UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended June 30, 1998 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
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 [ ].
On September 17, 1998, the aggregate market value of the common shares
held by nonaffiliates of the Registrant (based upon the closing price of
these shares on the New York Stock exchange) was approximately $197 million
(excluding shares deemed beneficially owned by affiliates of the Registrant
under Commission Rules).
As of September 17, 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 19,494,291
Class B common stock, $.10 par value 2,624,662
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement for the 1998
Annual Meeting of Stockholders' to be held on November 19, 1998 (the "1998
Proxy Statement"), which the Registrant intends to file within 120 days
after June 30, 1998, are incorporated by reference into Parts III and IV.
THE FAIRCHILD CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JUNE 30, 1998
PART I Page
Item 1. Business 4
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Stockholders 11
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters 12
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition 15
Item 8. Financial Statements and Supplementary Data 27
Item 9. Disagreements on Accounting and Financial Disclosure 66
PART III
Item 10. Directors and Executive Officers of the Company 67
Item 11. Executive Compensation 67
Item 12. Security Ownership of Certain Beneficial Owners and
Management 67
Item 13. Certain Relationships and Related Transactions 67
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 68
PART I
ITEM 1. BUSINESS
General
The Fairchild Corporation (the "Company") was incorporated in October
1969, under the laws of the State of Delaware. The Company is the largest
aerospace fastener manufacturer in the world and an international supplier
to the aerospace industry, distributing a wide range of aircraft parts and
related support services. Through internal growth and strategic
acquisitions, the Company is 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 Air Lines and US
Airways.
The Company's primary business focus is on the aerospace industry and
its aerospace business consists primarily of two segments: aerospace
fasteners and aerospace parts distribution. The aerospace fasteners segment
manufactures and markets high performance fastening systems used in the
manufacturing and maintenance of commercial and military aircraft by
original equipment manufacturers ("OEMs"). The aerospace distribution
segment stocks and distributes a wide variety of aircraft parts to
commercial airlines and air cargo carriers, other distributors, fixed-base
operators, corporate aircraft operators and other aerospace companies. The
Company's aerospace distribution business is conducted through its 83%
owned subsidiary, Banner Aerospace, Inc. ("Banner"). For a comparison of
the sales of the Company's business segments for each of the last three
fiscal years, see Item 7, "Management's Discussion and Analysis of Results
of Operations and Financial Condition", which is herein incorporated by
reference.
The Company also owns a technology products unit, which designs,
manufactures, and markets high performance production equipment and systems
required for the manufacture of semiconductor chips and recordable compact
discs, and a significant equity interest in Nacanco Paketleme ("Nacanco"),
which manufactures customized cans for the beverage industry in Turkey.
Recent Developments
Recent developments of the Company are incorporated herein by
reference from "Recent Developments and Significant Business Combinations"
included in Item 7 "Management's Discussion and Analysis of Results of
Operations and Financial Condition".
Financial Information about Business Segments
The Company's business segment information is incorporated herein by
reference from Note 20 of the Company's consolidated financial statements
included in Item 8, "Financial Statements and Supplementary Data".
Narrative Description of Business Segments
Aerospace Fasteners
The Company, through its Aerospace Fasteners segment, is a leading
worldwide manufacturer and supplier of fastening systems used in the
construction and maintenance of commercial and military aircraft. The
Aerospace Fasteners segment accounted for 50.9% of total sales for the year
ended June 30, 1998.
Products
In general, aerospace fasteners produced by the Company are used to
join materials in applications that are not of themselves critical to
flight. Products range from standard aerospace screws, to more complex
systems that fasten airframe structures, and sophisticated latching or
quick disconnect mechanisms that allow efficient access to internal parts
which require regular servicing or monitoring. The Aerospace Fasteners
segment also manufactures and supplies fastening systems used in non-
aerospace industrial and electronic niche applications. The Aerospace
Fasteners segment produces and sells products under various trade names and
trademarks including Voi-Shan (fasteners for aerospace structures),
Screwcorp (standard externally threaded products for aerospace
applications), RAM (custom designed mechanisms for aerospace applications),
Camloc (components for the industrial, electronic, automotive and aerospace
markets), and Tridair and Rosan (fastening systems for highly-engineered
aerospace, military and industrial applications).
Principal product lines of the Aerospace Fasteners segment include:
Standard Aerospace Airframe Fasteners - These fasteners consist of
standard externally threaded fasteners used in non-critical airframe
applications on a wide variety of aircraft. These fasteners include Hi-
Torque Speed Drive, Tri-Wing, Torq-Set, Phillips and Hex Heads.
Commercial Aerospace Structural and Engine Fasteners - These fasteners
consist of more highly engineered, permanent or semi-permanent fasteners
used in non-critical but more sophisticated airframe and engine
applications, which could involve joining more than two materials. These
fasteners are generally engineered to specific customer requirements or
manufactured to specific customer specifications for special applications,
often involving exacting standards. These fasteners include Hi-Lok, Veri-
Lite, Eddie-Bolt2 and customer proprietary engine nuts.
Proprietary Products and Fastening Systems - These very highly
engineered, proprietary fasteners are designed by the Company for specific
customer applications and include high performance structural latches and
hold down mechanisms. These fasteners are usually proprietary in nature
and are used primarily in either commercial aerospace or military
applications. These fasteners include Visu-Lok, Composi-Lok, Keen-serts,
Mark IV, Flatbeam and Ringlock.
Highly Engineered Fastening Systems for Industrial Applications -
These highly engineered fasteners are designed by the Company for specific
niche applications in the electronic, automotive and durable goods markets
and are sold under the Camloc trade name.
Sales and Markets
The products of the Aerospace Fasteners segment are sold primarily to
domestic and foreign OEMs of airframes, subcontracors to OEMs, engine
assemblies, and to the maintenance and repair market through distributors.
Sixty-six percent of its sales are domestic. Major customers include OEMs
such as Boeing, Airbus, and Aerospatiale and their subcontractors, as well
as major distributors such as AlliedSignal, Tri-Star Aerospace and Wesco
Aircraft Hardware. Recently, OEMs have significantly increased their
production levels. In addition, OEMs have implemented programs to reduce
inventories and pursue just-in-time relationships. This has allowed parts
distributors to significantly expand their business due to their ability to
better meet OEM objectives. In response, the Company, which formerly
supplied the OEMs directly, is expanding efforts to provide parts through
its subsidiaries, which are distributors, such as Special-T Fasteners in
the Unites States and AS+C GmbH in Europe. No single customer accounts for
more than 10% of the Company's consolidated sales.
Products are marketed by a direct sales force team and distribution
companies in the United States and Europe. The direct sales force team is
organized by customer and region. The internal sales force is organized by
facility and product range and is focused on servicing customers needs,
identifying new product applications, and obtaining the approval of new
products. All the Company's products are marketed through centralized
advertising and promotional activities.
Revenues in the Aerospace Fasteners segment bear a strong relationship
to aircraft production. As OEMs searched for cost cutting opportunities
during the aerospace industry recession, parts manufacturers, including the
Company, accepted lower-priced orders and/or smaller quantity orders to
maintain market share, at lower profit margins. However, during recent
years, this situation has improved as build rates in the aerospace industry
have increased and resulted in capacity constraints. All though lead times
have increased, the Company has been able to provide its major customers
with favorable pricing, while maintaining or increasing margins by
negotiating for larger minimum lot sizes that are more economic to
manufacture. In addition, the Company has eliminated "make and hold"
contracts under which large volume buyers would require current production
of parts for long-term unspecified dates of delivery. Overall, existing
backlog is anticipated to result in higher margins due to larger and more
efficient lot sizes, combined with the utilization of recently acquired
customized production capacity and training programs for all employees.
Fasteners also have applications in the automotive/industrial markets,
where numerous special fasteners are required (such as engine bolts, wheel
bolts and turbo charger tension bolts). The Company is actively targeting
the automotive market as a hedge against any potential downturn in the
aerospace industry.
Manufacturing and Production
The Aerospace Fasteners segment has eight primary manufacturing
facilities, of which three are located in the United States and five are
located in Europe. Each facility has virtually complete production
capability, and subcontracts only those production steps which exceed
capacity. Each plant is designed to produce a specified product or group
of products, determined by the production process involved and
certification requirements. The Company's largest customers have recognized
its quality and operational controls by conferring ISO D1-9000A status at
all of its U.S. facilities, and ISO D1-9000 status at all of its European
facilities. All of its facilities are "preferred suppliers" and have
received all SPC and NADCAP approvals from OEMs. The Company is the first
and only aerospace fastener manufacturing company with all of its
facilities holding ISO-9000 approval.
The Company has a fully operational modern information system at all
of its U.S. facilities, which was expanded to most of its European
operations in Fiscal 1998. The Company will expand this information system
to the remaining European operations in Fiscal 1999. The new system
performs detailed and timely cost analysis of production by product and
facility. Updated MIS systems also help the Company to better service its
customers. OEMs require each product to be produced in an OEM-qualified/OEM-
approved facility.
Competition
Despite intense competition in the industry, the Company remains the
dominant manufacturer of aerospace fasteners. The worldwide aerospace
fastener market is estimated to be $1.7 billion (before distributor
resales). The Company holds approximately 23% of the market and competes
with SPS Technologies, Hi-Shear, and Huck, which the Company believes hold
approximately 13%, 11% and 10% of the market, respectively. In Europe, its
largest competitors are Blanc Aero and Southco Fasteners.
The Company competes primarily in the highly-engineered "systems"
segment where its broad product range allow it to more fully serve each OEM
and distributor. The Company's product array is diverse and offers
customers a large selection to address various production needs. In
addition, roughly 45% of the Company's output is unique or is in a market
where the Company has a small number of competitors. The Company seeks to
maintain its technological edge and competitive advantage over its
competitors, and has historically demonstrated innovative production
methods and new products to meet customer demands at fair price levels.
Aerospace Distribution
The Company, through Banner (its Aerospace Distribution segment),
distributes a wide variety of aircraft parts, which it has purchased on the
open market or acquired from OEMs as an authorized distributor. No single
distributor arrangement is material to the Company's financial condition.
The Aerospace Distribution segment accounted for 48.3% of total sales in
Fiscal 1998.
Products
An extensive inventory of products and a quick response time are
essential in providing service to its customers. Another key factor in
selling to its customers is Banner's ability to maintain a system that
traces a part back to the manufacturer.
Products of the Aerospace Distribution segment are divided into two
groups: rotables and engines. Rotables include flight data recorders,
radar and navigation systems, instruments, landing gear and hydraulic and
electrical components. Engines include jet engines and engine parts for
use on both narrow and wide body aircraft and smaller engines for corporate
and commuter aircraft. Banner provides a number of services such as
immediate shipment of parts in aircraft-on-ground situations. Banner also
buys and sells commercial aircraft from time to time.
Rotable parts are sometimes purchased as new parts, but are generally
purchased in the aftermarket which are then overhauled for the Company by
outside contractors, including OEMs and FAA-licensed facilities. Rotables
are sold in a variety of conditions such as new, overhauled, serviceable
and "as is". Rotables may also be exchanged instead of sold. An exchange
occurs when an aircraft part in inventory is exchanged for a part from the
customer and the customer is charged an exchange fee plus the actual cost
to overhaul the part. Engines and engine components are sold "as is",
overhauled or disassembled for resale as parts.
Sales and Markets
Subsidiaries of the Aerospace Distribution segment sell their products
in the United States and abroad to most of the world's commercial airlines
and to air cargo carriers, as well as other distributors, fixed-base
operators, corporate aircraft operators and other aerospace companies.
Approximately 70.7% of its sales are to domestic purchasers, some of whom
may represent offshore users.
The Aerospace Distribution segment conducts marketing efforts through
its direct sales force, outside representatives and, for some product
lines, overseas sales offices. Sales in the aviation aftermarket depend on
price, service, quality and reputation. The Aerospace Distribution
segment's business does not experience significant seasonal fluctuations
nor depend on a single customer. No single customer accounts for more than
10% of the Company's consolidated revenue.
Competition
The rotables group competes with AAR Corp., Air Ground Equipment
Services ("AGES"), Aviation Sales Company, The Memphis Group and other
large and small companies in a very fragmented industry. The major
competitors for Banner's engine group are OEMs such as General Electric
Company and Pratt and Whitney, as well as the engine parts division of AAR
Corp., AGES, and many smaller companies.
Other Operations
Other operations include: Nacanco, real estate holdings, and a company
operating under the trade name of Fairchild Gas Springs Division ("Gas
Springs").
Nacanco Paketleme
Established in 1987, Nacanco is the largest manufacturer of aluminum
cans for soft drinks and beer in Turkey with an estimated 80% market share.
Nacanco generated EBITDA of approximately $38 million on annual sales of
$101 million for its fiscal year ended December 31, 1997. The Company owns
31.9% of Nacanco's common stock with Pechiney International SA and its
subsidiaries holding substantially all of the balance. The Company has
received cash dividends of $5.7 million and $4.8 million in the years ended
June 30, 1998 and 1997, respectively.
Real Estate
The Company has significant real estate holdings having a book value
of approximately $67 million as of June 30, 1998. The Company's real
estate holdings consist of (i) approximately 80 acres on Long Island, New
York which are currently being developed into retail centers; (ii) various
industrial buildings from which the Company receives rental income; and
(iii) property to be used as landfills upon receipt of necessary licenses
and government approvals.
Gas Springs Division
A Fiscal 1995 start-up operation, Gas Springs manufactures gas load
springs and other devices used in raising, lowering or moving of heavy
loads. Its products have numerous consumer and industrial applications,
including in fitness equipment, sunbeds, furniture, automotive, and
agricultural and construction equipment. Annual sales were $5.8 million
from Gas Springs in Fiscal 1998.
Technology Products
Acquired by the Company in June 1994, Fairchild Technologies ("FT")
manufactures, markets and services capital equipment for recordable compact
disc ("CD-R") and advanced semiconductor manufacturing. FT's products are
used worldwide to produce CD-Rs, CDs and CD-ROMs, as well as integrated
circuits for the data processing, communications, transportation,
automotive and consumer electronic industries, as well as for the military.
FT is a leader in microlithography semiconductor machinery
manufacturing in Europe and has four product lines, the first being
equipment for wafer microlithography processing. This includes the
mainstay Series 6000 Flexible Wafer Process Line, consisting of
lithographic processing systems with flexible material flow, modular design
and high throughput, and the recently introduced Falcon Modular
Microlithography System for 0.25 micron (65/256 Mbit DRAM) device
manufacturing. The Falcon system has a fully modular design and is
expandable to accommodate expected technological advancements and specific
customer configurations.
FT has recently combined new and proven technology and a number of
leading edge components and systems in compact disc processing to develop
its Compact Disc Recordable ("CD-R10X") manufacturing system. The CD-R10X
system is a state of the art design for producing cost effective recordable
CDs by combining a high quality injection molding machine with scanning,
inspection, and pneumatic handling systems.
With an established base of controls/clean room technology and
software/configuration engineering, FT is able to provide systems with
multiple modular designs for a variety of customer applications. More than
1,000 FT wafer production systems are in operation worldwide. Major
customers in the wafer product line include Motorola, Samsung, Siemens, GEC
Plessey, Texas Instruments, National Semiconductor, Macronix, and Erso.
Other major customers include Sonopress (Bertelsmann), and Krauss Maffei
for the CD product line. The wafer product line competes with Tokyo
Electron, Dai Nippon Screen and the Silicon Valley Group. Competitors in
the CD product line consist of Robi Systems, Leybold and Marubeni. (See
Note 4 to the Company's Consolidated Financial Statements, included in
"Item 8 Financial Statements and Supplementary Data").
Foreign Operations
The Company's operations are located primarily in the United States and
Europe. Inter-area sales are not significant to the total revenue of any
geographic area. Export sales are made by U.S. businesses to customers in
non-U.S. countries, whereas foreign sales are made by the Company's non-
U.S. subsidiaries. For the Company's sales results by geographic area and
export sales, see Note 21 of the Company's Consolidated Financial
Statements included in Item 8, Financial Statements and Supplementary Data.
Backlog of Orders
Backlog is important for all the Company's operations, due to the long-
term production requirements of its customers. The Company's backlog of
orders as of June 30, 1998 in the Aerospace Fasteners segment and Aerospace
Distribution segment amounted to $208.8 million, and $15.6 million,
respectively. The Company anticipates that in excess of 91% of the
aggregate backlog at June 30, 1998 will be delivered by June 30, 1999.
Suppliers
The Company does not consider itself to be materially dependent upon
any one supplier, but is dependent upon a wide range of subcontractors,
vendors and suppliers of materials to meet its commitments to its
customers. From time to time the Company enters into exclusive supply
contracts in return for logistics and price advantages. The Company does
not believe that any one of these contracts would impair its operations if
a supplier were unable to perform.
Personnel
As of June 30, 1998, the Company had approximately 3,900 employees.
Approximately 5% of these employees were covered by collective bargaining
agreements. The Company believes that its relations with its employees are
good.
Environmental Matters
A discussion of Environmental Matters is included in Note 19 to the
Company's Consolidated Financial Statements, included in Item 8, "Financial
Statements and Supplementary Data" and is herein incorporated by reference.
ITEM 2. PROPERTIES
As of June 30, 1998, the Company owned or leased buildings totaling
approximately 1,708,000 square feet, approximately 1,022,000 square feet of
which was owned and 686,000 square feet was leased. The Aerospace
Fasteners segment's properties consisted of approximately 1,084,000 square
feet, with principal operating facilities of approximately 922,000 square
feet concentrated in Southern California, France and Germany. The
Aerospace Distribution segment's properties consisted of approximately
370,000 square feet, with principal operating facilities of approximately
252,000 square feet located in Florida and Texas. Corporate and Other
operating properties consisted of approximately 129,000 square feet, with
principal operating facilities of approximately 104,000 square feet located
in California and Germany. The Company owns its corporate headquarters
building at Washington-Dulles International Airport.
The Company has several parcels of property which it is attempting to
market, lease and/or develop, including: (i) an eighty acre parcel located
in Farmingdale, New York, (ii) a six acre parcel in Temple City,
California, (iii) an eight acre parcel in Chatsworth, California, and (iv)
several other parcels of real estate, primarily located throughout the
continental United States.
The following table sets forth the location of the larger properties
used in the continuing operations of the Company, their building square
footage, the business segment or groups they serve and their primary use.
Each of the properties owned or leased by the Company is, in management's
opinion, generally well maintained, is suitable to support the Company's
business and is adequate for the Company's present needs. All of the
Company's occupied properties are maintained and updated on a regular
basis.
<TABLE>
<CAPTION>
Owned
or Square Business Primary
Location Leased Footage Segment/Group Use
<S> <C> <C> <C> <C>
Saint Cosme, Owned Aerospace
France 304,000 Fasteners Manufacturing
Torrance, Owned Aerospace
California 284,000 Fasteners Manufacturing
City of Industry, Owned Aerospace
California 140,000 Fasteners Manufacturing
Carrollton, Texas Leased Aerospace
126,000 Distribution Distribution
Dulles, Virginia Owned Corporate Office
125,000
Lakeland, Florida Leased Aerospace
70,000 Distribution Distribution
Ft. Lauderdale, Leased Aerospace
Florida 57,000 Distribution Distribution
Toulouse, France Owned Aerospace
56,000 Fasteners Manufacturing
Fremont, Leased Technology
California 55,000 Products Manufacturing
Kelkheim, Germany Owned Aerospace
52,000 Fasteners Manufacturing
Santa Anna, Owned Aerospace
California 50,000 Fasteners Manufacturing
Vaihingen, Leased Technology
Germany 49,000 Products Manufacturing
Chatsworth, Leased Aerospace
California 36,000 Fasteners Distribution
</TABLE>
Information concerning long-term rental obligations of the Company at
June 30, 1998, is set forth in Note 18 to the Company's consolidated
financial statements, included in Item 8, "Financial Statements and
Supplementary Data", and is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
A discussion of legal proceedings is included in Note 19 to the
Company's Consolidated Financial Statements, included in Item 8, "Financial
Statements and Supplementary Data" and is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Market Information
The Company's Class A Common Stock is traded on the New York Stock
Exchange and Pacific Stock Exchange under the symbol FA. The Company's
Class B Common Stock is not listed on any exchange and is not publicly
traded. Class B Common Stock can be converted to Class A Common Stock at
any time.
Information regarding the quarterly price range of the Company's Class
A Common Stock is incorporated herein by reference from Note 22 of the
Company's Consolidated Financial Statements included in Item 8 Financial
Statements and Supplementary Data.
Holders of Record
The Company had approximately 1,321 and 51 record holders of its Class
A and Class B Common Stock, respectively, at September 15, 1998.
Dividends
The Company's current policy is to retain earnings to support the
growth of its present operations and to reduce its outstanding debt. Any
future payment of dividends will be determined at the discretion of the
Company's Board of Directors and will depend on the Company's financial
condition, results of operations and restrictive covenants in the Company's
credit agreement that limit the payment of dividends over the term of the
agreement (See Note 8 of the Company's Consolidated Financial Statements
included in Item 8 Financial Statements and Supplementary Data).
Sale of Unregistered Securities
Fourth Quarter, Fiscal Year 1998
On May 14, 1998, pursuant to the Company's stock option deferral plan,
the Company issued an aggregate of 12,081 deferred compensation units to
certain officers of the Company as a result of the exercise of stock
options by such individuals. Each deferred compensation unit entitles the
recipient to receive one share of the Company's Class A Common Stock upon
expiration of the "deferral period" for the stock options exercised.
On May 4, 1998, in accordance with the terms of Special-T Acquisition,
the Company issued 15,090 restricted shares of the Company's Class A Common
Stock.
Third Quarter, Fiscal Year 1998
On February 12, 1998, pursuant to the Company's stock option deferral
plan, the Company issued 24,545 deferred compensation units to an officer
of the Company, as a result of the exercise of stock options by such
individual. Each deferred compensation unit entitles the recipient to
receive one share of Class A Common Stock upon expiration of the "deferral
period" for the stock options exercised.
On March 2, 1998, in accordance with the terms of Special-T
Acquisition, the Company issued 1,057,515 restricted shares of the
Company's Class A Common Stock.
On March 13, 1998, the Company issued 47,283 restricted shares of the
Company's Class A Common Stock resulting from a cashless exercise of
100,000 warrants by Dunstan Ltd.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
Five-Year Financial Summary
(In thousands, except per share data)
<CAPTION>
For the years ended June 30,
Summary of Operations: 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Net sales $203,456 $220,351 $349,236 $680,763 $741,176
Gross profit 28,415 26,491 74,101 181,344 186,506
Operating income (loss) (46,845) (30,333) (11,286) 33,499 45,443
Net interest expense 66,670 64,113 56,459 47,681 42,715
Earnings (loss) from
continuing operations 4,834 (56,280) (32,186) 1,816 52,399
Earnings (loss) per share from
continuing
operations:
Basic $ 0.30 $(3.49) $ (1.98) $ 0.11 $ 2.78
Diluted 0.30 (3.49) (1.98) 0.11 2.66
Other Data:
EBITDA (7,471) (9,830) 12,078 57,806 66,045
EBITDA Margin N.M. N.M. 3.5% 8.5% 8.9%
Cash used for operating (100,0 (102,3
activities (33,271) (25,040) (48,951) (100,058) (102,300)
Cash provided by (used for)
investing activities 166,068 (19,156) 57,540 79,975 60,876
Cash provided by (used for) (101,390) 12,345 (39,637) (1,455) 73,895
financing activities
Balance Sheet Data:
Total assets 860,943 828,680 993,398 1,052,666 1,157,259
Long-term debt, less current
maturities 518,718 508,225 368,589 416,922 295,402
Redeemable preferred stock of 17,552 16,342 -- -- --
subsidiary
Stockholders' equity 69,494 39,378 230,861 232,424 473,559
per outstanding common
share $ 4.32 $ 2.50 $ 14.10 $ 13.98 $ 20.54
</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. Fiscal 1998 includes the gain from the
Banner Hardware Group Disposition. The results of the hardware group are
included in the periods from March 1996 through December 1997, until
disposition (see Note 22 of the Company's Consolidated Financial
Statements). These transactions materially affect the comparability of the
information reflected in the selected financial data.
EBITDA represents the sum of operating income before depreciation and
amortization. Included in EBITDA are restructuring and unusual charges of
$25,553 and $2,319 in Fiscal 1994 and 1996, respectively. The Company
considers EBITDA to be an indicative measure of the Company's operating
performance due to the significance of the Company's long-lived asset and
because such data is considered useful by the investment community to
better understand the Company's results, and can be used to measure the
Company's ability to service debt, fund capital expenditures and expand its
business. EBITDA is not a measure of financial performance under GAAP, may
not be comparable to other similarly titled measures of other companies and
should not be considered as an alternative either to net income as an
indicator of the Company's operating performance, or to cash flows as a
measure of the Company's liquidity. Cash expenditures for various long-term
assets, interest expense, and income taxes have been, and will be incurred
which are not reflected in the EBITDA presentation. Furthermore, EBITDA is
not available for the discretionary use of management and, prior to the
payment of dividends, the Company uses EBITDA to meet its capital
expenditures and debt service requirements. EBITDA Margin represents EBITDA
as a percentage of net sales.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The Fairchild Corporation (the "Company") was incorporated in October
1969, under the laws of the State of Delaware. On November 15, 1990, the
Company changed its name from Banner Industries, Inc. to The Fairchild
Corporation. The Company is the owner of 100% of RHI Holdings, Inc.
("RHI") and the majority owner of Banner Aerospace, Inc. ("Banner"). RHI is
the owner of 100% of Fairchild Holding Corp. ("FHC"). The Company's
principal operations are conducted through Banner 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
4 to Financial Statements, as to the disposition of the Company's interest
in STFI.)
GENERAL
The Company is the largest aerospace fastener manufacturer in the
world and an international supplier to the aerospace industry, distributing
a wide range of aircraft parts and related support services. Through
internal growth and strategic acquisitions, the Company is 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 Air Lines and US Airways.
The Company's primary business focus is on the aerospace industry and
its business consists primarily of two segments: aerospace fasteners and
aerospace parts distribution. The aerospace fasteners segment manufactures
and markets high performance fastening systems used in the manufacturing
and maintenance of commercial and military aircraft. The aerospace
distribution segment stocks and distributes a wide variety of aircraft
parts to commercial airlines and air cargo carriers, original equipment
manufacturers ("OEMs"), other distributors, fixed-base operators, corporate
aircraft operators and other aerospace companies. The Company's aerospace
distribution business is conducted through its 83% owned subsidiary,
Banner.
CAUTIONARY STATEMENT
Certain statements in the financial discussion and analysis by
management contain forward-looking information that involve 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) focus its
operations in aerospace manufacturing; (iii) increase the number of
publicly held shares of Class A Common Stock; and (iv) increase the
Company's operating and financial flexibility.
On November 20, 1997, STFI entered into a merger agreement with
Intermedia Communications Inc. ("Intermedia") pursuant to which holders of
STFI common stock received $15.00 per share in cash (the "STFI Merger").
The Company was paid approximately $178.0 million in cash (before tax and
selling expenses) in exchange for the common and preferred stock of STFI
owned by the Company. In the nine months ended March 29, 1998, the Company
recorded a $96.0 million gain, net of tax, on disposal of discontinued
operations, from the proceeds received from the STFI Merger, which was
completed on March 11, 1998. The results of STFI have been accounted for as
discontinued operations.
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 $13.2 million, which
exceeded the fair value of the net assets of AS&C by approximately $7.4
million, 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.
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 its hardware business and PacAero unit to two
wholly-owned subsidiaries of AlliedSignal Inc. (the "Buyers"), in exchange
for 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 adjusted closing date balance sheet for the
assets (and liabilities) conveyed by the Selling Subsidiaries to the
Buyers. The assets transferred to the Buyers consist 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 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 a portion of the after tax proceeds the
Company 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 March 2, 1998, the Company consummated the acquisition of Edwards
and Lock Management Corporation, doing business as Special-T Fasteners
("Special-T"), in a business combination to be accounted for as a purchase
(the "Special-T Acquisition"). The contractual purchase price for the
acquisition was valued at approximately $47.3 million, of which 50.1% was
paid in shares of Class A Common Stock of the Company and 49.9% was paid in
cash according to terms specified in the acquisition agreement. The total
cost of the acquisition exceeded the fair value of the net assets of
Special-T by approximately $21.6 million, which amount is being allocated
as goodwill, and amortized using the straight-line method over 40 years.
Special-T manages the logistics of worldwide distribution of Company
manufactured precision fasteners to customers in the aerospace industry,
for government agencies, original equipment manufacturers, and other
distributors.
On May 11, 1998, the Company commenced an offer to exchange (the
"Exchange Offer"), for each properly tendered share of Common Stock of
Banner, a number of shares of the Company's Class A Common Stock, par value
$0.10 per share, equal to the quotient of $12.50 divided by $20.675 up to a
maximum of 4,000,000 shares of Banner's Common Stock. The Exchange Offer
expired on June 9, 1998 and 3,659,364 shares of Banner's Common Stock were
validly tendered for exchange, and the Company issued 2,212,361 shares of
Class A Common Stock to the tendering shareholders. As a result of the
Exchange Offer, the Company's ownership of Banner Common Stock increased to
83.3%. The Company effected the Exchange Offer to increase its ownership of
Banner to over 80% in order for the Company to include Banner in its United
States consolidated corporate income tax return.
Fiscal 1997 Transactions
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 then 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 $20.5 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 $0.9 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 were 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, Inc. 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. In June 1997,
the Company purchased $28.0 million of newly issued Series A Convertible
Paid-in-Kind Preferred Stock of Banner.
RESULTS OF OPERATIONS
The Company currently reports in two principal business segments:
Aerospace Fasteners and Aerospace Distribution. 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,
1996 1997 1998
<S> <C> <C> <C>
Sales by Segment:
Aerospace Fasteners $218,059 $269,026 $387,236
Aerospace Distribution (a) 129,973 411,765 358,431
Corporate and Other 7,046 15,185 5,760
Eliminations (b) (5,842) (15,213) (10,251)
Total Sales $349,236 $680,763 $741,176
Operating Income (Loss) by Segment:
Aerospace Fasteners (c) $ 135 $ 17,390 $ 32,722
Aerospace Distribution (a) 5,625 30,891 20,330
Corporate and Other (17,046) (14,782) (7,609)
Total Operating Income (Loss)$(11,286) $ 33,499 $ 45,443
(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, 1996, 1997 and 1998. 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,
1996 1997 1998
<S> <C> <C> <C>
Sales by Segment:
Aerospace Fasteners (a) $197,099 $269,026 $387,236
Aerospace Distribution 144,996 178,412 227,279
Corporate and Other 4,799 5,118 5,760
Eliminations - (29) -
Total Sales $346,894 $452,527 $620,275
Operating Income (Loss) by
Segment:
Aerospace Fasteners $ (2,639) $ 17,390 $ 32,722
Aerospace Distribution 4,881 9,739 9,740
Corporate and Other (15,731) (15,950) (7,609)
Total Operating Income
(Loss) $(13,489) $ 11,179 $ 34,853
(a) Fiscal 1998 results include comparable sales of approximately $59.2
million and operating income of approximately $10.0 million provided from
companies acquired in Fiscal 1997 and 1998.
</TABLE>
Consolidated Results
Net sales of $741.2 million in 1998 increased by $60.4 million, or
8.9%, compared to sales of $680.8 million in 1997. Sales growth was
stimulated by the resurgent commercial aerospace industry and business
acquisitions over the past 18 months, partially offset by the loss of
revenues as a result of the Banner Hardware Group Disposition.
Approximately 15.8% of the 1998 sales growth was stimulated by the
resurgent commercial aerospace industry. Recent acquisitions contributed
approximately 8.7% to the sales growth, while dispositions decreased growth
by approximately 15.0%. Net sales of $680.8 million in 1997 significantly
improved by $331.5 million, or 94.9%, compared to net sales of $349.2
million in 1996. Sales growth was stimulated by the improved commercial
aerospace industry, together with the effects of several strategic business
acquisitions. On a pro forma basis, net sales increased 30.5% and 37.1% in
1997 and 1998, respectively, as compared to the previous Fiscal periods.
Gross Margin as a percentage of sales was 21.2%, 26.6% and 25.2% in
1996, 1997, and 1998, respectively. Decreased margins in the Fiscal 1998
period was attributable to a change in product mix in the Aerospace
Distribution segment as a result of the Banner Hardware Group Disposition.
Partially offsetting overall lower margins were improved margins within the
Aerospace Fasteners segment, resulting from efficiencies associated with
increased production, improved skills of the work force, and reduction in
the payment of overtime. The increase in 1997 was attributable to higher
revenues combined with continued productivity improvements achieved during
Fiscal 1997.
Selling, General & Administrative expense as a percentage of sales was
22.7%, 21.0%, and 19.1% in Fiscal 1996, 1997, and 1998, respectively. The
improvement in Fiscal 1998 was attributable primarily to administrative
efficiencies allowed by increased sales. The improvement in Fiscal 1997 was
also positively affected by administrative efficiencies allowed by
increased sales and also benefited from the positive results obtained from
restructuring and downsizing programs put in place prior periods.
Other income increased $6.5 million in 1998 as compared to 1997, due
primarily to the sale of air rights over a portion of the property the
Company owns and is developing in Farmingdale, New York.
Operating income of $45.4 million in Fiscal 1998 increased $11.9
million, or 35.7%, compared to operating income of $33.5 million in Fiscal
1997. The increase in operating income was due primarily to the improved
results in the Company's Aerospace Fasteners segment. Operating income of
$33.5 million in Fiscal 1997 increased $44.8 million compared to operating
loss of $11.3 million in Fiscal 1996. The Fiscal 1997 increase in
operating income was due primarily to growth in sales and increased
operational efficiencies. On a pro forma basis, operating income increased
$23.7 million in Fiscal 1998, compared to Fiscal 1997, and $24.7 million in
Fiscal 1997, compared to Fiscal 1996.
Net interest expense decreased 10.4% in Fiscal 1998 compared to Fiscal
1997, and decreased 15.5% in Fiscal 1997 compared to Fiscal 1996. The
decreases were due to a series of transactions that significantly reduced
the Company's total debt. (See Recent Developments and Significant Business
Combinations in this section).
Investment income (loss), net, was $4.6 million, $6.7 million, and
$(3.4) million in 1996, 1997, and 1998, respectively. The $10.1 decrease
in 1998 was due to recognition of unrealized losses on the fair market
adjustments of investments previously classified as trading securities in
the Fiscal 1998 periods while recording unrealized gains from trading
securities in the Fiscal 1997 periods. Unrealized holding gains (losses) on
available-for-sale investments are marked to market value through
stockholders' equity and reported separately as part of comprehensive
income (see discussion below). The 45.4% increase in Fiscal 1997 was due
primarily to gains realized from the sale of investments in Fiscal 1997.
Nonrecurring income of $124.0 million in 1998 resulted from the Banner
Hardware Group Disposition. Nonrecurring income in 1997 includes the $2.5
million gain from the sale of SBC.
An income tax provision of $48.7 million in the first nine months of
Fiscal 1998 represented a 39.4% effective tax rate on pre-tax earnings from
continuing operations (excluding equity in earnings of affiliates and
minority interest) of $123.4 million. The tax provision was slightly higher
than the statutory rate because of goodwill associated with the Banner
Hardware Group Disposition, which is not deductible for tax purposes.
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.
Equity in earnings of affiliates decreased $0.6 million in 1998,
compared to 1997, and $0.2 million in 1997, compared to 1996. The current
year's decrease is attributable to losses recorded by small start-up
ventures. The prior year's decrease was attributable to the lower earnings
of Nacanco.
Minority interest increased by $22.8 million in Fiscal 1998 as a
result of the $124.0 million nonrecurring pre-tax gain recognized from the
Banner Hardware Group Disposition.
Included in earnings (loss) from discontinued operations are the
results of Fairchild Technologies ("Technologies") through January 1998,
the Company's equity in earnings of STFI prior to the STFI Merger, and the
results of FCS, DME and Data in Fiscal 1996. Losses increased in Fiscal
1998 as a result of increased losses recorded at Technologies and lower
equity earnings contributed by STFI (See Note 4 to the Company's
Consolidated Financial Statements).
In 1998, the Company recorded a $96.0 million gain, net of tax, on
disposal of discontinued operations, from the proceeds received from the
STFI Merger. Offsetting this gain was an after-tax charge of $36.2 million
the Company recorded in connection with the adoption of a formal plan to
enhance the opportunities for disposition of Technologies. Included in this
charge was (i) $28.2 million (net of an income tax benefit of $11.8
million) relating to the net losses of Technologies since the measurement
date, including the write down of assets for impairment to estimated
realizable value; and (ii) $8.0 million (net of an income tax benefit of
$4.8 million) relating to a provision for operating losses over the next
seven months at Technologies. The Company's results are affected by the
operations of Technologies, which may fluctuate because of industry
cyclicality, the volume and timing of orders, the timing of new product
shipments, customers' capital spending, and pricing changes by Technologies
and its competition. Technologies has experienced a reduction of its
backlog, and margin compression during the past year, which combined with
the existing cost base, is likely to impact future earnings from
Technologies. While the Company believes that $36.1 million is a reasonable
charge for the expected losses in connection with the disposition of
Technologies, there can be no assurance that this estimate is adequate. In
Fiscal 1996, the Company recorded a $54.0 million gain on disposal of
discontinued operations resulting from the sale of DME to CMI and a $163.1
million nontaxable gain resulting from the Merger.
In 1998, the Company recognized an extraordinary loss of $6.7 million,
net of tax, to write-off the remaining deferred loan fees and original
issue discounts associated with early extinguishment of the Company's
indebtedness pursuant to the Public Debt Repayment and refinancing of the
FHC and RHI Credit Agreement facilities. In 1996, the Company recognized an
extraordinary loss of $10.4 million, net of tax, as a result of premiums
paid, redemption costs, consent fees, and the write off of deferred loan
fees associated with the Senior Notes and bank debt extinguished prior to
maturity.
Net earnings of $101.1 million in 1998, improved by $99.8 million,
compared to the $1.3 million net earnings recorded in 1997. This
improvement is attributable to a $11.9 million increase in operating
income, a $124.0 million non-recurring gain from the Banner Hardware Group
Disposition, and the $59.7 million net gain on the disposal of discontinued
operations. Partially offsetting this increase was a $54.4 million increase
in the income tax provision, a $22.8 million change in minority interest, a
$10.0 decrease in investment income, and the $6.7 million extraordinary
loss. Net earnings in 1997 improved $28.3 million, compared to 1996, after
excluding the $216.7 million net gain on disposal of discontinued
operations in 1996. The 1997 increase reflected a $44.8 million improvement
in operating profit.
Comprehensive income includes foreign currency translation adjustments
and unrealized holding changes in the fair market value of available-for-
sale investment securities. The fair market value of unrealized holding
securities increased $20.6 million in 1998, primarily as a result of an
increase in the value of AlliedSignal common stock which was received from
the Banner Hardware Group Disposition.
Segment Results
Aerospace Fasteners Segment
Sales in the Aerospace Fasteners segment increased by $118.2 million
to $387.2 million, up 43.9% in Fiscal 1998, compared to Fiscal 1997,
reflecting significant growth in the commercial aerospace industry combined
with the effect of acquisitions. New orders have continued to be strong
resulting in a backlog of $209 million at June 30, 1998, up from $196
million at June 30, 1997. Excluding sales contributed by acquisitions,
sales increased approximately 21.9% in Fiscal 1998 compared to the prior
year. 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. On a pro forma basis, sales
increased 43.9% in Fiscal 1998, compared to Fiscal 1997 and 36.5% in Fiscal
1997, compared to Fiscal 1996.
Operating income improved by $15.3 million, or 88.2%, in Fiscal 1998,
compared to Fiscal 1997. Acquisitions and marketing changes were
contributors to this improvement. Excluding the results provided by
acquisitions, operating income increased by approximately 30.8% in Fiscal
1998, compared to the same period in the prior year. The Company
anticipates that manufacturing and productivity efficiencies will further
improve operating income in the coming months. 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. On a pro forma basis, operating
income increased $15.3 million in Fiscal 1998, as compared to Fiscal 1997,
and $20.0 million in Fiscal 1997, as compared to Fiscal 1996.
The Company believes that the demand for aerospace fasteners in Fiscal
1999 will remain relatively high, given the forecasted build rates for new
aircraft. The Company anticipates that order rates may level off in late
calendar 1998. However, production volume should remain at a respectable
level and production efficiency improvements should allow the Company to
generate an increase in profits.
Aerospace Distribution Segment
Sales in the Aerospace Distribution segment decreased by $53.3
million, or 13.0% in Fiscal 1998, compared to Fiscal 1997. The exclusion of
six months' revenues as a result of the Banner Hardware Group Disposition
was primarily responsible for the decrease in the current year, in which
sales otherwise reflected a robust aerospace industry. Sales increased
$281.8 million from reporting twelve months of activity in Fiscal 1997
versus four months of activity in Fiscal 1996, when the Company became the
majority shareholder of Banner and, accordingly, began consolidating their
results. On a twelve-month pro forma basis, sales increased $48.9 million,
or 27.4%, in Fiscal 1998 compared to Fiscal 1997, and $33.4 million, or
23.0%, in Fiscal 1997 compared to Fiscal 1996.
Operating income decreased $10.6 million in Fiscal 1998, compared to
Fiscal 1997, due to the Banner Hardware Group Disposition. Operating income
increased $25.3 million in 1997, compared to 1996, as a result of including
only four months of activity after consolidation of Banner in 1996. On a
twelve-month pro forma basis, operating income was stable in Fiscal 1998
compared to Fiscal 1997, and increased $4.9 million, or 99.5%, in Fiscal
1997 compared to Fiscal 1996.
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 classification includes the Gas Springs
Division and corporate activities. The results of SBC, which was sold at
Fiscal 1997 year-end, are included in the prior period results. The group
reported a decrease in sales of $9.4 million, in 1998, as compared to 1997,
due to the exclusion of SBC's results in the current year. Sales increased
in 1997 as a result of improved results contributed by SBC. The operating
loss decreased by $7.2 million in 1998, compared to Fiscal 1997, as a
result of an increase in other income and a decrease in legal expenses.
Over the past three years, corporate administrative expense as a percentage
of sales has decreased from 4.5% in 1996 to 2.8% in 1997 to 2.2% in 1998.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of June 30, 1998 and 1997 amounted to $789.6
million and $696.7 million, respectively. The changes in capitalization
included a decrease in debt of $148.2 million and an increase in equity of
$241.1 million. The decrease in debt was primarily the result of the
Refinancing and repayment of outstanding term loans with approximately $194
million of AlliedSignal Inc. common stock received from the Banner Hardware
Group Disposition, partially offset by additional borrowings. The increase
in equity was due to (i) Fiscal 1998 net income of $101.1 million, (ii)
$53.3 million in net proceeds received from the Offering, (iii) $64.5
million of Class A Common Stock issued in connection with the Exchange
Offering and the Special-T acquisition, and (iv) the $20.6 million net
unrealized gain recorded on the appreciation of available-for-sale
securities.
The Company maintains a portfolio of investments classified as
available-for-sale securities, which had a fair market value of $238.2
million at June 30, 1998. Although the market value of these investments
appreciated $20.6 million in Fiscal 1998, there is risk associated with
market fluctuations inherent to stock investments. Additionally, because
the Company's portfolio is small and predominately consists of a large
position in AlliedSignal common stock, large swings in the value of the
portfolio should be expected.
Net cash used by operating activities for the Fiscal 1998 and 1997
amounted to $102.5 million and $100.1 million, respectively. The primary
use of cash for operating activities in Fiscal 1998 was an increase in
inventories from continuing operations of $54.9 million. 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.
Net cash provided from investing activities for Fiscal 1998 and 1997
amounted to $60.9 million and $80.0 million, respectively. In Fiscal 1998,
the sale of discontinued operations, including the STFI Disposition
provided the primary source of cash from investing activities amounting to
$168.0 million, which was slightly offset by the acquisition of
subsidiaries in the amount of $32.8 million. In Fiscal 1997, the primary
source of cash from investing activities 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.
Net cash provided by (used for) financing activities for the Fiscal
1998 and 1997 amounted to $74.1 million and $(1.5) million, respectively.
Cash provided by financing activities in fiscal 1998 included the issuance
$53.8 million of stock from the Offering and $275.5 million from the
issuance of additional debt partially offset by the repayment of debt and
the repurchase of debentures of $258.0 million. The primary use of cash for
financing activities in Fiscal 1997 was cash used for 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 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 a
portion of the after tax proceeds the Company 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 reduced 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 further
reduced the Company's annual interest expense.
For the Company's fiscal years 1996, 1997, and 1998, Technologies had
pre-tax operating losses of approximately $1.5 million, $3.6 million, and
$48.7 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 the disposition of Technologies, while improving the
ability of Technologies to operate more efficiently. The plan includes a
reduction in production capacity, work force, 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 a spin-off. If the Company elects to include Technologies in a 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.
The Company is considering a transaction designed to separate the
aerospace fasteners business of the Company from the aerospace distribution
and other businesses of the Company. The transaction would consist of
distributing (the "Spin-Off") to its shareholders all of the stock of a
subsidiary to be formed ("Spin-Co"), consisting of the Company's aerospace
fasteners segment. The Spin-Off would result in the formation of two
publicly traded companies, each of which would be able to pursue an
independent strategic path. The Company believes this separation would
offer both companies the opportunity to pursue strategic objectives
appropriate to different businesses and to create targeted incentives for
their management and key employees. In addition, the Spin-Off would be
expected to offer each entity greater financial flexibility in their
respective capital raising strategies.
The Company has conditioned the Spin-Off distribution upon, among
other things, (i) approval of the Spin-Off by the Company's shareholders;
(ii) receiving confirmation that the distribution will qualify as a tax-
free transaction under Section 355 of the Internal Revenue Code of 1986, as
amended; (iii) the transfer of assets and liabilities contemplated by an
agreement to be entered into between the Company and Spin-Co having been
consummated in all material respects; (iv) the Spin-Co Class A Common Stock
having been approved for listing on the New York Stock Exchange; (v) a Form
10 registration statement with respect to Spin-Co Class A Common Stock
becoming effective under the Securities Exchange Act of 1934, as amended;
and (vi) receipt of a satisfactory solvency opinion for each entity.
Although the Company's ability to effect the Spin-Off is uncertain, the
Company may effect the Spin-Off as soon as it is reasonably practicable
following receipt of the aforementioned items 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.
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. 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. Consequently,
there can be no assurance that the Spin-Off will ever occur.
Year 2000
As the end of the century nears, there is a widespread concern that
many existing computer programs that use only the last two digits to refer
to a year will not properly recognize a year that begins with the digits
"20" instead of "19." If not corrected, many computer applications could
fail, create erroneous results, or cause unanticipated systems failures,
among other problems. The Company has begun to take appropriate measures
to ensure that its information processing systems, embedded technology and
other infrastructure will be ready for the Year 2000.
The Company has retained both technical review and modification
consultants to help it assess its Year 2000 readiness. Working with these
consultants and other advisors, the Company has formulated a plan to
address Year 2000 issues. Under this plan, the Company's systems are being
modified or replaced, or will be modified or replaced, as necessary, to
render them, as far as possible, Year 2000 ready. Substantially all of the
material systems within the Aerospace Fasteners segment are currently Year
2000 ready. Within the Aerospace Distribution segment and at Fairchild
Technologies, the Company intends to replace and upgrade a number of
important systems that are not Year 2000 compliant, and is assessing the
extent to which current product inventories may include embedded technology
that is not Year 2000 ready. The Company expects to complete initial
testing of its most critical information technology and related systems by
June 30, 1999, and anticipates that it will complete its Year 2000
preparations by October 31, 1999. The Company could be subject to
liability to customers and other third parties if its systems are not Year
2000 compliant, resulting in possible legal actions for breach of contract,
breach or warranty, misrepresentation, unlawful trade practices and other
harm.
In addition, the Company is continually attempting to assess the level
of Year 2000 preparedness of its key suppliers, distributors, customers and
service providers. To this end, the Company has sent, and will continue to
send, letters, questionnaires and surveys to its significant business
partners inquiring about their Year 2000 efforts. If a significant
business partner of the Company fails to be Year 2000 compliant, the
Company could suffer a material loss of business or incur material
expenses.
The Company is also developing and evaluating contingency plans to
deal with events affecting the Company or one of its business partners
arising from significant Year 2000 problems. These contingency plans
include identifying alternative suppliers, distribution networks and
service providers.
Although the Company's Year 2000 assessment, implementation and
contingency planning is not yet complete, the Company does not now believe
that Year 2000 issues will materially affect its business, results of
operations or financial condition. However, the Company's Year 2000
efforts may not be successful in every respect. To date, the Company has
incurred approximately $0.3 million in costs that are directly attributable
to addressing Year 2000 issues. Management currently estimates that the
Company will incur between $2.0 million and $3.0 million in additional
costs during the next 18 months relating to the Year 2000 problem.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131")
"Disclosures about Segments of an Enterprise and Related Information." 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 reportable
operating segments in annual and interim financial reports. Generally,
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The Company will adopt SFAS 131 in Fiscal 1999.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 ("SFAS 132") "Employers' Disclosures about Pensions and
Other Postretirement Benefits." SFAS 132 revises and improves the
effectiveness of current note disclosure requirements for employers'
pensions and other retiree benefits by requiring additional information to
facilitate financial analysis and eliminating certain disclosures which are
no longer useful. SFAS 132 does not address recognition or measurement
issues. The Company will adopt SFAS 132 in Fiscal 1999.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS 133") "Accounting for Derivative Instruments and
Hedging Activities." SFAS 133 establishes a new model for accounting for
derivatives and hedging activities and supersedes and amends a number of
existing accounting standards. It requires that all derivatives be
recognized as assets and liabilities on the balance sheet and measured at
fair value. The corresponding derivative gains or losses are reported
based on the hedge relationship that exists, if any. Changes in the fair
value of hedges that are not designated as hedges or that do not meet the
hedge accounting criteria in SFAS 133 are required to be reported in
earnings. Most of the general qualifying criteria for hedge accounting
under SFAS 133 were derived from, and are similar to, the existing
qualifying criteria in SFAS 80 "Accounting for Futures Contracts." SFAS
133 describes three primary types of hedge relationships: fair value hedge,
cash flow hedge, and foreign currency hedge. The Company will adopt SFAS
133 in Fiscal 1999 and is currently evaluating the financial statement
impact.
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 28
Consolidated Balance Sheets as of June 30, 1997 and 1998 29
Consolidated Statements of Earnings For Each of The Three Years Ended
June 30, 1996, 1997, and 1998 31
Consolidated Statements of Stockholders' Equity For Each of The Three
Years Ended June 30, 1996, 1997, and 1998 33
Consolidated Statements of Cash Flows For Each of The Three Years
Ended June 30, 1996, 1997, and 1998 34
Notes to Consolidated Financial Statements 35
Supplementary information regarding "Quarterly Financial Data (Unaudited)"
is set forth under Item 8 in Note 22 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 consolidated
subsidiaries as of June 30, 1997 and 1998, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1996, 1997 and 1998. 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 did not audit the financial statements of Nacanco
Paketleme (see Note 7), the investment in which is reflected in the
accompanying financial statements using the equity method of accounting.
The investment in Nacanco Paketleme represents 2 percent of total assets as
of June 30, 1998 and 1997, and the equity in its net income represents 17
percent, 257 percent, and 9 percent of earnings from continuing operations.
The statements of Nacanco Paketleme were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to
the amounts included for Nacanco Paketleme, is based on the report of other
auditors.
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, based on our audits and the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of The Fairchild Corporation and
consolidated subsidiaries as of June 30, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the
period ended June 30, 1996, 1997 and 1998, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
September 22, 1998
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
ASSETS June 30, June 30,
1997 1998
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents, $4,839 and $746
restricted $ 19,420 $ 49,601
Short-term investments 25,647 3,962
Accounts receivable-trade, less allowances of 151,361 120,284
$6,905 and $5,655
Inventories:
Finished goods 292,441 187,205
Work-in-process 20,357 20,642
Raw materials 10,567 9,635
323,365 217,482
Net current assets of discontinued operations 17,884 11,613
Prepaid expenses and other current assets 34,490 53,081
Total Current Assets 572,167 456,023
Property, plant and equipment, net of
accumulated
depreciation of $131,646 and $82,968 121,918 118,963
Net assets held for sale 26,147 23,789
Net noncurrent assets of discontinued 14,495 8,541
operations
Cost in excess of net assets acquired
(Goodwill), less
accumulated amortization of $36,672 and 154,129 168,307
$42,079
Investments and advances, affiliated 55,678 27,568
companies
Prepaid pension assets 59,742 61,643
Deferred loan costs 9,252 6,362
Long-term investments 4,120 235,435
Other assets 35,018 50,628
TOTAL ASSETS $1,052,666 $1,157,259
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>
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, June 30,
1997 1998
CURRENT LIABILITIES:
<S> <C> <C>
Bank notes payable and current maturities of
long-term debt $ 47,322 $ 20,665
Accounts payable 75,522 53,859
Accrued liabilities:
Salaries, wages and commissions 17,138 23,613
Employee benefit plan costs 1,764 1,463
Insurance 15,021 12,575
Interest 11,213 2,303
Other accrued liabilities 52,182 52,789
97,318 92,743
Income taxes 5,863 28,311
Total Current Liabilities 226,025 195,578
LONG-TERM LIABILITES:
Long-term debt, less current maturities 416,922 295,402
Other long-term liabilities 23,622 23,767
Retiree health care liabilities 43,351 42,103
Noncurrent income taxes 42,013 95,176
Minority interest in subsidiaries 68,309 31,674
TOTAL LIABILITIES 820,242 683,700
STOCKHOLDERS' EQUITY:
Class A common stock, 10 cents par value;
authorized 40,000,000
shares, 26,678,561 (20,233,879 in 1997)
shares issued and
20,428,591 (13,992,283 in 1997) shares 2,023 2,667
outstanding
Class B common stock, 10 cents par value;
authorized 20,000,000
shares, 2,624,716 (2,632,516 in 1997) 263 263
shares issued and outstanding
Paid-in capital 71,015 195,112
Retained earnings 209,949 311,039
Cumulative other comprehensive income 893 16,386
Treasury Stock, at cost, 6,249,970 (6,241,596
in 1997) shares
of Class A common stock (51,719) (51,908)
TOTAL STOCKHOLDERS' EQUITY 232,424 473,559
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$1,052,666 $1,157,259
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,
1996 1997 1998
<S> <C> <C> <C>
REVENUE:
Net sales $349,236 $680,763 $741,176
Other income, net 300 28 6,508
349,536 680,791 747,684
COSTS AND EXPENSES:
Cost of goods sold 275,135 499,419 554,670
Selling, general &
administrative 79,295 142,959 141,930
Research and development 94 100 172
Amortization of goodwill 3,979 4,814 5,469
Restructuring 2,319 - -
360,822 647,292 702,241
OPERATING INCOME (LOSS) (11,286) 33,499 45,443
Interest expense 64,521 52,376 46,007
Interest income (8,062) (4,695) (3,292)
Net interest expense 56,459 47,681 42,715
Investment income (loss), net 4,575 6,651 (3,362)
Non-recurring income (loss) (1,724) 2,528 124,028
Earnings (loss) from continuing
operations before taxes (64,894) (5,003) 123,394
Income tax (provision) benefit 29,839 5,735 (48,659)
Equity in earnings of affiliates,
net 4,821 4,598 3,956
Minority interest, net (1,952) (3,514) (26,292)
Earnings (loss) from continuing
operations (32,186) 1,816 52,399
Earnings (loss) from discontinued
operations, net 15,612 (485) (4,296)
Gain on disposal of discontinued
operations, net 216,716 - 59,717
Earnings (loss) before 200,142 1,331 107,820
extraordinary items
Extraordinary items, net
(10,436) - (6,730)
NET EARNINGS (LOSS) $189,706 $ 1,331 $101,090
Other comprehensive income, net
of tax:
Foreign currency translation
adjustments (606) (1,514) (5,140)
Unrealized holding gains (losses)
on securities arising - 74 20,633
During the period
Other comprehensive income (loss) (606) (1,440) 15,493
COMPREHENSIVE INCOME (LOSS) $189,100 $ (109) $116,583
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,
1996 1997 1998
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Earnings (loss) from continuing
operations $(1.98) $0.11 $2.78
Earnings (loss) from discontinued
operations, net 0.96 (0.03) (0.23)
Gain on disposal of discontinued
operations, net 13.37 - 3.17
Extraordinary items, net
(0.64) - (0.36)
NET EARNINGS (LOSS) $(0.64) $0.08 $5.36
Other comprehensive income, net
of tax:
Foreign currency translation
adjustments $(0.04) $(0.09) $(0.27)
Unrealized holding gains (losses)
on securities arising during the - - 1.10
period
Other comprehensive income
(0.04) (0.09) 0.83
COMPREHENSIVE INCOME (LOSS) $11.67 $(0.01) $6.19
DILUTED EARNINGS PER SHARE:
Earnings (loss) from continuing
operations $(1.98) $0.11 $2.66
Earnings (loss) from discontinued
operations, net 0.96 (0.03) (0.22)
Gain on disposal of discontinued
operations, net 13.37 - 3.04
Extraordinary items, net
(0.64) - (0.34)
NET EARNINGS (LOSS)
$11.71 $0.08 $5.14
Other comprehensive income, net
of tax:
Foreign currency translation
adjustments $(0.04) $(0.09) $(0.26)
Unrealized holding gains (losses)
on securities arising during the - - 1.05
period
Other comprehensive income
(0.04) (0.09) 0.79
COMPREHENSIVE INCOME (LOSS) $11.67 $(0.01) $5.93
Weighted average shares
outstanding:
Basic 16,206 16,539 18,834
Diluted 16,206 17,321 19,669
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>
Cumulativ
e
Class Class Other
A B
CommonCommon Paid- Retain Treas Comprehen
in ed ury sive
Stock Stock Capital Earnings Stock Income Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995 $1,965 $ 270 $67,011 $18,912 $(51,719) $2,939 39,378
Net earnings - - - 189,706 - - 189,706 06
Foreign currency
translation adjustments - - - - - (606) (606)
Fair market value of
stock warrants issued - - 1,148 - - - 1,148
Proceeds received from
options exercised 28 - 1,481 - - - 1,509
Exchange of Class B for
Class A
common stock
7 (7) - - - - -
Retirement of preferred
stock of subsidiary - - (274) - - - (274)
Balance, June 30, 1996
2,000 263 69,366 208,618 (51,719) 2,333 230,861
Net earnings
- - - 1,331 - - 1,331
Foreign currency
translation adjustments - - - - - (1,514) (1,514)
Fair market value of
stock warrants issued - - 546 - - - 546
Proceeds received from
options
exercised (234,935
shares) 23 - 1,103 - - - 1,126
Exchange of Class B for
Class A
Common stock (1,188
shares) - - - - - - -
Net unrealized holding
gain on
Available-for-sale
securities - - - - - 74 74
Balance, June 30, 1997
2,023 263 71,015 209,949 (51,719) 893 232,424
Net earnings
- - - 101,09 - - 101,0
0 90
Foreign currency
translation adjustments - - - - - (5,140) (5,14
0)
Compensation expense from
adjusted
terms to warrants and
options - - 5,655 - - - 5,655
Stock issued for Special-
T Fasteners 108 - 21,939 - - - 22,04
acquisition 7
Stock issued for Exchange
Offer 221 - 42,588 - - - 42,80
9
Equity Offering
300 - 53,268 - - - 53,56
8
Proceeds received from
stock options
exercised (141,259
shares) 10 - 652 - (189) - 473
Cashless exercise of
warrants (47,283 shares) 5 - (5) - - - -
Exchange of Class B for
Class A
common stock (7,800
shares) - - - - - - -
Net unrealized holding
gain on
available-for-sale
securities - - - - - 20,633 20,63
3
Balance, June 30, 1998 $ 2,667 $263 $195,112 $311,039 $(51,908)$16,386$473,559
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
1996 1997 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $189,706 $ 1,331 $101,090
Depreciation and amortization 21,045 24,307 20,036
Accretion of discount on long-term
liabilities 4,686 4,963 3,766
Net gain on the disposition of
subsidiaries - - (124,041)
Net gain on the sale of discontinued
operations (216,645) - (132,787)
Extraordinary items, net of cash
payments 4,501 - 10,347
Provision for restructuring (excluding
cash payments of $777 in 1996) 1,542 - -
(Gain) loss on sale of property, plant,
and equipment (9) (72) 246
(Undistributed) distributed earnings of
affiliates, net (3,857) (1,055) 1,725
Minority interest 1,952 3,514 26,292
Change in trading securities (5,346) (5,733) 9,275
Change in receivables (5,566) (48,693)(12,846)
Change in inventories (16,088) (36,868)(54,857)
Change in other current assets (2,989) (14,088)(26,643)
Change in other non-current assets 3,609 (16,565)(16,562)
Change in accounts payable, accrued
liabilities and other long-term liabilities (37,477) 6,102 80,677
Non-cash charges and working capital
changes of discontinued operations 11,985 (17,201) 11,789
Net cash used for operating activities (48,951)(100,058)(102,493)
Cash flows from investing activities:
Proceeds received from (used for)
investment securities, net 265 (12,951) (7,287)
Purchase of property, plant and
equipment (5,680) (15,014) (36,029)
Proceeds from sale of plant, property
and equipment 98 213 336
Equity investment in affiliates
(2,361) (1,749) (4,343)
Minority interest in subsidiaries
(2,817) (1,610) (26,383)
Acquisition of subsidiaries, net of cash
acquired - (55,916) (32,795)
Net proceeds received from the sale of
discontinued operations 71,559 173,719 167,987
Changes in net assets held for sale
5,894 385 2,140
Investing activities of discontinued
operations (9,418) (7,102) (2,750)
Net cash provided by investing
activities 57,540 79,975 60,876
Cash flows from financing activities:
Proceeds from issuance of debt
156,501 154,294 275,523
Debt repayments and repurchase of
debentures, net (195,420)(155,600)(258,014)
Issuance of Class A common stock
1,509 1,126 54,041
Financing activities of discontinued
operations (2,227) (1,275) 2,538
Net cash provided by (used for)
financing activities (39,637) (1,455) 74,088
Effect of exchange rate changes on cash
(485) 1,309 (2,290)
Net change in cash and cash equivalents
(31,533) (20,229) 30,181
Cash and cash equivalents, beginning of the
year 71,182 39,649 19,420
Cash and cash equivalents, end of the year
$39,649 $19,420 $49,601
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. The
Company is the majority owner of Banner Aerospace, Inc., ("Banner"). RHI
Holdings, Inc. ("RHI") is a direct subsidiary of the Company. RHI is the
owner of 100% of Fairchild Holding Corp. ("FHC"). The Company's principal
operations are conducted through FHC and Banner. The Company also holds a
significant equity interest in Nacanco Paketleme ("Nacanco"). Prior to
March 10, 1998, the Company held an equity interest in Shared Technologies
Fairchild Inc. ("STFI"). 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. The merger of STFI into Intermedia
Communications Inc., as discussed in Note 4, completes the disposition of
the Communications Services Segment. In February 1998, the Company adopted
a formal plan to dispose of its interest in the Fairchild Technologies
segment. Accordingly, the Company's financial statements 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 "1996", "1997", and "1998" mean the fiscal years
ended June 30, 1996, 1997 and 1998, 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 7).
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>
1996 1997 1998
<S> <C> <C> <C>
Interest $66,716 $48,567 $52,737
Income Taxes 9,279 (1,926) (987)
</TABLE>
Restricted Cash: On June 30, 1997 and 1998, the Company had restricted
cash of $4,839 and $746, 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 fastener manufacturing operations and using
the first-in, first-out ("FIFO") method elsewhere. If the FIFO inventory
valuation method had been used exclusively, inventories would have been
approximately $4,868 and $8,706 higher at June 30, 1997 and 1998,
respectively. Inventories from continuing operations are valued as
follows:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1998
<S> <C> <C>
First-in, first-out (FIFO)
$293,469 $177,426
Last-in, First-out (LIFO)
29,896 40,056
Total inventories
$323,365 $217,482
</TABLE>
Properties and Depreciation: The cost of property, plant and equipment
is depreciated over estimated useful lives of the related assets. The cost
of leasehold improvements is depreciated over the lesser of the length of
the related leases or the estimated useful lives of the assets.
Depreciation is computed using the straight-line method for financial
reporting purposes and using accelerated depreciation methods for Federal
income tax purposes. No interest costs were capitalized in any of the
years presented. Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1998
<S> <C> <C>
Land $ 13,438 $ 11,694
Building and improvements 54,907 47,579
Machinery and equipment 152,430 113,669
Transportation vehicles 864 676
Furniture and fixtures 25,401 16,362
Construction in progress 6,524 11,951
Property, plant and equipment at 253,564 201,931
cost
Less: Accumulated depreciation 131,646 82,968
Net property, plant and equipment $121,918 $118,963
</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 1996, 1997 and 1998 was
$3,827, $2,847 and $2,406, 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 currency transaction
gains and losses are included in other income and were insignificant in
Fiscal 1996, 1997 and 1998.
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 of $124,028 in 1998 resulted
from disposition of Banner hardware group (See Note 2). Nonrecurring income
of $2,528 in 1997 resulted from the 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 12.
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 1998 presentation.
Recently Issued Accounting Pronouncements: In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 131 ("SFAS 131") "Disclosures about Segments of an
Enterprise and Related Information." 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 reportable operating segments in annual and interim
financial reports. Generally, financial information is required to be
reported on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The
Company will adopt SFAS 131 in Fiscal 1999.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 ("SFAS 132") "Employers' Disclosures about Pensions and
Other Postretirement Benefits." SFAS 132 revises and improves the
effectiveness of current note disclosure requirements for employers'
pensions and other retiree benefits by requiring additional information to
facilitate financial analysis and eliminating certain disclosures which are
no longer useful. SFAS 132 does not address recognition or measurement
issues. The Company will adopt SFAS 132 in Fiscal 1999.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS 133") "Accounting for Derivative Instruments and
Hedging Activities." SFAS 133 establishes a new model for accounting for
derivatives and hedging activities and supersedes and amends a number of
existing accounting standards. It requires that all derivatives be
recognized as assets and liabilities on the balance sheet and measured at
fair value. The corresponding derivative gains or losses are reported
based on the hedge relationship that exists, if any. Changes in the fair
value of derivative that are not designated as hedges or that do not meet
the hedge accounting criteria in SFAS 133 are required to be reported in
earnings. Most of the general qualifying criteria for hedge accounting
under SFAS 133 were derived from, and are similar to, the existing
qualifying criteria in SFAS 80 "Accounting for Futures Contracts." SFAS
133 describes three primary types of hedge relationships: fair value hedge,
cash flow hedge, and foreign currency hedge. The Company will adopt SFAS
133 in Fiscal 1999 and is currently evaluating the financial statement
impact.
2. BUSINESS COMBINATIONS
The Company has accounted for the following acquisitions by using the
purchase method. The respective purchase price is assigned to the net
assets acquired based on the fair value of such assets and liabilities at
the respective acquisition dates.
In December 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 borrowings.
AS&C is an aerospace parts, logistics, and distribution company primarily
servicing the European OEM market.
On March 2, 1998, the Company consummated the acquisition of Edwards
and Lock Management Corporation, doing business as Special-T Fasteners
("Special-T"), in a business combination to be accounted for as a purchase
(the "Special-T Acquisition"). The contractual purchase price for the
acquisition was valued at approximately $47,300, of which 50.1% was paid in
shares of Class A Common Stock of the Company and 49.9% was paid in cash.
The total cost of the acquisition exceeded the fair value of the net assets
of Special-T by approximately $21,605, which amount is preliminarily being
allocated as goodwill, and amortized using the straight-line method over 40
years. Special-T manages the logistics of worldwide distribution of
Company manufactured precision fasteners to customers in the aerospace
industry, government agencies, original equipment manufacturers ("OEM's"),
and other distributors.
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 then initiated a tender offer to
purchase the remaining shares and convertible debt held by the public. By
June 30, 1997, the Company had purchased, or placed sufficient cash in
escrow to purchase, all the remaining shares and convertible debt of
Simmonds. The total purchase price of Simmonds, including the assumption of
debt, was approximately $62,000, which the Company funded with available
cash and borrowings. The Company recorded approximately $20,453 in goodwill
as a result of this acquisition, which will be amortized using the straight-
line method over 40 years. Simmonds is one of Europe's leading
manufacturers and distributors of aerospace and automotive fasteners.
On January 13, 1998, certain subsidiaries (the "Selling
Subsidiaries"), of Banner, 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 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 adjusted closing date balance sheet for the assets
(and liabilities) conveyed by the Selling Subsidiaries to the Buyers. The
assets transferred to the Buyers consist 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. The
Company will account for its remaining investment in AlliedSignal Inc.
common stock as an available-for-sale security. 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. As a result of the Banner Hardware Group
Disposition and the repayment of outstanding term loans, the Company
recorded non-recurring income of $124,028 for the year ended June 30, 1998.
On June 30, 1997, the Company sold all the patents of Fairchild
Scandinavian Bellyloading Company ("SBC") to Teleflex Incorporated
("Teleflex") for $5,000, and immediately thereafter sold all the stock of
SBC to a wholly owned subsidiary of Teleflex for $2,000. The Company may
also receive additional proceeds of up to $7,000 based on future net sales
of SBC's patented products and services.
3. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
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.
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%.
On May 11, 1998, the Company commenced an offer to exchange (the
"Exchange Offer"), for each properly tendered share of Common Stock of
Banner, a number of shares of the Company's Class A Common Stock, par value
$0.10 per share, equal to the quotient of $12.50 divided by $20.675 up to a
maximum of 4,000,000 shares of Banner's Common Stock. The Exchange Offer
expired on June 9, 1998 and 3,659,364 shares of Banner's Common Stock were
validly tendered for exchange and the Company issued 2,212,361 shares Class
A Common Stock to the tendering shareholders. As a result of the Exchange
Offer, the Company's ownership of Banner Common Stock increased to 83.3%.
The Company effected the Exchange Offer to increase its ownership of Banner
to more than 80% in order for the Company to include Banner in its United
States consolidated corporate income tax return.
On June 30, 1998, the Company had $31,674 of minority interest, of
which $31,665 represents Banner. Minority shareholders hold approximately
16.7% of Banner's outstanding common stock.
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.
4. DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE
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 segment 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 Shared Technologies Fairchild,
Inc ("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 FII 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.
On November 20, 1997, STFI entered into a merger agreement with
Intermedia Communications Inc. ("Intermedia") pursuant to which holders of
STFI common stock received $15.00 per share in cash (the "STFI Merger").
The Company was paid approximately $178,000 in cash (before tax and selling
expenses) in exchange for the common and preferred stock of STFI owned by
the Company. In the nine months ended March 29, 1998, the Company recorded
a $95,960 gain, net of tax, on disposal of discontinued operations, from
the proceeds received from the STFI Merger, which was completed on March
11, 1998. The results of STFI have been accounted for as discontinued
operations.
The results of FCSC and STFI have been accounted for as discontinued
operations. The net sales of FCSC totaled, $91,290 in 1996. Net earnings
from discontinued operations from FCSC and STFI was $7,901 $3,149, and $648
in 1996, 1997, and 1998, respectively.
For the Company's fiscal years 1996, 1997, and 1998, Fairchild
Technologies ("Technologies") had pre-tax operating losses of approximately
$1.5 million, $3.6 million, and $48.7 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
"measurement date"), 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 a spin-off. If the Company elects to include Technologies in a
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 recorded an
after-tax charge of $36,243 in discontinued operations in Fiscal 1998, of
which, $28,243 (net of an income tax benefit of $11,772) relating to the
net losses of Technologies since the measurement date, including the write
down of assets for impairment to estimated realizable value; and (ii)
$8,000 (net of an income tax benefit of $4,806) relating to a provision for
operating losses over the next seven months at Technologies. While the
Company believes that $36,243 is a reasonable charge for the expected
losses in connection with the disposition of Technologies, there can be no
assurance that this estimate is adequate.
Earnings from discontinued operations for the twelve months ended June
30, 1996, 1997, and 1998 includes net losses of $1,475, $3,634 and $4,944,
respectively, from Technologies until the adoption date of a formal plan on
the measurement date.
On February 22, 1996, pursuant to an Asset Purchase Agreement dated
January 26, 1996, the Company, through one of its subsidiaries, completed
the sale of certain assets, liabilities and the business of the D-M-E
Company ("DME") to Cincinnati Milacron Inc. ("CMI"), for a sales price of
approximately $244,331, as adjusted. The sales price consisted of $74,000
in cash, and two 8% promissory notes in the aggregate principal amount of
$170,331 (together, the "8% CMI Notes"). On July 29, 1996, CMI paid in
full the 8% CMI Notes. As a result of the sale of DME in 1996, the Company
recorded a gain on disposal of discontinued operations of approximately
$54,012, net of a $61,929 tax provision.
On January 27, 1996, FII completed the sale of Fairchild Data
Corporation ("Data") to SSE Telecom, Inc. ("SSE") for book value of
approximately $4,400 and 100,000 shares of SSE's common stock valued at
$9.06 per share, or $906, at January 26, 1996, and warrants to purchase an
additional 50,000 shares of SSE's common stock at $11.09 per share.
Accordingly, the results of DME and Data have been accounted for as
discontinued operations. The combined net sales of DME and Data totaled
$108,131 for 1996. Net earnings from discontinued operations was $9,186,
net of $5,695 for taxes in 1996.
Net assets held for sale at June 30, 1998, 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 consider anticipated sales proceeds,
and other carrying costs to be incurred during the holding period.
Interest is not allocated to net assets held for sale.
5. PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma information for 1996, 1997 and 1998
provides the results of the Company's operations as though (i) the
disposition of the Banner Hardware Group, DME, Data, and SBC (ii) the
Merger of FCSC and subsequent disposition of STFI, (iii) the transfer of
Harco to Banner, resulting in the consolidation of Banner, and (iv)
Exchange Offer had been in effect since the beginning of each period. The
pro forma information is based on the historical financial statements of
the Company, Banner, DME, FCSC and SBC, 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, and
(iii) reduce minority interest from increased ownership in Banner and the
preferred stock of a former subsidiary being redeemed.
The following unaudited pro forma financial information is not
necessarily indicative of the results of operations that actually would
have occurred if the transactions had been in effect since the beginning of
each period, nor is it necessarily indicative of future results of the
Company.
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Sales $346,893 $ 452,527 $620,275
Operating income (13,489) 11,179 34,853
Earnings (loss) from continuing operations (1,880) 3,616 4,628
Basic and diluted earnings (loss) from
continuing operations per share (0.10) 0.19 0.21
Net loss
(3,355) (18) (28,438)
Basic and diluted net loss per share
(0.18) (0.00) (1.35)
</TABLE>
The pro forma financial information does not reflect nonrecurring
income and gains from disposal of discontinued operations that have
occurred from these transactions.
6. INVESTMENTS
Investments at June 30, 1998 consist primarily of common stock
investments in public corporations, which are classified as available-for-
sale securities. Other short-term investments and 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>
June 30, 1997 June 30, 1998
Aggregate Aggregate
Fair Cost Fair Cost
Value Basis Value Basis
<S> <C> <C> <C> <C>
Short-term investments:
Trading securities - equity $16,094 $7,398 $ - $ -
Available-for-sale equity
securities - - 3,907 5,410
Other investments 9,553 9,553 55 55
$25,647 $16,951 $3,962 $ 5,465
Long-term investments:
Available-for-sale equity $ - $ - $234,307 $195,993
Other investments 4,120 4,120 1,128 1,128
$ 4,120 $ 4,120 $235,435 $197,121
</TABLE>
On June 30, 1998, the Company had gross unrealized holding gains from
available-for-sale securities of $38,314 and gross unrealized holding
losses from available-for-sale securities of $1,503.
Investment income is summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Gross realized gain (loss) from sales $(1,744)$ 1,673 $ 364
Change in unrealized holding gain
(loss) from trading securities 5,527 4,289 (5,791)
Gross realized loss from impairments - - (182)
Dividend income 792 689 2,247
$4,575 $6,651 $(3,362)
</TABLE>
Subsequent to year-end, the Company's investment in AlliedSignal
common stock (included in long-term available-for-sale equity securities)
declined in value from $218 million at June 30, 1998 to $177 million at
September 17, 1998. Also subsequent to year-end the Company sold calls on
800,000 shares of AlliedSignal common stock for approximately $1.8 million.
These calls will be marked to market through current income on a monthly
basis until the calls mature.
7. 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>
1996 1997 1998
<S> <C> <C> <C>
Statement of Earnings:
Net sales $295,805 $102,962 $ 90,235
Gross profit 89,229 39,041 32,449
Earnings from continuing
operations 18,289 14,812 14,780
Net earnings 18,289 14,812 14,780
Balance Sheet at June 30:
Current assets $ 47,546 $ 33,867
Non-current assets 40,878 39,898
Total assets 88,424 73,765
Current liabilities 26,218 14,558
Non-current liabilities 740 1,471
</TABLE>
The Company owns approximately 31.9% of Nacanco common stock. The
Company recorded equity earnings of $5,487, $4,673, and $4,683 from this
investment for 1996, 1997 and 1998, respectively.
Effective February 25, 1996, the Company increased its percentage of
ownership of Banner common stock from 47.2% to approximately 59.3%. Since
February 25, 1996, the Company has consolidated Banner's results. Prior to
February 25, 1996, the Company accounted for its investment in Banner using
the equity method and held its investment in Banner as part of investments
and advances, affiliated companies. The Company recorded equity in
earnings of $363 from this investment in 1996.
The Company's share of equity in earnings of all unconsolidated
affiliates for 1996, 1997 and 1998 was $4,821, $4,598, and $3,956,
respectively. The carrying value of investments and advances, affiliated
companies consists of the following:
<TABLE>
<CAPTION>
June June
30, 30,
1997 1998
<S> <C> <C>
Nacanco $ 20,504 $19,329
STFI 31,978 -
Others 3,196 8,239
$ 55,678 $27,568
</TABLE>
On June 30, 1998, approximately $6,103 of the Company's $473,559
consolidated retained earnings are from undistributed earnings of 50
percent or less currently owned affiliates accounted for using the equity
method.
8. NOTES PAYABLE AND LONG-TERM DEBT
At June 30, 1997 and 1998, notes payable and long-term debt consisted
of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1998
<S> <C> <C>
Bank credit agreements $ 100 $ -
Other short-term notes payable 15,429 17,811
Short-term notes payable (weighted
average interest rates of 7.8% $ 15,529 $ 17,811
and 5.2% in 1997 and 1998,
respectively)
Bank credit agreements $ 177,250 $290,800
11 7/8% RHI Senior debentures due 1999 85,852 -
12% Intermediate debentures due 2001 115,359 -
13 1/8% Subordinated debentures due 2006 35,188 -
13% Junior Subordinated debentures due
2007 24,834 -
10.65% Industrial revenue bonds 1,500 1,500
Capital lease obligations, interest from
4.4% to 10.1% 1,897 923
Other notes payable, collateralized by
property, plant and
equipment, interest from 3.0% to 10.0% 6,835 5,033
448,715 298,256
Less: Current maturities (31,793) (2,854)
Net long-term debt $416,922 $295,402
</TABLE>
The Company maintains credit agreements (the "Credit Agreements") with
a consortium of banks, which provide revolving credit facilities to the
Company and Banner, and a term loan to the Company (collectively the
"Credit Facilities").
On December 19, 1997, immediately following the Offering, the Company
restructured its FHC and RHI Credit Agreements by entering into a new
credit agreement (the "New Credit Agreement") 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.
Advances made under the Facility will generally bear interest at a rate of,
at the Company's option, either (i) 2% over the Citibank N.A. base rate, or
(ii) 3% over the Eurodollar Rate ("LIBOR") for the first nine months
following closing, which is subject to change based upon the Company's
financial performance thereafter. The New Credit Agreement is subject to a
non-use commitment fee of ??% of the aggregate unused availability for the
first nine months post-closing and is subject to change based upon the
Company's financial performance thereafter. Outstanding letters of credit
are subject to fees equivalent to the LIBOR margin rate. A borrowing base
is calculated monthly to determine the amounts available under the New
Credit Agreement. The borrowing base is determined monthly based upon (i)
the EBITDA of the Company's Aerospace Fastener business, as adjusted, and
(ii) specified percentages of various marketable securities and cash
equivalents. The New Credit Agreement will mature on June 18, 2004. The
term loan is subject to mandatory prepayment requirements and optional
prepayments. The revolving loan is subject to mandatory prepayment
requirements and optional commitment reductions.
The New Credit Agreement requires the Company to comply with certain
financial and non-financial loan covenants, including maintaining a minimum
net worth and maintaining certain interest and fixed charge coverage ratios
at the end of each Fiscal Quarter. Additionally, the New Credit Agreement
restricts annual capital expenditures to $35,000 in 1999 and $25,000 in
each year thereafter. Substantially all of the Company's assets are pledged
as collateral under the New Credit agreement. The New Credit Agreement
restricts the payment of dividends to the Company's shareholders to an
aggregate of $200 over the life of the agreement. At June 30, 1998, the
Company was in compliance with all the covenants under the New Credit
Agreement.
Banner maintains a credit agreement (the "Banner Credit Agreement")
which provides Banner and its subsidiaries with funds for working capital
and potential acquisitions. On November 25, 1997, Banner amended its credit
agreement to increase its revolving credit facility by $50,000. Immediately
following this amendment, the facility under the Banner Credit Agreement
consisted of (i) a $55,000 six-year term loan ("Banner Term Loan"); (ii) a
$30,000 seven-year term loan ("Tranche B Loan"); (iii) a $40,000 six-year
term loan ("Tranche C Loan"); and (iv) a $121,500 six-year revolving credit
facility ("Banner Revolver"). On January 13, 1998, in conjunction with the
Banner Hardware Group Disposition, the outstanding balances of the Banner
Term Loan, Tranche B Loan and Tranche C Loan were fully repaid (See Note
2).
Based on the Company's financial performance, the Banner Revolver
bears interest at prime plus 1/4% to 1 1/2% or LIBOR plus 1 1/2% to 2 3/4%
and is subject to a nonuse fee of 30 to 50 basis points of the unused
availability. On June 30, 1998, Banner's performance level resulted in
borrowings under the Revolver bearing interest at prime plus 1/4% and LIBOR
plus 1 1/2% and a nonuse fee of 30 basis points for the quarter ending
September 30, 1998. The Banner Credit Agreement contains certain financial
and nonfinancial covenants which Banner is required to meet on a quarterly
basis. The financial covenants include minimum net worth and minimum
earnings levels, and minimum ratios of interest coverage, fixed charges and
debt to earnings before interest, taxes, depreciation and amortization.
Banner also has certain limitations on the incurring of additional debt,
and has restrictions which limit dividends and distributions on the capital
stock of the Company to an aggregate of $150 in any fiscal year. At June
30, 1998, Banner was in compliance with all covenants under the Banner
Credit Agreement. Substantially all of the Company's assets are pledged as
collateral under the Banner Credit Agreement.
On February 3, 1998, with the proceeds of the Offering, term loan
borrowings under the Facility, and the after tax proceeds the Company
received from the STFI Merger, the Company redeemed (collectively, the
"Public Debt Repayment") all of its existing publicly held 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.
The Company recognized an extraordinary loss of $6,730, net of $3,624
tax benefit, to write-off the remaining deferred loan fees and original
issue discounts associated with the early extinguishment of the Company's
indebtedness pursuant to the Public Debt Repayment and refinancing of the
FHC and RHI Credit Agreement facilities.
The following table summarizes the Credit Facilities at June 30, 1998:
<TABLE>
<CAPTION>
Outstanding Outstanding
Revolving Term
Credit Loan Available
Facilities Facilities Facilities
<S> <C> <C> <C>
The Company:
Term Loan $ - $225,000 $225,000
Revolving credit facility - - 75,000
Banner Aerospace, Inc.:
Revolving credit facility 65,800 - 121,500
Total $ 65,800 $225,000 $421,500
</TABLE>
At June 30, 1998, the Company had letters of credit outstanding of
$18,658, which were supported by a sub-facility under the Credit
Facilities. At June 30, 1998, the Company had unused bank lines of credit
aggregating $112,042, at interest rates slightly higher than the prime
rate. The Company also has short-term lines of credit relating to foreign
operations, aggregating $21,205, against which the Company owed $10,088 at
June 30, 1998.
The annual maturity of long-term debt obligations (exclusive of
capital lease obligations) and bank notes payable for each of the five
years following June 30, 1998, are as follows: $20,398 for 1999, $3,210
for 2000, $3,382 for 2001, $70,972 for 2002 and $107,594 for 2003.
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.
In August 1997, the Company entered into a delayed-start swap interest
rate lock hedge agreement (the "FHC Hedge Agreement") to reduce its
exposure to increases in interest rates on variable rate debt. In December
1997, the Company amended the FHC Hedge Agreement. On February 17, 1998,
the FHC Hedge Agreement began to provide interest rate protection on
$100,000 of variable rate debt for ten years, with interest being
calculated based on a fixed LIBOR rate of 6.715%. On January 14, 1998, the
FHC Hedge Agreement was further amended to provide interest rate protection
with interest being calculated based on a fixed LIBOR rate of 6.24% from
February 17, 1998 to February 17, 2003. On February 17, 2003, the bank will
have a one-time option to either (i) elect to cancel the ten-year
agreement; or (ii) do nothing and proceed with the transaction, using a
fixed LIBOR rate of 6.715% for the period February 17, 2003 to February 19,
2008. No costs were incurred as a result of these transactions.
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 table below provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, which include interest rate swaps. For interest
rate swaps, the table presents notional amounts and weighted average
interest rates by expected (contractual) maturity dates. Notional amounts
are used to calculate the contractual payments to be exchanged under the
contract. Weighted average variable rates are based on implied forward
rates in the yield curve at the reporting date.
<TABLE>
<CAPTION>
Expected Maturity Date
1999 2000 2001 2002 2003 Thereafter
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps:
Variable to Fixed - 20,000 60,000 - - 100,000
Average cap rate - 7.25% 6.81% - - 6.49%
Average floor - 5.84% 5.99% - - 6.24%
rate
Weighted average - 5.71% 5.74% - - 5.95%
rate
Fair Market Value - (19) (204) - - (6,295)
</TABLE>
9. 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>
1996 1997 1998
<S> <C> <C> <C>
Service cost (current period
attribution) $3,513 $2,521 $2,685
Interest cost of projected benefit
obligation 14,499 15,791 14,476
Actual return on plan assets
(39,430) (31,400) (40,049)
Amortization of prior service cost
81 (180) (184)
Net amortization and deferral
21,495 11,157 21,228
158 (2,111) (1,844)
Net periodic pension expense
(income) for other plans (118) 142 (108)
including foreign plans
Net periodic pension expense
(income) $ 40 $(1,969) $(1,952)
</TABLE>
Assumptions used in accounting for the plans were:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Discount rate 8.5% 7.75% 7.0%
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, 1997
and 1998, for the plans:
<TABLE>
<CAPTION>
June 30,June 30,
1997 1998
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested $198,300 $212,837
Nonvested 7,461 8,120
Accumulated benefit obligation 205,761 220,957
Effect of projected future compensation
increases 683 1,650
Projected benefit obligation 206,444 222,607
Plan assets at fair value 237,480 261,097
Plan assets in excess of projected
benefit obligations 31,036 38,490
Unrecognized net loss 29,592 23,798
Unrecognized prior service cost (571) (387)
Unrecognized net transition assets (315) (258)
Prepaid pension cost $59,742 $61,643
</TABLE>
Plan assets include Class A Common Stock of the Company valued at a
fair market value of $26,287 and $16,167 at June 30, 1997 and 1998,
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 $779,
$642, and $804 for 1996, 1997 and 1998, respectively. The Company accrual
was approximately $34,965 and $33,062 as of June 30, 1997 and 1998,
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 $3,877,
$3,349, and $3,714 for the years ended June 30, 1996, 1997 and 1998,
respectively. The components of expense in Fiscal 1996, 1997 and 1998 are
as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Service cost of benefits earned $ 281 $ 140 $ 166
Interest cost on liabilities 4,377 3,940 3,979
Net amortization and deferral (2) (89) 373
Net periodic postretirement benefit $ 4,656 $ 3,991 $ 4,518
</TABLE>
A one-time credit of $3,938, resulting from the divestitures of
subsidiaries, was offset by $4,361 from DME's accumulated postretirement
benefit obligation for active employees, which was transferred to CMI as
part of the sale. The Company recognized the net effect of $423 as an
expense in 1996.
The following table sets forth the funded status for the Company's
postretirement health care benefit plans at June 30:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Accumulated postretirement benefit
obligations:
Retirees $ 48,145 $54,654
Fully eligible active participants 390 632
Other active participants 2,335 2,911
Accumulated postretirement benefit
obligation 50,870 58,197
Unrecognized prior service cost --- (935)
Unrecognized net loss 6,173 16,387
Accrued postretirement benefit liability $ 44,697 $42,745
</TABLE>
In Fiscal 1998, the Company amended a former subsidiary's medical plan
to increase the retiree's contribution rate to approximately 20% of the
negotiated premium, resulting in a $1,003 decrease to unrecognized prior
service costs.
The accumulated postretirement benefit obligation was determined using
a discount rate of 7.0%, and a health care cost trend rate of 6.7% 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,
1998, by approximately $1,666, and increase the net periodic postretirement
benefit cost by approximately $129 for Fiscal 1998.
10. INCOME TAXES
The provision (benefit) for income taxes from continuing operations is
summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Current:
Federal $(40,640) 5,612 (4,860)
State 1,203 1,197 500
Foreign (3,805) (49) 3,893
(43,242) 6,760 (467)
Deferred:
Federal 17,060 (15,939) 46,092
State (3,657) 3,444 3,034
13,403 (12,495) 49,126
Net tax provision (benefit) $(29,839) $(5,735) $ 48,659
</TABLE>
The income tax provision (benefit) for continuing operations differs
from that computed using the statutory Federal income tax rate of 35%, in
Fiscal 1996, 1997 and 1998, for the following reasons:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Computed statutory amount $(22,713) $(1,751) 43,188
State income taxes, net of applicable
federal tax benefit 782 778 4,362
Nondeductible acquisition valuation
items 1,329 1,064 1,204
Tax on foreign earnings, net of tax
credits 1,711 (1,938) (1,143)
Difference between book and tax basis
of assets acquired and 1,040 (1,102) 4,932
liabilities assumed
Revision of estimate for tax accruals
(3,500) (5,335) (3,905)
Other
(8,488) 2,549 21
Net tax provision (benefit) $(29,839) (5,735) 48,659
</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>
1996 1997 1998
Deferred Deferred Deferred
(Provision)(Provision)June 30,(Provision)June 30,
Benefit Benefit 1997 Benefit 1998
<S> <C> <C> <C> <C> <C>
Deferred tax assets:
Accrued expenses (1,643) 504 6,440 (3,853) 2,587
Asset basis differences 1,787 (1,492) 572 7,540 8,112
Inventory - 2,198 2,198 (2,198) -
Employee compensation
and benefits (26) (267) 5,141 (55) 5,086
Environmental reserves (737) (1,253) 3,259 207 3,466
Loss and credit
carryforward (23,229) (8,796) - - -
Postretirement benefits (1,273) 138 19,472 (1,338) 18,134
Other 2,186 2,079 7,598 4,506 12,104
(22,935) (6,889) 44,680 4,809 49,489
Deferred tax liabilities:
Asset basis differences 16,602 (3,855) (26,420) (54,012)(80,432)
Inventory 4,684 2,010 - (1,546) (1,546)
Pensions 1,516 (1,038) (19,281) 95 (19,186)
Other (13,270) 22,267 (7,240) 1,528 (5,712)
9,532 19,384 (52,941) (53,935)(106,876)
Net deferred tax
liability $(13,403) $12,495 $(8,261) $(49,126)$(57,387)
</TABLE>
The amounts included in the balance sheet are as follows:
<TABLE>
<CAPTION>
June June
30, 30,
1997 1998
<S> <C> <C>
Prepaid expenses and other current
assets:
Current deferred $ 11,307 $ -
Income taxes payable:
Current deferred $ (2,735) $34,553
Other current 8,598 (6,242)
$ 5,863 $28,311
Noncurrent income tax liabilities:
Noncurrent deferred $ 22,303 $22,834
Other noncurrent 19,710 72,342
$ 42,013 $95,176
</TABLE>
The 1996, 1997 and 1998 net tax benefits include the results of
reversing $3,500, $5,335, and $3,905 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 the Company intends to repatriate such earnings. 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, 1998, 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.
11. EQUITY SECURITIES
On December 19, 1997, the Company completed a secondary offering of
public securities. The offering consisted of the issuance of 3,000,000
shares of the Company's Class A Common Stock at $20.00 per share (the
"Offering").
In accordance with the terms of the Special-T Acquisition, the Company
issued 1,072,605 restricted shares of the Company's Class A Common Stock in
Fiscal 1998. Additionally, the Company established an employee stock plan
to issue up to 44,900 additional shares of Class A Common Stock to Special-
T employees.
On March 13, 1998, the Company issued 47,283 restricted shares of the
Company's Class A Common Stock resulting from a cashless exercise of
100,000 warrants by Dunstan Ltd.
On May 11, 1998, the Company commenced an offer to exchange (the
"Exchange Offer"), for each properly tendered share of Common Stock of
Banner, a number of shares of the Company's Class A Common Stock, par value
$0.10 per share, equal to the quotient of $12.50 divided by $20.675 up to a
maximum of 4,000,000 shares of Banner's Common Stock. The Exchange Offer
expired on June 9, 1998 and approximately 3,659,364 shares of Banner's
Common Stock were validly tendered for exchange and the Company issued
approximately 2,212,361 shares Class A Common Stock to the tendering
shareholders. As a result of the Exchange Offer, the Company's ownership of
Banner Common Stock increased to 83.3%. The Company effected the Exchange
Offer to increase its ownership of Banner to more than 80% in order for the
Company to include Banner in its United States consolidated corporate
income tax return.
The Company had 20,428,591 shares of Class A common stock and
2,624,716 shares of Class B common stock outstanding at June 30, 1998.
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 1998, 141,259 shares of Class A Common Stock were issued as a result
of the exercise of stock options and shareholders converted 7,800 shares of
Class B common stock into Class A common stock.
During Fiscal 1998, the Company issued 36,626 deferred compensation
units ("DCU's) pursuant to the Company's stock option deferral plan as a
result of a cashless exercise of 45,000 stock options. Each DCU is
represented by one share of the Company's Treasury Stock and is convertible
into a share of the Company's Class A Common Stock after a specified period
of time.
12. STOCK OPTIONS AND WARRANTS
Stock Options
The Company's 1986 Non-Qualified and Incentive Stock Option Plan (the
"1986 Plan"), authorizes the issuance of 4,541,000 shares of Class A Common
Stock upon the exercise of stock options issued under the 1986 Plan. At the
1998 Annual Meeting, stockholders will be asked to approve an amendment to
increase the number of shares authorized under the 1986 Plan to 5,141,000
shares of Class A Common Stock. 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. 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. The 1986 plan expires on April 9, 2006; however, all stock
options outstanding as of April 9, 2006 shall continue to be exercisable
pursuant to their terms.
The Company's ten year 1996 Non-Employee Directors Stock Option Plan
(the "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.
A summary 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, 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
Granted 357,250 24.25
Exercised (141,259) 4.70
Forfeited (46,650) 7.56
Outstanding at June 30, 1998 1,654,781 $ 7.46
Exercisable at June 30, 1996 399,022 4.59
Exercisable at June 30, 1997 486,855 4.95
Exercisable at June 30, 1998 667,291 $ 6.58
</TABLE>
A summary of options outstanding at June 30, 1998 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>
$3.50 - $8.625 848,791 $ 4.07 1.8 years 516,010 $ 4.05
$13.625 - $16.25 472,240 $14.98 3.4 years 151,281 $ 15.22
$18.5625 - $25.0625 333,750 $24.02 4.1 years - -
$3.50 - $25.0625 1,654,781 $ 7.46 3.2 years 667,291 $ 6.58
</TABLE>
The weighted average grant date fair value of options granted during
1996, 1997, and 1998 was $1.95, $6.90, and $11.18, respectively. The fair
value of each option granted is estimated on the grant date using the Black-
Scholes option pricing model. The following significant assumptions were
made in estimating fair value:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Risk-free interest rate 5.5% - 6.6% 6.0% - 6.7% 5.4% -6.3%
Expected life in years 4.27 4.65 4.66
Expected volatility 46% - 47% 43% - 45% 44% - 45%
Expected dividends none none none
</TABLE>
The Company recognized compensation expense of $104 as a result of
stock options that were modified in 1998. The Company is applying APB
Opinion No. 25 in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized for the granting of stock options in
1996, 1997 or 1998. If stock options granted in 1996, 1997 and 1998 were
accounted for based on their fair value as determined under SFAS 123, pro
forma earnings would be as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Net earnings:
As reported $189,706 $ 1,331 $101,090
Pro forma 189,460 283 99,817
Basic earnings per share:
As reported $ 11.71 $ 0.08 $ 5.36
Pro forma 11.69 0.02 5.30
Diluted earnings per share:
As reported $ 11.71 $ 0.08 $ 5.14
Pro forma 11.69 0.02 5.07
</TABLE>
The pro forma effects of applying SFAS 123 are not representative of
the effects on reported net earnings for future years. The effect of SFAS
123 is not applicable to awards made prior to 1996 and additional awards in
future years are expected.
Stock Option Deferral Plan
On February 9, 1998, the Board adopted a Stock Option Deferral Plan,
subject to approval by the shareholders at the 1998 Annual Meeting.
Pursuant to the Stock Option Deferral Plan, certain officers (at their
election) may defer payment of the "Compensation" they receive in a
particular year or years from the exercise of Company stock options.
"Compensation" means the excess value of a stock option, determined by the
difference between the fair market value of shares issueable upon exercise
of a stock option, and the option price payable upon exercise of the stock
option. An officer's deferred Compensation shall be in the form of
"Deferred Compensation Units," representing the number of shares of Common
Stock that the officer shall be entitled to receive upon expiration of the
deferral period. (The number of Deferred Compensation Units issueable to an
officer is determined by dividing the amount of the deferred Compensation
by the fair market value of the Company's stock as of the date of
deferral.)
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 were earned on a pro-rata basis over a six-month
period ending October 31, 1997. The warrants became exercisable on
November 1, 1997, and on March 13, 1998, the Company issued 47,283
restricted shares of the Company's Class A Common Stock resulting from the
cashless exercise of these warrants. The Company recorded expenses of $191
and $300 in 1997 and 1998, respectively, for stock warrants earned 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 March 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.,
Teleport Communications Group, Inc., or Intermedia Communications Inc.;
(ii) within 365 days after a change of control of the Company, as defined
in the Company's Credit Agreement; or (iii) within 365 days after a change
of control of Banner, as defined in the Banner Credit Agreement. The
payment of the warrant price may be made in cash or in shares of the
Company's Class A or Class B Common Stock, valued at fair market value at
the time of exercise, or combination thereof. In no event may the warrant
be exercised after March 13, 2002. As a result of the STFI Disposition,
these warrants became exercisable through March 9, 1999. Accordingly, the
Company recognized a charge of $5,606 in 1998.
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, 1998.
13. EARNINGS PER SHARE
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 following table illustrates the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Basic earnings per share:
Earnings (loss) from continuing
operations $(32,186) $ 1,816 $ 52,399
Weighted average common shares
outstanding 16,206 16,539 18,834
Basic earnings per share:
Basic earnings (loss) from continuing
operations per share $ (1.98) $ 0.11 $ 2.78
Diluted earnings per share:
Earnings (loss) from continuing
operations $(32,186) $ 1,816 $ 52,399
Weighted average common shares
outstanding 16,206 16,539 18,834
Diluted effect of options Antidilutive 449 546
Diluted effect of warrants Antidilutive 333 289
Total shares outstanding 16,206 17,321 19,669
Diluted earnings (loss) from
continuing operations per share $ (1.98) $ 0.11 $ 2.66
</TABLE>
The computation of diluted earnings (loss) from continuing operations
per share for 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. No
adjustments were made to earnings per share calculations for discontinued
operations and extraordinary items.
14. 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 other 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 other off-balance-sheet
instruments at June 30, 1998 was not material.
The carrying amounts and fair values of the Company's financial
instruments at June 30, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 19,420 $19,420 $49,601 $49,601
Investment securities:
Short-term equity securities
16,094 16,122 3,907 3,907
Short-term other investments
9,553 9,592 55 193
Long-term equity securities
- - 234,307 234,307
Long-term other investments
4,120 4,617 1,128 1,128
Notes receivable:
Long-term
1,300 1,300 850 850
Short-term debt
15,529 15,529 17,811 17,811
Long-term debt:
Bank credit agreement
177,250 177,250 290,800 290,800
Senior notes and subordinated
debentures 261,233 270,995 - -
Industrial revenue bonds
1,500 1,500 1,500 1,500
Capitalized leases
1,897 1,897 923 923
Other
6,835 6,835 5,033 5,033
</TABLE>
15. RESTRUCTURING CHARGES
In Fiscal 1996, the Company recorded restructuring charges in the
Aerospace Fasteners segment in the categories shown below. All costs
classified as restructuring were the direct result of formal plans to close
plants, to terminate employees, or to exit product lines. Substantially all
of these plans have been executed. Other than a reduction in the Company's
existing cost structure and manufacturing capacity, none of the
restructuring charges resulted in future increases in earnings or
represented an accrual of future costs. The costs included in
restructuring were predominately nonrecurring in nature and consisted of
the following significant components:
<TABLE>
<CAPTION>
<S> <C>
Write down of inventory to net realizable value related to
discontinued product lines (a) $ 156
Write down of fixed assets related to discontinued product
lines 270
Severance benefits for terminated employees (substantially
all paid within twelve months) 1,368
Plant closings facility costs (b)
389
Contract termination claims
136
$2,319
(a) Write down was required because product line was discontinued.
(b) Includes lease settlements, write-off of leasehold improvements,
maintenance, restoration and clean up costs.
</TABLE>
16. EXTRAORDINARY ITEMS
In Fiscal 1998 the Company recognized an extraordinary loss of $6,730,
net of tax, to write-off the remaining deferred loan fees and original
issue discounts associated with early extinguishment of the Company's
indebtedness pursuant to the Public Debt Repayment and refinancing of the
FHC and RHI Credit Agreement facilities (See Note 8).
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.
17. RELATED PARTY TRANSACTIONS
The Company and its 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.
The Company and Banner paid for a chartered aircraft used from time to
time for business related travel. The owner of the chartered aircraft is a
company 51% owned by an immediate family member of Mr. Jeffrey Steiner.
Cost for such flights charged to the Company and Banner are comparable to
those charged in arm's length transactions between unaffiliated third
parties.
The Company and Banner prepaid hours for a chartered helicopter used
from time to time for business related travel. The owner of the chartered
helicopter is a company controlled by Mr. Jeffrey Steiner. Cost for such
flights charged to the Company and Banner are comparable to those charged
in arm's length transactions between unaffiliated third parties.
Prior to the consolidation of Banner on February 25, 1996, the
Aerospace Fasteners segment had sales to Banner of $3,663 in 1996.
18. 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, 1998, are as follows: $3,174 for 1999, $4,145 for 2000,
$3,400 for 2001, $2,217 for 2002 and $1,526 for 2003. Rental expense on
operating leases from continuing operations for Fiscal 1996, 1997 and 1998
was $6,197, $4,928, and $8,610, respectively. Minimum commitments under
capital leases for each of the five years following June 30, 1998, are $322
for 1999, $275 for 2000, $238 for 2001, $164 for 2002, and $143 for 2003,
respectively. At June 30, 1998, the present value of capital lease
obligations was $923. At June 30, 1998, capital assets leased, included in
property, plant, and equipment consisted of:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements $ 70
Machinery and equipment 5,272
Furniture and fixtures 197
Less: Accumulated depreciation (2,898)
$ 2,641
</TABLE>
19. CONTINGENCIES
Government Claims
The Corporate Administrative Contracting Officer (the "ACO"), based
upon the advice of the United States Defense Contract Audit Agency, has
made a determination that Fairchild Industries, Inc. ("FII"), a former
subsidiary of the Company, did not comply with Federal Acquisition
Regulations and Cost Accounting Standards in accounting for (i) the 1985
reversion to FII of certain assets of terminated defined benefit pension
plans, and (ii) pension costs upon the closing of segments of FII's
business. The ACO has directed FII to prepare cost impact proposals
relating to such plan terminations and segment closings and, following
receipt of such cost impact proposals, may seek adjustments to contract
prices. The ACO alleges that substantial amounts will be due if such
adjustments are made, however, an estimate of the possible loss or range of
loss from the ACO's assertion cannot be made. The Company believes it has
properly accounted for the asset reversions in accordance with applicable
accounting standards. The Company has held discussions with the government
to attempt to resolve these pension accounting issues.
Environmental Matters
The Company's operations are subject to stringent Government imposed
environmental laws and regulations concerning, among other things, the
discharge of materials into the environment and the generation, handling,
storage, transportation and disposal of waste and hazardous materials. To
date, such laws and regulations have not had a material effect on the
financial condition, results of operations, or net cash flows of the
Company, although the Company has expended, and can be expected to expend
in the future, significant amounts for investigation of environmental
conditions and installation of environmental control facilities,
remediation of environmental conditions and other similar matters,
particularly in the Aerospace Fasteners segment.
In connection with its plans to dispose of certain real estate, the
Company must investigate environmental conditions and may be required to
take certain corrective action prior or pursuant to any such disposition.
In addition, management has identified several areas of potential
contamination at or from other facilities owned, or previously owned, by
the Company, that may require the Company either to take corrective action
or to contribute to a clean-up. The Company is also a defendant in certain
lawsuits and proceedings seeking to require the Company to pay for
investigation or remediation of environmental matters and has been alleged
to be a potentially responsible party at various "Superfund" sites.
Management of the Company believes that it has recorded adequate reserves
in its financial statements to complete such investigation and take any
necessary corrective actions or make any necessary contributions. No
amounts have been recorded as due from third parties, including insurers,
or set off against, any liability of the Company, unless such parties are
contractually obligated to contribute and are not disputing such liability.
As of June 30, 1998, the consolidated total recorded liabilities of
the Company for environmental matters approximated $8,659, 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 $14,995.
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.
20. 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 the results of two smaller operations. Fairchild Technologies is now
recorded in discontinued operations.
The Company's financial data by business segment is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Sales:
Aerospace Fasteners $ $ $
218,059 269,026 387,236
Aerospace Distribution (a)
129,973 411,765 358,431
Corporate and Other
7,046 15,185 5,760
Eliminations (b)
(5,842) (15,213) (10,251)
Total Sales $ $ $
349,236 680,763 741,176
Operating Income (Loss):
Aerospace Fasteners (c) $ $ $
135 17,390 32,722
Aerospace Distribution (a)
5,625 30,891 20,330
Corporate and Other
(17,046) (14,782) (7,609)
Operating Income (Loss) $ $ $
(11,286) 33,499 45,443
Capital Expenditures:
Aerospace Fasteners $ $ $
3,841 8,964 31,221
Aerospace Distribution 3,812
1,556 4,787
Corporate and Other 996
283 1,263
Total Capital Expenditures $ $ $
5,680 15,014 36,029
Depreciation and Amortization:
Aerospace Fasteners $ $ $
14,916 16,112 16,260
Aerospace Distribution
1,341 5,138 3,412
Corporate and Other 364
4,788 3,057
Total Depreciation and $ $ $
Amortization 21,045 24,307 20,036
Identifiable Assets at June 30:
Aerospace Fasteners $ $ $
252,200 346,533 427,927
Aerospace Distribution
329,477 428,436 452,397
Corporate and Other
411,721 277,697 276,935
Total Identifiable Assets $ $ $
993,398 1,052,66 1,157,25
6 9
(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>
21. FOREIGN OPERATIONS AND EXPORT SALES
The Company's operations are located primarily in the United States
and Europe. Inter-area sales are not significant to the total sales of any
geographic area. The Company's financial data by geographic area is as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Sales by Geographic Area:
United States $ $ $
292,136 580,453 613,325
Europe
56,723 100,310 127,851
Other
377 - -
Total Sales $ $ $
349,236 680,763 741,176
Operating Income (Loss) by
Geographic Area:
United States $ $ $
(12,175) 27,489 28,575
Europe
1,037 6,010 16,868
Other
(148) - -
Total Operating Income (Loss) $ $ $
(11,286) 33,499 45,443
Identifiable Assets by Geographic
Area at June 30:
United States $ $ $
929,649 855,233 903,054
Europe
63,749 197,433 254,205
Total Identifiable Assets $
993,398 $1,052,6 $1,157,2
66 59
</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>
1996 1997 1998
<S> <C> <C> <C>
Export Sales
Europe $ $ $
27,330 48,187 68,515
Asia (excluding Japan)
6,766 21,221 19,744
Canada
8,878 17,797 16,426
Japan
11,958 19,819 12,056
South America
2,118 4,414 11,038
Other
6,447 11,493 10,340
Total Export Sales $ $ $
63,497 122,931 138,119
</TABLE>
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table of quarterly financial data has been prepared from
the financial records of the Company without audit, and reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the interim periods
presented:
<TABLE>
<CAPTION>
Fiscal 1997 quarters ended Sept. 29 Dec. 29 March 30June 30
<S> <C> <C> <C> <C>
Net sales $ $ $ $
138,244 152,461 179,436 210,622
Gross profit
37,092 36,785 47,552 59,915
Earnings (loss) from continuing
operations (3,797) (1,960) (117) 7,690
per basic share
(0.22) (0.12) (0.01) 0.47
per diluted share
(0.22) (0.15) (0.01) 0.44
Earnings (loss) from discontinued
operations, net (821) (1,017) 157 1,196
per basic share
(0.05) (0.06) 0.01 0.07
per diluted share
(0.05) (0.06) 0.01 0.07
Net earnings (loss)
(4,618) (2,977) 40 8,886
per basic share
(0.27) (0.18) - 0.54
per diluted share
(0.27) (0.18) - 0.51
Market price range of Class A Stock:
High 17 17 3/8 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
Fiscal 1998 quarters ended Sept. 28 Dec. 28 March 29June 30
<S> <C> <C> <C> <C>
Net sales $ $ $ $
194,362 208,616 164,164 174,034
Gross profit
46,329 56,822 37,790 45,565
Earnings (loss) from continuing
operations 1,229 (4,605) 50,418 5,357
per basic share
0.07 (0.27) 2.52 0.25
per diluted share
0.07 (0.27) 2.41 0.24
Loss from discontinued operations, net
(737) (1,945) (1,578) (36)
Per basic share
(0.04) (0.11) (0.08) 0.24
Per diluted share
(0.04) (0.11) (0.08) 0.44
Gain (loss) from disposal of (16,805)
discontinued operations, net - 29,974 46,548
Per basic share (0.78)
- 1.75 2.32
Per diluted share (0.76)
- 1.75 2.23
Extraordinary items, net
- (3,024) (3,701) (5)
Per basic share
- (0.18) (0.18) -
Per diluted share
- (0.18) (0.18) -
Net earnings (loss) (11,489)
492 20,400 91,687
Per basic share (0.53)
0.03 1.19 4.58
per diluted share (0.52)
0.03 1.19 4.38
Market price range of Class A Stock:
High 28 3/8 28 11/16 25 23
Low 17 19 5/16 19 7/16 18 3/16
Close 26 7/8 21 1/2 21 1/4 20 3/16
</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) a $123,991 nonrecurring gain from the Banner Hardware
Group Disposition. Gain (loss) on disposal of discontinued operations
includes (i) gains (losses) of $29,974, $68,900, and $(2,914) in the
second, third and fourth quarter of Fiscal 1998, respectively, resulting
from the gain on the STFI disposition, and (ii) losses of $22,352 and
$13,891 in the third and fourth quarter of Fiscal 1998, respectively,
resulting from the estimated loss on dispoal of certain assets of
Technologies. Earnings from discontinued operations, net, includes the
results of Technologies and STFI (until disposition) in each quarter.
Extraordinary items relate to the early extinguishment of debt by the
Company.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 5. OTHER INFORMATION
Articles have appeared in the French press reporting an inquiry by a
French magistrate into certain allegedly improper business transactions
involving Elf Acquitaine, a French petroleum company, its former chairman
and various third parties, including Maurice Bidermann. In connection with
this inquiry, the magistrate has made inquiry into allegedly improper
transactions between Mr. Steiner and that petroleum company. In response
to the magistrate's request that Mr. Steiner appear in France as a witness,
Mr. Steiner submitted written statements concerning the transactions and
appeared in person before the magistrate and others. Mr. Steiner, who has
been put under examination (mis en examen), by the magistrate, with respect
to this matter, has not been charged.
Mr. Steiner has been cited by a French prosecutor to appear on
November 7, 1998, before the Tribunal de Grande Instance de Paris, to
answer a charge of knowingly benefiting in 1990, from a misuse by Mr.
Bidermann of corporate assets of Societe Generale Mobiliere et Immobiliere,
a French corporation in which Mr. Bidermann is believed to have been the
sole shareholder.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this Item is incorporated herein by
reference from the 1998 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference from the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference from the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference from the 1998 Proxy Statement.
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 70
II Valuation and Qualifying Accounts 74
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 22, 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 are the responsibility
of the Company's management and are presented for the purpose of complying
with the Securities and Exchange Commission's rules and are not part of the
basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly state 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 22, 1998
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
<TABLE>
THE FAIRCHILD CORPORATION
CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY
BALANCE SHEETS (NOT CONSOLIDATED)
(In thousands)
<CAPTION>
June 30, June 30,
ASSETS 1997 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 234 $ -
Accounts receivable 384 400
Prepaid expenses and other current assets 250 (1,230)
Total current assets 868 (830)
Property, plant and equipment, less accumulated 486 677
depreciation
Investments in subsidiaries 390,355 627,634
Investments and advances, affiliated companies 1,435 963
Goodwill 4,133 14,333
Noncurrent tax assets 29,624 45,439
Other assets 2,403 21,031
Total assets $ 429,304 $ 709,247
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ - $ 2,250
Accounts payable and accrued expenses 8,315 10,218
Total current liabilities 8,315 12,468
Long-term debt 190,567 222,750
Other long-term liabilities 797 470
Total liabilities 199,679 235,688
Stockholders' equity:
Class A common stock 2,023 2,467
Class B common stock 263 263
Retained earnings and other equity 227,339 470,829
Total stockholders' equity 229,625 473,559
Total liabilities and stockholders' equity $ 429,304 $ 709,247
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,
1996 1997 1998
<S> <C> <C> <C>
Costs and Expenses:
Selling, general & administrative 5,148 3,925 3,516
Amortization of goodwill 130 130 147
5,278 4,055 3,663
Operating loss (5,278 ) (4,055 ) (3,663 )
Net interest expense 28,387 25,252 24,048
Investment income, net 1 16 208
Equity in earnings of affiliates 269 480 (613 )
Nonrecurring expense (1,064 ) -- --
Loss from continuing operations before (34,459 ) (28,811 ) (28,116 )
taxes
Income tax provision (benefit) (12,509 ) (15,076 ) (10,580 )
Loss before equity in earnings of (21,950 ) (13,735 ) (17,536 )
subsidiaries
Equity in earnings of subsidiaries 211,656 15,066 118,626
Net earnings (loss) 189,706 1,331 101,090
The accompanying notes are an integral part of these condensed financial
statements.
</TABLE>
<TABLE>
Schedule I
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,
1996 1997 1995
<S> <C> <C> <C>
Cash provided by (used for) operations $ 36,916 $ (14,271 ) $(80,099)
Investing activities:
Equity investments in affiliates (21 ) 2,092 (141)
(21 ) 2,092 (141)
Financing activities:
Proceeds from issuance of debt 9,400 225,000
-
Debt repayments (42,265 )
- (198,867)
Issuance of common stock 1,509 1,126
53,848
(40,756 ) 10,526 79,981
Net decrease in cash $(3,861 ) $(1,653 ) $ (259)
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 1998
<S> <C> <C>
Bank Credit Agreement $ -- $225,000
12% Inter. Debentures Due 2001 128,000 --
13 1/8% Sub. Debentures Due 2006 35,856 --
13% Jr. Sub. Debenture Due 2007 30,063 --
Less: Original issue discounts (3,352) --
$ 190,567 $ 225,000
</TABLE>
Maturities of long-term debt for the next five years are as follows:
$2,250 in 1999, $2,250 in 2000, $2,250 in 2001, $3,375 in 2002, and
$107,438 in 2003.
3. DIVIDENDS FROM SUBSIDIARIES
Cash dividends paid to The Fairchild Corporation by its consolidated
subsidiaries were $5,000, $10,000, and $42,100 in 1998, 1997, and 1996,
respectively. The Fairchild Corporation also received dividends of
Banner stock with a fair market value of $187,424 from its subsidiaries
in 1998.
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,
1996 1997 1998
<S> <C> <C> <C>
Beginning balance $ 2,738 $ 5,449 $ 6,905
Charges to cost and expenses 1,766 1,978 2,240
Charges to other accounts (a) 2,405 445 (2,642)
Amounts written off (1,460) (967) (848)
Ending Balance $ 5,449 $ 6,905 $ 5,655
(a) Recoveries of amounts written off in prior periods, foreign currency
translation and the change in related noncurrent taxes. Fiscal 1998
includes a reduction of $2,801 relating to the assets disposed as a result
of the Banner Hardware Group Disposition.
</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 Registrant's Quarterly Report on
From 10-Q for the quarter ended December 29, 1996) (the "December 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").
10. Material Contracts
(Stock Option Plans)
10.1 1988 U.K. Stock Option Plan of Banner Industries, Inc. (incorporated
by reference from Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1988) (the "1988 10-K").
10.2 Description of grants of stock options to non-employee directors of
Registrant (incorporated by reference to the 1988 10-K).
10.3 1986 Non-Qualified and Incentive Stock Option Plan (incorporated by
reference to Registrant's Proxy Statement dated November 15, 1990).
10.4 1986 Non-Qualified and Incentive Stock Option Plan (incorporated by
reference to Registrant's Proxy Statement dated November 21, 1997).
10.5 1996 Non-Employee Directors Stock Option Plan (incorporated by
reference to Registrant's Proxy Statement dated November 21, 1997).
10.6 Stock Option Deferral Plan dated February 9, 1998(incorporated by
reference to Registrant's Quarterly Report on From 10-Q for the quarter
ended March 29, 1998) (the "March 1998 10-Q").
(Employee Agreements)
10.7 Amended and Restated Employment Agreement between Registrant and
Jeffrey J. Steiner dated September 10, 1992 (incorporated by reference from
Registrant's Annual Report on Form 10-K for the fiscal year ended June 30,
1993) (the "1993 10-K").
10.8 Letter Agreement dated September 9, 1996, between Registrant and Colin
M. Cohen (incorporated by reference from Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1997) (the "1997 10-K")
10.9 Employment Agreement between RHI Holdings, Inc., and Jacques Moskovic,
dated as of December 29, 1994. (incorporated by reference to the
Registrant's Annual Report on Form 10-K/A for the fiscal year ended June
30, 1996) (the "1996 10-K/A").
10.10 Employment Agreement between Fairchild France, Inc., and
Jacques Moskovic, dated as of December 29, 1994. (incorporated by reference
to the 1996 10-K/A).
10.11 Employment Agreement between Fairchild France, Inc.,
Fairchild CDI, S.A., and Jacques Moskovic, dated as of April 18, 1997
(incorporated by reference to the Registrant's Annual Report on From 10-K
for the fiscal year ended June 30, 1995) (the "1995 10-K").
10.12 Employment Agreement between Robert Edwards and Fairchild Holding
Corp., dated March 2, 1998 (incorporated by reference to the March 1998 10-
Q).
10.13 Letter Agreement dated February 27, 1998, between Registrant and
John L. Flynn (incorporated by reference to the March 1998 10-Q).
10.14 Letter Agreement dated February 27, 1998, between Registrant and
Donald E. Miller (incorporated by reference to the March 1998 10-Q).
*10.15 Promissory Note in the amount of $100,000, issued by Robert Sharpe
to the Registrant, dated July 1, 1998 (filed herewith).
*10.16 Promissory Note in the amount of $200,000 issued by Robert Sharpe
to the Registrant, dated July 1, 1998 (filed herewith).
(Credit Agreements)
10.15 Credit Agreement dated as of March 13, 1996, among Fairchild
Holding Corporation ("FHC"), Citicorp USA, Inc. and certain financial
institutions (incorporated by reference from Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996) (the "1996 10-K").
10.16 Restated and Amended Credit Agreement dated as of July 26,
1996, (the "FHC Credit Agreement"), among FHC, Citicorp USA, Inc. and
certain financial institutions (incorporated by reference to the 1996 10-
K).
10.17 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 Registrant's Quarterly Report on From 10-Q for the quarter ended March
30, 1997) (the "March 1997 10-Q").
10.18 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).
10.19 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).
10.20 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).
10.21 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).
10.22 Amendment No. 1 dated as of July 29, 1996, to the RHI Credit
Agreement (incorporated by reference to the 1996 10-K).
10.23 Amendment No. 2 dated as of April 7, 1997, to the RHI Credit
Agreement (incorporated by reference to the 1997 10-K).
10.24 Amendment No. 3 dated as of September 26, 1997, to the RHI Credit
Agreement (incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 28, 1997) (the "September 1997
10-Q").
10.25 Third Amended and Restated Credit Agreement, dated as of December
19, 1997, among RHI, FHC, the Registrant, Citicorp USA, Inc. and certain
financial institutions (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 28, 1997) (the
"December 1997 10-Q").
10.26 Interest Rate Hedge Agreement between Registrant and Citibank,
N.A. dated as of August 19, 1997 (incorporated by reference to the
September 1997 10-Q).
10.27 Amendment dated as of December 23, 1997, to the Interest Rate
Hedge Agreement between Registrant and Registrant and Citibank, N.A. dated
as of August 19, 1997(incorporated by reference to the December 1997 10-Q).
10.28 Amendment dated as of January 14, 1997, to the Interest Rate
Hedge Agreement between Registrant and Citibank, N.A. dated as of August
19, 1997 (incorporated by reference to the March 1998 10-Q).
(Stinbes Warrants)
10.29 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).
10.30 Form Warrant Agreement issued to Stinbes Limited dated as of
September 26, 1997, effective retroactively as of February 21, 1997
(incorporated by reference to the September 1997 10-Q).
10.31 Extension of Warrant Agreement between Registrant and Stinbes
Limited for 375,000 shares of Class A or Class B Common Stock dated as
of September 26, 1997, effective retroactively as of February 21, 1997
(incorporated by reference to the September 1997 10-Q).
10.32 Amendment of Warrant Agreement dated February 9, 1998, between
the Registrant and Stinbes Limited (incorporated by reference to the March
1998 10-Q).
(Other Material Contracts)
10.33 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.).
10.34 Stock Option Agreement dated November 20, 1997 between RHI
Holdings, Inc. and Intermedia Communications Inc. (Incorporated by
reference to Scheduled 13D/A (Amendment No. 4) dated as of November 25,
1997 filed by the Company on December 1, 1997).
10.35 Stock Purchase Agreement dated November 25, 1997 between RHI
Holdings, Inc. and Intermedia Communications Inc. (Incorporated by
reference to Schedule 13D/A (Amendment No. 4) dated as of November 25,
1997 filed by the Company on December 1, 1997).
10.36 Asset Purchase Agreement dated as of December 8, 1997, among
Banner Aerospace, Inc. and seven of its subsidiaries (Adams Industries,
Inc., Aerospace Bearing Support, Inc., Aircraft Bearing Corporation, Banner
Distribution, Inc., Burbank Aircraft Supply, Inc., Harco, Inc. and
PacAero), AlliedSignal Inc. and AS BAR LLC (incorporated by reference to
Banner Aerospace, Inc.'s Report on Form 8-K dated January 28, 1998).
10.37 Asset Purchase Agreement dated as of December 8, 1997, among
Banner Aerospace, Inc. and two of its subsidiaries (PB Herndon Aerospace,
Inc. and Banner Aerospace Services, Inc.), AlliedSignal Inc. and AS BAR PBH
LLC (incorporated by reference to Banner Aerospace, Inc.'s Report on Form 8-
K dated January 28, 1998).
10.38 Agreement and plan of Merger dated January 28, 1998, as amended
on February 20, 1998, and March 2, 1998, between the Company and the
shareholders' of Special-T Fasteners (Incorporated by reference to Form 8-K
dated as of March 2, 1998 filed by the Company on March 12, 1998).
*10.41 Registration Rights Agreement between Registrant and Banner
Aerospace, Inc., dated as of July 7, 1998 (filed herewith).
10.39 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).
10.40 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).
10.41 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).
10.42 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).
10.43 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).
10.44 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).
10.45 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).
10.46 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).
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).
*23.1 Consent of Arthur Andersen LLP, independent public accountants.
*23.2 Consent of Price Waterhouse Coopers, independent public accountants.
*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, 1998
(incorporated by reference to the Banner Aerospace, Inc. Form 10-K for
fiscal year ended March 31, 1998).
99.2 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 June 26, 1998).
*Filed herewith.
(b) Reports on Form 8-K
On March 12, 1998, the Company filed a From 8-K to report the
acquisition of Special-T Fasteners. On April 23, 1998, May 5, 1998, and
May 7, 1998, the Company filed amendments to said Form 8-K, to report (Item
7) audited financial statements of Special-T Fasteners, and unaudited pro
forma consolidate financial statements giving effect to the acquisition of
Special-T Fasteners.
On June 26, 1998, the Company filed a Form 8-K to report (Item 5)
audited financial statements for the years ended December 31, 1997, 1996
and 1995 for Nacanco Paketleme, a 32% owned equity affiliate.
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: /s/
Colin M. Cohen
Senior Vice President and
Chief Financial Officer
Date: September 23, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant, in their capacities and on the dates indicated.
By: JEFFREY J. STEINER Chairman, Chief Executive September 23,
/s 1998
/
Jeffrey J. Steiner Officer and Director
MICHAEL T. ALCOX Vice President and Director September 23,
By: /s 1998
/
Michael T. Alcox
MELVILLE R. BARLOW Director September 23,
By: /s 1998
/
Melville R. Barlow
MORTIMER M. CAPLIN Director September 23,
By: /s 1998
/
Mortimer M. Caplin
COLIN M. COHEN Senior Vice President, September 23,
By: /s Chief 1998
/
Colin M. Cohen Financial Officer and
Director
PHILIP DAVID Director September 23,
By: /s 1998
/
Philip David
ROBERT EDWARDS Director September 23,
By: /s 1998
/
Robert Edwards
HAROLD J. HARRIS Director September 23,
By: /s 1998
/
Harold J. Harris
DANIEL LEBARD Director September 23,
By: /s 1998
/
Daniel Lebard
JACQUES S. MOSKOVIC Senior Vice President September 23,
By: /s 1998
/
Jacques S. Moskovic And Director
HERBERT S. RICHEY Director September 23,
By: /s 1998
/
Herbert S. Richey
MOSHE SANBAR Director September 23,
By: /s 1998
/
Moshe Sanbar
ROBERT A. SHARPE II Senior Vice President, September 23,
By: /s 1998
/
Robert A. Sharpe II Operations and Director
ERIC I. STEINER President, Chief Operating September 23,
By: /s 1998
/
Eric I. Steiner Officer and Director
PROMISSORY NOTE
$100,000 Dulles, Virginia
July 1, 1998
FOR VALUE RECEIVED, the undersigned (the "Maker"),
promises to pay Fairchild Holding Corp. (the "Company")
the principal sum of $100,000, together with interest
at 5.48% per annum (the "Applicable Rate"), payable at
the offices of the Company in Dulles, Virginia, on
October 1, 1998.
The obligation represented by this Note shall
constitute the general obligation of the Maker. It
shall constitute a default hereunder if the principal
and interest is not paid when due and payable. If
Maker fails to pay principal and interest when due, the
Note, plus accrued interest, will continue to bear
interest at the Applicable Rate from the date the Loan
is due and as long as any principal and interest remain
outstanding.
The Maker waives all exemptions to the extent
permitted by law, diligence in collection, demand,
presentment for payment, protest, and notice of protest
and of non-payment. Time is of the essence in
connection with this Note, which shall be construed in
accordance with, and governed in all respects by, the
laws of the State of Delaware.
IN WITNESS WHEREOF, this Note has been duly executed
by the undersigned Maker on the date first above
written.
Robert A.
Sharpe
PROMISSORY NOTE
$200,000 Dulles, Virginia
July 1, 1998
FOR VALUE RECEIVED, the undersigned (the "Maker"), promises to
pay Fairchild Holding Corp. (the "Company") the principal sum of
$200,000 on June 20, 2001, plus interest at 5.48% per annum (the
"Applicable Rate") on September 30 of each year for the period
then ended, both payable at the offices of the Company in Dulles,
Virginia.
The obligation represented by this Note shall constitute the
general obligation of the Maker. It shall constitute a default
hereunder if the principal and interest is not paid when due and
payable. If Maker fails to pay principal and interest when due,
the Note, plus accrued interest, will continue to bear interest
at the Applicable Rate from the date the Loan is due and as long
as any principal and interest remain outstanding.
The Maker waives all exemptions to the extent permitted by
law, diligence in collection, demand, presentment for payment,
protest, and notice of protest and of non-payment. Time is of
the essence in connection with this Note, which shall be
construed in accordance with, and governed in all respects by,
the laws of the State of Delaware.
IN WITNESS WHEREOF, this Note has been duly executed by the
undersigned Maker on the date first above written.
Robert A. Sharpe
13
REGISTRATION RIGHTS
AGREEMENT
By and Between
THE FAIRCHILD
CORPORATION
And
BANNER
AEROSPACE, INC.
Dated as
of July 7, 1998
REGISTRATION RIGHTS
AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made
and entered into as of July 7, 1998, by and between The Fairchild
Corporation, a Delaware corporation (the "Company") and Banner
Aerospace, Inc., a Delaware corporation ("Banner").
R E C I T A L S:
On July 7, 1998, Banner announced its intention to purchase
up to 2.5 million shares of Class A Common Stock of the Company
through open market purchases (the "Subject Shares").
In connection therewith, the Company has agreed to grant
demand registration rights agreement in favor of Banner for the
registration and sale of such shares.
NOW, THEREFORE, the parties to this Agreement agree as
follows:
ARTICLE I
DEFINITIONS
1.1 Certain Definitions.
"Affiliate" shall have the meaning given to such term in
Rule 12b-2 promulgated under the Exchange Act.
"Commission" shall mean the Securities and Exchange
Commission.
"Common Stock" shall mean the shares of Class A Common
Stock, $.10 par value, of the Company.
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and all rules and regulations promulgated
thereunder.
"Holder" shall mean Banner or any Permitted Transferee of
Registrable Common Stock. There may be more than one Holder at
any time.
"NASDAQ" shall mean the National Association of Securities
Dealers Automated Quotation System.
"Person" shall mean any individual, group, partnership,
corporation, trust, joint stock company, unincorporated
organization, joint venture or other entity of whatever nature.
"Registration Statement" shall mean a registration statement
relating to the Common Stock on such form as counsel to the
Company deems appropriate to be filed with the Commission, as
such registration statement may be amended from time to time.
"Securities Act" shall mean the Securities Act of 1933, as
amended, and all rules and regulations promulgated thereunder.
"Subject Shares" shall have the meaning ascribed in the
Recitals hereof.
1.2 Permitted Transferees. "Permitted Transferees" shall
mean any subsidiary of Banner to whom Banner has (a) transferred
five percent (5%) or more of the aggregate Subject Shares and (b)
assigned its registrations rights under this Agreement. In the
event that Banner transfers the requisite percentage of Subject
Shares and assigns its registration rights under this Agreement,
it shall be a condition precedent to such transfer and assignment
that Banner give prior written notice thereof to the Company.
1.3 Registrable Common Stock. "Registrable Common Stock"
means the Subject Shares held by Banner or its Permitted
Transferees (as the case may be), until such time as the Common
Stock ceases to be registrable as provided in Section 2.2 of this
Agreement.
1.4 Registration Expenses. "Registration Expenses" shall
mean any and all expenses reasonably attributable to the
registration of the Registrable Common Stock, including, without
limitation, the following expenses: (a) all filing fees; (b) all
fees and expenses of complying with securities or blue sky laws
(including reasonable fees and disbursements of counsel for the
underwriters in connection with blue sky qualification of the
Registrable Common Stock); (c) all fees and expenses incurred in
connection with the listing of the Registrable Common Stock on
any securities exchange or other market (including, but not
limited to, NASDAQ) pursuant to Section 3.4(j) of this Agreement
and all fees of the National Association of Securities Dealers;
(d) the fees and disbursements of counsel retained by the Company
in connection with each such registration or listing on a stock
exchange and of its independent public accountants; (e) the fees
and disbursements of counsel retained by Holder and any
underwriter; (f) all commissions, fees and disbursements of
underwriters; (g) all underwriting discounts and commissions
applicable to the Registrable Common Stock; (h) all printing
expenses; and (i) all other out-of-pocket expenses of the Company
incurred in connection with the registration of the Registrable
Common Stock.
ARTICLE II
SECURITIES SUBJECT TO THIS AGREEMENT
2.1 Securities Subject to this Agreement. The securities
entitled to the benefits of this Agreement are shares of the
Registrable Common Stock.
2.2 Termination of Entitlement. For purposes of this
Agreement, the Subject Shares will cease to be Registrable Common
Stock when: (a) a Registration Statement with respect to the
sale of the Subject Shares shall have become effective under the
Securities Act and the Subject Shares shall have been transferred
pursuant to such Registration Statement; (b) the Subject Shares
shall have been transferred pursuant to Rule 144 (or any
successor provisions) under the Securities Act; (c) certificates
for the Subject Shares not bearing a legend restricting transfer
thereof under the Securities Act shall have been delivered by the
Company and, in the opinion of counsel for the Company, transfer
of such shares may be made without registration or qualification
under the Securities Act; or (d) the Subject Shares shall have
ceased to be outstanding.
ARTICLE III
REGISTRATION RIGHTS
3.1 Demand Registration.
(a) Request for Registration. At any time, a Holder
of Registrable Common Stock may make a written request for
registration under the Securities Act of all or part of its
Registrable Common Stock (a "Demand Registration"). Except
as set forth below, there shall be no limit on the number of
Demand Registrations that may be requested by Banner or its
Permitted Transferees, as the case may be.
Such requests for a Demand Registration will specify
the aggregate number of shares proposed to be sold and will
also specify the intended method of disposition thereof.
The Company will use its best efforts to effect such
registration; provided, however, that the Company shall not
be obligated to take any action to effect any such
registration, qualification or compliance pursuant to this
Agreement: (i) within sixty (60) days immediately following
the effective date of a Registration Statement pertaining to
a public offering of securities of the Company (other than a
registration relating solely to employee benefit plans);
(ii) if at the time of the request to register the Holder's
Registrable Common Stock, the Company gives notice within
thirty (30) days of such request that it intends to initiate
within sixty (60) days thereafter a registered public
offering (other than a registration relating solely to
employee benefit plans); or (iii) if at the time of the
request, the Holder could sell all of the Registrable Common
Stock requested to be registered under Rule 144 during the
three-month period following such request, or if, in the
opinion of counsel for the Company reasonably satisfactory
to the Holder, the proposed sale of its Registrable Common
Stock is otherwise exempt from registration under the
Securities Act.
(b) Effective Registration and Expenses. A
Registration Statement will not count as a Demand
Registration until it has become effective. Except as set
forth below in Section 3.1(d), in any registration initiated
as a Demand Registration, Banner or its Permitted
Transferee, as the case may be, will pay or cause to be paid
all Registration Expenses in connection therewith, whether
or not the Registration Statement becomes effective.
(c) Underwriting. If the Holder intends to distribute
the Registrable Common Stock covered by its request by means
of an underwritten offering, it shall so advise the Company
as a part of its request made pursuant to Section 3.1(a).
The Holder of the Registrable Common Stock to be registered
thereunder may select and obtain the investment banker or
investment bankers and manager or managers that will
administer the offering; provided, however, that such
investment bankers and managers must be reasonably
satisfactory to the Company.
(d) Priority on Demand Registration. If the
Underwriter does not limit the number of Registrable Common
Stock to be underwritten in a Demand Registration, the
Company may include securities for its own account or the
account of others in such registration if the underwriters
so agree and if the number of Registrable Common Stock which
would otherwise have been included in such registration and
underwriting will not thereby be limited. In the event that
the Company elects to include securities for its own account
or the account of others pursuant to this Section 3.1(d),
then notwithstanding anything to the contrary, the Company
will pay or cause to be paid, the pro rata portion of: (i)
any filing fees for such securities to be registered by the
Company; (ii) underwriting discounts and commissions
applicable to the Company's securities; and (iii) any
additional incremental costs, including without limitation,
printing expenses attributable to the offer, sale and
registration of the Company's securities in such Demand
Registration.
3.2 Piggy-Back Registration.
(a) If at any time or from time to time during the
five-year period commencing from the date of this Agreement,
the Company proposes to file a Registration Statement under
the Securities Act with respect to an offering for its own
account or for the account of others of any class of equity
security (other than a registration relating solely to
employee benefit plans or a registration on any registration
form which dos not include substantially the same
information as would be required to be included in a
Registration Statement covering the sale of Registrable
Common Stock), then the Company shall in each case give
written notice of such proposed filing to the Holder of
Registrable Common Stock at least sixty (60) days before the
anticipated filing date (the "Piggy-Back Registration
Notice"), and such notice shall offer the Holder the
opportunity to register such Registrable Common Stock as
such Holder may request in writing to the Company within
twenty (20) days after the date of the Piggy-Back
Registration Notice (a "Piggy-Back Registration").
(b) Underwriting. If the registration of which the
Company gives notice is for a registered public offering
involving an underwriting, the Company shall so advise the
Holder as part of the Piggy-Back Registration Notice. The
Company shall have the right to select and obtain the
services of the investment banker or investment bankers and
manager or managers that will administer the offering. The
right of a Holder to registration shall be conditioned upon
such Holder's participating in such underwriting and the
inclusion of such Holder's Registrable Common Stock in the
underwriting to the extent provided herein.
(c) Subject to the provisions of Section 3.2(d), the
Company shall use its best efforts to cause the managing
underwriter or underwriters of a proposed underwritten
offering to commit to the Holder of Registrable Common Stock
who has requested within twenty (20) days of receipt of the
Company's notice to be included in the registration for such
offering (the "Requesting Holder") to include such
Registrable Common Stock in such offering on the same terms
and conditions as any similar securities of the Company
included therein; provided, however, that the Company shall
not be required to effect any such registration for any
Holder if at the time of the request such Holder could sell
all of the Registrable Common Stock specified in its request
under Rule 144, or in any other transaction that is exempt
from registration under the Securities Act, during the three-
month period following such request.
(d) Priority on Piggy-Back Registration.
Notwithstanding any other division of this Section 3.2, if
the underwriter for the Company determines that market
factors require a limitation of the number of shares to be
underwritten, the underwriter may exclude some or all
Registrable Common Stock from such registration and
underwriting. The Company shall so advise the Holder and
the number of shares of Registrable Common Stock to be
offered by the Holder pursuant to the Piggy-Back
Registration will be reduced to the extent necessary to
reduce the total number of shares of Common Stock to be
included in such offering to the number recommended by the
underwriter(s).
(e) Expenses. In connection with a Piggy-Back
Registration, the Company will pay all of the Registration
Expenses, except for the pro rata portion of: (i) any filing
fees attributable to the Holder's Registrable Common Stock;
(ii) underwriting discounts and commissions applicable to
the Holder's Registrable Common Stock; and (iii) any
additional incremental costs, including, without limitation,
printing expenses attributable to the offer, sale and
registration of the Holder's Registrable Common Stock in
such Piggy-Back Registration.
3.3 Holdback Agreements.
(a) Registrations on Public Sale or Distribution. To
the extent not inconsistent with applicable law, the Holder
agrees not to effect any public sale or distribution of
Registrable Common Stock, including a sale pursuant to Rule
144 under the Securities Act during the sixty (60) day
period prior to, and during the ninety (90) day period
beginning on, the effective date of a Registration Statement
in which shares of its Registrable Common Stock are
registered (except as part of such registration), if and to
the extent requested by the Company or by the underwriter(s)
in the case of an underwritten public offering.
(b) Stop Orders; Suspension of Effectiveness. If, in
the case of either a Demand Registration or a Piggy-Back
Registration, a stop order is imposed or if for any other
reason the effectiveness of either a Demand Registration or
Piggy-Back Registration is suspended, then the Holder agrees
to stop distribution of its Common Stock thereunder
immediately upon written notice thereof from the Company.
3.4 Registration Procedures. Whenever the Holder has
requested that any Registrable Common Stock be registered
pursuant to this Agreement, the Company will use its best efforts
to effect the registration of such Registrable Common Stock in
accordance with the intended method of distribution therefore as
quickly as is reasonably practicable, and in connection with any
such request, the Company will:
(a) in connection with a request pursuant to Section
3.1, prepare and file with the Commission, not later than
ninety (90) days after receipt of a request to file a
Registration Statement with respect to Registrable Common
Stock, a Registration Statement on any form for which the
Company then qualifies and which counsel for the Company
shall deem appropriate and which form shall be available for
the registration of such Registrable Common Stock in
accordance with the intended method of distribution thereof,
and use its best efforts to cause such Registration
Statement to become effective; provided that if the Company
shall furnish to the Holder certified resolutions signed by
the Chief Executive Officer of the Company stating that in
the good faith judgement of the Board of Directors it would
be significantly disadvantageous to the Company and its
stockholders for such a Registration Statement to be filed
on or before the date filing would be required, the Company
shall have an additional period of not more than sixty (60)
days within which to file such Registration Statement;
(b) in connection with a registration pursuant to
Section 3.1, prepare and file with the Commission such
amendments and supplements to such Registration Statement
and the prospectus used in connection therewith as may be
necessary to keep such Registration Statement effective for
a period of not less than one hundred eighty (180) days or
such shorter period which will terminate when all
Registrable Common Stock covered by such Registration
Statement have been sold (but not before the expiration of
the ninety (90) day period referred to in Section 4(3) of
the Act and Rule 174 thereunder, if applicable), and comply
with the provisions of the Securities Act with respect to
the disposition of all Registrable Common Stock covered by
such Registration Statement during such period in accordance
with the intended methods of disposition by the Holders set
forth in such Registration Statement;
(c) furnish to each seller of Registrable Common
Stock, prior to filing a Registration Statement, copies of
such Registration Statement as proposed to be filed, and
thereafter such number of copies of such Registration
Statement, each amendment and supplement thereto (in each
case including all exhibits thereto), the prospectus
included in such Registration Statement (including each
preliminary prospectus) and such other documents as such
seller may reasonably request in order to facilitate the
disposition of the Registrable Common Stock owned by such
seller;
(d) use its best efforts to register or qualify such
Registrable Common Stock under such other securities or blue
sky laws of such jurisdiction as any seller reasonably
requests and do any and all other acts and things which may
be reasonably necessary or advisable to enable such seller
to consummate the disposition in such jurisdiction of the
Registrable Common Stock owned by such seller; provided,
that the Company will not be required to (i) qualify
generally to do business in any jurisdiction where it would
not otherwise be required to qualify but for this paragraph
(d), (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process
in any such jurisdiction;
(e) notify each seller of the Registrable Common
Stock, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the
happening of any event as a result of which the prospectus
included in such Registration Statement contains an untrue
statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the
statements therein misleading. The Company will prepare a
supplement or amendment to such prospectus as may be
appropriate and use its best efforts to cause such
supplement or amendment to become effective so that, as
thereafter delivered to the purchasers of such Registrable
Common Stock, such prospectus will not contain an untrue
statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading;
(f) enter into customary agreements (including an
underwriting agreement in customary form) and take such
other actions as are reasonably required in order to
expedite or facilitate the disposition of such Registrable
Common Stock;
(g) make available for inspection by any seller of
Registrable Common Stock, any underwriter participating in
any disposition pursuant to such Registration Statement, and
any attorney, accountant or other agent retained by any such
seller or underwriter (collectively, the "Inspectors"), all
financial and other records, pertinent corporate documents
and properties of the Company (collectively, the "Records")
as shall be reasonably necessary to enable them to exercise
their due diligence responsibility, and cause the Company's
officers, directors and employees to supply all information
reasonably requested by any such Inspectors in connection
with such Registration Statement. Records which the Company
determines, in good faith, to be confidential and which it
notifies the Inspectors are confidential shall not be
disclosed by the Inspectors unless (i) the disclosure of
such records is necessary to avoid or correct a misstatement
or omission in the Registration Statement or (ii) the
release of such Records is ordered pursuant to a subpoena or
other order from a court of competent jurisdiction. Each
seller of Registrable Common Stock agrees that it will, upon
learning that disclosure of such Records is sought in a
court of competent jurisdiction, give notice to the Company
and allow the Company, at the Company's expense, to
undertake appropriate action to prevent disclosure of the
Records deemed confidential.
(h) in the event such sale is pursuant to an
underwritten offering, use its best efforts to obtain (i) a
"cold comfort" letter from the Company's independent public
accountants in customary form and covering such matters of
the type customarily covered by "cold comfort" letters as
the Holder or the managing underwriter reasonably request
and (ii) an opinion or opinions of counsel for the Company
in customary form;
(i) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make
available to its security holders, as soon as reasonably
practicable, an earnings statement covering a period of
twelve (12) months, beginning within three months after the
effective date of the Registrable Statement, which earning
statement shall satisfy the provisions of Section 11(a) of
the Securities Act; and
(j) cause all such Registrable Common Stock to be
listed on each securities exchange or market on which
similar securities issued by the Company are then listed,
provided that the applicable listing requirements are
satisfied.
The Company may require each seller of Registrable Common
Stock as to which any registration is being effected to furnish
to the Company such information regarding the distribution of
such securities as the Company may from time to time reasonably
request in writing.
The Holder agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in
Section 3.4(e) hereof, such Holder will forthwith discontinue
disposition of Registrable Common Stock pursuant to the
Registration Statement covering such Registrable Common Stock
until such Holder's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3.4(e) hereof, and, if
so directed by the Company such Holder will deliver to the
Company (at the Company's expense) all copies, other than
permanent file copies then in such Holder's possession, of the
prospectus covering such Registrable Common Stock at the time of
receipt of such notice.
3.5 Indemnification and Contribution.
(a) Indemnification by the Company. The Company
agrees to indemnify, to the extent permitted by law, the
Holder, its officers, directors and agents and each Person
who controls such Holder (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act)
from and against any losses, claims, damages, liabilities
and expenses resulting from any untrue statement of material
fact contained in any Registration Statement, prospectus or
preliminary prospectus or any omission of a material fact
required to be stated therein or necessary to make the
statements therein (in the case of a prospectus, in the
light of the circumstances under which they were made) not
misleading, except insofar as the same are caused by or
contained in any information or affidavit with respect to
such Holder furnished in writing to the Company by, or on
behalf of, such Holder, expressly for inclusion in any
Registration Statement or prospectus.
(b) Indemnification by Holder. In connection with any
Registration Statement in which the Holder is participating,
such Holder will furnish to the Company in writing such
information and affidavits with respect to such Holder as
the Company reasonably requests for use in connection with
any such Registration Statement or prospectus and agrees to
indemnify, to the extent permitted by law, the Company, its
directors and officers and each Person who controls the
Company (within the meaning of Section 14 of the Securities
Act or Section 20 of the Exchange Act) from and against any
losses, claims, damages, liabilities and expenses resulting
from any untrue statement of a material fact or any omission
or a material fact required to be stated in the Registration
Statement or preliminary, final or summary prospectus or any
amendment thereof or supplement thereto, or necessary to
make the statements therein (in the case of a preliminary,
final or summary prospectus, in the light of the
circumstances under which they were made) not misleading to
the extent, but only to the extent, that such untrue
statement or omission is contained in any information or
affidavit with respect to such Holder so furnished in
writing by, or on behalf of, such Holder expressly for
inclusion in any Registration Statement or prospectus.
(c) Conduct of Indemnification Proceedings. Any
person entitled to indemnification hereunder agrees promptly
to give written notice to the indemnifying party after the
receipt of such person of any written notice of the
commencement of any action, suit, proceeding or
investigation or threat thereof made in writing for which
such person will claim indemnification or contribution
pursuant to this Agreement and, unless in the reasonable
judgment of such indemnified party a conflict of interest
may exist between such indemnified party and the
indemnifying party with respect to such claim, permit the
indemnifying party to participate in and assume the defense
of such claim with counsel reasonably satisfactory to such
indemnified party. If the indemnifying party is not
entitled to, or elects not to, assume the defense of a
claim, it will not be obligated to pay the fees and expenses
of more than one counsel with respect to such claim, unless
in the reasonable judgment of such indemnified party a
conflict of interest may exist between such indemnified
party and any other of such indemnified parties with respect
to such claim, in which event the indemnifying party shall
be obligated to pay the reasonable fees and expenses of such
additional counsel or counsels. The indemnifying party will
not be subject to any liability for any settlement made
without its consent, which consent shall not be unreasonably
withheld.
(d) Contribution. If the indemnification provided for
in this Section 3.5 from the indemnifying party is
unavailable to an indemnified party hereunder in respect to
any losses, claims, damages, liabilities or expenses
referred to herein, then the indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the
amount paid or payable to such indemnified party as a result
of such losses, claims, damages, liabilities or expenses in
such proportion as is appropriate to reflect the relative
fault of the indemnifying party and indemnified parties in
connection with the actions which resulted in such losses
claims, damages, liabilities or expenses, as well as any
other relevant equitable considerations. The relative fault
of such indemnifying party and indemnified parties shall be
determined by reference to, among other things, whether any
action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission
to state a material fact, has been made by, or related to
information supplied by, such indemnifying party and
indemnified parties, and the parties' relative intent,
knowledge, access to information and opportunity to correct
or prevent such action. The amount paid or payable by a
party as a result of the losses, claims, damages,
liabilities and expenses referred to above shall be deemed
to include, subject to the limitations set forth in Section
3.5(c), any legal or other fees or expenses reasonably
incurred by such party in connection with any investigation
or proceeding.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 3.5(d)
were determined by pro rata allocation or by any other
method of allocation which does not take account of the
equitable considerations referred to in the immediately
preceding paragraph. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from
any person.
3.6 Participation in Underwritten Registrations. The
Holder may not participate in any underwritten registration
hereunder unless such Holder (a) agrees to sell its Registrable
Common Stock on the basis provided in any underwriting
arrangements approved by the persons entitled hereunder to
approve such arrangements and (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the
terms of such underwriting arrangements.
3.7 Rule 144. The Company covenants that it will file the
reports required to be filed by it under the Exchange Act and the
rules and regulations adopted by the Commission thereunder; and
it will take such further action as any Holder may reasonably
request, all to the extent required from time to time to enable
such Holder to sell Registrable Common Stock without registration
under the Securities Act within the limitation of the exemptions
provided by (a) Rule 144, or (b) any similar rule or regulation
hereafter adopted by the Commission. Upon the request of any
Holder, the Company will deliver to such Holder a written
statement as to whether it has complied with such requirements.
ARTICLE IV
MISCELLANEOUS
4.1 Inconsistent Agreements. The Company will not
hereafter enter into any agreement with respect to its securities
which is inconsistent with this Agreement. The Company has not
previously entered into any agreement with respect to any of its
securities granting any registration rights to any person.
4.2 Amendments and Waivers. Except as otherwise provided
herein, the provisions of this Agreement may not be amended,
modified or supplemented, and waivers or consents to departures
from the provisions hereof may not be given unless the Company
has obtained the written consent of Holders of at least a
majority of the Registrable Common Stock which are then
outstanding affected by such amendment, modification, supplement,
waiver or departure.
4.3 Notices. All notices, requests, demands and other
communications under this Agreement must be in writing and will
be deemed duly given, unless otherwise expressly indicated to the
contrary, (i) when personally delivered, (ii) upon receipt of a
telephonic facsimile transmission with confirmed telephonic
transmission answer back, (iii) three (3) days after having been
deposited in the United States Mail, certified or registered,
return receipt required, postage prepaid, or (iv) business day
after having been dispatched by a nationally recognized overnight
courier service, addressed to the parties or their permitted
assigns at the following addresses (or at such other address or
number as is given in writing by any of the parties to the
others) as follows:
If to the Company: The Fairchild Corporation
45025 Aviation Drive
Suite 400
Dulles, VA 20166-7516
Attn: Senior Vice President
If to Banner: Banner Aerospace, Inc.
45025 Aviation Drive
Suite 300
Dulles, VA 20166-7556
Attn: Senior Vice President
4.4 Successors and Assigns. The provisions of this
Agreement shall be binding upon and inure to the benefit of the
parties hereto and their successors and permitted assigns.
4.5 Counterparts. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate
counterparts, each of which when so executed shall be deemed to
be an original and all of which taken together shall constitute
one and the same agreement.
4.6 Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise
affect the meaning hereof.
4.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware.
4.8 Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any
circumstances, is held invalid, illegal or unenforceable in any
respect for any reason, the validity, legality and enforceability
of any such provision in every other respect and of the remaining
provisions contained herein shall not be in any way impaired
thereby, it being intended that all of the rights and privileges
of the parties to this Agreement shall be enforceable to the
fullest extent permitted by law.
4.9 Entire Agreement. This Agreement constitutes the
entire agreement with respect to the subject matter hereof and
supersedes all prior written and oral agreements with respect
thereto.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
THE FAIRCHILD CORPORATION
By: Donald E. Miller, Sr. Vice
President
BANNER AEROSPACE, INC.
By: Eugene W. Juris, Vice
President and CFO
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 49,601
<SECURITIES> 3,962
<RECEIVABLES> 125,939
<ALLOWANCES> 5,655
<INVENTORY> 217,482
<CURRENT-ASSETS> 456,023
<PP&E> 201,931
<DEPRECIATION> 82,968
<TOTAL-ASSETS> 1,157,259
<CURRENT-LIABILITIES> 195,578
<BONDS> 295,402
0
0
<COMMON> 2,930
<OTHER-SE> 470,629
<TOTAL-LIABILITY-AND-EQUITY> 1,157,259
<SALES> 741,176
<TOTAL-REVENUES> 747,684
<CGS> 554,670
<TOTAL-COSTS> 702,241
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,715
<INCOME-PRETAX> 123,394
<INCOME-TAX> 48,659
<INCOME-CONTINUING> 52,399
<DISCONTINUED> 55,421
<EXTRAORDINARY> (6,730)
<CHANGES> 0
<NET-INCOME> 101,090
<EPS-PRIMARY> 5.36
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</TABLE>
To the Board of Directors
Of Nacanco Paketleme Sanayi vd Ticaret A.s.
22 September 1998
We agree to the inclusion in the Fairchild Company's annual
Report on Form 10-K of our report dated 12 March 1998 on our
audit of the financial statements of Nacanco Paketleme Sanayi vd
Ticaret A.S.
Regards,
Zeynep Uras
Partner
PriceWaterhouse Coopers
BJK Plaza Spo Caddesi No: 92
B Blok, Kat 9 Akaretler
Besilctas 80680 Istanbul-Turkey
THE FAIRCHILD CORPORATION
Alphabetical Listing of Subsidiaries as of 6/30/98
THE FAIRCHILD CORPORATION [DE] (The Ultimate)
A10 Inc. [DE] (3rd level sub)
Aero International, Inc. [Ohio] (2nd level sub)
Aero International, Inc. [Ohio] (2nd level sub)
Aircraft Tire Corporation [DE] (1st level sub)
Aviation Full Services (Hong Kong) Limited [Hong Kong] (7th level sub)
Aviatrada GmbH Aviation Support + Services [Germany] (7th level sub)
Banner Aero (Australia) Pty, Ltd. [Australia] (2nd level sub)
Banner Aerospace (U.K.) Limited [U.K.] (3rd level sub)
Banner Aerospace Foreign Sales Corporation [US Virgin Islands] (2nd
level sub)
Banner Aerospace Holding Company I, Inc.[DE] (1st level sub)
Banner Aerospace Holding Company II, Inc.[DE] (2nd level sub)
Banner Aerospace Services, Inc. [Ohio] (2nd level sub)
Banner Aerospace, Inc. [DE] (1st level sub)
Banner Aerospace-Singapore, Inc. [DE] (2nd level sub)
Banner Capital Ventures, Inc.[DE] (2nd level sub)
Banner Energy Corporation of Kentucky, Inc. [DE] (1st level sub)
Banner Industrial Distribution, Inc.[DE] (2nd level sub)
Banner Industrial Products, Inc.[DE] (1st level sub)
Banner Investments (U.K.) Limited [U.K.] (3rd level sub)
BAR DE, Inc. [DE] (2nd level sub)
Camloc (UK) Limited [UK] (5th level)
Camloc Holdings Inc. [DE]
Convac Dresden GmbH [Germany] (5th level)
Convac France S.A. [France] (5th level)
DAC International, Inc. [TX] (2nd level sub)
Dah Dah, Inc. [DE] (2nd level)
Dallas Aerospace, Inc. [TX] (2nd level sub)
Discontinued Aircraft, Inc. [TX] (2nd level sub)
Discontinued Services, Inc.[DE] (2nd level sub)
Eurosim Componentes Mec??nicos de Seguran??a, Lda. [Portugal] (6th
level sub)
F. F. Handels GmbH [Germany] (2nd level sub)
Fairchild Arms International Ltd. [Canada] (3rd level sub)
Fairchild AS+C oHG Aviation Supply + Consulting (GmbH & Co.) [Germany]
(6th level sub)
Fairchild CDI S.A. [France] (1st level sub)
Fairchild Data Corporation [DE] (3rd level sub)
Fairchild Export Sales Corporation [Barbados] (2nd level sub)
Fairchild Fastener Group Ltd. [U.K.] (4th level sub)
Fairchild Fasteners Corp.[DE] (3rd level sub)
Fairchild Fasteners Europe--Camloc GmbH [Germany] (5th level sub)
Fairchild Fasteners Europe--Simmonds S.A.R.L. [France] (4th level sub)
Fairchild Fasteners Europe--VSD GmbH [Germany] (5th level sub)
Fairchild Finance Company [Republic of Ireland] (3rd level sub)
Fairchild France, Inc.[DE] (2nd level sub)
Fairchild Germany, Inc. [DE] (3rd level sub)
Fairchild Holding Corp. [Delaware] (2nd level sub)
Fairchild Retiree Medical Services, Inc. [DE] (4th level sub)
Fairchild Technologies Europe Ltd. [U.K.] (4th level sub)
Fairchild Technologies GmbH [Germany] (4th level sub)
Fairchild Technologies USA, Inc. [DE] (4th level sub)
Fairchild Titanium Technologies, Inc.[DE] (1st level sub)
Faircraft Sales Ltd.[DE] (1st level sub)
GCCUS, Inc. [CA] (2nd level sub)
Georgetown Jet Center, Inc. [DE] (2nd level sub)
Harco Northern Ireland, Ltd. [N. Ireland--UK] (2nd level sub)
Jenkins Coal Dock Company, Inc.[DE] (2nd level sub)
JJS Limited [United Kingdom] (4th level sub)
Mairoll, Inc. [DE] (3rd level sub)
Matrix Aviation, Inc. [KS] (2nd level sub)
M??caero S.A. [France] (7th level sub)
Meow, Inc. [DE] (3rd level sub)
MTA, Inc. [DE] (2nd level)
Nasam Incorporated [CA] (2nd level sub)
Northking Insurance Company Limited [Bermuda] (2nd level sub)
Oink Oink, Inc. [DE] (3rd level sub)
PB Herndon Aerospace, Inc. [Missouri] (3rd level sub)
Plymouth Leasing Company [DE] (1st level sub)
Professional Aircraft Accessories, Inc. [FL] (3rd level sub)
Professional Aviation Associates, Inc. [GA] (2nd level sub)
Quack Quack, Inc. [DE] (3rd level sub)
Recycling Investments II, Inc. [DE] (2nd level sub)
Recycling Investments, Inc. [DE] (2nd level sub)
RHI Holdings, Inc.[DE] (1st level sub)
Simmonds Mecaero Fasteners, Inc.[DE] (3rd level sub)
Simmonds S.A. [France] (5th level sub)
Solair, Inc. [FL] (2nd level sub)
Sovereign Air Limited [DE] (2nd level sub)
Special-T Fasteners, Inc. [DE] (1st level sub)
Transfix S.A. [France] (6th level sub)
Tri-Fast S.A.R.L. [France] (2nd level sub)
VSI Holdings, Inc. [DE] (3rd level sub)
Consent of the Independent Public Accountants
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K,
into the Company's previously filed Registration Statement
File Nos. 35-27317, 33-21698, 33-06183, 333-49779, and 333-
62037.
Arthur Andersen LLP
Washington, DC
September 22, 1998
