses incurred for this transaction in 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.
In May 1997, Banner granted all of its stockholders certain rights to
purchase Series A Convertible Paid-in-Kind Preferred Stock. In June 1997,
Banner received net proceeds of $33,876 and issued 3,710,955 shares of
preferred stock. The Company purchased $28,390 of the preferred stock
issued by Banner, increasing its voting percentage to 64.0%.
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, 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.
5. DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE
----------------------------------------------------
On February 22, 1996, pursuant to an Asset Purchase Agreement dated
January 26, 1996, the Company, through one of 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 $244,331, as adjusted. The sales price consisted of $74,000
in cash, and two 8% promissory notes in the aggregate principal amount of
$170,331 (together, the "8% CMI Notes"). On July 29, 1996, CMI paid in
full the 8% CMI Notes.
As a result of the sale of DME in 1996, the Company recorded a gain on
disposal of discontinued operations of approximately $54,012, net of a
$61,929 tax provision.
On January 27, 1996, FII completed the sale of Fairchild Data
Corporation ("Data") to SSE Telecom, Inc. ("SSE") for book value of
approximately $4,400 and 100,000 shares of SSE's common stock valued at
$9.06 per share, or $906, at January 26, 1996, and warrants to purchase an
additional 50,000 shares of SSE's common stock at $11.09 per share.
Accordingly, the results of DME and Data have been accounted for as
discontinued operations. The combined net sales of DME and Data totaled
$108,131 and $180,773 for 1996 and 1995, respectively. Net earnings from
discontinued operations was $9,186, net of $5,695 for taxes in 1996, and
$13,994, net of $10,183 for taxes in 1995.
Net assets held for sale at June 30, 1997, includes two parcels of
real estate in California, and several other parcels of real estate located
primarily throughout the continental United States, which the Company plans
to sell, lease or develop, subject to the resolution of certain
environmental matters and market conditions. Also included in net assets
held for sale are limited partnership interests in (i) a real estate
development joint venture, and (ii) a landfill development partnership.
Net assets held for sale are stated at the lower of cost or at
estimated net realizable value, which reflect anticipated sales proceeds,
and other carrying costs to be incurred during the holding period.
Interest is not allocated to net assets held for sale.
See Note 24 for discontinuance of STFI.
6. PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
-----------------------------------------
The following unaudited pro forma information for the twelve months
ended June 30, 1996 and June 30, 1995, provides the results of the
Company's operations as though (i) the disposition of DME and Data, (ii)
the Merger of FCSC, 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
aforementioned 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 is 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 is it necessarily indicative of future results of the
Company.
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Sales................................... $597,407 $481,991
Loss from continuing operations......... (15,766) (32,972)
Primary loss from continuing operations
per share............................. (.96) (2.05)
Net loss................................ (15,766) (32,876)
Primary net loss per share............ (.96) (2.04)
</TABLE>
The pro forma financial information has not been adjusted for
nonrecurring income and gains from disposal of discontinued operations that
have occurred from these transactions.
7. EXTRAORDINARY ITEMS
-------------------
During Fiscal 1996, the Company used the Merger transaction and cash
available to retire fully all of the FII's 12 1/4% senior notes ("Senior
Notes"), FII's 9 3/4% subordinated debentures due 1998, and bank loans
under a credit agreement of a former subsidiary of the Company, VSI
Corporation. 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, net of a tax
benefit, in 1996.
During Fiscal 1995, the Company recognized extraordinary gains and
losses from the early extinguishment of debt resulting from repurchases of
its debentures on the open market or in negotiated transactions, and the
write-offs of certain deferred costs associated with the issuance of
securities repurchased. Early extinguishment of the Company's debt
resulted in an extraordinary gain of $355, net of a tax provision, in 1995.
8. INVESTMENTS
-----------
Short-term investments at June 30, 1997, consist primarily of common
stock investments in public corporations which are classified as trading
securities. All other short-term investments and all long-term investments
do not have readily determinable fair values and primarily consist of
investments in preferred and common stocks of private companies and limited
partnerships. A summary of investments held by the Company consists of the
following:
<TABLE>
1997 1996
------------------- ------------------
Aggregate Aggregate
Name of Issuer or Fair Cost Fair Cost
Type of Each Issue Value Basis Value Basis
- ------------------- --------- ------- ---------- --------
<S> <C> <C> <C> <C>
Short-term investments:
- -----------------------
Trading securities:
Common stock.................... $16,094 $ 7,398 $10,362 $ 5,954
Other investments................. 9,553 9,553 136 136
------ ------ ------ ------
$25,647 $16,951 $10,498 $ 6,090
====== ====== ====== ======
Other long-term investments:
- ----------------------------
Other investments................. $ 4,120 $ 4,120 $ 585 $ 585
====== ====== ======
======
</TABLE>
Investment income is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Gross realized gain (loss) from sales.. $ 1,673 $ (1,744) $ 3,948
Change in unrealized holding gain
(loss) from trading securities....... 4,289 5,527 (36)
Gross realized loss from impairments... -- -- (652)
Dividend income........................ 689 792 2,445
------- ------- -------
$ 6,651 $ 4,575 $ 5,705
======= ======= =======
</TABLE>
9. INVESTMENTS AND ADVANCES, AFFILIATED COMPANIES
-----------------------------------------------
The following table presents summarized historical financial
information on a combined 100% basis of the Company's principal
investments, which are accounted for using the equity method.
<TABLE>
<CAPTION>
1997 1996 1995
Statement of Earnings: -------- -------- --------
<S> <C> <C> <C>
Net sales............................ $292,049 $351,695 $313,888
Gross profit......................... 133,734 114,248 100,644
Earnings from continuing operations.. 10,216 15,183 9,623
Discontinued operations, net......... (1) -- --
Net earnings......................... 10,215 15,183 9,623
Balance Sheet at June 30,:
Current assets....................... $ 89,408 $ 93,925
Non-current assets................... 369,464 377,547
Total assets......................... 458,872 471,472
Current liabilities.................. 75,090 87,858
Non-current liabilities.............. 281,301 275,025
</TABLE>
The Company owns approximately 31.9% of Nacanco common stock. The
Company recorded equity earnings of $4,673, $5,487, and $2,859 from this
investment for 1997, 1996 and 1995, respectively.
Effective February 25, 1996, the Company increased its percentage of
ownership of Banner common stock from 47.2% to approximately 59.3%. Since
February 25, 1996, the Company has consolidated 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 in
earnings of $363 and $138 from this investment for 1996 and 1995,
respectively.
The Company is accounting for an investment in a public fund, which is
controlled by an affiliated investment group of the Company, at market
value. The amortized cost basis of the investment was $923 and had been
written down by $71, before tax, to market value. The Company recorded a
gross unrealized holding gain (loss) of $114 and $(120) from this
investment in 1997 and 1995, respectively.
The Company's share of equity in earnings of all unconsolidated
affiliates for 1997, 1996 and 1995 was $7,747, $4,871, and $1,607,
respectively. The carrying value of investments and advances, affiliated
companies consists of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
-------- --------
<S> <C> <C>
Nacanco............................ $ 20,504 $ 20,886
STFI............................... 31,978 30,559
Others............................. 3,196 2,026
------- -------
$ 55,678 $ 53,471
======= =======
</TABLE>
On June 30, 1997, approximately $9,056 of the Company's $209,949
consolidated retained earnings was from undistributed earnings of 50
percent or less currently owned affiliates accounted for by the equity
method.
10. NOTES PAYABLE AND LONG-TERM DEBT
--------------------------------
At June 30, 1997 and 1996, notes payable and long-term debt consisted
of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
-------- --------
<S> <C> <C>
Bank credit agreements....................... $ 100 $ 73,500
Other short-term notes payable............... 15,529 3,035
------- -------
Short-term notes payable (weighted average
interest rates of 7.8% and 8.6% in 1997
and 1996, respectively)..................... $ 15,629 $ 76,535
======= =======
Bank credit agreements....................... $177,250 $112,500
11 7/8% RHI Senior debentures due 1999....... 85,852 85,769
12% Intermediate debentures due 2001......... 115,359 114,495
13 1/8% Subordinated debentures due 2006..... 35,188 35,061
13% Junior Subordinated debentures due 2007.. 24,834 24,800
10.65% Industrial revenue bonds.............. 1,500 1,500
Capital lease obligations, interest from
4.4% to 10.5%.............................. 1,897 65
Other notes payable, collateralized by
property, plant and equipment, interest
from 4.3% to 10.0%......................... 6,835 2,756
------- -------
448,715 376,946
Less: Current maturities..................... (31,793) (8,357)
------- -------
Net long-term debt........................... $416,922 $368,589
======= =======
</TABLE>
Bank Credit Agreements: The Company maintains credit agreements (the
"Credit Agreements") with a consortium of banks, which provide revolving
credit facilities to RHI, FHC and Banner, and term loans to Banner
(collectively the "Credit Facilities").
On July 26, 1996, the Company amended and restated the terms and
provisions of FHC's credit agreement, in their entirety (the "FHC Credit
Agreement"). The FHC Credit Agreement extends to July 28, 2000, the
maturity of FHC's revolving credit facility (the "FHC Revolver"). The FHC
Revolver has a borrowing limit of $52,000, however, availability is
determined monthly by calculation of a borrowing base comprised of
specified percentages of FHC's accounts receivable, inventories and the
appraised value of equipment and real property. The FHC Revolver generally
bears interest at a base rate of 1 1/2% over the greater of (i) Citibank
New York's base rate, or (ii) the Federal Funds Rate plus 1 1/2% for
domestic borrowings and at 2 1/2% over Citibank London's base rate for
foreign borrowings. FHC's Revolver is subject to a non-use commitment fee
of 1/2% on the average unused availability; and outstanding letters of
credit are subject to fees of 2 3/4% per annum. The FHC Credit Agreement
was further amended on February 21, 1997 to permit the Simmonds
Acquisition. Terms modified by the February 21, 1997 amendment included a
provision in which the borrowing rate on the FHC Revolver will increase by
1/4% on each of September 30, 1997 and December 31, 1997, in the event that
the FHC Credit Agreement is not restructured or refinanced by such date.
The FHC Credit Agreement requires FHC to comply with certain financial
and non-financial loan covenants, including maintaining a minimum net worth
of $150,000 and maintaining certain interest and fixed charge coverage
ratios at the end of each Fiscal Quarter. Additionally, the FHC Credit
Agreement restricts annual capital expenditures of FHC to $12,000.
Substantially all of FHC's assets are pledged as collateral under the FHC
Credit Agreement. At June 30, 1997, FHC was in compliance with all the
covenants under the FHC Credit Agreement. FHC may transfer available cash
as dividends to the Company. However, the FHC Credit Agreement restricts
the Company from paying any dividends to stockholders.
On July 18, 1997, the FHC Credit Agreement was restructured to
provide FHC with a $150,000 senior secured credit facility (the "FHC
Facility") consisting of (i) up to $75,000 in revolving loans, with a
letter of credit sub-facility of $12,000, and (ii) a $75,000 term loan.
Advances made under the FHC Facility would generally bear interest at a
rate of, at the Company's option, (i) 2% over the Citibank N.A. base rate,
or (ii) 3 1/4% over the Eurodollar Rate ("LIBOR"). The FHC Facility is
subject to a non-use commitment fee of 1/2% of the aggregate unused
availability; and outstanding letters of credit are subject to fees of 3
1/2% per annum. A borrowing base is calculated monthly to determine the
amounts available under the FHC Facility. The borrowing base is determined
monthly based upon specified percentages of (i) FHC's accounts receivable,
inventories, and the appraised value of equipment and real property, and
(ii) assets pledged by RHI to secure the facility. The FHC Facility
matures on July 28, 2000. The FHC Facility provides that on December 31,
1998, the Company must repay the term loan, in full, together with an
amount necessary to reduce the outstanding revolving loans to $52,000, if
the Company has not complied with certain financial covenant requirements
as of September 30, 1998.
The Credit Agreements provide RHI with a $4,250 revolving credit
facility (the "RHI Credit Agreement") which (i) generally bears a base
interest rate of 1/2% over the prime rate, (ii) requires a commitment fee
of 1/2%, and (iii) matures on August 12, 1998. RHI's Credit Agreement
requires RHI to comply with specified covenants and maintain a consolidated
net worth of $175,000. Additionally, RHI's capital expenditures are
restricted, except for certain leasehold improvements, to $2,000 per annum
plus the selling price of fixed assets for such Fiscal Year. The Company
was in compliance with all the covenants under RHI's Credit Agreement at
June 30, 1997. RHI may pay dividends to the Company if the purpose of such
dividends is to provide the Company with funds necessary to meet its debt
service requirements under specified notes and debentures. However, all
other dividends are subject to certain limitations, which was $10,000 in
Fiscal 1997.
Banner has a credit agreement (the "Banner Credit Agreement") which
provides Banner and its subsidiaries with funds for working capital and
potential acquisitions. The facilities under the Banner Credit Agreement
consist of (i) a $55,000 six-year term loan (the "Banner Term Loan"), (ii)
a $30,000 seven-year term loan (the "Tranche B Loan"), (iii) a $40,000 six-
year term loan (the "Tranche C Loan"), and (iv) a $71,500 revolving credit
facility (the "Banner Revolver"). The Banner Credit Agreement requires
certain semiannual term loan payments. The Banner Term Loan and the Banner
Revolver bear interest at prime plus 1 1/4% or LIBOR plus 2 1/2% and may
increase by 1/4% or decrease by up to 1% based upon certain performance
criteria. As a result of Banner's performance level through March 31, 1997,
borrowings under the Banner Term Loan and the Banner Revolver bore an
interest rate of prime plus 3/4% and LIBOR plus 2% for the quarter ending
June 30, 1997. The Tranche B Loan bears interest at prime plus 1 3/4% or
LIBOR plus 3%. The Tranche C Loan initially bears interest at prime plus 1
1/2% or LIBOR plus 2 3/4% and may decrease by 1/4% based upon certain
performance criteria. The Banner Credit Agreement requires that loans made
to Banner can not exceed a defined borrowing base, which is based upon a
percentage of eligible inventories and accounts receivable. Banner's
revolving credit facility is subject to a non-use fee of 55 basis points of
the unused availability.
The Banner Credit Agreement requires quarterly compliance with various
financial and non-financial loan covenants, including maintenance of
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. As of June 30, 1997, Banner was in compliance with all
covenants under the Banner Credit Agreement. Substantially all of Banner's
assets are pledged as collateral under the Banner Credit Agreement. The
Banner Credit Agreement substantially limits the amount of dividends that
can be paid to its shareholders, including the Company. Banner's current
policy is to retain earnings to support the growth of its present
operations and to reduce its outstanding debt.
In September 1995, Banner entered into 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 of debt through September 2000, by
providing an interest rate 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
interest at a floor rate of approximately 6%.
In November 1996, Banner entered into an additional hedge agreement
("Additional Hedge Agreement") with one of its major lenders to provide
interest rate protection on $20,000 of debt for a period of three years.
Effectively, the Additional Hedge Agreement provides for a cap of 7 1/4% if
the 90-day LIBOR exceeds 7 1/4%. If the 90-day LIBOR drops below 5%,
Banner will be required to pay interest at a floor rate of approximately
6%. No cash outlay was required to obtain the Additional Hedge Agreement
as the cost of the cap was offset by the sale of the floor.
The Company recognizes interest expense under the provisions of the
Hedge Agreements and the Additional Hedge Agreement based on the fixed
rate. The Company is exposed to credit loss in the event of non-performance
by the lenders; however, such non-performance is not anticipated.
The following table summarizes the Credit Facilities under the Credit
Agreements at June 30, 1997:
[CAPTION]
<TABLE>
Revolving Term Total
Credit Loan Available
Facilities Facilities
Facilities
RHI Holdings, Inc. ---------- ---------- ---------
- -
<S> <C> <C> <C>
Revolving credit facility........... $ 100 $ -- $ 4,250
Fairchild Holding Corp.
Revolving credit facility........... 30,900 -- 52,000
Banner Aerospace, Inc.
Revolving credit facility........... 32,000 -- 71,500
Term Loan........................... -- 44,500 44,500
Tranche B Loan...................... -- 29,850 29,850
Tranche C Loan...................... -- 40,000 40,000
------- ------- -------
Total $ 63,000 $114,350 $242,100
======= ======= =======
</TABLE>
At June 30, 1997, the Company had outstanding letters of credit of
$10,811, which were supported by the Credit Agreement and other bank
facilities on an unsecured basis. At June 30, 1997, the Company had unused
bank lines of credit aggregating $53,939, at interest rates slightly higher
than the prime rate. The Company also has short-term lines of credit
relating to foreign operations, aggregating $9,350, against which the
Company owed $5,967 at June 30, 1997.
Summarized below are certain items and other information relating to
the debt outstanding at June 30, 1997:
<TABLE>
<CAPTION>
12% 13% 11 7/8%
13 1/8% Intermediate Junior RHI Senior
Subordinated Subordinated Subordinated Subordinated
Debentures Debentures Debentures Debentures
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Date Issued March 1986 Oct. 1986 March 1987 March 1987
Face Value $ 75,000 $160,000 $102,000 $126,000
Balance June 30, 1997 $ 35,188 $115,359 $ 24,834 $ 85,852
Percent Issued at 95.769 93.470 98.230 99.214
Bond Discount $ 3,173 $ 10,448 $ 1,805 $ 990
Amortization 1997 $ 127 $ 864 $ 34 $ 82
1996 $ 118 $ 761 $ 30 $ 82
1995 $ 103 $ 687 $ 27 $ 94
Yield to Maturity 13.80% 13.06% 13.27% 12.01%
Interest Payments Semi-Annual Semi-Annual Semi-Annual Semi-Annual
Sinking Fund Start Date 3/15/97 10/15/97 3/1/98 3/1/97
Sinking Fund Installments $ 7,500 $ 32,000 $ 10,200 $ 31,500
Fiscal Year Maturity 2006 2002 2007 1999
Callable Option on 3/15/89 10/15/89 3/1/92 3/1/92
</TABLE>
Under the most restrictive covenants of the above indentures, the
Company's consolidated net worth, as defined, must not be less than
$35,000. RHI's consolidated net worth must not be less than $125,000. At
June 30, 1997, consolidated net worth was $229,625 at the Company and
$438,830 at RHI. At the present time, none of the Company's consolidated
retained earnings are available for capital distributions due to a
cumulative earnings restriction. The indentures also provide restrictions
on the amount of additional borrowings by the Company.
The annual maturity of long-term debt obligations (exclusive of
capital lease obligations) for each of the five years following June 30,
1997, are as follows: $31,207 for 1998, $93,544 for 1999, $42,288 for
2000, $77,407 for 2001, and $77,772 for 2002.
11. PENSIONS AND POSTRETIREMENT BENEFITS
------------------------------------
Pensions
--------
The Company and its subsidiaries have defined benefit pension plans
covering most of its employees. Employees in foreign subsidiaries may
participate in local pension plans, which are in the aggregate
insignificant. The Company's funding policy is to make the minimum annual
contribution required by applicable regulations. The following table
provides a summary of the components of net periodic pension expense
(income) for the plans:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost (current period attribution).. $ 2,521 $ 3,513 $ 3,917
Interest cost of projected benefit
obligation............................... 15,791 14,499 14,860
Actual return on plan assets............... (31,400) (39,430)
(14,526)
Amortization of prior service cost......... (180) 81 81
Net amortization and deferral.............. 11,157 21,495
(4,341)
------- ------- -------
(2,111) 158
(9)
Net periodic pension expense (income) for
other plans including foreign plans...... 142 (118) 78
------- ------- -------
Net periodic pension expense (income)...... $ (1,969) $ 40 $ 69
======= ======= =======
</TABLE>
Assumptions used in accounting for the plans were:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Discount rate............................ 7.75% 8.5% 8.5%
Expected rate of increase in salaries.... 4.5% 4.5% 4.5%
Expected long-term rate of return on
plan assets............................ 9.0% 9.0% 9.0%
</TABLE>
In Fiscal 1996, the Company recognized one-time charges of $857 from
the divestiture of subsidiaries, which resulted in a recognition of prior
service costs, and $84 from the early retirement window program at the
Company's corporate office. The reduction in liabilities due from the
cessation of future salary increases is not immediately recognizable in
income, but will be used as an offset against existing unrecognized losses.
The Company will have a future savings benefit from a lower net periodic
pension cost due to the amortization of a smaller unrecognized loss.
The following table sets forth the funded status and amounts
recognized in the Company's consolidated balance sheets at June 30, 1997,
and 1996, for the plans:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
Actuarial present value of benefit obligations: -------- --------
<S> <C> <C>
Vested................................................ $183,646 $164,819
Nonvested............................................. 7,461 6,169
------- -------
Accumulated benefit obligation........................ 191,107 170,988
Effect of projected future compensation increases..... 683 905
------- -------
Projected benefit obligation............................ 191,790 171,893
Plan assets at fair value............................... 237,480 224,692
------- -------
Plan assets in excess of projected benefit obligations.. 45,690 52,799
Unrecognized net loss................................... 29,592 20,471
Unrecognized prior service cost......................... (571)
(354)
Unrecognized net transition assets...................... (315)
(608)
------- -------
Prepaid pension cost prior to SFAS 109 implementation... 74,396 72,308
Effect of SFAS 109 implementation....................... (14,654)
(14,648)
------- -------
Prepaid pension cost.................................... $ 59,742 $ 57,660
======= =======
</TABLE>
Plan assets include Class A Common Stock of the Company valued at a
fair market value of $26,287 and $11,094 at June 30, 1997 and 1996,
respectively. Substantially all of the plan assets are invested in listed
stocks and bonds.
Postretirement Health Care Benefits
-----------------------------------
The Company provides health care benefits for most retired employees.
Postretirement health care expense from continuing operations totaled $642,
$779, and $701 for 1997, 1996 and 1995, respectively. The Company has
accrued approximately $34,965 and $36,995 as of June 30, 1997 and 1996,
respectively, for postretirement health care benefits related to
discontinued operations. This represents the cumulative discounted value
of the long-term obligation and includes interest expense of $3,349,
$3,877, and $3,872 for the years ended June 30, 1997, 1996 and 1995,
respectively. The components of expense in Fiscal 1997, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost of benefits earned............ $ 140 $ 281 $ 321
Interest cost on liabilities............... 3,940 4,377 4,385
Net amortization and deferral.............. (89) (2) (133)
------ ------ ------
Net periodic postretirement benefit cost... $3,991 $4,656 $4,573
====== ====== ======
</TABLE>
A one-time credit of $3,938, resulting from the divestitures of
subsidiaries, was offset by $4,361 from DME's accumulated postretirement
benefit obligation for active employees, which was transferred to CMI as
part of the sale. The Company recognized the net effect of $423 as an
expense in 1996.
The following table sets forth the funded status for the Company's
postretirement health care benefit plans at June 30,:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligations:
Retirees........................................ $ 48,145 $ 46,846
Fully eligible active participants.............. 390 347
Other active participants....................... 2,335 1,887
------- -------
Accumulated postretirement benefit obligation..... 50,870 49,080
Unrecognized net loss............................. 6,173 2,086
------- -------
Accrued postretirement benefit liability.......... $ 44,697 $ 46,994
======= =======
</TABLE>
The accumulated postretirement benefit obligation was determined using
a discount rate of 7.75%, and a health care cost trend rate of 7.0% for pre-
age-65 and post-age-65 employees, respectively, gradually decreasing to
5.5% in the year 2003 and thereafter.
Increasing the assumed health care cost trend rates by 1% would
increase the accumulated postretirement benefit obligation as of June 30,
1997, by approximately $1,871, and increase the net periodic postretirement
benefit cost by approximately $132 for Fiscal 1997.
12 INCOME TAXES
------------
The provision (benefit) for income taxes from continuing operations is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................... $ 6,143 $ (41,595) $ (8,315)
State............................ 1,197 1,203 424
Foreign.......................... (45) 669 1,191
-------- -------- --------
7,295 (39,723) (6,700)
Deferred:
Federal......................... (15,939) 17,060 (24,754)
State........................... 3,444 (3,657) (2,052)
-------- -------- --------
(12,495) 13,403 (26,806)
-------- -------- --------
Net tax benefit.................... $ (5,200) $ (26,320) $ (33,506)
======== ======== ========
</TABLE>
The income tax provision (benefit) for continuing operations differs
from that computed using the statutory Federal income tax rate of 35%, in
Fiscal 1997, 1996 and 1995, for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Computed statutory amount.......... $ (1,354) $ (20,993) $ (31,944)
State income taxes, net of
applicable federal tax benefit... 778 782 (1,794)
Nondeductible acquisition
valuation items.................. 1,064 1,329 1,420
Tax on foreign earnings, net of
tax credits...................... (1,938) 1,711 2,965
Difference between book and tax
basis of assets acquired and
liabilities assumed.............. (1,102) 1,040 1,366
Revision of estimate for tax
accruals......................... (5,335) (3,500) (5,000)
Other.............................. 2,687 (6,689) (519)
--------- --------- --------
Net tax benefit.................... $ (5,200) $ (26,320) $ (33,506)
========= ========= ========
</TABLE>
The following table is a summary of the significant components of the
Company's deferred tax assets and liabilities, and deferred provision or
benefit for the following periods:
<TABLE>
<CAPTION>
1997
1996 1995
Deferred
Deferred Deferred
June 30, (Provision) June 30,
(Provision) (Provision)
1997 Benefit 1996
Benefit Benefit
-------- ---------- -------- --------
- --- -----------
<S> <C> <C> <C> <C>
<C>
Deferred tax assets:
Accrued expenses................... $ 6,440 $ 504 $ 5,936 $
(1,643) $ (2,218)
Asset basis differences............ 572 (1,492) 2,064
1,787 (7,292)
Inventory.......................... 2,198 2,198 -- --
- --
Employee compensation and benefits. 5,141 (267) 5,408
(26) 106
Environmental reserves............. 3,259 (1,253) 4,512
(737) (1,202)
Loss and credit carryforward....... -- (8,796) 8,796
(23,229) 17,991
Postretirement benefits............ 19,472 138 19,334
(1,273) 514
Other.............................. 7,598 2,079 5,519
2,186 1,530
------- ------- ------- ------
- - -------
44,680 (6,889) 51,569
(22,935) 9,429
Deferred tax liabilities:
Asset basis differences............ (26,420) (3,855) (22,565)
16,602 4,129
Inventory.......................... -- 2,010 (2,010)
4,684 3,176
Pensions........................... (19,281) (1,038) (18,243)
1,516 1,074
Other.............................. (7,240) 22,267 (29,507)
(17,525) 3,694
------- ------- ------- ------
- - -------
(52,941) 19,384 (72,325)
5,277 12,073
------- ------- ------- ------
- - -------
Net deferred tax liability........... $ (8,261) $ 12,495 $(20,756)
$(17,658) $ 21,502
======= ======= =======
======= =======
</TABLE>
The amounts included in the balance sheet are as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
-------- --------
<S> <C> <C>
Prepaid expenses and other current assets:
Current deferred..................... $ 11,307 $ 8,012
======= =======
Income taxes payable:
Current deferred..................... $ (2,735) $ 20,797
Other current........................ 8,616 3,838
------- -------
$ 5,881 $ 24,635
======= =======
Noncurrent income tax liabilities:
Noncurrent deferred.................. $ 22,303 $ 7,971
Other noncurrent..................... 19,710 23,766
------- -------
$ 42,013 $ 31,737
======= =======
</TABLE>
The 1997, 1996 and 1995 net tax benefits include the results of
reversing $5,335, $3,500 and $5,000, respectively, of federal income taxes
previously provided for due to a change in the estimate of required tax
accruals.
Domestic income taxes, less available credits, are provided on the
unremitted income of foreign subsidiaries and affiliated companies, to the
extent that such earnings are intended to be repatriated. No domestic
income taxes or foreign withholding taxes are provided on the undistributed
earnings of foreign subsidiaries and affiliates, which are considered
permanently invested, or which would be offset by allowable foreign tax
credits. At June 30, 1997, the amount of domestic taxes payable upon
distribution of such earnings was not significant.
In the opinion of management, adequate provision has been made for all
income taxes and interest, and any liability that may arise for prior
periods will not have a material effect on the financial condition or
results of operations of the Company.
13. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
----------------------------------------------
Included in the Company's $68,309 of minority interest at June 30,
1997, is $67,649, representing approximately 40.7% of Banner's common stock
effectively outstanding on a consolidated basis.
14. EQUITY SECURITIES
-----------------
The Company had 13,992,283 shares of Class A common stock and
2,632,516 shares of Class B common stock outstanding at June 30, 1997.
Class A common stock is traded on both the New York and Pacific Stock
Exchanges. There is no public market for the Class B common stock. Shares
of Class A common stock are entitled to one vote per share and cannot be
exchanged for shares of Class B common stock. Shares of Class B common
stock are entitled to ten votes per share and can be exchanged, at any
time, for shares of Class A common stock on a share-for-share basis. In
Fiscal 1997, 234,935 shares of Class A Common Stock were issued as a result
of the exercise of stock options and shareholders converted 1,188 shares of
Class B common stock into Class A common stock.
RHI holds an investment of 4,319,423 shares of the Company's Class A
common stock. At June 30, 1997, RHI's market value was approximately
$78,649. The Company accounts for the Class A common stock held by RHI as
Treasury Stock.
15. STOCK OPTIONS AND WARRANTS
--------------------------
Stock Options
-------------
The Company's 1986 Non-Qualified and Incentive Stock Option Plan (the
"1986 Plan"), authorizes the issuance of 4,320,000 shares of Class A Common
Stock upon the exercise of stock options issued under the 1986 Plan. The
purpose of the 1986 Plan is to encourage continued employment and ownership
of Class A Common Stock by officers and key employees of the Company and
its subsidiaries, and provide additional incentive to promote the success
of the Company. At the Company's 1996 annual meeting, the Company's
stockholders approved an extension of the expiration date of the 1986 Plan
from April 9, 1996 to April 9, 2006. The 1986 Plan authorizes the granting
of options at not less than the market value of the common stock at the
time of the grant. The option price is payable in cash or, with the
approval of the Company's Compensation and Stock Option Committee of the
Board of Directors, in shares of common stock, valued at fair market value
at the time of exercise. The options normally terminate five years from
the date of grant, subject to extension of up to 10 years or for a
stipulated period of time after an employee's death or termination of
employment.
At the Company's 1996 annual meeting, the Company's stockholders
approved the 1996 Non-Employee Directors Stock Option Plan (the "1996 NED
Plan"). The ten-year 1996 NED Plan authorizes the issuance of 250,000
shares of Class A Common Stock upon the exercise of stock options issued
under the 1996 NED Plan. The 1996 NED Plan authorizes the granting of
options at the market value of the common stock on the date of grant. An
initial stock option grant for 30,000 shares of Class A Common Stock will
be made to each person who becomes a new non-employee Director, on such
date, with the options to vest 25% each year from the date of grant. On
the date of each annual meeting, each person elected as a non-employee
Director at such meeting will be granted an option for 1,000 shares of
Class A Common Stock, which will vest immediately. The exercise price is
payable in cash or, with the approval of the Stock Option Committee, in
shares of Class A or Class B Common Stock, valued at fair market value at
the date of exercise. All options issued under the 1996 NED Plan will
terminate five years from the date of grant or a stipulated period of time
after a Non-Employee Director ceases to be a member of the Board. The 1996
NED Plan is designed to maintain the Company's ability to attract and
retain highly qualified and competent persons to serve as outside directors
of the Company.
On November 17, 1994, the Company's stockholders approved the grant
of stock options of 190,000 shares to outside Directors of the Company to
replace expired stock options. These stock options expire five years from
the date of the grant.
Summaries of stock option transactions under the 1986 Plan, the 1996
NED Plan, and prior plans are presented in the following tables:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
----------- --------
<S> <C> <C>
Outstanding at July 1, 1994 1,520,706 $ 5.57
Granted 356,600 3.78
Expired (116,875) 5.44
Forfeited (60,650) 5.94
----------- --------
Outstanding at June 30, 1995 1,699,781 5.14
Granted 540,078 4.33
Exercised (286,869) 5.26
Expired (659,850) 6.06
Forfeited (19,653) 4.30
----------- --------
Outstanding at June 30, 1996 1,273,487 4.27
Granted 457,350 14.88
Exercised (234,935) 4.79
Expired (1,050) 4.59
Forfeited (9,412) 3.59
----------- --------
Outstanding at June 30, 1997 1,485,440 $ 7.46
=========== ========
Exercisable at June 30, 1995 1,159,306 $ 5.68
Exercisable at June 30, 1996 399,022 $ 4.59
Exercisable at June 30, 1997 486,855 $ 4.95
</TABLE>
A summary of options outstanding at June 30, 1997 is presented as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- ---------------------
Weighted Average Weighted
Average Remaining Average
Range of Number Exercise Contract Number Exercise
Exercise Prices Outstanding Price Life Exercisable Price
- --------------- ----------- -------- --------- ----------- --------
<S> <C> <C> <C> <C>
$ 3.50 - 8.625 1,022,700 $ 4.10 2.6 years 452,509 $ 4.10
$13.625 - 16.25 462,740 $14.89 4.4 years 34,346 $16.19
- --------------- ----------- -------- --------- ----------- --------
$ 3.50 - 16.25 1,485,440 $ 7.46 3.2 years 486,855 $ 4.95
=============== =========== ======== ========= =========== ========
</TABLE>
The weighted average grant date fair value of options granted during
1997 and 1996 was $6.90 and $1.95, respectively. The fair value of each
option granted is estimated on the grant date using the Black-Scholes
option pricing model. The following significant assumptions were made in
estimating fair value:
<TABLE>
<CAPTION>
Assumption 1997 1996
- ---------- ----------- -----------
<S> <C> <C>
Risk-free interest rate 6.0% - 6.7% 5.5% - 6.6%
Expected life in years 4.65 4.27
Expected volatility 43% - 45% 46% - 47%
Expected dividends none none
</TABLE>
The Company applies APB Opinion 25 in accounting for its stock option
plans. Accordingly, no compensation cost has been recognized for the stock
option plans in 1997 or 1996. If stock options granted in 1997 and 1996
were accounted for based on their fair value as determined under SFAS 123,
pro forma earnings would be as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net earnings:
As reported $ 1,331 $189,706
Pro forma 283 189,460
Primary earnings per share:
As reported $ .08 $ 11.43
Pro forma .02 11.41
Fully diluted earnings per share:
As reported $ .08 $ 11.09
Pro forma .02 11.08
</TABLE>
The pro forma effects of applying SFAS 123 are not representative of
the effects on reported net earnings for future years. SFAS 123 does not
apply to awards made prior to 1996, and additional awards in future years
are expected.
Stock Warrants
--------------
On April 25, 1997, the Company issued warrants to purchase 100,000
shares of Class A Common Stock, at $12.25 per share, to Dunstan Ltd. as
incentive remuneration for the performance of certain investment banking
services. The warrants may be earned on a pro-rata basis over a six-month
period ending October 31, 1997. The warrants become exercisable on
November 1, 1997 and expire on November 8, 2000. The Company recorded a
selling, general & administrative expense of $191 in 1997 for stock
warrants earned in 1997 based on a grant-date fair value of $5.46.
Effective as of February 21, 1997, the Company approved the
continuation of an existing warrant to Stinbes Limited (an affiliate of
Jeffrey Steiner) to purchase 375,000 shares of the Company's Class A or
Class B Common Stock at $7.67 per share. The warrant was modified to
extend the exercise period from Mach 13, 1997, to March 13, 2002, and to
increase the exercise price per share by $.002 for each day subsequent to
March 13, 1997, but fixed at $7.80 per share after June 30, 1997. In
addition, the warrant was modified to provide that the warrant may not be
exercised except within the following window periods: (i) within 365 days
after the merger of STFI with AT&T Corporation, MCI Communications,
Worldcom Inc., Tel-Save Holdings, Inc., or Teleport Communications Group,
Inc.; (ii) within 365 days after a change of control of the Company, as
defined in the FHC Credit Agreement; or (iii) within 365 days after a
change of control of Banner, as defined in the Banner Credit Agreement. In
no event may the warrant be exercised after March 13, 2002.
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. The Company elected not to
exercise its rights under the Peregrine commitment. The warrants are
immediately exercisable and will expire on November 8, 2000.
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
on November 8, 2000.
The Company recorded nonrecurring expenses of $1,148 for the grant
date fair value of the stock warrants issued in 1996. The warrants issued
in 1996 were outstanding at June 30, 1997.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
Statement of Financial Accounting Standards No. 107, ("SFAS 107")
"Disclosures about Fair Value of Financial Instruments", requires
disclosures of fair value information about financial instruments, whether
or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. SFAS 107
excludes certain financial instruments and all non-financial instruments
from its disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
The carrying amount reported in the balance sheet approximates the
fair value for cash and cash equivalents, short-term borrowings, current
maturities of long-term debt, and all other variable rate debt (including
borrowings under the Credit Agreements).
Fair values for equity securities, and long-term public debt issued by
the Company are based on quoted market prices, where available. For equity
securities not actively traded, fair values are estimated by using quoted
market prices of comparable instruments or, if there are no relevant
comparable instruments, on pricing models or formulas using current
assumptions. The fair value of limited partnerships, other investments,
and notes receivable are estimated by discounting expected future cash
flows using a current market rate applicable to the yield, considering the
credit quality and maturity of the investment.
The fair value for the Company's other fixed rate long-term debt is
estimated using discounted cash flow analyses, based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements.
Fair values for the Company's off-balance-sheet instruments (letters
of credit, commitments to extend credit, and lease guarantees) are based on
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counter parties'
credit standing. The fair value of the Company's off-balance-sheet
instruments at June 30, 1997, was not material.
The carrying amounts and fair values of the Company's financial
instruments at June 30, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
June 30, 1997 June
30, 1996
--------------------- ------------
- ---------
Carrying Fair Carrying
Fair
Amount Value Amount
Value
-------- -------- --------
- --------
<S> <C> <C> <C>
<C>
Cash and cash equivalents......... $ 19,420 $ 19,420 $ 39,649
$ 39,649
Investment securities:
Short-term equity securities.... 16,094 16,122 10,362
10,362
Short-term other investments.... 9,553 9,592 136
167
Long-term other investments..... 4,120 4,617 585
1,451
Notes receivable:
Current......................... -- -- 170,384
170,384
Long-term....................... 1,300 1,300 3,702
3,702
Short-term debt................... 15,629 15,629 76,535
76,535
Long-term debt:
Bank credit agreement........... 177,250 177,250 112,500
112,500
Senior notes and subordinated
debentures.................... 261,233 270,995 260,125
264,759
Industrial revenue bonds........ 1,500 1,500 1,500
1,500
Capitalized leases.............. 1,897 1,897 65
65
Other........................... 6,835 6,835 2,756
2,756
</TABLE>
17. RESTRUCTURING CHARGES
---------------------
In Fiscal 1996, the Company recorded restructuring charges in the
Aerospace Fasteners segment in the categories shown below. All costs
classified as restructuring were the direct result of formal plans to close
plants, to terminate employees, or to exit product lines. Substantially
all of these plans have been executed. Other than a reduction in the
Company's existing cost structure and manufacturing capacity, none of the
restructuring charges resulted in future increases in earnings or
represented an accrual of future costs. The costs included in
restructuring were predominately nonrecurring in nature and consisted of
the following significant components:
<TABLE>
<CAPTION>
<S> <C>
Write down of inventory to net realizable value
related to discontinued product lines (a)...... $ 156
Write down of fixed assets related to
discontinued product lines..................... 270
Severance benefits for terminated employees
(substantially all paid within twelve months).. 1,368
Plant closings facility costs (b)............... 389
Contract termination claims..................... 136
------
$ 2,319
======
(a) Write down was required because product line was discontinued.
(b) Includes lease settlements, write-off of leasehold improvements,
maintenance,
restoration and clean up costs.
</TABLE>
18. RELATED PARTY TRANSACTIONS
--------------------------
Corporate office administrative expense recorded by FHC and its
redecessors was billed to the Company on a monthly basis during 1997, 1996
and 1995. These costs represent the cost of services incurred on behalf of
affiliated companies. Each of these affiliated companies has reimbursed
FHC for such services.
The Company and its wholly-owned subsidiaries are all parties to a tax
sharing agreement whereby the Company files a consolidated federal income
tax return. Each subsidiary makes payments to the Company based on the
amount of federal income taxes, if any, the subsidiary would have paid if
it had filed a separate tax return.
Prior to the consolidation of Banner on February 25, 1996, the
Aerospace Fasteners segment had sales to Banner of $3,663 and $5,494 in
Fiscal 1996, and 1995, respectively.
19. LEASES
------
The Company holds certain of its facilities and equipment under long-
term leases. The minimum rental commitments under non-cancelable operating
leases with lease-terms in excess of one year, for each of the five years
following June 30, 1997, are as follows: $5,182 for 1998, $4,127 for 1999,
$2,937 for 2000, $2,271 for 2001, and $1,732 for 2002. Rental expense on
operating leases from continuing operations for Fiscal 1997, 1996 and 1995
was $4,928, $6,197, and $6,695, respectively. Minimum commitments under
capital leases for each of the five years following June 30, 1997, was $651
for 1998, $693 for 1999, $262 for 2000, $210 for 2001, and $137 for 2002,
respectively. At June 30, 1997, the present value of capital lease
obligations was $1,897. At June 30, 1997, capital assets leased, included
in property, plant, and equipment consisted of:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements....... $ 1,396
Machinery and equipment.......... 8,017
Furniture and fixtures........... 114
Less: Accumulated depreciation... (7,700)
------
$ 1,827
======
</TABLE>
20. 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 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 and believes that the
ultimate disposition of this claim will not be material.
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, however, an estimate of the possible loss or range of
loss from the ACO's assertion cannot be made. The Company believes it has
properly accounted for the asset reversions in accordance with applicable
accounting standards. The Company has held discussions with the government
to attempt to resolve these pension accounting issues.
Environmental Matters
---------------------
The Company's operations are subject to stringent 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 June 30, 1997, the consolidated total recorded liabilities of
the Company for environmental matters approximated $8,420, 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 13,200 on an undiscounted basis.
Other Matters
-------------
The Company is involved in various other claims and lawsuits
incidental to its business, some of which involve substantial amounts. The
Company, either on its own or through its insurance carriers, is contesting
these matters. In the opinion of management, the ultimate resolution of
the legal proceedings, including those aforementioned, will not have a
material adverse effect on the financial condition, or future results of
operations or net cash flows of the Company.
21. BUSINESS SEGMENT INFORMATION
----------------------------
The Company reports in two principal business segments. The Aerospace
Fasteners segment includes the manufacture of high performance specialty
fasteners and fastening systems. The Aerospace Distribution segment
distributes a wide range of aircraft parts and related support services to
the aerospace industry. The results of Fairchild Technologies, which is
primarily engaged in the designing and manufacturing of capital equipment
and systems for recordable compact disc and advance semiconductor
manufacturing, are reported under Corporate and Other, along with results
two smaller operations. Prior to the Merger on March 13, 1996, the Company
operated in the Communications Services segment.
The Company's financial data by business segment is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Sales: --------- --------- ---------
<S> <C> <C> <C>
Aerospace Fasteners.............. $ 269,026 $ 218,059 $ 215,364
Aerospace Distribution (a)....... 411,765 129,973 --
Corporate and Other.............. 66,382 67,330 41,476
Eliminations (b)................. (15,213) (5,842) --
--------- --------- ---------
Total Sales........................ $ 731,960 $ 409,520 $ 256,840
========= ========= =========
Operating Income (Loss):
Aerospace Fasteners (c).......... $ 17,390 $ 135 $ (11,497)
Aerospace Distribution (a)....... 30,891 5,625 --
Corporate and Other.............. (17,764) (14,875) (20,420)
--------- --------- ---------
Operating Income (Loss)............ $ 30,517 $ (9,115) $ (31,917)
========= ========= =========
Capital Expenditures:
Aerospace Fasteners.............. $ 8,964 $ 3,841 $ 4,974
Aerospace Distribution........... 4,787 1,556 --
Corporate and Other.............. 8,365 1,225 937
--------- --------- ---------
Total Capital Expenditures......... $ 22,116 $ 6,622 $ 5,911
========= ========= =========
Depreciation and Amortization:
Aerospace Fasteners.............. $ 16,112 $ 14,916 $ 15,619
Aerospace Distribution........... 5,138 1,341 --
Corporate and Other.............. 4,685 5,396 5,260
--------- --------- ---------
Total Depreciation and Amortization $ 25,935 $ 21,653 $ 20,879
========= ========= =========
Identifiable Assets at June 30,:
Aerospace Fasteners.............. $ 346,533 $ 252,200 $ 290,465
Aerospace Distribution........... 428,436 329,477 --
Corporate and Other.............. 292,364 428,261 559,829
--------- --------- ---------
Total Identifiable Assets.......... $1,067,333 $1,009,938 $ 850,294
========= ========= =========
(a) Effective February 25, 1996, the Company became the majority
shareholder of Banner Aerospace, Inc. and, accordingly, began consolidating
their results.
(b) Represents intersegment sales from the Aerospace Fasteners segment to
the Aerospace Distribution segment.
(c) Includes restructuring charges of $2.3 million in Fiscal 1996.
</TABLE>
22. FOREIGN OPERATIONS AND EXPORT SALES
-----------------------------------
The Company's operations are located primarily in the United States
and Europe. Inter-area sales are not significant to the total sales of any
geographic area. The Company's financial data by geographic area is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
Sales by Geographic Area: --------- --------- ---------
<S> <C> <C> <C>
United States.................... $ 595,334 $ 301,957 $ 175,101
Europe........................... 136,626 107,186 80,945
Other............................ -- 377 794
--------- --------- ---------
Total Sales........................ $ 731,960 $ 409,520 $ 256,840
========= ========= =========
Operating Income by Geographic Area:
United States.................... $ 24,299 $ (14,903) $ (31,522)
Europe........................... 6,218 5,936 (432)
Other............................ -- (148) 37
--------- --------- ---------
Total Operating Income............. $ 30,517 $ (9,115) $ (31,917)
========= ========= =========
</TABLE>
Identifiable Assets by Geographic
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Area at June 30,:
United States.................... $ 857,943 $ 932,311 $ 763,734
Europe........................... 209,390 77,627 85,668
Other............................ -- -- 892
--------- --------- ---------
Total Identifiable Assets.......... $1,067,333 $1,009,938 $ 850,294
========= ========= =========
</TABLE>
Export sales are defined as sales to customers in foreign countries by
the Company's domestic operations. Export sales amounted to the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Export Sales
Europe........................... $ 48,490 $ 27,330 $ 13,329
Asia (excluding Japan)........... 29,145 8,920 1,526
Japan............................ 19,819 11,958 4,140
Canada........................... 17,955 8,878 2,810
Other............................ 15,907 8,565 911
--------- --------- ---------
Total Export Sales................. $ 131,316 $ 65,651 $ 22,716
========= ========= =========
</TABLE>
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
------------------------------------
The following table of quarterly financial data has been prepared from
the financial records of the Company without audit, and reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the interim periods
presented:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- ---------------
Fiscal 1997 quarters ended Sept. 29 Dec. 29 Mar. 30
June 30
- -------------------------------------------------------------------------------
- ---------------
<S> <C> <C> <C>
<C>
Net sales.......................... $146,090 $159,912 $190,782
$241,676
Gross profit....................... 39,810 38,775 52,788
73,750
Earnings (loss) from continuing
operations........................ (5,052) (3,638) 435
7,227
per share...................... (.31) (.22) .03
.42
Earnings from discontinued
operations, net.................. 434 661 395
1,659
per share...................... .03 .04 .02
.10
Net earnings (loss)................ (4,618) (2,977) 40
8,886
per share...................... (.28) (.18) --
.51
Market price of Class A Stock:
High............................. 17 17 3/4 15 3/8
18
Low.............................. 12 1/4 14 3/8 12 7/8
11 5/8
Close............................ 16 14 5/8 13 3/8
18
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- ---------------
Fiscal 1996 quarters ended Oct. 1 Dec. 31 March 31
June 30
- -------------------------------------------------------------------------------
- ---------------
<S> <C> <C> <C>
<C>
Net sales.......................... $ 74,929 $ 71,419 $109,189
$153,983
Gross profit....................... 15,502 15,134 23,856
40,418
Earnings (loss) from continuing
operations....................... (13,219) (12,818) (8,151)
527
per share...................... (.82) (.80) 9.04
.03
Earnings from discontinued
operations, net.................. 7,803 7,222 1,885
177
per share...................... .24 .21 .11
.01
Gain (loss) from disposal of
discontinued operations, net..... (20) (7) 224,416
(7,673)
per share...................... -- -- 3.66
(.45)
Extraordinary items, net........... -- -- (10,436)
- --
per share...................... -- -- (.62)
- --
Net earnings (loss)................ (5,436) (5,603) 207,714
(6,969)
per share...................... (.34) (.35) 12.42
(.41)
Market price range of Class A Stock
High............................. 6 8 3/4 9 7/8
15 7/8
Low.............................. 2 7/8 4 3/4 8
9 1/4
Close............................ 5 1/8 8 1/2 9 3/8
14 5/8
</TABLE>
Included in earnings (loss) from continuing operations are (i) a
$2,528 nonrecurring gain from the sale of SBC in the fourth quarter of
Fiscal 1997, (ii) charges to reflect the cost of restructuring the
Company's Aerospace Fasteners segment, of $285, $959 and $1,075 in the
second, third and fourth quarters of Fiscal 1996, respectively, and (iii)
nonrecurring income of $161,406 resulting primarily from the gain on the
merger of FCSC with STI in the third quarter of Fiscal 1996. Earnings from
discontinued operations, net, includes the results of DME and Data in each
Fiscal 1996 quarter. Extraordinary items relate to the early extinguishment
of debt by the Company. (See Note 7).
24. SUBSEQUENT EVENTS
-----------------
On November 20, 1997, Shared Technologies Fairchild Inc. ("STFI"), a
corporation of which the Company owns approximately 42% of the outstanding
common stock, entered into a merger agreement with Intermedia
Communications Inc. ("Intermedia") pursuant to which holders of STFI common
stock will receive $15.00 per share in cash, (the "STFI Sale"). In
connection with the STFI Sale, the Company has received approximately $85
million in cash (before tax) in exchange for certain preferred stock of
STFI and expects to receive an additional $93 million in cash (before tax)
in the first three months of 1998 in exchange for the 6,225,000 shares of
common stock of STFI owned by the Company. The Intermedia transaction
replaces an earlier merger agreement with the Tel-Save Holdings, Inc. under
which the Company would have received consideration primarily in common
stock of Tel-Save Holdings, Inc.
The results of STFI have been accounted for as discontinued
operations. The net sales of STFI totaled, $91,290 and $108,710 in 1996 and
1995, respectively. Net earnings from discontinued operations was $3,149,
$9,849 and $7,901, in 1997, 1996, and 1995, respectively. Gain on disposal
of discontinued operations includes a $163,130 nontaxable gain resulting
from the Merger (See Note 3).
On December 8, 1997, Banner and eight of its subsidiaries entered into
an Asset Purchase Agreement pursuant to which such subsidiaries have agreed
to transfer substantially all of their assets to AlliedSignal Inc.
("Allied") for approximately $345 million of common stock of Allied (the
"Disposition"). The assets transferred to Allied consists primarily of
Banner's hardware group, which includes the distribution of bearings, nuts,
bolts, screws, rivets and other type of fasteners. Approximately $170
million of the common stock received from Allied will be used to repay
outstanding term loans of Banner's subsidiaries and related fees.
Report of Independent Public Accountants
----------------------------------------
To The Fairchild Corporation:
We have audited the accompanying consolidated balance sheets of The
Fairchild Corporation (a Delaware corporation) and subsidiaries as of June
30, 1997 and 1996, and the related consolidated statements of earnings,
stockholders' equity and cash flows for the years ended June 30, 1997, 1996
and 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Fairchild
Corporation and subsidiaries as of June 30, 1997 and 1996, and the results
of their operations and their cash flows for the years ended June 30, 1997,
1996 and 1995, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
September 5, 1997
(except with respect to the matter discussed in
Note 24, as to which the date is December 8, 1997)
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
The following documents are filed as part of this Report:
(a)(1) Financial Statements.
All financial statements of the registrant as set forth under Item 8
of this report on Form 10-K (see index on Page 14).
(a)(2) Financial Statement Schedules and Report of Independent Public
Accountants.
Schedule Number Description
Page
--------------- ----------- ---
- -
I Condensed Financial Information of Parent Company 80
II Valuation and Qualifying Accounts 83
All other schedules are omitted because they are not required.
Report of Independent Public Accountants
----------------------------------------
To The Fairchild Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of The Fairchild Corporation and
subsidiaries included in this Form 10-K and have issued our report thereon
dated September 5, 1997. Our audits were made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The
schedules listed in the index on the preceding page is the responsibility
of the Company's management and is presented for the purpose of complying
with the Securities and Exchange Commission's rules and is not part of the
basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial
data required to be set forth therein in relation to the basic financial
statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
September 5, 1997
(except with respect to the matter discussed in
Note 24, as to which the date is December 8, 1997)
(a)(3) Exhibits.
3 (a) Registrant's Restated Certificate of Incorporation
(incorporated by reference to Exhibit "C" of Registrant's
Proxy Statement dated October 27, 1989).
(b) Registrant's Amended and Restated By-Laws, as amended as of
November 21, 1996 (incorporated by reference to the December
29, 1996 10-Q).
4 (a) Specimen of Class A Common Stock certificate (incorporated by
reference to Registration Statement No. 33-15359 on Form S-2).
(b) Specimen of Class B Common Stock certificate (incorporated by
reference from Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1989 (the "1989 10-K")).
(c) Form of Indenture between Registrant and J. Henry Schroder Bank
& Trust Company, pursuant to which Registrant's 13-1/8%
Subordinated Debentures due 2006 (the "Senior Debentures") were
issued (the "Debenture Indenture"), and specimen of Senior
Debenture (incorporated by reference to Registration Statement
No. 33-3521 on Form S-2).
(d) First Supplemental Indenture dated as of November 26, 1986, to
the Debenture Indenture (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1986 (the "December 1986 10-Q").
(e) Form of Indenture between Registrant and Manufacturers Hanover
Trust Company pursuant to which Registrant's 12-1/4% Senior
Subordinated Notes due 1996 (the "Senior Notes") were issued
(the"Note Indenture"), and specimen of Senior Note
(incorporated by reference to Registration Statement No.
33-03521 on Form S-2).
(f) First Supplemental Indenture dated as of November 26, 1986, to
the Note Indenture (incorporated by reference to the December
1986 10-Q).
(g) Indenture between Registrant and Connecticut National Bank (as
successor to National Westminster Bank) dated as of October 15,
1986, pursuant to which Registrant's Intermediate Subordinated
Debentures due 2001 (the "Intermediate Debentures") were
issued, and specimen of Intermediate Debenture (incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1986 (the "September 1986 10-Q")).
(h) Indenture between Rexnord Acquisition Corp. ("RAC") and Bank of
New York (as successor to Irving Trust Company) dated as of
March 2, 1987, pursuant to which RAC's Senior Subordinated
Debentures due 1999 (the "Rexnord Senior Debentures") were
issued (the "Rexnord Senior Indenture"), and specimen of
Rexnord Senior Debenture incorporated by reference from
Registrants Annual Report on Form 10-K for fiscal year ended
June 30, 1987 (the "1987 10-K").
(i) First Supplemental Indenture between Rexnord Inc. ("Rexnord")
(as successor to RAC) and Irving Trust Company dated as of July
1, 1987, to the Rexnord Senior Indenture (incorporated by
reference to Registration Statement No. 33-15359 on Form S-2).
(j) Second Supplemental Indenture between Rexnord Holdings Inc.,
now know as RHI Holdings, Inc. ("RHI") (as successor to
Rexnord) and Irving Trust Company dated as of August 16, 1988,
to the Rexnord Senior Indenture (incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1988 (the "1988 10-K")).
(k) Indenture between Registrant and Norwest Bank Minneapolis, N.A.
dated as of March 2, 1987, pursuant to which Registrant's
Junior Subordinated Debentures due 2007 (the "Junior
Debentures") were issued, and specimen of Junior Debenture
(incorporated by reference to Final Amendment to Tender Offer
Statement on Schedule 14D-1 of Banner Acquisition Corp. ("BAC")
dated March 9, 1987).
(l) First Supplemental Indenture between Registrant and Norwest
Bank, Minnesota Bank, N.A., dated as of February 28, 1991, to
Indenture dated as of March 2, 1987, relating to the Junior
Debentures (incorporated by reference to the 1991 10-K).
(m) Securities Purchase Agreement dated as of October 15, 1986, by
and among Registrant and each of the Purchasers of the
Intermediate Debentures (incorporated by reference to the
September 1986 10-Q).
(n) Securities Purchase Agreement dated as of March 2, 1987, by and
among Registrant, RAC and each of the Purchasers of the Junior
Debentures, the Rexnord Senior Debentures and other securities
(incorporated by reference to the 1987 10-K).
(o) Registration Rights Agreement dated as of October 15, 1986, by
and among Registrant and each of the purchasers of the
Intermediate Debentures (incorporated by reference to the
September 1986 10-Q).
(p) Registration Rights Agreement dated as of March 2, 1987, by and
among Registrant, RAC and each of the purchasers of the Junior
Debentures, the Rexnord Senior Debentures and other securities
(incorporated by reference to Registrant's Report on Form 8-K
dated March 17, 1987).
10 (a) Deferred Compensation Agreement between Registrant and Samuel
J.
Krasney dated July 14, 1972, as amended November 17, 1978,
September 3, 1985 (the "Krasney Deferred Compensation
Agreement") incorporated by reference to Registrant's
Annual Report on Form 10-K for the fiscal year ended
June 30, 1985).
(b) Amendment to the Krasney Deferred Compensation Agreement dated
September 6, 1990 (incorporated by reference to 1991 10-K).
(c) Amended and Restated Employment Agreement between Registrant
and Samuel J. Krasney dated April 24, 1990 (incorporated by
reference to the 1990 10-K).
(d) Letter Agreements dated August 4, 1993 among Samuel J. Krasney,
The Fairchild Corporation and Jeffrey J. Steiner (incorporated
by reference to 1993 10-K).
(e) 1988 U.K. Stock Option Plan of Banner Industries, Inc.
(incorporated by reference to the 1988 10-K).
(f) Description of grants of stock options to non-employee
directors of Registrant (incorporated by reference to the 1988
10-K).
(g) Amended and Restated Employment Agreement between Registrant
and Jeffrey J. Steiner dated September 10, 1992 (incorporated
by reference to 1993 10-K).
(h) Letter Agreement dated October 23, 1991 between Registrant and
Eric Steiner (incorporated by reference to 1992 10-K).
(i) Letter Agreement dated October 23, 1991 between Registrant and
John D. Jackson (incorporated by reference to 1992 10-K).
(j) Letter Agreement dated October 23, 1991 between Registrant and
Michael T. Alcox (incorporated by reference to 1992 10-K).
(k) Letter Agreement dated October 23, 1991 between Registrant and
Donald E. Miller (incorporated by reference to 1992 10-K).
(l) Letter Agreement dated October 23, 1991 between Registrant and
John L. Flynn (incorporated by reference to 1992 10-K).
(m) Letter Agreement dated April 8, 1993 between Registrant and
Thomas Flaherty (incorporated by reference to 1993 10-K).
(n) Purchase Agreement by and between BTR Dunlop Holdings, Inc.,
RHI Holdings, Inc., and Registrant, dated as of December 2,
1993 (incorporated by reference to Registrant's current
report on Form 8-K dated December 23, 1993).
(o) Letter Agreement dated October 21, 1994, as amended December
21, 1994, between Registrant and Eric Steiner
(incorporated by reference to the 1995 10-K).
(p) Letter Agreement dated October 21, 1994, as amended December
21, 1994, between Registrant and Michael T. Alcox
(incorporated by reference to the 1995 10-K).
(q) Letter Agreement dated October 21, 1994, as amended December
21, 1994, between Registrant and Donald E. Miller
(incorporated by reference to the 1995 10-K).
(r) Letter Agreement dated October 21, 1994, as amended December
21, 1994, between Registrant and John L Flynn
(incorporated by reference to the 1995 10-K).
(s) Letter Agreement dated October 21, 1994, as amended December
21, 1994, between Registrant and Thomas J. Flaherty
(incorporated by reference to the 1995 10-K).
(t) Letter Agreement dated September 9, 1996, between Registrant
and
Colin M. Cohen (incorporated by reference to the 1997 10-K).
(u)(i) Agreement and Plan of Merger dated as of November 9, 1995 by
and
among The Fairchild Corporation, RHI, FII and Shared
Technologies, Inc. ("STI Merger Agreement") (incorporated by
reference from the Registrant's Form 8-K dated as of November
9,
1995).
(u)(ii) Amendment No. 1 to STI Merger Agreement dated as of February 2,
1996 (incorporated by reference from the Registrant's Form 8-K
dated as of March 13, 1996).
(u)(iii) Amendment No. 2 to STI Merger Agreement dated as of February
23, 1996 (incorporated by reference from the Registrant's Form
8-K dated as of March 13, 1996).
(u)(iv) Amendment No. 3 to STI Merger Agreement dated as of March 1,
1996 (incorporated by reference from the Registrant's Form 8-K
dated as of March 13, 1996).
(v) Asset Purchase Agreement dated as of January 23, 1996, between
The Fairchild Corporation, RHI and Cincinnati Milacron, Inc.
(incorporated by reference from the Registrant's Form 8-K dated
as of January 26, 1996).
(w) Credit Agreement dated as of March 13, 1996, among Fairchild
Holding Corporation ("FHC"), Citicorp USA, Inc. and certain
financial institutions (incorporated by reference to the 1996
10-K).
(x)(i) Restated and Amended Credit Agreement dated as of July 26,
1996,
(the "FHC Credit Agreement"), among FHC, Citicorp USA, Inc. and
certain financial institutions.
(x)(ii) Amendment No. 1, dated as of January 21, 1997, to the FHC
Credit
Agreement dated as of March 13, 1996 (incorporated by reference
to the March 30, 1997 10-Q).
(x)(iii) Amendment No. 2 and Consent, dated as of February 21, 1997, to
the FHC Credit Agreement dated as of March 13, 1996
(incorporated by reference to the March 30,1997 10-Q).
(x)(iv) Amendment No. 3, dated as of June 30, 1997, to the FHC Credit
Agreement dated as of March 13, 1996 (incorporated by reference
to the 1997 10-K).
(x)(v) Second Amended And Restated Credit Agreement dated as of July
18, 1997, to the FHC Credit Agreement dated as of
March 13, 1996 (incorporated by reference to the 1997 10-K).
(y)(i) Restated and Amended Credit Agreement dated as of May 27, 1996,
(the "RHI Credit Agreement"), among RHI, Citicorp USA, Inc. and
certain financial institutions. (incorporated by reference to
the 1996 10-K).
(y)(ii) Amendment No. 1 dated as of July 29, 1996, to the RHI Credit
Agreement dated as of May 27, 1996 (incorporated by reference
to
the 1996 10-K).
(y)(iii) Amendment No. 2 dated as of April 7, 1997, to the RHI Credit
Agreement dated as of May 27, 1996 (incorporated by reference
to
the 1997 10-K).
(z)(i) 1986 Non-Qualified and Incentive Stock Option Plan
(incorporated
by reference to Registrant's Proxy Statement dated November 15,
1990).
(z)(ii) 1986 Non-Qualified and Incentive Stock Option Plan
(incorporated
by reference to Registrant's Proxy Statement dated November 21,
1997).
(aa) 1996 Non-Employee Directors Stock Option Plan (incorporated
by reference to Registrant's Proxy Statement dated November 21,
1997).
(ab) Stock Exchange Agreement between The Fairchild Corporation and
Banner Aerospace, Inc. pursuant to which the Registrant
exchanged Harco, Inc. for shares of Banner Aerospace,
Inc. (incorporated by reference to the Banner Aerospace,
Inc. Definitive Proxy Statement dated and filed with the SEC
on February 23, 1996 with respect to the Special Meeting
of Shareholders of Banner Aerospace, Inc. held on
March 12, 1996).
(ac)(i) Employment Agreement between RHI Holdings, Inc., and Jacques
Moskovic, dated as of December 29, 1994. (incorporated by
reference to the 1996 10-K/A).
(ac)(ii) Employment Agreement between Fairchild France, Inc., and
Jacques
Moskovic, dated as of December 29, 1994. (incorporated by
reference to the 1996 10-K/A).
(ac)(iii) Employment Agreement between Fairchild France, Inc., Fairchild
CDI, S.A., and Jacques Moskovic, dated as of April 18, 1997
(incorporated by reference to the 1995 10-K).
(ad) Voting Agreement dated as of July 16, 1997, between RHI
Holdings, Inc., and Tel-Save Holdings, Inc., (incorporated
by reference to the Registrant's Schedule 13D/A, Amendment
No. 3, filed July 22, 1997, regarding Registrant's
stock ownership in Shared Technologies Fairchild Inc.).
(ae) Allocation Agreement dated April 13, 1992 by and among The
Fairchild Corporation, RHI, Rex-PT Holdings, Rexnord
Corporation, Rexnord Puerto Rico, Inc. and Rexnord Canada
Limited (incorporate by reference to 1992 10-K).
(af) Form Warrant Agreement (including form of Warrant) issued
by the Company to Drexel Burnham Lambert on March 13, 1986,
subsequently purchased by Jeffrey Steiner and subsequently
assigned to Stinbes Limited (an affiliate of Jeffrey Steiner),
for the purchase of Class A or Class B Common Stock
(incorporated herein by reference to Exhibit 4(c) of the
Company's Registration Statement No. 33-3521 on Form S-2).
11 Computation of earnings per share (found at Note 1 in Item 8 to
Registrant's Consolidated Financial Statements for the fiscal
year ended June 30, 1997).
21 List of subsidiaries of Registrant (incorporated by reference to
the 1997 10-K).
23 Consent of Arthur Andersen LLP, independent public
accountants (incorporated by reference to the 1997 10-K).
27 Financial Data Schedules (incorporated by reference to the
1997 10-K).
99(a) Financial statements, related notes thereto and Auditors'
Report of Banner Aerospace, Inc. for the fiscal year ended
March
31, 1997 (incorporated by reference to the Banner Aerospace,
Inc. Form 10-K for fiscal year ended March 31, 1997).
99(b) Financial statements, related notes thereto and Auditors'
Report of Shared Technologies Fairchild, Inc. for the fiscal
year ended December 31, 1996 (incorporated by reference to
the Registrant's Form 8-K filed on December 8, 1997).
99(c) Financial statements, related notes thereto and Auditors'
Report
of Nacanco Paketleme for the fiscal year ended December 31,
1997 (incorporated by reference to the Registrant's Form 8-K
filed on December 8, 1997).
*Filed herewith.
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the last quarter of
Fiscal 1997.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE FAIRCHILD CORPORATION
By: ------------------------
Colin M. Cohen
Senior Vice President and
Chief Financial Officer
Date: December 15, 1997
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
<TABLE>
<CAPTION>
THE FAIRCHILD CORPORATION
CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY
BALANCE SHEETS (NOT CONSOLIDATED)
(In thousands)
June 30, June 30,
1997 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 234 $ 1,887
Accounts receivable 384 179
Prepaid expenses and other current assets 250 192
Total current assets 868 2,258
Property, plant and equipment, less accumulated 486 628
depreciation
Investments in subsidiaries 390,355 391,958
Investments and advances, affiliated companies 1,435 3,047
Goodwill 4,133 4,263
Noncurrent tax assets 29,624 14,548
Other assets 2,403 3,510
Total assets $ 429,304 $ 420,212
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,315 $ 7,735
Total current liabilities 8,315 7,735
Long-term debt 190,567 180,141
Other long-term liabilities 797 1,168
Total liabilities 199,679 189,044
Stockholders' equity:
Class A common stock 2,023 2,000
Class B common stock 263 263
Retained earnings and other equity 227,339 228,905
Total stockholders' equity 229,625 231,168
Total liabilities and stockholders' equity $ 429,304 $ 420,212
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
Schedule I
<TABLE>
<CAPTION>
THE FAIRCHILD CORPORATION AND
CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL STATEMENTS OF THE
COMPANY
STATEMENT OF EARNINGS (NOT
CONSOLIDATED)
(In thousands)
For the
Years Ended
June 30,
1997 1996 1995
Costs and Expenses:
<S> <C> <C> <C>
Selling, general & administrative 3,925 5,148 3,920
Amortization of goodwill 130 130 130
4,055 5,278 4,050
Operating income (4,055 ) (5,278 ) (4,050 )
Net interest expense 25,252 28,387 29,027
Investment income, net 16 1 (434 )
Equity in earnings of affiliates 480 269 (409 )
Nonrecurring expense -- (1,064 ) --
Loss from continuing operations before (28,811 ) (34,459 ) (33,920 )
taxes
Income tax provision (benefit) (15,076 ) (12,509 ) (18,838 )
Loss before equity in earnings of (13,735 ) (21,950 ) (15,082 )
subsidiaries
Equity in earnings of subsidiaries 15,066 211,656 (18,742 )
Net earnings (loss) 1,331 189,706 (33,824 )
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<TABLE>
THE FAIRCHILD CORPORATION
CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY
STATEMENT OF CASH FLOWS (NOT CONSOLIDATED)
(IN THOUSANDS)
<CAPTION>
For the
Years
Ended
June 30,
1997 1996 1995
<S> <C> <C> <C>
Cash provided by (used for) operations $(14,271 ) $ 36,916 $(9,607)
Investing activities:
Equity investments in affiliates 2,092 (21 ) 1,356
2,092 (21 ) 1,356
Financing activities:
Proceeds from issuance of 9,400 7,400
intercompany debt -
Debt repayments (42,265 )
- -
Issuance of common stock 1,126 1,509
-
10,526 (40,756 ) 7,400
Net decrease in cash $(1,653 ) $(3,861 ) $ (851)
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
Schedule I
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL STATEMENTS OF THE COMPANY
NOTES TO FINANCIAL STATEMENTS (NOT CONSOLIDATED)
(In thousands)
1. BASIS OF PRESENTATION
In accordance with the requirements of Regulation S-X of the Securities
and Exchange Commission, the financial statements of the Company are
condensed and omit many disclosures presented in the consolidated
financial statements and the notes thereto.
2. LONG-TERM DEBT
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
<S> <C> <C>
12% Inter. Debentures Due 2001 $ 128,000 $ 123,600
13 1/8% Sub. Debentures Due 2006 35,856 35,856
13% Jr. Sub. Debenture Due 2007 30,063 25,063
$ 193,919 $ 184,519
</TABLE>
Maturities of long-term debt for the next five years are as follows: no
maturities in 1998, $30,335 in 1999, $31,520 in 2000, $31,713 in 2001,
and $37,320 in 2002.
3. DIVIDENDS FROM SUBSIDIARIES
Cash dividends paid to The Fairchild Corporation by its consolidated
subsidiaries were $10,000, $42,100, and $10,000 in Fiscal 1997, 1996,
and 1995, respectively.
4. CONTINGENCIES
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 will not have a material adverse effect on the financial
condition, or future results of operations or net cash flows of the
Company.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------
Changes in the allowance for doubtful accounts are as follows:
<TABLE>
<CAPTION>
For the Years Ended June 30,
(In thousands) ----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Beginning balance................. $ 6,327 $ 3,971 $ 2,284
Charged to cost and expenses...... 1,999 2,099 1,868
Charges to other accounts (a)..... 491 1,970 (86)
Amounts written off............... (714) (1,713) (95)
------- ------- -------
Ending balance.................... $ 8,103 $ 6,327 $ 3,971
======= ======= =======
(a) Recoveries of amounts written off in prior periods, foreign currency
translation and the change in related noncurrent taxes.
</TABLE>
Included in Fiscal 1996 is $2,348 relating to the consolidation of
Banner Aerospace, Inc. and $(309) from the deconsolidation of the Fairchild
Communications Services Company as a result of the Merger.
