36
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 December 27, 1998
Commission File Number 1-6560
THE FAIRCHILD CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 34-0728587
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
45025 Aviation Drive, Suite 400
Dulles, VA 20166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 478-5800
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Title of Class January 31, 1998
Class A Common Stock, $0.10 Par Value 19,222,606
Class B Common Stock, $0.10 Par Value 2,624,062
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1.Condensed Consolidated Balance Sheets as of June 30, 1998 and
December 27, 1998 (Unaudited) 3
Consolidated Statements of Earnings for the Three and Six Months
ended December 28, 1997 and December 27, 1998 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Six Months
ended December 28, 1997 and December 27, 1998 (Unaudited) 7
Notes to Condensed Consolidated Financial Statements (Unaudited) 8
Item 2.Management's Discussion and Analysis of Results of Operations and
Financial Condition 13
Item 3.Quantitative and Qualitative Disclosure About Market Risk 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2 Changes in Securities and Use of Proceeds 23
Item 4.Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
* For purposes of Part I and this Form 10-Q, the term "Company" means The
Fairchild Corporation, and its subsidiaries, unless otherwise indicated. For
purposes of Part II, the term "Company" means The Fairchild Corporation, unless
otherwise indicated.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 27, 1998 (Unaudited)
(In thousands)
ASSETS
<CAPTION>
June 30, Dec. 27,
1998 1998
<S> <C> <C>
CURRENT ASSETS: (*)
Cash and cash equivalents, $746 and $0
restricted $ 49,601 $ 16,063
Short-term investments 3,962 216,260
Accounts receivable-trade, less 120,284 95,435
allowances of $5,655 and $3,079
Inventories:
Finished goods 187,205 146,466
Work-in-process 20,642 19,074
Raw materials 9,635 9,142
217,482 174,682
Net current assets of discontinued 11,613 1,670
operations
Prepaid expenses and other current 53,081 52,870
assets
Total Current Assets 456,023 556,980
Property, plant and equipment, net of
accumulated
depreciation of $82,968 and $98,382 118,963 124,446
Net assets held for sale 23,789 20,794
Net noncurrent assets of discontinued 8,541 10,945
operations
Cost in excess of net assets acquired
(Goodwill), less
accumulated amortization of $42,079 168,307 167,262
and $43,581
Investments and advances, affiliated 27,568 28,416
companies
Prepaid pension assets 61,643 62,246
Deferred loan costs 6,362 5,879
Long-term investments 235,435 36,398
Other assets 50,628 70,275
TOTAL ASSETS $1,157,259 $1,083,641
*Condensed from audited financial statements.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 27, 1998 (Unaudited)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
June 30, Dec. 27,
1998 1998
<S> <C> <C>
CURRENT LIABILITIES: (*)
Bank notes payable and current
maturities of long-term debt $ 20,665 $ 25,287
Accounts payable 53,859 36,511
Accrued salaries, wages and commissions 23,613 19,837
Accrued employee benefit plan costs 1,463 1,741
Accrued insurance 12,575 12,234
Accrued interest 2,303 1,581
Other accrued liabilities 52,789 56,424
Income taxes 28,311 8,397
Total Current Liabilities 195,578 162,012
LONG-TERM LIABILITES:
Long-term debt, less current maturities 295,402 278,229
Other long-term liabilities 23,767 24,707
Retiree health care liabilities 42,103 43,127
Noncurrent income taxes 95,176 107,871
Minority interest in subsidiaries 31,674 28,075
TOTAL LIABILITIES 683,700 644,021
STOCKHOLDERS' EQUITY:
Class A common stock, $0.10 par value;
authorized 40,000 shares, 26,709
(26,679 in June) shares issued and
19,219 (20,429 in June) shares
outstanding 2,667 2,671
Class B common stock, $0.10 par value;
authorized 20,000 shares, 2,624
(2,625 in June) shares issued
issued and outstanding 263 263
Paid-in capital 195,112 195,291
Retained earnings 311,039 294,222
Cumulative other comprehensive income 16,386 21,183
Treasury Stock, at cost, 7,490
(6,250 in June) shares of Class A
common stock (51,908) (74,009)
TOTAL STOCKHOLDERS' EQUITY 473,559 439,620
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,157,259 $1,083,641
*Condensed from audited financial statements
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) and Six (6) Months Ended December 28, 1997 and December 27,
1998
(In thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
12/28/97 12/27/98 12/28/97 12/27/98
<S> <C> <C> <C> <C>
REVENUE:
Net sales $208,616 $151,181 $402,978 $299,720
Other income, net 49 350 4,604 769
208,665 151,531 407,582 300,489
COSTS AND EXPENSES:
Cost of goods sold 151,794 113,799 299,827 227,666
Selling, general & administrative 42,259 27,272 78,968 55,446
Amortization of goodwill 1,387 1,360 2,606 2,638
195,440 142,431 381,401 285,750
OPERATING INCOME 13,225 9,100 26,181 14,739
Interest expense 15,683 7,770 28,658 15,206
Interest income (524) (476) (914) (1,059)
Net interest expense 15,159 7,294 27,744 14,147
Investment income (loss) (7,077) (1,027) (5,180) 834
Non-recurring loss on disposition
of subsidiary - (19,320) - (19,320)
Loss from continuing operations
before taxes (9,011) (18,541) (6,743) (17,894)
Income tax benefit 4,869 6,724 3,863 6,433
Equity in earnings of affiliates,
net 279 652 1,379 1,689
Minority interest, net (742) 2,338 (1,875) 2,135
Loss from continuing operations (4,605) (8,827) (3,376) (7,637)
Loss from discontinued operations,
net (1,945) - (2,682) -
Gain (loss) on disposal of
discontinued operations, net 29,974 (9,180) 29,974 (9,180)
Extraordinary items, net (3,024) - (3,024) -
NET EARNINGS (LOSS) $ 20,400 $(18,007) $20,892 $(16,817)
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustments (2,567) 2,306 (1,572) 7,552
Unrealized holding gains (losses)
on securities - 27,633 - (2,755)
Other comprehensive income (loss) (2,567) 29,939 (1,572) 4,797
COMPREHENSIVE INCOME (LOSS) $ 17,833 $ 11,932 $ 19,320 $(12,020)
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) and Six (6) Months Ended December 28, 1997 and December 27,
1998
(In thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
12/28/97 12/27/98 12/28/97 12/27/98
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Loss from continuing operations $ (0.27) $(0.40) $(0.20) $(0.35)
Loss from discontinued operations,
net (0.11) - (0.16) -
Gain (loss) on disposal of
discontinued operations, net 1.75 (0.42) 1.78 (0.41)
Extraordinary items, net (0.18) - (0.18) -
NET EARNINGS (LOSS) $ 1.19 $(0.82) $ 1.24 $(0.76)
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustments $(0.15) $ 0.11 $(0.09) $ 0.34
Unrealized holding losses on
securities arising during the period - 1.26 - (0.12)
Other comprehensive income (loss) (0.15) 1.37 (0.09) 0.22
COMPREHENSIVE INCOME (LOSS) $1.04 $ 0.55 $ 1.15 $ (0.54)
DILUTED EARNINGS PER SHARE:
Loss from continuing operations $(0.27) $ (0.40) $ (0.20) $ (0.35)
Loss from discontinued operations,
net (0.11) - (0.16) -
Gain (loss) on disposal of
discontinued operations, net 1.75 (0.42) 1.78 (0.41)
Extraordinary items, net (0.18) - (0.18) -
NET EARNINGS (LOSS) $1.19 $ (0.82) $ 1.24 $(0.76)
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustments $(0.15) $ 0.11 $ (0.09) $ 0.34
Unrealized holding losses on
securities arising during the period - 1.26 - (0.12)
Other comprehensive income (loss) (0.15) 1.37 (0.09) 0.22
COMPREHENSIVE INCOME (LOSS) $ 1.04 $ 0.55 $1.15 $(0.54)
Weighted average shares outstanding:
Basic 17,088 21,872 16,864 22,129
Diluted 17,088 21,872 16,864 22,129
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Six (6) Months Ended December 28, 1997 and December 27, 1998
(In thousands)
<CAPTION>
For the Six Months Ended
12/28/97 12/27/98
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 20,892 $(16,817)
Depreciation and amortization 11,632 9,503
Accretion of discount on long-term
liabilities 1,686 2,578
Net loss on divestiture of subsidiary - 13,500
Net gain on disposal of discontinued
operations (29,974) -
Extraordinary items, net of cash payments 3,024 -
Distributed (undistributed) earnings of
affiliates, net 344 (777)
Minority interest 1,875 (2,135)
Change in assets and liabilities (96,975) (34,110)
Non-cash charges and working capital
changes of discontinued operations (4,349) (8,559)
Net cash used for operating activities (91,845) (36,817)
Cash flows from investing activities:
Purchase of property, plant and equipment (15,964) (13,574)
Acquisition of subsidiaries, net of cash
acquired (11,774) -
Proceeds received from (used for)
investment securities, net 5,786 (15,648)
Net proceeds received from the divestiture - 60,397
of subsidiary
Net proceeds received from the disposal of 84,733 -
discontinued operations
Changes in net assets held for sale (324) 3,335
Other, net 179 238
Investing activities of discontinued
operations (3,119) (223)
Net cash provided by investing activities
59,517 34,525
Cash flows from financing activities:
Proceeds from issuance of debt 143,712 55,777
Debt repayments and repurchase of
debentures, net (145,130) (69,375)
Issuance of Class A common stock 53,921 182
Purchase of treasury stock - (22,101)
Financing activities of discontinued
operations - 121
Net cash provided by (used for) financing
activities 52,503 (35,396)
Effect of exchange rate changes on cash (688) 4,150
Net change in cash and cash equivalents 19,487 (33,538)
Cash and cash equivalents, beginning of the
year 19,420 49,601
Cash and cash equivalents, end of the
period $ 38,907 $ 16,063
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</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 December 27, 1998 and the consolidated
statements of earnings and cash flows for the six months ended December 28, 1997
and December 27, 1998 have been prepared by the Company, without audit. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at December 27, 1998, and for all periods presented,
have been made. The balance sheet at June 30, 1998 was condensed from the
audited financial statements as of that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's June 30, 1998 Annual Report on Form 10-K and the Banner
Aerospace, Inc. ("Banner") March 31, 1998 Annual Report on Form 10-K. The
results of operations for the period ended December 27, 1998 are not necessarily
indicative of the operating results for the full year. Certain amounts in the
prior year's quarterly financial statements have been reclassified to conform to
the current presentation.
2. BUSINESS COMBINATIONS
The Company has accounted for the following acquisitions by using the
purchase method. The respective purchase price is assigned to the net assets
acquired based on the fair value of such assets and liabilities at the
respective acquisition dates.
On November 28, 1997, the Company acquired AS+C GmbH, Aviation Supply +
Consulting ("AS+C") in a business combination accounted for as a purchase. The
total cost of the acquisition was $14.0 million, which exceeded the fair value
of the net assets of AS+C by approximately $8.1 million, which is allocated as
goodwill and amortized using the straight-line method over 40 years. The Company
purchased AS+C with cash borrowings. AS+C is an aerospace parts, logistics, and
distribution company primarily servicing the European original equipment
manufacturers ("OEM's") market.
On March 2, 1998, the Company consummated the acquisition of Edwards and
Lock Management Corporation, doing business as Special-T Fasteners ("Special-
T"), in a business combination accounted for as a purchase. The cost of the
acquisition was approximately $50.0 million, of which 50.1% of the contractual
purchase price was paid in shares of Class A Common Stock of the Company and
49.9% was paid in cash. The total cost of the acquisition exceeded the fair
value of the net assets of Special-T by approximately $23.6 million, which is
preliminarily being allocated as goodwill, and amortized using the straight-line
method over 40 years. Special-T manages the logistics of worldwide distribution
of Company manufactured precision fasteners to customers in the aerospace
industry, government agencies, OEM's, and other distributors.
On January 13, 1998, Banner completed the disposition of substantially all
of the assets and certain liabilities of certain subsidiaries to AlliedSignal
Inc., in exchange for shares of AlliedSignal Inc. common stock with an aggregate
value equal to $369 million. The assets transferred to AlliedSignal Inc.
consisted primarily of Banner's hardware group, which included the distribution
of bearings, nuts, bolts, screws, rivets and other types of fasteners, and its
PacAero unit. Approximately $196 million of the common stock received from
AlliedSignal Inc. was used to repay outstanding term loans of Banner's
subsidiaries and related fees. The Company accounts for its remaining investment
in AlliedSignal Inc. common stock as an available-for-sale security.
On December 31, 1998, Banner consummated the sale of Solair, Inc., it's
largest subsidiary in the rotables group, to Kellstrom Industries, Inc.
(''Kellstrom''), in exchange for approximately $57.0 million in cash and a
warrant to purchase 300,000 shares of common stock of Kellstrom. As a result of
this transaction, the Banner recorded a non-recurring pre-tax loss of
approximately $19.3 million in the current quarter.
3. DISCONTINUED OPERATIONS
For the Company's fiscal years ended June 30, 1996, 1997, 1998, and for the
first six months of fiscal 1999, Fairchild Technologies ("Technologies") had
pre-tax operating losses of approximately $1.5 million, $3.6 million, $48.7
million,and $16.1 million, respectively. The after-tax operating loss from
Technologies exceeded the previous recorded estimate for expected losses on
disposal by $2.9 million through December 1998. An additional after-tax charge
of $6.2 million was recorded in the six months ended December 27, 1998,
based on the current estimate of the remaining losses in connection
with the disposition of Technologies. While the Company believes that
$6.2 million is a reasonable charge for the remaining expected losses in
connection with the disposition of Technologies, there can be no assurance
that this estimate is adequate. Additional information regarding
discontinued operations is set forth in Footnote 4 of the Consolidated
Financial Statements of the Company's June 30, 1998 Annual Report on
Form 10-K.
4. PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial information for the six
months ended December 28, 1997, present the results of the Company's operations
as though the divestitures of Banner's hardware group and Solair, and the
acquisitions of Special-T and AS+C, had been in effect since the beginning of
fiscal 1998. The unaudited pro forma consolidated financial information for the
six months ended December 27, 1998 provide the results of the Company's
operations as though the divestiture of Solair had been in effect since the
beginning of fiscal 1999. The pro forma information is based on the historical
financial statements of the Company, Banner, Special-T, and AS+C giving effect
to the aforementioned transactions. In preparing the pro forma data, certain
assumptions and adjustments have been made, including reduced interest expense
for revised debt structures and estimates of changes to goodwill amortization.
The following unaudited pro forma information are not necessarily indicative of
the results of operations that actually would have occurred if the transactions
had been in effect since the beginning of each period, nor are they indicative
of future results of the Company.
<TABLE>
<CAPTION>
For the Six Months Ended
December 28, December 27,
1997 1998
<S> <C> <C>
Net sales $259,672 $271,401
Gross profit 59,039 66,081
Earnings (loss) from continuing operations (6,313) 4,960
Earnings (loss) from continuing operations,
per share $ (0.37) $ 0.22
</TABLE>
The pro forma financial information has not been adjusted for non-recurring
gains from disposal of discontinued operations, reductions in interest expense
and investment income that have occurred or are expected to occur from these
transactions within the ensuing year.
5. EQUITY SECURITIES
The Company had 19,219,006 shares of Class A common stock and 2,624,662
shares of Class B common stock outstanding at December 27, 1998. Class A common
stock is traded on both the New York and Pacific Stock Exchanges. There is no
public market for the Class B common stock. Shares of Class A common stock are
entitled to one vote per share and cannot be exchanged for shares of Class B
common stock. Shares of Class B common stock are entitled to ten votes per
share and can be exchanged, at any time, for shares of Class A common stock on a
share-for-share basis. For the six months ended December 27, 1998, 13,825
shares of Class A Common Stock were issued as a result of the exercise of stock
options, and shareholders converted 54 shares of Class B common stock into Class
A common stock. In accordance with terms of the Special-T Acquisition, as
amended, during the six months ended December 27, 1998, the Company issued 9,911
restricted shares of the Company's Class A Common Stock for additional merger
consideration. Additionally, the Company's Class A common stock outstanding was
effectively reduced as a result of 1,239,750 shares purchased by Banner. The
shares purchased by Banner are considered as treasury stock for accounting
purposes.
6. RESTRICTED CASH
On December 27, 1998, the Company did not have any restricted cash. On June
30, 1998, the Company had restricted cash of approximately $746, all of which
was maintained as collateral for certain debt facilities.
7. SUMMARIZED STATEMENT OF EARNINGS INFORMATION
The following table presents summarized historical financial information,
on a combined 100% basis, of the Company's principal investments, which are
accounted for using the equity method.
<TABLE>
<CAPTION>
For the Six Months Ended
December 28, December 27,
1997 1998
<S> <C> <C>
Net sales $ 48,841 $ 40,226
Gross profit 18,191 15,236
Earnings from continuing operations 8,132 8,929
Net earnings 8,132 8,929
</TABLE>
The Company owns approximately 31.9% of Nacanco Paketleme common stock.
The Company recorded equity earnings of $1,680 (net of an income tax provision
of $904) and $1,841 (net of an income tax provision of $991) from this
investment for the six months ended December 28, 1997 and December 27, 1998,
respectively.
8. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
On December 27, 1998, the Company had $28,075 of minority interest, of
which $28,066 represents Banner. Minority shareholders hold approximately 17%
of Banner's outstanding common stock. For additional information regarding the
Company's proposal to acquire all the remaining stock in Banner it does not
already own, please refer to Note 11.
9. EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
12/28/97 12/27/98 12/28/97 12/27/98
<S> <C> <C> <C> <C>
Basic earnings per share:
Loss from continuing operations $ (4,605) $ (8,827) $ (3,376) $ (7,637)
Common shares outstanding 17,088 21,872 16,864 22,129
Basic loss per share:
Basic loss from continuing
operations per share $ (0.27) $ (0.40) $ (0.20) $ (0.35)
Diluted earnings per share:
Loss from continuing operations $ (4,605) $ (8,827) $ (3,376) $ (7,637)
Common shares outstanding 17,088 21,872 16,864 22,129
Options antidilutive antidilutive antidilutive antidilutive
Warrants antidilutive antidilutive antidilutive antidilutive
Total shares outstanding 17,088 21,872 16,864 22,129
Diluted loss from continuing
operations per share $ (0.27) $(0.40) $ (0.20) $ (0.35)
</TABLE>
For the three-month and six-month periods ended December 28, 1997 and
December 27, 1998, the computation of diluted loss from continuing operations
per share exclude the effect of incremental common shares attributable to the
potential exercise of common stock options outstanding and warrants outstanding,
because their effect was antidilutive. No adjustments were made to earnings per
share calculations for discontinued operations and extraordinary items.
10. CONTINGENCIES
Government Claims
The Corporate Administrative Contracting Officer (the "ACO"), based upon
the advice of the United States Defense Contract Audit Agency, has made a
determination that Fairchild Industries, Inc. ("FII"), a former subsidiary of
the Company, did not comply with Federal Acquisition Regulations and Cost
Accounting Standards in accounting for (i) the 1985 reversion to FII of certain
assets of terminated defined benefit pension plans, and (ii) pension costs upon
the closing of segments of FII's business. The ACO has directed FII to prepare
cost impact proposals relating to such plan terminations and segment closings
and, following receipt of such cost impact proposals, may seek adjustments to
contract prices. The ACO alleges that substantial amounts will be due if such
adjustments are made, however, an estimate of the possible loss or range of loss
from the ACO's assertion cannot be made. The Company believes it has properly
accounted for the asset reversions in accordance with applicable accounting
standards. The Company has held discussions with the government to attempt to
resolve these pension accounting issues.
Environmental Matters
The Company's operations are subject to stringent government imposed
environmental laws and regulations concerning, among other things, the discharge
of materials into the environment and the generation, handling, storage,
transportation and disposal of waste and hazardous materials. To date, such
laws and regulations have not had a material effect on the financial condition,
results of operations, or net cash flows of the Company, although the Company
has expended, and can be expected to expend in the future, significant amounts
for investigation of environmental conditions and installation of environmental
control facilities, remediation of environmental conditions and other similar
matters, particularly in the Aerospace Fasteners segment.
In connection with its plans to dispose of certain real estate, the Company
must investigate environmental conditions and may be required to take certain
corrective action prior or pursuant to any such disposition. In addition,
management has identified several areas of potential contamination at or from
other facilities owned, or previously owned, by the Company, that may require
the Company either to take corrective action or to contribute to a clean-up.
The Company is also a defendant in certain lawsuits and proceedings seeking to
require the Company to pay for investigation or remediation of environmental
matters and has been alleged to be a potentially responsible party at various
"Superfund" sites. Management of the Company believes that it has recorded
adequate reserves in its financial statements to complete such investigation and
take any necessary corrective actions or make any necessary contributions. No
amounts have been recorded as due from third parties, including insurers, or set
off against, any liability of the Company, unless such parties are contractually
obligated to contribute and are not disputing such liability.
As of December 27, 1998, the consolidated total recorded liabilities of the
Company for environmental matters was approximately $8.9 million, which
represented the estimated probable exposures for these matters. It is
reasonably possible that the Company's total exposure for these matters could be
approximately $15.0 million.
Other Matters
In connection with the disposition of Banner's hardware business, the Company
received notice on January 12, 1999 from AlliedSignal making indemnification
claims against the Company for $18.9 million. Although the Company believes
that the amount of the claim is far in excess of any amount that AlliedSignal is
entitled to recover from the Company, the Company is in the process of reviewing
such claims and is unable to predict the ultimate outcome of such matter.
The Company is involved in various other claims and lawsuits incidental to
its business, some of which involve substantial amounts. The Company, either on
its own or through its insurance carriers, is contesting these matters. In the
opinion of management, the ultimate resolution of the legal proceedings,
including those mentioned above, will not have a material adverse effect on the
financial condition, or future results of operations or net cash flows of the
Company.
11. SUBSEQUENT EVENTS
On December 28, 1998, the Company announced that it had signed a definitive
merger agreement to acquire Kaynar Technologies Inc. (''Kaynar''), an aerospace
and industrial fastener manufacturer and tooling company, through a merger of
Kaynar with a wholly-owned subsidiary of the Company. The purchase price is $239
million for Kaynar common and preferred stock, $28 million for a covenant not to
compete from the majority Kaynar shareholder, and the Company will assume
approximately $98 million of Kaynar's debt. A majority of the holders of all
classes of Kaynar stock have agreed to vote in favor of the merger. The
transaction is subject to certain conditions, including financing and regulatory
approval.
On January 11, 1999, the Company reached an agreement and plan of merger to
acquire all of the remaining stock of Banner not already owned by the Company.
Currently, the Company owns approximately 85% of Banner's capital stock,
consisting of Banner common stock and Banner preferred stock, and public
shareholders own the remainder. The merger agreement is subject to approval by
Banner stockholders, and certain other conditions being satisfied or waived.
Pursuant to the merger agreement, each outstanding share of Banner's common
stock, other than shares owned by the Company and its affiliates, will be
converted into the right to receive $11.00 in market value of newly issued
shares of the Company's Class A Common Stock. The merger consideration is
subject to adjustments based on the price of the Company's Class A Common Stock
and the value of certain shares of AlliedSignal common stock owned by Banner.
The Company and Banner believe that combining will more closely coordinate the
activities of the two companies. In addition, the Company expects that the
merger will provide opportunities for reducing expenses, including saving the
costs of operating Banner as a separate public company. After the merger, Banner
will be a wholly-owned subsidiary of Fairchild.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Fairchild Corporation (the "Company") was incorporated in October 1969,
under the laws of the State of Delaware. On November 15, 1990, the Company
changed its name from Banner Industries, Inc. to The Fairchild Corporation. The
Company is the owner of 100% of RHI Holdings, Inc. ("RHI") and the majority
owner of Banner Aerospace, Inc. ("Banner"). RHI is the owner of 100% of
Fairchild Holding Corp. ("FHC"). The Company's principal operations are
conducted through Banner and FHC. The Company holds a significant equity
interest in Nacanco Paketleme ("Nacanco"), and, during the period covered by
this report, held a significant equity interest in Shared Technologies Fairchild
Inc. ("STFI"). (See Note 4 to the June 30, 1998 Form 10-K Consolidated
Financial Statements, as to the disposition of the Company's interest in STFI.)
The following discussion and analysis provide information which management
believes is relevant to assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the consolidated financial statements and
notes thereto.
GENERAL
The Company is a leading worldwide aerospace and industrial fastener
manufacturer and distributor. Through its 83% owned subsidiary, Banner, the
Company is also an international supplier to the aerospace industry,
distributing a wide range of aircraft parts and related support services.
Through internal growth and strategic acquisitions, the Company has become one
of the leading aircraft parts suppliers to aircraft manufacturers and aerospace
hardware distributors.
The Company's aerospace business consists of two segments: aerospace
fasteners and aerospace parts distribution. The aerospace fasteners segment
manufactures and markets high performance fastening systems used in the
manufacture and maintenance of commercial and military aircraft. The aerospace
distribution segment stocks and distributes a wide variety of aircraft parts to
commercial airlines and air cargo carriers, fixed-base operators, corporate
aircraft operators and other aerospace companies.
CAUTIONARY STATEMENT
Certain statements in the financial discussion and analysis by management
contain forward-looking information that involve risk and uncertainty, including
current trend information, projections for deliveries, backlog, and other trend
projections. Actual future results may differ materially depending on a variety
of factors, including product demand; performance issues with key suppliers;
customer satisfaction and qualification issues; labor disputes; governmental
export and import policies; worldwide political stability and economic growth;
and legal proceedings.
RESULTS OF OPERATIONS
Business Combinations
The following business combinations completed by the Company over the past
twelve months significantly effect the comparability of the results from the
current period to the prior period.
On November 20, 1997, STFI entered into a merger agreement with Intermedia
Communications Inc. ("Intermedia") pursuant to which holders of STFI common
stock received $15.00 per share in cash (the "STFI Merger"). The Company was
paid approximately $178.0 million in cash (before tax and selling expenses) in
exchange for the common and preferred stock of STFI owned by the Company. The
results of STFI have been accounted for as discontinued operations.
On November 28, 1997, the Company acquired AS+C GmbH, Aviation Supply +
Consulting ("AS+C") in a business combination accounted for as a purchase. The
total cost of the acquisition was $14.0 million, which exceeded the fair value
of the net assets of AS+C by approximately $8.1 million, which is allocated as
goodwill and amortized using the straight-line method over 40 years. The Company
purchased AS+C with cash borrowings. AS+C is an aerospace parts, logistics, and
distribution company primarily servicing the European original equipment
manufacturers ("OEMs") market.
On March 2, 1998, the Company consummated the acquisition of Edwards and
Lock Management Corporation, doing business as Special-T Fasteners ("Special-
T"), in a business combination accounted for as a purchase. The cost of the
acquisition was approximately $50.0 million, of which 50.1% of the contractual
purchase price for the acquisition was paid in shares of Class A Common Stock of
the Company and 49.9% was paid in cash. The total cost of the acquisition
exceeded the fair value of the net assets of Special-T by approximately $23.6
million, which is preliminarily being allocated as goodwill, and amortized using
the straight-line method over 40 years. Special-T manages the logistics of
worldwide distribution of Company manufactured precision fasteners to customers
in the aerospace industry, government agencies, OEMs, and other distributors.
On January 13, 1998, Banner completed the disposition of substantially all
of the assets and certain liabilities of certain subsidiaries to AlliedSignal
Inc., in exchange for shares of AlliedSignal Inc. common stock with an aggregate
value equal to $369 million. The assets transferred to AlliedSignal Inc.
consisted primarily of Banner's hardware group, which included the distribution
of bearings, nuts, bolts, screws, rivets and other types of fasteners, and its
PacAero unit. Approximately $196 million of the common stock received from
AlliedSignal Inc. was used to repay outstanding term loans of Banner's
subsidiaries and related fees. The Company accounts for its remaining investment
in AlliedSignal Inc. common stock as an available-for-sale security.
On December 31, 1998, Banner consummated the sale of Solair, Inc., it's
largest subsidiary in the rotable group, to Kellstrom Industries, Inc.
(''Kellstrom''), in exchange for approximately $57 million in cash and a warrant
to purchase 300,000 shares of common stock of Kellstrom. As a result of this
transaction, the Company recorded a non-recurring loss of approximately $19.3
million in the quarter ended December 27, 1998.
Consolidated Results
The Company currently reports in two principal business segments: Aerospace
Fasteners and Aerospace Distribution. The results of the Gas Springs Division
are included in the Corporate and Other classification. The following table
illustrates the historical sales and operating income of the Company's
operations for the three and six months ended December 27, 1998 and December 28,
1997, respectively.
(In thousands) Three Months Ended Six Months Ended
12/28/97 12/27/98 12/28/97 12/27/98
Sales by Segment:
Aerospace Fasteners $ 91,014 $102,764 $167,861 $ 199,322
Aerospace Distribution 119,614 46,838 242,528 97,366
Corporate and Other 1,362 1,579 2,724 3,032
Intersegment Eliminations(a) (3,374) - (10,135) -
TOTAL SALES $ 208,616 $151,181 $402,978 $ 299,720
Operating Results by Segment:
Aerospace Fasteners $ 6,382 $ 10,647 $ 8,892 $ 18,477
Aerospace Distribution 7,714 2,035 17,085 3,753
Corporate and Other (871) (3,582) 204 (7,491)
OPERATING INCOME $ 13,225 $ 9,100 $ 26,181 $ 14,739
(a) Represents intersegment sales from the Aerospace Fasteners segment to the
Aerospace Distribution segment.
The following table illustrates sales and operating income of the Company's
operations by segment, on an unaudited pro forma basis, as though the
divestitures of Banner's hardware group and Solair, and the acquisitions of
Special-T and AS+C had been in effect for the three and six months ended
December 28, 1997, and the divestiture of Solair had been in effect for the
three and six months ended December 27, 1998. The pro forma information is based
on the historical financial statements of the Company, Banner, Special-T, and
AS+C giving effect to the aforementioned transactions. The pro forma information
is not necessarily indicative of the results of operations that would actually
have occurred if the transactions had been in effect since the beginning of each
period, nor is it necessarily indicative of future results of the Company.
(In thousands) Three Mnths Ended Six Months Ended
12/28/97 12/27/98 12/28/97 12/27/98
Sales by Segment:
Aerospace Fasteners $ 98,391 $102,764 $184,215 $199,322
Aerospace Distribution 34,710 34,946 72,733 69,047
Corporate and Other 1,362 1,579 2,724 3,032
TOTAL SALES $134,463 $139,289 $259,672 $271,401
Operating Results by Segment:
Aerospace Fasteners $ 8,011 $ 10,647 $ 12,480 $ 18,477
Aerospace Distribution 1,849 1,652 5,574 3,575
Corporate and Other (1,505) (3,582) (265) (7,491)
OPERATING INCOME $ 8,355 $ 8,717 $ 17,789 $ 14,561
Net sales of $151.2 million in the second quarter of fiscal 1999 decreased
by $57.4 million, or 27.5%, compared to sales of $208.6 million in the second
quarter of fiscal 1998. Net sales of $299.7 million in the first six months of
fiscal 1999 decreased by $103.3 million, or 25.6%, compared to sales of $403.0
million in the first six months of fiscal 1998. This decrease is primarily
attributable to the loss of revenues resulting from the disposition of Banner's
hardware group. Approximately 2.3% of the fiscal 1999 second quarter and 2.9% of
the current six months sales growth was stimulated by the commercial aerospace
industry. Recent acquisitions contributed approximately 3.5% and 4.1% to sales
growth in the fiscal 1999 second quarter and six-month periods, respectively.
While divestitures decreased growth by approximately 33.4% and 32.6% in the
fiscal 1999 second quarter and six-month periods, respectively. On a pro forma
basis, net sales increased 3.6% and 4.5% for the three and six months ended
December 27, 1998, respectively, compared to the same periods ended December 28,
1997.
Gross margin as a percentage of sales was 20.3% and 24.7% in the second
quarter of fiscal 1998 and 1999, respectively, and 25.6% and 24.0% in the first
six months of fiscal 1998 and 1999, respectively. The lower margins in the
fiscal 1999 period are attributable to a change in product mix in the Aerospace
Distribution segment as a result of the disposition of Banner's hardware group.
Partially offsetting the overall lower margins was an improvement in margins
within the Aerospace Fasteners segment resulting from acquisitions, efficiencies
associated with increased production, improved skills of the work force, and
reduction in the payment of overtime.
Selling, general & administrative expense as a percentage of sales was
20.3% and 18.0% in the second quarter of fiscal 1998 and 1999, respectively, and
19.6% and 18.5% in the six month period of fiscal 1998 and 1999, respectively.
The improvement in the fiscal 1999 periods is attributable primarily to
administrative efficiencies of the Company's ongoing operations.
Other income decreased $3.8 million in the first six months of fiscal 1999,
compared to the first six months of fiscal 1998. The Company recognized $4.4
million of income in the prior period from the involuntary conversion of air
rights over a portion of the property the Company owns and is developing in
Farmingdale, New York.
Operating income of $9.1 million in the second quarter of fiscal 1999
decreased 31.2%, compared to operating income of $13.2 million in the second
quarter of fiscal 1998. Operating income of $14.7 million in the first six
months of fiscal 1999 decreased 43.7%, compared to operating income of $26.2
million in the fiscal 1998 six-month period. The decreases are primarily
attributable to the loss of operating income resulting from the disposition of
Banner's hardware group and the decrease in other income.
Net interest expense decreased $7.9 million, or 51.9%, in second quarter of
fiscal 1999, compared to the second quarter of fiscal 1998. Net interest expense
decreased $13.6 million, or 49.0%, in first six months of fiscal 1999, compared
to the same period of fiscal 1998. The decreases in the current year were due to
a series of transactions completed in fiscal 1998, which significantly reduced
the Company's total debt.
Investment income (loss) improved by $6.0 million in the first six months
of fiscal 1999, compared to the same period of fiscal 1998, due to recognizing
realized gains in the fiscal 1999 period while recording unrealized holding
losses on fair market adjustments of trading securities in the fiscal 1998
period.
The Company recognized a $19.3 million non-recurring loss in the second
quarter and first six months of fiscal 1999 as a result of its recent
divestiture Solair, Inc.
Minority interest improved by $4.0 million in the first six months of
fiscal 1999 due to losses reported by Banner in the fiscal 1999 periods
primarily resulting from the divestiture of Solair, Inc.
An income tax benefit of $6.4 million in the first six months of fiscal
1999 represented a 36.0% effective tax rate on pre-tax losses from continuing
operations. The tax provision was slightly higher than the statutory rate
because amortization of goodwill is not deductible for income tax purposes.
Included in loss from discontinued operations for the six months ended
December 28, 1997, are the results of Fairchild Technologies ("Technologies")
and the Company's equity in earnings of STFI prior to the STFI Merger. The
Company reported a $30.0 million after-tax gain on disposal of discontinued
operations in the fiscal 1998 periods resulting from the disposition of a
portion of its investment in STFI. The Company reported a $9.2 million loss on
disposal of discontinued operations in the fiscal 1999 periods. This charge is
the result of the after-tax operating loss from Technologies exceeding the
previous estimate for expected losses from disposal by $2.9 million through
December 1998, and the Company taking an additional $6.2 million after-tax
charge based on the current estimate of remaining losses in connection with the
disposition. While the Company believes that $6.2 million is a reasonable charge
for the remaining expected losses in connection with the disposition of
Technologies, there can be no assurance that this estimate is adequate.
In the fiscal 1998 periods ended December 28, 1997, the Company recorded a
$3.0 million extraordinary loss, net, from the write-off of deferred loan fees
associated with the early extinguishment of credit facilities that were
significantly modified and replaced as part of a refinancing.
Comprehensive income (loss) includes foreign currency translation
adjustments and unrealized holding changes in the fair market value of available
for-sale investment securities. Foreign currency translation adjustments
increased by $2.3 million and $7.6 million in the three and six months ended
December 27, 1998. The fair market value of unrealized holding securities
increased by $27.6 million in the second quarter and declined by $2.8 million in
the six months ended December 27, 1998. The changes reflect primarily market
fluctuations in the value of AlliedSignal common stock, which the Company
received from the disposition of Banner's hardware group.
Segment Results
Aerospace Fasteners Segment
Sales in the Aerospace Fasteners segment increased by $11.8 million in the
second quarter of fiscal 1999 and $31.5 million in the first six months of
fiscal 1999, compared to same periods of fiscal 1998, reflecting growth
experienced in the commercial aerospace industry combined with the effect of
acquisitions. Approximately 4.8% and 9.0% of the increase in sales resulted from
internal growth in the current quarter and six-month period, respectively, while
acquisitions contributed approximately 8.1% and 9.7% of the increase in the
current quarter and six-month period, respectively. New orders have leveled off
in recent months. Backlog was reduced to $158 million at December 27, 1998, down
from $177 million at June 30, 1998. On a pro forma basis, including the results
from acquisitions in the prior period, sales increased by 4.4% and 8.2% in the
second quarter and first six months of fiscal 1999, respectively, compared to
the same periods of the prior year.
Operating income improved by $4.3 million, or 66.8%, in the second quarter
and $9.6 million, or 108%, in the first six months of fiscal 1999, compared to
the fiscal 1998 periods. Acquisitions and marketing changes contributed to this
improvement. Approximately 67.4% of the increase in operating income during the
first six months of fiscal 1999 reflected internal growth, while acquisitions
contributed approximately 40.4% to the increase. On a pro forma basis, operating
income increased by 32.9% and 48.1%, for the quarter and six months ended
December 27, 1998, respectively, compared to the quarter and six months ended
December 28, 1997.
Aerospace Distribution Segment
Aerospace Distribution sales decreased by $72.8 million, or 60.8% in the
second quarter and $145.2 million, or 59.9%, for the fiscal 1999 six-month
period, compared to the fiscal 1998 periods, due primarily to the loss of
revenues as a result of the disposition of Banner's hardware group.
Approximately 58.4% of the decrease in sales in the current six-month period
resulted from divestitures, and approximately 1.5% resulted from a decrease in
internal growth. On a pro forma basis, excluding sales contributed by
dispositions, sales increased 0.7% in the second quarter and decreased 5.1% in
the first six months of fiscal 1999, compared to the same periods in the prior
year.
Operating income decreased $5.7 million in the second quarter and $13.3
million in the first six months of fiscal 1999, compared to the same periods of
the prior year, due primarily to the disposition of Banner's hardware group. On
a pro forma basis, excluding results from dispositions, operating income
decreased $0.2 million in the second quarter and $2.0 million in the first six
months of fiscal 1999, compared to the same periods of the prior year.
Corporate and Other
The Corporate and Other classification includes the Gas Springs Division
and corporate activities. The group reported a slight improvement in sales in
the fiscal 1999 periods, compared to fiscal 1998 periods. An operating loss of
$7.5 million in the first six months of fiscal 1999 was $7.7 million lower than
operating income of $0.2 million reported in the first six months of fiscal
1998. The comparable period in the prior year included other income of $4.4
million realized as a result of the sale of air rights over a portion of the
property the Company owns and is developing in Farmingdale, New York and a
decline in legal expenses.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of June 30, 1998 and December 27, 1998 amounted to
$789.6 million and $743.1 million, respectively. The changes in capitalization
included an decrease in debt of $12.6 million and a decrease in equity of $33.9
million. The decrease in debt was the result proceeds received from the
divestiture of Solair used to reduce debt, offset partially from additional
borrowings for investment purposes and the purchase of some of the Company's
common stock. The decrease in equity was due primarily to a $22.1 million
purchase of treasury stock and the $16.8 million reported loss, offset partially
by a $4.8 million increase in cumulative other comprehensive income.
The Company maintains a portfolio of investments classified as available-
for-sale securities, which had a fair market value of $252.7 million at December
27, 1998. The market value of these investments decreased $2.8 million in the
first six months of fiscal 1999. While there is risk associated with market
fluctuations inherent to stock investments, and because the Company's portfolio
is small and predominately consists of a large position in AlliedSignal common
stock, large swings in the value of the portfolio should be expected. In the six
months ended December 27, 1998, the Company reclassified a large portion of its
investment portfolio to current assets as a result of an increased probability
that these investments will be liquidated during the next twelve months, subject
to market conditions.
Net cash used by operating activities for the six months ended December 28,
1997 and December 27, 1998 was $91.8 million and $36.8 million, respectively.
The primary use of cash for operating activities in the first six months of
fiscal 1999 was a decrease of $47.5 million in accounts payable and accrued
liabilities, and increases in inventories of $20.1 million and other non-current
assets of $17.6 million. Partially offsetting the use of cash from operating
activities was a $30.2 increase in other non-current liabilities and a $13.6
million decrease in accounts receivable. In the first six months of fiscal 1998
the primary use of cash for operating activities was a $33.7 million increase in
inventories, $16.6 million increase in other current assets and accounts
receivable of $7.3 million and a $35.0 million decrease in accounts payable and
other accrued liabilities.
Net cash provided from investing activities for the six months ended
December 27, 1998 and December 28, 1997, amounted to $59.5 million and $34.5
million, respectively. In the first six months of fiscal 1999, the primary
source of cash from investing activities was $57.0 million of net proceeds
received from disposition of Solair, Inc., offset partially by $16.0 million of
capital expenditures and $15.6 million used to purchase investments. In the
first six months of fiscal 1998, the primary source of cash from investing
activities were $84.7 million of net proceeds received from investment
liquidations in STFI, offset partially by $16.0 million of capital expenditures.
Net cash provided by (used for) financing activities for the six months
ended December 27, 1998 and December 28, 1997, amounted to $52.5 million and
$(35.4) million, respectively. Cash used for financing activities in the first
six months of fiscal 1999 included a $69.4 million repayment of debt and the
$22.1 million purchase of treasury stock, offset partially by a $55.8 million
net increase from the issuance of additional debt. The primary source of cash
provided by financing activities in the first six months of fiscal 1998 was the
net proceeds received from the issuance of additional stock of $53.7 million.
The Company's principal cash requirements include debt service, capital
expenditures, acquisitions, and payment of other liabilities. Other liabilities
that require the use of cash include postretirement benefits, environmental
investigation and remediation obligations, and litigation settlements and
related costs. The Company expects that cash on hand, cash generated from
operations, and cash from borrowings and asset sales will be adequate to satisfy
cash requirements.
Proposed Mergers
On December 28, 1998, the Company announced that it had signed a definitive
merger agreement to acquire Kaynar Technologies Inc. (''Kaynar''), an aerospace
and industrial fastener manufacturer and tooling company, through a merger of
Kaynar with a wholly-owned subsidiary of the Company. The purchase price is $239
million for Kaynar common and preferred stock, $28 million for a covenant not to
compete from the majority Kaynar shareholder, and the Company will assume
approximately $98 million of Kaynar's debt. A majority of the holders of all
classes of Kaynar stock have agreed to vote in favor of the merger. The
transaction is subject to certain conditions, including financing and regulatory
approval.
On January 11, 1999, the Company reached an agreement and plan of merger to
acquire all of the remaining stock of Banner not already owned by the Company.
Currently, the Company owns approximately 85% of Banner's capital stock,
consisting of Banner common stock and Banner preferred stock, and public
shareholders own the remainder. The merger agreement is subject to approval by
Banner stockholders, and certain other conditions being satisfied or waived.
Pursuant to the merger agreement, each outstanding share of Banner's common
stock, other than shares owned by the Company and its affiliates, will be
converted into the right to receive $11.00 in market value of newly issued
shares of the Company's Class A Common Stock. The merger consideration is
subject to adjustments based on the price of the Company's Class A Common Stock
and the value of certain shares of AlliedSignal common stock owned by Banner.
The Company and Banner believe that combining will more closely coordinate the
activities of the two companies. In addition, the Company expects that the
merger will provide opportunities for reducing expenses, including saving the
costs of operating Banner as a separate public company. After the merger, Banner
will be a wholly-owned subsidiary of Fairchild.
Discontinued Operations
For the Company's fiscal years ended June 30, 1996, 1997, 1998, and for the
first six months of fiscal 1999, Fairchild Technologies ("Technologies") had
pre-tax operating losses of approximately $1.5 million, $3.6 million, $48.7
million, and $16.1 million, respectively. In response, in February 1998,
the Company adopted a formal plan to enhance the opportunities for
disposition of Technologies, while improving the ability of Technologies to
operate more efficiently. The plan includes a reduction in production capacity,
work force, and the pursuit of potential vertical and horizontal integration
with peers and competitors of Technologies. The Company believes that it may
be required to contribute substantial additional resources to provide
Technologies with the liquidity necessary to continue operating before such
integration is completed.
Uncertainty of the Spin-Off
In order to focus its operations on the aerospace industry, the Company has
been considering for some time distributing (the ''Spin-Off'') to its
stockholders certain of its assets via distribution of all of the stock of
Fairchild Industrial Holdings Corp. (''FIHC''), which may own all or a
substantial part of the Company's non-aerospace operations. The Company is still
in the process of deciding the exact composition of the assets and liabilities
to be included in FIHC, but such assets would be likely to include certain real
estate interests and the Company's 31.9% interest in Nacanco Paketleme (the
largest producer of aluminum cans in Turkey). The ability of the Company to
consummate the Spin-Off, if it should choose to do so, would be contingent,
among other things, on obtaining consents and waivers under the Company's credit
facility and all necessary governmental and third party approvals. There is no
assurance that the Company will be able to obtain the necessary consents and
waivers from its lenders. In addition, the Company may encounter unexpected
delays in effecting the Spin-Off, and the Company can make no assurance as to
the timing thereof. There can be no assurance that the Spin-Off will occur.
Depending on the ultimate structure and timing of the Spin-Off, it may be a
taxable transaction to stockholders of the Company and could result in a
material tax liability to the Company and its stockholders. The amount of the
tax to the Company and the shareholders is uncertain, and if the tax is material
to the Company, the Company may elect not to consummate the Spin-Off. Because
circumstances may change and provisions of the Internal Revenue Code of 1986, as
amended, may be further amended from time to time, the Company may, depending on
various factors, restructure or delay the timing of the Spin-Off to minimize the
tax consequences thereof to the Company and its stockholders, or elect not to
consummate the Spin-Off. Pursuant to the Spin-Off, it is expected that FIHC may
assume certain liabilities (including contingent liabilities) of the Company and
may indemnify the Company for such liabilities. In the event that FIHC is unable
to satisfy the liabilities, which it will assume in connection with the Spin-
Off, the Company may have to satisfy such liabilities.
Year 2000
As the end of the century nears, there is a widespread concern that many
existing computer programs that use only the last two digits to refer to a year
will not properly recognize a year that begins with the digits "20" instead of
"19." If not corrected, many computer applications could fail, create erroneous
results, or cause unanticipated systems failures, among other problems. The
Company has begun to take appropriate measures to ensure that its information
processing systems, embedded technology and other infrastructure will be ready
for the Year 2000.
The Company has retained both technical review and modification consultants
to help it assess its Year 2000 readiness. Working with these consultants and
other advisors, the Company has formulated a plan to address Year 2000 issues.
Under this plan, the Company's systems are being modified or replaced, or will
be modified or replaced, as necessary, to render them, as far as possible, Year
2000 compliant. Substantially all of the material systems within the Aerospace
Fasteners segment are currently Year 2000 compliant. At Technologies, the
Company intends to replace and upgrade a number of important systems that are
not Year 2000 compliant, and is assessing the extent to which current product
inventories may include embedded technology that is not Year 2000 compliant.
The Company expects to complete initial testing of its most critical information
technology and related systems by June 30, 1999, and anticipates that it will
complete its Year 2000 preparations by October 31, 1999. The Company could be
subject to liability to customers and other third parties if its systems are not
Year 2000 compliant, resulting in possible legal actions for breach of contract,
breach or warranty, misrepresentation, unlawful trade practices and other harm.
In addition, the Company is continually attempting to assess the level of
Year 2000 preparedness of its key suppliers, distributors, customers and service
providers. To this end, the Company has sent, and will continue to send,
letters, questionnaires and surveys to its significant business partners
inquiring about their Year 2000 efforts. If a significant business partner of
the Company fails to Year 2000 compliant, the Company could suffer a material
loss of business or incur material expenses.
The Company is also developing and evaluating contingency plans to deal
with events affecting the Company or one of its business partners arising from
significant Year 2000 problems. These contingency plans include identifying
alternative suppliers, distribution networks and service providers.
Although the Company's Year 2000 assessment, implementation and contingency
planning is not yet complete, the Company does not now believe that Year 2000
issues will materially affect its business, results of operations or financial
condition. However, the Company's Year 2000 efforts may not be successful in
every respect. To date, the Company has incurred approximately $0.8 million in
costs that are directly attributable to addressing Year 2000 issues. Management
currently estimates that the Company will incur between $2 million and $3
million in additional costs during the next 12 months relating to the Year 2000
problem.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131") "Disclosures
about Segments of an Enterprise and Related Information." SFAS 131 supersedes
Statement of Financial Accounting Standards No. 14 "Financial Reporting for
Segments of a Business Enterprise" and requires that a public company report
certain information about its reportable operating segments in annual and
interim financial reports. Generally, financial information is required to be
reported on the basis that is used internally for evaluating segment performance
and deciding how to allocate resources to segments. The Company will adopt SFAS
131 in fiscal 1999.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 ("SFAS 132") "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS 132 revises and improves the effectiveness of
current note disclosure requirements for employers' pensions and other retiree
benefits by requiring additional information to facilitate financial analysis
and eliminating certain disclosures which are no longer useful. SFAS 132 does
not address recognition or measurement issues. The Company will adopt SFAS 132
in fiscal 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes a new model for accounting for derivatives and
hedging activities and supersedes and amends a number of existing accounting
standards. It requires that all derivatives be recognized as assets and
liabilities on the balance sheet and measured at fair value. The corresponding
derivative gains or losses are reported based on the hedge relationship that
exists, if any. Changes in the fair value of hedges that are not designated as
hedges or that do not meet the hedge accounting criteria in SFAS 133 are
required to be reported in earnings. Most of the general qualifying criteria
for hedge accounting under SFAS 133 were derived from, and are similar to, the
existing qualifying criteria in SFAS 80 "Accounting for Futures Contracts."
SFAS 133 describes three primary types of hedge relationships: fair value hedge,
cash flow hedge, and foreign currency hedge. The Company will adopt SFAS 133 in
fiscal 1999 and is currently evaluating the financial statement impact.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The table below provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, which include interest rate swaps. For interest rate
swaps, the table presents notional amounts and weighted average interest rates
by expected (contractual) maturity dates. Notional amounts are used to calculate
the contractual payments to be exchanged under the contract. Weighted average
variable rates are based on implied forward rates in the yield curve at the
reporting date.
<TABLE>
<CAPTION>
Expected Fiscal year Maturity Date
1999 2000 2001 2002 2003 Thereafter
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps:
Variable to Fixed - 20,000 60,000 - - 100,000
Average cap rate - 7.25% 6.81% - - 6.49%
Average floor rate - 5.84% 5.99% - - 6.24%
Weighted average - 4.99% 4.80% - - 5.44%
rate
Fair Market Value - (88) (731) - - (9,828)
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required to be disclosed under this Item is set forth in
Footnote 10 (Contengencies) of the Consolidated Financial Statements (Unaudited)
included in this Report.
Item 2 Changes in Securities and Use of Proceeds
On December 4, 1998, Banner Aerospace, Inc. (a subsidiary of the Company)
donated 6,650 unregistered shares of the Company's Class A Common Stock to
Brandeis University. Such shares were previously treated as Treasury Shares by
the Company. As this was a charitable contribution, no proceeds were received
either by the Company or its subsidiary in connection with the donation.
Item 4. Submission of Matters to a vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on November 19,
1998. Seven matters of business were held to vote for the following purposes:
(1) to elect fourteen directors of the Company for the ensuing year ("Proposal
1"); (2) to amend the Company's Stock Option Plan by increasing the number of
shares issuable thereunder ("Proposal 2"); (3) to amend the Company's Stock
Option Plan to permit plan participants to defer the gain that would otherwise
be received by such participants upon the exercise of an option ("Proposal 3");
(4) to approve the grant of stock options to certain executive officers and
employees under the Company's Stock Option ("Proposal 4"); (5) to approve the
material terms of performance goals for fiscal 1999 incentive compensation award
for the Company's President and Chief Operating Officer ("Proposal 5"); (6) to
approve the material terms of performance goals for fiscal 1999 incentive
compensation award for the Company's Chief Executive Officer ("Proposal 6"); and
(7) to approve the amendment to a warrant issued to an affiliate of the
Company's Chief Executive Officer ("Proposal 7"). The following tables provide
the shareholder election results in number of shares:
Proposal 1
</TABLE>
<TABLE>
<CAPTION>
Directors: Votes For Votes
Withheld
<S> <C> <C>
Michael T. Alcox
43,306,167 201,656
Melville R. Barlow
43,302,267 205,556
Mortimer M. Caplin
43,269,587 238,236
Colin M. Cohen
43,312,279 195,544
Philip David
43,305,592 202,231
Robert E. Edwards
43,307,212 200,611
Harold J. Harris
43,313,884 193,939
Daniel Lebard
43,308,789 199,034
Jacques S. Moskovic
43,280,157 227,666
Herbert S. Richey
43,281,494 226,329
Moshe Sanbar
43,310,784 197,039
Robert A. Sharpe
43,304,697 203,126
Eric I. Steiner
43,297,871 209,952
Jeffrey J. Steiner
43,298,870 208,953
</TABLE>
<TABLE>
<CAPTION>
Votes For Votes Abstain Non-Vote
Against
<S> <C> <C> <C> <C>
Proposal 2
40,363,495 3,082,510 61,818 2,235,142
Proposal 3
41,339,967 2,108,882 58,973 2,235,143
Proposal 4
41,139,504 2,284,684 83,635 2,235,142
Proposal 5
36,676,003 675,496 81,954 8,309,512
Proposal 6
36,652,364 681,247 99,842 8,309,512
Proposal 7
36,647,952 683,542 101,960 8,309,511
</TABLE>
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 paid a fine of two million French Francs in
connection therewith.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(Stinbes Warrants)
*10.1 Amendment of Warrant Agreement dated December 12, 1998, effective
retroactively as of September 17, 1998, between Registrant and Stinbes
Limited.
(Other Material Contracts)
10.2 Agreement and Plan of Merger by and between The Fairchild Corporation, MTA,
Inc. and Banner Aerospace, Inc., dated as of January 11, 1999 (incorporated
by reference to Registrants' Registration Statement on Form S-4, filed on
January 15, 1999).
10.3 Agreement and Plan of Reorganization by and among The Fairchild
Corporation, Dah Dah, Inc. and Kaynar Technologies Inc. dated as of
December 26, 1998 (incorporated by reference to Registrant's Report on Form
8-K dated December 30, 1998).
10.4 Voting and Option Agreement by and among The Fairchild Corporation, Dah
Dah, Inc., CFE Inc., and General Electric Capital Corporation dated as of
December 26, 1998 (incorporated by reference to Registrant's Report on Form
8-K dated December 30, 1998).
10.5 Voting Agreement by and between The Fairchild Corporation and Jordan A. Law
dated as of December 26, 1998 (incorporated by reference to Registrant's
Report on Form 8-K dated December 30, 1998).
10.6 Voting Agreement by and between The Fairchild Corporation and David A.
Werner dated as of December 26, 1998 (incorporated by reference to
Registrant's Report on Form 8-K dated December 30, 1998).
10.7 Voting Agreement by and between The Fairchild Corporation and Robert L.
Beers dated as of December 26, 1998 (incorporated by reference to
Registrant's Report on Form 8-K dated December 30, 1998).
10.8 Voting Agreement by and between The Fairchild Corporation and LeRoy A. Dack
dated as of December 26, 1998 (incorporated by reference to Registrant's
Report on Form 8-K dated December 30, 1998).
*27 Financial Data Schedules.
* - Filed herewith
(b) Reports on Form 8-K:
There have been no reports on Form 8-K filed during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to the signed on its behalf by the undersigned
hereunto duly authorized.
For THE FAIRCHILD CORPORATION
(Registrant) and as its Chief
Financial Officer:
By: Colin M. Cohen
Senior Vice President and
Chief Financial Officer
Date: February 5, 1999
-3-
AMENDMENT OF WARRANT AGREEMENT
BETWEEN THE FAIRCHILD CORPORATION AND
STINBES LIMITED
FOR 375,000 SHARES OF CLASS A OR CLASS B COMMON STOCK
This Amendment of Warrant Agreement (the "Amendment"), dated
December 28, 1998, effective retroactively as of September 17,
1998, is made for the purpose of modifying (as provided below)
the Warrant Agreement dated as of March 13, 1986 (the "Warrant
Agreement"), between The Fairchild Corporation, p/k/a Banner
Industries, Inc., a Delaware corporation (the "Company"), and
Stinbes Limited. Capitalized terms used but not otherwise defined
herein shall have the meaning ascribed to them in the Warrant
Agreement. This amendment was approved (as a form of
compensation to Jeffrey Steiner) by the Company's shareholders at
the 1998 Annual Meeting held on November 19, 1998.
RECITALS
A. On March 13, 1986, the Company entered into the Warrant
Agreement with Drexel Burnham Lambert ("DBL"), and (pursuant
to the terms of the Warrant Agreement) issued to DBL
warrants to purchase up to an aggregate of 200,000 shares of
either Class A or Class B common stock of the Company (the
"Warrants"). The Warrants were issued in conjunction with
DBL acting as the underwriter for the public offering of
certain of the Company's debentures.
B. Pursuant to a Purchase and Sale Agreement dated as of
January 4, 1989, Jeffrey J. Steiner ("Steiner"), DBL and the
Company, Steiner purchased 187,500 Warrants from DBL
(subject to all the benefits and obligations under the
Warrant Agreement).
C. Section 5.1 of the Warrant Agreement provides that the
Warrant Price and the number of Warrant Shares are subject
to adjustment upon the occurrence of certain events pursuant
to the terms of Section 9 of the Warrant Agreement. In
June, 1989, as a result of a two-for-one stock split (an
adjustable event as defined in Section 9 of the Warrant
Agreement) the number of Warrant Shares in favor of Steiner
was increased to 375,000, and the Warrant Price was
decreased to $7.67 per share.
D. On September 12, 1991, the Board of Directors of the Company
voted to renew the Warrants issued in favor of Steiner,
which had expired on March 13, 1991, for an extended term to
expire on March 13, 1993. On March 8, 1993, the Board of
Directors of the Company voted to extend the Expiration Date
of the Warrants to March 13, 1995. On February 16, 1995,
the Board of Directors of the Company voted to extend the
Expiration Date of the Warrants to March 13, 1997.
E. On March 22, 1993, Steiner assigned the Warrants to Bestin
Ltd. On May 31, 1993, Bestin Ltd. assigned the Warrants to
Stinbes Limited. Stinbes Limited is an affiliate of
Steiner.
F. By Board action taken on February 21, 1997, and again on
September 11, 1997, and September 26, 1997, the Board of
Directors of the Company voted to extend the Expiration Date
of the Warrants to March 13, 2002, subject to the following
modifications: (i) effective as of February 21, 1997, the
Expiration Date of any issued Warrants, outstanding and
unexpired on that date, shall be March 13, 2002; (ii)
effective as of February 21, 1997, the Warrant Price shall
be $7.67 per share, increased by two tenths of one cent
($.002) for each day subsequent to March 13, 1997, but fixed
at $7.80 per share after June 30, 1997.
G. On February 9, 1998, the Board voted to modify the Warrant
Agreement to: (i) revise the window periods during which the
Warrants may be exercised; and (ii) to provide that the
payment of the Warrant Price may be made in shares of the
Company's Class A or Class B Common Stock.
H. On September 17, 1998, subject to shareholder approval, in
recognition of services performed by Mr. Steiner, the
Compensation Committee and the Board voted to modify the
Warrant Agreement to: (i) revise the window period during
which the Warrants may be exercised; (ii) to revise the
Warrant Price; and (iii) to provide that these amendments to
the Warrants shall be deemed additional compensation to the
Chief Executive Officer;
I. Section 17 of the Warrant Agreement provides that the
Company and the Holder may, from time to time, supplement or
amend the Warrant Agreement in any manner which "the Company
may deem necessary or desirable and which shall not be
inconsistent with the provisions of the Warrants and which
shall not adversely affect the interest of the Holders."
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein, and for other good and valuable consideration
(the receipt and adequacy of which are hereby acknowledged), the
parties hereto agree as follows:
1. Effective as of September 17, 1998, the Warrants may not be
exercised except within any one of the following window
periods: (a) Window Period One: at any time on or prior to
March 9, 2000 (two years from the date of the merger of
Shared Technologies Fairchild, Inc. with Intermedia
Communications, Inc.); (b) Window Period Two: within 365
days after a change of control of the Company, as defined in
the Fairchild Holding Corp. Credit Agreement with Citicorp
et. al.; or (c) Window Period Three: within 365 days after
a change of control of Banner Aerospace, Inc., as defined in
the Banner Aerospace, Inc. Credit Agreement with Citicorp.
et. al. In no event may the Warrants be exercised after
March 13, 2002.
2. Effective as of September 17, 1998, the Warrant Price at
which the Warrants may be exercised during Window Period One
shall be $7.80 per share, plus two tenths of one cent
($.002) for each day subsequent to March 9, 1999. The
Warrant Price at which the Warrants may be exercised during
Window Periods Two and Three shall be $7.80 per share.
3. The amendments made to the Warrants effective as of
September 17, 1998 (outlined above) are made in recognition
of the services performed by Mr. Jeffrey Steiner in
connection with the extraordinary transactions during fiscal
1998 and are intended to be deemed additional compensation.
The amendments were approved by the Company's shareholders
at the 1998 Annual Meeting (held on November 19, 1998).
4. Each reference in the Warrant Agreement to "this Agreement"
"hereunder", "hereof", "herein", or words of like import
shall mean and be a reference to the Warrant Agreement, as
amended, extended or modified previously or hereby, and each
reference to the Warrant Agreement and any other document,
instrument or agreement executed and/or delivered in
connection with the Warrant Agreement shall mean and be a
reference to the Warrant Agreement as amended, extended, or
modified previously or hereby.
5. Except as specifically modified herein, the Warrant
Agreement shall remain in full force and effect and is
hereby ratified and confirmed.
6. This Amendment may be executed in multiple counterparts.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed by their respective officers thereunto duly
authorized as of the date first written above.
THE FAIRCHILD CORPORATION
By: ___________/s/_______________
Donald E. Miller
Executive Vice President and Corporate
Secretary
STINBES LIMITED
By: __________/s/___________________
David Faust
Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-27-1998
<CASH> 16,063
<SECURITIES> 216,260
<RECEIVABLES> 98,514
<ALLOWANCES> 3,079
<INVENTORY> 174,682
<CURRENT-ASSETS> 556,980
<PP&E> 222,828
<DEPRECIATION> 98,382
<TOTAL-ASSETS> 1,083,641
<CURRENT-LIABILITIES> 162,012
<BONDS> 278,229
0
0
<COMMON> 2,933
<OTHER-SE> 436,687
<TOTAL-LIABILITY-AND-EQUITY> 1,083,641
<SALES> 299,720
<TOTAL-REVENUES> 300,489
<CGS> 227,666
<TOTAL-COSTS> 285,750
<OTHER-EXPENSES> 19,320
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,147
<INCOME-PRETAX> (17,894)
<INCOME-TAX> 6,433
<INCOME-CONTINUING> (7,637)
<DISCONTINUED> (9,180)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,817)
<EPS-PRIMARY> (0.76)
<EPS-DILUTED> (0.76)
</TABLE>
