UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A2
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 Identification No.)
Incorporation or organization)
45025 Aviation Drive, Suite 400
Dulles, VA 20166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703)478-5800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on 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 ninety (90) days [X].
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 March 2, 1998, 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 $295.2 million
(excluding shares deemed beneficially owned by affiliates of the Registrant
under Commission Rules).
As of March 2, 1998, 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 18,150,227
Class B common stock, $.10 par value 2,624,716
AMENDMENT:
The purpose of this amendment is to provide restated financial information
and additional disclosure for (i) Item 6, "Selected Financial Data", (ii)
Item 7, "Management's Discussion and Analysis of Results of Operations and
Financial Condition", (iii) Item 8, "Financial Statements and Supplementary
Data", and (iv) Item 14, "Exhibits, Financial Statement Schedules and Reports
on Form 8-K", as a result of the Company's adoption of a formal plan to
discontinue Fairchild Technologies in February 1998.
THE FAIRCHILD CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K/A2
FOR FISCAL YEAR ENDED JUNE 30, 1997
PART II Page
Item 6. Selected Financial Data 4
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition 5
Item 8. Financial Statements and Supplementary Data 15
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K 51
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Financial Summary
(In thousands, except per share data)
<CAPTION>
For the years ended June 30,
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Net sales $247,080 $203,456 $220,351 $349,236 $680,763
Gross profit 42,609 28,415 26,491 74,101 181,344
Operating income (loss) (29,595) (46,845) (30,333) (11,286) 33,499
Net interest expense 67,162 66,670 64,113 56,459 47,681
Earnings (loss) from
continuing operations (62,413) 4,834 (56,280) (32,186) 1,816
Earnings (loss) per share from
continuing
Operations:
Basic $ (3.87) $ 0.30 $ (3.49) $ (1.98) $ 0.11
Diluted (3.87) 0.30 (3.49) (1.98) 0.11
Other Data:
EBITDA 5,739 (7,471) (9,830) 12,078 57,806
EBITDA Margin 2.3% N.M N.M 3.5% 8.5%
Cash used for operating
activities (21,120) (33,271) (25,041) (48,951)(100,058)
Cash provided by (used for)
investing activities (9,290) 166,068 (19,156) 57,540 79,975
Cash provided by (used for)
financing activities 57,431 (101,390) 12,345 (39,637) (1,455
Balance Sheet Data:
Total assets 941,675 860,943 828,680 993,398 1,052,666
Long-term debt, less current
maturities 566,491 518,718 508,225 368,589 416,922
Redeemable preferred stock of 17,732 17,552 16,342 -- --
subsidiary
Stockholders' equity 53,754 69,494 39,378 230,861 232,424
per outstanding common
share $ 3.34 $ 4.32 $ 2.50 $ 14.10 $ 13.81
</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 holds a significant
equity interest in Nacanco Paketleme ("Nacanco"), and, during the period
covered by this report, held a significant equity interest in Shared
Technologies Fairchild Inc. ("STFI"). (See Item 8, Note 24 to Financial
Statements, Subsequent Events, as to the disposition of the Company's
interest in STFI.)
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 66% 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
The Company has effected a series of transactions designed to: (i)
reduce its total indebtedness and annual interest expense; (ii) increase the
number of publicly held shares of Class A Common Stock; and (iii) increase
the Company's operating and financial flexibility.
On November 20, 1997, Shared Technologies Fairchild Inc. ("STFI"), a
corporation of which the Company owned approximately 42% of the outstanding
common stock, executed a Merger Agreement with Intermedia Communications Inc.
("Intermedia"), pursuant to which holders of STFI common stock would receive
$15.00 per share in cash (the "STFI Merger"). On March 10, 1998, the STFI
Merger was consummated. In the quarter ended December 28, 1997 the Company
was paid approximately $85,000 in cash (before tax and selling expenses) in
exchange for preferred stock of STFI owned by the Company. The Company
received an additional $93,000 in cash (before tax and selling expenses) in
the third quarter of Fiscal 1998, in exchange for the 6,225,000 shares of
common stock of STFI owned by the Company.
On December 19, 1997, the Company completed a secondary offering of
public securities. The offering consisted of an issuance of 3,000,000 shares
of the Company's Class A Common Stock at $20.00 per share (the "Offering").
On December 19, 1997, immediately following the Offering, the Company
restructured its FHC and RHI Credit Agreements by entering into a new six-and-
a-half-year credit facility to provide the Company with a $300 million senior
secured credit facility (the "Facility") consisting of (i) a $75 million
revolving loan with a letter of credit sub-facility of $30 million and a $10
million swing loan sub-facility, and (ii) a $225 million term loan.
On January 13, 1998, certain subsidiaries of Banner (the "Selling
Subsidiaries") completed the disposition of substantially all of the assets
and certain liabilities of the Selling Subsidiaries to two wholly-owned
subsidiaries of AlliedSignal Inc. (the "Buyers"), in exchange for
unregistered shares of AlliedSignal Inc. common stock with an aggregate value
equal to $369 million (the "Banner Hardware Group Disposition"). The purchase
price received by the Selling Subsidiaries was based on the consolidated net
worth as reflected on an estimated closing date balance sheet for the assets
(and liabilities) conveyed by the Selling Subsidiaries to the Buyers. Such
estimated closing date balance sheet is subject to review by the parties, and
the purchase price will be adjusted (up or down) based on the net worth as
reflected on the final Closing Date Balance Sheet. The assets transferred to
the Buyers consists primarily of Banner's hardware group, which includes the
distribution of bearings, nuts, bolts, screws, rivets and other type of
fasteners, and its PacAero Unit. Approximately $196 million of the common
stock received from the Buyers was used to repay outstanding term loans of
Banner's subsidiaries and related fees. Banner effected the Banner Hardware
Group Disposition to concentrate its efforts on the rotables and jet engine
businesses and because the Banner Hardware Group Disposition presented a
unique opportunity to realize a significant return on the disposition of the
hardware group.
On March 2, 1998, the Company consummated the acquisition of Special-T,
from the stockholders of Special-T, pursuant to an agreement and plan of
merger dated as of January 28, 1998 as amended on February 20, 1998 and March
2, 1998. The purchase price for the acquisition was $46.5 million, of which
$23.5 million was paid in shares of Class A Common Stock of the Company and
the remainder was paid in cash. The purchase price is subject to certain post-
closing adjustments. Special-T is a distributor of aerospace fasteners.
On February 3, 1998, with the proceeds of the Offering, term loan
borrowings under the Facility, and the after tax proceeds the Company has
already received from the STFI Merger (collectively, the "Refinancing"), the
Company refinanced substantially all of its existing indebtedness (other than
indebtedness of Banner), consisting of (i) $63.0 million to redeem the 11
7/8% Senior Debentures due 1999; (ii) $117.6 million to redeem the 12%
Intermediate Debentures due 2001; (iii) $35.9 million to redeem the 13 1/8%
Subordinated Debentures due 2006; (iv) $25.1 million to redeem the 13% Junior
Subordinated Debentures due 2007; and (vi) accrued interest of $10.6 million.
On November 28, 1997, the Company acquired AS+C GmbH, Aviation Supply +
Consulting ("AS&C") in a business combination accounted for as a purchase.
The total cost of the acquisition was $13,245, which exceeded the fair value
of the net assets of AS&C by approximately $7,350, which is preliminarily
being allocated as goodwill and amortized using the straight-line method over
40 years. The Company purchased AS&C with cash borrowed. AS&C is an aerospace
parts, logistics, and distribution company primarily servicing the European
OEM market.
Fiscal 1997 Transactions
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.
Fiscal 1996 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 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>
(In thousands) For the years ended June 30,
1995 1996 1997
<S> <C> <C> <C>
Sales by Segment:
Aerospace Fasteners $215,364 $218,059 $269,026
Aerospace Distribution(a) - 129,973 411,765
Corporate and Other 4,987 7,046 15,185
Eliminations (b) - (5,842) (15,213)
Total Sales $220,351 $349,236 $680,763
Operating Income (Loss) by Segment:
Aerospace Fasteners(c) $(11,497) $ 135 $ 17,390
Aerospace Distribution(a) - 5,625 30,891
Corporate and Other(b) (18,836) (17,046) (14,782)
Total Operating Income $(30,333) $(11,286)$33,499
(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) 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>
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, 1995, 1996 and 1997. The pro forma results are based on the
historical financial statements of the Company and Banner as though the
Banner Hardware Group 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,
Sales by Segment: 1995 1996 1997
<S> <C> <C> <C>
Aerospace Fasteners $190,287 $197,099 $269,026
Aerospace Distribution(a) 108,359 153,830 187,768
Corporate and Other 5,462 7,046 15,185
Eliminations (b) - - (29)
Total Sales $304,108 $357,975 $471,950
Operating Income (Loss)by Segment:
Aerospace Fasteners(c) $(15,736) $ (2,639) $ 17,390
Aerospace Distribution(a) (9,995) 5,431 8,272
Corporate and Other(b) (16,260) (17,047) (14,782)
Total Operating Income $(41,991) $(14,255) $ 10,880
(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 $680.8 million in Fiscal 1997 improved significantly by
$331.5 million, or 94.9%, compared to sales of $349.2 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 58.5% from Fiscal 1995
reflecting strong sales performances from the Aerospace Fasteners segment and
the inclusion of four months of sales from the Aerospace Distribution
segment. On a pro forma basis, net sales increased 26.7% and 20.4% in Fiscal
1997 and 1996, respectively, as compared to the previous Fiscal periods.
Gross Margin as a percentage of sales was 12.0%, 21.2%, and 26.6% in
Fiscal 1995, 1996, and 1997, 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
24.0%, 22.7%, and 21.2% in Fiscal 1995, 1996, and 1997, 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 $30.3 million in Fiscal 1997 increased $44.8 million
compared to operating loss of $11.3 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 $19.0 million over Fiscal 1995 due primarily to improved cost efficiencies
applied in the Aerospace Fasteners segment. On a pro forma basis, operating
income increased $32.5 million in Fiscal 1997, as compared to Fiscal 1996,
and $20.4 million in Fiscal 1996, as compared to Fiscal 1995.
Net interest expense decreased 15.5% in Fiscal 1997 compared to Fiscal
1996, and decreased 11.9% 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 $5.7 million, $4.6 million and $6.7 million
in Fiscal 1995, 1996, and 1997, respectively. The 45.4% increase in Fiscal
1997 is due primarily to gains realized 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 $5.7 million tax benefit in Fiscal 1997 on a pre-
tax loss of $7.1 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 $29.8 million.
Earnings from discontinued operations, net, include the earnings, net of
tax, from Fairchild Technologies in Fiscal 1995, 1996 and 1997, STFI in
Fiscal 1996 and 1997, and FCS, DME and Data in Fiscal 1995 and 1996.
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 $41.6 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 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 7.0% in 1995 to 4.5% in
1996 to 2.8% in 1997.
Backlog of Orders
Backlog is significant to all of the Company's operations, due to long-
term production requirements of its customers. The Company's backlog of
orders as of June 30, 1997 in the Aerospace Fasteners segment and Aerospace
Distribution segment amounted to $195.7 million and $90.9 million,
respectively, with a "Book-to-Bill" ratio of 1.3 and 1.1, respectively. The
Company anticipates that approximately 94.8% of the aggregate backlog at June
30, 1997 will be delivered by June 30, 1998.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities for the fiscal years ended June
30, 1997 and 1996 amounted to $100.1 million and $49.0 million, respectively.
The primary use of cash for operating activities in fiscal 1997 was an
increase in accounts receivable of $48.7 million and inventories of $36.9
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
$37.5 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 $39.6 million, respectively.
The primary use of cash for financing activities in fiscal 1997 was the
repayment of debt and the repurchase of debentures of $155.6 million offset
by proceeds from the issuance of additional debt of $154.3 million. The
primary use of cash for financing activities in fiscal 1996 was the repayment
of debt and the repurchase of debentures of $195.4 million which was
partially offset by proceeds from the issuance of additional debt of $156.5
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.
With the proceeds of the Offering, borrowings under the Facility and the
after tax proceeds the Company has already received from the STFI Merger, the
Company refinanced 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 reduced the Company's total net
indebtedness by approximately $132 million and reduced the Company's annual
interest expense, on a pro forma basis, by approximately $21 million. The
completion of the STFI Merger will reduce the Company's annual interest
expense by approximately $3 million. In addition, a portion of the proceeds
from the Banner Hardware Group Disposition were 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 increase in the Company's shareholders' equity is expected to be
approximately $40 million resulting a projected gain of $90 million to be
recorded at the closing of the Banner Hardware Group Disposition, and an
estimated tax provision of $39 million and a minority interest effect of $20
million. The operating income of the subsidiaries included in the Banner
Hardware Group Disposition was $6.1 million and $14.1 million for the three
and six months ended December 28, 1997, respectively. 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 AlliedSignal stock.
For the Company's fiscal years 1995, 1996, and 1997, and for the first
six months of fiscal 1998, Fairchild Technologies ("Technologies") had
operating losses of approximately $1.5 million, $1.5 million, $3.6 million,
and $5 million, respectively. In addition, as a result of the downturn in the
Asian markets, Technologies has experienced delivery deferrals, reduction in
new orders, lower margins and increased price competition.
In response, in February, 1998, the Company adopted a formal plan to
enhance the opportunities for disposition of Technologies, while improving
the ability of Technologies to operate more efficiently. The plan includes a
reduction in production capacity and headcount at Technologies, and the
pursuit of potential vertical and horizontal integration with peers and
competitors of the two divisions that constitute Technologies, or the
inclusion of those divisions in the Spin-Off. If the Company elects to
include Technologies in the Spin-Off, the Company believes that it would be
required to contribute substantial additional resources to allow Technologies
the liquidity necessary to sustain and grow both the Fairchild Technologies'
operating divisions.
In connection with the adoption of such plan, the Company will take an
after-tax reserve of approximately $22 million in discontinued operations in
the third fiscal quarter ending March 29, 1998, of which $14 million (net of
income tax benefit of $4 million) relates to an estimated loss on the
disposal of certain assets of Technologies, and $8 million relates to a
provision for expected operating losses over the next twelve months at
Technologies. While the Company believes that $22 million is a sufficient
charge for the expected losses in connection with the disposition of
Technologies, there can be no assurance that the reserve is adequate.
In order to focus its operations on the aerospace industry, the Company
is considering distributing (the "Spin-Off") to its shareholders all of the
stock of a subsidiary to be formed ("Spin-Co"), which may own substantially
all of the Company's non-aerospace assets. Although the Company's ability to
effect the Spin-Off is uncertain, the Company may effect a spin-off of
certain non-aerospace assets as soon as it is reasonably practicable
following receipt of a solvency opinion relating to Spin-Co and all necessary
governmental and third party approvals. In order to effect the Spin-Off,
approval is required from the board of directors of the Company, however,
shareholder approval is not required. The composition of the assets and
liabilities to be included in Spin-Co, and accordingly the ability of the
Company to consummate the Spin-Off, is contingent, among other things, on
obtaining consents and waivers under the Company's New Credit Facility. In
addition, the Company may encounter unexpected delays in effecting the Spin-
Off, and the Company can make no assurance as to the timing thereof. In
addition, prior to the consummation of the Spin-Off, the Company may sell,
restructure or otherwise change the assets and liabilities that will be in
Spin-Co, or for other reasons elect not to consummate the Spin-Off.
Consequently, there can be no assurance that the Spin-Off will occur.
In connection with the possible Spin-Off, it is anticipated that the
Company will enter into an indemnification agreement pursuant to which Spin-
Co 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 matter described under "Legal Proceedings"; certain environmental
liabilities currently recorded as $7.5 million, but for which it is
reasonably possible the total expense could be $12.3 million on an
undiscounted basis; certain retiree medical cost and liabilities related to
discontinued operations for which the Company has accrued approximately $31.3
million as of December 28, 1997 (see Note 11 to the Company's Consolidated
Financial Statements); and certain tax liabilities. In addition, the Spin-Co
would also be responsible for all liabilities relating to the Technologies
business and an allocation of corporate expenses. Responsibility for such
liabilities would require significant commitments.
Should the Spin-Off, as presently contemplated, occur prior to June of
1999, the 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
shareholders. The amount of the tax to the Company and its shareholders is
uncertain, and if the tax is material to the Company, the Company may elect
not to consummate the 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 the Spin-Off to minimize the tax
consequences thereof to the Company and its shareholders.
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 of its systems are Year 2000 compliant.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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.
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
Report of Independent Public Accountants 16
Consolidated Balance Sheets as of June 30, 1996 and 1997 17
Consolidated Statements of Earnings For The Three Years Ended June 30,
1995, 1996, and 1997 19
Consolidated Statements of Stockholders' Equity For The Three Years
Ended June 30, 1995, 1996, and 1997 20
Consolidated Statements of Cash Flows For The Three Years Ended June 30,
1995, 1996, and 1997 21
Notes to Consolidated Financial Statements 22
Supplementary data regarding "Quarterly Financial Information (Unaudited)" is
set forth under Item 8 in Note 23 to Consolidated Financial Statements.
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, 1996 and 1997, and the related consolidated statements of earnings,
stockholders' equity and cash flows for the years ended June 30, 1995, 1996
and 1997. 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, 1996 and 1997, and the results of
their operations and their cash flows for the years ended June 30, 1995, 1996
and 1997, 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 February 28, 1998)
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
June 30 June 30,
ASSETS 1996 1997
<S> <C> <C>
Current Assets:
Cash and cash equivalents (of which
$8,224 and $4,839 is restricted) $ 39,649 $ 19,420
Short-term investments 10,498 25,647
Accounts receivable-trade, less 89,164 151,361
allowances of $5,449 and $6,905
Notes Receivable 170,384 --
Inventories:
Finished goods 234,395 292,441
Work-in-process 12,909 20,357
Raw materials 13,989 10,567
261,293 323,365
Net current assets of discontinued 2,179 17,884
operations
Prepaid expenses and other current assets 20,283 34,490
Total Current Assets 593,450 572,167
Property, plant and equipment, net of
accumulated
depreciation of $78,593 and $131,646 86,645 121,918
Net assets held for sale 45,405 26,147
Net noncurrent assets of discontinued 4,622 14,495
operations
Cost in excess of net assets acquired
(Goodwill), less
accumulated amortization of $31,885 and 139,504 154,129
$36,627
Investments and advances, affiliated 53,018 55,678
companies
Prepaid pension assets 57,660 59,742
Deferred loan costs 7,825 9,252
Long-term investments 585 4,120
Notes receivable and other assets 4,684 35,018
Total Assets $993,398 $1,052,666
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)
<CAPTION>
June 30, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
<S> <C> <C>
Current Liabilities:
Bank notes payable and current maturities
of long-term debt $ 83,517 $ 47,322
Accounts payable 59,894 75,522
Accrued liabilities:
Salaries, wages and commissions 15,407 17,138
Employee benefit plan costs 6,342 1,764
Insurance 15,863 15,021
Interest 10,732 11,213
Other accrued liabilities 24,179 52,182
72,523 97,318
Income taxes 24,635 5,863
Total Current Liabilities 240,569 226,025
Long-term debt, less current maturities 368,589 416,922
Other long-term liabilities 18,605 23,622
Retiree health care liabilities 44,412 43,351
Noncurrent income taxes 31,737 42,013
Minority interest in subsidiaries 58,625 68,309
Total Liabilities 762,537 820,242
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) 2,000 2,023
shares outstanding
Class B common stock, 10 cents par value;
authorized
20,000,000 shares, 2,632,516 (2,633,704
in 1996) shares issued
and outstanding 263 263
Paid-in capital 69,366 71,015
Retained earnings 208,618 209,949
Cumulative translation adjustment 2,453 939
Net unrealized holding loss on available- (120) (46)
for-sale securities
Treasury Stock, at cost, 6,241,596 shares (51,719)(51,719)
of Class A common stock
Total Stockholders' Equity 230,861 232,424
Total Liabilities and Stockholders'
Equity $993,398 $1,052,666
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,
1995 1996 1997
<S> <C> <C> <C>
Revenue:
Net sales $220,351 $349,236 $680,763
Other income 942 300 28
221,293 349,536 680,791
Costs and expenses:
Cost of goods sold 193,860 275,135 499,419
Selling, general & administrative 52,975 79,295 142,959
Research and development 974 94 100
Amortization of goodwill 3,817 3,979 4,814
Restructuring -- 2,319 --
251,626 360,822 647,292
Operating income (loss) (30,333) (11,286) 33,499
Interest expense 67,462 64,521 52,376
Interest income (3,349) (8,062) (4,695)
Net interest expense 64,113 56,459 47,681
Investment income, net 5,705 4,575 6,651
Equity in earnings of affiliates 1,607 4,821 4,598
Minority interest (2,293) (1,952) (3,514)
Non-recurring income (loss) -- (1,724) 2,528
Loss from continuing operations (89,427) (62,025) (3,919)
before taxes
Income tax benefit 33,147 29,839 5,735
Earnings (loss) from continuing (56,280) (32,186) 1,816
operations
Earnings (loss) from discontinued 22,360 15,612 (485)
operations, net
Gain (loss) on disposal of (259) 216,716 --
discontinued operations, net
Extraordinary items, net 355 (10,436) --
Net earnings (loss) $(33,824)$189,706 $1,331
Basic and Diluted Earnings Per
Share (see Note 24):
Earning (loss) from continuing
operations $ (3.49)$ (1.98) $ 0.11
Earnings from discontinued
operations, net 1.39 0.96 (0.03)
Gain (loss) on disposal of
discontinued operations, net (0.02) 13.37 --
Extraordinary items, net 0.02 (0.64) --
Net earnings (loss) $ (2.09) $ 11.71 $ 0.08
Weighted average shares outstanding 16,103 16,206 16,539
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 Class Cumulative
A B
Common Common Paid- Retai Transla Treasu
n n in ned tion ry
Stock Stock Capital Earni Adjustm Stock Other Total
ngs ent
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1994 $ $ $ $ $ $ $ $
1,965 270 66,775 52,73 872 (51,71 (1,40 69,494
6 9) 5)
Net loss - (33,8 -- - (33,82
-- -- - 24) - -- 4)
Cumulative translation - 2,187 - 2,187
adjustment, net -- -- - -- - --
Gain on purchase of 236 -- - 236
preferred stock of -- -- -- - --
subsidiary
Reduction of minimum - -- - 1,405 1,405
liability for pensions -- -- - -- -
Net unrealized holding - -- - (120) (120)
loss on available-for- -- -- - -- -
sale securities
Balance, June 30, 1995 1,965 270 67,011 18,91 3,059 (51,71 (120) 39,378
2 9)
Net earnings - 189,7 -- - 189,70
-- -- - 06 - -- 6
Cumulative translation - (606) - (606)
adjustment -- -- - -- - --
Fair market value of 1,148 -- - 1,148
stock warrants issued -- -- -- - --
Proceeds received from 28 1,481 -- - 1,509
stock options exercised -- -- - --
Exchange of Class B for 7 (7) - -- - -
Class A common stock - -- - -- -
Gain realized on (274) -- - (274)
retirement of preferred -- -- -- - --
stock of subsidiary
Balance, June 30, 1996 2,000 263 69,366 208,6 2,453 (51,71 (120) 230,86
18 9) 1
Net earnings - 1,331 -- - 1,331
-- -- - - --
Cumulative translation - (1,514) - (1,514
adjustment -- -- - -- - -- )
Fair market value of 546 -- - 546
stock warrants issued -- -- -- - --
Proceeds received from 23 1,103 -- - 1,126
options exercised -- -- - --
Net unrealized holding - -- - 74 74
gain on available-for- -- -- - -- -
sale securities
Balance, June 30, 1997 $ $ $ $209, $ $ $ $
2,023 263 71,015 949 939 (51,71 (46) 232,42
9) 4
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 Twelve Months Ended
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) (33,824) 189,706 1,331
Depreciation and amortization 20,503 21,045 24,307
Accretion of discount on long-term
liabilities 4,773 4,686 4,963
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 649 (9) (72)
Undistributed earnings of affiliates,
net (500) (3,857) (1,055)
Minority interest 2,293 1,952 3,514
Change in trading securities 1,879 (5,346) (5,733)
Change in receivables (3,909) (5,566) (48,693)
Change in inventories 1,063 (16,088) (36,868)
Change in other current assets (3,256) (2,989) (14,088)
Change in other non-current assets 4,590 3,609 (16,565)
Change in accounts payable, accrued
liabilities and other long-term liabilities (25,184)(37,477) 6,102
Non-cash charges and working capital
changes of discontinued operations 5,883 11,985 (17,201)
Net cash used for operating activities (25,040)(48,951)(100,058)
Cash flows from investing activities:
Proceeds received from (used for)
investment securities, net 12,281 265 (12,951)
Purchase of property, plant and
equipment (5,383) (5,680) (15,014)
Proceeds from sale of plant, property
and equipment 126 98 213
Equity investment in affiliates (1,051) (2,361) (1,749)
Minority interest in subsidiaries -- (2,817) (1,610)
Acquisition of subsidiaries, net of (511) -- (55,916)
cash acquired
Net proceeds received from the sale of -- 71,559 173,719
discontinued operations
Changes in net assets held for sale 1,441 5,894 385
Investing activities of discontinued
operations (26,059) (9,418) (7,102)
Net cash provided by (used for)
investing activities (19,156) 57,540 79,975
Cash flows from financing activities:
Proceeds from issuance of debt
71,339 156,501 154,294
Debt repayments and repurchase of
debentures, net (55,311) (195,420) (155,600)
Issuance of Class A common stock -- 1,509 1,126
Financing activities of discontinued
operations (3,683) (2,227) (1,275)
Net cash provided by (used for)
financing activities 12,345 (39,637) (1,455)
Effect of exchange rate changes on cash 665 (485) 1,309
Net decrease in cash and cash
equivalents (31,186) (31,533) (20,229)
Cash and cash equivalents, beginning of
the year 102,368 71,182 39,649
Cash and cash equivalents, end of the
year $ 71,182 $39,649 $ 19,420
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. In February 1998, the
Company adopted a formal plan to sell its interest in the Fairchild
Technologies segment. Accordingly, the Company's financial statements have
been restated to present the results of the Communications Services Segment,
STFI and Fairchild Technologies as discontinued operations.
Fiscal Year: The fiscal year ("Fiscal") of the Company ends June 30.
All references herein to "1995", "1996", and "1997" mean the fiscal years
ended June 30, 1995, 1996 and 1997, 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>
1995 1996 1997
<S> <C> <C> <C>
Interest $ 66,004 $ 66,716 $48,567
Income Taxes (3,056) 9,279 (1,926)
</TABLE>
Restricted Cash: On June 30, 1996 and 1997, the Company had restricted
cash of $8,224 and $4,839, 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 $4,756 and $4,868
higher at June 30, 1996 and 1997, respectively. Inventories from continuing
operations are valued as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1997
<S> <C> <C>
First-in, first-out (FIFO) $229,950 $293,469
Last-in, Last-out (LIFO) 31,343 29,896
Total inventories $261,293 $323,365
</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,
1996 1997
<S> <C> <C>
Land $ 10,408 $ 13,438
Building and improvements 40,597 54,907
Machinery and equipment 93,495 152,430
Transportation Vehicles 737 864
Furniture and fixtures 17,672 25,401
Construction in progress 2,329 6,524
Property, plant and equipment at 165,238 253,564
cost
Less: Accumulated depreciation (78,593) (131,646)
Net property, plant and equipment $ 86,645 $121,918
</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 1995, 1996 and 1997 was $3,794,
$3,827, and $2,847, 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 1995, 1996 and 1997.
Research and Development: Company-sponsored research and development
expenditures are expensed as incurred.
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.
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 (see Note 24). 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
$180,773 and $108,131 for 1995 and 1996, respectively. Net earnings from
discontinued operations was $13,994, net of $10,183 for taxes in 1995, and
$9,186, net of $5,695 for taxes in 1996.
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 and Fairchild Technologies.
6. PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma information for the twelve months
ended June 30, 1995 and June 30, 1996, 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>
1995 1996
<S> <C> <C>
Sales $445,502 $537,123
Loss from continuing operations (31,489) (14,291)
Basic and diluted loss from continuing
operations per share (1.96) (0.88)
Net loss (32,876) (15,766)
Basic and diluted net loss per share (2.04) (0.97)
</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>
<CAPTION>
1996 1997
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 $10,362 $ 5,954 $16,094 $ 7,398
Other investments 136 136 9,553 9,553
$10,498 $ 6,090 $25,647 $16,951
Long-term investments:
Other investments $ 585 $ 585 $ 4,120 $ 4,120
</TABLE>
Investment income is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Gross realized gain (loss) from sales $3,948 $(1,744) $ 1,673
Change in unrealized holding gain (36) 5,527 4,289
(loss) from trading securities
Gross realized loss from impairments (652) -- --
Dividend income 2,445 792 689
$5,705 $4,575 $6,651
</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>
1995 1996 1997
Statement of Earnings:
<S> <C> <C> <C>
Net sales $313,888 $295,805 $102,962
Gross profit 100,644 89,229 39,041
Earnings from continuing
operations 9,623 18,289 14,812
Discontinued operations, net - - -
Net earnings 9,623 18,289 14,812
Balance Sheet at June 30:
Current assets $53,843 $47,546
Non-current assets 37,201 40,878
Total assets 91,044 88,424
Current liabilities 27,392 26,218
Non-current liabilities 1,194 740
</TABLE>
The Company owns approximately 31.9% of Nacanco common stock. The
Company recorded equity earnings of $2,859, $5,487, and $4,673 from this
investment for 1995, 1996 and 1997, 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 $138 and $363 from this investment for 1995 and 1996, 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 $(120) and $114 from this investment in 1995 and
1997, respectively.
The Company's share of equity in earnings of all unconsolidated
affiliates for 1995, 1996 and 1997 was $1,607, $4,271, and $4,598,
respectively. The carrying value of investments and advances, affiliated
companies consists of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1997
<S> <C> <C>
Nacanco $20,886 $20,504
STFI 30,559 31,978
Others 1,573 3,196
$53,018 $55,678
</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,
1996 1997
<S> <C> <C>
Bank credit agreements $ 73,500 $ 100
Other short-term notes payable 2,821 15,429
Short-term notes payable (weighted
average interest rates of 8.6% and
7.8% in 1996 and 1997, respectively) $ 76,321 $15,529
Bank credit agreements $ 112,500 $177,250
11 7/8% RHI Senior debentures due 1999 85,769 85,852
12% Intermediate debentures due 2001 114,495 115,359
13 1/8% Subordinated debentures due 2006 35,061 35,188
13% Junior Subordinated debentures due
2007 24,800 24,834
10.65% Industrial revenue bonds 1,500 1,500
Capital lease obligations, interest from
4.4% to 10.5% 65 1,897
Other notes payable, collateralized by
property, plant and 1,595 6,835
equipment, interest from 4.3% to 10.0%
375,785 448,715
Less: Current maturities
(7,196) (31,793)
Net long-term debt $368,589 $416,922
</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:
<TABLE>
<CAPTION>
Revolving Term Total
Credit Loan Available
Facilities Facilities Facilities
<S> <C> <C> <C>
RHI Holdings, Inc.
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 letters of credit outstanding 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 1995 $ 103 $ 687 $ 27 $ 94
1996 $ 118 $ 761 $ 30 $ 82
1997 $ 127 $ 864 $ 34 $ 82
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>
1995 1996 1997
<S> <C> <C> <C>
Service cost (current period
attribution) $ 3,917 $ 3,513 $ 2,521
Interest cost of projected benefit
obligation 14,860 14,499 15,791
Actual return on plan assets (14,526)(39,430)(31,400)
Amortization of prior service cost 81 81 (180)
Net amortization and deferral (4,341) 21,495 11,157
(9) 158 (2,111)
Net periodic pension expense
(income) for other plans 78 (118) 142
including foreign plans
Net periodic pension expense
(income) $ 69 $ 40 $(1,969)
</TABLE>
Assumptions used in accounting for the plans were:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Discount rate 8.5% 8.5% 7.75%
Expected rate of increase in 4.5% 4.5% 4.5%
salaries
Expected long-term rate of return 9.0% 9.0% 9.0%
on plan assets
</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, 1996, and 1997, for
the plans:
<TABLE>
<CAPTION>
June 30,June 30,
1996 1997
Actuarial present value of benefit
obligations:
<S> <C> <C>
Vested $164,819 $183,646
Nonvested 6,169 7,461
Accumulated benefit obligation 170,988 191,107
Effect of projected future compensation
increases 905 683
Projected benefit obligation 171,893 191,790
Plan assets at fair value 224,692 237,480
Plan assets in excess of projected
benefit obligations 52,799 45,690
Unrecognized net loss 20,471 29,592
Unrecognized prior service cost (354) (571)
Unrecognized net transition assets (608) (315)
Prepaid pension cost prior to SFAS 109
implementation 72,308 74,396
Effect of SFAS 109 implementation (14,648) (14,654)
Prepaid pension cost $ 57,660 $ 59,742
</TABLE>
Plan assets include Class A Common Stock of the Company valued at a fair
market value of $11,094 and $26,287 at June 30, 1996 and 1997, 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 $701,
$779, and $642 for 1995, 1996 and 1997, respectively. The Company has
accrued approximately $36,995 and $34,965 as of June 30, 1996 and 1997,
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 $3,872, $3,877, and $3,349 for
the years ended June 30, 1995, 1996 and 1997, respectively. The components
of expense in Fiscal 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Service cost of benefits earned $ 321 $ 281 $ 140
Interest cost on liabilities 4,385 4,377 3,940
Net amortization and deferral (133) (2) (89)
Net periodic postretirement benefit cost $ 4,573 $ 4,656 $ 3,991
</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>
1996 1997
<S> <C> <C>
Accumulated postretirement benefit
obligations:
Retirees $46,846 $48,145
Fully eligible active participants 347 390
Other active participants 1,887 2,335
Accumulated postretirement benefit
obligation 49,080 50,870
Unrecognized net loss 2,086 6,173
Accrued postretirement benefit liability $46,994 $44,697
</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>
1995 1996 1997
<S> <C> <C> <C>
Current:
Federal $(7,956) $(40,640) $ 5,612) )
State 424 1,203 1,197
Foreign 1,191 (3,805) (49)
(6,341) (43,242) 6,760
Deferred:
Federal (24,754) 17,060 (15,939)
State (2,052) (3,657) 3,444
(26,806) 13,403 (12,495)
Net tax benefit $(33,147) $(29,839)$(5,735)
</TABLE>
The income tax provision (benefit) for continuing operations differs
from that computed using the statutory Federal income tax rate of 35%, in
Fiscal 1995, 1996 and 1997, for the following reasons:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Computed statutory amount $(31,299) $(21,709) $(1,372)
State income taxes, net of applicable
federal tax benefit (1,794) 782 778
Nondeductible acquisition valuation
items 1,420 1,329 1,064
Tax on foreign earnings, net of tax
credits 2,965 1,711 (1,938)
Difference between book and tax basis
of assets acquired and 1,366 1,040 (1,102)
liabilities assumed
Revision of estimate for tax accruals (5,000) (3,500) (5,335)
Other (805) (9,492) 2,170
Net tax benefit $(33,147) $(29,839 $(5,735)
</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>
1995 1996 1997
Deferred Deferred Deferred
(Provision) (Provision) June 30,(Provision) June 30,
Benefit Benefit 1996 Benefit 1997
<S> <C> <C> <C> <C> <C>
Deferred tax assets:
Accrued expenses $(2,218) $(1,643) $5,936 $ 504 $ 6,440
Asset basis differences (7,292) 1,787 2,064 (1,492) 572
Inventory - - - 2,198 2,198
Employee compensation
and benefits 106 (26) 5,408 (267) 5,141
Environmental reserves (1,202) (737) 4,512 (1,253) 3,259
Loss and credit
carryforward 17,991 (23,229) 8,796 (8,796) -
Postretirement benefits 514 (1,273) 19,334 138 19,472
Other 1,530 2,186 5,519 2,079 7,598
9,429 (22,935) 51,569 (6,889) 44,680
Deferred tax liabilities:
Asset basis differences 4,129 16,602 (22,565) (3,855) (26,420)
Inventory 3,176 4,684 (2,010) 2,010 -
Pensions 1,074 1,516 (18,243) (1,038) (19,281)
Other 8,998 (13,270) (29,507) 22,267 (7,240)
17,377 9,532 (72,325) 19,384 (52,941)
Net deferred tax
liability $26,806 $(13,403)$(20,756) $ 12,495 $ (8,261)
</TABLE>
The amounts included in the balance sheet are as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1997
<S> <C> <C>
Prepaid expenses and other current
assets:
Current deferred $ 8,012 $ 11,307
Income taxes payable:
Current deferred 20,797 (2,735)
Other current 3,838 8,598
$ 24,635 $ 5,863
Noncurrent income tax liabilities:
Noncurrent deferred $ 7,971 $ 22,303
Other noncurrent 23,766 19,710
$ 31,737 $ 42,013
</TABLE>
The 1995, 1996 and 1997 net tax benefits include the results of
reversing $5,000, $3,500 and $5,335, 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
On June 30, 1997, the Company had $68,309 of minority interest, of which
$67,649 represents Banner. Minority shareholders hold approximately 40.7% of
Banner's outstanding common stock.
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> <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
1996 and 1997 was $1.95and $6.90, 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:
[CAPTION]
<TABLE>
1996 1997
<S> <C> <C>
Risk-free interest rate 5.5%-6.6% 6.0%-6.7%
Expected life in years 4.27 4.65
Expected volatility 46% - 47% 43% - 45%
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 1996 or 1997. If stock options granted in 1996 and 1997 were
accounted for based on their fair value as determined under SFAS 123, pro
forma earnings would be as follows:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Net earnings:
As reported $189,706 $ 1,331
Pro forma 189,460 283
Basic earnings per share:
As reported $ 11.71 $ 0.08
Pro forma 11.69 0.02
Diluted earnings per share:
As reported $ 11.71 $ 0.08
Pro forma 11.69 0.02
</TABLE>
The pro forma effects of applying SFAS 123 are not representative of the
effects on reported net earnings for future years. SFAS 123 is not
applicable 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, 1996 and 1997, are as follows:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 39,649 $39,649 $19,420 $19,420
Investment securities:
Short-term equity securities 10,362 10,362 16,094 16,122
Short-term other investments 136 167 9,553 9,592
Long-term other investments 585 1,451 4,120 4,617
Notes receivable:
Current 170,384 170,384 - -
Long-term 3,702 3,702 1,300 1,300
Short-term debt 76,321 76,321 15,529 15,529
Long-term debt:
Bank credit agreement 112,500 112,500 177,250 177,250
Senior notes and subordinated
debentures 260,125 264,759 261,233 270,995
Industrial revenue bonds 1,500 1,500 1,500 1,500
Capitalized leases 65 65 1,897 1,897
Other 1,595 1,595 6,835 6,835
</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
</TABLE>
(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.
18. RELATED PARTY TRANSACTIONS
Corporate office administrative expense recorded by FHC and its
predecessors was billed to the Company on a monthly basis during 1995, 1996
and 1997. 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 $5,494 and $3,663 in Fiscal 1995,
and 1996, 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 1995, 1996 and 1997
was $6,695, $6,197, and $4,928, 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,
were previously reported under Corporate and Other, along with results two
smaller operations. Fairchild Technologies is now recorded in discontinued
operations.
The Company's financial data by business segment is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Sales:
Aerospace Fasteners $215,364 $218,059 $269,026
Aerospace Distribution (a) - 129,973 411,765
Corporate and Other 4,987 7,046 15,185
Eliminations (b) - (5,842) (15,213)
Total Sales $220,351 $349,236 $680,763
Operating Income (Loss):
Aerospace Fasteners $(11,497)$ 135 $ 17,390
Aerospace Distribution (a) - 5,625 30,891
Corporate and Other (18,836) (17,046) (14,782)
Operating Income (Loss) $(30,333)$(11,286)$ 33,499
Capital Expenditures:
Aerospace Fasteners $ 4,974 $ 3,841 $ 8,964
Aerospace Distribution - 1,556 4,787
Corporate and Other 409 283 1,263
Total Capital Expenditures $ 5,383 $ 5,680 $ 15,014
Depreciation and Amortization:
Aerospace Fasteners $ 15,619 $ 14,916 $ 16,112
Aerospace Distribution - 1,341 5,138
Corporate and Other 4,884 4,788 3,057
Total Depreciation and
Amortization $ 20,503 $ 21,045 $ 24,307
Identifiable Assets at June 30:
Aerospace Fasteners $290,465 $252,200 $346,533
Aerospace Distribution - 329,477 428,436
Corporate and Other 538,215 411,721 277,697
Total Identifiable Assets $828,680 $993,398 $1,052,666
(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:
[CAPTION]
<TABLE>
1995 1996 1997
<S> <C> <C> <C>
Sales by Geographic Area:
United States $164,153 $292,136 $580,453
Europe 55,404 56,723 100,310
Other 794 377 -
Total Sales $220,351 $349,236 $680,763
Operating Income by Geographic
Area:
United States $(30,537)$(12,175)$ 27,489
Europe 167 1,037 6,010
Other 37 (148) -
Total Operating Income $(30,333)$(11,286)$ 33,499
Identifiable Assets by Geographic
Area at June 30:
United States $760,756 $929,649 $855,233
Europe 69,027 63,749 197,433
Other (1,103) - -
Total Identifiable Assets $828,680 $993,398 $1,052,666
</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>
1995 1996 1997
<S> <C> <C> <C>
Export Sales
Europe $13,329 $27,330 $48,187
Asia (excluding Japan) 1,526 6,766 21,221
Japan 2,702 11,958 19,819
Canada 2,810 8,878 17,797
Other 911 8,565 15,907
Total Export Sales $21,278 $63,497 $122,931
</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 1996 quarters ended Oct. 1 Dec. 31 March 31June 30
<S> <C> <C> <C> <C>
Net sales
$ 53,015 $ 56,615 $92,973 $146,633
Gross profit
8,424 10,350 18,902 36,425
Earnings (loss) from continuing
operations (16,150) (12,918) (8,368) (4,196)
per share
(0.82) (0.81) (0.50) (0.24)
Earnings from discontinued operations,
net 10,734 7,322 2,102 (4,546)
per share
0.48 0.46 0.11 (0.27)
Gain (loss) from disposal of
discontinued operations, net (20) (7) 224,416 (7,673)
per share
- - 13.51 (0.45)
Extraordinary items, net
- - (10,436) -
per share
- - (0.62) -
Net earnings (loss)
(5,436) (5,603) 207,714 (6,969)
per share
(0.34) (0.35) 12.42 (0.41)
Market price range of Class A Stock:
High 6 8 _ 9 7/8 15 7/8
Low 2 7/8 4 _ 8 9 1/4
Close 5 1/8 8 1/2 9 3/8 14 5/8
Fiscal 1997 quarters ended Sept. 29 Dec. 29 March 30June 30
Net sales $ $ $ $
137,613 151,842 179,480 211,828
Gross profit
37,092 36,785 47,552 59,915
Earnings (loss) from continuing
operations (3,363) (1,299) (117) 6,595
per share
(0.20) (0.08) (0.01) 0.40
Earnings from discontinued operations,
net (1,255) (1,678) 157 2,291
per share
(0.07) (0.09) 0.01 0.14
Net earnings (loss)
(4,618) (2,977) 40 8,886
per share
(0.27) (0.17) - 0.52
Market price of Class A Stock:
High 17 17 _ 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>
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,
and (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. Gain on disposal of discontinued
operations Includes $161,406 resulting primarily from the gain on the merger
of FCSC with STI in the third quarter of Fiscal 1996 and the gain on the sale
of DME. 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
Effective December 28, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128). This statement
replaces the previously reported primary and fully diluted earnings (loss)
per share with basic and diluted earnings (loss) per share. Unlike primary
earnings (loss) per share, basic earnings (loss) per share excludes any
diluted effects of options. Diluted earnings (loss) per share is very similar
to the previously reported fully diluted earnings (loss) per share. All
earnings (loss) per share have been restated to conform to the requirements
of SFAS 128.
The computation of diluted earnings (loss) per share for Fiscal 1995 and
1996 excluded the effect of incremental common shares attributable to the
potential exercise of common stock options outstanding and warrants
outstanding, because their effect was antidilutive. These shares could
potentially dilute basic earnings (loss) per share in the future. Subsequent
to June 30, 1997, the Company issued three million shares of Class A common
stock through an equity offering and also entered into a merger agreement
which, as mentioned below, also increased the number of outstanding shares.
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 $108 million in cash
(before tax) in exchange for certain preferred stock of STFI and expects to
receive an additional $70 million in cash (before tax) in the first three
months of 1998 in exchange for the 4,669,352 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, $108,710 and $91,290 in 1995 and 1996,
respectively. Net earnings from discontinued operations was, $9,849, $7,901
and $3,149, in 1995, 1996, and 1997, respectively. Gain on disposal of
discontinued operations includes a $163,130 nontaxable gain resulting from
the Merger (See Note 3).
On December 19, 1997, the Company completed a secondary offering of
public securities. The offering consisted of an issuance of 3,000,000 shares
of the Company's Class A Common Stock at $20.00 per share (the "Offering").
Immediately following the Offering, the Company restructured its FHC and RHI
Credit Agreements by entering into a new six-and-a-half-year credit facility
to provide the Company with a $300,000 senior secured credit facility (the
"Facility") consisting of (i) a $75,000 revolving loan with a letter of
credit sub-facility of $30,000 and a $10,000 swing loan sub-facility, and
(ii) a $225,000 term loan.
On January 13, 1998, certain subsidiaries (the "Selling Subsidiaries"),
of Banner Aerospace, Inc. ("Banner", a majority-owned subsidiary of the
Registrant), completed the disposition of substantially all of the assets and
certain liabilities of the Selling Subsidiaries to two wholly-owned
subsidiaries of AlliedSignal Inc. (the "Buyers"), in exchange for
unregistered shares of AlliedSignal Inc. common stock with an aggregate value
equal to $369,000 (the "Banner Hardware Group Disposition"). The purchase
price received by the Selling Subsidiaries was based on the consolidated net
worth as reflected on an estimated closing date balance sheet for the assets
(and liabilities) conveyed by the Selling Subsidiaries to the Buyers. Such
estimated closing date balance sheet is subject to review by the parties, and
the purchase price will be adjusted (up or down) based on the net worth as
reflected on the final closing date balance sheet. The assets transferred to
the Buyers consists primarily of Banner's hardware group, which includes the
distribution of bearings, nuts, bolts, screws, rivets and other type of
fasteners, and its PacAero unit. Approximately $196,000 of the common stock
received from the Buyers was used to repay outstanding term loans of Banner's
subsidiaries and related fees. Banner effected the Banner Hardware Group
Disposition to concentrate its efforts on the rotables and jet engine
businesses and because the Banner Hardware Group Disposition presented a
unique opportunity to realize a significant return on the disposition of the
hardware group.
On February 3, 1998, with the proceeds of the Offering, term loan
borrowings under the Facility, and the after tax proceeds the Company has
already received from the STFI Merger (collectively, the "Refinancing"), the
Company refinanced substantially all of its existing indebtedness (other than
indebtedness of Banner), consisting of (i) $63,000 to redeem the 11 7/8%
Senior Debentures due 1999; (ii) $117,600 to redeem the 12% Intermediate
Debentures due 2001; (iii) $35,856 to redeem the 13 1/8% Subordinated
Debentures due 2006; (iv) $25,063 to redeem the 13% Junior Subordinated
Debentures due 2007; and (v) accrued interest of $10,562.
On January 28, 1998, the Company entered into a merger agreement to
acquire Edwards and Lock Management Corporation, doing business as Special-T
Fasteners ("Special-T"), in a business combination to be accounted for as a
purchase. Total cost of the acquisition will be approximately $46,500, and
will be funded with $23,000 of available cash and $23,500 of unregistered
shares of the Company's Class A Common Stock.. The purchase price is subject
to certain post-closing adjustments. Special-T is a distributor of aerospace
fasteners. Special-T distributes precision fasteners worldwide, utilized
primarily in the aerospace industry, to both government and commercial
manufacturers.
Net sales of Fairchild Technologies ("Technologies") for 1995, 1996 and
1997 were $36,489, $60,284, and $51,197, respectively. For the Company's
fiscal years 1995, 1996, and 1997, Technologies had operating losses of
approximately of $1,483, $1,475, and $3,634, respectively.
In February 1998, the Company adopted a formal plan to enhance the
opportunities for disposition of Technologies, while improving the ability of
Technologies to operate more efficiently. The plan includes a reduction in
production capacity and headcount at Technologies, and the pursuit of
potential vertical and horizontal integration with peers and competitors of
the two divisions that constitute Technologies, or the inclusion of those
divisions in the Spin-Off. If the Company elects to include Technologies in
the Spin-Off, the Company believes that it would be required to contribute
substantial additional resources to allow Technologies the liquidity
necessary to sustain and grow both the Fairchild Technologies' operating
divisions.
In connection with the adoption of such plan, the Company will take an
after-tax reserve of approximately $22 million in discontinued operations in
the third fiscal quarter ending March 29, 1998, of which $14 million (net of
income tax benefit of $4 million) relates to an estimated loss on the
disposal of certain assets of Technologies, and $8 million relates to a
provision for expected operating losses over the next twelve months at
Technologies. While the Company believes that $22 million is a sufficient
charge for the expected losses in connection with the disposition of
Technologies, there can be no assurance that the reserve is adequate.
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 15).
(a)(2) Financial Statement Schedules and Report of Independent Public
Accountants.
Schedule Number Description Page
I Condensed Financial Information of Parent Company
53
II Valuation and Qualifying Accounts 57
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 (except with the matters discussed in Note 24 to
those financial statements, as to which the date is February 28, 1998). 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 February 28, 1998)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
<TABLE>
THE FAIRCHILD CORPORATION
CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY
BALANCE SHEETS (NOT CONSOLIDATED)
<CAPTION>
(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
The accompanying notes are an integral part of these condensed financial
statements.
</TABLE>
Schedule I
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL STATEMENTS OF THE COMPANY
STATEMENT OF EARNINGS (NOT CONSOLIDATED)
(In thousands)
<CAPTION>
For the Years Ended June 30,
1997 1996 1995
<S> <C> <C> <C>
Costs and Expenses:
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)
The accompanying notes are an integral part of these condensed financial
statements.
</TABLE>
<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)
The accompanying notes are an integral part of these condensed financial
statements.
</TABLE>
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,
1995 1996 1997
<S> <C> <C> <C>
Beginning balance $ 901 $2,738 $5,449
Charges to cost
and expenses 1,569 1,766 1,978
Charges to other
accounts (a) 410 2,405 445
Amounts written
off (142) (1,460) (967)
Ending Balance $2,738 $5,449 $6,905
(a) Recoveries of amounts written off in prior periods, foreign currency
translation and the change in related noncurrent taxes.
</TABLE>
(a)(3) Exhibits.
3.1 Registrant's Restated Certificate of Incorporation (incorporated by
reference to Exhibit "C" of Registrant's Proxy Statement dated October 27,
1989).
3.2 Registrant's Amended and Restated By-Laws, as amended as of November 21,
1996 (incorporated by reference to the December 29, 1996 10-Q).
4.1 Specimen of Class A Common Stock certificate (incorporated by reference
to Registration Statement No. 33-15359 on Form S-2).
4.2 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")).
4.3 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).
4.4 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").
4.5 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).
4.6 First Supplemental Indenture dated as of November 26, 1986, to the Note
Indenture (incorporated by reference to the December 1986 10-Q).
4.7 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")).
4.8 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").
4.9 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).
4.10 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")).
4.11 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).
4.12 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).
4.13 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).
4.14 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).
4.15 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).
4.16 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).
10.1 Deferred Compensation Agreement between Registrant and Samuel J. Krasney
dated July 14, 1972, as amended November17, 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).
10.2 Amendment to the Krasney Deferred Compensation Agreement dated September
6, 1990 (incorporated by reference to 1991 10-K).
10.3 Amended and Restated Employment Agreement between Registrant and Samuel
J. Krasney dated April 24, 1990 (incorporated by reference to the 1990 10-K).
10.4 Letter Agreements dated August 4, 1993 among Samuel J. Krasney, The
Fairchild Corporation and Jeffrey J. Steiner (incorporated by reference to
1993 10-K).
10.5 1988 U.K. Stock Option Plan of Banner Industries, Inc. (incorporated by
reference to the 1988 10-K).
10.6 Description of grants of stock options to non-employee directors of
Registrant (incorporated by reference to the 1988 10-K).
10.7 Amended and Restated Employment Agreement between Registrant and Jeffrey
J. Steiner dated September 10, 1992 (incorporated by reference to 1993 10-K).
10.8 Letter Agreement dated October 23, 1991 between Registrant and Eric
Steiner (incorporated by reference to 1992 10-K).
10.9 Letter Agreement dated October 23, 1991 between Registrant and John D.
Jackson (incorporated by reference to 1992 10-K).
10.10 Letter Agreement dated October 23, 1991 between Registrant and
Michael T. Alcox (incorporated by reference to 1992 10-K.
10.11 Letter Agreement dated October 23, 1991 between Registrant and
Donald E. Miller (incorporated by reference to 1992 10- K).
10.12 Letter Agreement dated October 23, 1991 between Registrant and John
L. Flynn (incorporated by reference to 1992 10-K).
10.13 Letter Agreement dated April 8, 1993 between Registrant and Thomas
Flaherty (incorporated by reference to 1993 10-K).
10.14 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).
10.15 Letter Agreement dated October 21, 1994, as amended December 21,
1994, between Registrant and Eric Steiner (incorporated by
reference to the 1995 10-K).
10.16 Letter Agreement dated October 21, 1994, as amended December 21,
1994, between Registrant and Michael T. (incorporated by
reference to the 1995 10-K).
10.17 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).
10.18 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).
10.19 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).
10.20 Letter Agreement dated September 9, 1996, between Registrant and
Colin M. Cohen (incorporated by reference to the 1997 10-K).
10.21 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).
10.22 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).
10.23 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).
10.24 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).
10.25 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).
10.26 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).
10.27 Restated and Amended Credit Agreement dated as of July 26, 1996,
(the "FHC Credit Agreement"), among FHC, Citicorp USA, Inc. and certain
financial institutions.
10.28 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).
10.29 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).
10.30 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).
10.31 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).
10.32 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).
10.33 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).
10.34 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).
10.35 1986 Non-Qualified and Incentive Stock Option Plan (incorporated by
reference to Registrant's Proxy Statement dated November 15, 1990).
10.36 1986 Non-Qualified and Incentive Stock Option Plan (incorporated by
reference to Registrant's Proxy Statement dated November 21, 1997).
10.37 1996 Non-Employee Directors Stock Option Plan (incorporated by
reference to Registrant's Proxy Statement dated November 21, 1997).
10.38 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).
10.39 Employment Agreement between RHI Holdings, Inc., and Jacques
Moskovic, dated as of December 29, 1994. (incorporated by reference to the
1996 10-K/A).
10.40 Employment Agreement between Fairchild France, Inc., and Jacques
Moskovic, dated as of December 29, 1994. (incorporated by reference to the
1996 10-K/A).
10.41 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).
10.42 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.).
10.43 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).
10.44 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).
22 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.
99.1 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).
99.2 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).
99.3 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: April 3, 1998
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