18
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 28, 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 Identification No.)
Incorporation or organization)
Washington Dulles International Airport
300 West Service Road, PO Box 10803
Chantilly, VA 20153
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (703) 478-5800
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety (90) days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Title of Class September 28, 1997
Class A Common Stock, $0.10 Par Value 14,030,717
Class B Common Stock, $0.10 Par Value 2,625,616
AMENDMENT:
The purpose of this amendment is to revise and provide additional
disclosure for (i) Part I, "Financial Information", and (ii) Part II, Item
6, "Exhibits and Reports on Form 8-K", as suggested by the SEC staff from
their review of the Company's filing.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX
Page
PART 1. FINANCIAL INFORMATION
Item 1.Condensed Consolidated Balance Sheets as of September 28, 1997
(Unaudited) and
June 30, 1997 .
3
Consolidated Statements of Earnings for the Three Months ended
September 28, 1997
and September 29, 1996 (Unaudited)
5
Condensed Consolidated Statements of Cash Flows for the Three
Months ended
September 28, 1997 and September 29, 1996 (Unaudited)
6
Notes to Condensed Consolidated Financial Statements (Unaudited)
7
Item 2.Management's Discussion and Analysis of Results of Operations
and Financial
Condition
11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
16
* For purposes of Part 1 and this Form 10-Q, the term "Company" means The
Fairchild Corporation, and its subsidiaries, unless otherwise indicated.
For purposes of Part II, the term "Company" means The Fairchild
Corporation, unless otherwise indicated.
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 28, 1997 (Unaudited) and June 30, 1997
ASSETS
<CAPTION>
(In thousands)
September 28, June 30,
28, 1997 1997 (*)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, $4,725 and $ 9,049 $ 19,420
$4,839 restricted
Short-term investments 18,403 25,647
Accounts receivable-trade, less 172,239 168,163
allowances of $9,157 and $8,103
Inventories:
Finished goods 305,048 297,223
Work-in-progress 29,812 26,887
Raw materials 24,807 18,626
359,667 342,736
Prepaid expenses and other current 39,595 33,631
assets
Total Current Assets 598,953 589,597
Property, plant and equipment, net of 132,195 128,712
accumulated depreciation of $127,538
and $134,032
Net assets held for sale 26,262 26,147
Cost in excess of net assets acquired, 154,233 154,808
(Goodwill) less accumulated
amortization of $37,895 and $36,672
Investments and advances, 55,337 55,678
affiliated companies
Prepaid pension assets 59,512 59,742
Deferred loan costs 11,489 9,252
Other assets 45,135 43,397
TOTAL ASSETS $ 1,083,116 $ 1,067,333
*Condensed from audited financial statements
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 28, 1997 (Unaudited) and June 30, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
(In thousands)
September June 30,
28, 1997 (*)
1997
<S> <C> <C>
CURRENT LIABILITIES:
Bank notes payable and current $ 79,781 $ 47,422
maturities of long-term debt
Accounts payable 84,797 84,953
Other accrued liabilities 91,289 105,199
Income taxes -- 5,881
255,867 243,455
Total Current Liabilities
LONG-TERM LIABILITIES:
Long-term debt, less current 412,261 416,922
maturities
Other long-term liabilities 22,381 23,622
Retiree health care liabilities 43,284 43,387
Noncurrent income taxes 48,939 42,013
Minority interest in subsidiaries 69,178 68,309
TOTAL LIABILITIES 851,910 837,708
STOCKHOLDERS' EQUITY:
Class A common stock, $0.10 par value; 2,027 2,023
authorized 40,000 shares, 20,272
shares issued (20,234 in June) and
14,031 shares outstanding (13,992 in
June)
Class B common stock, $0.10 par value; 263 263
authorized 20,000 shares, 2,626
shares issued and outstanding (2,633
in June)
Paid-in capital 71,105 71,015
Retained earnings 210,441 209,949
Cumulative translation adjustment (865 ) (1,860 )
Net unrealized holding loss on (46 ) (46 )
available-for-sale securities
Treasury Stock, at cost, 6,242 shares (51,719 ) (51,719 )
of Class A common stock
TOTAL STOCKHOLDERS' EQUITY 231,206 229,625
TOTAL LIABILITIES AND STOCKHOLDERS' $ 1,083,116 $ 1,067,333
EQUITY
*Condensed from audited financial statements
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) Months Ended September 28, 1997 and September 29, 1996
<CAPTION>
(In thousands, except per share data) Three Months
Ended
September
September 29,
28, 1996
1997
<S> <C> <C>
REVENUE:
Net sales $ 213,761 $ 146,090
Other income, net 5,357 223
219,118 146,313
COSTS AND EXPENSES:
Cost of goods sold 161,699 106,280
Selling, general & administrative 45,479 35,846
Research and development 605 23
Amortization of goodwill 1,223 1,116
209,006 143,265
OPERATING INCOME 10,112 3,048
Interest expense 12,988 14,672
Interest income (398 ) (2,192 )
Net interest expense 12,590 12,480
1,897 (375 )
Investment income (loss), net
Equity in earnings of affiliates 1,692 1,877
Minority interest (788 ) (785 )
323 (8,715 )
EARNINGS (LOSS) BEFORE TAXES
110 3,663
Income tax benefit
Earnings (loss) before discontinued 433 (5,052 )
operations
Earnings from discontinued operations 59 434
NET EARNINGS (LOSS) $ 492 $ (4,618 )
Primary earnings (loss) per share $ .03 $ (.28)
Fully diluted earnings (loss) per .03 (.28)
share
Weighted average number of shares used
in
computing earnings per share:
Primary 17,457 16,425
Fully Diluted 17,588 16,425
The accompanying notes to summarized financial information are an integral
part of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Three (3) Months Ended September 28, 1997 and September 29, 1996
<CAPTION>
(In thousands) Three Months Ended
September September
28, 29,
1997 1997 (*)
<S> <C> <C>
Cash flows provided by (used for)
Operations:
Net earnings (loss) 492 (4,618 )
$ $
Depreciation and amortization 6,857 5,268
Accretion of discount on long-term 34 1,100
liabilities
Distributed earnings of 715 1,499
affiliates, net
Minority interest 788 785
Changes in assets and liabilities (45,729 ) (49,923 )
(36,843 ) (45,889 )
Net cash used for operations
Investments:
Net proceeds from the sale of -- 173,719
discontinued operations
Purchase of property, plant and (10,206 ) (2,131 )
equipment
Net proceeds received from 7,815 15
investments
Changes in net assets held for (139 ) (1,230 )
sale
Other, net 45 5
(2,485 ) 170,378
Net cash provided by (used for)
investments
Financing:
Proceeds from issuance of debt 95,109 33,627
Debt repayments and repurchase of (67,698 ) (77,783 )
debentures, net
Issuance of Class A common stock 149 522
27,560 (43,634 )
Net cash provided by (used for)
financing
1,397 594
Effects of exchange rate changes on
cash
Net increase (decrease) in cash and (10,371 ) 81,449
cash equivalents
Cash and cash equivalents, beginning 19,420 39,649
of period
Cash and cash equivalents, end of $ 9,049 $ 121,098
period
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per share data)
1. FINANCIAL STATMENTS
The consolidated balance sheet as of September 28, 1997 and the
consolidated statements of earnings and cash flows for the three months
ended September 28, 1997 and September 29, 1996 have been prepared by the
Company, without audit. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at September
28, 1997, and for all periods presented, have been made. The balance sheet
at June 30, 1997 was condensed from the audited financial statements as of
that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's June 30, 1997 Form
10-K and Banner Aerospace, Inc.'s March 31, 1997 Form 10-K. The results of
operations for the period ended September 28, 1997 are not necessarily
indicative of the operating results for the full year. Certain amounts in
prior years' quarterly financial statements have been reclassified to
conform to the current presentation.
2. BUSINESS COMBINATIONS
The Company's acquisitions described in this section have been
accounted for using the purchase method. The respective purchase price
assigned to the net assets acquired were based on the fair value of such
assets and liabilities at the respective acquisition dates.
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
June 30, 1997, the Company had purchased, or placed sufficient cash in
escrow to purchase, all the remaining shares and convertible debt of
Simmonds. The total purchase price of Simmonds, including the assumption
of debt, was approximately $62,000, which the Company funded with available
cash. The Company recorded approximately $13,750 in goodwill as a result
of this acquisition, which will be amortized using the straight-line method
over 40 years. Simmonds is one of Europe's leading manufacturers and
distributors of aerospace and automotive fasteners.
In January 1997, Banner Aerospace, Inc. ("Banner"), a majority-owned
subsidiary of the Company, acquired PB Herndon Company ("PB Herndon") in a
business combination accounted for as a purchase. The total cost of the
acquisition was $16,000, including the assumption of $1,300 in debt, which
exceeded the fair value of the net assets of PB Herndon by approximately
$3,500, which is being amortized using the straight-line method over 40
years. The Company purchased PB Herndon with available cash. PB Herndon is
a distributor of specialty fastener lines and similar aerospace related
components.
On June 30, 1997, the Company sold all the patents of Fairchild
Scandinavian Bellyloading Company ("SBC") to Teleflex Incorporated
("Teleflex") for $5,000, and immediately thereafter sold all the stock of
SBC to a wholly owned subsidiary of Teleflex for $2,000. The Company may
also receive additional proceeds of up to $7,000 based on future net sales
of SBC's patented products and services.
3. RESTRICTED CASH
The Company had approximately $4,725 and $4,839 of restricted cash on
September 28, 1997 and June 30, 1997, respectively, all of which is
maintained as collateral for certain debt facilities.
4. SUMMARIZED STATEMENT OF EARNINGS INFORMATION
The following table presents summarized historical financial
information, on a combined 100% basis, of the Company's principal
investments, which are accounted for using the equity method.
<TABLE>
<CAPTION>
Three Months Ended
September September
28, 29,
1997 1996
<S> <C> <C>
Net sales 82,025 80,037
$ $
Gross profit 35,686 34,997
Earnings from continuing operations 2,501 4,052
Net earnings 2,501 4,052
</TABLE>
The Company owns approximately 31.9% of Nacanco Paketleme common stock.
The Company recorded equity earnings of $1,692 and $1,877 from this
investment for the three months ended September 28, 1997 and September 29,
1996, respectively.
On September 28, 1997, the Company's investments in Shared
Technologies Fairchild Inc. ("STFI") consisted of (i) $22,703 carrying
value for $25,000 face value of 6% cumulative Convertible Preferred Stock,
(ii) $11,666 carrying value for $20,000 face value of Special Preferred
Stock, and (iii) $(2,332) carrying value for 6,225,000 shares of common
stock. At the close of trading on September 26, 1997, STFI's common stock
was quoted at $11.56 per share. Based on this price, the Company's
investment in STFI common stock had an approximate market value of $71,977.
Earnings from discontinued operations includes the Company's equity
earnings of $59 and $434 from the STFI investments during the three months
ended September 28, 1997 and September 29, 1996, respectively. (See Note
10).
5. CREDIT AGREEMENTS
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) a $75,000 revolver loan, 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 Company was in compliance with all of its credit agreements on
September 28, 1997. FHC may transfer available cash to the Company.
However, the FHC Credit Agreement restrict the Company from paying any
dividends to stockholders.
In August 1997, the Company entered into a delayed-start swap interest
rate lock hedge agreement (the "FHC Hedge Agreement") to reduce its
exposure to increases in interest rates on variable rate debt. Beginning on
December 15, 1997, the FHC Hedge Agreement will provide interest rate
protection on $100,000 of variable rate debt for ten years, with interest
being calculated based on a fixed LIBOR rate of 6.696%.
6. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
On September 28, 1997, the Company had $69,178 of minority interest,
of which $68,856 represents approximately 40.7% of Banner's common stock
outstanding on a consolidated basis.
7. EQUITY SECURITIES
The Company had 14,030,717 shares of Class A common stock and
2,625,616 shares of Class B common stock outstanding at September 28, 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. For
the three months ended September 28, 1997, 31,534 shares of Class A Common
Stock were issued as a result of the exercise of stock options, and
shareholders converted 6,900 shares of Class B common stock into Class A
common stock.
8. EARNINGS PER SHARE
Primary and fully diluted earnings per share are computed by dividing
net income 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 the three months ended September
28, 1997, the conversion of options and warrants was assumed, as the effect
was dilutive. In computing primary and fully diluted earnings per share for
the three months ended September 29, 1996, the conversion of options and
warrants was not assumed, as the effect was antidilutive.
9. CONTINGENCIES
Government Claims
The Corporate Administrative Contracting Officer (the "ACO"), based
upon the advice of the United States Defense Contract Audit Agency, has
made a determination that Fairchild Industries, Inc. ("FII"), a former
subsidiary of the company, did not comply with Federal Acquisition
Regulations and Cost Accounting Standards in accounting for (i) the 1985
reversion to FII of certain assets of terminated defined benefit pension
plans, and (ii) pension costs upon the closing of segments of FII's
business. The ACO has directed FII to prepare cost impact proposals
relating to such plan terminations and segment closings and, following
receipt of such cost impact proposals, may seek adjustments to contract
prices. The ACO alleges that substantial amounts will be due if such
adjustments are made, however, an estimate of the possible loss or range of
loss from the ACO's assertion cannot be made. The Company believes it has
properly accounted for the asset reversions in accordance with applicable
accounting standards. The Company has held discussions with the government
to attempt to resolve these pension accounting issues.
Environmental Matters
The Company's operations are subject to stringent Government imposed
environmental laws and regulations concerning, among other things, the
discharge of materials into the environment and the generation, handling,
storage, transportation and disposal of waste and hazardous materials. To
date, such laws and regulations have not had a material effect on the
financial condition, results of operations, or net cash flows of the
Company, although the Company has expended, and can be expected to expend
in the future, significant amounts for investigation of environmental
conditions and installation of environmental control facilities,
remediation of environmental conditions and other similar matters,
particularly in the Aerospace Fasteners segment.
In connection with its plans to dispose of certain real estate, the
Company must investigate environmental conditions and may be required to
take certain corrective action prior or pursuant to any such disposition.
In addition, management has identified several areas of potential
contamination at or from other facilities owned, or previously owned, by
the Company, that may require the Company either to take corrective action
or to contribute to a clean-up. The Company is also a defendant in certain
lawsuits and proceedings seeking to require the Company to pay for
investigation or remediation of environmental matters and has been alleged
to be a potentially responsible party at various "Superfund" sites.
Management of the Company believes that it has recorded adequate reserves
in its financial statements to complete such investigation and take any
necessary corrective actions or make any necessary contributions. No
amounts have been recorded as due from third parties, including insurers,
or set off against, any liability of the Company, unless such parties are
contractually obligated to contribute and are not disputing such liability.
As of September 28, 1997, the consolidated total recorded liabilities
of the Company for environmental matters approximated $8,300, 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 $13,000 on an undiscounted cash flow 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.
10. 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.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Fairchild Corporation (the "Company") was incorporated in October
1969, under the laws of the State of Delaware. On November, 15, 1990, the
Company changed its name from Banner Industries, Inc. to The Fairchild
Corporation. RHI Holdings, Inc. ("RHI") is a direct subsidiary of the
Company. RHI is the 100% owner of Fairchild Holding 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").
The following discussion and analysis provide information which
management believes is relevant to assessment and understanding of the
Company's consolidated results of operations and financial condition. The
discussion should be read in conjunction with the consolidated financial
statements and notes thereto.
CAUTIONARY STATEMENT
Certain statements in the financial discussion and analysis by
management contain forward-looking information that involves risk and
uncertainty, including current trend information, projections for
deliveries, backlog, and other trend projections. Actual future results
may differ materially depending on a variety of factors, including product
demand; performance issues with key suppliers; customer satisfaction and
qualification issues; labor disputes; governmental export and import
policies; worldwide political stability and economic growth; legal
proceedings; business combinations; investment risks; and acts of nature.
RECENT DEVELOPMENTS
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.
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 additional proceeds of up to $7.0 million
based on future net sales of SBC's patented products and services.
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
June 30, 1997, the Company had purchased, or placed sufficient cash in
escrow to purchase, all the remaining shares and convertible debt of
Simmonds. The total purchase price of Simmonds, including the assumption
of debt, was approximately $62.0 million, which the Company funded with
available cash. The Company recorded approximately $13.7 million in
goodwill as a result of this acquisition, which will be amortized using the
straight-line method over 40 years. Simmonds is one of Europe's leading
manufacturers and distributors of aerospace and automotive fasteners.
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. The total cost of the acquisition was $16.0
million, including the assumption of $1.3 million in debt, 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. The Company purchased PB Herndon with available cash. PB Herndon
is a distributor of specialty fastener lines and similar aerospace related
components.
RESULTS OF OPERATIONS
The Company currently reports in two principal business segments:
Aerospace Fasteners and Aerospace Distribution. The results of Fairchild
Technologies, together with the results of Gas Springs and SBC (for the
prior year period) are included in the Corporate and Other classification.
The following table illustrates the historical sales and operating income
of the Company's operations for the three months ended September 28, 1997
and September 29, 1996.
<TABLE>
<CAPTION>
(In thousands) For the Quarter Ended
September September
28, 1997 29, 1996
<S> <C> <C>
Sales by Segment:
Aerospace Fasteners 76,847 55,047
$ $
Aerospace Distribution 122,914 84,107
Corporate and Other 18,847 9,654
Eliminations (a) (4,847 ) (2,718 )
213,761 146,090
Total Sales $ $
Operating Income (Loss) by Segment:
Aerospace Fasteners $ 2,510 $ 2,108
Aerospace Distribution 9,371 5,981
Corporate and Other (1,769 ) (5,041 )
10,112
Total Operating Income $ $ 3,048
(a) Represents intersegment sales from the Aerospace Fasteners segment to
the Aerospace Distribution segment.
</TABLE>
CONSOLIDATED RESULTS
Net sales of $213.8 million in the first quarter of Fiscal 1998
improved significantly by $67.7 million, or 46.3%, compared to sales of
$146.1 million in the first quarter of Fiscal 1997. Sales growth was
stimulated by the resurgent commercial aerospace industry, together with
the effects that recent acquisitions contributed in the current quarter.
Gross Margin as a percentage of sales was 24.4% and 27.3% in the first
quarter of Fiscal 1998 and 1997, respectively. The lower margin in the
current quarter is attributable to inefficiencies associated with increased
production rates requiring the addition of new employees and the payment of
overtime to existing employees within the Aerospace Fasteners segment, and
a change in product mix and increased price competition in the Aerospace
Distribution segment.
Selling, General & Administrative expense as a percentage of sales was
21.3% and 24.5% in the first quarter of Fiscal 1998 and 1997, respectively.
The improvement in the current quarter was attributable primarily to
administrative efficiencies in correlation to the increase in sales.
Research and Development expense increased in the current quarter,
compared to the prior year quarter, as a result of product development
within Fairchild Technologies. Additional research and development
expenses will be incurred in the future.
Other income increased $5.1 million in the current quarter, compared
to the prior year quarter, due primarily to the sale of air rights over a
portion of the property the Company owns and is developing in Farmingdale,
New York.
Operating income of $10.1 million in the first quarter of Fiscal 1998
increased $7.1 million, or 232%, compared to operating income of $3.0
million in the first quarter of Fiscal 1997. The increase in operating
income was due primarily to the improved results provided by the Company's
aerospace operations and the aforementioned increase in other income.
Investment income, net, increased $2.3 million in the first quarter of
Fiscal 1998, due primarily to recording unrealized gains on the fair market
adjustments of trading securities in the first quarter of Fiscal 1998 while
recording unrealized losses from trading securities in the first quarter of
Fiscal 1997.
Equity in earnings of affiliates decreased $.6 million in the first
quarter of Fiscal 1998, compared to the first quarter of Fiscal 1997, due
to slightly lower earnings by STFI and Nacanco.
Income Taxes included a $.1 million tax benefit in the first quarter
of Fiscal 1998, on pre-tax earnings of $.4 million. The tax benefit was
due primarily to losses generated by domestic operations.
Net earnings of $.5 million in the three months ended September 28,
1997, improved by $5.1 million compared to the $4.6 million net loss
recorded in the three months ended September 29, 1996. This improvement
is attributable to (i) the $7.1 million increase in operating income, and
(ii) the $2.3 million increase in investment income, offset partially by a
$3.6 million decrease in income tax benefit.
SEGMENT RESULTS:
AEROSPACE FASTENERS SEGMENT
Sales in the Aerospace Fasteners segment increased by $21.8 million to
$76.8 million, up 39.6% the first quarter of Fiscal 1998, compared to the
first quarter of Fiscal 1997, reflecting significant growth in the
commercial aerospace industry combined with the effect of the Simmonds
acquisition. New orders have continued to exceed reported sales, resulting
in a backlog of $201 million at September 28, 1997, up from $196 million at
June 30, 1997. Excluding current quarter sales of $14.6 million contributed
by Simmonds, sales increased 13.1% in Fiscal 1997, compared to the same
quarter of the prior year.
Operating income improved by $.4 million, or 19.1%, during the first
quarter of Fiscal 1998, compared to the first quarter of Fiscal 1997. This
improvement was attributable to the results of Simmonds. Excluding current
quarter results of Simmonds, operating income would have decreased by $1.1
million in the first quarter of Fiscal 1998, compared to the same quarter
of the prior year, reflecting inefficiencies associated with increased
production rates which required the addition of employees and substantial
overtime work. The Company anticipates that the productivity inefficiencies
will gradually improve in the coming months.
AEROSPACE DISTRIBUTION SEGMENT
Aerospace Distribution sales were up $38.8 million, or 46.1%, for the
first three months of Fiscal 1998, compared to the same period of the prior
year. The improvement in the current period is due to increased sales to
commercial airlines, original equipment manufacturers, and other
distributors and increased sales of turbine parts and engine management
services. In addition, incremental sales of $5.2 million by PB Herndon also
contributed to the increase.
Operating income was up $3.4 million, or 56.7%, for the first three
months of Fiscal 1998, compared to the same period of the prior year, due
primarily to the increase in sales and the related economies of scale.
Lower gross margins, as a percentage of sales, resulting from a change in
product mix together with increased price competition were offset by
improved efficiencies of selling, general and administrative expenses, as a
percentage of sales. This segment has benefited from the extended service
lives of existing aircraft, growth from acquisitions and internal growth,
which has increased its overall market share.
CORPORATE AND OTHER
The Corporate and Other classification includes Fairchild
Technologies, Gas Springs Division and corporate activities. The results of
SBC, which was sold at Fiscal 1997 year-end, are included in the prior
period results. The group reported an increase in sales of $9.2 million,
or 95.2%, in the first quarter of Fiscal 1998, as compared to the same
period in Fiscal 1997, due primarily to an improvement in sales of
Fairchild Technologies advanced semiconductor manufacturing equipment line.
The operating loss decreased by $3.3 million in the first quarter of Fiscal
1998, compared to the first quarter of Fiscal 1997, as a result of an
increase in other income, partially offset by increased losses at Fairchild
Technologies. The operating results classified under Corporate and Other
are affected by the operations of Fairchild Technologies Division ("The
Division"), which may fluctuate because of industry cyclicality, the volume
and timing of orders, the timing of new product shipments, customer's
capital spending, and pricing changes by The Division and its competition.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At September 28, 1997, cash and cash equivalents decreased to $9.0
million from $19.4 million at June 30, 1997, due to cash used for
operations of $36.8 million and net capital expenditures of $10.2 million,
offset partially by cash of $27.4 million provided from the increased
borrowings from revolving debt and $10.2 million received from the sale of
investments. The Company's principal cash requirements include debt
service, capital expenditures, acquisitions, and payment of other
liabilities. Other liabilities that require the use of cash include post-
employment benefits for retirees, environmental investigation and
remediation obligations, and litigation settlements and related costs. The
Company maintains credit agreements with a consortium of banks, which
provide revolving credit facilities to RHI and FHC, and a separate
revolving credit facility and term loans to Banner. At September 28, 1997,
the Company had available credit lines of $86.9 million. The Company
anticipates that existing capital resources, cash generated from
operations, and cash from borrowings and asset sales will be adequate to
maintain the Company's current level of operations. The Company's
management intends to take appropriate action to refinance portions of its
debt, if necessary to meet long-term cash requirements.
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.
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 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 1999.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
99(d) Financial statements, related notes thereto and
Auditors' Report of Shared Technologies Fairchild, Inc. for the quarter
and
nine months ended September 30, 1997 (incorporated
by reference to the Registrant's Form 8-K filed on December 8, 1997).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
September 28, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to the signed on
its behalf by the undersigned hereunto duly authorized.
For THE FAIRCHILD CORPORATION
(Registrant) and as its Chief
Financial Officer:
By: Colin M. Cohen
Senior Vice President and
Chief Financial Officer
Date: December 15, 1997
