26
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended December 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 January 31, 1998
Class A Common Stock, $0.10 Par Value 19,222,606
Class B Common Stock, $0.10 Par Value 2,624,062
AMENDMENT:
The purpose of this amendment is to provide restated financial
information and additional disclosure for (i) Part I, "Financial
Information", and (ii) Part II, Item 6, "Exhibits and Reports on Form 8-K".
The Company restated its results to include the loss on the divestiture of
Solair, Inc. as part of operating income. The Company is also updating its
Year 2000 disclosure.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1.Condensed Consolidated Balance Sheets as of June 30, 1998 and
December 27, 1998 (Unaudited) .
3
Consolidated Statements of Earnings for the Three and Six
Months ended
December 28, 1997 and December 27, 1998 (Unaudited)??
5
Condensed Consolidated Statements of Cash Flows for the Six
Months
ended December 28, 1997 and December 27, 1998 (Unaudited)
7
Notes to Condensed Consolidated Financial Statements (Unaudited)
8
Item 2.Management's Discussion and Analysis of Results of Operations
and
Financial Condition
13
Item 3.Quantitative and Qualitative Disclosure About Market Risk
24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
24
* 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.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 27, 1998 (Unaudited)
(In thousands)
ASSETS
June 30, Dec. 27,
1998 1998
CURRENT ASSETS: (*)
Cash and cash equivalents, $746 and $0 $ $
restricted 49,601 16,063
Short-term investments 3,962 216,260
Accounts receivable-trade, less 120,284 95,435
allowances of $5,655 and $3,079
Inventories:
Finished goods 187,205 146,466
Work-in-process 20,642 19,074
Raw materials 9,635 9,142
217,482 174,682
Net current assets of discontinued 11,613 1,670
operations
Prepaid expenses and other current 53,081 52,870
assets
Total Current Assets 456,023 556,980
Property, plant and equipment, net of
accumulated
depreciation of $82,968 and $98,382 118,963 124,446
Net assets held for sale 23,789 20,794
Net noncurrent assets of discontinued 8,541 10,945
operations
Cost in excess of net assets acquired
(Goodwill), less
accumulated amortization of $42,079 168,307 167,262
and $43,581
Investments and advances, affiliated 27,568 28,416
companies
Prepaid pension assets 61,643 62,246
Deferred loan costs 6,362 5,879
Long-term investments 235,435 36,398
Other assets 50,628 70,275
TOTAL ASSETS $ $
1,157,259 1,083,641
*Condensed from audited financial statements.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 27, 1998 (Unaudited)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, Dec. 27,
1998 1998
CURRENT LIABILITIES: (*)
Bank notes payable and current $ $
maturities of long-term debt 20,665 25,287
Accounts payable 53,859 36,511
Accrued salaries, wages and commissions 23,613 19,837
Accrued employee benefit plan costs 1,463 1,741
Accrued insurance 12,575 12,234
Accrued interest 2,303 1,581
Other accrued liabilities 52,789 56,424
Income taxes 28,311 8,397
Total Current Liabilities 195,578 162,012
LONG-TERM LIABILITES:
Long-term debt, less current maturities 295,402 278,229
Other long-term liabilities 23,767 24,707
Retiree health care liabilities 42,103 43,127
Noncurrent income taxes 95,176 107,871
Minority interest in subsidiaries 31,674 28,075
TOTAL LIABILITIES 683,700 644,021
STOCKHOLDERS' EQUITY:
Class A common stock, $0.10 par value;
authorized
40,000 shares, 26,709 (26,679 in June)
shares issued and
19,219 (20,429 in June) shares 2,667 2,671
outstanding
Class B common stock, $0.10 par value;
authorized 20,000
shares, 2,624 (2,625 in June) shares 263 262
issued and outstanding
Paid-in capital 195,112 195,291
Retained earnings 311,039 294,222
Cumulative other comprehensive income 16,386 21,183
Treasury Stock, at cost, 7,490 (6,250 in (51,908) (74,009)
June) shares of Class A common stock
TOTAL STOCKHOLDERS' EQUITY 473,559 439,620
TOTAL LIABILITIES AND STOCKHOLDERS' $ $
EQUITY 1,157,259 1,083,641
*Condensed from audited financial statements
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) and Six (6) Months Ended December 28, 1997 and December
27, 1998
(In thousands, except per share data)
Three Six Months Ended
Months
Ended
12/28/97 12/27/98 12/28/97 12/27/98
REVENUE:
Net sales $ $ $ $
208,616 151,181 402,978 299,720
Other income, net
49 350 4,604 769
208,665 151,531 407,582 300,489
COSTS AND EXPENSES:
Cost of goods sold
151,794 133,119 299,827 246,986
Selling, general & administrative
42,259 27,272 78,968 55,446
Amortization of goodwill
1,387 1,360 2,606 2,638
195,440 161,751 381,401 305,070
OPERATING INCOME (LOSS)
13,225 (10,220) 26,181 (4,581)
Interest expense
15,683 7,770 28,658 15,206
Interest income
(524) (476) (914) (1,059)
Net interest expense
15,159 7,294 27,744 14,147
Investment income (loss)
(7,077) (1,027) (5,180) 834
Loss from continuing operations
before taxes (9,011) (18,541) (6,743) (17,894)
Income tax benefit
4,869 6,724 3,863 6,433
Equity in earnings of affiliates,
net 279 652 1,379 1,689
Minority interest, net
(742) 2,338 (1,875) 2,135
Loss from continuing operations
(4,605) (8,827) (3,376) (7,637)
Loss from discontinued operations,
net (1,945) - (2,682) -
Gain (loss) on disposal of
discontinued operations, net 29,974 (9,180) 29,974 (9,180)
Extraordinary items, net
(3,024) - (3,024) -
NET EARNINGS (LOSS) $ $ $ $
20,400 (18,007) 20,892 (16,817)
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustments (2,567) 2,306 (1,572) 7,552
Unrealized holding gains (losses)
on securities - 27,633 - (2,755)
Other comprehensive income (loss)
(2,567) 29,939 (1,572) 4,797
COMPREHENSIVE INCOME (LOSS) $ $ $ $
17,833 11,932 19,320 (12,020)
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) and Six (6) Months Ended December 28, 1997 and December
27, 1998
(In thousands, except per share data)
Three Six Months Ended
Months
Ended
12/28/97 12/27/98 12/28/97 12/27/98
BASIC EARNINGS PER SHARE:
Loss from continuing operations $ $ $ $
(0.27) (0.40) (0.20) (0.35)
Loss from discontinued operations,
net (0.11) - (0.16) -
Gain (loss) on disposal of
discontinued operations, net 1.75 (0.42) 1.78 (0.41)
Extraordinary items, net
(0.18) - (0.18) -
NET EARNINGS (LOSS) $ $ $ $
1.19 (0.82) 1.24 (0.76)
Other comprehensive income (loss),
net of tax:
Foreign currency translation $ $ $ $
adjustments (0.15) 0.11 (0.09) 0.34
Unrealized holding losses on
securities arising during the period - 1.26 - (0.12)
Other comprehensive income (loss)
(0.15) 1.37 (0.09) 0.22
COMPREHENSIVE INCOME (LOSS) $ $ $ $
1.04 0.55 1.15 (0.54)
DILUTED EARNINGS PER SHARE:
Loss from continuing operations $ $ $ $
(0.27) (0.40) (0.20) (0.35)
Loss from discontinued operations,
net (0.11) - (0.16) -
Gain (loss) on disposal of
discontinued operations, net 1.75 (0.42) 1.78 (0.41)
Extraordinary items, net
(0.18) - (0.18) -
NET EARNINGS (LOSS) $ $ $ $
1.19 (0.82) 1.24 (0.76)
Other comprehensive income (loss),
net of tax:
Foreign currency translation $ $ $ $
adjustments (0.15) 0.11 (0.09) 0.34
Unrealized holding losses on
securities arising during the period - 1.26 - (0.12)
Other comprehensive income (loss)
(0.15) 1.37 (0.09) 0.22
COMPREHENSIVE INCOME (LOSS) $ $ $ $
1.04 0.55 1.15 (0.54)
Weighted average shares outstanding:
Basic 17,088 21,872 16,864 22,129
Diluted 17,088 21,872 16,864 22,129
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Six (6) Months Ended December 28, 1997 and December 27, 1998
(In thousands)
For
the Six
Months
Ended
12/28/9 12/27/9
7 8
Cash flows from operating activities:
Net earnings (loss) $ $
20,892 (16,817
)
Depreciation of fixed assets and
amortization of goodwill 11,623 11,476
Amortization of deferred loan fees 1,487 388
Accretion of discount on long-term
liabilities 1,686 2,578
Net loss on divestiture of subsidiary
- 13,500
Net gain on disposal of discontinued
operations (29,974 -
)
Extraordinary items, net of cash payments
3,024 -
Distributed (undistributed) earnings of
affiliates, net 344 (777)
Minority interest
1,875 (2,135)
Change in assets and liabilities
(98,453 (36,471
) )
Non-cash charges and working capital
changes of discontinued operations (4,349) (8,559)
Net cash used for operating activities
(91,845 (36,817
) )
Cash flows from investing activities:
Purchase of property, plant and equipment
(15,964 (13,574
) )
Acquisition of subsidiaries, net of cash (11,774
acquired ) -
Proceeds received from (used for)
investment securities, net 5,786 (15,648
)
Net proceeds received from the divestiture - 60,397
of subsidiary
Net proceeds received from the disposal of 84,733 -
discontinued operations
Changes in net assets held for sale (324) 3,335
Other, net
179 238
Investing activities of discontinued
operations (3,119) (223)
Net cash provided by investing activities
59,517 34,525
Cash flows from financing activities:
Proceeds from issuance of debt
143,712 55,777
Debt repayments and repurchase of
debentures, net (145,13 (69,375
0) )
Issuance of Class A common stock
53,921 182
Purchase of treasury stock
- (22,101
)
Financing activities of discontinued
operations - 121
Net cash provided by (used for) financing
activities 52,503 (35,396
)
Effect of exchange rate changes on cash
(688) 4,150
Net change in cash and cash equivalents
19,487 (33,538
)
Cash and cash equivalents, beginning of the
year 19,420 49,601
Cash and cash equivalents, end of the $ $
period 38,907 16,063
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
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 December 27, 1998 and the
consolidated statements of earnings and cash flows for the six months ended
December 28, 1997 and December 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 December 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 Annual
Report on Form 10-K and the Banner Aerospace, Inc. March 31, 1998 Annual
Report on Form 10-K. The results of operations for the period ended
December 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.
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 total cost of the acquisition was $14.0 million, which
exceeded the fair value of the net assets of AS+C by approximately $8.1
million, which is 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 market.
On March 2, 1998, the Company consummated the acquisition of Edwards
and Lock Management Corporation, doing business as Special-T Fasteners, in
a business combination accounted for as a purchase. The cost of the
acquisition was approximately $50.0 million, of which 50.1% of the
contractual purchase price 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
$23.6 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, 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
AlliedSignal Inc., in exchange for shares of AlliedSignal Inc. common stock
with an aggregate value equal to $369 million. The assets transferred to
AlliedSignal Inc. consisted primarily of Banner's hardware group, which
included 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 AlliedSignal Inc. 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 December 31, 1998, Banner consummated the sale of Solair, Inc.,
it's largest subsidiary in the rotables group, to Kellstrom Industries,
Inc., in exchange for approximately $60.4 million in cash and a warrant to
purchase 300,000 shares of common stock of Kellstrom. In December 1998,
Banner recorded a $19.3 million pre-tax loss from the sale of Solair. This
loss was included in cost of goods sold as it was primarily attributable to
the bulk sale of inventory at prices below the carrying amount of
inventory.
3. DISCONTINUED OPERATIONS
For the Company's fiscal years ended June 30, 1996, 1997, 1998, and
for the first six months of fiscal 1999, Fairchild Technologies
("Technologies") had pre-tax operating losses of approximately $1.5
million, $3.6 million, $48.7 million, and $16.1 million, respectively. The
after-tax operating loss from Technologies exceeded the previous recorded
estimate for expected losses on disposal by $2.9 million through December
1998. An additional after-tax charge of $6.2 million was recorded in the
six months ended December 27, 1998, based on the current estimate of the
remaining losses in connection with the disposition of Technologies. While
the Company believes that $6.2 million is a reasonable charge for the
remaining expected losses in connection with the disposition of
Technologies, there can be no assurance that this estimate is adequate.
Additional information regarding discontinued operations is set forth in
Footnote 4 of the Consolidated Financial Statements of the Company's June
30, 1998 Annual Report on Form 10-K.
4. PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial information for the six
months ended December 28, 1997, present the results of the Company's
operations as though the divestitures of Banner's hardware group and
Solair, and the acquisitions of Special-T and AS+C, had been in effect
since the beginning of fiscal 1998. The unaudited pro forma consolidated
financial information for the six months ended December 27, 1998 provide
the results of the Company's operations as though the divestiture of Solair
had been in effect since the beginning of fiscal 1999. 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 each period, nor are
they indicative of future results of the Company.
For the Six Months
Ended
December December
28, 27,
1997 1998
Net sales $ $
259,672 271,401
Gross profit 66,081
59,039
Earnings (loss) from continuing operations (6,313) 4,960
Earnings (loss) from continuing operations, $ $
per share (0.37) 0.22
The pro forma financial information has not been adjusted for non-
recurring gains from disposal of discontinued operations, reductions in
interest expense and investment income that have occurred or are expected
to occur from these transactions within the ensuing year.
5.
EQUITY SECURITIES
The Company had 19,219,006 shares of Class A common stock and
2,624,662 shares of Class B common stock outstanding at December 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 six months ended December 27, 1998, 13,825 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, during the six months ended December 27, 1998, the Company issued
9,911 restricted shares of the Company's Class A Common Stock for
additional merger consideration. Additionally, the Company's Class A common
stock outstanding was effectively reduced as a result of 1,239,750 shares
purchased by Banner. The shares purchased by Banner are considered as
treasury stock for accounting purposes.
6. RESTRICTED CASH
On December 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.
For the
Six Months
Ended
December December
28, 27,
1997 1998
Net sales $ $
48,841 40,226
Gross profit
18,191 15,236
Earnings from continuing operations
8,132 8,929
Net earnings
8,132 8,929
The Company owns approximately 31.9% of Nacanco Paketleme common
stock. The Company recorded equity earnings of $1,680 (net of an income
tax provision of $904) and $1,841 (net of an income tax provision of $991)
from this investment for the six months ended December 28, 1997 and
December 27, 1998, respectively.
8. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
On December 27, 1998, the Company had $28,075 of minority interest, of
which $28,066 represents Banner. Minority shareholders hold approximately
17% of Banner's outstanding common stock. For additional information
regarding the Company's proposal to acquire all the remaining stock in
Banner it does not already own, please refer to Note 11.
9.
EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share:
Three Six
Months Months
Ended Ended
12/28/9 12/27/9 12/28/9 12/27/9
7 8 7 8
Basic earnings per share:
Loss from continuing operations $ $ $ $
(4,605) (8,827) (3,376) (7,637)
Common shares outstanding
17,088 21,872 16,864 22,129
Basic loss per share:
Basic loss from continuing $ $ $ $
operations per share (0.27) (0.40) (0.20) (0.35)
Diluted earnings per share:
Loss from continuing operations $ $ $ $
(4,605) (8,827) (3,376) (7,637)
Common shares outstanding
17,088 21,872 16,864 22,129
Options
antidil antidil antidil antidil
utive utive utive utive
Warrants
antidil antidil antidil antidil
utive utive utive utive
Total shares outstanding 17,088 21,872 16,864 22,129
Diluted loss from continuing $ $ $ $
operations per share (0.27) (0.40) (0.20) (0.35)
For the three-month and six-month periods ended December 28, 1997 and
December 27, 1998, the computation of diluted loss from continuing
operations per share exclude 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.
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 December 27, 1998, the consolidated total recorded liabilities
of the Company for environmental matters was approximately $8.9 million,
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 $15.0 million.
Other Matters
In connection with the disposition of Banner's hardware business, the
Company received notice on January 12, 1999 from AlliedSignal making
indemnification claims against the Company for $18.9 million. Although the
Company believes that the amount of the claim is far in excess of any
amount that AlliedSignal is entitled to recover from the Company, the
Company is in the process of reviewing such claims and is unable to predict
the ultimate outcome of such matter.
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 mentioned above, will not have a
material adverse effect on the financial condition, or future results of
operations or net cash flows of the Company.
11. SUBSEQUENT EVENTS
On December 28, 1998, the Company announced that it had signed a
definitive merger agreement to acquire Kaynar Technologies Inc., an
aerospace and industrial fastener manufacturer and tooling company, through
a merger of Kaynar with a wholly-owned subsidiary of the Company. The
purchase price is $239 million for Kaynar common and preferred stock, $28
million for a covenant not to compete from the majority Kaynar shareholder,
and the Company will assume approximately $98 million of Kaynar's debt. A
majority of the holders of all classes of Kaynar stock have agreed to vote
in favor of the merger. The transaction is subject to certain conditions,
including financing and regulatory approval.
On January 11, 1999, the Company reached an agreement and plan of
merger to acquire all of the remaining stock of Banner not already owned by
the Company. Currently, the Company owns approximately 85% of Banner's
capital stock, consisting of Banner common stock and Banner preferred
stock, and public shareholders own the remainder. The merger agreement is
subject to approval by Banner stockholders, and certain other conditions
being satisfied or waived. Pursuant to the merger agreement, each
outstanding share of Banner's common stock, other than shares owned by the
Company and its affiliates, will be converted into the right to receive
$11.00 in market value of newly issued shares of the Company's Class A
Common Stock. The merger consideration is subject to adjustments based on
the price of the Company's Class A Common Stock and the value of certain
shares of AlliedSignal common stock owned by Banner. The Company and Banner
believe that combining will more closely coordinate the activities of the
two companies. In addition, the Company expects that the merger will
provide opportunities for reducing expenses, including saving the costs of
operating Banner as a separate public company. After the merger, Banner
will be a wholly-owned subsidiary of Fairchild.
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. and
the majority owner of Banner Aerospace, Inc. RHI is the owner of 100% of
Fairchild Holding Corp. The Company's principal operations are conducted
through Banner and FHC. The Company holds a significant equity interest in
Nacanco Paketleme, 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 a leading worldwide aerospace and industrial fastener
manufacturer and distributor. Through its 83% owned subsidiary, Banner, the
Company is also 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 has become
one of the leading aircraft parts suppliers to aircraft manufacturers and
aerospace hardware distributors.
The Company's aerospace business consists of two segments: aerospace
fasteners and aerospace parts distribution. The aerospace fasteners segment
manufactures and markets high performance fastening systems used in the
manufacture 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, fixed-base
operators, corporate aircraft operators and other aerospace companies.
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 $14.0 million, which
exceeded the fair value of the net assets of AS+C by approximately $8.1
million, which is 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 ("OEMs") market.
On March 2, 1998, the Company consummated the acquisition of Edwards
and Lock Management Corporation, doing business as Special-T Fasteners, in
a business combination accounted for as a purchase. The cost of the
acquisition was approximately $50.0 million, of which 50.1% of the
contractual purchase price for the acquisition 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 $23.6 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,
government agencies, OEMs, and other distributors.
On January 13, 1998, Banner completed the disposition of substantially
all of the assets and certain liabilities of certain subsidiaries to
AlliedSignal Inc., in exchange for shares of AlliedSignal Inc. common stock
with an aggregate value equal to $369 million. The assets transferred to
AlliedSignal Inc. consisted primarily of Banner's hardware group, which
included 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 AlliedSignal Inc. 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 December 31, 1998, Banner consummated the sale of Solair, Inc.,
it's largest subsidiary in the rotables group, to Kellstrom Industries,
Inc., in exchange for approximately $60.4 million in cash and a warrant to
purchase 300,000 shares of common stock of Kellstrom. In December 1998,
Banner recorded a $19.3 million pre-tax loss from the sale of Solair. This
loss was included in cost of goods sold as it was primarily attributable to
the bulk sale of inventory at prices below the carrying amount of
inventory.
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 and six months ended December 27,
1998 and December 28, 1997, respectively.
(In thousands) Three Six
Months Months
Ended Ended
12/28/9 12/27/9 12/28/9 12/27/9
7 8 7 8
Sales by Segment:
Aerospace Fasteners $ $ $ $
91,014 102,764 167,861 199,322
Aerospace Distribution
119,614 46,838 242,528 97,366
Corporate and Other
1,362 1,579 2,724 3,032
Intersegment Eliminations
(a) (3,374) - (10,135 -
)
TOTAL SALES $ $ $ $
208,616 151,181 402,978 299,720
Operating Results by
Segment:
Aerospace Fasteners $ $ $ $
6,382 10,647 8,892 18,477
Aerospace Distribution
7,714 (17,285 17,085 (15,567
) )
Corporate and Other
(871) (3,582) 204 (7,491)
OPERATING INCOME (LOSS) $ $ $ $
13,225 (10,220 26,181 (4,581)
)
(a) Represents intersegment sales from the Aerospace Fasteners segment to
the Aerospace Distribution segment.
The following table illustrates sales and operating income of the
Company's operations by segment, on an unaudited pro forma basis, as though
the divestitures of Banner's hardware group and Solair, and the
acquisitions of Special-T and AS+C had been in effect for the three and six
months ended December 28, 1997, and the divestiture of Solair had been in
effect for the three and six months ended December 27, 1998. 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.
(In thousands) Three Six
Months Months
Ended Ended
12/28/9 12/27/9 12/28/9 12/27/9
7 8 7 8
Sales by Segment:
Aerospace Fasteners $ $ $ $
98,391 102,764 184,215 199,322
Aerospace Distribution
34,710 34,946 72,733 69,047
Corporate and Other
1,362 1,579 2,724 3,032
TOTAL SALES $ $ $ $
134,463 139,289 259,672 271,401
Operating Results by
Segment:
Aerospace Fasteners $ $ $ $
8,011 10,647 12,480 18,477
Aerospace Distribution
1,849 1,652 5,574 3,575
Corporate and Other
(1,505) (3,582) (265) (7,491)
OPERATING INCOME $ $ $ $
8,355 8,717 17,789 14,561
Net sales of $151.2 million in the second quarter of fiscal 1999
decreased by $57.4 million, or 27.5%, compared to sales of $208.6 million
in the second quarter of fiscal 1998. Net sales of $299.7 million in the
first six months of fiscal 1999 decreased by $103.3 million, or 25.6%,
compared to sales of $403.0 million in the first six months of fiscal 1998.
This decrease is primarily attributable to the loss of revenues resulting
from the disposition of Banner's hardware group. Approximately 2.3% of the
fiscal 1999 second quarter and 2.9% of the current six months sales growth
was stimulated by the commercial aerospace industry. Recent acquisitions
contributed approximately 3.5% and 4.1% to sales growth in the fiscal 1999
second quarter and six-month periods, respectively. While divestitures
decreased growth by approximately 33.4% and 32.6% in the fiscal 1999 second
quarter and six-month periods, respectively. On a pro forma basis, net
sales increased 3.6% and 4.5% for the three and six months ended December
27, 1998, respectively, compared to the same periods ended December 28,
1997.
Gross margin as a percentage of sales was 11.9% and 17.6% in the three
and six months ended December 27, 1998, respectively. Included in cost of
goods sold was a charge of $19.3 million recognized on the sale of Solair.
This charge was attributable primarily to the bulk sale of inventory at
prices below the carrying amount of the inventory. Excluding this charge,
gross margin as a percentage of sales was 20.3% and 24.7% in the second
quarter of fiscal 1998 and 1999, respectively, and 25.6% and 24.0% in the
first six months of fiscal 1998 and 1999, respectively. The lower margins
in the fiscal 1999 period are attributable to a change in product mix in
the Aerospace Distribution segment as a result of the disposition of
Banner's hardware group. Partially offsetting the overall lower margins was
an improvement in margins within the Aerospace Fasteners segment resulting
from acquisitions, 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 was
20.3% and 18.0% in the second quarter of fiscal 1998 and 1999,
respectively, and 19.6% and 18.5% in the six month period of fiscal 1998
and 1999, respectively. The improvement in the fiscal 1999 periods is
attributable primarily to administrative efficiencies of the Company's
ongoing operations.
Other income decreased $3.8 million in the first six months of fiscal
1999, compared to the first six months of fiscal 1998. The Company
recognized $4.4 million of income in the prior period from the involuntary
conversion of air rights over a portion of the property the Company owns
and is developing in Farmingdale, New York.
Operating income for the six months ended December 27, 1998 decreased
$30.8 million from the comparable prior period, of which $19.3 million was
a charge attributable primarily to the bulk sale of inventory at prices
below the carrying amount of the inventory. Excluding the charge related
to the sale of Solair in the current period, operating income would have
been $9.1 million in the second quarter of fiscal 1999, a decrease of 31.2%
compared to operating income of $13.2 million in the second quarter of
fiscal 1998. Excluding the charge related to the sale of Solair in the
current period, Operating income would have been $14.7 million in the first
six months of fiscal 1999, a decrease of 43.7% compared to operating income
of $26.2 million in the fiscal 1998 six-month period. The decreases are
primarily attributable to the loss of operating income resulting from the
disposition of Banner's hardware group and the decrease in other income.
Net interest expense decreased $7.9 million, or 51.9%, in second
quarter of fiscal 1999, compared to the second quarter of fiscal 1998. Net
interest expense decreased $13.6 million, or 49.0%, in first six months of
fiscal 1999, compared to the same period of fiscal 1998. The decreases in
the current year were due to a series of transactions completed in fiscal
1998, which significantly reduced the Company's total debt.
Investment income (loss) improved by $6.0 million in the first six
months of fiscal 1999, compared to the same period of fiscal 1998, due to
recognizing realized gains in the fiscal 1999 period while recording
unrealized holding losses on fair market adjustments of trading securities
in the fiscal 1998 period.
Minority interest improved by $4.0 million in the first six months of
fiscal 1999 due to losses reported by Banner in the fiscal 1999 periods
primarily resulting from the divestiture of Solair, Inc.
An income tax benefit of $6.4 million in the first six months of
fiscal 1999 represented a 36.0% effective tax rate on pre-tax losses from
continuing operations. The tax provision was slightly higher than the
statutory rate because amortization of goodwill is not deductible for
income tax purposes.
Included in loss from discontinued operations for the six months ended
December 28, 1997, are the results of Fairchild Technologies
("Technologies") and the Company's equity in earnings of STFI prior to the
STFI Merger. The Company reported a $30.0 million after-tax gain on
disposal of discontinued operations in the fiscal 1998 periods resulting
from the disposition of a portion of its investment in STFI. The Company
reported a $9.2 million loss on disposal of discontinued operations in the
fiscal 1999 periods. This charge is the result of the after-tax operating
loss from Technologies exceeding the previous estimate for expected losses
from disposal by $2.9 million through December 1998, and the Company taking
an additional $6.2 million after-tax charge based on the current estimate
of remaining losses in connection with the disposition. While the Company
believes that $6.2 million is a reasonable charge for the remaining
expected losses in connection with the disposition of Technologies, there
can be no assurance that this estimate is adequate.
In the fiscal 1998 periods ended December 28, 1997, the Company
recorded a $3.0 million extraordinary loss, net, from the write-off of
deferred loan fees associated with the early extinguishment of credit
facilities that were significantly modified and replaced as part of a
refinancing.
Comprehensive income (loss) includes foreign currency translation
adjustments and unrealized holding changes in the fair market value of
available-for-sale investment securities. Foreign currency translation
adjustments increased by $2.3 million and $7.6 million in the three and six
months ended December 27, 1998. The fair market value of unrealized holding
securities increased by $27.6 million in the second quarter and declined by
$2.8 million in the six months ended December 27, 1998. The changes reflect
primarily market fluctuations in the value of AlliedSignal common stock,
which the Company received from the disposition of Banner's hardware group.
Segment Results
Aerospace Fasteners Segment
Sales in the Aerospace Fasteners segment increased by $11.8 million in
the second quarter of fiscal 1999 and $31.5 million in the first six months
of fiscal 1999, compared to same periods of fiscal 1998, reflecting growth
experienced in the commercial aerospace industry combined with the effect
of acquisitions. Approximately 4.8% and 9.0% of the increase in sales
resulted from internal growth in the current quarter and six-month period,
respectively, while acquisitions contributed approximately 8.1% and 9.7% of
the increase in the current quarter and six-month period, respectively. New
orders have leveled off in recent months. Backlog was reduced to $158
million at December 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 by 4.4% and 8.2% in the second quarter and first
six months of fiscal 1999, respectively, compared to the same periods of
the prior year.
Operating income improved by $4.3 million, or 66.8%, in the second
quarter and $9.6 million, or 108%, in the first six months of fiscal 1999,
compared to the fiscal 1998 periods. Acquisitions and marketing changes
contributed to this improvement. Approximately 67.4% of the increase in
operating income during the first six months of fiscal 1999 reflected
internal growth, while acquisitions contributed approximately 40.4% to the
increase. On a pro forma basis, operating income increased by 32.9% and
48.1%, for the quarter and six months ended December 27, 1998,
respectively, compared to the quarter and six months ended December 28,
1997.
Aerospace Distribution Segment
Aerospace Distribution sales decreased by $72.8 million, or 60.8% in
the second quarter and $145.2 million, or 59.9%, for the fiscal 1999 six-
month period, compared to the fiscal 1998 periods, due primarily to the
loss of revenues as a result of the disposition of Banner's hardware group.
Approximately 58.4% of the decrease in sales in the current six-month
period resulted from divestitures, and approximately 1.5% resulted from a
decrease in internal growth. On a pro forma basis, excluding sales
contributed by dispositions, sales increased 0.7% in the second quarter and
decreased 5.1% in the first six months of fiscal 1999, compared to the same
periods in the prior year.
Operating income for the three and six months ended December 27, 1998
decreased by $25.0 million and $32.7 million, respectively as compared to
the prior periods. Included in the current period results was a charge of
$19.3 million attributable primarily to the bulk sale of inventory at
prices below the carrying amount of the inventory. Excluding this charge
related to the sale of Solair in the current period, operating income would
have decreased $5.7 million in the second quarter and $13.3 million in the
first six months of fiscal 1999, compared to the same periods of the prior
year, due primarily to the disposition of Banner's hardware group. On a pro
forma basis, excluding results from dispositions, operating income
decreased $0.2 million in the second quarter and $2.0 million in the first
six months of fiscal 1999, compared to the same periods of the prior year.
Corporate and Other
The Corporate and Other classification includes the Gas Springs
Division and corporate activities. The group reported a slight improvement
in sales in the fiscal 1999 periods, compared to fiscal 1998 periods. An
operating loss of $7.5 million in the first six months of fiscal 1999 was
$7.7 million lower than operating income of $0.2 million reported in the
first six months of fiscal 1998. The comparable period in the prior year
included other income of $4.4 million realized as a result of the sale of
air rights over a portion of the property the Company owns and is
developing in Farmingdale, New York and a decline in legal expenses.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of June 30, 1998 and December 27, 1998
amounted to $789.6 million and $743.1 million, respectively. The changes in
capitalization included an decrease in debt of $12.6 million and a decrease
in equity of $33.9 million. The decrease in debt was the result proceeds
received from the divestiture of Solair used to reduce debt, offset
partially from additional borrowings for investment purposes and the
purchase of some of the Company's common stock. The decrease in equity was
due primarily to a $22.1 million purchase of treasury stock and the $16.8
million reported loss, offset partially by a $4.8 million increase in
cumulative other comprehensive income.
The Company maintains a portfolio of investments classified as
available-for-sale securities, which had a fair market value of $252.7
million at December 27, 1998. The market value of these investments
decreased $2.8 million in the first six months of fiscal 1999. While there
is risk associated with market fluctuations inherent to stock investments,
and 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. In the six months ended December 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 six months ended
December 28, 1997 and December 27, 1998 was $91.8 million and $36.8
million, respectively. The primary use of cash for operating activities in
the first six months of fiscal 1999 was a decrease of $47.5 million in
accounts payable and accrued liabilities, and increases in inventories of
$20.1 million and other non-current assets of $17.6 million. Partially
offsetting the use of cash from operating activities was a $30.2 increase
in other non-current liabilities and a $13.6 million decrease in accounts
receivable. In the first six months of fiscal 1998 the primary use of cash
for operating activities was a $33.7 million increase in inventories, $16.6
million increase in other current assets and accounts receivable of $7.3
million and a $35.0 million decrease in accounts payable and other accrued
liabilities.
Net cash provided from investing activities for the six months ended
December 27, 1998 and December 28, 1997, amounted to $59.5 million and
$34.5 million, respectively. In the first six months of fiscal 1999, the
primary source of cash from investing activities was $57.0 million of net
proceeds received from disposition of Solair, Inc., offset partially by
$16.0 million of capital expenditures and $15.6 million used to purchase
investments. In the first six months of fiscal 1998, the primary source of
cash from investing activities were $84.7 million of net proceeds received
from investment liquidations in STFI, offset partially by $16.0 million of
capital expenditures.
Net cash provided by (used for) financing activities for the six
months ended December 27, 1998 and December 28, 1997, amounted to $52.5
million and $(35.4) million, respectively. Cash used for financing
activities in the first six months of fiscal 1999 included a $69.4 million
repayment of debt and the $22.1 million purchase of treasury stock, offset
partially by a $55.8 million net increase from the issuance of additional
debt. The primary source of cash provided by financing activities in the
first six months of fiscal 1998 was the net proceeds received from the
issuance of additional stock of $53.7 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 postretirement benefits,
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.
Proposed Mergers
On December 28, 1998, the Company announced that it had signed a
definitive merger agreement to acquire Kaynar Technologies Inc.
(''Kaynar''), an aerospace and industrial fastener manufacturer and tooling
company, through a merger of Kaynar with a wholly-owned subsidiary of the
Company. The purchase price is $239 million for Kaynar common and preferred
stock, $28 million for a covenant not to compete from the majority Kaynar
shareholder, and the Company will assume approximately $98 million of
Kaynar's debt. A majority of the holders of all classes of Kaynar stock
have agreed to vote in favor of the merger. The transaction is subject to
certain conditions, including financing and regulatory approval.
On January 11, 1999, the Company reached an agreement and plan of
merger to acquire all of the remaining stock of Banner not already owned by
the Company. Currently, the Company owns approximately 85% of Banner's
capital stock, consisting of Banner common stock and Banner preferred
stock, and public shareholders own the remainder. The merger agreement is
subject to approval by Banner stockholders, and certain other conditions
being satisfied or waived. Pursuant to the merger agreement, each
outstanding share of Banner's common stock, other than shares owned by the
Company and its affiliates, will be converted into the right to receive
$11.00 in market value of newly issued shares of the Company's Class A
Common Stock. The merger consideration is subject to adjustments based on
the price of the Company's Class A Common Stock and the value of certain
shares of AlliedSignal common stock owned by Banner. The Company and Banner
believe that combining will more closely coordinate the activities of the
two companies. In addition, the Company expects that the merger will
provide opportunities for reducing expenses, including saving the costs of
operating Banner as a separate public company. After the merger, Banner
will be a wholly-owned subsidiary of Fairchild.
Discontinued Operations
For the Company's fiscal years ended June 30, 1996, 1997, 1998, and
for the first six months of fiscal 1999, Fairchild Technologies
("Technologies") had pre-tax operating losses of approximately $1.5
million, $3.6 million, $48.7 million, and $16.1 million, respectively. In
response, in February 1998, the Company adopted a formal plan to enhance
the opportunities for disposition of Technologies, while improving the
ability of Technologies to operate more efficiently. The plan includes a
reduction in production capacity, work force, and the pursuit of potential
vertical and horizontal integration with peers and competitors of
Technologies. The Company believes that it may be required to contribute
substantial additional resources to provide Technologies with the liquidity
necessary to continue operating before such integration is completed.
Uncertainty of the Spin-Off
In order to focus its operations on the aerospace industry, the
Company has been considering for some time distributing (the ''Spin-Off'')
to its stockholders certain of its assets via distribution of all of the
stock of Fairchild Industrial Holdings Corp. (''FIHC''), which may own all
or a substantial part of the Company's non-aerospace operations. The
Company is still in the process of deciding the exact composition of the
assets and liabilities to be included in FIHC, but such assets would be
likely to include certain real estate interests and the Company's 31.9%
interest in Nacanco Paketleme (the largest producer of aluminum cans in
Turkey). The ability of the Company to consummate the Spin-Off, if it
should choose to do so, would be contingent, among other things, on
obtaining consents and waivers under the Company's credit facility and all
necessary governmental and third party approvals. There is no assurance
that the Company will be able to obtain the necessary consents and waivers
from its lenders. 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. There can be no assurance that the Spin-Off will occur.
Depending on the ultimate structure and timing of the Spin-Off, it may
be a taxable transaction to stockholders of the Company and could result in
a material tax liability to the Company and its stockholders. The amount of
the tax to the Company and the shareholders is uncertain, and if the tax is
material to the Company, the Company may elect not to consummate the Spin-
Off. Because circumstances may change and 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 stockholders, or elect not to consummate the Spin-Off.
Pursuant to the Spin-Off, it is expected that FIHC may assume certain
liabilities (including contingent liabilities) of the Company and may
indemnify the Company for such liabilities. In the event that FIHC is
unable to satisfy the liabilities, which it will assume in connection with
the Spin-Off, the Company may have to satisfy such liabilities.
Year 2000
As the end of the century nears, there is a widespread concern that
many existing data processing devices 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 properly modified, these data
processing devices could fail, create erroneous results, or cause
unanticipated systems failures, among other problems. In response, the
Company has developed a worldwide Year 2000 readiness plan that is divided
into a number of interrrelated and overlapping phases. These phases include
corporate awareness and planning, readiness assessment, evaluation and
prioritization of solutions, implementation of remediation, validation
testing, and contingency planning. Each is discussed below.
Awareness. In the corporate awareness and planning phase, the Company
formed a Year 2000 project group under the direction of the Company's Chief
Financial Officer, identified and designated key personnel within the
Company to coordinate its Year 2000 efforts, and retained the services of
outside technical review and modification consultants. The project group
prepared an overall schedule and working budget for the Company's Year 2000
plan. The Company has completed this phase of its Year 2000 plan. The
Company evaluates its information technology applications regularly, and
based on such evaluation revises the schedule and budget to reflect the
progress of the Company's Year 2000 readiness efforts. The Chief Financial
Officer regularly reports to the Company's management and the audit
committee of the board of directors on the status of the Year 2000 project.
Assessment. In the readiness assessment phase, the Company, in
coordination with its technical review consultants, has been evaluating the
Company's Year 2000 preparedness in a number of areas, including its
information technology infrastructure, external resources, physical plant
and production facilities, equipment and machinery, products and inventory.
The Company has substantially completed this phase of its Year 2000 Plan.
However, the Company is continuing to assess the extent and implications
relating to product inventories maintained by Fairchild Technologies that
include embedded data processing technology. In addition, pending the
completion of all validation testing, the Company continues to review all
aspects of its Year 2000 preparedness on a regular basis. In this respect,
we have designated officers at each business segment to provide regular
assessment updates to our outside consultants. These consultants are
assimilating a range of alternative methods to complete each phase of our
Year 2000 plan and are reporting regularly their findings and conclusions
to the Company's Chief Financial Officer.
Evaluation. In the evaluation and prioritization of solutions phase,
the Company seeks to develop potential solutions to the Year 2000 issues
identified in the Company's readiness assessment phase, consider those
solutions in light of the Company's other information technology and
business priorities, prioritize the various remediation tasks, and develop
an implementation schedule. This phase is ongoing and will not be completed
until after October 31, 1999, when all validation testing is anticipated to
be completed. However, identified problems are corrected as soon as
practicable after identification. To date, the Company has not identified
any major information technology system or non-information technology
system that it must replace in its entirety for Year 2000 reasons. The
Company has also determined that most of the Year 2000 issues identified in
the assessment phase can be addressed satisfactorily through system
modifications, component upgrades and software patches. Thus, the Company
does not presently anticipate incurring any material systems replacement
costs relating to the Year 2000 issues.
Implementation. In the implementation of remediation phase, the
Company, with the assistance of its technical review and modification
consultants, began to implement the proposed solutions to any identified
Year 2000 issues. The solutions include equipment and component upgrades,
systems and software patches, reprogramming and resetting machines, and
other modifications. Substantially all of the material systems within the
aerospace fasteners and aerospace distribution segments of the Company's
business are currently Year 2000 ready. However, the Company is continuing
to evaluate and implement Year 2000 modifications to embedded data
processing technology in certain manufacturing equipment used in its
aerospace fasteners segment. At Fairchild Technologies, the Company
intends, but has no specific plan, to replace and upgrade a number of its
systems that are not Year 2000 compliant.
Testing. In the validation testing phase, Fairchild seeks to evaluate
and confirm the results of its Year 2000 remediation efforts. In conducting
its validation testing, the Company is using, among other things,
proprietary testing protocols developed internally and by the Company's
technical review and modification consultants, as well as testing tools
such as Greenwich Mean Time's Check 2000 and SEMATECH's Year 2000 Readiness
Testing Scenarios Version 2.0. The Greenwich tools identify potential Year
2000-related software and data problems, and the SEMATECH protocols
validate the ability of data processing systems to rollover and hold
transition dates. Testing for the aerospace fasteners segment is
approximately 20 percent complete, and testing for the aerospace
distribution segment is approximately 30 to 40 percent complete. To date,
the results of the Company's validation testing have not revealed any new
and significant Year 2000 issues or any ineffective remediation. The
Company expects to complete testing of its most critical information
technology and related systems by June 30, 1999.
Contingency Planning. In the contingency planning phase, the Company,
together with its technical review consultants, is assessing the Year 2000
readiness of its key suppliers, distributors, customers and service
providers. Toward that objective, the Company has sent letters,
questionnaires and surveys to its business partners, inquiring about their
Year 2000 readiness arrangements. The average response rate to date has
been approximately 40%, but all of our most significant business partners
have responded to our inquiries. In this phase, the Company also began to
evaluate the risks to the Company that its failure or the failure of others
to be Year 2000 ready would cause a material disruption to, or have a
material effect on, the Company's financial condition, business or
operations. So far, we have identified only our aerospace fasteners MRP
system as being both mission critical and potentially at risk. In
mitigation of this concern, we have engaged a consultant to test and
evaluate the manufacturer-designed Year 2000 patches for the system. This
testing has only recently commenced, but no significant problems have been
identified. The Company also is developing and evaluating contingency plans
to deal with events arising from significant Year 2000 issues outside of
our infrastructure. In this regard, the Company is considering the
advisability of augmenting its inventories of certain raw materials and
finished products, securing additional sources for certain supplies and
services, arranging for back-up utilities, and exploring alternate
distribution and sales channels, among other things.
The following chart summarizes the Company's progress, by phase and
business segment, in completing its Year 2000 plan:
Percentage of Year 2000 Plan Completed
(By Phase and Business Segment)
Quarte
r
Ended
Sept. Dec. Mar. June Sept. Dec. Work
28, 28, 29, 30, 27, 27,
1997 1997 1998 1998 1998 1998 Remaini
ng
Awareness:
Aerospace 50% 100% 100% 100% 100% 100% 0%
Fasteners
Aerospace 100 100 100 100 100 100 0
Distribution
Assessment:
Aerospace 25 50 75 100 100 0
Fasteners
Aerospace 0 0 0 50 100 0
Distribution
Evaluation:
Aerospace 0 70 30
Fasteners
Aerospace 20 100 0
Distribution
Implementation:
Aerospace 50 50
Fasteners
Aerospace 40 60
Distribution
Testing:
Aerospace 20 80
Fasteners
Aerospace 30-40 60-70
Distribution
Contingency
Planning:
Aerospace 0 20 80
Fasteners
Aerospace 25 50 50
Distribution
The following chart summarizes the total costs incurred by the Company
as of December 27, 1998, by business segment, to address Year 2000 issues,
and the total costs the Company reasonably anticipates incurring during
1999 relating to the Year 2000 issue.
Year 2000 Costs Anticipated Year 2000
as of Costs
December 27, During the Next Twelve
1998 Months
Aerospace Fasteners $250,000 $2,000,000
Aerospace Distribution $550,000 $ 100,000
The Company has funded the costs of its Year 2000 plan from general
operating funds, and all such costs have been deducted from income. To
date, the costs associated with the Company's Year 2000 efforts have not
had a material effect on, and have caused no delays with respect to, our
other information technology programs or projects.
The Company anticipates that it will complete its Year 2000
preparations by October 31, 1999. Although the Company's Year 2000
assessment, evaluation, implementation, testing and contingency planning
phases are not yet complete, the Company does not currently believe that
Year 2000 issues will materially affect its business, results of operations
or financial condition. However, in some international markets in which the
Company conducts business, the level of awareness and remediation efforts
by third parties, utilities and infrastructure managers relating to the
Year 2000 issue may be less advanced than in the United States, which
could, despite the Company's efforts, have an adverse effect on us. If the
Company's Year 2000 programs are not completed on time, or its mission
critical systems are not Year 2000 ready, the Company could be subject to
significant business interruptions, and could be liable to customers and
other third parties for breach of contract, breach of warranty,
misrepresentation, unlawful trade practices and other claims.
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.
Expecte
d
Fiscal
Year
Maturit
y Date
Thereaf
1999 2000 2001 2002 2003 ter
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 - 4.99% 4.80% - - 5.44%
rate
Fair Market Value - (88) (731) - - (9,828)
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
*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: March 25, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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