9
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 March 28, 1999
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
Incorporation or organization) No.)
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 March 28, 1999
Class A Common Stock, $0.10 Par Value 19,222,606
Class B Common Stock, $0.10 Par Value 2,624,062
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1.Condensed Consolidated Balance Sheets as of June 30, 1998 and
March 28, 1999 (Unaudited) 3
Consolidated Statements of Earnings (Unaudited) for the Three
and Nine Months ended March 29, 1998 and March 28, 1999 5
Condensed Consolidated Statements of Cash Flows (Unaudited)for
the Nine Months ended March 29, 1998 and March 28, 1999 7
Notes to Condensed Consolidated Financial Statements (Unaudited) 8
Item 2.Management's Discussion and Analysis of Results of Operations
and Financial Condition 14
Item 3.Quantitative and Qualitative Disclosure About Market Risk 24
PART II. OTHER INFORMATION
Item 1.Legal Proceedings 25
Item 5.Other Information 25
Item 6.Exhibits and Reports on Form 8-K 25
* For purposes of Part I of 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
<TABLE>
ITEM 1. FINANCIAL STATEMENTS
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1998 and March 28, 1999 (Unaudited)
(In thousands)
ASSETS
<CAPTION>
June 30, March 28,
ASSETS 1998 1999
(*)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, $746 and $0
restricted $ 49,601 $ 167,346
Short-term investments 3,962 3,777
Accounts receivable-trade, less 120,284 101,731
allowances of $5,655 and $3,149
Inventories:
Finished goods 187,205 136,918
Work-in-process 20,642 21,639
Raw materials 9,635 8,416
217,482 166,973
Net current assets of discontinued
operations 11,613 -
Prepaid expenses and other current 53,081 48,267
assets
Total Current Assets 456,023 488,094
Property, plant and equipment, net of
accumulated
Depreciation of $82,968 and $99,896 118,963 122,876
Net assets held for sale 23,789 20,625
Net noncurrent assets of discontinued 8,541
operations -
Cost in excess of net assets acquired
(Goodwill), less
accumulated amortization of $42,079 168,307 167,164
and $46,081
Investments and advances, affiliated 27,568 29,209
companies
Prepaid pension assets 61,643 62,597
Deferred loan costs 6,362 6,377
Long-term investments 235,435 42,441
Other assets 50,628 75,448
TOTAL ASSETS $1,157,259 $1,014,831
*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 March 28, 1999 (Unaudited)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
June 30, March 28,
1998 1999
<S> <C> <C>
CURRENT LIABILITIES: (*)
Bank notes payable and current
maturities of long-term debt $ 20,665 $ 34,020
Accounts payable 53,859 31,942
Other accrued liabilities 92,743 71,158
Income taxes 28,311 15,760
Net current liabilities of discontinued
operations - 7,985
Total Current Liabilities 195,578 160,865
LONG-TERM LIABILITES:
Long-term debt, less current maturities 295,402 227,475
Other long-term liabilities 23,767 26,303
Retiree health care liabilities 42,103 43,356
Noncurrent income taxes 95,176 104,635
Minority interest in subsidiaries 31,674 30,502
TOTAL LIABILITIES 683,700 593,136
STOCKHOLDERS' EQUITY:
Class A common stock, $0.10 par value;
authorized
40,000 shares, 26,747 (26,679 in June)
shares issued and
19,257 (20,429 in June) shares 2,667 2,674
outstanding
Class B common stock, $0.10 par value;
authorized 20,000
shares, 2,622 (2,625 in June) shares 263 262
issued and outstanding
Paid-in capital 195,112 195,679
Retained earnings 311,039 294,911
Cumulative other comprehensive income 16,386 2,179
Treasury stock, at cost, 7,490 (6,250 in (51,908) (74,010)
June) shares of Class A
common stock
TOTAL STOCKHOLDERS' EQUITY 473,559 421,695
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,157,259 $1,014,831
*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) and Nine (9) Months Ended March 29, 1998 and March 28,
1999
(In thousands, except per share data)
<CAPTION>
Three Months Nine Months
Ended Ended
3/29/98 3/28/99 3/29/98 3/28/99
<S> <C> <C> <C> <C>
REVENUE:
Net sales $164,164 $ 146,352 $ 567,142 $446,072
Other income, net 847 704 5,451 1,473
165,011 147,056 572,593 447,545
COSTS AND EXPENSES:
Cost of goods sold 126,374 109,462 426,201 356,448
Selling, general & administrative 28,219 28,049 107,187 83,495
Amortization of goodwill 1,573 1,364 4,179 4,002
156,166 138,875 537,567 443,945
OPERATING INCOME 8,845 8,181 35,026 3,600
Interest expense 9,369 7,075 38,027 22,281
Interest income (587) (267) (1,501) (1,326)
Net interest expense 8,782 6,808 36,526 20,955
Investment income (loss) 234 36,876 (4,946) 37,710
Nonrecurring gain on disposal of
subsidiary 123,991 - 123,991 -
Earnings from continuing operations
before taxes 124,288 38,249 117,545 20,355
Income tax provision (52,295) (13,749) (48,432) (7,316)
Equity in earnings of affiliates,
net 330 132 1,709 1,821
Minority interest, net (21,905) (4,249) (23,780) (2,114)
Earnings from continuing operations 50,418 20,383 47,042 12,746
Loss from discontinued operations,
net (1,578) - (4,260) -
Gain (loss) on disposal of
discontinued operations, net 46,548 (19,694) 76,522 (28,874)
Extraordinary items, net (3,701) - (6,725) -
NET EARNINGS (LOSS) $ 91,687 $ 689 $112,579 $(16,128)
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustments (2,178) (6,139) (3,750) 1,413
Unrealized holding changes on
securities arising during the period 14,540 (12,865) 14,540 (15,620)
Other comprehensive income (loss) 12,362 (19,004) 10,790 (14,207)
COMPREHENSIVE INCOME (LOSS) $104,049 $(18,315) $123,369 $(30,335)
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) and Nine (9) Months Ended March 29, 1998 and March 28,
1999
(In thousands, except per share data)
<CAPTION>
Three Months Nine Months
Ended Ended
3/29/98 3/28/99 3/29/98 3/28/99
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Earnings from continuing operations $ 2.52 $ 0.93 $ 2.62 $ 0.58
Loss from discontinued operations,
net (0.08) - (0.24) -
Gain (loss) on disposal of
discontinued operations, net 2.32 (0.90) 4.27 (1.30)
Extraordinary items, net (0.18) - (0.37) -
NET EARNINGS (LOSS) $ 4.58 $ 0.03 $ 6.28 $ (0.72)
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustments $ (0.11) $ (0.28)$ (0.21)$ 0.06
Unrealized holding changes on
securities arising during the period 0.73 (0.59) 0.81 (0.71)
Other comprehensive income (loss) 0.62 (0.87) 0.60 (0.65)
COMPREHENSIVE INCOME (LOSS) $ 5.20 $ (0.84)$ 6.88 $ (1.37)
DILUTED EARNINGS PER SHARE:
Earnings from continuing operations $ 2.41 $ 0.92 $ 2.50 $ 0.57
Loss from discontinued operations,
net (0.08) - (0.23) -
Gain (loss) on disposal of
discontinued operations, net 2.22 (0.89) 4.07 (1.28)
Extraordinary items, net (0.18) - (0.36) -
NET EARNINGS (LOSS) $ 4.37 $ 0.03 $ 5.98 $ (0.71)
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustments $ (0.10) $ (0.28)$ (0.20)$ 0.06
Unrealized holding changes on
securities arising during the period 0.69 (0.58) 0.77 (0.69)
Other comprehensive income (loss) 0.59 (0.86) 0.57 (0.63)
COMPREHENSIVE INCOME (LOSS) $ 4.96 $ (0.83)$ 6.55 $ (1.34)
Weighted average shares outstanding:
Basic 20,036 21,872 17,938 22,129
Diluted 20,922 22,165 18,813 22,552
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 Nine (9) Months Ended March 29, 1998 and March 28, 1999
(In thousands)
<CAPTION>
For the Nine Months Ended
3/29/98 3/28/99
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $112,579 $(16,128)
Depreciation and amortization 16,480 17,371
Amortization of deferred loan fees 2,057 888
Accretion of discount on long-term
liabilities 2,744 3,854
Net (gain) loss on divestiture of
subsidiaries (99,766) -
Net gain on the sale of discontinued
operations (135,736) -
Extraordinary items, net of cash
payments 6,725 -
Distributed earnings of affiliates,
net (165) 3,376
Minority interest 23,780 2,114
Change in assets and liabilities (50,735) (44,431)
Non-cash charges and working capital
changes of discontinued operations 18,083 12,445
Net cash used for operating
activities (103,954) (20,511)
Cash flows from investing activities:
Purchase of property, plant and
equipment (23,706) (18,694)
Acquisition of minority interest in
subsidiaries (26,383) -
Acquisition of subsidiaries, net of
cash acquired (32,404) (3,940)
Net proceeds received from investment
securities 9,202 173,424
Gross proceeds received from the
divestiture of subsidiary - 60,397
Net proceeds received from the sale
of discontinued operations 167,987 -
Changes in net assets held for sale
2,239 3,526
Other, net 180 283
Investing activities of discontinued
operations (3,328) (542)
Net cash provided by investing
activities 93,787 214,454
Cash flows from financing activities:
Proceeds from issuance of debt 178,036 80,127
Debt repayments and repurchase of
debentures, net (177,056) (135,569)
Issuance of Class A common stock 54,176 153
Purchase of treasury stock - (22,101)
Financing activities of discontinued
operations (100) 30
Net cash provided by (used for)
financing activities 55,056 (77,360)
Effect of exchange rate changes on
cash (2,496) 1,162
Net increase in cash and cash
equivalents 42,393 117,745
Cash and cash equivalents, beginning
of the year 19,420 49,601
Cash and cash equivalents, end of the
period $ 61,813 $167,346
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 March 28, 1999 and the
consolidated statements of earnings and cash flows for the nine months
ended March 29, 1998 and March 28, 1999 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 March 28, 1999, 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 March
28, 1999 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 European original equipment manufacturers.
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 of $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 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, 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 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 December 31, 1998, Banner consummated the sale of Solair, Inc., its
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.
On February 22, 1999, the Company used available cash to acquire 77.3%
of SNEP S.A. for approximately $5.0 million, including $1.1 million of debt
assumed, in a business combination accounted for as a purchase. The total
cost of the acquisition exceeded the fair value of the net assets of SNEP
by approximately $3.8 million, which is preliminarily being allocated as
goodwill, and amortized using the straight-line method over 40 years. SNEP
is a French manufacturer of precision machined self-locking nuts and
special threaded fasteners serving the European industrial, aerospace and
automotive markets.
3. DISCONTINUED OPERATIONS
For the Company's fiscal years ended June 30, 1996, 1997, 1998, and
for the first nine months of fiscal 1999, Fairchild Technologies
("Technologies") had pre-tax operating losses of approximately $1.5
million, $3.6 million, $48.7 million, and $25.0 million, respectively. The
after-tax operating loss from Technologies exceeded the June 1998 estimate
recorded for expected losses by $9.2 million through March 1999. An
additional after-tax charge of $19.7 million was recorded in the nine
months ended March 28, 1999, based on a current estimate of the remaining
losses in connection with the disposition of Technologies. While the
Company believes that $19.7 million is a reasonable charge for the
remaining losses to be incurred from Technologies, there can be no
assurance that this estimate is adequate.
During the third quarter of fiscal 1999, the Semiconductor Equipment
Group of Technologies ceased all manufacturing activities, began to dispose
of its production machinery and existing inventory, informed customers and
business partners that it has discontinued operations, significantly
reduced its workforce, and stepped up the level of discussions and
negotiations with other companies regarding the sale of its remaining
assets. Technologies is also exploring several alternative transactions
with potential successors the business of its Optical Disc Equipment Group,
but has made no definitive arrangement for its disposition. 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
nine months ended March 29, 1998, 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 nine months ended March 28, 1999 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 changes in interest expense for
revised debt structures and estimates of changes to goodwill amortization.
The following unaudited 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 are
they indicative of future results of the Company.
<TABLE>
<CAPTION>
For the Nine
Months Ended
March 29, March 28,
1998 1999
<S> <C> <C>
Net sales $413,254 $417,753
Gross profit 93,670 102,971
Earnings (loss) from continuing operations 1,832 22,461
Earnings (loss) from continuing operations,
per basic share $ 0.10 $ 1.02
Earnings (loss) from continuing operations,
per diluted share $ 0.10 $ 1.00
</TABLE>
The pro forma financial information has not been adjusted for
nonrecurring 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 19,257,360 shares of Class A common stock and
2,621,652 shares of Class B common stock outstanding at March 28, 1999.
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 nine months ended March 28, 1999, 40,575 and 14,969 shares of Class A
Common Stock were issued as a result of the exercise of stock options and
the Special-T restricted stock plan, respectively, and shareholders
converted 3,064 shares of Class B common stock into Class A common stock.
In accordance with terms of the Special-T Acquisition, as amended, during
the nine months ended March 28, 1999, 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 March 28, 1999, 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 Nine Months Ended
March 29, March 28,
1998 1999
<S> <C> <C>
Net sales $ 63,615 $ 55,102
Gross profit 23,095 18,603
Earnings from continuing operations 9,769 10,207
Net earnings 9,769 10,207
</TABLE>
The Company owns approximately 31.9% of Nacanco Paketleme common
stock. The Company recorded equity earnings of $2,010 (net of an income
tax provision of $1,083) and $2,105 (net of an income tax provision of
$1,134) from this investment for the nine months ended March 29, 1998 and
March 28, 1999, respectively.
8. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
On March 28, 1999, the Company had $30,502 of minority interest, of
which $29,743 represents Banner. On March 28, 1999, minority shareholders
held approximately 17% of Banner's outstanding common stock. For additional
information regarding our acquisition of all the remaining stock in Banner
the Company did not previously own, please refer to Note 11.
9. EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
3/29/98 3/28/99 3/29/98 3/28/99
<S> <C> <C> <C> <C>
Basic earnings per share:
Earnings from continuing operations $50,418 $20,383 $47,042 $12,746
Common shares outstanding 20,036 21,872 17,938 22,129
Basic earnings from continuing
operations per share $ 2.52 $ 0.93 $ 2.62 $ 0.58
Diluted earnings per share:
Earnings from continuing operations $50,418 $20,383 $47,042 $12,746
Common shares outstanding 20,036 21,872 17,938 22,129
Options 595 208 579 128
Warrants 291 85 296 295
Total shares outstanding 20,922 22,165 18,813 22,552
Diluted earnings from continuing
operations per share $ 2.41 $ 0.92 $ 2.50 $ 0.57
</TABLE>
Subsequent to March 28, 1999 the Company issued 2,981,412 shares of
Class A common stock to shareholders' of Banner as a result of the Banner
Merger (see Note 11). Additionally, participants in Banner's stock option
plans now hold stock options under the Company's plan which entitle them to
purchase 870,315 shares of Class A common stock. These shares were not
included in the earnings per share calculations for the periods ended March
28, 1999 and could be dilutive in subsequent periods. 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 March 28, 1999, the consolidated total recorded liabilities of
the Company for environmental matters was approximately $8.5 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
The KTI Acquisition
On April 20, 1999, the Company completed the acquisition of all of
Kaynar Technologies, Inc. ("KTI") capital stock for approximately $222
million and assumed approximately $103 million of KTI's existing debt, the
majority of which was refinanced at closing. In addition, the Company paid
$28 million for a covenant not to compete from KTI's largest preferred
shareholder. The acquisition was financed with existing cash, the sale of
$225 million of 10 3/4% senior subordinated notes due 2009 (the "Notes")
and a new bank credit facility.
The Banner Merger
On April 8, 1999, the Company acquired the remaining 15% of the
outstanding common and preferred stock of Banner not already owned by the
Company, through the merger (the ''Banner Merger'') of Banner with one of
the Company's subsidiaries. Under the terms of the Banner Merger, each
share of Banner's preferred stock was converted into the right to receive
one share of Banner common stock and each share of Banner common stock
(other than those owned by the Company) was converted into the right to
receive 0.7885 shares of the Company's Class A common stock. The Company
issued 2,981,412 shares of Class A common stock as a result of the Banner
Merger. Banner is now our wholly-owned subsidiary of the Company.
New Credit Facility
Simultaneous with the consummation of the KTI Acquisition and the sale
of the Notes, we entered into a new $325.0 million credit facility (the
''New Credit Facility'') which consists of a $225.0 million term loan, and
a $100.0 million revolving credit facility of which approximately $31.5
million was drawn upon the acquisition of KTI (excluding approximately
$19.0 million of outstanding letters of credit). The term loan bears
interest at LIBOR plus 3.25% and the revolving credit facility bears
interest at LIBOR plus 3.0%. Additionally, the revolving credit facility is
subject to a non-use fee of ??%. The term loan matures on April 30, 2006
and the revolving credit facility matures on April 30, 2005.
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
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 distribution logistics manager and through Banner, an
international supplier to the airlines and general aviation businesses,
distributing a wide range of aircraft parts and related support services.
Through internal growth and strategic acquisitions, we have become one of
the leading suppliers of fasteners to aircraft OEM's such as Boeing,
Lockheed Martin, Northrop Grumman, and the Airbus consortium members,
including, Aerospatiale, DaimlerCrysler Aerospace, British Aerospace and
CASA.
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 parts 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 discussion summarizes certain business combinations
completed by the Company which significantly affect the comparability of
the period to period results presented.
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 OEMs market.
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 of $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 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 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 December 31, 1998, Banner consummated the sale of Solair, Inc., its
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 nine months ended March 29,
1998 and March 28, 1999, respectively.
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended Nine Months Ended
3/29/98 3/28/99 3/29/98 3/28/99
<S> <C> <C> <C> <C>
Sales by Segment:
Aerospace Fasteners $102,857 $103,749 $270,718 $303,071
Aerospace Distribution 60,865 41,082 303,393 138,448
Corporate and Other 1,442 1,521 4,166 4,553
Intersegment Eliminations
(a) (1,000) - (11,135) -
TOTAL SALES $164,164 $146,352 $567,142 $446,072
Operating Results by Segment:
Aerospace Fasteners $ 9,668 $ 10,913 $ 18,560 $ 29,390
Aerospace Distribution 2,085 2,289 19,170 (13,278)
Corporate and Other (2,908) (5,021) (2,704) (12,512)
OPERATING INCOME $ 8,845 $ 8,181 $ 35,026 $ 3,600
(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 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
nine months ended March 29, 1998, and the divestiture of Solair had been in
effect for the three and nine months ended March 28, 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. 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)
Three Months Ended Nine Months Ended
3/29/98 3/28/99 3/29/98 3/28/99
<S> <C> <C> <C> <C>
Sales by Segment:
Aerospace Fasteners $102,857 $103,749 $287,072 $303,071
Aerospace Distribution 38,978 41,082 122,016 110,129
Corporate and Other 1,442 1,521 4,166 4,553
TOTAL SALES $143,277 $146,352 $413,254 $417,753
Operating Results by Segment:
Aerospace Fasteners $ 9,668 $ 10,913 $ 22,148 $ 29,390
Aerospace Distribution 2,199 2,289 7,492 5,864
Corporate and Other (2,439) (5,021) (2,704) (12,512)
OPERATING INCOME $ 9,428 $ 8,181 $ 26,936 $ 22,742
</TABLE>
Net sales of $146.4 million in the third quarter of fiscal 1999
decreased by $17.8 million, or 10.9%, compared to sales of $164.2 million
in the third quarter of fiscal 1998. Net sales of $446.1 million in the
first nine months of fiscal 1999 decreased by $121.1 million, or 21.3%,
compared to sales of $567.1 million in the first nine months of fiscal
1998. The decrease is primarily attributable to the loss of revenues
resulting from the disposition of Banner's hardware group and Solair.
Approximately 2.2% of the current nine months sales growth came from the
commercial aerospace industry. Recent acquisitions contributed
approximately 1.9% and 3.4% to sales growth in the fiscal 1999 third
quarter and nine-month periods, respectively. While divestitures decreased
growth by approximately 12.7% and 27.0% in the fiscal 1999 third quarter
and nine-month periods, respectively. On a pro forma basis, net sales
increased 1.1% for the nine months ended March 28, 1999 compared to the
same period ended March 29, 1998.
Gross margin as a percentage of sales was 20.1% and 24.9% for the nine
months ended March 28, 1999 and March 29, 1998, respectively. Included in
cost of goods sold for the nine months ended March 28, 1999 was a charge of
$19.3 million recognized from 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 24.9% and 24.4% in the first nine 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. Gross margin as a
percentage of sales was 23.0% and 25.2% in the third quarter of fiscal 1998
and 1999, respectively.
Selling, general & administrative expense as a percentage of sales was
18.9% and 18.7% in the nine month period of fiscal 1998 and 1999,
respectively. The improvement in the fiscal 1999 period is attributable
primarily to administrative efficiencies of the Company's ongoing
operations.
Other income decreased $4.0 million in the first nine months of fiscal
1999, compared to the first nine 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 nine months ended March 28, 1999 decreased
$31.4 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
$22.9 million in the first nine months of fiscal 1999, a decrease of 34.6%
compared to operating income of $35.0 million in the fiscal 1998 nine-month
period. Operating income was $8.2 million in the third quarter of fiscal
1999, a decrease of 7.5% compared to operating income of $8.8 million in
the third quarter of fiscal 1998. The decreases are primarily attributable
to the loss of operating income resulting from the disposition of Banner's
hardware group and Solair and the decrease in other income.
Net interest expense decreased $2.0 million, or 22.5%, in the third
quarter of fiscal 1999, compared to the third quarter of fiscal 1998. Net
interest expense decreased $15.6 million, or 42.6%, in first nine 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.
Nonrecurring income of $124.0 million in the three and nine months
ended March 29, 1998 resulted from the disposition of the Banner hardware
group.
Investment income improved by $42.7 million in the first nine months
of fiscal 1999, compared to the same period of fiscal 1998. This
improvement was due primarily to recognizing realized gains on investments
liquidated 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 $21.7 million in the first nine months
of fiscal 1999 as a result of the $124.0 million nonrecurring pre-tax gain
from the disposition of Banner's hardware group in the first nine months of
fiscal 1998.
An income tax provision of $7.3 million in the first nine months of
fiscal 1999 represented a 35.9% effective tax rate on pre-tax earnings from
continuing operations. The tax provision was slightly higher than the
statutory rate because the amortization of goodwill is not deductible for
income tax purposes.
The Company reported a $28.9 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 by $9.2 million through March 1999, and the Company
taking an additional $19.7 million after-tax charge based on the current
estimate of remaining losses in connection with the disposition. While the
Company believes that $19.7 million is a reasonable charge for the
remaining losses to be incurred from Technologies, there can be no
assurance that this estimate is adequate. In the nine months ended March
29, 1998, the Company recorded a $98.8 million gain, net of tax, on
disposal of discontinued operations, from the proceeds received from the
STFI Merger. In the quarter ended March 29, 1998, the Company recorded a
$68.8 million gain, net of tax, on disposal of discontinued operations,
from proceeds received for the common stock of STFI. Partially offsetting
this gain was an after-tax charge of $22.4 million the Company recorded in
the third quarter ended March 29, 1998 in connection with the adoption of a
formal plan for disposition of Technologies.
In the fiscal 1998 nine-month period ended March 29, 1998, the Company
recorded a $6.7 million extraordinary loss, net. The extraordinary loss
resulted from the write-off of deferred loan fees and original issue
discounts associated with the early extinguishment of the Company's
indebtedness pursuant to the repayment of the Company's outstanding public
debt and a significant modification of the Company's credit facilities.
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 decreased by $6.1 million and increased by $1.4 million in the
three and nine months ended March 28, 1999, respectively. The fair market
value of unrealized holding securities declined by $12.9 million in the
third quarter and $15.6 million in the nine months ended March 28, 1999.
The changes reflect primarily realized gains from the liquidation of
investments.
Segment Results
Aerospace Fasteners Segment
Sales in the Aerospace Fasteners segment increased by $0.9 million in
the third quarter of fiscal 1999 and $32.4 million in the first nine 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% of the increase in sales resulted from
internal growth in the current nine-month period, while acquisitions
contributed approximately 3.1% and 7.2% of the increase in the current
quarter and nine-month period, respectively. Internal growth has declined
2.2% in the current quarter. New orders are up 13.2% in the current third
quarter compared to the third quarter of the prior year, however, new
orders leveled off in the recent quarter as compared to the second quarter
of fiscal 1999. Backlog was reduced to $148 million at March 28, 1999, 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 0.9% and
5.6% in the third quarter and first nine months of fiscal 1999,
respectively, compared to the same periods of the prior year.
Operating income improved by $1.2 million, or 12.9%, in the third
quarter and $10.8 million, or 58.4%, in the first nine months of fiscal
1999, compared to the fiscal 1998 periods. Acquisitions and marketing
changes contributed to this improvement. Approximately 37.2% of the
increase in operating income during the first nine months of fiscal 1999
reflected internal growth, while acquisitions contributed approximately
21.2% to the increase. On a pro forma basis, operating income increased by
12.9% and 32.7%, for the quarter and nine months ended March 28, 1999,
respectively, compared to the quarter and nine months ended March 29, 1998.
Aerospace Distribution Segment
Aerospace Distribution sales decreased by $19.8 million, or 32.5% in
the third quarter and $164.9 million, or 54.4%, for the fiscal 1999 nine-
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
and Solair. Divestitures accounted for approximately 50.4% of the decrease
in sales in the current nine-month period, and approximately 3.9% resulted
from a decrease in internal growth. On a pro forma basis, excluding sales
contributed by dispositions, sales increased 5.4% the third quarter and
decreased 9.7% in the first nine months of fiscal 1999, compared to the
same periods in the prior year.
Operating income for the three and nine months ended March 28, 1999
increased by $0.2 million and decreased by $32.4 million, respectively as
compared to the prior periods. Included in the current nine-month results
was a charge of $19.3 million attributable primarily to the bulk sale of
Solair 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 $13.1 million in the first nine
months of fiscal 1999, compared to the same period 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 increased 4.1%
in the third quarter and decreased 21.7% million in the first nine 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 $12.5 million in the first nine months of fiscal 1999 was
$9.8 million higher than the operating loss of $2.7 million reported in the
first nine 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 March 28, 1999 amounted
to $789.6 million and $683.2 million, respectively. The changes in
capitalization included a decrease in debt of $54.6 million and a decrease
in equity of $51.9 million. The decrease in debt was the result primarily
of proceeds received from the divestiture of Solair and proceeds received
from the liquidation of investments used to reduce debt, offset partially
from additional borrowings for 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, the $16.1 million reported loss, and a $14.2 million
change 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 $46.2
million at March 28, 1999. The market value of these investments decreased
$15.6 million in the first nine months of fiscal 1999 due primarily to the
liquidation of investments in which investment income of $37.7 million was
realized. While there is risk associated with market fluctuations inherent
in stock investments, and because the Company's diversification of its
portfolio is small, large swings in the value of the portfolio should be
expected. In the nine months ended March 28, 1999, the Company liquidated
substantially all of its AlliedSignal common stock and subsequently has
used the proceeds therefrom in connection with the acquisition of Kaynar
Technologies, Inc. Through the March 1999, the Company sold approximately
4.8 million shares of AlliedSignal common stock for aggregate proceeds of
approximately $214.4 million.
Net cash used for operating activities for the nine months ended March
29, 1998 and March 28, 1999 was $104.0 million and $20.5 million,
respectively. The primary use of cash for operating activities in the first
nine months of fiscal 1999 was a decrease of $56.1 million in accounts
payable and accrued liabilities and an increase in other non-current assets
of $31.4 million. Partially offsetting the use of cash from operating
activities was a $50.5 million decrease in inventories and a $18.6 decrease
in accounts receivable. In the first nine 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 nine months ended
March 29, 1998 and March 28, 1999, amounted to $93.8 million and $214.5
million, respectively. In the first nine months of fiscal 1999, the primary
source of cash from investing activities was $173.4 million from the
liquidation of investment securities and $60.4 million of gross proceeds
received from disposition of Solair, Inc., partially offset by $18.7
million of capital expenditures. In the first nine months of fiscal 1998,
the primary source of cash from investing activities was $168.0 million of
net proceeds received from investment liquidations in STFI, offset
partially by $58.8 of cash used for acquisitions, including minority
interests in subsidiaries, and $23.7 million of capital expenditures.
Net cash provided by (used for) financing activities for the nine
months ended March 29, 1998 and March 28, 1999, amounted to $55.1 million
and $(77.4) million, respectively. Cash used for financing activities in
the first nine months of fiscal 1999 included a $135.6 million repayment of
debt and the $22.1 million purchase of treasury stock, offset partially by
a $80.1 million net increase from the issuance of additional debt. The
primary source of cash provided by financing activities in the first nine
months of fiscal 1998 was the net proceeds received from the issuance of
additional stock of $54.2 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.
Subsequent Mergers and Financing Activities
On April 8, 1999, the Company acquired the remaining 15% of the
outstanding common and preferred stock of Banner not already owned by the
Company, through a merger with Banner (the ''Banner Merger''). Under the
terms of the Banner Merger, each share of Banner's preferred stock was
converted into the right to receive one share of Banner common stock and
each share of Banner common stock (other than those owned by the Company)
was converted into the right to receive 0.7885 shares of the Company's
Class A common stock. The Company issued 2,981,412 shares of Class A common
stock as a result of the Banner Merger. Banner is now the Company's wholly-
owned subsidiary.
On April 20, 1999, the Company completed the acquisition of all of
Kaynar Technologies, Inc. ("KTI") capital stock for approximately $222
million and assumed approximately $103 million of KTI's existing debt. In
addition, the Company paid $28 million for a covenant not to compete from
KTI's largest shareholder. The acquisition was financed with existing cash,
the sale of $225 million of 10 3/4% senior subordinated notes due 2009, and
a new bank credit facility.
Concurrently with the closing of the acquisition of KTI and the
issuance of $225 million 10 ??% senior subordinated notes due 2009, the
Company entered into a new credit facility. The new credit facility
provides total lending commitments of $325 million comprised of a $100
million revolving credit facility and a $225 million term loan facility.
The term loan bears interest at LIBOR plus 3.25% and the revolving credit
facility bears interest at LIBOR plus 3.0%. Additionally, the revolving
credit facility is subject to a non-use fee of ??%. The term loan matures
on April 30, 2006 and the revolving credit facility matures on April 30,
2005. Borrowings under the new credit facility were used to refinance the
Company's previous credit facilities and to finance the acquisition of KTI.
Discontinued Operations
For the Company's fiscal years ended June 30, 1996, 1997, 1998, and
for the first nine months of fiscal 1999, Fairchild Technologies
("Technologies") had pre-tax operating losses of approximately $1.5
million, $3.6 million, $48.7 million, and $25.0 million, respectively. The
after-tax operating loss from Technologies exceeded the June 1998 estimate
recorded for expected losses on disposal by $9.2 million through March
1999. An additional after-tax charge of $19.7 million was recorded in the
nine months ended March 28, 1999, based on a current estimate of the
remaining losses in connection with the disposition of Technologies. While
the Company believes that $19.7 million is a reasonable charge for the
remaining losses of Technologies, there can be no assurance that this
estimate is adequate.
During the third quarter of fiscal 1999, the Semiconductor Equipment
Group of Technologies ceased all manufacturing activities, began to dispose
of its production machinery and existing inventory, informed customers and
business partners that it has discontinued operations, significantly
reduced its workforce, and stepped up the level of discussions and
negotiations with other companies regarding the sale of its remaining
assets. Technologies is also exploring several alternative transactions
with potential successors the business of its Optical Disc Equipment Group,
but has made no definitive arrangement for its disposition.
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 its stockholders 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 interrelated 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 and a Year 2000 coordinator, 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 and the Year 2000
coordinator regularly report 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.
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 and the Year 2000
coordinator.
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.
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 35 percent complete, and testing for the aerospace
distribution segment is approximately 70 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 55 percent, 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:
<TABLE>
Percentage of Year 2000 Plan Completed
(By Phase and Business Segment)
<CAPTION>
Quarter Ended
Sept. Dec. Mar. June Sept. Dec. Mar.
28, 28, 29, 30, 27, 27, 28, Work
1997 1997 1998 1998 1998 1998 1999 Remaining
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Awareness:
Aerospace 50% 100% 100% 100% 100% 100% 100% 0%
Fasteners
Aerospace 100 100 100 100 100 100 100 0
Distribution
Assessment:
Aerospace 25 50 75 100 100 100 0
Fasteners
Aerospace 0 0 0 50 100 100 0
Distribution
Evaluation:
Aerospace 0 70 90 10
Fasteners
Aerospace 20 100 100 0
Distribution
Implementation:
Aerospace 50 60 40
Fasteners
Aerospace 40 75 25
Distribution
Testing:
Aerospace 20 35 65
Fasteners
Aerospace 30-40 70 30
Distribution
Contingency
Planning:
Aerospace 0 20 35 65
Fasteners
Aerospace 25 50 65 35
Distribution
</TABLE>
The following chart summarizes the total costs incurred by the Company
as of March 28, 1999, 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.
<TABLE>
<CAPTION>
(In thousands) Year 2000 Costs Anticipated Year 2000
as of Costs
March 28, 1999 During the Next Nine
Months
<S> <C> <C>
Aerospace Fasteners $550 $3,250
Aerospace Distribution $550 $ 100
</TABLE>
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.
<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 - 4.99% 4.90% - - 5.62%
rate
Fair Market Value - (95) (454) - - (6,912)
</TABLE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required to be disclosed under this Item is set forth
in Footnote 10 (Contingencies) 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 appeared 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. Mr. Steiner has been assessed a fine of two million
French Francs in connection therewith. Both Mr. Steiner and the prosecutor
(parquet) have appealed the decision.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
*10.1 Amendment No. 1, dated as of dated as of January 29, 1999 to Third
Amended and Restated Credit Agreement dated as of December 19, 1997.
*27 Financial Data Schedules.
* - Filed herewith
(b) Reports on Form 8-K:
On December 30, 1998, the Company filed a Form 8-K to report on Item
5 and Item 7 regarding the agreement to acquire Kaynar Technologies, Inc.
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: May 12, 1999
19
TFC/RHI/FHC AM1
AMENDMENT NO. 1
dated as of January 29, 1999
to
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of December 19, 1997
THIS AMENDMENT NO. 1 ("Amendment") is entered into as
of January 29, 1999 by and among The Fairchild Corporation, a
Delaware corporation, Fairchild Holding Corp., a Delaware
corporation, RHI Holdings, Inc., a Delaware corporation, and the
institutions identified on the signature pages hereof as Lenders.
Capitalized terms used herein but not defined herein shall have
the meanings provided in the Credit Agreement (as defined below).
W I T N E S S E T H:
WHEREAS, the Borrowers and the Lenders and Issuing
Banks are parties to that certain Third Amended and Restated
Credit Agreement dated as of December 19, 1997 (together with the
Exhibits and Schedules thereto, the "Credit Agreement"), pursuant
to which the Lenders and Issuing Banks have agreed to provide
certain financial accommodations to the Borrowers; and
WHEREAS, in accordance with the requirements of Section
10.04 of the Credit Agreement, the Collateral Agent has consented
to the formation of a new Wholly-Owned Subsidiary of Mairoll,
Inc. under the laws of the State of Delaware and such Subsidiary
has been formed and is known as Warthog, Inc.;
WHEREAS, the Borrowers have requested certain
amendments to Article X of the Credit Agreement;
NOW, THEREFORE, in consideration of the premises set
forth above, the terms and conditions contained herein, and other
good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Amendment to Credit Agreement. Effective as of
January 29, 1999, upon satisfaction of the conditions precedent
set forth in Section 2 below, the Credit Agreement is hereby
amended as follows:
1.1 Section 1.01 is amended to (i) delete the
provisions of clause (ii)(b) of the definition of "Borrowing
Base" in its entirety and substitute the following therefor:
(b) the Banner Stock Availability;
and (ii) add the following definitions thereto:
"Banner Stock Availability" means an amount equal to forty
percent (40%) of the Market Value of the Banner Stock minus
forty percent (40%) of the cumulative amount of cash loaned,
advanced, dividended, distributed, invested, or otherwise
transferred by Banner to Fairchild from and after December
26, 1998.
"Commitment" means, with respect to a given Lender, the sum
of such Lender's Revolving Credit Commitment plus such
Lender's Term Loan Commitment.
"Farmingdale Property" means the Real Property located in
Farmingdale, New York and owned by Mairoll, Inc.
1.2 Section 10.01 is amended to (i) delete the phrase
"Intentionally omitted" from clause (h) thereof and substitute
the following therefor:
(h) Indebtedness owing to Banner in the principal amount of
$30,000,000 evidenced by a promissory note in the form set
forth on Exhibit 10.01-H attached hereto and made a part
hereto;
(ii) delete the word "and" at the end of clause (n) thereof and
(iii) delete the provisions of clause (o) thereof in their
entirety and substitute the following therefor:
(o) Indebtedness of Warthog, Inc., a Wholly-Owned
Subsidiary of Mairoll, Inc. owing to Fleet Bank, National
Association in an aggregate principal amount not to exceed
$35,000,000 at any time outstanding on the terms and
conditions set forth on Schedule 10.01-O attached hereto and
made a part hereof, subject to agreements in form and
substance satisfactory to the Collateral Agent; provided
that such agreements are executed and delivered on or before
May 31, 1999;
(p) Indebtedness of TFC in respect of the indemnity
described on Schedule 10.01-O, subject to an agreement in
form and substance satisfactory to the Collateral Agent;
(q) in addition to the Indebtedness permitted by clauses
(a) through (p) above, other unsecured Indebtedness and
secured Indebtedness of Subsidiaries of the Borrowers which
are not Domestic Subsidiaries in an aggregate amount which,
when combined with outstanding Accommodation Obligations
permitted under Section 10.05(d) and Section 10.05(j), does
not exceed $15,000,000 outstanding.
1.3 Section 10.02 is amended to (i) delete the
provisions of clause (i) thereof in its entirety and substitute
the following therefor:
(i) any transfers of any portion or all of the Capital
Stock or assets of the Spin-Off Businesses and any transfers
of assets required to consummate the Spin-Off;
(ii) delete the word "and" at the end of clause (j) thereof,
(iii) delete the "." at the end of clause (k) thereof and
substitute "; and" therefor, and (iv) add the following
provisions as clause (l) thereof:
(l) the transfer by Mairoll, Inc., a Wholly-Owned
Subsidiary of FHC, to Warthog, Inc., a Delaware corporation
and a Wholly-Owned Subsidiary of Mairoll, Inc., of the
Farmingdale Property.
1.4 Section 10.03 is amended to (i) delete the word
"and" at the end of clause (e) thereof, (ii) delete the "." at
the end of clause (f) thereof and substitute "; and" therefor,
and (iii) add the following provision as clause (g) thereof:
(g) Liens granted by Warthog, Inc., a Wholly-Owned
Subsidiary of Mairoll, Inc., in (i) the Farmingdale Property
and improvements made thereto, (ii) all fixtures,
furnishings, Equipment and other personal property used in
connection with the Farmingdale Property and such
improvements, and (iii) all leases, subleases, licenses,
concession agreements, contracts, and managerial agreements,
entered into with respect thereto and permits affecting the
Farmingdale Property and improvements made thereto.
1.5 Section 10.04 is amended to (i) delete the word
"and" at the end of clause (p) thereof, (ii) delete the "." at
the end of clause (q) thereof and substitute ";" therefor, and
(iii) add the following provisions as clause (r) and clause (s)
thereof:
(r) an Investment by Mairoll, Inc. in Warthog, Inc., a
Delaware corporation and Wholly-Owned Subsidiary of Mairoll,
Inc., in the form of a contribution to the capital of
Warthog, Inc. of the Farmingdale Property; and
(s) an Investment by RHI in Capital Stock of Mediadisc, a
corporation formed under the laws of France, aggregating
approximately a 35% interest therein, the amount of which
Investment shall be charged against the Investments
referenced in Section 10.17 and the subsequent Investment(s)
by Subsidiaries of RHI of all of the Capital Stock of Convac
France to Mediadisc immediately preceding the merger of
Convac France and Mediadisc permitted under Section
10.09(ix).
1.6 Section 10.05 is amended to (i) delete the word
"and" at the end of clause (h) thereof and (ii) delete clause (i)
thereof in its entirety and substitute the following therefor:
(i) Accommodation Obligations in the form of a "Completion
Guaranty" and a "Full Payment Guaranty" incurred by TFC for
the benefit of Fleet Bank, National Association, on the
terms and conditions set forth on Schedule 10.01-O, subject
to agreements in form and substance satisfactory to the
Collateral Agent; and
(j) in addition to the Accommodation Obligations permitted
by clauses (a) through (i) above, other unsecured
Accommodation Obligations in an aggregate amount which does
not exceed $10,000,000 at any time outstanding.
1.7 Section 10.09 is amended to (i) delete the word
"and" at the end of clause (vii) thereof, (ii) delete the "." at
the end of clause (viii) and substitute "; and" therefor, and
(iii) add the following provision as clause (ix) thereof:
(ix) the merger of Mediadisc with and into Convac France
with Convac France being the surviving corporation.
1.8 Section 10.17 is amended to delete the provisions
thereof in their entirety and substitute the following therefor:
10.17. Transactions with the Technologies Companies. ??
Notwithstanding anything to the contrary contained in this
Article X, prior to consummation of the Spin-Off, the
Technologies Companies may, directly or indirectly, (a)
incur Indebtedness from or receive the benefit of
Investments made by the Borrowers or any Subsidiary of the
Borrowers after the Effective Date and (b) receive the
benefit of Accommodation Obligations incurred by the
Borrowers or any Subsidiary of the Borrowers after the
Effective Date, in an amount (in the aggregate at any time
outstanding, exclusive of fees and interest with respect
thereto) not exceeding $42,000,000 and the Borrowers and any
Subsidiary of the Borrowers may make such Investments and
incur such Accommodation Obligations.
1.9 Schedule 1.01.10 is deleted in its entirety and
Schedule 1.01.10 attached hereto and made a part hereof is
substituted therefor.
2. Conditions to Effectiveness. The provisions of
this Amendment shall become effective as of January 29, 1999 upon
receipt by the Collateral Agent, by no later than 5:00 p.m. (New
York time) on February 5, 1999, of (i) executed counterparts of
this Amendment signed on behalf of the Borrowers and the
Requisite Lenders, (ii) payment in immediately available funds of
a fee for the account of each Lender having executed and
delivered this Amendment on or before such date in the amount of
0.05% of such Lender's Commitment.
3. Representations, Warranties and Covenants.
3.1 The Borrowers hereby represent and warrant that
this Amendment and the Credit Agreement, as amended hereby,
constitute the legal, valid and binding obligations of the
Borrowers and are enforceable against the Borrowers in accordance
with their terms.
3.2 The Borrowers hereby represent and warrant that,
before and after giving effect to this Amendment, no Event of
Default or Potential Event of Default has occurred and is
continuing.
3.3 The Borrowers hereby reaffirm all agreements,
covenants, representations and warranties made in the Credit
Agreement, to the extent the same are not amended hereby, and
made in the other Loan Documents to which it is a party; and
agrees that all such agreements, covenants, representations and
warranties shall be deemed to have been remade as of the
effective date of this Amendment. To the extent the Credit
Agreement is amended hereby to modify or add agreements,
covenants and/or representations and warranties, such agreements,
covenants and/or representations and warranties are made as of
the date on which this Amendment becomes effective with respect
thereto.
4. Reference to and Effect on the Credit Agreement.
4.1 Upon the effectiveness of this Amendment, each
reference in the Credit Agreement to "this Agreement",
"hereunder", "hereof", "herein" or words of like import shall
mean and be a reference to the Credit Agreement as amended
hereby.
4.2 Except as specifically amended above, the Credit
Agreement shall remain in full force and effect, and is hereby
ratified and confirmed.
4.3 The execution, delivery, and effectiveness of this
Amendment shall not, except as expressly provided herein, operate
as a waiver of any right, power or remedy of the Collateral Agent
or Lenders, or constitute a waiver of any provision of any of the
Loan Documents.
5. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK.
6. Headings. Section headings in this Amendment are
included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose.
7. Counterparts. This Amendment may be executed by
one or more of the parties hereto on any number of separate
counterparts, each of which shall be deemed an original and all
of which, taken together, shall be deemed to constitute one and
the same instrument. Delivery of an executed counterpart of this
Amendment by facsimile transmission shall be effective as
delivery of a manually executed counterpart hereof.
IN WITNESS WHEREOF, this Amendment has been duly
executed as of the day and year first above written.
FAIRCHILD HOLDING CORP. RHI HOLDINGS, INC.
By Karen L. Schneckenburger By Karen L. Schneckenburger
Vice President & Treasurer Vice President & Treasurer
THE FAIRCHILD CORPORATION
By Karen L. Schneckenburger
Vice President & Treasurer
Lenders:
CITICORP USA, INC. NATIONSBANK, N.A.
By: Suzanne Crymes By: Michael R. Heredia
Attorney-in-Fact Senior Vice President
CREDIT AGRICOLE INDOSUEZ BHF-BANK AKTIENGESELLSCHAFT
By: David Bouhl, F.V.P. By:
Head of Corporate Banking
Chicago
By: Dennis M. Toolan By:
Vice President
Senior Relationship Manager
PRIME INCOME TRUST SENIOR DEBT PORTFOLIO
By Boston Management and
Research as Investment
Adviser
By: Peter Gewirtz By: Scott H. Page
Authorized Signatory Vice President
KZH CRESCENT LLC KZH CRESCENT-2 LLC
By: Virginia Conway By: Virginia Conway
Authorized Agent Authorized Agent
KZH SHOSHONE LLC KZH SOLEIL-2 LLC
By: Virginia Conway By: Virginia Conway
Authorized Agent Authorized Agent
KZH ING-2 LLC KZH CRESCENT-3 LLC
By: Virginia Conway By: Virginia Conway
Authorized Agent Authorized Agent
PROVIDENT BANK OF MARYLAND MERRILL LYNCH PIERCE FENNER &
SMITH INCORPORATED
By: Robert L. Smith By: Neil Brisson
Assistant Vice President Director
UNION BANK OF CALIFORNIA, N.A. TORONTO DOMINION (TEXAS), INC.
By: J. Scott Jessup By____________________________
Vice President
COMPAGNIE FINANCIERE DE CIC NATEXIS BANQUE
ET DE L'UNION EUROPEENNE
By: Sean Mounier By: Pieter J. van Tulder
First Vice President
President and
Manager
Multinational Group
By: Brian O'Leary By: John Rigs
Vice President Vice President
BOEING CAPITAL CORPORATION FIRST DOMINION FUNDING I
By: James C. Hammersmith By: Andrew H. Marshak
Senior Documentation Officer Authorized Signatory
PAM CAPITAL FUNDING, INC. VAN KAMPEN PRIME RATE
By Highland Capital Management INCOME TRUST
Company as Collateral Manager
By: James Dondero, CFA, CPA By: Jeffrey W. Maillet
President Senior Vice President
And Director
BALANCED HIGH-YIELD FUND I LTD.
By BHF-Bank Aktiengesellschaft
acting through its New York
Branch as attorney-in-fact
By___________________________
Name:
Title:
By___________________________
Name:
Title:
EATON VANCE SENIOR INCOME TRUST
By Eaton Vance Management, as
Investment Advisor
By: Scott H. Page
Vice President
EXHIBIT 10.01-H
to
Third Amended and Restated Credit Agreement
dated as of December 19, 1998
Form of Subordinated Banner Note
Attached
SCHEDULE 1.01.10
to
Third Amended and Restated Credit Agreement
Dated as of December 19, 1997
as amended by Amendment No. 1 and Consent
dated as of January 29, 1999
SPIN-OFF BUSINESSES
I. Principal Spin-Off Businesses
Technologies Companies:
Fairchild Technologies GmbH
Convac France S.A.
Fairchild Technologies UK Ltd.
Convac Dresden GmbH
Fairchild Germany, Inc.
Convac USA, Inc.
Fairchild Technologies USA, Inc.
Fairchild CDI S.A.
Mediadisc??
CuTek Research, Inc.
Nacanco Paketleme Sanayi Ve Ticaret A.S.
Investments:
Holder Investment
TFC Billecart Expansion
Skinner Engine Company Preferred Stock
Teuza Fund
Rotlex
Nevatim Triangle Venture
Oramir Semiconductor Equipment Ltd.
Technical Devices Note Receivable
($914,193)
Stelfast Fasteners Note Receivable
($181,093)
Banner Industrial Products, Inc.
Plymouth Leasing Company
Banner Energy Corporation of Kentucky,
Inc. ("BECK")
Faircraft Sales Ltd.
Fairchild Export Sales Corporation
Aircraft Tire Corporation
Fairchild Titanium Technologies, Inc.
RHI Medical Resources, Inc.
S.A.R.L. Soustiel 2000
Bolshoi Fund (Antiques)
Celtronix Ltd.
Visionix Ltd.
Fairchild Scandinavian Bellyloading
Company -- Royalty Agreement with
Teleflex
MISAT Ltd.
Northking Insurance Company Limited, a
Bermuda corporation (re-
insurance collateral and guaranty)
Recycling Investments, Inc. ("RII")
Recycling Investments II, Inc. ("R-II")
Banner Capital Ventures, Inc.
Shared Technologies Cellular, Inc.
Tri-Fast S.A.R.L.
Sovereign Air Limited -- Bristol
Holdings
Banner Industrial Distribution, Inc.
MTA, Inc.
F.F. Handels GmbH
Aero International, Inc.
FHC S.S.E. Telecom, Inc. common stock &
warrants
Colt Royalty Agreement
Teuza Management and Development (1991)
Limited
Mairoll, Inc. (exclusive of Fastener
Business assets & liabilities)
A10 Inc.
Fairchild Arms International Ltd.
Oink Oink, Inc.
Fairchild Data Corporation
Communication Intelligence Corporation
(preferred stock)
D-M-E Iberica S.A.
Partes Para Moldes D-M-E S.A.
Banner Investments (UK) Limited
JJS Limited
Boussugue Note Receivable (FF 4,000,000)
Mairoll, Inc. V&V Redondo Beach Limited Partnership,
a California partnership (49%
interest)??
Hartz-Rex Associates, a New Jersey
partnership (49% interest)
A10 Inc. Fairchild Retiree Medical Services, Inc.
RII Eagle Environmental, Limited
Partnership, a Delaware partnership
(49.9% limited partnership interest)
R-II Eagle Environmental II, Limited
Partnership (49.9% limited partnership
interest)
BECK Jenkins Coal Dock Company, Inc. (shell
corporation; 80% owned)??
KenCoal Associates, an Ohio partnership
(80% interest; inactive entity with no
assets or liabilities)
Real Estate:
Owner Real Estate Location
FHC Sloane Street Real Property (London)
RHI West Milwaukee Real Property (Wisconsin)
Brady Lane Real Property (Indiana)
Burlington Real Property (Massachusetts)
Plymouth Leasing Trucking terminals located in Huron,
Company Ohio and leased to Conway
Freight and
Mansfield, Ohio (unoccupied)
BECK 700 acres of unimproved land in Kentucky
Faircraft Sales 50 acres including a coal mine in
Ltd. Vincennes, Indiana
II. Fairchild Finance Company
III. Other Non-Aerospace Businesses
SCHEDULE 10.01-O
to
Third Amended and Restated Credit Agreement
dated as of December 19, 1997
Farmingdale Financing Termsheet
Attached
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-28-1999
<CASH> 167,346
<SECURITIES> 3,777
<RECEIVABLES> 104,880
<ALLOWANCES> 3,149
<INVENTORY> 166,973
<CURRENT-ASSETS> 488,094
<PP&E> 222,772
<DEPRECIATION> 99,896
<TOTAL-ASSETS> 1,014,831
<CURRENT-LIABILITIES> 160,865
<BONDS> 227,475
0
0
<COMMON> 2,936
<OTHER-SE> 418,759
<TOTAL-LIABILITY-AND-EQUITY> 1,014,831
<SALES> 446,072
<TOTAL-REVENUES> 447,545
<CGS> 356,448
<TOTAL-COSTS> 443,945
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,955
<INCOME-PRETAX> 20,355
<INCOME-TAX> 7,316
<INCOME-CONTINUING> 12,746
<DISCONTINUED> (28,874)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,128)
<EPS-PRIMARY> (0.72)
<EPS-DILUTED> (0.71)
</TABLE>
