27
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 27, 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
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety (90) days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Title of Class October 30, 1998
Class A Common Stock, $0.10 Par Value 19,205,031
Class B Common Stock, $0.10 Par Value 2,624,662
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1.Condensed Consolidated Balance Sheets as of June 30, 1998 and
September 27, 1998 (Unaudited) 3
Consolidated Statements of Earnings for the Three Months ended
September 27, 1998 and September 28, 1997 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Three
Months ended September 27, 1998 and September 28, 1997
(Unaudited) 7
Notes to Condensed Consolidated Financial Statements (Unaudited) 8
Item 2.Management's Discussion and Analysis of Results of Operations
and Financial Condition 12
Item 3.Quantitative and Qualitative Disclosure About Market Risk 19
PART II. OTHER INFORMATION
Item 1.Legal Proceedings 20
Item 2.Changes in Securities and Use of Proceeds 20
Item 5.Other Information 20
Item 6.Exhibits and Reports on Form 8-K 20
* For purposes of Part I and this Form 10-Q, the term "Company" means The
Fairchild Corporation, and its subsidiaries, unless otherwise indicated.
For purposes of Part II, the term "Company" means The Fairchild
Corporation, unless otherwise indicated.
<TABLE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1998 and September 27, 1998 (Unaudited)
(In thousands)
ASSETS
<CAPTION>
June 30, Sept. 27,
1998 (*) 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, $746 and $0
restricted $ 49,601 $ 49,428
Short-term investments 3,962 175,802
Accounts receivable-trade, less 120,284 110,191
allowances of $5,655 and $5,345
Inventories:
Finished goods 187,205 208,999
Work-in-process 20,642 20,087
Raw materials 9,635 9,217
217,482 238,303
Net current assets of discontinued 11,613 1,540
operations
Prepaid expenses and other current 53,081 42,493
assets
Total Current Assets 456,023 617,757
Property, plant and equipment, net of
accumulated
depreciation of $82,968 and $86,840 118,963 124,331
Net assets held for sale 23,789 23,627
Net noncurrent assets of discontinued 8,541 9,117
operations
Cost in excess of net assets acquired
(Goodwill), less
accumulated amortization of $42,079 168,307 170,783
and $43,304
Investments and advances, affiliated 27,568 27,361
companies
Prepaid pension assets 61,643 61,961
Deferred loan costs 6,362 6,149
Long-term investments 235,435 19,240
Other assets 50,628 62,151
TOTAL ASSETS $1,157,259 $1,122,477
*Condensed from audited financial statements.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1998 and September 27, 1998 (Unaudited)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
June 30, Sept. 27,
1998 (*) 1998
<S> <C> <C>
CURRENT LIABILITIES:
Bank notes payable and current
maturities of long-term debt $ 20,665 $ 23,647
Accounts payable 53,859 52,569
Accrued salaries, wages and commissions 23,613 21,970
Accrued employee benefit plan costs 1,463 2,271
Accrued insurance 12,575 11,332
Accrued interest 2,303 4,226
Other accrued liabilities 52,789 43,401
Income taxes 28,311 11,057
Total Current Liabilities 195,578 170,473
LONG-TERM LIABILITES:
Long-term debt, less current maturities 295,402 327,500
Other long-term liabilities 23,767 23,601
Retiree health care liabilities 42,103 43,418
Noncurrent income taxes 95,176 94,407
Minority interest in subsidiaries 31,674 31,977
TOTAL LIABILITIES 683,700 691,376
STOCKHOLDERS' EQUITY:
Class A common stock, 10 cents par value
per share; authorized
40,000 shares, 26,695 (26,679 in June)
shares issued and
19,504 (20,429 in June) shares 2,667 2,669
outstanding
Class B common stock, 10 cents par value
per share; authorized
20,000 shares, 2,625 (2,625 in June) 263 263
shares issued and outstanding
Paid-in capital 195,112 195,261
Retained earnings 311,039 312,229
Cumulative other comprehensive income 16,386 (8,756)
(loss)
Treasury Stock, at cost, 7,191 (6,250 in (51,908) (70,565)
June) shares of Class A common stock
TOTAL STOCKHOLDERS' EQUITY 473,559 431,101
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,157,259 $1,122,477
*Condensed from audited financial statements
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) Months Ended September 28, 1997 and September 27, 1998
(In thousands, except per share data)
<CAPTION>
Three Months Ended
9/28/97 9/27/98
<S> <C> <C>
REVENUE:
Net sales $194,362 $148,539
Other income, net 4,555 419
198,917 148,958
COSTS AND EXPENSES:
Cost of goods sold 148,033 113,867
Selling, general & administrative 36,660 28,108
Research and development 49 66
Amortization of goodwill 1,219 1,278
185,961 143,319
OPERATING INCOME 12,956 5,639
Interest expense 12,975 7,436
Interest income (390) (583)
Net interest expense 12,585 6,853
Investment income 1,897 1,861
Earnings from continuing operations before
taxes 2,268 647
Income tax provision (1,006) (291)
Equity in earnings of affiliates, net 1,100 1,037
Minority interest, net (1,133) (203)
Earnings from continuing operations 1,229 1,190
Loss from discontinued operations, net (737) -
NET EARNINGS $ 492 $ 1,190
Other comprehensive income (loss), net of
tax:
Foreign currency translation adjustments $ 995 $ 5,246
Unrealized holding losses on securities
arising during the period - (30,388)
Other comprehensive income (loss) 995 (25,142)
COMPREHENSIVE INCOME (LOSS) $ 1,487 $(23,952)
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) Months Ended September 28, 1997 and September 27, 1998
(In thousands, except per share data)
<CAPTION>
Three Months Ended
9/28/97 9/27/98
<S> <C> <C>
BASIC EARNINGS PER SHARE:
Earnings from continuing operations $ 0.07 $ 0.05
Loss from discontinued operations, net (0.04) -
NET EARNINGS $ 0.03 $ 0.05
Other comprehensive income (loss), net of
tax:
Foreign currency translation adjustments $ 0.06 $ 0.23
Unrealized holding losses on securities
arising during the period - (1.36)
Other comprehensive income (loss) 0.06 (1.13)
COMPREHENSIVE INCOME (LOSS) $ 0.09 $(1.07)
DILUTED EARNINGS PER SHARE:
Earnings from continuing operations $ 0.07 $ 0.05
Loss from discontinued operations, net (0.04) -
NET EARNINGS $ 0.03 $ 0.05
Other comprehensive income (loss), net of
tax:
Foreign currency translation adjustments $ 0.06 $ 0.23
Unrealized holding losses on securities
arising during the period - (1.32)
Other comprehensive income (loss) 0.06 (1.09)
COMPREHENSIVE INCOME (LOSS) $ 0.09 $(1.04)
Weighted average shares outstanding:
Basic 16,633 22,401
Diluted 17,588 23,001
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Three (3) Months Ended September 28, 1997 and September 27, 1998
(In thousands)
<CAPTION>
For the Three Months Ended
9/28/97 9/27/98
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 492 $ 1,190
Depreciation and amortization 5,907 4,699
Accretion of discount on long-term
liabilities 34 1,072
Loss on sale of property, plant, and
equipment 323 46
Distributed earnings of affiliates, net 715 226
Minority interest 788 203
Change in assets and liabilities (27,840) (10,109)
Non-cash charges and working capital
changes of discontinued operations (15,695) (6,523)
Net cash used for operating activities (35,276) (9,196)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds received from (used for)
investments 7,815 (3,113)
Purchase of property, plant and equipment (9,091) (6,551)
Changes in net assets held for sale (139) 288
Other, net 45 156
Investing activities of discontinued
operations (1,115) (165)
Net cash used for investing activities (2,485) (9,385)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 95,109 41,362
Debt repayments and repurchase of
debentures, net (67,631) (6,282)
Issuance of Class A common stock 149 158
Purchase of treasury stock - (18,657)
Financing activities of discontinued
operations (67) (15)
Net cash provided by financing activities 27,560 16,566
Effect of exchange rate changes on cash (170) 1,842
Net decrease in cash and cash equivalents (10,371) (173)
Cash and cash equivalents, beginning of the
year 19,420 49,601
Cash and cash equivalents, end of the period $ 9,049 $ 49,428
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
1. FINANCIAL STATEMENTS
The consolidated balance sheet as of September 27, 1998 and the
consolidated statements of earnings and cash flows for the three months
ended September 28, 1997 and September 27, 1998 have been prepared by the
Company, without audit. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at September
27, 1998, and for all periods presented, have been made. The balance sheet
at June 30, 1998 was condensed from the audited financial statements as of
that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's June 30, 1998 Form
10-K and the Banner Aerospace, Inc. ("Banner") March 31, 1998 Form 10-K.
The results of operations for the period ended September 27, 1998 are not
necessarily indicative of the operating results for the full year. Certain
amounts in the prior year's quarterly financial statements have been
reclassified to conform to the current presentation. The financial
statements for the periods ended September 28, 1997 have been restated to
present the results of Shared Technologies Fairchild Inc. and Fairchild
Technologies as discontinued operations.
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.
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 "AS+C Acquisition"). The total cost of the acquisition was $13,630,
which exceeded the fair value of the net assets of AS+C by approximately
$7,735, 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 original equipment
manufacturers ("OEM's") 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 accounted for as a purchase (the
"Special-T Acquisition"). The contractual purchase price for the
acquisition was valued at approximately $49,055, 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 $23,360, which 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, OEM's, and other distributors.
On January 13, 1998, Banner completed the disposition of substantially
all of the assets and certain liabilities of certain 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 assets
transferred to the Buyers consist primarily of Banner's hardware group,
which includes the distribution of bearings, nuts, bolts, screws, rivets
and other types 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 accounts
for its remaining investment in AlliedSignal Inc. common stock as an
available-for-sale security.
3. DISCONTINUED OPERATIONS
For the Company's fiscal years ended June 30, 1996, 1997, 1998, and
for the first quarter of Fiscal 1999, Fairchild Technologies
("Technologies") had pre-tax operating losses of approximately $1.5
million, $3.6 million, $48.7 million, and $8.2 million, respectively. The
remaining provision for operating losses over the next four months at
Technologies is $2,892 (net of an income tax benefit of $1,735). Additional
information regarding discontinued operations is set forth in Footnote 4 of
the Consolidated Financial Statements of the Company's June 30, 1998 Form
10-K.
4. PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial information for the
three months ended September 28, 1997, provide the results of the Company's
operations as though the Banner Hardware Group Disposition, the Special-T
Acquisition, and the AS+C Acquisition had been in effect since the
beginning of the Fiscal 1998 period. The pro forma information is based on
the historical financial statements of the Company, Banner, Special-T, and
AS+C giving effect to the aforementioned transactions. In preparing the pro
forma data, certain assumptions and adjustments have been made, including
reduced interest expense for revised debt structures and estimates of
changes to goodwill amortization. The following unaudited pro forma
information are not necessarily indicative of the results of operations
that actually would have occurred if the transactions had been in effect
since the beginning of the three month period ended September 28, 1997, nor
are they indicative of future results of the Company.
<TABLE>
<CAPTION>
September 28, 1997
<S> <C>
Net sales $143,621
Gross profit 29,609
Loss from continuing operations (1,206)
Loss from continuing operations per $ (0.03)
</TABLE>
The pro forma financial information has not been adjusted for non-
recurring income and gains from disposal of discontinued operations that
have occurred or are expected to occur from these transactions within the
ensuing year.
5. EQUITY SECURITIES
The Company had 19,504,256 shares of Class A common stock and
2,624,662 shares of Class B common stock outstanding at September 27, 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. For
the three months ended September 27, 1998, 6,500 shares of Class A Common
Stock were issued as a result of the exercise of stock options, and
shareholders converted 54 shares of Class B common stock into Class A
common stock. In accordance with terms of the Special-T Acquisition, as
amended, the Company issued 9,911 restricted shares of the Company's Class
A Common Stock for additional merger consideration during the three months
ended September 27, 1998. Additionally, the Company's Class A common stock
outstanding was effectively reduced as a result of 940,800 shares purchased
by Banner during the three months ended September 27, 1998. The shares
purchased by Banner are considered as treasury stock for accounting
purposes.
6. RESTRICTED CASH
On September 27, 1998, the Company did not have any restricted cash.
On June 30, 1998, the Company had restricted cash of approximately $746,
all of which was maintained as collateral for certain debt facilities.
7. SUMMARIZED STATEMENT OF EARNINGS INFORMATION
The following table presents summarized historical financial
information, on a combined 100% basis, of the Company's principal
investments, which are accounted for using the equity method.
<TABLE>
<CAPTION>
For the Three Months Ended
September 28, September 27,
1997 1998
<S> <C> <C>
Net sales $ 34,234 $ 29,416
Gross profit 13,387 11,492
Earnings from continuing operations 5,330 5,728
Net earnings 5,330 5,728
</TABLE>
The Company owns approximately 31.9% of Nacanco Paketleme common
stock. The Company recorded equity earnings of $1,100 (net of an income
tax provision of $592) and $1,182 (net of an income tax provision of $636)
from this investment for the three months ended September 28, 1997 and
September 27, 1998, respectively.
8. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
On September 27, 1998, the Company had $31,977 of minority interest,
of which $31,968 represents Banner. Minority shareholders hold
approximately 17% of Banner's outstanding common stock.
9. EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
(In thousands, except per share data) For the Three Months Ended
9/28/97 9/27/98
<S> <C> <C>
Basic earnings per share:
Earnings from continuing operations $ 1,229 $ 1,190
Weighted average common shares
outstanding 16,633 22,401
Basic earnings per share:
Basic earnings from continuing
operations per share $ 0.07 $ 0.05
Diluted earnings per share:
Earnings from continuing operations $ 1,229 $ 1,190
Weighted average common shares
outstanding 16,633 22,401
Options 588 416
Warrants 367 184
Total shares outstanding 17,588 23,001
Diluted earnings from continuing
operations per share $ 0.07 $ 0.05
</TABLE>
10. CONTINGENCIES
Government Claims
The Corporate Administrative Contracting Officer (the "ACO"), based
upon the advice of the United States Defense Contract Audit Agency, has
made a determination that Fairchild Industries, Inc. ("FII"), a former
subsidiary of the Company, did not comply with Federal Acquisition
Regulations and Cost Accounting Standards in accounting for (i) the 1985
reversion to FII of certain assets of terminated defined benefit pension
plans, and (ii) pension costs upon the closing of segments of FII's
business. The ACO has directed FII to prepare cost impact proposals
relating to such plan terminations and segment closings and, following
receipt of such cost impact proposals, may seek adjustments to contract
prices. The ACO alleges that substantial amounts will be due if such
adjustments are made, however, an estimate of the possible loss or range of
loss from the ACO's assertion cannot be made. The Company believes it has
properly accounted for the asset reversions in accordance with applicable
accounting standards. The Company has held discussions with the government
to attempt to resolve these pension accounting issues.
Environmental Matters
The Company's operations are subject to stringent Government imposed
environmental laws and regulations concerning, among other things, the
discharge of materials into the environment and the generation, handling,
storage, transportation and disposal of waste and hazardous materials. To
date, such laws and regulations have not had a material effect on the
financial condition, results of operations, or net cash flows of the
Company, although the Company has expended, and can be expected to expend
in the future, significant amounts for investigation of environmental
conditions and installation of environmental control facilities,
remediation of environmental conditions and other similar matters,
particularly in the Aerospace Fasteners segment.
In connection with its plans to dispose of certain real estate, the
Company must investigate environmental conditions and may be required to
take certain corrective action prior or pursuant to any such disposition.
In addition, management has identified several areas of potential
contamination at or from other facilities owned, or previously owned, by
the Company, that may require the Company either to take corrective action
or to contribute to a clean-up. The Company is also a defendant in certain
lawsuits and proceedings seeking to require the Company to pay for
investigation or remediation of environmental matters and has been alleged
to be a potentially responsible party at various "Superfund" sites.
Management of the Company believes that it has recorded adequate reserves
in its financial statements to complete such investigation and take any
necessary corrective actions or make any necessary contributions. No
amounts have been recorded as due from third parties, including insurers,
or set off against, any liability of the Company, unless such parties are
contractually obligated to contribute and are not disputing such liability.
As of September 27, 1998, the consolidated total recorded liabilities
of the Company for environmental matters approximated $8,861, 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 $15,000 if execution would be required in accordance
with the current application of legislation.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Fairchild Corporation (the "Company") was incorporated in October
1969, under the laws of the State of Delaware. On November 15, 1990, the
Company changed its name from Banner Industries, Inc. to The Fairchild
Corporation. 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 Note 4 to
the June 30, 1998 Form 10-K Consolidated Financial Statements, as to the
disposition of the Company's interest in STFI.)
The following discussion and analysis provide information which
management believes is relevant to assessment and understanding of the
Company's consolidated results of operations and financial condition. The
discussion should be read in conjunction with the consolidated financial
statements and notes thereto.
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.
RESULTS OF OPERATIONS
Business Combinations
The following business combinations completed by the Company over the
past twelve months significantly effect the comparability of the results
from the current period to the prior period.
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. 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 $13.6 million, which
exceeded the fair value of the net assets of AS+C by approximately $7.7
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 January 13, 1998, Banner completed the disposition of substantially
all of the assets and certain liabilities of certain 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 million (the "Banner Hardware Group Disposition"). 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 types of fasteners, and its PacAero unit. Approximately $196
million of the common stock received from the Buyers was used to repay
outstanding term loans of Banner's subsidiaries and related fees. The
Company accounts for its remaining investment in AlliedSignal Inc. common
stock as an available-for-sale security.
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 accounted for as a purchase (the
"Special-T Acquisition"). The contractual purchase price for the
acquisition was valued at approximately $49.1 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 $23.4 million, which 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,
for government agencies, original equipment manufacturers, and other
distributors.
Consolidated Results
The Company currently reports in two principal business segments:
Aerospace Fasteners and Aerospace Distribution. The results of the Gas
Springs Division are included in the Corporate and Other classification.
The following table illustrates the historical sales and operating income
of the Company's operations for the three months ended September 27, 1998
and September 28, 1997, respectively.
<TABLE>
<CAPTION>
(In thousands) Three Months Ended
Sept. 28 Sept. 27
1997 1998
<S> <C> <C>
Sales by Segment:
Aerospace Fasteners $ 76,847 $ 96,558
Aerospace Distribution 122,914 50,528
Corporate and Other 1,362 1,453
Intersegment Eliminations (a) (6,761) -
TOTAL SALES $194,362 $148,539
Operating Results by Segment:
Aerospace Fasteners $ 2,510 $ 7,830
Aerospace Distribution 9,371 1,718
Corporate and Other 1,075 (3,909)
OPERATING INCOME $ 12,956 $ 5,639
(a) Represents intersegment sales from the Aerospace Fasteners segment to
the Aerospace Distribution segment.
</TABLE>
The following table illustrates sales and operating income of the
Company's operations by segment, on an unaudited pro forma basis, as though
the Banner Hardware Group Disposition, the Special-T Acquisition, and the
AS+C Acquisition had been in effect for the three months ended September
28, 1997. The pro forma information is based on the historical financial
statements of the Company, Banner, Special-T, and AS+C giving effect to the
aforementioned transactions. 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>
(In thousands) Sept. 28
1997
<S> <C>
Sales by Segment:
Aerospace Fasteners $ 85,824
Aerospace Distribution 56,435
Corporate and Other 1,362
TOTAL SALES $143,621
Operating Results by Segment:
Aerospace Fasteners $ 4,469
Aerospace Distribution 3,372
Corporate and Other 1,240
OPERATING INCOME $ 9,081
</TABLE>
Net sales of $148.5 million in the first quarter of Fiscal 1999
decreased by $45.8 million, or 23.6%, compared to sales of $194.4 million
in the first quarter of Fiscal 1998. This decrease is primarily
attributable to the loss of revenues resulting from the Banner Hardware
Group Disposition. Approximately 7.2% of the current three months sales
growth was stimulated by the commercial aerospace industry. Recent
acquisitions contributed approximately 3.4% to the sales growth, while
divestitures decreased growth by approximately 34.2%. On a pro forma basis,
net sales increased 3.4% for the three months ended September 27, 1998
compared to the three months ended September 28, 1997.
Gross margin as a percentage of sales was 23.8% and 23.3% in the first
quarter of Fiscal 1998 and 1999, respectively. The lower margins in the
Fiscal 1999 period is 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.
Selling, general & administrative expense as a percentage of sales
remained stable at 18.9% in both the first quarter of Fiscal 1998 and 1999.
Other income decreased $4.1 million in the first quarter of Fiscal
1999, compared to the first quarter of Fiscal 1998. The Company recognized
$4.4 million of income in the prior period from the sale of air rights over
a portion of the property the Company owns and is developing in
Farmingdale, New York.
Operating income of $5.6 million in the first quarter of Fiscal 1999
decreased 56.5%, compared to operating income of $13.0 million in the first
quarter of Fiscal 1998. This decrease is primarily attributable to the loss
of operating income resulting from the Banner Hardware Group Disposition
and the decrease in other income.
Net interest expense decreased $5.7 million, or 45.5%, in first
quarter of Fiscal 1999 compared to the first quarter of Fiscal 1998. The
decreases were due to a series of transactions that significantly reduced
the Company's total debt.
Minority interest decreased by $0.9 million in the first quarter of
Fiscal 1998, as a result of lower earnings contributed by Banner and the
increase in the Company's ownership of Banner as a result of the Exchange
Offer.
An income tax provision of $0.3 million in the first three months of
Fiscal 1999 represented a 45.0% effective tax rate on pre-tax earnings from
continuing operations (excluding equity in earnings of affiliates and
minority interest) of $0.6 million. The tax provision was higher than the
statutory rate because amortization of goodwill is not deductible for
income tax purposes.
Included in loss from discontinued operations for the three months
ended September 28, 1997, are the results of Fairchild Technologies
("Technologies") and the Company's equity in earnings of STFI prior to the
STFI Merger.
Net earnings of $1.2 million in the first three months ended September
27, 1998, improved by $0.7 million compared to the $0.5 million net
earnings recorded in the three months ended September 28, 1997.
Comprehensive income (loss) 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 declined by $30.4 million in the three months
ended September 27, 1998, primarily as a result of a decrease 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 $19.7 million,
or 25.6%, in the first quarter of Fiscal 1999, compared to the first
quarter of Fiscal 1998, reflecting growth experienced in the commercial
aerospace industry combined with the effect of acquisitions. Approximately
17.0% of the increase in sales in the current three-month period resulted
from internal growth, while acquisitions contributed approximately 8.6% to
the increase. New orders have leveled off in recent months. Backlog was
reduced to $166 million at September 27, 1998, down from $177 million at
June 30, 1998. On a pro forma basis, including the results from
acquisitions in the prior period, sales increased 12.5% in the first
quarter of Fiscal 1999, compared to the same period in the prior year.
Operating income improved by $5.3 million, or 212%, in the first
quarter of Fiscal 1999, compared to the first quarter of Fiscal 1998.
Acquisitions and marketing changes were contributors to this improvement.
Approximately 101.8% of the increase in operating income during the first
quarter of Fiscal 1999 reflected internal growth, while acquisitions
contributed approximately 110.2% to the increase. The Company anticipates
that manufacturing and productivity efficiencies will further improve
operating income in the coming months. On a pro forma basis, operating
income increased $3.4 million, or 75.2%, for the three months ended
September 27, 1998, compared to the three months ended September 28, 1997.
Aerospace Distribution Segment
Aerospace Distribution sales decreased by $72.4 million, or 58.9% in
the first quarter Fiscal 1999, compared to the first quarter Fiscal 1998,
due primarily to the loss of revenues as a result of the Banner Hardware
Group Disposition. Of the decrease in sales in the current three-month
period approximately 54.1% resulted from divestitures, and approximately
4.8% resulted from a decrease in internal growth. On a pro forma basis,
excluding sales contributed by dispositions, sales decreased 10.5% in the
first quarter of Fiscal 1999, compared to the same period in the prior
year.
Operating income decreased $7.6 million, in the first quarter of
Fiscal 1999, compared to the same period of the prior year, due primarily
to the Banner Hardware Group Disposition. On a pro forma basis, excluding
results contributed by dispositions, operating income decreased $1.7
million in the first quarter of Fiscal 1999, compared to the first quarter
of Fiscal 1998.
Corporate and Other
The Corporate and Other classification includes the Gas Springs
Division and corporate activities. The group reported a slight increase in
sales in the first quarter of Fiscal 1999, compared to first quarter in
Fiscal 1998. An operating loss of $4.0 million in the first quarter of
Fiscal 1999 was $5.0 million lower than operating income of $1.0 million
reported in the first quarter of Fiscal 1998. The comparable period in the
prior year included other income of $4.4 million realized as a result the
sale of air rights over a portion of the property the Company owns and is
developing in Farmingdale, New York.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of September 27, 1998 and June 30, 1998
amounted to $782.2 million and $789.6 million, respectively. The changes in
capitalization included an increase in debt of $35.1 million and a decrease
in equity of $42.5 million. The increase in debt was primarily the result
of additional borrowings for investment purposes and the purchase of the
Company's common stock. The decrease in equity was primarily due to an
$18.7 million increase in the Company's treasury stock and a $30.4 million
net unrealized loss recorded from the decline in the market value of
available-for-sale securities, partially offset by a $5.2 million increase
in foreign currency translation adjustment.
The Company maintains a portfolio of investments classified as
available-for-sale securities, which had a fair market value of $193.9
million at September 27, 1998. The market value of these investments
depreciated $49.7 million in the first quarter of Fiscal 1999 and 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 Inc. common stock, large
swings in the value of the portfolio should be expected. In the quarter
ended September 27, 1998, the Company reclassified a large portion of its
investment portfolio to current assets as a result of an increased
probability that these investments will be liquidated during the next
twelve months, subject to market conditions.
Net cash used by operating activities for the three months ended
September 27, 1998 and September 28, 1997 was $9.2 million and $35.3
million, respectively. The primary use of cash for operating activities in
the first quarter of Fiscal 1999 was an increase in inventories of $20.8
million and a decrease in accounts payable and accrued liabilities of $10.8
million, which were partially offset by a $20.7 decrease in accounts
receivable and other current assets. The primary use of cash for operating
activities in the first quarter of Fiscal 1998 was an increase in
inventories of $16.9 million and accounts receivable of $4.1 million and a
decrease in accounts payable and other accrued liabilities of $14.1
million.
Net cash provided from investing activities for the three months ended
September 27, 1998 and September 28, 1997, amounted to $9.4 million and
$2.5 million, respectively. In the first quarter of Fiscal 1999, capital
expenditures were the primary use of cash from investing activities. In the
first quarter of Fiscal 1998, the primary use of cash from investing
activities were capital expenditures of $9.1 million partially offset by
$7.8 million of net proceeds received from investment liquidations.
Net cash provided by financing activities for the three months ended
September 27, 1998 and September 28, 1997, amounted to $16.6 million and
$27.6 million, respectively. Cash provided by financing activities in the
first quarter of Fiscal 1999 included $41.4 million net increase from the
issuance of additional debt, partially offset by the repayment of debt and
the $18.7 million purchase of treasury stock. The primary source of cash
provided by financing activities in the first quarter of Fiscal 1998 was
the net proceeds received from the issuance of additional debt of $95.1
million, partially offset by cash used for the repayment of debt and the
repurchase of debentures of $67.6 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.
For the Company's fiscal years ended June 30, 1996, 1997, 1998, and
for the first quarter of Fiscal 1999, Fairchild Technologies
("Technologies") had pre-tax operating losses of approximately $1.5
million, $3.6 million, $48.7 million, and $8.2 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 compliant. Substantially all of
the material systems within the Aerospace Fasteners segment are currently
Year 2000 compliant. 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 compliant. 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 able to supply to, or accept
from, the company, business services or products, for a material period,
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 $0.5 million in costs that are directly attributable
to addressing Year 2000 issues. Management currently estimates that the
Company will incur between $2 million and $3 million in additional costs
during the next 15 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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 Fiscal Year 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 rate - 5.84% 5.99% - - 6.24%
Weighted average rate - 4.93% 4.86% - - 5.35%
Fair Market Value - (157) (433) - - (10,763)
</TABLE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required to be disclosed under this Item is set forth
in Footnote 10 (Contengencies) of the Consolidated Financial Statements
(Unaudited) included in this Report.
Item 2. Changes in Securities and Use of Proceeds
On September 25, 1998, in accordance with the terms of the Special-T
Acquisition, the Company issued 9,911 restricted shares of the Company's
Class A Common Stock to Robert E. Edwards, as additional merger
consideration. Information regarding the Special-T Acquisition is set forth
in Footnote 2 (Business Combinations) of the Consolidated Financial
Statements (Unaudited) included in this Report.
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 23, 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
*10.1 Third amendment dated September 25, 1998 to the 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.
*27 Financial Data Schedules.
* - Filed herewith
(b) Reports on Form 8-K:
There have been no reports on Form 8-K filed during the
quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to the signed on
its behalf by the undersigned hereunto duly authorized.
For THE FAIRCHILD CORPORATION
(Registrant) and as its Chief
Financial Officer:
By: Colin M. Cohen
Senior Vice President and
Chief Financial Officer
Date: November 11, 1998
THIRD AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
This THIRD AMENDMENT TO AGREEMENT AND PLAN OF MERGER
dated as of September 17, 1998 ("Third Amendment") is made by
and among The Fairchild Corporation, a Delaware corporation
("Fairchild"), Special-T Fasteners, Inc., a Delaware
corporation ("Fairchild Subsidiary") as the surviving
corporation of the merger with Edwards & Lock Management Corp.
("Fasteners") and Robert Edwards, a California resident
("Edwards"), amending certain provisions of the Agreement and
Plan of Merger dated as of January 28, 1998 (including the
exhibits and schedules thereto, the "Merger Agreement"), as
amended to date, by and among Fairchild, Fairchild Subsidiary,
Fasteners and Edwards. Terms used but not otherwise defined
herein shall have the respective meanings ascribed thereto in
the Merger Agreement.
WHEREAS, Fairchild, Fairchild Subsidiary and Edwards
have agreed to modify certain terms and conditions as
specifically set forth in this Third Amendment.
NOW, THEREFORE, in consideration of the premises and
mutual agreements contained herein and for other good and
valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
AMENDMENTS TO THE MERGER AGREEEMENT
1.1 The first sentence of Section 3.3(a) of the
Merger Agreement is revised in its entirety to read as follows:
(a) During the period commencing on the Effective
Date and ending upon the earlier of (a) the
second anniversary of the Effective Date or
(b) the date Edwards or an Edwards Affiliate (as
defined below) no longer owns at least 50% of
the 1,055,141 shares of Fairchild Common Stock
received by Edwards in connection with the
Merger (as adjusted for any stock split or
reclassification) (the "Edwards' Shares"),
Edwards will be paid the amount, if any, (the
"Additional Merger Consideration") by which
(i) 10% of the aggregate EBITD (as defined
below) of the Surviving Corporation (the
"Earnings Share") for the period commencing on
the Effective Date and ending June 30, 1998 and
thereafter for all completed fiscal quarters
(for which Edwards or an Edwards Affiliate owned
at least 50% of the Edwards' Shares for such
entire fiscal quarter) exceeds (ii) $520,000 per
year (the "Amount") (pro rated on a per diem
basis for any period less than 12 calendar
months); provided, however, that if during the
period commencing on the Effective Date and
ending one year later the Earnings Share accrued
for such period is less than the Amount, then
the difference between the Amount and the
Earnings Share accrued for such period shall be
subtracted from any Additional Merger
Consideration accruable for the next fiscal
quarter and thereafter from each subsequent
fiscal quarter until such difference shall be
consumed.
1.2 The next to last sentence of Section 3.3(b) is
revised in its entirety to read as follows:
The "Adjustment Date" shall be the last day of
each fiscal year of the Surviving Corporation;
provided that if Edwards or an Edwards Affiliate
no longer owns at least 50% of the Edwards'
Shares, the Adjustment Date shall be the date
Edwards or an Edwards Affiliate no longer owns
at least 50% of the Edwards' Shares.
1.3 An additional sentence is added to Section
3.3(b) as the last sentence of such section to read as follows:
"For purposes of this Agreement, an Edwards
Affiliate shall be any of Edwards' family
members, any trust for the benefit of any of
Edwards' family members, or any corporation,
limited liability company or other entity
controlled by Edwards, any of Edwards' family
members or any such trust."
1.4 The last sentence of Section 3.3(a) is revised
in its entirety to read as follows:
"EBITD" means the consolidated net income of a
person for any period plus, to the extent
deducted in determining consolidated net income,
the Amount, consolidated interest expense,
federal, state, local and foreign income tax
expense and depreciation expense of such person
for such period, in each case as determined in
accordance with generally accepted accounting
principles in the United States as in effect
from time to time.
ARTICLE II
AMENDMENT OF REGISTRATION RIGHTS AGREEMENT
2.1 Section 3 of the Registration Rights Agreement
attached to the Merger Agreement as Exhibit A, shall be deleted
in its entirety to read as follows: "INTENTIONALLY OMITTED."
ARTICLE III
PROVISIONS OF GENERAL APPLICATION
3.1 Except as otherwise expressly provided by this
Third Amendment, all of the terms, conditions and provisions to
the Merger Agreement remain unaltered. The Merger Agreement
and this Third Amendment shall be read and construed as one
agreement.
3.2 If any of the terms of this Third Amendment
shall conflict in any respect with any of the terms of the
Merger Agreement, the terms of this Third Amendment shall be
controlling. This Third Amendment will be effective as of
March 2, 1998.
IN WITNESS WHEREOF, the parties hereto have caused
this Third Amendment to be executed by their duly authorized
officers, all as of the day and year first above written.
THE FAIRCHILD CORPORATION
By: John L. Flynn
Title: Senior Vice President
Tax
SPECIAL-T FASTENERS, INC.
By: John L. Flynn
Title: Vice President
Robert Edwards (i) (1)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-27-1998
<CASH> 49,428
<SECURITIES> 175,802
<RECEIVABLES> 115,536
<ALLOWANCES> 5,345
<INVENTORY> 238,303
<CURRENT-ASSETS> 617,757
<PP&E> 211,171
<DEPRECIATION> 86,840
<TOTAL-ASSETS> 1,122,477
<CURRENT-LIABILITIES> 170,473
<BONDS> 327,500
0
0
<COMMON> 2,932
<OTHER-SE> 428,169
<TOTAL-LIABILITY-AND-EQUITY> 1,122,477
<SALES> 148,539
<TOTAL-REVENUES> 148,958
<CGS> 113,867
<TOTAL-COSTS> 1,433,199
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,853
<INCOME-PRETAX> 647
<INCOME-TAX> 291
<INCOME-CONTINUING> 1,190
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,190
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
